Michigan Energy Deregulation Facts

About Deregulation

Get the facts on how electric deregulation would hurt Michigan families and businesses.

A raise in the deregulation cap... would be economically disastrous for Michigan. It would unfairly raise the burden on families and businesses, who would be forced to shoulder the hundreds of millions of dollars in fixed costs left behind. - Detroit Regional Chamber
Electric deregulation – also referred to as “electric restructuring” or “electric choice,” is a model under which some or all customers can opt out of having their electricity provided by their local utility. Instead, these customers receive electricity provided by a retail energy marketer  – but the local utility is still responsible for delivering this power and servicing the customer.

 

Today, Michigan allows 10 percent of the state’s electric usage to be served by deregulated energy marketers. Statewide, 99.7 percent of Michigan’s families and businesses are paying $350 million more every year to properly maintain the state’s electric system so that the other 0.3 percent of customers can purchase deregulated power.

 

As a commodity, electricity is unique because it provides an essential service that has no substitutes, has highly variable demand and cannot be stored. For these reasons, a significant amount of reserve supply is needed to ensure reliability. The reliability of electric supply is a “public good” that everyone benefits from. Economic theory points to the fact that over-reliance on market forces to supply a public good can be risky.

 

It is only in the last fifteen years that some states have experimented with deregulation. Implementation of deregulation has been fraught with challenges, and in the years following California’s disastrous energy crisis, many states suspended deregulation. Today, the majority of the United States operates under a fully regulated model as shown below.

State regulatory models

Deregulation has not led to lower rates in deregulated states as seen in the figure below. Rates in states that deregulated were higher before deregulation driven by structural and geographic reasons. They remained higher after deregulation. In addition, customers in deregulated markets experienced significant price spikes and rate volatility.

Michigan’s rates have been lower than the rates in almost every deregulated state both in 2008 (a period of high gas prices) and in 2011 (a period of low gas prices), as can be seen in the figure below:

Comparing rates in 2008 and 2011

An increase in the deregulation cap would put long-term reliability at risk. In the early years of deregulation, merchant generators across the nation and in Michigan overbuilt capacity based on market expectations that did not materialize and went bankrupt. Deregulated generators have become unwilling to invest for reliability without sufficient assurance of investment recovery.

For the customer participating in the choice program, it represents costs avoided. And for the customer left behind, it represents a cost shift – to small businesses, families and low-income households who can least afford it. - Joe Jones, Grand Rapids Urban League

More than 99% of Michigan’s customers currently pay $300 million per year to support the fixed costs of generation for energy marketers, effectively providing a subsidy to a very small number of customers. The current cost equates to a ~4% impact on utility customer rates. An increase in the deregulation cap would only increase that burden while benefitting a very small number of large companies at the expense of the vast majority of customers.

Costs Shifted to Remaining Utility Customers