Feds Push Change to Boost Industry Competition

Feb 21, 2003

Feds Push Change to Boost Industry Competition

Detroit, MI, February 21, 2003 - Federal regulators Thursday approved DTE Energy's plans to sell its electricity transmission subsidiary to two companies for $610 million in cash.

The Detroit-based energy company plans to sell the business -- which includes 3,000 miles of high-voltage lines -- because state and federal regulators have prompted utility companies to give up their power distribution systems to foster industry competition.

Exiting the transmission business marks a new chapter in the history of the company, which celebrates its 100th anniversary this year. DTE Energy owns Detroit Edison and the Michigan Consolidated Gas Co, or MichCon. It supplies electricity to more than 2.1 million customers in southeast Michigan and provides natural gas to more than 1.2 million customers statewide.

The company and its two New York-based buyers -- private investment firm Kohlberg Kravis Roberts & Co. and private asset manager Trimaran Capital Partners LLC -- expect to close the transmission deal before the end of this quarter. They announced the sale in December.

After the ownership of the power transmission network is transferred, an independent electric transmission system -- the Midwest Independent Transmission System Operator -- will distribute power to Detroit Edison customers. Kohlberg and Trimaran have agreed to cap transmission rates for Detroit Edison customers through 2005. After that, the federal government will set the rates.

Michigan consumers will be among the first in the country to be served by an independent operator. DTE Energy's largest competitor in the state -- Dearborn-based CMS Energy Corp. -- sold its transmission system in May to a division of General Electric Co. for $290 million.

"How consumers will be affected is a complex question," said Janice Beecher, director of the Institute of Public Utilities at Michigan State University. "Restructuring the industry is an experiment in progress."

"The presumption is restructuring the industry will help consumers, but we certainly want to make sure we get it right."

DTE Energy officials say the transaction will enhance the company's financial flexibility and balance sheet.

The company has faced some of its greatest challenges in its history over the last decade, including the restructuring of the energy industry that forced utilities that started out as regulated monopolies to compete for customers and its merger with MCN Energy Group in 2001, said Anthony F. Earley, the company's chairman and CEO.

"It's been a period of intense change," said Earley, who has been the company's top executive since 1998 after joining DTE as its president and Chief Operating Officer in 1994.

And while larger energy companies such as Enron Corp. and CMS Energy gambled on operations overseas and energy trading and later were rocked by corporate scandals, DTE thrived and survived by sticking to a proven strategy, company officials say.

Its strategy focuses on supplying electricity and natural gas to customers in Michigan and the Midwest as well as related businesses where there's little competition, such as marketing and transporting coal, operating energy projects and managing rail car fleets for other companies.

The strategy appears to be paying off. Last week, DTE Energy said its businesses generated $6.7 billion in revenues and earned $630 million in profits for 2002 -- despite grappling with higher energy costs.

Meanwhile, seven of the 11 Wall Street analysts who follow DTE rate its stock a "hold" and four have graded it a "buy." On Wednesday, New York brokerage house UBS Warburg raised its rating on DTE Energy to "buy" from "neutral."

Shares of DTE Energy closed at $41.98 Thursday, down 13 cents.

Still, the company -- and the industry -- have more challenges ahead, including managing its businesses in a new regulatory environment, dealing with the continuing fallout from Enron's scandal and the 2001 California energy crisis as well as staying ahead of technology, Earley said.

"We're still making the transition from a traditional, regulated utility into a diversified energy company," he said. "It's really an exciting and interesting time."

Bloomberg Business News contributed to this report.

You can reach Charles E. Ramirez at (313) 222-2401 or cramirez@detnews.com.