The controversial deal Mayor Brandon Scott inked with Baltimore’s dominant utility provider over access to the city-owned underground conduit could come at a steep price for the company’s customers: $860 million over 50 years.
That’s the finding of the Maryland Office of the People’s Counsel, an independent state agency representing ratepayer interests in Baltimore Gas and Electric Co.’s ongoing rate case. The 10-month regulatory process to set BGE’s electric and gas rates takes into account a broad set of variables, among them the deal the company struck earlier this year with Baltimore over access to the conduit system, a 741-mile underground network housing the wires that power street lights, traffic signals and phone and internet services.
BGE began its rate case in February on the heels of sealing its deal with the Scott administration, which requires the company to fund improvements to the aging conduit instead of paying rent on its use of the system. According to regulatory filings from the Office of the People’s Counsel, that arrangement could pay dividends for Baltimore City. But the watchdog’s analysis finds it would cost BGE ratepayers “dearly.”
Because utilities are not typically able to earn a return on investment from assets like the conduit that they don’t own, David Lapp with the Office of the People’s Counsel called the arrangement a “monopoly company’s gambit” to benefit its investors at the expense of its customers.
“BGE is gambling on the Public Service Commission approving a novel proposal to have customers pay for a deal that no business in a competitive market would ever enter,” Lapp said in a statement Thursday.
These findings run counter to arguments BGE has made in favor of the agreement. While the Scott administration faced blowback for what appeared a rushed deal, BGE insisted it needed to have things finalized before the start of its rate case in February, telling City Council members the agreement allowed them to reduce the rate increase they were seeking by tens of millions of dollars. In a statement Thursday responding to the People’s Counsel analysis, the utility pegged those savings at $57 million.
A BGE spokesperson called the watchdog’s argument “misleading” but said direct comment on the analysis would be “improper” with proceedings ongoing before the Public Service Commission. “Extrajudicial comments” from the People’s Counsel, spokesman Richard Yost said a statement, “are a transparent attempt to improperly influence the outcome” of the rate case by flouting rules about public commentary.
In filings, BGE asks regulators to dismiss the watchdog’s argument, calling it “extreme.” The company characterizes its conduit deal as advantageous for customers, spreading out maintenance costs over time, and argues that it’s common practice in Maryland and elsewhere for utilities to recover the costs of investment on infrastructure they use but do not own.
BGE, a subsidiary of the Chicago-based Exelon Corp., serves 1.3 million electric customers and 700,000 natural gas customers in Baltimore and the surrounding region. The company has asked to hike rates on customers over the next three years in order to cover the costs of more than $600 million in improvements to its gas and electric infrastructure.
Under the contract between BGE and Baltimore, the utility would receive access to the city-owned conduit by funding $212 million in system improvements between now and 2029 instead of paying rent, terms that drew backlash in some corners of Baltimore government after voters barred the privatization of the underground system. The power company would also pay Baltimore an annual occupancy fee of $1.5 million.
Revelations about the terms of these negotiations sparked an uproar in City Hall earlier this year, coming to a head at a dramatic meeting of the city spending board in February in which Scott and two of his appointees rammed the deal through over the protests of Comptroller Bill Henry and City Council President Nick Mosby. Those two spending board members had skipped the meeting in a last-minute effort to prevent a quorum and block a vote.
The Scott administration pressed on with the agreement in spite of criticism, and, following hours of City Council hearings on the proposal, protests from Henry, Mosby and other elected officials fizzled.
In the past, BGE customers have helped cover about $28 million in annual lease payments for the utility’s use of the underground conduit system.
The Office of the People’s Counsel found that costs for utility customers in the short-term would be lower than that because BGE has proposed spreading the costs of system improvements over time. The longer-term burden on customers, however, would be much higher than the $212 million the utility is on the hook for over the next six years, according to analysis by the watchdog’s expert witness submitted before regulators last Friday. Those costs would reach approximately $860 million as ratepayers foot the bill both for BGE’s rate of return — a cost analogous to paying interest — and for its taxes on those returns.
The office’s expert witness also pushed back on arguments that the utility’s investment in the conduit will improve electric reliability for customers, noting that the company has been unable to cite service reductions that have stemmed from issues with the underground system.
A spokesperson for Scott’s office did not respond to a request for comment on the findings.
Mosby, who vehemently opposed the deal at the Board of Estimates, maintained in a statement Thursday that the spending board never held a legitimate vote approving the contract. The deal “circumvented what voters overwhelmingly expressed, and placed the interests of private industries above the future protection of a valuable City asset,” the council president said. “That deal was a vital and incremental step that will allow BGE to take full control of Baltimore’s conduit system at the expense of rate payers.”
The Office of the People’s Counsel estimates that the cost of BGE’s improvements to the conduit would be $40 million in 2030, a cost that would extend on annually until 2078.
And the arrangement could wind up even more expensive for BGE customers than the $860 million figure, since the company’s deal with the city does not guarantee it rights to the conduit after 2029. As a result, it’s likely the company would wind up having to pay for the use of the conduit twice after that date — once for the structural improvements and once for renewed lease payments, the watchdog predicted.
In regulatory filings, BGE denies this possibility, saying the company is making investments in a system that will provide service for half a century or more, a cost they should be able to recover over the useful life of the conduit. Arguments that these costs will not be appropriately represented in customer rates amount to “a fundamental lack of basic” rate-making knowledge or “an intentional effort to obfuscate the issue,” the company argues.
The five-member Public Service Commission is expected to reach a decision on BGE’s application for a rate increase before the end of this year.
