Maryland's Smart Grid Fiasco

Maryland's Smart Grid Fiasco

July 05, 2010
Originally published in The Baltimore Sun

Last month, the Public Service Commission rejected Baltimore Gas & Electric Co.'s "smart grid" proposal. From start to finish, the whole affair demonstrated everything that is wrong with Maryland's socialized electricity industry.

To begin with, BGE's plan was a dud. The whole idea of "smart grid" is to inform customers how much electricity costs in real time so that they have an incentive to use less electricity during times of peak demand (usually hot summer afternoons), when electricity is expensive to generate and transmit. There are a number of ways to achieve this price signal, but BGE chose an ill-defined, incomplete technology that would not have allowed consumers to see their energy costs in real time and adjust their usage accordingly.

Then again, BGE can't be faulted for its bad choice. Under state law, BGE is, "in appropriate circumstances," awarded "reasonable" profits in order to "promote the efficient use and conservation of energy." The most direct path to this legally mandated reward is to build infrastructure, especially the kind that needs constant and costly upgrades. To that end, BGE touted the $800 million plan as an investment in "foundational elements," the clear implication being that further expenditures would be necessary.

But that's not why the commission rejected BGE's plan. Instead, the PSC was protecting its turf. In order to recover its costs, the utility wanted permission to circumvent the commission's authority to set rates by applying a surcharge on bills. Naturally, the commission defended its prerogatives. After bemoaning a "trend" of utilities seeking to remove as many cost recovery flows as possible from its ratemaking process, the PSC denied BGE's preferred financing mechanism.

Absurdly, the commission expressed its support for smart grid technology, but it objected to time of use pricing, which is the entire purpose of smart grid technology. The commission argued that BGE had insufficiently planned an education campaign for real time pricing, as if Baltimoreans are incapable of comparing numbers. This paternalistic explanation likely obfuscates an ulterior motive. If the price of electricity were set by the market, then the commission would lose the power to establish rates.

Enough is enough. The PSC has been the primary impediment to progress in the electric industry since 1910. Back then, early 20th century Progressive Party politicians determined that the electric companies inexorably evolved into predatory monopolies, despite the existence of widespread competition among electric utilities in most urban areas at the time. The Progressives' ironic solution to these so-called "natural" monopolies was a government-certified monopoly. The Maryland legislature created the PSC 100 years ago and gave it the regulatory power to outlaw competition among utilities and set electricity rates for consumers. Yet without competition, there can be no innovation, which is why the industry hasn't changed since Theodore Roosevelt was president.

As BGE is fast-learning, 20th century technology is no match for 21st century demands. It used to be that the only concern was reliability. Now, politicians demand "green" power. Moreover, it has become virtually impossible for utilities to build major infrastructure, due to not-in-my-backyard opposition.

To be sure, Maryland is not alone — the business of electricity provision is centrally planned in every state. The ossification of the national grid is a national problem. And Congress is only making things worse by proposing billions of dollars in smart grid subsidies that would further entrench the statist status quo.

In a truly competitive market, the possibilities are endless. Suppose that an entrepreneur invents a wind-power technology that could provide affordable, reliable electricity to 50 houses and that a developer wants to use this technology to power a small housing project he plans to build. The entrepreneur sells his product; the developer gets affordable, reliable energy; and environmentalists get their clean energy. It is win-win-win. It is also illegal under the Progressive regulatory regime because it would violate the local utility's government-granted monopoly. Only one company is allowed to string a wire.

Imagine independent power producers teaming up with telecom firms and property developers to share the cost of building new underground networks to provide both electricity and communications to consumers. Such a partnership would render unsightly transmission towers superfluous.

It's well past time to eliminate government-certified monopolies and statist price controls in the electricity business. Only when energy entrepreneurs in Maryland are free to compete to distribute and retail electricity will the grid become "smart."