Over the past two weeks, Attorney General Dana Nessel has drawn attention to Michigan’s increasing electricity rates, pleasing consumer advocacy groups who say the issue has received little attention.
Speaking to Michigan State University’s Institute of Public Utilities on Feb. 22, Nessel said in a statement she wants to “revive the legacy” of former Attorney General Frank Kelley in advocating for the public in rate cases before the Michigan Public Service Commission. Four days later, Nessel filed testimony in an Upper Peninsula utility’s rate case, attempting to block more than $6 million in requested rate increases. Marquette-based Upper Peninsula Power Co. (UPPCO) has some of the highest electric rates in the country.
Nessel has noted that Michigan’s residential electric rates have increased 41 percent in the past 10 years, more than double the increase across the Midwest.
“Rates in this state are extremely high and we must do a better job of keeping them affordable, especially for our state’s most vulnerable populations,” Nessel said.
Her attention to electric rate increases is part of growing interest among advocacy groups in the state who say utilities — particularly Consumers Energy and DTE Energy — have been overcharging customers for years. Many of the rate increases are driven by increased infrastructure and modernization costs that critics say are higher than necessary.
The MPSC approved Consumers Energy’s latest rate increase in early January. The $99 million increase will hike the average residential customer’s bill by $1.62 a month. DTE’s pending rate case, which is expected to be decided in May, would increase average residential bills $9.42 a month.
While the Attorney General’s office has featured a consumer protection division that intervenes in rate cases before the MPSC, advocates said involvement has been lacking.
The state-funded Utility Consumer Participation Board, created in 1992, issues grants to organizations like the Michigan Environmental Council, Citizens Against Rate Excess and the Residential Customer Group to advocate on behalf of residential ratepayers. In the 2017 fiscal year, the UCPB issued nearly $700,000 in grants.
Along with Nessel’s interest, the Citizens Utility Board launched a Michigan chapter in late February to “educate Michigan ratepayers about their energy costs and empower them to advocate against unfair rate increases.”
While residential ratepayers have faced the largest increases, advocates for large energy users hope to raise awareness about the ratemaking process utilities go through every year. That process involves using projected costs to recover the expenses for programs like maintaining reliability, environmental controls, grid modernization and a wide variety of utility spending programs.
Rod Williamson, executive director of the Association of Businesses Advocating Tariff Equity (ABATE), said Michigan is among the one-third of states nationally that allow utilities to use projected costs as opposed to historical data in setting spending levels. While all businesses base spending on projected costs, “the difference is (utilities) are not operating in that competitive marketplace,” Williamson said.
“We’re seeing very serious concerns about the use of these projected costs resulting in rates for all customers that are higher than what is needed to collect the actual cost utilities are incurring,” he said.
ABATE says Consumers Energy routinely underspends on programs, compared to levels that are approved by the MPSC. For example, the group points out that in a rate case opened in 2016, Consumers had been approved to spend $131 million on grid reliability, but only spent $85 million.
In a February 2017 order in the case, the MPSC said it “finds Consumers’ explanations regarding past underspending troubling. … Because the evidence suggests Consumers did not spend the amount approved for the program in its last rate case, and could not accurately trace the funds, the Commission has serious doubts about the company’s willingness to spend the projected expenditures on its reliability program during the test year in this rate case.”
Usually that excess funding is directed to other programs or carried over into the next rate case.
“The problem is, you’re on to another set of projections for more money,” Williamson said.
Energy laws signed by former Gov. Jennifer Granholm in 2008 allowed utilities to use projected costs instead of relying on a historical test year, or the most recent 12 months. The laws also reduced the amount of time the MPSC had to rule on rate cases, from two years to one year. Utilities were also allowed to self-implement rates that turned out to be higher than what the MPSC approved, Williamson said. While self-implementation was eliminated in revised 2016 energy laws, the rate case time frame was shortened further.
“It’s hard for (utilities) to argue when they’re filing every year that there is a significant lag like there used to be if they use the historical test year,” he said. “The Legislature made too many adjustments and swung the pendulum too far.”
State Rep. John Reilly, R-Oakland Township, introduced a bill in 2018 that would have required utilities to use a historical test year in setting rates that could be adjusted “only for known and measurable changes.” The bill didn’t make it out of committee.
DTE and Consumers counter that relying on historical cost data doesn’t meet customers’ needs on issues like grid reliability.
Consumers spokesperson Katelyn Carey said using historical data to set rates “would create a mismatch between revenues being collected from customers and the actual expenses necessary to meet the needs of customers. Future test years ensure that rates reflect the recovery of costs for the period in which they will be in effect.”
Carey added that while Consumers plans to stick to its spending levels for major items like forestry, “business realities sometimes result in fluctuations in spending, both up and down. Historical spending is one factor which is examined in rate cases in order to determine the projected costs for a forward test year, but it alone is insufficient to determine rates for a future test year.”
DTE spokesperson Peter Ternes said “adhering strictly to historical spending would prevent the utility from making shifts in spending to facilitate new policies and goals. Using a projected test year also allows the company to factor out items from the past that will not be future targets of spending, thus helping maintain affordability while shifting spending to match emerging policies and goals.”
Advocates say the issue could be resolved through retroactive ratemaking that would reimburse customers, or through performance-based rates that base utilities’ rate of return on targeted policy outcomes.
The sweeping energy legislation of 2016 required the MPSC to study performance-based ratemaking further and issue a report. The MPSC is evaluating how metrics could be used for utility investments.
MPSC spokesperson Nick Assendelft said it’s the obligation of MPSC staff to review projections to ensure spending requests are “reasonable and prudent.”
“That projected spending will be revised by staff based on historical spending by a utility as well as on reasoned, thoughtful estimations of future program spending,” he said.
MPSC staff then makes recommendations to the three-member commission, which has the final decision.
Amy Bandyk, executive director of Citizens Utility Board of Michigan, says underspending projected costs and over-earning an authorized rate of return is “a problem.”
“Reconciliation after the fact with rebates to customers for ‘underspending’ the projected amount would help and could be done either in total or for specific spending categories of concern,” Bandyk said. “Performance-based ratemaking would allow the utility to spend less and earn more profit, but that only works if they have performance metrics and performance pay that is tied to long-term performance.”