Assessing Electric Choice in Michigan

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Assessing Electric Choice in Michigan

• Theodore R. Bolema, Ph.D., J.D.

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Central Issues

• Restructuring is generally proceeding well and
  should be allowed to continue
• Scare scenarios are not plausibleNothing like
  California
• Comments on recently introduced legislation
• Recommendations to enhance competition

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Electricity Markets
Residential Customers
IOU Generation
Transmission Grid
Schools and Universities
Cooperative Generation
Commercial Customers
Alternative Energy Suppliers
Industrial Customers
Transmission
Generation
Distribution
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Higher Rates Among Regulated Firms Rates
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• Where We Are Today

• In the Detroit Edison territory, about 20 of
  commercial sales and 16 of industrial sales are
  by alternative power suppliers
• In the Consumers Energy territory, alternative
  suppliers account for abut 7 of commercial sales
  and 16 of industrial sales.
• Very few residential sales (still subject to rate
  caps) are by alternative suppliers

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• Electricity Sales in CMS Territory

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• Electricity Sales in DTE Territory

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• Where We Are Today
• (continued)

• Industrial, commercial and school/university
  customers report savings in the 10 to 20 range
  after turning to alternative suppliers
• Some new generating capacity added or under
  construction
• Overall assessment
• Transition is going well
• Incumbent utilities receiving transition payments
• Alternative suppliers are a viable option for
  many commercial, industrial and institutional
  customers
• Lower energy costs to pass on to customers, and
  taxpayers

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Nothing Like California

• Consumers are being told Michigan is headed for a
  California-like electricity market meltdown.
  This is not the case.
• California regulators forced utilities to divest
  all generating capacity and purchase all power
  from wholesale suppliers
• California prohibited utilities from negotiating
  long-term contracts to ensure a stable supply at
  lower fixed rates
• California retained regulation of retail rates
  which, when wholesale prices rose, forced
  utilities to sell power at rates far below
  prevailing wholesale prices
• Californias restructuring process showed a
  fundamental distrust for the market process and
  was a recipe for power market ruin

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Skyrocketing Rates?

• No reason to fear skyrocketing rates due to
  competition from alternative suppliers
• Competition means consumers can choose from
  suppliers and exerts downward, not upward,
  pressure on rates
• MPSC report projected increases more on the order
  of 4 once rate caps are removed
• If any supplier raises its rates 30, the result
  would be lost sales to competitors, and probably
  a violation of suppliers fiduciary duty to its
  shareholders

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Incumbent Utilities Can Thrive in a Competitive
Market

• Michigan restructuring opens markets --
  restructuring designed to rely on competition to
  determine market outcomes
• More burdens on alternative suppliers do not help
  consumers and do not help incumbent utilities in
  the long run they simply raise barriers to
  entry
• Incumbent utilities have significant advantages
  existing customer base, brand name, established
  facilities and infrastructure

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Implications of Turning Back

• All customers would face higher rates in the long
  run
• Quality of service would deteriorate due to lack
  of competition
• Michigan would likely lose investment in new
  generating capacity Investors will not pay to
  build new plants

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The Recently Introduced Legislation

• Senate Bills 1331 to 1336, introduced in July of
  2004, propose changes to electricity
  restructuring in Michigan. Although these bills
  call for more modest reforms than proposals
  previously advocated by CLEAR, this package of
  proposed changes is flawed.
• Senate Bill 1331 would extend transition costs
  on all Michigan customers for 10 years, or until
  2014, rather than ending the charges in 2007.

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Recently-Introduced Legislation (continued)

• Senate Bill 1331 also would eliminate after 2005
  the requirement that incumbent utilities take
  back former customers at regulated rates. This
  proposal deserves serious consideration current
  rules constitute a competitive disadvantage for
  incumbent utilities.
• Senate Bill 1332 would require that all suppliers
  maintain a 15 reserve generating capacity. This
  requirement is wholly arbitrary and would
  significantly raise market entry costs. Market
  incentives make state-mandated requirements
  unnecessary.
• Senate Bill 1334 would impose 10 to 20 rate
  reductions for K-12 schools. If choice is
  preserved, schools and Michigan colleges could
  continue to enjoy similar savings through a
  competitive market.

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Recently-Introduced Legislation (continued)

• Senate Bill 1333 would require that all power
  suppliers contribute to a subsidy fund for
  low-income customers. This is effectively a new
  tax, and other low income energy programs already
  exist. If subsidizing low income energy
  households is deemed a worthy social goal, it
  should be done through the General Fund rather
  than as a new tax.
• Senate Bills 1332, 1335 and 1336 would provide
  state-backed financing for facility improvements.
  This would constitute unnecessary government
  interference in the energy market. Charges
  passed on to ratepayers would raise energy costs

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Reform to Strengthen Competition in Electricity
Markets

• Although no major repeal of restructuring is
  warranted, changes in the direction of less
  government intervention could improve Michigans
  electricity market
• 1. Remove requirements that incumbent utilities
  serve as suppliers of last resort
• Not require that utilities take back customers at
  regulated rates
• Allow firms to bid to serve as suppliers of last
  resort

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Recommendations for Reform (continued)

• 2. Do not require that incumbent utilities bear
  burden of peak-load management
• Market incentives should exist for all suppliers
  to maintain adequate reserves without imposing
  arbitrary percentage requirements
• Alternatives based on market incentives are also
  available e.g., the state accepting bids for
  back-up capacity
• 3. Remove all price controls
• Scheduled to expire in 2006
• Distort market-based pricing

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Recommendations for Reform (continued)

• 4. End current regulatory uncertainty
• Investors are understandably reluctant to risk
  capital investment at a time when regulatory
  rules are in flux
• 5. If electricity welfare is to be pursued as a
  social goal, it should be done generally rather
  than selectively
• Various overlapping federal, state and
  utility-funded programs already exist with
  wasteful overlap of administrative costs