Response to the “Ann Arbor Municipalization Study” from Charles River Associates

Context: DTE paid for this study, so the report should be viewed with great skepticism. DTE wants to make the potential costs of municipalization look as high as possible. The report by noted Big-Oil propagandist Charles River Associates (CRA) is designed to stoke public fears about the cost of a municipal utility, not to present objective factual information. 

A close reading of this study reveals no validity for its numbers. The main findings are that municipalization would cost Ann Arbor $1 billion up front and another $1 billion over the next twenty years; that the city utility’s operating costs would be 40% higher than DTE’s; and that rates would rise 30-40% in year one. These numbers are wildly inflated and are based on demonstrably false assumptions. 

CRA’s Assumptions

• Assumption: A municipal utility would lose economies of scale and would pass these increased costs to customers. (Page 4.)

False. Central DTE management in Detroit does provide services that Ann Arbor would need to replace. These include billing, load forecasting, bid/offer strategy, power purchase agreements, strategic planning, and regulatory compliance. However, with the exception of billing (a relatively small cost), all of these services are provided by the Michigan Public Power Agency (MPPA), a not-for-profit joint action agency that works collectively with member Michigan munis to share energy supply and related services to lower costs, reduce risks, and leverage expertise. Ann Arbor membership in the MPPA would thus take advantage of substantial economies of scale.

• These lost economies of scale would result in 40 percent higher O&M (operations & maintenance) costs for Ann Arbor. (Pages 3,4 and 9.)

False. CRA presents no evidence for this assertion, for which there is no basis. As we stated above, MPPA membership would restore economies of scale for most operational activities. Routine maintenance costs are driven by the cost of labor and equipment, and would be comparable. The Michigan Municipal Electric Association (MMEA) also assists its members in emergency disaster planning through a mutual aid contract, whereby cities provide both labor and equipment to other member munis in the event of an emergency.

• The study assumes Ann Arbor customers “would pay for financing of upfront investments and future capital investments required to replace aging infrastructure;” that the city would “pay utility operation costs;” and that it would pay for “purchases of energy and capacity, alongside transmission and subtransmission expenses” (page 4).

Misleading.  We pay all of these costs now each month through our DTE bills. There are four different capacity charges on the bill, and transmission and subtransmission costs are paid through the “power supply cost recovery” line item. DTE’s capital costs are fully reimbursed by ratepayers at a 9.9% ROI (return on investment). CRA has listed these items simply for effect.

• The study states that “Ann Arbor would lose out on the benefits from being part of a vertically integrated utility and pay more for financing and running a utility without any institutional experience” (page 4.)

False. DTE’s vertical integration, which encompasses both generation and distribution, is a net cost sink, not a cost saver. Ratepayers will foot the bill for DTE’s Monroe coal plant for years after it shuts down in 2032. Through our DTE bill (“other power supply volumetric charges”) we also pay a nuclear surcharge that covers the costs associated with decommissioning, low-level radioactive waste disposal, site security, and radiation protection at DTE’s Fermi 2 Nuclear Plant. And, of course, DTE Electric takes a 14% profit right off the top–mostly from ratepayers. With a municipal electric utility, Ann Arbor would not be saddled with legacy fossil fuel generation costs and nuclear power expenses, and would reinvest surpluses into operations, not shareholder dividend payouts.

• The study sets DTE’s current retail rate at 16 cents/kWh. (Page 4.)

False (for the residential rate). DTE now uses a variable time-of-day rate, but its current overall residential rate is 20 cents/kWh, not 16. That’s based on its last pre-time-of-day 2022 rate of 17.8 cents and layering on the three most recent rate increases, 0.78% (2022), 6.38% (2023), and 4.65% (2025). 

The residential rate is what matters to Ann Arbor residents. So the DTE bar in the comparison chart on page 12 should be much higher. And the Ann Arbor bar should be much lower, as shown below.

• “Total retail rate increase for Ann Arbor customers starting in year one ranges from 30% to 40%.”

False. These percentage increases are based on CRA’s calculated figure of $1 billion in near-term investment. That number is nonsensical, because it’s based on the following false assumptions.

• Assumption: That DTE’s asset value is at least $350 million. (Page 6.)

False.  CRA is using a discounted cash flow (DCF) analysis to arrive at this number. It does not provide any figures. DCF is not typically used to place a value on publicly traded companies like DTE, because the method relies on estimates of future earnings, which are uncertain, instead of actual asset value. CRA does not provide these estimates, so we have no way to know if they’re realistic, or (most probably) overstated. Using the widely employed and accepted OCLD (original cost less depreciation) method, 5Lakes Energy, in its phase 1 study for Ann Arbor, put the value of DTE’s assets at $190 million–a little more than half CRA’s estimate. 

• Assumption: Near term capital investments: ~$290 million. (Page 6.)

False. CRA puts 2025-2028 DTE capital investments in reliability improvements at $290 million from 2025-2028. Yet DTE’s own current marketing material cites a figure of $250 million from 2025-2029. CRA has exaggerated this number. More importantly, either the work will be completed by the time the city utility is operating, or the incomplete work will result in a lower purchase price. CRA is trying to have it both ways: saddle Ann Arbor with the cost of improvements and charge a premium for buying the system. It has to be one or the other.

• Assumption: Other customer make-whole: ~$125 million. This includes two components: Securitization make-whole, and income tax make-whole. (Page 6.)

False.  A utility uses securitization to replace existing debt and equity with lower-cost debt in the form of securitization bonds. DTE is saying here that Ann Arbor must compensate DTE for its share of bond servicing payments, since when Ann Arbor leaves the system DTE will still have to service those bonds, but without Ann Arbor’s revenue. Even if this is true (unclear), the dollar figure is outrageously high. Consider that in 2023 DTE Electric’s system-wide securitization bond total was $769 million. DTE’s total customer base is 2.3 million accounts, so the roughly 50,000 Ann Arbor accounts are just 2.2 percent of that. 2.2 percent of $769 million is $17 million: a far cry from the $125 million overall that CRA is saying Ann Arbor must pay DTE to make it whole. As for the income tax make-whole, DTE is apparently saying that Ann Arbor needs to compensate DTE for the portion of state income tax it pays that goes to benefit the city. This is highly unlikely. Even if true, the amounts involved would be miniscule, a far cry from the $125 million.

• “The municipal utility would also need to fund at least another ~$255M to cover grid separation costs, general equipment & systems, metering & billing, and transaction costs.” (Page 7.)

False. CRA is saying that Ann Arbor would have to pay more than the entire value of the DTE’s assets (as estimated by 5Lakes Energy) just to cover the cost to separate from DTE and set up its own systems. This is implausible, and CRA provides no documentation whatsoever. Separation and reintegration costs for Winter Park, Florida, were only $1 million. Although that was in 2005, and Winter Park is a smaller city (pop. 15,000), it is entirely implausible that Ann Arbor separation costs could run anywhere close to the $185 million figure in the CRA report.

CRA’s $30 million in legal and consulting fees is based on Boulder’s municipalization experience from 2014 to 2020. (Legal fees there totaled $27 million.) But that was an outlier–no other municipalization effort has spent anywhere close to that amount. Former Boulder consulting attorney John Coyle told us: “Boulder made a tactical error deciding they wanted to serve outside of the municipal boundaries…the Colorado Public Utilities Commission got involved…Boulder spent three years playing “bring me a rock” with the CPSC…  Had the muni effort focused strictly within the municipality these delays would not have happened.”

• From 2029 to 2044, “Over $1B of ongoing capital investments required to replace aging infrastructure and maintain the distribution system, based on current spending outlook for the Ann Arbor system, including the conversion plan.” (Page 8.)

False.  The Ann Arbor grid of course needs a lot of work, including upgrading from a 4.8kV to a 13.2 kV distribution system across several areas of the city. But the $1 billion in new capital investment that CRA says will be required between 2029 and 2044 contradicts DTE’s own plans. According to DTE’s 2023 Distribution Grid Plan (DGP), the reliability problems will mostly be fixed by 2029. From the plan: “By 2029, All-weather SAIDI [system average interruption duration index] is projected to improve by 64% in normal weather, improving from a fourth quartile baseline to second quartile performance.” And “All-weather SAIFI [system average interruption frequency index] during normal weather is projected to improve by 27% and achieve first quartile performance in 2029.” DTE confirmed this timeline in its response to the Liberty Consulting Group’s recent reliability audit for the MPSC: “The Company does not believe that customers can wait 10 years for improved reliability. The Company is confident that it can manage cost efficiency over the next five years to deliver on the investments described in its 2023 DGP.” So DTE’s own filings promise superior reliability performance before the end of the decade, before the $1 billion CRA estimated capital investment would even begin. We don’t necessarily believe that DTE will achieve these results, but those are their claims.

DTE anticipates winding down its modernization program over the next decade. DTE engineer Mike Witkowski said this at the August 8, 2023 Ann Arbor Energy Commission meeting: “In the next five years we should start to see that perimeter of the 4.8 to 13.2 conversion start to come into the city. And then in the 5-10 year range would be the next core of substations, working through those. So that’s kind of where we’re at. I think for the city of Ann Arbor we’re probably in the 10-15 year range for full conversion… at the tail end of this 10-15 year window here Ann Arbor is probably going to have one of the newest distribution systems in the entire country.” So why would CRA show Ann Arbor spending $50-plus million a year on capital improvements into the 2040s if DTE isn’t planning to do that? To inflate the numbers, of course.

• “In a market-based supply scenario, Ann Arbor’s total energy supply costs range from $150M/year to over $290M/year, covering energy, capacity, transmission and sub-transmission expenses.” (Page 10.)

False or misleading. Ratepayers, through our monthly bills, fully reimburse DTE already for its energy, capacity, transmission and sub-transmission expenses. These costs are unlikely to be higher for Ann Arbor than what we’re already paying DTE; in fact, they are likely to be lower. Michigan municipal utilities that don’t have their own power plants go to MISO for their electricity, and every single one charges lower rates than DTE.

• Green energy. “In a green energy scenario, Ann Arbor’s total energy supply costs range from $165M/year to over $280M/year.” (Page 11.)

False. This barely dignifies a response. CRA’s steeply rising curve for the cost of renewable energy is the exact opposite of historical trends, which show renewables becoming cheaper over time. MISO does have serious interconnection problems that could cause prices to rise in the short term, but not at the rate CRA projects. These problems should be resolved over time, not continue through 2044. Meanwhile, DTE is doubling down on its commitment to fossil fuels in the form of new and planned gas-fired generating plants, to operate through 2050 and beyond. What about the social, humanitarian, and economic costs of continuing to burn fossil fuels to make electricity, as DTE fully intends? Unsurprisingly, there’s no mention of these in the CRA report.

Conclusion: The CRA report contains no useful information. Its assumptions and statistics are meant to place municipalization in the worst possible light, and close inspection reveals obvious bias throughout. Frankly, we expected a more effective disinformation effort from DTE than this transparently phony study.