Economic Development, Government, and Sustainability

Utilities argue for repeal of energy choice

Grand Rapids Chamber and some West Michigan companies oppose the proposal.

April 17, 2015
| By Pete Daly |
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David Mengebier says repeal of Michigan’s 10 percent energy choice law is the most reliable and affordable way of providing electricity to customers in Michigan.

Andy Johnston says energy choice, also known as Retail Open Access, improves the competitiveness of Michigan business by keeping energy costs competitive.

Mengebier, a senior vice president at Consumers Energy, and Johnston, vice president of Grand Rapids Area Chamber of Commerce, were two of many speakers from across the state who packed the Michigan House Energy & Technology Committee day-long hearing last week.

Committee Chair Aric Nesbitt, R-Lawton, sponsored House Bill 4298, which would end the right of electricity customers in Michigan to buy it from a supplier other than the public utility that delivers it to them.

In 2000, Michigan enacted a law allowing any electricity customer to buy power from any generation company, even those outside of Michigan. In 2008, that was replaced with a new law capping that customer choice to no more than 10 percent of an electric utility’s retail sales.

Now the push is on, via Nesbitt’s proposal — which is strongly supported by the state’s two largest public utilities, DTE and Consumers Energy — to completely eliminate customers’ choice of an alternative electricity supplier.

“The 10 percent cap filled quickly, and today nearly 12,000 businesses are waiting in the queue to use an alternative energy supplier,” said Johnston. He said the cost of electricity is “becoming a primary issue for the business community” in Michigan.

According to the U.S. Energy Information Administration, in January 2015 the average electricity rate for all users in Michigan was 10.5 cents per kilowatt hour. In January 2014, it was higher: 11.05 cents. The rate for industrial customers in January was 6.64 cents, down from 7.78 cents a year ago.

In the five-state region that includes Illinois, Indiana, Ohio and Wisconsin, Michigan’s overall rate was second highest, after Wisconsin at 10.69 cents. For industrial customers, Michigan’s rate was the second lowest; Illinois was at 6.38 cents.

A number of West Michigan corporations in opposition to Nesbitt’s bill were represented at the hearing, including Amway, Steelcase, Spartan-Nash and others.

Bryan Harrison, senior policy advisor in government affairs at Amway, said his company has a contract with Wolverine Power Marketing Cooperative, a private provider, under the existing law.

“The freedom to negotiate with a private provider has provided substantial savings to our company — over $7 million to date,” he said.

John DeAngelis, an executive in the Steelcase Global Sustainability Initiatives Group, did not give a dollar amount but said Steelcase has been saving about 20 to 25 percent on its electricity cost compared to the rates it had been charged by the utilities.

Schools also benefit from energy choice in Michigan and were represented at the hearing.

According to Mary Beth Rogers, executive director of business services at Clarkston Community Schools, her school system is saving more than $350,000 per year, or 25 percent of what it would otherwise pay for DTE rates. She said school funding has already been cut and resources are at an all-time low, with any further cuts being staff. Clarkston schools, she said, do not have the financial capacity to absorb increases in its electricity expenses.

On the other side, Mengebier noted Consumers and other public utilities are required by law to serve as the electricity provider of last resort. He said complete deregulation of the electricity market — in which all customers could choose any generating source of their power — is a model “seriously flawed and often driven more by ideology and, in some cases, short-term profit-making, than it is by economic fundamentals and the physical characteristics of electricity.”

Electricity, he said, is a commodity “entirely unsuited to a deregulated market” because it cannot be stored and must be consumed instantaneously. He said electricity cost is “the most volatile commodity in the world — 300 times more volatile than commodities such as oil, corn or wheat and natural gas.”

To minimize that price volatility, energy providers make long-term investments in power plants sufficient to meet demand, plus provide a reserve to cover periods when demand spikes, according to Mengebier.

“The utility industry is the most capital intensive in the world. Power plant investments range from tens of millions into the billions of dollars. In order to make these investments affordable for customers, the costs of these plants are recovered over 30 or 40 years or more,” said Mengebier.

He said the regulated model in 36 states today provides certainty of cost recovery, which energy providers need to finance and construct new generating plants.

“The regulated system may not always lead to the lowest prices, but it keeps prices stable and predictable,” he said, adding that deregulation is “a strong disincentive” for long-term investments in power plants able to cover the wide swings in electricity demand.

“During periods when there is a surplus of generating capacity in the market, there is no need for the type of certainty I'm talking about, and the price volatility problems found in deregulated markets are muffled. This has been true in the Midwest where low natural gas prices and excess capacity have depressed market prices for electricity,” said Mengebier. He added that Consumers and DTE both have sufficient capacity to meet customers’ needs for the next five years.

“What we are concerned about is the prospect of 2,000 megawatts of ROA load returning to the utilities with as little as two months’ notice” if the alternative energy suppliers pull out, said Mengebier.

Something like that nearly happened last year in Michigan. We Energies of Wisconsin wanted to close its coal-fired power plant in Marquette when its biggest customer turned to another supplier for electricity. Federal energy regulators would not allow the plant to close, however, because the Midcontinent Independent System Operator Inc., which oversees the grid covering more than a dozen northern states and one Canadian province,  said the Marquette plant was needed to maintain a prudent “reserve margin” of capacity in the U.P.

In September, Consumers Energy reached a settlement with the U.S. Environmental Protection Agency and the U.S. Department of Justice to upgrade equipment to reduce air pollution at its coal-fired plants. It also agreed to close seven of its coal-fired generating units in Michigan, and the EPA is forcing closure of coal-fired plants in other states, too.

DTE also has two coal-fired plants slated to be shut down.

Both Consumers Energy and DTE began a campaign last fall urging construction of new gas-fired power plants to prepare for the loss of coal-generated electricity, which they say will be reflected by reserve shortfalls in 2016.

“The capacity shortfall is not going away. According to a statement made just last week by the president of the North American Electric Reliability Council, proposed EPA rules governing carbon emissions from power plants will lead to even more coal plant retirements, creating additional generation shortages in the Midwest and other regions of the country,” said Mengebier.

The 1 percent of customers with electricity choice in Michigan are subsidizing the other 99 percent of customers, said Mengebier.

MISO gave a report to the House energy committee in February that predicts the Lower Peninsula’s “reserve margin” of electricity supply in 2016 will be about 21.8 gigawatts instead of the 24.8 gigawatts MISO says is prudent.

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