Background

Since July 2021, when the Ann Arbor Energy Commission first took up a resolution for a municipal electric utility feasibility study, A2P2 and city staff have been considering the municipalization option and its promise of a cleaner, more reliable electricity supply. In September, 2023, consulting firm 5Lakes Energy delivered its report, “City of Ann Arbor 100% Renewable Energy Options Analysis.” Among its conclusions was the following: “We suggest that the City authorize a Phase 2 Feasibility Study to characterize more precisely the costs and risks of the MEU [Municipal Electric Utility] approach.”

Purpose

Phase 2 feasibility studies are typically done in large part to prepare for a formal municipalization proceeding, assuming the city chooses to proceed. As such, the main objective of this phase 2 study should be to arrive at a technically sound and legally defensible valuation of DTE’s local distribution assets.

Cost

Scott Burnham, Business Development Lead of NewGen Strategies & Solutions (which worked with 5Lakes on the phase 1 study) told City Council on September 26, 2023 that the cost of an MEU phase 2 study would be “a range between $300,000-$500,000 depending on the level of effort and the scope of the elements.”

Proposed Scope of Work

The study should include the following elements:

  • A more complete visual inspection of DTE’s poles, lines, transformers, and substations by the contractor’s electrical engineers to more closely estimate their aggregate value, to build on the limited sampling approach taken in phase 1.
  • A thorough examination of DTE’s filings with the Michigan Public Service Commission (MPSC) and with the Federal Energy Regulatory Commission (FERC), in order to obtain DTE disclosures on the value and condition of their local assets, to help inform a valuation.
  • Using this information, valuations based on three methods: OCLD (original cost less depreciation), RCNLD (replacement cost new less depreciation), and premium over book value.
  • Building on the phase 1 study, a more thorough and documented legal analysis estimating the most likely range of compensation to be awarded to DTE for going concern (lost profits), if any, and an estimate of the city’s most likely stranded cost obligation. This estimate should take into account DTE plans to add generation capacity, FERC standards for calculating and minimizing stranded costs, and relevant legal precedents, including the 1997 Alma, Michigan municipalization case (FERC Docket No. SC97-4-000).
  • Financing alternatives for the acquisition of DTE’s distribution system.
  • Building on phase 1’s rate projections, provide updated annual rate projections over the next 30 years for the MEU versus continued DTE service, taking into account a more thorough and comprehensive legal assessment of going concern and stranded costs than in phase 1, and likely costs to the city to staff and stand up the muni, including billing systems, and to engineer separation from DTE. Rate projection models should incorporate updated assumptions for wholesale electricity costs over 30 years, O&M costs, and the cost of debt service for system acquisition financing, as well as differences in tax treatment, and shall allow for the city to later vary inputs on standard spreadsheets.
  • The phase 1 models calculated anticipated asset replacement costs. For phase 2, include estimated costs to underground wires, upgrade circuits, add needed capacity and improve reliability to the standards of the state’s existing municipal utilities and to regional norms.
  • The phase 1 study assumed the City would not acquire any DTE substations, sub-transmission, or transmission assets in the city. For phase 2, include such acquisitions where technically feasible within city boundaries and beneficial for MEU operations.
  • Phase 1 models assumed that all energy for the MEU would be sourced from the grid and not from local or distributed sources. For phase 2, model the stacking of other energy options for the MEU, including PV, PV with battery storage, community solar, and energy efficiency initiatives.
  • An estimate of the legal, professional and administrative costs to the city to see the municipalization process through to completion, including proceedings in Circuit Court and FERC stranded costs proceedings.

The city should follow the contractor’s phase 1 recommendation to pursue the phase 2 MEU feasibility study independently of other options.