STATE OF MICHIGAN DEPARTMENT OF ATTORNEY GENERAL BILL SCHUETTE ATTORNEY GENERAL. May 24, 2018

Transcription

1 STATE OF MICHIGAN DEPARTMENT OF ATTORNEY GENERAL P.O. BOX LANSING, MICHIGAN BILL SCHUETTE ATTORNEY GENERAL May 24, 2018 Kavita Kale Executive Secretary Michigan Public Service Commission 7109 W. Saginaw Highway Lansing, MI Dear Ms. Kale: RE: MPSC Case No. U Enclosed for filing in the above-captioned case is the Attorney General s Initial Brief, together with a proof of service. This filing is being submitted electronically pursuant to the Commission's Paperless Electronic Filings Program. Sincerely, Celeste R. Gill (P52484) Assistant Attorney General Special Litigation Division (517) Enclosures c: Service List Hon. Martin Snider by and U.S. Mail

2 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of DTE GAS COMPANY for authority to increase its rates, amend its rate schedules and rules governing the distribution and supply of natural gas, and for miscellaneous accounting authority increase its rates for the distribution of natural gas and for other relief. MPSC No. U (Paperless e-file) / Attorney General s Initial Brief Bill Schuette Attorney General Celeste R. Gill Assistant Attorney General Special Litigation Division Michigan Dept. of Attorney General P. O. Box Sixth Floor Williams Bldg. Lansing, MI Ph: (517) gillc1@michigan.gov Dated: May 24,

3 Table of Contents INTRODUCTION... 3 ARGUMENT... 8 I. The Commission should utilize higher forecasted electricity sales, leading to a $19.4 million reduction to the Company s claimed revenue deficiency II. The Commission should revise the Company s higher off-system, exchange and appliance service program revenues to total $32.2 million, which further reduces the Company s revenue deficiency by $35.9 million III. The Commission should lower the level of Operations and Maintenance expenses for the test year, which reduces the Company s revenue deficiency by $56.0 million IV. The Commission should reduce the Company s capital expenditures by $113.0 million and a reduction of $114.7 million to rate base for the test year, including adjustments to working capital. This reduces the Company s revenue deficiency by $9.9 million V. The Commission should adopt a lower cost of capital rate of 5.23%, a capital structure with 50% equity capital and a return on common equity of 9.50%. These recommendations reduce the Company s revenue deficiency by $31.6 million VI. The Commission should decide to reflect the impact of the lower federal income tax rate in this case. When considering the lower tax rate impact on net operating income and applying the lower tax multiplier, Mr. Coppola calculated the Company s adjusted revenue sufficiency to be $88.8 million instead of $46.7 million. The impact of the lower tax rate is approximately $42 million, which could be refunded to customers through a negative rate surcharge VII. The Commission should retain the residential monthly customer charge at $11.25, or at the most increase it to $ Similarly, the Commission should keep the GS customer charge at $31.00 or increase it by $1.00 at the most Adjustments to Revenue Deficiency RELIEF REQUESTED ii

4 INTRODUCTION Bill Schuette, Attorney General of Michigan, by and through Celeste R. Gill, Assistant Attorney General with the Michigan Department of Attorney General s Special Litigation Division, submits this Initial Brief to the Michigan Public Service Commission ( Commission ) in response to the Application for rate increase filed by DTE Gas Company ( DTE Gas or the Company ) on October 20, The Special Litigation Division has prepared this Initial Brief with the resources available during the pendency of this case, and its silence on some issues presented in the case does not necessarily reflect its position on those issues. Accordingly, the Special Litigation Division reserves the right to address other appropriately raised issues in subsequent filings in accordance with the case schedule established by the presiding Administrative Law Judge ( ALJ ). On October 20, 2017, DTE Gas filed this general rate case seeking an $85.1 million rate increase from the Commission based on an October 1, 2018 through September 30, 2019 projected test year. Attorney General s Testimony The Attorney General sponsored the Direct Testimony and Exhibits of Sebastian Coppola, which were bound into the record during the rate case hearings. Mr. Coppola s pre-filed testimony consists of 107 pages of questions and answers, along with an Appendix A outlining his extensive qualifications within the utility industry (4 Tr ) and 50 pre-filed exhibits labeled as follows: 1. Exhibit AG-1 Analysis of Gas Sales 2. Exhibit AG-2 Average Heat Value of Gas Sales 3

5 3. Exhibit AG-3 Average Heat Value of Marcellus-Utica Gas 4. Exhibit AG-4 Incremental Revenue from Higher Residential Sales 5. Exhibit AG-5 Incremental Revenue from Higher Commercial Sales 6. Exhibit AG-6 Incremental Revenue from Higher Industrial Sales 7. Exhibit AG-7 DTE Gas Response Higher Gas Price for Power Generation 8. Exhibit AG-8 DTE Gas Response Energy Optimization Losses from EUT 9. Exhibit AG-9 Incremental Revenue from Higher EUT Gas Deliveries 10. Exhibit AG-10 Incremental Revenue from Higher Off-System & Exchange 11. Exhibit AG-11 DTE Gas Response Exchange Revenue Forecast 12. Exhibit AG-12 DTE Gas Response ASP Revenue and Operating Expense 13. Exhibit AG-13 Incremental Margin from Higher ASP Revenue 14. Exhibit AG-14 Total Incremental Revenue 15. Exhibit AG-15 O&M Inflation Adjustments 16. Exhibit AG-16 DTE Gas Response AMI Benefits and Cost Savings 17. Exhibit AG-17 DTE Gas Response Customer Service Returning Employees 18. Exhibit AG-18 DTE Gas Response Customer 360 Amortization of Deferred Costs 19. Exhibit AG-19 AG Calculation of Uncollectible Accounts Expense 20. Exhibit AG-20 DTE Gas Response Pipeline Assessment Expense 21. Exhibit AG-21 DTE Gas Response Corporate Rent Expense 22. Exhibit AG-22 DTE Gas Response Returning Corporate Employees 23. Exhibit AG-23 DTE Gas Response Corporate Employee Replacements 24. Exhibit AG-24 DTE Gas Response Achieved Performance Measures 25. Exhibit AG-25 Analysis of Achieved and Non-Achieved Performance Measures 26. Exhibit AG-26 LAUF Gas Analysis 27. Exhibit AG-27 DTE Gas Response Initiatives to Reduce LAUF Gas 28. Exhibit AG-28 Gas In Kind Rate Determination 29. Exhibit AG-29 Allocation of LAUF Gas and GIK Costs 30. Exhibit AG-30 Summary of O&M Expense Reductions 31. Exhibit AG-31 Contingent Capital Expenditures 32. Exhibit AG-32 DTE Gas Response - Contingent Capital Expenditures 33. Exhibit AG-33 DTE Gas Response - Reported Gas Leaks 34. Exhibit AG-34 MRP Capital Expenditures Disallowed 35. Exhibit AG-35 DTE Gas Response Distribution Public Improvements 4

6 36. Exhibit AG-36 AG Capital Expenditures and Rate Base Adjustments 37. Exhibit AG-37 AG Working Capital Adjustments 38. Exhibit AG-38 Overall Cost of Capital 39. Exhibit AG-39 Cost of Common Equity 40. Exhibit AG-40 Cost of Common Equity-DCF 41. Exhibit AG-41 Cost of Common Equity-CAPM 42. Exhibit AG-42 Cost of Common Equity-Risk Premium 43. Exhibit AG-43 Peer Group Utility and Non-Utility Business Mix 44. Exhibit AG-44 Market to Book Ratios of Peer Group 45. Exhibit AG-45 ROE Decisions by Regulatory Commissions 46. Exhibit AG-46 Value Line Report on Water Utilities 47. Exhibit AG-47 AG Revenue Deficiency Calculation 48. Exhibit AG-48 Interest on Security Deposits 49. Exhibit AG-49 Revised Revenue Multiplier at 21% FIT 50. Exhibit AG-50 AG Revenue Deficiency Calculation with 21% FIT Based on his calculations, Mr. Coppola opines that the Company will enjoy a revenue sufficiency of $46.7 million in the forecasted test year ending September (4 Tr. 1416). This sufficiency is not surprising given that the Company consistently over-earned its authorized rate of return in 2016 and likely did so again in Mr. Coppola set forth the following recommendations in his testimony in support of his revenue requirement calculation (4 Tr ): 1. Higher forecasted gas sales and transportation deliveries should be used, which will increase revenues by $19.4 million. In addition, higher off-system, exchange and appliance service program revenues total $32.2 million, which further reduces the Company s revenue deficiency by $35.9 million. 5

7 2. The level of Operations and Maintenance expenses for the test year should be lower, which reduces the Company s revenue deficiency by $56.0 million. 3. Capital expenditures should be reduced by $113.0 million and rate base should be reduced by $114.7 million for the test year, including adjustments to working capital. These changes reduce the Company s revenue deficiency by $9.9 million. 4. The Commission should adopt a lower cost of capital rate of 5.23%, a capital structure with 50% equity capital and a return on common equity of 9.50%. These recommendations reduce the Company s revenue deficiency by $31.6 million. 5. Other adjustments related to rate base increase the revenue deficiency by a net amount of $1.6 million. 6. The Commission should maintain the residential monthly customer charge at $11.25, or at the most increase it to $ Similarly, the Commission should keep the GS customer charge at $31.00 or increase it by $1.00 at the most. 7. The Commission should reject the Company s proposal to increase the level of capital expenditures for the MRP program within the IRM. 8. The Commission should direct the Company to continue to provide the AMI and AMR cost-benefit analyses in future rate cases. 9. The Commission should require that the impact of the lower federal income tax rate be reflected in this case. When considering the lower tax rate impact on net operating income and applying the lower tax multiplier, Mr. Coppola calculated the Company s 6

8 adjusted revenue sufficiency to be $88.8 million instead of $46.7 million. The impact of the lower tax rate is approximately $42 million, which could be refunded to customers through a negative rate surcharge. In total Mr. Coppola s proposed adjustments reduce the Company s proposed revenue deficiency from approximately $85.1 million to a revenue sufficiency of $88.8 million when taking into consideration the lower federal tax rate. Given this revenue sufficiency calculation, the Attorney General recommends that the Commission not grant any rate relief in this case. 7

9 ARGUMENT While examining the Attorney General s substantive objections, the Commission should consider that DTE Gas 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. White v Campbell, 25 Mich 463, 475 (1872). A plaintiff always has the burden of proving its cause of action. Caruso v Weber, 257 Mich 333; 241 NW2d 198 (1931). As applied to administrative cases, a party seeking relief must prove his, her, or its claim by a preponderance of evidence. 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). Likewise, in cases before the Commission, the utility bears the burden of proof by a preponderance of evidence. 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 Given the nature of the burden of proof, the Commission may reject even uncontradicted evidence. 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). When the burden of proving a fact falls on one party, then the other party does not have the burden of proving the opposite fact. S.C. Gary, Inc v Ford Motor Co, 92 Mich App 789, ; 286 NW2d 34 (1979). 8

10 I. The Commission should utilize higher forecasted electricity sales, leading to a $19.4 million reduction to the Company s claimed revenue deficiency. DTE Gas s forecasted revenue and operating income for the projected test year are not accurate because sales for the projected period are understated. (4 Tr. 1418). In Exhibit A-15, Schedule E-1.1, Company witness George Chapel presents the Company s forecast for gas sales in the projected test year. DTE Gas has forecasted total gas sales of Bcf in the projected test year. This sales level represents a decrease of approximately 3.4 Bcf, or 2.2%, from the actual weather-normalized gas sales in 2016, and 2.0% from the actual weather-normalized 2017 gas sales. (4 Tr. 1419). Mr. Coppola testified that DTE Gas significantly underestimates the gas sales volume for its residential, commercial, and industrial customers and the related test year revenue. (4 Tr. 1419). Based on information provided by the Company during discovery, Mr. Coppola calculated gas usage per customer for each customer service class in Exhibit AG-1, which shows the average gas usage per customer for the historical years from 2012 to 2017, along with the forecasted 2018, 2019, and projected test year periods. Exhibit AG-1 includes the calculated percentage change in average usage per customer, year-over-year, from 2012 to 2019 and for the projected test year, along with the average compound rate of decline or increase for the historical five-year period. Mr. Coppola s analysis in Exhibit AG-1 demonstrates that weather-normalized average usage for residential and commercial customers has varied little in recent 9

11 years. Some years show a slight decline and other years an increase, but overall residential gas usage per customer has averaged only a slight decline of approximately 0.6% per year during the 5-year period. On the other hand, commercial customers gas usage has increased an average of 0.7% per year in the past five years. Industrial sales have experienced larger variations year over year due to the smaller number of customers, changes in operations, and the likely shift of customers from sales to transportation service and vice versa. Over the five-year period, the average usage per industrial sales customer has declined by approximately 6% annually. (4 Tr. 1420). In comparison, the Company s gas sales forecast for 2018 and 2019, gas usage per residential customer declines by 3.6% in 2018 with a further decline of 1.3% in 2019 for a cumulative decline of 4.5% for the projected test year from the average usage in Similarly, the Company s forecast shows commercial customer usage declining 1.2% in 2018 and the same in 2019 for an overall decline of 2.1% in the projected year. The Company s forecasted rate of decline for industrial customers is even more significant dropping nearly 67% in 2018 and rebounding slightly in 2019 for a cumulative decline of 66.4% for the projected test year from the level in The Company has not provided any explanation for this dramatic decline in average gas usage by industrial sales customers. The rate of decline in average customer usage forecasted by the Company from 2018 to the projected test year is excessive and not supported by historical data or trends. See Exhibit AG-1. 10

12 Mr. Chapel discusses certain assumptions and adjustments that he has made to the regression model s gas sales forecast to reflect exogenous factors, such as incremental energy efficiency and forecasted changes in the heat content of gas sales. These adjustments plus the fact that the model includes customer usage data only up to July 2016, which excludes nearly one and one-half years of the most recent sales volumes, could account for most of the discrepancy in average usage for all customer classes. With regard to energy waste reduction, Mr. Keaton assumed a rate of decline in customers usage of 1% each year from 2016 to Although the 5-year historical rate of decline in sales appears to reflect some level of reduction in gas sales from energy efficiency, it does not support the much larger rate of decline forecasted by the Company for 2018, 2019, and the projected test year. (4 Tr. 1421). DTE Gas s adjustment to the sales forecast for the heat content of the gas was unreasonable. The Company calculated the Btu value of the gas sold in the historical period of August 2014 to July 2016, used in its regression model, at 1,040 Btu per cubic foot ( cf ). (2 Tr. 105). The Company determined the heat content of the gas sold to be at 1,048 Btu/cf for the period of August 2016 to July For the projected test year, the Company has forecasted that the Btu content of the gas will increase to 1,051 Btu/cf. (2 Tr. 105). DTE Gas justifies this higher factor due to the planned deliveries of gas supply from the Marcellus-Utica gas basins by the NEXUS Pipeline beginning in the fourth quarter of As a result, the Company has reduced the regression model forecasted sales by an additional 1% annually from July 2016 to September 2019, the end of the projected test year. (4 Tr. 1422). 11

13 Mr. Coppola disagreed with the Company s Btu adjustments. (4 Tr. 1422). Although the Btu content of the gas supply purchased by DTE Gas has increased over the past three years, the cumulative impact reflected by the Company in its forecast of gas sales to the end of the projected test year is excessive. When looking at the average usage per customer for residential and commercial customers in Exhibit AG-1 for 2016 and 2017, the annual rate of decline in prior years is in the range of 0.5% to 0.7%. Id. If, according to the Company, the rate of decline in sales due to energy efficiency is 1% annually, then the lower actual rate of decline in average customer usage does not support decreases due to other factors. In fact, the opposite is true. Other factors are reducing the losses from energy efficiency and higher heat content of the gas. The historical gas usage data does not support both a 1% annual decline due to energy efficiency and an additional 1% decline due to the higher heat content of the gas, which would add to a total decline of 2% annually. In fact, having reached a level of 1,049 in 2016, the Btu/cf factor declined to 1,046 in (4 Tr. 1423). The Company s expectation that the Btu factor will increase further in the projected test year due to the gas delivered by NEXUS also is not supported by the data. Pipelines bringing gas to Michigan in recent years have had access to gas in the Marcellus-Utica basins. Part of the reason why the heat content of gas in the past three years has increased is because the higher Btu gas in these gas basins has been shipped to the Michigan market. 12

14 In response to discovery, the Company provided the Btu content of gas from the Marcellus-Utica gas basins. The data shows that the average Btu factor has stabilized and in certain areas even declined in the last two years. Exhibit AG-3 shows this information. It is should also be pointed out that the gas supply the Company has planned to ship through the NEXUS Pipeline is only 17% of the total gas supply purchases it plans to make for the projected test year. 1 (4 Tr. 1424). There is no basis for the Company s projected increase in the Btu factor to 1,051 and it should not be relied on to reduce gas sales for the projected test year. Using the latest available weather-normalized actual usage for 2017 is a more appropriate historical base from which to forecast gas sales for the projected test year. (4 Tr. 1424). The 2017 normalized usage data reflects a gas heat content of 1,046 Btu/cf and the actual energy efficiency reductions achieved by customers. (4 TR 1424). Mr. Coppola presented a supportable forecast of gas sales for the projected test year in Exhibit AG-4, in which he calculated a forecast of residential gas deliveries of 117,327,038 Mcf for the projected test year. Id. at This forecast exceeds DTE Gas s forecast by 4,506,085 Mcf, or 4.5 Bcf rounded. To arrive at the revised forecast, he began with the average weather-normalized gas usage per residential customer of Mcf for the year To this number, Mr. Coppola applied the 5- year annual rate of decline of 0.59% prorated for the period from the end of 2017 to the end of the projected test year. These calculations resulted in a lower average usage per 1 DTE Gas GCR Plan forecast in Case No. U-18412, Exhibit A-11, pages 1-2, line 14 multiplied by the number of days per month as a percent of total gas deliveries in Exhibit A-12, pages 1-2, line 4 from Oct to Sep (22.3 Bcf / Bcf = 17%). 13

15 customer of Mcf for the projected test year. This number was then multiplied by the average number of residential customers provided by the Company for the projected test year to arrive at the forecast of 117,327,038 Mcf. (4 Tr. 1425). Similarly, for commercial customers in Exhibit AG-5, Mr. Coppola calculated an average usage per customer of Mcf for the projected test year using the average annual rate of growth of 0.66% during the past five years. He then multiplied this average usage by the average number of commercial customers provided by DTE Gas for the projected test year to arrive at the forecast of 41,790,764 Mcf. Mr. Coppola s forecast for commercial customers gas sales is 1,214,542 Mcf, or 1.2 Bcf rounded, higher than the Company s projection for the test year. (4 Tr ). Mr. Coppola also used the same approach for industrial customers in Exhibit AG-6 and applied the average rate of decline of 6.29% to the 2017 customer usage to arrive at an average use per customer of 2, Mcf for the projected test year. Multiplied by the number of customers, the result is forecasted gas sales of 764,740 Mcf. This forecast is 486,392 Mcf higher than the Company s forecast. In terms of the impact of higher gas sales on the Company s revenue and revenue requirement, Exhibits AG-4, AG-5, and AG-6 show the calculation of the incremental revenue related to the forecasted higher residential, commercial and industrial gas sales. (4 Tr. 1426). To calculate the additional revenue, Mr. Coppola applied the current gas sales rates to the incremental gas sales. To perform this calculation for commercial and industrial customers, he first allocated the 14

16 incremental gas sales to the applicable rate schedule based on the gas sales volume projections presented by the Company on page 1 of Exhibit A-15, Schedule E2, for The result is incremental revenue of approximately $14.7 million for the residential customer class, $3.4 million for the commercial customer class, and $1.3 million for the industrial class. The combined incremental revenue for all three classes is $19.4 million. Id. The Commission should increase the revenue forecasted by DTE Gas for the future test year by $19,433,553, which, in turn, reduces the revenue requirement projected by the same amount. (4 Tr. 1426). The Company s forecasted revenue for the projected test year is not accurate because gas sales for the projected period are understated. The Company s gas sales forecast includes losses of sales from energy efficiency, higher Btu content and other factors that are not likely to materialize to the level projected by the Company. Thus, the Commission should reject the Company s gas sales forecast for the projected test year and instead adopt the Attorney General s forecast as presented in Exhibits AG-4, AG-5, and AG-6. Id. In addition, the Commission should increase the Company s EUT forecast by 9.1 Bcf. The Company has not provided credible evidence that transportation gas deliveries to power generation customers during the projected test year will decline by 19.7 Bcf. (4 Tr. 1431). Although some level of decline from 2016 to the projected test year can be reasonably anticipated, the actual decline is likely to be about half as much as stated by DTE Gas. Id. Based on the three-year average of gas deliveries from 2015 to 2017, Mr. Coppola concluded that it is reasonable to increase 15

17 the Company s forecast by 9.1 Bcf. (4 Tr. 1431). Moreover, the Company has not adequately supported the projected loss of 1.4 Bcf of gas deliveries due to energy efficiencies expected to be achieved by its customers. Id. Therefore, the Commission should increase the revenue and operating income forecasted by the Company for the future test year by $3,106,114. (4 TR 1431). II. The Commission should revise the Company s higher off-system, exchange and appliance service program revenues to total $32.2 million, which further reduces the Company s revenue deficiency by $35.9 million. Off-System Transportation and Exchange Services Revenues Company witness Decker presents the Company s forecast of revenues for Contract Storage, Park & Loan, Off-system Transportation and Exchange Services for the projected test year in Exhibit A-13, Schedule C3.3. After reviewing Mr. Decker s direct testimony and responses to several discovery requests, Mr. Coppola determined that the revenue forecast for contract storage and park & loan services is reasonable. However, Mr. Coppola found that the revenue forecast for off-system transportation and exchange gas services is significantly understated. Mr. Decker attempts to explain in his direct testimony, how DTE Gas arrived at its revenue forecast of $57.5 million for off-system transportation. (2 Tr ). But, his explanation supports a number higher than $57.5 million. According to Mr. Decker, the Company started with the historical revenue of $31.6 million, added $32.5 million of revenue for transportation services provided to the NEXUS 16

18 Pipeline, and then subtracted $1.7 million for lost midstream transportation margin. The net amount of these three numbers is $62.4 million, not $57.5 million. The Company provided the volume and revenue amount earned during each of the past six years from 2012 to 2017 in response to a discovery request. Exhibit AG-10 shows this information and the rate per Mcf of volume transported each year. It is apparent from this information that during the 2012 to 2014 period, revenues varied considerably, with 2013 being a peak year and 2014 an extremely low year. The low amount of transportation service volume and revenue in 2014 most likely reflects the unusual and extreme cold weather during the first three months of 2014 which may have prevented any significant off-system transportation services with other parties. (4 Tr ). The most recent three years from 2015 to 2017 have been more stable with revenues in the range of $30 million to $33 million, and the average rate for transportation service also being in a tight range of $0.21 to $0.26 per Mcf. Based on this information, Mr. Coppola calculated average revenue for the three-year period of $31.6 million, which he believes is a reasonable revenue estimate for the projected test year for the base off-system transportation services provided by the Company. To this amount, Mr. Coppola added the $32.1 million of revenue projected by the Company for transportation services to be provided to the NEXUS Pipeline for the projected test year. Based on these calculations, the total projected off-system transportation services is $63.7 million, which is $6.3 million higher than the $57.5 million shown by the Company in Exhibit A-13, Schedule C

19 Mr. Coppola did not include the $1.7 million reduction in midstream margin identified by the Company in his calculations. (4 Tr. 1434). The Company made this adjustment under the premise that it will have fewer off-system transportation opportunities with Union Gas Company and with the Vector Pipeline. But, the basis for this premise is unknown and likely speculative. It should also be noted that in testimony filed by Company witness Michael Sloan, in several GCR and PSCR cases, has discussed the increased opportunities for higher midstream services that could be available to DTE Gas as a result of NEXUS bringing more natural gas into Michigan and surrounding areas. 2 Therefore, the reduction in midstream margin of $1.7 million, in addition to not being adequately supported, does not appear to be credible. DTE Gas has projected that revenue from exchange services will decline from $9.2 million in 2016 to $6.0 million in the projected test year. See, Exhibit A-13, Schedule C3.3. Company witness Decker briefly explains in his direct testimony that this decline of $3.2 million is due to lower market opportunities for exchange services with the NEXUS and Rover pipelines entering the Dawn market hub. (2 Tr. 206 and 4 Tr. 1434). When asked to explain how it arrived at the $6.0 million of forecasted revenue, the Company provided a schedule showing the $6.0 million in revenue being divided by the average rate of $0.108 per Mcf from the period to arrive at a volume of 55,883,453 Mcf. However, there is no explanation or basis provided as to how this volume was determined and why it is reasonable. On the contrary, the resulting volume is significantly lower than during any period 2 Michael Sloan direct testimony in MPSC Case Nos. U-17691, U-17941, U and U

20 from 2012 to Exhibit AG-11 includes a copy of the discovery response showing the calculation and historical volumes. DTE Gas was also asked to provide supporting evidence for its assertion that there will be lower market opportunities for exchange services once the NEXUS and Rover pipelines begin operation. The response, which is also included in Exhibit AG-11, simply states an expectation that the spread between the Dawn Hub and the MichCon city gates will be lower. This contradicts the Company s calculation of the $6 million revenue forecast using a rate of $0.108 per Mcf, which is the same average rate that the Company has achieved during the past three years. The Company s explanations and revenue projection are not adequate. Mr. Coppola calculated a revenue forecast for exchange services in Exhibit AG- 10, which shows the average revenue during the most recent three years from 2015 to (4 Tr ). This average amount during this three-year period is $10.7 million, which is $4.7 million higher than the Company s forecast. Although a 5-year average would have provided a larger forecasted revenue amount, the decline in the level of revenue in the most recent three years is more representative of what will likely occur in the projected test year. Also, the three-year average rate of $0.09 per Mcf is slightly lower than the $0.108 rate used by the Company in attempting to justify its $6.0 million projection. Thus, the $4.7 million revenue increase amount is reasonable and should be adopted by the Commission. (4 TR 1436). In terms of the Company s forecasted revenue for off-system transportation 19

21 and exchange services, Exhibit AG-10 presents the most reasonable forecast of revenue for each of these services based on the average revenue earned during the most recent three years. Thus, the Commission should adopt these calculations and add an additional $10.9 million to DTE Gas s projected revenues. Appliance Service Program Revenues The Commission should also adopt the Attorney General s recommended adjustments to DTE Gas s projected revenue from its Appliance Service Program s gross margin for the projected test year. (4 Tr. 1437). The gross margin is the difference between program revenues and related program expenses. The Company forecasted the same revenue of $70.7 million for the projected test year as it billed for See. Exhibit A-13, Schedule C3, line 11. When asked to explain why the revenue would not change between 2016 and the projected test year, the Company answered that [g]iven the potential variability in retaining existing customers and attracting new customers, the projected test year assumes no change from See, Exhibit AG-12. It appears from this response, that the Company did not make the effort to develop reasonable revenue and cost estimates for the ASP in the projected test year for its rate case filing. In another discovery response, the Company provided the historical revenue and expense amounts for the six-year period from 2012 to This information is also included in Exhibit AG-12. Based on the information provided by the Company, Mr. Coppola calculated the annual margin, the margin percent, and the 5-year growth rate in ASP revenue in Exhibit AG-13. The ASP revenue has steadily grown over the six-year period 20

22 from $53.4 million in 2012 to $73.4 million in Therefore, it is reasonable to expect that the program revenue and margin will continue to increase into the projected test year. As shown in Exhibit AG-13, Mr. Coppola applied the average revenue growth rate of 7% to the 2017 actual revenue to arrive at the projected revenue of $78.2 million for 2018 and similarly to the projected revenue of $83.3 million in For the projected test year, he calculated revenue of $82.1 million based on three months from 2018 and nine months from To arrive at the forecasted gross margin of $21.9 million for the projected test year, he used the average margin percent of 27% experienced by the Company during the 2015 to 2017 period. The forecasted program operating expense is the difference between the revenue and gross margin. (4 Tr. 1438). Based on this calculation, it is apparent that the Company s 2016 revenue of $70.7 million and margin of $19.0 million are understated. The Commission should increase the Company s projected revenue by an additional $2.9 million. (4 Tr. 1438). Exhibit AG-14 summarizes each of the proposed revenue or margin adjustments. The total increase to operating income and therefore the decrease in revenue requirement is $35,898,837. This amount also includes a reduction for lower Gas in Kind revenue, which is discussed later in this brief. The Commission should reflect this reduction to the Company s revenue deficiency. 21

23 III. The Commission should lower the level of Operations and Maintenance expenses for the test year, which reduces the Company s revenue deficiency by $56.0 million. The Company has projected that O&M expenses will increase to $414.4 million during the test year ending September 2019, which represents a 25% or $52.1 million increase from the Adjusted Historical Test Period expense level set forth in DTE Gas s case for Other O&M of $332.3 million in (4 Tr. 1439). Inflation Adjustments Approximately $23.4 million of the Company s $52.1 million increase to O&M expenses in the projected test year represents inflation increases estimated by the Company. These inflation increases are purportedly based on a blend of the Consumer Price Index ( CPI ) and 3% forecasted annual wage increases for union, non-union, and contract employees. However, use of such a blended rate has not been approved by the Commission in any past general rate case in recent years to my knowledge. (4 Tr. 1439). Contrary to some of the testimony in this case, the Company has not experienced across-the-board inflation pressure on its operating costs. In fact, according to Company witness Michael Cooper, actual O&M costs have remained well below the inflation trend line from 2007 to It is therefore difficult to understand why the Company would project inflation-related cost increases for 2017, and the nine months in The Company has also indicated in the past that investments in technology will result in the reduction of O&M expenses, yet customers now must pay higher 3 Michael Cooper direct testimony at page

24 rates due to forecasted increases in O&M costs. The Company has not provided any evidence that its operations are facing inflationary cost pressures that it cannot manage in the course of operating its business. It is more than likely, based on historical data, that the proposed $23.4 million in inflation cost increases will not happen. The Company will likely continue to manage its operations to offset the low level of forecasted inflation with increased operating efficiencies. Although the Commission has allowed inflation cost increases for O&M expenses in prior rates cases, it has also rejected blended inflation cost factors that include internal salary increases with CPI factors as proposed by the Company in this case. As a matter of policy, it is not advisable to allow utilities to escalate costs for forecasted future inflation, as it becomes a self-fulfilling prophecy to increase future costs with inflation increases which then fuel and justify further inflationary trends. (4 Tr. 1440). The Commission should only grant inflation cost increases when those increases are actually experienced and are likely to occur, and not because it has been past practice to do so. In this case, the evidence is clear that inflation cost increases are not warranted or necessary. (4 TR 1440). If the Commission decides to allow the Company to recover some portion of projected inflationary cost increases, the recovery amount should reflect only half of the Consumer Price Index for Urban cities ( CPI-U ) inflation factors. Such an approach more equally balances the interests of the Company with those of the customers and provides the Company the incentive to further control costs. (4 Tr. 1441). Mr. Coppola calculated the inflationary cost increases that would be allowed 23

25 under this alternative approach in Exhibit AG-15. The amount of inflation cost adjustment would be approximately $8.7 million, which reflects removal of the blended rate with the 3% salary increases and includes only half of the CPI-U inflation factors for 2017, 2018 and the nine months in Id. Meter Reading Expenses DTE Gas is proposing to recover nearly $7.0 million in Meter Reading O&M expense in the projected test year. See, Exhibit A-13, Schedule C5.4. To arrive at this amount, the Company simply applied inflation factors to the 2016 historical amount. However, it did not take into consideration that fewer meter readers will be needed in the projected test year than it used in The Company recently completed the installation of AMI/Smart meters and new AMR meters in the southeast Michigan service area, and it plans to complete the remaining installations of AMI and AMR meters in the western part of the state by the end of Therefore, as the installation of these automated meters is completed, the cost of manual meter reading should decline. (4 Tr. 1442). In the calculation of cost savings from the installation of AMI and AMR meters for DTE Gas, Exhibit A-21 shows that meter reading costs should decline by $5,182,000 as of the end of 2018 and $5,382,000 by the end of Therefore, the prorated amount as of the projected test year is $5,332,000. By comparing this amount to the $4,214,000 of cumulative meter reading savings as of the end of 2016, Mr. Coppola determined that meter reading costs, outside of any inflationary cost 4 Exhibit A-21, Schedule K1, page 1 and 2 line

26 increases, should decline by at least $1,118,000 in the projected test year. (4 TR 1442). The Commission should remove this amount from the Company s forecasted O&M expense for the projected test year. Customer Service O&M Expenses The Company indicates that the installation of AMI/AMR meters will result in cost savings in the customer service operation. See, Exhibit A-21, Schedule K1. Line 52 of the Exhibit shows that in 2018, the Company will realize cumulative savings of $8,689,000 and those savings will grow to $9,549,000 in The prorated amount for the projected test year is $9,334,000. By comparing this amount to the cumulative savings of $5,304,000 as of the end of 2016, the Company should achieve incremental cost savings of $4,030,000 in the projected test year. (4 Tr ). The Company was asked, in discovery, to identify where it has included the cost savings from the implementation of AMI and AMR meters in the O&M expense exhibits. The response states that the Company does not track cost savings and discusses meter reading cost savings that have been achieved. Exhibit AG-16 includes a copy of the discovery response. Although actual cost savings are likely reflected in historical O&M expense, it appears clear that the Company has not included incremental future cost savings in the projected O&M expense. The Commission should reduce O&M expense for the projected test year by the amount of $4,030,000 as calculated above. (4 Tr. 1444). In addition, the Commission should remove $6,629,000 from DTE Gas s 25

27 forecasted O&M expense related to the customer service issues stemming from the C360 project. On line 5 of Exhibit A-13, Schedule C5.4, the Company has included an O&M expense amount adjustment of $2,190,000 related to employees returning to the customer service department following the implementation of the Customer 360 project. On the same line the Company has also included $1,483,000 of amortization expense for the same project. The Customer 360 project involved the development and installation of a new customer billing and customer service system over a period of more than 2 years and required the involvement of experienced employees from various areas of the Company. In response to discovery, the Company stated that 61 employees returned to the Customer Service department in the second quarter of 2017 after the new system was implemented. The Company has included $2,190,062 in expense in the future test year for DTE Gas s share of the employee costs. When asked in discovery, the Company to explain what the returning employees will be doing and who performed their duties while they were away. The response stated that the employees will work on projects that were delayed during their absence and that their tasks were completed by other employees working overtime or by other employees filling the open positions. The discovery responses are included in Exhibit AG-17. Two issues arise from the response. First, if the tasks were delayed by two years or longer, they are probably of little importance and those tasks and the associated positions should be eliminated. Second, if the positions of the 61 26

28 returning employees were either filled by temporary employees or by other employees working overtime during that time period, then those costs will no longer be incurred and the costs of the returning employees to a large extent replace other avoided costs. In either case, it seems clear that the $2,190,052 in expense should not be included in the projected test year. The Commission should remove this amount from the projected test year O&M expense. Additional issues arise with the amortization of the C360 costs. Included in the amortization expense of $1,483,000 for the projected test year is an amount of $409,000 related to the capitalization of $17.9 million of post-implementation costs after the Customer 360 system was installed and began operation. Exhibit AG-18 includes a discovery response identifying the deferred expense of $17.9 million, which when amortized over 15 years and prorated between DTE Electric (65.75%) and DTE Gas (34.25%) results in $409,000 being charged to DTE Gas in the projected test year. (4 Tr. 1444). This same issue arose in DTE Electric s general rate case No. U except that the amount at the time was $20 million. In filed direct testimony in that case, Mr. Coppola emphasized that the post-implementation costs contribute no significant added value to the development of the system. They are merely costs to fix small programming errors and daily operating costs as employees get accustomed to the new system. The system is up and running and these costs should be operating costs for the Company to absorb. Furthermore, the Company has already included training costs, software maintenance fees, system stabilization 27

29 costs and customer service costs to be incurred during the implementation phase in the $47 million shown in the discovery response and used to calculate the remaining amount of the $1,483,000 of amortization expense. 5 Continuing to defer the additional $17.9 million costs post-implementation is not acceptable for the reasons stated above. Thus, the Commission should reject the inclusion of the $17.9 million in the regulatory asset and also remove the $409,000 from O&M expense. Id. Uncollectible Accounts Expense DTE Gas calculated its uncollectible accounts expense by taking the average of the uncollectible expense recorded on the books during the three-year period from 2014 to See, Exhibit A-13, Schedule C5.7. This calculation results in a forecasted test year expense of $41.2 million. The Company then subtracted the 2016 expense of $30.5 million to arrive at the $10.7 million adjustment to add to the historical expense level. (4 Tr. 1445). The approach taken by the Company is too simplistic and results in an inaccurate forecast. Uncollectible expense and revenues can vary from year to year due to weather patterns, economic conditions and other reasons including, such as the underlying cost of gas rates in revenues. A better approach is to determine the ratio of uncollectible write-offs to revenues over multiple years. The resulting average ratio can then be applied to forecasted test year revenues to determine an appropriate forecast of uncollectible accounts. This approach also avoids the need to make adjustments for changes in the uncollectible reserve since those adjustments 5 Case No. U-18255, Sebastian Coppola direct testimony at page

30 are merely timing differences between write-offs and the recognition of uncollectible expense. (4 TR ). Exhibit AG-19, shows the calculation steps to arrive at the projected uncollectible accounts expense level for the year ending September As shown in this exhibit, the percentage of average net write-offs to distribution revenues for the three-year period from 2015 to 2017 is 3.79%. Multiplying this percentage times the Company s projected distribution revenue of $750.2 million results in an expense level of $28.4 million. From this result, Mr. Coppola subtracted $248,000 of expected AMI uncollectible expense savings based on information in Exhibit A-21, Schedule K1 (line 54). The uncollectible accounts expense that Mr. Coppola recommended for the projected test year is $28.2 million, which is the result of subtracting the $248,000 of AMI-related savings from the $28.4 million calculated expense. This recommended expense level is $13.0 million lower than the amount proposed by the Company. (4 Tr. 1447). There are two other key reasons why the Attorney General disagrees with the Company s Uncollectible Accounts Expense. The first reason is due to lower forecasted revenues which reflect the lower cost of gas for the future test period. The second reason is the timing of recording uncollectible expense on the books of the Company and, in particular for not taking into consideration the lower uncollectible expense in The Company s approach of simply averaging the historical uncollectible accounts expense for the three years ending 2016 did not 29

31 take into consideration these two factors in arriving at the $41.2 million expense projection. Accordingly, the Commission should adopt the $28.2 million expense level for uncollectible accounts expense for the forecast test year and reduce the revenue requirement by $13.0 million. (4 Tr. 1448). Transmission O&M Expense The Company has forecasted $15.2 million of O&M expense under Other Adjustments which is in addition to the inflation cost adjustments. See, Exhibit A- 13, Schedule C5.2. Approximately $8.2 million of the expense increase is for pipeline integrity work, and an additional $2.8 million pertains to the ANR/Alpena transmission fees. The Company provided the actual and projected pipeline assessment expense from 2016 to the projected test year in response to discovery. This information is included in Exhibit AG-20. The information shows that the Company incurred $4.1 million of expense in 2016 and has forecasted $10.4 million for the future test year. The increase over this period of time is $6.3 million. In Exhibit A-13, Schedule C5.2, and the related footnote 3 in the schedule, the Company has included an incremental forecasted amount of $8.2 million from 2016 to the future test year. The difference between the $8.2 million and the $6.3 million is $1.9 million. This amount appears to be related to additional MAOP record review work that the Company anticipates doing following the release of final rules by PHMSA. 6 Company witness Alida Sandberg discusses this item on page 43 of her direct 6 MAOP is an acronym for the Maximum Allowable Operating Pressure of a pipeline. PHMSA is an acronym for the Pipeline and Hazardous Materials Safety Administration. 30

32 testimony. It is apparent from Ms. Sandberg s testimony and responses to discovery requests, that the occurrence of this expense is dependent on the issuance of final rules by PHMSA. (4 Tr ). The Company anticipates that the final rules may be issued sometime in 2018 at the earliest. But, it is possible that the final rules may be delayed past that anticipated time period. The fact that the final rules have not yet been issued and the timing of their enactment is uncertain makes it unreasonable and imprudent to accept the $1.9 million of incremental expense projected for the future test year. The Commission should remove this amount for the Company s projected O&M expense. (4 Tr. 1449). In terms of the ANR/Alpena transportation fees, the inclusion of transportation costs related to the ANR/Alpena contract # has been the subject of litigation over the past few years in both the Company s general rate cases and the GCR mechanism. The predecessor contract to the ANR/Alpena current contract # was strictly an arrangement to allow ANR to transport gas from the Company Woolfolk storage operations to the Alpena gate station. The Company did not have sufficient transmission facilities of its own to allow for the delivery of sufficient quantities of gas during the winter months to the Alpena gate station. In the settlement of Case No. U-16999, the Company agreed that the predecessor transportation contract with ANR performed the function of integrating the Company s transmission system. Therefore, the costs related to transportation contract were removed from the GCR mechanism and included in base rates. (4 Tr. 31