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Michigan Moves Ahead On Electric Restructuring

Michigan Moves Ahead On Electric Restructuring

Michigan Gov. John Engler has signed into law an electric deregulation utility package which mandates an immediate 5% rate cut for residential customers and gives the state's Public Service Commission (PSC) additional authority to ensure competition exists for electric services.

Heavy advertising and lobbying on both sides marked the push toward the final package, which provides "choice for those who want it and protection for those who need it," said Engler. The Michigan governor said the final bill, which combined two Senate bills (SB 937 and SB 1253), ensures the state will obtain new generating capacity, a critical issue for growth in the state. His sentiments were echoed by Consumers Energy Sr. Vice President John Clark.

"Michigan has long needed the certainty of law to support the development of new power supplies for our homes and businesses," Clark said. "It will serve the state very well."

Rate cuts by Michigan's major utilities, Consumers Energy and Detroit Edison, were expected to take effect last week, according to officials. The rate cut is based on charges as of May 1, and will continue for at least two years under the legislation. Rates for large industrial and commercial customers also were capped for two years. Rates for small businesses were capped for three years, and residents will not see a rate increase before 2006. In fact, PSC said that unless there is competition, rates could be frozen until 2013.

Although the legislation is not as wide-ranging as in some other states, it will authorize refinancing of electric facilities through bonding to enable further rate reductions. Compensating utilities for power plants that were built when the utilities had a guaranteed customer base had been a major hurdle. But "stranded" cost recovery was inserted in the legislation, enabling the utilities to throw their full support toward the bills.

Customers will be able to choose an alternative supplier by 2002, and the PSC also will be allowed to issue orders to prevent slamming to protect against unauthorized switching from electric providers. Also, the legislation creates a $40 million low income and energy efficiency fund.

One problem with passage had been over the issue of aggregation. This allows virtually any group the right to create cooperatives. The cooperatives pool or aggregate their power needs and then negotiate the sale of the aggregated power demands to any supplier. Large corporations and small business groups aggregate power, but in Michigan, a dispute arose between Michigan's House and Senate over franchise fees for school districts that also wanted to participate. In the end, a compromise was reached exempting the schools from the fees.

Enactment of electric restructuring in the state will be a positive for the utilities involved because it removes the "major financial uncertainties" said CMS Energy Chairman and CEO William T. McCormick Jr. Consumers is the principal subsidiary of CMS Energy Corp., and Michigan's largest utility, providing natural gas and electricity to more than 6 million residents.

"Legislative action on electric restructuring sweeps away substantial regulatory uncertainty that had been facing Consumers Energy since this debate began four and one-half years ago, in late 1995," McCormick said.

Under the enacted legislation, the utilities will be able to make a full recovery of their stranded costs and have securitization benefits to offset the 5% rate cut. A market power test in the legislation also will allow the utilities to build additional needed generating capacity in the state, and it also does not require divestiture of power generation assets.

The state actually began retail electric competition last November. Georgia-Pacific Corp., Keebler Co., Keeler Brass Co., Lakehead Pipeline Co. and Martin Marietta Magnesia Specialties Inc. were among the first customers in the state to take delivery of their electric power from a supplier other than their local utility, participating in Consumers' Direct Access Program, a customer choice initiative approved by the PSC. Nordic Electric, an independent power company, was selected as the energy supplier.

The Direct Access Program was the first in Michigan to allow customers to buy power from an alternative provider. According to PSC, nearly 130 applications, representing approximately 1000 MW of capacity, were submitted for consideration in the initial program. Since initial participation was limited to 100 MW, a lottery was used to allocate capacity.

Carolyn Davis, Houston

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