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Michigan lawmakers, regulators poised to choke out electricity choice

By   /   November 28, 2016  /   News  /   No Comments

White Pigeon Paper Company, located in a tiny corner of Southwest Michigan, is the nation’s last family-owned mill in North America that produces clay-coated recycled paperboard.

“We are it,” White Pigeon Vice President and General Manager Dave DiBiaggio tells Watchdog.org. “And it’s a very difficult, competitive marketplace.”

Already saddled with monthly power bills of $250,000, and his electricity provider set to double rates, DiBiaggio decided in 2012 to leave his utility and try his luck in the state’s electricity choice market. He calculated that going to an alternative energy supplier would save his company $575,000 per year.

Michigan law allows 10 percent of its electricity customers to buy their power from an alternative energy supplier. The rest is controlled by large utility companies like DTE and CMS Energy in most of the state. In the area where DiBiaggio lives, the monopoly utility is Indiana Michigan Power (owned by American Electric Power, or AEP) and is operated by a different regulatory system than that of DTE and CMS.

But a pricing gambit by AEP killed DiBiaggio’s options before he even had a chance to make the switch.

“Of course [AEP] will sit there and say, ‘Oh yeah, you can shop around for electricity,’” he said. “But what they did was increased the transmission rates that they charge competitors to use their lines so significantly that they can’t be competitive.”

Here’s what happened. AEP got federal regulators to approve a formula for “capacity charges” in Michigan and Ohio. These are fees paid by alternative suppliers who buy incumbent utilities’ power for resale, but don’t generate their own electricity. And since the incumbent utilities are responsible for not only producing electricity, but ensuring it always has the “capacity” or ability to do so, they should collect a fee from alternative suppliers who buy their power, but don’t give any back.

So capacity charges themselves aren’t the problem, says R-Street electricity policy manager Devin Hartman. The problem is how they’re determined. Normally, state regulators use annual surveys by regional transmission operators to figure out capacity needs and charges. But Hartman says this new scheme by which the utilities call the shots undercuts the value of choice.

“Alternative suppliers should have to pay market-based capacity rates which they factor into their retail offerings rather than an administratively determined surcharge,” Hartman told Watchdog.org.

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The fees are assigned on megawatt per day basis — that is, how much it costs utilities to continuously run one MW of power for a full day. For example, a one MW power plant with a one dollar capacity charge gets one dollar per day from alternative suppliers. If the plant can produce 500 MW, it gets $500 every day.

AEP asked Ohio regulators for a capacity charge of $355 per MW/day, and $394 per MW/day in Michigan, claiming that’s how much it needed to keep plants ready to run at full capacity.

Given that Ohio market prices at the time were about $16, these proposed charges were excessive enough for regulators there to hire an auditor. The auditor (who was coincidentally based in Michigan) discovered AEP threw everything but the kitchen sink into its calculation — rates of return, costs of construction in progress, costs of plants not being used and payroll and benefits for eliminated positions, to name a few.

Eventually, the Public Utilities Commission of Ohio (PUCO) approved a $188 capacity charge. This capacity charge hike doesn’t appear to have harmed Ohio’s alternative suppliers as consumers, businesses and industries have reportedly saved $15 billion in electricity costs between 2011 and 2015.

Michigan regulators also didn’t accept AEP’s proposed capacity charge of $394/day. Instead of reducing the fee, as in Ohio, the Michigan Public Service Commission (MPSC) raised the fee nearly 50 percent — to $588/day.

Shutterstock photo

CHARGED UP: Same regulatory mistakes could doom all electricity choice in Michigan

The result, according to Maureen McNulty-Saxon, a spokesperson with electricity choice advocacy group Energy Choice Now (ECN), was that electricity choice in southwest Michigan died overnight.

“Until the actions of the MPSC in 2012, there was a robust electric choice program in AEP’s territory of southwest Michigan,” she said. “Today, there is no participation in the electric choice program there.”

And now, she warns, Michigan legislators are on the verge of doing the same thing to the rest of the state under a hotly contested electricity reform bill passed by the Senate on Nov. 10, and goes to the House this week.

“Under Senate Bill 437, the MPSC is tasked with implementing a ‘capacity charge’ from Consumers Energy and DTE to be imposed on schools and electric customers,” McNulty-Saxon said in a statement sent to lawmakers and other stakeholders.

The incumbent utilities claim retiring coal plants are driving the need for investment into natural gas and other energy sources, and alternative suppliers need to pay their share. So tucked into the bill are several layers of requirements for alternative suppliers, including how capacity charges are set. McNulty-Saxon says the formula is nearly identically to AEP’s formula that wiped out the choice market in 2012 — essentially swapping PUCO for MPSC as state regulators, and AEP for DTE and CMS Energy as the monopoly utilities.

“It’s the poison pill utilities have used in Michigan before,” she said.

DiBiaggio is dismayed that the hundreds of millions of dollars saved by many of Michigan’s public schools and universities, hospitals, local governments and businesses could eventually disappear as alternative suppliers get squeezed out of the choice market, just as it did for him.

“You’re talking about jobs, you’re talking about tax dollars going into this little community in southwest Michigan.” he said. “[Now] this is a serious issue for the whole state of Michigan. And I’m just at a point where I’m very frustrated with the whole situation. Because the folks in Lansing haven’t really heard us. They don’t get it. They really don’t get it.”

And even less competition among electricity providers means prices could soar above rates that are already highest in the Midwest and 12th in the nation.

“I’ve got friends who run paper mills down in South Carolina and Georgia, and they’re paying two cents a kilowatt. How are we going to compete when we’re paying seven?” DiBiaggio asked. “If they put enough of us out of business, where are they going to put their electricity then?”

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Kathy Hoekstra is the regulatory policy reporter for Watchdog.org. Before joining Watchdog, she was a senior communications manager and Michigan state director for Job Creators Network, an advocacy organization that focuses on employee education. She has also been a TV news reporter and anchor, a contributor to the Detroit News and occasional guest-host for Frank Beckmann on WJR Radio in Detroit, and was an investigative reporter for the Mackinac Center for Public Policy. She lives in Michigan and is a member of Investigative Reporters and Editors.