Propane: A Barrier To Affordable Development

RawlingsThough there are numerous obstacles to improving the region’s affordable housing concerns, many feel dependence on propane in northern Michigan is chief among them.

For homeowners, propane can mean compounding costs, especially during winter and periods when supply is strained. For affordable housing developers, propane-only infrastructure can result in a higher cost of living, often rendering their proposed projects untenable.

While natural gas usage can negate many of these issues, numerous areas in the region still do not have access.

“These types of barriers to entry happen in the northern part of the state or on the external fringes of the existing gas service territory,” said Steve Rawlings, DTE Energy’s regional manager for Northern Michigan. DTE services 53,000 customers in the Grand Traverse County (and parts of neighboring counties) with natural gas.

The lack of natural gas infrastructure harkens back to the mid-90s, when regulations were put on how energy companies could recover area expansion costs. Prior to the 90s, Rawling ssaid energy companies would include the cost of expanding pipelines and service within their total operating costs.

However contested rate cases and user outcry that the cost of expanding in one area shouldn’t be shared by consumers in another led to a legal change.

“So suddenly connections to these next mile situations or areas just outside the existing service territory became very expensive for users,” said Rawlings. “It’s been an impediment and a barrier to expansion for some time.”

Expansion like Crystal Mountain’s proposed affordable housing development.

Chris MacInnes, the resort’s chief operations officer, recently spoke at the Networks Northwest 2015 Housing Summit about the resort’s unsuccessful attempt and how propane (and a lack of natural gas infrastructure) proved to be an insurmountable issue.

Crystal Mountain’s propane barrier

Crystal Mountain, located in Thompsonville, averages 650 employees during their peak season (and 450 during their lowest point). The resort pays approximately $12.5 million in payroll and benefits annually.

The bulk of their employees are service workers and many of them fall into the moderate and low income category, said MacInnes. To this end the resort has long been interested in building affordable housing in their area.

“You’re not as high of quality an employee if you can’t afford decent housing,” said MacInnes. She explained the quality of their product, guest experience, is directly tied to worker performance. And worker performance is dependent on their basic needs being met, she said.

MacInnes indicated Crystal Mountain has been looking for partners to help build an affordable housing project for more than 15 years. Their 2012-2013 effort to create an affordable housing project represents their closest effort yet. They partnered with a low income tax credit developer. They conducted market studies and created a site plan. The project seemed feasible.

“We have the infrastructure, at least we thought, to support the multi-family density that is needed.” MacInnes said. Theproposed site had both a municipally-permitted wastewater system and a potable water system, with the capacity to serve dozens of multi-family housing units.

“Crystal Mountain and Frankfort-Elberta are the only communities in our county that have that capacity,” said MacInnes. “We have the land, and certainly the neighborhood would be delighted for the land to be used for this purpose. And that’s not always the case.”

What Crystal Mountain didn’t have was access to natural gas.

The project was aborted when planners determined monthly energy costs would lead to unreasonable rent, and consequently insufficient funds to pay the property’s mortgage.

“A larger portion would be consumed by the energy cost residents would have to pay because it was propane,” said MacInnes. “When we put that number in there simply wasn’t enough money, as a result of what would be charged, to make the project viable.”

Simply converting to natural gas was also not a feasible option for the resort.

“The way the law is currently stated, the users need to pay the cost of running the access (so that would be the pipe) to service the project from where it currently exists,” said MacInnes. “For us, that would be anywhere from $1.2 million to $1.5 million, based on where natural gas is currently coming into Benzie County.”

MacInnes said the closest gate, or natural gas access point, to Crystal Mountain is located at the Benzie Central School system. This would mean running eight or nine miles of pipe from the gate to the resort.

“That would be [Crystal Mountain’s] responsibility based on current statutes. That would be the user’s responsibility to pay for that,” reiterated MacInnes. “We do not have the money to bring natural gas at that cost to our campus.”

MacInnes felt passing the full cost on to the user, especially when energy companies would be expanding their market, is unreasonable.

“It certainly seems onerous that that would be the responsibility of the user, but that is the statute,” she said. “This is a law that we have been negatively impacted by for many years.”

Even if the resort could afford to expand natural gas lines to their area, it would still incur hundreds of thousands of dollars to change over from propane, said Macinnes.

“It’s not just the cost of running the pipe,” she explained. “There would be a fair amount of conversion that would need to be done.”

MacInnes said Crystal Mountain would be willing to pay to convert their campus, not only to create their affordable housing development but also for environmental reasons.

“From an energy quality standpoint we would much prefer to have natural gas,” she said. “Propane is dirtier; there is more residue.”

The resort has also dealt with fluctuating propane prices, particularly during recent winter shortages.

“We had to pay inordinately high prices,” MacInnes said. “Our staffs’ energy costs were very, very high.”

Given the practicality of natural gas over propane and what expanding infrastructure could mean both for Crystal Mountain and its neighbors, MacInnes hopes to see legislative change in the near future.

“I would hope that we could facilitate a statewide conversation that could potentially change those laws,” Macinnes said. “It’s a conversation with our elected officials and the influence that they have in the House and Senate.”

“Natural gas is on the horizon”

MacInnes and others looking to see natural gas expanded in their area may soon get their wish, thanks to Michigan House Bill No. 4303.

“It would essentially allow for the expansion of natural gas infrastructure to more rural areas, and helps subsidize the cost of that throughout the state,” said Kent Wood, the Traverse City Area Chamber of Commerce government relations director. “It allows for economic development because if provides a way for some of that critical energy structure to be realized here in northern Michigan.”

The bill “addresses the very problem and tries to alleviate some of the barriers we’re experiencing,“ said Rawlings.

“When we had these last two winters of historic volatile pricing in the propane market it really brought a sharp focus on this very situation,” he continued. “So the legislature in part is trying to address that and make it more economical.”

He explained that, if passed, the bill will lead to a deregulated system, similar to what was in place before the mid-90s change.

“It allows the utilities to take a certain percentage of the area expansion projects and absorb those costs into their entire rate base,” Rawlings said. “As opposed to making the costs exclusively the responsibility of the people that you’re hooking up.”

Rawlings also said the bill will provide a cost effective mechanism for updating old gas lines in need of repair throughout the state.

Opposition to the bill includes areas where users have already paid to expand natural gas service. However, Rawling feels sharing the initial costs of expanding infrastructure will lead to overall state gains.

“It’s an economic benefit to Michigan,” said Rawlings. “When we can expand the system and bring affordable reliable, clean natural gas to more areas of the state, it’s seen as an enhancement.”

Also, expanding natural gas service would mean more users sharing in the total cost, Rawlings noted, and it would help absorb the cost of replacing the aforementioned aging lines.

“I’m optimistic about the benefits of it, and the more people learn about it the more they become supportive of it,” said Rawlings. “The Traverse City Area Chamber of Commerce and many of the  northern legislators are supportive of the concept and the legislation.”

“We’re starting to see a crowd of folks who are low income [earner] advocates who are clamoring for this,” Rawlings said.

In addition to improving many homeowner’s energy costs and creating new affordable housing developments, the bill could serve as a catalyst for overall economic development.

“I wouldn’t just stop at affordable housing,” said the Chamber’s Wood. “It would certainly help with development and developers, whether it’s housing or manufacturing or other types of projects. Natural gas is on the horizon, and to be able to expand that natural gas infrastructure helps remove one of those barriers to development in Northern Michigan,” he concluded.