ISSUE #2: Price / rate controls

The MPSC Staff Report recommends that a number of pricing safeguards be included in the plan to open the market to retail access. These protections include (1) a base rate freeze, (2) alternative power supply cost recovery treatment, and (3) limited performance-based regulation.

The MPSC argues these safeguards are necessary since, "Customers not participating in the direct access program need to be protected from potential cost increases that might otherwise result from the transition to direct access. Such protection is especially important during the period when direct access opportunities are necessarily limited." 20 

This begs the question: Would such price protections and rate controls be necessary in an environment of full-blown competitive retail choice? It is only because the MPSC Staff Report recommends a staggered phasing-in of retail access that such protections must be considered. If Recommendation #1 is followed and all customers are provided choice on equal terms immediately, there is no need for convoluted price controls to be in place as Michigan moves toward a more competitive future.

The only legitimate pricing issue the MPSC should be concerned with is the price utilities charge alternative providers for access to transmission and distribution lines used to reach customers. Because alternative power providers will need to use these lines to "wheel" their power to customers across Michigan during the transition to a fully competitive market, the MPSC may have a role in making sure access prices are not well above the actual cost of providing such service. If utilities controlling these lines are allowed to include many other costs in the transmission access price (such as a stranded cost recovery tax discussed below) then competition may fail to develop and overall power prices may not fall.

As long as the MPSC stipulates that alternative power providers deliver service to all Michigan consumers across existing transmission and distribution lines at reasonable rates, there should be no need to regulate final retail power prices since the competitive interplay of buyers and sellers in the marketplace will work to reduce prices. Furthermore, even the regulations governing the pricing of transmission access should end at some point in the near future—perhaps after five years.

 Recommended Action #2: Eliminate transitional price controls on final retail prices.

Recommended Action #3: Establish a simple, transitional transmission access pricing rule that compensates holders of the lines only for the actual cost of using those lines. Sunset such transitional rules once competition takes hold and the market power of the current monopolists has dissipated.