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STATE OF MICHIGAN DEPARTMENT OF ATTORNEY GENERAL
P.O. BOX 30755 LANSING, MICHIGAN 48909
BILL SCHUETTE ATTORNEY GENERAL
July 18, 2018
Ms. Kavita Kale Michigan Public Service Commission 7109 West Saginaw Highway Lansing, MI 48917 Dear Ms. Kale: Re: MPSC Case No. U-18424
Enclosed find the Attorney General's Exceptions to the Proposal for Decision, and related Proof of Service.
Sincerely, Joel B. King Assistant Attorney General
cc: All Parties
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STATE OF MICHIGAN
BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION ___________________________
In the matter of the Application of Consumers Energy Company for Authority to Increase its Rates for the Distribution of Natural Gas and for other relief. __________________________________________/
MPSC Case No. U-18424
Attorney General's Exceptions to the Proposal for Decision
Bill Schuette Attorney General Joel B. King (P81270) Assistant Attorney General Michigan Department of Attorney General Special Litigation Division Sixth Floor Williams Bldg. 525 W. Ottawa Street P. O. Box 30755 Lansing, MI 48909 (517) 373-1123 [email protected]
July 18, 2018
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Introduction
On July 2, 2018, Administrative Law Judge (ALJ) Suzanne Sonneborn issued
her proposal for decision (PFD) in this case. In the PFD, Judge Sonneborn provided
that exceptions to the PFD must be filed on or before July 18, 2018. Accordingly,
the Attorney General, by and through, Assistant Attorney General Joel B. King,
files the instant exceptions.
On October 31, 2017, Consumers Energy Company (“Consumers Energy,”
“Consumers,” “CECo,” or “the Company”) filed its application seeking $178.194
million in rate relief for the 12-month period ending June 30, 2019 (“projected test
year” or “test year”). The Company also sought incremental rate relief of $39.161
million associated with $301.987 million of capital expenditures included in an
expanded Investment Recovery Mechanism (IRM). As part of its case, Consumers
originally requested a return on equity (ROE) of 10.50% and an overall rate of
return of 6.11% on its total rate base. In its initial brief, the Company revised its
requested revenue increase downward to $82.775 million while increasing its
requested ROE to 10.75%. It also adjusted its IRM request.
The Attorney General would like to note up front, as he did in his initial
brief, that Consumers made these requests and asserted that almost $200 million of
rate relief is necessary a mere three months after the Company was granted a rate
increase of approximately $29 million in its last gas rate case, U-18124.
Additionally, the Company’s request came 18 months after the Company was
granted a rate increase of approximately $40 million in its second-to-last gas rate
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case, U-17882, and 33 months after the Company was granted a rate increase of
approximately $45 million in its third-to-last gas rate case, U-17643.
ALJ Sonneborn recommended in her PFD that the Commission adopt her
findings, conclusions, and recommendations on rate base, capital structure, cost of
capital, and operating revenue and expenses which would lead to an estimated
revenue deficiency of approximately $10.6 million, an authorized ROE of 10.0%, and
an overall cost of capital of 5.86%. She also recommended approval of an expanded
IRM.1 The Attorney General files these exceptions to respond to certain of ALJ
Sonneborn’s findings, conclusions and recommendations as described below.
Standard of Review
Recently, the Michigan Public Service Commission (“MPSC” or
“Commission”) summarized the standard of review of an ALJ decision as follows:
[I]n issuing a ruling, an ALJ does not create findings of fact or conclusions of law that bind the Commission. The ALJ’s decision is a recommendation, and the Commission is not subject to the constraints imposed by a legal standard of appellate review in deciding whether to accept, reject, or modify the ALJ’s assessment of the evidence or legal analysis. See MCL 24.281(3); MSA 3.560(181)(3) (“On appeal from or review of a proposal of decision the agency, except as it may limit the issue upon notice or by rule, shall have all the powers which it would have if it had presided at the hearing.”) In the matter of the complaint of AT&T Communications of Michigan, Inc., MPSC Case No. U-12321 (August 31, 2000), p 13. In fact, the Commission has held that “it will reverse an administrative law
judge’s ruling if the Commission finds that a different result is more appropriate.”
1 PFD page 267.
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In the matter of the application of the Midland Cogeneration Venture Limited
Partnership for approval of capacity charges contained in a power purchase
agreement with Consumers Power Company, MPSC Case No. U-8871 (June 28,
1988), p 2.
Arguments
While examining the Attorney General’s substantive arguments and
objections, the Commission should consider that Consumers Energy bears the
burden of proof to demonstrate that its proposals are just and reasonable. The
obligation of proving any fact lies upon the party who substantially asserts the
affirmative of the issue.2 A plaintiff always has the burden of proving its cause of
action.3 As applied to administrative cases, a party seeking relief must prove his,
her, or its claim by a preponderance of evidence.4 Likewise, in cases before the
Commission, the utility bears the burden of proof by a preponderance of evidence.5
Given the nature of the burden of proof, the Commission may reject even
uncontradicted evidence.6 When the burden of proving a fact falls on one party,
2 White v Campbell, 25 Mich 463, 475 (1872). 3 Caruso v Weber, 257 Mich 333; 241 NW2d 198 (1931). 4 Dillon v Lapeer State Home & Training School, 364 Mich 1, 8; 110 NW2d 588 (1961); BCBSM v Governor, 422 Mich 1, 88-89; 367 NW2d 1 (1985). 5 In re Michigan Gas Utilities Co, MPSC Case No. U-7484, Opinion & Order dated August 30, 1983; In re Detroit Edison Co, MPSC Case No. U-8030-R, Opinion & Order dated July 9, 1987, pp 16-17. 6 Woodin v Durfee, 46 Mich 424, 427; 9 NW 457 (1881); Accord, Yonkus v McKay, 186 Mich 203, 211; 152 NW 1031 (1915); Cuttle v Concordia Mut Fire Ins Co, 295 Mich 514, 519; 295 NW 246 (1940).
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then the other party does not have the burden of proving the opposite fact.7
Therefore, Consumers Energy bears the burden of proof to demonstrate that its rate
increase and other requests in its application are just and reasonable.
Here, the Attorney General would like to present a general critique that he
has of the ALJ’s approach to the PFD. Throughout the PFD, the ALJ appeared to
hold a loose, at times incorrect, idea of which party has the burden of proof.
Numerous times throughout the PFD she said something to the effect of, ‘since no
party has objected to the Company’s position, the ALJ recommends that it be
approved.’8 This is an inappropriate approach to ratemaking, and fails to hold the
Company to the standard of prudent and reasonable requests, proven by a
preponderance of the evidence. It is a troubling shift of the burden away from the
Company and onto Staff and Intervenors. The Attorney General requests that the
Commission take note of this inappropriate application of the burden of proof
throughout the PFD and adjust the order accordingly, where the Company has
failed to meet its burden.
Rate Base
The Attorney General recommended and supported a total adjustment in rate
base of $231 million based on reductions to capital expenditures of $335.2 million
and working capital of $8.9 million in his initial brief which if adopted, would
7 S.C. Gary, Inc v Ford Motor Co, 92 Mich App 789, 803-804; 286 NW2d 34 (1979). 8 See e.g. PFD p 119, under “Business Services Capital Expenditures.”
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decrease the Company’s projected test year revenue deficiency by $21.1 million.9
ALJ Sonneborn recommended reducing rate base by $301,409,000.10 In the process
she rejected several of the Attorney General’s recommended reductions to capital
expenditures and working capital.
Capital expenditures, which mainly drive the growth in Consumers Energy’s
rate base, more than doubled in the five-year time frame from 2010 to 2014 and will
likely triple in the next five years.11 It is clear that the Company is continuing a
major ramp-up of capital expenditures in a variety of areas despite its existing rate
base of over $4.4 billion.
In his initial brief and reply brief, the Attorney General, through his expert
Sebastian Coppola, analyzed the Company’s forecasted capital expenditures by
major department or area and identified more reasonable expenditure levels that he
recommends the Commission adopt. As noticed and mentioned by the Commission
in its January 20, 2017 Order in case U-18124, Consumers has a track record and
tendency of overstating the rate relief that the Company believes it requires.12
Accordingly, throughout this case the Attorney General has attempted to provide
more reasonable projections and levels of the Company’s revenue requirement. The
9 Attorney General’s (Confidential) Initial Brief, dated March 22, 2017 (pp 58-59). All page references will be to this version of the Attorney General’s Initial Brief. 10 PFD page 163. 11 U-18124 (7 TR 1289). 12 Order page 8.
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Attorney General’s exceptions will address several of his proposed reductions in
capital expenditures that were rejected by the ALJ.
RATE BASE
While not an exception from the ALJ’s PFD, the Attorney General would first like to note that he is particularly troubled and concerned with Staff’s and the ALJ’s findings with regard to Consumers’ practices surrounding its Pipeline Integrity Program
While the AG agrees with the ALJ’s findings in her PFD with regard to
Consumers’ Pipeline Integrity Program, he would like to emphasize to the
Commission that he is particularly troubled with the findings and the conclusions
drawn by Staff and the ALJ surrounding this program. Specifically, Staff found
that
Consumers is unnecessarily repairing pipe defects that can be as small as one-inch with pipe segments in excess of 50 feet. It is Staff’s belief that this practice is conducted to allow the Company to capitalize these remediation digs.13
The Company attempted to deflect attention and criticism from its pipe replacement
practices through discussion of public safety and the technical aspects of pipeline
repair and replacement.14 While the ALJ recognized the continued importance of
the program and pipeline safety, she stated that
this PFD nonetheless finds troubling the results of Staff’s investigation into the Company’s pipeline remediation dig practices based on data provided by the Company and the unflattering portrait that Staff’s investigation has painted regarding the internal inconsistencies between the Company’s capitalization practices and subsequent justifications for them under the guise of public safety.
13 Staff’s Initial Brief pp 71-93; see also Confidential 6 TR 1658-1688. 14 See Consumers Energy’s Initial Brief; 5 TR 1392-1399.
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Significantly, the Company has not substantively challenged the … six conclusions reached by Staff as a result of this investigation, as outlined at length in Mr. Miller’s testimony and supported by his Exhibits S-12.0 through S-12.56.15 [citations omitted]
The PFD went on to say that
Consumers Energy’s ability to capitalize on its pipeline remediation program by unnecessarily remediating minor pipe anomalies with pipe segment replacement lengths in excess of 50 feet, which expenditures in turn result in a rate relief request that, if approved, increases customers’ rates, amounts to a practice that ultimately exceeds the fair value or benefit to ratepayers. Doing so is neither prudent nor reasonable.16
Saying that such a practice by the Company is “neither prudent nor reasonable” is
an understatement at best.
It seems apparent to the Attorney General that Consumers used this
situation to take advantage of its position as a large public utility with many
moving parts and attempted to pad its bottom line at the expense of Michigan
ratepayers. These actions contributed directly to unnecessary escalated costs for
ratepayers, which includes low-income households and Michigan’s most vulnerable
citizens. The Attorney General requests that the Commission take special note of
this circumstance and Staff’s and the ALJ’s findings and respond accordingly,
especially in light of the fact that this proceeding was commenced by Consumers to
ask for additional revenue, stating that it has a revenue deficiency.
The ALJ erred in recommending that the Commission decline to accept the Attorney General’s proposed
15 PFD at pp 84-85. 16 PFD at p 87.
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disallowance of Consumers Energy’s projected expenditures for the South Oakland Macomb Network.
The Attorney General recommended that the Commission exclude all of the
Company’s projected capital expenditures for the South Oakland Macomb Network,
which includes $15,400,000 for 2018 and $45,300,000 for the six months ending
June 30, 2019.17 The AG’s argument for exclusion of those costs is that the South
Oakland Macomb Network program has not yet been approved by the Company’s
Board of Directors and no work plans for the project or timeline have been
developed by the Company or provided to other parties for a review.18 The
Company disagreed with the ALJ’s position and relied on Ms. Palkovich’s testimony
that the Company does not require approval by its Board for the entire program,
and that the Company has developed a high-level scope for the program.19
The ALJ agreed with the Company, finding that Ms. Palkovich’s testimony
“provided a reasonable explanation for both the project’s procession without specific
approval from the Board of Directors as well as the development of the scope of
work involved and the Attorney General has neither discussed nor challenged her
testimony.”20 The ALJ erred in her findings and conclusion on this matter. The
ALJ’s contention that the AG neither discussed nor challenged Ms. Palkovich’s
testimony is incorrect, as the portions of the AG’s brief on this matter are a direct
17 Exhibit A-59. 18 Attorney General’s Initial Brief, p 71; 7 TR 2387-2388. 19 TR 1525-26. 20 PFD p 103-04.
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challenge to Ms. Palkovich’s testimony.21 However, even if that were not the case,
the burden remains on the Company to prove that these expenditures are
reasonable and prudent. The AG/other parties need not oppose every request
Consumers makes in order for it to be deemed unreasonable or imprudent.22 Thus,
the ALJ’s comment that the Attorney General failed to challenge Ms. Palkovich’s
testimony in this area is irrelevant.
While the AG continues to maintain his position that the lack of approval for
this project from the Company’s Board of Directors is reason to deny recovery of
these costs, the larger issue is the lack of any concrete work plans or timeline that
would help Staff and Intervenors analyze the necessity, reasonableness, and
prudency of this project.23 The PFD erred in finding persuasive Ms. Palkovich’s
vague testimony about the Company’s development of a high-level scope, beginnings
of designs and engineering, and other preliminary activities. Ms. Palkovich’s
testimony fails to show a concrete commitment by the Company that it is going to
pursue and complete this project. Without more detailed plans or a more thorough
explanation of what stage the project is at, and without approval form the Board of
Directors to proceed with the entire project, the Company has failed to meet its
burden to support these projected expenditures and the ALJ erred in finding that
21 See Attorney General’s Initial Brief, pp 71-72. 22 Woodin v Durfee, 46 Mich 424, 427; 9 NW 457 (1881); Accord, Yonkus v McKay, 186 Mich 203, 211; 152 NW 1031 (1915); Cuttle v Concordia Mut Fire Ins Co, 295 Mich 514, 519; 295 NW 246 (1940). 23 Attorney General’s Initial Brief, pp 74-75.
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the Company did. Accordingly, the AG requests that the Commission accept the
Attorney General’s proposed disallowance of Consumers Energy’s projected
expenditures for the South Oakland Macomb Network.
The ALJ erred in recommending that the Commission decline to accept the Attorney General’s proposed disallowance of Consumers Energy’s projected expenditures for the Regulator Stations – Distribution Program in 2018.
In his brief, the Attorney General recommends that the Commission reduce
the Company’s proposed capital expenditures for the regulator stations –
distribution program for 2018 by at least $3 million, because the Company failed to
support the amount requested with adequate work plans or details.24 The ALJ
rejected the proposed disallowance, alleging that the Company has sufficiently
demonstrated in its explanation and testimony that the proposed expenditures are
reasonable and that the Attorney General’s rationale for the disallowance “is
premised on a generalization regarding the nature of the Company’s cost
estimates.”25 Here again the ALJ appears to misconstrue the burden and shift it
from the Company to the Attorney General, without analyzing the Company’s
testimony and finding it adequate. Nothing in either the Company’s testimony or
the PFD provides any concrete details or evidence for this large increase in costs
from one year to the next or how that amount was arrived at.
24 Attorney General’s Initial Brief, pp 70-71. 25 PFD p 111.
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The Company’s explanation for the increase in costs, that the increase is
based on in-house engineering expertise and subject matter expert input, and that
the Company recognizes that the facilities have a limited lifespan and that past
funding has been insufficient, is very high-level and provides nothing more than
cursory statements about how the Company looked into the program and deemed
funding insufficient. 5 TR 1407-08. The ALJ, however, performed no additional
analysis of the record and found the Company’s vague overview to be sufficient.26
In doing so, the PFD errs by not requiring the Company to meet its burden of proof
to prove that these projected costs are reasonable. Accordingly, the Commission
should accept the Attorney General’s proposed disallowance of Consumers Energy’s
projected expenditures for the Regulator Stations – Distribution Program because
they are unsupported.
The ALJ erred in recommending that the Commission decline to accept the Attorney General’s proposed disallowance of Consumers Energy’s projected expenditures for the disaster recovery project.
The ALJ erred when she found that the Company adequately refuted the
Attorney General’s concerns regarding the Company’s proposed “disaster recovery
project.”27 Instead of finding that the Company adequately justified the projected
expenditures for the project, the ALJ erroneously focused on whether the Company
26 See PFD pp 111-12. 27 PFD p 139.
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adequately refuted the Attorney General’s concerns.28 In the Attorney General’s
Initial Brief, he detailed the immense future costs of this proposed project, as well
as the attempts by the Attorney General to get additional information from the
Company on why alternatives to building an entirely new site are not feasible.29 In
responses to discovery requests, the Company stated that it did not run cost-benefit
analyses of alternatives to its preferred plan of building an entirely new center, nor
did it consider what other utilities in the region do with regard to backup
facilities.30
It is clear from Consumers’ discovery responses and testimony that the
Company has proposed to include capital expenditures in rate base in this case for a
costly project that has not been adequately vetted, and where practical alternatives
were not adequately considered. Additional research of other alternatives and
opportunities to reduce capital costs needs to occur before the proposed
expenditures can be deemed to be prudent and reasonable. The ALJ erred in
recommending that the Commission decline to accept the Attorney General’s
proposed disallowance of the Company’s projected expenditures for the disaster
recovery project, and accordingly the Attorney General asks that the Commission
disallow these costs.
The ALJ erred in recommending that the Commission decline to accept the Attorney General’s proposed reduction
28 PFD p 139. 29 Attorney General’s Initial Brief at p 82. 30 Attorney General’s Initial Brief at pp 81-85; see also Ex AG-37.
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to Consumers Energy’s forecasted cash balance in the Company’s working capital projection.
In this case, Consumers proposed a cash balance level in working capital of
$22.9 million. In the Attorney General’s initial brief, he explained why such a large
cash balance is unnecessary and why it is more expensive for customers to carry
that balance.31 For Consumers to earn a return at the overall cost of capital on such
a large cash balance is costly for customers. Consumers’ arguments for why the
Company needs to carry such a large balance are not supportable when DTE, a
Michigan utility of comparable size, carries a cash balance of around $1 million.32
The ALJ’s PFD again inappropriately shifts the burden off of the Company
and onto an intervenor, without finding that the Company’s level of cash balance is
reasonable and prudent. The ALJ uses a citation from the Company for the
proposition that, “issues insufficiently briefed are deemed abandoned.”33 The
Attorney General’s position on this in his initial brief, which included analysis and
discussion of why an elevated level of cash for working capital is inappropriate, can
hardly be considered “insufficiently briefed.”34 However, even if it the brief did not
include any discussion of the cash balance, or even if the Attorney General explicitly
31 Direct testimony of Attorney General’s expert Sebastian Coppola at pp 88-90. 32 Id. pp 89-90. 33 PFD p 158. 34 See Attorney General’s Initial Brief at pp 91-93.
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stated that he “abandoned” the issue, that does not excuse the Company’s burden to
show that its projected costs are reasonable and prudent.35
The Attorney General maintains that a cash level of $22.9 million in working
capital is inappropriately high and unnecessarily costly to customers, and
accordingly asks the Commission to disallow the Company from including that level
of a cash balance in this case.
Capital Structure, Cost of Capital, and Rate of Return
The ALJ erred in rejecting the Attorney General’s proposed equity balance ratio.
The Company continues to maintain a capital structure that is unbalanced,
disadvantageous to its customers, and out of line with other similarly situated
utilities. Consumers’ proposed capital structure for the test year only perpetuates
the inequities. Recently, the Commission has been explicit with how it expects the
Company to organize its capital structure, but the Company has been unwilling to
cooperate and continues to come up with excuses for why it should not move to a
balanced capital structure. In its application, Consumers proposed a permanent
capital structure with a common equity component of 52.49%.36 The Attorney
General’s initial brief recommended a capital structure with a 50% equity balance,
which as the ALJ noted was accomplished by increasing the company’s long-term
35 In re Michigan Gas Utilities Co, MPSC Case No. U-7484, Opinion & Order dated August 30, 1983; In re Detroit Edison Co, MPSC Case No. U-8030-R, Opinion & Order dated July 9, 1987, pp 16-17. 36 Exhibit A-14, Schedule D-1a.
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debt ratio by $322 million and reducing its common equity component by the same
amount.37 The result is a capital structure with 50% of common equity and 50% of
debt and preferred stock.
The Attorney General, as he has in numerous other cases, presents several
cogent reasons for proposing a rebalancing of the Company’s capital structure: (1)
the Commission’s directive in the Company’s most recent rate cases; (2) consistency
with Consumers Energy’s stated goal to maintain a capital structure with a
common equity ratio of approximately 50%; (3) the Company’s capital structure
primarily supports the electric business; (4) the Company’s proposed common equity
ratio is excessive in comparison to most other gas utilities; (5) this higher level of
common equity capital unnecessarily increases costs to customers because common
equity is a much higher cost source of capital than debt; and (6) the Company and
CMS Energy can make the level of common equity in Consumers Energy whatever
they want it to be.38 The ALJ’s assertion that the debt-equity ratio imbalance is
justified because of proposed capital investment reflects a narrow view of capital
funding. Debt is also a form of capital. While debt can be riskier, there are also
costs and risks from too much equity capital that must be considered in determining
the proper debt-equity ratios. The ALJ’s implication that the Company’s credit
rating may suffer if the capital structure is realigned, and that the Company’s
37 Exhibit AG-42. 38 Attorney General’s Initial Brief, pp 93-105.
17
planned investments would thereby be harmed, is similarly flawed.39 As pointed
out by the Attorney General, the common equity ratio of the peer group is just over
50%, as compared to the Company’s proposal of 52.5%.40 Despite a ratio that is
much closer to 50-50 as proposed by the Attorney General, those companies in the
peer group continue to function and do not appear to have difficulty raising capital
due to falling credit ratings, as implied by the ALJ.
The PFD also erred in determining that the Attorney General failed to
provide adequate support for his positions on this matter. The Attorney General’s
positions and arguments are well-established in the record, and the Company does
not dispute that moving to a more balanced capital structure would lower costs for
customers.41
In its February 28, 2017 order in Case No. U-17990, Consumers Energy’s
second to last electric rate case, the Commission addressed Consumers Energy’s
capital structure and its seeming inability to reach a 50/50 balance:
The appropriate capital structure of a utility is based on considerations of cost and risk, and in accordance with these considerations, the Commission from time to time adjusted a company’s capital structure to one that was more reasonable. While a company with more debt is a financially riskier enterprise, a company with more equity has a greater amount of capital invested in the most expensive type of capital. Not only is equity capital more expensive than debt capital, but the return on equity adds a tax burden to total revenue requirements, whereas debt does not. Thus, the
39 PFD p 173. 40 Attorney General’s Initial Brief, p 103. 41 See 7 TR 2419-20, lines 12-8.
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Commission seeks an appropriate balance between the risks and costs of investor debt funding.
Beginning in the 1980s, Consumers adopted a holding company structure and the Commission treated Consumers as a stand-alone company for ratemaking purposes. However, treating Consumers as a stand-alone company has been predicated on the company maintaining “a capital structure roughly balanced between debt and equity.” June 7, 2012 order in Case No. U-16794. In the instant case Consumers states that a balanced capital structure continues to be its goal.
The Commission understands that fluctuations will occur, however it notes that since Case No. U-16191, the amount of equity, on a relative basis, has been consistently increasing. During this period of time, interest rates on long-term debt have been historically low. Accordingly, the Commission agrees with the Attorney General that an imbalance is amplified when considering its impact on the overall rate of return in the current market.” p.63. (emphasis added.)
While the Commission did not perform a rebalancing of Consumers capital
structure in Case No. U-17990, it voiced its expectation that the Company “will
have arrived at or will present a strategy to return to a balanced structure within
the five-year infrastructure plan time period.”42
In its July 31, 2017 Order in case No. U-18124, Consumers Energy’s most
recent gas rate case, the Commission again addressed Consumers Energy’s capital
structure and its continued inability to reach a 50/50 balance.43 In her PFD in this
case, the ALJ noted that in U-18124, the Commission stated that the Company’s
proposed capital structure in U-18124 “represents a departure from its stated
objective of a roughly balanced capital structure” and accordingly directed
42 Commission Order in U-17990, p 64. 43 Commission Order in U-18124, pp 45-46.
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Consumers to “return to a balanced capital structure.”44 In the PPD, the ALJ
included the pertinent block quotation in a footnote:
The Commission cannot overemphasize the company’s responsibility to rebalance its equity and debt capital. . . Consumers shall, in its next rate case, articulate its strategy to return to a balanced capital structure and the steps it intends to take to reach its stated goal, or the Commission will have to consider using its regulatory authority to rebalance Consumers’ capital structure.45 The same concerns expressed by the Commission in Case No. U-17990 and U-
18124 apply in this case. The Company continues to increase the imbalance
between its debt and equity ratios. Given the Company’s lack of will power to
address this issue head on, despite clear direction from the Commission, the
Attorney General recommends that the Commission act now and approve a capital
structure of 50% common equity and 50% preferred stock and debt, which is
consistent with the Company’s stated goal of 50% common equity and 50% debt and
the Commission’s directive in cases U-17990 and U-18124. It is a more reasonable
capital structure and better balances the Company’s risk versus the cost of capital
to be borne by ratepayers. The ALJ erred in recommending otherwise.
The Commission should approve a return on equity of no more than 9.50%.
The Company requested a 10.50% return on equity (ROE) in its application,
and then increased that request to a 10.75% ROE in its initial brief.46 The ALJ
44 PFD p 172. 45 PFD p 172, citing to Commission’s Order in U-18124, pp 45-46. 46 PFD p 178.
20
correctly dismissed an ROE at either level as excessive.47 In doing so, she pointed
out the flaws and weaknesses in the Company’s analysis.48 Instead, the ALJ
recommends that the Commission approve a 10.0% ROE, which she asserts is
“based upon an objectively reasonable analysis which is consistent with past
Commission decisions and the requirements of Bluefield and Hope, and
acknowledges both the volatility in United States and global markets and the
likelihood of rising interest rates.”49 She also asserts that the ROE recommended
by Staff, as well as the ROEs recommended by ABATE and the Attorney General
(ranging from 9.50% to 9.72%) send the wrong message to investors.50 Her analysis
appears to be based on the voluminous, yet vague and unsubstantiated testimony of
the Company’s witness, Srikanth Maddipati, which references legislative and
judicial underpinnings, consistency and predictability, sufficiency of rates, and
returns and non-constructive outcomes.51 Such vague assertions should not form
the basis for the Commission’s decision, which must balance competing factors.
The ALJ also makes numerous references to the Commission’s recent
statement that parties should consider the degree of financial adjustment that they
ask the Commission to make, “because it is not realistic to make a significant
47 PFD p 207. 48 PFD pp 178-207. 49 PFD pp 207-08. 50 PFD p 206. 51 PFD p 179-81.
21
change in ROE absent a radical change in underlying economic conditions.”52 The
PFD appears to put a significant emphasis on that statement, and uses it as part of
the justification for refusing to deviate too far in either direction from the ROE
established in Consumers’ last rate case.
The Attorney General’s recommended ROE range is based on objectively
reasonable analysis, the correct application of generally accepted models, and is
well documented.53 It should also be pointed out that both Staff’s witness and
ABATE’s witness calculated very similar ROEs.54 While the Commission has stated
that the determination of the ROE is not based merely on mathematical
calculations, the Attorney General provided support beyond mere calculations in his
witness’s testimony, and his Initial and Reply Briefs, to support an ROE below 10%.
Mr. Coppola’s testimony, including Exhibit AG-49, provides evidence of gas utilities
with authorized ROEs of less than 10% that continue to have access to capital
markets and continue to raise debt capital at competitive rates. ROEs below 10%
have not affected these utilities’ credit ratings or financial soundness and likewise
will not negatively impact Consumers’ credit rating or financial soundness.55 The
Company has not effectively rebutted this evidence or similar evidence put forth by
other parties in the case. Nor has the Company provided any evidence that those
52 PFD p 206, 207. 53 Attorney General’s Initial Brief at pp 105-32. 54 PFD p 178. 55 Attorney General’s Initial Brief, p 125.
22
utilities with ROEs below 10% are operating in unconstructive regulatory
environments.
Michigan’s regulatory environment has long been recognized as constructive
to utilities, and as stated by Mr. Maddipati, continues to be recognized as such.56
Part of that is that Michigan has, for a long time, had ROEs higher than, and out of
line with, the national average. While ROEs in the state have been trending down,
as pointed out by the ALJ, they have been doing so slowly, and all the while
customers have been paying inflated rates. Moving to an ROE of 9.50% would bring
Consumers more in line with similarly situated utilities nation-wide and recognize
Michigan’s steadily improving economy.
For the reasons provided above and in his Initial and Reply Brief and witness
testimony and exhibits, the Attorney General recommends that the Commission
authorize an ROE of no more than 9.50%. This ROE is more representative of a fair
return that balances the Company’s true cost of capital and need to attract capital
while minimizing negative rate impacts on customers.
Overall Return on Capital
The Attorney General continues to recommend an overall return on capital of
5.58% which includes a return on common equity of 9.50%, as shown in Exhibit AG-
42, page 1.
Throughput.
56 4 Tr 810-811, 829.
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A. The ALJ erred in rejecting the Attorney General’s adjustment to forecasted sales. Consumers Energy uses various regression analysis models and a weather
normalization process to forecast gas sales and transportation deliveries for the test
year.57 Consumers Energy’s continued reliance on assumed energy efficiency
savings does not provide a reasonable basis for asserting a decline in sales for which
additional revenue is required.58 As noted by Mr. Coppola, if the Company’s
assumed energy efficiency was correct, we would expect to see cumulative savings of
3.75% over the five year period, however that is not the case.59
The ALJ based her recommendation in the PFD on the Company’s argument
that to exclude the energy efficiency savings adjustment from the forecasted gas
deliveries ignores economic conditions, the fact that the regression models have
been accepted and approved in prior rate cases, and that the Attorney General’s
analysis overlooks the Company’s unchallenged expectation that the weather
adjusted actuals will be within 0.3% and 1.3% of the originally forecasted deliveries
for 2016 and 2017, respectively.60 This is essentially the same reasoning that the
ALJ applied in Consumers’ last gas rate case, U-18124.61
57 2 TR 320. 58 See Attorney General’s Initial Brief, pp 13-15. 59 Attorney General’s Initial Brief, p 12. 60 PFD p 214. 61 See U-18124 PFD p 112.
24
The reasons given for not accepting the Attorney General’s proposed
adjustments are baseless and should not be given any weight. First, each case is
judged on its own merits, and the merits of this case indicate that using regression
analysis leads to unreasonable assumptions regarding the value of energy efficiency
in the sales numbers. It would be absurd to rely on the Company’s faulty regression
analysis in this case, just because the Commission approved similar methodology in
prior cases. Second, actual sales for the past 5-6 years have stayed static, with a
slight increase in the most recent 5 year period.62 Third, Mr. Coppola took into
consideration all of the relevant factors. Because the Company relied on an
assumed rate for energy efficiency in its analysis, the Attorney General conducted
discovery and further analysis to determine the reasonableness of those
assumptions. That discovery included the Company’s historical weather normalized
sales and transportation volumes for 2011-2016 and the twelve months ended
October 2017, and the number of customers the Company had during those time
periods. Mr. Coppola provides additional analysis in his testimony.63
It is apparent that Consumers Energy’s reliance on the assumed energy
efficiency savings does not provide a reasonable basis for asserting a decline in sales
for which additional revenue is required. This was true in U-18124 and remains
true in this case. The Attorney General’s proposed adjustments results in an
62 Attorney General’s Initial Brief, p 11. 63 See, Attorney General’s Initial Brief, pp 10-19.
25
increase of approximately $14.3 million in revenue for the test year over the
amounts proposed by the Company.64
The PFD made no mention of many of the Attorney General’s arguments
included in his initial brief. Specifically, the Attorney General included detailed
arguments that the Company continues to present its data in misleading fashion
and that the Company traditionally forecasts gas deliveries below actual
deliveries.65 These are trends that can be seen from rate case to rate case, and the
Commission should not allow Consumers to perpetuate these habits by approving
the Company’s gas deliveries forecast. The Attorney General’s calculation and
analysis are reasonable and he recommends that the Commission adopt his
proposed reductions.
ADJUSTED NET OPERATING INCOME
The ALJ erred in not accepting the Attorney General’s proposed rate of return on plan assets in the Company’s pension and benefits expense.
The ALJ erred in not accepting the Attorney General’s arguments regarding
the Company’s projected rate of return on plan assets. The Company’s decision to
reduce the expected return rate from 7.25% in 2017, to 7.0% in 2018, is unsupported
by the Company in the record and is neither prudent nor reasonable. As pointed
out in the Attorney General’s initial brief, the Company proffered an explanation
64 See, Attorney General’s Initial Brief, p 24. 65 Attorney General’s Initial Brief p 19.
26
during discovery for this reduction, which was thoroughly refuted by the Attorney
General’s witness in his testimony.66
In her PFD, the ALJ disregards the Attorney General’s argument and
discussion that the Company simply picked the return rate of 7.0% before the rate
case was filed, filed it as a part of the rate case, and then attempted to support it
after the fact.67 The fact that Consumers followed this pattern is clear from the
Company’s originally filed testimony and its testimony on cross examination. The
ALJ attempts to spin this as a mischaracterization of Mr. Kops’ testimony, but his
answers on cross examination, as laid out in the Attorney General’s initial brief, are
clear. Therefore, the Attorney General recommends that the Commission accept the
Attorney General’s proposed rate of return on plan assets in the Company’s pension
and benefits expense and set it at 7.25%.
OTHER REVENUE RELATED ISSUES
The ALJ erred in not accepting the Attorney General’s recommendations related to the Company’s proposed expansion of its IRM.
66 Attorney General’s Initial Brief, pp 45-46. 67 See Attorney General’s Initial Brief, pp 48-50.
27
The ALJ erred in recommending a modified and expanded Infrastructure Recovery Mechanism because it is unreasonable, and imprudent.
Consumers Energy has once again proposed An investment recovery
mechanism (IRM) to recover costs for capital expenditures to be made from 2019
until rates are reset in a subsequent general rate case. The Company identified
eight programs that it proposed to include in its expanded IRM: TED-I Distribution;
TED-I Transmission; EIRP-Distribution; EIRP-Transmission; VSR; Asset
Relocation – Decision Analysis Mains and Services; Pipeline Integrity-
Transmission; Pipeline Integrity-Transmission Operated by Distribution.68
Recovery for the investments would be through a surcharge effective from January
1, 2019 until rates are reset in a subsequent general rate case, with a reconciliation
process at the end of June 30, 2020. The amounts to be included in the IRM
continue to reflect a significant amount of capital expenditures for those years and
the ALJ erred by recommending Commission approval of a portion of the Company’s
proposal.
Like the Company’s existing IRM, this IRM would be a surcharge to customer
bills, with any over- or under-recovery adjustments to be recovered in the
subsequent year through a reconciliation process.69 This would be an additional
rate increase to customers on top of what the Commission grants in this case for the
forecasted test year.
68 2 TR 371. 69 Id.
28
The MPSC Staff proposed a revised IRM in this case that would, among other
things, exclude the TED-I Distribution and TED-I Transmission programs.70
Although the PFD notes that Staff continues to support the general concept of the
proposed IRM for high-risk pipelines, the ALJ goes on to note that Staff rejects the
IRM originally proposed by the Company in this case because Staff is starting to see
that the benefits of the IRM that the Company continually espouses, such as less
frequent rate cases and reductions in resources tied to regulatory proceedings, are
not actually being realized.71 This ties into the Attorney General’s continued
contention that an IRM is not an appropriate mechanism to use in this forum and
the only party that benefits from it is the Company.
As the Attorney General and its expert witness, Mr. Coppola, have continually
predicted and warned, if the Commission opened the door for the Company and
approved an IRM of any scope, the Company would soon follow with requests to
expand it further.72 True to the Attorney General’s predictions, three months after
receiving the Order in U-18124, the Company filed this rate case, which included
proposals for including more and larger capital projects in an IRM. If given the
chance, the Company will continue to attempt to blow that door wide open and
include everything it can in an IRM mechanism.
70 6 TR 1896. 71 6 TR 1894. 72 “There is virtually nothing that is appealing about having an IRM for 2018 and 2019 or any future period, as most likely the Company will request it again, if this one is approved.” See U-18124, 7 TR 1355, 8-10.
29
The expansion to the IRM recommended by the ALJ in this case simply
broadens the scope of Consumers’ IRM, and the Company will continue to attempt
to broaden the IRM until the Commission puts a stop to it. The proposed IRM is
another stand alone cost tracking mechanism that would cover a broad range of
capital expenditure programs. It makes for bad regulatory policy and erodes
ratemaking processes that have worked for decades.
In the PFD, the ALJ recommended that a revised IRM, which incorporated the
changes proposed by Staff and agreed to by the Company, should be approved.73
The Attorney General maintains his position that there should be no expansion of
the IRM past what was approved in case U-18124, and argues that the Commission
should re-evaluate the necessity and probity of allowing the Company to employ any
type of IRM. Leaving a re-evaluation of the Company’s IRM to the Commission, the
Attorney General urges in these exceptions that the Commission disregard the
ALJ’s recommendation in the PFD and refuse to expand the Company’s IRM past
what was established in U-18124.
The Attorney General has spent significant time in the past several rate cases
laying out his arguments against an IRM, specifically against approving one in the
context of a rate case, and he will not rehash all of that here.74 However, he would
like to briefly address the ALJ’s main concern with the AG’s position, as noted in
the PFD. The ALJ does not agree with the Attorney General’s characterization of
73 PFD p 267. 74 See e.g. Attorney General’s Initial Brief pp 93-96.
30
the IRM as turning a rate case into an “automatic cost recovery program.”75 While
the statement “automatic cost recovery program,” may slip into hyperbole, the
underlying point remains and the Attorney General wants to make sure that it does
not get lost. The idea of an IRM strays far afield from the structure and purpose of
ratemaking through the general rate case process. As laid out by the Attorney
General in his initial brief:
Rate case review of projected costs offers all parties the opportunity to weigh in on the reasonableness of those projected costs before significant capital expenditures are incurred. This is a tried and true part of rate cases that include projected costs. The IRM defeats that by taking a level of capital expenditures identified in prior years and allowing the Company to recover the associated costs through bill surcharges. This means that there is no specific list of projects or breakdown of components of the program expenditures to challenge upfront. Such challenges can only occur years later, after the summary program amounts have been spent.76
This is the crux of the issue for the Attorney General, and one of the main reasons
that he remains adamant that the IRM should not be utilized or expanded through
a general rate case, either for Consumers or for any utility in Michigan.
Consumers has again failed to make a showing that the IRM is critically
needed or will help customers. The ALJ’s assertion that the record lacks evidence
quantifying risk exposure reductions and increases or evidence regarding reduced
regulatory lag in the recovery of capital costs is inaccurate and nothing more than a
distraction. First, the IRM itself is a risk reducing mechanism. It would continue
to allow the Company to self-implement a surcharge for expenditures that may
75 PFD p 266. 76 Attorney General’s Initial Brief p 94.
31
ultimately not be reasonable or prudent. Second, the point asserted by the Attorney
General is that by reducing regulatory lag in the recovery of capital costs for the
Company, overall earnings volatility is also reduced. This simply reduces the
overall business risk for the Company, and shifts another burden squarely onto
ratepayers.
The Commission should reject the ALJ’s recommendation of any expansion
to the Company’s IRM for the reasons provided above.
The ALJ erred in failing to recommend that the Commission instruct Staff to organize a collaborative to develop a daily balancing program for EUT customers.
In his initial brief, the Attorney General recommended that the Commission
instruct Staff to organize a collaborative effort with all stakeholders for the purpose
of developing a workable daily balancing program for EUT customers of Consumers
Energy.77 In cases U-17900 and U-17334, the Commission ruled that modifications
to the End-User Transportation tariff may be necessary in order to address
inequities to GCR costs, and the Company agreed to present a study of end-user
transportation daily balancing in U-18424.78 Unfortunately, the Company did not
take this requirement seriously and conducted the study in a way that slanted the
daily balancing proposal toward maintaining the status quo.79
77 Attorney General’s Initial Brief p 140. 78 Id. at 140-41. 79 Id. at 140-44.
32
Other gas utilities in Michigan have recognized that problems occur during
cold weather, when gas supplies become scarce and are not fully delivered to the
local utility to match the EUT customers’ demand, or are redirected to higher value
markets by the alternative supplier. SEMCO Gas and Michigan Gas Utilities
Corporation have both moved to EUT daily balancing to prevent the “gaming” of the
system that can occur with monthly balancing.80
The ALJ erred in her conclusions that the Attorney General failed to
demonstrate that the Company’s study was not in good faith and that the Attorney
General failed to establish in the record that a problem exists with monthly
balancing. The PFD provides no analysis of any of the information or analysis
presented in either the Attorney General’s testimony or brief, and appears to simply
side with the Company out of the convenience and safety of retaining the status
quo.81 As numerous parties, including the Commission, have discussed, there is a
problem with monthly balancing that should be addressed by a move to daily
balancing. Accordingly, the Attorney General requests that the Commission
instruct Staff and the Company to convene a collaborative among interested
stakeholders to discuss a move to daily balancing.
80 Id. at 142. 81 See PFD pp 281-82.
33
Relief Requested
The Attorney General respectfully requests that the Commission issue an
order that is consistent with the positions set forth in these Exceptions to the
Proposal for Decision, and the Attorney General’s Initial and Reply Briefs.
Respectfully submitted, Bill Schuette Attorney General Joel B. King Assistant Attorney General Michigan Department of Attorney General Special Litigation Division Sixth Floor, Williams Bldg. 525 W. Ottawa Street P. O. Box 30755 Lansing, MI 48909 (517) 373-1123
July 18, 2018
1
PROOF OF SERVICE - U-18424 The undersigned certifies that a copy of the Attorney General’s Exceptions to the Proposal for Decision, was served upon the parties listed below by e-mailing the same to them at their respective email addresses on the 18th of July, 2018. Amanda Churchill MPSC: Amit Singh Monica Stephens Lori Mayabb Daniel Sonneveldt [email protected] [email protected] [email protected] [email protected] ALJ: Hon. Suzanne Sonneborn [email protected] Attorney General Special Litigation Division: Joel B. King Celeste Gill [email protected] [email protected] [email protected] Seb Coppola [email protected]
Consumers Energy Company: Robert Beach Gary Gensch, Jr. Theresa Staley Bret Totoraitis Anne Uitvlugt Kelly Hall Michael Rampe [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] Midland Cogeneration Venture: Richard Aaron Jason Hanselman Kyle Asher [email protected] [email protected] [email protected] Lansing Board of Water & Light: Richard Aaron Kyle Asher Jason Hanselman [email protected] [email protected] [email protected]
2
RESA: Jennifer Utter Heston [email protected] ABATE: Bryan Brandenburg Michael Pattwell [email protected] [email protected]
Jeffry Pollock Kitty Turner [email protected] [email protected] Residential Customer Group: Brian Coyer Don Keskey [email protected] [email protected]
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