Exceeding its targeted growth rate in 1999, DTE Energy isn’t complacently resting on its laurels. Its sights are set on successfully pushing into the future-striving to be one of the major energy players in the Great Lakes region.
Providing the muscle for this push are its core utility business (Detroit Edison), non-regulated businesses, and its investments in technology.
Going from zero in 1996 to an anticipated net income approaching $100 million this year, DTE Energy’s strategy of staying true to its energy roots when looking for non-regulated business opportunities has paid off. In 1999, those businesses showed a remarkable growth spurt in earnings-62 percent over 1998.
Investment in emerging technology is another characteristic that differentiates DTE Energy from its competitors. Plug Power, a company developing residential fuel cells, was the result of a joint venture involving DTE Energy. Created in 1997, the company went public in October 1999. By Jan. 31, 2000, it had a market capitalization of more than $4 billion and DTE Energy’s investment was worth $1.3 billion.
DTE Energy is pursuing additional growth opportunities through its pending merger with MCN Energy Group Inc., a diversified natural gas company.
Anthony F. Earley Jr., DTE Energy’s chairman and CEO, spoke with EL&P in June about the company’s role in Michigan’s recently restructured market.
EL&P: With the recent enactment of restructuring legislation in Michigan, what are Detroit Edison’s strategies to meet the challenges resulting from restructuring?
Earley: The legislation on restructuring the electric industry in Michigan is something that we have been working for for five years. A number of years back, as we assessed the direction in our industry, we concluded that: deregulation in the electric industry was inevitable and the best way to position yourself was to be proactive and move ahead as fast as you could into that environment. So we started working on legislation back then. It has been a real struggle here in Michigan to get legislation-not because there isn’t support for the concept of deregulation but because there are so many complex issues. And the state has recognized-and I applaud the state for being very thoughtful in what they’ve done-they’ve recognized that the regulated monopoly electric business delivered the most reliable, most efficient electric system in the whole world and that they didn’t want to lose the benefits of that just because they wanted to rush into a new, and as yet untested, deregulated environment. In fact, the legislation doesn’t actually ultimately deregulate electric utilities; it probably gets about 80 percent of the way there, and I suspect in a couple of years we’ll be back finishing that job. We feel very good about what was done in the legislation in terms of moving us forward.
Our strategy for ‘how do we operate in this new utility environment?’ is a strategy that really involves what we call three different horizons. The first horizon is the here, now: what’s going on today. One of the things we believe we have to be able to do is run a core utility business extremely well. One of the mistakes I think some companies have made is [that] they look at the opportunities in a deregulated environment as all the new stuff. The growth areas going overseas tend to have a very exotic feel, and everyone likes to focus on them. And they forget that, at their core, the utility business is a darn good business to be in. And so we believe we have to make sure that we bring our utility business into the 21st century: working on using computers and e-commerce and whatever tools are available to make sure we deliver the best possible utility service to traditional utility customers.
The second horizon that we look at is energy-related growth business. We concluded-as we looked at new opportunities for growth-we really were an energy company, and we had to be careful not to stray far afield. And there are stories about utilities that have gotten into other businesses-most of them ultimately unsuccessful, although some of them have been successful. Our conclusion was [that] we wanted to expand in areas that we knew we had expertise, where we had relationships with customers and where we had our assets generally located. So we have targeted a geographic area around the Great Lakes Basin (all the way from Minnesota to New York and down to the Ohio River), which is a great area for an energy company because it uses almost half the energy in the U.S., and [planned to] expand in business lines that are close to things we know. We started a coal transportation business-building off of our historical strength in transporting of low sulfur western coal from the Powder River Basin; we built an energy-services business servicing the energy needs of large industrial customers. (This is an area that has steel companies and auto companies.) We probably serve more large industrial loads than almost any utility in the U.S., and we found that many of these large industrial customers are looking for someone to come in and help them through this very complex issue of ‘what do we do with energy in a deregulated environment?’ We’ve had great success in expanding that business. We’ve put together a very nice and growing energy trading business, again focused in the Midwest area. Our non-regulated businesses last year were about 15 percent of our net income. and we expect over the next two or three years to get to 25 percent of our net income. This year we anticipate our non-regulated businesses to be in the order of about $100 million in net income; that was from a standing start. That number was zero in 1996. We’ve seen some pretty spectacular growth there.
The third horizon we look at is ‘what is this industry going to look like in a decade or so?’ Can I get some understanding of the direction the industry may be going in? How should we be positioning ourselves? We did this in a fairly disciplined way: We invested several years ago in a number of venture capital funds that were specializing in energy related start-up companies, and that way we got to look at 20 or more different technologies. And as we came across one that struck us as having some potential for transforming our industry, we looked at ways for us to get involved-either with an equity position or to be a user of some of these new technologies so we could lead the way into the electric utility environment of the future. That has led to a number of exciting things we’re doing; we have a major stake in Plug Power, which has a goal of producing the first commercially viable residential fuel cell. And we’re well along in that process. We started a business, internally-DTE Energy Technologies-that is developing the distributed generation business. We see the generating business in our industry going from large central station generators to modular combined cycle plants, and the next logical step is localized personal generation-whether it be at your house, your commercial facility or industrial facility. We’ve seen that trend in industrial facilities in cogeneration, which is a large-sized personal generation, but we’re focusing on something that will appeal to the mass market. We believe this will really transform our industry.
EL&P: As a result of this changing market, do you anticipate increased criticisms such as those made recently by Nordic Electric (a Michigan-based power marketer) charging that Detroit Edison and its affiliates are hoarding transmission capacity?
Earley: Absolutely. This is going to be a very, very competitive environment, and competitors will always try and find ways to get an advantage to advance their particular business. The accusations by Nordic, which is a small marketer of electricity, are not true, but they’re looking for ways to see if they can get in the business. I think we’re all going to find that this business is going to be competitive. An industry that was very collaborative because we’re regulated monopolies with set geographic areas are going to become more aggressive. Our goal is to be a good competitor: an aggressive competitor, but a fair competitor. I think there are lots of models of industries that can compete and collaborate at the same time. The computer industry is one of the best examples where you always find people [working like that]-on the one hand they may be competitors on one project, but they may be partners on another. I think that’s going to be a trend that develops in our industry.
EL&P: Detroit Edison recently filed to form a new transmission subsidiary. What is the timeline for its formation?
Earley: I think we can get all the approval this year. The question is then ‘what do you do next?’ We strongly believe that control of transmission will shift from the integrated utilities to some independent body. In fact in the recent legislation in Michigan, we are required to join a regional transmission organization. We’ve been involved in the Alliance RTO for a while. The issue will be ‘what’s the right model?’ There’s the ISO model where utilities would continue to own the transmission but operating control would be ceded to this independent operating organization, or you could have an independent transmission company. We like the latter model rather than the former. We have some concerns about whether a pure ISO is a good business model. The ISO doesn’t have an incentive to maximize the benefits to the owners of the transmission system, but rather has sole responsibility for reliability and access. We think that trying to find a model that will create a company that can be competitive-[that] will have an incentive to expand the capacity of the system but will also be independent of the users of the system-is probably the way to go. We’re looking at how we migrate there: There are a lot of tax issues, legal issues associated with how we go about it. Certainly in the next two years, you will see either a spinning off [of] our transmission or [us] working with others to create an independent transmission company. Of course, there are a couple of companies that have already announced that they want to buy up transmission, and we’ve had discussions with them.
EL&P: What do you see as the regulatory structure over the next 10 years in Michigan?
Earley: The legislation that was just passed pretty well defines the structure for at least the next five years. It moves us a long way toward competition. It allows for all customers in Michigan to choose their energy suppliers by Jan. 1, 2002. It helps solve the stranded cost issues that the utilities have; it addresses the consumer issues of slamming and cramming and gives the appropriate protection there. I think the one issue that the state was concerned about was ‘how volatile will these markets be?’ Low income customers (and customers that don’t really have viable choices) are concerned about what happened. One of the issues used in the recent debate was about what’s happening in the gasoline market today. Will we have volatility that’s even worse than that in electric markets? So, what Michigan has done is set up this transition: set price freezes and price caps that will protect consumers who don’t have the competitive ability to go out in the marketplace. I think in the next three years-once people get comfortable with the marketplace and its developing-there will be discussions around ‘how do we get to a totally deregulated generation market?’ I think 10 years from now we certainly will be in an environment where utilities don’t own-or don’t control-transmission, the generation is totally competitive and [you’ll have] regulated distribution companies delivering power to their local customers. You’ll start to see competition in distribution with the rise of distributed generation. You’re going to see new products that change the dynamics of even the regulated distribution business.
EL&P: Your standing as an electric-only utility will change with completion of the pending merger with MCN Energy Group. What strategic advantages are envisioned with this merger?
Earley: With respect to our expanding growth businesses-particularly ones like DTE Energy Services that do a lot of projects where our customers need both electricity and natural gas for their industrial facilities-it gives us a better ability to meet our customers’ needs by supplying both of those energy commodities to them and being able to do it in a way that’s fuel neutral. In the past, our customers would complain, ‘well, the electric company is always saying electric is best, and the gas company is saying gas is best.’ The reality is each of those energy sources have their strengths and weaknesses, and we ought to be offering to our customers the best possible mix.
Second, it will make us more competitive in the bidding in the generation markets for new capacity. Virtually all new power plants are gas-fired. We want to continue in the generation business, and we knew that to do that we needed to become better educated and a better participant in the gas markets. And what better way to do that than by merging with a well-established natural gas company.
Third, there are benefits in the trading market. We’ve got a trading business (that trades electricity) that’s been successful, but if you look at the model of other successful energy trading companies, you have to be able to trade in multiple commodities.
Finally, given the geographic proximity of the systems, there are some great cost synergies that will be a benefit to our customers and to our shareholders for a long time to come.
EL&P: You referred to expanding the non-regulated businesses of DTE. Is one line of business being targeted more than the others?
Earley: The real flagship of our non-regulated businesses in the near- to mid-term horizon (the next three to five years) will be DTE Energy Services. This is the business that focuses on energy projects for large, energy-intensive customers. We do a lot of work with the steel industry, the automobile industry and other energy-intensive customers. That business is our largest non-regulated business now; it has about $1.2 billion in assets. That will continue to be the dominant non-regulated business. Some of our other businesses-like the trading business and our coal transportation business-will be good-sized businesses that will be contributing to our bottom line in excess of $10 million a year, but they will not be the size of Energy Services and also are complementary to some of these other businesses. The other businesses will make money but also support the work of that central business. Over time some of that will shift, and we believe DTE Energy Technologies has tremendous long-term potential in the distributed generation marketplace. Selling products like Plug Power fuel cells-or selling some of the microturbine concepts that we’re trying to develop with partners like Pratt & Whitney-that will come along and start to hit the marketplace in the next three to five years but really [will] not deliver big profits until the five, six year time frame out. So we start to see that becoming a major part of non-regulated businesses as you get near the end of the decade.
EL&P: DTE is unique in its focus on technology. You’ve taken a leading role in development of distribution automation, high temperature superconductor cable and fuel cell technologies. What are your future plans for leveraging energy technologies into new businesses?
Earley: We’re working on a number of different areas. It is not a hit or miss effort. We start with investments in energy-related venture capital operations to look at a whole spectrum of different energy-related technologies. Where we see one we like, we may put a larger stake in a particular company-like Plug Power. We were an early investor in a company called Echelon that is doing some interesting things with protocols for appliances to be able to talk to computers and the like. We move that into a business environment. The main business environment that has developed out of some of these technologies is DTE Energy Technologies. That company will be developing this distributed generation business. The fuel cell is one product that will be focused on the residential market. Microturbines will be focused on the commercial market. We’re looking at one or two other technologies to fill in the gap in terms of the different size markets and having products that will be available all up and down the spectrum. With respect to some of the other things, obviously high temperature superconductors are further out in terms of commercial applications. We were an early investor through some of our venture capital funds in American Superconductor Corp.; that’s how we got linked up with them. That’s not far enough along to figure out where it’s going as a business proposition yet, but I think it has some real potential. I think we have a process in place to identify new technologies early on and move them through our protocol for trying to develop them as a business.
EL&P: What is DTE doing to ensure reliability?
Earley: Our near-term horizon is focusing on running the core business extremely well and making sure that we have a utility that is a solid foundation to build off of, and some companies in the past have missed that point. They move on to other businesses and haven’t focused on their utility. We had our awakening in the early ’90s when we had some storm problems and some customers dissatisfied with the company’s performance, and so we undertook a major effort to look at our system and to start strengthening it. But more importantly, [we] shifted our focus from an engineering focus to a customer focus. We really focused on the process of delivering energy to customers and how could we do it most efficiently and most reliably. Stemming from that work, we have moved ourselves into a position where consistently we are at the top of the heap in terms of system reliability and efficiency-the cost per customer served. We feel pretty good about what we’ve done with our infrastructure. The challenge in the future for all of us will be allocating our investments in our various systems between the new business opportunities and the existing business. From a regulatory standpoint, the regulator is going to have to make sure [to]-although they want to control costs-remember that the competitive part of our business will be generation. The distribution business will still be regulated, and there have to be adequate returns and incentives for people to keep investing in the infrastructure.
EL&P: What role do you see for e-business in DTE’s future?
Earley: The role I see for e-business is to be able to provide better and more efficient services to our customers. Every business today is trying to figure out how to make the Web work for us and, in fact, make our work easier. We think there are huge opportunities for customers to help us give them better service through the use of the Web. In terms of pure business opportunities, there are some opportunities in the procurement area and [we] have joined a group called Pantellos-a group of utilities putting together a venture.
EL&P: How would you describe your personal management style?
Earley: [There are] three things that I think characterize my style. One is the ability to take a look at the complexities of what’s going on in a business and-maybe even when I don’t understand all of them-to be able to pull together a coherent view of where I think the company ought to be going. And to help employees sort through all the chaff of what’s going on and give them some vision or direction that they ought to be focusing their creative efforts on.
Second is an extremely strong focus on people. If you ask employees how they would characterize me, I think the one thing that would come to mind would be a people focus. There’s a very real purpose for that. Not only is it something I believe is the right thing to do, to focus on people-life is too short not to enjoy what you’re doing-but there’s [an] incredible business purpose. If you look at our industry-people talk about what’s the winning strategy in our industry-you can find utilities that are following virtually every strategic path you can think of. So, there are the ‘I-hate-generation’ utilities: ‘I gotta get rid of it, it’s going to be a dog-eat-dog competitive business.’ And then you’ve got another group that’s going out and buying those same plants that the other utilities were dumping. You’ve got the international group; you’ve got the group that went international and decided to sell that and come back and focus domestically-and I don’t think there’s any one right strategy. But, if you look at companies that seem to be successful and have their act together, the one hallmark is talent: committed, smart, flexible employees. That’s where we’re trying to get. Lots of mistakes will be made in selecting strategies, but if we’ve got an employee force that is smart, flexible, business-focused, works well together as a team, they’ll figure out they made a mistake and change direction and never miss a beat. That’s been a primary focus here over the last couple years: What do we need to do not only to help our employees, but probably more importantly, how do we help our leaders lead in that sort of organization? Leaders, particularly at my level and other levels, talk about our employees and say, ‘they need to change.’ The reality is we, as leaders,are the first people that need to change: change how we do business and change the things that got us here successfully and force ourselves to abandon our successes and our successful approaches in the past and find new ways to lead the organization in the future.EL&P: What are your goals for Detroit Edison over the next five years?
Earley: Our overall goal will be to be one of the major energy players in the Great Lakes region. In the next five years the utility business will still be largely geographic focused, but it will be a regional geography. There may be some national players emerging but we want to be one of the players in our region in the energy business and to do that we need to be in electricity and in gas and in some of these new businesses that I was talking about. We want to continue to establish the growth profile in non-regulated businesses. Our goal in the next two to three years is to have about a quarter of our net income coming from non-regulated businesses, so five years out I would expect it to be even bigger than that. When you look at our portfolio, we have a good balance of electric business, gas businesses and non-regulated energy businesses. We’ve established a strong growth track record over the last three years in those businesses, and I want that growth track record to continue. We are in the process right now of taking this legislation that was passed, combining that with what we see in terms of the environment, and developing some new targets and approaches. Over the last couple years, our target has been to deliver at least six percent net income earnings growth a year. We’ve achieved that target; in fact, last year we were closer to 10 percent. We’re now taking a look at how does this legislation impact that, and we’ll be coming back over the next couple months with some stronger statements about targets and where we want to go. n
Anthony F. Earley Jr.
chairman and CEO