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Changing the Game

Why did Michigan cap competition?

Fortnightly Magazine - February 2010

legislature essentially was cowed by the powerful IOU lobby.

“The legislation was heavily influenced by them,” Cargill says. “They spent a lot of money on campaigns, as did organizations that they’re affiliated with, in an effort to reduce choice.”

The IOUs, for their part, readily acknowledge their opposition to retail choice. Their pitch to legislators was straightforward: Without a regulated monopoly, they couldn’t afford to invest in generation, customer-service technology or the smart grid.

“We said we needed the 10-percent cap in order to give us the certainty to invest in things like this proposed clean coal plant up in Bay County,” says David Mengebier, senior vice president for governmental and public affairs at Consumers Energy. “If we build that plant, we’re talking 1,800 construction jobs, 100 permanent operating jobs, and about $2.5 billion in economic benefits to the state and region as a result.”

Promises of jobs and an influx of money have self-evident appeal in a state with high unemployment and a beleaguered industrial base, and the IOUs argue these points convincingly.“The whole economy issue as it relates to the Michigan energy law really was a major factor in the legislature moving this forward,” says Mengebier. “That’s true if you look at the other aspects of the law as well. The company will invest about $1.2 billion in renewable energy between now and 2017, and we’re going to invest about $500 million in energy optimization programs. All of these create jobs, and the economic and environmental benefits are a direct result of the fact that the legislature decided to put this 10-percent cap on choice. We think it’s been very good.”

Backlash

Michigan’s IOUs are pleased with the result of the state’s comprehensive regulatory overhaul. “I would say 295 and 286 have created a very constructive regulatory environment here in Michigan,” says Detroit Edison’s Lauer. “It’s a very bi-partisan law that was signed off by all the people at the table. It’s working very well and we’re moving forward on a lot of fronts.”

But for critics, the proof is in the price. After just over a year under the cap, competition advocates say there’s ample evidence of its adverse effect on customers. Consumers Energy hit the 10-percent threshold in the fall, and DTE reached the cap just before the new year. With no further competition in play, advocates say any meaningful impact on price has been negated.

“We’re looking to overturn this,” says Cargill. “The cap has allowed the utilities—free of the threat of competition—to raise rates, particularly in the residential area. Rates have gone up substantially while the national wholesale price of electricity is going down.”

Michigan Senator Cameron Brown currently is working on legislation that will lift the cap. At last report, the legislation was still in draft form, but nearly ready for introduction. Cargill says it’s unlikely the cap will be dropped entirely, but he hopes it will be raised to a level that will foster meaningful price competition.

“It’s a question of how much competition there is, and clearly 10 percent isn’t enough,” he says.