Putting aside calls for a faster-paced switch to the new industry format, the Michigan Public Service Commission has adopted a phase-in schedule for customer direct access to alternative electricity suppliers that runs through 2002. The order, which some have said needs additional work, also outlines stranded cost recovery policies and related securitization strategies.

Under the plan, 2.5 percent of each electric utility's retail load will become eligible for customer choice each year from 1997 through 2001, with all customers eligible in 2002. The commission said that a faster schedule would increase the potential magnitude of stranded costs and that a cautious approach is appropriate because the customer-choice model for the electric market "is relatively untried in this country and has not always been successfully implemented in other countries."

Michigan Attorney General Frank J. Kelley expressed his disappointment with the order, and said he intended to introduce a plan that is fair. "[The order] giving full stranded costs to the utilities and the lack of any provisions to allow other utilities into the Michigan electric market will greatly diminish the potential benefits to ratepayers," Kelley said.

Stranded Cost Recovery. The commission said that prudently incurred costs are recoverable. The following would qualify for recovery: regulatory assets, capital costs of nuclear plants, capacity costs in power purchase agreements, employee retraining costs and direct-access implementation costs.

Nuclear capital costs and regulatory assets reflected in rates will be included in stranded cost charges for direct-access customers. Customers who leave to participate in direct access will pay an

appropriate transition charge to cover the costs. The commission said it is unfair to increase rates for remaining customers to pay for costs associated with those who choose direct access.

It noted, however, that uncertainties in both the estimated future market price of power and the potential impact of utility mitigation measures (two fundamental factors used to estimate future market value) make it imperative that a true-up mechanism is used. According to the commission, such a mechanism will provide for annual stranded cost adjustments up or down to reflect changes in the actual market price of power. The PSC ordered Detroit

Edison and Consumers Power to file proposals for establishing a true-up mechanism for an annual adjustment to stranded costs.

Securitization. The commission found that while it could help reduce electric rates, legislation is required to allow securitization of stranded costs. The commission believes that legislation should establish a trust to issue bonds and assure payment of interest and principal through a charge on the delivery of power.

Consumers Energy President and CEO Michael G. Morris testified June 3 before a joint legislative committee in favor of legislation allowing securitization. "Spartan Stores told this committee last week that its current electric bill would be cut five to eighteen percent, and Jackson Community College reported its electric bill would be cut three to five percent," Morris said. "Securitization is the best opportunity we have to lower our customers' rates in conjunction with a restructuring plan."

If allowed, Detroit Edison would propose to securitize $1.95 billion of Fermi nuclear assets, $424 million of regulatory assets and $394 million of renewable energy contracts. Detroit Edison estimates a net annual rate reduction of $295 million, assuming 15-year bonds with a July 1, 1997 start date and a 7.5-percent interest rate.

Consumers Energy would propose to securitize $552.5 million of nuclear facilities, $311.6 million of generation-related regulatory assets, $24.2 million for Ludington pumped storage and hydroelectric plants, and $3.19 billion in contract capacity costs. Assuming 15-year bonds at an interest rate of 7.4 percent, Consumers estimates an immediate savings to customers greater than $200 million.

The PSC's order marks the first step in restructuring. The rest is up to the Michigan Legislature, which started hearings in April. Action is expected this fall.

By 2002, when full competition begins, only those states allowing Michigan utilities to compete will be allowed to provide power in Michigan.

Commissioner John Shea filed a dissenting opinion. "I have significant doubts whether the Commission has statutory authority to issue today's order, and would commend the matter to close legislative scrutiny."

Detroit Edison President and COO Anthony F. Earley Jr. noted that the PSC order carried good and bad news. Earley is disappointed that the PSC did not adopt its staff's restructuring proposal. "If it had, Detroit Edison would have begun immediately the transition to providing customers choice in their electricity supplier," Earley said. "Instead, we are left with several open-ended issues that first must be resolved before competition can proceed."

He said the order called for more hearings on delivery charges for customers choosing new power suppliers. Hearings also are required on issues of fuel and purchased power cost recovery. "These additional hearings will make it difficult to meet the goal of a final restructuring plan by the end of the year," Earley said. (em LB, PC

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