Recent Publications
An Energy Plan for Michigan's Future
By Jennifer Utter Heston
As business leaders, you are well aware of the impact that energy costs can have on your ability to compete, and electricity costs are among the biggest concerns for businesses deciding whether to locate in Michigan. Recently, J. Peter Lark, Chairman of the Michigan Public Service Commission, unveiled the 21stCentury Electric Energy Plan, his plan for meeting Michigan’s electricity needs for the next 20 years. The plan is expected to play a role in transitioning Michigan’s economy, but is of course not without controversy.
Many of the Chairman’s policy recommendations will require
legislation to be implemented. Consequently, in addition to tackling
business tax reform, Michigan’s legislature is expected to debate the
merits of the Chairman’s plan this legislative session, affording
stakeholders an additional opportunity to get involved. While there are
certainly many positive aspects of the plan that should be recognized,
the plan has become the focus of considerable debate.
Development of the Plan
In the spring of 2006, Governor Granholm issued an executive directive
calling upon the Chairman to develop a comprehensive energy plan to
address Michigan’s short and long term needs. As the Governor aptly
noted, a reliable, safe, clean and affordable supply of electricity is
critical, and any plan should support the goals of improved economic
development, environmental quality and resource diversity. To that end,
more than 350 people representing over 150 different organizations
participated in the Chairman’s forums and workgroups to share
knowledge, information, and insight over the course of nine months.
The plan forecasts a 1.2 percent annual increase in Michigan’s
electricity demands for the next 20 years. At this rate, the Chairman
concludes that Michigan will need a new large power plant by 2015.
Given the long lead-time necessary for the development and construction
of a power plant, we are already behind. As a result, the Chairman
recommends an ambitious plan that requires the use of renewable
resources and energy efficiency measures first, and supports the
longer-term development of new utility-owned power plants. The Chairman
contends that his plan, if implemented, would lower Michigan’s total
electricity costs by $4 billion over the next 20 years; $2 billion
resulting from new power plants, and $2 billion from the renewable
energy and energy efficiency measures. He does not provide an estimate
of how much the plan would cost.
The Plan’s Recommendations
New Electric Generation. One of the most prominent
and controversial aspects of the Chairman’s plan is to change the way
new power plants are built and financed. The Chairman proposes
legislation that would permit existing electric utilities to file an
application with the Public Service Commission to obtain a “Certificate
of Need” for construction of a new power plant. If the Commission
grants the application, the need for the new power plant cannot later
be challenged. The Chairman also proposes permitting utilities to
recover financing costs for the plant during construction.
As you can imagine, not everyone is in agreement with these
proposals. In fact, the Chairman’s recommendations run counter to a
consensus proposal put forth by a majority of the parties participating
in the Chairman’s process. That consensus proposal advocates the use
of competitive bidding for all new power plant construction, and is
premised upon the idea that competitive forces are more likely to
ensure the lowest cost power for Michigan’s future compared to
government command and control regulation methods. Backers of the
consensus proposal often cite Michigan utilities’ poor history of power
plant construction which resulted in serious cost overruns in excess
of several hundred percent and the relatively high electricity rates
today.
Critics of the Chairman’s plan further suggest that if the
generation provisions are implemented, they could effectively eliminate
new competitive sources of electricity. Non-utility power producers
would not benefit from the same terms and conditions as their utility
counterparts, and would be subject to significantly greater market
risk. If a non-utility decides to build a power plant, but once
constructed the power is no longer needed, the non-utility producer
would bear all the risk and expense of that decision. Greater risk is
typically associated with higher financing costs. A utility, on the
other hand, would have received prior approval for the plant and by law
would be permitted to recover the reasonable and prudent expenses of
that construction from utility customers. The utility would likely be
able to obtain lower financing costs for its new power plant. All
other things being equal, the regulated utility would be able to
provide a lower priced product. Moreover, whereas the non-utility must
bear the risk associated with the decision to construct a new plant,
under the Chairman’s plan, the risk associated with new utility power
plant construction shifts largely to utility customers.
Additionally, the non-utility power producer must recover its
costs for the new plant in a competitive wholesale market for
electricity, and can begin to recover these costs only when the plant
is producing power. The non-utility producer is not guaranteed that
the wholesale market will purchase its power, nor purchase the power at
a price high enough to recover its costs plus earn a profit. In
contrast, under the energy plan, utilities would be entitled to recover
the reasonable costs of their plants from largely captive ratepayers,
plus be guaranteed an opportunity to earn a reasonable rate of return
on that investment. Moreover, under the proposed plan, a utility can
begin recovering certain financing costs associated with a new plant
from existing ratepayers even before the plant produces a single
kilowatt of power. Non-utility power producers are concerned that the
proposed energy plan would create an uneven playing field, so uneven
that it would effectively eliminate their ability to compete in the
electricity market. Consumer advocates are concerned that ratepayers
would be forced to shoulder the risk of power plant construction,
potentially forcing customers to pay for plants which are later not
needed, and to begin paying for plants long before any benefit of the
power is produced.
Customer Choice. Seven years ago, the legislature enacted
Public Act 141, the Customer Choice and Electricity Reliability Act.
That Act permits electric utility customers to price shop for
electricity and to receive their electric supply from a provider other
than a local utility. Historically, customers were able to switch
between alternative suppliers and their utility with relative ease. The
energy plan, however, characterizes customer switching as one of
Michigan’s “market flaws,” and recommends proposals that would reduce
the potential benefits of customer choice. Under the plan, if a
customer exercises his ability to choose an alternative electric
supplier after a Certificate of Need for a new power plant has been
approved, the customer would be responsible for paying a surcharge
associated with the cost of the new power plant. Consequently, a
customer must continue to pay for a portion of the utility’s approved
power plant, even if the customer is no longer receiving electricity
from that plant. Furthermore, if a customer wishes to return to the
utility for electric service after having been supplied by a
competitive provider, the customer would not be able to obtain
electricity at the utility’s rates for two years from the date when the
customer notifies the utility of his return to service. In the
interim, the customer must pay market prices. Additionally, the plan
proposes to require all suppliers, including competitive electric
suppliers, to acquire more power than their customers need, for
planning purposes. Suppliers that fail to do so would be subject to
penalties.
Proponents of the Chairman’s plan contend that restrictions on
customer migration would result in utilities having a more stable
customer base, and therefore, more stable revenues. Revenue stability
would result in better financing terms, which would lower the overall
cost of building large expensive power plants, benefiting all
consumers. Critics of the plan argue that these proposals would
effectively eliminate the benefits of customer choice, and increase
costs for competitive electricity suppliers. Customers would no longer
be able to take full advantage of competitive pricing and avoid costly
decisions of a utility. Moreover, the benefit of relying upon
competition to discipline business decision-making to ensure the lowest
possible costs are incurred is significantly diminished, if not
entirely eliminated, under a plan that guarantees customers pay for the
plant. Critics further contend that it would not be appropriate to
force customers to pay for a power plant from which they do not receive
service.
Renewable Energy Program. The Chairman recommends that the
state adopt a more extensive renewable energy program. He recommends
legislation establishing a statewide renewable portfolio standard
requiring all electricity providers to serve customers with at least 10
percent renewable energy by the end of 2015, with an interim goal of 3
percent by the end of 2009, and the discretion to expand the program to
require 20 percent by the end of 2025. All reasonable and prudent
compliance costs incurred by a utility cost recovery from ratepayers.
While many parties agree that the development of renewable
energy is beneficial, there are concerns that mandates would be costly
and that those costs would ultimately result in further increases to
energy bills. Today, many utilities offer “green power” programs to
customers on a voluntary basis where customers agree to pay any
additional costs associated with their decision to support renewable
energy. Under these programs, several utilities today already procure 5
percent or more renewable energy. Proponents of these programs contend
that our existing energy supply is overly-dependent on fossil fuels
and that diversification involving more locally produced power is
valuable. Further, proponents assert that renewable energy would
actually be cheaper than fossil fuel energy if existing energy sources
were required to reflect their true costs, including environmental and
health impacts. With several utilities already meeting the interim
goal, many proponents of renewable energy suggest that the Chairman’s
proposal is not aggressive enough.
The plan further recommends that the Commission be given the
authority to permit customers who generate power to be able to use the
utility’s wires to transmit that power, and to consider an expanded net
metering program so that more customers may economically benefit from
the power that they produce. The plan also recommends legislation
providing property tax relief for residential customers who install
solar photovoltaic, wind, fuel cell, or other renewable energy
resources, and to authorize the Commission to conduct a pilot project
to investigate expanded solar-generated electricity involving one or
more utilities.
Electric Reliability. The plan suggests that Michigan will need a more reliable system for delivering electricity as Michigan’s economy shifts from traditional manufacturing to more high-technology processing. Recognizing that electric lines are particularly vulnerable to weather and growing trees, the plan recommends that the Commission consider requiring more electricity facilities to be placed underground. While many communities currently require new facilities to be located underground, largely for aesthetic reasons, there is a substantially higher cost associated with doing so.
Energy Efficiency Program. The energy plan advocates
for a significant Michigan Energy Efficiency Program (MEEP). The MEEP
would be funded through a new $68 million statewide public benefits
fund, expanding to $110 million in the third year, to be administered
by an independent third-party under the supervision of the Public
Service Commission. The monies would be used for expenses related to
program administration, education, marketing, research and development
grants, evaluation studies and other oversight expenses. The Chairman
proposes that the program be supported with an additional surcharge on
all electric customers. Large manufacturing customers may opt out of
the program on a showing that they have undertaken a self-directed
program.
In addition, the Chairman recommends a number of other programs
to bolster energy efficiency in the state. This includes immediately
requiring utilities to engage in active electric load management
activities. The Chairman further recommends processes for
incorporating energy efficiency improvements into new building codes,
establishing state appliance efficiency standards, and utilizing more
advanced electric metering programs. As with the plan’s other
proposals, concerns have been raised about the costs of these proposed
programs. Advocates of greater energy efficiency, however, argue that
implementing energy efficiency improvements and reducing our need for
electricity is less costly than building new power plants, and
therefore contend that the energy efficiency proposals do not go far
enough.
Conclusion
As you can see, there is much to discuss about the Chairman’s
21stCentury Electric Energy Plan. Committee chairs overseeing energy
policy in both the Michigan Senate and House of Representatives will
begin hearings on aspects of the plan this month, and legislative bills
are expected to be introduced soon. The Governor’s office is
particularly supportive of establishing a renewable portfolio standard.
Members of the Fraser team look forward to advocating our clients’
interests in this important debate.
Ms. Heston is a member of the Utility Law Practice Group
at Fraser Trebilcock Davis & Dunlap, P.C. Previously, she served
as an attorney with the Michigan Public Service Commission and as the
energy policy advisor to the Michigan Senate. In addition to her law
degree, she holds graduate degrees in government and public
administration. Ms. Heston can be reached at 517/377-0802 or juheston@fraserlawfirm.com.