P.A. 141 and P.A. 142 were passed in 2000, but because of phase-in provisions in the legislation, significant competition among electricity providers did not really begin until 2002. This competition peaked during the next two years, but diminished considerably after November 2004, when "stranded-cost recovery" commenced.

Before Stranded-Cost Recovery

Between 2000 and 2004, nonincumbent suppliers captured well over 20 percent of Michigan’s industrial and commercial retail customers by volume in the combined Detroit Edison and Consumers Power service areas.[9] The results were impressive: During that period, average industrial rates in the state dropped by about 3 percent at the same time that the average industrial rates in the United States as a whole increased by around 13 percent.[*] Meanwhile, commercial rates dropped by about 4 percent in Michigan, even as the average commercial rates in the country as a whole increased by around 10 percent. In fact, Michigan’s total electricity prices across all sectors dropped by about 2 percent, while the nation’s total electricity prices rose by about 12 percent.[10]

There was much less change in the state’s residential sector, however. The incumbent utilities’ residential rates during this period were regulated at an artificially low level, making price competition difficult. This constraint reduced the potential for profit and rendered the residential sector less attractive to new suppliers. Moreover, the residential market was not a natural niche for these suppliers: They were seeking to establish themselves in the marketplace, and they focused first on attracting higher-volume customers, such as schools, retail stores and manufacturing plants. Not surprisingly, then, few residences switched to alternative suppliers.

Regardless, all Michigan residents benefited either directly or indirectly from the lower electricity prices spurred by competition, and this competition brought Michigan’s business rates closer to those of surrounding states, thereby ameliorating a competitive disadvantage.

Graphic 3 - click to enlarge

Source: U.S. Energy Information Administration.[11]

Public Act 141 also succeeded in drawing investment in new generating capacity to Michigan — primarily in natural gas-powered facilities that burned cleaner than coal.[12] The incumbent utilities did not, however, contribute as much to the expansion of capacity. As the Michigan Public Service Commission noted in a 2003 report on electric competition, there was substantial investment in capacity across the United States, but only about 10 percent in 2002 was by investor-owned utilities.[†]

Contrary to the predictions of their executives, neither DTE nor Consumers Power experienced undue financial hardship. Indeed, the stock of DTE outperformed the utility average during the years of peak competition (see Graphic 4).[**]

Graphic 4 - click to enlarge

Source: The Wall Street Journal.[13] Calculations begin May 8, 1998.

After Stranded-Cost Recovery

There was considerable opposition to P.A. 141’s stranded- cost recovery scheme. Flush with cash, the incumbents held a competitive advantage. Further, critics noted that the premise of stranded costs was belied by the incumbent utilities’ ownership of valuable power plants, for which there continued to be market demand. And to the extent competition might diminish the incumbents’ market share, they could sell surplus electricity on the spot market (allowing them to export electricity elsewhere) or by private contract — as long as the energy was produced at competitive prices. Moreover, utility investors had enjoyed the considerable fruits of monopoly status for decades; covering stranded costs arguably prolonged that advantage.

There was no bailout of incumbents in the deregulation of other industries, such as rail, aviation, trucking and telecommunications. Under this view, consumers would have been better served had the Legislature eliminated the burdensome service and capacity mandates on the utilities and left them to compete freely with other producers.

As a variety of experts predicted, the stranded-cost scheme and various regulatory mandates ultimately undermined competition. For example, the state loan guarantees provided the incumbent utilities with a marked competitive advantage over prospective competitors in both better access to capital and lower debt costs. Moreover, the surcharge imposed on competitors’ customers narrowed the price differences between new, more efficient electricity suppliers and the incumbents.[‡] Simply put, customers of competing suppliers were effectively subsidizing the former monopolies.

The advent of stranded-cost recovery in 2004 essentially stalled competition by eliminating the price advantage that alternative suppliers had acquired over the incumbent utilities. Meanwhile, the rising price of natural gas hit alternative suppliers hard. Taken together, these factors led many customers to return to the incumbents for service. Graphic 5 shows the result.

Graphic 5 - click to enlarge

Source: Michigan Public Service Commission.[14]
(Note: Data for 2007 does not include December 2007.)

Stranded-cost recovery also undermined the rate discipline that partial deregulation had stimulated. The average price of electricity for industrial customers in Michigan jumped 23.0 percent between 2004 and 2006 (the last full year for which data are available), while industrial rates rose 17.3 percent for the nation as a whole.[15] The state’s commercial rates fared a bit better, rising 12.4 percent, compared to 15.8 percent for the nation as a whole, but overall, Michigan’s electricity prices rose 17.3 percent, compared to a national increase of 17.0 percent.[16][***] Thus, after 2004, the state’s electricity rates were no longer rising less than the national average; instead, they were rising at about the same rate as the national average.

Similarly, Michigan’s electrical rates improved and then lost ground compared to electricity prices in the surrounding four Midwest states (Illinois, Indiana, Ohio and Wisconsin). Although Michigan’s prices were high compared to the four-state average from 2000 to 2006, they declined relative to that average from 2000 to 2004. This decline ended after 2004, however, with Michigan trending up again at a faster rate than the four-state average.[17]

Graphic 6 - click to enlarge

Graphic 7 - click to enlarge

Graphic 8 - click to enlarge

Source for Graphics 6-8: U.S. Energy Information Administration.[18]


[*] Authors’ calculations based on "Electric Power Annual 2006 - State Data Tables: 1990 - 2006 Average Price by State by Provider (EIA-861)," U.S. Energy Information Administration, www.eia.doe.gov/cneaf/electricity/epa/epa_sprdshts.html (accessed May 10, 2008). The figures are slightly imprecise because of changes in the way the U.S. Energy Information Administration classified these data in 2003. Nevertheless, the reclassification involved less than 3 percent of the entire market and affected the data for all of the United States, so that the large difference between the price trends for Michigan and for the country as a whole remain significant.

[†] Laura Chappelle, David A. Svanda, and Robert B. Nelson, "Status of Electric Competition in Michigan," (Michigan Public Service Commission, Department of Consumer & Industry Services, 2003), 10, www.dleg.state.mi.us/mpsc/electric/restruct/reports/compreport2002.pdf, (accessed May 10, 2008). The report noted that there is considerable uncertainty about some of the capacity investment, including significant delays and cancellations. Regulatory uncertainty is presumably contributes to these delays.

[**] Note that DTE’s stock performance during this period cannot be explained simply by the subsidies DTE received under the rules of the partial deregulation. The subsidies did not begin until 2004, well after DTE’s stock price began exceeding the industry average. Nor could investors have incorporated all of the anticipated subsidies into the DTE stock price in 2001, because the MPSC had not yet written the rules that would determine the size of the subsidies.

[‡] The surcharge was levied on the customers of incumbents and nonincumbents alike. Incumbents, however, were better able to keep prices down to ease the burden on their customers, since the incumbents could offset any paper losses with the benefits they received from the surcharge in return. Nonincumbents, in contrast, still had to cover their costs and make a profit, despite a surcharge that raised prices for their customers and helped finance their competitors.

[***] As in the previous section of this brief, we omit computations of residential rates here, which were largely determined by state regulation that placed them at an artificially low level (see discussion under "Before Stranded-Cost Recovery"). For the record, however, residential rates rose about 17.3 percent, compared to the national average increase of 16.2 percent.