February 5, Ms. Mary Jo Kunkle Executive Secretary Michigan Public Service Commission 6545 Mercantile Way Lansing, Michigan

Transcription

1 DTE Energy One Energy Plaza, Detroit, MI RICHARD P. MIDDLETON (313) February 5, 2010 Ms. Mary Jo Kunkle Executive Secretary Michigan Public Service Commission 6545 Mercantile Way Lansing, Michigan Re: In the matter of the application of Michigan Consolidated 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 MPSC Case No. U Dear Ms. Kunkle: Attached for electronic filing in the above-captioned matter is Michigan Consolidated Gas Company s Initial Brief and a Proof of Service. Very truly yours, RPM/kbt Attachments cc: Service List Richard P. Middleton

2 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) MICHIGAN CONSOLIDATED 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. ) Case No. U ) (Paperless e-file) MICHIGAN CONSOLIDATED GAS COMPANY S INITIAL BRIEF MICHIGAN CONSOLIDATED GAS COMPANY Legal Department Bruce R. Maters (P28080) Richard P. Middleton (P41278) Jon P. Christinidis (P47352) Michael J. Solo, Jr. (P57092) One Energy Plaza, 688 WCB Detroit, MI (313) Dated: February 5, 2010

3 TABLE OF CONTENTS I. HISTORY OF PROCEEDINGS....1 II. BACKGROUND AND SUMMARY OF MAJOR ISSUES....7 III. JURISDICTION, STANDARD OF REVIEW AND RATE SETTING LAW A. Jurisdiction and Standard of Review B. Rate Setting Legal Requirements IV. TEST YEAR V. RATE BASE VI. RATE OF RETURN A. Capital Structure B. Debt Cost Rates Long-Term Debt Short-Term Debt C. Return on Common Equity CAPM and ECAPM Estimates Historical Risk Premium Estimates DCF Estimates MichCon s High Business Risk Justifies a Higher Return on Equity Any Reduction of Equity in MichCon s Capital Structure Would Require a Higher Return on Equity MichCon s Return on Equity Should be Adjusted for Flotation Costs Summary and Recommendations Regarding MichCon's Cost of Equity D. Other Cost Rates i

4 E. Overall Rate of Return VII. ADJUSTED NET OPERATING INCOME AND REVENUE DEFICIENCY A. Throughput Weather Normalization Customer Usage Exelon Energy Company ( Exelon ) End-Use Transportation ( EUT ) Long-Term Fixed-Price Contract Revenues B. Other Operating Revenue C. Midstream Revenue D. MichCon s Capital, Operating and Maintenance ( O&M ), Administrative and General ( A&G ) and Infrastructure Costs Are Reasonable to Maintain Safe and Reliable Service Capital Expenditures O&M Expenses Customer Service and Revenue Management& Protection ( RM&P ) O&M Expense Gas Operations O&M Expenses Administrative and General Expenditures Uncollectible Accounts Expense MichCon Should Be Allowed to Recover Its Projected Employee Benefits Costs a. Pension b. Other Post-Employment Benefit ("OPEB") Expenses c. Active Employee Benefits d. Total O&M Employee Benefit Costs e. Incentive Compensation ii

5 8. Manufactured Gas Plant ( MGP ) Remediation Expenses Depreciation Expense E. MichCon Should Be Permitted to Recover the Costs to Achieve ( CTA ) of its Performance Excellence Process ("PEP") F. Uncollectible Expense True-Up Mechanism ( UETM ) G. Annual Safety and Training Expense Reports H. Low-Income Energy Efficiency ( LIEEF ) Program I. Revenue Decoupling Mechanism ( RDM ) J. Company Use ( CU ) and Lost And Unaccounted For ( LAUF ) Gas, Gas-In-Kind ( GIK ), and Lost Gas True-Up Mechanism ( LGTM ) K. Michigan Business Tax Expense L. Accounting Requests VIII. REVENUE DEFICIENCY/REQUESTED RATE RELIEF IX. RATE DESIGN AND TARIFF REVISIONS A. Allocation of Revenue Deficiency B. Cost of Service Adjustments C. Tariff Changes for Sales Rate Schedules Rate AS Rate 2A Rates A and AS Rates A, AS, 2A, GS-1, GS-2, and S Rates GS-1, GS-2, and S D. Tariff Changes for Transportation Service Sections E1 through E Section E Load Balancing Storage Charge iii

6 4. Proposed New XXLT Rate Other Transportation and Storage Tariff Changes Pooling Transfer of Saginaw Bay Pipeline to MichCon E. Tariff Changes for All Customers F. Proposed New Rate Class For The Special Contract With Dearborn Industrial Group LLC ( DIG ) G. Proposed Monthly Customer Charges and Rate Schedule Economic Break Even Points XI. REQUEST FOR RELIEF iv

7 I. HISTORY OF PROCEEDINGS. Michigan Consolidated Gas Company ( MichCon or the Company ) is presently serving its retail natural gas transportation, storage and distribution customers under rates, terms and conditions that the Commission established in its April 28, 2005 Opinion and Order Granting Rate Relief and July 19, 2005 Order Granting Request for Rehearing in Part in consolidated Case Nos. U and U This case began on June 9, 2009, when MichCon filed its Application, direct testimony and exhibits and published notice of its request to raise distribution revenues by approximately $193 million annually. A pre-hearing conference was held on July 14, Administrative Law Judge Mark E. Cummins (the ALJ ) granted petitions to intervene filed by the Association of Businesses Advocating Tariff Equity ( ABATE ); the Attorney General ( AG ); the Michigan Community Action Agency Association ( MCAAA ); Utility Workers Local 223 ( UWL 223 ); Interstate Gas Supply, Inc. ( IGS ); Muskegon Development Company 1 ; National Energy Marketers Association ( NEMA ); and Atlas Gas & Oil Company, LLC, BreitBurn Operating LP, HighMount Exploration & Production Michigan, LLC, HighMount Midwest Energy, LLC, and O.I.L. Energy Corporation (collectively, Atlas ) (1 T 7, 16, 22, 24). Staff also participated, and a schedule was set (1 T 29-31). On July 22, 2009, the ALJ issued a Ruling that granted the Residential Ratepayers Association s ( RRC ) petition to intervene. On September 21, 2009, the ALJ granted Constellation NewEnergy Gas Division, LLC s ( Constellation or CNEG ) late petition to intervene (2 T 51). MichCon sponsored the direct testimony and exhibits of 21 witnesses: David W. Broome is DTE Energy s Director of Customer Service (qualifications and direct testimony at 5 T Muskegon Development Company later withdrew as a party (3 T 60). 1

8 79); 2 Daniel G. Brudzynski is DTE Energy s Vice President of Regulatory Affairs (qualifications and direct testimony at 5 T ); 3 George H. Chapel is MichCon s Manager, Market Forecasting (qualifications and direct testimony at 5 T ); 4 JoAnn Chavez is the Vice President and Chief Tax Officer at DTE Energy (qualifications and direct testimony at 5 T ); 5 Russell A. Feingold is a Vice President at Black & Veach Corporation ( Black & Veach ) where he leads the Rate & Regulatory Advisory Group of its Enterprise Management Solutions ( EMS ) Division (qualifications and direct testimony at 5 T ); 6 Wayne Fox is MichCon s Manager, Gas Accounts (qualifications and direct testimony at 5 T ); 7 2 Mr. Broome has a Bachelor and a Masters degree in Business Administration, and a Master of Science degree in Information Systems. He has worked for The Detroit Edison Company ( Edison ) and DTE Energy since 1980 in positions of increasing responsibility, and presently leads the program management and continuous improvement function within Customer Service at DTE Energy (5 T 1172). 3 Mr. Brudzynski has a Bachelor of Science degree in Business Administration with concentrations in finance and accounting, and a Masters degree in Business Administration. Prior to joining Edison, in 1997 as assistant controller, he held several positions of increasing responsibility in the finance area at DaimlerChrysler Corporation from 1984 to In February 2001, he was named Vice President and Controller of Edison. In November 2005, he was named to his current position, where he is responsible for the development and implementation of regulatory strategy for Edison and MichCon (5 T ). 4 Mr. Chapel has a Bachelor of Science degree in Mathematics, and has worked for MichCon since 1998 in positions of increasing responsibility. He is currently responsible for projecting MichCon s rate schedule customer growth/decline, natural gas supply requirements, review and analysis of the natural gas market, and End-Use Transportation ( EUT ) customer load (5 T ). 5 Ms. Chavez has a Bachelor of Business Administration degree and a Juris Doctorate degree. She is a member of both the New York and Florida State Bar Associations. She was hired to her present position in 2007, after serving as director of taxation at Atlas Oil Co., and as a tax partner in the Detroit Business Unit of the international accounting firm KMPG LLP serving large multinational companies. In her present position, she is responsible for overseeing the tax function, which includes federal, state, and local income and property taxes including accounting for taxes (5 T ). 6 Mr. Feingold has a Bachelor of Science degree in Electrical Engineering, and a Master of Science degree in Financial Management. He has over 33 years of experience in the utility industry, the last 30 of which have been in the field of utility management and economic consulting. He has been actively involved with the evaluation and development of revenue decoupling mechanisms for gas and electric utilities (5 T ; Exhibit A-19, Schedules L1 and L2). 7 Mr. Fox has a Bachelor of Science degree in Mechanical Engineering. He has worked for MichCon since 1983 in positions of increasing responsibility. In his current position, he is responsible for sales, marketing, and account management activities for services provided to MichCon s largest EUT and sales customers throughout the entire MichCon service area (5 T ). 2

9 Michael K. Homan is the Manager, Decision Support MichCon (qualifications and direct testimony at 5 T ); 8 Abed A. Houssari is MichCon s Manager of Environmental Management and Resources (qualifications and direct testimony at 5 T ); 9 Mark C. Johnson is MichCon s General Manager, Revenue Protection - Energy Theft (qualifications and direct testimony at 5 T ); 10 Thomas W. Lacey is a Principal Financial Analyst in the Revenue Requirements department of DTE Energy s Regulatory Affairs organization (qualifications and direct testimony at 5 T ); 11 Dr. Robert E. Livezey is a selfemployed consultant on matters related to climate normals, variability, change, and prediction (qualifications and direct testimony at 4 T ); 12 Richard J. Lueders is DTE Energy s Director, Human Resources, Compensation, Benefits and Human Resources Process and 8 Mr. Homan has a Bachelor of Science Degree in Economics and a Master of Business Administration degree. He has worked for DTE Energy since 2005, after serving as an officer in the United States Navy and holding progressive operational positions at Xerox Corporation and Ford Motor Corporation. The Manager, Decision Support MichCon, is responsible for the budget and forecast of MichCon s Operations & Maintenance ( O&M ) and capital expenditures (5 T ). 9 Mr. Houssari has a Bachelor of Science degree in Civil Engineering, and a Master of Science degree in Environmental Engineering. Since 1984, he has worked in several industries in different capacities as an environmental coordinator/engineer/manager. In his current position, one of his major responsibilities is to manage MichCon s remediation efforts at the former Manufactured Gas Plant ( MGP ) properties, manage the expenses associated with the investigation and remediation, and investigate any cost recovery from insurance carriers (5 T ). 10 Mr. Johnson has a Bachelor of Science degree in Business Administration with a concentration in Operations Management, and a Masters of Business Administration degree. Prior to joining MichCon in 2007, he spent 18 years working for Ford Motor Company in positions of increasing management responsibility. In his current position, his responsibilities include managing the Revenue Protection Energy Theft organization, which is responsible for the resolution of illegal energy diversion within Edison s and MichCon s service territories (5 T 706). 11 Mr. Lacey has a Bachelor of Science degree in Accounting and a Masters of Business Administration degree. Prior to joining DTE Energy in 2002, he worked for 19 years in several positions of increasing responsibility at ANR Pipeline Company, ultimately rising to the position of Senior Rates Analyst. In his current position, his responsibilities include the preparation of revenue requirements, cost of service and rate design, testimony, exhibits and workpapers in cases for Edison and MichCon (5 T ). 12 Dr. Livezey retired as Chief of National Weather service ( NWS ) Climate Services in He is considered to be one of the top experts in the world on climate statistics, and estimating and tracking weather/climate normals and post-war climate change over North America, and possibly as the leading expert in the world on short-term North American climate variations and their prediction (4 T 126). 3

10 Technology ( HRPT ) (qualifications and direct testimony at 5 T ); 13 Anastasia E. Minor is MichCon s Director Gas Sales and Marketing (qualifications and direct testimony at 5 T ); 14 Dr. Roger A. Morin is Emeritus Professor of Finance at the College of Business, Georgia State University; Professor of Finance for Regulated Industry at the Center for the Study of Regulated Industry at Georgia State University; and a principal in Utility Research International, an enterprise engaged in regulatory finance and economics consulting to business and government (qualifications and direct testimony at 5 T ); 15 Todd F. Persells is MichCon s Director, Asset Management and Engineering (qualifications and direct testimony at 4 T ); 16 Peter M. Rynearson is the Controller of MichCon and other energy gas subsidiaries of DTE Energy (qualifications and direct testimony at 4 T ); 17 Edward J. 13 Mr. Lueders has a degree in economics and accounting, as well as an MBA. He is a CPA. He joined DTE Energy in 2002, and has over 30 years of experience in finance and human resources. In his current position, he is responsible for executive and broad-based compensation, benefits, HR systems and disability management (5 T 1135). 14 Ms. Minor has a Bachelor of Arts degree in Economics and Business Administration, and a Master of Business Administration degree with specializations in finance and strategy. She held several positions in investment banking and commercial lending before joining DTE Energy in 1997, where she has held positions of increasing responsibility. In her current position, she is responsible for all aspects of sales and marketing for MichCon s gas distribution, transportation and midstream services customers (5 T ). 15 Dr. Morin has a Bachelor of Engineering degree, an MBA in Finance, and a Ph.D. in Finance and Econometrics. He has taught at several universities and conducted numerous national seminars. He has authored or co-authored several books, monographs, and articles in academic scientific journals on the subject of finance. His widely-used treatise on regulatory finance, Utilities Cost of Capital, was published in In 1994 Dr. Morin published his second book on regulatory matters, Regulatory Finance, which is a voluminous treatise on the application of finance to regulated utilities. A revised and expanded edition, The New Regulatory Finance, was published in August 2006 (5 T ). 16 Mr. Persells has a Bachelor of Science degree in Mechanical Engineering with a concentration in Management, and a Master of Business Administration degree. Before joining DTE Energy Trading in 2001, he held various positions of increasing responsibility at ANR Pipeline Company, ultimately rising to Assistant Vice President of Project Development and Management. He is presently responsible for the system planning, engineering, and major construction activities for MichCon (4 T ). 17 Mr. Rynearson has a Bachelor of Arts degree in Business Administration, with a major in Accounting. After working for KPMG Peat Marwick and becoming a CPA, he joined DTE Energy in 1990, and was promoted to positions of increasing responsibility. In his current position, he is responsible for all areas of accounting and financial reporting including budgeting, forecasting, financial planning, project analysis, regulatory support and accuracy of financial statements (4 T ). 4

11 Solomon is the Assistant Treasurer and Director of Corporate Finance for DTE Energy and its subsidiaries, including MichCon (qualifications and direct testimony at 5 T ); 18 Andrew M. Springstead is MichCon s Director, Gas Control (qualifications and direct testimony at 5 T ); 19 Mark W. Stiers is the Vice President, Gas Sales & Supply for DTE Corporate Services, LLC, and an officer of MichCon (qualifications and direct testimony at 4 T ); 20 Margaret A. Suchta is a Principal Financial Analyst in the Revenue Requirement Department of DTE Energy s Regulatory Affairs organization (qualifications and direct testimony at 5 T ); 21 and Amy W. Walt is DTE Energy s General Manager Revenue Management and Protection Strategy (qualifications and direct testimony at 5 T ). 22 On October 22, 2009, ABATE filed a motion to strike a portion of the direct testimony and exhibits of MichCon witnesses regarding MichCon s recovery of its portion of the control premium that DTE Energy Company ( DTE ) paid to acquire MCN Energy Group, Inc. 18 Mr. Solomon has a Bachelor of Business degree, with a concentration in Accounting, and an Master of Business Administration degree, with a focus in Finance and Corporate Strategy. He began working for DTE Energy in 1998, and held positions of increasing responsibility, including Assistant Treasurer and Director of Corporate Development. He is responsible for assisting the Treasurer in managing MichCon's capital needs (5 T ). 19 Mr. Springstead has a Bachelor of Science degree in Civil Engineering. He joined MichCon in 1978, and has held positions of increasing responsibility. In his current position, he is responsible for all aspects of gas control activity for MichCon (5 T ). 20 Mr. Stiers has an Honors Bachelor of Commerce degree and a Masters degree in Business Administration. He joined MichCon in 2006, after gaining substantial experience in positions of increasing responsibility (4 T ). His responsibilities include leading the sales and marketing efforts that support the delivery of natural gas and related services to all of MichCon s customers (4 T 210). 21 Ms. Suchta has a Bachelor of Business Administration degree with a major in Accounting, and a Master of Business Administration degree with a concentration in Finance. After practicing public accounting, she joined MichCon in She currently is responsible for Edison s and MichCon s revenue requirement studies, and regulatory analysis and research (5 T ). 22 Ms. Walt has a Bachelor s degree in Business Administration, with a concentration in Accounting. She began working for MichCon in 1992, and has held positions involving increasing responsibilities in financial and operational matters. In her current position, her responsibilities include developing strategies for the Revenue Management and Protection ( RM&P ) organization for both Edison and MichCon related to the collection of all customer accounts, with the goal of improving collection efficiency and reducing arrears and uncollectible expense (5 T ). 5

12 ( MCN ). In response, on November 6, 2009, MichCon filed revised testimony and exhibits, removing all references to MichCon s previously-proposed control premium recovery. 23 On November 19, 2009, the Commission Staff and Intervenors filed their testimony. Staff sponsored Daniel M. Birkam (qualifications and direct testimony at 6 T ); Kristin Brock (qualifications and direct testimony at 6 T ); David Chislea (qualifications and direct testimony at 6 T ); Bonnie Janssen (qualifications and direct testimony at 6 T ); Poornima Jayasheela (qualifications and direct testimony at 6 T ); Kevin S. Krause (qualifications and direct testimony at 6 T ); James E. LaPan (qualifications and direct testimony at 6 T ); Kevin Liu (qualifications and direct testimony at 5 T ); Steven Q. McLean (qualifications and direct testimony at 6 T ); Kirk D. Megginson (qualifications and direct testimony at 6 T ); Robert Ozar (qualifications and direct testimony at 6 T ); Nicholas M. Revere (qualifications and direct testimony at 6 T ); and Vera C. Talbert (qualifications and direct testimony at 6 T ). ABATE sponsored James T. Selecky (qualifications and direct testimony at 6 T ). The Attorney General sponsored Sebastian Coppola (qualifications and direct testimony at 6 T ). Atlas sponsored Carl J. Croskey (qualifications and direct testimony at 5 T ). CNEG sponsored James R. Germain (qualifications and direct testimony at 4 T ). MCAAA sponsored William A. Peloquin (qualifications and direct testimony at 6 T ). RRC sponsored Frank J. Hollewa (qualifications and direct testimony at 6 T ). UWL 223 sponsored Richard Mata (qualifications and direct testimony at 4 T ). On December 9, 2009, MichCon filed the rebuttal testimony and exhibits of witnesses Brudzynski (5 T ), Chapel (5 T ), Chavez (5 T ), Robert D. Feldmann (5 T 23 Since MichCon s initial Application reflected the assumption that the costs of the control premium would be offset by separately authorized revenues, the elimination of the control premium testimony and data had a minimal effect on the Company s revenue deficiency. (Application, p. 4) 6

13 ), 24 Feingold (5 T ), Fox (5 T ), Lacey (5 T ), Livezey (4 T ), Lueders (5 T ), Minor (5 T ), Morin (5 T ), Persells (4 T ), Rynearson (4 T ), Springstead (5 T ), Solomon (5 T ), Stiers (4 T ), and Suchta (5 T ). On that same day, ABATE filed the rebuttal testimony of Mr. Selecky (5 T ), and CNEG filed the rebuttal testimony of Mr. Germain (4 T ). Cross-examination and binding-in of testimony was held on January 11, 12 and 14, The record consists of 1866 pages of transcript and 112 Exhibits. II. BACKGROUND AND SUMMARY OF MAJOR ISSUES. MichCon faces a revenue deficiency of approximately $192.3 million for the 2010 projected test year per Attachment E 25, and seeks authorization to increase its rates as soon as possible (4 T 218, ; 5 T ; Exhibit A-8, Schedule A1(Revised)). The major reasons for MichCon s revenue deficiency are: (1) increased costs associated with the expenses of operating the Company s natural gas pipeline system; (2) increased costs of company use; (3) increase in lost gas; (4) increased uncollectible expense; (5) reduced revenues due to significant declines in consumption and customer losses; (6) reductions in end-use transportation; (7) increased operations and maintenance costs and capital expenditures including costs associated with pipeline integrity which are necessary to maintain safe, reliable operation of MichCon s distribution and transmission system despite achieved cost reductions, (8) higher depreciation expense and property taxes on gross plant; and (9) costs to remediate former manufactured gas plant ( MGP ) sites. MichCon s proposed revenue increase is necessary to maintain MichCon s 24 Mr. Feldman is MichCon s Director of Gas Operations for the Southeast Michigan area. He has an Honors Bachelor of Commerce Degree and a Master of Business Administration degree. He has worked for MichCon since 2008, after gaining over 20 years of Gas Operations experience at Union Gas (5 T ). 25 Attachment E starts with MichCon s revised filed position of $192.4 million (4 T 218, ; 5 T ; Exhibit A-8 Schedule A1 (Revised) and makes adjustments to reflect MichCon s current position as discussed in this Brief. 7

14 financial health, ensure the continuation of adequate levels of reliability and customer service, and continue to maintain the Company s gas distribution system (3T 67-68; 4 T ). MichCon s lower revenues and higher expenses are due to the continued deterioration of MichCon s markets, and unavoidable increases in a number of costs. Thus, MichCon s corresponding need for rate relief is largely the result of external economic and financial events that are beyond MichCon s control (4 T 217). In the years following MichCon s last rate case (Case No. U-13898), MichCon has sought creative means to mitigate the need for rate increases with self-help initiatives including sales of base gas, revenue growth initiatives in its Midstream business, and aggressive cost reduction measures including cost savings associated with MichCon s Performance Excellence Process which reached $45 million in cumulative savings in MichCon has also proactively engaged in, and continues to pursue, a number of efforts to improve processes and reduce costs as much as possible, while still providing safe and reliable service to its customers. 27 Even with MichCon s significant cost savings and revenue growth in its Midstream business, the Company still faces a revenue deficiency of approximately $192.3 million for the 2010 projected test year (Attachment E). Some parties to this case have presented arguments suggesting that rate relief to MichCon should be diminished or denied due to the current state of the economy, while ignoring the impact of recent economic events on MichCon. These arguments rely on hyperbole rather than reasoned analysis. In reality, MichCon needs rate relief in order to continue to provide safe and 26 MichCon sold 3.6 Bcf of native gas during 2007 and 2008, and in 2009 MichCon received authority from the Commission to sell an additional 2.0 Bcf of native gas. MichCon also increased its Midstream revenue from $41 million (included in the final order in Case No. U-13898) to $99 million in 2008, and initiated aggressive cost reduction efforts that allowed the Company to effectively manage non-gas, routine operating costs without reducing the quality of service to its customers (3 T 66-67; 4 T ). 27 For example, this case includes approximately $16 million of Company-initiated O&M cost savings between the 2008 historical test year and the 2010 projected test year (3 T 67; 5 T ; Exhibit A-10, Schedule C5 (Revised)) 8

15 reliable service to its customers, and to continue its support of Michigan s economy, as a major employer and taxpayer in the communities it serves. As Mr. Norcia 28 explained: The decision to file for $192.4 million in rate relief was carefully evaluated. It has been six years since MichCon last filed a rate case. We recognize that the current economic environment in Michigan has made this an extremely difficult time for many of our customers. We require adequate resources to provide safe and reliable service to our customers. We also considered that because of customer conservation, our ability to store large volumes of gas, asset monetization efforts and aggressive cost reductions, on average, our customers will pay less in 2010 on a total cost basis than in MichCon needs to be financially healthy to ensure it can adequately provide the required service levels that our customers desire and deserve as well as maintain the utility infrastructure necessary to support current and future customer requirements. Rates that do not provide adequate returns will ultimately result in higher financing costs for capital, will have a significant negative impact on our ability to serve our customers and cost effectively maintain the integrity of our natural gas assets. It is also important to remember the positive economic impact that we have on the communities we serve. MichCon is a significant employer in Michigan with approximately 2,200 employees. We also utilize the services of numerous local contractors and vendors. In addition, through property taxes, we also contribute to the financial health of the communities in which we serve; in 2008 MichCon paid about $35 million in property taxes to Michigan communities. (3 T 66, 68-69). 28 Gerardo Norcia is MichCon s President and Chief Operating Officer, with overall responsibility for the day-today operation of the Company. He has a Bachelor of Science degree in chemical engineering, and joined DTE Energy in 2002, after holding a number of assignments of increasing responsibility in business development, engineering, and operations at Union Gas, Maritimes & Northeast Pipeline and St. Clair Pipelines. He was directly involved in the decision to file this case, and presented MichCon s self-implementation testimony and exhibits (3 T 64-65). 9

16 MichCon is keenly aware of the poor economy s effects on its customers, and therefore continues to aggressively pursue opportunities to reduce costs and improve performance as much as possible, while still providing safe and reliable service to its customers. The evidence in this case supports Mr. Norcia s message. 29. MichCon will continue to face considerable risks and cost pressures due to Michigan s overall economic climate, and more specifically the economic difficulties currently affecting MichCon s service territory. All of these issues must be addressed in this proceeding in order for MichCon to have a reasonable opportunity to earn its authorized return. Rate relief that ignores, diminishes, or dismisses the impacts of these events will result in inadequate relief and ensure that MichCon s revenues will not approach the levels necessary to run a healthy cost-efficient utility business. Staff s position in this case is that MichCon s rate relief should total $144,622,000 (6 T 1713; Exhibit S-1, Schedule A1, line 8). Staff s position understates MichCon s revenue deficiencies of approximately $192.3 million for the 2010 projected test year (Attachment B). Therefore, the following additions must be made to Staff s proposal to capture all known and measurable changes: (1) Increase MichCon s allowed return on equity to 11.25% ($6.2 million); (2) Adjust Capital Structure and debt rates ($1.2 million) (3) Increase working capital allowance for environmental costs ($0.5 million); (4) Reduced revenues from late payment fees ($1.8 million ) and gas sales of ($0.2 million); (5) Reduce revenues from MichCon s mid-stream services ($15.3 million) and Gas-in- Kind ($5.0 million) 29 Specifically, included in MichCon s case is about $16 million of Company-initiated O&M cost savings (5 T ; Exhibit A-10, Schedule C5 (Revised)). 10

17 (6) Include in O&M the costs of incentive compensation ($10.0 million); (7) Reflect higher company use and lost and unaccounted for gas costs ($1.2 million); (8) Reflect the tax loss carryforward on Michigan Business Tax ($2.0 million); and (9) Include the net plant, revenue and expenses of the roll-in of the Saginaw Bay Pipeline into MichCon ($4.4 million) 30. These matters are summarized on Attachments A through E 31 and discussed in more detail below within the context of the related topic. III. JURISDICTION, STANDARD OF REVIEW AND RATE SETTING LAW. A. Jurisdiction and Standard of Review. The Commission has jurisdiction over this case pursuant to 1909 PA 106, as amended, MCL et seq.; 1919 PA 419, as amended, MCL et seq.; 1939 PA 3, as amended, MCL et seq.; 1969 PA 306, as amended, MCL et seq.; and the Commission s Rules of Practice and Procedure, as amended, 1999 AC, R et seq. Const 1963, art 6, 28 requires the Commission s findings to be supported by competent, material and substantial evidence on the whole record. Expert testimony is substantial only if it is offered by a qualified expert who has an informed and rational basis for his or her view, even if other experts disagree. Great Lakes Steel v Public Service Comm, 130 Mich App 470, 481; 334 NW2d 321 (1983). The Administrative Procedures Act ( APA ) 30 This assumes that the prerequisite approval of the Commission to make this asset transfer has occurred. 31 Attachments A, B and C start with Staff s positions with respect to Net Operating Income and Revenue Deficiency and reconcile the specific areas of disagreement between Staff and MichCon. Attachment A is the computation of the revenue deficiency, including net operating income, rate base and rate of return; Attachment B are the specific components of the Company s revenue requirement adjustments to Staff s filing; Attachment C calculates the impact on MichCon s revenue requirement of rolling Saginaw Bay pipeline into MichCon; and Attachment D calculates the impact on Other Operating Revenue and the GIK percentage of the reduced transportation volumes that result from rolling into MichCon the Saginaw Bay Pipeline. Attachment E calculates the difference between MichCon s revised filed revenue deficiency, of $192.4 million (4 T 218, ; 5 T ; Exhibit A-8, Schedule A-1 (Revised)) and MichCon s revenue deficiency of $192.3 million supported in this Brief. 11

18 precludes the Commission from making decisions based on non-record materials. MCL provides: Evidence in a contested case... shall be offered and made part of the record. Other factual information or evidence shall not be considered in determination of the case except as permitted under [MCL ] concerning official notice of judicially cognizable facts and facts within the agency s specialized expertise]. Noncompliance with the APA is reversible error. In re Public Service Commission Guidelines for Transactions Between Affiliates, 252 Mich App 254, 267; 652 NW2d 1 (2002). explained: In Kar v Hogan, 399 Mich 529, 539; 251 NW2d 77 (1976), our Supreme Court "The party alleging a fact to be true should suffer the consequences of a failure to prove the truth of that allegation." Thus, unproven allegations cannot stand in the place of evidence. Things not proven must be taken as not existing, since a decision cannot be based upon conjecture. Star Steel v USF&G, 186 Mich App 475, 481; 465 NW2d 17 (1990); see also, Skinner v Square D Co, 445 Mich 153; 516 NW2d 475 (1994). It is similarly well established that an agency decision may not be based on speculation. Ludington Service Corp v Comm r of Insurance, 444 Mich 481, 483, , , 507; 511 NW2d 661 (1994), amended 444 Mich 1240 (1994) (unanimously reversing agency decision that exceeded the limits of the agency s statutory authority, and that was based on speculation instead of the required competent, material and substantial evidence); In re Complaint of Pelland, 254 Mich App 675, ; 658 NW2d 849 (2003); Battiste v Dep t of Social Services, 154 Mich App 486, 492; 398 NW2d 447 (1986) (holding that agency s decision was not supported by evidence that a reasonable person would consider adequate). 12

19 B. Rate Setting Legal Requirements. All Commission decisions must be authorized by law, and the Commission s findings of fact must be supported by competent, material, and substantial evidence. Const 1963, art 6, 28. The record demonstrates that MichCon is experiencing a substantial annual revenue underrecovery, which justifies and requires MichCon s recovery of approximately $192.3 million in additional annual revenue (Attachment E). MichCon also has constitutional protections against takings and confiscatory rates under the Fifth Amendment to the U.S. Constitution, which is applicable to the states through the Fourteenth Amendment. Similarly, Mich Const 1963, art 10, 2 provides in part, Private property shall not be taken for public use without just compensation therefore being first made or secured in a manner prescribed by law. These constitutional protections have been recognized and applied to public utility rates in well-established case law. 32 The Michigan Supreme Court has provided further guidance that the Commission must use in setting MichCon s rates. Specifically, creating rates that recognize reductions in certain costs while ignoring the increase in other costs, violates the due process rights of utilities. The Court cited with approval the conclusions of a circuit court judge granting an injunction against such unlawful rates: Certainly at first blush it would appear to anyone steeped in due process considerations that it is grossly unfair to include certain items of decreased cost in rate determination while at the same time to exclude items of increased cost. Michigan Consolidated Gas Company v Public Service Comm, 389 Mich 624, 633; 209 NW2d 210 (1973). 32 See generally, Missouri ex rel Southwestern Bell Telephone Co v Public Service Comm of Missouri, 262 US 276; 43 S Ct 544; 67 L Ed 981 (1923); Federal Power Comm v Natural Gas Pipeline, 315 US 575; 62 S Ct 736; 86 L Ed 1037 (1942); Duquesne Light Co v Barasch, 488 US 299; 109 S Ct 609; 102 L Ed 2d 646 (1989). See also, Northern Michigan Water Co v Public Service Comm, 381 Mich 340; 161 NW2d 584 (1968); Consumers Power Co v Public Service Comm., 415 Mich 134; 327 NW2d 875 (1982); ABATE v Public Service Comm, 430 Mich 33; 420 NW2d 81 (1988). 13

20 As a matter of fundamental ratemaking law, MichCon is entitled to a commensurate return of and on its investment in providing utility service. 33 It is axiomatic that utility rates are overall rates. Federal Power Comm, supra, 320 US at 602; Michigan Bell Telephone Co v Public Service Comm, 332 Mich 7, 37; 50 NW2d 826 (1952); MCL 460.6a(2)(b). MichCon s constitutional rights would be violated by a failure to acknowledge (and establish rates based on) both decreasing and increasing costs. The United States Supreme Court, in construing the Fifth Amendment mandates in conjunction with utility ratemaking, aptly concluded: Regulation may, consistently with the Constitution, limit stringently the return recovered on investment, for investors interests provide only one of the variables in the constitutional calculus of reasonableness (citations omitted). It is, however, plain that the power to regulate is not a power to destroy, (citations omitted) and that maximum rates must be calculated for a regulated class in conformity with the pertinent constitutional limitations. Price control is unconstitutional if arbitrary, discriminatory, or demonstrably irrelevant to the policy the legislature is free to adopt. Permian Basin Area Rate Cases, supra, 390 US at The Commission has an obligation to facilitate MichCon s financial health for the benefit of its customers and shareholders. See, by way of example and not limitation, MCL 460.6a(2)(3); MCL 460.6h(1); 2008 PA 286; Smith v Illinois Bell Telephone Co, 270 US 587, 591; 46 S Ct 408; 70 L Ed 747 (1926). Federal Power Comm, supra, 320 US at 602; Michigan Bell Telephone Co, supra, 332 Mich at 37; MichCon, supra, 389 Mich at 633; Michigan Bell Telephone Co v 33 See Bluefield Waterworks Improvement Co v Public Service Commission of West Virginia, 262 US 679, ; 43 S Ct 675; 67 L Ed 1176 (1923); Federal Power Comm v Hope Natural Gas Co, 320 US 591, 603; 64 S Ct 281; 88 L Ed 333 (1944). See also Permian Basin Area Rate Cases, 390 US 747, ; 88 S Ct 1344; 20 L Ed 2d 312 (1968); FPC v Memphis Light, Gas and Water Division, 411 US 458; 43 S Ct 1723; 36 L Ed 2d 426 (1973); General Telephone Co v Public Service Comm, 341 Mich 620; 67 NW2d 882 (1954); Michigan Consolidated Gas Co v Public Service Comm, 389 Mich 624; 209 NW2d 210 (1973). 14

21 Engler, 257 F3d 587, (CA 6, 2001). Furthermore, our Supreme Court has clearly admonished that: Statutes will be construed in the most beneficial way which their language will permit to prevent absurdity, hardship or injustice; to favor public convenience, and to oppose all prejudice to public interests. Attorney General v Marx, 203 Mich 331, 335; 168 NW 1005 (1918). MichCon s testimony and exhibits demonstrate that, despite MichCon s ability to mitigate and delay the need for rate relief through creative self-help initiatives and other onetime events, 34 MichCon now needs rate relief for the 2010 projected test year (3 T 66; 4 T ). Under well-established ratemaking law, rates for utility service are set prospectively so that the utility provides service and its customers receive service at established rates, which are based on the estimated costs of providing that service, plus a reasonable return on the utility s investment. See ABATE v Public Service Comm, 208 Mich App 248, ; 527 NW2d 533 (1994). This is part of the regulatory compact, under which the utility dedicates its private property to serve the public, and correspondingly receives a reasonable return on the value of its private property. In Board of Public Utility Comm rs v New York Telephone Co, 271 US 23; 46 S Ct 363; 70 L Ed 808 (1926), the United States Supreme Court explained that the just compensation safeguarded to the utility by the Fourteenth Amendment is a reasonable return on the value of the property used at the time that the property is being used for the public service. Rates that are not sufficient to yield that present return are confiscatory. 271 US at 31. To the extent that the utility might have earned sufficient revenue in the past, such past revenue cannot 34 MichCon sold 3.6 Bcf of native gas during 2007 and 2008, and in 2009 MichCon received authority from the Commission to sell an additional 2.0 Bcf of native gas. MichCon also increased its Midstream revenue from $41 million (included in the final order in Case No. U-13898) to $99 million in 2008, and initiated aggressive cost reduction efforts that allowed the Company to effectively manage non-gas, routine operating costs without reducing the quality of service to its customers (3 T 66-67; 4 T ). 15

22 be used to sustain confiscatory rates in the future. Id. at 32. Thus, it would be unconstitutional for the Commission to use hindsight or otherwise base MichCon s rates on past events. In Michigan, our Supreme Court announced the retroactive ratemaking prohibition in Michigan Bell Telephone Co v Public Service Comm, 315 Mich 533; 24 NW2d 200 (1946). The Court used a statutory analysis, reasoning that the Commission has only limited statutory authority, which does not include the authority to retroactively reduce rates. 315 Mich at 547. Further, a lawfully-established rate remains in force until altered by a subsequently-established lawful rate. 315 Mich at 544. A regulatory body cannot penalize a utility for collecting a rate during the period elapsing between the date of the order prescribing the rate and the date of the subsequent order reducing it. Id. at Where the Commission establishes a reasonable rate in its legislative capacity, the Commission cannot later, in its quasi-judicial capacity, find that the utility violated the law because it charged that rate. Id. at In any event, the essential principal of the rule against retroactive ratemaking is that when the estimates prove inaccurate and costs are higher or lower than predicted, the previously set rates cannot be changed to correct for the error; the only step that the MPSC can take is to prospectively revise rates in an effort to set more appropriate ones. The Detroit Edison Co v Public Service Comm, 416 Mich 510, 523; 331 NW2d 159 (1982) (opinion by Fitzgerald, C.J.). IV. TEST YEAR. MichCon proposes a 2010 projected test year (5 T 906). There appears to be no disagreement with respect to MichCon s projected test year among the parties. Prior to 2008 PA 286, which allows utilities to use fully-forecasted projected test years in requesting rate relief, 35 Commission policy called for the use of prior actual experience adjusted 35 MCL 460.6a(1) relevantly states: A utility may use projected costs and revenues for a future consecutive 12- month period in developing its regulated rates and charges. 16

23 for known and measurable changes. Notwithstanding the statutory authority to use a fullyforecasted test period, MichCon used actual financial results from the historical test year ended December 30, 2008 as a point of departure, and then normalized and adjusted those results for inflation and other known and measurable changes, to arrive at its projected revenue deficiency of approximately $192.3 million (Attachment E). 36 In other words, MichCon essentially utilized the Commission s prior methodology, which produced the equivalent of a fully-projected test year. A component of the Company s known and measurable change is the level of inflation over the test years. MichCon s O&M forecast is primarily driven by inflation increases, which are forecasted as 0% 2009 and 1.6% for 2010 (5 T 1452; Exhibit A-10, Schedule C7). V. RATE BASE. A utility s rate base consists of the net amount of capital invested in plant, plus the utility s working capital requirements. MichCon s filed for Total Rate Base for the 2010 test year was $2.361 billion, which consisted of $1.666 billion of Net Plant and $0.695 billion of Working Capital (5 T ; Exhibit A-9, Schedule B1 (Revised)). Staff supports a total rate base amount of $2,354.5 million, consisting of $1,669.4 million of Net Plant and $685.2 million of Working Capital (6 T ; Exhibit S-1, Schedule A-1). Although Staff and MichCon took different paths to arrive at utility rate base, MichCon will accept Staff s rate base amount, with the following two adjustments to arrive at the approximate 36 Attachment D starts with MichCon s filed position of $192.4 million (4 T 218, ; 5 T ; Exhibit A-8, Schedule A-1 (Revised) and makes adjustments to that position to reflect MichCon s current position as discussed in Brief. MichCon s revised Revenue Deficiency of $192.4 million is based on a 13-month average Rate Base of $2,359 million, adjusted NOI of $55 million, and an overall rate of return of 7.31%. The $2,359 million Total Rate Base is detailed on Exhibit A-9, Schedule B1 (Revised). The $55 million NOI is developed on Exhibit A-10, Schedule C1.1 (Revised), and summarized in an income statement format on Exhibit A-10, Schedule C1 (Revised). The 7.31% Rate of Return is set forth on Exhibit A-11, Schedule D1 (Revised) (5 T 1336). 17

24 total rate base amount of $2,370.2 million, consisting of $1,680.5 million of net plant and $689.7 million of working capital. The first adjustment is related to the Manufactured Gas Plant (MGP) issue. The Commission should approve an increase in Staff s working capital in the amount of $4.532 million related to Manufactured Gas Plant (MGP) expenditures through August (4 T 424, Exhibit A-39, col. e) 37 Staff incorrectly recommends an $8.189 million reduction in Projected Working Capital from MichCon s original projection which would result in elimination of all Environmental working capital from MichCon s rate base (6 T ; Exhibit S-2, Schedule B-4). The second adjustment is related to Atlas proposed transfer and integration of the Saginaw Bay Pipeline ( SBPL ) into MichCon, (5 T ). MichCon supports Atlas proposal, which would provide benefits to MichCon customers that outweigh the increase in annual cost of service, if it is done consistent with the operational and financial issues noted below and further discussed in MichCon s rebuttal (4 T 437; 5 T 1361, ). Transfer of the SPBL to MichCon will require an $11.1 increase in rate base (4 T 437; Exhibit A-40, line 4). The increase in rate base related to SBPL consists of two elements. One, an odorization facility would be needed at the existing Saginaw Bay to Alpena meter station, and the small volumes of production gas that currently enter the SBPL would have to be treated or redirected to ensure that the gas stream after transfer meets MichCon s gas quality specifications for heavy hydrocarbons, hydrocarbon dew point, and carbon dioxide (CO2) content (5 T ). 37 This increase is comprised of the following adjustments: (1) increase of $8.416 million related to MGP Regulatory Asset, net of MGP Insurance Recoveries (4 T 425; Exhibit A-39, col. g); (2) decrease of $0.115 million related to projected amortization of the MGP Regulatory Asset and MGP Insurance Recoveries (4 T 426); (3) decrease of $5.269 million for Non-MGP Reserve (4 T ); and (4) increase of $1.50 million related to MGP Injuries and Damages Reserve Reclassification (4 T , 428) 18

25 Two, financially, there would be a 2010 Average Rate Base impact of $11.1 million (4 T 437; Exhibit A-40). MichCon requests that the Commission explicitly authorize MichCon to transfer the SBPL at its construction cost and corresponding accumulated depreciation (4 T 438). Based on the longstanding utility accounting and ratemaking treatment of Original Cost accounting for utility plant, the SBPL transfer should be without regard to the accounting impairment recognized in 1998 pursuant to SFAS 121 (4 T ). With inclusion of these two adjustments, MichCon maintains that the Commission should approve a total rate base amount of $2,370.2 million consisting of $1,680.5 million of net plant and $689.7 million of working capital. VI. RATE OF RETURN. MichCon requests a weighted after-tax rate of return of 7.30% (Attachment A, p. 4). Staff recommends a weighted after tax return of 7.11% (6 T 1678, 1697, 1713; Exhibit S-4, Schedule D-1). The AG proposes 6.67% (6 T 1590, 1627, 1644; Exhibit AG-13 (Revised)). As Staff has adopted much of the Company s projections, the only remaining substantive issues affecting rate of return relate to Staff s understated cost of debt and Return on Equity ( ROE ). For all of the detailed reasons and adjustments set forth below, the Commission should adopt MichCon s weighted after-tax rate of return of 7.30% as computed on Attachment A, p. 4 to this Brief. A. Capital Structure. The Company recommended and explained the need for MichCon to have a permanent capital structure consisting of 50.4% debt and 49.6% equity, which is essentially consistent with the Commission s ruling in Case No. U (4 T 216; 5 T , 1121, 1127; Exhibit A-11, 19