Current rates and how competition might impact them

As mentioned above, Michigan’s electricity rates are among the highest in the Midwestern region and are also above the national average. Appendix B summarizes the average price per kWh charged by Michigan’s regulated utilities for all customers classes.

Chart 4 dramatically illustrates the true impact higher electricity rates have on the Michigan marketplace. While Michigan’s average electricity rate of 7.1 cents per kWh does not sound that much higher than the national average of 6.9 cents per kWh, it is important to discuss the rates Michigan’s different customer classes are charged relative to other states—especially those which compete with the state for industrial and commercial job opportunities.

Within the Midwest region, Michigan’s overall electricity rates are higher than those of Indiana, Wisconsin, and Minnesota, and its industrial rates are higher than those of Illinois and Ohio. Average commercial and industrial rates are particularly important to Michigan since artificially high electricity prices can discourage industries from settling in Michigan or even staying there. Because a great number of energy-intensive businesses currently reside in the state, it is vital that policy makers remove barriers that keep electricity costs artificially high for these firms. Without action, many firms might relocate to other states.

Consider automobile manufacturing. When an automaker is considering expansion plans, it first looks for an appropriate location for the plant. Of the many considerations (including labor costs, environmental regulations, tax incentives, and others), one of the most important will be how the region may affect the firm’s cost of goods sold (including effects on raw material and overhead costs). One of the most important costs will be electricity, since auto production demands large energy inputs.

Holding all other factors equal, consider the choice a firm’s board of directors has if the field has been narrowed to Michigan, Ohio, Kentucky, and South Carolina. Michigan’s industrial rates hover around 5.2 cents per kWh. Ohio, Kentucky, and South Carolina’s rates are all roughly 4 cents or lower. Clearly, if the decision came down to such a consideration, Michigan might lose a potential source of good jobs and income. While the state might attempt to find ways to get around this problem via tax breaks or other special incentives, history has proven that other states will be willing to engage in a "race to the bottom" in terms of special preferences. If Michigan policy makers have to engage in such an economic war of special preferences to compensate for artificially high electricity rates, Michigan taxpayers will end up footing the bill in one way or another.

The same scenario could play out across many other commercial industries as well, such as large retail stores or grocery chains. Higher electricity prices affect the decisions businesses make and can have a negative impact on the future economic competitiveness of the state. A study by Wayne Crews shows just how much Michigan’s commercial, and industrial consumers have to gain under competitive conditions. Assuming a 5 percent to 45 percent price cut, Crews estimates commercial customers could save anywhere from $293 to $2,641 annually. For the average industrial customer, the savings are even more impressive, ranging from $6,831 to $61,481 annually. 13  For very large industrial companies that consume more electricity, the savings would be even higher.

Savings of this magnitude will lower the overall costs for Michigan’s industrial and commercial customers, which in turn will improve business efficiency and productivity. A more competitive economy and an improved job market will result from such savings.

Customer choice and competition will also have direct benefits for Michigan’s residential consumers. Electricity choice will lower rates for families and senior citizens on fixed incomes, resulting in an immediate improvement in their standard of living. And while those who support the uncompetitive status quo will argue that residential consumers will not have the knowledge or information available to them to "shop around" for service, history certainly points to the opposite conclusion. Airline transportation, rail and truck shipping services, and long-distance telephone service—all once heavily regulated industries—are now extremely competitive thanks largely to the vigorous efforts of consumers to constantly shop around for the best deal.

It is likely that competition will greatly increase marketing and advertising efforts by companies seeking to attract the allegiance of Michigan’s overcharged electricity consumers. Newspaper, magazine, and television reports will undoubtedly make consumers aware of the options available to them. Consumers will become savvy electricity shoppers with the sort of information shown in Chart 5.

What will be the end result for residential consumers in terms of reduced rates and overall savings? Economist Wayne Crews estimates substantial savings. Even a small 5 percent drop in prices would yield $29 in annual savings. A more substantial cut of 45 percent would yield estimated savings of $265. 14  Regardless of the magnitude of the savings, residential customers will have more disposable income available once choice becomes a reality.

A competitive electricity market will increase service quality and reliability while introducing more innovative service options into the marketplace. For example, more environmental options—such as so-called green power from hydroelectric, solar, and wind sources—will be available. Likewise, consumers will be able to bid as a group for reduced rate bulk power. For example, a senior citizens’ organization may be able to arrange special deals on behalf of its members.

This will be extremely important since, as shown by Chart 6 and Chart 7, residential consumers and small commercial businesses actually get hit very hard by electricity prices. In fact, residential and small commercial business rates are actually much higher in per kWh terms than the rates charged to large industrial customers.

Higher residential and small commercial rates are not surprising since large industrial consumers have some bargaining power that allows them to negotiate long-term bulk purchase arrangements that help reduce their overall rates. In an environment of comprehensive choice, all rates—not just those paid by industry—would tend to be forced downward by competition.

Politically, this means policy makers must ensure that residential and small business consumers are guaranteed competitive choice on equal terms with large commercial and industrial businesses. Otherwise, residential and small business customers will rightly claim they are not being treated equitably as deregulation unfolds.

An oft-repeated criticism of deregulation made popular by defenders of the regulatory status quo—that Americans already enjoy low enough electricity rates relative to the rest of the world—must be debunked. William T. McCormick, Jr., chief executive of Consumers Energy, argues, "America’s industrial electric rates are far lower than those in countries we regard as our main industrial competitors. Japanese and German factories pay electrical rates several times higher than U.S. rates." 15 

"But," as Doug Bandow, senior fellow with the Washington, D.C.-based Cato Institute responds, "being the best regulated monopolist is no longer enough." 16  The fact that the rest of the world suffers the adverse effects of centralized regulatory planning should not serve as an excuse for denying American consumers the benefits of competition and customer choice. Technologically, there is nothing preventing such a development from occurring. All that remains is the political will to take action to ensure that a fair and competitive future develops.