Hydro deal would let private buyer flip Consumers Energy dams

LANSING, MI — Consumers Energy’s plan to sell 13 hydroelectric dams to a private equity-backed firm would allow the new owner resell or stop operating the dams without state approval, according to testimony from Michigan utility regulators in a contested sale case.

In testimony released this earlier this week, the Michigan Public Service Commission staff confirmed that the deal proposed in September would not stop Confluence Hydro LLC, a new subsidiary of Maryland firm Hull Street Energy, from flipping the dams to a new buyer.

“Staff did not find any terms or conditions which would limit the ability of Confluence to transfer ownership of all or part of the hydro fleet to an unaffiliated third party,” testified Jonathan DeCooman, an MPSC public utilities engineer.

DeCooman, whose testimony was among hundreds of pages released Feb. 9-10 from multiple intervenors in the contested sale application, said commission staff also found no requirement in the contracts that Confluence operate the dams for the full term of the proposed deal.

The deal structure worries conservation groups and state agencies, who say that allowing Consumers dams to fall into private hands based out-of-state creates environmental, public safety and liability risks exemplified by the 2020 Edenville Dam disaster in Midland and Gladwin counties.

As a regulated utility, Consumers can seek approval to recover major repair costs through electric rates. Confluence would instead rely on revenue from a long-term power purchase agreement with Consumers to fund operations, maintenance and capital improvements.

“Historically, they’ve been a dam-flipping company rather than one to retain dams,” said Daniel Abrams, an attorney with the Environmental Law and Policy Center, which represents a coalition of conservation groups which are critical of the deal.

Consumers has said the deal to sell its river hydro fleet for $1 per dam while committing to purchase their electricity for 30 years provides long-term stability and ensures continued investment in its aging dams.

Under the deal, Consumers would buy back the hydro fleet’s output at a starting price of $160 per megawatt-hour — double the market rate for comparable hydropower. The utility says that’s the least expensive path for ratepayers compared to relicensing the dams for continued long-term operation or decommissioning and removing them.

Both companies say the deal incentivizes long-term ownership. However, the potential for Confluence to either resell, walk away from or bankrupt the dams has emerged as a central concern among several case intervenors — some of whom question the math being used to support assertions that Confluence can both profit from the dams and perform necessary upkeep and maintenance on the old structures.

Additionally, Confluence’s plan to create separate LLCs to operate each dam could hamper the state’s ability to hold the new dam owner accountable in the event of a failure, they warn.

In responses to MLive, Consumers and Confluence said the proposed 30-year purchase agreement provides strong financial incentives for long-term ownership and safe operation of the dams. Neither company committed to a minimum ownership period.

“The federal licenses for these facilities do not expire until 2034 or later, and the long-term power purchase agreement clearly incentivizes a long-term approach to operating the dams,” said Confluence CEO Ed Quinn.

“We are confident our long-term plan to upgrade and operate the 13 dams will work,” Quinn said in a statement.

Testimony reveals competing cost estimates for dam sale

The testimony this week includes initial discovery responses in the case pending before administrative law judge James Varchetti, who is presiding over the legal proceedings before making a recommendation to the public service commission later this year on whether it should approve, deny or impose conditions on the deal.

The commission isn’t bound by Varchetti’s decision. The three-member, governor-appointed board is charged with evaluating whether the proposed contracts are prudent, cost-effective and protect ratepayers compared with alternatives, and whether the deal aligns with state energy laws governing renewable generation and asset transfers.

The dams were constructed between 1906 and 1968. They include the Calkins Bridge Dam on the Kalamazoo River, Webber Dam on the Grand River; Croton, Hardy and Rogers dams on the Muskegon River; Tippy and Hodenpyl dams on the Manistee River; and the Mio, Loud, Alcona, Cooke, Five Channels and Foote dams on the Au Sable River.

Hydropower licenses for the dams begin expiring in 2034.

Testimony from local governments and lake associations overwhelmingly supported the sale, arguing it’s the only realistic path to preserving the reservoirs, lakefront value and recreation opportunity the ponds create.

The Michigan Department of Natural Resources expressed concern that the dams are artificially raising water temperatures on the Muskegon, Manistee and Au Sable rivers above state standards for high-quality trout streams — which could prove a hurdle when the dams seek state certification as part of the relicensing process.

Jessica Mistak, DNR fisheries habitat supervisor, called it “concerning” in testimony that Confluence “does not have a plan to address this issue.”

Other intervenors argue the structure locks ratepayers into decades of payments while leaving dam ownership flexible.

Under the proposed agreement, Consumers would pay $160 per megawatt-hour in year one for output from the dams, escalating 2.5% annually. In earlier filings, Consumers said that price is roughly double the $79 per megawatt-hour it believes it could pay long-term for comparable replacement hydropower on the open market.

Discovery responses show the megawatt-hour price was the result of negotiations and was not derived from a formal cost-based calculation tied to a specific capital plan.

The Association of Businesses Advocating Tariff Equity (ABATE), an intervenor group representing large industrial customers, argues that Consumers’ assertion the deal is the lowest-cost option rests on inflated relicensing and decommissioning cost assumptions.

Consumers argues the deal is favorable on a net-present-value basis compared with relicensing or removing the dams, saving more than $500 million in today’s dollars.

However, Brian Andrews, a financial and regulatory consultant with Brubaker & Associates who testified for ABATE, argued that under adjusted modeling assumptions, the sale and 30-year power purchase agreement is far more expensive than either decommissioning or relicensing — even after including hundreds of millions of dollars in projected capital spending, such as major spillway work.

At least two of the Muskegon River facilities face significant capital needs. Consumers forecasts about $124 million in spillway work is needed at Rogers Dam. The DNR estimates that $350 million is needed to upgrade the deteriorated auxiliary spillway at Hardy Dam, which generates about a quarter of the utility’s total hydropower.

Other intervenors agreed the sale represents the cheapest option — albeit at a smaller margin than the utility projected.

An analysis from business consultant Sebastian Coppola submitted in testimony from the Michigan Attorney General’s Office found the average residential electric bill could be discounted $155 over the next 10 years if the transaction proceeds.

Nonetheless, Coppola urged regulators to impose a slew of conditions, including a requirement that the power purchase deal be re-approved if the dams are flipped to a new owner, and that any of the 32,000 acres of land Confluence would get with the dams be transferred to the state for public use once they’re not needed for hydropower.

Experts raise safety concerns if dams fall into private hands

Beyond the competing cost models, intervenors say the structure of the transaction itself and Hull Street Energy’s ownership patterns create uncertainty and long-term doubt.

Michigan’s dam safety chief, Luke Trumble, cited “several recent examples of bad outcomes” when hydropower revenue wasn’t enough to safely operate a private dam. That includes Edenville and the troubled Au Train Dam in the Upper Peninsula.

“In these examples, the dams fell into disrepair, did not receive necessary safety upgrades, and in some cases resulted in failure of dams, jeopardizing public health, safety and welfare, and causing harm to natural resources,” Trumble said in testimony submitted by the Michigan Department of Environment, Great Lakes and Energy.

Thomas Lyon, a University of Michigan environmental policy expert testifying for the conservation coalition, noted that Hull Street has acquired 47 hydroelectric dams since 2017 and divested all but one — the Boott Hydro project in Massachusetts.

Confluence’s plan to operate each dam under a separate limited liability shell creates a “judgment-proof” owner that may lack assets to cover damage from a failure, rendering court rulings ineffective and shifting recovery costs onto the state and taxpayers, Lyon warned.

Lyon called Confluence “evasive” about upgrade plans, saying its refusal to share them until a sale is approved offers “no assurances” to taxpayers or regulators that it will “make fully sufficient investments.”

When asked by MLive, Quinn did not provide specifics on how the power-buyback deal would cover long-term costs and still generate profit, or commit to funding major capitol upgrades such as the Hardy spillway project without seeking to renegotiate the deal or resell the dam.

Quinn said Hull Street spent more than a year evaluating the potential investment and reviewing thousands of pages of documentation. The power sales will provide “sufficient revenue to operate the dams safely for generations to come,” he said.

Confluence has not submitted testimony in the case.

Consumers also pointed to the 30-year term as a “compelling financial incentive” and a “key financial safeguard” for Confluence to fulfill a long-term commitment. It declined to offer any detail on corporate parent-level financial guarantees to protect ratepayers, citing confidentiality terms in the proposed agreement.

“Confluence Hydro has given every indication it will continue operating the dams,” said Consumers spokesperson Brian Wheeler in a statement.

“Should Confluence Hydro wish to remove power generation or decommission one or more of the river hydro facilities, they would be required to work with (the Federal Energy Regulatory Commission) and state regulatory agencies on a plan that ensures safety for nearby communities,” Wheeler said.