UPPCO’s ratepayers are saddled with some of the highest electricity bills in the country. This week, Spark U.P. is exploring the utility’s history and ownership structure in a multi-part series.
Part III: Why Did UPPCO’s Ratepayers Cross the Road? (To Get to a New Utility Service Territory)
It was the spring of 2016, and residents of the tiny hamlet of Germfask, Michigan were not happy with UPPCO.
Germfask is located in the central UP, a few miles off of US 2 near Lake Michigan. And ever since UPPCO had been sold to Balfour Beatty and then Basalt, its citizens had been getting erroneous bills that reflected several months of service instead of just one billing cycle.
The spike in billings resulted when UPPCO was transitioning its offices and software systems from the headquarters of its former parent company, Integrys, to its new center of operations in Marquette. But the errors packed a wallop in part because rates were so high to begin with.
Community leaders hosted a town hall to protest, and the event drew nearly a hundred residents.
A contemporary news report from TV 6 News quoted Germfask resident Dan Vanneste as saying, “I’ve got a young couple that lives behind me that had back-to-back $600-plus electric bills. That’s too much for an electric bill!”
At a second town hall attended by the representatives from UPPCO and region’s state legislators, residents demanded that they be allowed to switch their service to Cloverland Electric Cooperative, whose service territory surrounds Germfask on two sides.
TV 6 News quoted John Kivela, who was then the region’s state representative, as saying: “What… I come away with after this meeting is knowing that there is a lot of frustration here, and we’ve got some questions to try and find answers to. Notably, how, if it’s possible, to switch providers, and what that process would look like if it’s possible. We intend to find that out.”
Customers throughout UPPCO’s service territory were getting the same erroneous bills. But only the residents of Germfask organized a protest as a result. The reason may lie in the town’s proximity to the Cloverland’s service territory, which at the time had residential rates that were less than half that of UPPCO.
I spoke with Gary Talarico, a Germfask resident who helped organize the 2016 town halls. He confirmed that proximity to Cloverland’s territory was a motivating factor in his decision to help raise awareness about high energy rates.
“I’ve lived here about 12 years, bought my house here,” said Talarico when reached by phone. “Kind of the dream house, the last one. The one where you want to be carried out later on… I fell in love with the place. But in the last few years, I’ve noticed that I had to start thinking about, am I going to be able to afford the utilities here? They’re just so outrageous that I don’t think, as a retired person, that I could afford them.”
“As an UPPCO customer, I’m within a mile of Cloverland territory,” said Talarico. “I have neighbors who live a mile and a half down the road, and they pay less than half of what I pay for my electric bill.”
So what we are looking for as UPPCO customers is parity,” Talarico continued. “We want a sustainable, livable, electric rate. As it stands, most people in this area can’t afford to pay their UPPCO bill without some help from the state or federal government, and that’s just wrong.”
No Escaping the Monopoly
Michigan has what could be described as a “mostly monopoly” electric utility system, which is to say that state law gives utilities the right to serve customers who reside inside their service territory boundaries as long as they agree to serve all of them, no matter how inconvenient the outliers may be.
There are notable exceptions to this; but for the most part, customers in UPPCO’s service territory do not have the ability to choose a different provider without violating state law.
Utility boundaries have been determined over time by a combination of fate, litigation, and happenstance. Generally, electric utility service began in urban centers and spread outward. When one expanding utility butted up against another, a lawsuit might determine who had the right to serve whom. But sometimes, it was as simple as a new customer in a yet-unserved region calling one utility company instead of another and asking for service.
In researching this story and talking to customers about UPPCO, residents and businesses often suggest that they could try to get their power from elsewhere, contract with a different company, or lobby their local officials to start a municipal electric provider.
The problem is that UPPCO will promptly sue any provider who encroaches into their territory. That’s what happened to the Village of L’Anse, which in 2018 sought to provide electricity to two small manufacturers who had been served by UPPCO. The businesses are located in a village-owned industrial park within the limits of the municipality.
L’Anse argues that because it has a village-owned electric utility, it should be able to offer power to customers inside the village limits. UPPCO claims that Michgian’s utility law protects its right to serve the customers, and that L’Anse unlawfully poached them. The suit is currently in litigation.
If the monopoly system is imperfect, it was designed at the turn of the last century with consumers’ best interests in mind. If a utility knows with certainty what territory it will serve, it has the ability to plan how to invest in natural gas generators, solar arrays, wind farms, and utility lines. And a utility’s lenders have a reasonable expectation that if they put up money to fund these efforts, they will be repaid.
A cornerstone of Michigan’s monopoly utility law is allowing investors a 10 percent return on equity. This means that for every dollar of investment that the company puts into providing service running the business, they are allowed a profit of 10 cents.
And at least in theory, allowing investor-owned utilities to earn a 10 percent return on equity can improve service for ratepayers. The idea goes that if utility companies are incentivized to invest in maintaining and improving electrical infrastructure to make it more efficient, rates will continue to be affordable and service will be reliable. The concept that allowing utilities a reasonable rate of return translates to better service for customers is called the regulatory compact.
The Michigan Public Service Commission was created to, among other things, oversee utility spending and make sure utilities correctly calculate their return on equity. The cost a utility’s of investments, plus its allowed returns are then passed on to customers through their electricity rates.
A utility industry analyst named Robert Benninghoff, who worked for Integrys during a period when that company owned UPPCO, concludes that there is no virtuous cycle connecting the interests of UPPCO’s customers and its investors.
Instead, in a paper published in March, 2019, he writes that they are locked in a zero sum game, where infrastructure investments benefit the bottom line of UPPCO’s owners while inflicting financial harm on UPPCO’s customers.
Two Wounds, One Tourniquet, and Little Relief
As of May, 2019, UPPCO’s residential rates were the highest in the continental United States at 25 cents per kilowatt hour.
However, a settlement reached by UPPCO and interveners that takes effect in June will lower residential rates by 1.55 percent, or $1.76 per billing period, for those who use 500 kilowatt hours a month. It is the first rate decrease for residential customers in recent history.
The agreement was hailed as a victory by consumer advocates, including Michigan’s Attorney General Dana Nessel, who has revived the office’s role as a watchdog for utility ratepayers. In February, 2019, her office intervened in the most recent UPPCO rate case, recommending that the company only receive $3.5 million instead of the nearly $10 million in annual revenues the company was seeking.
When the Michigan PSC issued its order in May, press release her office issued carried the triumphant headline, “AG Nessel Reverses Rate Increase Trend for Michigan Utility Customers”.
Michigan PSC Commissioner Dan Scripps, who was recently appointed by Gov. Gretchen Whitmer, tweeted:
However, the decision also raised UPPCO’s commercial rates by 14.11 percent, and industrial rates by 9.34 percent.
With the oversight of the Michigan PSC, utility companies develop rate schedules for residential, commercial, and industrial customers.
Nearly every utility charges residential customers the most, the logic being that electricity use in the home is sporadic and the least easy to predict. Predictability is a key factor in determining rates, as it drives decision-making around how to invest to meet customer demand.
Next highest are commercial rates, charged to entities like retail stores and churches, because they tend to have more consistent electricity needs. Least expensive of all are industrial rates, as large manufacturing facilities tend to use a consistent amount of power on a highly regimented schedule.
In April, 2019, prior to the commercial rate increases, I visited Terry LaJeunesse, 66, who owns Omer’s, a rustic 9-hole golf resort located in Twin Lakes, a tiny community located near a state park of the same name. A few small motels and shops line the highway that cater to snowmobilers in the winter, and those who come to fish and enjoy the lakes in the summer.
LaJeunesse’s operation consists of a tiny bar and grill, two barns to store equipment, a house trailer, two small rental cabins, and the modest home he shares with his wife, Linda, and a house for his daughter, Samantha, who is also a co-owner. During the summer, he runs a pump from a nearby river to water the greens. In 2018, his total electricity budget was $22,488.15.
Running Omer’s was the fulfillment of a dream for the couple after Terry retired four years ago after a long career representing teachers in the Michigan Education Association. He enjoys the work and visiting with Omers’ patrons, who are as much friends as they are customers. And he’s proud of being able to employ five full-time workers in the winter, and eleven in the summer.
“We have very loyal clientele, and our business has improved each year,” he told me. But the margins on a place like Omer’s are small and UPPCO’s high electricity costs are burden for the family.
“We’re struggling just to stay even, and that’s without my wife and me taking any kind of salary,” said LaJeunesse.
When reached by phone on June 11, LaJeunesse confirmed that the rates on his commercial accounts had gone up.
Interestingly, Benninghoff, who published his whitepaper in March, 2019, is prescient in predicting the cost shift from residential rate customers back to commercial and industrial customers. He argues that the Michigan PSC, having limited tools to provide rate relief, has historically attempted to limit skyrocketing industrial costs to protect the UP’s economy, at the expense of residential ratepayers.
But he sees the impact of these decisions as being limited, comparing UPPCO’s customer classes to “two acute open wounds — one wound on its arm representing the residential customers and another on its leg representing its commercial and industrial customers, and where only one tourniquet is available,” he writes.
“In the long run, the whole body will ultimately succumb from the effects of the wound that goes unattended, and one limb bleeds faster once the tourniquet is applied to the other limb.”
In other words, attempts by UPPCO and regulators to lessen the burden of high rates by shifting costs between customer classes will ultimately fail to provide relief to customers in any meaningful way.
Elise Matz is a mommy, Yooper, and energy dork, in that order. A former political staffer, in 2019 she was appointed to the Utility Consumer Participation Board. Find her on Twitter at @michigist or email her at elisematz@gmail.com.
