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CEO Forum: Facing the Future

Three CEOs, three business models, one shared outlook.

Fortnightly - June 2012

Fortnightly: How has retail competition in Michigan affected your business?

Russell: The legislation in 2008 included a retail open access level of 10 percent. That enabled customers, primarily large ones, to shop among suppliers. In the context of the full law it made sense. The retail cap was about the amount of power that we were buying on the market at the time. Although there’s some talk about increasing that cap, the 10-percent level made sense and it still does. [Editor’s note: Rep. Mike Shirkey (R-Clarkdale) in March 2012 introduced HB5503, which would allow choice immediately for any customer currently on a waiting list, and would raise the open-access cap incrementally by 6 percent each year through 2015.]

Very few customers are shopping today. It’s 10 percent of our load, but only 300 electric customers, out of 1.8 million.

On the gas side of the business, we’ve always had open access for industrial through residential customers. Surprisingly, in today’s market the majority of our gas customers are paying more through third-party suppliers than they would be if they’d bought gas from us.

The fact is, deregulated states have higher rates than states that are regulated. And most of our business customers want certainty. They want value but they also want predictability in their costs.

Fortnightly: How does cheap shale gas affect your investment decisions?

Russell: We were in the process of developing an 830-MW clean-coal generation plant that we canceled in part because of shale gas. Other factors were the weak economy and excess capacity. That was going to be a multi-billion dollar investment.

Due to environmental rules and gas prices—but primarily because of environmental rules—we’re mothballing seven coal-fired plants between now and 2015. That buys us some time to determine what the EPA rules will mean for these plants.

Uncertainty about the rules makes large investments difficult in this industry. Even when the agency issues new rules, they’re challenged in court, and that can send you back to square one. We’re the largest investor-owned utility in Michigan, and we’ll be investing capital. But we need certainty about the rules. The investments we make are 30- to 40-year investments. Conflict happens when regulations change, or aren’t codified, or they’re challenged and decided by the courts.

Low gas prices open up opportunities in gas fueled generation. We purchased a 900-MW plant a few years ago that was running at 13- to 14-percent capacity factor. Last month it ran at over 80 percent. So we’re seeing a shift in the balance of our portfolio from coal toward natural gas. That has reduced costs to customers by over $100 million. I expect those changes to continue.

The default fuel for new generation will be natural gas. Since legislators haven’t taken a position on it, regulators are filling that void, and that means natural gas will be the fuel of choice. One thing I believe is that it’s important to have a balanced portfolio. If everyone switches to natural gas, it will drive up demand and prices. We need a balance between gas, coal, nuclear,