On September 18, 2015 Upper Peninsula Power Company (UPPCO) filed an application with the Michigan Public Service Commission (Commission) for a 12.7% rate increase. This is the first rate case since UPPCO was purchased by a subsidiary of the London England Conglomerate, Balfour Beatty, in 2014. Balfour Beatty reported over $8 billion in annual revenues in 2015. This was the first and only utility the company had ever owned or purchased.
Citizens Against Rate Excess (CARE) intervened in the case to review the application and make a determination whether to oppose any and all aspects of the proposed rate increase. CARE was the first consumer advocate intervenor in an UPPCO rate case in over 16 years. After careful review by CARE’s expert and legal team, several matters were presented to the Administrative Law Judge encouraging him to recommend that the Commission deny UPPCO’s requested rate increase.
The most obvious concern was the lack of affordability of the rates that UPPCO proposed. After review, CARE came to the conclusion that no rate increase was justified, in part, because UPPCO’s rates were so much higher than neighboring utilities in the Upper Peninsula (see map on p1 of website below). There was nothing in UPPCO’s application that explained what extraordinary circumstances existed that could possibly justify such a disparity.
Digging deeper into the case, which now has over 2,000 pages of testimony, exhibits and transcripts, CARE focused on the assurances contained in the proceeding before the Commission which approved the sale of UPPCO to Balfour Beatty’s subsidiary. In that 2014 case, representations were made that the sale would “have no adverse impact on rates.” The sale was treated as a “stock sale” and approved by the Commission as such. However, after receiving approval for the transaction, UPPCO treated the sale as an “asset transfer” as they were permitted to do under IRS regulations, and not as a “stock sale” as presented to the Commission. This change has had a substantial adverse impact on rates.
Specifically, UPPCO carried a $70 million tax credit on its books prior to the sale, and when the sale closed that $70 million credit went to the seller, UPPCO’s former owner. But because UPPCO elected to treat the sale as an asset transfer instead of a stock purchase, accounting rules required that UPPCO’s rate base be increased by the same amount ($70 million). This has an adverse impact on rates because UPPCO is entitled to a rate of return on its rate base. A larger rate base means more revenue for the utility, and higher rates for ratepayers. For example, if a utility has a rate base of $100 million and an overall rate of return of 10% they would be entitled to revenue of $10 million as part of the ratemaking process. In this case, UPPCO was proposing a $246 million rate base. CARE has taken the position that the $246 million rate base should be reduced by $70 million. If the Commission agrees with CARE, there would be no need for a rate increase, in fact, ratepayers would be entitled to refunds.
There are many other issues that CARE has identified that it objects to. Most notably is a contract to purchase power from its former owner. CARE views that contract as a sweetheart deal for the previous owner because the prices set by the contract are way above market prices that UPPCO could purchase from others.
The Administrative Law Judge has rejected CARE’s positions, however there is some good news for ratepayers in the proposal for decision setting out his recommendations. While UPPCO originally requested additional revenues of $13 million, the ALJ recommended only $5 million. Nevertheless, it is CARE’s position that no increase is justified. It is now up to the Commission to make a final determination. By law, they must make a ruling by Sept 18, 2016 or UPPCO’s original request will be deemed granted.
For further information: go to the case docket U-17895 on the Commission website:
Citizens Against Rate Excess
921 N. Washington Ave
Lansing, MI 48906