Drafting Rate Case Orders

1. Drafting Rate Case Orders Energy Regulatory Partnership Program Abuja, Nigeria July 14-18, 2008 Presented by Robert W. Kehres

2. The participants • Regulated Energy Division – a party in the case and the technical advisor to the Commission. • Regulatory Affairs Division – the legal advisor to the Commission. • The Commissioners – the ultimate decisionmakers.

3. The Starting Point -- PFD • Normally, RAD does not become involved until the ALJ issues the Proposal for Decision (PFD). • The PFD is electronically sent to Director of RAD when it is issued. • I review it and assign it to an attorney to act as the lead attorney.

4. Exceptions • When the ALJ issues the PFD, the parties are notified of the date y which their objections (exceptions) must be filed. This is normally 3-4 weeks for a rate case. • During this time, the RAD attorneys will be reviewing the PFD, attempting to determine the contested issues, and drafting the preliminary portion of the final order, which describes the procedural history of the case.

5. Identification of issues • When the exceptions are filed (there are always exceptions in a contested rate case) the RAD attorneys review them and identify all contested issues. • The attorneys start drafting the arguments of the parties. • Ideally, the attorneys and the Commissioners begin meeting to discuss the issues and the position of the Commission.

6. Replies to exceptions • Ordinarily, the parties have 1-2 weeks after the exceptions before the replies to exceptions are due. • RAD attorneys use the 1-2 week period to review the testimony and exhibits cited in the arguments section of the draft order. • Upon the filing of the replies to exceptions, the case is formally submitted to the Commission.

7. Deliberations Phase • Commissioners provide general guidance. • RAD attorneys address specific questions. • RED staff ceases acting as a party and switches to role as technical advisors to RAD attorneys and the Commissioners. • Responsible for calculating all changes in revenue deficiency/sufficiency based on proposals drafted by the RAD attorneys or proposed by a Commissioner.

8. Order Circulation Phase • Once all of the major factors are resolved, RAD prepares a draft order that is circulated to all Commissioners and the RED staff. • Commissioners review the draft order and make comments in writing. • RED staff checks the accuracy of the calculations. • RED staff prepares exhibits (tariff sheets).

9. Nearing the end • Once the exact size of the revenue deficiency/sufficiency is determined, the Commission must determine how the change in rates is to be apportioned amongst the rate classes. • Tariff sheets are finalized. • Copies of the final order are shared with Commission’s in-house press relations and legislative staffers. • A press release is prepared. • A Commission meeting is scheduled. • An agenda for the Commission meeting is posted at least 18 hours before the Commission meeting.

10. The End • In a meeting open to the public, the Commissioners vote by roll call vote to support or oppose the order, which must be in writing. • At least two of the three Commissioners must agree for the order to be issued. • All of the Commissioners may issue a concurring or dissenting order. • A press release is issued. • The revised rates take effect the day after the order is issued, due to notice issues.

11. Rehearings • Any party may seek reheaqring before the Commission. • Grounds for rehearings: • Legal error • Factual error • Unintended consequence • Newly discovered evidence • Clarification needed

12. Appeals • After the final Commission order and rehearings, if any, any aggrieved person may file an appeal with the Michigan Court of Appeals. • Unless stayed, the order remains in effect during the appeal. • If an aggrieved person is still aggrieved after the Court of Appeals decision, an appeal may be taken to the Michigan Supreme Court.

13. Order in which the issues are discussed in a rate case • Procedural history of the case. • Test year – [2008] • Rate base – [$5,013,880,000] • Net utility plant [$4,848,102,000] • DOE liability [$117,678,000] • Working capital [$48,100,000] • Ludington land sales proceeds [moot]

14. Issues, continued: • Overall rate of return • Capital structure • Cost rates • Common equity [10.7%] • Long-term debt [5.62%] • Short-term debt [5.68%] & preferred stock [4.46%] • Deferred income tax credit [0.00%] • Deferred investment tax credit [0.00%] • Deferred federal income tax [0.00%]

15. Issues, continued • Adjusted Net Operating Income [$376,926,000] • Jurisdictional revenues [$3,047,948,000] • Fuel & purchased and net interchanged power [$1,488,745,000] • Discount fees on accounts receivables • Employee Incentive Compensation Plan • Dues and Lobbying expenses • Billing system cost subsidy • Tree trimming costs and tracker • Pension costs and OPEB tracker • Incremental environmental compliance costs • Pro-forma tax adjustment

16. Calculation of Base Rate Sufficiency • Rate Base $5,013,880,000 • Rate of Return 6.93% • Income Required $347,462,000 • Adjusted NOI $379,926,000 • Income excess $29,464,000 • Revenue multiplier 1.5683 • Revenue excess $46,208,400

17. Issues, continued • Other Revenue Issues • Zeeland plant revenue issues • Interim relief order granted $69.5 million to be collect via a surcharge, not through base rates • Final order approved an additional $4.177 million • Palisades transaction costs • Palisades refund to Rate E-1 customers • Energy Efficiency Proposal • Electric Choice Incentive Mechanism • Low-income energy efficiency fund • Nuclear legacy costs • REVENUE DEFICIENCY -- $27,468,000

18. The End