Electric shock: energy costs have spiked since electric restructuring, and price controls set then are expiring. Customers and legislators now face the pain of market prices.

Maryland consumers got an electric shock recently, but it's not the kind of jolt one might imagine. What stood their hair on end was the potential for an increase in the price of electricity--a dramatic 72 percent more for 1.2 million customers to begin on July 1, 2006. Debate raged in the mayor's office, the regulatory commission, the Legislature and the governor's office about how to address consumer outrage over the increase.

Overriding Governor Robert Ehrlich's veto during a special session in late June, the Maryland Legislature passed a bill providing temporary relief from the rise in electric rates for Baltimore Gas and Electric (BGE) customers. The law calls for a 15 percent increase in the total electricity rate for every BGE residential customer from July 1, 2006 through May 31, 2007, and defers the transition to full market rates until January 2008. Earlier this year, rates went up for Pepco customers by 30 percent and Delmarva Power and Light customers by 35 percent.

Unfortunately, Maryland's predicament is not unique. Simply put, price controls are expiring, and customers previously shielded from the actual cost of their power now face the wrath of market prices. It all goes back to 1999, when Maryland joined many states across the country in restructuring their electric industries. The prevailing wisdom held that competition should be brought to all monopolistic industries. In this vision, the familiar utility would be a thing of the past as customers shopped among options and prices that used to be available only at wholesale.

Most states, including Maryland, included a transition period in their restructuring plans. The idea was to freeze, cap or reduce consumers' rates while giving the electric industry time to switch to a competitive market. And the transition periods have postponed what many see as the inevitable. Governor Ehrlich says the electric deregulation plan (including capping residential rates below 1993 levels) set customers up for "a painful rate shock." He says the plan failed to attract competition in the residential market.

Pennsylvania has had much success with residential customers switching to new electricity providers after restructuring. The credit goes to a state marketing program that gave consumers the information they needed to make decisions about staying with their present company or switching to another electricity provider.

In other states, restructuring has benefited mostly big electricity users, such as heavy industries. Electricity providers haven't had the advertising budget to target homeowners. It is costly to seek out new customers, and power providers get more 'bang for the buck' from selling to a big industrial customer.

So for the most part, homeowners buy their power from the same company today that received their monthly checks 20 years ago. And that company likely is paying much more for fuel now. In Maryland since 1999, natural gas prices have risen by almost 100 percent and crude oil prices by more than 350 percent--and when the price controls expire as the statutes mandate, consumers will feel the burn as utilities recover those higher costs. At least 10 other states face a similar reality between 2005 and 2007.

In Illinois, conflict has gone on for months about how the dominant utility, Commonwealth Edison, should obtain its power when the caps expire. "Alarm over price spikes from replacing capped rates with prices driven by current fuel costs have led to intense political upheaval, including the governor replacing the [public utility] commission chair," says Rich Sedano of the Regulatory Assistance Project. The commission will soon have an open auction for power supply, and rate hike estimates range from 25 percent to 33 percent. "Illinois cannot avoid this problem--it can only hope to contain it," says Sedano.

Some states also have considered extending rate caps or allowing the caps to expire gradually. In the meantime, lawmakers are keeping a close eye on other states to replicate their successes and avoid their missteps.

ENERGY EFFICIENCY

To help consumers save money by decreasing energy demand, a state can push efficiency and conservation. There are many ways of encouraging consumers to cut their power use through efficiency. During California's recent energy crisis, the "20/20" program encouraged consumers to decrease their electricity demand by 20 percent. If they did so, they could receive a 20 percent reduction on their electric bill compared to the same month the previous year. Several states facing expiring rate caps offer customers little or no energy efficiency help, but some are considering paying customers to reduce use of air conditioners and lights for a few hours.

RETHINKING RESTRUCTURING

Some believe that controls on electric are an important reason for the lack of a competitive market in most places--producers can't compete, so they don't enter the market. Disappointed or worse, some states are stalling or repealing the restructuring policies that were supposed to bring competition and less expensive electricity. Arkansas, Montana, Nevada, New Mexico and Oklahoma withdrew or delayed their plans, and a California 2005 ballot initiative repealed provisions of the 1996 electricity restructuring law while returning rate-setting authority to the California Public Utilities Commission. Undoing restructuring is possible, but not easy. In many cases, to help change the integrated utility model, laws required or strongly encouraged utilities to sell off the power plants they used to own. If states want utilities back in the supply business, those utilities will have to buy power until they can reassemble their own power plant fleet. In the meantime, though, utilities have found themselves paying high prices and passing them through to customers.

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Christina Rewey is a former NCSL expert who covered several energy issues, including electricity. Kate Burke is an NCSL expert on energy security and other energy issues.