Assessing Electric Choice in Michigan Theodore R. Bolema, Ph.D., J.D.

Assessing Electric Choice in Michigan

Theodore R. Bolema, Ph.D., J.D.

Central Issues

Restructuring is generally proceeding well and should be allowed to continue

Scare scenarios are not plausible—Nothing like California

Comments on recently introduced legislation

Recommendations to enhance competition

Electricity MarketsElectricity Markets

Cooperative Cooperative GenerationGeneration

IOU IOU GenerationGeneration

Alternative Alternative Energy Energy

SuppliersSuppliers

Transmission Transmission GridGrid

Residential Residential CustomersCustomers

Schools and Schools and UniversitiesUniversities

Commercial Commercial CustomersCustomers

Industrial Industrial CustomersCustomers

GenerationGenerationTransmissionTransmission

DistributionDistribution

Higher Rates Among Higher Rates Among Regulated Firms RatesRegulated Firms Rates

In the Detroit Edison territory, about

20% of commercial sales and 16% of industrial sales are by alternative power suppliers

In the Consumers Energy territory, alternative suppliers account for abut 7% of commercial sales and 16% of industrial sales.

Very few residential sales (still subject to rate caps) are by alternative suppliers

Where We Are Today

Electricity Sales in CMS Territory

Electricity Sales in DTE Territory

Industrial, commercial and school/university

customers report savings in the 10% to 20% range after turning to alternative suppliers

Some new generating capacity added or under construction

Overall assessment: Transition is going well Incumbent utilities receiving transition payments Alternative suppliers are a viable option for many

commercial, industrial and institutional customersLower energy costs to pass on to customers,

and taxpayers

Where We Are Today(continued)

Nothing Like CaliforniaNothing Like California Consumers are being told Michigan is headed for

a California-like electricity market meltdown. This is not the case. California regulators forced utilities to divest all

generating capacity and purchase all power from wholesale suppliers

California prohibited utilities from negotiating long-term contracts to ensure a stable supply at lower fixed rates

California retained regulation of retail rates which, when wholesale prices rose, forced utilities to sell power at rates far below prevailing wholesale prices

California’s restructuring process showed a fundamental distrust for the market process and was a recipe for power market ruin

Skyrocketing Skyrocketing Rates?Rates?

No reason to fear skyrocketing rates due to competition from alternative suppliers

Competition means consumers can choose from suppliers and exerts downward, not upward, pressure on rates

MPSC report projected increases more on the order of 4% once rate caps are removed

If any supplier raises its rates 30%, the result would be lost sales to competitors, and probably a violation of supplier’s fiduciary duty to its shareholders

Incumbent Utilities Can Thrive in a Competitive

MarketMichigan restructuring opens markets --

restructuring designed to rely on competition to determine market outcomes

More burdens on alternative suppliers do not help consumers and do not help incumbent utilities in the long run — they simply raise barriers to entry

Incumbent utilities have significant advantages — existing customer base, brand name, established facilities and infrastructure

Implications of Implications of Turning BackTurning Back

All customers would face higher rates in the long run

Quality of service would deteriorate due to lack of competition

Michigan would likely lose investment in new generating capacity — Investors will not pay to build new plants

The Recently The Recently Introduced LegislationIntroduced Legislation

Senate Bills 1331 to 1336, introduced Senate Bills 1331 to 1336, introduced in July of 2004, propose changes to in July of 2004, propose changes to electricity restructuring in Michigan. electricity restructuring in Michigan. Although these bills call for more Although these bills call for more modest reforms than proposals modest reforms than proposals previously advocated by CLEAR, this previously advocated by CLEAR, this package of proposed changes is flawed.package of proposed changes is flawed.

Senate Bill 1331 would extend Senate Bill 1331 would extend “transition costs” on all Michigan “transition costs” on all Michigan customers for 10 years, or until 2014, customers for 10 years, or until 2014, rather than ending the charges in rather than ending the charges in 2007.2007.

Recently-Introduced Recently-Introduced Legislation Legislation (continued)(continued)

Senate Bill 1331 also would eliminate after 2005 the Senate Bill 1331 also would eliminate after 2005 the requirement that incumbent utilities take back former requirement that incumbent utilities take back former customers at regulated rates. This proposal deserves customers at regulated rates. This proposal deserves serious consideration – current rules constitute a serious consideration – current rules constitute a competitive disadvantage for incumbent utilities.competitive disadvantage for incumbent utilities.

Senate Bill 1332 would require that all suppliers Senate Bill 1332 would require that all suppliers maintain a 15% reserve generating capacity. This maintain a 15% reserve generating capacity. This requirement is wholly arbitrary and would requirement is wholly arbitrary and would significantly raise market entry costs. Market significantly raise market entry costs. Market incentives make state-mandated requirements incentives make state-mandated requirements unnecessary.unnecessary.

Senate Bill 1334 would impose 10% to 20% rate Senate Bill 1334 would impose 10% to 20% rate reductions for K-12 schools. If choice is preserved, reductions for K-12 schools. If choice is preserved, schools and Michigan colleges could continue to enjoy schools and Michigan colleges could continue to enjoy similar savings through a competitive market.similar savings through a competitive market.

Recently-Introduced Recently-Introduced Legislation Legislation (continued)(continued)

Senate Bill 1333 would require that all power Senate Bill 1333 would require that all power suppliers contribute to a subsidy fund for low-suppliers contribute to a subsidy fund for low-income customers. This is effectively a new tax, income customers. This is effectively a new tax, and other low income energy programs already and other low income energy programs already exist. If subsidizing low income energy exist. If subsidizing low income energy households is deemed a worthy social goal, it households is deemed a worthy social goal, it should be done through the General Fund rather should be done through the General Fund rather than as a new tax.than as a new tax.

Senate Bills 1332, 1335 and 1336 would provide Senate Bills 1332, 1335 and 1336 would provide state-backed financing for facility improvements. state-backed financing for facility improvements. This would constitute unnecessary government This would constitute unnecessary government interference in the energy market. Charges interference in the energy market. Charges passed on to ratepayers would raise energy costspassed on to ratepayers would raise energy costs

Reform to Strengthen Competition Reform to Strengthen Competition in Electricity Marketsin Electricity Markets

Although no major repeal of restructuring is Although no major repeal of restructuring is warranted, changes in the direction of less warranted, changes in the direction of less government intervention could improve government intervention could improve Michigan’s electricity marketMichigan’s electricity market

1. Remove requirements that incumbent 1. Remove requirements that incumbent utilities serve as suppliers of last resortutilities serve as suppliers of last resort Not require that utilities take back Not require that utilities take back

customers at regulated ratescustomers at regulated rates Allow firms to bid to serve as suppliers of Allow firms to bid to serve as suppliers of

last resortlast resort

Recommendations for Recommendations for Reform Reform (continued)(continued)

2. Do not require that incumbent utilities 2. Do not require that incumbent utilities bear burden of peak-load managementbear burden of peak-load management

Market incentives should exist for all Market incentives should exist for all suppliers to maintain adequate reserves suppliers to maintain adequate reserves without imposing arbitrary percentage without imposing arbitrary percentage requirementsrequirements

Alternatives based on market incentives are Alternatives based on market incentives are also available — e.g., the state accepting also available — e.g., the state accepting bids for back-up capacitybids for back-up capacity

3. Remove all price controls3. Remove all price controls Scheduled to expire in 2006Scheduled to expire in 2006 Distort market-based pricingDistort market-based pricing

Recommendations for Recommendations for

ReformReform (continued)(continued)

4. End current regulatory uncertainty4. End current regulatory uncertainty Investors are understandably reluctant Investors are understandably reluctant

to risk capital investment at a time to risk capital investment at a time when regulatory rules are in fluxwhen regulatory rules are in flux

5. If electricity welfare is to be pursued 5. If electricity welfare is to be pursued as a social goal, it should be done as a social goal, it should be done generally rather than selectivelygenerally rather than selectively Various overlapping federal, state and Various overlapping federal, state and

utility-funded programs already exist utility-funded programs already exist with wasteful overlap of administrative with wasteful overlap of administrative costscosts