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1 May, 00 A CMS Energy Company Ms. Mary Jo Kunkle Executive Secretary Michigan Public Service Commission Mercantile Way P.O. Box 0 Lansing, MI 0 General Offices: One Energy Plaza Tel: () -00 Jackson, MI 0 Fax: () - or () - *Washington Office: 0 th Street, NW Tel: (0) - Washington, DC 00 Fax: (0) - Writer s Direct Dial Number: () -0 Writer s Address: jrrobinson@cmsenergy.com LEGAL DEPARTMENT DAVID A MIKELONIS Senior Vice President And General Counsel James E Brunner Jon R Robinson Arunas T Udrys Assistant General Counsel David E Barth Francis X Berkemeier H Richard Chambers John P Dickey Ann F Goodman Deborah Ann Kile Roger K Krakusin Eric V Luoma Raymond E McQuillan Rhonda M Morris Deborah A Moss* Mirče Michael Nestor Robert M Neustifter David A Pell Vincent P Provenzano Susan L Rasmussen Catherine M Reynolds John C Shea P Leni Staley Charlotte A Walls Kimberly C Wilson Michael G Wilson Attorney Re: Case No. U-0 (In The Matter Of The Application Of Consumers Energy Company For Determination Of Net Stranded Costs For The Year 00 And For Approval Of Net Stranded Cost Recovery Charges.) Dear Ms. Kunkle: Enclosed, for filing, in the above-referenced matter, is an original and four copies of Consumers Energy Company s Application, Motion for Interim Relief, and the supporting testimony and exhibits of Scott B. Brockett, Jeanne Kurzynowski and Michael A. Torrey. In addition, an electronic copy, of the documents listed above, is being filed with the Commission in a portable document format (PDF) as part of the Commission s Electronic Filings Program. Sincerely, Jon R. Robinson CC: Parties to MPSC Case No. U-0 fl00--

2 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for determination of net stranded costs for ) Case No. U-0 the year 00 and for approval of net ) stranded cost recovery charges. ) ) APPLICATION OF CONSUMERS ENERGY COMPANY Consumers Energy Company ( Consumers Energy ) applies for approval of a determination of its net stranded costs for the year 00, and for approval of stranded cost recovery charges to recover those costs. In support of this relief, Consumers Energy says as follows:. Consumers Energy is a public utility engaged in, among other things, the generation, purchase, distribution and sale of electric energy to approximately. million retail customers in the lower peninsula of the State of Michigan.. Consumers Energy s retail electric business is subject to the jurisdiction of the Michigan Public Service Commission ( Commission ) pursuant to certain provisions of PA, as amended by various acts, including 000 PA, MCL 0. et seq; MSA.() et seq; 0 PA 0, as amended, MCL 0. et seq; MSA. et seq; and 0 PA 00, as amended, MCL. et seq; MSA. et seq.. In an order issued December 0, 00 in Case No. U-, the Commission adopted a methodology for calculating net stranded costs. That methodology requires an annual calculation of net stranded costs, and the establishment of a charge to recover such costs. In orders issued December 0, 00 and December, 00 in Case No. U-0, the Commission ap00--

3 issued further orders addressing stranded costs for 000 and 00. On March, 00, Consumers Energy filed an application in Case No. U-0 seeking recovery of stranded costs incurred in 00. That case remains pending at the Commission, with a schedule established that is unlikely to result in a final order before September 00.. Consumers Energy has applied the stranded cost methodology utilized by the Commission in Case Nos. U- and U-0 to actual 00 results. Because of some uncertainty concerning the proper treatment of Clean Air Act costs, Consumers Energy is presenting two alternative calculations. For purposes of one of its alternative calculations for 00, Consumers Energy has, consistent with a July 0, 00 Commission order in Case No. U-0, removed Clean Air Act compliance costs from the stranded cost calculation. This approach presumes that the Commission provides an alternative means of recovering such costs, as was indicated in the July 0, 00 U-0 order. Consumers Energy has filed, in Case No. U-, an application seeking authorization to recover these costs via the securitization procedure outlined in 000 PA and 000 PA. MCL 0.0 et seq. Pursuant to an order issued December, 00, Case No. U- was remanded to the Administrative Law Judge for further hearings, which have now been completed. No final order has been issued in that case, and it is unknown whether a final order will be issued that will allow the issuance of securiitzation bonds. Assuming that such an order is issued, and securitization bonds are issued that allows the recovery of the Clean Air Act costs, the removal of those costs from the stranded cost calculation for 00 would be appropriate. If Case No. U- does not produce such a result, these Clean Air Act costs should be included in the stranded cost calculation made for 00. Alternative calculations of 00 stranded costs for both of these possible outcomes are included in the Company s filing in this matter. ap00--

4 . If Clean Air Act costs are removed from the stranded cost calculation because they will be recovered as proposed in Case No. U-, Consumers Energy calculates that it incurred $,,000 in net stranded costs in 00. Because of the lag associated with the recovery of this amount (incurred in 00, but unlikely to be recovered prior to 00), it is appropriate to add carrying costs, which would increase this amount to approximately $0,0,000. The net stranded cost recovery charge necessary to recover this amount, assuming a recovery period of January, 00 through December, 00, is $0.0 per kilowatthour.. If Case No. U- does not result in an order that will allow issuance of securitization bonds with respect to the Clean Air Act capital investments, and these costs are included in the 00 stranded cost calculation, Consumers Energy calculates that it incurred $,,000 in net stranded costs in 00. Adding carrying costs would increase this amount to $,,000. The net stranded cost recovery charge necessary to recover this amount, assuming a recovery period of January, 00 through December, 00, is $0.0 per kilowatthour.. An exhibit showing the above calculations in more detail is attached to this Application as Exhibit.. As noted above, the 00 stranded cost case is still pending at the Commission, and is unlikely to result in a final order prior to September 00. Even if processed in accordance with the procedure adopted by the Commission in Case No. U-0, this 00 stranded cost case is unlikely to result in a final order prior to the end of 00. In order to allow a more timely recovery of stranded costs, Consumers Energy is filing contemporaneously with ap00--

5 this Application a Motion for Interim Relief that, if granted, would grant authority to collect a stranded cost recovery surcharge on an expedited basis.. In the December 0, 00 order in Case No. U-0, the Commission directed Consumers Energy to file an accounting of the specific sources and applications of all excess securitization savings it has realized since the issuance of its securitization bonds (i.e., those savings in excess of those used to offset the % residential rate reduction imposed by 000 PA that have resulted from the issuance of securitization bonds approved in Case No. U-0). Attached to this Application as Exhibit is an accounting that summarizes the excess securitization savings realized from the time the bonds were issued through December, 00. The total excess savings realized during this period was $,0,000. In the October, 000 Case No. U-0 order, the Commission directed Consumers Energy to apply 0% of the excess savings to reductions in distribution charges for non-residential customers and 0% to reduction in the charges developed to recover stranded costs. Exhibit shows that retail open access ( ROA ) customers have, through December, 00, been provided offsets to securitization charges that total $,0,000. It is Consumers Energy s position that these offsets are unlawful, and this issue is on appeal in Supreme Court Nos. / (appeal of U- orders) and Court of Appeals No. (appeal of U-0 orders). In any event, even if application of some portion of the excess securitization savings as an offset to securitization charges for ROA customers is lawful, Exhibit shows that the amount of the excess savings that is available to ROA customers in 00 will be consumed prior to the end of the year. Thus, Consumers Energy proposes to terminate the securitization charge offset for ROA customers at the time their cumulative 0% share of the excess savings is consumed. In addition, because 0% of the excess savings from the U-0 securitization are being used to ap00--

6 provide securitization charge offsets, there are no excess securitization savings available to reduce the 00 stranded cost charge. 0. Accompanying this Application is a Motion for Interim Relief, and the supporting testimony of Michael A. Torrey, Scott B. Brockett, and Jeanne Kurzynowski. This motion and testimony are integral parts of the relief being sought by Consumers Energy in this Application, and are hereby incorporated by reference. WHEREFORE, Consumers Energy Company respectfully requests that the Commission grant the following relief: (A) Determine that the net stranded costs for Consumers Energy in 00 were $,,000, assuming that the Clean Air Act costs are securitized as proposed in Case No. U-, and approve a corresponding recovery charge of $0.0 per kilowatt-hour; (B) Determine that the net stranded costs for Consumers Energy in 00 were $,,000, assuming that the Clean Air Act costs are not securitized as proposed in Case No. U-, and approve a corresponding recovery charge of $0.0 per kilowatt-hour; (D) Approve the determination of the excess securitization savings shown on Exhibit to this Application, and approve the use of such savings in the manner described in this Application; (E) Establish a schedule for the notice and processing of this case in accordance with the procedures adopted in Case No. U-0; and (F) Grant the Motion for Interim Relief that accompanies this Application; ap00--

7 (G) Grant such other and further relief as is appropriate and lawful. Respectfully submitted, CONSUMERS ENERGY COMPANY Dated: May, 00 By: John G. Russell President and Chief Executive Officer - Electric Consumers Energy Company Jon R. Robinson (P) One Energy Plaza Jackson, MI 0 () -0 Attorney for Consumers Energy Company ap00--

8 EXHIBIT

9 MICHIGAN PUBLIC SERVICE COMPANY Case No: U-0 Witness: MATorrey Consumers Energy Company Exhibit: A- (MAT-) Calculation of the Stranded Cost Recovery Charge Based Date: May 00 on Commission Order for Recovery of 00 Stranded Cost Page of ($000's) Line No. Description Amount Source (a) (b) (c) Excludes Title I Clean Air Act Revenue Requirement 00 Actual Stranded Cost $, Ex. A- (MAT-), L- Years of Carrying %, Line * ((.0 )-) 00 Actual Stranded Cost with Carrying Charges $ 0,0 00 ROA Sales Forecast (MWh),, Ex. A- (MAT-) Stranded Cost Recovery Charge ($/kwh) $ 0.0 Line / Line Assumes Title I Clean Air Act Revenue Requirement is not Securitized 00 Actual Stranded Cost $, Ex. A- (MAT-), L-0 Years of Carrying % 0,0 Line * ((.0 )-) 00 Actual Stranded Cost with Carrying Charges $, 00 ROA Sales Forecast (MWh),, Ex. A- (MAT-) 0 Stranded Cost Recovery Charge ($/kwh) $ 0.0 Line / Line Minimum Transition Charge - Unrecovered QF Cost Escalation 00 Actual Stranded Cost $,0 Ex. A- (MAT-), L- Years of Carrying %, Line * ((.0 )-) 00 Actual Stranded Cost with Carrying Charges $ 0,0 00 ROA Sales Forecast (MWh),, Ex. A- (MAT-) Stranded Cost Recovery Charge ($/kwh) $ 0.00 Line / Line //00: AM

10 EXHIBIT

11 Consumers Energy Company Case No. U-0 Excess Securitization Savings Summary Exhibit A - (MAT-) ($000) Witness MATorrey Date May 00 Page Page of Line Excess Savings Available Excess Savings Received Variance Carrying Costs No. Period Total C&I ROA Total C&I ROA Total C&I ROA Total C&I ROA (a) (b) (c) (d) (e) (f) (g) (h) (I) (j) (k) (l) (m) 00-0 Actual $, $, $, $,0 $ - $,0 $ (,) $ (,) $ 0 $ $ () $ 00 Actual,,,, -, (,) (,) (,0) () () () Subtotal $,0 $, $, $,0 $ - $,0 $ (,00) $ (,) $ (0) $ () $ () $ () 00 Est.,,,, -, (,) (,),0 () () Total $, $, $, $, $ - $, $ (,) $ (,) $,0 $ () $ (0) $ () Add: 00 Carrying Cost on 00 Variance () () Add: 00 Carrying Cost on 00 and 00 Variance (,0) (,) () Cumulative Carrying Cost through 00 $ (,) $ (,) $ () Footnotes Monthly excess savings available based on annual amount of $,,000 beginning in August 00. August 00 prorated based on recovery of deferred % residential rate reduction (clawback). Allocation of excess savings available is 0% C&I / 0% ROA. Excess savings received by ROA customers is the offset to securitization bond and tax charges..% Carrying Costs Interest Rate when Excess Savings Received is less than Excess Savings Available.00% Carrying Costs Interest Rate when Excess Savings Received is greater than Excess Savings Available

12 S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for determination of net stranded costs for ) Case No. U-0 the year 00 and for approval of net ) stranded cost recovery charges. ) ) MOTION OF CONSUMERS ENERGY COMPANY FOR INTERIM RELIEF Consumers Energy Company ( Consumers Energy ) moves for an interim order in this proceeding. In support of this Motion, Consumers Energy says as follows:. This proceeding concerns stranded costs incurred in 00. Pursuant to the procedures adopted by the Commission, annual stranded cost cases are conducted to determine the amount of stranded costs that have been experienced. Due to delays in the conduct of the 00 proceeding, Case No. U-0, and the length of time expected to complete this 00 proceeding, Consumers Energy is seeking interim relief.. Consumers Energy filed its application in Case No U-0 on March, 00. The notice was not issued until December, 00, months later. The prehearing conference in that case was held January, 00, 0 months after the application was filed. The schedule established at the U-0 prehearing conference provides for a Proposal for Decision ( PFD ) target date of August, 00, months after the application was filed. Assuming the PFD is issued on the target date, a final order is unlikely before October. Thus, a case concerning stranded costs that were incurred in 00 will perhaps not have a final order issued until the last quarter of 00, approximately -0 months after the filing of the application. Any resulting mo00--

13 stranded cost recovery charge will not be fully collected until sometime in 00. The 00 stranded cost case has clearly been significantly delayed.. Perhaps in part due to the delay in processing Case No. U-0, Consumers Energy has, over the course of the past year, watched an increasingly rapid migration of customers from full service to retail open access ( ROA ). In 00, total ROA load was,, MWh. There was a significant increase in 00 to,, MWh, and a further projected expansion in 00 to,,0 MWh. See Mr. Torrey s Exhibit A- (MAT-). Based upon the actual growth in the ROA program that has occurred over the past several months, this 00 projection may well be understated. Assuming it is accurate, ROA load will increase over the period by approximately. times. The resulting negative impact on Consumers Energy s financial position has been, and will continue to be significant.. The impact of the delay in Case No. U-0 is compounded by the 00 stranded costs addressed in this U-0 proceeding. The - year lag in recovery of 00 stranded costs threatens the ability to process the 00 stranded cost filing in a timely manner.. The delay in this case is effectively acknowledged by the Commission s June, 00 order in Case No. U-0, where the Commission adopted Case Completion Objectives for Stranded Cost/Implementation Cost Cases Under Act ( Case Completion Objectives ). Although not technically applicable to the U-0 application which was filed prior to June, 00, the Case Completion Objectives state that they are intended to ensure that stranded cost and implementation cost recovery cases are completed within months following the filing of an application.... Eight months after the application was filed in the The negative impact of the delay in this stranded cost proceeding is compounded by the delay in completion of the U- securitization proceeding. Notwithstanding the 0 day completion requirement specified in 000 PA, the Company s U- application was filed one year ago, and was recently remanded for additional hearings. There were approximately ROA customers at the end of 00; there are currently over 00 customers enrolled in the ROA program. mo00--

14 U-0 proceeding would have been November, 00. As noted above, Case No. U-0 had not even been noticed by that date.. Because of the extraordinary delay in Case No. U-0, Consumers Energy requests that the Commission adopt a procedure that will allow the consideration of interim relief on an expedited basis. Briefly, Consumers Energy asks that the Commission direct the Administrative Law Judge to schedule an interim hearing to be held no later than June 0, 00. At that time, Consumers Energy will present the prefiled testimony of its witnesses for crossexamination. In anticipation of the information needs of other parties, Company witnesses will provide supplemental workpapers prior to the pre-hearing conference. The supplemental workpapers will consist of updated responses to the discovery requests served on the Company in Case No. U-0. Other parties will also be permitted to pre-file direct testimony addressing this motion for interim relief no later than one week prior to the interim hearing date. Such testimony would also be subject to cross-examination at the interim hearing. Briefs would be submitted to the Commission, and Consumers Energy requests that the Commission agree to read the evidentiary record, thereby eliminating the need for a Proposal for Decision concerning the requested interim relief. Consumers Energy requests that the Commission follow a schedule in this case that allows the issuance of an order granting interim relief by July, 00.. As set forth in Consumers Energy s testimony and exhibits, it is seeking approval for the recovery of $,,000 of stranded costs incurred in 00, plus carrying costs, assuming that investments associated with Clean Air Act compliance are recovered via the securitization request that is pending in Case No. U-. If those Clean Air Act investments are not recovered through securitization, then they should be included in the stranded cost The testimony of Michael A. Torrey, Jeanne Kurzynowski and Scott Brockett is being filed contemporaneously with this motion. mo00--

15 calculation for 00, which would then increase to $,,000, plus carrying costs. For purposes of interim relief, Consumers Energy requests that the Commission authorize a stranded cost recovery charge equal to $0.00 per kilowatt-hour, as described in more detail in Scott B. Brockett s testimony.. In addition, Consumers Energy is proposing in this case to reduce the distribution charges for its non-residential customers through a negative surcharge to reflect the pass-through of certain excess savings derived from the securitization approved in Case No. U-0. Through December, 00, the cumulative total amount of such excess savings is estimated at $,,000. For purposes of this Motion for Interim Relief, Consumers Energy seeks authority to apply a negative surcharge equal to $0.00 per kwh that would passthrough this amount of savings to its commercial and industrial customers.. Consumers Energy agrees to refund the amount, if any, by which the revenue collected pursuant to a interim order in this proceeding exceeds the amount of 00 stranded costs that are ultimately determined by the Commission. Upon issuance of an order granting interim relief, Consumers Energy would file an undertaking with the Commission evidencing such a commitment. 0. The interim relief sought herein is comparable, at least in terms of the proposed procedure, to that granted The Detroit Edison Company in Case No. U-0. In the February 0, 00 order issued in that case, the Commission authorized Detroit Edison to collect, on an interim basis, a $0.00 per kwh stranded cost recovery charge from retail open access customers. In addition, the Commission also terminated the securitization charge offset and the rate equalization credit for ROA customers. The overall impact on ROA customers resulting from the February 0 U-0 order was an increase of between $0.0 per kwh and mo00--

16 $0.0 per kwh, (plus the increase in the ROA distribution charge). See February 0, 00 Order in U-0, p.. The interim charge for which Consumers Energy is seeking approval is $0.00 per kilowatt-hour, (offset by the negative surcharge that passes through excess securitization savings to commercial and industrial customers), which is considerably less than the impact on Detroit Edison s ROA customers resulting from the U-0 order. WHEREFORE, Consumers Energy Company respectfully requests that the Commission grant the following relief: (A) Grant this Motion, (B) Direct the presiding Administrative Law Judge to adopt a schedule that will permit a hearing on this Motion for Interim Relief no later than June 0, 00, (C) Rule that the Commission will read the record made concerning the interim motion, thereby eliminating the need for a Proposal for Decision, (D) Grant such further relief as may be lawful and proper. Respectfully submitted, CONSUMERS ENERGY COMPANY Dated: May, 00 By: Jon R. Robinson Consumers Energy Company One Energy Plaza Jackson, MI 0 () -0 mo00--

17 S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for determination of net stranded costs for ) the year 00 and for approval of net ) Case No. U-0 stranded cost recovery charges ) ) DIRECT TESTIMONY OF SCOTT B. BROCKETT ON BEHALF OF CONSUMERS ENERGY COMPANY May 00

18 SCOTT B. BROCKETT DIRECT TETIMONY 0 0 BACKGROUND Q. Please state your name and business address. A. Scott B. Brockett, One Energy Plaza, Jackson, Michigan. Q. By whom are you employed? A. Consumers Energy Company ( Consumers or the Company ). Q. What is your position with Consumers? A. I am Supervisor of Pricing and Revenue Forecasting in the Rates Department. Q. Please summarize your educational and professional background. A. I graduated from Otterbein College in 0 with a Bachelor of Arts degree in English and economics. I graduated from Miami University (Ohio) in with a Masters of Arts degree in economics. From August to February I was employed by the Minnesota Department of Public Service ( Department ), a state agency charged with developing state energy policy and representing all customers in utility matters before the Minnesota Public Utilities Commission. From August to January I held analytical positions of increasing responsibility. For the first months I worked in the Computational Services Unit, where I conducted economic analyses and reviewed telecommunications depreciation filings. From June to January I worked in the Energy Unit. My major areas of responsibility were buyback rates for Qualifying Facilities, rate design, embedded cost of service and marginal costs of service. From January to August I held two similar supervisory positions. My primary responsibility was to oversee the Department staff s advocacy in electric utility

19 SCOTT B. BROCKETT DIRECT TETIMONY 0 0 matters including general rate proceedings, integrated resource plans, demand-side management programs and a wide variety of other regulatory issues. In August I was promoted to Manager of Energy Advocacy and Planning. In this capacity the responsibilities I assumed as a supervisor were expanded to include natural-gas advocacy, the development of energy policy, and testifying on energy matters before the Minnesota Legislature. In December I was appointed Acting Assistant Commissioner of Energy. I held this position until February. In February I assumed my current position of Supervisor of Pricing and Revenue Forecasting with Consumers. In this capacity I develop prices for Consumers electric and natural-gas services, conduct economic analyses of service options, estimate customer bills, forecast gas revenue, and manage the Company s Green Power Pilot Program. Q. In your tenure with the Department, did you testify in any utility proceedings before the Minnesota Public Utilities Commission? A. Yes. I testified on a wide range of issues, including conservation, rate design, embedded cost of service, marginal cost of service, and the environmental cost of electric generation. Q. During your tenure with Consumers, have you testified in any utility proceeding before the Michigan Public Service Commission ( MPSC or Commission )? A. Yes. I have testified in several electric proceedings. My testimony has covered strandedcost issues (Case Nos. U-0 and U-0), the potential rate effects of a special contract (Case No. U-), and issues related to renewable energy (Case No.

20 SCOTT B. BROCKETT DIRECT TETIMONY 0 U-). I have also testified on gas pricing issues in Consumers last two general rate cases (Case No. U-000 and Case No. U-0). PURPOSE OF TESTIMONY Q. What is the purpose of your direct testimony? A. I will sponsor Consumers position on whether actual or hypothetical revenues from customers taking service under special contracts should be used in the stranded-cost calculation. I will also propose a means of providing rate reductions to Commercial and Industrial ( C&I ) customers to capture their share of accrued excess securitization savings. Finally, I will propose and support the level of the Company s proposed Interim Stranded Cost Recovery Surcharge. CONSUMERS PROPOSED TREATMENT OF SPECIAL-CONTRACT REVENUES Q. How do revenues from sales to retail customers affect the calculation of the Company s stranded costs? A. As explained in the testimony and exhibits of Company witness Michael A. Torrey, stranded costs are derived by subtracting.0 percent of total bundled sales revenues from the Company s fixed generation-related costs. Consequently, the Company s stranded costs decrease as bundled sales revenues increase.

21 SCOTT B. BROCKETT DIRECT TETIMONY 0 0 Q. In determining revenues from bundled sales, does Consumers propose to use the actual revenues from customers on special contracts or the hypothetical revenues that would have been generated from these customers had they taken service under standard tariffs? A. The Company proposes to use.0 percent of the actual revenues as an offset to fixed generation-related costs. COMMISSION STANDARD FOR RECOVERY OF RATE DISCOUNTS Q. What criteria has the MPSC established for the recovery of rate discounts? A. In previous orders the Commission has established the following two criteria for the recovery of rate discounts from other customers: The contracts terms and prices are justified based on the cost of service. The benefits to other (non-participating) customers are substantial and have a value that outweighs the costs that are not recovered from the customers on special contracts. A utility must meet at least one of these two criteria, either of which requires support from a cost-of-service study that identifies and quantifies all costs incurred under the contracts. Finally, the utility must demonstrate that its special contracts have not, and will not in the future, impede the development of competition in its service territory. Q. Do you believe Consumers proposal meets this standard? A. Yes. I believe the recovery of the 00 special-contract discounts can be justified on the basis of either of the two criteria listed above. Moreover, the special contracts have not impeded (and will not impede) the development of competition in Consumers service territory.

22 SCOTT B. BROCKETT DIRECT TETIMONY 0 0 COST OF SERVICE Q. How can the MPSC determine if the special-contract rates are justified based on the costs of serving the loads? A. The best way is to compare the revenues from serving special-contract loads with the revenues that would have been generated under cost-based (i.e., non-skewed) rates. Since the Company s rates are not set exactly at embedded cost, a two-step process must be used to estimate the revenues generated under cost-based rates. First, the hypothetical revenues from serving special-contract loads under standard tariffs must be estimated. These revenues represent the recovery of all costs of serving the special-contract loads, plus (minus) any subsidies provided by (to) the same loads. Second, the subsidies built into these tariffs must be removed to derive true cost-based revenues. Q. Have you estimated the embedded cost of serving 00 special-contract loads using the approach described above? A. Yes. I first identify the revenues that would have been generated in the absence of the special contracts. (Consumers provides this amount annually to the MPSC in the Company s Annual Report of Special Content Revenue and Billing Determination. ) These revenues represent what would have been recovered from the special-contract customers if they had been on standard rates, including any subsidies built into those rates. Next, I derive the portion of these hypothetical revenues that represent subsidies to or from other rate classes. To estimate these subsidies I use the applicable Regulatory Adjustment component of Consumers Commercial and Industrial unbundling filing (Case No. U-0). This unbundling filing was approved by the Commission in an

23 SCOTT B. BROCKETT DIRECT TETIMONY 0 0 Order dated May, 00 (Case No. U-0). The Regulatory Adjustment represents the subsidy provided by or to a given rate class. Specifically, I multiply the 00 use of each special-contract account by the applicable rate subsidy. These account-specific amounts are then summed to derive a total subsidy. Finally, I subtract this total subsidy from the revenues that would have been generated in the absence of the special contracts. This difference is the embedded cost of serving the special-contract loads. Only if special-contract revenues were below this embedded cost would there be discounts not justified based on the cost of service. Q. What are the results of the analysis described above? A. The 00 results are summarized in Exhibit A- (SBB-). The embedded cost of serving the special-contract loads is $,,0, while the special contracts generate revenues of $,,. Consequently, all but $0, of the rate discounts are justified on the basis of the embedded cost of service. BENEFITS OF SPECIAL CONTRACTS TO OTHER CUSTOMERS Q. Did the special contracts effective in 00 provide substantial benefits to other customers? A. Yes. The Company executed its special contracts with price-sensitive customers to retain load. By retaining this load the Company was able to recover significant amounts of fixed costs that would have otherwise been shifted to other customers. These fixed costs may have been either distribution- or generation-related costs. The value to other customers of the reduction in fixed generation-related costs is captured through the reduction in 00 stranded costs.

24 SCOTT B. BROCKETT DIRECT TETIMONY 0 0 Q. Have you calculated this value for 00? A. Yes. For 00 I calculate a value of about $ million. The derivation of this amount is provided in Exhibit A- (SBB-). This calculation is based on the assumption that 00 percent of the load on special contracts would have either self-generated or migrated to ROA in the absence of the contracts. For illustrative purposes I have also estimated the reduction in stranded costs assuming that percent (Scenario ) or 0 percent (Scenario ) of the special contract load would have either self-generated or migrated to ROA. The reductions in stranded costs under these two scenarios are about $ million and $ million, respectively. Q. How does this additional fixed-cost recovery compare with the amount of the rate discounts? A. The discounts in 00 were about $. million. Consequently, the reduction in stranded costs under the first two scenarios is greater than the 00 rate discounts. The reduction in stranded costs under the third scenario is almost as great as the 00 rate discounts. Q. Does this comparison suggest that the true value of the load retention was the reduction in stranded costs minus the rate discounts? A. No. I compare the additional fixed-cost recovery with the rate discounts only to demonstrate that the approximately $. million in rate discounts leveraged a significant reduction in stranded costs. The true value of this load retention was still about $ million under Scenario, $ million under Scenario and $ million under Scenario. Moreover, this exercise does not recognize any additional recovery of distribution-related fixed costs that would have been lost if the customers had elected to self-generate.

25 SCOTT B. BROCKETT DIRECT TETIMONY 0 0 EFFECT OF SPECIAL CONTRACTS ON RETAIL COMPETITION Q. Have the special contracts effective in 00 impeded the development of competition in Consumers service territory? A. No. The special contracts have not impeded, and will not impede, fair and effective competition in the Company s service territory. Q. Why do you reach this conclusion? A. Consumers executed all 0 of these contracts from through, before the Company offered its current, permanent retail open-access program. In most cases the Company s primary intent was to compete with alternatives other than third-party suppliers of electricity. The primary competitive alternative at that time was selfgeneration. Q. Regardless of the original intent of the contracts, doesn t the fact that Consumers lockedin customers at lower rates mean that the contracts ultimately impeded retail competition? A. No. The special contracts provided the Company with a fraction of the pricing flexibility afforded third-party suppliers. It is important to remember that alternative electric suppliers are not subject to rate regulation. They are free to price down to their marginal cost, if necessary, to secure load. The special contracts simply allow Consumers limited flexibility to compete with unregulated competitors. This leveling of the playing field actually enhances fair and efficient competition in the Company s service territory and enhances the benefits retail customers gain from competition. If the goal is truly to maximize customer welfare through competition, and not simply to promote a welfare shift from utility shareholders and customers to thirdparty providers, then the special contracts are important and beneficial tools.

26 SCOTT B. BROCKETT DIRECT TETIMONY 0 0 Q. Putting aside the theoretical support for special contracts based on their furthering of true competition, can you provide other evidence that the special contracts have not impaired competition? A. Yes. Consumers pilot open-access program (the Direct Access Program) was fully subscribed. Therefore, the special contracts obviously did not reduce the amount of Direct Access load. Moreover, the load on the Company s Retail Open Access ( ROA ) program has increased dramatically since the program s inception in October 000. In a little over three years the number of accounts has grown to over,0. The load now exceeds 00 MW, which is about 0 percent of Consumers 00 total system peak load and percent of total C&I peak load. This significant penetration illustrates that thirdparty competitors have successfully gained market share in Consumers service territory. Q. Please summarize your conclusions regarding the effects of Consumers special contracts on retail competition. A. The special contracts afford Consumers limited price flexibility. This flexibility allows the Company to compete on more equal footing with its competitors, notwithstanding the skewing of its regulated rates. To that extent special contracts promote fairer competition in the market for generation services. The beneficiaries of this more robust competition are retail customers. Establishing skewed rates for a utility, while forbidding that utility from negotiating non-skewed, special-contract rates, would be non-competitive. Moreover, Consumers ROA program has grown to over,0 accounts and over 00 MW of load. This significant penetration demonstrates that the special contracts have not prevented third-party suppliers from serving load in Consumers service territory.

27 SCOTT B. BROCKETT DIRECT TETIMONY 0 0 Consequently, the proposition that the Company s special contracts have thwarted competition has neither theoretical nor empirical support. SUMMARY OF TESTIMONY ON SPECIAL CONTRACT REVENUES Q. Please summarize your conclusion regarding the treatment of special-contract revenues in this proceeding. A. The MPSC allows a utility to recover rate discounts from other customers only if it meets at least one of two criteria. The utility must also demonstrate that its special contracts have not, and will not in the future, impede competition the utility s service territory. In my testimony I have demonstrated that Consumers meets both of the Commission s criteria for the recovery of rate discounts: The discounted prices recover all but a very small portion of the embedded costs of serving the loads, and the contracts provide substantial benefits to other customers. Moreover, I have explained why the Company s special contracts have not impaired competition. In fact, the special contracts actually promote effective and fair competition in the market for generation services. Q. If Consumers is not allowed to collect its stranded costs through stranded-cost recovery charges, what impact will this decision have on rates to bundled customers? A. During the next general rate-case proceeding Consumers test-year costs will include the types of fixed generation-related costs at issue in this proceeding. If these stranded costs are not collected through ROA transition charges, then they must be collected through higher rates for customers taking service under traditional bundled tariffs. 0

28 SCOTT B. BROCKETT DIRECT TETIMONY 0 0 C&I RATE REDUCTION FROM SECURITIZATION SAVINGS Q. How should the excess securitization savings earmarked for reductions in C&I rates be credited to customers? A. As I explain in my Direct Testimony in Case No. U-0, Consumers proposes to institute a uniform rate reduction per kwh for all C&I customers. The Company proposes to set the level of this rate reduction such that all of the applicable securitization savings accrued until the end of 00, plus carrying charges, are returned over a one-year period. Exhibit A- (SBB-) provides an illustrative example of the resulting bill decreases by tariff, assuming that the CI& rate reduction is implemented from January, 00, through December, 00. This exhibit simply updates a similar exhibit I provided in Case No. U-0 to reflect more current estimates of C&I sales. INTERIM STRANDED COST RECOVERY SURCHARGE Q. Is the Company requesting authority to implement an Interim Stranded Cost Recovery Surcharge in this proceeding? A. Yes. Mr. Torrey explains the necessity for this interim surcharge in his Direct Testimony. I am proposing and supporting the level of this surcharge. Q. What specific surcharge are you recommending? A. I recommend a surcharge of $.00 per kwh, which would be applied to all ROA sales. Q. Why do you believe this surcharge is reasonable? A. This surcharge is reasonable for a variety of reasons. First, it represents a conservative step towards full recovery of the Company s 00 and 00 stranded costs. The sum of these costs in 00 dollars is about $ million. The surcharge required to collect these costs over one year, assuming an effective date of January 00 and 00 ROA sales of

29 SCOTT B. BROCKETT DIRECT TETIMONY 0 0,,, would be about $.00 per kwh. (See Exhibit A- SBB-.) The Company s proposed interim surcharge would recover a small portion of the 00 and 00 stranded costs on a timelier basis. Second, even the Minimum Stranded Costs derived by Mr. Torrey in both this proceeding and in Case No. U-0 would support a surcharge of about $.0 per kwh. (See Exhibit A- SBB-.) Consequently, the proposed Interim Stranded Cost Recovery Surcharge is significantly less than would be required to recover a very limited definition of 00 and 00 stranded costs. Third, on February 0, 00, the MPSC approved an interim surcharge for Detroit Edison (DE) of $.00 per kwh (Case No. U-0). The Company s position in this proceeding is consistent with the relief granted DE. In fact, when combined with the MPSC s other pricing decisions in case No. U-0, DE s interim surcharge will have a greater impact on supplier headroom than the Interim Stranded Cost Recovery Charge that Consumers is requesting. Fourth, the institution of an interim surcharge would not impair fair competition. It would simply address a distortion in Consumers current C&I rates that unfairly disadvantages the Company as a provider of generation services. Q. Why do you believe that allowing Consumers an interim surcharge of $.00 per kwh would have a smaller impact on supplier headroom than the MPSC s pricing decisions in case No. 0? A. In its Order Granting Interim Rate Relief in Case No. U-0, the MPSC approved rate changes in addition to the interim surcharge. Specifically, the MPSC terminated DE s securitization charge offset and rate-equalization credit. The Commission noted

30 SCOTT B. BROCKETT DIRECT TETIMONY 0 0 that the total impact of its Order on open-access customers would be rate increases of $.0 per kwh for primary customers and $.0 per kwh for secondary customers. Even after accounting for the interim increases ordered for DE s bundled customers, the differences between the open-access and bundled rate increases were greater than the $.00 per kwh that Consumers requests. Q. Is there any evidence that the reduced supplier headroom in DE s service territory has impeded competition? A. The Commission approved DE s stranded-cost surcharge and the elimination of the securitization charge offset a little over two months ago. With such limited experience, it is difficult to reach definitive conclusions. Nonetheless, since February over 00 new meters and 00 MW of new load have been enrolled under DE s Electric Choice Program. These additions suggest that the relief granted DE has not thwarted competition. Q. Is there any other evidence of the impact of reduced supplier headroom on competition? A. Yes. In its December, 00, Staff Report on the Detroit Edison Company s Motion for Partial and Immediate Rate Relief in Case No. U-0, the MPSC Staff recommended a stranded-cost surcharge of somewhere between $.00 per kwh and $.00 per kwh. The Staff also implicitly accepted DE s recommendation to eliminate the securitization charge offset. The Staff s position at the very least served as a warning to competitors that DE s rates for open-access customers might increase significantly. Yet since December almost,000 new meters and over 00 MW of new load have been enrolled under DE s Electric Choice Program. Again, these additions suggest that the relief granted DE has not thwarted competition.

31 SCOTT B. BROCKETT DIRECT TETIMONY 0 Q. You have discussed competition in DE s service territory. Do recent trends suggest greater competition in Consumers service territory? A. There is some evidence that competitive providers of generation of services are focusing more on Consumers retail customers. During the first four months of 00, 0 accounts (in-service) have been added to the ROA program, which exceeds the total growth of accounts realized in 00. The load (in-service) in Consumers ROA program has increased by MW during 00, which is almost as great as the load growth of MW for the entire year of 00. Moreover, during April 00 more ROA load was added to the program ( MW) than during any month since the inception of the program in October 000. These trends indicate that Consumers is facing greater competitive threats. Q. Why do you believe that the MPSC s approval of your proposed interim surcharge would not unfairly disadvantage competitive suppliers in Consumers service territory? A. The interim surcharge would be only slightly greater than the average subsidy of $.00 per kwh provided by customers in the Company s four major C&I rate classes. (See Exhibit A- SBB-.) In other words, the Company is proposing a surcharge that is approximately equal to the skewing currently built into C&I rates. Any proposal that does little more than offset such an impediment to a level playing field cannot be considered anti-competitive.

32 SCOTT B. BROCKETT DIRECT TETIMONY Q. How long would it take the Company to recover its 00 and 00 stranded costs if it assessed a surcharge of $.00 per kwh on an ongoing basis? A. A surcharge of mills would recover Consumers 00 and 00 stranded costs sometime in 00. The derivation of this required term is provided in exhibit A- (SBB-). It assumes a carrying cost of percent. Q. Is your testimony concluded? A. Yes.

33 S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for determination of net stranded costs for ) the year 00 and for approval of net ) Case No. U-0 stranded cost recovery charges ) ) EXHIBITS OF SCOTT B. BROCKETT ON BEHALF OF CONSUMERS ENERGY COMPANY May, 00

34 Consumers Enerav ComDany 00 Special Contract Discounts Ao.usted for Rate Sdewing Case No: U-0 Witness: SBBrockett Exhibit: A--(SBB-l) Page: of Date: May, 00 Rate ServiceVoitaue 00 kwh D Subtransmission,, D Subtransmission,00,0 D Subtransmission,, D Subtransmission,, D Subtransmission,, F Subtransmission,, F Transmission,, Total Customer 0,, D Subtransmission 0,, D Subtransmission,, D Subtransmission,, D Transmission,, D Transmission,0,00 F Subtransmission,, F Subtransmission,0,0 F Subtransmission 0,, F Transmission 00,,0 i Transmission,,00 J-I Transmission.0.0 Total Customer.I,0, R- Subtransmission,, D Transmission,,0 D Subtransmission,0,0 F Subtransmission,, D Subtransmission 0,, D Transmission,,0 F Subtransmission 0,, 0 F Transmission 0,, D Transmission,, D Transmission.0.0 Total Customer -,,0, Grand Total,,, 00 Revenue from Special Contract Load Under Standard Tariffs Embedded Cost of Serving Special Contract Load 00 Revenue from Special Contract Load Discounts Based on Cost of Service Regulatory Adjustment rn Adjustment to Standard Tariff Revenue for Rate Skewinq, 0,,, 0,0..0. $,,0,,0,,0 0. ;lol 0, 0,,0.00,0,..,, $,,,,,0,,0,,,,,., $,,,0,,,0,. 0,

35 SCENARIO In absence of Special Contracts: ~ Case No: U-0 Witness: SBBrockett Exhibit: A-- (SBB-) Page: of Date: May, 00 CONSUMERS ENERGY COMPANY EFFECTS OF SPECIAL CONTRACTS ON 00 STRANDED COST Bundled Revenue Reduction in Stranded 00 in Absence Cost Attributable Special Contract Special Contract of Special Bundled Revenue to SDecial Revenue Revenue x.0% contracts x.0% Coniracts ( col. ) (col. ) (col. ) ( col. ) (col. ) $,, $,, $0 $0 0,, SCENARIO In absence of Special Contracts: % of SRecial Contract load would have self-aenerated or miurated to ROA % of SDecial Contract load would have remained on standard bundled tariffs Bundled Revenue Reduction in Stranded 00 in Absence Cost Attributable Special Contract Special Contract of Special Bundled Revenue to Special Revenue Revenue x.0% Contracts x.0% Contracts ( col. ) (col. ) (col. ) ( col. ) ( col. ) $,, $,,0 $,0, $,0, $,, SCENARIO In absence of Special Contracts: 0% of SRecial Contract load would have self-aenerated or miarated to ROA Bundled Revenue Reduction in Stranded 00 in Absence Cost Attributable Soecial Contract Soeciai Contract of SDecial Bundled Revenue to Soecial Revenue Revenue x.0% Coniracts ~.0% Coniracts ( col. ) (col. ) (col. ) (col. ) (col. ) $,, $,, $,00, $,, $,,0

36 * Rates L-, L-, and L- are unmetered streetlighting rates. The customerr on these rates are billed in rates per luminaire. The rates per luminaire have been reduced proportionately based on these factors. Consumers Enerqy Year 00: Distribution Rate Reduction for Commercial and Industrial Customers Case No: U-0 Wanes: SBBrockett Exhibit: A, (SB) Date: May. 00 Page: of 00 Budget Reduction to Revenue Consumption Revenue Energy Charge Decrease Raws) Rate M!m Decrease ($/kwh B R 00,00,0,,,0, B 0.0,0,0 C R 0,0,,,0,,,00, CG D R 0,0,0, F 0,0 GH 0,0 H 0,0 I 0 J 0 J... PSI o n PS 0 PS 0 UR 0.0.0,:0:,0, 00,,,,0,, 0,0,,0,0,,,,,0,0 0,, $,0,,0a,,0,,0,..0., 0,,0, 00,0,, L Sec 0 L Pri L 0 L 0 L.,, 0,0,0,0,,,.,,00.0., GR 0,,. ROAS 0,0 ROAP 0,,, Total,,, $0 00 $,,000 Assumptions: Rate reduction does not apply to wholesale or residential customers. Rate reduction does not apply to special contract customerr or interdepartmental. No nudear decommissioning or transition surcharge revenues are included in this analysis See ExhibitA--(MAT-), Pg. of, U-0

37 Case No.: U-0 Witness: SBBrockett Exhibit: A-- (SBB-) Page: of Date: May, 00 STRANDEDCOSTRECOVERYSURCHARGEREQUIREDTORECOVER PROPOSED 00 AND 00 STRANDED COSTS IN 00 REQUIRED STRANDED 00 ROA STRANDED COST STRANDED COSTS SALES RECOVERY YEAR COSTS IN 00 $ (kwh) SURCHARGE 00 $,0,000 $,,,,, $,,000 $ 0,,0,,, TOTAL $ 0,,000 $,, 0.00 STRANDED COST RECOVERY SURCHARGE REQUIRED TO RECOVER 00 AND 00 MINIMUM STRANDED COSTS IN 00 REQUIRED STRANDED 00 ROA STRANDED COST STRANDED COSTS SALES RECOVERY YEAR COSTS IN 00 $ SURCHARGE 00 $,,000 $,00,0,,, $,0,000 $ 0,0,0,,,000 o.00 TOTAL $,,000 $,, 0.0 See Exhibit A-- (MAT-). Page of, in Case No. U-0. See Exhibit A-- (MAT-), Page of, in Case No. U-0.

38 Case No.: U-0 Witness: SBBrockett Exhibit: A-- (SBB-) Page: of Date: May, 00 CONSUMERS ENERGY COMPANY Analysis of Cross Class Subsidization contained in current rates. 0 Regulatory Adj. Chrg. in current 00 Budgeted Rate Class ComDanv tariffs Sales (kwh) Rate B $ ,,, Rate C $ ,0,, Rate D Transmission $ ,,0 Subtransmission $ ,00, W$ Total $ 0.00,,0, Rate F Transmission $ ,, Subtransmission $ ,, W$ (0.0000).. Total $ ,0, Cross Class Subsidization $,, $,0, $,0, $ 0,, $,, $,,0 $. $ ;0 (.) $, Weighted Average $ 0.000,,, $,0, Sales-by-Rate data used to separate Rate D and Rate F 00 budgeted sales by voltage level.