BOEHM, KURTZ & LOWRY ATTORNEYS AT LAW 36 EAST SEVENTH STREET, SUITE 1510 CINCINNATI, OHIO TELEPHONE (513) TELECOPIER (513)

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1 BOEHM, KURTZ & LOWRY ATTORNEYS AT LAW EAST SEVENTH STREET, SUITE 0 CINCINNATI, OHIO 0 TELEPHONE () - TELECOPIER () - Via Electronic Mail April, 0 Mary Jo Kunkle, Executive Secretary Michigan Public Service Commission Mercantile Way Lansing, MI Re: Case No. U- & Dear Ms. Kunkle: Please find enclosed the DIRECT TESTIMONY AND EXHIBITS OF NEAL TOWNSEND on behalf of THE KROGER CO., and its PROOF OF SERVICE filed in the above captioned matter. Please place this document of file. Thank you for your assistance in this matter. Very truly yours, Kurt J. Boehm, Esq. BOEHM, KURTZ & LOWRY MLKkew Enclosure

2 STATE OF MICHIGAN BEFORE THE PUBLIC UTILITIES COMMISSION In The Matter Of The Application Of The Detroit Edison Company For Authority To Increase Its Rates, Amend Its Rate Schedules and Rules Governing The Distribution And Supply Of Electric Energy, And For Miscellaneous Accounting Authority In The Matter of the Application of the Detroit Edison Company for Approval to Defer Certain Pension and Post-Employment Benefits Expense for Future Amortization and Recovery : : : : : : : : : : Case No. U- (E-file) Case No. U- (E-file) PROOF OF SERVICE Kurt J. Boehm, Esq. duly sworn, deposes and says that on April, 0 he served (via electronic mail) a copy of the DIRECT TESTIMONY AND EXHIBITS OF NEAL TOWNSEND on behalf of THE KROGER CO., and a copy of this PROOF OF SERVICE upon those listed on the attached Certificate of Service. Kurt J. Boehm, Esq. BOEHM, KURTZ & LOWRY East Seventh Street, Suite 0 Cincinnati, Ohio 0 Ph: -- Fax: -- kboehm@bkllawfirm.com Subscribed to and sworn before me this st day of April, 0. Anthony J. Szilagyi, Esq. (Michigan #P-) Law Offices of Anthony J. Szilagyi, PLLC 0 South Clemens Avenue Lansing, Michigan Ph: Fax: szilagyilaw@sbcglobal.net COUNSEL FOR THE KROGER CO. Notary Public

3 MPSC Case No. U- & U- SERVICE LIST ABATE Robert A.W. Strong Leland R. Rosier Clark Hill PLC S. Old Woodward Avenue, Suite 00 Birmingham, MI 00 James T. Selecky Brubaker & Associates, Inc. 0 Swingley Ridge Road, Suite 0 Chesterfield, MO 0 jtselecky@consultbai.com DETROIT EDISON ALLIANCE OF RETIREES Raymond O. Sturdy, Jr. Thornbridge Dr. Plymouth, MI 0 rsturdy@comcast.net DETROIT MEDICAL CENTER; HENRY FORD HEALTH SYSTEM; WILLIAM BEAUMONT HOSPITAL Michael J. Watza Robert T. Kent Kitch Drutchas Wagner Valitutti & Sherbrook One Woodward Avenue, th floor Detroit, MI mike.watza@kitch.com rob.kent@kitch.com THE DETROIT WATER AND SEWERAGE DEPARTMENT Robert Walter, Senior Assistant Corp. Counsel City of Detroit Law Department 0 Woodward, Suite 0 Detroit MI - waltr@detroitmi.gov ENERGY MICHIGAN Eric J. Schneidewind, Esq. Varnum, Riddering & Schmidt The Victor Center, Suite 0 0 N. Washington Square Lansing, MI ejschneidewind@varnumlaw.com MICHIGAN ATTORNEY GENERAL Donald E. Erickson Assistant Attorney General Michigan Department of Attorney General Environment, Natural Resources & Agricultural Division Six Floor Williams Building W. Ottawa Street, P.O. Box 0 Lansing, Michigan 0 ericksond@michigan.gov MPSC Case No. U- & U- SERVICE LIST March, 0 Page Michael J. McGarry Dan Salter Blue Ridge Consulting Services, Inc. Woodruff Rd., Suite 00 PMB0 Greenville, SC 0 mmcgarry@blueridgecs.com dsalter@blueridgecs.com Sebastin Coppola Corporate Analystics Springwood Lane Rochester Hills, MI 0 sebcoppola@corplytics.com John W. Hutts GDS Associates, Inc. 0 Parkway Place, Suite 00 Marietta, GA 00 John.Hutts@gdsassociates.com MICHIGAN CABLE TELECOMMUNICATIONS David E. S. Marvin Jennifer Utter Heston Fraser Trebilcock Davis & Dunlap West Allegan Street, Suite 000 Lansing, MI dmarvin@fraserlawfirm.com jheston@fraserlawfirm.com

4 MICHIGAN COMMUNITY ACTION AGENCY ASSOCIATION Don L. Keskey Public Law Resource Center PLLC 0 N. Capitol Avenue Lansing, MI -0 donkeskey@publiclawresourcecenter.com MICHIGAN ENVIRONMENTAL COUNCIL; NATURAL RESOURCES DEFENSE COUNCIL; ENVIRONMENTAL LAW & POLICY CENTER Christopher M. Bzdok Olson, Bzdok & Howard, P.C. 0 E. Front Street Traverse City, MI chris@envlaw.com ruthann@envlaw.com Shannon Fisk Natural Resources Defense Council North Riverside Plaza, Ste. 0 Chicago, IL 00 MPSC STAFF Robert W. Beach Brian W. Farkas Anne Uitvlugt Spencer A. Sattler, Mercantile Way, # Lansing, MI 0 beachr@michigan.gov farkasb@michigan.gov uitvlugta@michigan.gov sattlers@michigan.gov mpscredratecase@michigan.gov UTILITY WORKERS LOCAL John R. Canzano Meagan B. Dolleris Klimist, McKnight, Sale, McClow & Canzano 00 Galleria Officentre, Suite Southfield, MI 0 jcanzano@kmsmc.com mdolleris@kmsmc.com WAL-MART STORES EAST, LP; SAM S EAST, ONC. Rick D. Chamberlain Behrens, Wheeler & Chamberlain N.E. rd Street, Ste 00 Oklahoma City, OK 0 rdc_law@swbell.net MPSC Case No. U- & U- SERVICE LIST March, 0 Page Edward C. Dawda Tyler D. Tennent Dawda, Mann, Mulcahy & Sadler, PLC Woodward Avenue, Suite 00 Bloomfield Hills, MI 0 edawda@dmms.com ttennent@dmms.com THE DETROIT EDISON COMPANY Bruce R. Maters Jon P. Christinidis Richard P. Middleton Michael J. Solo, Jr. David S. Maquera One Energy Plaza, WCB Detroit, MI matersb@dteenergy.com christinidisj@dteenergy.com middletonr@dteenergy.com solom@dteenergy.com maquerad@dteenergy.com mpscfilings@dteenergy.com

5 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In The Matter of the Application of the ) Detroit Edison Company for Authority to ) Increase its Rates, Amend its Rate Schedules ) Case No. U- And Rules Governing the Distribution and ) Supply of Electric Energy, and for ) Miscellaneous Accounting Authority ) In The Matter of the Application of the ) Detroit Edison Company for Approval to ) Defer Certain Pension and Post-Employment ) Case No. U- Benefits Expense for Future Amortization ) and Recovery ) Direct Testimony of Neal Townsend on behalf of The Kroger Co. April, 0

6 DIRECT TESTIMONY OF NEAL TOWNSEND INTRODUCTION Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is Neal Townsend. My business address is South State Street, Suite 00, Salt Lake City, Utah. 0 Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY? A. I am a Senior Consultant for Energy Strategies, LLC. Energy Strategies is a private consulting firm specializing in economic and policy analysis applicable to energy production, transportation, and consumption. Q. ON WHOSE BEHALF ARE YOU TESTIFYING IN THIS PROCEEDING? A. My testimony is being sponsored by The Kroger Co. ( Kroger ). Kroger is one of the largest retail grocers in the United States, and operates over facilities in the territory served by the Detroit Edison Company ( Company or "Detroit Edison"). These facilities purchase more than million kwh annually from Detroit Edison, generally through retail open access ( ROA ). 0 Q. PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND. A. I received an MBA from the University of New Mexico in. I also earned a B.S. degree in Mechanical Engineering from the University of Texas at Austin in. TOWNSEND /

7 Q. PLEASE DESCRIBE YOUR PROFESSIONAL EXPERIENCE AND BACKGROUND. A. I have provided regulatory and technical support on a variety of energy projects at Energy Strategies since I joined the firm in 00. Prior to my employment at Energy Strategies, I was employed by the Utah Division of Public Utilities as a Rate Analyst from to 00. I have also worked in the aerospace, oil and natural gas industries. 0 Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION ("COMMISSION") A. Yes, I provided testimony in the last two Consumers Energy rate cases, Case No. U- and Case No. U-. In addition, Energy Strategies has provided expert testimony sponsored by Kroger in nine previous proceedings before this Commission and I have assisted in the preparation of analysis applicable to a number of those proceedings. 0 Q. HAVE YOU TESTIFIED BEFORE UTILITY REGULATORY COMMISSIONS IN OTHER STATES? A. Yes. I have testified in utility regulatory proceedings before the Illinois Commerce Commission, the Kentucky Public Service Commission, the Utah Public Service Commission, and the Public Service Commission of West TOWNSEND /

8 Virginia. A more detailed description of my qualifications is contained in Attachment A, attached to this testimony. 0 OVERVIEW AND CONCLUSIONS Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING? A. My testimony addresses the following issues applicable to Detroit Edison's general rate case filing: () Detroit Edison s proposals to mitigate the impact of its proposed rate increase; () The need to recognize bonus tax depreciation in determining Detroit Edison s revenue requirement; () Rate spread; () Detroit Edison s proposal to modify its Revenue Decoupling Mechanism; and () The Experimental Load Aggregation Provision (ELAP). 0 Q. WHAT RECOMMENDATIONS DO YOU PRESENT IN YOUR TESTIMONY? A. I offer the following recommendations: () I recommend approval of Detroit Edison s proposal to reduce the Nuclear Decommissioning Surcharge, but do not support the Company s alternative TOWNSEND /

9 0 0 proposals to defer costs associated with Electric Choice sales and Pension and Other Post Employment Benefits. () Detroit Edison's revenue requirement should be adjusted to account for the incremental effects of bonus tax depreciation permitted by the Small Business Jobs Act of 00 and the Tax Relief, Unemployment Insurance and Job Creation Act of 00. I recommend that the Commission order Detroit Edison to recalculate its revenue requirement in a compliance filing, fully incorporating the effects of all bonus tax depreciation applicable to its plant in service through the end of the test period. This compliance filing can be made subsequent to the Commission s determination of revenue requirement under the tax law assumptions used in the Company s filed case. () I recommend adoption of Detroit Edison s primary rate spread proposal, as it is a reasonable attempt to move rates in the direction of cost of service consistent with the requirements of PA 00. () I agree with Detroit Edison that revenue decoupling is not reasonably workable for C&I customers. However, I do not support adoption of a lost revenues approach, which introduces a new set of equity concerns. If lost revenue recovery is allowed, then I recommend that the Commission limit the kilowatt-hours used for measuring going-forward lost revenue recovery to the lesser of energy efficiency improvements attributable to EO programs or actual net reductions in retail kilowatt-hours sold. Moreover, if lost revenue recovery is allowed, then customers who are self-directing their TOWNSEND /

10 0 energy optimization activities pursuant to Section of Public Act should be expressly exempted. () I recommend that the tariff provision causing the ELAP to automatically expire upon issuance of a final order in this docket should be rescinded and the rate provision allowed to continue unless expressly terminated by a Commission order in a general rate proceeding. This change would be consistent with the approach recently adopted by the Commission for Consumers Energy s generation aggregation program, which is directly comparable to the ELAP. This recommendation will ensure that the ELAP, which is both reasonable and cost-based, would remain in effect unless a convincing case can be made to end it. MITIGATION OF RATE INCREASE Q. WHAT IS THE SIZE OF THE RATE INCREASE BEING PROPOSED BY DETROIT EDISON IN THIS PROCEEDING? A. Detroit Edison is requesting a rate increase of $ million. 0 Q. WHAT PROPOSALS HAS DETROIT EDISON OFFERED TO MITIGATE THE SIZE OF THE INCREASE? A. The Company proposes to reduce its requested rate increase by deferring two items for future recovery portions of the requested rate relief for Electric Choice sales and increases in Pension and Other Post Employment Benefits (OPEB) costs. In addition, the Company is proposing to reduce the Nuclear TOWNSEND /

11 Decommissioning Surcharge. In total, these three items would reduce the requested rate relief in this proceeding by $0 million. 0 Q. WHAT IS YOUR ASSESSMENT OF THESE MITIGATION PROPOSALS? A. I recommend approval of the Company s proposal to reduce the Nuclear Decommissioning Surcharge. The proposed reduction in this charge is based on the Company s plans to seek a life extension of its Fermi nuclear plant. Extending the life of this plant would provide a longer period over which to recover decommissioning costs, thereby justifying a lower annual charge. This change would reduce costs to customers by $. million per year. However, I am not supportive of either of the deferral proposals, as they do not represent actual reductions in cost, but merely delay cost recovery now for recovery in the future. This distorts inter-temporal cost responsibility assigned to customers. Instead the revenue requirements at issue should be addressed on their merits in this case. 0 Q. ARE THERE OTHER OPTIONS AVAILABLE FOR RATE MITIGATION NOT PROPOSED BY THE COMPANY? A. Yes. Rates can be mitigated through proper recognition of bonus tax depreciation, as I will discuss in the next section of my testimony. TOWNSEND /

12 0 BONUS TAX DEPRECIATION Q. WHAT IS BONUS TAX DEPRECIATION? A. Bonus tax depreciation refers to a greatly accelerated tax deduction for depreciation that has been permitted pursuant to several statutes signed into law in recent years to stimulate the economy. For example, bonus tax depreciation was permitted in 00 and 00 pursuant to the Economic Stimulus Act of 00 and the American Recovery and Reinvestment Act of 00. Generally, these acts permitted a first-year deprecation tax deduction equal to 0 percent of the cost of qualified property. According to the provisions of the American Recovery and Reinvestment Act of 00, bonus tax depreciation was scheduled to end on December, Q. HAS BONUS TAX DEPRECIATION BEEN EXTENDED? A. Yes. Bonus tax depreciation has been extended by the passage of two new pieces of legislation. First, on September, 00, the Small Business Jobs Act was signed into law. This act extended 0 percent bonus tax depreciation through December, 00. Then, on December, 00, President Obama signed into law the Tax Relief, Unemployment Insurance and Job Creation Act of 00. This act increased bonus tax depreciation from 0 percent to 00 percent for qualified property acquired and placed into service on or after September, 00 through December, 0. In addition, 0 percent bonus tax depreciation was extended from January, 0 through December, 0. TOWNSEND /

13 0 Q. HOW DOES BONUS TAX DEPRECIATION IMPACT RATEMAKING FOR REGULATED UTILITIES? A. Bonus tax depreciation is a form of accelerated tax depreciation. Regulatory authorities have long contended with the fact that utility depreciation for tax purposes differs from utility book depreciation used in ratemaking. Generally, the tax benefits of accelerated depreciation are not passed through directly to ratepayers; indeed there are restrictions on doing so applied by the Internal Revenue Service. Instead, according to the conventions of income tax normalization, the benefit of a utility s accumulated deferred income tax is viewed as a source of zero-cost capital to the utility as part of the ratemaking process. Consequently, accumulated deferred income tax is booked as a credit against rate base, thereby reducing revenue requirements for customers. Bonus tax depreciation affects rates through the same mechanics as standard accelerated tax depreciation, buts its impact is more dramatic in the years immediately following the placement of the qualifying plant into service. 0 Q. WHAT ARE THE IMPLICATIONS OF BONUS TAX DEPRECIATION FOR THIS RATE CASE? A. Detroit Edison s filing includes the effects of bonus tax depreciation for 00 and 00. However, the Company has not included the effects of the Small Business Jobs Act of 00 or the effects of the Tax Relief, Unemployment Insurance and Job Creation Act of 00. The Small Jobs Act of 00 was signed on September TOWNSEND /

14 , 00, just weeks prior to the Company s filing of its rate application on October, 00. According to Detroit Edison, there was not sufficient time prior to the filing of the case to undertake an assessment of the impact of this act on the revenue requirement. The Tax Relief, Unemployment Insurance and Job Creation Act of 00 was signed into law on December, 00, several weeks after the Company filed its case. Thus, the Company s filing does not reflect the 0 percent bonus tax depreciation for most of 00; nor does it reflect the increase to 00 percent bonus tax depreciation starting September, 00 and extended through the end of 0, nor does it reflect the 0 percent bonus tax depreciation 0 for 0. Exhibit I (TNT-) provides Detroit Edison's responses to Kroger's data requests regarding this bonus tax depreciation issue. 0 Q. WHAT RECOMMENDATION ARE YOU MAKING WITH RESPECT TO BONUS TAX DEPRECIATION? A. Detroit Edison's revenue requirement should be adjusted to account for the incremental effects of bonus tax depreciation permitted by the Small Business Jobs Act of 00 and the Tax Relief, Unemployment Insurance and Job Creation Act of 00. According to the Company's data responses, a preliminary assessment of the impacts of bonus tax depreciation in 00, 0 and 0 produced a deferred tax impact in the range of $0 million to $0 million. Recognition of deferred income tax of this magnitude in this case would cause a material reduction in rate base, which properly should be reflected through a See Detroit Edison's Response to Kroger Data Request No. KRDE.a/. TOWNSEND /

15 reduction in the Company s Revenue requirement. However, Detroit Edison states that it has not determined the actual revenue requirement impact. Given the complexity involved in these calculations, I recommend that the Commission order Detroit Edison to recalculate its revenue requirement in a compliance filing, fully incorporating the effects of all bonus tax depreciation applicable to its plant in service through the end of the test period. This compliance filing can be made subsequent to the Commission s determination of revenue requirement under the tax law assumptions used in the Company s filed case. 0 RATE SPREAD Q. WHAT GENERAL GUIDELINES SHOULD BE EMPLOYED IN SPREADING ANY CHANGE IN RATES? A. In determining rate spread, or revenue apportionment, it is important to align rates with cost causation, to the greatest extent practicable. Properly aligning rates with the costs caused by each customer group is essential for ensuring fairness, as it minimizes cross subsidies among customers. It also sends proper price signals, which improves efficiency in resource utilization. 0 At the same time, it can be appropriate to mitigate the impact of moving immediately to cost-based rates for customer groups that would experience significant rate increases from doing so by employing the ratemaking principle of gradualism. When employing this principle, it is important to adopt a long-term See Detroit Edison's Response to Kroger Data Request No. KRDE.d/. TOWNSEND / 0

16 strategy of moving in the direction of cost causation, and to avoid practices that result in permanent cross-subsidies from other customers. 0 Q. WHAT HAS DETROIT EDISON PROPOSED WITH RESPECT TO RATE SPREAD? A. As discussed in the direct testimony of Mr. Timothy Bloch, Detroit Edison has both a primary and alternative rate spread recommendation. The Company s primary spread proposal is detailed in Exhibit A-, Schedules F and F.. At the Company s requested revenue increase of $ million, the Company s primary rate spread recommendation moves the educational schedules (D.-Sec. and D.-Pri.) to cost of service and moves the remaining schedules % towards cost of service. The Company asserts that based on the subsidy existing in this case, the proposed Rate Realignment Adjustment surcharges and credits detailed in Exhibit A-, Schedule F. will eliminate the remaining subsidy by October, 0 without violating the. percent residential cap contained in PA Q. WHAT IS YOUR ASSESSMENT OF THE COMPANY'S PRIMARY RATE SPREAD PROPOSAL? A. Detroit Edison's primary rate spread proposal is a reasonable attempt to move rates in the direction of cost of service consistent with the requirements of PA 00. I support its adoption. TOWNSEND /

17 Q. WHAT IS YOUR ASSESSMENT OF THE COMPANY'S ALTERNATIVE RATE SPREAD PROPOSAL? A. Detroit Edison's proposed alternative rate spread is tied to its alternative proposal for cost deferral. As discussed above, I am recommending against adoption of the proposed deferrals. 0 REVENUE DECOUPLING MECHANISM Q. WHAT CHANGE IS DETROIT EDISON PROPOSING WITH RESPECT TO ITS REVENUE DECOUPLING MECHANISM ( RDM )? A. Detroit Edison is proposing to jettison revenue decoupling in favor of a lost revenues cost recovery approach that is targeted to its Energy Optimization ( EO ) programs. 0 Q. WHAT REASONS DOES DETROIT EDISON OFFER FOR THIS CHANGE? A. Detroit Edison witness Donald M. Stanczak explains as follows: Based on our experience, it is clear that Edison s current RDM does not meet the requirements of a well designed RDM. Edison s current RDM is highly sensitive to changes in the number of customers, particularly relative to Commercial and Industrial (C&I) customer classes, which have far fewer absolute numbers of customers than the residential class. More specifically, small changes in numbers of customers, due to such things as plant closing, customer additions, migration among customer classes, including migration to Electric Choice, and the like, have a huge impact on changes in average use per customer. As I indicated earlier, this is particularly true for the C&I customer classes which tend to have relatively low customer counts and high average electric use per customer. [p., lines -] TOWNSEND /

18 0 0 0 Q. DOES THIS RESULT SURPRISE YOU? A. Not at all. Kroger opposed the adoption of revenue decoupling in Case No. U- and, in particular, warned that adoption of revenue decoupling for C&I customers was fraught with peril: Detroit Edison promotes its decoupling proposal as a means to eliminate any utility disincentives for implementing its mandated Energy Optimization requirements. However, the implications of the proposal are much broader than energy conservation efforts: any change in class kilowatt-hour usage for any reason except weather would result in a rate adjustment under the Company s proposal. For example, a loss of load attributable to reduced operations by manufacturers would result in a rate increase through the Company s decoupling mechanism; even worse, the rate increase would fall entirely on the other customers who happened to be in the class that experienced the usage reduction. Under normal economic circumstances, such a mechanism is fundamentally inequitable. For an economy in contraction, the proposal promises to compound the difficulties of businesses struggling to survive a major recession. Although the RDM that was adopted differed from the Company s proposal in that the adopted proposal was based on average usage per customer, Kroger also expressed its concern that such a metric was not appropriate for C&I customers: Although I am recommending against adoption of any part of the proposal, I wish to emphasize the particular inappropriateness of its application to non-residential customers. Whereas decoupling mechanisms for residential customers can target metrics such as average usage per customer, there is no reasonable common denominator for setting a decoupling baseline for non-residential customers. Detroit Edison s attempt to use a target revenue requirement for this purpose creates problems far greater than the utility disincentive problem it is attempting to solve. To Detroit Edison s credit, the Company is recognizing that its RDM is not reasonably constructed, and is proposing to change it in a fundamental way. Case No., Direct testimony of Kevin C. Higgins, p., lines -. TOWNSEND /

19 Q. WHAT IS YOUR ASSESSMENT OF THE COMPANY S PROPOSAL FOR LOST REVENUE RECOVERY? A. I agree with Detroit Edison that revenue decoupling is not reasonably workable for C&I customers. However, I do not support adoption of a lost revenues approach, which introduces a new set of equity concerns. 0 Q. PLEASE EXPLAIN. A. Detroit Edison asserts that lost revenue recovery is needed because it would allow the Company to recoup the fixed cost recovery that is foregone due to the sales reduction associated with its EO programs. Because a portion of fixed costs are included in volumetric rates, when sales volume changes, fixed-cost recovery is impacted, all other things being equal. The primary problem with this argument is that it focuses on the sales impact of EO in isolation and in the real world, all other things do not remain equal. In practice, the implementation of EO programs does not imply that a utility will be unable to fully recover its fixed costs. 0 In general, when load grows above the level of the billing determinants used in setting rates, the fixed-cost recovery that occurs as a function of volumetric sales increases. This inures to the benefit of the utility. In traditional ratemaking, Ibid., p., line p., line. TOWNSEND /

20 utilities are not required to return this incremental fixed-cost recovery to customers. To the extent kilowatt-hour reductions attributable to EO activities are offset by growth in load above what is included in the billing determinants used to establish rates, lost revenues are offset by new revenues. If this occurs, there would be no reasonable equity basis for customers to have to pay Detroit Edison for lost revenues attributable to EO programs. 0 Q. ARE THERE OTHER CONSIDERATIONS AS WELL? Yes. Rates for larger C&I customers include demand charges that are designed to recover the utility's fixed costs. Consequently, there are fewer fixed costs recovered in the kilowatt-hour charge that may be lost when energy sales are reduced as a result of EO programs. 0 Q. WHAT IS YOUR RECOMMENDATION TO THE COMMISSION? A. The application of the RDM to C&I customers should be abandoned as being illsuited to such customers. However, lost revenue recovery should not be instituted in its place. If lost revenue recovery is allowed, then I recommend that the Commission limit the kilowatt-hours used for measuring going-forward lost revenue recovery to the lesser of energy efficiency improvements attributable to EO programs or actual net reductions in retail kilowatt-hours sold. Measuring lost revenue in this manner protects customers from paying charges for revenues that are not truly lost on a net basis. TOWNSEND /

21 Q. IF LOST REVENUE RECOVERY IS ADOPTED, ARE THERE CUSTOMER GROUPS THAT SHOULD BE SPECIFICALLY EXEMPTED? A. Yes. If a lost revenues mechanism is adopted by the Commission, then customers who are self-directing their EO activities pursuant to Section of Public Act should be expressly exempted. Self-directing customers fund their own EO investments; consequently, there is no reasonable basis for adjusting the rates of these customers to rectify the utility s disincentive to support energy efficiency programs. 0 0 EXPERIMENTAL LOAD AGGREGATION PROVISION ( ELAP ) Q. WHAT IS THE EXPERIMENTAL LOAD AGGREGATION PROVISION ( ELAP )? A. Detroit Edison s ELAP allows a qualifying customer with multiple accounts to aggregate the demands across its sites for power supply billing purposes. With respect to power supply service, this approach treats customers with multiple sites on comparable terms as customers with single sites. This type of aggregation allows the customer to capture the diversity within its loads for billing purposes. By treating the multiple loads of a single customer as a single entity for the purpose of measuring the amount of power supply service provided to the customer, it treats the customer s load in manner that is comparable to its treatment in the competitive market. Thus, the ELAP is both fair for customers and Detroit Edison. TOWNSEND /

22 Q. WHAT IS THE CURRENT STATUS OF THE ELAP? A. In its order in Detroit Edison's last rate case, Case No. U-, the Commission approved an extension of the ELAP until a final order is issued in this current rate case. Q. DOES THE COMPANY PROPOSE ANY CHANGE TO THE A. No. EXPIRATION OF THE ELAP IN THIS CASE? 0 Q. DO YOU HAVE ANY RECOMMENDATIONS REGARDING THE TERMINATION OF THE ELAP UPON THE ISSUANCE OF AN FINAL ORDER IN THIS CASE? A. Yes. I recommend that the provision causing the ELAP to automatically expire upon issuance of a final order in this docket should be rescinded and the rate provision allowed to continue unless expressly terminated by a Commission order in a general rate proceeding. This change would be consistent with the approach recently adopted by the Commission for Consumers Energy s generation aggregation program, which is directly comparable to the ELAP. This 0 recommendation will ensure that the ELAP, which is both reasonable and cost- based, would remain in effect unless a convincing case can be made to end it. Case No. U-, Order issued November, 00 at, FN. TOWNSEND /

23 Q. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? A. Yes, it does. TOWNSEND /

24

25 ATTACHMENT A Resume Neal Townsend Energy Strategies, LLC S. State Street, Suite 00 Salt Lake City, Utah Work Experience: Senior Consultant, Energy Strategies (00 Present) Rate Analyst, Utah Division of Public Utilities ( 00) Other Systems Engineer, Morton Thiokol, Inc. Assistant Engineer, Schafer Engineering Graduate/Research Assistant, University of New Mexico Education: University of New Mexico, Masters of Business Administration, University of Texas, Austin, B.S., Mechanical Engineering, Regulatory Testimony: State of Illinois Case # Title Activity 0-0 Commonwealth Edison Rate Spread, Rate Design Company Proposed General Increase in Electric Rates State of Kentucky Case # Title Activity Application of Kentucky Rate Spread, Rate Design Utilities Company for an Adjustment of Base Rates

26 ATTACHMENT A Application of Louisville Gas Rate Spread, Rate Design and Electric Company for an Adjustment of its Electric and Gas Base Rates State of Michigan Case # Title Activity U- In the Matter of the Pension Tracker, Class Cost Application of Consumers of Service, Decoupling, Energy Company for Authority Rate Spread, Tariff Language to Increase Its Rate for the Generation and Distribution of Electricity and for Other Relief U- In the Matter of the Class Cost of Service, Application of Consumers Rate Spread Energy Company for Authority to Increase Its Rate for the Generation and Distribution of Electricity and Other Relief State of Oregon Case # Title Activity UE- In the Matter of the Support of Stipulation PacifiCorp, dba Pacific Power's Request for a General Rate Revision State of Utah Docket # Title Activity 0-0- In the Matter of the Rate Design/ Application of Rocky Mountain Decoupling Power for Authority to Increase its Retail Electric Utility Service Rates in Utah and for Approval of its Proposed Electric Service Schedules and Electric Service Regulations

27 ATTACHMENT A 0-0-T0 In the Matter of Support of Stipulation Rocky Mountain Power Advice No. 0-0, seeking an Adjustment to the DSM Tariff Rider, Schedule 0-0- In the Matter of the Derivation of Prudence Application of PacifiCorp Disallowance For Approval of its Proposed Electric Rate Schedules and Electric Service Regulations 0-0- In the Matter of the Derivation of Methodology Application of PacifiCorp for Establishing QF Avoided For Approval of an IRP Based Cost Pricing Avoided Cost Methodology For QF Projects Larger than MW -0-0 In the Matter of the Revenue Requirement and Application of Questar Gas Class Cost of Service Company for an Increase Modeling, Proposed CO Plant In Rates and Charges Disallowance Mechanism -0-0 In the Matter of the Interjurisdictional Cost Application of PacifiCorp Allocation and Class Cost of For Approval of its Proposed Service Modeling Electric Rate Schedules and Electric Service Regulations -0- In the Matter of the Application Assessment of Application, of Questar Gas Company for Revenue Requirement Approval of a Natural Gas Modeling Processing Agreement State of West Virginia Case # Title Activity 0--E-T Monongahela Power Company Rate Spread, Rate Design and the Potomac Edison Company, both d/b/a Allegheny Power Rule T Tariff Filing to Increase Rates and Charges

28 Exhibit I (TNT-) Detroit Edison's Responses to Kroger Data Requests Set Questions Nos. a & d

29 MPSC Case No.: U-/U- Respondent: M. Lewis/P. Horgan Requestor: Kroger Question No.: KRDE-.a/ Page: of Question: For the projected month test period ending Mar., 0 as shown in Exhibit A-, Schedule A: a. Does Detroit Edison's derivation of both the "Total Electric" and "Jurisdictional Electric" revenue requirements include the impacts of bonus depreciation for all qualified property placed in service after Dec, 00 and before Jan, 0 as provided in the Economic Stimulus Act of 00 and subsequent extensions (i.e. the American Recovery and Reinvestment Act of 00, the Small Business Jobs Act of 00, and the Tax Relief Act, Unemployment Insurance Reauthorization, and Job Creation Act of 00)? Answer: The projected test year Total Electric and Jurisdictional Electric revenue requirements shown on Exhibit A-, Schedule A does include the aggregate impact of bonus depreciation claimed in the 00 and 00 federal income tax returns, but does not reflect the impact of bonus depreciation after 00 through the end of the projected test year, ie March, 0. Income taxes are normalized in Michigan. Bonus depreciation is a temporary difference that does not reduce the overall projected Federal Income Tax Expense reflected in Exhibit A-0 Schedule C and rolled forward as part of total Adjusted Net Operating Income into the requested Revenue Deficiency on Exhibit A-, Schedule A. However, these temporary differences would impact the Cumulative Deferred Income Taxes (Net) amount underlying Detroit Edison s Rate Base Capitalization and used to determine the requested Overall Rate of Return as calculated on Exhibit A-, Schedule D, which is rolled forward to Exhibit A-, Schedule A as a component of projected rate of return.

30 MPSC Case No.: U-/U- Respondent: M. Lewis/P. Horgan Requestor: Kroger Question No.: KRDE-.a/ Page: of The Small Business Jobs Act of 00 was enacted on September, 00 and this case was filed on October, 00. There wasn t sufficient time between the enactment and the filing of the rate case to complete a study which is necessary to determine a reliable estimate of property qualifying for bonus depreciation. The capital expenditure information in the case by itself does not allow us to determine how much is eligible for bonus depreciation. A determination of which assets qualify for bonus depreciation requires a labor intensive study on an asset-by-asset basis and an estimate of when the assets will be placed in service. Special rules apply to self-constructed property, which further complicates the study. The impact of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 00 was not included in Detroit Edison s October, 00 filing because the legislation was enacted in December, 00, which was approximately 0 days following the filing of Case No, U-. A determination of which assets qualify for bonus depreciation requires a labor intensive study on an asset-by-asset basis and an estimate of when the assets will be placed in service. Special rules apply to self-constructed property, which further complicates the study. Although these studies are still in progress, the preliminary estimate of bonus depreciation for the period beginning January, 00 and ending December, 0 would have an impact on deferred taxes in the range of $0 to $0 million.

31 MPSC Case No.: U-/U- Respondent: M. Lewis/P. Horgan Requestor: Kroger Question No.: KRDE-.d/ Page: of Question: For the projected month test period ending Mar., 0 as shown in Exhibit A-, Schedule A: d. If the answer to a) is no, please provide all of the adjustments necessary to produce test year results of operations that incorporate all allowed bonus depreciation for qualified property placed in service prior to Jan, 0 as authorized by the statutes in effect on Dec, 00, summarized for all of the rate base and expense categories shown in Exhibit A-, Schedule B and Exhibit A-0, Schedule C. This adjustment should allow for a complete assessment of the revenue requirement impact of including bonus depreciation in the projected revenue requirement. As part of this response, please include all electronic workpapers with formulas intact used to derive the bonus depreciation impact. Answer: See the response to question KRDE-.a/. The impact on Detroit Edison s revenue requirement has not been determined.