This chapter explains some of the key regulatory issues that impact Michigan consumers. These issues are by no means the only regulatory topics of interest, but they are likely to have the largest impact on the reliability and affordability of electricity, the two chief concerns of nearly all utility customers.
Regulation of Public Utilities
As noted in the opening of this paper, Michigan’s market is generally divided into three distinct phases: generation, transmission and distribution. A mix of companies, including DTE, Consumers Energy, UPPCO, UMERC, and a portion of alternative energy suppliers — both in state and out — are responsible for the generation and distribution of electricity. ITC and ATC are primarily responsible for the transmission in Michigan.
Prior to 2000, Michigan had a vertically integrated electricity system, meaning the electricity used by Michigan’s residents was provided by monopoly utilities working within a fully regulated system. Utilities operated as “natural monopolies,” generating electricity, and operating both the transmission and distribution sectors.
In another Mackinac Center report titled, “Proposals to Further Regulate Michigan’s Electricity Market,” authors Diane Katz and Ted Bolema explained the concept of a natural monopoly in electricity markets:
Historically, the provision of electricity in Michigan was considered to be a “natural monopoly.” The theory of natural monopoly, now largely questioned, presumes that building competing electricity infrastructure would be too costly for a second electricity supplier to afford. The customer base and price of electricity supposedly are insufficient to recover the capital investment required to construct competing facilities. Consequently, the state bestowed regional monopoly status on select utilities and imposed price controls and other regulations to temper their monopoly market power.
Attitudes toward the natural monopoly concept have been questioned and are viewed by many as being less than an ideal way of providing reliable and affordable electricity to the public. The natural outgrowth of those changing mindsets came in FERC’s Order 888, which broke up these natural monopolies across the nation and moved transmission of electricity into a separate segment.
Today, Michigan’s monopoly utilities — DTE and Consumers Energy — no longer own and operate the majority of high voltage transmission lines. But they do continue to operate the generation and distribution sectors for 90% of Michigan’s retail electricity markets. The remaining 10% is supplied by alternative electricity suppliers, operating in a more free-market system that allows them to either generate the electricity that their customers require, or to purchase electricity from regional markets. Transmission continues to be provided by single, “natural monopoly” transmission providers, with ITC and ATC building and maintaining much of the state’s high voltage transmission system.