Significant changes in utility industry

Bob Dylan sings: “The times they are a-changin.'” This manifestation can’t be seen anywhere more graphically than in the electric power industry.

The structure of the industry has shifted radically in the last few years due to federal rule changes and new state laws. When I first became the CEO of an electric utility more than 40 years ago, the regulatory landscape was dominated by the Michigan Public Service Commission and a very backwater federal agency called the Federal Power Commission.

Most states geographically regulated their electrical systems and they were not interconnected very well with neighboring states. Utilities were known by the places they served – Kansas City Electric or Florida Power. Here we still have Presque Isle Electric and Alpena Power but those types of names have been replaced by New York Stock Exchange symbols like CMS or DTE or names like Calpine, Exel, or Progress Energy.

Today large utilities mostly don’t own transmission anymore and the grid in Michigan is dominated by ITC (International Transmission Company). Generating stations were once the sole province of large utilities but even Northeast Michigan has two wood-fired generating stations at Hillman and Lincoln. Wind generation is easily visible on a car ride to Lansing. The Midland nuclear station was converted to gas-fired generation before it ever opened and still degrades the CMS balance sheet.

Consolidation has been rampant over the years, with the result being fewer co-ops in Michigan or locally owned Upper Peninsula utilities being sold to out-of-state interests. The Federal Energy Regulatory Commission now governs most everything and interstate and international interconnections abound.

Coal and nuclear are out and natural gas is in as the government’s choice of fuel for firing generating plants. There is huge uncertainty in an industry where 50-year plans are normal. New plants aren’t being announced very fast. Actually, most of the current news is about plants that are to be closed.

There are new users for electricity such as automobiles and huge computer server centers. Plants that operate constantly, called “base load plants,” like the one that Wolverine Electric proposed for Rogers City, are just unable to be built due to EPA regulations. Wolverine needs more energy for its customers, so it turned to the renovation of the Presque Isle Generating Plant in Marquette, only to be again thwarted by regulatory barriers.

Michigan’s geography is tough on utility planning because the Great Lakes are both broad and deep. The only major cable was put into service in 1975 across the Straits of Mackinac. The U.P. isn’t well connected east to west with transmission lines.

Reserve margins, which are measured by the amount of reserve generation the state has at peak load times, is at 14 percent – which is an all time low. Normal is more like the low 20 percent level.

Change is generally good unless it happens all at once, which it is now. Loads are increasing but the crystal ball used for planning new generation is murky. Utility people are waiting to see which regulations will apply so that a new plant doesn’t become an albatross like the Midland nuclear plant, which after billions were spent to get it 90 percent completed, it was abandoned.

Does regulatory intervention defer investment? Well, argue all you want that it doesn’t but it would be good to insist on clear permanent rules if you really want to read at night.