The Transition to Competition

Monopoly status carried both advantages and obligations. With government protection from competition, Detroit Edison and Consumers Energy could depend on a secure share of the market. But they were also required to maintain at all times enough power capacity to serve the peak demands of all customers in their regions. In many instances, this required the utilities to negotiate long-term contracts with other power suppliers without knowing what the future market price of electricity would be months or years into the future.

Moreover, the utilities invested capital in infrastructure based on the power demands forecast for a fixed share of the market.

When the debate over restructuring commenced, utility officials and shareholders were particularly concerned that a loss of customers to competitive power suppliers would deprive them of revenue needed to recoup investments that had been made with the explicit approval of the state, and for which a return was guaranteed through regulated rates paid by a captive customer base.

With this in mind, lawmakers sought to ease the transition to competition for Detroit Edison and Consumers Energy. Public Act 141 of 2000 authorized the Public Service Commission to analyze which utility investments were made to fulfill regulatory obligations. If the utilities’ customer base does not generate sufficient revenue to recoup the regulated investments, the commission is authorized to impose charges to recover so-called “stranded costs” to be paid monthly by every ratepayer, regardless of supplier.

The issue of “stranded costs” continues to arouse considerable debate. Opponents contend that power plants are actually valuable assets for which there continues to be market demand. The utilities’ debts, they argue, can be recovered through the sale of electricity on the spot market or by private contracts, or by outright sale of the infrastructure. Moreover, encumbering all ratepayers with a share of “stranded costs” artificially inflates the price of electricity in Michigan and, therefore, diminishes the benefits of competition.

Nonetheless, stranded cost recovery was the political price paid to initiate utility restructuring. The two incumbent utilities are also guaranteed compensation for costs associated with transforming the power networks and billing systems to facilitate competition.

Michigan ratepayers are liable for a total of $2.2 billion in utility debt recovery. The bulk of the tab — $1.77 billion — represents the dollar value of securities sold by Detroit Edison in order to refinance outstanding debt. This process of refinancing, called “securitization,” enabled the utility to obtain an influx of cash at very attractive interest rates because debt securities are exempt from federal income taxes. They also carry less risk to investors because a revenue stream for repayment was secured by the state.

The recovery of utilities’ costs related to implementing restructuring, such as adapting billing systems to competition, has prompted litigation. But the Michigan Court of Appeals in April ruled that the Public Service Commission had improperly delayed consideration of this cost recovery, and rightly ordered the state to move ahead with compensation.