Michigan’s Approach to Competition in Energy Supplies

Electricity Transmission System
Click to enlarge

The provision of electricity was once regarded as a “natural monopoly.” The theory of “natural monopoly,” now largely questioned, presumes that building competing electricity infrastructure is too costly to justify. Supposedly, the customer base and price of electricity are insufficient to recover the capital investment required to construct a competing power plant. Consequently, the state bestowed regional monopoly status on select utilities, and imposed price controls and other regulations to temper the market power of the chosen monopolists.

For decades, Michigan has been divided into service territories with a specific utility designated by the state to generate electricity, transmit the power to the grid and distribute it to customers. Detroit Edison and Consumers Energy, between them, have long serviced 90 percent of the market statewide. The Michigan Public Service Commission regulates rates and service standards. In the late-1990s, in concert with a deregulatory trend nationwide, Michigan lawmakers began mulling reform proposals. Electricity rates in the state were consistently higher than the Midwest average, putting Michigan at a competitive disadvantage in retaining and attracting new industries. Lawmakers sought to open the market to competing suppliers of electricity and to promote investment in new, more efficient power plants.

The Legislature authorized utility restructuring in Public Act 141 of 2000, the “Customer Choice and Electricity Reliability Act.” The new law effectively “unbundled” power generation, transmission and distribution as distinct services, and allowed alternative power suppliers both inside and outside the state to consign electricity to the existing power grid and thus compete with Detroit Edison and Consumers Energy for industrial, commercial and residential customers.

As a practical matter, power suppliers cannot direct the electricity they produce to specific customers. But the total volume of power they add to the transmission grid represents the load specified by their customer contracts.

To comply with changes in federal and state law, both Consumers Energy and Detroit Edison in 2002 sold their transmission facilities to an “independent system operator.” Independent management of these transmission assets is being phased in. The Midwest Independent Transmission System Operator, Inc., will ultimately oversee an electricity network traversing 15 states, from Pennsylvania to Montana, and including Manitoba, Canada.