With Competition Diminished, Michigan Citizens Paying High Price For Electricity

Once a leader in energy competition, Great Lakes State now lags behind the Midwest

Michigan's Public Service Commission — the state's electric and natural gas regulators —  published a new report reviewing electric choice policies as an alternative way to keep electric prices low. Unfortunately, the report underplays the success that Michigan had from its relatively brief electric choice experiment when electricity prices dropped to benefit all residents. 

Michigan, like other states, has long regulated the supply and delivery of electricity. The state is divided into service territories dominated by regulated suppliers, either Consumers Energy or Detroit Edison for about 90 percent of Michigan customers.

Michigan once had one of the most successful electricity competition laws and policies in the country, and electricity customers received clear and measurable benefits from this competition while it lasted.

However, in 2008 the state Legislature chose to cut short this brief era of competition, and today Michigan residents, employers, and the state economy as a whole are paying a high price for protecting the monopoly status of its largest utilities.

The Mackinac Center for Public Policy has issued three previous studies assessing electricity competition legislation and policies in Michigan. The first was published while electricity competition legislation was being considered by the Legislature. The two subsequent studies evaluated the early results from introducing competition and legislative proposals in 2008 to impose strict new limits on electricity competition in Michigan.

These studies gave mostly favorable assessments of the 2000 legislation that introduced choice to Michigan electricity markets, with some criticism of certain specific provisions in the legislation. The most recent study was critical of proposals to limit competition and described how the overall positive benefits for Michigan electricity consumers and the Michigan economy would be undermined by the proposed legislation.

The 2000 legislation opened competition to anyone who wanted to enter the market. Beginning in 2004, state regulators began to impede this competition in various ways, and the 2008 legislation guaranteed the large utilities 90 percent of electricity sales in their territories, leaving 10 percent of the market open to competition.

Today customers seeking to buy electricity from competing suppliers are placed on waiting lists until some electricity is available under the cap. While they wait, they must turn to the dominant utility in their area even if they want to do business with another supplier.

The results have been entirely predictable. Competition brings innovation and lower prices, while monopolists insulated from competition raise prices. Before competition was introduced, Michigan's electricity rates were 5 percent higher than average prices in the rest of the nation and 11 percent higher than the average price in the Great Lakes States.

By 2004 — only two years after competition was introduced — Michigan rates were below the national average and were narrowing the gap with the other Great Lakes States. After the cap and other restrictions on competition were imposed in 2008, rates increased much faster than the national average, and by the end of 2012, rates in Michigan were about 18 percent above the national average and 23 percent above the regional average (see chart nearby).

The state's renewable energy standard, also imposed in 2008, has also contributed to higher prices. It should be noted, however, that the state's neighbors and most other states have renewable energy standards similar to Michigan's.

Today, there is competition in a wide range of other markets with high fixed costs, including cable television, landline telephone service, airline tickets, natural gas production, and freight shipments over railroads, with government no longer regulating price. Yet, imagine the public reaction to a cable TV company claiming that television viewers would be better off if competition from satellite services like DirecTV and Dish Network was suppressed. Or to a local telephone giant like AT&T asserting that telephone users would be better off if access to cell phones or alternatives like Vonage was strictly limited. Yet that is what we see in Michigan's electricity markets today, with competition for electricity supply limited to a small fraction of the sales of the dominant suppliers.

Michigan can recapture the benefits of competition in electricity supply by removing the cap and undoing other restrictions on electricity sales that allow its largest utilities to charge unnecessarily high prices to Michigan's residents, employers, and schools.

Theodore Bolema is the senior policy editor at the Mercatus Center at George Mason University and an adjunct scholar with the Mackinac Center for Public Policy.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.