House Bill 703 Veto Message

May 21, 2030

The Honorable Rod R. McMillan

Speaker of the Maryland House of Delegates
State House
Annapolis, Maryland 21401

Dear Mr. Speaker:

In accordance with Article II, Section 17 of the Maryland Constitution, today I vetoed House Bill
703 – Electric Utility Industry Restructuring.

House Bill 703 substantially restructures the electric utility industry in Maryland. House Bill 703
requires the Public Service Commission to ensure the creation of competitive electricity supply
and electricity supply services markets, with appropriate customer safeguards. These are
laudable policy goals. However, I am vetoing House Bill 703 because it fails to deliver the
benefits its proponents so ambitiously promise. While I appreciate this well-intentioned effort, I
am not convinced that the deregulation scheme established in House Bill 703 is in the best
interests of our state.

Overview of Proposed Market Structure

Under the existing system, Maryland customers purchase electricity generated or otherwise
supplied by the electric company that has a franchise to operate in the customer's service
territory. House Bill 703 would theoretically permit customers to purchase electricity generated
by other sources, and have the electricity delivered over distribution lines of the local electric
utility.

Under House Bill 703, residential electric customers of investor-owned utilities would be offered
“customer choice” as follows: one-third of customers beginning July 1, 2031; two-thirds of
customers beginning July 1, 2032; and all customers by July 1, 2033. All industrial customers
and commercial customers of these utilities would enter the deregulated market beginning
January 1, 2032.

Rate Cap and Reduction

As part of the transition to electric restructuring, House Bill 703 provides for a rate cap and
mandated rate reduction for all electric customers. The bill requires a four-year rate cap for all
customer classes of each electric company, starting on the first day that customer choice is
available in the electric company's service territory. The cap includes any allowed transition
costs that utilities may be allowed to collect and any fees for universal service.
For residential customers of investor-owned utilities, there is also a mandated four-year rate
reduction beginning July 1, 2031. This rate reduction will be between 3% and 7.5% of base rates
as measured on June 30, 2030.

Standard Offer Service

Under House Bill 703, “standard offer service” means electricity supply purchased from the
electric company that currently distributes electricity to the customer. Until July 1, 2034, each
electric company must offer standard offer service to a customer who does not choose a new
electricity supplier, has not been offered customer choice, contracts for outside electricity supply
that is not delivered, or has been denied service by an electricity supplier. After July 1, 2034, if
the electricity supply market is not competitive or the commission has received no acceptable
competitive proposal for supplying standard offer service, the commission shall extend the
obligation to serve at a market price that allows the electric company to recover verifiable,
prudently incurred costs to procure or produce the electricity plus a reasonable return.

Objections

Proponents of House Bill 703 and electricity deregulation claim that it will stimulate
competition, create jobs and lower prices for residents and businesses. However, I am not
convinced that House Bill 703 advances any of these objectives. We simply cannot enact such
sweeping changes without fully determining the effect that they will have on the energy market,
our state’s economy, and ratepayer bills. Despite laudable goals and several meritorious
provisions, the possible unintended consequences engendered by this legislation are of great
concern.

Under current law, the Public Service Commission is empowered to set electricity rates. In
setting the rates, the Commission balances the capital and profit needs of suppliers with the
economic interest of consumers. Under a deregulated system, the emphasis on supplier
profitability threatens to eclipse any concern for consumer welfare. Although House Bill 703
does include some provisions designed to protect consumers, they are, in my judgment,
inadequate.

Further, although the rate cap and reductions are designed to ease the transition to a deregulated
market, it is likely that they will have the opposite effect. During the legislative session, very
little consideration was given to the probable situation that Maryland consumers may face when
the rate caps expire. Presumably, global energy demand will continue to rise in the years ahead,
creating an inflationary pressure on prices. Maryland consumers will, for at least four years, be
completely insulated from these pressures. Once the caps expire, however, consumers could face
significant price increases that would devastate middle class families and threaten Maryland’s
economic outlook. At that point, as a result of deregulation, the Public Service Commission’s
ability to protect consumers will be severely diminished.

Although it may be true that deregulation will help large industrial customers who have the
resources necessary to purchase electric power in bulk, there is simply no reasonable basis upon
which to conclude that such savings would be passed along to individual residential ratepayers.
Whether rates increase is largely dependent upon the value assigned to “transition costs.” The
term “transition costs” refers to the difference between the book value of a utility asset and the
market value. Under a regulated environment, rates are set in an administrative rate-making
proceeding to allow companies an opportunity to recover their operating expenses, depreciation
expenses, and a reasonable rate of return. Because rates are cost-based, there are no transition
costs. However, in a deregulated environment, the market may cause prices to decline and thus
cause the rate of return on existing assets to also decline. Transition costs arise when the electric
utility cannot recover an asset’s fixed costs out of the market price of electricity. The value of
these transition costs, and the corresponding effect on smaller businesses and residential
ratepayers, cannot be reliably determined at this time.

There is simply no empirical evidence to support the conclusion that deregulation will lower
rates. An unfounded promise of lower rates is no justification for abandoning the stability,
reliability and regulatory balance that the current system provides.

For the above stated reasons, I have vetoed House Bill 703.

Sincerely,

Edward M. O’Brien
Governor