Semiannual Projections of Energy Supply and Demand

Winter Outlook 2002/2003

This publication is available on the MPSC website at cis.state.mi.us/mpsc/reports/energy/

Michigan Department of Consumer & Industry Services Public Service Commission PSC-PUB 0017 (Rev. 09/01)

Preface The Michigan Energy Appraisal is a semiannual assessment of Michigan’s energy markets. The assessment assists in identifying potential supply problems, including adequacy of supply, weaknesses in the distribution system, and energy price changes. The focus of this report is on recent events impacting supply and prices, and expected conditions and changes for the next six months. The scope of the analysis varies by energy source. Petroleum product markets in Michigan are affected by international market conditions and events and regional refinery production. Michi-gan’s 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. For the appraisal, recent historical balances between Michigan’s 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 concerns regarding summer energy use, including peak electricity supply and demand and gasoline for the summer driving season. This report is prepared by the Executive Secretary, Electric, and Gas Divisions of the Michigan Public Service Commission (MPSC), Department of Consumer & Industry Services, State of Michigan. Project Manager Jeffrey Pillon Electric Jack Mason, Jane Huver, Tim Boyd Natural Gas Nicholas Nwabueze, Jack Mason Petroleum Jeffrey Pillon, Jack Mason The Energy Appraisal is on the MPSC website at http://cis.state.mi.us/mpsc/reports/energy/. This site is linked to other energy-related sites, including the federal Energy Information Ad-ministration (EIA) at http://www.eia.doe.gov. The EIA site contains information on a variety of energy sources. If you would like to be placed on the mailing list to receive future semiannual Energy Appraisal issues, please complete and return the form on the inside of the back cover. Comments or ques-tions on this appraisal are welcomed and may be directed to Jeffrey Pillon, Michigan Public Ser-vice Commission, P.O. Box 30221, Lansing, Michigan 48909, phone (517) 241-6171, fax (517) 241-6101, or e-mail jpillon@michigan.gov.

Printed under authority of: MCL 10.82 Number of copies printed: 300

Total cost: $206.90 Cost per copy: $0.69

The Department of Consumer & Industry Services 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 − Winter 2002/2003

October 18, 2002 Michigan Public Service Commission Department of Consumer & Industry Services

Winter energy heating bills in Michigan may show some increases compared to last winter should Michigan see a return to normal winter temperatures after last winter’s 9 percent warmer than normal weather. Natural gas, which is used to heat 78 percent of Michigan homes, is not expected to show significant changes in price this winter. While usage and bills would go up with a return to normal winter weather, the National Weather Service has suggested a higher probability of warmer and dryer weather for the upper Midwest over the next six months. Michigan has seen warmer than normal weather in four of the last five winters. The increases in residential heating bills are expected to be less than the current national projections by the Energy Information Administration. Electricity – Michigan’s electricity sales are expected to grow about 2.4 percent in 2002, compared to the 1.0 percent decline seen in 2001. Warmer-than-normal weather this summer contributed to near record peak demands and higher electricity sales, especially in June and July. New generating units and increased transmission capacity continue to improve the outlook for electricity supply in Michigan. Prices for residential customers of Detroit Edison and Consumer Energy remain unchanged under a freeze enacted as part of the electric restructuring laws. Natural Gas – Michigan’s natural gas deliveries for year 2002 are expected to increase about 4.8 percent, following last year’s 3 percent decline. Consumption was down this past winter due to weather that was about 9 percent warmer than normal. As a result, gas storage levels remained very high and will contribute to reducing imports this year. While the price of gas is expected to show little change, a return to normal winter weather will increase consumption about 9 percent, which in turn will lead to higher winter heating bills than last year. Petroleum – Crude oil prices are near $30 per barrel up $3.50 per barrel from year ago levels and up about $10 from the low point seen in January 2002. This has resulted in higher costs for petroleum products in general. The increase in crude oil cost has been caused by an OPEC decision to not increase production quotas at their September meeting, concerns about the potential for military action against Iraq and rising world oil demand. As was noted in the Summer Appraisal, “If production is not increased and demand continues to rise, oil prices may increase to nearly $30 per barrel.” Motor Gasoline – While showing some significant swings week to week, Michigan’s gasoline prices overall were more stable this summer compared to recent years, averaging about $1.40 per gallon from April through September. According to AAA of Michigan, gasoline prices averaged $1.55 on October 14, 2002. Assuming no major disruptions in the petroleum markets, prices are expected to remain at about this level through the winter. Distillate Fuel Oil − The average residential price of home heating oil in Michigan was $1.23 per gallon excluding sales tax on October 14, 2002. The price a year ago was $1.28, however by the spring of 2002 prices had declined to an average of $1.07. A return to normal weather this year would increase usage by about 9 percent, and when coupled with the expected prices increases could result in heating bills approximately 25 percent higher than last winter for a typical home. Michigan Homeland Security Task Force − Before and since 9/11, the Michigan Public Service Commission Staff has worked with the energy industry to protect Michigan’s energy security. This year, efforts have been started to secure training opportunities and to improve coordination between the energy industry, the U.S. Department of Energy, the Michigan State Police and local first responders. As part of this indicative power plant and pipeline operators continue to enhance security.

Electricity

Michigan’s electricity sales are expected to grow about 2.4 percent in 2002, compared to the 1.0 percent decline seen in 2001. Warmer-than-normal weather this summer contributed to near record peak demands and higher electricity sales, especially in June and July. New generat-ing units and increased transmission capacity continue to improve the outlook for electricity supply in Michigan. No supply shortages or transmission constraints are expected to impact the ability of Michigan utilities to meet winter peak electric demand, which is normally about 30 percent lower than the summer peak demand. Michigan's electric generation market was opened to competition on January 1, 2002 under the "Customer Choice and Electricity Reliability Act" (MCL 460.10). In January, customers of investor-owned utilities were free to select a new electric supplier or continue to receive service from their current utility under regulated rates. Already, 22 companies known as Alternative Electric Suppliers (AES) have been licensed by the MPSC to sell competitive electric generation service. By October 1, 2002, over 4,500 indus-trial and large commercial customers represent-ing a total demand of about 1,400 MW were be-ing served by AES. So far, there has been al-most no activity in the residential and very small commercial customer markets. Demand Consumers Energy and Detroit Edison both set near record peak loads in August 2002. Con-sumers’ highest load was 7,726 megawatts (MW) plus about 386 MW of retail open access (ROA) on August 1 versus 8,269 MW plus 200 MW of load management and 76 MW of ROA on August 7, 2001. Edison had a peak of 11,200 MW plus 250 MW of load management and 970 MW of ROA on August 1 versus 11,846 MW plus 200 MW of load management and 389 MW of ROA on August 7, 2001. Combined, these 2002 peak loads are about 2.1 percent lower than the all time record of 20,980 MW on August 7, 2001. Both Consumers Energy and Detroit Edi-son used load management on occasion to re-duce electricity demand, especially in June and July. Detroit Edison cycled the interruptible residential air-conditioning customers about 4-6 times, and Consumers Energy reduced system loads by using its contracts that allow the com-

pany to pay large customers to reduce demand. Each company reduced demand by about 200-250 MW as a result of these measures to reduce system peaks. Total Michigan electricity sales to ultimate cus-tomers including ROA sales increased 4.5 per-cent in the first seven months of 2002 versus the same period in 2001. The faster growth was the result of the slow recovering economy and hot summer weather. Consumers Energy and De-troit Edison saw sales increase to ultimate cus-tomers including ROA sales increases of 3.6 percent and 5.2 percent, respectively, for the first seven months of 2002. Cooling-degree days in Lansing for June and July 2002 were 48 and 36 percent above normal, respectively. For 2002, Michigan sales are expected to total 105,395 million kilowatt-hours (kWh), 2.4 per-cent over 2001 sales levels. These projections assume the economy will continue to recover at a very slow rate. Supply The supply picture was much better this summer than in either 2000 or 2001. Detroit Edison, Consumers Energy, and American Electric Power completed transmission upgrades, in-creasing Michigan’s potential import capability to 6,000 MW. External purchases by Detroit Edison and Consumers Energy were normally in the range of 2,000 to 2,500 MW total on the highest load days. The highest capacity and purchases available to meet load for the year was about 21,000 MW. Several new merchant power plants are now in operation, including: CMS Generation (910 MW); Mirant (830 MW); Kinder Morgan (550 MW); DTE Energy (580 MW); Dynegy (680 MW); First Energy (340 MW); and Wolverine Co-op (100 MW). These projects have added 3,990 MW to Michigan's generating capacity. Prices A Consumers Energy residential customer using 500 kWh per month currently pays $40.23 (8.05 cents per kWh). A Detroit Edison residential customer using 500 kWh per month currently pays $43.45 (8.69 cents per kWh). Under Act 141, rates were reduced by 5 percent and frozen at those levels until January 1, 2006.

Michigan Electricity Sales

0

2,000

4,000

6,000

8,000

10,000

12,000

Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03

Mill

ions

of k

Wh'

s

Residential

Commerical

Industrial

Other

Projection

Residential Commercial Industrial Other Total

Historical 1999 Total 30,703 34,977 36,264 851 102,7952000 Total 30,597 35,641 36,833 953 104,0242001 Total 31,693 35,635 34,647 960 102,935

2002 January 3,118 2,975 2,534 82 8,709February 2,453 2,660 2,919 74 8,106March 2,663 2,925 2,983 82 8,653April 2,317 2,807 2,842 75 8,041May 2,308 3,000 2,992 67 8,367

Projection June 2,692 3,438 3,129 66 9,325July 3,269 3,533 2,968 73 9,843August 3,178 3,581 3,105 77 9,942September 2,539 3,094 2,978 79 8,690October 2,350 3,029 3,065 86 8,530November 2,465 2,894 2,883 88 8,330December 2,963 2,990 2,808 98 8,859

2002 Total 32,315 36,926 35,206 947 105,395% Change from 2000 2.0% 3.6% 1.6% -1.3% 2.4%

2003 January 3,272 3,104 2,712 91 9,180February 2,637 2,878 2,796 84 8,395March 2,696 2,984 2,997 80 8,757April 2,340 2,849 2,885 75 8,149May 2,331 3,045 3,037 67 8,480June 2,719 3,489 3,176 66 9,451

NOTE: Projected electricity sales are based on historical trends.

SOURCES: Historical Data -- Energy Information Administration, U.S Department of Energy.Projection -- Executive Secretary Division, Michigan Public Service Commission.

Michigan Electricity Sales Projection(Millions of kW h)

Natural Gas

Michigan’s natural gas deliveries for 2002 are expected to increase about 4.8 percent, following last year’s 3 percent decline. Consumption was down this past winter due to weather that was about 9 percent warmer than normal. As a result, gas storage levels remained very high and will contribute to reducing imports this year. Natural gas prices have risen this year, but the impact on customers in Michigan will vary from utility to utility. The increase in price seen by Michigan consumers in the last year or so is seen as a one-time increase. Future gas prices remain highly uncertain and are expected to be volatile. Michigan has added about 3,990 MW of natural gas-fired generation the past two years. The increased gas-fired generation has and will continue to increase the demand for natural gas in Michigan and elsewhere. Demand Natural gas sales in Michigan for 2002 are projected to be 904 billion cubic feet (Bcf). This reflects a 4.8 percent increase from sales in 2001. The expected increase is principally due to assumed normal weather for the next winter. This past winter in Michigan was about 9 percent warmer than normal. The weather pattern was very warm early on and turned cold late in the winter months. March 2002 was colder than January, with 1,031 heating-degree-days at the Lansing Airport weather station, compared to 1,061 in January 2002 and 938 in December 2001, leading to abnormal seasonal and very high March consumption of natural gas. Supply Natural gas production in Michigan is projected to decline to 214.8 Bcf in 2002. Slow growth in the production of Antrim gas and continued reductions in Niagaran Reef production contrib-ute to the decline in production. Continued reductions are expected for the foreseeable future. Net interstate deliveries are projected to decrease to 602.2 Bcf in 2002. This 133.3 Bcf decrease over the 2001 level of 735.5 Bcf reflects the expected use of withdrawals from existing high storage balances carried over from

2001. The increased withdrawals from storage will reduce the December 2002 storage balance to 409 Bcf, which is more in line with levels that reflect normal operating conditions. Price Natural gas prices have trended upward and have been very volatile the last three years. Demand increasing relative to supply is the pri-mary reason for higher prices, and natural gas-fired electric generation is a primary component of the increasing demand. Increased natural gas wellhead prices have fed through to higher resi-dential prices in Michigan and elsewhere. The New York Mercantile Exchange (NYMEX) prices for natural gas (Henry Hub) this year have ranged from a low just below $2.00 per 1,000 cubic feet (Mcf) to a high above $4.00 at the end of September. The EIA, in its October 2002 “Short-Term Energy Outlook,” projects natural gas prices at the wellhead will diminish from $4.00 to $3.21 per Mcf by the end of winter. The increased volatility has made it difficult for gas suppliers, whether local distribution or alter-native suppliers, to determine what prices will be in the future. To deal with this price uncer-tainty, MichCon has requested the MPSC approve a contingency factor that could be used to reflect price increases based on the NYMEX price. This would allow the price charged to customers to increase should the market prices of gas increase. The estimated average monthly bill for a Con-sumers Energy residential customer using 100 Mcf of gas over the winter months (November-April) is $88.63 per month ($3.66 per Mcf for gas, $1.27 per Mcf for delivery, and a monthly customer charge of $6.50). Consumers’ gas component charge was $3.74 in October 2001. A similar MichCon (DTE) customer will pay $102.66 per month ($4.38 Mcf in November and December; a request is pending to charge $4.14 for gas beginning January 2003, plus $1.45 for delivery, and a monthly customer charge of $7.50) for the same period. MichCon’s gas charge one year ago was $2.95 per Mcf. A return to normal winter weather would increase consumption by about 9 percent, which is turn would lead to higher winter heating bills.

Michigan Natural Gas Supply & Demand

-75

-25

25

75

125

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03

Billio

ns o

f Cub

ic F

eet

DemandProjection

Deliveries

When demand is in excess of deliveries, the difference is withdrawn from storage

Total Net Interstate Michigan To (From) StorageDemand Deliveries Production Storage Balance

Historical 1999 Total 870.8 549.1 262.5 -59.2 459.92000 Total 890.0 578.4 243.8 -67.8 392.12001 Total 863.1 735.5 231.8 104.2 496.3

2002 January 113.9 10.1 19.1 -84.6 411.7February 103.7 13.6 17.2 -73.0 338.7March 108.8 15.6 18.8 -74.4 264.3April 75.1 67.7 17.9 10.5 274.8

Projection May 66.2 87.6 18.1 39.6 314.4June 40.5 81.1 17.6 58.2 372.5July 37.3 53.6 18.2 34.4 407.0August 38.2 59.7 17.9 39.4 446.4September 45.6 61.9 17.4 33.7 480.1October 65.2 92.4 17.9 45.2 525.3November 93.1 42.2 17.2 -33.7 491.6December 116.7 16.6 17.5 -82.5 409.0

2002 Total 904.2 602.2 214.8 -87.3 409.0

2003 January 128.5 -5.6 17.5 -116.7 292.3

February 106.3 15.2 15.6 -75.4 216.9March 102.2 24.3 18.0 -60.0 157.0April 75.6 79.2 16.6 20.2 177.1May 54.1 94.6 17.3 57.8 234.9June 39.9 84.9 16.2 61.2 296.1

the gas in Michigan storage. The storage balance is the amount of working gas in storage at the end of the month/year.

SOURCES: Historic Data - Demand and Storage from EIA; Production is from MPSC Gas Division.Projection - Production from MPSC Gas Division; Demand/Storage are by MPSC Executive Secretary Division.

Michigan Natural Gas Supply and Demand(Billions of Cubic Feet--BCF)

NOTES: Projected demand assumes normal weather. The Michigan production series is Michigan production compiled by the Gas Gas Division, MPSC. Net interstate deliveries are calculated using sales less the sum of Michigan production and the change in

Petroleum

As was noted in the Summer Appraisal, “If pro-duction is not increased and demand continues to rise, oil prices may increase to nearly $30 per bar-rel.” Crude oil prices are now near $30 per barrel, up $3.50 per barrel from a year ago levels and up about $10 from the low point seen in January 2002. This has resulted in higher costs for all re-fined petroleum products. The increase in crude oil prices has been caused by OPEC’s decision at their September meeting to not increase produc-tion quotas, raising world oil demand, and con-cerns about the potential for military action against Iraq, which some industry analysts suggest has contributed between $3 and $5 to the price. World Outlook The U.S. is expected to account for half of the growth in world oil demand of 1.2 million barrels per day (b/d) in 2003, based on U.S. economic growth of three percent, according to the “Short-Term Energy Outlook” by EIA. Total world oil demand is expected to average 77.6 million b/d in 2003, up 1.2 million b/d. The U.S. is expected to account for half of this growth with a total pro-jected U.S. demand of 20.3 million b/d. OPEC’s 10 principal producing countries are pumping an estimated 2.2 million b/d above their quota levels, and EIA expects production will rise further over the winter despite their decision in September to leave production quotas unchanged. These levels are expected to maintain inventories and meet projected growth in world oil demand of 1.2 million b/d in 2003. As a result, crude oil prices are expected to remain within the $25 to $30 range over the next year. Iraq is producing about 1.9 million b/d, although this number fluctuates depending on the UN Oil for Food Program. This program next rolls over at the end of November, and production may drop at this point for a time. Non-OPEC-producing countries are expected to increase output by 1 million b/d in 2003. Half of this amount is expected to come from Russia and the Caspian Sea region. U.S. production is projected to increase by 70,000 b/d in 2002 and then decline 110,000 b/d in 2003. U.S. Outlook Last winter’s record warmer-than-normal weather, the economic recession, and depressed jet fuel

demand following September 11th all contributed to a 1 percent decline in U.S. petroleum demand in 2001. For the year 2002 demand is expected to be up only 0.3 percent over 2001 levels. For 2003 demand growth of 3 percent is expected, assuming a return to normal weather and renewed economic growth. At 275 million barrels, U.S. crude oil inventories were at the lowest level seen in 25 years during the first week of October, just 5 percent above their lowest operating levels. A return to normal weather and higher prices will cause a substantial increase in the cost of residen-tial heating compared to last year’s record warm weather. Crude oil prices this winter are expected to average over $10 per barrel higher than last winter, which directly adds 24 cents per gallon to the prices of petroleum products. EIA projects that a residential user in the Northeast, for exam-ple, will see their heating bill go up by 45 percent due to a combination of increased usage, assum-ing a return to normal weather following last year’s record warm winter, and higher fuel oil prices stemming from price increases in crude oil. Midwest The Midwest has been showing some signs of petroleum product supply tightness. Some pipe-line terminals temporarily ran out of supplies. These problems were seen in the western half of the Midwest and were due to reduced shipments on some pipelines and planned seasonal refinery maintenance shutdowns. A fire at the 140,000 b/d Toledo Refinery of Sunoco on October 6th will not affect supply and is now back in operation. Only one of the two crude oil units was affected. The 26-inch diameter Centennial pipeline from Texas to Illinois went into operation on April 1, 2002, and substantially increases the ability to move petroleum products into the Midwest from the Gulf Coast. This converted natural gas pipeline has a capacity of 210,000 b/d. This pipeline helps offset the planned closing of the 70,000 b/d Prem-cor refinery in Hartford, Illinois this month. Finally, the U. S. Department of Agriculture is forecasting a 7 percent drop in the corn crop this year, the lowest level since 1995. This should reduce propane and natural gas demand for crop drying which will cause a smaller drain on inven-tories going into the winter heating season as seen in recent years.

Note: The Energy

Imported Crude Oil Refiner Aquisition Cost1983 and projections to 2003

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03

Dol

lars

per

Bar

rel (

Nom

inal

)

Projection

*All values are for Mid Price Case 3rd 4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th 2002 2003

Demand in 50 States 19.70 19.41 19.44 19.64 19.81 19.93 20.12 20.02 20.42 20.62 19.71 20.30

Domestic Crude Oil Supply 1 5.73 5.84 5.93 5.89 5.81 5.86 5.89 5.76 5.70 5.75 5.87 5.77

Total Petroleum Net Imports 2 10.82 10.33 10.08 10.67 10.29 10.33 10.65 11.50 11.55 11.06 10.36 11.19

Imported Crude Oil Price 3 23.04 16.94 19.33 23.84 26.00 28.27 28.99 28.06 27.01 25.93 24.43 27.47

2003

PROJECTED

U.S. Petroleum Demand Projections(Million Barrels per Day)

Yearly Ave2001 2002

NOTES: 1 Includes only crude oil productions. Additional sources of domestic petroleum supply includes natural gas liquids, other hydrocarbons, alcohol inputs and processing grains. 2 Net imports include deliveries of crude oil to the strategic petroleum reserve. 3 in Dollars per barrelSOURCES: U.S. Department of Energy, Energy Information Administration, Short-Term Energy Outlook, October 2002 and Petroleum Supply Monthly.

above projections and analysis were excerpted from the DOE Energy Information Administration’s (EIA) “Short- Term Outlook,” October 2002, the EIA Weekly Petroleum Status Report, Monthly Energy Review, and other industry sources.

United States Total Petroleum Demand and Net Imports

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

January-99 January-00 January-01 January-02 January-03

Milli

ons

of B

arre

ls p

er D

ay

Projection

Demand

Net Imports

Motor Gasoline

Self-serve regular gasoline sold in Detroit on October 14, 2002, for $1.55 per gallon, according to AAA Michigan. This is 30¢ higher than a year ago. Assuming no major disruptions in the petroleum markets, prices are expected to remain around this level through the winter. While showing some significant week to week swings, Michigan’s gasoline prices overall were more stable this summer compared to recent years, averaging about $1.40 per gallon from April through September. This is a departure from the previous two summers. In 2000 and 2001, gasoline prices were very volatile in Michigan and peaked at about $2 per gallon in each of those years as a result of pipeline and refinery outages. Demand For 2002, gasoline sales in Michigan are pro-jected to increase 2 percent after declining the last two years. Projected sales for 2002 are 4,814.0 million gallons, up from 4,718.4 million gallons in 2001. Gasoline sales in the year 2001 were less than in any year since 1997. Total Michigan gasoline sales grew at an average rate of 1.1 percent per year in the 10-year period 1991-2001. In that same time period, U.S. gasoline sales have increased an average of 1.8 percent per year. Gasoline demand growth in the 1990s reflects less impact of increased fuel efficiency gains in the vehicle fleet than in the 1970s and 1980s. In fact, gasoline consumption in Michigan was 6 percent higher in 1975 than in 1991, in spite of a vehicle fleet almost 25 percent larger in 1991. The Michigan vehicle fleet in 2001 was about 16 percent higher than in 1991, and so gasoline consumption is now rising just a bit slower than growth in the vehicle fleet. Supply

With the normal seasonal decline in demand, Michigan and Midwest gasoline supplies are sufficient through the winter. The general trend of increased gasoline demand combined with distribution constraints could result in some temporary supply imbalances. U.S. gasoline stocks on September 28, 2002, were 208.4

million barrels, up slightly from 203.9 million barrels one year earlier. The current level repre-sents about 24 days of U.S. demand. Midwest inventories were 52.7 million barrels on September 28, almost identical to the figure of 52.6 one year ago. Nationally, refineries ran at record levels for this summer. Gasoline inventories were in the upper range of normal in the spring and the increased refinery output through the summer allowed inventories to remain at reasonable levels even with higher national gasoline demand. The direct result was more stable gasoline prices nationally and in Michigan this summer than in the previous two years. Price Self-serve regular gasoline sold in Detroit on October 14, 2002, at $1.55 per gallon, according to AAA Michigan − 30¢ higher than the $1.25 per gallon price the same week one year ago. Prices have been volatile nationally and especially in Michigan since the spring of 2000. In June 2000, prices peaked at almost $2 per gallon when an already tight supply situation was aggravated by a refined products pipeline break near Jackson, Michigan. In early summer of 2001, an outage at the Tosco refinery in Illinois aggravated a low supply situation. Prices spiked to $2 and then moderated until August when the Citgo Lemont refinery in Illinois shut down. After the World Trade Center and the Pentagon were attacked on September 11, 2001, gasoline prices around the nation again spiked from panic buying. Prices then fell dramatically and bottomed in Detroit at $1.07 the week of January 22, 2002, when crude oil prices bottomed out under $20 per barrel. Then, in March 2002 prices began to rise due to higher world oil prices. Prices since April have been pretty stable, ranging within a dime, from the high $1.30s to the high $1.40s. According to EIA, national gasoline prices this winter are expected to be stable and average $1.50 per gallon, about 38¢ above last winter’s average. Prices in Michigan historically follow the national average and should do so this winter.

Michigan Gasoline Sales

300

350

400

450

500

Jul-98 Jul-99 Jul-00 Jul-01 Jul-02

Mill

ions

of G

allo

ns Monthly SalesProjected

T o ta l H is to ric a l A ll G ra d e s (p r io r ye a r) % C h a n g e

H is to r ic a l 1 9 9 9 T o ta l 4 ,8 2 0 .5 4 ,8 1 1 .4 0 .2 %2 0 0 0 T o ta l 4 ,7 8 0 .5 4 ,8 2 0 .6 -0 .8 %2 0 0 1 T o ta l 4 ,7 1 8 .4 4 ,7 8 0 .5 -1 .3 %

P ro je c tio n 2 0 0 2 J a n u a ry 3 7 7 .4 3 7 3 .3 1 .1 %F e b ru a ry 3 5 1 .1 3 5 3 .4 -0 .6 %M a rc h 3 8 1 .8 3 8 7 .6 -1 .5 %A p ril 3 8 3 .3 3 7 7 .7 1 .5 %M a y 4 1 5 .2 4 0 0 .8 3 .6 %J u n e 4 1 0 .7 4 1 4 .8 -1 .0 %J u ly 4 3 4 .8 4 1 4 .6 4 .9 %A u g u s t 4 3 3 .0 4 1 7 .1 3 .8 %S e p te m b e r 4 0 0 .0 3 8 5 .2 3 .9 %O c to b e r 4 1 4 .0 4 1 1 .5 0 .6 %N o ve m b e r 3 9 0 .9 3 8 9 .6 0 .3 %D e c e m b e r 4 0 2 .5 3 9 2 .9 2 .4 %

2 0 0 2 T o ta l 4 ,8 1 4 .0 4 ,7 1 8 .4 2 .0 %2 0 0 1 -2 0 0 2 ch a n g e 2 .0 % -1 .3 %

2 0 0 3 J a n u a ry 3 7 3 .2 3 7 7 .4 -1 .1 %F e b ru a ry 3 5 4 .2 3 5 1 .1 0 .9 %M a rc h 3 8 8 .5 3 8 1 .8 1 .7 %A p ril 3 8 2 .4 3 8 3 .3 -0 .3 %M a y 4 1 4 .7 4 1 5 .2 -0 .1 %J u n e 4 1 7 .6 4 1 0 .7 1 .7 %

N O T E : T h e s e p ro je c tio n s a s su m e a m o d e ra te re c o ve ry in M ich ig a n 's e co n o m y.S O U R C E S : H is to rica l d a ta - E n e rg y In fo rm a tio n A d m in is tra tio n , U .S . D e p a rtm e n t o f E n e rg y . P ro je c tio n -- E xe c u tive S e c re ta ry D iv is io n , M P S C .

M ic h ig a n G a s o lin e S a le s P ro je c tio n s(M illio n s o f G a llo n s )

Regional Gasoline Supply and Demand

0

500

1,000

1,500

2,000

2,500

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03

Mill

ions

of G

allo

ns

Projection

Imports from other Regions

Demand

Production

Production Inventories Dem and

Historical 1999 Average 1,519.1 720.3 1,944.72000 Average 1,459.9 672.0 1,950.92001 Average 1,459.6 651.8 1,931.4

2002 January 1,547.0 751.1 1,862.9Projection February 1,306.7 715.6 1,737.6

March 1,400.8 657.1 1,893.2April 1,488.5 607.0 1,928.5May 1,515.7 616.0 2,022.9June 1,523.5 611.2 1,988.6July 1,509.6 638.1 2,063.0August 1,508.5 619.1 2,063.0Septem ber 1,494.0 641.1 1,921.1October 1,498.7 586.0 2,020.4Novem ber 1,468.2 616.2 1,917.2Decem ber 1,569.3 603.3 1,981.9

2002 Average 1,485.9 638.5 1,950.0 2001-2002 change 1.8% -2.0% 1.0%

2002 January 1,513.4 698.5 1,808.9February 1,370.3 697.2 1,732.9March 1,399.0 621.9 1,924.9April 1,410.1 611.4 1,915.7May 1,537.3 651.6 2,007.6June 1,524.3 673.7 1,996.2

NOTES: Production projections based on expected refinery utilizations and recent trends.Inventory projections are based on the assumption that oil companies will increase inventories somewhat through the year, with the return of the Lemont refinery.The region is comprised of Illinois, Indiana, Kentucky, Michigan, Tennessee, and Ohio.SOURCES: Historical data -- Energy Information Administration, U.S. Department of Energy Projection -- Executive Secretary Division, MPSC.

Regional Gasoline Supply and Demand(M illions of Gallons)

Regional Regional Michigan Production Inventories Inventories Total Gasohol

1997 Average 1,583,649 670,327 128,902 392,406 24,229

1998 Average 1,561,732 722,999 116,757 400,953 27,626

1999 Average 1,519,137 720,262 112,791 401,055 29,9152000 January 1,341,354 674,394 109,620 369,719 47,164

February 1,268,778 831,474 109,074 368,582 63,888March 1,370,670 615,468 98,532 389,419 69,770April 1,435,728 610,680 94,206 376,589 66,694May 1,571,346 604,296 78,498 414,656 71,073June 1,572,144 758,226 109,158 407,610 75,446July 1,600,662 806,064 136,332 410,220 71,838August 1,528,548 644,994 99,330 437,040 78,725September 1,488,144 663,852 116,214 399,058 78,683October 1,467,522 652,806 131,628 410,818 75,670November 1,393,812 619,332 115,668 392,401 72,513December 1,479,912 581,994 102,354 404,374 78,602

Average 1,459,885 671,965 108,385 398,374 70,839

2001 January 1,444,758 696,234 122,178 373,349February 1,341,690 704,340 115,584 353,363March 1,428,126 573,468 93,072 387,625April 1,437,366 556,668 80,346 377,654May 1,527,078 641,424 115,122 400,755June 1,538,544 688,212 124,908 414,832July 1,479,072 694,470 118,356 414,589August 1,425,102 633,864 107,478 417,081September 1,490,958 698,964 127,428 385,166October 1,481,382 678,174 110,754 411,515November 1,381,968 630,924 98,532 389,580December 1,539,636 624,372 112,518 392,876

Average 1,459,640 651,760 110,523 393,199

NOTES: The region includes Illinois, Indiana, Kentucky, Michigan, Tennessee and Ohio. Inventories are month-end. Gasohol, a mix of unleaded motor gasoline and 10 percent ethanol, is no longer collected separately by the Michigan Department of Treasury.

SOURCES: The Petroleum Supply Monthly and Prime Supplier Report, Energy Information Administration;U.S. Department of Energy for regional and Michigan total, and the Michigan Department of Treasury for gasohol.

Gasoline Supply and Demand(Thousands of Gallons)

Michigan Demand

Distillates

Supply The statewide average residential price of home heating oil in Michigan was $1.23 per gallon, excluding the 4 percent sales tax on October 14, 2002, the first date for the winter fuels survey. One year ago, on October 15, 2001, the average price was $1.28; however, by spring 2002 prices had declined to an average of $1.07 per gallon.

Midwest refineries are expected to produce an average of 654 million gallons of distillate fuel oil per month in 2002. Production in 2001 averaged 681 million gallons per month, and in 2000 was 698 million gallons. National inventories of distillates were 130.1 million barrels on September 27, 2002, com-pared to 122.7 million barrels one year ago. Regional distillate inventories were 30 million barrels on September 27, just above last year’s levels of 27.2 barrels.

Residential customers using home heating oil are likely to see higher bills this year as crude oil costs and associated petroleum product prices are expected to remain near current levels through the winter. A return to normal weather conditions would also increase usage and affect bills. Last winter was 9 percent warmer than normal so a return to normal weather would increase usage by an equivalent amount. This means higher heating bills are likely for residen-tial heating oil users this winter. In Michigan 3.5 percent of homes use heating oil.

Last year’s inventories were low, and this year’s national inventories remain just 5 million barrels above the lower limit of normal, according to EIA. However, the relatively low inventories are not expected to affect prices. Rather, higher prices are projected to stem almost entirely to higher crude petroleum costs. Oil prices are projected to be about $10 per barrel above last winter, and this translates to 24 cents per gallon for refined products such as distillates.

Michigan distillates fuel demand declined 2.2 percent in 2001 to 1.19 billion gallons due to warm winter weather and the economic slow-down. For 2002, sales are expected to be the same, at 1.19 billion gallons, which reflects increases in the last half of 2002 following a 2.4 percent decline in the first six months.

Price

Michigan heating oil prices averaged $1.23 on October 14, 2002 (excluding the 4 percent sales tax), the first date for the winter fuels survey. One year earlier, on October 15, 2001, the average price was $1.28. Based on EIA’s crude oil prices projections prices could increase in Michigan from current levels by 5 to 10 cents per gallon before the seasonal price decline typically seen at the end of winter.

Demand Michigan distillate deliveries fell again in 2001 to 1.19 billion gallons. This is 2.2 percent below the 1.217 billion gallon seen in 2001, and 10.2 percent below the 1.326 billion gallons consumed in 1999.

For 2002, distillate deliveries are projected to be essentially the same as in 2001, at 1.19 billion gallons. Deliveries were down 2.4 percent the first six months of 2002 due to both decreased home heating demand and the slow economy, which held down diesel demand. The projection assumes normal winter weather, although the National Weather Service does project tempera-tures to be warmer than normal. The projection also assumes the economy will improve only slightly through the period. If the economy recovers more quickly, demand for distillates will be higher than projected.

The average residential customer uses about 700 gallons of fuel oil during a normal winter. Last winter’s warmer-than-normal weather reduced consumption about 9 percent to 637 gallons. If the weather returns to normal temperatures this winter, consumption would return to 700 gallons. Assuming a return to normal temperatures and prices averaging $1.26 per gallon, the cost of heating a typical home with fuel oil will rise from $700 last winter ($1.10 per gallon average) to $882 this winter, an increase of 26 percent.

Michigan Distillate Fuel Oil Sales

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03

Mill

ions

of G

allo

ns

Projection

Total

Diesel

No. 1 No. 2 Diesel Prior Fuel Oil Fuel Oil Fuel Total Year % Change

Historical 1999 Total 28.2 192.7 1,105.2 1,326.1 1,181.6 12.2%2000 Total 33.2 218.9 965.4 1,217.5 1,326.1 -8.2%2001 Total 33.9 180.4 975.9 1,190.2 1,217.5 -2.2%

2002 January 4.5 12.9 82.0 99.4 103.9 -4.3%February 4.1 11.3 74.0 89.5 90.9 -1.6%March 1.7 12.3 81.5 95.4 97.8 -2.4%April 1.3 13.2 88.3 102.8 95.1 8.2%May 1.2 11.9 80.1 93.3 102.9 -9.3%June 1.1 12.7 80.3 94.2 98.0 -3.8%

Projection July 1.4 14.5 80.2 96.1 95.9 0.1%August 1.5 15.2 85.3 102.1 103.9 -1.8%September 1.9 16.2 85.0 103.2 98.1 5.2%October 2.6 18.4 93.3 114.4 113.6 0.7%November 3.4 16.1 80.8 100.3 100.7 -0.4%December 5.3 17.8 76.9 100.0 89.6 11.6%

2002 Total 30.1 172.7 987.8 1,190.5 1,190.3 0.0%

2003 January 5.3 17.1 77.9 100.3 95.1 5.5%February 4.7 14.6 72.6 91.9 87.2 5.4%March 3.2 15.7 78.7 97.6 94.3 3.4%April 1.7 14.5 81.1 97.3 95.6 1.8%May 1.7 15.8 86.1 103.5 101.8 1.6%June 1.5 15.0 84.7 101.2 99.7 1.5%

NOTES: These projections assume normal degree day accumulations. Actual demand may vary as a result of actual temperature variations.SOURCES: Historical data -- Energy Information Administration, U.S. Department of Energy. Projections -- Executive Secretary Division, Michigan Public Service Commission.

Michigan Distillate Fuel Oil Sales Projection(Millions of Gallons)

Regional Distillate Fuel Supply and Demand

-200.0

0.0

200.0

400.0

600.0

800.0

1000.0

Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02

Milli

ons

of G

allo

ns

Projection

Imports

Production

Demand

Production Inventories Demand

Historical 1999 Average 665.0 548.0 768.02000 Average 698.0 485.0 654.02001 Average 681.0 463.0 795.0

2002 January 688.1 542.0 895.2February 604.9 529.4 688.4March 580.0 532.5 714.4

April 607.0 474.3 770.6May 664.2 480.4 781.3June 644.4 440.1 765.3July 678.4 458.4 753.9

Projection August 656.1 445.9 790.5September 658.1 451.9 796.6October 679.2 400.1 865.2November 681.9 461.1 782.0December 707.7 483.0 768.6

2002 Average 654.2 474.9 781.0

2003 January 696.2 487.1 791.8February 626.6 485.1 706.2March 606.1 421.4 803.3April 641.8 466.5 773.9May 701.1 496.5 802.3June 659.3 488.0 764.2

NOTES: Production projections based on expected refinery capacity utilization and recent trends. Inventory projections assume that refiners will increase inventory levels to normal relative to demand. 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; Projection - Executive Secretary Division, Michigan Public Service Commission.

Regional Distillate Fuel Oil Supply and Demand (Millions of Gallons)

Regional Regional Michigan Production Inventories Inventories #1 Fuel #2 Fuel Diesel Total

1997 Average 694,922 515,606 72,937 2,078 23,094 73,303 98,4741998 Average 704,942 564,582 74,771 1,931 18,824 80,911 101,667

1999 Average 665,147 548,349 65,090 2,354 16,057 92,097 110,5082000 January 666,162 480,942 63,588 5,995 19,446 72,434 97,875

February 641,970 468,552 65,016 5,194 16,621 75,163 96,978March 623,994 429,324 60,774 2,081 16,778 78,530 97,389April 657,216 472,206 48,342 1,448 17,474 75,084 94,006May 756,252 502,950 61,740 1,130 19,190 87,115 107,435June 653,100 529,242 57,792 1,144 18,256 86,019 105,419July 678,006 509,376 63,126 886 16,571 77,823 95,280August 737,688 484,932 70,686 1,521 17,634 89,274 108,429September 741,174 479,934 60,858 2,032 18,794 82,152 102,978October 761,334 497,616 66,318 2,026 20,086 88,005 110,117November 707,532 502,908 55,902 3,349 17,285 79,071 99,705December 746,550 470,568 58,044 6,386 20,771 74,755 101,912

Average 697,582 485,713 61,016 2,766 18,242 80,452 101,460

2001 January 770,238 490,728 63,420 5,918 19,019 78,973 103,910February 645,834 466,998 63,546 4,438 16,526 69,970 90,934March 658,266 423,192 55,860 3,293 14,973 79,539 97,805April 678,804 466,620 54,096 1,437 14,798 78,822 95,057May 687,120 481,026 62,832 1,277 15,479 86,112 102,868June 694,092 454,062 59,094 1,258 14,938 81,761 97,957July 712,152 472,248 53,424 1,073 14,502 80,351 95,926August 658,728 445,956 48,090 1,538 15,293 87,057 103,888September 657,132 501,690 64,428 2,002 14,177 81,904 98,083October 638,610 425,460 56,070 2,607 16,451 94,508 113,566November 629,832 453,768 65,940 w 12,363 85,014 97,377December 688,086 542,010 70,098 w 11,928 72,487 84,415

Average 676,575 468,647 59,742 2,484 15,037 81,375 98,482

NOTES: The region includes Illinois, Indiana, Kentucky, Michigan, Tennessee, and Ohio. Inventory and production data include all distillate categories.

SOURCES: The Petroleum Supply Monthly, and the Prime Supplier Report, Energy Information Administration, U.S. Department of Energy.

Deliveries to Michigan

Distillate Fuel Oil Supply and Demand(Thousand of Gallons)

Michigan Homeland Security Task Force

Before and since 9/11, the Michigan Public Service Commission (MPSC) staff has worked with the energy industry to protect Michigan’s energy security. This year, efforts have been started to secure training opportunities between the energy industry, the U.S. Department of Energy, the Michigan State Police, and local first responders. Power plant operators continue to enhance security at plants and pipeline operators are doing the same. The State of Michigan and the energy industries are working together toward a safe, secure energy infrastructure.

Following 9/11, an executive directive by the Governor established the Michigan Homeland Security Task Force in January 2002, which expands on the work of the Michigan Terrorism Task Force (MTTF), established in 1996 in response to the Oklahoma City bombing. The Emergency Management Division of the Michigan State Police directed the work of the MTTF to review ongoing antiterrorism efforts at the federal level, as well as to seek opportunities for developing programs to safeguard the pubic in Michigan. (The Homeland Security Task Force has subsumed the work of the MTTF.)

The Homeland Security Task Force includes representatives from the Emergency Management Division of State Police; the Michigan National Guard; state Departments of Environmental Quality, Agriculture, Consumer & Industry Services, Natural Resources, and Community Health; the U.S. Department of Defense; the U.S. Environmental Protection Agency; the U.S. Public Health Service; and the Federal Bureau of Investigation, along with local agencies. The Director of the Michigan State Police, Colonel Steve Madden, is the state's director of Homeland Security and the principal contact with the Federal Office of Homeland Security. Under his direction, the Emergency Management Division is responsible for the coordination of all state homeland security matters.

The mission of the Homeland Security Task Force is:

“To coordinate all Homeland Security-related actions across a broad multidisciplined spectrum, including federal, state, local and private organizations, and to advance the effective development and implementation of a state Homeland Security Strategy based upon explicit goals and objectives.”

To help it achieve this objective, the Michigan Homeland Security Task Force consists of the Homeland Security Advisory Council and four Committees. The mission of the Advisory Council is to review the Task Force’s strategic initiatives, to provide functional input to major program areas, and to serve as a conduit to share information within state agencies.

The four Committees of the Michigan Homeland Security Task Force are:

- Indication and Warning Committee, which will coordinate law enforcement and intelligence information regarding potential attacks against Michigan;

- Critical Infrastructure Protection Committee, which will identify infrastructures that are vital to Michigan;

- Response Committee, which will analyze statewide response readiness; and - Health Committee, which is charged with actions to evaluate the readiness of and to

protect Michigan’s medical institutions.

MPSC staff serve on the Critical Infrastructure Protection (CIP) Committee. The CIP Committee has been charged with investigating and protecting critical infrastructure facilities in Michigan,

including energy facilities. To accomplish this the CIP Committee is composed of several subcommittees, one of which is the Energy Subcommittee. As part of its overall effort, the Energy Subcommittee is looking at the security of all systems that produce or distribute energy, including petroleum products, natural gas, and electricity. This endeavor covers efforts to reduce risk and vulnerability to, and increased security and contingency planning at, electric generation plants, transmission lines, interconnection points, switch yards, natural gas facilities (compression stations, interstate gas pipelines and storage fields), and local distribution and control systems. In the petroleum sector, it is examining refineries and petroleum product and crude oil pipelines, barge shipments, distribution terminals, propane storage and distribution points. Coal supply will be addressed as part of the electric sector review.

Since 9/11 there have been many published reports and articles about the vulnerabilities of the energy infrastructure. Therefore, as a first step, the Energy Subcommittee began its task by initiating a series of meetings with energy companies in Michigan (electric, gas and petroleum) to gauge the status of security efforts and the recovery readiness of those industries. Initial findings have been encouraging; Michigan’s energy companies have been responding to the new challenges and have taken many steps to secure both. For more information on emergency preparedness at the MPSC, see http://michigan.gov/mpsc/0,1607,7-159-16370_17791---,00.html. Corrections, please: The Michigan Energy Appraisal is available free of charge to people interested in energy supply and demand trends. If you have comments or suggestions for additional informa-tion and analysis that you would like to see included, send them to the address below. Please use this form (with mailing label intact on reverse side) to request address or name changes or to be added to our mailing list. Please check appropriate box below: [ ] Please add my name to your mailing list. [ ] Please remove my name from your mailing list. [ ] Please make the following address corrections: Name_____________________________________________________________ Organization_______________________________________________________ Address___________________________________________________________ City___________________________________State_____________Zip_______ Send to: Michigan Energy Appraisal Michigan Public Service Commission P.O. Box 30221 Lansing, MI 48909

Michigan Public Service Commission Executive Secretary Division Michigan Energy Appraisal

P.O. Box 30221 Lansing, MI 48909