Gold and Energy Advisor: Gold, Oil & Energy Markets Investment Research
James DiGeorgia, Mr. Macro
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Real Wealth

Real Wealth #028  03/22/2006

That'll Be $743, Please!

The news was splashed across the front page of the Baltimore Sun on March 8: "BGE bill ton increase $743; Average 72 percent rise for residential customers to be one of the largest one-year price hikes in the U.S."


Yes, you read that right...the average bill for a BGE (Baltimore Gas & Electric) customer is set to rise by a whopping $743 — or 72 percent — after July 1. 


And since BGE services more than 1.2 million residential customers, you can guess what kind of uproar this news has caused.


In a nutshell, here's what has happened: the state of Maryland deregulated its electric industry back in 1999...and at that point BGE's rates were frozen for a period of six years. 


That rate freeze expires beginning on July 1 of this year...and that's precisely when BGE can begin charging prices more reflective of their costs for electricity.


But a 72% increase?  Is that really possible?


Actually, it makes a lot of sense — after all, energy costs have soared in the years BGE's prices were capped.  So, in effect, BGE customers were getting a great deal on their electricity for a long, long time. 


But that sweetheart deal is about to end...and consumers are furious. 


So now that the public is outraged, what will happen next?  And who stands to benefit from all of this?


Why, the politicians, of course.


After all, the state of Maryland will elect a new governor this November.  And already the candidates — including incumbent Bob Ehrlich — have begun posturing.  Candidates are accusing Ehrlich of not doing enough to prevent this increase from being inflicted on Maryland voters...and Ehrlich is scrambling to work out a deal that will soften the blow. 


Of course, Maryland is not the only state in the midst of a debate over soaring energy bills.  According to the March 8 story in the Sun...


"Similar debate is taking place in Delaware, where customers will see a 59-percent increase when their rate caps expire. In Connecticut, Massachusetts, New York, New Jersey, Ohio, Texas and Montana, lawmakers are considering ways to lessen the impact of soaring electricity costs as caps there expire and the free market takes hold."


It's difficult to say how this situation will play out across the nation, but in Maryland the politicians are playing hardball.


In fact, they're threatening to pass legislation that would jeopardize the $11 billion merger deal between Florida Power and Light and BGE's parent company, Constellation Energy.


I know, I know — it's hard to believe, isn't it?  Politicians meddling in a business deal purely for their own political gain?


All sarcasm aside, the situation in Maryland is one that bears watching. 


Without question, a sudden, $743 increase in energy costs will prove very difficult on many consumers.  (And wasn't it generous of the company to offer a "phase-in" program to allow for a gradual increase in costs...with 5% interest, of course?)


But the behavior of Maryland's politicians — as they scramble for the spotlight in the months leading up to the November election — will be especially important to watch.


Will they try and sabotage an $11 billion corporate merger in order to get re-elected?  According to a story in Tuesday's Sun, that appears likely...


"Many lawmakers have promised to use the $11.5 billion merger as leverage to negotiate a more manageable rate increase for customers.


Of about two dozen legislative proposals concerning the electric industry, two bills would put the fate of the merger in lawmakers' hands. One proposal seeks to undo the 1999 law and return to utility regulation; another would require the General Assembly to sign off on any utility merger."


I can honestly say that I don't like the idea of gouging customers with outrageous energy prices any more than the next guy. 


But I also can't imagine a scenario where a group of politicians looking to get re-elected will do anything other than try and win votes. 



Best Wishes,
James DiGeorgia
Gold and Energy Advisor


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