What are some approaches to regulation adopted in recent decades by national governments, and the implications for management making international investment decisions?
Changing the Game
Why did Michigan cap competition?
The sweeping regulatory reform implemented in Michigan over the past year is often couched as a response to the economic crisis. Decoupling rates from utility profits, the reasoning goes, will remove disincentives to efficiency. Reducing the subsidies that commercial customers have long shouldered will ease their financial burdens. New renewable portfolio standards and wind generation initiatives will create green jobs and much-needed infrastructure.
To be sure, the recession has hit Michigan and its manufacturing-based economy particularly hard. A disastrous 2009 saw bankruptcies at two of the big three automakers, leading to the demise of several familiar brands and sending shock waves through the auto parts supply industry. Further, the latest blows are nothing new—Michigan’s economic decline over the course of decades is a sad and familiar story.
It would be a mistake, however, to view the new regulatory regime solely as a response to the current economy. The legislative effort behind the state’s regulatory reform laws, Public Acts 286 and 295 ( see “Re-Restructuring in Michigan” ), dates back years before the 2007 financial meltdown. And while Michigan’s long-term economic plight creates the backdrop for every aspect of the state’s energy business, critics say the real guiding force behind the new laws is the influence of Michigan’s two dominant investor-owned utilities, Detroit Edison (DTE) and Consumers Energy.
“They basically wrote the legislation,” says Bob Strong, a lawyer for ABATE, an association of large industrial power customers in Michigan. “These laws have not been helpful to the public; they’ve been helpful to the utilities. Frankly, the utilities are using the acts to create their own economies, and not live in the same economies as everybody else here in Michigan.”
The criticism is most pointed when it comes to a controversial aspect of PA 286 that caps retail competition at 10 percent of each utility’s market base. The cap, which already has been reached, shackles Michigan’s alternative energy suppliers (AES), which the IOUs say are cherry-picking the most lucrative customers.
As associations of utility customers and AES companies push back hard, lawmakers are considering new legislation that would lift the cap and once again shift the leverage in Michigan’s deregulation scheme. This ongoing regulatory teeter-totter calls into question Michigan’s commitment to retail market competition, and whether in fact competition is advisable or even viable in such a troubled state.
Just a decade ago, Michigan was moving vigorously toward a new market structure. Cognizant of the deregulation mistakes that led to the California energy crisis, the state embarked on its own effort to create retail market competition.
“Michigan had the benefit of that history prior to passing our legislation. The end result, at that time, was that it worked very well,” says Barry Cargill, executive director of the Customer Choice Coalition (CCC), a group lobbying to lift the cap. Members of the CCC include a range of utility customers, from businesses to school organizations, plus several AES companies. (Editor’s Note: Several AES companies were contacted for