William T. McCormick, Jr.
CMS Energy 

Before joining the company in November of 1985, McCormick had been chairman and CEO of American Natural Resources Company (ANR) and executive Vice President and a director of its parent company, The Coastal Corporation. He joined ANR in 1978.

Prior to joining ANR, McCormick served with the American Gas Association as a vice president for policy analysis and government relations. Between 1973 and 1976, he held several senior posts in the federal government, including policy level positions in the Energy Policy Office at the White House, and the Office of Management and Budget, and the U.S. Energy Research and Development Administration.

McCormick served on the Boards of Directors of NBD Bancorp, Rockwell international Corporation, Schlumberger Limited, the American Gas Association, the Edison Electric Institute, and the National Petroleum Council. In the Detroit area, McCormick served on the Boards of Directors of Detroit Renaissance, the Detroit Symphony Orchestra Hall, Michigan Opera Theatre, St. John Hospital, McGregor Fund, and the United Way of Southern Michigan.

McCormick received a Bachelor's Degree in engineering physics from Cornell University in 1966 and a doctorate in nuclear engineering from the Massachusetts Institute of Technology in 1969. He was born in Washington, D.C. on September 12, 1944.

Editor's note (September 2002): On 24 May 2002, Dr. McCormick resigned as Chairman and CEO of CMS Energy in the wake of revelations that the company had during the previous two years engaged in so-called “wash trading” of wholesale electric power. Industry journal Megawatt Daily defined this practice as “the sale and buyback of the same amounts of power at the same price, ... designed to artificially inflate trading volumes and revenue.” As of this update, several companies involved in energy trading during those years are being investigated for a variety of questionable practices by Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Energy Regulatory Commission.

See, “CMS Energy gets ‘wash’ subpoena, CEO quits,” Megawatt Daily, 28 May 2002.

Tell us about yourself

I was born here in Washington D.C., and lived here through high school. I went to college at Cornell, where I got my bachelor's degree in engineering and physics. At MIT, I took a Ph.D. in nuclear engineering, and then I returned to the DC area and worked here for several years. My father was an attorney. He was a graduate of Georgetown College and Law School and was sort of disappointed I didn't go to Georgetown. At that time (and now, I think), Georgetown did not have an engineering school. I was interested in engineering, so I ended up going away.

I've been married for 28 years now; my wife's name is Ann. I have two boys, 25 and 22. My older boy graduated from Georgetown University, worked for Ford motors and Masco corporation, and then went back to school for his MBA. My younger son graduated a month ago from the U.S. Naval Academy and plans to fly those F-18s off carriers. He graduated high in his class and did very well there.
 

Were you interested in science as a boy?

I think that everybody who grew up in the Sputnik era, if they had any capability in science or math, was interested in technology. I think a lot of kids were interested in engineering. At that time the engineering schools were getting a lot of applications and that's sort of the direction I went. When I started I was open to any area of science, although in my first year of college I took physics and I seemed to like that more than chemistry or the life sciences. I ended up getting my undergraduate degree in engineering and physics. In the last year or so I decided to pursue nuclear engineering.
 

Nuclear was the glamour field of engineering when you were in school?

I think it certainly was becoming the glamour field. The first commercial nuclear reactors were started in the very late 1950s and early '60s. By the time I graduated from college in 1966, the nuclear industry was on a very steep ascension, a very exciting area for engineers to go into. Once I chose nuclear engineering I knew I was interested in the energy business. And I kind of hopped on the train and had a good experience at MIT.

MIT was exhilarating; a terrific atmosphere for science and technology. A relatively small place compared to a lot of universities. You could easily interact with professors, with graduate students, research people and it was a lot of fun. In order to understand the device and operate nuclear power plants, you have to know not only nuclear physics, but also control systems, electrical engineering, thermodynamics, heat-transfer fluid-flow, materials research and science. Just about every discipline of engineering is brought into a nuclear power plant, so when you get through with that program, you've had courses in almost all aspects of engineering.
 

Was there a lead professor that shaped how you thought about nuclear engineering?

When I was there, Manson Benedict (who worked on the Manhattan project) was chairman of the nuclear engineering department. There were several very distinguished professors who were senior people in the department. Norm Rasmussen, who's sort of the guru on nuclear safety; Irving Kaplan (who died recently) was a very distinguished reactor physicist. It was really quite a good group. The department had about 120 graduate students in it, some going for masters degrees, some going for Ph.Ds. Some colleagues in the industry, such as Joe Kearney (of USGen) and Fred Buckman (of PacifiCorp), I overlapped with there.

In recent times I've talked a little more to Joe. Both those guys used to work for me at various times in my career. Joe worked for me both at OMB and then ANR. I hired Fred to work for me at CMS, before he went out to PacifiCorp to become the CEO there. They're both good friends. I think we have similar visions of the way things are going, though not identical as you'd expect. Joe has grown up most recently as a true independent power producer, not shackled by any utility concerns. So I know he believes in moving quickly toward a deregulated environment, although I think he understands the problems and concerns. I think he has a rational view of it.

Fred's thinking is probably fairly close to mine, because he's been in a utility environment and understands the challenges that utilities have in this transition. But he's also doing a lot of things around the world and has some big plans for PacifiCorp. Last week they announced the acquisition of an energy group out of England, so he's got his hands full too. But we stay in communication and I think share much the same vision for the future. I personally know most of the leaders of the companies. Dennis Baake of AES, who I worked with 25 years ago in the government. Ken Lay from Enron is a good friend, so there is a community of us who know each other pretty well.

When you came out of MIT energy policy in America was starting to be a significant issue?

There was certainly a feeling that energy requirements were growing quite rapidly. This was before the Oil Embargo in 1973. Between the time I came out of school in 1969and 1973, utilities were building energy facilities rapidly, and it was generally considered to be a growth area. And I would not say that there was any particular crisis mentality, because the crisis really developed initially in oil in '73.

When I got out, I started my career with the Institute for Defense Analysis, joining their research staff. I started off working on defense nuclear issues. I would say if you looked at the graduating class at MIT, about half the people went into the commercial nuclear industry and the other half went into the defense area in some way. It was split more or less even; I elected initially to start in the defense area.

Some of the studies we did involved policy analysis, and part of that involved evaluation of technologies and technological capabilities. Some of it involved modeling and decision analysis. I worked on weapons evaluation, strategic nuclear forces, modeling nuclear war, you name it. I got the opportunity to understand the technologies both at the systems level as well as the broad strategic level. I was there almost three years.
 

How did you move into energy policy?

One of the division directors at IDA became an assistant director of the Office of Science and Technology, in the executive office of the President and recruited me to come over. I was there for about a year when they created a new office in the White House called the Energy Policy Office and asked me to join that group. A small group originally, under Charlie DeBono who was Counselor to the President for Energy. They needed a person knowledgeable about energy research and technology. And so in that first eight or ten person staff, I covered all the technology issues for energy. I was 27 or 28 and it was quite an experience.

It was right about the time of the Oil Embargo; matter of fact that was the seminal event which precipitated the creation of the White House Energy Office. I think there were about ten of us in the group to coordinate the federal energy policy. There was no Energy Department, no ERDA or FEA or predecessor agency. At that time the government's energy functions were split among about eight agencies. So there was a need to have somebody in charge of energy.
 

What is your current perspective on how early energy policies have borne out?

There was a definite need for some kind of Federal organization to deal with the energy issues at the time. The eventual creation of the Department of Energy out of what was then the Federal Energy Administration and then ERDA, was probably a good idea. I think the bureaucracy has grown larger than it should have, as often happens in those situations. But, there are some functions that couldn't be performed in the private sector or anywhere else. But I think some of the programs and activities went overboard.

The interest in alternative technologies that by the mid and late '70s really blossomed into solar, geothermal, wind, and a number of other things. Some of those programs, frankly, got out of hand. If you look back and see how much money we spent on solar and geothermal and wind over the years, it's incredible the amount of money spent by the government on that. Way out of proportion to its potential contribution.

After the oil embargo a lot of people predicted that the sky was going to fall in terms of conventional energy supplies: gas and oil. All kinds of projections and predictions that oil and gas reserves would decline and the prices would go way up. And that made the case for alternative energy sources. Part of the reason was that people were operating in an environment in which oil and gas prices were still regulated at the well-head. All through the 1970s and into the '80s, natural gas prices were so low that there was very little exploration going on. In the late '80s laws were passed deregulating natural gas at the well-head. Once gas was deregulated and they raised the price a little bit, people were amazed at how much there was around and how much incentive there was for people to go out and explore.
 

What led you out of government and into the private sector?

Gerald Ford's defeat was the reason, I was a Republican appointee. When he lost the election, I'd been in government for four years and it was really time to go. I went to the American Gas Association and became vice president for policy analysis, and later, government relations. While in the government I had responsibilities across the spectrum of energy. So while I wasn't an expert in the gas business, I was comfortable working with them. The American Gas Association was coming to its own. It had a new president and a new management team. They asked me to come over and head up the policy group, which dovetailed perfectly as far as my career was concerned.

They were lobbying for deregulation of natural gas and for expanding its use, and from a policy and legislative perspective it was a very exciting time. They were in the middle of one of the biggest policy issues in the energy business, because natural gas was a tremendous resource in the United States. The gas industry was trying to make the case, "look, if you deregulate, we can have more gas and it can contribute more." I led the team at AGA that did the policy analysis which was the underlying analytic work in substantiating the case for deregulation. Then I headed up the AGA lobbying activities that got it through Congress, so it was a pretty exciting time.
 

You then went to American Natural Resources. What was the source of that transition?

The board of the AGA is made up of CEOs of major gas companies around the country. One of them was Art Seer who was the chairman and CEO of American Natural Resources Company in Detroit. At the time they were one of the larger interstate gas pipelines and also had a gas distribution company and some other energy components. He recruited me to come and work as a vice president and assistant to him. It was a very attractive opportunity, so I moved my family to Detroit in 1978.

I came to Washington frequently, testified before the FERC, was involved in meetings at the predecessors to the Energy Department and so forth. But in addition I was involved in business decisions. It was a nice first step into what I call a true private company, and I had experiences that were very valuable. I had day to day contact with the CEO and an opportunity to see the inner workings of a company at the highest level. After a couple of years, I was promoted to chief operating officer of the interstate gas pipeline unit. Eventually I was named president of the parent company, the number two person in the whole company. I think that was 1983.

When I first got involved in the planning and policy area there, one of the major issues was whether we wanted to spin off the gas distribution company. This was a big step because that was the big thing in the early days, though they eventually formed a gas pipeline company, an exploration company, and others. But the regulatory environment was such that the company was penalized by regulators due to earnings and profitability in other areas. We finally came to the tough decision to separate the gas distribution company. Later, when I was president of the company and chief operating officer, I was involved in turning around several of the subsidiaries that weren't performing as well as they should. That was pretty challenging as well.
 

You had a whole range of experiences to draw on when you went to CMS in 1985?

Yes, at that point I had a wide variety of government experiences and I had worked in almost every part of the energy business: the pipeline business, the distribution business, oil and gas exploration, coal. ANR, in the spring of'85, got a major unsolicited bid from Coastal Corporation. It was the first major merger in the gas pipeline industry, and ultimately ANR and Coastal negotiated a deal to merge. In April1985, I became an executive vice president of the new parent company and was on the board. But after a few months it became apparent that it would be in my interest to move on and do something else.

Just about that time, Consumer's Power Company (the predecessor to CMS) was in deep trouble. They stopped construction on a large twin-unit nuclear plant after investing over $4 billion. The company was in a very difficult situation and the board had in effect asked the chairman and CEO of the company to leave. That happened right about the time that I was preparing to leave ANR, and Consumer's executive recruiter asked to talk to me. After a lot of discussion I made the decision to go there in 1985.

Consumer's was a tough brief to pick up off the table?

It was not in very good shape. The company had $9 billion of assets on the balance sheet, $4.2 billion of which were impaired. They had stopped paying common dividends; some preferred dividends and retained bankruptcy counsel. So it was a dire situation in need of new leadership, new direction. I knew I was entering a situation that needed a real turn around. As a matter of fact, one of the challenges of taking the job was that, if I could turn this baby around, there was an opportunity to get a lot of upside.

And I had some ideas about how to do it, going in and shaking up the organization, paring down peripheral costs. I also undertook a political campaign to convince leaders in Michigan that the company was important to the future of the state and therefore needed support. Not financial support, but the support of the regulators, the legislators, the governor, and everybody else in order to turn itself around and contribute to the progress of the state. Consumers supplied energy to two thirds of the people and businesses of Michigan. The case I made was that it would have been a disaster if the company failed.

The political campaign was needed because when they stopped construction of the Midland nuclear plant, it had a terrible reputation and nobody wanted that facility. They didn't want to touch it with a ten foot pole. I was able to convince the commissioners, the governor, and a lot of political leaders that the best solution was to convert it to a gas-fired cogeneration plant. We were successful in putting the project together and at the time it was completed, it was the largest combined-cycle plant in the world.

One of the important things that needed to be done early was to motivate the people, and we did that by telling them we had a plan for getting out of the mess. The people inside the company really felt like they were beat upon because the company had not been successful and had been the butt of negative press. So part of the political effort outside the company was also a way to positively impact the people inside the company. If we could get more public and political support, that would convince people we had a workable plan. I think that, in fact, happened. That started raising the morale and productivity within the company.

Were there competing recovery strategies at that time?

The first thing I did was to commission an internal study on alternatives. I wanted to really look at it from technical, economic, and political standpoints. That's how we came up with the idea of converting Midland to a gas cogeneration plant. We announced the result of our study about five months after I got there, in the spring of '86. And then we proceeded with all the efforts to gather support and put together a partnership to fund it.

Our company didn't have any cash to do this. So we ended up contributing the existing plant assets and property to a partnership. And then we attracted some other partners and raised capital from them. It was a big financial transaction in the end, a $3.2 billion deal. It's still the largest sale / lease-back in American history, or in world history, for that matter. The plant went into operation in the spring of 1990.

There were crisis points along the way and it was a real struggle. I thought that I would be able to turn the company around in 3 years. It actually took about five to really get to the point where most of the major negatives had gone away. Even after we got the plant converted in 1990, there were still some regulatory issues that had to be settled. So it really wasn't until the beginning of '92 that we completely cleared the underbrush of the problems of the past. Then the fun started. We decided to redesign the direction of the whole company and the strategy for CMS Energy.

As a trained nuclear engineer, do you think nuclear power will come back?

We have in this country over 100 nuclear plants in operation, representing about 20% of all the power generated. It's a substantial contributor. We haven't started a new nuclear plant in almost 20 years. I think we screwed up the regulatory / political environment for nuclear power. Eventually that can be corrected, and there are things under way to do that. A fresh design of a nuclear power plant which makes it inherently, passively safe. The NRC is in the final stages of considering new "one stop shopping" licensing regulation. We're on the verge of solving the high level nuclear waste issue with legislation that will hopefully take care of that problem. I think it's possible that five to ten years down the road, a lot of the hard spots with nuclear power will have been softened over and we'll be poised for a potential comeback.

One of the big advantages of nuclear power is that it doesn't have any air-emissions and greenhouse gasses. No CO₂. As environmental concerns grow (if we can satisfy concerns on nuclear safety), eventually people will look at the choices more rationally and will see that nuclear power does have some significant benefits. If I can produce energy with no air-emissions, can safely store the waste, and can assure you that the plant is not going to melt down, then there isn't any reason other than irrational, emotional reasons why nuclear power shouldn't be a contributor. So I'm optimistic that down the road, as the negatives of other energy sources start to rise, the balance will come back and people will take another look at nuclear.

I look back with a little disappointment that nuclear energy has taken a negative turn in the United States. Early on, nuclear power was not controversial. The Atoms For Peace program that came out of the Eisenhower administration in the late 50s, and the idea of moving from nuclear weapons to civilian nuclear power was very popular throughout the country. The early nuclear plants and the wonders of atomic energy, the peaceful uses, were generally considered to be very good things. Until Three Mile Island, I don't think anybody seriously questioned the desirability of nuclear power. It was considered a good thing and nobody debated the social consequences of it.

Will America, or others, actually build modern nuclear plants within ten years or so?

I think it will be built with American technology, but I'm not sure it will be built first in America. The major nuclear supply vendors are working hard on that next generation of nuclear power plants. Whether the political environment in the United States is at the point where those plants can be built here remains to be seen. Certainly there are other countries in the world that have not had the adverse political and regulatory climate that we've had. It's very conceivable that those countries will be a better environment for the first of the new generation nuclear plants. When everybody realizes how well they work, then they'll be brought back here.

As CMS came out of crisis and began looking ahead, what appeared to be the best direction?

In our traditional service area of Michigan, we were not looking at high growth rates in the company. The energy usage was growing at 2 to 3 percent per year, which is at or slightly above the national average. In the U.S., energy is fairly mature, the economy is fairly mature, and growth rates of energy and the economy are more or less commensurate. But we did see the opportunity to spread out geographically, both in the United States and around the world.

However, there were some serious constraints. Until 1992 when the Holding Company Act [PUHCA] was amended, utilities couldn't invest in anything except qualified cogeneration facilities. I interested some other utility executives who had similar aspirations and we formed a group called the Utility Working Group which lobbied for changes in the Holding Company Act and open access to transmission at the wholesale level. These were executives from major utilities interested in making investments in independent power around the country and around the world. It was a committee of 12 or 15companies.

There were also some independent power companies that were beginning to get interested in this subject. So we formed a broader coalition with industrial users that were interested, and others, and carried out a five year campaign. The Energy Policy Act of 1992 was really the culmination of the effort. Up until that time our geographic aspirations were pretty constrained. Once that act passed, we started spreading out across the country and around the world.

It's interesting because 1992 was about the time privatization of energy facilities around the world started. So it was a propitious time for that legislation to pass. It allowed us to go into various countries to make initial investments in energy facilities. Here we are in 1997 and our company has hard assets and investments in 16 countries, and is developing projects in another seven or eight. So we're involved in 25 countries around the world and we've invested almost $3 billion outside the US. It's become a very important piece of legislation for us and provided us tremendous opportunity.

Was there opposition to changing PUHCA or were people not concerned?

I think, initially, people were just ignorant of it. It was a very arcane subject. When you go into a congressman's office and say, "I want to talk to you about the Public Utility Holding Company Act and why you won't amend it," you get this glazed-over look and a stare. Finally we got good at telling the story and selling it in a political sense by convincing people that this is going to create competition and lower costs. Customers will benefit and there's no down-side to it. What's wrong with having more generation or competing generation? As time went on, more and more people got on the bandwagon. I think the major opposition came from some public-interest types at consumer groups who were afraid the utilities were going to monopolize independent power. Many of these groups were always opposed to things utilities were doing, so there was a core of dissent. But in the end we were able to carry the day with more positive arguments.

Your strategy for CMS seems to be directed toward international markets.

Our strategy is to be an energy infrastructure company that can build, own, and operate energy facilities, and provide energy services in all major growth markets. That sounds like a big statement and it is. We're heavily involved in Argentina and Chile. And we're in Ecuador, Venezuela, and Colombia, and we have projects developing in Brazil and Peru. So we're certainly one of the most important energy companies in Latin America right now. We are the largest single investor in Argentina of any kind of U.S. company.

We have in operation the first independent power plant in India. We're in the Philippines, Thailand, and Indonesia. And we're looking at a number of other countries in south and southeast Asia. We also have the largest independent power plants on three continents: North America, Africa (in Morocco), and in Australia (a 2000 megawatt plant). We also have gas pipelines on three continents, and storage and processing facilities, and oil and gas exploration all over the world.

All of those countries have the potential for growth in energy 2 to 3 times the U.S. growth rate, and at the same time they're privatizing. So it's kind of a double whammy. You have the growth of the country, and the opportunity to grow even quicker by taking over ownership of facilities. That combination has actually grown our international business (over the last 5 years) at a compounded annual rate of over 40%, which is pretty impressive. Our plan is really to provide energy capability all the way from the well-head to the burner tip, because we're in all stages of the energy business. We're in the production of oil and gas, we're in the pipeline business, we're in the processing business, we're in the power generation business, and we're in the transmission and distribution business.

Some people hold that growth for energy companies will be in alternate services like telecommunications.

Basically, that's not where we're headed. At our utility level in the retail services for residential customers, we provide some ancillary services, but that's not the thrust of our company. The thrust of our company is the energy business. That's what we're good at, that's what we know. We don't see the need to go into those other areas because we have tremendous growth opportunities in our core business.

One of your main concerns is making sure that the international environment remains stable?

Right. Fortunately most countries of the world view the US energy infrastructure as the best. The reason the United States is doing so well internationally in the energy business is because this is one of the premier US industries in the world. We're good at computers and software, we're clearly the leader in the aerospace industry, and in pharmaceuticals. But we're also the world's leader in energy. You can't go anywhere in the world and find reliability and quality of service for energy as good as in the United States. As developing nations begin to privatize their energy systems, they are looking for US participation because they know we're the best and they want the best.

If things are so great now why are we making fundamental changes in America's power industry?

First of all there isn't a crisis, and some people have overblown the urgency of deregulation. The gas and oil industries are already deregulated. If you look at the cost of energy or electricity in the United States and compare it to our major world trading partners, we're the lowest. Germany has double the cost of electricity and Japan is three times higher than the US. There are a few that have abundant hydro and very cheap coal, but basically United States energy and electricity is very competitive.

Having said that, there is no question that deregulation ultimately will lead to even lower prices. However, in the case of electricity there are important tradeoffs of reliability and quality of service that people have to look at. It's one thing to have your telephone service not exactly right, but nobody wants to come home, flip the switch, and not have their lights go on. Electricity, of all the things that people buy, is probably the most important essential service. If you lose your electricity, nothing in the house works. Your pumps, your lights, you can't even turn your heating system on because the fans won't go.

It also turns out that, at the residential level, it's a very small part of a person's disposable income. The average monthly electric bill in our service area is around $35 a month. We don't hear from our customers about our electric rates. The people most interested in electric deregulation are some of the large industrial electric users who understand that their rates are not high relative to others, but realize that there may be opportunities to get lower. Anybody in business wants to get their costs lower. I think everybody understands and respects that.

Is there a basic problem that you believe will prevent restructuring?

I don't' have any problem with moving toward a competitive environment at the retail level. It has to be done properly and in a way which doesn't injure the utilities, because the utilities are still going to have the wires and distribution systems that deliver that energy to the customer. If you are going to provide competition, you have to put in all the infrastructure necessary for effective retail wheeling. That means sophisticated demand meters that not only measure how much you use, but when you use it since electricity changes costs over the course of the day.

Our utility alone has 1.6 million electric meters. It can't be done in a year, there's just no physical way to do it. Every household has one. Also the meters haven't really been built yet. Nobody's decided what the standard is going to be for measurements. After the meters, you have to design the billing and accounting systems. Who knows what choices people will want? And then who's going to pay for it all? Obviously it shouldn't be the utilities, because presumably all of this is being put in for the benefit of new entrants and customers. There are very complex questions. Deregulation at the retail level is going to happen, but it's going to take 3 to 5 years to be widespread in the country.

Stranded costs are cited as a major problem.

Some people have argued, "when you have this deregulation, let the utility shareholders eat the stranded cost. They made these imprudent investments that aren't economic now." The investments made were not imprudent. Every investment that we're charging for right now has gone through a prudency review at our state commission. It's already been through the test. Also, many investments for coal and nuclear plants were made during a period when utilities had no alternatives. Gas combined-cycle's a good idea, but there was a law on the books until the mid '80s called the Fuel Use Act, which prevented use of gas in electric generation. So, the improvements in technology that have allowed the gas-turbine to become an economic competitor were not there when these investments were made.

The generation utilities put in, coal and nuclear, were the best they could do at the time. And you want to now come around as an afterthought and say, "we're going to deregulate, allow this new technology to come in and undercut the old, and all those costs are going to be shoved on share holders, and millions of people across the country that own stocks in utilities are going to take it in the chops?" To say that they should eat that is really a violation of the regulatory compact that was agreed to. What I mean by that is, when utilities make decisions they have a monopoly franchise, and they agree to a regulated modest rate of return in exchange for a reasonable return on their investment. Everyone realizes those are 20, 30, 40 year investments for these big power plants. In the middle of that we're going to change the rules?

So the utility industry has taken the view that we don't have any problem with deregulation, but the stranded generating or above market costs need to be amortized as a surcharge that will be paid by the people who take advantage of the new world. It will take a while to amortize until that's all paid off, but even during that period you can have a competitive environment. The customers will be paying no more for their electricity than they would before the change.

Remember, nobody forces airlines to buy airplanes. In the utility industry you have an obligation to serve and you have to make the investments to serve the customer. If somebody calls up and says, "I want electric service," you've got to provide it. In the airline industry or the telecommunications industry or any of the others people use as examples, the companies are not required to extend their roots. Number one: the obligation to serve forced utilities to make investments. Number two: they were constrained to make investments that were available at the time. It's an equity argument and a good one.

How would you compare gas deregulation with what we're now seeing in electricity?

If you think of the energy chain in the gas area, you have gas production at the well-head, the pipelines, and gas distribution; the three elements of the supply chain. In the electric power area it's generation plants, the transmission system, and the distribution system. So the well-head deregulation of gas is really akin to deregulating generation in the power sector. The issues that we're dealing with now, in terms of retail and wholesale wheeling, are more akin to the deregulation that occurred in the gas pipeline and distribution industries, which really happened in the late '80s and early '90s.

The final order that FERC gave on gas came out a year or two ago, and was the end point of all their work on gas. It really started in the mid '70s, so it's been almost a 20-year legislative process getting from well-head deregulation to total deregulation all the way up the pipelines and the distribution system. It was not a quick thing at all.

Are people overly optimistic about how fast electricity deregulation will go?

Yes, I think they are. There are efforts to get a Federal bill mandating retail wheeling, and it's going to take awhile. There's no crisis right now and there's no consensus. My experience in looking to the legislative process is that you have to create a strong need. The members of Congress have to hear from their constituencies, and then there has to be consensus. Right now we don't have a consensus. There are too many divergent views about what needs to be done and how it should be done.

There has been a lot of media coverage of Markey's and Schaefer's bills, and Bliley's desire to have Federal legislation. But there has been very little support on their own committee, even among the Republicans. Dingle, the ranking minority member on the House Commerce Committee, has been very much opposed to moving quickly. You've really got a coalition of Democrats and Republicans, a strong majority on the committee, not in favor of moving quickly. The individual members are hearing a lot from their home states. What they're hearing is negative about moving quickly, and about the problems. If they tried to bring a bill through committee, there would be a big fight and it would not have the votes to go.

The law passed in 1992 (the Energy Policy Act) opened up the wholesale transmission system and encouraged deregulated generation and independent power. So we have the first two legs of the chain, in effect, deregulated. The last big step is retail and I think we're probably 3 to 5 years away from that happening. Frankly, there's a debate about whether that will ever happen at the Federal level or whether it will happen at the state level. There are five or six states almost through the process of implementing retail choice, and probably 20 or 30 others that are seriously considering it.

From CMS' perspective, should this policy be shaped at the Federal or the state level? Which is better?

We've been arguing for shaping it at the state level for a couple of reasons. Every state is different; has a different mix of customers, different rates. The mixture of fuels are different. We think local state commissions and legislatures are in a better position to legislate a deregulation bill consistent with their objectives and particular problems. We're basically arguing that one size doesn't fit all. Legislation at the Federal level may work well in some areas, but in other areas it may not work well at all. Also, since states traditionally have purview over the retail level, the knowledge and expertise really exists there.

The proponents of rapid change have argued for federal legislation because they see it as a way to get it done quickly. You know, cut through all the stuff at the states. But a lot of people believe that wouldn't be best. State regulators, as you might suspect, don't want to lose the regulatory jurisdiction. Most utilities, not all, but most believe it should be done at the state level. I would say the vast majority of consumer activists also believe it should be done at that level because they don't believe in one size fits all.

Next year is an election year. In this Congress, it's not going to happen this year or next. My theory is after the next election, retail deregulation will have happened or be imminent in maybe 20 or 25 states. That'll really take the steam out of the Federal effort. People will say, "gee it's happening," and the states will not be in favor of legislation that might pre-empt them. That will really knock the wind out of sails. I'm one who's predicting now that it's not going to be driven at the Federal level.

There is also legitimate debate about Federal government involvement, because under the act that governs FERC's authority, they have only been involved in wholesale transactions. Authority for regulation at the retail level has been kept with the states. So there are a lot of people who argue, I think pretty persuasively, that the states ought to decide for themselves how to deal with retail wheeling. Every state is different. The National Association of Regulatory Utility Commissioners (NARUC) has spoken their view that it should be done at the state and not the Federal level.

Are there other issues about restructuring that concern you?

The proponents of doing it quickly and broadly obviously try to make the best case they can for their point of view. And in doing that, there tends to be an exaggeration of the benefits. There are going to be benefits and I acknowledge there will be, but I hear numbers thrown around - we'll be able to cut electric rates by 30% and things like that - it's just not in the cards. As is often the case in debates on important issues, there tend to be exaggeration on both sides. Some ardent opponents of deregulation among the hard-core utilities argue all sorts of catastrophic consequences. Now there are some important issues of reliability and quality of service that have to be dealt with; it's not a totally bogus issue.

Utility grids and systems were designed around existing generation and locations, and have been optimized for that. If you suddenly start bringing in new generation and using the transmission system in different ways, you are going to have some reliability issues. You're going to need protocols and rules you'll have to follow for reliability. One thing the industry is doing in discussing Independent System Operators (or ISOs), is getting the National Electric Reliability Counsel and the local reliability counsels to agree on rules of the road. Protocols to insure that independent power generators follow certain rules so that reliability is maintained. Generators, if not operated properly, can degrade reliability of the transmission system. They're not insignificant issues, I just don't think they should be exaggerated.

Some generators are just interested in selling power; they want to do it quickly and haven't thought through the customer reliability issues. Frankly many of them don't really understand how transmission and distribution systems work in this country. All they want to do is sell their electricity and make some money. Somewhere in this process, if system reliability and quality of service is going to be maintained, somebody must have a continuing interest in these issues. And they're not insignificant issues. Once the power goes down, like it did in Oregon and northern California where the whole system went down, it gets peoples' attention.

Does deregulation change CMS' outlook for the domestic power market?

We are positioning ourselves to compete in a deregulated electric market at the retail level. We already compete in the deregulated gas market at that level. We have a lot of industrial , commercial customers that we sell energy to around the country. It's good business and growing. We're already doing wholesale electric transactions around the country, and that'll be good when we eventually get to retail wheeling in the electric business. We think it will be a good business for us, although we're going to focus on commercial and industrial customers - not residential. We've made that strategic decision, that we're not going to go after residential customers. It's going to be a tough market, and the local utilities are going to have a tremendous advantage. Residential customers really aren't as price sensitive as the industrial / commercial, and they're more oriented toward services and loyalty. I mean you tend to stick with who you have.

Is demand side management going to go away in this deregulated environment?

The deregulated environment is leading toward pure economic decisions and the arguments made for spending lots of money on demand side management were not made on economic terms. They were made for unquantifiable social benefits. Local state commissions and the Federal government were very enthusiastic about demand side management, everybody thought it was socially right. But I think the more people got into the details, the more they realized that some of those technologies just weren't economic. They couldn't justify paying the extra money to force them into the energy economy.

We found that state commissions started souring on them. Our own commission in Michigan was very enthusiastic about it in the mid '80s like everybody else. But then industrial customers and price-sensitive customers started complaining. They said, "you're forcing us to subsidize all this demand side management and it's not economic, it isn't doing what you said it was going to." The commission started getting flak, and finally started cutting back. Now it's gone completely; we don't have any requirements to make expenditures on demand side management. We can make expenditures, but we have to justify them to the commission on prudency grounds. When we make that case, industrial and commercial customers will come in and argue that they're not good investments. We're probably back to the proper balance where people make investments for good economic reasons, and not for "social reasons."

If a technology you're pushing is really that good, or really that economic, people are going to buy it. If it's got a 20% IRR or it's got a 3-year payback, people have incentive to make the investment. But if it doesn't, they're not going to make the investment. Let's don't force everybody to make investments in these things if they aren't economic.

How do you see the technological future in generation?

The major changes in gas-fired cogeneration or gas-fired combined-cycle have really been driving the technology of the energy generation business. I think the technological improvements in gas turbines have been the most important factor in the last five years or so. For both environmental and cost reasons, gas-fired plants in many parts of the world have assumed prominence. So if there is natural gas around and it's easy to get at, gas-fired would be the technology of choice. The efficiency of combined-cycle generation has increased tremendously in the last decade.

Now that has allowed it to compete very effectively with coal-fired plants. It used to be that big coal-fired plants were the lowest cost base-load generation. People thought of gas and oil as peaking or intermediate load because the price of gas just couldn't compete. But with the improvements in efficiency and heat-rates in high-temperature turbines, gas combined-cycle now competes very favorably for base-load generation. That combines with the environmental characteristics, which in the United States are pre-eminent. Almost all the new generation that's being put in is gas-fired. In fact, I can't think of one large coal plant that's being constructed. And it's not that you can't build a coal plant, because you can if you use the best available scrubber technology and a lot of environmental controls. But with all that, there are very few places in the country where it's more economical than gas.

Is alternative generation still off in the future, or are new technologies emerging?

I think there will be continual improvements in the alternative technologies, and they may make some penetration in certain niche markets. But in the next 10 or 20 years, I don't foresee any breakthroughs which would permit them to be the technologies of choice for energy supply. On the user's side, there are continued technological improvements in industrial processes that are reducing the amount of electricity used. New technologies for both gas and electric vehicles. You're going to see continued improvements in those technologies and it's quite possible that in 10 or 15 years you'll see alternate fuel vehicles. But on the supply side, in generation, I think conventional sources of energy will still be dominating the market.

What about more decentralized facilities?

People have been predicting distributed generation will become more and more important. That was predicted 20 years ago during the Energy Crisis when people were arguing for everything from fuel cells to little solar panels. The fact of the matter is the economics have not improved relative to base-load generation. There is still a fairly substantial gap between distributed generation and large base-load coal or gas. Now as you go around the world, of course, you have different resources. There are places where gas is not available indigenously, and the only way is L.N.G. That's much more expensive, so you have places in the world where coal or hydro is best. I'm not suggesting by any means that gas is the only way to go, but from a technological standpoint, it's had the most impact on the world energy scene over the last 8 or 10 years.

Do you see more innovations coming in transmission of power?

There will be some incremental technological innovation in the transmission business. Things to enhance deliverability; not dramatically, but you'll be able to make some changes. There will probably be some reinforcement or improvement in the transmission system, which is not easy. Right now, anytime you try to build a transmission line you get local opposition; people don't want it. Part of that is the EMF scare. Even though the National Academy of Science came out with a study showing no evidence that electro-magnetic fields cause cancer. It's still hard to build transmissions systems. People don't want one in their neighborhood, although as population grows around metropolitan areas, it gets denser and you need more transmission. Nobody wants to build a generating plant in the middle of the city. They want to build them outside in the rural areas and then transport the energy into the metropolitan areas. So you must have transmission corridors. It's a difficult political issue.

What will the power industry look like in America in 2010?

I think the generation sector clearly will be more deregulated than it is today. Today, 90% of the generation in this country is still utility and the other 10% is IPP. In the next 12 or 15 years probably half the country's generation will be owned by generating companies selling to utilities and directly to end-users. The transmission system will still be owned by utilities but will, in many cases, be operated cooperatively through ISO-type groups on a non-discriminatory basis. Any user can get in line to use it, but it will be operated under a set of rules to ensure reliability and quality of service.

Lastly, I think the distribution systems will be pretty much unchanged from the way they are today. You'll still have utilities owning the wires that go out along the roads into peoples' homes and businesses. Although those utilities may not own the generators. They will be providing electricity from generation that they themselves don't own. The customers will choose.

What's in your personal future?

I've been the CEO at CMS for 11 years and I'll probably be there a few more years, but I'm not going to be there until I'm 65. It's healthy to have some management turnover, and I'm getting close to what I regard as a maximum time a CEO should stay in a job. I think I'm doing a reasonable job, but every organization needs an infusion of new thinking from time to time, new energy if you will. I suspect sometime in the next 3 to 5 years, I'll step down from CMS and then decide what I want to do.

My career has been extremely diverse within the energy business and I've had a balance between government service and the private sector which has given me a lot of perspective. I've been able to deal successfully with government leaders, having served in positions like that makes it easier for me to put myself in their shoes. I can frame issues in a way which makes sense to them; sometimes business people aren't able to do that. That's extremely important in the energy business because we're constantly dealing with governmental officials, not just in the United States but around the world.