Top Hillsdale Economist Argues State Energy Market Needs Structural Separation

Dr. Gary Wolfram testifies in front of House Energy Policy Committee

LANSING, Mich. – Dr. Gary Wolfram, the director of economics at Hillsdale College, testified Tuesday in front of the Michigan House Energy Policy Committee on the need for further structural separation of Michigan’s electric utility industry. Wolfram discussed the perverse incentives of the current system and legislative solutions that can improve innovation and lower rates.

In his testimony, Wolfram cited his recently released white paper, “Open-Access Power Generation: The Need for Structural Separation of Michigan’s Electric Utility Industry,” which was commissioned by the Michigan Conservative Energy Forum (MCEF) in 2018. While transmission has already been unbundled from the generation and distribution of electricity (per Public Act 141 of 2000), the state’s two major investor-owned utilities still own and control generation and distribution technology for most of the state. As a result, Michigan is losing out on innovation and paying more for energy.

Wolfram writes in his paper, “since investor-owned utilities are allowed by state regulators to set rates that recoup their costs and provide a given rate of return, the greater these costs the larger the return to the utility. The incentive would be to build as large and costly a plant as the regulators would allow since net revenues will be larger the costlier the plant. This situation is aggravated by the fact that utilities have more information about the costs of generating and delivering electricity than does the body that regulates them.”

Wolfram notes that changes to Michigan’s electric utility industry model, such as structural separation and increased market access for renewable energy providers, will benefit the state’s retail electricity rates, which are highest in the region and only continue to climb in comparison to neighboring states.

“Michigan’s current energy market does not offer proper incentives to innovators who could take us from a ‘land-line era’ to a ‘cell phone era’ in terms of energy technology,” said Wolfram. “If we separate generation from distribution and open the generation market to competition, we can spur the development of new technologies that will make Michigan energy cheaper, more reliable and efficient, and better suited to meet customer demands. It’s simple: introduce competition and allow access to customers – innovation and lower rates will follow.”

Wolfram also addressed how the issue of structural separation relates to legislation being considered by the committee on a fair value tariff for distributed generation (formerly known as “net metering”) customers.

Opening markets to competition can spur development of third party ownership, increasing choices for where and how consumers get their energy. More choices and competition will help drive down costs – which remain one of the highest bills that industrial and manufacturing companies pay. Lower rates will allow families to spend less on utility bills, and businesses to invest more in employees with the money they save. In turn, a more competitive and distributed generation-friendly energy environment can help attract additional companies and investments to the state.

“Our current regulated monopoly utility industry is not working for Michigan ratepayers, plain and simple,” said Ed Rivet, executive director of MCEF. “We are losing out on cheaper, cleaner more reliable and efficient energy technologies because of a lack of incentive to innovate. Structural separation in Michigan’s energy market will level the playing field for electricity generators, increase consumer choice and innovation, and create jobs. MCEF thanks Dr. Wolfram for his leadership on this issue, and we look forward to working with energy stakeholders, policymakers, and the public to further open access to Michigan’s energy market, improve innovation, and protect ratepayers.”

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About MCEF: The Michigan Conservative Energy Forum is an organization comprised of conservatives who believe that Michigan should adopt a true “All of the Above” energy policy that includes an increase in our commitment to renewable energy and energy efficiency.  MCEF believes encouraging diverse and clean energy production and reduced energy waste will create jobs and stimulate Michigan’s economy, reduce our reliance on foreign energy, improve our national security, and protect our valuable natural resources. http://www.micef.org/