Public Utilities Reports

PUR Guide 2012 Fully Updated Version

Available NOW!
PUR Guide

This comprehensive self-study certification course is designed to teach the novice or pro everything they need to understand and succeed in every phase of the public utilities business.

Order Now

Changing the Game

Why did Michigan cap competition?

Fortnightly Magazine - February 2010

this article. They either didn’t respond to interview requests or confined their comments to generalities on the value of market competition.)

In addition to keeping prices in check, Cargill says the deregulated market sparked investment in generation assets that helped fix chronic reliability problems.

“About 4,000 MW of gas-fired peaker plants were built shortly after 2000, and it resolved our brownout problem,” he says. “The price of electricity never dropped, but it was more competitive here in Michigan than any of the other Midwest states. Previously, our trend was going the other way.”

But right from the start, IOUs opposed the AES model. Because of the way the market was structured, IOUs saw nothing but downside in retail competition.

Unlike other deregulated markets where generation assets are transferred to non-regulated entities held by the parent company, or sold altogether, in Michigan, only transmission was fully spun off. This partially deregulated approach left IOUs to compete in the retail market, while still fully responsible for fixed costs.

The IOUs’ biggest complaint was that AES plucked their best customers— i.e., high-load, low-risk industrial users—leaving utilities with the low-income residential market and the full responsibilities of being provider of last resort.

“We would prefer to see electric choice completely eliminated in the state, but it didn’t happen,” says Trevor Lauer, vice president of marketing at Detroit Edison.

Lauer says the competition cap issue has overshadowed the fact that PA 286 also “de-skewed” rates in Michigan, reducing the premium—which was as high as 30 percent—that commercial customers long have paid to subsidize residential service.

“The average commercial industrial customer in Michigan will see anywhere from a 5-percent to 15-percent reduction in their utility bill based on de-skewing,” he says.

From the IOUs’ perspective, retail competition in Michigan was a false market from the get-go, because the hybrid market design didn’t evenly distribute risk and cost. De-skewing helps in part by reducing rate disparities that made some large customers easy pickings for alternative suppliers. And eliminating, or at the very least capping competition, they say, is a fair trade-off for ensuring reliability and a measure of rate stability in an ailing market.

Hard Sell

By the middle of the decade, the IOUs were fully mobilized in an effort to re-regulate the retail market. With a little help from term limits, they largely got their way.

In the early 1990s, Michigan passed term limits for state legislators—three terms (six years) in the House, and two terms (eight years) for senators and constitutional officers, such as the governor and attorney general. The law matured in 1998, ushering out the last of the old guard.

The practical effect was a dramatically reduced institutional memory in the legislature. Even unbiased observers comment that the fresh legislators lacked the sophistication and experience necessary to deal with the most complex issues, such as health care and energy.

Without a nuanced understanding of the complicated and often murky interplay of utilities and the markets, as well as the ways perceived interests don’t always align, and how customers are ultimately affected, critics say the