An investment fund’s bid to buy Michigan’s Upper Peninsula Power Company is generating fresh debate about how to address the utility’s soaring rates, with some stakeholders arguing that the solution needs to include ownership reform, along with greater electrification and use of distributed energy.
Axium Infrastructure claims to be in it for the long haul, unlike previous owners that sought to flip the company for a quick profit, while UPPCO has promised no changes to management. But several experts say that a sale and “business as usual” plan will only offer incremental improvements.
“I don’t know why a purchase — unless strings are attached by state or regulators — why that would cause rates to go down,” said Will Lytle, a Hancock City Council member who is pursuing a doctorate in energy policy at Michigan Tech University.
UPPCO serves 54,000 customers across 4,460 square miles of largely rural territory. Its residential customers in 2018 paid 21.8 cents per kilowatt-hour, among the highest rates in the country and second highest in Michigan.
The utility’s sale would represent its third in about 15 years. Consumer advocates say they’re hopeful that the Michigan Public Services Commission, which will likely approve the sale, will at least ensure that customers aren’t taken advantage of, as they were during UPPCO’s last sale. Then-seller Balfour Partners burned customers and the commission with a tax trick that benefited its investors and ultimately bumped up UPPCO’s rates.
Many fear a similar scenario, said Marquette Mayor Pro Tem Jen Hill, who’s also a board member of the Citizens Utility Board of Michigan, which advocates for residential customers.
“It’s great to have the conversation about how we manage electricity in the U.P., but if it’s changing hands and they’re going to make the deal happen, then someone is profiting off of it,” Hill said.
The Michigan Attorney General’s Office is intervening in the case at the Public Services Commission with the goal of avoiding such a repeat, and Axium’s offer “sounds good and shouldn’t impact rates,” said Michael Moody, an assistant attorney general who handles rate cases.
“On its face, it looked like an OK deal, but the tax issue saddled the purchaser with extra bad debt, which was passed on to the customers, so we want to avoid that,” Moody said. “At this point, we’re trying to protect the customers from something like that.”
Regardless, Axium takes over a company facing difficult logistical challenges. UPPCO must send electricity to small numbers of people across transmission lines covering long spans of rugged terrain — its customer density is about 12 customers per square mile.
The high fixed costs stemming from the infrastructure needs contribute to higher residential prices, and this is the type of scenario in which microgrids and distributed energy could help alleviate the problems, Lytle said. The utility and the Public Services Commission could also consider changes to net metering that would make home solar more feasible, or biomass or geothermal production, said Lytle, who noted that his opinions don’t represent the city of Hancock.
In the sale’s announcement, UPPCO touted Axium’s portfolio, which “includes a significant focus on renewables, including solar and wind projects,” and it owns several cogeneration plants. However, there’s no mention in the filing of distributed energy, which private utilities in the state generally oppose.
Hill said some of the high residential rate issues could be solved through electrification of the Upper Peninsula’s economy. Parts of the region are at a crossroads as the upcoming shutdown of the Line 5 gas pipeline will disrupt propane supplies for about 15% of the Upper Peninsula’s population, including some UPPCO customers. Experts have called on the state to use the opportunity to switch from propane to electric heat pumps, among other measures.
Boosting the amount of electricity consumed would “dilute” the high fixed costs associated with the infrastructure and bring down rates, along with helping combat climate change, Hill said. However, experts noted that electrification is a long term process, and UPPCO hasn’t shown signs of supporting such measures.
“There are multiple ways to deal with the energy needs of the region,” Lytle said. “But when I hear presentations from UPPCO, there’s this entrenched mindset that they have so many miles of lines so all we can do is keep power flowing through those while extracting the profit margin.”
Moreover, UPPCO’s “residential rates are high and industrial rates are very, very low,” Lytle said. That was partially addressed during a 2019 UPPCO rate case in which the utility asked for an 18% rate increase, but after consumer advocates and the attorney general’s office intervened, the Public Services Commission granted smaller increases for industrial and commercial customers, and a decrease for most residential users. But experts say the cost burden is still out of balance and the filing doesn’t mention any proposed adjustment to those rates.
Perhaps the biggest drivers of UPPCO’s high rates are past management blunders and the ownership structure, stakeholders who spoke with the Energy News Network said. The utility’s high debt is thought to be among the chief problems, though many say UPPCO’s finances largely remain a mystery because it’s not publicly traded and doesn’t share details with the public. There are growing calls for a switch to a cooperative model that would provide access to cheaper capital, wouldn’t require UPPCO to pay income tax or investors, and would open up the finances.
Several experts pointed to neighboring Cloverland Cooperative, which offered residential rates in 2018 that were about half of UPPCO’s. The co-op provides service to about the same number of customers across a similar geographic region.
Hill and others also said a larger private utility in Michigan or Wisconsin could purchase UPPCO and spread its fixed costs among a larger customer base, but Axium wrote in its filing that it’s confident it will bring down rates without structural changes.
“Axium UP has a plan to restructure the debt of UPPCO in order to save the company and its customers money over the long term, and plans to continue UPPCO’s movement towards increasing use of renewable energy generation resources located in the Upper Peninsula of Michigan,” it wrote.