Research — Oct 04, 2024
Settlement would provide Upper Mich. Energy Resources 1st-ever rate increase
By Dan Lowrey
Upper Michigan Energy Resources Corp. and parties to its electric rate case before the Michigan Public Service Commission have reached a settlement agreement supporting a $6.6 million increase in rates for the utility, which is about 59% of the rate increase the utility requested.
Hearings in the proceeding (Docket C-U-21541) scheduled for October were canceled due to settlement discussions. It is unclear when the commission will address the settlement. The company requests that new rates become effective no earlier than Jan. 1, 2025.
➤ Upper Michigan Energy Resources (UMER) and parties to its first-ever rate case filed with the Michigan Public Service Commission (PSC) have reached a settlement that, if adopted by the commission, would authorize the company a $6.6 million electric rate increase, payable by all customers other than Tilden Mining Co. LC, for which UMER has a special contract. The stipulated increase is about 59% of the $11.2 million increase sought by UMER for non-Tilden customers.
➤ The settlement is premised upon authorizing UMER a return on equity that exceeds national averages tracked by Regulatory Research Associates.
➤ Under terms of the settlement, UMER is to file a distribution investment and maintenance plan by Jan. 30, 2026, ensuring alignment with regulatory directives. Additionally, future initiatives addressed in the settlement include an electric vehicle pilot program, reflecting a commitment to sustainable energy solutions.
➤ RRA views the regulatory environment for energy utilities in Michigan as somewhat constructive from an investor perspective; however, the recent rate case outcomes could indicate a tightening of the regulatory climate. Still, authorized ROEs have trended above national averages. In addition, several constructive practices have been in place, including a streamlined rate case process and a framework for using forecast test years to reduce regulatory lag.
The $6.6 million rate increase is premised upon a 9.86% ROE (50% of financial capital structure) for a test year ending Dec. 31, 2025, and it reflects updated depreciation rates approved in a separate proceeding before the commission. The settlement did not provide a breakdown of the settled-upon regulatory capital structure or specify an overall return amount on rate base.
The stipulated 9.86% ROE is above prevailing industry averages for electric and gas utilities nationwide. According to RRA, the average ROE authorized for electric utilities was 9.68% for rate cases decided in the first half of 2024, above the 9.60% average observed in full year 2023. Looking at the 12 months ended June 30, 2024, the average ROE authorized in all electric utility rate cases was 9.63%. However, the stipulated ROE is below UMER's currently authorized ROE.
The settlement emphasizes the importance of transparency and collaboration among the parties involved, outlining a series of commitments, including the development of a distribution investment and maintenance plan. This plan is set to be filed by Jan. 30, 2026, and will be aligned with previous commission directives. Additionally, UMER agrees to conduct a line loss study of the company's entire service territory to inform future requests for a line loss factor before filing another electric rate case. Such proactive measures are intended to ensure UMER can effectively manage its distribution assets and respond to the evolving energy landscape.
Furthermore, the settlement includes provisions for future initiatives, such as introducing an electric vehicle pilot program and related tariff and more granular descriptions of UMER's distribution investments in its next electric base rate case.
Concerning rate design, the settlement would authorize UMER to implement a rate realignment factor to make the rates in its Wisconsin Electric Power Co. (WEPCO) and Wisconsin Public Service Corp. (WPSC) Rate Zones equal over time. The settlement also recommends approval of UMER's proposal to offer low-income assistance and senior credits, of which there will be no limits on customer participation, and any revenue changes resulting from higher or lower participation compared to estimates will be handled through deferral treatment. For the 2025 test year, the estimated participation is set at zero for both the residential income allowance and the senior bill assistance program. Additionally, any credits issued to customers between Jan. 1, 2025, and UMER's next rate case will be deferred for recovery in that upcoming rate case application.
Also, the settlement supports UMER's proposals to discontinue residential and commercial direct load control programs due to equipment surpassing its end of life, terminating the Tax Cuts and Jobs Act of 2017 credits, and implementing an inflow/outflow parallel generation rate schedule to replace the net metering rate schedule.
Parties to the settlement included UMER, the Michigan Public Service Commission Staff, Attorney General Dana Nessel, the Citizens Utility Board of Michigan and Billerud Americas Corp.
UMER is a WEC Energy Group Inc. subsidiary. In 2016, the PSC adopted a settlement agreement that approved the formation of UMER as a Michigan-only jurisdictional utility authorized to provide electric service to all retail customers within WEPCO's Michigan service territory.
The WEPCO base electric rates adopted by UMER for its WEPCO Rate Zone were last approved by the commission in June 2012, based on a 2012 test year and an authorized rate of return on common equity of 10.10%. The base electric rates adopted by UMER for its WPSC Rate Zone were last approved by the commission in April 2015, based on a 2015 test year and an authorized rate of return on common equity of 10.20%.
Rate case background
UMER filed its first-ever general rate case application with the PSC on May 1, seeking a $7.3 million electric base rate increase and an above-average ROE. However, most customers would realize a rate increase of about $11.2 million because of the utility's special contract with Tilden Mining Co. LC.
UMER's requested rate increase was premised upon a 10.25% return on equity (42.24% of regulatory capital structure), a 6.56% overall return on an average rate base valued at $560.2 million and a test year ending Dec. 31, 2025. Inclusive of the company's request for new depreciation rates associated with new reciprocating internal combustion engine (RICE) electric generation units, UMER expected a total retail electric revenue deficiency of approximately $8.3 million, or 5.3%, in 2025.
Primary drivers of the rate request were UMER's investment in needed capital projects, notably the natural gas-burning RICE units that improve the reliability of the electric system in the Upper Peninsula, the effects of the depreciation rates, increased costs associated with maintenance at the RICE units, increased personal property tax associated with capital investments and tax rate increases, changes in the recovery of regulatory assets and liabilities, and a higher projected cost of capital in the 2025 test year.
UMER indicated that two macroeconomic factors are impacting these drivers: historic levels of inflation for materials and labor and the significant and swift increases in interest rates since early 2022.
The commission issued an order in October 2017 approving the construction of the RICE units in Baraga Township, Baraga County, and Negaunee Township, Marquette County, finding that the RICE units represented "the most reasonable and prudent means of meeting the power need." The units began commercial operation in 2019. Additionally, the commission approved the retail large curtailable special contract between UMER and Tilden.
The structure of the special contract with Tilden has a rate-making impact on UMER and its customers. The contract identified specific costs for which Tilden would be responsible, including Tilden's portion of the capital costs associated with the RICE units being recovered over 20 years on a levelized basis. This structure resulted in a situation in which, in the initial years of the contract's term, UMER recovered less revenue from Tilden than it would have if traditional cost allocation and ratemaking were used to establish cost recovery from Tilden. Under this structure, the total amount of revenue UMER will recover from Tilden over the term of the special contract is the same as it would recover under traditional cost allocation and ratemaking, but the timing of when that recovery shifts from the early years of the contract to later years.
Mich. regulatory environment
Regulatory Research Associates views the regulatory climate in Michigan as somewhat constructive from an investor perspective. However, on July 31, RRA reduced its ranking of Michigan regulation to Average/1 from Above Average/3. While the jurisdiction remains more constructive than average from an investor viewpoint, the outcomes of certain recent rate proceedings could indicate a tightening in the regulatory climate.
RRA had placed the state on watch following a 2022 rate case decision in which the PSC authorized DTE Electric Co. (DTE-E) an increase in rates that was less than 10% of that requested but did not lower the ranking at that time. RRA viewed the decision as an anomaly, as a large part of the revenue requirement difference stemmed from reliance on a higher post-COVID-19 sales forecast than the utility had used in its revenue requirement calculations. Even so, the company filed a new rate case less than three months later, asserting existing rates and projected electricity sales could not sustain its major capital investment program. Even though the outcome of the subsequent rate case was more constructive, DTE-E filed its third case in three years within four months on March 28.
Nevertheless, the commission has several constructive practices in place, including a streamlined rate case process, a framework for using forecast test years to reduce regulatory lag and a framework that permits a cash return on certain construction work in progress, thereby reducing the uncertainty of cost recovery. Retail competition for electric generation is in place but is limited, and attempts to raise this limit have not been successful. Electric utilities have retained their generation assets, and customers who do not select a competitive supplier receive service on a regulated, traditional cost-of-service basis. Adjustment mechanisms are in place for fuel costs for customers served under bundled service. For more details, refer to the commission profile page.
For additional detail concerning RRA's regulatory rankings, refer to the latest "Quarterly State Regulatory Evaluations" report.
For a full listing of past and pending rate cases, rate case statistics and upcoming events, visit the S&P Capital IQ Pro Energy Research Home Page.
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