Midwest utility rising from A-plant mire
After almost forcing itself into bankruptcy in an effort to build the Midland nuclear power plant in Michigan, Consumers Power Company now appears to be moving toward financial recovery. Abandonment of Midland as a nuclear plant, together with a special $91 million annual rate increase granted to the company by the Michigan Public Service Commission and new corporate management, boosted net income for the third quarter some 62 percent over that of a year ago. Corresponding earnings per share gained 18 cents over 1985 figures.
Since announcing cancellation of the Midland nuclear plant in the summer of 1984, Consumers Power has reduced its outstanding debt and preferred and preference stock by about $700 million. It expects to reduce senior capital debt by $600 million more by 1988.
Also contributing to the company's financial improvement were increased electricity sales last year, lower interest rates, and a debt refinancing program. Although the company is recovering, chairman William T. McCormick Jr. notes that it ``still has a way to go before its earnings are satisfactory.''
Confirming the substantive nature of Consumers' improved performance is Leonard Hyman, a utility analyst at Merrill Lynch. Mr. Hyman said the utility's recovery could be ``compared to Lazarus.'' And according to Daniel Scotto, an analyst at L.F. Rothschild, Unterberg, Towbin Inc., in New York, Consumers' ``free fall'' toward corporate default has finally been broken.
``Clearly, they are on the road to financial recovery,'' Mr. Scotto says.
At the heart of the company's financial difficulties was the Midland nuclear plant. Ordered by Consumers in 1968 at an estimated total cost of $349 million, the two-unit, 1.3 million-kilowatt plant grew to represent a $4.2 billion investment when it was canceled in 1984. It was 85 percent complete when the utility's ability to finance further construction foundered.
What could add significantly to the utility's long-term financial stability is the bold, complex, and controversial plan set out by Consumers to turn Midland into a non-utility, gas-fired cogeneration power plant. (Cogeneration facilities are those that produce both electricity and industrial-process steam.)
Consumers, Michigan's largest electric utility, says that in an effort to salvage some of its huge nuclear investment, $1.5 billion of its $4.2 billion in sunk costs could be used productively in the proposed gas plant.
The company has identified Dow Chemical and numerous other unnamed participants as potential partners in the nuclear conversion project. These partners are expected to come up with an additional $560 million needed to complete the switch from nuclear to gas.
Federal rules established in 1978 sought to encourage the development of independent, non-utility small power plants and cogeneration facilities around the country. Under these rules, electric companies are prohibited from owning more than 49 percent of such plants.
As envisioned, the proposed gas-fired plant at the Midland site is to be one of those ``non-utility'' plants. As such, Consumers will be limited to a 49 percent equity interest, its ownership being secured by its contribution of the nonnuclear components of its now abandoned nuclear venture.
Thus, rather than producing electricity in conventional fashion by building a plant and seeking recovery of construction costs from ratepayers, Consumers will purchase electricity from this ``non-utility'' gas plant for resale to its customers. But the utility will seek to recover these power purchase costs from customers just as it would construction costs.
And here is the focus of the controversy.
Consumers Power must, on the one hand, pay enough to the consortium of investors who own 51 percent of the proposed gas plant to provide an adequate return to make the project economically feasible.
On the other hand, payments for purchased power must be sufficiently competitive to get the Public Service Commission to approve pass-through of these expenses to ratepayers.
Joseph Tuchinsky, executive director of the Michigan Citizens Lobby, believes the utility will have difficulty purchasing electricity at prices pleasing to both project investors and the commission. He has calculated rate increases of between 22 and 25 percent, representing $350 million to $390 million annually.
``I suspect the PSC will find this [argument for Midland electricity] very unpersuasive,'' Mr. Tuchinsky says.
But Consumers spokesman Dan Bishop says the citizens lobby is using inappropriate data and ``lousy math.'' He puts expected rate increases at a ``modest'' 10 to 15 percent.
``We feel confident that power coming out of that project will be competitive,'' he adds.
In a separate action, the utility is seeking rate increases that will enable it to collect $2.1 billion from ratepayers for the non-usable portion of its failed investment in the Midland nuclear plant. In 1985, the company wrote off $490 million in Midland-related costs.