We now must purchase about 70% of the electricity from outside suppliers as our hydro base is limited in its production capabilities as the water flows from Lake Superior have been reduced due to low lake levels.  The long term purchased power contract we have in place with our outside supplier (We Energies) was recently reviewed and approved both by the Michigan Public Service Commission (MPSC) and the Federal Energy Regulatory Commission (FERC).

In September of each year, we file with the MPSC a projection of our Power Supply Cost Recovery (PSCR) for the following year.  The costs for these outside purchases are reviewed/audited/modified annually and then approved by the Michigan Public Service Commission.  In March of the following year, we file a reconciliation of PSCR costs from the previous year comparing actual costs to the estimate previously approved.  Any PSCR costs over-recovered by us are refunded to the customers with interest; any PSCR costs which are under-recovered are then added to the next year's PSCR.  By statute, the only item included in the recovery of PSCR costs is the cost of power supply.  We do not collect for any other costs such as profits, wages, benefits, poles, wires, or any other operation or maintenance items through the PSCR.  This process has been in place for over twenty years and the only difference in this year's PSCR is the magnitude of the increase.  This charge appears as "PSCR CHARGE ($0.000/KWH)" as a line item on most customer bills.

Further, the introduction by the Federal Energy Regulatory Commission of mandated Regional Transmission Organizations to help spur competition has impacted how these transmission costs are spread as they are also part of the PSCR costs.  Finally, here in Michigan we lack sufficient generation in order to have a robust competitive market which limits our options for purchasing power outside of our own hydro generation.  Basic and elementary economics are at work here - lack of enough of a product (electricity) at the wholesale level to sustain competition along with increased prices for items which create that product (coal, natural gas) or act as alternatives to that product.

We are concerned as are many of our customers over increasing electricity prices.  We believe that we have always acted in the best interest of our customers and we will continue to do so.  However, the new environment in which we currently find ourselves is not just a local or regional condition but is also being played out throughout the rest of the country as well.  Until certain things are put into place such as additional generation or increased access to other outside purchased power sources through transmission upgrades (which will take at least several years), we will continue to see high energy costs.

Importantly, even with these price increases, our rates are still below the state average depending upon which rate categories one compares.

We believe that we have followed good industry practice and have recently secured reliable power sources at reasonable cost.  During 2007, we sent out bids to over 100 electric suppliers for a long term purchased power agreement.  We received back only 5 bids with only a single bidder being able to meet the bid specifications.

Importantly, to help our customers cope with higher PSCR costs in 2008, we recently petitioned and received approval from the MPSC to spread out the 2008 PSCR increase over a three year period.