October 5, Attached herewith for filing, please find the Initial Brief of Constellation NewEnergy, Inc. and Certificate of Service of same.

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1 124 West Allegan Street, Suite 1000 Lansing, Michigan T (517) F (517) Douglas J. Austin Michael E. Cavanaugh David E.S. Marvin Stephen L. Burlingame Darrell A. Lindman Gary C. Rogers Mark A. Bush Michael H. Perry Brandon W. Zuk Thomas J. Waters Michael S. Ashton H. Kirby Albright Graham K. Crabtree Michael P. Donnelly Edward J. Castellani Peter D. Houk Jonathan E. Raven Thaddeus E. Morgan Anita G. Fox Elizabeth H. Latchana Brian P. Morley Max R. Hoffman, Jr. Thomas L. Sparks Paula J. Manderfield Marlaine C. Teahan Mark E. Kellogg Ryan K. Kauffman Jennifer Utter Heston Samantha A. Kopacz Paul V. McCord Brian T. Gallagher Jonathan T. Walton, Jr. Laura S. Faussié Melisa M. W. Mysliwiec Aaron L. Davis Paul C. Mallon, Jr. Mark J. Hynes R. Paul Vance Shaina R. Reed RETIRED Donald A. Hines John J. Loose Archie C. Fraser ( ) Everett R. Trebilcock ( ) James R. Davis ( ) Mark R. Fox ( ) Peter L. Dunlap, P.C. jheston@fraserlawfirm.com (517) October 5, 2017 Ms. Kavita Kale Michigan Public Service Commission 7109 W. Saginaw Hwy. Lansing, MI RE: MPSC Docket No. U Dear Ms. Kale: Attached herewith for filing, please find the Initial Brief of Constellation NewEnergy, Inc. and Certificate of Service of same. If you have any questions, please feel free to contact my office. Thank you. Very truly yours, Fraser Trebilcock Davis & Dunlap, P.C. JUH/ab Enclosures cc: All counsel of record Jennifer Utter Heston FRASER TREBILCOCK DAVIS & DUNLAP PC LANSING DETROIT GRAND RAPIDS

2 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter, on the Commission s own motion, ) to open a docket to implement the provisions of ) Section 6w of 2016 PA 341 for ) Case No. U DTE ELECTRIC COMPANY S ) service territory. ) ) INITIAL BRIEF OF CONSTELLATION NEWENERGY, INC. Dated: October 5, 2017 FRASER TREBILCOCK DAVIS & DUNLAP, P.C. Jennifer U. Heston (P65202) Fraser Trebilcock Davis & Dunlap, P.C. 124 W. Allegan, Suite 1000 Lansing, MI Telephone: (517) addresses: jheston@fraserlawfirm.com

3 TABLE OF CONTENTS I. INTRODUCTION... 1 II. THE COMMISSION SHOULD ADOPT AN OVERALL AVERAGE SRM CAPACITY CHARGE FOR DTE THAT IS NO HIGHER THAN MISO S CONE... 4 A. DTE s proposed SRM capacity charge does not comply with Act 341, is not reasonable, and should not be approved... 5 B. The Commission should direct DTE to provide in future SRM rate proceedings a planning model that isolates projected capacity requirements from energy requirements... 7 C. Absent a planning model, the Commission should utilize NARUC s average and excess method to isolate DTE s capacity costs... 9 D. The Commission should not approve an SRM capacity charge that exceeds MISO s CONE... 9 III. THE COMMISSION SHOULD DIRECT DTE TO ASSESS THE SRM CHARGE ON THE AES A. Section 6w of Act 341 requires that any SRM charge be assessed on the AES B. If the Commission chooses to fail to comply with the law, then the Commission should adopt a mechanism whereby the AES could still manage the SRM charge on a portfolio basis IV. THE COMMISSION SHOULD REJECT DTE S PROPOSED 30-YEAR TERM FOR THE SRM CHARGE. THE TERM OF THE SRM CHARGE SHOULD BE FOR ONE YEAR AND APPLY ONLY IN THOSE YEARS FOR WHICH THE AES HAS NOT SATISFIED THE CAPACITY DEMONSTRATION REQUIREMENTS FOR ALL OF ITS LOAD A. DTE s proposed 30-year term for its SRM charge is not reasonable B. DTE s proposed 30-year term for the SRM charge is inconsistent with DTE s SRM charge calculation under Act C. DTE s proposed 30-year term for the SRM charge would violate Section 6w(6) of Act i

4 V. DTE S PROPOSED INTERRUPTIBLE CAPACITY SERVICE FOR AES CUSTOMERS IS UNREASONABLE AND SHOULD BE REJECTED VI. DTE S PROPOSED CUSTOMER NOTIFICATION REQUIREMENT IS UNLAWFUL, UNREASONABLE, AND INCONSISTENT WITH THE COMMISSION S CAPACITY DEMONSTRATION DETERMINATIONS. DTE S PROPOSAL SHOULD BE REJECTED A. DTE s proposal to apply the SRM charge to AES customers who fail to provide DTE with its proposed notification would violate Section 6w(6) of Act B. DTE s proposal to apply the SRM charge to AES customers who fail to provide DTE with its proposed notification is unreasonable C. DTE s proposal to apply the SRM charge to AES customers who fail to provide DTE with its proposed notification is contrary to the Commission s capacity demonstration determinations in Case No. U VII. CONCLUSIONS AND PRAYER FOR RELIEF ii

5 NOW COMES Constellation NewEnergy, Inc. ( CNE ), by and through its attorneys, Fraser Trebilcock Davis & Dunlap, P.C., and pursuant to the schedule established by Administrative Law Judge Mark D. Eyster ( ALJ ), hereby respectfully submits this Initial Brief on DTE Electric Company s ( DTE s ) application to implement a state reliability mechanism ( SRM ) under Section 6w of Public Act 341 of 2016 ( Act 341 ). I. INTRODUCTION At the end of 2016, the Michigan Legislature passed Act 341 reforming Michigan s existing energy laws and adopting several new requirements. Among the new provisions is Section 6w, which establishes new capacity requirements for Michigan load serving entities ( LSEs ). Section 6w(2) of Act 341 provides that if the Federal Energy Regulatory Commission ( FERC ) has not, by September 30, 2017, approved a resource adequacy tariff that includes a capacity forward auction or a Prevailing State Compensation Mechanism ( PSCM ), then the MPSC shall implement an SRM. On February 2, 2017, the FERC rejected the Midcontinent Independent System Operator, Inc. s ( MISO s ) application for approval of a Competitive Retail Solution ( CRS ) tariff in Docket No. ER As a result, there is no MISO capacity forward auction or PSCM, and MISO has indicated it has no plans to propose a new or revised capacity forward auction or PSCM prior to September 30, The Commission recognized that it is now required to implement an SRM in this proceeding. 1 Act 341 defines an SRM as a plan adopted by the [C]ommission in the absence of a prevailing state compensation mechanism to ensure reliability of the electric grid in this state consistent with subsection (8). 2 1 See, Order dated March 10, 2017, MPSC Case No. U-18248, p Section 6w(12)(h) of Act 341, MCL 460.6w(12)(h). 1

6 Section 6w(8) of Act 341 provides that if an SRM is required to be implemented, then the Commission must: (i) require by December 1 of each year that each electric utility demonstrate to the Commission that for the planning year beginning four years after the beginning of the current planning year, the electric utility owns or has contractual rights to sufficient capacity to meet its capacity obligations as set by the appropriate independent system operator or the Commission, as applicable; and (ii) require by the seventh business day of February each year, that each alternative electric supplier ( AES ), cooperative utility, or municipally owned electric utility demonstrate to the Commission that for the planning year beginning four years after the beginning of the current planning year, the AES, cooperative utility, or municipally owned electric utility owns or has contractual rights to sufficient capacity to meet its capacity obligations as set by the appropriate independent system operator, or Commission, as applicable. If the Commission finds that an AES has failed to demonstrate it can meet a portion or all of its capacity obligation, the Commission must require the payment of a capacity charge that is determined, assessed, and applied as set forth in Section 6w(3) of Act 341 for the portion of the AES load not covered by the AES capacity demonstration. In its order dated September 15, 2017, in MPSC Case No. U-18197, the Commission made several important determinations with respect to capacity demonstrations. Thus, the focus of this proceeding is the establishment of an SRM and associated capacity charge for DTE s service area. CNE is an AES providing electricity to customers in DTE s service area. 3 CNE is a very large AES and has direct interests in the SRM charges proposed in this proceeding as a participant in the electric choice market in Michigan Tr Id. 2

7 On April 11, 2017, DTE filed its application in this proceeding, as directed by the Commission in its March 10, 2017 order in this case. This is DTE s first application to implement the provisions of Section 6w of Act 341. If CNE is subject to the SRM charge, then the amounts that CNE pays for capacity service will have a direct impact on its operations and its customers. As a result, CNE is keenly interested in the SRM charges and the terms and conditions of the SRM established by the Commission in this Section 6w case. For this proceeding, CNE retained the highly qualified and well-respected economist, Dr. Jeff D. Makholm, to analyze DTE s proposals and propose an appropriate SRM charge for DTE. Dr. Makholm is a Senior Vice President / Managing Director at National Economic Research Associates, Inc. ( NERA ). 5 Dr. Makholm holds a master s degree and a Doctor of Philosophy degree in economics from the University of Wisconsin, Madison, in addition to holding a bachelor s degree and master s degree in economics from the University of Wisconsin, Milwaukee. 6 Dr. Makholm joined NERA in Dr. Makholm has performed numerous analyses and testified before numerous regulatory commissions on regulated pricing, market power, competition, rate of return, regulatory rulemaking, incentive ratemaking, load forecasting, least-cost planning, cost measurement, contract obligations and bankruptcy, among other issues. 8 Dr. Makholm reviewed DTE s proposed SRM charges and made several recommendations with respect to DTE s proposals. Dr. Makholm first analyzed DTE s proposed SRM methodology and identified several problems with the method proposed by DTE which is inconsistent with the requirements of Act 341. Dr. Makholm then performed 5 3 Tr Tr Id. 8 Id. 3

8 his own economic analysis of DTE s proposed SRM charges to remedy the problems with DTE s proposals. Dr. Makholm also addressed DTE s proposed terms and conditions of the SRM, including DTE s proposed 30-year term for the SRM charge. For the reasons stated below, the Commission should adjust DTE s proposals. The Commission should adopt an SRM charge for DTE between $164/MW-day and $260/MWday, considerably less than DTE s proposed $436/MW-day proposal, and a range more reflective of a capacity-only value. Under no circumstance should the Commission permit an SRM charge for DTE more than MISO s Cost of New Entry ( CONE ) for Zone 7, which was set at $260/MW-day for the planning year. The Commission should also direct DTE to assess the SRM capacity charge on the AES, as required by Act 341, and not the AES customer. The Commission should also reject DTE s proposed 30-year term for SRM capacity service as entirely unreasonable and inconsistent with Act 341. The term of the SRM charge should be for one year and applied to the AES (not the AES customer) only in a year for which the AES does not meet the capacity demonstration requirements set by the Commission. The Commission should also reject DTE s proposal to provide interruptible service to AES customers when it experiences a capacity shortfall. II. THE COMMISSION SHOULD ADOPT AN OVERALL AVERAGE SRM CAPACITY CHARGE FOR DTE THAT, AT A MINIMUM, IS NO HIGHER THAN MISO S CONE. DTE competes with AESs for customers based on capacity costs. Thus, the Commission s implementation of Section 6w of Act 341 and the setting of an SRM capacity charge for AESs under the guise of ensuring electric reliability could fundamentally alter the status of electric competition in Michigan. Thousands of customers, including many Michigan schools, utilize electric competition to better manage their electric bills. The 4

9 Commission s decisions in this Section 6w case are of significant consequence. A key component of Section 6w is the SRM capacity charge. The SRM capacity charge is levied on AES load where the AES has not met the capacity demonstration requirements four planning years in the future. Section 6w(3) of Act 341 provides guidance for calculating an SRM capacity charge for each utility service territory. Like all charges reviewed and approved by the Commission, the SRM capacity charge must be reasonable. CNE recommends that the Commission reject DTE s proposed SRM capacity charge. DTE s proposed charge includes non-capacity values and therefore does not reflect DTE s costs to provide SRM capacity service. Going forward, the Commission should direct DTE to produce a planning model that will isolate DTE s capacity cost from its energy and other noncapacity costs when establishing an SRM charge. In the interim, however, CNE s witness, Dr. Makholm, utilized DTE s own embedded cost data and NARUC s average and excess energy weighting methodology to derive an SRM capacity value for DTE of $224/MW-day. Dr. Makholm s calculated charge is reasonable considering other capacity cost benchmarks, including MISO s CONE. A. DTE s proposed SRM capacity charge does not comply with Act 341, is not reasonable, and should not be approved. To calculate its proposed SRM charge, DTE seeks to establish rates for both its bundled service and AES customers that would equal the revenue requirement approved in its last rate case, MPSC Case No. U DTE s witness Ms. Wojtowicz presents DTE s most recent cost of service study ( COSS ). Using the COSS, Mr. Lacey identifies projected energy sales net of projected fuel costs, fuel expenses, purchased power costs from MISO for Rider 3 and Rider 10, and variable O&M costs. These costs are effectively classified as noncapacity costs. These items are then subtracted from the production related revenue 5

10 requirement and the difference is called the capacity revenue requirement. Using this method, DTE proposed an SRM capacity charge of $436/MW-day. DTE s methodology for calculating its SRM charge does not comply with Act 341. As Dr. Makholm explained: DTE s methodology for calculating a SRM charge does not get at what the legislation is after an SRM, which would be applicable both to AES and utility customers, that ensures that non-capacity electric generation services are not included in the capacity charge.... Such a method only serves roughly to segregate fixed costs from variable costs. It does not reflect, and has no practical possibility of finding, an SRM capacity charge that deals reasonably with the problem that Section 6w seeks to remedy which is to establish a cost-effective, reasonable and prudent mechanism to ensure reliability. The legislation seeks to ensure sufficient capacity resources at the forecasted coincident peak demand plus a reserve margin. In contrast, DTE s proposed capacity charge is made up of the entirety of its non-variable costs unrelated to any measure of peak reliability, as such. DTE s charge is not related to capacity in any way consistent with what the legislation appears to be seeking. DTE s method is simply a fixed cost-related charge that does not recognize that many of DTE s fixed embedded costs are related to providing energy a service that AES customers do not receive from DTE.... I see no economic way to reconcile the legislation s call for an SRM that ensures that non-capacity electric generation services are not included in the capacity charge with DTE s method. If all that the legislation were after was to apportion to AES customers a pro rata share of DTE s non-variable costs precisely what DTE has done then there would be no need in the legislation to describe in detail how to tie the SRM capacity charge to those forward-looking, forecasted costs that would apply to AES load Tr (internal citations omitted). 6

11 Dr. Makholm concludes that DTE s method is not consistent with the law or reasonable. Instead, DTE s method is simply a re-statement of its traditional embedded production cost of service with no attempt to distinguish energy values from capacity values to arrive at a capacity only price. To isolate DTE s forward-looking capacity requirements from its energy requirements, Dr. Makholm recommends that DTE utilize a planning model. B. The Commission should direct DTE to provide in future SRM rate proceedings a planning model that isolates projected capacity requirements from energy requirements. Dr. Makholm recommends that DTE utilize a planning model when calculating its SRM capacity charge. By using a planning model, DTE could have calculated an SRM charge that reflects its going-forward capacity-only costs during the applicable term of the capacity charge, as required under Section 6w(3). 10 Rather than employ a planning model to separate out capacity from energy requirements for the purpose of computing the SRM charge, DTE computes its charge based on a split between its fixed and variable embedded cost of service (including substantial purchased electricity charges). The importance of using a planning model to determine DTE s capacity costs was demonstrated by Dr. Makholm s examples included in his testimony. Dr. Makholm testified: 10 3 Tr Consider first a scenario with only fully-bundled utility customers that is, without any AES customers. Label as System A a system designed by a planning model with sufficient capacity to serve the anticipated loads of such bundled customers, and no more. Label as System B a system designed simply to provide energy alone to such customers (as if storing electricity were costless). Such a system with a planning model cost of System A is clearly well overbuilt to provide energy alone, as System A is designed to handle uneven loads and System B (in which I postulate that customers take at 100 percent load factors) is not. The least cost plan to provide energy only to bundled service customers would retire or mothball the least efficient units, saving their fixed operating and maintenance costs. The difference 7

12 between the full revenue requirement costs of the two systems (System A minus System B) is exactly the cost of service to provide capacity to the bundled service customers over the cost of service to provide energy alone. In other words, simply providing energy requires the payment of fixed costs from utility-built plants, new contracted supplies, purchases in local power markets, etc. Dealing with the capacity at the peak of the system the consideration that most spurs the Section 6w legislation requires only the increment above the cost of service that would be required to serve a system without such anticipated peaks. Note that in this example we did not need any complex characterization of what were and were not capacity costs. In order to provide energy, you have to have generating capacity (or its equivalent in purchases). Capacity costs in the Section 6w sense, in my opinion, are those costs above and beyond those needed to provide energy. 11 Dr. Makholm explained that since AES customers get their energy from their AES, they add capacity-only demands to DTE s system. The planning models will specify that the utility must do something to deal with those capacity-only AES demands (e.g., the purchase of imports, signing up additional interruptible loads or other demand side management customers, delays in planned retirements or possibly new plant construction probably peaking plants to meet this capacity-related demand on the system). Dr. Makholm continued: Label as System C the new total cost of the system designed by the planning model to deal with the AES demands. We know that the cost of System C is higher than that of System A (as the AES customers represent new capacity demands). The difference between Systems C and A represents the cost to provide capacity to AES customers. One way to charge AES customers would be simply to charge them in aggregate (System C minus System A), but this is not the way Section 6w is written. Instead, since all customers must pay the same capacity charge, we know that the difference between C 11 3 Tr (internal footnote omitted). 8

13 and B (System C minus System B) represents all of the capacity charges on the system. The SRM charge (System C-System B) can simply be split across all of the capacity demands of both the AES and bundled service customers on a per kw of peak day demand, or on whatever drivers the planning models determine require capacity. 12 A benefit of Dr. Makholm s recommended planning model approach is that the methodology avoids disputes over the classification of costs as capacity-related or non-capacity-related. CNE recommends that, going forward, the Commission require DTE to perform and present a planning model calculation consistent with Dr. Makholm s testimony in this case when seeking approval of future SRM capacity charges. C. Absent a planning model, the Commission should utilize NARUC s average and excess method to isolate DTE s capacity costs. Despite the lack of a planning model to distinguish capacity-only values, Dr. Makholm concluded that it is possible to use DTE s embedded costs to establish a reasonable SRM capacity charge for DTE. To reasonably approximate the incremental cost of DTE providing capacity-only SRM service using DTE s embedded costs, Dr. Makholm utilized NARUC s long established average and excess energy weighting method to derive an appropriate SRM charge for DTE. Using the average and excess method, Dr. Makholm calculates an SRM capacity charge of $224/MW-day. 13 D. The Commission should not approve an SRM capacity charge that exceeds MISO s CONE. Dr. Makholm s average and excess methodology calculation produces a reasonable SRM charge for capacity utilizing DTE s own embedded costs of capacity consistent with Section 6w(3) of Act 341. The Commission can assess the reasonableness of Dr. Makholm s 12 3 Tr Tr

14 proposed SRM charge by comparing the results of the average and excess methodology to other known capacity prices, such as CONE, calculated by MISO independently from this proceeding for determining the cost of capacity in Zone 7 and approved by the FERC. At a minimum, the Commission should ensure that the SRM charge does not exceed MISO s CONE. In his testimony, Dr. Makholm identified other recent prices for capacity that the Commission can utilize to assess a proposed SRM charge for DTE. 14 One such example was Consumers Energy Company s ( Consumers ) recent auction for zonal resource credits ( ZRCs ). ZRCs are capacity credits used to comply with MISO s resource adequacy requirements. Dr. Makholm testified that Consumers issued a request for proposals for ZRCs and selected only those ZRCs at or below $164/MW-day. 15 Another important benchmark for assessing the reasonableness of any SRM capacity charge is MISO s CONE. MISO s CONE value represents the costs of acquiring new generation within a specified MISO local resource zone. CONE is the highest value that any participant in the MISO capacity market would have to pay for capacity. MISO files annual CONE values to FERC for approval. Dr. Makholm testified that the current CONE value for MISO Zone 7, which is the zone that covers most of Michigan s lower peninsula is $260/MW-day. 16 MISO s CONE value represents the full cost of new generation in the market, including both energy and capacity values. 17 Because CONE includes the costs of both 14 3 Tr Tr , citing Case No. U-18382, In the matter of the application of Consumers Energy Company for approval of long-term power purchase agreements. Testimony of David F. Ronk, Jr., page Tr MISO Module E-1, Section 69A.8.a. 10

15 capacity and energy for new generation, the value exceeds just the cost of capacity. CONE is the highest amount that any participant in the MISO capacity market would have to pay for capacity, and as such, a capacity-only charge, such as the SRM capacity charge, should never exceed MISO s CONE as a reasonable cost for capacity. III. THE COMMISSION SHOULD DIRECT DTE TO ASSESS THE SRM CHARGE ON THE AES. In its application, DTE proposes that the SRM capacity charge be assessed directly on the AES customer rather than the AES. DTE s proposal is in direct contravention of clear and unambiguous language in Section 6w(6) of Act 341. Act 341 requires that the SRM charge be assessed on the AES. Moreover, from a practical perspective, there are considerable problems with DTE s proposal to directly bill AES customers for any SRM capacity charge. DTE s proposal must be rejected. A. Section 6w of Act 341 requires that any SRM charge be assessed on the AES. Section 6w(6) of Act 341 states, in relevant part, as follows: Any electric provider that has previously demonstrated that it can meet all or a portion of its capacity obligations shall give notice to the commission by September 1 of the year 4 years before the beginning of the applicable planning year if it does not expect to meet that capacity obligation and instead expects to pay a capacity charge. The law plainly states the electric provider must give notice if it does not expect to meet the capacity obligation and expects to pay the capacity charge. An electric provider is defined in the law to include an AES. 18 An electric provider does not include the AES customer. Thus, clearly the law demands that it is the electric provider, not the AES customer, who pays the capacity charge. 18 Section 6w(12)(c) of Act 341, MCL 460.6w(12)(c). 11

16 Furthermore, the law clearly imposes the capacity demonstration obligation on the AES. Under Section 6w(8)(b) of Act 341, MCL 460.6w(8)(b), it is the AES who must make the capacity demonstration. If it is the AES who has the capacity obligation with MISO as the LSE, and it is the AES who also must make the capacity demonstration to the Commission, then the AES would be responsible for paying the SRM charge that results from any gap between the AES s capacity demonstration and its load. B. If the Commission chooses to fail to comply with the law, then the Commission should adopt a mechanism whereby the AES could still manage the SRM charge on a portfolio basis. Under DTE s proposal, specific customers would be identified to be subject to the SRM capacity charge. Apart from the plain language of Act 341 requiring that the AES pay any capacity charge, Energy Michigan s witness, Lael E. Campbell, provided testimony explaining from a practical perspective the issues with directly billing AES customers for any applicable SRM capacity charge. Mr. Campbell explains that AESs should be permitted to manage the SRM charge on a portfolio basis consistent with how the utility is able to manage its capacity costs. 19 Mr. Campbell identifies several important concerns with directly billing the SRM charge to AES customers. First, Mr. Campbell explains how depriving the AES from being able to manage the SRM charge on a portfolio basis would significantly diminish the benefits of customers participation in the retail open access program. 20 Second, Mr. Campbell explains how directly billing the SRM charge to customers would force customers into the center of disputes related to the AES s capacity demonstration. 21 If AES customers 19 3 Tr Tr Tr

17 are to be assessed an SRM charge, potentially for a period of 30 years under DTE s proposal, based on an AES capacity demonstration, then the AES customer must suddenly be more aware and involved in capacity demonstration issues. Mr. Campbell then offers recommendations for the Commission s consideration. First, Mr. Campbell recommends that the AES be assessed the SRM charge for any portion of its load not satisfied by the AES capacity demonstration. 22 This approach would allow AESs to manage the SRM charge on a portfolio basis. Under this approach, the AES would continue to be responsible for its capacity obligation at MISO. Second, to avoid the AES double-paying both the Planning Resource Auction ( PRA ) clearing price and the SRM capacity charge for capacity to serve the same load, Mr. Campbell recommends that the SRM charge be reduced by the PRA clearing price. 23 CNE supports Mr. Campbell s recommendations. IV. THE COMMISSION SHOULD REJECT DTE S PROPOSED 30-YEAR TERM FOR THE SRM CHARGE. THE TERM OF THE SRM CHARGE SHOULD BE FOR ONE YEAR AND APPLY ONLY IN THOSE YEARS FOR WHICH THE AES HAS NOT SATISFIED THE CAPACITY DEMONSTRATION REQUIREMENTS FOR ALL OF ITS LOAD. In its application, DTE proposes to apply the SRM charge for a period of 30 years. DTE s witness Mr. Stanczak explains the proposed 30-year term in his testimony. He states: Once an Electric Choice customer returns for either bundled or capacity only service, they must stay with the Company for a 30- year period. This will provide the needed assurance that the costs associated with any asset built to support the required capacity can be recovered from the customer Tr Tr Tr. 88, ln Tr. 89, ln

18 DTE s proposal is not reasonable, is not consistent with DTE s SRM charge calculation under the requirements of Section 6w(3) of Act 341, and if approved would violate Section 6w(6) of Act 341. The Commission should direct DTE to apply the SRM charge only in a year where the AES has not satisfied the capacity demonstration requirements for all of its load, for up to four planning years in the future from the capacity demonstration. A. DTE s proposed 30-year term for its SRM charge is not reasonable. The fallacy of DTE s proposal is that it assumes that DTE will add additional power plants to meet the capacity obligations for AES load. As Dr. Makholm explained, however, DTE can acquire capacity as needed through capacity markets. 25 Dr. Makholm explained that the utilization of competitive power markets, and the institutions that support them, is growing. 26 Indeed, Consumers auction for ZRCs demonstrate utility acceptance of the fact that capacity can be reasonably purchased in a competitive market. Utilities purchase ZRCs to meet their bundled service customers capacity needs, but DTE assumes that it will pursue a potentially costly and risky plan to build or buy generation capacity long-term to meet the potentially short-term need to provide capacity when an AES does not meet the capacity demonstration requirements for all or part of its load for a planning year. Additionally, DTE s concerns are tied to its false assumption that the capacity needed to support the SRM will be new investment, not purchases in the wholesale market. In an attempt to ensure cost recovery from AES customers, DTE proposes a 30-year standard to which even its own bundled service customers are not subject. Bundled service customers today are not subject to a 30-year surcharge to take capacity service from the utility. DTE s proposal is patently discriminatory Tr Tr

19 B. DTE s proposed 30-year term for the SRM charge is inconsistent with DTE s SRM charge calculation under Act 341. The calculation of the SRM charge is governed by Section 6w(3) of Act 341. Under Sections 6w(3)(a) and (b), the Commission is to include capacity-related generation costs and subtract all non-capacity-related electric generation costs [f]or the applicable term of the capacity charge. In calculating its proposed capacity charge, DTE failed to forecast its capacity-related costs and subtract all forecasted non-capacity-related electric generation costs for its proposed 30-year term of the SRM charge. Consequently, there is a clear impermissible disconnect between DTE s proposed SRM charge calculation and its proposed term. Sections 6w(3)(a) and (b) state, as follows: (3)... In order to ensure that noncapacity electric generation services are not included in the capacity charge, in determining the capacity charge, the commission shall do both of the following and ensure that the resulting capacity charge does not differ for full service load and alternative electric supplier load: (a) For the applicable term of the capacity charge, include the capacity-related generation costs included in the utility s base rates, surcharges, and power supply cost recovery factors, regardless of whether those costs result from utility ownership of the capacity resources or the purchase or lease of the capacity resource from a third party. (b) For the applicable term of the capacity charge, subtract all noncapacity-related electric generation costs, including, but not limited to, costs previously set for recovery through net stranded cost recovery and securitization and the projected revenues, net of projected fuel costs, from all of the following: (i) All energy market sales. (ii) Off-system energy sales. (iii) Ancillary services sales. (iv) Energy sales under unit-specific bilateral contracts. 15

20 Thus, the statute is clear that in determining the capacity charge... the Commission shall [f]or the applicable term of the capacity charge include the capacity-related costs and subtract the non-capacity-related costs. In other words, the calculation of the SRM charge should be based on forecasted data during the term of the charge, including projected energy and ancillary services market clearing prices which are forward looking values that should be deducted from the SRM price. DTE s proposed SRM charge is based on annual data from DTE s last approved general electric rate case, MPSC Case No. U DTE did not provide in this proceeding a forecast of its costs, much less provide a forecast of its costs over its proposed 30-year term for its SRM capacity charge. C. DTE s proposed 30-year term for the SRM charge would violate Section 6w(6) of Act 341. Furthermore, a 30-year term for the SRM charge is inconsistent with other provisions in Section 6w of Act 341. Under Section 6w(6), a capacity charge is to be assessed based on planning years for which the AES fails to meet the capacity demonstration requirements. More importantly, the Commission cannot assess a capacity charge in those years where the AES can satisfy the capacity demonstration requirements for all of its load. Section 6w(6) of Act 341 states, A capacity charge shall not be assessed for any portion of capacity obligations for each planning year for which an alternative electric supplier can demonstrate that it can meet its capacity obligations Thus, the Commission cannot impose a capacity charge in those years where the AES demonstrates that it meets the capacity obligation set by the Commission, nor can the Commission impose a 27 Section 6w(6) of Act 341, MCL 460.6w(6) (emphasis added). 16

21 capacity charge for any portion of the AES s capacity obligation for which the AES has sufficiently met the demonstration requirements. Consequently, DTE s proposal to attached a SRM charge for 30 years regardless of the results of the AES s capacity demonstration for each planning year of the 30-year term would violate Section 6w(6) of Act 341. CNE recommends that the Commission adopt a one-year term for the SRM capacity charge. DTE s 30-year term proposal is unreasonable, inconsistent with its own SRM capacity charge calculation, and if approved would violate Section 6w(6) of Act 341. DTE s proposal must be rejected. V. DTE S PROPOSED INTERRUPTIBLE CAPACITY SERVICE FOR AES CUSTOMERS IS UNREASONABLE AND SHOULD BE REJECTED. In its application, DTE proposes to provide returning AES customers with interruptible service. DTE s witness, Mr. Stanczak states, as follows: notwithstanding our best efforts, we may not be able to procure the required capacity to serve all customers if a significant amount of Choice load returns to DTE. [A] reasonable and appropriate way to deal with such a situation is for the Company to charge a reduced interruptible capacity charge for Choice] load that is not supported by either Company owned or purchased capacity. 28 DTE s proposal is unreasonable and should be rejected. DTE s proposal is unreasonable for principally two reasons. First, as Dr. Makholm explains, there is a substantial queue of customers waiting to take service from an AES. 29 Thus, even if customers were to return to DTE for bundled service, there are other customers who would leave DTE s bundled service. Thus, until the queue is exhausted, the net effect on DTE s capacity demands by customers returning and leaving DTE s service is effectively zero Tr Tr

22 Second, Dr. Makholm explains that under the new SRM legislation, both bundled service customers and any AES capacity-only service customers must pay the same capacity charge. 30 If customers are paying the same charge, then there is no reasonable basis to give AES customers a lower priority for the capacity used to serve them. Customers paying the same charge should receive the same service. DTE s proposal unjustly and unreasonable prioritizes bundles service customers over AES capacity-only service customers. VI. DTE S PROPOSED CUSTOMER NOTIFICATION REQUIREMENT IS UNLAWFUL, UNREASONABLE, AND INCONSISTENT WITH THE COMMISSION S CAPACITY DEMONSTRATION DETERMINATIONS. DTE S PROPOSAL SHOULD BE REJECTED. In its application, DTE proposes to require AES customers to notify DTE by April 1, 2018 that they are exempt from any applicable SRM charge and provide documentation that the customer s AES has secured sufficient capacity for the planning years that are June 1, 2018 through May 31, DTE s proposed Retail Access Service tariff states, as follows: By April 1, 2018, each Retail Access Customers must notify DTE Electric in writing that it will not be returning to Full Service or initiating Utility Capacity Service beginning June 1, 2018 and provide documentation from their AES that demonstrates that the AES has secured sufficient capacity to serve the customer s load from June 1, 2018 through May 31, Failure to provide this notice will result in DTE Electric providing Utility Capacity Service to the Customer beginning with their June 2018 billing cycle and shall obligate the Customer to take Full Service or Utility Capacity Service from DTE Electric for 30 years. If at any time after Customers initial capacity notification to the Company, it is determined that Customer will not have access to capacity from its AES sufficient to serve Customer s load, the Company shall bill Customer the applicable capacity charge for the entire plan period regardless of when the capacity shortfall was discovered Tr Exhibit A-12, Schedule 2, p

23 Thus, any AES customer who does not provide DTE with the requisite notice in a manner acceptable to DTE would be made to return to take utility capacity service and pay the SRM charge for a term of 30 years. DTE s proposal is unlawful, unreasonable and contrary to the Commission s capacity demonstration determinations in Case No. U DTE s proposal should be rejected. A. DTE s proposal to apply the SRM charge to AES customers who fail to provide DTE with its proposed notification would violate Section 6w(6) of Act 341. Under Section 6w(6), a capacity charge is to be assessed to AES load only in those planning years for which an AES fails to meet the required capacity demonstration. DTE cannot assess a capacity charge in those years where the AES can satisfy the capacity demonstration requirements for all of its load. Section 6w(6) of Act 341 states, A capacity charge shall not be assessed for any portion of capacity obligations for each planning year for which an alternative electric supplier can demonstrate that it can meet its capacity obligations Thus, DTE cannot impose a capacity charge in those years where the AES demonstrates that it meets the capacity obligation set by the Commission, nor can DTE impose a capacity charge for any portion of the AES s capacity obligation for which the AES has sufficiently met the demonstration requirements. Consequently, DTE s proposal to impose a SRM charge for 30 years based on failure of the AES customer to provide notice regardless of the results of the AES s capacity demonstration to the Commission would be unlawful. 32 Section 6w(6) of Act 341, MCL 460.6w(6) (emphasis added). 19

24 B. DTE s proposal to apply the SRM charge to AES customers who fail to provide DTE with its proposed notification is unreasonable. DTE s proposal, if approved, would require nearly 5,000 individual AES customers to notify DTE and provide supporting documentation by April 1, 2018 or incur a SRM charge for 30-years. DTE s proposal is administratively complex and, if approved, will certainly result in AES customers failing to comply. Customers tend to not be as involved or informed on regulatory proceedings as AESs or utilities. DTE has not provided any information concerning how customers will be notified of the requirement or how to comply. Moreover, DTE s proposed tariff does not specify what is needed for supporting documentation. Customer apathy, forgetfulness, technology issues, mailing delays, etc., could all play a role in large numbers of customers failing to comply with DTE s unreasonable notification proposal. There are numerous reasons why customers may not meet DTE s notification requirements none of which have anything to do with ensuring electric reliability. AES customers should not be burdened with DTE s cumbersome and vague notification requirement. C. DTE s proposal to apply the SRM charge to AES customers who fail to provide DTE with its proposed notification is contrary to the Commission s capacity demonstration determinations in Case No. U Finally, DTE s notification requirement should be rejected as inconsistent with the capacity demonstration process adopted by the Commission in its September 15, 2017 order in MPSC Case No. U In that order, the Commission established a process whereby AESs would submit their capacity demonstration information to the Commission for review by the MPSC Staff. The MPSC Staff will issue a memorandum regarding the sufficiency of the capacity demonstrations. If the Commission has a concern with a supplier s capacity 33 Order dated September 15, 2017, pp

25 demonstration, then the Commission may open a show cause proceeding to be conducted as a contested prior to the imposition of any SRM charge. Thus, the Commission has made clear that the capacity demonstration is to the Commission and not to the affected utility. Further, it is the Staff and the Commission, not the individual AES customer, who will provide notice to the affected utility when an AES has not demonstrated that it has sufficient capacity for all of it load. DTE s proposal is contrary to the Commission s determination and should be rejected. VII. CONCLUSIONS AND PRAYER FOR RELIEF For the reasons explained in the preceding sections of this brief, CNE respectfully recommends that the Commission issue an order adopting the following: 1) Direct DTE to submit a planning model in its next proceeding wherein the SRM charge will be reviewed or amended: 2) Adopt an SRM capacity charge for DTE between $164/MW-day and $260/MWday; 3) Direct DTE to assess to the AES any SRM capacity charge for any portion of capacity obligations for each planning year for which an AES has not met the Commission s capacity demonstration requirements; 4) Reject DTE s proposed 30-year term for SRM capacity service as entirely unreasonable and inconsistent with Act 341. The term of the SRM charge should be for one year and applied to the AES (not the AES customer) only in those years and for the portion of the AES load for which the AES has not met the capacity demonstration requirements; 5) Reject DTE s proposed interruptible capacity service for AES customers; and 21

26 6) Reject DTE s proposed customer notification requirement. Respectfully submitted, FRASER TREBILCOCK DAVIS & DUNLAP, P.C. ATTORNEYS FOR CONSTELLATION NEWENERGY, INC. Date: October 5, 2017 By: Jennifer U. Heston (P65202) Business Address: 124 W. Allegan, Suite 1000 Lansing, MI jheston@fraserlawfirm.com 22

27 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter, on the Commission s own motion, ) to open a docket to implement the provisions of ) Section 6w of 2016 PA 341 for ) Case No. U DTE ELECTRIC COMPANY S ) service territory. ) ) CERTIFICATE OF SERVICE Angela R. Babbitt hereby certifies that on the 5 th day of October, 2017, she served the Initial Brief of Constellation NewEnergy, Inc. and this Certificate of Service on the persons identified on the attached service list via electronic mail. Angela R. Babbitt

28 Service List for U Administrative Law Judge Honorable Mark D. Eyster Michigan Public Service Commission 7109 W. Saginaw Hwy. Lansing, MI Counsel for DTE Gas Company Michael J. Solo Richard P. Middleton Jon Christinidis David S. Maquera Andrea A. Hayden DTE Gas Company One Detroit Plaza, 688 WCB Detroit, MI Counsel for Sierra Club Christopher M. Bzdok Tracy Jane Andrews Olson, Bzdok & Howard 420 East Front St. Traverse City, MI Counsel for MPSC Staff Lauren D. Donofrio Meredith R. Beidler Monica M. Stephens Michigan Public Service Commission 7109 W. Saginaw Hwy., 3 rd Floor Lansing, MI donofriol@michigan.gov beidlerm@michigan.gov stephensm11@michigan.gov Counsel for Wal-Mart Stores East, LP and Sam s East, Inc. Melissa M. Horne Higgins, Cavanagh & Cooney, LLP 10 Dorrance St., Ste. 40 Providence, RI mhorne@hcc-law.com Counsel for Residential Customer Group Don L. Keskey Brian W. Coyer Public Law Resource Center PLLC University Office Place 333 Albert Ave., Ste. 425 East Lansing, MI donkeskey@publiclawresourcecenter.com bwcoyer@publiclawresourcecenter.com Counsel for Energy Michigan, Inc. Timothy J. Lundgren Laura A. Chappelle Vanum Law Firm 201 N. Washington Sq., Ste. 910 Lansing, MI tjlundgren@varnumlaw.com lachappelle@varnumlaw.com Toni L. Newell Varnum Law Firm 333 Bridge St., NW Grand Rapids, MI tlnewell@varnumlaw.com Counsel for ABATE Stephen A. Campbell Clark Hill 500 Woodward Ave. Detroit, MI scampbell@clarkhill.com 2

29 Sean P. Gallagher Michael J. Pattwell Clark Hill 212 E. Grand River Ave. Lansing, MI Counsel for Calpine Energy Timothy J. Lundgren Laura A. Chappelle Vanum Law Firm 201 N. Washington Sq., Ste. 910 Lansing, MI Counsel for Wolverine Power Marketing Cooperative, Inc. Richard Aaron Courtney Kissel Dykema Gossett, PLLC 201 Townsend, Ste. 900 Lansing, MI Peter H. Ellsworth Nolan J. Moody Dickinson Wright 215 S. Washington Sq., Ste. 200 Lansing, MI Counsel for Michigan State Utility Workers Council, Utility Workers Union of America, AFL-CIO John A. Conzano Patrick J. Rorai 423 N. Main St., Ste. 200 Royal Oak, MI Counsel for Attorney General Celeste R. Gill 525 W. Ottawa St., Williams Bldg., 6 th Floor PO Box Lansing, MI Gillc1@michigan.gov Counsel for Spartan Renewable Energy, Inc. Jason Hanselman Dykema Gossett, PLLC 201 Townsend, Ste. 900 Lansing, MI jhanselman@dykema.com Counsel for Michigan Municipal Electric Association Jim B. Weeks 809 Centennial Way Lansing, MI jweeks@mpower.org 3