Energy Prices Will Continue To Be a Challenge, Predicts DTE Energy COO
Pursuing closely related niche businesses produces strong returns for utility.
ANN ARBOR, Mich.—Gerard M. Anderson's training in physics, engineering and business all have been invaluable, but he credits his studies at the University of Michigan's Gerald R. Ford School of Public Policy as the best preparation for the issues he deals with daily as president and COO of DTE Energy.
"Public policy studies forced me to abandon my belief that I had ready answers for complex, difficult problems. In the business world and our industry that mindset has led to spectacular blunders. Markets are unforgiving to those who presume they have them pegged," Anderson recently told 21 Stephen M. Ross School students at a Dean's Seminar.
As head of DTE Energy, a utility with 2.1 million electrical customers and 1.2 million natural gas customers, Anderson works on some of the most serious public policy issues of the day, issues that affect the nation's economy and the environment.
"Energy is the lifeblood of our economy and our lives. That became painfully clear during the last blackout. The world stops without energy and light," commented Anderson, who earned an engineering degree at the University of Notre Dame before earning two master's degrees, in business and in public policy, in 1988 from the University of Michigan.
Anderson worked five years as a senior consultant at McKinsey & Co. Inc., where he focused on the energy sector and financial institutions, prior to being recruited by DTE Energy.
"When I first met with DTE Energy's CEO, I proposed that the utility launch a series of start-up businesses. He asked me to put my ideas on paper. I came to DTE Energy in 1993 with a concept written on three pages." Since then, the businesses Anderson started have grown to 1,000 employees, and annual income from the start-ups has grown from zero to $300 million. The start-ups consistently produce strong returns and earnings growth, Anderson recounted.
DTE Energy's business model calls for launching new businesses that build on the utility's strengths. "We're a commodity industry. We focus on where the competition is manageable and we have unique value to bring. We pursue closely related niche businesses," he explained.
A project in one of Anderson’s first ventures — which involves managing DaimlerChrysler's energy needs at eight large production sites — is saving the automaker $50 million a year in energy costs. Another business, in which DTE Energy taps landfills for methane gas, has grown to 33 landfills around the country. The company plans to acquire 15 more. DTE Energy also has brought innovation to steel production. The industry has been using coke, a refined coal product, to produce steel. DTE Energy now saves energy by using coal to manufacture steel, eliminating the need to convert coal to coke. The utility has become the largest third-party shipper of coal in North America. It also is pumping natural gas from shale in the upper part of Michigan's Lower Peninsula and in Texas.
Anderson foresees continued high energy prices. "Every significant commodity hit its all-time high in 2005. Eastern coal doubled in price. Western coal tripled in price. Uranium doubled in price. With natural gas, the days of 100 percent North American production are numbered. In 10 to 15 years we'll no longer be able to supply our own natural gas and will be importing it from countries that are even less stable than where we get our oil from now. The recent gas price increases are a shock to homeowners, especially at the marginal end of the economic chain," Anderson acknowledged.
He also predicted the nation's utilities will require a large influx of capital for infrastructure, similar to investments that were made in the 1970s for coal and nuclear plants. Pipelines will be needed to bring gas from the west and Arctic Circle to customers in the east and to develop the liquefied natural gas industry, in which gas is cooled, shipped and then warmed where it is delivered, he predicted.
Unfortunately, only five years ago natural gas-fired generation looked like a promising solution to energy needs, and in response the United States overbuilt gas-fired generation plants and in the process pushed gas prices to record levels, he noted. "Now our customers and regulators are saying 'go build coal-fired plants.' But burning more coal and the continual pressure for action on climate change are two trains on a collision course."
While technology has reduced sulfur dioxide and nitrogen oxide emissions to five percent of what they were in the 1970s, carbon emissions are rising steadily, said Anderson, vice chairman of the Michigan chapter of The Nature Conservancy.
He cited some promising ways to produce energy and improve the environment:
- Tap methane from coal mines. When coal is mined, methane is part of the waste and is released into the air.
- Burn waste wood at power plants to produce electricity, conserving landfill space.
- Reforestation. DTE Energy has planted more than 20 million trees in Michigan since 1995, and is reforesting Mississippi and Louisiana. The old growth hardwood forests in the area were cleared in the 1960s for soybean production.
- Geological sequestration of carbon dioxide by injecting the gas into rock formations.
Rising energy prices also should encourage people to curb usage. "Changing human behavior is a tough thing," said Anderson. He noted that when people build larger homes, their energy consumption increases about 75 percent because of the additional space heating and lighting intensity, even when they buy more energy-efficient appliances.
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Mary Jo Frank