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Changing the Game

Why did Michigan cap competition?

Fortnightly Magazine - February 2010

“We feel 30 percent would be a reasonable amount, where there would be a continuous element of competition. That’s the appropriate cap for Michigan.”

Whether Michigan’s utilities can accept this greater exposure to competition depends in part on other aspects of the state’s regulatory evolution.

Risk Reward

From the outside, Michigan’s partially regulated market can seem like a tangled mess of qualifications and counter-measures. But this much is certain: the competition cap issue can’t be segregated from other elements of PAs 286 and 295, including rate decoupling, cross-subsidization and RPS.

The decoupling issue alone presents a perplexing array of interests and motivations. Generally speaking, vertically integrated IOUs tend to oppose decoupling, because it can make it more difficult to grow the generation rate base. The opposite is true in fully unbundled markets, where decoupling can protect T&D utilities’ profits while giving them incentives to invest in wires. But in Michigan’s hybrid market, where transmission has been unbundled and the big IOUs’ wholesale and retail businesses remain connected, the issue is far murkier.

An unspoken subtext in the decoupling debate involves how Michigan’s manufacturing decline is affecting IOUs’ profitability. In this context, decoupling might serve less to provide incentives for efficiency than it does to ameliorate the fixed costs of base-load generation and distribution.

In the run-up to regulatory reform, IOUs argued they needed a competition cap for cost certainty as they embarked on building new generation assets for projected load growth. With load shrinking—and, in fact, with a requirement under PA 295 to reduce load by 2 percent by 2012—this rationale no longer seems valid. However, under the new RPS, and with federal carbon emissions standards looming, Michigan likely will need investments in new, cleaner generation—investments utilities are planning to put into the rate base.

Mengebier says Consumers Energy projects its fuel mix in 2018 will be less than one-third coal and just over one-third gas, with the remainder coming from renewables, demand response, efficiency programs and purchased power. That transition, he says, requires a substantial investment—and a regulated market to support affordable financing.

But how those investments ultimately will affect Michigan seems unclear at best. On one hand, power companies argue that new investments will create new jobs. But on the other hand, rate increases to pay for new generation assets won’t help the state’s economy. Moreover, the state’s constrained and uncertain power market seems unlikely to cultivate vigorous wholesale price competition, leaving customers with few options other than rate-based generation investments.

The complexities and contradictions of Michigan’s regulatory scheme reflect the difficulty of balancing constituencies in a state under great economic duress.

“From the 30,000 ft. level, PAs 286 and 295 are a push to improve, modernize and clean up the dirty business of utilities,” says Joe Baumann, an energy lawyer at the Dykema law firm in Lansing. “On the ground, however, it involves a tremendous amount of legislative compromise.”

All the complexities, however, can be distilled into a single factor: risk. In a burgeoning economy, risk taking can offer the prospect of innovation, lower costs and greater efficiency—and lawmakers