ELECTRICITY:

2 states feel the market heat as their deregulated neighbors reap rewards

Electric deregulation is getting a fresh look in two Great Lakes states as big energy users see power prices rise while rivals in neighboring states reap the benefits of competition.

In Michigan and Indiana, two states hoping to revive energy-hungry manufacturing sectors, pro-competition groups are working to reinvigorate debate over electric restructuring more than a decade after California's electricity crisis and Enron Corp.'s collapse led many states to abandon the idea.

Legislation was filed last month in Michigan, which opened its retail electric market in 2001 only to limit competition years later. Today, just 10 percent of incumbent utilities' retail electric load is allowed to shop for an alternative supplier.

But rising energy prices have pro-competition groups agitating for change.

"The big problem in Michigan is we have rates that are much higher than the Midwest and national averages," said Wayne Kuipers, a former Republican state senator who leads Energy Choice Now, a coalition pushing to fully open the state's retail electric markets.

The debate in Indiana, a traditional rate-regulated state, hasn't advanced as far. But a legislative committee took up the issue last year. And a state energy plan being drafted for Republican Gov. Mike Pence this spring is expected to address electric choice.

The discussions about electric restructuring are reminiscent of those held across the country in the late 1990s. Then, as now, the concept seemed straightforward: Opening the monopoly electric generation market to competition would usher in a new era of lower prices and innovation the same way it did with airlines and long-distance telephone service.

But restructuring century-old electricity markets didn't go so smoothly. California's market collapse made headlines for rolling blackouts, soaring prices and utility bankruptcies. There were also a series of energy trading scandals that roiled markets. States quickly put the brakes on deregulation, and some that had enacted laws repealed them.

Pent-up demand

Michigan was among the states to pull back, but not until years later. And it wasn't because of California or Enron.

The state opened its retail electric market to competition in 2001. But for a variety of reasons, few consumers switched electricity suppliers. In 2008, then-Gov. Jennifer Granholm (D) agreed to cap participation in electric choice programs, guaranteeing utilities a 90 percent market share, in exchange for a commitment to deploy more renewable energy.

A Michigan Public Service Commission report released last November on the state's hybrid electric choice program showed a backlog of demand for programs that goes beyond the 10 percent cap. For the state's two largest utilities, DTE Energy and Consumers Energy, more than 20 percent of customers are "in the queue" to switch electricity providers.

That pent-up demand for consumer choice has become a bullet point for competition advocates who are lined up behind legislation filed last month by Republican state Rep. Bill Shirkey.

According to data from the Energy Information Administration, Michigan's retail electric prices of 10.94 cents per kilowatt-hour across all customer classes in the month of November were highest among five Great Lakes states and above the 9.83-cent national average.

Indiana's rates, meanwhile, have risen by almost a third over the past five years to 8.67 cents per kWh, EIA data show.

Not only are electricity rates in Michigan and Indiana rising, the states are wedged between two states where deregulation has contributed to lower electricity prices: Illinois and Ohio. And those states are increasingly factoring into the conversation.

Philip O'Connor, a Chicago-based consultant who advocates for competitive electric markets, said Michigan is paying a huge price by not fully expanding consumer choice.

A former Illinois Commerce Commission chairman, O'Connor calculated that the 3.28-cent difference between electric rates in Michigan and Illinois, which he calls the "market standard for the upper Midwest," cost Michigan consumers $3.3 billion in excess energy costs last year.

The potential savings, he said, would be enjoyed by not just big businesses, but residential customers as well.

"This is truly a case of a rising tide lifts all boats," O'Connor said.

Rocking the boat?

Not everyone is convinced a return to fully competitive electric markets is the answer to rising energy prices.

In Michigan and Indiana, utilities say existing regulatory structures are working fine.

In comments to the Michigan Public Service Commission, utilities including DTE Energy and Consumers Energy said enabling more electric switching among customers would come with a laundry list of unwanted consequences: potentially higher, more volatile energy prices, reliability concerns and a disincentive to invest in generation.

"The notion of stability and reliability are key for us," said DTE Energy spokesman Alejandro Bodipo-Memba.

Michigan Gov. Rick Snyder (R) didn't embrace the idea of expanding retail choice when he discussed the state's energy goals in a Dec. 19 press briefing.

Instead, he said it was appropriate to step back and look at ways to improve competitiveness of industrial energy customers in a way that didn't harm smaller consumers.

"I wouldn't jump to say increasing choice is the answer," Snyder said.

In Indiana, a bill signed by the governor last spring required a legislative committee to study electric restructuring, and that committee heard testimony from interested parties in September.

Those groups included industrial energy users in the state, which submitted a white paper advocating reform of Indiana's retail electric market to "provide greater flexibility and better options to manage energy costs."

The industrial consumers said the state has gone from being a low-cost state for manufacturing to middle of the pack nationally. And electricity in Indiana is now more expensive than it is in neighboring Illinois and Ohio, both of which are competitive states.

"The upward spiral in electric prices ... has severely and adversely impacted the economics of industrial operations in Indiana," the group said.

Further increases in electricity prices in Indiana are expected.

The State Utility Forecasting Group, a state-funded panel of researchers based at Purdue University, last month predicted a 32 percent increase in electricity rates for Indiana over the next decade largely related to the state's dependence on coal for electricity generation and a variety of new environmental regulations it must meet.

Concerns beyond pricing

Rising energy prices are a big part of what prompted the governor's call for a new energy plan being developed by the Indiana Office of Energy Development.

The plan will be based on three principles established by the governor. They include "improving options available to energy consumers" -- a provision widely expected to address the prospect of restructuring the retail electric market.

Kerwin Olson, executive director of Citizens Action Coalition, a consumer and environmental advocacy group, agrees that rising energy prices are a key issue. But he has concerns about what a competitive electric market would mean for low-income consumers.

"The impact of deregulation on low-income and vulnerable populations is horrific," he said. "That said, we hate monopolies. So the question is, how do you nuance your position being a consumer advocate?"

That skepticism has put Olson's group in the unusual position of being aligned on the issue with the utility lobby in Indiana -- a group generally on the other side of the table.

Mark Maassel, vice president of the Indiana Energy Association, the utility lobby, said the current system of regulation can be changed for the better without being overhauled.

"People have asked the question: Should we? And from the utility industry's standpoint, the answer is no," he said.

Pro-competition advocates in both states acknowledge swaying political sentiment will be a difficult task when it means taking on powerful utilities with a strong presence at the respective state capitals.

But Kuipers of Energy Choice Now said his group is steadily making progress.

"I think we're very successful in raising the issue and making it an issue," he said. And ideologically, he said the benefits of competition in the marketplace are just as clear for the electric utility business as they are for other industries.

"If they hadn't deregulated the telecommunications industry, we'd still be talking into a bag phone," he said.

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