“Remonopolization”: Ending Partial Deregulation

At present, Michigan law does not limit the market share of nonincumbent electricity suppliers. One House bill currently under consideration, however, would restrict nonincumbent suppliers to providing no more than 10 percent of an incumbent utility’s average weather-adjusted retail sales for the preceding calendar year.[*]

Executives of the incumbent utilities object to the characterization of this legislation, which they endorse, as "remonopolization," arguing that this 10 percent share of the market would still be subject to competition. In reality, there would be very little incentive for energy suppliers to invest in Michigan and compete for such a small slice of the customer base.

Advocates of this legislation claim that Michigan’s partial deregulation of electricity supply will rob Michigan of energy reliability and rate stability. According to this view, the incumbent utilities cannot secure capital to build new generating facilities without a secure customer base.

It is understandable, perhaps, that executives of DTE and Consumers Energy would much prefer to recover infrastructure costs through regulated rates rather than the expenditure of shareholders’ money. After all, these utilities incurred huge cost overruns in plant construction in previous years. For example, Consumers Energy reportedly experienced cost overruns of nearly $5 billion when it attempted to build a nuclear power plant in Midland, while Detroit Edison realized cost overruns of about $4 billion when building a nuclear power plant in Monroe.[19][†] In the regulated monopoly energy market of the time, these costs were passed on to consumers.

But nonincumbent utilities have managed to secure capital to build new facilities without guarantees of either market share or rates of return. LS Power, for instance, is preparing to invest approximately $2 billion in a new power plant in Midland.[**] The nonincumbents’ uncertainty about the market appears to have helped, not hurt, consumers by forcing businesses to minimize costs and maximize service quality. Precisely the opposite seems to occur under the regulated monopoly regime.

Capping competition in electricity generation in Michigan may instead undermine reliability by centralizing energy supplies and driving away new entrants. Absent the prospect of meaningful profits, investors would have a strong incentive to skip the state for more advantageous environs.

Proponents of curtailing competition also claim that Michigan cannot rely on nonincumbent electrical plants to meet the state’s energy needs. But there was no shortage of willing and able suppliers — or demand for them — when the choice program peaked in 2004, before imposition of stranded-cost recovery. In Detroit Edison’s service territory between 2001 and 2004, nonincumbent suppliers increased the number of customers they served at a whopping rate of 104 percent annually, amassing a 69 percent annual gain in megawatts served.[20] In 2004, these nonincumbents peaked at 17,241 customers, representing 2,378 megawatts of load.[21] Similarly, in Consumers Energy service territory between 2001 and 2004, nonincumbent suppliers increased their customer base at a clip of 65 percent annually, producing a 60 percent annual gain in megawatts served.[22] In 2004, they reached 1,473 customers, representing 926 megawatts of load.[23]

There currently exists considerable debate about the future direction of energy demand in Michigan. A report by former MPSC Chairman Peter Lark estimated that energy demand would grow an average of 1.3 percent per year through 2025, requiring the construction of at least one large coal-fired power plant by 2015.[24] That forecast was about 40 percent less than an MPSC capacity-needs report issued only one year earlier.[25]

Other forecasts are more negative. A December 2006 report prepared for the Michigan House of Representatives by the East Lansing-based Anderson Economic Group characterized existing capacity as "adequate,"[26] while Mackinac Center Senior Economist David Littmann is forecasting a drop in demand over the next decade due to Michigan’s declining population, jobs and income.

These divergent scenarios indicate the value of allowing the market — not government — to make decisions about generating capacity. With their own investment at stake, suppliers have much greater incentive than government officials to produce accurate forecasts. Nonetheless, there is a proposal in the Michigan Legislature to authorize the MPSC to control the amount of electricity produced in the state.[‡]

Some argue that curtailing competition would reduce the volatility of energy rates. But such reasoning is flawed. For example, regulated rates have fluctuated dramatically with the price of natural gas (a fuel recommended by state and federal governments because it burns more cleanly than coal). However, retail rates among all customer classes progressively declined during the peak years of competition.

A recent regulatory filing by the U.S. Federal Trade Commission directly disputed the premise that curtailing competition is necessary to promote price stability and investment in energy markets. According to the FTC, "We believe that a focus on removal of regulatory obstacles to efficient real-time price signals and demand response at the federal and state levels can be an important step toward appropriate, efficient reliance on conventional price mechanisms to handle scarcity and guide investment. [The absence of such pricing] or other mechanisms to moderate demand during periods of scarcity is one of the most serious flaws in organized electricity markets."[27]

Graphic 9 - click to enlarge

Source: Energy Information Administration.[28]

Lawmakers would do well to remember that their predecessors pursued competition because, as the National Economic Research Associates put it, "[R]egulation was producing unacceptable outcomes, including large price differences between proximate utilities, large plant cost overruns, rate shocks and phase-ins, and customer dissatisfaction with lack of control over their electricity costs."[29]

[*] See House Bill 5524, Section 10a(1)(A). According to www.MichiganVotes.org, House Bill 5524, which has passed the state House, would "mostly end the state’s electric competition law that allows customers to choose an alternative provider; allow the utilities (primarily DTE and Consumers Power) to impose surcharges on customers so they can recoup the ‘costs’ incurred from Michigan’s experiment with competitive electricity markets; and gradually phase out current cross-subsidization of residential customers by commercial and industrial ones. The proposed law would prohibit competing power companies from garnering more than 10 percent of the electricity market, even if they offer lower prices."

[†] The Michigan Public Service Commission later ordered that the Consumers facility be converted to a gas-fired unit at a cost of $600 million.

[**] MIRS Capitol Capsule, "Power Plant Company Defends P.A. 141," Michigan Information & Research Service Inc, www.mirsnews.com/capsule.php?gid=923#14273 (accessed May 1, 2008). The article quotes Lynne Mackey, LS Power’s director of regulatory policy, as saying, "Power plants can and are being financed all over the country right now without having the protection — or what I would call the ‘lock’ on providing that service."

[‡] According to www.MichiganVotes.org, House Bill 5525, which has passed the Michigan House, mandates that "electric utilities reduce the amount of energy they provide by 1 percent each year beginning in 2012, and that gas utilities reduce production by 0.75 percent per year. To accomplish this goal, the companies would be required to charge higher rates to pay for programs that ‘target customer behavior, equipment, or devices without reducing the amount or quality of energy services.’ Utilities that fell short of the energy production reduction mandates could potentially be ordered by the [Michigan] Public Service Commission to reduce their prices."