Regulatory Considerations in a Transitional Environment

1. Regulatory Considerations in a Transitional Environment Orjiakor N. Isiogu, Chairman Michigan Public Service Commission, USA Nigerian Association for Energy Economics Workshop May 1, 2008

2. United States of America

4. Michigan Electric Statistics • Generating Capacity: 30,787 MW • Transmission Line Miles: 8,525 • Number of Customers: 4.5 million • Annual Power Supply Cost: $3.2 billion • Asset Base for 2 largest utilities • Detroit Edison: $7 billion plant in service • Consumers Energy: $3 billion plant in service

5. Michigan Regulation • Electricity regulated since 1909 • 90+ years utilities vertically integrated • 1978: PURPA authorized non-utility generators • 1996: Open access to transmission lines ordered by the Federal Energy Regulatory Commission

6. Retail Choice • 2000: MI Public Act 141 enabled retail choice • Rates unbundled • License Alternative Electric Suppliers (AES) • Develop code of conduct • Certain low-income protections • Low-Income and Energy Efficiency Fund • Establish interconnection standards • Utilities required to join regional transmission organizations or divest transmission assets

7. Regulation vs. Competition • Both imperfect • Regulators must find balance • Promoting workable competition • Tradition regulatory purview • Supporting social goals • Political acumen

8. Competition Perfect Competition A market structure in which the following five criteria are met: 1. All firms sell an identical product. 2. All firms are price-takers. 3. All firms have a relatively small market share. 4. Buyers know the nature of the product being sold and the prices charged by each firm. 5. The industry is characterized by freedom of entry and exit.

9. Regulation • Society determines that a service is more efficiently provided by a monopoly than competition • Regulation also invoked when a hybrid competitive market exists • Regulation substitutes for competition • Attempts to mimic a perfectly competitive market as much as possible

10. Promoting Workable Competition • Abuses • Cross-subsidies • Self-dealing • Insider information • Transfer of risk from regulated to unregulated affiliates • Tools to combat abuses • Structural separation • Access to books and records • Transparent market information • Pre-approval of certain transactions

11. Promoting Workable Competition Incentives may be needed: New construction • Generation • Transmission • Distribution • Build-out – universal access to service • Renewable Resources/Energy Efficiency • Economic Development • New Technology/Operational Efficiencies

12. Promoting Workable Competition • Penalties are also tools: • Fines • Reduced rate of return • Denial of filed requests • Usually without prejudice • Conditional approval

13. Traditional Regulatory Purview • Access to service (issuing or enforcing) • Licensing • define franchises/service areas • Just and reasonable rates • Cost-justified • Non-discriminatory • Acceptable quality of service • Assure public safety • Opportunity for fair return on investment

14. Political Acumen • Build and maintain credibility • Executive, Legislative and Judicial branches • Consumers • Residential • Business • Utilities and other industry participants • Regulatory peers • Media • Academia

15. Supporting Social Goals • Universal service • Low income assistance • Environmental consciousness • Economic development

16. Low-Income Assistance • Winter Shut-off protection • Service Quality Rules • Performance Standards • Timely service restoration • Complaint response • Customer call answer time • Limits on estimated bills • 21 days to pay • Utility pays 7% interest on over-charges • Low-income can designate how partial payment applied

17. Low-Income Assistance • Low-Income and Energy Efficiency Fund • Bill payment assistance • $213,136,541 from 2003 through 2007 • 515,906 customers helped • Average assistance payment over 5 years: $413

18. Economic Development • Encourage • New job growth, • Current job retention, • Development of certain industries, • New investment through plant expansion, or • New investment in existing facilities.

19. Economic Development • Rate design options • Declining discounts over a period of years, • Fixed discounts for a fixed period of years, • Discounts related to availability of special power supply arrangements, or • Achievement of the underlying goal.

20. Procedural Considerations • Due process in decision-making • Public Hearings • Fair opportunity for all to be heard • Limits on Ex Parte communications • Open Meetings Act • Treatment of Confidential Information • Commercially sensitive • Customer privacy

21. Open Meetings - “Sunshine Laws” - all deliberations public - perception of fairness - high dependence on staff - Private Deliberations - more efficient communications - may lend itself to decisions based on extra-record factors - may not benefit from staff expertise

22. Consumer Affairs • Outreach • Several Consumer Forums every Fall • Education • Complaint resolution • In person, via telephone or Internet • Avoid recorded menus as much as possible

23. Jurisdictional Issues • Federal • Pre-emption • State • Greater understanding of decision impacts • Local • Regional • Cooperation among states to achieve mutual benefits

24. Establish fair and reasonable rates for regulated services and adopt and administer fair terms and conditions of service for the State’s utility customers. Assure adequate and reliable supplies of regulated services to all Michigan customers, and the safe and efficient production, distribution, and use of the State’s energy, telecommunications and transportation services. Assure the security of the State’s critical infrastructure by promoting homeland security. Promote the State’s economic growth and enhance the quality of life of its communities through adoption of new technologies like broadband telecommunications and efficient renewable energy resources. Provide customers with the opportunity to choose alternative electric, natural gas, telecommunications and transportation providers. Provide regulatory oversight in a prudent and efficient manner while implementing legislative and constitutional requirements. MPSC Goals

25. Michigan Public Service Commission Website • www.michigan.gov/mpsc

26. Thank you for your kind attention.