Processing Rate Cases

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

2. Why is there Regulation? • Certain privately-owned activities are “affected with a public interest.” • Electric service is necessary for a reasonable quality of life. • An unregulated electric market is imperfect.

3. Indicia of a Perfect Market • Supply and demand set market price. • The perfect marketplace has: • Many buyers • Many sellers • No entry barriers • A fully fungible product

4. Reality of the Electricity Marketplace • Many buyers • Fungible product • Extremely high entry barriers • Insurmountable economies of scale for generation capacity and energy costs • It is not practical to duplicate transmission or distribution systems

5. Goal of Regulation • Reliable and abundant service at reasonable prices • To serve as a marketplace substitute for competition • By limiting a utility’s ability to recover only just and reasonable rates, regulation encourages the maximization of satisfaction in the face of scarcity • Incentive to profit through the wise use of scarce resources and avoidance of waste

6. Social Compact • Obligation to serve all customers’ needs • Just and reasonable rates • Abundant, safe, and reliable service • Right to recover all reasonable and prudently incurred costs • Opportunity to earn a reasonable rate of return on its capital investments

7. Ratemaking Principles • The Commission is not bound to the use of any single formula or combination of formulae in determining rates. • The ratemaking function involves the making of pragmatic adjustments. • Although rates must be just and reasonable, it is the result reached, not the method employed, which is controlling.

8. More Ratemaking Principles • The fact that the method employed to reach a result may contain infirmities is not important so long as the total effect of the rate order cannot be said to be unjust and unreasonable. • The ratemaking process, i.e., the fixing of "just and reasonable" rates, involves a balancing of the investor and the consumer interests.

9. Even More Ratemaking Principles • Rate regulation need not ensure that the utility will produce net revenues. • However, the Commission must realize that the investor interest has a legitimate concern with the financial integrity of the company whose rates are being regulated. • From the investor or company point of view, it is important that there be enough revenue not only for operating expenses, but also for the capital costs of the business. • By that standard, the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. • That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital.

10. Legal Basis For Ratemaking • US Constitution, Amendment V., states: • “…nor shall private property be taken for public use, without just compensation.”

11. Preliminary Considerations • A Regulatory Agency should not be surprised by the filing of a rate case. • A Regulatory Agency should avoid unnecessary delays (i.e. “Regulatory Lag”). • A Regulatory Agency should attempt to conserve its scarce resources.

12. How to accomplish these goals? • Rate Case Filing Requirements

13. MPSC’s Initial Solution • Case No. U-4252, issued January 2, 1973 adopted “Emergency Rules” • The emergency was passage of a requirement that rate cases be resolved in 9 months. • The possibility existed that many rate case applications would be filed in the very near future. • See, http://www.cis.state.mi.us/mpsc/orders/archive/pdfs/U-4252_01-02-1973.PDF

14. What did Case No. U-4252 do? • Standardized the filing requirements for all utility rate cases through adoption of 10 requirements. • This made it easier for the Commission Staff to process cases because they become familiar with the format.

15. The ten Case No. U-4252 requirements were: • The filing of an original and 12 copies of the application. • The filing of 12 copies of all testimony and exhibits. • The filing of 2 copies of all work papers. • The test year upon which the testimony and exhibits were based had to be fully available for audit at the time of filing. • Rate Base, revenues, and expenses must be separated between jurisdictional and non-jurisdictional operations.

16. Case No. U-4252 continued: • Jurisdictional operations had to be further separated in accordance with commission policy. • All data had to state bases for normalization and adjustments of rate base, revenues, and expenses and appropriate supporting data. • The proposed rates had to be submitted in rate schedules (tariff sheets) in accord with Commission rules and regulations.

17. Case No. U-4252 continued: • All testimony and exhibits had to be submitted in such form and detail as necessary for the Commission to analyze and verify its propriety, validity, and effect. • Customer’s billing data had to be submitted in sufficient detail as to enable calculation of the proposed rates and charges of customers by rate schedules.

18. Case No. U-4252 “completeness” requirement. • The application is deemed filed only when it fully complies with all of the above requirements. • If insufficient information was filed, the application languishes until the deficiency is corrected.

19. The MPSC’s current standard – Case No. U-4771 • This order adopted standard filing requirements for electric utilities with annual revenues of $50 million or more. • See, http://www.cis.state.mi.us/mpsc/orders/archive/pdfs/U-4771_05-10-1976.PDF

20. Electric Rate Regulation in Michigan • Periodically, the MPSC examines an electric utility’s costs and revenues in a rate case proceeding. Usually, the utility is asking for higher rates to cover increases in its costs. • Annually, the MPSC conducts power supply cost recovery (PSCR) plan and reconciliation proceedings, which focus only on fuel and purchased power costs and transportation charges.

21. Step 1 -- The Rate Case Application • Case No. U-15245 - filed by Consumers Energy Company (Consumers) on March 30, 2007 with the Commission’s Executive Secretary. The application was 22 pages. • http://efile.mpsc.cis.state.mi.us/efile/docs/15245/0001.pdf • The pre-filed testimony was 330 pages from 15 witnesses. • http://efile.mpsc.cis.state.mi.us/efile/docs/15245/0002.pdf • The 85 pre-filed exhibits were 494 pages. • http://efile.mpsc.cis.state.mi.us/efile/docs/15245/0003.pdf

22. What did Consumers want? • $143.5 million rate increase above the retail electric base rates established in the company’s last rate case. • Consumers proposed that its rates be based on 2006 financial information, updated to reflect known and measurable changes, to arrive at a projected level of costs and revenues for the 2008 test year. • A 11.25% return on equity (ROE), which represents a 10 basis point increase above its then existing ROE of 11.15%.

23. Proof of Service • On March 30, 2007, Consumers Energy Company also submitted proof that it had sent copies of its rate case filing to all parties in its previous recent rate case, and its 2006 and 2007 recent PSCR cases.

24. Step 2 – Docketing of the Application • Immediately upon filing, an application is assigned a Docket Number and entered into the Commission’s electronic filing system. • The Executive Secretary notifies the State Office of Administrative Hearings and Rules, who assigns an independent Administrative Law Judge (ALJ). The assigned ALJ informs the Executive Secretary of the date for the initial hearing. • The Executive Secretary also notifies the MPSC’s Regulated Energy Division (RED), who assigns a case coordinator.

25. Step 3 – Review of Notice of Hearing • The company files a proposed Notice of Hearing (NOH) with its application. • The Executive Secretary reviews the proposed NOH, makes changes, and fills in: • The amount of the proposed increase • The date for the initial hearing • The name of the ALJ • Advice on how to intervene as a party, including the deadline for filing petitions to intervene by parties • Advice on how to comment informally (Rule 207)

26. Step 4 – Publishing the Notice of Hearing • Within 2 weeks of the application’s filing, the Executive Secretary directs the company to: • Mail a copy of the enclosed notice of hearing to all cities, incorporated villages, townships and counties in its electric service area, and to intervenors in other cases. • Publish the notice of hearing in daily newspapers of general circulation in its electric service area. • Serve upon each person who has petitioned to intervene a copy of the written direct testimony of its proposed witnesses and the proposed exhibits as filed with the Commission. • Provide timely proof of the completion of these activities.

27. Step 5 -- Discovery • Discovery is a well-established part of American Legal Jurisprudence. • Parties may send written interrogatories to any other party. • Discovery goes on throughout the proceeding. • Normally, receiving party must respond (or object) within 14 days. • Objections are ruled on by the ALJ. • In Case No. U-15245, discovery commenced May 10, 2007. • Staff has right to audit company’s books.

28. Standard for Discovery • Discovery questions may seek information that is admissible evidence, or that may lead to admissible evidence.

29. Step 6 – Interventions by Parties • Attorney General Michael A. Cox (Attorney General) • The Kroger Company (Kroger). • The Association of Businesses Advocating Tariff Equity (ABATE). • The Michigan Retailers Association (MI Retailers). • Michigan Environmental Council & Public Interest Research Group in Michigan (MEC/PIRGIM). • The Midland Cogeneration Limited Partnership (MCV). • AARP Michigan (AARP). • Dow Corning and Hemlock Semiconductor Corporations (Dow/Hemlock). • Energy Michigan. • the National Energy Marketers Association (NEMA). • Constellation New Energy (CNE). • Phil Forner. • The Commission Staff (Staff) also participated in the proceedings. • [One “delayed” intervenor, MML, took case as it was.]

30. Step 7 -- Informal Comments • Rule 207 of the MPSC’s Rules of Practice and Procedure allow anyone to appear at a hearing or to submit written comments. • These comments are placed in the record, but are not record evidence. • Those making Rule 207 comments are not sworn as witnesses and cannot be cross-examined. • Such comments may be received at any time.

31. Step 8 – Objections to Interventions • Consumers objected to almost every petition to intervene • The primary objection was that the intervenors did dot state their interest in the proceedings • This was an effort by the utility to nail down the intervenors to specific issues and positions – possibly to simplify the proceeding

32. Intervention Standards • Controlled by Rule 201 of MPSC’s Rules of Practice and Procedure and Case Law: • Intervenor must have an interest in the proceeding that is clearly pleaded in the petition to intervene. • Any other party may object. • MPSC applies the “Two-Prong Test” from Association of Data Processing Service Organizations, Inc. v Camp, 397 US 150; 90 S Ct 827; 250 LEd 184 (1970) to determine standing. • That test requires a proposed party to show (1) that it will suffer an “injury in fact” and (2) that the interest allegedly damaged are within the “zone of interests” to be protected or regulated by the statute or constitutional guarantee in question. • MPSC has discretion to permit anyone to intervene if the Commission is persuaded that the intervenor will add something. • Generally, the two-prong test excludes competitors.

33. Step 9 – Initial Prehearing Conference • The first prehearing conference was May 10, 2007. The ALJ granted the petitions to intervene submitted by the Attorney General, Kroger, ABATE, and MI Retailers. • ALJ also set a schedule for the remainer of the prodeedings. • The other intervenors were given a chance to supplement their petitions to intervene. • Consumers again filed objections to the interventions.

34. Step 10 – Second Prehearing Conference • At the second prehearing conference on May 31, 2007, the ALJ granted the petitions to MEC/PIRGIM, the MCV, AARP, Dow/Hemlock, Energy Michigan, NEMA, CNE, and Phil Forner.

35. Step 11 – Joint Motion regarding Expert Witness • In June 2007, the former Chairman of the MPSC took another job and he convinced several key Commission RED staffers to switch jobs with him. • Given the loss of veteran employees and the complex nature of their expertise, the Commission Staff and Consumers requested approval of a proposal to have Consumers pay for two expert witnesses to be used to present portions of the Staff’s case. One consultant was needed to make an assessment of Consumers’ environmental compliance programs and the other was needed to make an assessment of issues concerning Consumers’ load study and class cost of service study.

36. Step 12 – Responses to the joint motion regarding expert witnesses • CNE filed a response in support of the joint motion. • Energy Michigan also supported the joint motion, but argued that the Staff had to maintain its independence from Consumers. • Attorney General filed comments opposing the joint motion.

37. Step 13 – Commission Order • On June 26, 2007, the MPSC issued an order granting the joint motion authorizing the Staff to retain, at Consumers’ expense, the services of independent consultants to assess Consumers’ environmental compliance programs and load study and class cost of service study. • In order to avoid any appearance of impropriety, the Commission directed that the Staff shall provide Consumers with a list of qualified consulting firms for Consumers to inform these firms of the bidding process. While Consumers was responsible for drafting the legal contracts with the Staff-selected vendors and for payments under the contracts, the Staff was to have control over the nomination, selection, supervision, conclusions, reports, and possible expert testimony of the consultants. • Consumers’ sole involvement in the Staff’s retention of consultants was limited to the administration of the solicitation of bids from the Staff-selected vendors, the contracting of services, and the payment of the consulting fees. • http://efile.mpsc.cis.state.mi.us/efile/docs/15245/0088.pdf

38. Step 14 – [Bombshell]The Utility Amends its Application • On July 3, 2007, Consumers filed an amended application. • 672 pages of an amended application, a Motion for Partial and Immediate Relief, and the testimony and exhibits of seven witnesses. • The utility also proposes to revise the schedule of the proceeding.

39. Now What Does Consumers want? • Partial and immediate (P & I) rate relief of $77 million. • An immediate final determination on a request for rate relief associated with Consumers’ proposed acquisition of a 946 megawatt (MW) gas-fired generating plant located in Zeeland, Michigan for $84 million. • Authorization to remove $169 million of costs from its rates and the contemporaneous elimination of the power supply cost recovery (PSCR) crediting mechanism valued at $167 million. • Authorization to utilize $127 million of Palisades proceeds to offset both its proposed P & I rate increase of $77 million and the $84 million rate increase associated with the purchase of the Zeeland Generating Station until issuance of a final order or exhaustion of the $127 million, whichever comes first.

40. Step 15 – A New Notice of Hearing • Because the new rate filing increased the amount sought by Consumers and included a request for P&I rate relief, a new notice of hearing had to be issued by the Executive Secretary and published by the company.

41. Step 16 – Motion to strike July 3 filing for costs and attorney fees by ABATE • According to ABATE, because Consumers updated its case, ABATE should be entitled to recover its costs of litigating the new aspects of the case, which ABATE contends could have been included in the company’s original filing. In the alternative, ABATE asked the ALJ to strike the new filing.

42. Step 17 – Attorney General’s petition for review in the Circuit Court of the June 26 order • Normally, court challenges of the MPSC’s orders go to the Michigan Court of Appeals. • But, the Court of Appeals will not entertain any appeal of the MPSC’s interlocutory rulings. • So, the Attorney General tried to bring the matter before the Circuit Court.

43. Step 18 -- Motion Hearing • On July 26, 2007, the ALJ decided to allow Consumers to revise the schedule, but denied the requests by ABATE to strike the company’s July 3 filing and for costs and attorney fees.

44. Step 19 – Appeal of the ALJ’s July 26 ruling by the Attorney General • The Commission has provided for parties who are dissatisfied with the ALJ’s ruling to have an opportunity to file an interlocutory appeal to the Commission. • The Commission need not address such appeals if it appears that the ALJ’s decision was correct. • If the Commission disagrees with the ALJ, the Commission issues an order granting the appeal. • Here, the Commission waited until issuing its order on P & I relief to address this appeal.

45. Step 20 – Assorted Motions • Attorney General’s motion to amend schedule. • MML’s motion to intervene. • Motions to compel discovery. Many of these were withdrawn. • Motion for a protective order limiting discovery. • At a September 24, 2007 motion hearing one motion to compel was granted in part, and the motion to limit discovery was rejected.

46. Step 21 – Filing of Staff Report and Staff and Intervenor Testimony and Exhibits • The submission of a Staff Report is required before the Commission may consider a motion for P & I rate relief • Intervenors get the opportunity for a full evidentiary hearing, including the right to submit there own testimony and exhibits on the issue of interim relief.

47. Step 22 -- Protective order • On October 3, 2007, the ALJ issued an order finding that Exhibit AG-22 should remain confidential.

48. Step 23 – Evidentiary Hearing on the request for P & I Rate Relief • Evidentiary hearings on Consumers’ requested P & I rate relief were held on October 3 and 4, 2007. • Eleven witnesses testified and 112 exhibits were received into evidence. • On October 26, 2007, Consumers, the Staff, the Attorney General, the MCV, ABATE, and Dow/Hemlock filed briefs. • On November 9, 2007, Consumers, the Staff, the Attorney General, the MCV, and ABATE filed reply briefs.

49. Admissible Evidence • Must be relevant to the subject matter. • Admissibility of evidence is determined by the same standard applicable to civil trials heard by a judge. • Agency may admit and give probative effect to evidence of a type commonly relied upon by reasonably prudent men in the conduct of their affairs.

50. Step 24 -- Decision on Interim Relief • No Proposal for Decision by ALJ. • On December 18, 2007, the Commission approved: • An electric rate increase of $69.5 million related to Consumers’ pending purchase of the Zeeland Generating Station, a 946 megawatt gas-fired generating plant. The increase was 17 percent below what the utility requested. The average residential Consumers electric customer saw an increase of $1.09 per month. • However, the Commission denied the utility's request for partial and immediate rate relief in the net additional amount of $77 million, noting that the utility is not currently experiencing a revenue deficiency.