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CEO Forum: Facing the Future

Three CEOs, three business models, one shared outlook.

Fortnightly - June 2012

you’re not accounting for the pace of change in modern society. In any industry except ours, 20 years is like an epoch. It won’t happen next month, but I’d expect people will be doing this by 2020.

Fortnightly: If that’s true, then the industry could be looking at a lot of stranded costs.

Crane: Stranded cost recovery is a concept that’s unique to rate-based utilities. But yes, if I were running a rate-based utility where the pricing system is based on volume, with fixed costs spread over sales of electricity, and if I were in a high-tariff market where 50 percent of my retail customers might take a majority of their business off line and generate their own electrons—and yet depend on my system as a backup—then I would be very concerned about the Post-Officization of the business.

You see what’s happened to the Post Office. Nobody sends 1st-class mail anymore. It’s junk mail at a lower cost per piece, and the Post Office has to keep raising rates to cover fixed costs that keep rising. And that just makes them less competitive. I see that happening in this industry as people generate more of their own power. It’s inevitable that they will; people will look to harvest the solar real estate that they own. And as the people in younger generations grow up, they won’t be as comfortable buying electrons that come from a source they might not like. Why would someone in the Midwest have to take electrons produced from a mountaintop coal mine in West Virginia, if they don’t agree with that practice?

As a company, we want to be around for a long time. We want to be there for the next generation when they start to own houses, and they want clean and sustainable energy.

 

John Russell: President & CEO, CMS Energy and Consumers Energy

Fortnightly: Michigan’s market framework has gone through a lot of evolution. How has that evolution affected CMS Energy’s business and its opportunities in the state?

John Russell, CMS Energy: The regulatory environment is very important to the company’s success. The game changer for us was the 2008 energy law (Michigan Public Act 295 ) that provided a comprehensive regulatory structure for Michigan. It included renewable energy, efficiency targets, and regulatory changes, and it focused on where Michigan wanted to go in the future. It provided us with certainty in timeliness of recovery—not certainty of recovery itself, but timeliness. That has allowed us to invest in renewables, energy efficiency, distribution reliability, and gas safety. It’s helped us to make the investments that our customers need, and that are required to improve the environment.

We’re investing capital now to reduce fuel and O&M costs. By investing capital with discipline, we’re able to reduce our O&M costs by 4 percent, and we’ll continue reducing them by 1 percent per year. That keeps our base rates in the electric and gas business at or below the rate of inflation. That’s the range that our customers can afford, and we’ll continue providing a great value.

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