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Detroit Edison Signs Deal With 3 Auto Makers : Energy: The $2-billion agreement with Ford, GM and Chrysler is the first U.S. utility contract with an entire industry.

August 04, 1994|DONALD W. NAUSS | TIMES STAFF WRITER

DETROIT — In the biggest move yet by a utility to stave off competition, Detroit Edison agreed Wednesday to sharply reduce rates charged to the Big Three auto makers in exchange for long-term supply contracts.

The agreement, valued at $2 billion, is the first time a U.S. utility has negotiated a contract with an entire industry within its service area. Detroit Edison would provide power to 54 plants and offices of General Motors Corp., Ford Motor Co. and Chrysler Corp. in southeast Michigan.

The deal reflects a strong response to deregulation and growing competition in the utility industry, as major industrial users push for more choice and lower prices from power providers.

Stephen Fedun, an analyst for Fitch Investors Service, a credit-rating service, said that while there have been isolated instances of utilities offering discounts to keep industrial users, the Detroit Edison contract is precedent-setting because of its scale.

"The auto makers were looking at other power sources--cogeneration or competitor utilities," he said. "Now Detroit Edison has secured a stream of revenue through contract. It's very significant."

More utilities are expected to follow Detroit Edison's lead as they seek to keep major customers. "The concept will spread," said Douglas Fischer, an analyst for A.G. Edwards & Co. in St. Louis.

States nationwide have been under pressure by manufacturers to end the monopoly of utility companies. California and Michigan are among states that have passed regulations that are phasing in competition among the different utilities.

The auto industry accounts for nearly 13% of Detroit Edison's sales. The utility is seen as particularly vulnerable to competition because of its heavy reliance on auto, steel and other large industrial customers.

"These contracts represent a managed transition to a more competitive environment," said John Lobbia, Detroit Edison's chairman and chief executive.

The agreements, which must be approved by the Michigan Public Service Commission, would provide the auto makers with savings of $30 million next year, the utility estimates. By 1999, the figure could reach $50 million annually.

Peter Mehra, Ford's manager of energy efficiency and supply, said the deal means electricity rates should on average be 20% lower for his company over the next 10 years than they were in 1993.

Detroit Edison said it will make up the savings offered to the Big Three by reducing operating expenses. It would also work with the manufacturers to save energy costs. The rates of other commercial customers and residential consumers would not be affected, the utility said.

The auto makers have been leaders in finding ways to lower utility costs. Recently, Ford sought to form a municipal utility in Romeo, Mich., to supply electricity to its engine plant there, now served by Detroit Edison. Under the new agreement, the auto makers agreed not to create competing utilities or operate cogeneration facilities, except for emergency backup purposes.

Under the new agreement, Detroit Edison would be the sole supplier to the Big Three for six years. After that, the companies can reduce their power purchases from the utility by 20% a year.

Mehra said he believes the Michigan regulators will approve the deal because they have been supportive of a slow deregulation. "They want to move to competition, but in a managed fashion," he said. "This does that by getting Edison through the transition."

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