New Electricity Rates on Tap for Maryland

Here in Maryland, oldstyleliberal and 1.2 million of his fellow Free Staters are witnessing a political donnybrook over a proposed 72% hike in their electric bills, supposedly due in July 2006.

Most of the state, including Baltimore County where oldstyleliberal dwells, gets its electricity from Baltimore Gas and Electric, aka BGE, a subsidiary of Constellation Energy Group. BGE/Constellation had long been subject to old-fashioned rate regulation, before a deregulation bill was enacted in 1999. Between deregulation and now, prices for electrical power sold to consumers nonetheless remained capped at comfortable below-market rates.

In the last year, meanwhile, market prices for the fuels used in generating electricity shot up — by whopping amounts, just as the artificial rate caps were slated to come off. That's what triggered the anticipated 72% hike in BGE's electric rates.


The state's mostly-Democratic General Assembly, its Republican governor, Robert L. Ehrlich, and the governor's mostly hand-picked Public Service Commission have, since the sharp 72% rise was announced earlier this year, offered several plans to soften the shock of the hike.

A week or two ago, the Maryland General Assembly passed into law a plan that would defer the full rate increase for all BGE customers, with no individual choice to opt in or out, for 11 months. During that time, rates would rise by only 15% over present rates.

After that period, consumers would have the option to extend the deferral period for another several months. The exact details of that second-deferral option are murky. Those who don't avail themselves of it will, we do know, go to paying full market prices as of June 2007.

They can then expect to start paying for 10 years a $2.19 monthly surcharge to recompense BGE for the cost of borrowing money to pay for its fuel at market rates while, under the law, for 11 months it is not able to pass those costs on to its consumers.

The exact size of that monthly deferral charge, $2.19, assumes that BGE comes through with certain financial "givebacks" it promised the General Assembly as it was considering the new legislation in an unusual special session in early June. Otherwise, the size of the surcharge would nearly double to roughly $5 a month.


Assuming that no individual consumers sign on for the second deferral, the benefits of the first deferral — the mandatory one — are small but undeniable. According to a chart published in The Baltimore Sun ...

(Sorry, the link to the chart no longer works.)

... the General Assembly's plan effectively saves consumers $311.78 over its lifetime of 11 months plus 10 years. The governor's plan saves customers just $43.02 over the same period, while a plan offered earlier this year by the PSC (and killed via a legal challenge instigated by Ehrlich's Democratic gubernatorial-race rival, Baltimore Mayor Martin O'Malley) saves consumers a paltry $3.90.


The rate-plan comparison in the chart above strikes oldstyleliberal as the right way to judge the respective plans. It is the only comparison he has seen that takes into account the "present value" of the dollars in question.

Look at the numbers. Over 10 years and 11 months, in the absence of any deferral plan whatsoever, the "average" consumer would pay $18,591.83 in increased electric bills. With the Assembly plan, that increase goes down to $18,332.79, a saving of $259.04.

But if the pennies the Assembly plan saves consumers on a month-by-month basis are religiously put, by those consumers, in a savings account that pays interest at the rate of 5 percent per year, the total amount of interest which accumulates over 10 years, 11 months will be $52.74. That $52.74 accrual increases the plan's savings to the consumer of $259.04, over the course of the 10-years-and-11-months deferral/recovery period, to $311.78.

Hence the "net present value" of the total savings afforded by the Assembly plan to BGE's residential consumers is $311.78.

Applying like arithmetic to the governor's plan and to the PSC's plan gives $43.02 and $3.90, respectively, as the "net present value" of the total savings afforded by each plan, considered in turn.

That's why oldstyleliberal thinks the Assembly plan is, of all the plans that have been laid on the table, manifestly the best deal.


Since the General Assembly passed its deferral plan by apparently veto-proof majorities in each house, Governor Ehrlich has dug in his heels against it. He recently convened a five-hour public hearing in the state capital, where most speakers denounced the plan. In the last few days, he has actually made good on his threats and vetoed the bill. The General Assembly then met yet again in special session to override the veto.

In addition to complaining that the Assembly's bill fired his hand-picked Public Service commissioners, Ehrlich seized upon two admittedly unpopular features of the plan in justifying his veto. One, the rate-increase deferral over the first 11 months is mandatory for individual consumers, not optional. Two, consumers would then be forced to pay back (some of) the added interest payments BGE will have incurred — since it must of course sell bonds on the open market to offset its heightened energy costs during the deferral period.


But, say the Assembly plan's proponents, making the deferral plan mandatory for all consumers during the initial 11-month period, and then charging them a fixed amount on each month's bill over the next 10 years, lets BGE's bond buyers feel sure that the deferred consumer billings are fully "securitized": they will certainly be covered by carrying charges, billed to customers in a set monthly amount of $2.19, during the course of a predictable 10-year recovery period.

That means BGE's bond rating can stay high. Accordingly, the interest BGE will pay on its new bonds will stay low. That's good for consumers, for BGE (like any other business) must in the end pass on its costs of borrowing money to its customers.

The need to assure bond buyers that the utility's deferred costs are "securitized," with a known-in-advance carrying surcharge over 10 years, explains why the Assembly's initial deferral plan must be made mandatory for all consumers. If it weren't, opters-out would saddle opters-in with a higher carrying charge later on down the road. The eventual size of the carrying charge would be unknown; it would depend on how many consumers opted out. The plan's predictability would thus disappear, and BGE's bond buyers would insist on the utility paying a higher interest rate on its bonds to offset their extra risk.

So BGE customers must participate in repaying some or most of the "interest charges" BGE incurs to BGE at the end of the 11-month deferral period. That is the unavoidable cost of "securitizing" the deferred sums BGE will postpone receiving, as part of the deferral plan.

That $2.19/mo. surcharge will allow BGE to recoup about $109 million in paid-out interest over the 10-yer recovery period. However, supporters of the Assembly plan say that the givebacks promised by BGE as part of the deal far exceed that $109 million.


The plan the Governor hashed out earlier with BGE, prior to the Assembly going into special session to pass its own plan, offered savings whose "net present value" is much less ($43.02) than the $311.78 of the current Assembly plan. If BGE's deferred receipts cannot be "securitized" by means of a mandatory plan that features a fixed post-deferral surcharge — one that takes into account the extra interest costs the utility sustains — then obviously the deferral-period savings it can offer to its customers will have to be less. That's the bottom line here.

It only stands to reason that the mandatory Assembly plan is a better deal than the optional Governor's plan. It's like auto insurance. The fact that car insurance is mandatory under state law maximizes the size of the coverage pool and accordingly holds premium rates in check. If people could opt out of buying car insurance, those who opt in would have to pay premiums through the nose.

Interestingly, the Governor's own plan charged consumers interest, too, as did yet another plan which the Governor agreed to earlier this year but which couldn't be passed by the General Assembly before its regular session expired. But the Governor's own plan passed less interest on to BGE customers, it is true. In part, that was because it saved consumers less money up front, and in part it was because BGE exchanged the ability to recoup some of its interest expenses for a virtual guarantee that a proposed merger between its parent, Constellation, and a Florida energy company would not be blocked.

The givebacks in the Assembly plan, on the other hand, are not tied to any merger.


The above is why Marylanders ought to support the Assembly rate plan and tell the governor to look elsewhere for votes in this fall's gubernatorial election ... in which his opponent will undoubtedly be the very O'Malley whose legal suit as mayor of Baltimore was instrumental in getting the General Assembly to come up with its plan in the first place.

Time to Reinstate the Draft?

Baltimore Sun columnist Dan Rodricks has written recently ("Require all young people to serve the nation" and "Draft might breathe new life into a listless U.S.") in support of reinstating the draft. Bully for him. Not only would requiring young adults to serve their country for two years equalize the risks of war-fighting among all social classes and backgrounds, it would also initiate Americans in the sadly dormant value of shared sacrifice in performing personal service to one's community and nation.

Rodricks wants everyone at 18 — with possible deferment not beyond age 21 — to be required to go into the military branch of their choice, or an AmeriCorps-style domestic service, or "a revitalized and expanded Peace Corps."

Why? "A draft would wake everyone up," Rodricks says. "It would ... transform a citizenry that, in the post-baby boom period, has become increasingly myopic, wealth-obsessed, self-centered, cynical and clueless to essential concepts of loyalty and teamwork, community and commitment. We think our kids are getting this through community service hours in high school. But that's a limited lesson, easily overwhelmed by the me-first think that marks the adolescent society of 21st-century America."

Such a draft it would also end the persistent complaint that the war in Iraq is being fought by the sons and daughters of the have-nots in lieu of those of the have-a-lots, whose offspring simply aren't signing up. oldstyleliberal can't decide which rationale for supporting a return to conscription impresses me the most: the value of shared sacrifice, or that of egalitarianism.


The idea of expressing my support for Rodricks' idea popped into oldstyleliberal's head today when he read Charles Krauthammer's Time essay "In Plain English: Let's Make It Official". Krauthammer fears that the "enormous, linguistically monoclonal immigration [influx we experience] today from Latin America" will undermine American cultural and political unity. English, he says, ought post haste to be declared our "official language."

Indeed? Whatever happened to the love which conservatives like Krauthammer so often profess for uncoerced market outcomes, including those in the "marketplace of ideas"? Which language people choose to speak in their homes and everyday lives — that of their native land or that of their adoptive country — depends on ideas they subscribe to about what is right and best. Why should the government in Washington step in and force them to employ a different tongue?

Well, says Krauthammer, we're in grave danger of becoming like his native Quebec: a threat to the continued existence of (in that case) Canada as one united nation. That's why we here in the U.S. need an "official language," now, for the very first time.

If in fact we are so imminently threatened, oldstyleliberal would suggest that Rodricks' idea of shared compulsory national service, at the cost to each of us of personal sacrifice in the bloom of our youth, would do at least as much to hold us together and build national solidarity as declaring English the "official language" of the United States would.

Not that oldstyleliberal is unalterably opposed to requiring citizens to be conversant with English. Let's just say that he'll cheerfully support Krauthammer and other conservatives in this regard when they sign on to the idea of reinstating the draft.