Possible Policy Outcomes (Section IX)

This section appears to describe four possible policy outcomes. One option is to move to “Full Deregulation,” although that term is not clearly defined, and this option is grouped with the “Full Customer Choice” option. It appears that the Draft Report is defining Full Deregulation as the opening of Michigan electricity markets to competition and the elimination of all rate regulations. The term "deregulation," however, is frequently used in other sections to describe past regulatory policies in Michigan and other states, and that usage of the term in other sections of the Draft Report is misleading.

As a general principle, competition is more effective than rate regulation in holding down prices over time, but Michigan's electricity choice program as it existed from 2002 to 2008 did not eliminate rate regulations for incumbent utilities. By defining Full Deregulation in Section IX as eliminating all rate regulation, the Draft Report turns all of its prior uses of the term in previous sections into mischaracterizations of the state of electricity competition in Michigan and other states. The Draft Report should be more careful in how it uses the term "deregulation," and better terms are available to describe these policies, including "restructuring" and "introducing competition."

The Draft Report describes Full Customer Choice as the option that existed in Michigan from 2002 to 2008. That term is also somewhat misleading, because Michigan's choice law contained several requirements that undermined the "choice" aspects of the regulation at that time. These requirements included:

  • Price caps that locked residential rates (but not commercial and industrial rates) at 5 percent below 2000 levels until 2005. These price controls inhibited competition, innovation and efficiency by artificially distorting the market and probably discouraged entry by suppliers into this customer sector. Notably, according to the U.S. Energy Information Administration, commercial rates dropped by 3.5 percent and industrial rates by 4.2 percent between 2000 and 2004 in Michigan, so the residential price cap likely had little effect on residential prices.

  • A requirement that the incumbent utilities alone must act as the suppliers of last resort. DTE Energy and Consumers Energy, for example, must reconnect customers at the regulated rate should they opt to leave a competing service provider. This requirement constitutes a competitive disadvantage because incumbent utilities must underwrite the costs of maintaining supply for phantom customers or purchasing more costly power that regulated rates would not cover.

  • Incumbent utilities were required to provide home heating assistance programs. This program overlapped substantially with other assistance programs from public sources, including federal funds for home heating assistance programs, Michigan's home heating tax credit, and the Family Independence Agency (now the Department of Human Services) providing emergency heating assistance.

  • Michigan ratepayers were paying various forms of substantial payments to the largest utilities to compensate the large utilities for the move away from "Full Regulation" (and which were not repaid when the utilities received their 90 percent guaranteed market shares in 2008). Some of these charges were imposed on the new entrants supplying electricity, so that they were collecting charges from their customers that were turned over to their largest competitors.

Nonetheless, the "Full Customer Choice" option comes the closest to describing competition in Michigan as it existed beginning in 2002, so that term will be used in these comments. As discussed below, the Full Customer Choice regime, while it lasted, was very successful in terms of making Michigan electricity rates more competitive with those of nearby states and the United States as a whole.

As a practical matter, the important difference between Full Deregulation and Full Customer Choice will occur if not enough entrants come to the Michigan electricity market. A fully deregulated market — one with no rate regulations — would create downward pressure on prices as both new entrants and incumbent utilities competed for customers. If sufficient entry occurs under Full Customer Choice, the large incumbent utilities will have to respond to downward pressure on prices, or else they will lose market share, so even regulated rates will have to reflect competitive pricing. If, however, too little entry occurs to sufficiently affect electricity rates, Full Customer Choice could preserve traditional rate regulation, while full deregulation would not.[2]

The Draft Report also lists "Adjust the 10% Cap" as an option. It appears that adjusting the cap to 100 percent would be the same as the "Full Customer Choice" option.  Any such cap is arbitrary and artificial, and Michigan is unique among all states in using its cap to guarantee a 90 percent market share for its largest utilities. Indeed, a 90 percent market share “is enough to constitute a monopoly,” according to the U.S. Second Circuit Court of Appeals.[3] That the cap was reached within months of being imposed by the 2008 legislation suggests both that the cap was too low and unnecessarily arbitrary.

The other option in the Draft Report is “Full Regulation,” presumably as it existed before 2002. The Draft Report correctly noted that Michigan ratepayers paid compensation to the largest utilities for the move away from Full Regulation, and raised the issue of the large utilities paying back those charges. The evidence shows that rates in Michigan went down after competition was introduced and went up when competition was limited by the 10 percent cap. Eliminating all competition and turning back to Full Regulation will leave Michigan with no competition to hold rates in check, and will inevitably place Michigan at a greater competitive disadvantage with neighboring states and the rest of the country where rates are generally lower.

Section IX and earlier sections of the Draft Report generally describe electricity competition as something that has had little success when it has been tried. Many states have tried something that has been called "competition" or "deregulation," but actually have imposed new and often worse regulatory requirements that have undermined the introduction of competition. As noted above, Michigan also introduced new and inefficient regulatory requirements during its brief era of Full Customer Choice, but for the most part Michigan's electricity choice program was simple and clean compared to many other states that required utilities to sell-off assets and do business in certain ways that were mandated by regulators.

The Draft Report could also take a broader view of competition policies by looking to other markets where we can see the results from introducing competition to formerly regulated markets. Competition has been introduced in a wide range of other formerly monopolized markets with high fixed costs, including cable television, telephone service, airline travel, natural gas production and freight shipments over railroads. Today, each of these markets is characterized by competition and, for the most part, the absence of government price regulation.

Suppose Michigan's current approach to electricity requirements was applied to other markets. In cable television, local cable firms would be guaranteed a 90 percent market share and customers wanting to switch to DirecTV or Dish Network would be placed on a waiting list until a spot opened up for them under the 10 percent cap. AT&T landline service would also have a 90 percent guaranteed share of customers, and those wanting cell phones or to switch to an alternative provider like Comcast or Vonage would also be placed on a waiting list. Such policies seem absurd today, but 25 or so years ago, these caps on access to alternative service providers may not have seemed unreasonable for monopolized telephone or cable television services operating under traditional natural monopoly regulations.

[2]  Unlike other states that tried to force certain market outcomes as they restructured in the last decade, Michigan's Full Customer Choice approach did not attempt to force some form of new entry. Instead, Michigan's choice law opened the market to competition and invited any entrants to compete. If entrants believed they could provide electricity more efficiently than the incumbent utilities, they had the opportunity to do so, but none were required to do so.

[3]  United States v. Aluminum Co. of Am., 148 F.2d 416, 424 (2d. Cir. 1945); Am. Tobacco Co. v. United States, 328 U.S. 781, 813-814 (1946).