Preface

The Michigan Energy Appraisal is a semi-annual assessment of Michigans energy baseline. The
assessment assists in developing a situational awareness of the states energy environment
including recent events impacting supply and prices, expected conditions, and changes over the
next six months. Additionally, it provides the necessary information to enable a reliable assessment
of the risk posed by an energy supply disruption.

The scope of the analysis varies by energy source. Michigans electricity prices, supply and
availability are largely determined by events in Michigan and the Midwest. Natural gas supplies
and prices are closely tied to national trends. Petroleum product markets in Michigan are affected
by international market conditions and events and regional refinery production. For the appraisal,
recent historical balances between Michigans energy consumption and supply are analyzed, and
consumption and supplies are projected. Actual and expected energy prices are reviewed to
identify changes impacting consumer costs. Generally, the fall appraisal focuses on the winter
heating season, and the summer appraisal focuses on summer energy use, including peak electricity
supply and demand, and gasoline for the summer driving season.

This report is prepared by the Operations & Wholesale Markets Division with assistance from the
Regulated Energy Division of the Michigan Public Service Commission (MPSC), Department of
Licensing and Regulatory Affairs, State of Michigan.


A major source of data and analysis used in this appraisal is from the federal Energy Information
Administration (EIA) at http://www.eia.doe.gov. The EIA collects national, state and international
data on energy usage, prices, supply, etc., and provides expert analysis on trends in energy.

The Energy Appraisal is available at: http://www.dleg.state.mi.us/mpsc/reports/energy/.

Comments or questions on this appraisal are welcomed and may be directed to Alex Morese,
Michigan Public Service Commission, 4300 W. Saginaw Highway, PO Box 30221, Lansing, Michigan
48909, phone (517) 241-0292, or email moresea@michigan.gov.

Project Manager Alex Morese
Author/Editor David Binkley
Electric
Gasoline
David Binkley, Raushawn Bodiford
David Binkley

Natural Gas

Petroleum
David Binkley, Nora Quilico, Cindy
Creisher
David Binkley, Alex Morese

Forecasts David Binkley
Database Development David Binkley
Issued: May 23, 2014
The Department of Licensing and Regulatory Affairs will not discriminate
against any individual or group because of race, sex, religion, age, national
origin, color, marital status, disability, or political belief. If you need
assistance with reading, writing, hearing, etc., under the Americans with
Disabilities Act, you may make your needs known to this agency.
HIGHLIGHTS
Energy Appraisal Summer 2014


1
The demand for energy in Michigan is projected to increase across all sectors compared to last year,
with the majority of growth occurring due to weather related factors. The first three months of
2014 were 21 percent colder than normal which contributed to higher consumption of electricity,
natural gas, and heating oil. Assuming normal weather this summer, demand for electricity and
natural gas (electric power sector) are expected to be higher than the same period last year, which
was 12 percent cooler than normal (June August). On-highway diesel usage is also expected to
grow, but due largely to an increase in industrial production and trucking demand. In contrast,
motor gasoline consumption is expected to see only slight growth as increased vehicle fuel
efficiency and sustained high gasoline prices continue to place downward pressure on demand.

Electricity Assuming normal weather, Michigans total electric sales are projected to increase by
1.9 percent in 2014. Increases are driven primarily by the residential sector with first quarter
demand (January - March) well above last year, due in large part to heating demand. Over the
summer months (June - August), aggregate electricity sales are expected to be higher than last year,
which was 12 percent cooler than normal. Given the anticipated demand and reserved margins
within the MISO and PJM footprints, there should be an adequate supply of electricity over the
summer.

Natural Gas Higher demand across all sectors is expected to raise total annual natural gas sales in
Michigan for 2014 to 859.9 billion cubic feet (Bcf), a 9.7 percent increase over 2013. In the
residential and commercial sectors, severe winter weather from the polar vortex caused significant
increases in demand. Due to a high reliance on natural gas as a direct heating fuel, the effect of
prolonged low temperatures was more significant than in the industrial or electric generation
sectors. Assuming a return to normal weather this summer, demand in the electric power sector is
expected to increase as a result of higher demand for air conditioning.

Petroleum The EIA estimates that global petroleum consumption grew by 1.2 million barrels per
day (bbl/d) in 2013. Total U.S. liquid fuels consumption rose by an estimated 2.1 percent in 2013,
but this growth trend is expected to slow down in 2014. Since January 2014, the startup of
TransCanadas Marketlink pipeline, which moves crude from Cushing to the Gulf Coast, and strong
refinery runs contributed to an increase in the WTI crude oil spot price. Prices ranged from an
average of $94/bbl in January to $102/bbl in April. U.S. crude oil production is expected to remain
strong and average 8.5 million bbl/d in 2014, and 9.2 million bbl/d in 2015 which would be the
highest annual production average since 1972.

Motor Gasoline Gasoline sales in Michigan are expected to remain relatively flat in 2014, with a
slight 0.6 percent increase over last year. Gasoline demand grew by 1.4 percent in 2013, only the
second year of consumption increases since 2004. Stronger-than-expected growth in highway
travel during the second half of 2013 contributed to the increase. Overall, gasoline consumption
has been on a downward trend due in large part to increases in fleet-wide fuel efficiency and
sustained high prices. During the AprilthroughSeptember summer driving season, regular
gasoline retail prices are forecast to average about $3.57/gallon according to the EIA.

Distillate Fuel Oil Distillate sales in Michigan are projected to increase by 3 percent to 1,058.8
million gallons in 2014, following a similar increase of 2.7 percent in 2013. This growth reflects
both colder temperatures this winter as well as growth in industrial production. First quarter
industrial growth in 2014 was 3.8 percent higher than the same quarter in 2013. According to the
EIA, onhighway diesel fuel retail prices, which averaged $3.92/gallon in 2013, will fall to an
average of $3.87/gallon in 2014.


2
Electricity


Demand

Assuming normal weather, Michigans total electric sales are projected to increase by 1.9
percent in 2014. Increases are driven primarily by the residential sector, due in large part to
colder than normal temperatures and strong heating demand for the first quarter of the year.
In contrast, commercial sector demand is expected to remain relatively flat since winter
temperatures had less of a pronounced effect on consumption behavior. Over the summer
months (June - August), aggregate electricity sales are expected to average 3.6 percent above
the same period last year. Last summer was 12 percent cooler than normal. Industrial sector
demand is also expected to grow due to a pickup in manufacturing, marking a return to 2012
levels. First quarter industrial growth in 2014 was 3.8 percent higher than the same quarter in
2013. Overall, the majority of expected demand growth in total electricity sales will be the
result of extreme winter weather during the first 3 months of 2014 and the assumption of
normal summer temperatures.

The projected combined coincident peak electrical demand for both the Consumers Energy and
DTE Electric service areas for this summer is 18,033 megawatts (MW), a 4.9 percent increase
from 2013. The instate generating capacity for the two utilities, including existing capacity
contracts, totals 17,328 MW after accounting for power outages, disruptions and regional
transmission losses (ZRC basis).
1
The actual 2013 peak demand for DTE Energy was 11,669
MW, which was recorded on July 18. In 2013, Consumers and DTE Energy accounted for 89
percent of total electricity sales in Michigan.


1
A ZRC is one (1) megawatt (MW) of unforced capacity from a planning resource for a specific planning
year pursuant to MISO tariffs. Unforced Capacity is the installed capacity reduced by the amount of
forced outages.


3
Supply

The total generating and purchased power supply for
Consumers and DTE Electric this summer is expected
to be equivalent to 17,522 MW on a ZRC basis. Both
Consumers Energy and DTE Energy plan to purchase
the necessary planning resource credits to
supplement their capacity in order to comply with
Federal Energy Regulatory Commission (FERC) and
Midcontinent Independent System Operator (MISO)
resource adequacy provisions. DTE Electric will
purchase the equivalent of 941 MW (ZRC) as needed
to meet its peak demand requirement (forecasted
peak demand of 9,501 MW plus zonal planning
reserve margin of 743 (MW) this summer. Consumers
Energy will purchase the equivalent of 94 MW (ZRC)
to meet its requirement of 8,165 MW (forecasted
peak demand of 7,609 MW plus a zonal planning
reserve margin of 556 MW) this summer. The
Commission requires all of Michigans electric
utilities to provide electric supply reliability plans
annually, and has recently asked for a more extensive
review to cover 2014-2016 (U17523).

Michigan relies partially on power purchased from
out of state, so availability of generation in the Midwest is important. The MISO and PJM
Interconnection (PJM) each manage wholesale power markets, reliability, and planning in
adjoining regions that include Michigan. In MISOs 2013 Resource Adequacy Survey, Michigans
Lower Peninsula (Zone 7) is expected to fall short of its reserve margin by 3.1 GW of generation
capacity in 2016. The U.P. and Wisconsin (Zone 2) are expected to see a 0.5 GW deficit although
adjustments are expected that would show a slight surplus. MISO is expected to update these
estimates periodically based on changes in load growth and plans of generation owners. The
MPSC is working with MISO, transmission companies, load serving entities, and generators to
ensure resource adequacy.

Price

Electricity prices have fluctuated for two of the states largest utility companies. Consumers
Energy prices reflect increased transmission costs as well as an adjustment to customer prices
to correct a previous wholesale transaction error. Conversely, DTE Electrics prices are lower
due in part to the resulting energy credits from the same error. These changes as well as
adjustments for fuel costs and market purchased power costs were made through each
companys Power Supply Cost Recovery (PSCR) mechanism.

Monthly Bill* /kWh Monthly Bill /kWh
Consumers Energy $70.48 14.10 $76.63 15.32 +8.7% U-17087
DTE $80.54 16.11 $73.05 14.61 -9.3% U-16472
*monthly bill calculations are based on usage of 500 kWh/month
Reference
Case #
2013 2014 Percent
Change

The average supply of coal held at electric
power generators in December 2013
dropped below 60 days of burn (a
function of both inventory levels and
anticipated consumption) for the first
time since summer 2011.

As coal regained generation market share
from natural gas, operators of coal-fired
plants drew down inventory levels that
had grown abnormally high in late 2012
and early 2013. Receipts of new coal
supplies at electric power plants were
generally below the five-year range
throughout 2013, leading to low
inventory heading into this spring.

At Michigan power plants, the situation
was made worse by severe winter
weather. Heavy ice on the Great Lakes
prevented shipments of coal and further
contributed to lower inventories.
Coal Supplies Down at Power
Plants Nationwide

4

Michigan Electricity Sales


Michigan Electricity Sales Projection
(Millions of kWh)
Residential Commercial Industrial Total
Historical 2011 Total 34,609 38,131 31,074 103,814
2012 Total 34,439 38,331 31,337 104,107
2013 Total 33,992 37,861 30,613 102,466
Projection 2014 January 3,536 3,166 2,243 8,946
February 2,928 2,926 2,504 8,357
March 3,037 3,022 2,621 8,680
April 2,439 2,891 2,553 7,883
May 2,491 3,131 2,696 8,318
June 2,838 3,345 2,769 8,953
July 3,712 3,570 2,680 9,963
August 3,382 3,535 2,735 9,651
September 2,499 3,118 2,729 8,347
October 2,322 3,105 2,790 8,217
November 2,624 2,953 2,646 8,222
December 3,257 3,054 2,544 8,855
1996 Total 2014 Total 35,066 37,816 31,510 104,392
2013-2014 change 3.2% -0.1% 2.9% 1.9%

NOTE: Projected electricity sales are based on historical trends.
SOURCES: Historical Data -- Energy Information Administration, U.S Department of Energy.
Projection: Energy Data & Security, MPSC.

5
Natural Gas


Demand

Higher demand across all sectors is expected to raise total annual natural gas sales in Michigan
for 2014 to 859.9 billion cubic feet (Bcf), a 9.7 percent increase over 2013. In the residential
and commercial sectors, severe winter weather from the polar vortex caused significant
increases in demand. Due to a high reliance on natural gas as a direct heating fuel, the effect of
prolonged low temperatures was more significant than in the industrial or electric generation
sectors. Assuming a return to normal weather this summer, demand in the electric power
sector is expected to increase as a result of higher demand for air conditioning. Last summer
(June through August) was 12 percent cooler than normal and greatly reduced demand for
natural gas peaking plants (see graph below). Electric power sector demand, however, is
projected to be counterbalanced by higher natural gas prices.



Supply

Natural gas volumes in underground storage for the lower 48 states were 899 Bcf as of April 18,
2014, which is 52.9 percent below the five-year average. Natural gas storage levels are
normally at their lowest levels by the end of the heating season in March and are built up during
the summer months. In Michigan, severe cold weather this past heating season (November
March), left inventories 12 percent below the five-year average. Michigans storage volume is
projected to gradually increase throughout the summer, reaching 499.4 Bcf in October 2014.
Storage injection typically begins after the end of the heating season in March and is sensitive to
both current market prices as well as price expectations for the upcoming heating season. High
current market prices create a disincentive to storage.

Michigan supplies close to 20 percent of its natural gas needs through substantial but declining
production wells. This production is projected to decline by 4.3 percent to 116.7 Bcf in 2014.

6
Net interstate deliveries are projected to increase by 39.2 percent to 726.2 Bcf in 2014 as a
result of increased demand and below normal storage levels.
2


Continued interest in the states Utica-Collingwood Shale for both natural gas and oil
production have recently begun to materialize on a limited scale due in part to higher gas
prices. In the latter half of 2013, there were noticeable increases in production in the Trenton-
Black River formation (oil wells that produce associated gas) and the Collingwood-Utica
formation (some months were actually over twice the previous years production volume).
Natural gas prices above $4/Mcf tend to encourage production as the construction of new wells
becomes more economical.

Price

Natural gas prices will continue to be influenced by the state of the U.S. economy, the national
supply-demand situation, and world energy markets. Natural gas wholesale (spot) prices were
relatively stable heading into the previous winter, but gas prices experienced volatility and
price spikes (reaching as high as $35/MMcf) during the extreme winter weather from January
through March 2014. Prices are currently trading above those seen at the same period last
year. During the first half of April 2014, the Henry Hub natural gas spot price was averaging
$4.61 per million cubic feet (Mcf), which is $0.66 above the price of $3.95 per Mcf, the average
at the same time in 2013.

The weighted average gas cost for the four largest gas utilities (commodity price/GCR factor +
distribution charge) of Michigan is projected to be approximately $9.28/Mcf for April 2014
through March 2015, with the commodity cost making up 56 percent of this price.
3
The
weighted average monthly customer charge for these same utilities is $10.75 a month. A
residential customers annual bill for the April 2014 - March 2015 gas year is forecasted to be
$899 based on May 2014 billed gas cost recovery (GCR) factors. If prices remain at current
levels, this years average annual gas bill is expected to be $67 more than last years average
annual bill, largely due to the extreme weather and price spikes experienced in the winter of
2013-2014. Incremental costs from the 2013-2014 colder than normal winter were not
factored into the approved GCR factors at the time and had to be shifted to the 2014-2015 year.

There are additional factors besides storage levels that may influence the price of natural gas
over the summer. A warm summer causes electricity generators to use more natural gas for
peak generation. If this summer is significantly warmer than normal, the increased use of
natural gas to meet peak electric loads will exert upward pressure on natural gas prices. An
active hurricane season in the Gulf of Mexico can drive up prices if significant damage occurs to
the natural gas production or distribution infrastructure. With the emergence of shale gas
(natural gas produced from shale) and the Rockies Express Pipeline (REX), however, Michigan
has become less reliant on natural gas from the Gulf of Mexico and Canada.




2
A net interstate delivery is natural gas from out of state used to meet total demand which excludes
Michigan production and storage.
3
This price includes the Gas Cost Recovery (GCR) factor, distribution charge, and monthly customer
charge. Utilities included in the cost are Consumers Energy, DTE Gas (formerly MichCon), SEMCO,
Michigan Gas Utilities (MGU).

7
Michigan Natural Gas Supply and Demand


Michigan Natural Gas Supply and Demand
(Billion Cubic FeetBcf)

Total Net Interstate Michigan To (From) Storage
Demand Deliveries Production Storage Balance
Historical 2011 Total 745.1 681.5 134.9 71.3 564.0
2012 Total 774.5 632.5 127.5 -14.5 549.5
2013 Total 783.9 521.5 122.0 -140.4 409.1
Projection 2014 January 139.8 -43.7 10.0 -174.2 235.5
February 130.3 -15.6 9.1 -139.5 98.7
March 118.2 25.1 9.9 -94.0 15.6
April 73.8 104.0 9.5 39.1 55.3
May 44.3 110.5 9.8 76.0 131.4
June 35.6 110.1 9.6 84.1 215.4
July 36.2 102.0 9.9 75.8 291.0
August 37.7 104.6 10.1 77.1 368.1
September 32.5 98.2 9.9 75.6 443.7
October 45.3 91.0 10.0 56.2 499.4
November 68.8 42.3 9.2 -17.0 482.1
December 97.4 -2.2 9.7 -90.0 392.1

2014 Total 859.9 726.2 116.7 -17.0 392.1
2013-2014 change 9.7% 39.2% -4.3% -4.1%


NOTES: Projected demand assumes normal weather for the remainder of the year. The Michigan production series
is compiled by the Operations & Wholesale Markets Division, MPSC. Net interstate deliveries are calculated using
total demand less the sum of Michigan production and change in Michigan storage. Storage balance is end of
month/year. SOURCES: 'Historical Data -- Demand and Storage from Energy Information Administration, U.S.
Department of Energy. Projection: Energy Data & Security Section, MPSC.
When demand is in excess of deliveries, the difference is withdrawals from storage.

8
Petroleum


World Outlook

The EIA estimates that global petroleum consumption grew by 1.2 million barrels per day
(bbl/d) in 2013. This trend is expected to continue through 2015 with an average annual
growth of 1.2 million bbl/d. Countries outside of the Organization for Economic Cooperation
and Development (OECD) account for nearly all of the expected consumption growth, led by
China which has experienced steady economic growth.
8
Chinese demand is expected to grow by
400,000 bbl/d in 2014, but growth rates have moderated compared with rates before 2012.
Among OECD countries, demand is expected to decrease, particularly in Japan and Europe.

Non-OPEC (Organization of the Petroleum Exporting Countries) liquid fuel production grew by
1.3 million bbl/d in 2013, and the EIA expects a similar increase of 1.5 million bbl/d in 2014.
Much of the increase is likely to come from the United States and Canada, with a combined
annual average growth of 1.4 million bbl/d in 2014. Production growth is also expected in
Russia and other Former Soviet Union countries with annual average increases of around 0.21
million bbl/d in 2014. These levels will likely drop considerably in 2015, however, with levels
of only 30,000 bbl/d.

The EIA estimates that OPEC crude oil production averaged 30.0 million bbl/d in 2013, a
decline of 0.9 million bbl/d from 2012. This decrease primarily reflects declining production in
Iran, growing numbers of unplanned outages in Libya, Nigeria, and Iraq, and strong non-OPEC
supply growth. Overall, OPEC crude oil production is expected to fall by 0.4 million bbl/d in
2014, as a result of production disruptions and reduced OPEC demand as non-OPEC countries
increase their production.

U.S. Outlook

Total U.S. liquid fuels consumption grew by 400,000 bbl/d (2.1 percent) in 2013, but this
growth trend is expected to slow down in 2014. Motor gasoline consumption grew by 1.1
percent in 2013, the largest increase since 2006. Gasoline consumption is expected to grow by
an additional 0.23 percent in 2014, but then level off as rising vehicle fuel economy continues to
offset highway travel growth. Distillate fuel consumption increased by 2.5 percent last year,
reflecting colder weather and domestic economic growth. Distillate fuel oil consumption is
projected to continue its upward trend in 2014, growing by 1.6 percent.

Since January 2014, the startup of TransCanadas Marketlink pipeline, which moves crude from
Cushing to the Gulf Coast, and strong refinery runs contributed to an increase in the WTI crude
oil spot price. Prices ranged from an average of $94/bbl in January to $102/bbl in April. The
pipeline startup helped to relieve the supply glut in Cushing, which had previously put
downward pressure on the WTI market. This increase also reduced the discount of WTI crude
oil to Brent crude oil to an average of less than $6/bbl in April, down from previous discounts of
more than $13/bbl between November 2013 and January 2014. The EIA expects the discount
of WTI crude oil to Brent crude oil to grow again in the coming months which will further
encourage more domestic light sweet crude to be transported to the Gulf Coast.


8
OECD stands for the Organisation for Economic Co-operation and Development and is comprised of 14 member countries
(www.oecd.org)
9
The EIA estimates U.S.
total crude oil production
averaged 8.3 million
barrels/day (bbl/d) in
April 2014, levels that
have not been reached in
26 years. Total U.S.
crude oil production is
expected to average 8.5
million bbl/d for all of
2014, nearly a 15 percent
increase over last year.
Projected production of
9.2 million bbl/d in 2015
would be the highest
annual average since 1972. U.S. production has been on an upward trend since 2009. Most of
that increase is due to production from oil-bearing rocks with very low permeability through
the use of horizontal drilling combined with hydraulic fracturing. The states with the largest
increases have been Texas and North Dakota. Since 2012, production from California has also
begun to rise, reversing a previous steady downward trend. Alaskan production, however,
continues to fall.
As domestic production of light crude oil has increased in the Midcontinent, infrastructure
changes have been necessary to move product to refining centers on the Gulf Coast and to
relieve storage buildups in Cushing, Oklahoma. In particular, TransCanadas Keystone
Marketlink pipeline, which started up in January 2014 can now transport up to 400,000 barrels
per day of crude from Cushing to the Gulf Coast. This is in addition to the Seaway pipeline
reversal and expansion in 2012, which also ships growing amounts of domestic crude to the
Gulf Coast. Many Gulf Coast refineries, and increasingly those in the Midwest and West Coast,
had previously invested in secondary upgrading units to convert heavy sour crudes from
Canada into high-margin petroleum products. Higher quantities of cost competitive domestic
crude, however, will likely encourage Gulf Coast refineries to increase their processing
capabilities of light sweet crude going forward. Much of the increased production can then be
used to replace imports of medium and heavy crude, provided there are no barriers involving
existing refinery partnerships and/or long-term supply contracts.
Where current pipeline infrastructure is insufficient to keep pace with production, rail
transport has increased to fill the gap. Although rail is generally more costly than pipelines for
crude oil transport, railroad loading facilities can typically be built relatively quickly and with
fewer regulatory hurdles, which can help to narrow the gap between rail and pipeline shipment
costs. A series of rail car explosions over the past two years, however, have recently prompted
the Federal Department of Transportation to consider new standards for rail cars carrying
ethanol and hydrocarbons.
So far this year, changes to infrastructure and increased rail transport have been successful at
relieving bottlenecks in the Midwest regions. Midwest (PADD 2) inventories were down 20
percent from last year for the week ending May 2, 2014. Much of this product shifted to the Gulf
Coast (PADD 3), where stocks were up 11 percent for the same time period.

10
U.S. Refiner Acquisition Cost of Crude Oil


U.S. Petroleum Demand Projections
(Million barrels per day)

Yearly Ave
1st 2nd 3rd 4th 1st 2nd 3rd 4th 2012 2013 2014
Demand in 50 States 18.60 18.61 19.09 19.25 18.71 18.78 19.08 19.02 18.49 18.89 18.90
Domestic Crude Oil Supply
1
7.10 7.27 7.56 7.83 8.06 8.30 8.43 8.70 6.49 7.44 8.37
Total Petroleum Net Imports
2
6.52 6.60 6.43 5.35 5.38 5.84 5.64 4.79 7.40 6.22 5.41
Crude Oil Price
3
101.15 99.45 105.25 96.02 101.15 103.17 98.83 95.17 101.00 100.47 99.58
2013 2014
PROJECTED


Notes:
1
Includes only crude oil production. Additional sources of domestic petroleum supply include natural gas liquids, other
hydrocarbons, alcohol inputs and processing gains.
2
Net Imports include deliveries to the Strategic Petroleum Reserve.
3
In Dollars
per barrel for Imported Crude Oil Refiner Acquisition Costs for imports and domestic.
Sources: Energy Information Administration, U.S. Department of Energy, Short-Term Energy Outlook April 2014, and Petroleum
Weekly Status Report.

U.S. Total Petroleum Demand and Net imports

Notes: The above projections and analysis were excerpted from the DOE Energy Information Administrations (EIA) Short-Term
Energy Outlook, April 2014, the EIA Weekly Petroleum Status Report, and other industry sources.
11

Motor Gasoline


Demand

Gasoline sales in Michigan are expected to remain relatively flat in 2014, with only a 0.6 percent
increase over last year. Gasoline demand grew by 1.4 percent in 2013, only the second year of
consumption increases since 2004. Stronger-than-expected growth in highway travel during the
second half of 2013 contributed to the increase. Overall, gasoline consumption has been on a
downward trend due in large part to increases in fleet-wide fuel efficiency. The average sales
weighted fuel efficiency for the 2013 model year reached 24.8 miles per gallon, up from 23.9 miles
per gallon in 2012.
6
In addition to fuel efficiency, rising gasoline prices have put strong downward
pressure on demand. In the graph below, sustained gasoline prices above $3.00 per gallon since
December, 2010 have been responsible for much of the decline in demand in 2011 and 2012.
Regionally, demand is also expected to be remain flat with less than a one percent decrease overall.



Supply

For the week ending April 25th, refineries were operating at 91.0 percent of capacity nationally.
This was well above the 84.4 percent capacity utilization rate seen a year ago at this time. Despite
recent national attention on rising domestic production of light sweet crude oil, especially from oil
formations in North Dakota, some Midwest refiners are reconfiguring their facilities to process
additional heavy crude oil, which will likely come from Canada. As this additional coking capacity
comes online, Midwest refiners will be able to significantly increase runs of heavy crude, such as
Western Canadian Select (WCS). WCS currently sells at a steep discount to other crude oil
benchmarks used in the United States, including West Texas Intermediate, Louisiana Light Sweet,
and West Texas Sour, and processing WCS reduces refiner crude oil costs.


6
Univ. of MI Transportation Research Institute: http://www.umich.edu/~umtriswt/EDI_sales-weighted-
mpg.html
12

Nationally, imports of finished gasoline to the U.S. during
2013 remained relatively flat compared to 2012. This is
in contrast to the previous year where imports dropped
by 58 percent. At the same time, markets for finished
gasoline have also grown. Access to less-expensive crude
oil and natural gas is making U.S. refineries more
competitive, boosting refinery runs and putting Gulf
Coast refineries at an advantage to supply markets in
Latin American and West Africa. Despite the significant
growth in exports, the East Coast is still a significant
importer of gasoline as a result of capacity constraints on
product pipelines serving the region from the Gulf Coast
and the high cost of coastal shipments between U.S.
ports.

National gasoline inventories are currently back within
the five-year range for this time of year, after a heavy
refinery maintenance season reduced production and
inventories. For the week ending April 25, U.S. gasoline
inventories stood at 211.6 million barrels (24.4 days of
supply), 2 percent below the same period last year.
Regional inventories for 2014 are projected to remain
relatively flat overall, rebounding from early season lows.
Based on past trends, summer stock withdrawals are not
expected to be a significant source of gasoline for the
summer season which will help maintain these inventories.

Price

According to AAA, the average price for a gallon of regular unleaded gasoline in the U.S. was
$3.67/gallon as of May 6, 2014. For much of the first quarter of 2014, gasoline prices have been
higher than the same period last year. Prices began to trend upward as season refinery
maintenance continued and international tensions put pressure on the price of crude. The highest
weekly average price of unleaded gasoline was $3.82/gallon and occurred the week ending April
25. Since then, prices have slowly trended downward as refineries complete the switch over to
summer grade fuel and resume full production.

The EIA expects that regular-grade gasoline retail prices, which averaged $3.58/gallon last summer,
will average $3.57/gallon during the current summer (April - September) driving season. Because
taxes and retail distribution costs are generally stable, movements in gasoline prices are driven
primarily by changes in both crude oil prices and wholesale margins. The EIA expects wholesale
gasoline margins (the difference between the wholesale price of gasoline and the Brent crude oil
price) will average 38 cents/gallon this summer, about 3 cents higher than last summer and 4 cents
higher than the previous five-summer average. Any unforeseen refinery outages or other
disruptions to supply may also have the potential to increase regional product prices in the short
term.



Changes in the price of retail gasoline
result from changes in the crack spread.
A crack spread is the difference
between the price of crude oil and the
wholesale price of refined product. While
crude oil prices do not display a seasonal
pattern, crack spreads for gasoline are
very seasonal. Over the past five years,
gasoline crack spreads have typically
been flat in January and February,
averaging 17 cents/gal during those
months. In May, they have generally
increased, peaking at an average of 35
cents/gallon. This post-February increase
is largely related to typical seasonal
factors such as refinery maintenance,
increasing demand from driving, and the
switch to summer-grade gasoline, which
is more costly to produce than winter-
grade gasoline.
Why do Gasoline Prices Rise Every
Spring?
13

Michigan Gasoline Sales



Michigan Gasoline Sales Projection
(Millions of Gallons)
Total Historical
All Grades (prior year) % Change
Historical 2011 Total 4,277 4,344 -1.6%
2012 Total 4,202 4,277 -1.7%
2013 Total 4,259 4,202 1.4%
Projection 2014 January 337.4 339
February 328.2 320
March 354.5 348
April 347.0 343
May 368.1 378
June 362.1 352
July 372.0 373
August 378.2 376
September 350.9 346
October 372.3 369
November 355.1 357
December 360.9 359
2014 Total 4,286.7 4,259.1 0.6%


NOTE: These projections are based EIA forecasts of real gasoline prices.
SOURCE: Historical data - Energy Information Administration, U.S. Department of Energy.
PROJECTIONS: Energy Data & Security Section, MPSC

14
Regional Gasoline Supply and Demand


Regional Gasoline Supply and Demand
(Millions of Gallons)
Production Inventories Demand
Historical 2011 Average 1,827.2 234.2 1,752.7
2012 Average 1,791.4 232.2 1,765.5
2013 Average 1,822.0 208.6 1,767.4
Projection 2014 January 1,758.3 214.8 1,663.6
February 1,582.0 195.1 1,587.8
March 1,895.9 124.1 1,739.6
April 1,829.1 181.9 1,728.3
May 1,952.8 190.5 1,817.3
June 1,858.7 224.8 1,790.0
July 1,931.7 253.1 1,826.9
August 1,961.2 246.1 1,849.8
September 1,813.3 224.8 1,720.5
October 1,839.0 231.0 1,811.0
November 1,760.6 220.4 1,731.8
December 1,828.1 210.0 1,773.9
2014 Average 1,834.2 209.7 1,753.4
2013-2014 change 0.7% 0.5% -0.8%


NOTES: *Production projections are based on refinery utilizations and recent trends. Much of the recent
increase in production, however, can be attributed to ethanol blending. The region is comprised of Illinois,
Indiana, Kentucky, Michigan, Tennessee, and Ohio.
SOURCE: Historical data - Energy Information Administration, U.S. Department of Energy.
Projections: Energy Data & Security Section, MPSC
15
Distillates


Demand

Distillate sales in Michigan are projected to increase by 3 percent to 1,058.8 million gallons in 2014,
following a similar increase of 2.7 percent in 2013. This growth reflects both increased demand for
No. 2 heating oil following colder temperatures this winter as well as growth in industrial production.
Industrial production is an important determinant of sales since the trucking and railroad industries
are large consumers of diesel fuel. First quarter industrial growth in 2014 was 3.8 percent higher
than the same quarter in 2013. Diesel fuel remains the prime component of distillate demand, over
95 percent, with the majority being used for transportation by highway trucks and by rail.



Supply
In 2013, lower priced domestic crude oil and natural gas encouraged near-record-high refinery runs,
with distillate fuel production increasing 160,000 barrels/day over 2012. While domestic demand
has been largely flat or with only modest increases, international demand has been robust and has
urged U.S. refiners to further ramp up exports. Regional production dropped by 2.8 percent in 2013
due to a slowdown in industrial production, but is projected to rebound in 2014 to meet expected
industrial growth.
Nationally, inventories of distillates are well below the five-year range for this time of year, down 1.2
percent from levels in 2013. Inventories have been near the bottom of the five year range since 2012,
reflecting the economic incentive for producers to export their fuel to meet strong demand abroad.
Average exports of distillate fuels exceeded 1.1 million barrels/day in 2013, an increase of 110,000
barrels/day over levels in 2012. The largest increases in distillate export volumes were those
destined for Central and South America, already the largest destination for U.S.-produced distillate
fuel. In the graph below, net exports can be seen reaching new historic highs in 2013.
16

Price

Price

According to the EIA, onhighway diesel fuel retail prices, which averaged $3.92/gallon in 2013, are
projected to average $3.87/gallon in 2014. For the week of May 5, the average Midwest price of
$3.94/gallon was 7 cents higher than last year, but slightly below the U.S. average. According to AAA,
the peak price of $4.85/gallon was recorded in Michigan was on July 17, 2008.

Michigan residential heating oil prices averaged $3.77/gallon (excluding sales tax) on March 17,
2014, 6 cents higher than the same time last year. The 2013/2014 heating season began with
residential heating oil prices at a price of $3.56/gallon (Oct. 7, 2013) and held relatively stable until
the end of January. Cold weather from the Polar Vortex, however, caused prices to rise to
$3.93/gallon the week of February 24
th
before trending downward at the end of the season. Despite
the unseasonably cold weather, prices for the 2013/2014 season averaged 10 cents below last year
and followed typical seasonal patterns. Ample supplies prevented heating oil prices from
experiencing the same volatility as propane (a comparable heating fuel).












17
Michigan Distillate Fuel Oil Sales



Michigan Distillate Fuel Oil Sales Projection
(Millions of Gallons)

Diesel Other * Prior
Fuel Distillate Total Year % Change
Historical 2011 Total 991.0 47.5 1,038.5 1,045.5 -0.7%
2012 Total 1,019.2 11.8 1,030.9 1038.5 -0.7%
2013 Total 1,027.7 31.1 1,058.8 1030.9 2.7%
2014 January 85.3 2.8 88.1 82.2
Projection February 79.5 2.5 82.0 73.5
March 84.7 0.5 85.2 78.5
April 86.9 0.4 87.3 85.0
May 94.3 0.9 95.3 96.5
June 92.1 0.2 92.3 85.9
July 89.3 1.5 90.8 93.2
August 94.3 0.3 94.7 93.3
September 93.1 0.9 94.0 89.4
October 101.7 0.6 102.3 103.3
November 89.7 1.1 90.8 87.7
December 86.5 1.5 88.0 90.3
2014 Total 1,077.4 13.3 1,090.7 1,058.8 3.0%


NOTES: These projections assume normal degree day accumulations for the remainder of the year.
SOURCES: Historical data -- Energy Information Administration, U.S. Department of Energy.
PROJECTIONS: Energy Data & Security Section, MPSC
* = Other Distillate is comprised of: Kerosene, No. 1 Distillate and No. 2 Fuel Oil
18
Regional Distillate Fuel Oil Supply and Demand


Regional Distillate Fuel Oil Supply and Demand
(Millions of Gallons)
Production Inventories Demand **
Historical 2011 Average 740.6 514.6 743.5
2012 Average 759.0 504.2 741.4
2013 Average 737.3 494.2 756.7
Projection 2014 January 769.5 458.9 759.3
February 675.8 461.7 708.6
March 705.2 444.4 761.9
April 723.1 459.0 760.3
May 761.0 467.0 768.5
June 753.6 462.6 759.4
July 781.3 480.9 741.4
August 792.1 476.7 783.3
September 775.1 490.9 782.8
October 778.0 453.4 852.0
November 789.5 466.6 778.4
December 836.1 520.7 761.5
2014 Average 761.7 470.2 768.1


NOTES: Production projections based on expected refinery capacity utilization and recent trends. Regional
demand estimates are based on the recent regional trend. The region is comprised of Illinois, Indiana, Kentucky,
Michigan, Tennessee, and Ohio.
SOURCES: Historical data -- Energy Information Administration, U.S. Department of Energy;
PROJECTIONS: Energy Data & Security Section, MPSC.
19

Propane Energy Emergency of 2013/2014

During the winter heating season of 2013/2014, the entire Midwest experienced extreme low
temperatures (16 percent below normal) which led to a state of energy emergency for 11
Midwestern states. For Michigan, the acute phase of the crisis began in late December 2013 and
continued into early March 2014. The prime factors leading to the emergency included:

Low Pre-Season Inventories Inventories ended the 2012/2013 season about 3 million barrels
or 20 percent below the five year average. This led to propane inventories beginning the 2013
winter season (October), 8 million
barrels below last year.

Crop Drying Demand Propane use
for crop drying soared almost 500
percent for the agricultural industry
last year. This was due to a record
corn and soybean crop harvested late
in the season, and complicated by
above average rainfall during harvest
time. As farmers throughout the
Midwest began drying their crops, a
significant draw down in inventories
occurred. As a result, supply
shortages for residential customers
quickly developed as severe winter weather loomed.

Winter Weather A late and significant drawdown of propane inventories was exacerbated
by the early arrival of winter weather. The resulting increase in demand shortened the
window to restock inventories in
preparation for the season. Further
complicating matters, the
2013/2014 winter heating season
(November March) turned out to
be one of the coldest in years, 16
percent colder than normal, which
strained the already low
inventories.

Infrastructure - Two additional
factors that impacted the situation
were untimely infrastructure
interruptions due to repairs and
upgrades. First, the Cochin Pipeline, a major source of propane to the Midwest (20 to 25
percent), was out of operation nearly three weeks for repair, from the late November
through December 20, 2013. Second, in January, 2014, the major supply terminal
(fractionator) for the Upper Peninsula in Rapid River, MI ceased producing and supplying
product, when shipments of natural gas liquids (used to make propane) were halted in
order to install equipment at an upstream facility in Superior, Wisconsin.
20

The result of all of the above was that propane supply was so tight in Michigan that dealers had
extreme difficulty obtaining adequate propane to fully supply customers. Dealers were forced to
limit supplies to customers, and drive long distances (as far as KS, PA, and TX) to obtain supply.

In addition to and largely resulting from
the restricted supply issues, retail prices
steadily increased as the heating season
progressed. This escalated the week of
January 20
th
, as wholesale propane
prices spiked to almost $5.00 a gallon at
Conway, KS, a major Midwest propane
storage hub. This wholesale price spike
sent retail prices soaring. Dealers were
forced to short fill customers in an
effort to manage both supply and the
financial impact of high retail prices. At
the very peak of the price spike, the
average for a gallon of propane in
Michigan was $3.76, based on a limited
sample of dealers participating in the State Heating Oil and Propane Price survey (SHOPP). The
SHOPP report survey sample will be expanded in 2014 to better represent the range of retail prices
seen across Michigan last winter, often ranging into the four or five dollar range per gallon.

The Energy Data & Security section staff responded to the crisis with the following actions:

Increased monitoring of propane supply and price data (expanded weekly SHOPP calls,
outreach to wholesale terminals, propane associations, federal agencies, etc.);
Recommended declaration of Energy Emergency to allow for waivers of federal safety
regulations (hours of service (HOS)) allowing drivers more time for propane delivery;
Coordinated multi-state calls surveying public and private counterparts across the Midwest
to gain situational awareness of the propane emergency. Participants included: the propane
industry, state energy offices/public utility commissions, law enforcement, propane
associations, and the federal government (DOE, FERC, FMCSA, DHS); and
Participated, along with other MPSC staff and the Commission Chair, in interdepartmental
meetings/calls to discuss the issue and determine appropriate actions.

The Department of Licensing and Regulatory Affairs (LARA) took the lead in coordinating the State
level response to this crisis. Working with the Governors office and Legislature, LARA hosted
interdepartmental meetings, worked with the MEDC to make funds available to struggling propane
dealers, and facilitated delivery of additional propane supply by working with pipelines and
railroads. The Federal Motor Carrier Safety Administration also contributed significantly by issuing
regional HOS waivers which helped interstate transport trucks bring supply into Michigan.

The crisis eased towards the end of February/beginning of March but the emergency highlighted
weaknesses in the propane supply infrastructure and delivery system. Discussions are ongoing
between private and public sector stakeholders to address issues identified this heating season and
better prepare for the future.

























Michigan Public Service Commission
Michigan Energy Appraisal
4300 W. Saginaw Highway
P.O. Box 30221
Lansing, MI 48909