Electric Choice- Is Deregulation a Cheaper Alternative?
One of the buzz words being used by Republicans in the race for the 97 is Electric Choice- Deregulation of the Electric Market to increase competition and reduce costs to consumers by letting the free market control the price of electricity. While the free market is a cornerstone of our economy and it makes sense that by increasing competition for our energy dollars will result in cheaper electricity and better service, this is a superficial impression at best.
The same arguments were made with airline deregulation a couple of decades ago. End monopolies and the airlines would compete for your business- service would improve and price would go down. As a side benefit the government would no longer endure the costs of subsidies. Unfortunately, the free market took over- the basis of which is reduce costs while maximizing profits. This lead to the inevitable outcome. Small and mid size airports were not as profitable as larger hubs, so service was discontinued as the airlines scrambled for market share and profit.
Furthermore, while the ticket price may have decreased, many airlines folded (Eastern, American, Pan Am) and those that remained found creative ways to separate travelers from their money. We lost in flight meals (or they were ‘sold’ to a captive audience at high prices) and we started to pay $25-50 per bag for our luggage. The cost of the flight overall, with all the additional charges, increased, but we had to drive to Detroit to get our flights. What’s more, they used the UPS model, and routed the flight from hub to hub. What was once a 2 hour direct flight from Detroit to Myrtle Beach, SC became a 6-8 hour journey through Boston, New York or Washington because that was the most efficient way to move people and assure full flights.
The Electrical Grid
Electricity is more than a commodity like corn or soybeans. It cannot be created and stored efficiently for later use, it is gone ‘somewhere’ and used within a millisecond of being generated. Electric choice ONLY refers to the electric power (be it generated or bought at auction by the outside company). In most cases, they do not generate the electricity, they buy and sell it like a stock, earning money from the speculation along the way.
Our electric grid consists of three major components- sources of generation, transmission and distribution. Electricity is generated and sent out to the world on high tension wires at 50-250,000 volts. These are the high tension lines we see going from city to city (the ones that hum when we stand beneath them). In each community, there are substations that connect to these lines and step the power down to something we can use in our homes (220-110 volt). From here the substations send the electricity along the distribution lines to our homes.
To look at this in the context of Consumers Energy or DTE (the major power companies in Michigan) the companies have the ability to generate a fixed amount of electricity, the transmission lines are owned by a multi-state company (ITC), and Consumers and DTE own the substations and distribution lines. To do this Consumers Energy alone has 7500 Michigan employees along with an additional 7500 Michigan contractors. They paid $193 million in taxes, $138 million in energy efficiency discounts, and wrote off $600,000 in bills for hardship. They also gave $8.5 million to communities in the form of grants.
It should be noted as well that there are smaller electric companies and co-ops in Michigan. An example of this is the city of St. Louis, which has a hydro-electric dam to provide part of their energy needs. These co-ops have their own distribution lines or they simply act as power sources for the overall system.
The Cost of Electricity
To get electric power to your house, you pay for the cost of the power itself, the cost of moving the power along the transmission lines, and the cost of the substation and distribution lines. All theses are ‘regulated’ by the Michigan Public Service Commission and these rates are determined by the cost to the companies to provide and maintain the individual components of the electric grid as noted above.
Building the System
Our electric power grid was designed and evolved over the last 100 years with several goals in mind- The primary goal is the efficient delivery of reliable electric power to as many homes and businesses in Michigan as possible. It is not strictly viewed as a free market endeavor for a very good reason. Electric lines cost money, as do the substations. It is far more cost effective to only provide electric service to dense population centers- 100 paying customers per mile is more profitable that 7 customers per mile, so given a pure free market environment, we would only have power in the cities and urban areas. To provide power to an entire community, the pot was sweetened for the electric companies by giving them a franchise to be the sole supplier for the city or township. The overall ‘territories’ for each company are determined by the MPSC, each company then makes an agreement with individual government units.
Once the distribution system is built, and sufficient to handle anticipated peak loads and growth, it is connected to the transmission system. Then attention is turned to generation capacity. Some states, such as New York, have very little energy generation capacity- they simply buy their power from other states and countries at wholesale or auction price. Advantages of this system are reduced infrastructure costs (no power plants). Disadvantages are loss of control of the source of the power, the tax dollars generated by those plants, and the workers employed to run them.
Obviously the cost of the power depends on the amount available and the demand to buy it. In order to work the power must be generated elsewhere to have sufficient supplies available to purchase at a reasonable cost. Consider the situation where New York buys its power under this system from New Jersey. Ideally New Jersey would have enough generation capacity to cover its needs and those of New York at a typical peak load, plus a little extra for emergencies that, if not used, they can sell to Vermont.
But if it is an unseasonably hot day in New York, everyone runs their air conditioner the the peak load goes through the roof. No problem, just buy more power from New Jersey. Problem is, if it is hot in New York, it is hot in New Jersey and they are running their air conditioners as well and don’t have the extra power to sell, at any cost. Vermont isn’t getting the excess power from New Jersey, and it is hot there too. All three states turn to Ontario asking for power. In good free market form, the Canadians say ‘How much is it worth to ya???’. That Fall the electric rates go up for all 3 states to make up for the deficit and plan better for the future.
The Benefits of a Power Generating Monopoly
In Michigan, we have two major companies that have the monopoly on electric service. They also generate their own power, generating taxes, jobs and community grants in the process. Their approach is slightly different than the free market in New York. They have years of data and projections that define the peak loads of their systems, and they built a sufficient generation capacity to provide for those loads, plus a little extra (How much is that worth to ya, New York, New Jersey and Vermont??).
The entire system is based on having a fixed set of customers, and the cost of that system is broken down and shared over that customer base. Michigan linemen keep the system working to transmit the Michigan generated power which employs Michigan workers and EVERYONE pays Michigan Taxes and fees. The resulting electric bills are about 13th highest in the nation (could be better, could be worse) and we have a steady source of reliable electric power for our homes and businesses.
Deregulation Comes to Town
In 2000, deregulation came to the Michigan Power Grid. Unlimited at first, customers could choose the source of their electricity- determined by the free market, and PAY to have that electricity transmitted over the transmission (ITC) and distribution lines (Consumers and DTE). Slow at first, this built to about 3% by 2008. Though easily handled at that time, the problems of a New York style non-generation/free market system were anticipated. So in 2008 the number of customers that could use ‘Electric Choice’ was limited to 10% of the total system capacity.
Currently in 2016 that 10% is filled and there are about 20% of the customers on the waiting list to use the service. Because of the limits, only customers using 1 megawatt or more a month can apply for electric choice- mostly large school districts and industry. Those on electric choice are experiencing some savings (not in small part due ‘large volume’ discounts not available to the average homeowner) . But that is deceptive and done at the cost of their neighbors. The major cost is not money, but reliability and availability of electricity.
Dogma, Politics, Fear and Facts
As noted in the first paragraph, several Republican contenders for the 97th District are promoting the idea of going to a ‘free market’ rates to increase competition and save us all money. This reflects a very superficial understanding of our electric grid, technology involved and the market for electricity. Recalling what it did to the airlines, I also suspect it will result in higher prices and reduced service in the long run. It is a problem they commonly face due to their habit of applying dogma to technology without bothering to check the facts. To use a talking point, you should understand the talking point. Basically don’t tell me you are against Common Core Math unless you can tell me what Common Core Math IS. Otherwise you are just repeating something you heard rather than understanding the problem. That is not a good character trait for a Representative charged with making decisions about deregulation and Electric Choice.
The Cost of Deregulated Electricity
Let’s say we go to ‘Electric Choice’ and remove the limits without change. At first things go well. Marketing agents go wild calling everyone in the state to switch, and my neighbor decides to get his power from a speculator in Indiana that buys a future on electric power (generated by someone else). Recall that this is just for the power, it still has to be transmitted (a separate charge by ITC) to his community, from there it is distributed (a separate charge by Consumers Energy) to his house. His electric cost goes from say 15 cents a kW to 12 and he is happy. Breaking this down both the old rate and the new included 7 cents to transmit the power and 2 cents to distribute it. Consumers charged 6 cents to generate it and the new guy in Indiana is charging 3 cents for his power- this cheaper generation cost is the source of his savings.
Time goes on and my neighbor is glowing about his new rate, telling everyone the ‘Free Market’ politician was right. More and more people change over. Pretty soon we have 40% of all customers on electric choice.
Now what about Consumers Energy (just used as an example)??? 40% of their customers are gone, yet they still have the same expenses for their distribution system. They are not generating and selling as much power, so the cost of maintaining that system becomes a bigger percentage of their budget, so they increase the cost of their distribution for 2 to 3 cents. They also find themselves with a surplus of generation capacity, so they shut down some older plants and lay off the Michigan workers than ran them. Not only does the state absorb the unemployment costs, it has less tax revenue. The money for community grants starts to dry up as well, but they save some money on energy efficiency rebates because they only have 60% of the customers. The generation capacity goes down and less electricity is on the market.
With 40% of Michigan residents buying their power on the market, and the supply of electricity going down because Consumers and DTE are shutting down generators as unneeded expense, the auction price of electricity goes back up. This eventually reaches a point of equilibrium between demand and availability and the electric choice power becomes more expensive. Perhaps the market price goes to 5 cents. Recall too that the increased numbers of electric choice consumers are quickly buying up the available excess power. At current estimates we will reach the capacity to meet the need as early as 2020 assuming no generation plants close.
Consumers start to drop electric choice and return to Consumers Energy in droves. Consumers Energy, which no longer has the generation capacity it once did, is forced to buy electricity on the market. The sudden increase in demand for the remaining available energy drives up the market price, maybe to 7 cents. Consumers, paying 7 cents for transmission, 3 cents for distribution, and 7 cents for the electricity are not forced to pay 17 cents per kW hour (up from 15). Because the supply is reduced due to the shut down power plants, the system struggles with peak loads, and brownouts occur.
The result of deregulation is decreased power generation, the loss of jobs and tax revenue for Michigan (because of the transfer of those jobs and taxes to wherever the power is being produced) and the speculators in Chicago get rich on the energy futures market. The consumers end up with higher energy costs to pay for it all. Recall the old adage, every change in the law will make someone money. Unfortunately that someone will not be you, the consumer.
What is Going on NOW?
Currently there are bills in the legislature expanding the ability of smaller customers to participate in Electric Choice. While there are clearly reasons to maintain a monopoly system, there are potential cost savings with putting the cost of power out to bid. It is a social and technological experiment.
Key features of this legislation are twofold. First, to become an electric choice provider, you MUST be able to demonstrate sufficient capacity to assure a supply for consumers for a period of time, somewhere from 1-3 years. This is needed because if the capacity to provide the promised electricity is not there, it has to come from somewhere, and currently our local companies (Consumers and DTE) are required to provide backup power. The out of state companies get the benefit, but the local folks take the risk.
Second, if you switched to electric choice, you should live with it and not return to the local utilities without notice. This is to give them an opportunity to increase their generation capacity to provide for you, again it will take a notice period, currently proposed for 1-3 years. Both proposals make sense, and work toward the primary goal of the system, reliable electric power for the residents of Michigan.
If these proposals do not pass, I don’t feel that increasing the current cap is worth the risk. We may have some short term savings, but in the long run it will increase the cost to the consumer and decrease the availability of power for residents and businesses in Michigan. It will also decrease jobs, taxes and community support. You may save a buck on your monthly bill for a few years, but it will be on the backs of your friends and neighbors. In the end you may well end up paying more, and in the process buy a second home for an energy broker in Chicago. On the bright side, that second home might be your lake cottage, which you’ll have to sell to feed your family if you are a former power plant worker in Michigan. I’m sure the broker’s family will enjoy it as much as yours did.