Questions and Answers
Can any electric customer take advantage today of competitive electric rates via the electric choice program?
Is the 10% cap harmful to customers and to the Michigan economy?
Should the 10% cap be removed or raised, and if so, why?
Why was the 10% cap included in PA 286 in the first place?
Will eliminating or raising the 10% cap affect the ability of utilities to build new power plants if needed for reliability?
Will eliminating or raising the 10% cap be harmful to utilities, by impeding their ability to finance new power plants?
Do the utilities have to build more new power plants than currently needed just in case customers on electric choice return to utility service?
If customers leave for electric choice, won't the remaining utility customers have to pay higher rates for the utility generation that is no longer being used?
If the utility builds a new power plant, then its rates will increase. This could drive customers to competitive suppliers.
Isn't a cap needed to allow the utility to recover the increased costs of the new plant by retaining customers?
Are not all customers currently paying for the transition to a competitive electric market, and if so, should not all customers be eligible for competitive supply?
Can any electric customer take advantage today of competitive electric rates via the electric choice program?
- No. Public Act 286, enacted in October 2008, put a “Cap” on electric choice. And the cap has been filled.
- Electric choice sales in a year are capped at 10% of the weat her-adjusted sales of the local traditional utility (Consumers Energy or Detroit Edison) for the previous year.
- Both Consumers Energy and Detroit Edison reached the 10% cap in 2009 – Consumers Energy in mid-August 2009 and Detroit Edison in early December 2009.
- There is no cap on gas choice.
(Back To Top) Is the 10% cap harmful to customers and to the Michigan economy?
- Yes. The cap is a barrier to competitive energy costs for companies in Michigan.
- By making some Michigan companies less competitive, it hinders the retention and creation of jobs in Michigan.
- Further, the 10% cap is economically discriminatory among Michigan businesses. The 10% cap has created two classes of customers – the few who are able to shop for the best price for electric energy, and the many who are stuck with whatever their local traditional utility charges them.
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Should the 10% cap be removed or raised, and if so, why?
- Yes. The 10% cap should either be removed or raised to at least 30%.
- At the 30% level, most larger users of electricity would be eligible for competitive supply. This would: a. reduce their operating costs and thus improve their ability to stay in business and expand their operations, and b. help them become more competitive with businesses in other states.
- Consequently, removing or raising the Cap would lead to greater retention and creation of jobs in Michigan , and help Michigan recover from the recent and drastic economic downturn.
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Why was the 10% cap included in PA 286 in the first place?
- At the time, Consumers Energy and Detroit Edison claimed that the cap was needed so they could finance and build new power plants. However, virtually no evidence was put forth to support the necessity of a cap.
- Regardless, circumstances now are different from 2008, and a cap is not needed.
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Will eliminating or raising the 10% cap affect the ability of utilities to build new power plants if needed for reliability?
- No. The utilities will still be able fund new plants, if they decide to do so.
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Will eliminating or raising the 10% cap be harmful to utilities, by impeding their ability to finance new power plants?
No, the utilities will not be harmed. Eliminating or raising the cap will not impede utility financing . There are five reasons:
- Historical Evidence – Utilities, as regulated businesses under the purview of the Michigan Public Service Commission, have had little difficulty historically in financing investment in new power plants.
In 2007 – prior to the enactment of the 10% cap in 2008 – Detroit Edison projected an investment of over $1 billion in its Monroe power plant alone to comply with Clean Air Act requirements (Detroit Free Press, February 19, 2007) and projected capital expenditures of almost $900 million per year through 2011 (DTE presentation to financial analysts). These huge investments, on the order of what would be spent on a new power plant, were not impaired by lack of a cap on electric choice.
Further, between 2000 and 2007, independent businesses constructed about 4,000 MW of new power generation in Michigan (about 8 times the size of a large 500 MW coal unit) – without the need for a “cap.”
- PA286 Certificate of Necessity – PA 286 of October 2008 requires the MPSC to grant the utility, if the utility provides specified information, a “certificate of necessity” prior to the construction of a proposed new power plant. This certificate will guarantee that the capital costs and the financing for the new power plant will be recoverable in rates. (PA 286, Sec. 6s(3)(d))
Thus, the utility will know ahead of time that it will be able to recover the cost of its investment in a new power plant (PA 286, Sec 6s(9) ), and therefore risk of non-recovery will have been removed from the utility's financing.
- PA286 Faster Recovery of Financing Interest – Under previous regulatory practice, utilities had to wait to recover the financing costs of new power plants. A utility building a new power plant would accrue the interest cost of funds used during construction and add such costs to the total cost of the plant. Once the plant has been put into service (“used”) and deemed to be beneficial to customers (“useful”) by the MPSC, the utility would collect for the cost of the plant in its rates.
Now , however, utilities will begin recovering financing costs as soon as the plant is granted a certificate of necessity. Under PA286 in effect since October 2008, the MPSC must allow the utility to recover financing interest costs on construction work in progress (CWIP) in the utility's base rates during the construction period, prior to the plant being considered “used and useful. ” (PA 286, Sec. 6s(12)) Faster recovery of financing costs puts utilities in a very favorable position to finance plants.
- PA286 File and Use Provision – Under PA286, if a utility files for a rate increase and the Commission does not issue an order within 180 days, the utility can implement up to the proposed amount of the increase on its own . (PA286, Sec. 6a(1)) This “file and use” provision has allowed Consumers Energy and Detroit Edison to collect more than $150 million in rates than they would have without PA286.
- Commission-Approved Revenue Decoupling Mechanism – In the most recent rate cases for Consumers Energy and Detroit Edison, the MPSC has approved a “revenue decoupling mechanism,” or “RDM.” Under an RDM, utility rates are adjusted for changes in actual sales, up or down. Thus, under MPSC order, utilities are allowed to increase rates to offset the impact of lower electric sales, or to lower rates if sales are higher than forecast.
Consequently, utilities are virtually guaranteed to receive the revenues authorized in the rate case, and – like the other factors above – this will facilitate financing of new power plants by stabilizing the revenue of the utility over time.
(Back To Top) Do the utilities have to build more new power plants than currently needed just in case customers on electric choice return to utility service?
- No, this argument is no longer valid. Circumstances are different from October 2008.
- In the Midwest, under the Midwest ISO market, each supplier has to provide enough capacity to meet its customer load plus a reserve margin . If customers change suppliers, then capacity from the old supplier will be freed up and available to be purchased in the market by the new supplier.
- Therefore, the new supplier has no reason to build or hold onto extra capacity just for the possibility of “returning customers.”
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If customers leave for electric choice, won't the remaining utility customers have to pay higher rates for the utility generation that is no longer being used?
- No. And further, this question includes a misleading assumption.
- First, both Consumers Energy and Detroit Edison need and purchase additional capacity in the high cost summer months. Thus, when customers leave, it reduces the need for high cost summer capacity purchases . Average supply rates should go down , not up.
- Second, if so many customers leave to take advantage of competitive electric supply that the utility actually has excess generation, then the utility can sell the excess generation in the marketplace . Recall that the new supplier of the customer must provide the same amount of generation for the customer load as the utility did. In short, in this situation, the utility has excess generation, but someone else needs it, so it can be sold.
- If a situation exists that the utility has excess generation and such a great excess also exists in the marketplace that the utility cannot sell its excess , then the entire question about utilities needing financing to build more power plants becomes moot – it does not need to build more power plants, and so does not need more financing, and so the existence of a cap to protect utility financing accomplishes nothing except harm to customers.
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If the utility builds a new power plant, then its rates will increase. This could drive customers to competitive suppliers. Isn't a cap needed to allow the utility to recover the increased costs of the new plant by retaining customers?
- No. If the new plant increases costs to such a level that it drives customers to the competition, and the utility ends up with excess generation that it cannot sell in the marketplace, then the plant is no longer economically “useful” to utility customers.
- In this situation, the utility has made a bad decision – it chose to build its own expensive plant rather than purchase capacity more cheaply from another supplier.
- The risk of a bad economic decision by the utility should be borne by stockholders, not by utility customers . Since the plant is not “useful” to customers, the recovery of its costs from customers should be temporarily disallowed. However, it should be noted that if the utility has received a “certificate of necessity” from the MPSC under PA 286 (Sec. 6s), then the utility is guaranteed to recover costs even turns out that the decision to build the plant was a bad economic decision. The correction of this situation should be via the provisions of the certificate of necessity, not by exercising a cap on electric choice to hold customers captive to a bad utility decision.
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Are not all customers currently paying for the transition to a competitive electric market, and if so, should not all customers be eligible for competitive supply?
- Yes and yes.
- In 2000, the legislature provided generous support for utilities to transition to a competitive market in PA 141.
- PA 141 resulted in:
a. Securitization of more than $2 billion in Consumers Energy and Detroit Edison high-cost nuclear generation assets through 15 year bonds. All customers, including electric choice, must pay – and are still paying – securitization charges, removing the risk that the utilities would not recover the cost of the nuclear generating assets . Without the need to recover the cost of nuclear generation from the marketplace, the intent was that utilities could compete for power supply to customers. Securitization, therefore, was the price of access to competitive power.
b. Recovery by utilities of more than $100 million in “stranded costs.” Utilities were able to collect for the cost of transitioning to competition and for the cost of any excess generation that was not competitive in the marketplace.
- The MPSC subsequently ruled that the utilities had fully recovered all stranded costs associated with the transition to competition.
- All utility customers – both utility full service customers and electric choice distribution customers – are still paying a “securitization charge” to cover the cost of securitization bonds, and will continue paying through 2015.
- Therefore, customers who are prevented by the 10% cap from going to electric choice are paying utilities for the costs of transitioning to competition, but not receiving the benefits of competition.
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