Michigan Public Service Commission expected to rule July 31
Vic Leabu, owner of White's Bridge Hydro Co. in Lowell, only wants a fair contract from Consumers Energy Corp.
Leabu produces about 750 kilowatts of clean, renewable energy for 400 of his home and business owner customers in Ionia County, just east of Grand Rapids. For the past 32 years, Consumers has been paying him a variable rate of 6.8 cents to 7.6 cents per kilowatt hour. Last year, Consumers offered him a five-year contract at 4.5 cents per kilowatt hour, which Leabu described as financially unsustainable.
Leabu's contract expired in December 2015. He's operated under a contract extension with Consumers since then.
But because of the low rate Consumers wanted to pay, Leabu and several other mostly small renewable energy producers — under the newly formed Independent Power Producers Coalition of Michigan — filed a complaint last year against Jackson-based Consumers with the Michigan Public Service Commission. They want the commission to require the utility to pay them fair rates under long-term contracts that will keep them in business.
On July 31, the Michigan Public Service Commission is expected to rule on the contested case IPPC filed against Consumers that would set long-term contract prices for 20 years.
At stake is whether small, independent producers of power from renewable sources such as hydroelectric, biomass, waste-to-energy and landfill gas will be able to remain part of the renewable energy mix now dominated by big wind and solar — which are increasingly owned by utilities. But Consumers argues that their ability to offer affordable rates to their customers also hangs in the balance.
The case, and others like it, could set a national precedent.
In Michigan, there are more than 30 renewable energy providers — generating up to 500 megawatts of power for 500,000 homes — some of which are IPPC members and many of which have contracts set to expire from 2017 to 2039. There are six other regulated utilities in Michigan, including DTE Energy Co., that also have similar cases before the MPSC. Consumers Energy by far has the largest number of renewable energy contracts of this kind.
Leabu and other IPPC members have become increasingly glum about their chances for a favorable outcome. MPSC staff has changed its recommendations on pricing downward twice in the past month. Last fall, MPSC staff recommended a proxy pricing formula that IPPC signed off on, but Consumers didn't like it and objected.
"We are getting really frustrated with the staff because they seem to be headed more in Consumers' direction," said Leabu. "We are very frustrated now after we had initial thoughts of them being fair and reasonable."
In an email, a Consumers Energy official said the utility is "committed to working with all stakeholders during this process ... and will continue to advocate for competitive, affordable energy for our customers."
Leabu, who lives in Brighton, has operated the White's Bridge hydro plant with four employees in West Michigan on the Flat River since 1984. It was built by the city of Lowell in 1896. He told Crain's that the rates Consumers has offered and what the commission's staff is recommending would financially cripple or put out of business several dozen renewable power operators.
"Most of us hydro (operators) are looking at something under 7 cents" and potentially as low as 6 cents per kilowatt hour, Leabu said. "At 8 cents, which they were offering, we can exist. ... I am a little pioneer guy who could fall by the wayside."
IPPC officials said they supported rates in the range of 7 cents to 9 cents per kilowatt hour, which would fund required capital improvements, employee salaries and benefits, according to IPPC filings.
However, MPSC staff's latest recommendation, issued June 19, suggests that rates could fall under 7 cents per kilowatt hour, ranging from as low as 5 cents to 7 cents per kilowatt hour.
MPSC declined comment on the case because it is pending before MPSC Administrative Law Judge Mark Cummins.
Katie Carey, Consumers director of media relations for governmental, regulatory and public affairs, said Consumers wants to take a "balanced approach to ensure our customers have the energy they need to power their homes and businesses, at prices they can afford."
Carey said the balanced approach means using natural gas, but also prioritizing such renewable energy sources as wind and solar. Consumers also wants to manage energy through efficiency and demand response programs. She said biomass and hydro continue to be part of supply mix, just not part of Consumers' priority focus.
The MPSC bases its authority to set rates for Consumers, DTE and other utilities on a 1978 federal law, the Public Utility Regulatory Power Act, which requires regulated utilities to purchase power from renewable power generators under 20 megawatts.
Under PURPA, utilities must pay the price based on the "avoided costs" to generate the same amount of power used in the current standard power-generation source, which used to be coal.
Since the MPSC's May 31 order, the state's approved avoided cost methodology is now based on natural gas generation with several energy and capacity factor adjustments. The last time Consumers agreed to contract prices with independent, qualified facility renewable power owners was in 1982.
The three-member MPSC now must decide whether to support rates based on a modified avoided cost methodology that the IPPC contends is 20 percent to 30 percent lower than the previous two staff recommendations and lower than current contracts. The rates also "do not reflect similar costs that Consumers receives to run its own similarly-situated facilities," the IPPC said.
On the utility side, Consumers and other utilities say they want to pay the lowest price possible to keep electricity rates down for customers. But renewable energy operators say they need fair prices that also comport with federal law to continue operations and build for the future.
Margrethe Kearney, a staff attorney in Grand Rapids with Environmental Law and Policy Center, said ELPC believes the MPSC staff's third recommendation on June 19 is in error and has objected in a response to the commission. She said ELPC supported the commission staff's first recommendation and felt the rates complied with federal law and would sustain the small renewable operators.
Kearney said the third set of numbers lowered prices by at least 20 percent.
"One of the goals of PURPA is by reaching the right avoided cost you are properly incentivizing small independent power producers, like hydro, to help meet renewable goals. It strengthens the grid and you have a national security benefit," Kearney said. "If avoided costs are too low, like double counting inflation, customers get hurt because you have falsely low avoided costs."
Gary Melow, director of Michigan Biomass, said the PURPA avoided cost formula must fairly price projected electric capacity and energy production provided by the independent power producers.
Melow said Michigan Biomass, which is not a part of the case before the commission, has three members in IPPC — the Hillman Power Co., Viking Energy of Lincoln, and Viking Energy of McBain.
Darwin Baas, director of the Kent County Department of Public Works, said preliminary rate projections Consumers would pay for the county's 15-megawatt waste-to-energy facility range from 6 cents to 6.5 cents per kilowatt hour, down from its current 8.5 cent rate.
Kent County stands to lose $2.5 million in annual electrical revenue if the MPSC recommendation stands, Baas said. Kent County's contract with consumers expires in early 2022. The county recently made a $2 million refurbishment investment on its plant that employs 40 workers, Baas said.
"We continue to push back and do not think the (MPSC) staff-proposed proxy figures are anywhere near reality nor accurately represent Consumers Energy actual avoided cost calculations for electrical generation," Baas said. "We're worried to say the least."
James Charles is director of operations with Sacramento, Calif.-based Fortistar Biomass Group, which owns Hillman, a 20 megawatt biomass plant that powers about 14,000 homes.
Charles said the MPSC staff has been recommending declining rates the past month. He said the impact to Hillman won't be known until the commission's decision.
"We are concerned. We have been providing renewable energy at Hillman's for 30 years. We want to continue to generate renewable energy as long as the commission comes up with a fair rate," Charles said.
IPPC's other members include Lansing-based Granger Energy Services (landfill gas) and about 22 other hydroelectric facilities, among them Boyce Hydro; Michiana Hydro Electric Co.; Tower Kleber LP/Black River LP; the city of Beaverton; and Elk Rapids Electric Power.
State, national precedent?
Kearney said the Michigan PURPA cases have national implications for renewable energy operators and regulated utilities, especially in Midwestern states.
"If Michigan can show that PURPA competitively prices clean renewables and doesn't impact prices customers are paying, it can send a very strong message that PURPA works," Kearney said.
Melow said and Kearney also agreed that a favorable ruling for renewable operators from MPSC could lead to further growth in the renewable market, including distributed and community solar projects.
"As states are capping out (reaching maximum state-mandated renewable portfolio standard), you have solar developers looking for ways to develop projects," Melow said. "People are realizing they can use PURPA and utilities have to buy their solar. This is the national dialogue that is affecting Michigan, and what's happening in Michigan is being watched closely around the country."
Kearney said many cities and community solar operators are looking to expand their renewable energy portfolios. A favorable PURPA decision could encourage more solar and other renewable plants.
"It gives them another tool and more flexibility to put together projects," Kearney said. "Cities are pledging to make energy use 100 percent renewable. It gives them flexibility how to do it."
Moreover, Michigan's new energy law requires utilities to produce 15 percent of energy from renewable sources by 2021. A previous 10 percent renewable energy goal was reached in 2015.
Consumers Energy provides natural gas and electricity to 6.6 million of the Michigan's 10 million residents. DTE Energy, the state's other major power producer, sells electricity to 2.2 million customers in Southeast Michigan and another 1.2 million gas customers in Michigan.