Green Energy Mandates and Cap on Competition Blamed for Michigan's High Energy Costs

In October of 2008, former Gov. Jennifer Granholm signed the “Clean, Renewable, and Efficient Energy Act.”

News releases supporting the legislation described it as a “bipartisan renewable energy package” that would “create jobs, diversify Michigan’s economy and save customers money on their electric bills by ensuring that the bulk of Michigan’s future energy needs are produced from renewable energy resources and energy efficiency savings.”

The most prominent features of the measure included:

1 — Michigan's two quasi-monopolistic power utilities, Consumers Energy (CMS) and Detroit Edison (DTE), got the competition from competitor electric companies capped at no more than 10 percent of the marketplace.

2 — CMS and DTE agreed to a renewable portfolio standard (RPS) mandating that 10 percent of the state’s energy come from “renewable” sources by 2015.

CMS and DTE spread a lot of money around Lansing three years ago as lobbying for the “Energy Act” took place.

Three years later, Michigan's electric rates are the highest among its neighboring states. According to the most recent data available from the U.S. Energy Information Agency (EIA), for May, Michigan's rates were 14.5 percent above the regional average, and 5.8 percent above the national average.

The EIA data showed the state's manufacturers paying 19.6 percent more than the regional average. Meanwhile, Illinois and Ohio had factory rates among the lowest in the region. Energy Choice Now, a group pushing to lift the 10 percent cap on competition, points out that Illinois and Ohio have traditionally had relatively high industrial rates, but have lower rates now after increasing competition.

Michigan residents are paying more now as well. The latest EIA data has them paying 9.6 percent more than the regional average and 10.1 percent more than the national average.

CMS and DTE argue that the EIA figures from May don't represent what the overall 2011 data would look like. They point out that in 2010 (the most recent full year of data), Michigan's rates were only 0.2 percent above the national average. But, those who are pushing to lift the competition cap claim that the most recent data is a harbinger of things to come.

“The rates through May will look good compared to what lies ahead,” said Maureen Saxon, spokeswoman for Energy Choice Now, which supports raising the cap but leaving the RPS alone. Legislation to raise the cap is expected to be introduced in the Legislature. Legislation to alter the RPS seems probable as well.

The last decade began with CMS and DTE facing increasing competition. In June of 2000, former Gov. John Engler signed the “Michigan Customer Choice and Electricity Reliability Act.” As of 2002, the utilities' customers were eligible to choose their own electric suppliers. Small cooperative customers got “choice” in 2005.

However, by 2004 CMS and DTE were campaigning to rein the competition back in. They claimed that the competitive suppliers were “cherry picking” the more lucrative business customers. This, the utilities argued, would eventually force rate increases of as much as 30 percent for residential customers. In addition, they claimed that a guaranteed source of ratepayer funding would allow them to secure financing for new base load power plants.

But after the 2008 “Energy Act” became law, the two giant utilities dumped their plans for the new power plants. At the time the “Energy Act” passed, roughly 400 Michigan businesses were getting power from competitive suppliers. Now, the 10 percent competitive cap has been reached and, according to Energy Choice Now, more than 1,000 businesses are on waiting lists to jump to competitive suppliers.

In light of the comparably high rates and the fact that building big base load plants has been taken off the table, Capitol Confidential asked CMS spokesman Jeff Holyfield if the 2008 “Energy Act” should be changed.

“No. When you look at it nationally we're just about at the average rate level,” Holyfield said, reflecting the overall 2010 figures. “Then you look at our neighboring states of Ohio, Illinois and Indiana – they all produce their own coal. About three-quarters of the cost of coal is transporting it. Michigan has to import its coal.”

Michigan has never been a coal producing state, but its rates haven't always been higher than all others in the region. How could that be the cause of the current situation?

“Our aging coal plants are an issue,” Holyfield said. “Since former Gov. Granholm signed the 'Energy Act,' most of our increased costs have come from three sources; the first being investment in our larger coal-fired plants to meet higher (national) Clear Air standards. The other major factors are the cost of implementing the '08 renewable portfolio standards (RPS) and the cost of the '08 energy efficiency standards.”

(The 2008 energy efficiency standards are tax breaks, etc. for energy efficient furnaces, insulation, windows, and so on.)

Is the RPS worth doing if it increases costs?

“It costs more but there's the advantage of doing things in a more environmental way,” Holyfield said. “A lot of our customers believe that's worth it.”

Holyfield acknowledged, however, that he had no way of knowing for sure if 50 percent or more of CMS customers would decide the RPS was “worth it” if given a choice to opt out of paying for it.

When asked about the decision not to pursue a new base load plant, Holyfield pointed out that CMS was making other significant investments. Specifically, he pointed out two wind-farms and an upgrade of the utility's Ludington facility. The Ludington plant is considered a renewable energy generator. It lifts water at night when rates are low and uses the water to generate energy during the daytime.

Mark S. Butler, owner of the Campbell Grinder Company of Spring Lake, which, among other products, manufactures jet engines, said he believes it is time to change Michigan's 2008 “Energy Act.”

“We've been here since 1969,” Butler said. “We're one of the few companies left that's still making large capital machines. Our main competitors are in Germany, Japan and South Carolina. Energy costs are lower in South Carolina and the governments in Germany and Japan help offset the energy rates for their companies.

“Our business requires extreme accuracy,” Butler continued. “We employ highly skilled workers. The economy has been down since 2008, but we still have to keep our workers. We can't just cut them back. It doesn't help when our energy bills keep going up the way they have.”

Capitol Confidential asked Butler what changes he thought should be made to the 2008 law.

“First, they need to have a plan that's something more than just having CMS and DTE give a lot of money to legislators and be among the top contributors to influential associations,” Butler responded.

Butler said the quasi-monopoly status for the two utilities should be changed and he has little use for the renewable energy standards.

“I think it's time for Michigan to increase the cap on electric competition,” Butler said. “I am not privy to all of the potential problems that could be caused by completely lifting the cap, but I do believe it should at least be increased to around 15 percent.

“The renewable energy standards really bother me,” Butler added. “I can't justify passing on higher costs to my customers just because of a feel-good decision. When you start paying for things like that it can become a death spiral of failed initiatives.”

According to Butler, General Electric (GE) is his company's biggest customer. Capitol Confidential asked if that was the same GE that's at the forefront of the “green” energy movement in the U.S. corporate world?

“They're for it when they get government money for doing it,” Butler said. “But if I tell GE that they'll have to pay 2 percent more for my product because of what I have to pay for renewable energy, they won't like it.”

The cost of the 2008 RPS standards will be recovered by charging higher energy prices and by collecting a surcharge of up to $3 per month (currently lowered to $0.75 by CMS) for residential customers, $16.58 for commercial customers, and $187.50 for industrial customers. The charges may be collected over a 20-year span.

Steve Elsea is director of energy services with Leggett & Platt Inc., a North American manufacturer with a customer base of familiar U.S. manufacturers and retailers. Its 2009 sales totaled $3.06 billion. It employs 19,000 workers at more than 140 facilities in 18 countries, including five plants in Michigan.

Elsea argues that increasing energy competition in Michigan would put to rest a lot of the concerns about the viability of the RPS.

“Michigan should allow new companies entering the state to not only sell here, but to generate their own energy here,” Elsea said. “That would change the dynamic. Those companies would have to adhere to the same RPS, but they wouldn't be out there spending money on the gold-plated projects. They'd have to do ones that really work and are efficient. That's because they'd be accountable to their stockholders. DTE and CMS don't have to worry about that; they can just pass the cost on to their ratepayers.”

Elsea said he doesn't agree with the CMS and DTE cherry-picking argument.

“The states that have really opened their markets up to competition are Pennsylvania and Texas,” Elsea said. “In those states the original utilities are still doing quite well. The state Michigan is most similar to is California. Both had competition and then took it away. California did open its up a little bit, but that lasted just nine seconds. I'm not kidding. The demand was so high for alternative suppliers that it filled up in about nine seconds. Michigan hasn't opened theirs up at all.”

The Michigan Manufacturers Association (MMA) recently released results of a survey it took of its own membership that listed electricity prices as the third most important cost they face. In '08 the MMA supported the “Energy Act.” This week, Capitol Confidential asked MMA Vice President for Government Affairs Mike Johnston if the MMA still supports it.

“Absolutely,” Johnston said. “There were a lot of different parts to that plan. Michigan may have higher electricity prices right now compared to other states in the region, but we're in the middle of the pack nationally. Really, when you consider the realities of the new carbon-restrained market, the 2008 energy legislation was very important to Michigan's future.

“We have to look ahead to building capacity as we move forward,” Johnston added. “We're going to be dealing with the potential loss of our coal plants, which are comparatively old. The 2008 legislation included a renewable energy portfolio, much of it being wind, to help supply energy while we prepare for the longer term case load.”

Is it realistic to expect wind to play a significant role in the production of energy for the state?

“Wind was just the initial response,” Johnston said. “It will help supply electricity while other sources are developed.”

Capital Confidential asked Johnston how much time Michigan residents should give the '08 measure before passing judgment on it.

“We'll have to wait and see,” Johnston said. “There are many factors that influence the price. Looking ahead, these will include new discoveries of [natural] gas.”

Jim Holcomb, senior vice president for business advocacy for the Michigan Chamber of Commerce, said he has a time line for seeing how the 2008 “Energy Act” works out.

“We think we should give it at least until 2013-2014,” Holcomb said. “There are provisions of the act that still haven't taken effect. But it has already improved the status of the market. It's certainly not perfect. No legislation is. A lot of people would like to see it tweaked this way or that way to their benefit. But the issues involving higher prices aren't only attributable to the 2008 legislation.”

After months of negotiations, the Michigan Chamber reached agreement on the 2008 “Energy Act” and supported it. That key “breakthrough” led to passage of the measure.

“Everybody likes competition,” Holcomb said. “The Chamber has always supported market competition. But when you're dealing with energy it’s a little bit different. You have to make sure it’s reliable and available for everyone.”

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