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Michigan Electric Sales Forecast

Michigan Public Service Commission Staff
May 2003

Commission Operations Division
Energy Data and Security Section

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Introduction

This is a composite projection of Michigan total electric sales for the years 2003 through 2012. The projection is based primarily on forecasts prepared by Consumers Energy and Detroit Edison.

The purpose of this forecast is to provide information for policy development and for analysis of electric market issues. Electricity sales projections are needed to determine future power supply requirements. More detailed projections are also used for setting electricity rates and for assessing the adequacy of generating capacity and efforts to modify customer electricity demand.

This projection provides information on the market size and expected growth in both the Upper and Lower Peninsulas. In addition, Consumers Energy and Detroit Edison are shown separately, showing the major importance of Michigan's largest utilities in the Lower Peninsula market.


Michigan's Electric Market

As a result of Michigan's electric restructuring legislation, enacted into law in June 2000, a significant transformation is under way in the market for electricity. The legislation bifurcated the regulated market into a competitive price market and a traditional rate of return regulated price market.

The regulated market will continue to operate in much the same way as it has in the past. Electric customers may continue to purchase generation and distribution services (bundled service) from the same utility under a rate structure that is approved by either the state or a local unit of government.

Alternatively, retail customers may seek out lower prices or a better value on electric generation services by choosing to purchase this service from an alternative electric supplier (AES). The price of the generation service provided by AESs is not regulated, rather it is a market-based price. The distribution of the electricity supplied by an AES will continue to be provided by the local distribution utility under delivery rates that remain regulated. AESs may produce their own electricity or purchase it either in wholesale markets or under contract with another producer.


Michigan's Electric Utilities

Michigan total electric sales included in this outlook are bundled sales to retail customers by the three types of electric utilities in the state: investor-owned, member-owned cooperatives, and public-owned municipals. Investor-owned electric utilities, whose prices are regulated by the Michigan Public Service Commission, provide generation, transmission and distribution services. Cooperative electric utilities purchase most of their energy and are also subject to price regulation. Cooperatives operate in more sparsely populated rural areas. Municipal electric utilities are publicly owned nonprofit municipal government agencies and provide electric service to their communities and adjacent areas. Because municipal electric utilities are part of a local governmental unit, their prices are not regulated by the state. There are 60 electric utilities in Michigan. Thirty-nine are in the Lower Peninsula and 21 are in the Upper Peninsula. Electric service provided by Consumers Energy and Detroit Edison accounted for 81 percent of Michigan total electric sales in the year 2001. Upper Peninsula utilities account for about 6 percent, and the balance of Lower Peninsula utilities comprise about 12 percent of the state total.

Also included in this outlook are sales to retail customers by AESs. Twenty-five AESs have been licensed to sell electricity to retail customers. As of January 1, 2002, all retail customers in territories served by investor-owned utilities may choose to purchase electric generation service from an AES. However, electric choice activity has thus far been limited to territories served by Consumers Energy and Detroit Edison. For the purposes of this study, sales by AESs are sourced to, and included in the reported figures for, the electric utility into whose service territory the sales are made. At the end of 2002, there were 26 licensed AESs, although only 12 made retail sales. Sales by AESs totaled 5,357 GWh in 2002, or 4.9% of total sales and while small today, this is an increase of 189% from the 2001 level of 1,851 GWh.

The electricity market is significant in Michigan's economy. At the current average price of 7 cents per kilowatt-hour, total revenues of Michigan utilities and AESs are nearly $7.5 billion per year. This represents about 2.5 percent of Michigan's total personal income of $303 billion for the year 2002.


Sales Forecast

Michigan's electric restructuring legislation allows existing utilities to retain the exclusive right to distribute power in their service area, but they no longer have the exclusive right to sell electricity generation services. Allowing customers to purchase generation services from other suppliers may significantly impact the amount of electricity generated by utilities in Michigan. Therefore, the projected sales reflect expected retail sales in a geographic area, but are not intended to reflect any shift in sales or the generation market share by the existing utilities. No attempt has been made to determine future shares in the competitive generation market.

Michigan's electric sales are projected to grow at an average annual rate of 1.9 percent from 2003 to 2012. Sales are expected to grow from 108,218 gigawatt-hours (GWh) in 2002 to 130,291 GWh in 2012, an increase of 22,073 GWh. This is less than the 2.6 percent annual average rate of growth in the ten-year period 1993-2002. However, the projected growth rate is just slightly less than in the 1998 to 2002 period, when sales grew an average of 2.1 percent per year. The two major company forecasts included in this projection show much different rates of growth, with Consumers Energy projecting annual sales growth of 2.3 percent and Detroit Edison projecting growth averaging 1.5 percent.

While the projected sales refect long-term trends and are not intended to capture business cycle expansions or recessions, clearly both Consumers Energy and Detroit Edison are projecting a significant slowdown (and in the case of Detroit Edison a decline) in rate of electricity consumption in their respective service territories in 2003. This is largely driven by reduced consumption by residential customers. Warmer-than-normal temperatures in 2002 created additional demand that disappears when temperatures are assumed to return to the historical norm. In addition, Detroit Edison forecasts a decline in demand by commercial customers in 2003. The industrial sector is forecast by both firms to grow by the fastest rate among the three sectors in 2003, as well as throughout the remainder of the forecast horizon. Both firms project residential sales to grow by the slowest rate in each year of their forecasts.


Peak Demand and Load Factors

Peak electricity demand measures the maximum number of megawatts of electricity sold during any one-hour period throughout the year. It is a key parameter used by utilities to ensure adequate power will be available when needed. The figures illustrated in this study show the cumulative non-coincident peak demand for electricity in Michigan. Non-coincident peak measures the maximum demand for each utility during the hour when demand is the highest. Peak demand for one utility may occur during a different hour, or on a different day than peak demand for another utility. Therefore, unlike coincident peak demand, which measures the maximum demand for all utilities during the same hour on the same day, non-coincident peak can be viewed as the upper bound of coincident peak.

Unlike annual sales, which are influenced by weather patterns throughout the course of the year, peak demand is largely determined by weather extremes experienced at any one point during the year and usually occurs during an afternoon in July or August on a hot, humid weekday. Peak demand in 2002 is estimated to be 23,918, down more than 2.5% from the record peak of 24,547 in 2001. Peak demand has grown by an average of 2.5% per year over the past five years. This is slightly higher than the projected growth in peak demand over the next ten years of 2.3%.

The space heating requirements of a cold, snowy Michigan winter also creates higher levels of electricity sales. However, peak demand for the state is much lower in the winter than in the summer. In the Lower Peninsula over the past ten years peak winter demand has been 23% lower than peak summer demand. The opposite is true in the Upper Peninsula where over the past ten years winter peak has been more than 8 percent higher than summer peak demand. Winter peak demand for the entire state has grown by an average annual rate of 1.9% over the past ten years, and is projected to grow by a similar amount (1.8%) over the next ten years.

Load factor is a parameter that brings together annual sales and peak demand. It measures the ratio of average sales to peak sales during a year. There was sharp drop in the summer load factor for both the Upper and Lower Peninsulas in 2001. This was product of record peak demand combined with a year over year drop in annual sales. The summer load factor for both Peninsulas is projected to decline modestly over the next ten years as annual average growth in peak demand (2.3%) is expected to outpace average annual growth in annual sales (1.9%). Conversely, winter load factors are projected to grow modestly over the next ten years, as the average annual growth in winter peak demand (1.8%) is slightly less than the average annual growth in sales


Projection Methods

Historical Michigan electric sales data for 1990 through 2001 were compiled from the Form EIA-861 database from the Energy Information Administration, U.S. Department of Energy. Year 2002 sales data for Detroit Edison and Consumers Energy are from company reports.

The sales forecast for Detroit Edison for 2003 through 2007 is the company projection prepared in the third quarter of 2002. The Consumers Energy forecast for 2003 through the 2007 is the company projection prepared in November 2002. Each firm maintains its own forecasting model and uses information such as economic growth, housing starts and industrial production to generate sales projections. For the post-2007 period, both the Detroit Edison and Consumers Energy company projections are simply trended to 2012.

Projections for the other utilities were made by using a linear trend of the historic sales from 1990-2001. The simple trending of the sales data for a single utility is not seen as a method that would provide an acceptable planning projection for a small utility. However, summing these projections to a larger geographic area, in this case the Upper and Lower Peninsula totals, tends to remove the errors which are naturally induced when attempting to project electric sales or economic growth for small geographic areas. The aggregates of these individual utility trend projections for the Upper and Lower Peninsulas are a reasonable scenario of expected electricity sales growth for these two electricity markets.





 

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