Re-regulating Electricity Could Shock Michigan’s Economy

The Michigan Legislature in May 2000 approved the introduction of competition in retail power supplies. Ending the monopoly structure in the generation of electricity was intended to lower rates and improve service quality. But attempts are underway to reverse this restructuring.

Such a reversal in deregulation would restrict choice in electricity supply, harming rather than benefiting consumers and the businesses that employ them. However, some regulatory reforms would improve the system.

For decades, Michigan was divided into service territories with a specific utility designated to generate electricity, transmit the power to the grid and distribute it to customers. Detroit Edison and Consumers Energy, between them, serviced 90 percent of the market statewide.

In the late-1990s, Michigan lawmakers began mulling reforms. Electricity rates in the state were higher than the Midwest average, putting Michigan at a disadvantage in retaining and attracting industry.

The Legislature authorized restructuring in Public Act 141 of 2000. The law “unbundled” power generation, transmission and distribution as distinct services, and it allowed alternative power suppliers to compete for customers.

Michigan is in a transition phase of restructuring. In the Detroit Edison service area, alternative power suppliers now account for about 20 percent of commercial sales and 16 percent of industrial sales. In the Consumers Energy territory, alternative power suppliers account for about 7 percent of commercial sales and 16 percent of industrial sales.

Few residential customers have opted for a competing supplier. This is not surprising. Lawmakers in 2000 mandated a 5 percent rate cut, which reduced customers’ incentive to seek alternatives. Too, new entrants in the power market have targeted their marketing on large-volume purchasers, the better to gain a foothold in the market. Residential customers do benefit from restructuring, however. Competition overall puts downward pressure on rates.

The restructuring has increased the potential for investment in new generating capacity. Officials have identified at least 15 new facilities in the planning stages or under construction that, if completed, would add nearly 12,000 megawatts of new generating capacity in the state — or about four times the amount currently provided by alternative suppliers.

Some rhetoric employed by advocates of new regulation is false. Michigan is not heading toward an energy crisis of catastrophic proportions, as California did.

In the case of California, regulators forced utilities to divest all generating capacity and required them to purchase all power from wholesale suppliers and brokers, such as Enron. Regulators also prohibited California utilities from negotiating long-term contracts that would ensure a stable supply of electricity at lower, fixed rates. Compounding the problem were price controls that forced utilities to sell power at retail rates far below the prices paid for the electricity on the wholesale market.

Detroit Edison officials have raised some legitimate policy issues that deserve consideration. None warrant repeal of utility restructuring, but some changes could improve Michigan’s power market.

A key complaint among the incumbent utilities is the requirement they alone must act as the suppliers of last resort. Detroit Edison and Consumers Power, for example, must reconnect customers at regulated rates should they opt to leave a competing service provider. This requirement constitutes a competitive disadvantage because incumbent utilities must underwrite the costs of maintaining capacity for phantom customers.

Similarly, the former monopolists should not be forced to subsidize electrical service to rural households or business. The choice to live in a remote area involves trade-offs that ought not to be subsidized by Detroit Edison or Consumers Power.

The one element of P.A. 141 that deserves repeal is the price cap that locked in rates at 5 percent below 2000 levels until 2006. Price controls inhibit competition, innovation and efficiency by artificially limiting returns on investment.

Detroit Edison’s campaign to alter utility restructuring has created uncertainty in the marketplace. Investors are understandably reluctant to risk their capital where the rules appear to be in flux. For this reason alone, the Legislature should address the issue without delay. And considering the benefits to date of competition in power supply — and the promise of more to come — lawmakers would do well to focus on further deregulation of the electricity market.

Theodore Bolema, Ph.D., is an adjunct scholar for the Mackinac Center for Public Policy and a faculty member of the Finance and Law Department of Central Michigan University’s College of Business Administration. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation are cited.