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Future shock?



When it comes to electric utility deregulation, it doesn’t take many amps of brainpower to see cause for trepidation among Michigan residents. All you have to do is peer west, to California with its rolling blackouts and budget-busting electric bills, and the question hits with an unsettling jolt:

Can it happen here?

It was just five years ago that the Golden State lit the path toward deregulation with the passage of a landmark law, and now the nation is watching as … what do we call it now — the Black Hole State? — plunges headlong into an energy nightmare of epic proportions.

And here we are, just eight months into our own restructuring foray.

Can it ...?

Michigan’s utility companies tell us not to fret. They say — correctly — that the deregulation bill signed into law last June was not nearly as sweeping as California’s, that what are proving to be monumental flaws in that state’s approach were avoided by Gov. John Engler and crew.

However, critics — and there is no shortage of them — aren’t so sanguine. In recent months, experts representing big industry, consumer groups and environmental organizations have all weighed in, and, to varying degrees, many of them are voicing similar concerns: the potential for power shortages, rate increases and environmental setbacks.

“We ought not be spreading fear and panic about imminent crises,” observes Howard Learner, executive director of the nonprofit Environmental Law and Policy Center in Chicago. “Clearly, Michigan is different than California in terms of the way each state structured energy legislation. But there are legitimate, non-fear-mongering reasons for concern.”

Brief history

According to energy expert Charles Higley of the consumer group Public Citizen, the electric-utility deregulation currently under way in about two dozen states began generating during the early ’70s. From the days of Roosevelt’s New Deal at least, it had been commonly believed that “one utility could produce, transmit, and distribute electricity more cheaply than several.”

In some cases, the utilities providing this power were publicly owned. When they weren’t, strict government regulation ensured that everyone within a particular utility’s service area would be guaranteed current and protected from price gouging. In return, the utility, unhindered by costly competition, would be in a position to provide shareholders with a reasonable return on what were widely considered to be very secure investments. Utilities offered the kind of foundation pensions were built upon.

Starting in the ’70s, however, large industries such as steel producers, auto manufacturers and oil refiners began noticing that rates varied drastically from one utility to another.

“Always looking to cut costs, many large industrial corporations, which use tremendous amounts of electricity, began complaining about the differences in rates, as well as having to buy electricity from their local monopoly utility,” explained Higley in a Citizen Action position paper. “Instead, these large customers wanted to shop for the cheapest power available. They also argued that new companies should be allowed to generate and sell electricity, which would put competitive pressure on the utilities to reduce their rates.”

Fueling the nascent calls for deregulation were new technologies such as turbines powered by natural gas. With many utilities investing heavily in expensive coal and nuclear plants, manufacturers believed they could obtain power more cheaply if the market were opened up and they were allowed to shop around.

States enacted a string of deregulation bills in the mid-to-late ’90s; Massachusetts, New York, Pennsylvania, Texas and others followed California’s lead.

Michigan joined the deregulation club last June when, after years of legislative wrangling over competing plans offered by business interests and the state’s two primary utilities, Engler weighed in on the side of DTE Energy and Consumers Energy to break up the logjam.

A key sticking point was the so-called stranded-cost issue. The utilities demanded billions to recoup investments — particularly in nuclear power — made under the old rules that guaranteed a captive customer to pay for their mistakes. Big industry and consumers fought against having to pay for these nuclear white elephants.

The utilities won. The transition to a deregulated electric marketplace began last year.

Bad grades?

How are things shaking out so far? Well, the big manufacturers that fought the state’s electric industry over the form deregulation would take still aren’t happy campers. Just this month they released a report card evaluating the effects of deregulation and declared that they are thoroughly underwhelmed. According to the Association of Businesses Advocating Tariff Equity (ABATE), a coalition of 23 major manufacturers, the state’s utilities earned grades that ranged from lackluster to failing when evaluated on issues such as price, competition and reliability.

Representatives from DTE Energy didn’t say so flat out, but the implication was clear: They considered the ABATE report a cheap shot, pointing out that the report covered only the first six months of a plan that, in some cases, will take years to implement.

The utility even took some umbrage at the lone “A” it earned — for the six-month increase in the stock price for the two utilities that control 90 percent of the Michigan electric market. CMS Energy stock jumped more than 32 percent between July 2000 and January 2001; DTE Energy rose nearly 23 percent. The implication, of course, is that Wall Street greeted deregulation with approval.

“In general,” says DTE Energy manger of regulatory affairs Jim Padgett, “ABATE’s report card is at best totally premature and at worst, maybe a mischaracterization of what’s going on.”

And what’s really going on, says Padgett, is a cautious move away from a tightly regulated market toward one that will bring new competition into a state dominated by two utilities. The whole plan is being phased in slowly, with residential customers receiving a 5 percent rate cut to hold bills down until 2005. By then, according to the free-market scenario, there will be choice, and that will help keep rates low.

“The goal,” says Padgett, “is a vibrant, competitive market.”

That scenario though, raises an interesting question. It is posed by Martin Kushler, a 10-year veteran of the Michigan Public Services Commission staff who now works for the nonprofit Americans for an Energy Efficient Economy:

“If this is really about creating competition, why is it that the big monopolies are the ones pushing deregulation through?”

Well, uh ...

“The answer,” says Kushler, “is that it isn’t about competition at all. What we have, on the generation side of the equation, is essentially an oligopoly, with a relatively small number of national or global firms that control the vast majority of the generation supply.”

The thrust behind the deregulation efforts that began cropping up across the country during the past decade is a burning need for higher profits.

“What happened was that during the go-go ’90s utilities looked around and saw companies like Ameritech earning 40 percent profits, while utilities were still earning their traditional 12 percent. They started saying, ‘How do we get those kinds of big returns?’ And the answer was to get out of the constraints of regulation.”

And what’s going to happen when those caps come off residential rates in 2005?

“We’ll have to cross that bridge when we come to it,” says Padgett. “We’re not there yet.”

Big users and small

What makes the complaints from ABATE unsettling is the fact that the group carries considerable clout. While deregulation was being debated among the state’s lawmakers, it was able to match the utilities’ campaign contributions dollar for dollar, and then some.

And when it comes to taking advantage of the open market, corporations such as the automakers and steel producers ABATE represents are in a considerably stronger position than your average residential customer.

“It’s the big users that clearly have the clout,” says Harry M. Trebing, former chief economist for the Federal Communications Commission and now professor emeritus of economics at Michigan State University. “Corporations like General Motors can lean on the utilities and get concessions. If worse comes to worse, they can even build their own power plants.”

Residential customers and small businesses aren’t totally on their own. A city such as Detroit could bargain on behalf of residents. And aggregators, or brokers, could do the same for groups of customers. But the reality, so far, is that residential customers are by and large staying with the utilities that have always served them.

“Recent experience indicates that relatively few customers will actually switch away from taking utility services” from traditional suppliers, Geoffrey C. Crandall reported to the Michigan Public Services Commission in January.

Crandall, who served on the MPSC for 15 years as an analyst for the electric division before joining the consulting firm MSB Energy Associates in Wisconsin, noted that in California, “after two years and extensive advertising and extensive public awareness campaigns, less than 2 percent of residential customers made use of alternative supplies.”

Even in Pennsylvania, which provided an environment considered conducive to customers who sought to take advantage of the choices offered by deregulation, “less than 10 percent of residential customers actually switched after two years and an extensive public-awareness campaign.”

Trebing points out that most of those customers lived in either Pittsburgh or Philadelphia, and that tens of thousands of them were forced to return to their traditional utilities when their alternative suppliers abandoned the market.

The problem, Crandall said, is that energy suppliers can make more money dealing with corporate customers.

Based on the evidence available so far, Crandall told the MPSC, “electric power marketers do not pursue the residential markets. Marketers pursue their most lucrative customers first. Thus, to the extent that competition at the generation level exists, the alternative suppliers tend to market their services to larger industrial and commercial customers. The transaction costs to market to and develop contracts with individual customers are much higher for the residential sector. As a result, marketers pay little attention to the residential sector, and especially the low-income customers.

“As an example, Enron, a giant among alternative providers, withdrew from the residential markets in California and the East Coast because [it] determined the residential markets were not profitable.”

The bottom line for Michigan, predicted Crandall: “… few, if any, alternatives to [the monopoly] utility service for the residential sector, and especially low-income customers.”

Power lines

Aggravating the situation further is the fact that Michigan’s power grid — the system in place to move electricity from generating facilities to customers — is already handling nearly all the load of which it is capable.

Even the MPSC, which is more prone to tout how Michigan has developed a plan designed to avoid a California-like catastrophe (see “Power on”), agrees on that point. Furthermore, according to the MPSC, “In addition to physical limitations, the operating procedures under [federal] regulations make it difficult for new suppliers to meaningfully participate in the process of obtaining adequate transmission.”

DTE Energy’s spokesman doesn’t disagree, and again points out it is still very early in the process.

“There is a lot of push in the region to add capacity,” says Padgett. “This takes time.”

However, critics from Crandall and Trebing to industrial customers such as those belonging to ABATE are concerned that inadequate transmission infrastructure may continue to keep real competition a chimera.

“While the need for transmission upgrades has been well known for several years, utilities have no incentive to open their systems to possible competitions,” explained ABATE in its February newsletter.

Making matters even worse, claims the industry coalition, is the fact that DTE Energy is “soaking up” the available transmission capacity in southeast Michigan, “making it impossible for other utilities and marketers to reliably promise customers they can deliver power.”

In addition to all that is the natural tendency to maximize profits. Which is why experts such as Crandall, Trebing and Citizen Action’s Higley consider it vital that transmission grids be controlled by what writer Wallace Roberts described as an “institutional structure that will protect the public interest.”

Just as California has thrown a spotlight on just how disastrous deregulation can be, it also offers strong evidence of a system that does work.

Amid all the utility carnage in the Golden State, the two systems that have emerged unscathed from the debacle are the Sacramento Municipal Utility District and the Los Angeles Department of Water and Power. It is no coincidence that both are publicly owned systems that retained control of both their generation and distribution networks in addition to investing heavily in energy efficiency and renewable energy sources.

The flip side is the sort of free-for-all seen elsewhere in California. Supporters of deregulation argue that the basic concept remains sound; it was just the application in California that caused such a miserable failure.

Critics disagree. The way they see it, what happened in California is the natural outcome of what happens when a vital commodity such as electricity is placed at the mercy of market forces that view maximizing profits as the ultimate goal.

“The California blackouts are a simple case of greed run amok,” according to Gregory Palast, founder of the UK’s Public Utilities Reform Group and author of the book Democratic Regulation. “Deregulation is a lie — it is simply moving regulation from democratic government agencies to an unelected circle of market manipulators.”

“I think there is near unanimity that what is happening in California won’t happen here,” assures Padgett. “There are fundamental differences that make it unlikely.”

Even critics of deregulation agree that California is an extreme case. Nonetheless, they are concerned that Michigan may be starting down a slippery slope; some of them are convinced that Michigan has already begun the slide.

“It appears to me that we’re on the path to selling our souls,” says Kushler who, after 10 years on the MPSC, doesn’t put a world of faith in that body standing between Michigan’s citizens and big corporations hungry for profits (see side story). In addition, he points to areas where deregulation is farther along, and fears that the same could be in store for us.

“Michigan could be in very deep trouble when the frozen rates disappear,” he predicts. “Look at Alberta, Canada, which had some of the lowest rates in all of Canada. Their rates tripled, and there is an absolute crisis. Market prices have gone up more than 50 percent in Rhode Island and Massachusetts as a result of deregulation. And it’s been almost as bad in other states.

“I believe deregulation of electricity will go down as one of the worst public policy mistakes in history.”

Others see an equally dire future awaiting if the deregulation trend isn’t soon short-circuited.

“The problems now gripping deregulated electricity systems have been predicted by free-thinking analysts for decades, yet ignored by free-market ideologues,” argues Public Citizens’ Higley. “Suppliers will collude to raise prices and profits, and they will merge with their competitors in order to monopolize markets … By ignoring these simple truths, which are fundamental qualities of electric power, free-market reforms have caused the mayhem we now see in California, and to a lesser degree, in New York, New England, and the Midwest.”

“This is real stuff,” emphasizes Crandall. “The jury is still out on Michigan, but there are many warning signs that deregulation may never work.”

Curt Guyette is the Metro Times news editor. Call 313-202-8004 or e-mail

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