DTE’s electric utility has incurred unnecessary extra costs due to its contract with the NEXUS pipeline.
New utility regulators’ upcoming decision could prevent DTE Electric customers from having to pay the extra costs.
Michigan Environmental Council and Attorney General are pushing for stronger regulatory oversight for NEXUS-related expenses.
It has been a year and a half since gas began flowing through the NEXUS pipeline, a 255-mile long pipeline that transports fracked gas from the Marcellus and Utica shale basins into Michigan.
The pipeline is co-owned by Enbridge and DTE Energy under a venture called NEXUS Gas Transmission. One of the customers buying the gas is DTE Electric, a subsidiary of DTE Energy. In just the two months of 2018 when NEXUS began service, DTE Electric unnecessarily paid an extra $1 million by having an agreement with the affiliated pipeline company, according to testimony from the Michigan Attorney General.
This affiliated transaction has been argued over for years at the Michigan Public Service Commission (PSC). Still, the PSC has never resolved several issues, including whether or how it should apply its Code of Conduct for Affiliate Transaction to the situation. Two new commissioners, Dan Scripps and Tremaine Phillips, will be part of an upcoming order that could determine the outcome of the Code of Conduct question.
If the PSC decides to enforce this code, customers won’t have to pay the extra $1 million from 2018. The PSC would also set a precedent for future commissioners to protect customers from paying tens of millions of dollars in unnecessary costs in future NEXUS-related cases.
The PSC will also need to wrestle with other issues that contribute to the extra costs, including DTE Electric’s transaction with an additional affiliate, and the utility’s use of the purchased gas while it finishes the construction of its $1 billion 1,150 megawatt gas plant, the Blue Water Energy Center.
Will the Code of Conduct be enforced; are NEXUS’ rates reasonable and prudent?
The case before the PSC is the reconciliation of DTE Electric’s 2018 Power Supply Cost Recovery Plan (PSCR). Under state law, a utility must file a plan to demonstrate that its expenses to generate electricity, including fuel transportation costs, are prudent and reasonable. At the conclusion of the year, the utility then files the reconciliation of the plan to show the actual costs of the fuel and other related expenses to keep the lights on. Since NEXUS entered service in November 2018, this PSCR reconciliation is the first in which DTE has requested to recover the costs incurred under the NEXUS contract.
Both the Michigan Environmental Council (MEC) and the Department of Attorney General have intervened to contest DTE’s recovery request.
MEC has argued explicitly that the PSC needs to apply the Code of Conduct when DTE seeks to recover NEXUS related costs from its customers.
Enforcing the Code of Conduct protects customers from being overcharged by their monopoly utility company when it signs contracts with affiliated companies. It strictly limits the compensation to the market price of the service — any costs above the market price would be charged to DTE’s shareholders, not customers. In the case of NEXUS, the Code of Conduct can protect DTE Electric customers from paying extra on their utility bills. If not enforced, DTE will be able to recoup millions of dollars from customers without strict regulatory oversight throughout the 20-year contract.
In this case, it is uncontested that the cost to transport gas via NEXUS is above the market price, causing customers to pay daily expenses for unneeded capacity. The total cost that the intervenors urge the PSC to disallow is approximately $1 million for the first two months of DTE’s contract with NEXUS.
While the reconciliation of the 2018 plan will conclude in the coming weeks, evidence submitted in the DTE Electric 2019 power supply plan case last year revealed that the NEXUS contract continues to be uneconomical. DTE estimates that NEXUS imposed a $6.5 million net cost to customers in 2019. The utility further estimates that it will cost customers an extra $39 million through 2023.
However, the utility wants the Commission to take into consideration the 20-year contract it has signed with NEXUS in the belief that there will be savings at the backend. It further argues that it should not have to debate the NEXUS contract every time it files a PSCR.
MEC has argued that the Code of Conduct needs to be applied every time a utility takes service from an affiliate and that cost exceeds the market price.
Since 2000, when the Legislature mandated that the PSC establish a code of conduct and apply it to all utilities, the rule prohibiting subsidization of affiliates has remained unchanged. In its initial brief in the 2018 reconciliation case, MEC pointed to prior PSC rulings that have deemed it necessary to impose pricing restrictions on affiliate transactions:
“Even though the subsidiaries, ventures, and affiliates embedded within a utility holding structure usually maintain distinct identities as legal persons, they act as a single firm that serves the collective economic interests of the parent company’s investors and management.”
Indeed, DTE reports to its shareholders how each of its subsidiaries contributes to the total earnings of the corporation. Its pipeline division is increasingly adding more in profit every year to the holding company thanks in part to recent investments in gas infrastructure, including the NEXUS pipeline. The pipeline and storage division of DTE is expected to earn $277-$293 million this year, which will likely consist of up to 23% of the company’s total earnings.
MEC contended that DTE has paid more than the market price for NEXUS gas transportation and therefore did not comply with the Code of Conduct affiliate price cap rule.
The Office of the Attorney General also argued that the PSC must disallow $1 million from being paid by customers in this reconciliation case. The expert witness hired by the AG, Sebastian Coppola, a former Senior Vice President and CFO at SEMCO Energy (a Michigan-based natural gas public utility), provided an analysis to further demonstrate that DTE Electric has unduly increased costs to its customers. He explained that the PSC should assess the transportation options of other pipelines that bring natural gas to Michigan.
Chart 1 shows the cost to transport gas on the NEXUS pipeline “is the highest among the other pipelines to which the Company has access,” according to testimony on behalf of the Attorney General.
Chart 2 shows planned gas purchases over a five-year period by DTE Gas will exceed the total cost delivered by other pipelines, which would be similar to prices paid by DTE Electric, according to testimony on behalf of the Attorney General.
Coppola said that the utility “unnecessarily increased its fuel costs in 2018 by approximately $1 million to the detriment of [its] customers and for the benefit of NEXUS, which is partially owned by an affiliated company.”
He concluded that the rates paid by DTE Electric for capacity on NEXUS are therefore not reasonable and prudent.
Fuel via NEXUS not being used for power generation
If the PSC decides not to enforce the Code of Conduct and determines that DTE Electric has paid reasonable and prudent rates to NEXUS, then there is still the fact that the utility did not fully utilize the pipeline. MEC argued that state statute only allows a utility to recover costs of fuel burned for electric generation. DTE Electric utilized just under 10% of the fuel transported by NEXUS at its generating units.
MEC said that this should not surprise the Commission and highlighted in their testimony a December 2013 presentation in which DTE management admitted that the full NEXUS capacity was unneeded. The original contract with NEXUS was only for 8,500 Dth/day, MEC noted; DTE then amended the contract in 2015 to take 30,000 Dth/day and admitted it did this to ensure the pipeline was built during a 2016 cross-examination in a PSCR case.
“The statute authorizes recovery of fuel-related costs to supply current generation, but not present costs incurred to supply future generation … As a result, the Commission should disallow recovery of the daily NEXUS transportation costs incurred for gas not delivered to and burned by DTE for generation in 2018,” concluded MEC.
DTE’s contract with another affiliated company
Another affiliate transaction is among the list of issues that have contributed to the above-market price. In 2018, DTE Electric amended its NEXUS contract to take half of its contracted capacity with the Texas Eastern Appalachian Lease (TEAL) pipeline for four years. Enbridge, the co-owner of NEXUS, is also the owner of the TEAL pipeline. It connects with NEXUS at a receipt point called Kensington.
Map showing the NEXUS pipeline (black dashes with a yellow highlight) and the TEAL pipeline (red with a yellow highlight). (Source: Enbridge)
Enbridge leased the entire capacity of TEAL to NEXUS. DTE Gas also contracted for nearly half its NEXUS capacity with TEAL (37,000 Dth/d out of 75,000 Dth/d).
The amended contract allows DTE to buy cheaper gas at the Clarington receipt point on the TEAL pipeline due to changing conditions in the shale basin. However, the Attorney General and MEC raised concerns again about the affiliated transaction. They pointed out that because the pipeline is not being fully utilized due to expensive rates, the cost savings from switching receipt points does not offset the charges to reserve capacity. Coppola, the witness for the Attorney General, argued in testimony that while DTE had access to cheaper gas at Clarington, gas purchases flowing on the pipeline were only utilized 27% of the time in the first six months of NEXUS’ service. If DTE does not fully use the capacity, then it does not generate the cost savings.
MEC also found that the cost savings have “evaporated” and turned into a net cost of over $500,000 in the two months of the case. In their initial brief, MEC emphasized that there appears to have been a lack of negotiation between the affiliates, while Coppola similarly emphasizes that this amendment mainly benefits the pipeline owners:
“NEXUS has leased the entire capacity of TEAL from Enbridge to market to utilities and other companies … [the] contract change with NEXUS is another affiliated company transaction to help NEXUS market the additional capacity it has leased from TEAL … With NEXUS holding the entire capacity of the TEAL pipeline, it must find an outlet to market that capacity. DTE Electric and DTE Gas are two of the prime outlets” (emphasis added).
An administrative law judge is expected to make recommendations on all these issues by June 4, followed by a Commission order sometime over the summer.
