Deregulation, Choice & Change- Tony Anderson (2015.07.22)

transcript– We’ve had this element of choice introduced into the marketplace. What is it that’s re‑energized this conversation or made it that it’s being so much more public than it was several months ago? 

Tony- Well, PA 295, the public act that started choice in 2008 or… Well, it was our basic energy policy. I think we had choice before that, but it was… It’s overriding the energy policy for the state. And it’s set to expire. So the legislators are looking at, all our energy issues in Michigan, what are they? Choice is one. The renewable mandate is another. Energy conservation is another. All of that is in play in Lansing this summer and this fall with a goal of getting something done by the end of the year. The Governor had his big energy speech, I believe, in March…first part of March. And that’s his initiative for the year as well. So energy is at the top of everybody’s list. And choice is a big deal to the two investor-owned utilities in the state. And so it’s hot right now.–   I’ve read about the Governor’s… I can’t figure out what his initiative is. 

Tony-   Yeah, for me his initiative is renewables and energy conservation is what he’d like to see. You know, he talked about reducing energy waste by 30%. And I think he’s including gas in that and he’s heavy into renewables and energy conservation those are two of the key components of PA 295 and, what do we do with them going forward? Then also, to his credit, he’s also getting us ready for… We have to comply with federal rules that EPA, they call it 111D, that rule that’s not finalized yet, but it’s just about to be. That’s going to require us to be cleaner than we’ve ever been as well. So there is an underlying responsibility to get ready for that. And that’s good as well.–   It seems like there’s two sides, and it’s hard to tell who’s on what side. There seems to be this choice element and then there seems to be this native, you know, take-care-of-Michigan-first side.

Tony-   Yes, I believe DTE and Consumers Energy have pooled their resources for a campaign to eliminate choice. They’re not advertising their names on that campaign. I think it’s a… They just have it generically labeled “Michigan First” or something like that. And then I believe there’s some consumer advocate groups who want to see choice open to everybody at all levels. And for me that’s a frustration because we had it open at all levels ten years ago or so. Nobody came to serve the residential customer. What boiled out of that is the commercial customers got served. There’s not enough volume at the residential level to get served.–   What are the economic interests that are in the pursuit of maintaining or expanding this idea of choice? 

Tony-   You can make money at it. If you can serve large commercial load, you can go out on the market, buy a chunk of power, serve that load, you can make a profit on that contract. They’re typically short contracts, from a year or three years is what we see. So the economic interest, there’s people doing that from all over. There’s a number of, they call them, alternative energy suppliers who are in the business of taking customers from other utilities and buying a chunk of power and selling it to them at a profit. So they certainly want to see the 10% cap we have stay. But they would also like to see it expanding. So there’s some of that going on. I’m sure there’s some money being funneled from that. And then there’s also just the free market people who want everything open to everybody because that’s the way it should be. You know? So how they put their money in, I don’t know. But there is money to be made if you can sell a big chunk of power. Take an Ice Mountain facility that runs 24/7, huge amounts of power, pumps, and water, there’s some money to be made there, as there are with Dow Chemical, East Jordan Iron Works, other large customers.– I understand why it is that the industrial customer… In what ways is this going to reach your average consumer? 

Tony-   I don’t believe it will. Yes, there’s no scenario where I believe it’ll reach the residential customer. And that’s because we’ve been there in the past. I think people want to go back there, but I think when it’s all said and done in Lansing, the compromise is going to be, “Let’s just leave the residential people alone, and we’ll focus on the big players, and we’ll move on.”– It won’t reach them because of the logistics? 

Tony-   Well, the average residential home in Michigan uses 700 kilowatt hours, so as an alternative energy supplier, I’ve got to find a contract that will supply somebody that small amount of power every month. I’m going to make a tiny margin on 700 kilowatt hours. Or I can go to serve Ferris State or Dow Chemical, who uses megawatt hours every month, and I make a bigger amount of money. So if you’re going fishing, what are you going to fish for?–   What impact or what considerations are involved…? At least the power companies are saying that there’s a significant number of power plants that are aging out. I think the government says they’re aging out. 

Tony-   Yes, there is. That’s one of the main reasons that IOUs, the investor-owned utilities, like DTE and Consumers Energy, want choice to go away. They’re seeing a significant investment ahead in new generation – nuclear and natural gas, probably not coal. So they’re going to make a big investment. And those generation investments are long-term investments. You need as many kilowatt hours and as many customers as possible to spread those out over and pay those off over a long period of time. So they’re wanting to capture all the revenue they can. And that means getting back the 10% of their load that they’ve lost over the last several years.–  And then you have the more free market end of that discussion, which is, “They don’t want to produce it. Somebody else will, and we’ll buy it.” In this case it would be outside of Michigan. But somebody’s going to produce the electricity because there’s money to be made. They don’t want to make the money… So what’s the impact in terms of this idea of, you know, “Well, we’ll just buy somewhere else.” 

Tony-   Well, the problem there is when you’re shutting off coal plants, you’re reducing the capacity in the state. And that’s the capacity to meet all the power needs on the peak days. So if I’m DTE or Consumers and I’ve got to build a power plant to keep the grid powered up, it’s really not fair that somebody comes in from out of state and uses my capacity and the strength that I put in the grid to wheel power to them and make a profit. They have no investment in Michigan. They have no investment in that capacity that’s needed to support the grid. They’re just using the market and not making an investment in it. So that’s a legitimate argument that anybody with a power plant, anybody who’s produced or constructed generation in Michigan, has.–   Well Tony, the issue of choice really comes into play it seems with all that’s happening in the Upper Peninsula of Michigan the U.P. What’s the story up there? 

Tony-   There’s a very small transmission through the Straits, underneath the Straits, actually. It’s not big enough to support the UP. And I actually think they have a flow inhibitor on it right now, so you can’t flow power back and forth across the Strait. It just goes one direction. So the UP is disconnected from the Lower Peninsula. So they’re required to get all their power through Wisconsin and those points and the generation they have. And Marquette is certainly the only major generation in the UP. And it’s going to be shut down eventually. So that’s the UP issue, is they have no capacity up there. They have no generation up there. So where are they going to get it from? And that’s a problem for them.–   I mean it’s obviously not a huge population, but you’re talking about a significant… Where this discussion of choice or not choice, that really has nothing to do with anything. 

Tony- Well, in the UP it does. The people who want choice to go away will use the UP as an example. When the Cleveland-Cliffs mines…they became a choice customer. And they left their income at utility… We Energies. That caused the Marquette plant to… It was necessary to…I’m trying to think how to…to spread those costs over the entire UP, where I think it was 85% of that plant was going to Cleveland-Cliffs. So now when they get a different contract and they’re buying it via transmission out of Wisconsin, there’s no need for that plant. So We Energies says, “Let’s just shut this thing down now instead of later,” but MISO, the Midwest Independent System Operator (that’s the overseer of the entire grid) they said, “We can’t shut that Marquette down because we can’t support the grid if Marquette shuts off.” So We Energies says, “Well, I’m not going to pay for running Marquette then.” So who pays for it? Everybody in the UP. We were looking at some very high prices. We were looking at $25 a month to the average house in the UP at one point. The Governor since came in, and they worked out some different agreements, and we avoided that scenario. But it’s still lingering out there. You know, one of the agreements is to build a gas plant by Cleveland-Cliffs prior to shutting down Marquette. That deal, as far as I know, has not been finalized yet. And Marquette does have a limited life. So there’s still some uncertainty in the UP. But choice…some people will blame choice for bringing it all to a head. Cleveland-Cliffs got an exemption in the original choice law that allowed them to go whenever they wanted to. They weren’t part…they could not be counted as part of anybody’s 10% cap. There was one little exemption that…well two, actually. Cleveland-Cliffs had an exemption and Dow had an exemption. Dow never exercised theirs. And for whatever, for a multitude of reasons, Cliffs waited and exercised that choice option last year. And that started a whole UP rate spiral that we’ve so far avoided, but it’s still lingering.– So in some ways it’s sort of like, “Here’s what can happen when these various scenarios bump into one another.” 

Tony-   Yes. If you are against choice, you’re going to use Cleveland-Cliffs and the Marquette power plant as your poster child to remove choice. And there’s only two solutions in the UP to support that grid. And that’s build new generation or improve the transmission connection to the UP. And you do that by building a new line across the Straits or you can build a line out of Wisconsin, how you want to do that and who wants to do that, and then ultimately, who pays for it?–   What I’ve read is that they’re looking at some pretty severe…in terms of the residential market… 

Tony-   Oh, yes. The price increases they were looking at when Cleveland-Cliffs left and everybody else was going to support the Marquette coal plant while it operated, were astronomical. You know, one case in point was a paper mill that their power costs were going to go up a million dollars a year. That would have put them out of business. So then you’ve got jobs that are going away and that whole spiral. Yes, it’s a big issue in the UP that’s not resolved yet. The Governor’s worked hard on it. Valerie Brader, the senior energy advisor to the Governor, has worked hard on it. They’re trying to work towards an agreement, but…– Without saying anything about their choice of hot beverages or anything, there’s a political group that would suggest that’s just real life.

Tony- It is. But there’s also real people up there, so, you know… There’s advantages to a transmission line connection between Lower Michigan to Upper Michigan too. Because when you look at the grid, if those people who say, “That’s life,” look at the bigger picture, we have a massive grid across the country. But a lot of it runs through Chicago. And it’s a very congested transmission corridor through Chicago. And when you have congestion, you have higher prices. If you open up a line from Lower Michigan to the UP, you can reduce that Chicago congestion. You can bring it in from the western states. We can bring in more wind from the Dakotas or more hydro from Canada and the grid spreads out better. I don’t know how best to explain it, but right now we have a fire hose coming out of Chicago, dump it into the grid, and we have a garden hose going to the UP. You can’t get a fire house through a garden hose and have solid, reliable power that meets all their needs. You have to… Because we have the garden hose at the Straights, we have to have multiple hoses coming out of Wisconsin to take care of the UP. You could pull out a couple of those hoses from Wisconsin if you had a better hose through the UP…or from lower to northern Michigan, if that makes sense. It’s a pathway thing. And then when you can bypass Chicago, you can get cheaper power. And Michigan is a peninsula state, and we have very few ways to get power in here. If we could improve one way, we could reduce our prices for everybody. That’s where everybody wins. That’s where helping the UP gets down to helping to everybody – it can lower prices or keep prices stable. Or you can let Wisconsin do it, and they can enjoy the benefits of that. We won’t have it.–   How would you compare and contrast the situation here in Northwest Michigan with what they’re dealing with? 

Tony- Our power supplier, Wolverine Power Cooperative, has looked out ahead and they’ve seen power plants shutting down, and they’ve attempted to prepare for that. They looked at the Marquette plant as a potential solution. That deal fell through. They looked at a coal plant in Roger City. That deal fell through. So they ended up buying shares in a power plant in Indiana and Ohio, transmitted that power up here to us, and they’re under construction of a gas plant in Gaylord. So we’ve made some significant investments over the past several years in preparing for coal plants shutting down and power getting more expensive and the supply going down while the demand’s going up. So Wolverine’s put us in a great position, where we’re probably going to have stable rates for the next 7, 8, 10 years.– How can this discussion of more choice, less choice, let the markets deal with it itself, these different angles that are coming out, the loss of generation power, how is that going to impact you and your customers? 

Tony-   Well, if choice goes away totally, if you drop the 10% cap and everybody goes back to the income and supplier, it’s going to be a small hit to my customers. Wolverine makes about a million dollars a year off of its alternative energy supply subsidiary. And my customers get about 13% of that million dollars. So it’s marginal. It’ll hit us a little bit if choice goes away, if they leave choice in play, well then nothing changes. We keep making that million dollars and life is as it’s been for several years. The compromise in the middle is, if we keep choice capped at 10% but you have to have steel in the ground or an investment in Michigan. If that happens, under that scenario, we can make more money. Because the out-of-state alternative energy suppliers, they’re going to go away, because they’re not going to make an investment in Michigan. And that 10% cap will stay in place, but Consumers and DTE might only have 5% of their customers at choice. That’s a 5-percent opportunity for us to increase our customers, because there’s now room under the cap. Wolverine’s also a product of being small. And in the power business, there’s sometimes disadvantages to being small and sometimes advantages. They only serve 250,000 meters. Five distribution co-ops. And that’s their focus. And when you can focus on a smaller pool, it’s easier to prepare for the future.  DTE and Consumers, they serve millions. It’s a little tougher to get your hands around that. It’s kind of like the difference between driving a semi-truck through downtown Detroit and a sports car. In this scenario we’re in the sports car. We’re navigating pretty well. That semi-truck’s a little tougher to get through there. It can be done, and it’s done well, but I think this is just one of the times in our history where being small is going to be to our advantage and is to our advantage.