December 18, Kavita Kale Executive Secretary Michigan Public Service Commission 7109 West Saginaw Highway, 3 rd Floor Lansing MI 48909

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1 Dykema Gossett PLLC Capitol View 201 Townsend Street, Suite 900 Lansing, MI Tel: (517) Fax: (517) Richard J. Aaron Direct Dial: (517) Direct Fax: (855) December 18, 2017 Kavita Kale Executive Secretary Michigan Public Service Commission 7109 West Saginaw Highway, 3 rd Floor Lansing MI Re: Case No. U Dear Ms. Kale: Enclosed for electronic filing is Indiana Michigan Power Company s Initial Brief and Proof of Service of same. If you have any questions, please contact me. Sincerely, DYKEMA GOSSETT PLLC Richard J. Aaron RJA/rlg Enclosures California Illinois Michigan North Carolina Texas Washington, D.C ID\AARON, RICHARD \000016

2 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) INDIANA MICHIGAN POWER COMPANY ) Case No. U for Authority to Increase Its Rates for the Sale of ) Electric Energy and for Approval of Depreciation ) Accrual Rates and Other Related Matters. ) ) INDIANA MICHIGAN POWER COMPANY S INITIAL BRIEF

3 TABLE OF CONTENTS Page I. INTRODUCTION AND OVERVIEW... 1 A. Procedural Overview... 1 B. Executive Summary and Overview of Company Requests... 7 II. JURISDICTION, STANDARD OF REVIEW AND RATE SETTING LAW A. Jurisdiction and Standard of Review B. Rate Setting Legal Requirements III. TEST YEAR IV. RATE BASE A. Net Utility Plant Capital Expenditures on Fossil, Hydro, and Solar (a) The Company s Position (b) The Attorney General s Position (c) The Staff s Position (d) Conclusion Generation Major Capital Projects Environmental projects at Rockport (a) The Company s Position (b) The Attorney General s Position (c) ABATE s Position (d) Staff s Position (e) Conclusion on Environmental Projects Nuclear Generation Capital Expenditures (a) The Company s Position (b) Position of Staff and Intervenors (c) Conclusion on Nuclear Capital Investment Distribution Capital Expenditures (a) The Company s Position (b) Staff s Positions (c) Intervenors Positions (d) Conclusion on Distribution Capital Investment Construction Work In Progress (a) The Company s Position ii

4 (b) Staff s Position (c) Conclusion Accumulated provision for depreciation Cyber Security and Other IT Projects (a) The Company s Position (b) Staff s Position (c) Conclusion B. Working capital Working Capital Methodology and Calculation (a) The Company s Position (b) Staff s Position (c) Conclusion C. Total Rate Base V. Capital Structure, Cost of Capital, and Rate of Return A. Capital structure B. Cost of long-term debt C. Short-term debt costs D. Deferred ITC, FIT and JDITC E. Cost of common equity F. Conclusion VI. Adjusted Net Operating Income A. Sales Forecast B. Operating Revenues C. Operating Expenses The Company s Proposal Distribution O&M Expenses (a) Vegetation Management (b) Major storm deferral (c) Risk Mitigation Fossil, hydro, nuclear-based generation O&M expense Customer Service and Administrative and General O&M Expenses Employee incentive compensation program costs (a) The Company s Position (b) Staff s Position iii

5 (c) The Attorney General s Position (d) Conclusion Depreciation and amortization expense (a) Depreciation Expense (i) The Company s Positions (ii) Staff s Position (iii) ABATE s Position (iv) Conclusion (b) Amortization Tax expense (a) Income Taxes (b) Taxes Other Than Income Allowance for Funds Used During Construction D. Calculation of adjusted net operating income VII. Revenue deficiency calculation VIII. Cost of service IX. Rate design and other tariff issues A. State Compensation Mechanism The Company s Position Staff s Position ABATE s Position Conclusion B. Capacity Costs The Company s Position Staff s Position Conclusion C. PSCR Basing Point The Company Position Staff s Position Other Parties Positions Conclusion D. Tariff revisions E. Economic Development Rider F. Net Lost Revenue Tracker iv

6 G. Low Income Rate H. Customer Charge v

7 I. INTRODUCTION AND OVERVIEW A. Procedural Overview On May 15, 2017, Indiana Michigan Power Company ( I&M or the Company ) filed its application seeking an adjustment in its electric rates sufficient to produce additional net revenues in the approximate annual amount of $51.7 million. On June 22, 2017, a pre-hearing conference was held before Administrative Law Judge Mark E. Cummins (the ALJ ), who granted petitions to intervene filed by the Michigan Attorney General ( AG ) and the Association of Businesses Advocating Tariff Equity ( ABATE ). The MPSC Staff ( Staff ) also participated in this case. I&M s existing retail electric base rates and charges were established pursuant to the Commission s February 15, 2012 Order Approving Settlement Agreement in Case No. U In addition, the Commission has authorized I&M to implement various surcharges including a Power Supply Cost Recovery ( PSCR ) Clause and Factors, Rate Realignment Surcharge / Credit, Energy Optimization Surcharge Rider, Nuclear Decommissioning Surcharge, Renewable Energy Surcharge, and Low-Income Energy Assistance Fund Surcharge. I&M s depreciation rates for its electric plant-in-service were established by: (i) the Commission s February 15, 2012 Order Approving Settlement Agreement in Case No. U-16801, which set I&M s current nuclear, hydroelectric, transmission, distribution, and general plant depreciation rates; (ii) the Commission s September 26, 2014 Order Approving Settlement Agreement in Case No. U-17524, which set I&M s current steam production plant depreciation rates and addressed the retirement of the Tanners Creek Generating Plant; and (iii) the Commission s December 11, 2015 Order Approving Settlement Agreement in Case No. U , which set depreciation rates for I&M s solar generating assets. 1

8 I&M sponsored the direct testimony and exhibits of the following 20 witnesses in support of its request for a rate increase and other regulatory relief: Toby L. Thomas, President and Chief Operating Officer of I&M (qualifications and direct testimony at 3 Tr. 56) 1 ; David A. Lucas, Vice President Finance and Customer Experience of I&M (qualifications and direct testimony at 3 Tr. 100) 2 ; Nancy A. Heimberger, a Financial Analyst Senior Staff in Corporate Planning and Budgeting for the American Electric Power Service Corporation ( AEPSC ) 3 (qualifications and direct testimony at 3 Tr. 130) 4 ; Thomas A. Kratt, Vice President of Distribution Operations of I&M (qualifications and direct testimony at 3 Tr. 145) 5 ; Q. Shane Lies, Site Vice President at 1 Mr. Thomas holds a Bachelor of Science Degree in Mechanical Engineering from the Rose Hulman Institute of Technology. He joined American Electric Power Company, Inc. (AEP) in 2001 and was named Vice-President Competitive Generation for AEP Generation Resources, where he was responsible for the safe, efficient, and environmentally compliant operation of AEP s competitive generating assets. Mr. Thomas became I&M s President and Chief Operating Officer on January 1, Mr. Lucas has a Bachelor Degree in Business Management and a Master of Business Administration from Marshall University. Prior to joining AEP, he worked for more than 12 years in the heavy industrial construction industry. His primary roles since joining AEP have been in the areas of project management, budgeting, and project controls where he has served as Manager Project Cost Management and Director Project Controls. He also held the position of Director Environmental Retrofits from November 2010 to January In April 2014, Mr. Lucas was named Vice President Finance of I&M and in November 2016 was named Vice President Finance and Customer Experience. 3 AEPSC supplies engineering, financing, accounting, planning, advisory, and other services to the subsidiaries of the American Electric Power (AEP) System, one of which is I&M. 4 Ms. Heimberger earned a Bachelor of Business Administration Degree in Accounting from Ohio University in She is a Certified Public Accountant (Inactive) in the state of Ohio. She was first employed by Arthur Andersen & Co. in 1986 in the Audit section where she performed audits of financial statements and internal controls for various clients. From 1988 to 1997, she was employed by Columbia Energy Group, Inc. and held positions in the Internal Audit, Accounting, and Tax Departments. From 1997 to the present, she has been employed by AEPSC and has held positions in the Tax, Regulated Pricing and Analysis, and Corporate Planning and Budgeting Group where she holds a position in Financial Forecasting. 5 Mr. Kratt received a Bachelor of Science degree in electronics engineering technology in 1983 from the Ohio Institute of Technology. Prior to joining the Company, he spent five years 2

9 I&M s Donald C. Cook Nuclear Plant ( Cook )(qualifications and direct testimony at 3 Tr. 252) 6 ; Timothy C. Kerns, Managing Director Generating Assets for I&M (qualifications and direct testimony at 3 Tr. 210) 7 ; John C. Hendricks, Director Air Quality Services within the Environmental Services Division of AEPSC (qualifications and direct testimony at 3 Tr. 290) 8 ; John F. Torpey, Director Integrated Resource Planning of AEPSC (qualifications and direct testimony at 3 Tr. 301) 9 ; Jason A. Cash, Staff Accountant in Accounting Policy and Research ( AP&R ) for AEPSC (qualifications and direct testimony at 3 Tr. 323) 10 ; William A. Allen, as an engineer in the robotics industry. He joined I&M in 1986 as a design engineer for I&M s Cook Nuclear Plant, where he worked in various capacities for 13 years. In 2000, he joined I&M Distribution, where he eventually became the Manager of Distribution Systems for I&M s Michigan District. In 2010, he became the Manager of Distribution Dispatching for I&M, where he was responsible for the operation of the electrical distribution grid. In July 2013, he was named to his present position, where he is responsible for the safe, reliable, and efficient day-today operation of I&M s distribution system. 6 Mr. Lies received a Bachelor of Science Degree in Nuclear Engineering from Kansas State University in Additionally, he received a Master s Degree in Mechanical Engineering in 1996, also from Kansas State University. Mr. Lies began his career with I&M in June 1996 as a System Engineer at Cook. In 2000, he joined the Operations Department and obtained his Senior Reactor Operator s license and assumed his current position as Site Vice President in Mr. Kerns holds a Bachelor s of Science in Mechanical Engineering from West Virginia Institute of Technology and has been employed with AEP for 28 years. 8 Mr. Hendricks received a Bachelor of Science degree in 1975 in Chemistry and a Master of Science degree in 1978 in Water Resources Management from the University of Wisconsin. His professional experience includes thirty-seven years with AEP. Mr. Hendricks was appointed to his current position of Director Air Quality Services in Mr. Torpey received a Bachelor of Engineering from the Cooper Union for the Advancement of Science and Art (New York) in 1979 and a Master of Business Administration from Saint John s University (New York) in Mr. Torpey has been employed by AEPSC since 1979 during which time he has held various managerial positions in the AEPSC generation organization related to planning, budgeting, and cost control. Mr. Torpey assumed his current position in April Mr. Cash graduated with a Bachelor of Science degree with a major in accounting from The Ohio State University in In 2000, he joined AEPSC and has held several positions 3

10 Managing Director of Regulatory Case Management for AEPSC (qualifications and direct testimony at 3 Tr. 353) 11 ; Andrew R. Carlin, Director of Compensation & Executive Benefits for AEPSC (qualifications and direct testimony at 3 Tr. 379) 12 ; Jeffrey L. Brubaker, Director of Regulatory Accounting Services for AEPSC (qualifications and direct testimony at 3 Tr. 467) 13 ; Michael N. Kelly, Manager of Taxes Tax Accounting and Regulatory Support for AEPSC (qualifications and direct testimony at 3 Tr. 493) 14 ; Robert B. Hevert, a Partner at ScottMadden, within the Accounting organization, including general ledger accounting and financial reporting for Ohio Power Company and AEPSC. From 2008 through 2013, he worked in AEPSC s Transmission Accounting department where he was promoted to Supervisor of Transmission Accounting in Mr. Cash started his current position as Staff Accountant in AP&R in Mr. Allen received a Bachelor of Science in Nuclear Engineering from the University of Cincinnati in 1996 and a Master of Business Administration from the Ohio State University in He was employed by AEPSC beginning in 1992 as a Co-op Engineer in the Nuclear Fuels, Safety and Analysis department and upon completing his degree in 1996 was hired on a permanent basis in the Nuclear Fuel section of the same department. In 2010, he transferred to the Regulatory Services Department as Director of Regulatory Case Management. He was named to his current position in January Mr. Carlin received a Bachelor of Arts Degree from Bowdoin College in 1988 with majors in Economics and Government. He also received a Master of Business Administration degree from the J.L. Kellogg Graduate School of Management at Northwestern University in 1992, with concentrations in finance, management strategy, and accounting. Mr. Carlin joined AEPSC as the Director of Executive Compensation & Benefits in In 2002, he took on responsibility for employee compensation, in addition to his executive compensation and benefits responsibilities, and has served the Company as the Director of Compensation and Executive Benefits since then. 13 Mr. Brubaker graduated with a Bachelor of Science Degree in Accounting from Radford University in May He became a Certified Public Accountant in He joined Appalachian Power Company (APCo), a subsidiary of AEP, in August 1981 as an Associate Staff Accountant. Mr. Brubaker was promoted to his current position effective August 1, Mr. Kelly earned a Bachelor of Science Degree in Accounting from Virginia Polytechnic Institute and State University (Virginia Tech) in He has been a Certified Public Accountant since He joined APCo, a subsidiary of American Electric Power in April 1984 as an Associate Staff Accountant. In 2000, he transferred to Corporate Development as the Principal Financial Coordinator and in 2001 transferred to the Tax Department as Tax Project Manager. Mr. Kelly was promoted to his current position effective January 1,

11 Inc. ( ScottMadden ) (qualifications and direct testimony at 3 Tr. 500) 15 ; Franz D. Messner Managing Director of Corporate Finance for AEPSC (qualifications and direct testimony at 3 Tr. 678) 16 ; Andrew J. Williamson, Director of Regulatory Services for I&M (qualifications and direct testimony at 3 Tr. 690) 17 ; Teresa A. Caudill, a Regulatory Consultant Staff in Regulated Pricing and Analysis for AEPSC (qualifications and direct testimony at 3 Tr. 748) 18 ; Daniel E. High, a Staff Regulatory Consultant in Regulated Pricing and Analysis for AEPSC (qualifications and direct testimony at 3 Tr. 766) 19 ; Matthew W. Nollenberger, Manager, 15 Mr. Hevert holds a Bachelor s degree in Business and Economics from the University of Delaware, and an MBA with a concentration in Finance from the University of Massachusetts. He also holds the Chartered Financial Analyst designation. 16 Mr. Messner earned a Bachelor of Science in Systems Engineering from the United States Naval Academy in He earned a Master of Business Administration from the Fisher College of Business at the Ohio State University in In June 1999, he was hired by AEPSC as an associate in a finance associate development program. His primary roles have been in the areas of financial analysis, budgeting, and forecasting. In May 2016, He assumed his current position as Managing Director of Corporate Finance. 17 Mr. Williamson received a Degree of Bachelor of Business Administration, Accounting and Finance Majors, in May 2004 from Ohio University. In January 2007, he passed the Certified Public Accountant (CPA) Examination. He is a licensed CPA in the state of Ohio and a member of the American Institute of CPAs. In January 2008, he joined American Electric Power (AEP) as a Staff Accountant in the Accounting Policy and Research department. In March 2014, Mr. Williamson assumed his current position as Director of Regulatory Services for I&M. 18 Ms. Caudill graduated from Ohio University in 1987 with a Bachelor of Business Administration degree. She is a Certified Internal Auditor and began her career with AEP in 1975 in the Marketing and Customer Services department of the Ashland Division of Kentucky Power Company. While in the Marketing and Customer Services Department, she held various positions. She accepted an internal auditor position at AEPSC in 1989 and joined Regulatory Services in 1998 where she was promoted to her current position of Regulatory Consultant Staff in In December 1989, Mr. High received a Bachelor of Science Degree in Energy Management from West Liberty University. In May 1997, he received a Master s of Business Administration degree from Ashland University. In February 1990, he joined Columbus Southern Power Company as a Commercial Marketing and Customer Services Representative in the Marketing and Customer Services Department of the Columbus Region. In July 1998, Mr. 5

12 Regulated Pricing and Analysis for AEPSC. (qualifications and direct testimony at 3 Tr. 788) 20 ; and Kurt C. Cooper, a Principal Regulatory Consultant in the Regulatory Services Department of I&M (qualifications and direct testimony at 3 Tr. 809). 21 On October 12, 2017, the Staff and Intervenors filed their testimony and exhibits. Staff sponsored the testimony of Ryan Laruwe, Cody S. Matthews, Donald J. Mazuchowski, Heather A. Cantin, Jay S. Gerken, Kirk D. Megginson, Robert F. Nichols II, Brian Welke, Daniel J. Gottschalk, Lisa M. Kindschy, Nicholas M. Revere, Brooke R. Wizner, Nick M. Evans, and Katie J. Smith. ABATE sponsored the testimony of Nicholas Phillips, Jr., Brian C. Andrews, Christopher Walters, and James R. Dauphinais. The Attorney General sponsored the testimony of George Evans and Zhen Zhu. On October 30, 2017, I&M filed the rebuttal testimony and exhibits of witnesses Thomas, Lucas, Kratt, Kerns, Torpey, Cash, Allen, Carlin, Hevert, Williamson, and Nollenberger. On High joined Regulated Pricing & Analysis under the Regulatory Services Department as a Regulatory Consultant. 20 Mr. Nollenberger graduated from Bowling Green State University in 1989 with a Bachelor of Science degree in Technology, with a major in Construction Technology. From 1990 to 1996, he was employed as a Project Engineer in the construction services industry. In 1998, he earned a Master of Business Administration degree from the Ohio State University. In 1998, he joined AEPSC as an Energy Associate in its Energy Trading and Marketing organization and has since served in several positions in the Company. In 2010, he joined AEPSC's Regulatory Services as Manager, Regulatory Support, supporting AEP's Commercial Operations organization. In May of 2011, he was promoted to his current position of Manager, Regulated Pricing and Analysis. 21 Mr. Cooper received a Bachelor of Science Degree in Management from Indiana Wesleyan University in 2007 and an Associate in Applied Science Degree in Electrical Engineering Technology from Indiana Vocational Technical College in He joined I&M in 1994 as a Customer Design Technician in the Engineering Department and served in several capacities until being promoted to his current position as a Principal Regulatory Consultant in Mr. Cooper supports a variety of regulatory functions including reports, tariff application and interpretation, complaint resolution and regulatory filings as needed. 6

13 that same day, Staff filed rebuttal testimony of witness Revere, and ABATE filed rebuttal testimony of witnesses Dauphinais, Andrews, Phillips, and Walters. An evidentiary hearing in this case for the purpose of binding-in testimony took place on November 15, All parties waived cross-examination of witnesses. The record consists of 1285 pages of transcript and 217 exhibits. Pursuant to the schedule established by the ALJ, Initial Briefs are due December 18, 2017, and Reply Briefs are due January 4, A Proposal for Decision ( PFD ) target date is set for February 26, B. Executive Summary and Overview of Company Requests Company witness Thomas provided an overview of I&M s request in this case and explained that the Company s decisions are driven by its goal of improving customer value, customers satisfaction with their utility service, and all aspects of the customer experience. The Company is also focused on improving the way it communicates with customers through a new billing format, mobile alerts, improved outage management system, and greater use of social media. The Company is committed to providing more options to its customers through voluntary tariffs, greater access to renewable energy, enhanced payment options, and economic development opportunities. Goal of Customer Satisfaction Mr. Thomas testified that I&M s long-term strategy is to provide its customers a system that has an adequate and reliable set of resources, a robust energy delivery system that is both reliable and efficient, and a platform which enables customers to be served at a reasonable cost. I&M s rates in Michigan have historically been among the lowest in the state and will remain comparatively low if the proposed rate request is approved. 7

14 Revenue Requirement Mr. Thomas testified that I&M is requesting that the Commission approve an annual increase in revenues of approximately $51.7 million, or 17%, to be made effective ten months following the filing of this case. The amount is based on a projected calendar test year ending December 31, 2018 and is primarily driven by the need to adjust rates to reflect appropriate depreciation rates, deferrals of investments made to serve customers, and actions that are underway to enhance the reliability of I&M s service. Depreciation Mr. Thomas testified that I&M has conducted a new depreciation study and is requesting that its depreciation accrual rates be adjusted in this proceeding. Mr. Thomas explained that it is important to revise depreciation rates because depreciation is intended to reflect the cost of an asset over its remaining useful life. Whereas in the past, useful lives were primarily set based on how long an asset could physically operate, today many external pressures mean that economic and technological obsolescence are limiting factors. The new depreciation study shows that significant changes in circumstances have caused I&M's existing depreciation rates to become too low and in need of revision. The proposed depreciation rate changes are reasonable and necessary to provide the Company with a more appropriate and accurate depreciation accrual based upon current regulatory circumstances. The proposed rates also better match the cost of I&M s plant-in-service with the remaining period such plant may be expected to benefit customers. In particular, several factors have contributed to a need to shorten the timeframe that I&M s investment in Rockport Unit 1 can reasonably be expected to be available to serve customers, and it is necessary and proper to revise I&M s depreciation rates to allow the timely 8

15 recovery of those investments. I&M also requests that the Commission support a reasonable transition toward full deployment of AMI through a revised depreciation rate for existing AMR meters. Cook Nuclear Plant The Company has operated the two units at the Cook Nuclear Plant since 1974 and 1977 (Units 1 and 2, respectively). In 2005, the Nuclear Regulatory Commission approved license extensions to the operating licenses of each Unit, so that Unit 1 is currently licensed to operate until 2034 and Unit 2 is licensed to operate until In Case No. U-17026, the Company sought and received from the Commission a Certificate of Necessity ( CON ) for a $1.169 billion Life Cycle Management ( LCM ) project at Cook. The purpose of the LCM project was to identify and undertake the necessary capital investment to the Cook units so that they can operate through the end of their license extensions. Many of those LCM capital investments are now in service and are reflected in rate base in this proceeding. In addition, the Company anticipates that it will complete the LCM project within its original budget projection and, although some LCM work has been deferred, these deferrals were prudent and cost-beneficial because the Company prioritized its capital resources and sought to minimize the length of outages. Rockport Plant As part of a Consent Decree with the U.S. Environmental Protection Agency and other parties under the New Source Review ( NSR ) provisions of the Clean Air Act, I&M was required to install Flue Gas Desulphurization ( FGD ) systems and Selective Catalytic Reduction ( SCR ) systems on Rockport Unit 1 by December 31, 2017 and on Rockport Unit 2 by December 31, To reduce costs for environmental compliance in a manner that benefits 9

16 customers, the Company subsequently agreed to a modified consent decree in which the Company agreed to install less-expensive Dry Sorbent Injection ( DSI ) technology and higherefficiency FGD technology ( Scrubbers ) at a later time, thereby deferring a significant (approximately $1 billion) investment. The DSI and SCR investments fulfill I&M s strategy for its generation fleet by preserving Rockport s safe, reliable, and efficient generation for I&M s customers rather than ceasing operating the Rockport units pursuant to the Consent Decree. The Company currently is evaluating the Rockport Plant s future in an effort to ensure that the Company pursues the most cost-effective options for customers. Environmental regulations, low natural gas prices, and increasing public support for and decreasing cost of renewable energy resources are reducing the need to rely on coal as a source for low cost power. Specifically, the Consent Decree s requirement to install Scrubbers adds a significant operational cost that the Company must evaluate. Additionally, the Company s lease for Rockport Unit 2 expires in 2022 and it remains unclear whether a new lease is viable. As a result of the challenges facing the Rockport Plant and because it is unclear whether adding a $1 billion Scrubber is the most cost-effective solution for long-term viability, the Company is requesting authority to change its depreciation rates so that Rockport Unit 1 is depreciated through 2028, as that is the most likely expected end of its useful life. Capacity Charge I&M has been a Fixed Resource Requirement ( FRR ) entity since the inception of the Reliability Pricing Model market in June 2007 under PJM s Reliability Assurance Agreement ( RAA ), which means I&M is a load serving entity ( LSE ) that uses its own capacity resources to meet the capacity requirements for its load obligations. As a vertically integrated utility, I&M self-supplies the capacity needs of its retail and firm wholesale customers and, 10

17 therefore, meets the standard for being an FRR entity. As an FRR entity, I&M provides the capacity for both Standard Service and Open Access Distribution ( OAD ) Service customers. The RAA sets forth the rules of participation in the PJM Capacity Market and also establishes capacity obligations of PJM LSEs, including requiring alternative retail LSEs to compensate I&M at the capacity price established in the PJM Tariff. That non-bypassable capacity charge is an important regulatory mechanism because it provides customers an accurate and appropriate price signal based on I&M s embedded cost of capacity. Other Parties Positions The Staff s position in this case supports a revenue deficiency of approximately $48.8 million, with Staff proposing a return on equity of 9.8%. Although there are some minor differences, the positions of the Company and Staff are relatively similar with regard to most of the substantive subjects in this case. The Company disagrees, however, with most of the proposals included in the testimony filed by the intervenors in this case. The Company in this Brief addresses several anticipated areas of dispute and relies upon the record and evidence in support of its requested rate relief. As discussed below, the record evidence in this case supports final rate relief in the annual amount of $51.7 million, including a 10.6% return on equity, adjusted depreciation on Rockport Unit 1 to 2028, an increased customer charge of $18, and approval of all of the other various requests included in the Company s filings. All other parties arguments to the contrary should be rejected, and the Commission should issue an order granting the Company s requested relief in full. 11

18 II. JURISDICTION, STANDARD OF REVIEW AND RATE SETTING LAW A. Jurisdiction and Standard of Review The Commission has jurisdiction over this case pursuant to 1909 PA 106, as amended, MCL et seq.; 1909 PA 300, as amended, MCL et seq.; 1919 PA 419, as amended, MCL et seq.; and 1939 PA 3, as amended, MCL et seq. The Michigan Constitution requires the Commission s findings to be supported by competent, material and substantial evidence on the whole record. Const 1963, Art 6, 28. Expert testimony is substantial only if it is offered by a qualified expert who has an informed and rational basis for his or her view, even if other experts disagree. Great Lakes Steel v Public Service Comm, 130 Mich App 470, 481; 334 NW2d 321 (1983). Therefore, substantial evidence is evidence that a reasoning mind would accept as sufficient to support a conclusion. Monroe v State Employees Retirement Sys, 293 Mich App 594, 607; 809 NW2d 453 (2011). However, substantial evidence is more than a mere scintilla but less than a preponderance of the evidence. Huron Behavioral Health v Dep t of Behavioral Health, 293 Mich App 491, 497; 813 NW2d 763 (2011). The applicable standard of proof for purposes of determining whether the Company s proposals or recommendations are reasonable and prudent is, therefore, the substantial evidence standard, which is a lighter standard than even the preponderance of the evidence standard, which is a lighter standard than the beyond a reasonable doubt standard reflected in the record. 22 For the reasons discussed below, I&M s proposals and recommendations in this case clearly satisfy the substantial evidence standard. Furthermore, the Administrative Procedures Act ( APA ) precludes the Commission from making decisions based on non-record materials. MCL provides: Evidence in a 22 Thangavelu v Dep t of Licensing & Regulation, 149 Mich App 546, ; 386 NW2d 584 (1986). 12

19 contested case... shall be offered and made part of the record. Other factual information or evidence shall not be considered in determination of the case except as permitted under [MCL concerning official notice of judicially cognizable facts and facts within the agency s specialized expertise]. Noncompliance with the APA is reversible error. In re Public Service Commission Guidelines for Transactions Between Affiliates, 252 Mich App 254, 267; 652 NW2d 1 (2002). In Kar v Hogan, 399 Mich 529, 539; 251 NW2d 77 (1976), the Michigan Supreme Court explained that [t]he party alleging a fact to be true should suffer the consequences of a failure to prove the truth of that allegation. Accordingly, unproven allegations cannot stand in the place of evidence and things not proven must be taken as not existing. Star Steel v USF&G, 186 Mich App 475, 481; 465 NW2d 17 (1990); see also, Skinner v Square D Co, 445 Mich 153; 516 NW2d 475 (1994). Finally, it is similarly well established that an agency decision may not be based on speculation. Ludington Service Corp v Comm r of Insurance, 444 Mich 481, 483, , , 507; 511 NW2d 661 (1994), amended 444 Mich 1240 (1994) (unanimously reversing agency decision that exceeded the limits of the agency s statutory authority, and that was based on speculation instead of the required competent, material and substantial evidence); In re Complaint of Pelland, 254 Mich App 675, ; 658 NW2d 849 (2003); Battiste v Dep t of Social Services, 154 Mich App 486, 492; 398 NW2d 447 (1986) (holding that agency s decision was not supported by evidence that a reasonable person would consider adequate). B. Rate Setting Legal Requirements All Commission decisions must be authorized by law and the Commission s findings of fact must be supported by competent, material, and substantial evidence, in the record. Const 1963, Art 6, 28; MCL The record demonstrates that I&M will experience an annual 13

20 revenue deficiency in the projected test year, which justifies and requires I&M s recovery of additional revenue in the total amount of approximately $51.7 million. I&M also has constitutional protections against takings and confiscatory rates under the Fifth Amendment to the U.S. Constitution, which is applicable to the states through the Fourteenth Amendment. Similarly, Mich Const 1963, art 10, 2 provides in part, Private property shall not be taken for public use without just compensation therefore being first made or secured in a manner prescribed by law. These constitutional protections have been recognized and applied to public utility rates in well-established case law. 23 The Michigan Supreme Court has provided further guidance that the Commission must use in setting I&M s rates. Specifically, creating rates that recognize reductions in certain costs while ignoring the increase in other costs, violates the due process rights of utilities. The Court cited with approval the conclusions of a circuit court judge granting an injunction against such unlawful rates: Certainly at first blush it would appear to anyone steeped in due process considerations that it is grossly unfair to include certain items of decreased cost in rate determination while at the same time to exclude items of increased cost. Michigan Consolidated Gas Company v Public Service Comm, 389 Mich 624, 633; 209 NW2d 210 (1973). 23 See generally, Missouri ex rel Southwestern Bell Telephone Co v Public Service Comm of Missouri, 262 US 276; 43 S Ct 544; 67 L Ed 981 (1923); Federal Power Comm v Natural Gas Pipeline, 315 US 575; 62 S Ct 736; 86 L Ed 1037 (1942); Duquesne Light Co v Barasch, 488 US 299; 109 S Ct 609; 102 L Ed 2d 646 (1989). See also, Northern Michigan Water Co v Public Service Comm, 381 Mich 340; 161 NW2d 584 (1968); Consumers Power Co v Public Service Comm, 415 Mich 134; 327 NW2d 875 (1982); ABATE v Public Service Comm, 430 Mich 33; 420 NW2d 81 (1988). 14

21 As a matter of fundamental ratemaking law, I&M is entitled to a commensurate return of and on its investment in providing utility service. 24 It is axiomatic that utility rates are overall rates. Federal Power Comm, supra, 320 US at 602; Michigan Bell Telephone Co v Public Service Comm, 332 Mich 7, 37; 50 NW2d 826 (1952); MCL 460.6a(2)(b). The Commission has an obligation to facilitate I&M s financial health for the benefit of its customers and shareholders. See, by way of example and not limitation, MCL 460.6a(2), (3); MCL 460.6j(1); MCL (2)(e); Smith v Illinois Bell Telephone Co, 270 US 587, 591; 46 S Ct 408; 70 L Ed 747 (1926); Federal Power Comm, supra, 320 US at 602; Michigan Bell Telephone Co, supra, 332 Mich at 37; MichCon, supra, 389 Mich at 633; Michigan Bell Telephone Co v Engler, 257 F3d 587, (CA 6, 2001). admonished that: Furthermore, the Michigan Supreme Court has clearly Statutes will be construed in the most beneficial way which their language will permit to prevent absurdity, hardship or injustice; to favor public convenience, and to oppose all prejudice to public interests. Attorney General v Marx, 203 Mich 331, 335; 168 NW 1005 (1918). I&M s testimony and exhibits demonstrate that I&M needs rate relief for the projected test year. Under well-established ratemaking law, rates for utility service are set prospectively so that the utility provides service and its customers receive service at established rates, which are based on the estimated costs of providing that service, plus a reasonable return on the utility s investment. ABATE v Public Service Comm, 208 Mich App 248, ; 527 NW2d See Bluefield Waterworks Improvement Co v Public Service Commission of West Virginia, 262 US 679, ; 43 S Ct 675; 67 L Ed 1176 (1923); Federal Power Comm v Hope Natural Gas Co, 320 US 591, 603; 64 S Ct 281; 88 L Ed 333 (1944). See also Permian Basin Area Rate Cases, 390 US 747, ; 88 S Ct 1344; 20 L Ed 2d 312 (1968); FPC v Memphis Light, Gas and Water Division, 411 US 458; 43 S Ct 1723; 36 L Ed 2d 426 (1973); General Telephone Co v Public Service Comm, 341 Mich 620; 67 NW2d 882 (1954); Michigan Consolidated Gas Co v Public Service Comm, 389 Mich 624; 209 NW2d 210 (1973) 15

22 (1994). This is part of the regulatory compact under which the utility dedicates its private property to serve the public and receives a reasonable return on the value of its private property. In Board of Public Utility Comm rs v New York Telephone Co, 271 US 23; 46 S Ct 363; 70 L Ed 808 (1926), the United States Supreme Court explained that the just compensation safeguarded to the utility by the Fourteenth Amendment is a reasonable return on the value of the property used at the time that the property is being used for the public service. Rates that are not sufficient to yield that present return are confiscatory. 271 US at 31. To the extent that the utility might have earned sufficient revenue in the past, such past revenue cannot be used to sustain confiscatory rates in the future. Id. at 32. Thus, the Commission cannot use hindsight or otherwise base I&M s rates on past events. The Michigan Supreme Court announced the retroactive ratemaking prohibition in Michigan Bell Telephone Co v Public Service Comm, 315 Mich 533; 24 NW2d 200 (1946). A regulatory body cannot penalize a utility for collecting a rate during the period elapsing between the date of the order prescribing the rate and the date of the subsequent order reducing it. Id. at Where the Commission establishes a reasonable rate in its legislative capacity, the Commission cannot later, in its quasi-judicial capacity, find that the utility violated the law because it charged that rate. Id. at In any event, the essential principal of the rule against retroactive ratemaking is that when the estimates prove inaccurate and costs are higher or lower than predicted, the previously set rates cannot be changed to correct for the error; the only step that the MPSC can take is to prospectively revise rates in an effort to set more appropriate ones. The Detroit Edison Co v Public Service Comm, 416 Mich 510, 523; 331 NW2d 159 (1982) (opinion by Fitzgerald, C.J.). 16

23 III. TEST YEAR In each rate case, a test year must be selected. I&M proposes a projected test year of January 2018 through December No party proposed a different test year. There appears to be no disagreement among the parties with respect to I&M s projected test year. IV. RATE BASE A utility s rate base consists of the net amount of capital invested in plant, plus the utility s working capital requirements. The Company s rate base for the projected test year ending December 2018 is $1,014,566,000 (Exhibit IM-4). The Staff recommends a rate base of $984,540,000 reflecting adjustments to plant-in-service and depreciation. (Exhibit S-2). The Attorney General recommends reducing I&M s rate base by approximately $31,183,000 for certain Rockport related capital projects. 3 Tr ABATE did not offer an evidentiary position on Rate base. A. Net Utility Plant 1. Capital Expenditures on Fossil, Hydro, and Solar (a) The Company s Position The projected period with respect to capital investment ( Capital Forecast Period ) is the period from January 1, 2017 through December 31, Tr This 24-month period commences after the conclusion of the Historical Period and continues through the end of the Test Year. The Capital Forecast Period includes all of the Company s projected capital expenditures in 2017 and I&M s fossil, hydro, and solar generating fleet consists of the coal-fired Rockport Plant, six run-of-river hydro facilities, and four universal solar generating sites. (The Cook Nuclear Plant is discussed below.) I&M s Rockport Plant is located in Rockport, Indiana and consists of two similar 1300 MW (nominal) generating units fired with pulverized coal. Run-of-River 17

24 Hydro units are power stations situated along a river that utilize the river s flow for generation of power without materially altering the normal course of the river. Id. I&M s six hydro facilities combine for a total of 22.4 megawatts ( MW ) of installed capacity and consistently produce, on average, approximately 100,000 MWH of emission-free renewable energy annually. By 2016, I&M had completed the installation of four Universal Solar facilities: Deer Creek, Twin Branch, Watervliet, and Olive. The power output of these units is dictated by the amount of solar energy, but they have an installed capacity of 14.7 MW. I&M bases its investment on work plans developed by the Company and vetted through multiple steps. The I&M generation plant and support staff work collaboratively with AEPSC s Environmental, Engineering, and Project Management teams to evaluate the needs of each generating unit to maintain reliability, safety, environmental compliance, and other unit performance parameters. The timing of capital investments depends on economic evaluations between competing projects and regulatory, safety, environmental, or reliability requirements. All of those factors serve as inputs to the capital projects approval process for I&M s generating fleet. For its fossil, hydro, and solar generating facilities, the Company forecasts Major Project capital expenditures of $75,487,000 in 2017 and $63,213,000 in The Company also forecasts fossil, hydro, and solar Other Capital Investment of $14,577,000 in 2017 and $22,655,000 in The Major Projects category includes all generation capital projects with capital expenditures exceeding $1 million during the Capital Forecast Period. The Other Capital Investment category includes capital expenditures associated with multiple smaller projects, such as the Rockport Unit 1 soot blower header control system, replacement of the North and South pyrite tanks, and replacement of a Rockport Unit 1 GSU high voltage bushing. These projects 18

25 represent the type of continuous investment that is necessary to maintain the availability and reliability of the generating units. Major Projects Placed in Service During Capital Forecast Period The following generation Major Projects were forecasted to be placed in service during the Capital Forecast Period: Major Project 1 The Rockport Unit 1 SCR. This project will allow I&M to meet the requirements set forth in I&M s NSR Consent Decree, which is discussed in further detail below. This project was forecasted to be placed in service in 2017 at a total cost of $ million (including AFUDC). 3Tr Major Project 2 Rockport Unit 1 Low Pressure Turbine Upgrade. This project involves installation of an upgraded steam path in the four Low Pressure ( LP ) turbines including rotors, stationary blade carriers, and associated components on Rockport Unit 1. This upgrade would provide for a 6% turbine efficiency improvement. The current LP rotors have exceeded their useful life and their replacement with upgraded rotors would allow the unit to meet the parasitic load associated with the DSI and SCR systems. This project was forecasted to be placed in service in 2017 at a total cost of $ million (including AFUDC). Id. Major Project 3 Rockport Unit 1 Ash Hopper Slope Replacement. Rockport Unit 1 s existing ash hopper slope is original to the unit and over time numerous slag fall events have caused extensive damage across the slope tubing including the underlying truss support structure. This portion of the ash hopper is at the end of its useful life and its replacement is expected to avoid future forced outages. This project was forecasted to be placed in service in 2017 at a total cost of $6.641 million (including AFUDC). Id. at

26 Major Project 4 Rockport Unit 1 Electrostatic Precipitator Roof. The condition of the Rockport Unit 1 electrostatic precipitator ( ESP ) roof has deteriorated over time due to normal wear and tear, reducing the structural integrity of the ESP while contributing to high opacity levels and curtailments of the Unit. This project would replace the Unit s existing ESP roof. This project was forecasted to be placed in service in 2017 at a total cost of $4.428 million (including AFUDC). Id. Major Project 5 Elkhart Spillway Gate Replacement. The Elkhart Hydroelectric Plant has eleven spillway gates that are used to pass flood waters and were installed in 1913 during the plant s original construction. A structural analysis of these spillway gates indicated that they did not meet the current factor of safety standard required by the FERC. FERC has directed I&M to comply with the required safety factor, and in response to this, the spillway gates at the Elkhart facility will be replaced. This project was forecasted to be placed in service by December 31, 2017 at a total cost of $1.882 million (including AFUDC). Id. at 223. Major Project 6 Reserve Auxiliary Transformers. The Company s forecast also included plans to purchase two Reserve Auxiliary Transformers to ensure the units are able to maintain power to critical systems during outages. This project was forecasted to be placed in service by December 30, 2017 at a total cost of $1.703 million (including AFUDC). Id. Major Projects Placed in Service After Capital Forecast Period The following generation Major Projects were forecasted to be placed in service after the Capital Forecast Period: Major Project 7 Rockport Unit 2 SCR. The Rockport Unit 2 SCR Project is necessary for I&M to meet the requirements of the NSR Consent Decree, which is discussed in greater detail below. This project was forecasted to be placed in service by December 31, 2019, with 20

27 total invested cost at the end of the Capital Forecast Period of $ million (including AFUDC). Id. Major Project 8 Rockport Plant ELG Compliance. As part of I&M s compliance with the United States Environmental Protection Agency s ( USEPA ) Electric Effluent Limitations Rule ( ELG Rule ), I&M will transition from a wet to dry bottom ash handling system for the Rockport Plant. This project was forecasted to be placed in service by August 6, 2020, with total invested cost by the end at the Capital Forecast Period of $6. 8 million (including AFUDC). Id. at 224. Major Project 9 Rockport Unit 2 Turbine Upgrade. This project involves installing an upgraded steam path in the four Low Pressure ( LP ) turbines including rotors, stationary blade carriers and associated components on Rockport Unit 2. The upgrade would provide for a 6% turbine efficiency improvement. The Unit 2 rotors have exceeded their useful life and their replacement with upgraded rotors would allow the unit to meet the parasitic load associated with the DSI and SCR systems. This project was forecasted to be placed in service by December 31, 2019, with total invested cost at the end of the Capital Forecast Period of $3.866 million (including AFUDC). Id. Major Project 10 Rockport Plant Pond Reline. This project involves relining the Rockport bottom ash ponds in response to the USEPA s EPA s Coal Combustion Residuals Rule ( CCR Rule). This project was forecasted to be placed in service by May 31, 2021, with total invested cost at the end of the Capital Forecast Period of $2.907 million (including AFUDC). Id. Summary of Generation Capital Investment The amount of capital to be invested in the Company s generating fleet during the Capital Forecast Period is reasonable and prudent. The components of generating fleet deteriorate, fail, 21

28 or become obsolete over time and must be replaced to maintain safe, reliable, efficient, environmentally-compliant, and low-cost service. Additionally, capital investment must be made in response to evolving environmental regulatory requirements. The amount of capital investment to be made during the Capital Forecast Period represents an appropriate spend built upon the needs of the generating facilities to maintain this expected level of service. (b) The Attorney General s Position The Attorney General proposes to exclude from rate base the following generation Major Projects: Project 2 Rockport Unit 1 Low Pressure Turbine Upgrade; Project 3 Rockport Unit 1 Ash Hopper Slope Replacement;, Project 4 Rockport Unit 1 Electrostatic Precipitator Roof;, Project 6 Reserve Auxiliary Transformers; and Project 9 Rockport Unit 2 Turbine Upgrade. The AG claims that the Company did not justify those projects through a cost/benefit analysis. 3 Tr (c) The Staff s Position Staff recommends removing projected contingency expenditures associated with the projects shown in Figure TCK-5, which is located on page 10 of Company witness Kerns direct testimony. This figure shows capital expenditures for I&M major generation projects. Staff calculated the Michigan jurisdiction contingency amounts to be $1,149,177 for 2017 and $965,848 for Staff decided that 10% was a reasonable estimate for a contingency amount and multiplied the 2017 and 2018 grand totals by a factor of Staff argues that ten percent is a reasonable estimate because in prior electric rate cases, other Michigan utilities used contingency projections that were greater than ten percent. Staff believes it is inappropriate for the Company to earn depreciation and return on projected contingency expenditures for two main reasons: 1) There is a much greater degree of uncertainty regarding how much contingency will ultimately be expended than the amount of 22