SEMCO Gas Proposed Rate Increase Shows Warning Signs Ratepayers Should Watch

SEMCO service territory highlighted in yellow above. Source: Michigan Public Service Commission.

SEMCO Energy Gas Co. is not nearly as big of a name as DTE or Consumers Energy, but all Michigan residential ratepayers should take note of the latest rate increase request from SEMCO – the third-largest natural gas utility in Michigan. This case demonstrates a few of the common issues with utility rate cases that can be bad news for residential ratepayers.

The Citizens Utility Board (CUB) of Michigan on Sept. 27 filed testimony with the Michigan Public Service Commission (MPSC) in this SEMCO rate case (U-20479) to voice objections to SEMCO’s proposal. CUB entered a joint litigation agreement with Attorney General Dana Nessel to streamline and maximize savings for ratepayers. AG Nessel’s office also filed testimony, which found common ground with CUB on many points.

The AG’s extensive and thorough testimony is incredibly helpful for our joint efforts to protect not only SEMCO ratepayers but all Michigan residential ratepayers. As we will explain, SEMCO’s proposed monthly ‘customer charge,’ which disproportionately affects low-income customers, would set a bad precedent for the state if approved by the MPSC.

For context, SEMCO serves 300,000 residential, commercial and industrial customers in many different parts of Michigan, including Holland, Port Huron, Battle Creek and Marquette (as shown by the map of SEMCO’s service territory at the beginning of this post or this map on SEMCO’s website). The biggest problems with SEMCO’s rate proposal were outlined by CUB of Michigan President and former MPSC Commissioner Robert Nelson in an op-ed that recently appeared in the Holland Sentinel and other newspapers throughout Michigan. Our testimony goes into greater detail.

To give the utility some credit before we get into criticisms, SEMCO put forth a low-income assistance program that would give a $30 credit to 3,200 low-income households. CUB’s testimony supported this program as an appropriate proposal. The only issue with this program is that it doesn’t go far enough – 3,200 households is a very low share of the low-income customers who will be adversely affected by the rest of SEMCO’s rate proposal.

Here is a brief summary of the testimony:

1. SEMCO proposes an “alternative revenue decoupling mechanism” which is a fancy term for an increase in fixed charges on customers. These monthly charges are fixed in the sense that customers must pay them regardless of how much natural gas they use. For residential customers, SEMCO wants to increase the monthly charges by $2.40, making SEMCO’s fixed monthly charge the highest of any natural gas utility in the state. But as CUB’s testimony explains, this charge shifts costs from high-income customers to low-income customers. The more money a household makes, the more natural gas it uses on average. The testimony cites data showing that in Michigan’s region, households making over $140,000 use over twice as much natural gas as households making less than $20,000. Since it means that SEMCO will be getting more of its revenue from a fixed payment and less from charging customers for the amount of natural gas they use, this proposed charge places more of the burden for SEMCO’s revenues on those who can afford to pay the least.

Fixed charges have become a common tactic for utilities to more predictably make money. The SEMCO rate case is an opportunity for the MPSC to make this process fairer for all customers.

2. SEMCO proposes investing about $55 million through 2025 to provide redundant pipeline paths to several parts of its service territory. These could be wise investments, but SEMCO provides no evidence that this plan is the most cost-effective way to make customers less vulnerable from price spikes (which occur in winters when demand for natural gas for heating skyrockets). It is important that the MPSC carefully scrutinize utility plans to make sure utilities are not just investing in their systems, but investing in the most prudent manner. For example, as CUB has discussed in the context of electric reliability, Michigan utilities spend money all the time on upgrades to their distribution system, but the state still lags the nation in actual reliability outcomes. The SEMCO rate case could set a precedent for a more robust review of the prudence of utility plans.

3. Under what it calls “rate stability,” SEMCO wants to increase rates on various types of customer classes by varying amounts. For residential customers, rates would go up 14%, while they would go up 9% for commercial customers and 37% for classes of large commercial customers who have such large demand that they buy their natural gas through special contracts and pay SEMCO for transporting that gas to them. CUB’s testimony raises questions about how these rate increases are allocated among these different types of customers. SEMCO wants residential customers to pay about 2.5% more than they otherwise would so that the large commercial customers pay less. While that large commercial class would see the largest percentage rate increase, they also only pay SEMCO for part of their gas expenditures, so in the context of their full gas bills the proposed increase is not as large as it appears in SEMCO’s rate case.