January 4, 2006

The Michigan Public Service Commission (MPSC) staff late yesterday issued its report on Michigan’s future electric capacity needs, indicating that Michigan’s existing generation resources are adequate to meet the state’s demand, but by 2009, growing demand will require that certain measures be undertaken to ensure that Michigan’s electric grid keeps the power flowing. 

“With aging electric plants and increasing demand for electricity, Michigan needs to start planning now to ensure that the lights stay on well into the future,” said MPSC Chairman J. Peter Lark.  “While problems are not imminent, more electric generation may be needed as soon as 2009.  I am pleased that Capacity Need Forum participants have laid much of the groundwork needed to determine what Michigan needs and how to meet that need.”

The MPSC on Oct. 14, 2004 issued an order directing the MPSC staff to begin a Capacity Need Forum (CNF) with a two-fold goal:

·        to determine whether Michigan’s electric generating capacity will be adequate to meet the growing demand for electricity, especially given the likely retirement of some of the state’s older generating units, and assuming additional resources are needed, what types of resources would be best for Michigan; and

·        to provide guidance to the MPSC on rate-making policies and methodologies to allow recovery of utility investment in electric generation resource additions.

Over 160 individuals from 60 organizations participated in the forum.  It is the first electric energy planning effort coordinated by a State of Michigan agency since 1985.

The 60-page report contains these major findings:

• Peak electric power demand is projected to increase at an annual rate of about 2.1 percent.

• By 2009, unless enhancements to existing supplies are undertaken, growing demand will cause existing electric generation and transmission capacity in the Lower Peninsula to be insufficient to maintain reliability standards. 

• Resource enhancements available could include a wide variety of near-term options, including additional demand-side options (energy efficiency improvements, load management, and demand-response programs) and generally faster-to-complete supply-side options such as transmission improvements, natural gas combustion turbines or combined cycle generators, renewable energy, and combined heat and power systems. 

• New base load power plant construction may need to be undertaken, depending on Michigan’s overall economic activity and the number of short-term enhancements made, by 2011, or shortly thereafter.

• Demand growth, coupled with the expected retirements of some of Michigan’s existing base load power plants, will necessitate the addition of one or two base load plants by 2014.

To reduce the risks associated with power plant construction, the MPSC staff is recommending that the Commission modify its rate-making methodology to include a “reliability option.”  Under this approach, the utility would, in a contested case, demonstrate the need for additional capacity, the type needed, and that its recommended plant is the best option for meeting that need.  A competitive bidding process would be used to ensure a reasonable cost.  Any MPSC-approval project using this option would include a related reliability charge assessed to all distribution customers, providing the utility with a significant measure of revenue certainty to allow a new plant to be financed.  In addition, the utility could receive a construction work in progress (CWIP) amount in the rate base, without the typical offset for funds used during construction.  This approach would mean that decisions on the need for, and cost of, a plant would be made in advance and provide enough revenue certainty to allow it to be financed.

The entire report is available on the MPSC’s website:
http://www.dleg.state.mi.us/mpsc/electric/capacity/
cnf/cnf_report_1-3-06.pdf
and
http://www.dleg.state.mi.us/mpsc/electric/capacity/
cnf/cnf_reportvol2_1-3-06.pdf

The MPSC is an agency within the Department of Labor & Economic Growth.

Case No. U-14231