The Michigan Legislature is considering a package of bills
designed to decrease the amount of competition in Michigan’s electricity markets
and impose mandates for the use of certain "renewable energies," such as solar
power. The bills are marketed as job creators that would help provide a reliable
supply of energy, but in fact, the record shows they would raise the cost of
electricity and deliver a painful blow to Michigan’s economy.
Michigan introduced competition in the supply of electricity in
2000 with Public Act 141. The act allowed consumers to purchase electricity
through their existing electrical lines from suppliers competing with the
state’s regional monopoly utilities (primarily DTE Energy and Consumers Energy).
When the law was passed, Michigan electricity rates were among the highest in
the country, and they were higher than rates in any of the neighboring states.
Given a state unemployment rate of more than 8.5 percent, Michigan cannot afford to abandon competition in electricity supply for the benefit of its two biggest utilities.
Despite shortcomings, P.A. 141 has been successful in holding
down electricity prices. Between 2000 and 2007, U.S. electricity rates increased
34.2 percent, or 4.3 percent per year on average. Michigan rates during this
time increased only 20.8 percent, or 2.7 percent per year on average. In
Wisconsin, where electricity choice was repealed, rates increased 47.1 percent,
or 5.7 percent per year on average.
The majority of the benefits from competition occurred in the
four years following the passage of P.A. 141. By 2004, Michigan’s electricity
rates had fallen below the national average, where they remain today, and the
gap between electricity rates in Michigan and surrounding states had narrowed.
Michigan businesses and schools were saving millions of dollars in electricity
costs by contracting with new suppliers at substantially lower rates than those
charged by the former monopoly utilities. New generating capacity was also
coming online, demonstrating that entrants were willing to invest in Michigan
when the playing field is relatively level.
In late 2004, however, the Michigan Public Service Commission
began requiring the customers of alternative suppliers to pay a surcharge to
help the original utilities cover the "stranded" costs of meeting earlier state
mandates. These surcharges were authorized by P.A. 141, but they undermined the
act’s benefits. In the 12 months following the institution of the surcharge,
industrial electricity rates jumped 13.2 percent, and the expansion of
electricity competition effectively ended.
Hence, the Michigan Legislature should focus on eliminating
these subsidies to the established big utilities, which benefited for decades
from their state-granted monopoly status. Instead, the legislation being
considered would guarantee the big utilities a 90 percent market share. The
utilities claim they need such a guarantee on grounds that they need a
predictable income in order to afford investments in new capacity.
But alternative suppliers in Michigan and throughout the country
have managed to invest in new capacity while facing competition. Furthermore,
the U.S. Federal Trade Commission has disputed the claim that regulatory
protectionism is necessary for new investment. In an April 2008 regulatory
filing, the FTC wrote, "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
The House package of bills also contains a "renewable portfolio
standard" requiring that a certain quota of Michigan electricity generation come
from renewable energy sources. Since this requirement is included in a package
that limits competition, the effect would be to largely foreclose anyone other
than the big utilities from offering renewable energy in Michigan. The American
Wind Energy Association, representing wind entrepreneurs who might possibly
benefit from a renewable energy quota, urged legislators to reject the House
bills because "the public should not expect economic benefits to result from the
Energy affordability and innovation are crucial to Michigan’s
future. High energy costs hurt businesses and residents alike. Given a state
unemployment rate of more than 8.5 percent, Michigan cannot afford to abandon
competition in electricity supply for the benefit of its two biggest utilities.
As noted by renowned economist Alfred E. Kahn, the father of airline
deregulation under the Carter administration: "Policy makers confronting
pressures to undo the restructuring of the electricity industry would be well
advised to base their decisions on the longer-term benefits that will flow from
properly implementing competitive markets."
Theodore Bolema, an attorney and faculty member at the Central Michigan University College of Business Administration, is an adjunct scholar of the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich.
Permission to reprint in whole or in part is hereby granted, provided that the
author and the Center are properly cited. Bolema also is co-author of a recent
policy brief about this issue titled "Proposals to Further Regulate Michigan’s Electricity Market: An Assessment."