SEMCO Drops Plan For Three Year Rate Freeze

June 24, 2002
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SEMCO Energy Gas Co. says resistance from state regulators forced it to abandon a plan to implement a rate increase next spring that was coupled with a new three-year rate freeze.

The Port Huron-based natural gas utility now plans to return to a rate structure beginning April 1, 2002, that bases monthly bills on what it pays for natural gas at the wholesale level. That means monthly gas rates could fluctuate during the year for SEMCO customers if the volatility and price spikes experienced last year in the wholesale market return this winter.

“It just depends on what we can lock up with our suppliers,” SEMCO spokesman Francis Leider said.

SEMCO, with more than 40,000 customers in the Holland-Zeeland area and 267,000 statewide, now charges $3.24 per thousand cubic feet of gas (Mcf). SEMCO in September filed a request with the Michigan Public Service Commission (MPSC) to raise its natural gas rate to a maximum of $4.99 per Mcf, a 54 percent increase, and lock in the rate for three years, through April 1, 2005, to protect consumers from the kind of price volatility that was spurred last year by high demand and lower supply.

The higher rate represented the maximum that SEMCO estimated it would pay for natural gas on the wholesale level and subsequently charge its residential, commercial and industrial customers. SEMCO was the only gas utility pursuing the higher rate and coupling it with the continuation of a three-year freeze first implemented in 1999.

SEMCO estimates that its current rate freeze saved consumers $112 million this year, as wholesale prices spiked to between $10 and $11 per Mcf at one point early this year.

But with wholesale rates down significantly after supply grew and demand softened with the economy, and expected to remain stable for the foreseeable future, MPSC staff resisted the proposal. They contended the maximum rate was too high because it could leave SEMCO customers paying more for natural gas than wholesale market prices, which would conflict with efforts to generate competition among natural gas providers.

“They indicated that based on their monitoring and assessment of the market, that this filing was just too high,” MPSC spokeswoman Mary Jo Kunkle said. “Based on current market conditions, it was hard to justify the rate that was proposed. Rates have come down pretty significantly.”

MPSC staff believed a rate of $4.25 Mcf was reasonable because “it would protect customers from significant price run ups and yet be low enough to keep gas affordable,” Joel Sharkey, supervisor of the Competitive Services Section of the MPSC’s Gas Division, testified at an Oct. 18 hearing on SEMCO’s proposal held before an administrative law judge.

SEMCO withdrew its request to the MPSC on Nov. 9 after it was unable to reach agreement on a frozen rate for three years. The utility anticipates filing a new one-year plan with the MPSC that will set a base rate that could change month to month as wholesale prices fluctuate.

“They’d rather swing from year to year and see what happens,” Leider said. “I hope we can still get a great deal put together, but it’s going to be for a year and then we’ll move on.”

In abandoning its proposed rate plan, SEMCO seeks to follow the same course pursued by Michigan Consolidated Gas Co.

MichCon, which serves 1.2 million commercial and residential gas customers statewide — about 283,000 of them in Kent and Muskegon counties — plans to raise its rates from the current $2.95 per Mcf to a maximum cap of $4.54 per Mcf starting with January gas bills, when its existing three-year rate freeze expires at the end of the year.

Michigan Gas Utilities, which has about 36,000 customers in northwestern Ottawa County and portions of Muskegon and Allegan counties, opted three years ago not to implement a rate freeze program.

After three rate increases since September 2000 in the wake of unprecedented wholesale price spikes, MGU now wants to implement a new rate plan that would lower rates from  $6.84 per Mcf to $4.45 per Mcf.

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