Why Michigan utilities saw profits soar during the pandemic

The pandemic at first seemed to present a serious threat to utilities’ bottom lines — consumption from their largest industrial and commercial consumers plummeted in March, just as millions of residential customers lost their jobs. 

But as utilities braced for profound revenue loss in a failing economy, something unexpected happened instead — they ended up reaping enormous windfalls, earning up to $30 million beyond what they expected in Michigan. 

Consumer advocates say the high profits highlight a problem with how utility customers are charged. Changes to Michiganders’ utility bills made in 2016 shifted much of the cost burden from large industrial and commercial users to individual residential customers. That helped send residential rates soaring over the last five years, and the spike in residential usage as people stayed home during the pandemic generated enormous profits for utilities. 

Industry observers say the cost shift has proven to be overburdensome to residential customers, and the pandemic windfall underscores the imbalance.

“I don’t think the way that rates have been set is fair — industrial customers have been given quite a good deal here,” said Bob Nelson, a former commissioner at the Michigan Public Services Commission. Gov. John Engler appointed him as a political independent. He now serves as a board member for the consumer advocacy group Citizens Utility Board of Michigan. 

Nelson said federal Energy Information Administration data show the state now has the nation’s third-largest rate gap between its industrial and residential users. The changes, he said, were a direct result of powerful industry lobbying groups like the Association of Businesses Advocating Tariff Equity (ABATE) pressuring the legislature to enact changes to make the state more hospitable to big business. 

The results of the shift are in: Residential costs in Michigan jumped by $775 million between 2015 and 2019 — the second-highest increase in the country — and continue to climb. Meanwhile, Michiganders’ energy household energy expenditures are now among the nation’s highest. 

The changes represent “the principal cause” behind the rate increases. However, investment in the state’s deteriorating utility infrastructure also contributes, said Douglas Jester, a partner with the 5Lakes Energy consulting firm. 

Regardless, the higher prices have created an enormous strain on low-income residents like Eban Morales, a disabled Highland Park resident who raises his 15-year-old son off less than $800 per month in assistance. 

Though he’s switched to energy-efficient bulbs and taken other cost-saving measures in recent years, Morales said his bills continue to increase and can reach $1,000 during the winter’s coldest months.

That creates a situation in which he simply can’t keep up. 

“I don’t have $1,000 per month,” Morales said. “I can pay a little bit, but then the next bill comes, and you’ve got to deal with that amount, and it’s hard to catch up and stay current.

“I stay in constant fear of being shut off.” 

Changing the formula to favor industry

During the 1970s, the Michigan industry generally paid higher rates than residential customers because the MPSC didn’t want the latter to bear the brunt of the cost of bringing nuclear online, Nelson said. 

Industry sought to change that, and the 2009 energy bill passed by then Gov. Jennifer Granholm and the Republican-controlled legislature directed the MPSC to balance the cost burden, Jester said. By 2012, changes to the price structure seemed to do that, he added, but industry sensed an opportunity with the GOP in charge of the government. 

“This is where industrial customers got greedy and wanted to go further than just balancing the cost of service — they wanted to change it to their advantage,” Jester said. 

To accomplish this, GOP leadership included changes to the 2016 energy bill that tweaked the complex formula that lays out the proportion of utility expenses that each customer class must cover. 

The tweaks centered around the cost of owning and maintaining power plants, Jester said. Residential customers account for a larger share of “peak demand” power delivery during the summer and winter, while industrial customers use about the same amount of energy all year. 

Before 2016, 50% of the cost of maintaining power plants was allocated based on peak demand, and 50% was allocated based on use throughout the year, Jester said. The legislature changed the formula, so 75% of costs were assigned based on peak demand, and 25% were allocated based on use throughout the year. That shift dramatically favors industrial users, Jester said. 

“I do not think this is fair, and I have testified on that many times,” he added. 

At least part of the reason residential customer rates are higher makes sense, experts say. Delivering power to individual homes costs more because it requires more infrastructure, like distribution and transmission lines.

But the rate structure has swung far in industry’s favor, and industrial users also have customer choice, which means some businesses can buy their power from utilities other than the monopoly that serves their areas, Nelson noted. Residential users do not have the benefit of choice. 

‘We just don’t have the money’

The cost shift isn’t solely responsible for utilities’ pandemic windfall. Each year that utilities seek state approval for their rates, they bake into their costs the estimated revenue they will lose from non-payments. 

MPSC data shows that the number of accounts in arrears dropped significantly during the pandemic, which means that companies collect more money than in previous years. DTE Energy, for example, reported 560,000 accounts that were at least 90 days past due in October 2019 and only 355,000 in October 2020. That means the company has collected payments from around 205,000 more customers during the pandemic, translating into extra revenue.  

Jester said the drop in late payments largely appears to result from the state and federal government making more financial assistance available for struggling residents and making it easier to access. Meanwhile, the state’s utilities generally worked harder to help out struggling customers, he added.

“This is an example of what happens when everyone steps up,” Jester said. 

For now, it appears utilities won’t be placing the extra profits back in customers’ pockets. A DTE spokesperson told Planet Detroit that the company is giving customers a “refund” by delaying its next rate case and investing the excess profits in its operations. A Consumers Energy spokesperson said the company “reinvests its excess funds,” largely to make improvements to its system, though a small amount will be dedicated to assistance programs. 

Rick Bunch, executive director for the Michigan Municipal Association for Utility Issues, scoffed at the idea of utilities giving customers “refunds” by putting the excess profits into its own pockets, labeling the move “Orwellian.” 

“I think if you look at the term ‘refund’ in the dictionary, it would typically involve putting money back into customers’ pockets,” he said. Consumer advocacy groups are preparing to pressure the MPSC to require the utilities to refund the excess profits to low-income and struggling customers, Bunch said. 

Regardless of how the profits are distributed, the rate structure that’s partly behind the profits remains in place. Jester said consumer groups have repeatedly testified to the MPSC that the formula is unfair to small users, but the way the law is written makes it difficult for the MPSC — now controlled by commissioners who are generally more sympathetic to residential consumers than in previous years — to do much about it. 

The easiest path to re-balancing the rate structure is through legislative action, but that’s unlikely with the GOP in control of the state House and Senate, Jester added.  

In the meantime, some, like Morales, continue struggling. He said he hadn’t seen an increase in assistance available during the pandemic, and obtaining it remains a complicated process. At the same time, aid for other necessities besides his utility bill isn’t always there, leading to difficult decisions.  

“People that are low income, elderly, disabled, really have to be fearful during the colder months … because we may have to choose between medication and food or whatever because we just don’t have the money,” Morales said.