Business Group, Utilities, Clash Over Rate Hikes, Electric Choice

ABATE says customers pay more while Consumers Energy is granted above-average returns

By Jack Spencer | December 17, 2015

A business group is asking the Michigan Court of Appeals to overturn a rate hike it claims would give Consumers Energy the highest profits granted by regulators this year in the U.S. The lawsuit comes while Michigan customers face the highest electricity rates in the region and the state’s two largest utilities, Consumers Energy and Detroit Edison, lobby the Legislature to return them to the status of full monopolies.

On Monday, the Association of Businesses Advocating Tariff Equity filed an appeal to reverse a decision announced by the Michigan Public Service Commission in November allowing Consumers Energy to impose a 4.5 percent ($130 million annually) rate increase, which went into effect Dec. 1.

According to the business group, under the decision the utility would be permitted to get a 10.3 percent return on equity going forward. ABATE argues that, by comparison, if the utility had been granted an increase that simply restricted its return to the 9.55 percent national average, the resulting cost to customers would have been $46.8 million less per year.

“There’s no evidence to support the commission granting an increase to give Consumers Energy a 10.3 percent return on equity,” said the group's attorney Rick Coy. “The average around the country is less than 9.6 percent and Michigan already has the highest rates in the region.”

The commission approved the Consumers' rate hike in mid-November, about three weeks before granting Michigan’s other quasi-monopolistic utility, DTE, $159 million in rate increases. Both utilities had sought even larger increases than were granted.

Between 2000 and 2008, Michigan’s electricity market was open to competition under a regime known as “electric choice,” and it routinely experienced rates that were either the lowest in the region or among the lowest. Then in 2008, the Legislature rewrote the state’s energy laws. Among other changes, the Legislature capped the level of competition Consumers Energy and DTE faced at just 10 percent of the market. Over the seven years since, Michigan’s electric rates have consistently become the highest in the region.

This year, Consumers Energy and DTE have attempted to persuade the Legislature to eliminate the final 10 percent of the market in which they face competition. Initially, House Bill 4298 would have done that openly, but with polls showing overwhelming opposition to letting Consumers Energy and DTE become full monopolies, the measure failed to move.

In early November, House Bill 4298 was changed in a manner that wouldn’t instantly eliminate the 10 percent electric choice market, but would instead restrict it under an array of new regulations. Opponents of the bill say these regulations would eventually strangle the element of competition and ultimately eliminate it. After the changes were made to the bill, it was voted out of committee and is now poised to move on the House floor if enough votes for its passage can be mustered.

“The big utilities already control 90 percent of the state’s electricity market, but they want it all,” Coy said. “The alternative electricity suppliers are selling electricity at rates 20 to 30 percent lower than the large utilities are charging and Consumers Energy and DTE don’t like the price comparison revealed by the 10 percent of the market where there is competition.”

The term “alternative electricity suppliers” as used here does not refer to companies that sell renewable energy such as wind energy. It simply means power companies that want to compete with the big utilities.

“School districts are among the 10 percent that are taking advantage of the competition and saving taxpayer dollars as a result,” Coy continued. “There are about 11,000 customers waiting for spots to open up within the ‘electric choice’ portion of the market. But in the meantime, the Legislature is considering legislation that would lock them all out permanently.”

Dan Bishop, the director of media relations for Consumers Energy, issued a statement in response to the ABATE lawsuit.

“Consumers Energy continues to make significant investments in the infrastructure to provide safe and reliable service to our customers and comply with federal and state requirements,” Bishop said. “The MPSC’s decision to maintain Consumers Energy’s currently authorized return on equity of 10.3 percent is supported by substantial record evidence and extensive MPSC deliberation, and is fully within the MPSC’s expert ratemaking discretion. The MPSC speaks through its orders, and after carefully weighing the record evidence, reasonably and appropriately concluded its order.”

“The recently concluded electric rate case for Consumers Energy resulted in lower electric costs for job creators in our State, which is helping to drive economic development, as well as ensuring that all customers are benefiting from our enhanced reliability of electric service,” Bishop continued. “Total bills paid by Consumers Energy’s residential customers remain below the national average following this rate case. We also are securing energy supply for the future, purchasing a natural gas-fired plant in our hometown of Jackson for a quarter of the cost of building a new plant. We call on ABATE to suspend its advocacy for massive subsidies — now totaling more than $1.8 billion — paid by virtually all of us, 99.98 percent of customers, to a very small group of customers, 00.02 percent, served by out-of-state and increasingly unreliable alternate energy suppliers.”

Maureen McNulty Saxton, a spokewoman for Energy Choice Now, one of the groups fighting the effort to end electricity choice in Michigan, described the Consumers Energy rate hike in the context of a triple whammy aimed at the state’s ratepayers.

“It comes when the big utilities control 90 percent of the market and are trying to regain full monopoly status by grabbing 100 percent,” Saxton said. “It comes when Michigan residents are paying the highest rates in the region. And it comes when we all know that overall energy costs are down due to competition and the abundance of natural gas.”

“The rate increase also shows that the MPSC can’t be counted on to fully protect ratepayers,” Saxton added. “What’s needed is competition.”

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.

Government Officials to Pick Lodging Industry Winners and Losers?

Tourism officials said to be scrutinizing Airbnb

By Michael D. LaFaive and Jack McHugh | December 16, 2015

A recent report from Lansing-based MIRS News indicated that state tourism officials are closely monitoring the travel accommodations website Airbnb. The site brings together travelers looking for a place to stay and property owners willing to rent a room, apartment or house for a few days. These peer-to-peer exchanges are often compared to Uber’s ride-sharing service.

Lodging industry lobbyists and some government economic development officials are publicly referring to Airbnb as a “threat.” This suggests that citizens should be on guard against Lansing lawmakers passing bipartisan protectionist laws that regulate new and rising services out of business.

In the MIRS report, an industry lobbyist and several local economic development officials were quoted saying that Airbnb’s lodging providers have unfair advantages when it comes to taxes, fees and other matters. One official called private home owners free riders. They also shared speculations about potential security shortcomings at Airbnb lodgings.

The report follows an event earlier this year sponsored by the state agency in charge of marketing subsidies for the lodging industry, which also referred to Airbnb in unflattering terms.

These examples of economic development officials siding with lodging industry incumbents are curious: More choices and potentially lower prices are what drive the very thing their agencies claim to be about, which is to encourage more out-of-state visitors to spend money in Michigan.

Taken together, it starts to look like a classic example of “agency capture.” That’s what happens when government officials charged with regulating an industry — or in this case, with helping to grow it — place what’s best for the largest players in that industry ahead of what best serves the people and state as a whole.

Here are several examples from the MIRS article of the complaints that industry officials and their allies raise about Airbnb:

“We can safely say they’re not all paying those taxes.” This was in reference to government mandates that impose a host of fees and taxes for the privilege of operating a hotel or motel.

Just because free people choose to peacefully interact in a manner that doesn’t fall under archaic tax regimes doesn’t make their transactions unfair. Real economic growth necessarily results in a degree of “creative destruction,” as more expensive and less satisfying ways of meeting human needs give way to less expensive and more satisfying ones. Saving the buggy whip makers would have been a poor reason to prohibit early automobiles.

“Owners of private homes are kind of getting a free ride on the backs of the lodging facilities that are abiding by the public act.”

The “public act” seems to refer a law that empowers local bureaucracies to levy a promotion “assessment” or property tax on traditional lodging owners. Without this additional burden on conventional lodging facilities, there would be no free ride for the peer-to-peer providers — or for any kind of provider.

“What assurance do you have that at 2, 3 o’clock in the morning, that that deadbolt’s not going to start turning from the outside of the room?” This was from the state lodging industry’s top lobbyist.

Airbnb does not force anyone to take undue risks. The website — which says it has 2 million rental opportunities in 190 countries and has served 60 million guests — uses the kind of user feedback tools that are common in the growing area of peer-to-peer exchange sites that were popularized by outfits such as eBay, Amazon and the like, starting in the 1990s.

Millions of people are familiar with and comfortable using these reputation-dependent institutions because they quickly root out bad actors. See Airbnb’s “trust” page here.

Business history is littered with examples of politically well-connected industries engaging in “a conspiracy against the public, or in some contrivance to raise prices,” as the wise Adam Smith put it back in 1776.

We can only hope that Michigan’s politicians understand that the has-been locations in this world are the ones where politicians let themselves be used by industry players to protect them from the future.