With the legislature scheduled to resume debate over electricity deregulation, Michigan consumers may be convinced that the dream of a competitive power market may soon become a reality. Unfortunately, if the states largest electric utility monopolies prevail, this dream of a competitive future could become a costly nightmare. The states electric monopoliesmost notably Detroit Edison and Consumers Energyhave convinced many policy makers that Michigan ratepayers should pick up the tab for an expansive list of their uneconomical past investments, or so-called "stranded costs."
Stranded costs are, in reality, nothing more than economic losses companies incur, especially during transitional periods. All industries face stranded costs of some sort, whether it is an old piece of machinery that becomes technologically obsolete over time or a new product that simply flops when it hits the market. When firms incur such losses, they typically absorb the costs internally, refinance their assets, restructure their debts, or ask their shareholders to eat some of the costs over time. The bottom line is that customers are not required by law to pick up the tab for their suppliers past mistakes.
In the case of electricity, however, the proposed transition to a competitive market has left the utilities searching for ways place the losses that could accompany the rise of competitive rivalry on someone elses shoulders. That someone else, argue utility officials, should be the states captive electric ratepayers. In other words, while Michigans electricity consumers may have thought that deregulation would allow them to escape the grip of monopoly, they may have to remain hostages until a ransom is paid in full.
How much is this ransom? In Michigan, anywhere between $1 billion and $7 billion, depending on whos counting. The legislature has yet to put a microscope to the generous stranded cost claims of the utilities, although a bill introduced in October by Representative Tom Alley (D-West Branch), and based on a proposal by Attorney General Frank Kelley, addresses that issue. Nationwide, estimates run as high as $200 to $300 billion, meaning the bailout of the electric industry could easily rival the bailout of the savings and loans as Americas all-time greatest giveaway.
More disturbing, however, is how this ransom is to be paid out. Utilities are working overtime to convince lawmakers to give them most of the money theyre asking for up front via the "securitization" of their future losses. That means utilities estimate their stranded costs and sell bonds equal to the amount they wish to recover. This provides them with a cash windfall at the starting gate of competition, which promises to stifle competition, not enhance it.
Electricity customers would be legally obligated to repay these new bondholders over a multi-year period. Electricity bills would contain an additional monthly charge, or transition tax, that would be used to help pay off utility debts over the next few years.
This process can be called many things, but deregulation is not one of them. Securitization entails continued rate-rigging and taxation that were supposed to be eliminated as Michigan moved to consumer choice in electricity.
This isnt the way electricity deregulation was supposed to turn out. Securitization is not a sensible market mechanism that will make the stranded cost issue disappear, as some policy makers expect. Instead, it will simply transfer the problem onto the shoulders of unwitting and powerless ratepayers who will, most likely, not even be aware of what is taking place.
This issue requires the legislature and the public to wrestle with some very important philosophical and policy issues: Should ratepayers be stuck footing the bill for problems they did not create? Should inefficient utilities be rewarded for those past investment mistakes that were not mandated by law or regulation? Other industries that have been deregulatedtrucking, airlines, and telecommunicationswere not granted similar bailouts, so what reasons justify special treatment for the electric industry?
The interests of consumers and competition must be taken into account if electricity deregulation is to achieve the best results, which implies a much narrower view of what constitutes a legitimate "stranded cost" than what the utilities want. If legislators are instead seduced into supporting large-scale securitization, it will represent a major victory for monopoly over the captive ratepayers that policy makers profess to protect.