Analysis of 2013 MPSC Report

To explain the rise in the price of electricity in Michigan since 2005 shown in Graphic 1, the Draft Report points to one ill-conceived provision in the Michigan electricity choice program created by
P.A. 141 of 2000 — a temporary mandatory rate cut for residential customers that expired in 2005 — and asserts that this policy wholly explains these rising costs. This explanation is lacking, however, because it does not explain why electricity rates for commercial and industrial consumers, who were not subject to the temporary rate cut and who consume two-thirds of the retails sales of electricity in Michigan, also rose over this period. It also fails to take into consideration that the average price for electricity in surrounding states was also increasing at this same time and across the United States as a whole. Finally, the Draft Report’s explanation for rising costs after 2005 ignores important exogenous factors impacting the price of electricity, such as the increase in the price for coal and natural gas during this time period.

The Draft Report proposes four possible regulatory responses: “Full Deregulation,” “Full Customer Choice,” “Adjust the 10% Cap” and “Full Regulation.” Attempting to identify options for regulators and evaluating the options is a useful approach, but the options, especially the Full Deregulation and Full Customer Choice options, are vaguely defined. Even more problematic, these options are not defined until near the end of the report, and yet the terms are used frequently and inconsistently throughout. The Draft Report's recommendation section correctly identifies Full Customer Choice, or opening markets to competition, as different from Full Deregulation. However, these terms are not used in the same way in the other sections. In particular, the term "deregulation" is used to describe choice. Similarly, "deregulation" or "customer choice" are used to describe regulatory policies, especially those in other states that are inconsistent with the Draft Report's definitions. Defining these terms and using them consistently is important to provide useful guidance for policymakers.

The Draft Report also raises the possibility that additional "stranded cost" payments should be made to large utilities if Michigan changes its regulatory policies. In doing so, the Draft Report is too quick to assume that such payments are justified. As discussed below, the economic justification for requiring rate-payers to make stranded cost payments to large utilities is questionable at best. Moreover, Michigan utilities have already collected substantial stranded cost payments from Michigan ratepayers, and did not return any of their original stranded cost payments after they were insulated from competition in 2008.

The following comments address three specific sections of the Draft Report: “Possible Policy Outcomes” (Section IX), “Rates” (Section VI) and “Stranded Costs” (Section V).