To All Employees and Other Interested Parties:
Attached please find a small
"White Paper" describing electric industry issues in which you may
have an interest.
We have made this paper available to several
persons within the governmental units of the communities in which we are living,
and you should have the same basic knowledge that these people have.
Please feel free to call me if you have any
questions or other ideas on this issue.
Donald Sawruk
President
Edison Sault Electric (ESE) and Don
Sawruk's Views on Electricity Reregulation in Michigan
(Updated October 2003)
What happened in California ?
The troubles in California actually had their start going back at least
a decade in time. As the most populous and fastest growing state in the union,
California and its demand for electricity has been increasing much faster than
the national average, increasing roughly 40% in the past decade. However for
many years, no major new sources of electric
generation had been built in California. Concerns over plant siting and environmental impacts of new generation bottlenecked plant construction and
created investment uncertainties that forestalled commitments by those who might otherwise have
addressed the state’s growing energy needs.
To compound this problem, California then
passed legislation which made the utilities sell to other parties their generating plants
under the belief that these other parties
would compete vigorously with each other to sell electricity back to the power companies
as well as to ultimate customers and thereby reduce the cost of electricity. What
the architects of California restructuring failed to take into
consideration was a very basic economic law - if you deregulate the price of a
commodity such as electricity for which there is a shortage, market forces will necessarily respond by driving the price
up. This is exactly what has happened at the wholesale producer level whereby
the prices being paid by the utilities for power from the plants they previously
themselves owned skyrocketed. Further, the runup in natural gas
prices also increased the price of electricity generated by that source. In short, California would have experienced price spikes even in the absence of
utility restructuring – the fundamental prerequisites for a stable market had not been met.
That was not the end of the problem in California,
however.
Because of the highly volatile wholesale prices which utilities had to pay
to the new owners of their old plants, regulators sought to protect ultimate retail consumers by a) freezing the prices which utilities
could charge their customers and b) not allowing utilities the ability to enter
into long term power agreements with power producers. Imposing these conditions on California
utility companies greatly increased the chances that they would face bankruptcy.
California utilities were subjected to wildly fluctuating (mostly upward) prices for purchasing a
commodity which they in turn were required to sell at a price substantially lower than
what they are paying. With the utilities' credit ratings harmed, the state
moved in and signed long term contracts during a time of high price, utility
prices are are now locked in at high levels for years to come.
Can/will the same thing happen in Michigan?
Most likely not because Michigan took a very different and more constrained approach to reregulation. The only problem which
Michigan had similar to that of California was that for a period of time was an insufficient
supply of new generation coming online. That problem has generally been resolved over the
past several years as some new generation was built by companies entering the
generation market.
The electric utility industry has to make some
very difficult choices with respect to the future of generating plants and it
needs to make these choices now. I believe that the only true, low cost,
effective and yes, even environmentally logical longterm solution to producing
all the electricity our country needs is to consider building nuclear plants,
albeit on a different set of standards than we used before. Most of the 85
nuclear plants built over the last 20-25 years are still producing electricity
at the currently attractive price of 2 cents per kwh even when the cost of new
gas or coal generation is coming in at costs approaching 4 cents.
How does our current rate structure compare to
others in Michigan and the US?
In 2003 a residential customer of ESE
using 1000 kwh currently paids about 5.91 cents per kwh (not including state sales tax
of 4%) compared to a state average of 7.66 cents and 8.39 cents on a national
average. This 5.91 cents is 23% below the state average and 30% below the
national average. It would be difficult for competitive power suppliers to offer savings to ESE customers and this low cost reality
may in fact discourage competitors from entering the UP market.
What factors currently affect our rates?
In January of 2002, the same factors which
previously affected rates came back into play. ESE has low rates due in
part to its base hydro generation which produces 40% of the power it sells with
the remaining 60% coming from outside sources. The three major factors here
include the amount of water available for hydro generation, the amount and the
cost of outside power we have to purchase from Consumers Energy and the amount
and cost of outside power we need to purchase from Wisconsin Electric.
What is the status for deregulation (aka
reregulation) in Michigan?
Customers in Michigan are able
to choose from whom they wish to purchase the generation portion of their
electricity since January 2002. As part of this reregulation, customers Have
been seeing a different bill format known as an unbundled bill which describe to
customers how much they are paying for the services they receive from ESE
- power supply and distribution. The power supply portion of the bill
will detail how much the customer is paying on a per kilowatt-hour basis for the
production and transmission of the electricity and if the customer can find a supplier who will
supply the customer with a lower cost, the customer can elect to take that
portion of the service from the Alternative Energy Supplier or AES instead of ESE. The
distribution portion of the bill will continue to be
supplied by ESE as will all the current services such as meter reading, billing,
processing of payments and service and outage calls.
What do you expect the impact to be on our
rates?
Because we have the lowest rate
structure in Michigan, we expect that the impact will be minimal if
indeed there is any impact at all. However,
we can say with some certainty that except in some special cases, we do not see potential for savings below our current rates. It is
important to understand that rates in a competitive market can go both up and down, so there is no
way to predict long term trends after competition is introduced.
What benefits will we receive from
reregulation?
The one potential benefit for customers is that they have the right to make a choice if they
prefer to no longer have ESE supply the generation portion of their billing and competing sources are available.
As with the old axiom that Rome was not built in a day, this process of
reregulation will take time to fully run its course as it is
our opinion that this is just the first of
several steps to be taken along the reregulation journey. In the long run,
customers will benefit by not only having additional electricity
choices/services available to them but also from various alliances/ventures with
other retailers and new product offerings which utilities will enter into in
order to provide even more services to their customers.
Will your company split up like Ontario Hydro
has?
Due to a rulings by the Federal Energy
Regulatory Commission (FERC) most electric utilities have sold or released operational controls (divest/sell) over their high
voltage transmission systems. The theory behind
this is that the transmission systems, if they are controlled by someone other
than the utilities who built them, can act as an "interstate highway
system" by which large volumes of electricity can be moved in response to
market forces. If utilities were to retain their right of ownership to these
facilities, they could hold up the movement of power and hence cause difficulty in implementing nationwide
reregulation.
Customers should understand that those high
voltage transmission systems were built to serve each individual utility and not
to act as an "interstate highway system". In order to get to a
fully functioning "interstate highway system" much additional time,
money and effort will be required.
ESE, as of December 31, 2000, transferred all
of its transmission assets to a newly formed private company called the
American Transmission Company (ATC). ATC also contains transmission assets
formerly owned by several other utility companies in Michigan, Wisconsin and
Illinois several other states. All of the former owners of the
various transmission system are now also prorata owners of ATC and share in
ATC system wide cost and benefits of using that entire system to move large
quantities of electricity. This change is entirely consistent with the declared federal policy direction.
Will ESE treat customers differently if they
are receiving their generation from a source other than ESE?
By law, ESE must treat all
customers alike no matter who is supplying the generation portion of the bill.
By law, ESE is also known as the supplier of last resort for all customers
within its service territory. This means that should a customer contract out
with a separate AES and then decide that it no longer wants that service, ESE
must take the customer back as a full service customer. Having said that, there
will be price rules in place to keep AESs and customers from
"gaming the system" by moving customers back and forth between the
utility and AES to take advantages of seasonal and other possible price moves.
There will also be rules about the number of times a customer can
change suppliers in a one year period as well as how and at what
price a customer comes back to receive service from ESE after they have dropped
their service from an AES, or been dropped by their AES. This is a very complex issue but it suffices to say
that there will be some built in protections for both the company and for those
customers who decide to remain with ESE.
In summary, all of us at ESE are working hard to understand the
implications of these industry changes and to make sure that the high level of service and favorable prices that have been our
trademark for so many years are not negatively impacted by reregulation. Our first priority is to
insure that your ability to choose whom to buy your electricity from is implemented in a careful and
well-informed manner so that no harm is done over the near term and that healthy competition can
work to your advantage over the long run.
