Energy Legal Blog

Maryland Pols and Regulators Backpedal from 1999 Legislation to Shield Standard Offer Consumers from Market Prices

Reacting to public outrage over the specter of large rate increases following several years of frozen rates, a politically pressed Maryland Public Service Commission (PSC) reached settlements — called Rate Stabilization Plans — with three of the state’s utilities to phase-in market pricing of Standard Offer Service (SOS). 

Under Maryland legislation, consumers who fail to select a competitive supplier default to SOS provided by the incumbent utility in their area.  Power supply for SOS service is procured through a competitive bidding process involving electricity suppliers.  Under Maryland’s 1999 electricity deregulation legislation, SOS rates were frozen until summer 2006.  With the impending expiration of the rate freeze, and intervening increases in power costs, Maryland ratepayers who did not select another retail power supplier faced large rate increases to cover the cost of competitively bid supplies.  Faced with consumer backlash, the PSC struck deals with the utilities to phase in market rates for SOS service. 

As of June 1, Pepco and Delmarva residential customers stood to pay an additional 39% and 35%, respectively, for SOS.  Under these plans, a participating SOS consumer will see its rate increase implemented over an 18-month period from June 1, 2007 to November 30, 2008; no carrying charges will accrue on the deferred amounts.  A Baltimore Gas and Electric (BG&E) SOS consumer would have seen an even more dramatic rate increase of 72% on July 1, when that utility’s rate freeze is scheduled to end.  BGE’s Rate Stabilization Plan, however, now calls for incremental rate increases for participating customers beginning July 1 and every six months thereafter until January 1, 2008, when full market rates take effect.  Again, no carrying charges will accrue on deferred amounts.  At the end of the transition period all SOS customers will pay the same rate.

These developments may expose the distortions that can attend frozen-rate transitions to retail competition.  Ratepayers are lulled into a false sense of entitlement to below market priced energy.  (In the case of BGE, the frozen rates were based on the last BGE rate case, which hearkened back to 1993, and BGE’s customers received a further 6.5% discount off of  those rates.)  Then when rate freezes expire, SOS-type consumers are caught off guard, unprepared to transition to pent-up market prices, and react with predictable outrage.  Allegations of competitive abuse are thrown around, and politicians are forced to spring into action lest they be seen as too sympathetic to utilities and other power companies.  This scenario is playing itself out with increasing frequency.