Maryland must deal with tight power supplies -PSC

NEW YORK, Dec 5 (Reuters) - Maryland faces a critical shortage of electric capacity that could lead to rolling blackouts by 2011 or 2012, utility regulators told state legislators this week.

The state faces a potential energy crisis because consumers use more power than the state generates and the transmission lines are highly congested, making it difficult to bring more power in from elsewhere, the Maryland Public Service Commission said in a report to the General Assembly.

The PSC recommended adding more generation and transmission facilities and reducing electricity use.

In 1999, Maryland deregulated the power market and required investor-owned power companies to separate generation operations from distribution and transmission.

The utilities, now subsidiaries of Constellation Energy Group Inc (CEG.N), Pepco Holdings Inc (POM.N) and Allegheny Energy Inc (AYE.N), either sold or transferred their power plants to companies not regulated by the state.

In 2006, state officials started to mull re-regulating the power market after Maryland's largest utility, Constellation's Baltimore Gas and Electric, proposed a 72 percent rate increase for residential customers as rates frozen at 6.5 percent below 1993 levels were set to expire.

DEREGULATION FAILURE?

Maryland, like other deregulated states, capped rates for a period of years when they restructured their power markets, in part to give competitive suppliers time to enter the market.

While the caps remained in place, the cost of fuel, especially natural gas, skyrocketed, making the capped price too low for other suppliers to compete with and competitive markets did not develop - at least not for residential customers.

To avoid ratepayer anger as caps expire, state officials, including those in Maryland, sought ways to ease the transition from the low fixed rates to the now much higher market rates.

Some Maryland officials have even considered re-regulating the market as neighboring Virginia did earlier this year.

THE SHORT-TERM FIX

As Maryland legislators ponder their next move, the PSC said it would, if necessary, direct utilities to enter long-term contracts to bolster the supply of electricity.

The PSC will require utilities to implement conservation and demand management programs, which provide incentives (money, lower rates) to customers for reducing power usage.

The PSC also said it would look at how the utilities buy the power they sell customers in an effort to achieve better and more stable prices. (Reporting by Scott DiSavino)