Michigan Energy Appraisal

Summer Outlook 2014

Michigan Public Service CommissionMay 2014

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

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HIGHLIGHTS Energy Appraisal Summer 2014

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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.

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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

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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 Total2014 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).

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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.

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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: 1Includes only crude oil production. Additional sources of domestic petroleum supply include natural gas liquids, other hydrocarbons, alcohol inputs and processing gains. 2Net 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.

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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

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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?

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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

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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.

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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 24th 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).

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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

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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.

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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.

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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 20th, 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

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