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Michigan Morass

Fortnightly Magazine - June 2011

trial and error. But I think policymakers can figure out how to do this now and how to do it well. The least of our worries is too much competition.


Fortnightly: How would you rate the Michigan market compared to other states with at least some level of deregulation?

Massey: There’s a problem with any state that moves toward a market, backs off, goes to a hybrid, backs off, changes again. [As a market participant,] you need to know what the governing policy’s going to be—a not just today, but a year from now, and two years from now, and three years from now, so that you can project into the future. Can I enter this market and have a reasonable chance of success?

It’s a mistake for policymakers to create a Byzantine market structure where the participants can’t figure it out, don’t really understand all of the pieces, and wonder whether it’s going to be tweaked again next year. The best thing for any jurisdiction is to choose a regulatory model, stick with it and refine it over time.

That’s what FERC is doing. When I was at FERC and we were moving to Order 888, the average rolled-in, regulated utility rate was significantly higher than the marginal cost to bring the next unit online. That was because of the generation overhang created by the huge build-out of nuclear and coal-based generation back in the ’80s. And a lot of that was just put in rate base, so the average rolled-in utility rate was higher than the price of a new combined cycle gas plant.

So the munis and cooperatives and large industrial customers were banging on our door saying now’s the time to move to a market-based approach, and it made sense. That correlation flipped when natural gas prices were higher. Some of the same parties went back to the states, and back to FERC, and said “Wait a minute, you got it all wrong. What we really want is the lower of cost or market. Give us that.” Now natural gas prices are lower again and prices in the marketplace are low.

My point is policymakers can’t flip the regulatory paradigm every time prices go up or down. It creates way too much uncertainty. In the long term, a market-based approach will create the greatest efficiencies. It’s going to provide the space for innovators to come into the market—and we desperately need those. It will provide the greatest incentive for the renewable producers to come in, for the demand response providers to come in. And long term, it’s in the best interest of consumers and our country. We want policymakers to give serious consideration to competitive markets for electricity, move to that model, and once they do, continue to refine it and make it work.– SA