Executive Summary

Though choice is commonplace in most everyday goods and services, Michigan consumers have heretofore had no realistic choices in the purchase of electric power. Both technology and a national trend toward deregulation of the industry are about to change that.

Michigan’s electricity rates are among the highest in the Midwest—15 percent higher on average—and are a major economic impediment. Giving customers the power to freely choose their electricity provider, thereby ending decades of government-protected monopoly, would enhance the state’s future economic competitiveness. Enacting legal reforms to abolish exclusive franchise territories and allowing alternative power providers use of existing transmission and distribution facilities can bring about a truly competitive electricity marketplace in Michigan.

The result of bringing fair, timely, and comprehensive customer choice to the Michigan electricity market will be to:

• create a level playing field for future industry rivalry and competition, spurring new innovations;

• cut prices for residential customers by empowering them to choose their electricity provider;

• cut prices for commercial enterprises, especially small businesses;

• equalize regional differences in electricity prices;

• benefit the environment;

• increase service reliability; and finally,

• increase jobs and benefit local communities.

In January 1996, the Michigan Jobs Commission (MJC) issued a report on the electricity market in Michigan. Its nine recommendations were passed on to the Michigan Public Service Commission (MPSC), which issued an important staff report in December of that year. The MPSC staff report advanced at least two ingredients not included in that initial MJC report : It argued that all electricity customers, not merely industrial and commercial users, be granted choice (a position now embraced by the MJC), and it argued that rates under deregulation should not be increased for any customers. In a critical step toward deregulating the state’s electric industry, the MPSC approved in early June 1997 an order to phase in competition over a five-year period, with all customers given choice by 2002.

This study identifies six key deregulatory issues facing the state and in each case, makes one or more specific recommendations:

Retail customer choice agenda and schedule: grant all customers choice immediately;

Price/rate controls: eliminate transitional price controls on final retail prices and establish a simple, transitional transmission access pricing rule that compensates holders of the lines only for the actual cost of using those lines—sunsetting such rules once competition takes hold;

Stranded cost recovery: disallow all stranded cost claims for compensation except in rare cases where a utility can prove beyond doubt that the investment was forced upon it by the MPSC or the legislature, and do not guarantee utilities a revenue flow (via transmission fees or customer rates) to pay back any bonds they may issue to "securitize" their losses.

A "stranded cost" is a cost incurred during the era of regulation (such as the expenses for a facility that may not be viable in a competitive market) that utilities argue should be paid for in the future by their customers or competitors. To allow for stranded cost recovery, except in the rare cases referred to above, would amount to a bailout of the industry that would hamper competition, give the less efficient utilities an unfair advantage, nullify many of the benefits of deregulation, force consumers to pay for services they do not want or may not even receive, and provide a harmful precedent for the future deregulation of other industries.

Curiously, the stranded cost question never arose when other industries were deregulated in recent years. Attempts to include such extraneous costs as employee retraining or the creation of new billing systems into a stranded cost definition should be seriously questioned.

The remaining three key deregulatory issues and related recommendations are as follows:

Transmission operation and regulation: allow market participants to establish a regional transmission system without a preemptive mandate, and work with federal authorities to resolve interstate reciprocity concerns;

Environmental concerns: ensure that the pro-environmental benefits of competition manifest themselves by giving all customers the choice to shop for "green power" immediately; and

Universal service: impose no "carrier of last resort" requirements on any carriers and refrain from implementing assistance programs in ways that distort market activity.