Before votes, financial analysis predicts electric choice will ‘whither’
July 28, 2015
Although no votes have been taken yet, top officials for Michigan’s two major incumbent electric utilities have express confidence with investors that upcoming changes to electric choice will go in their favor.
And at least one firm that analyzes the finances of DTE Energy and CMS Energy seems to agree. In an April report provided to MIRS, the financial services firm UBS wrote that the state’s retail electricity market is “likely to whither organically” under upcoming reforms.
That would send customers back to the major utilities and likely benefit those utilities’ bottom lines.
Under current law, electric choice allows 10 percent of utility customers in the state, including major businesses and schools, to switch to alternative suppliers through the retail market — often at a savings for themselves.
There’s a legislative push in Lansing to do away with that 10-percent allowance, however, to combat concerns about capacity and costs statewide. And the issue has become one of the biggest topics of debate as lawmakers try to craft a comprehensive new energy policy.
While utilities say they understand it’s the lawmakers who will decide the matter and that they believe limiting choice is the right move, supporters of choice allege that the utilities are being overly confident in their assertions for investors.
“They have made some pretty arrogant claims to their investors,” said Wayne KUIPERS, a former lawmaker who is executive director of Energy Choice Now. He continued, “If I were them, I’d be a little cautious.”
Kuipers went as far as to say that if he were a regulator, he would take a second look at the comments the utilities have made.
According to documents, the UBS report, which projected the retail market would “whither,” came a day after an analyst from UBS participated in an earnings call with CMS Energy officials in April.
Consumers Energy — one of the state’s two dominant electricity providers — is a subsidiary of CMS.
On that call, John RUSSELL, the president and CEO of CMS, said the “worst-case scenario” for CMS appeared to be that the 10-percent choice market would remain but that the alternative energy suppliers would begin having to have a “firm capacity position.”
The transcripts for Consumers’ quarterly calls are available through the entity Seeking Alpha at www.seekingalpha.com.
What Russell described would be similar to a plan from Gov. Rick SNYDER, who suggested a five-year capacity guarantee in the choice market. That would mean the alternative suppliers would have to begin proving that they could provide the needed capacity for choice customers going forward.
While not CMS’s “best-case scenario,” which is total elimination of the retail market, the capacity requirement would still benefit the utilities because they wouldn’t be responsible for keeping capacity on hand in case the choice customers returned to them.
And according to the UBS analysis, under that setup, the retail open-access customers “are likely to return to utility service once their current contracts expire because new contracts encumbered with the new capacity charge . . . will almost certainly be uncompetitive . . .”
Rep. Gary GLENN (R-Midland) is one of the strongest supporters of choice in the Legislature. Asked if Russell’s “worst-case scenario” was truly the “worst-case scenario,” Glenn responded that at minimum he wants to see the current choice system maintained.
“Does the five-year guarantee kill the choice market through the backdoor as the utilities are predicting?” Glenn questioned.
Glenn is working on his own free-market focused energy reform. He’s also working on an amendment to other energy bills that would allow all schools to access the choice market without the schools counting against the 10 percent cap.
Glenn believes that with free-market Republicans in support and pro-education Democrats, who would like to see schools save money, in support, the amendment could win.
“I think that will pass,” Glenn predicted.
Asked if Consumers believes the open-access market is going to whither, Dan BISHOP, spokesperson for Consumers, said the future of the retail market “will be made by the Governor and Legislature, so I will decline to speculate on that.”
But, as Bishop explained, Consumers believes that the deregulated market shifts costs from industrial customers, who can access electricity on the retail market, to residential customers and small businesses that are “left holding the bag” for the fixed costs of the electric grid.
Currently, Bishop said, the state’s hybrid system shifts more than $300 million in fixed costs from a few hundred mostly large business customers (0.02 percent of all Consumers Energy customers) onto our remaining customers (99.98 percent of Consumers Energy customers), increasing full service utility customer rates by about 4 percent.
Asked about the comments on legislative outcomes during the earnings call, Bishop said like any publicly traded company, “a variety of topics and issues are discussed on a regular basis with financial analysts who follow the industry.”
During DTE’s own first quarter earnings call in April, financial analysts asked six different questions pertaining to the upcoming energy legislation.
Half of them focused on electric choice.
One analyst from Macquarie Capital Securities asked specifically how much of the energy load that has switched away from DTE could return.
Peter OLESKIAK, senior vice president and chief financial officer for DTE, responded, according to a transcript available on the company’s website, “I would anticipate some of that load coming back before people sign the bottom line of that new type of structure.”
“Some could remain,” he continued. “It would be, until you get into details and the economics and the decision-making process with the individual customers, it would be tough to predict.”
Also during the call, Oleskiak said of the legislation, “We want to make sure it goes through its normal process.”
In response to another question about what the legislation will ultimately look like, Oleskiak emphasized that the legislation that “is getting the most momentum” “has some sort of fix to this broke retail access program.”
Asked if DTE believes the choice market will ultimately whither, Scott SIMONS, spokesperson for DTE, said that “will depend on market conditions.”
“As 30 percent of Michigan’s generation gets transformed, we’ll see capacity resource issues for Michigan and the retail open access market will not be attractive,” Simons said.
“Without clear planning and accountability, there may not be enough electric capacity available to serve both full service and those participating in retail access,” he added. “That would negatively impact all customers since an electric capacity shortfall would impact the entire grid, not just a subset of customers.”
In Lansing, state lawmakers continue to debate how to reform the state’s energy policy to ensure that enough capacity is available going forward for the entire state.
Senate Energy Chair Mike NOFS (R-Battle Creek), House Energy Chair Aric NESBITT (R-Lawton) and Snyder have all floated their own plans.
During the earnings calls, officials from DTE and Consumers said they believe legislation will be in place by the end of the year.