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Maryland residents face the prospect of power shortages and higher electricity rates unless the state moves to reimpose some regulation on the industry, members of the state Public Service Commission concluded in a preliminary report to lawmakers yesterday.

The report is critical of the competitive power market, concluding that unregulated electricity suppliers can't be relied on to deliver low-cost electricity or to build enough power plants to ensure that the lights stay on.

But the commission said that full re-regulation of the power industry would be too expensive and impractical.

Instead, it recommends spurring construction of new power plants by requiring utilities to enter into long-term contracts with generators. The move would coincide with other proposed reforms in the way utilities buy power through suppliers in the competitive market.

Regulators also are considering a variety of proposals to reward consumers for reducing consumption, which would help to relieve upward price pressure in the regional energy market. The measures coincide with Gov. Martin O'Malley's call on consumers to reduce energy consumption 15 percent by 2015.

"In our view, it is not in the public interest to continue to rely exclusively on market forces to address Maryland's reliability concerns and the high wholesale electricity prices Marylanders pay," the commission said.

PSC Chairman Steven B. Larsen declined to comment on the report yesterday, saying he wanted to give lawmakers a chance to review it.

A spokesman for Baltimore Gas and Electric, Maryland's largest utility, said the company is reviewing the findings.

The 45-page report was the commission's first answer to legislation passed last spring requiring it to study options for re-regulating the power industry.

Lawmakers also asked the commission to look at options for addressing the state's projected energy shortfall, among other things. Its preliminary findings will be presented to the Senate Finance Committee today.

The commission is expected to issue a number of additional reports and regulatory orders in coming weeks and months.

"Over a decade ago, a number of states moved to see if competition would bring prices down," said Sen. President Thomas V. Mike Miller. "What started out as a noble cause - not fueled by lobbyists or special interests, but a desire to bring down rates - really didn't result in the same."

Deregulation was passed in 1999 with the idea of giving consumers a choice in their energy supplier. To date, only a handful of competitors offer residential electric service, and fewer than 3 percent of consumers have switched to alternative suppliers.

Miller said he expected lawmakers to revisit re-regulating the power industry in the next legislative session.

Lawmakers have been looking for ways to reform energy markets since the move to deregulation coincided with a 72 percent rate increase for Baltimore Gas & Electric's 1.1 million customers. The record rate increase came after power prices had been artificially frozen for six years, subjecting consumers to the sudden reality of the wholesale energy market in 2006.

O'Malley made undoing the rate increase a focus of his campaign, vowing to take on power companies if elected. He subsequently reconstituted the five-member Public Service Commission, appointing three new members whom he viewed as more consumer-friendly. But the commission concluded it could not deny a 50 percent electricity rate increase for BGE's customers in Central Maryland earlier this year.

An O'Malley spokesman could not be reached for comment last night.

Some lawmakers and consumer advocates have since called for a return to the days before deregulation, when utilities owned power plants and their rates were set by the PSC.

Consultants hired by the commission said it would cost $18 billion to $24 billion for Maryland utilities to buy back power plants they relinquished as part of the move to deregulation.

Total re-regulation also would not rid the state of its dependence on competitive wholesale energy markets. That's because Maryland imports almost 30 percent of its electricity from suppliers in other states. Those suppliers sell their power in the competitive wholesale market, which is subject to the same market forces that have resulted in higher electricity rates in Maryland.

"The purchase price associated with reacquiring the state-wide generation fleet is so great that this approach could not result in any financial benefit to ratepayers, and we do not recommend any further consideration of this approach," the commission said in its report.

But the commission said some regulatory interventions are needed. Maryland's place in the regional power grid leaves it vulnerable to wholesale market rules that pay generators more in areas where power and transmission lines are in short supply. PJM Interconnection, which operates the regional power grid and wholesale energy market, argues that the higher payments will spur construction of new plants and power lines in areas that need them most.

But so far that hasn't been the case, the commission said. Part of the reason is that generators benefit from the shortage, which drives up the price they can charge for power.

With respect to transmission, two new power lines have been proposed that would alleviate the state's energy shortfall at a favorable price to consumers, the commission said. But PSC staff doubt that either project will be built in time. The state faces the potential for rolling blackouts as early as 2011 if nothing is done to address the energy shortage.

One solution, the PSC said, is for regulators to force construction of new generation by having utilities enter into agreements with power companies to build new plants.

The utilities would agree to purchase power from the plants through long-term contracts that ensure the owner earns a fair return. The price guarantee also would make it easier to line up financing at favorable rates for the builder, further lowering prices.

In theory, additional generation would lower the premium that Marylanders must pay for their power, while increasing the reliability of the grid.

Of the generation options studied, consultants hired by the commission said a new 1,600-megawatt nuclear plant built at Calvert Cliffs would provide the best long-term payoff for ratepayers. One megawatt is roughly enough to power 1,000 average homes.

Constellation Energy Group, BGE's corporate parent and owner of two existing nuclear reactors at Calvert Cliffs, has said it hopes to build a new reactor in Maryland. It has not made a final decision on whether to proceed, largely because it is waiting to see whether federal loan guarantees are available to help finance the project, which will cost up to $5 billion.

The proposed reactor, however, would likely not be in service until 2017 - long after the state will run short of energy.

In the short term, the commission said, another option might be a combination of conservation programs and construction of 1,200 megawatts of combined cycle gas-fired generation.

However, this would increase the state's reliance on natural gas, which has been subject to wild price swings in recent years. Rising natural gas prices are blamed in part for the increase in wholesale energy prices.