Lessons Learned: Michigan Electricity Restructuring Report

Executive Summary

Less than a decade ago, Michigan, along with numerous other States throughout the U.S., began experimenting with increased economic competition within the electric industry. Many states had high expectations in the replacement of traditional cost and services regulation of the electric industry with market driven competition in the generation and supply of electricity. They had hoped that the onerous rate case processes and regulatory procedures would be replaced by market driven efficiencies and that true competition would benefit all customers. With that stated purpose, the Michigan legislature passed the "Customer Choice and Electric Reliability Act" which went into effect shortly after Governor John Engler signed it in June 2000. This law had an impact on both The Detroit Edison Company and Consumers Energy Company and their customers in Michigan.

Over two decades ago, the legislature established the Utility Consumer Participation Board (UCPB). This Board provides grants to ensure equitable representation of the interests of residential electric and gas ratepayers at various Michigan Public Service Commission (MPSC) proceedings. In response to a request for a review of this new competitive approach by PIRGIM, the UCPB funded this study. The UCPB felt it appropriate that an assessment be made of the impact on fuel and purchase power costs and the PSCR planning process resulting from competition and customer choice in Michigan.

A major reason that this study was done was to learn from the experiences of other States who have implemented similar electric industry competition and customer choice options. An indepth survey was conducted on the experiences and lessons learned in Illinois, Maryland, Maine, Massachusetts, Ohio and Pennsylvania. Because the initial transition periods have now ended, we are at a point where assessments can be made. Based on the experiences of the other states we believe the following are some important lessons learned that Michigan should be aware of:

• Control of the electric industry remains highly concentrated at all levels.
• Small customers have not generally received or benefited from their ability to choose electricity suppliers. Larger customers appear to have had more opportunities to take advantage of retail access in several states.
• Reductions in electric rates that have occurred during the early years of restructuring have evaporated in most states and are threatened in others.
• Technological, infrastructure and governance changes set loose by restructuring have left the electricity system increasingly dependent on natural gas, threatened by degradation in service reliability and more reliant on power purchases from wholesale electricity markets.
• Loosening of controls over regulated utilities has led to increased financial risk, thus impacting utilities’ financial health and access to low-cost credit.
• States are taking a variety of approaches to restructuring as “transition” periods end. In some states, these changes have led to large rate increases or to political turmoil that has left the future of restructuring in doubt.

Based on the lessons learned from the other states’ experiences with restructuring and the review of the results in Michigan of the Act 141 over the past six and one-half years, the following are additional recommendations of this report:

• Retail competition for small customers has not worked to deliver more choice or lower costs and it likely cannot work.
• Restructuring has not eliminated the ability of small numbers of firms to shape the cost and terms of electric service to consumers.
• The fate of consumers in restructured states is integrally tied to the fate of regional wholesale markets.
• The loss of long-term, comprehensive planning authority has had negative consequences for the stability and reliability of the electric system.
• The Michigan Legislature should adopt a state public utility holding company act.
• The Commission and Legislature should seek to promote a more viable renewable industry to reduce purchase power, fuel costs and minimize electric utility customers energy costs.
• The Commission and Legislature should investigate “opt-out” or other aggregation models to enhance customer participation in customer choice.
• Michigan customers in all sectors have preferred to stay with the incumbent utilities since the implementation of Act 141, and most recently the participation levels have reduced very significantly resulting in less than a 10% participation level at the end of 2006.
• The current Act 304 process should include a green pricing option so that PSCR customers can select from various levels of green energy vis-a-vis the PSCR process as a resource “choice“ for a customer on the CECO or DECO system.
• The MPSC’s current electric and gas system planning process both in general rate cases and Act 304 proceedings is broken and in need of repair. The process is flawed because it does not provide sufficiently for electric system long-term planning or comprehensive resource selection which would significantly reduce the customers total energy costs.
• The MPSC and Legislature need to initiate an increased commitment to energy efficiency and low-income programs and resources. The recommendation is that $170 million per year be dedicated to energy efficiency resources and low-income programs.
• Efforts should be made to empower residential customers to reduce energy waste, use energy more efficiently, to reduce energy costs, and to allow residential customers to participate in the establishment of a more diversified energy industry, to include advancement of renewable energy technologies.
• Efforts should be made to enhance the value and reliability of electric distribution service, to include upgrades to reduce widespread and repeated outages of electric service.
• Michigan should adopt better building codes for new home construction which incorporate cost-effective energy efficiency requirements, and which will conserve financial resources and increase the value of homes; the provision of utility service to new homes should be conditioned upon compliance with improved construction standards.