Electricity deregulation is zapping Md. industry

November 6, 2005
Daniel J. Sernovitz

TRI-STATE - One of the most vocal and active proponents of electricity deregulation five years ago could fall prey to its effects come January, when Allegheny Energy's largest commercial and industrial customers are switched from default- to market-based rates.

In mid-October, the Eastalco Aluminum Co. smelting plant in Frederick, Md., sent layoff notices to its more than 600 workers. The notices warned employees the plant could be forced to close on Jan. 1 unless company officials can avert a projected 83 percent increase in electricity costs, plant spokesman Earl H. Robbins Jr. said.

"We understand that the (electricity) generators need to make a profit, but we didn't think that, (when the law was put into effect), it would put a company like Eastalco out of business," Robbins said. "In my opinion, this is a situation that is deeper than what's affecting Eastalco. It's affecting large power users across the U.S."

Eastalco, a subsidiary of Pittsburgh-based Alcoa, is among the state's largest electricity users. Under regulated electricity, the plant benefited from a long-term contract with Allegheny Energy that will expire at the end of the year.

As a result of the state's Electric Customer Choice and Competition Act of 1999, Allegheny has abandoned a rate structure under which it was able to offer lower rates to large electricity users such as Eastalco, Allegheny spokesman Allen Staggers said. The economic impact of an Eastalco plant closure would be considerable, Staggers said.

"The revenue that Eastalco generates for Allegheny Power, if they go ahead and close the plant, that would absolutely be significant," Staggers said. "What we can't do is get into a contract with a company like Eastalco...like we have in the past."

Staggers added that while Allegheny would like to keep Eastalco as a customer, "the State of Maryland has enacted restrictions, and all the commercial and industrial customers in Maryland have moved to market-based rates."

Promises vs. realities

While Eastalco appears to be among the most significantly affected of Maryland's businesses, others are finding there is a widening gap between the promises of deregulation and the realities of a deregulated electricity market.

"I don't know. I don't know what it's going to do, but I don't see it getting any better," said Gary Batey, general manager of the St. Lawrence Cement Corp. facility in Hagerstown. "It's unfortunate because with electricity, the problem can be solved by adding more capacity."

Batey said while he hoped deregulation would result in more competitive prices, he has not found that to be the case. St. Lawrence pays about $3 million in energy costs annually, which represents about 10 percent of the plant's operating costs, he said.

The plant is a subsidiary of a Montreal-based company that operates plants across the United States. Batey said from his perspective, the company's other plants are experiencing the same situations, and that unless additional power plants are built, he does not expect the market will become more favorable for business.

Deregulation has occurred in different stages across Maryland, both in terms of the regions that have been turned over to market rates and the timing of when segments within those areas - including residents, small businesses and large industries - are switched over.

Utility companies such as Allegheny will continue to maintain their transmission lines, make repairs to their infrastructure and bill customers for that service as a traditional utility. Under the deregulated market, though, customers who switch to an alternate supplier will receive a separate bill for the amount of electricity they use. Allegheny will not begin to deregulate its residential service until the end of 2008.

Commercial and industrial businesses in Western Maryland, and specifically those serviced by Allegheny Energy, were switched in January to a transitional phase between regulated electricity service and unregulated, market-based rates.

Those customers could, at that time, select alternate suppliers for their electricity. Those that opted to remain with Allegheny or failed to select an alternate supplier were switched from regulated rates to a default, Standard Offer Service plan. Rates under Allegheny's SOS plan increased by an average of 46 percent, according to previously reported company statements.

Rates and demand

Some of Allegheny's customers switched to other suppliers, including the Volvo Group's Hagerstown plant, though a majority remain with the company. According to the Maryland Public Service Commission, which is overseeing the transition, 377 of Allegheny's 28,043 commercial and industrial customers selected other suppliers as of September. Only 53 of Allegheny's 123 large commercial and industrial customers found other suppliers.

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