The Blackout of 2003 Doesn’t Justify Regulation in 2004

(A shorter version of this commentary appeared in the Sunday, Aug. 15 Lansing State Journal.)

A year ago this month, 2.3 million Michigan residents lost electrical power in a blackout that extended across eight states and Ontario. Today, a barrage of ads is warning of similar dark days ahead unless the Michigan Legislature imposes new regulations on customer choice in electricity supplies.

The ad campaign, led by Detroit Edison, claims that “plummeting” revenues could undermine power plant maintenance, leading to “more outages, reduced ability to restore customers after storms and other reliability issues.” The revenue decline, company officials say, is a result of state regulatory reforms in 2000 that launched competition in Michigan’s electricity market and ended the government-sanctioned monopolies of Detroit Edison and Consumers Energy.

Stay Engaged

Receive our weekly emails!

The forecasts of a power meltdown are unfounded. The blackout of Aug. 14, 2003 was tripped by a wire outage in Akron, Ohio, and exacerbated by the failure of Akron’s FirstEnergy Corp. to stem the resulting overload on the transmission grid. The whole sorry episode was unrelated to deregulation of power supplies. It primarily involved the transmission lines – the single most regulated element in the electricity network.

Restricting competition in electricity supply would harm, rather than benefit, consumers and the businesses that serve them. Indeed, Michigan’s deregulation has encouraged investment in power generation, leaving the state better prepared for future system failures.

Competition that benefits consumers is on the upswing. The number of active electricity suppliers increased by more than 60 percent in 2003, bringing the statewide total to 26. Rates vary significantly among suppliers, with some manufacturers reporting savings of 15 percent to 20 percent from shopping around. The increase in suppliers also promises a more stable supply.

Just as important is the investment in new generating capacity spurred by the 2000 reforms. At least 15 new facilities are in the planning stages or under construction. If completed, they would add nearly 12,000 megawatts of generating capacity in Michigan.

The ad campaigns have caught the attention of legislators, however. A package of six bills to restrict Michigan’s electrical choice program was introduced in the state Senate on July 1.

The proposed legislation is flawed. One measure, for example, would require all electricity suppliers to maintain a “reserve” generating capacity of 15 percent. This supposedly would “level the playing field ” by imposing on all suppliers the reserve requirements currently applied only to the former monopolies.

The proposed requirement is wholly arbitrary, however, and would increase the cost of market entry for competitors, thwarting the purpose of deregulation. A more rational approach would be to level the playing field by eliminating state reserve requirements entirely. Power generators have every incentive to maintain adequate electricity supplies for customers — especially in a competitive market. Moreover, electrical companies must already meet certain reserve requirements in order to use the transmission grid.

The proposed legislation would also increase subsidies for low-income customers by placing a surcharge on everyone’s energy bills. But this would essentially constitute a new tax on electricity production and consumption in order to increase the substantial subsidies that already exist for low-income households. If lawmakers deem energy assistance to be a worthy social goal, additional funding should be allocated from the General Fund, not from citizens’ electric bills.

Also proposed is a new energy subsidy ranging from 10 percent to 20 percent for K-12 schools. But schools have already realized similar energy savings by contracting with the alternative electricity suppliers empowered by deregulation. The proposed subsidy would use taxes on ratepayers to deliver the same savings the market already provides.

A proposal to provide low-interest financing to the former monopolies for plant improvements is also unwarranted. Funding this proposed subsidy with new charges levied on ratepayers would undermine the viability of competing suppliers – and consumer choice – by artificially increasing rates.

One Senate proposal does merit serious consideration: Eliminating the current requirement that former monopolies reconnect customers at the low, regulated rate after they discontinue service with an alternative supplier. This change would help to establish more market-based pricing and reduce the burden on incumbent utilities of maintaining unused capacity.

The goal of a competitive market will not be realized until the vestiges of monopoly regulation are eliminated. Considering the benefits to date of competition in power supply — and the promise of more to come — lawmakers would do well to reject these bills and focus instead on reducing all of the remaining unnecessary regulation of the electricity market.

Theodore Bolema, J.D, Ph.D, is an adjunct scholar of the Midland-based Mackinac Center for Public Policy and a professor at Central Michigan University.