Joint Letter on Standard Offer Service in Maryland

Dear Chairman Riley:

We are writing to register deep reservations about the proposed Settlement Agreement intended to govern Standard Offer Service (SOS) for retail electric customers in Maryland following the end of the rate-freeze period. We urge the Commission not to approve this Settlement Agreement in its present form.

Electric power generation has major impacts on Maryland's environment. Public health and environmental quality in Maryland remain at risk from the emissions of power plants. A large portion of Maryland, including the entire Baltimore-Washington Metropolitan Area, remains designated as a serious or severe ozone non-attainment area. Health-threatening air pollutants, gasses that contribute to global climate change, and excess nutrients entering Chesapeake Bay are all byproducts of fossil fuel combustion in power plants. Investments in energy efficiency and renewable energy can help reduce these emissions. However the Settlement Agreement will discourage development of these clean energy resources.

Conventional power generation resources bear unexpected, higher risks.

Since Maryland's restructuring legislation was enacted in 1999, several assumptions driving this policy have proven alarmingly incorrect. First, it was assumed that private, unregulated companies would supply all needed power generation through the invisible hand of the marketplace. Second, it was assumed that power prices would generally fall under restructuring. Third, it was assumed that sophisticated risk-management methods, such as the trading and derivatives markets developed by Enron and others, would keep prices stable. Recent developments have seriously undermined these assumptions.

Bankruptcies and credit downgrades are sweeping the unregulated power industry, including companies active in Maryland. Plant cancellations and delays have mushroomed: non-utility generators were scheduled to provide 86% of new capacity in 2002, but 70% of that has been delayed or cancelled1, including more than 2000 MW of planned capacity cancelled in Maryland this year alone. Since 1999, power prices have often run substantially higher than historical levels, forcing most competitive power marketers out of Maryland and other PJM states. Finally, in the last year electricity trading and related derivatives markets have collapsed, leaving utilities and customers alike increasingly exposed to price volatility in electricity markets.

Energy efficiency and renewable energy offer cost-effective, practical risk-management options for Maryland's electricity portfolio. They are, in essence, modest-cost insurance policies against higher prices and power outages. To embrace a settlement that omits these options is bad business and bad policy. We urge the Commission to expand its thinking and include serious energy efficiency and renewable energy components in any final order relating to matters covered by this Settlement Agreement.

The Settlement Agreement purposefully raises rates for retail customers and leaves price stability behind.

These comments are directed primarily toward the shortcomings of the Settlement Agreement as it applies to residential and small commercial (Type I) customers. Provisions applicable to large commercial customers are similar in nature, although specific details may differ.

The Settlement Agreement contains binding ground rules for the provision of electric service to the vast majority of retail electric customers in Maryland (those who have not switched electricity suppliers) during the four-year period that immediately follows the expiration of the rate-freeze period of each of Maryland's four investor-owned electric distribution companies. In brief, the Settlement Agreement requires that –

• o The four incumbent electric companies will procure electric power for customers who have not switched electricity suppliers;
• o This power procurement is to be undertaken in increments of short duration (at least 50% in one-year contracts) and at seasonally differentiated prices;
• o No contracts are to extend beyond the four-year period, unless subsequently allowed or directed by the Commission;
• o Power must be acquired as a fixed percentage of the incumbent electric companies' load, rather than in specific amounts of capacity or energy.

In addition to the price fluctuations that will result from short-term contracting, retail customer rates are to be increased by a so-called Administrative Charge of 4 mills for residential customers and 5.5 mills for small commercial customers, of which not less than 1.5 mills and 2 mills, respectively will be retained by the electric companies explicitly for the benefit of their stockholders.