Power Restructuring Proceeds Smoothly So Far

May 8, 2002
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Editor's Note:This is the fourth story in a 10-part series profiling the Business Journal’s nominees for Newsmaker of the Year.

GRAND RAPIDS — Even though electricity-generating reserves in Michigan have declined steadily for some time, restructuring of Michigan’s electricity production industry seemed to take a much more optimistic turn during Year 2000 than in California.

Thanks to a relatively mild summer, brownouts never occurred in Michigan. And in May — a month before Lansing’s final action on deregulation legislation — ground was broken for construction of a new 1,000-megawatt, gas-fired electricity generating plant in Zeeland.

Shortly on the heels of that announcement from Southern Electric, the nation’s largest power company, another firm named Panda Energy International announced plans to build a similar plant with identical wattage in Tallmadge Township, also in Ottawa County.

Both plants cost in the $450 million to $500 million range and, even with temporary tax reductions, will produce enormous amounts of school district and county government revenue.

That economic investment, coupled with landmark legislation smoothing the way for restructuring of an entire industry, makes power a top 10 finalist for the Business Journal Newsmaker of the Year Award. The winner will be announced during a March 8 luncheon meeting of Grand Rapids Rotary. Finalists announced to date also include Don Maine and Davenport University, Gentex Corp. and Fifth Third’s acquisition of Old Kent.

It’s notable that while some Tallmadge citizens protested Panda’s first-choice site, neither of the natural gas facilities has drawn the massive environmental protests that routinely happen in the Golden State.

Both plants use natural gas to produce electricity in their initial stages, and then use steam generated by that process to drive additional power production units.

Because natural gas is relatively free of pollution, environmentalists’ few attacks against Michigan power companies seemed focused entirely on coal-fired plants, which they had understood would be slowly phased out of operation over the years.

But instead of being phased out, the older plants are sticking with coal (which is cheap compared with natural gas). They also are bringing old power generators back on line (albeit after converting them to natural gas operation), to provide relatively expensive “peaking power” for those days when high power demand threatens to cause brownouts.

When complete and in full production three years from now, the two new Ottawa County power plants together would generate one-third of the electricity currently generated by all of Consumers Energy’s plants.

Beyond that, something else seems to distinguish the Michigan case from the California case. Michigan’s deregulation statute, entitled the Customer Choice and Reliability Act, which Gov. John Engler signed in June, created a mechanism to encourage outside supplies of electricity.

It does so in part by phasing out business and consumer price controls between now and 2005, gradually introducing the free market competition to the energy business in this state.

Secondly, the act created the Retail Access Participating Licensing Program, an initiative that encourages out-of-state power companies to sell power either to Consumers Energy or Detroit Edison (as Panda and Southern Electric plan to do) or directly to retail clients, using the Consumers or Detroit Edison distribution and transmission systems.

California’s so-called deregulation program apparently made no such provisions.

Instead, according to Pete Ellsworth, an attorney with Dickinson Wright’s Lansing office who specializes in utility law, California forced that state’s power generating companies to divest themselves of their distribution and transmission system.

Ellsworth said the idea is a good one, in that it prevents a power generator from hogging its own distribution and transmission system for its own marketing and price-influence purposes.

Unfortunately for Californians, he said, he understands from colleagues that the power generators began selling electricity wherever they could for the highest prices.

Meanwhile, the state prevented the transmission and distribution companies — which now function as California’s power providers — from raising their rates. Thus, they had to start borrowing money to buy top-dollar wholesale electricity in order to sell it at government-mandated low prices.

And the real killer, Ellsworth said, was that the state prevented the retail firms from signing long-term supplier contracts, so that they became subject to high-volatility wholesale prices while still only able to sell at low retail prices.

They borrowed to cover the difference. They now are facing bankruptcy.

“Curiously,” he said, “the municipal power companies in California are doing just fine; just like the companies here in Zeeland, Holland and Grand Haven.

“Out there, Los Angeles is doing fine. It has municipal power. And now there’s a move underfoot for more cities to do the same.”

It doesn’t help that building power plants of any kind in California has proved to be both difficult and time-consuming because of very strict environmental rules and tough restrictions on power plant construction.

Under Michigan’s Retail Access program, the first firm to go into business was Ann Arbor-based Quest Energy, which began selling power to Meijer Inc. stores in this state. By the end of December, Quest was selling 500 megawatts a day not only to the entire Meijer chain in Michigan, but to other clients as well.

“That’s the kind of thing deregulation was supposed to do,” Ellsworth told the Business Journal. “To enable Ford or GM to set up power contracts with generators or suppliers over the existing transmission and distribution systems.”

Meanwhile, at least nine other alternative suppliers — including two owned by Consumers and one by Detroit Edison — have been licensed to do business in Michigan. More may show up. The licensing application deadline is Jan. 1 of next year.

But this doesn’t necessarily mean that deregulation in Michigan is on a smooth track. Congressman Peter Hoekstra, R-Holland, noted last week that the cost of natural gas is rising.

“And when these gas-fired plants start sucking up all the natural gas,” he added, “it just looks like families’ heating bills are going to be going up even higher.”           

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