Michigan’s attempt to introduce competition in electricity supply, which showed early promise, is now showing signs of defeat. Between regulators who distrust markets and incumbent utilities bent on defeating rivals, the initial benefits from competition are being reversed. Unless the Michigan Legislature acts to bolster competition, the state’s poor-performing economy will be burdened with yet another competitive disadvantage.

Michigan households, schools and businesses have long paid significantly more for electricity than those in neighboring states, primarily because of regulatory policies in the state. In response, the Michigan Legislature in May 2000 approved the introduction of competition in retail power supplies. Public Act 141 was intended to lower rates and improve service quality by ending the monopoly structure of electricity generation, as well as by increasing generating capacity in the state.

By 2004, the introduction of competition was proceeding steadily, and the benefits were apparent. Michigan businesses and schools were saving millions of dollars in electricity costs by contracting with new suppliers at substantially lower rates than those charged by the incumbent utilities. New generating capacity was also coming online, mostly in the form of natural gas-powered facilities that run cleaner than the coal-burning plants of the incumbents.

In the past two years, however, several forces have combined to undermine competition. Surcharges, authorized by Public Act 141 but not implemented until November of 2004, require customers of rival suppliers to pay for the "stranded" costs of the incumbent utilities’ past investments in generating capacity. In other words, the rates of new suppliers subsidize their larger and better-established rivals.

In the 12 months following imposition of the surcharge, industrial electricity rates, the category with the most vigorous competition, jumped 13.2 percent, from 4.93 cents per kilowatt hour to 5.58 cents, according to the U.S. Energy Information Agency. During the same period, rates in all of the states surrounding Michigan started out lower than the Michigan rates and rose by much less. In Illinois, these rates actually dropped from 4.66 cents to 4.55, so that industrial employers deciding between Michigan and Illinois will now see that their electricity costs will be over 25 percent higher in Michigan.

A loss of competition appears to be a major reason for Michigan’s escalating rates. According to a report by Michigan Public Service Commission staff, the number of businesses getting electricity from an alternate supplier fell in 2005, the first decline since Public Act 141 was enacted. According to the PSC report, average monthly sales by rivals of Detroit Edison fell 26 percent in 2005, a reversal from the gains of 45 percent in 2004 and 138 percent in 2003. In the Consumers Energy territory, the number of customers buying from alternate suppliers dropped by 20 percent although total sales to the remaining customers actually increased by 1 percent. Overall, sales by competitive suppliers dropped by about 20 percent in Michigan, which the PSC report attributed primarily to customers returning to DTE Energy after the new surcharges eliminated the savings from competitors in DTE’s territory.

To make matters worse, the Public Service Commission is attempting to add another tax on top of the existing surcharges, although this has drawn a legal challenge from Michigan Attorney General Mike Cox. The Michigan Court of Appeals ruled in November that the PSC had indeed exceeded its authority by unilaterally imposing a surcharge of 5 cents per meter per month on customers of Consumers Energy to subsidize renewable energy programs. An appeal of that decision by the PSC is now pending before the Michigan Supreme Court.

In its most recent report on electricity competition in Michigan, the PSC recommended only one legislative change — authorizing the PSC to reimpose the 5 cent tax. Despite the mounting evidence that electricity competition is faltering in Michigan, the only improvement the PSC recommended is yet another surcharge to make Michigan rates even less competitive with those in surrounding states.

In January, the PSC staff advocated another approach for encouraging suppliers to build more capacity in Michigan. The report notes that the early momentum for electricity choice has stalled and not enough supply is coming in for future needs. Therefore, according to the staff report, regulators should be empowered to grant subsidies to favored firms for construction of generating capacity. The subsidies would be financed by imposing even more surcharges on ratepayers. Remarkably, the PSC report calls this a competitive process, because private firms have to compete for favors from the regulators.

While the PSC proposal may result in some new government-subsidized competition, a far simpler and more effective approach for meeting future electricity needs is available. Electricity choice was making inroads, providing customers with substantial cost savings in the 3 ½ years it was allowed to operate. Only when regulators imposed large surcharges on competitors to subsidize the incumbent firms did competition stall.

Competition has proven successful in Michigan, and its benefits can still be recovered if the Legislature would remove or greatly reduce these subsidies to the incumbent utilities. As we saw from 2002 to 2004, the positive impact of electricity competition is measurable. Michigan’s economic recovery needs all the advantages available, and the state can ill-afford to abandon competition in electricity supply.

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Theodore R. Bolema, an attorney and faculty member at the Central Michigan University College of Business Administration, is an adjunct scholar of the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.