Executive Summary

A series of bills in the Michigan Legislature would increase regulation of the state’s electricity industry, decrease competition between suppliers and mandate greater use of "renewable energy," such as solar, wind and hydroelectric power. Such regulation would mark a departure from the mild deregulation of electricity markets initiated by the Legislature in 2000, when passage of Public Acts 141 and 142 permitted new competition among electricity suppliers.

These reforms were meant to reduce the state’s historically high electricity costs and improve service to consumers. At first, the new laws achieved these goals. From 2000 to 2004, industrial and commercial electric rates fell by approximately 3 percent and 4 percent respectively in Michigan, while rising by about 13 percent and 10 percent nationwide. The state’s average rates for all customers displayed a similar trend.[*] Just as telling, Michigan’s electricity prices, which are typically higher than those of Illinois, Indiana, Ohio and Wisconsin, fell enough to diminish the gap and make the state more competitive with its neighbors.

These trends ended after 2004. State government began providing a large subsidy to the "incumbent utilities" — Detroit Edison and Consumers Energy — in the form of a state loan guarantee backed by a surcharge on their own and their competitor’s customers. This infusion of cash, meant to indemnify the incumbents against possible losses from competition and compensate the companies for the cost of regulatory mandates, undercut the price advantage of their competitors, who were simultaneously hit by rising natural gas prices. The nonincumbents’ market share, which had been skyrocketing, plummeted, and Michigan’s electricity prices started rising once again.

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Source: Michigan Public Service Commission.[†]
Note: Data for 2007 does not include December 2007.

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Source: U.S. Energy Information Administration.[**]

One proposed House bill would cap nonincumbent sales at 10 percent of an incumbent supplier’s previous year’s sales. Proponents argue that incumbents need a guaranteed market share to finance new generating facilities. Still, power companies nationwide have financed new generating facilities in competitive markets; LS Power, a nonincumbent, plans to invest $2 billion in a new plant in Midland. Nonincumbents have also shown they can meet rapidly growing demand: Their share of Detroit Edison’s customer base increased by nearly 104 percent annually between 2001 and 2004, reaching 17,341 customers and 2,378 megawatts of load.

Others bills would force electric companies to provide a certain percentage of their power through renewable energy. While there is no reason to object to the private development of such energy, a state mandate would lessen the market pressure on renewable energy providers to reduce the cost, inefficiency and environmental impact of their product. The mandate would also disadvantage suppliers that use other fuels, such as natural gas, and raise electricity rates for Michigan residents and businesses already pinched by a weak economy. Michigan’s electricity markets have been trending toward cleaner fuels without renewable energy mandates; between 1990 and 2006, the percentage of Michigan’s electric capability fired by coal declined by 22 percent.

Instead of mandating costlier energies and turning toward monopolized markets, policymakers should expand Michigan’s limited experiment with deregulation. Specifically, they should stop providing incumbent utilities with the large subsidies that have undermined competition;[‡] eliminate capacity mandates that unnecessarily burden incumbent utilities and reduce their competitiveness; and terminate regulatory cross-subsidies that favor residential customers, discourage residential energy conservation and reduce competition in the residential marketplace. The evidence indicates that competition will be more effective than regulated monopolies at providing clean, reliable and inexpensive energy.

[*] Less change occurred in residential electrical rates, partly because residential rates remained regulated at an artificially low price, discouraging competition.

[†] Authors’ calculations based on Orjiakor N. Isiogu, Monica Martinez, and Steven A. Transeth, "Status of Electric Competition in Michigan: Report for Calendar Year 2007," (Michigan Public Service Commission, Department of Labor & Economic Growth, 2008), Chart 3, Chart 5, www.dleg.state.mi.us/mpsc/electric/restruct/reports/compreport2007.pdf, (accessed May 9, 2008).

[**] "Electric Power Annual 2006 - State Data Tables: 1990 - 2006 Average Price by State by Provider (EIA-861)," U.S. Energy Information Administration, www.eia.doe.gov/cneaf/electricity/epa/epa_sprdshts.html (accessed May 10, 2008).

[‡] The subsidies are known in the industry as "stranded-cost recovery."