Electric Deregulation- Tony Anderson


energy-101.org:  Let’s start this from the assumption that we’re talking about deregulation, not as a new thing, but we need to define what we’re talking about.

Tony: Sure.

 energy-101.org: It seems to me that it’s more complex than just, there’s electricity and you can buy it.

Tony: Right.

 energy-101.org: So what are the different elements of that pathway that can cause there to be some confusion or opportunities for misadventure?

Tony: Yeah, well, there’s 3 distinct segments of the pathway. You have the generation, the coal plant, the gas plant, the nuclear plant. Then you have the transmission system that carries it to an entity like my cooperative, a distribution system. So you have generation, transmission, and distribution. And there’s a cost to each. Generation is, obviously, the biggest investment, because you’re spending billions, in some cases, for a 30- to 50-year investment. And you’re counting on a customer base to be available to take the power from that purchase. So that’s one piece.

Then you have the transmission piece. And we put our transmission in Michigan in one pot. There’s a rate of return in that piece. And so that’s pretty well defined, pretty well controlled.

And then there’s the distribution piece, which is never going to go away. There’s always going to be poles and wires going to homes. We just don’t want multiple poles and wires. And that’s what people need to understand, is when they have choice, you’re not going to have multiple poles and wires. You’re going to have choice on just the generation piece, the wholesale power piece. And so that’s just a small part… Well, that’s a big part of your bill, but it’s not your entire bill. So you have to think about, what do you want to pay for that? And how do you want to pay for that? And you can’t blame the IOUs, like, DTE and Consumers for not wanting choice because they’re the ones making the investment in that generation. And when you talk about prices in Michigan, that’s going to set the price. You know, if you’ve got a generator and you have less customers to serve, they’re each going to pay more, because you have to pay for that generator whether you serve 2 million people or 10 million people. You have a generator to pay for. And if you have a set customer base, it’s just more economical to do that.

And another thing that raises our prices in Michigan is the fact that if we don’t have generation in the state, we’ve got to come through the grid from out-of-state sources. And that grid takes it through Chicago. And Chicago’s one of the most congested hubs for electricity transmission in the country. And so you pay a higher price for that congestion. So that drives up our price.

I maybe want to incentivize some generation in my state and spend my time on that rather than choice, because choice is going to drive in power supply from out of state, and I just don’t think we’re going to see the price go down. We’re a peninsula in Michigan. We have one pathway to come from out of state.

energy-101.org: There has been a lot of talk over the last several years about deregulation. What do we really mean by that?

Tony: A better definition is choice, customer choice. Can you, as an electric customer, choose your wholesale provider of energy? That means you’d have the ability to shop. There would be alternative energy suppliers. We call them AESs in the business. And an alternative energy supplier would offer you a price for the wholesale piece of your electric bill. And you can take it from AES A or AES B or Company XYZ, depending on whatever price or program they offered you. And then they would sell you that electricity. The AES would essentially rent the poles and wires from the incumbent utility, DTE, Consumers, —, whatever the case may be, and you would pay a poles and wires charge to the incumbent utility with the facility. And then there would be the wholesale piece that would go to the alternative energy supplier, the AES. So you would have a different component to your bill. So you wouldn’t totally escape your present utility. It’s just there’s a wholesale piece and then there’s the poles and wires piece. That would get broken out and essentially deregulated.

energy-101.org: It seems to me that sort of the challenge is, is this is a historically heavily regulated market…

Tony: Yes.

energy-101.org: I mean it’s like health insurance or vehicles or driving. It’s highly regulated. And it seems like the opportunity for a certain amount of chaos exists as you sort of pull at this thread and pull at that thread.

Tony: Absolutely. Electricity is a monopoly business, you know? We can talk about choice and the little bit of competition we have, but DTE’s got a defined territory. Consumers has a defined territory, and all the electric co-ops have a defined territory. We have monopolies. If we were not regulated, what would the price be? You know, we need some regulation to keep the price stable and reasonable, because you could have the wild, wild west and rates go all over the place.

Now, the electric co-ops, we’re regulated by our members. So I feel pretty confident and safe that that’s going to control our rates like it does today. And investor-owned utilities, they’re profit motivated. They’re regulated by the Michigan Public Service Commission. So that’s the entity that keeps the prices within reason. So I think the regulation today we have is good. You take that regulation away, then wow. You know, it’s not like you can go shopping for a loaf of bread. Electricity just isn’t like that, as much as some people want it to be. It’s never going to be.

energy-101.org: And why is that? Is it the investment level? I mean I know at one point it was chaos because you used to see those wirings…those scenes of downtown cities where there were 3000 wires running across a Manhattan street.

Tony: Yeah, and that’s really it. It’s duplication of service. If there’s one provider there, you don’t need another set of poles and wires there. That just clogs things up. Well, aesthetically it’s terrible, but engineering-wise it creates issues too, because you have electricity going all over the place. And economically it’s terrible. You know, if you’re splitting up… I serve 11 meters per mile of line, you know? If you take a couple meters off of that, that changes my economics, so my prices have to go up. You know? DTE and Consumers in Jackson and Lansing, they’re going to have 50 and 60 meters per mile. But you pull 20 or 30 meters per mile off of that, and their economics changes. So it’s just… To be economical, you need to be regulated. And we need to be in our defined territories. There’s a reason it’s worked for the last 76 years and longer in the cases of IOUs.

DTE and Consumers will argue that choice is not good because they have to invest in generation. And you kind of have to know who your customers are so you can size that generation. So if they’re constantly losing customers or customers are in flux, that’s tough to make an investment in generation. That’s a legitimate argument. And one that people just have to understand and decide for themselves. That’s their best argument, rather than Eron and blackouts and stuff. It’s, we need new generation in Michigan. All our fleet of coal plants and a lot of our gas plants are getting old. We need to build new stuff. And who’s going to build that new stuff? It’s going to be DTE, Consumers, and electric cooperatives. So if you start taking a lot of customers from them or letting us grab each other’s customers, those generation choices get tough. And then we’re buying generation from out of state, and that’s driving the price up.

energy-101.org: Who does it benefit? I mean who would actually go out and price their wholesale…?

Tony: Any company could create an alternative energy supply arm and go on the open market and buy chunks of wholesale power. You know, you have to buy some significant chunks. For them to go out and buy 700 kilowatt hours a month for you at your house is not realistic. You know, we had that back in 2001. And nobody came to supply that market. The alternative energy suppliers that came about when choice was first opened up in Michigan in 2001 came to serve the large customers, the East Jordan Iron Works, the Herman Millers, the Dow Chemicals, the universities. You know, you have to have megawatts of energy to attract an alternative energy supplier, because you have to go out on the market and buy large chunks of power. Certainly if they could package 1000 or 10,000 homes, they might be able to provide a price, but that’s tough to do.

energy-101.org: What’s your opinion on how well that’s…? I mean as a concept that’s worked. You said it started in 2001…

Tony: It started in 2001, and, like I said, it didn’t work on the residential side. There’s been some success on the commercial side. We have a power supplier, Wolverine Power Supply Cooperative, that provides our wholesale piece. And in 2001, the electric co-ops were against choice. We did not want to go there. We were afraid we would be taken over by the big utilities, lose all our large customers. And we essentially went kicking and screaming into the world of choice. But to Wolverine’s credit, they formed an alternative energy supplier, Wolverine Power Marketing, so they could play in that game, and if we were going to lose load, we were going to get some back. Well, as the story unfolded, we didn’t lose any commercial load. Co-op customers, commercial customers stayed with their incumbent cooperatives. And Wolverine was successful because they have a marketing arm. They have an energy control center where they can buy chunks of power. So today, fast forward more than 10 years now, they have 19 customers they serve in the choice market. And some of those customers are East Jordan Iron Works, Ferris State, Saginaw Valley State. They just signed Michigan Tech in the last year.

The Amway Grand Hotel is the best example. That sits, as you know, in the heart of Grand Rapids. That’s a Wolverine Power Supply Cooperative customer through Wolverine Power Marketing. All those 19 customers return margins to Wolverine that, in turn, get rolled back to my members. So choice at the commercial level, even though we didn’t want to go there, we’ve been successful because we have the marketing experience and the power supply purchase experience. And Wolverine’s been very good at the customer experience as well. They have been able to attract these customers, take care of these customers, and save them some significant money. So we now have some of these bigger companies on the cooperative board and experience in the cooperative model. And we’ve turned what we thought was a bad thing into a very good thing for us right now.

energy-101.org: How about on a more national scale? Obviously that’s not your focus, but nationally is it a patchwork? How does it work? Is it state by state?

Tony: Yeah, it’s definitely a state-by-state situation. There’s no national legislation being proposed that I’m aware of. What we have in Michigan currently is the House Bill 5184. It’s an expansion. In my mind, they want to go back to 2001. We had 100% choice in 2001, but when you have a term-limited legislature, they don’t create a lot of new ideas. So they’re going back and recycling an old idea. And I just don’t see it any different than 2001. They’re arguing that, well, Michigan’s rates are high, is one of the big arguments, that we can drive down electric rates if there’s 100% choice. And we have all these alternative energy suppliers and you create competition and the price will go down. We didn’t see that to a large degree in 2001. We saw it to a small degree. And my argument to that is, the legislature in Michigan has mandated a renewable energy mandate, an energy conservation mandate, and last year we got a low-income, energy‑assistance surcharge on our bills. You want to lower the bills to Michigan businesses, let’s take off the charges the legislature’s put on the last 3 years. And forget this idea that didn’t work.

energy-101.org: But how is it possible that Consumers could arm themselves for that whole debate? I don’t quite understand how reliable… I mean how well you could believe it? It seems like it could be scammy.

Tony: It could. Somebody could come in and offer you a low price and then how do you know they have the contract locked up? And who is regulating that? There is a question. You know, some of the ads are thrown out, Enron and we’ll have blackouts if we have 100% choice. I think those are a little bit of scare tactics. But there is a little bit of snake oil salesmen to the whole thing that we’d have to be careful of and we’d want to regulate and certainly monitor very closely.

Who wants to have deregulation? Some businesses do. Because right now we have choice for the large customers. But utilities can’t lose more than 10% of their load to choice. That change was made in 2008. They capped choice at 10%. That 10% cap got filled in 2009. So there’s… One of the things I read the other day, there’s 11,000 entities waiting for their turn at choice. They’re seeing the Herman Millers, the Amway Grands and other people save money in the choice market. And now they want in on that, but DTE’s met their cap, Consumers’ has met their cap. And so they can’t… There’s no place for them to go. So those people would like their opportunity at choice. That’s why they want either the capped raised, maybe, to 20%, but this bill has it at 100%. And therein lies the argument. You have the big utilities, who don’t want the higher cap. They’d like the 10% cap to go away and then they’d get back all those customers. But they certainly don’t want the cap to go up. So it’s those entities. And then you have the power supply entities, the alternative energy suppliers, who think they can make some money for a short time, they’d certainly like the cap to go up too.