Environmental pressures and economic slowdowns are admittedly hard for state governors to tackle. Even still, Michigan's latest is a lousy idea.
As noted here, the state legislature has just passed a bill which Gov. Granholm has promised to sign that would:
- Strengthen the utility monopolies, guaranteeing DTE and Consumer's Energy at least 90% of the electric market in the state.
- Reduce electric rates for businesses and raise them for consumers.
- Allow the utilities to raise rates without any regulatory oversight until after the fact.
- Mandate an increased commitment to renewables by the state's regulated utilities.
Sadly -- if predictably -- the last point is getting the headline, with comments like this one:
"Overall, this is a good deal for the environment," said James Clift, spokesman for the Michigan Environmental Council. "This is taking real important steps toward cleaner energy in Michigan."
In spite of the fact that:
The action came on the same day that DTE Energy proposed the first new nuclear plant in Michigan in 20 years -- a $10-billion new reactor that would be built next to the existing Fermi 2 nuclear plant near Monroe.
Note to the environmental community: utilities don't make money by saving fuel or lowering power costs. You can mandate all you want, but so long as we remain wedded to a model that places the good of the ratepayer and the environment at odds with the interests of regulated utility shareholders, financial pressure will continue to work against us.
Regulated electric utilities in the U.S. are only half as efficient as they were in 1910, in no small part because they are not allowed to make money off of conservation ... and because no matter how many philosophers may dream otherwise, five smart dudes sitting in a room making forecasts of supply and demand to set price are never as efficient as a competitive market.
As a result, the money we can force utilities to spend on renewables or energy efficiency inevitably pales next to the ~$30 billion or so they spend on fuel. The problem isn't our lack of utility mandates -- it is our century-long love affair with socialist planning in the electric sector.
But regardless of where one comes on the pro-market/pro-government divide, here's the painful truth: By mandating both increased renewable use and rate increases, this law will further cement the idea that environmental stewardship is incompatible with economic growth. Worse, it will do so in a way that ensures those two motivations remain in conflict.
Carl Levin (D-Mich.) [UPDATED]
Gore on the Daily Show: extended dance remix
Blowing up our clean energy future
Comments
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LGT Posted 10:01 am
22 Sep 2008
See
http://gristmill.grist.org/story/2008/9/19/204745/765#com ...
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Gar Lipow Posted 11:13 am
22 Sep 2008
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caniscandida Posted 11:46 am
22 Sep 2008
More surprising is that Granholm is not doing all she can to look populist, in the lead-up to November. Of all the states that voted for Kerry in 2004, Michigan is apparently the most likely to tilt GOP this year (Pennsylvania is a close second), according to some pundits. And economic issues are said to be more important there than anywhere.
Chickens deserve our true friendship! So do fish! So do other sentient beings! Let us learn to be kind.
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KenG Posted 1:50 pm
22 Sep 2008
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raphsperry Posted 5:27 am
23 Sep 2008
I regularly enjoy your posts and have learned a lot from you, but I'm a bit puzzled here. The environment aside, is there any way that one can align the interests of ratepayers and shareholder? Don't ratepayers always want to pay less and shareholders always want to earn more?
I suppose that in an ideal market the optimal price is found that balances the ratepayer's need for service with his/her willingness to pay, and also balances the shareholder's risk and reward. But that doesn't mean they are on the same side, does it?
Raphael Sperry
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Duggles Posted 7:12 am
23 Sep 2008
For number 1, the 90% guarantee:
Today, independent power producers make up, what, 3% of the electricity production in Michigan? I know it's not more than 5%, whatever it is. So it's not like any current competitors are going to be shut out by this.
Mind you, what kind of power plants have those independent producers been building? Peakers, not baseload plants. This brings me to my next point, which is that we need new baseload power plants in Michigan. The Lansing Board of Water & Light and Consumers Energy (I don't know about Detroit Thomas Edison) are both looking to retire coal plants in the next few years, because the existing fleets are very old. The 90% guarantee is necessary to secure funding for new power plant construction (credit crunch, anyone?).
For number 2: If you are against socialism, then this one should be an absolute bonus. The truth of the matter is, businesses have been subsidizing electric costs for the residential sector for a few decades. Subsidizing electricity is not a good way to get people to conserve, is it? They're not seeing the actual cost of the electricity they use, so they don't get the full benefit of conservation on the residential side. Certainly, making businesses pay higher than the actual costs may make them want to conserve more, but in the end it's still unfair.
For number 3: This one makes me nervous. I don't think that anything which (in my eyes) weakens the Public Service Commission is a good thing.
For number 4: This Renewable Portfolio Standard is part of Michigan's strategy to attract green industry jobs and manufacturers to Michigan. I am curious to know whether or not the final version allows conservation to be counted towards the standard (some early versions did, some did not).
In the end, I personally think that this legislation is an overwhelmingly good thing for the state. By not guaranteeing the customer base of CE and DTE it will be difficult, more likely impossible for them to secure funding for new plants. These are going to be REPLACEMENT plants, meaning that even though they will not be environmentally squeaky-clean, they will be better for the environment than the extant plants. The alternative is to retire the old plants anyway, and watch as electric rates go through the roof because the utilities will have to buy electricity on the open market.
Additionally, Consumers Energy alone is going to be investing billions of dollars (4 or 5, I believe) in Michigan for their proposed new coal plant. Michigan has 8.9% unemployment, so the state can't afford to say, "No" to new energy legislation and the jobs that it will bring to the state.
Lastly, it sounds like you are in favor of fully deregulating the utility industry. Am I correct in inferring that?
Electric deregulation hurts ratepayers. If you do not believe me and would like me to take the time to look it up, I will gladly provide evidence to back up this claim.
As for your last point, that this will create a link between the RPS and increased rates, I disagree that that will be the outcome. I think that if the RPS works as expected to bring green jobs to Michigan, it will make people equate green energy with job creation. Would you prefer that the bill not include a Renewable Portfolio Standard? Good luck trying to pass a stand-alone RPS.
I am sorry that this is not the most cogent post, but I am fully willing to discuss and clarify my points over the next few days if you would like.
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Duggles Posted 7:17 am
23 Sep 2008
The American Wind Energy Association called the legislation "more of a snooze button than it is a jobs-jolt package" and said it broadly defines renewable energy to include things like energy efficiency and municipal solid-waste generation.
"You add up all that and there's no need to build any new renewable generation period," said Hans Detweiler, manager of state legislation for the Washington-based trade group.
The same article says that the "green power" part of the rate hike is $3 per household per month, and the utilities may begin collecting the money even before they start producing the green power. So that's a bit of a bummer.
So I guess the RPS portion was kind of neutered.
Nevertheless, I don't think that not passing the bill was going to do anyone any good, for the reasons I mentioned above.
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Sean Casten Posted 8:19 am
23 Sep 2008
Remember that a monopoly utility is a capitalist/socialist half-breed. Capitalist in the sense that it is for-profit, but socialist in the sense that it is protected from competition and not allowed to fail. (a la Fannie Mae, for a timely comparison). Ergo, any action that shifts that entity away from competition towards a lower-risk enterprise is a socialist motivation and any action that injects competition into their environment is inherently capitalistic - in the purest sense of those terms.
Think of it this way: is GazProm an example of the power of competitive markets, or of the consequences of an overhanging socialist model in Russia? That's a fairly obvious answer, and DTE has a lot more in common with GazProm than it does with Google.
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Sean Casten Posted 8:43 am
23 Sep 2008
In a competitive market, the managers of a business have an obligation to maximize their distributions to their shareholders. To do that, they have to maximize the amount of free cash their business generates, which means lowering their costs of production and raising their rates as high as competitive forces will allow, and/or selling a really terrific thing that no one else sells. WalMart does the former. Apple does the latter.
In a non-competitive market (e.g., our electric structure, where monopolies are guaranteed... especially if they're in Michigan), but one where we still retain for-profit businesses, the same pressures exist vis a vis shareholders, but there is no competitive pressure to limit the prices you can charge. In steps the regulatory model which says that (a) rates are only set at levels deemed to be "appropriate" by regulators and (b) all operating costs must be passed through in rates, so that there is no way for a utility to earn more money by spending more money - unless it's money for capital investment, since rates are set to allow utilities to earn "fair" returns on capital.
In theory that's fine, but watch what this does: you can't differentiate between kilowatt-hours - every electric provider, competitive or otherwise, is selling an undistinguishable commodity. (I'm ignoring issues of reliability and power quality here, but they are second order considerations.)
So for a competitive electric provider (admission: like me), the only way to honor my obligations to shareholders is to lower my operating costs. And since the overwhemling majority of operating costs associated with power generation are fuel, this means burning less of it. Ergo, competitive forces drive me to conserve. (This is why I have personally never built a power plant that wasn't at least twice as fuel-efficient as the US power grid.)
But for a regulated monopoly, cost-control isn't a means to greater profits (recall that all operating costs are pass-throughs: when a $100 fuel savings = a $100 rate cut, there is no reason for utility employees to spend any of their time thinking about how to save fuel.) Deploying expensive capital on the other hand does make money. The result is that regulated monopolies spend a huge amount of time figuring out how to convince regulators that it is in the public interest to deploy expensive capital and no time trying to lower their fuel spend. The result, unsurprisingly but dangerously is that the electric sector today is less fuel efficient than it was in 1910 and the single biggest source of CO2 emissions as a sector (40%).
Bottom line: profit-seeking behavior can engender the public good if it takes place in the context of a competitive market, thereby aligning the interests of customers and shareholders. Apple invented the iPhone to satisfy both sets of stakeholders, after all. But if profit-seeking behavior occurs within a regulated monopoly, it is simply a tax on service, and there is no interest of shareholders that is aligned with those of the customers. Witness the collapse in efficiency, and the utter lack of innovation in the electric sector - not because utility managers are dumb, but because they are responding to the incentives the regulation imposes. We get what we reward, and a for-profit monopoly rewards neither innovation nor conservation.
Make sense?
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Sean Casten Posted 8:53 am
23 Sep 2008
Re: the problem with monopoly regulations, see my prior response to Raphael.
Re: IPPs and the actions of the "competitive" power industry in Michigan to date, the key point to recognize is that headlines notwithstanding, we haven't deregulated anything, anywhere. We've restructured, but we still haven't injected competition into the electric grid. California proves this as well as anywhere else - this is held up as the poster child for why deregulation didn't work and yet when PG&E approached bankruptcy, they were bailed out by the state. That is not how competitive markets work - and it's worth noting that there was no move by the state to bail out the IPPs who also went bankrupt during the same period. So I wouldn't make much of what is there right now - but there is a massive potential for investment in all sorts of power by the private sector provided we actually deregulated the market. In the meantime though, providing protection from competition is a recipe for disaster. Witness the states that have granted utilities exit fees and standby rates (e.g., you may the utility for their lost revenue if you reduce your load) in the name of protection from competition. More details on those problems - and where they come from, and how to resolve here.
Per the previous, deregulation doesn't hurt ratepayers. Botched restructuring does. The heck of it is though that the states that have taken even hesitant steps towards deregulation have actually seen lower rates than those who haven't. Details and numbers here.
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