Municipalization: Is Ann Arbor Breaking Free from DTE? If Not, it Should Be.
Libby Antonneau
In the late 1990s, the town of Alma, Michigan, tried to break free from Consumers Energy Co. and start its own city electric utility, but the Federal Energy Regulatory Commission (FERC) told the city they would owe the company millions of dollars in “stranded investment costs” if the city chose to discontinue service.[1] However, a lengthy regulatory process and the closing of the Total Petroleum refinery, the largest electricity user in Alma, meant that the municipalization project was sent to the grave.[2] Despite Alma’s defeat, residents of Ann Arbor are pushing the city to follow Alma’s example and ditch DTE.[3] Ann Arbor for Local Power is a coalition of local residents and organizations advocating for a 100% renewable, public-owned electric utility.[4] While the story of Alma’s failed attempt could be a cautionary tale, changed regulatory conditions in Michigan may mean Ann Arbor can avoid a lengthy run-in with FERC.
Across much of the country, investor-owned utilities (IOUs) provide electric utility services to the public.[5] Municipalization is when a city takes over utility services and creates a not-for-profit self-regulating utility.[6] Municipal utilities, “munis” for short, do not have to maximize profits to pay dividends to shareholders, so they can achieve a broad range of policy objectives, such as reducing costs, promoting local autonomy, and reducing emissions.[7] Munis are not subject to the same state regulation as IOUs, so they can often implement and experiment with more progressive policies without state interference.[8]
The municipalization process includes feasibility studies, public vote, acquisition of assets, and then, once approved, the city’s transition into and operation of the new utility.[9] The specifics of this process vary depending on state law.[10] Here, the Michigan Constitution allows a city to acquire a public utility with the approval of 3/5 of the voters.[11] If an Ann Arbor municipal utility proposal gets enough votes, the next step would be acquiring DTE’s distribution assets.[12] It is highly unlikely that DTE will be willing to negotiate the sale because they have a permanent franchise and would lose a substantial amount of customers. [13] Therefore, the city will likely rely on its right to condemn the property for public necessity.[14] However, because few modern examples of municipalization exist, determining the property’s fair market value will be a major hurdle.[15]
There are very few recent examples of the municipalization process, which stems from the history of the electric utility industry. For many years, large vertically integrated utilities that owned generation, transmission, and distribution assets were thought to be the most efficient way to supply power because of the economies of scale that could be reached.[16] Municipal and co-operative utilities existed but were outcompeted by IOUs and often limited in location to rural areas.[17]
Despite the IOUs’ tight grip on the electric industry, FERC and state legislatures began recognizing the potential benefits of a competitive wholesale energy market in the 1990s.[18] FERC Order 888, given in 1996, required all transmission owners to provide “open access” energy transmission to any generators that wished to use the line to sell wholesale or retail power.[19] Open Access transmission allowed munis and other small power producers to take advantage of the transmission networks of the large IOUs and more readily compete with large utilities to wholesale electricity. [20]
The advent of open-access transmission made starting a muni a real possibility again. Cities looking to start a muni would not have to build their own long-range transmission lines but rather would be able to connect local distribution to the incumbent utility’s transmission and pay a fee for the use.[21] However, IOUs are reluctant to let a municipality take a large chunk of their customers away because, through their state-regulated rates, they recover the costs of their investments.[22] Without those guaranteed customers, the IOU may be stuck with extra generation capacity, resulting in “stranded costs.”[23]
FERC knew IOUs would be dissatisfied with the way open access transmission increased the ability of cities to municipalize and addressed this by providing a mechanism for the IOUs to recover the “stranded costs” from leaving customers.[24] FERC Order 888 allows an IOU to recover “stranded costs” from a retail customer turned wholesale customer if it can show it had a reasonable expectation of continuing to serve the customer and if the former customers take advantage of the former utilities’ open access transmission lines to reach other sources of power.[25] FERC has primary jurisdiction over determining when an IOU can recover “stranded costs” and the amount.[26] Therefore, when a city municipalizes and the incumbent IOU owns the transmission it must use, FERC will be involved to determine how much the city owes in stranded costs.
FERC Order 888 lays out a formula for determining stranded costs: Stranded Cost Obligation = (Revenue Stream Estimate – Competitive Market Value Estimate) * Length of Obligation.[27] While the formula seems relatively straightforward, Alma shows just how contested the values within the formula can be.[28] Major disputes occurred in Alma over how many years the length of obligation should be and whether distribution costs should be subtracted from the Revenue Stream Estimate.[29] This entire ordeal took Alma about three years.[30] By that time, the city’s largest electricity user was closing its factory, the movement lost steam, and they did not proceed with municipalizing.[31]
While Alma is the most recent example of attempted municipalization in Michigan, acquiring DTE’s assets would likely look much different for Ann Arbor. In September 2023, the City of Ann Arbor released its 100% Renewable Energy Options Analysis, discussing preliminary findings about how much time and money would be needed to municipalize.[32] The report suggested that the time needed to create a municipal utility would not allow the city to reach its 100% renewable energy goals by 2030, and it may be cost-prohibitive.[33] The amount of time it would take to municipalize is very uncertain, so it is true municipalization might not be the fastest way to 100% renewable energy. However, as discussed earlier, municipalization still has other public policy benefits, and 100% renewable energy could be reached eventually.[34]
Additionally, Ann Arbor’s 100% Renewable Energy Report relies on the FERC Stranded Cost formula for determining the cost of municipalization.[35] However, Ann Arbor may have a strong case against using that method and may be able to avoid FERC altogether. FERC Order 888 allows for recovery of wholesale stranded costs only when the incumbent IOU can show that the departing customer will be using its transmission system.[36] This requirement is referred to as the transmission nexus.[37] Here, DTE does not own the transmission assets Ann Arbor would need to import power. Therefore, DTE does not have the transmission nexus required to recover stranded costs from Ann Arbor upon its departure. If Ann Arbor pursues a second feasibility study, exploring other methods of calculating the cost to take DTE’s distribution assets would be beneficial.
In 2000, one year after Alma failed to municipalize, Michigan underwent electrical restructuring.[38] Public Act 141 required that all IOUs in Michigan join a multistate regional transmission system or divest their interest in their transmission facilities.[39] Accordingly, in 2002, DTE sold its transmission subsidiary, International Transmission Co. (ITC), to Kohlberg Kravis Roberts & Co. (KKR) and Trimaran Capital Partners LLC affiliates for about $610 million in cash.[40] Therefore, unlike Alma, which went through this process while IOUs in the state still owned transmission assets, Ann Arbor will not have to compensate DTE for “stranded costs.” While the Michigan Public Service Commission or the court, either of which could determine how much Ann Arbor owes DTE for the condemned property, may elect to use a formula like FERC, it is unlikely that Ann Arbor will be subject to FERC directly under Order 888. Alma’s experience should not deter Ann Arbor. Instead, Ann Arbor should capitalize on the restructured market and proceed with municipalization.
[1] Stacey Henson, Alma officials once again examine possibility of municipal utility, The Saginaw News (Jul. 14, 2008), https://www.mlive.com/saginawnews/business/2008/07/alma_officials_once_again_exam.html.
[2] Id.
[3] Akielly Hu, Meet the communities trying to take over their local electric utility, Grist (Jan. 25, 2024) https://grist.org/politics/meet-the-communities-trying-to-take-over-their-local-electric-utility/.
[4] Ann Arbor for Public Power, https://annarborpublicpower.org/ (last visited Feb. 15, 2024).
[5] See Alexandra B. Klass & Rebecca Wilton, Local Power, 75 Vand. L. Rev. 93, 124 (2022) (stating that IOUs provide electricity to 67% of U.S. residential, commercial, and industrial end-use customers).
[6] Id. at 100.
[7] Id.
[8] Id. at 100-01.
[9] See Synapse Energy Economics, Inc., An Analysis of Municipalization and Related Utility Practices: Prepared for District of Columbia Department of Energy and Environment 1 (Sept. 30, 2017); City of Ann Arbor, supra note 4, at 28-31.
[10] Forming a Public Power Utility, supra note 4, at 27.
[11] Mich. Const. art. VII, § 25.
[12]See City of Ann Arbor, 100% Renewable Energy Options Analysis15(Sept. 2023) (explaining the uncertainty surrounding the process of acquiring DTE’s assets).
[13] Id.
[14] Id.
[15] Id.
[16] See Sharon Jacobs & Dave Owen, Community Energy Exits, 73 Duke L. J. 251, 259 (2023) (explaining the development of the central-station model of energy production, distribution, and use).
[17] Ari Peskoe, Is the Utility Transmission Syndicate Forever?, 42 Energy L. J. 1, 6 (2021).
[18] Klass & Wilton, supra note 5, at 125-26.
[19] Id.
[20] Id.
[21] Id.
[22] See Transmission Access Pol’y Study Grp. v. FERC, 225 F.3d 667, 690-700 (2000) (explaining how FERC understands stranded costs).
[23] Id.
[24] Id.
[25] City of Toledo v. Toledo Edison Co., 118 Ohio Misc. 2d 131, 138 (2000).
[27] City of Alma, 88 F.E.R.C. P63,002, 65019 (1999).
[28] Id.
[29] Id.
[30] Henson, supra note 1.
[31] Id.
[32] City of Ann Arbor, supra note 12,at 15.
[33] Id.
[34] Klass & Wilton, supra note 5, at 100.
[35] City of Ann Arbor, supra note 12, at 16.
[36] City of Toledo, 118 Ohio Misc. 2d at 138.
[37] Transmission Access Pol’y Study Grp, 225 F.3d at 723.
[38] Public Sector Consultants, Electricity Restructuring in Michigan: The Effects to Date of Public Act 141 and Potential Future Challenges, 1 (2006).
[39] Id.
[40] Clarion Energy Content Directors, DTE Energy to sell transmission business to KKR and Trimaran Capital Partners, Power Grid International (Dec. 3, 2024) https://www.power-grid.com/td/dte-energy-to-sell-transmission-business-to-kkr-and-trimaran-capital-partners/#gref.