BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

Transcription

1 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of THE DETROIT EDISON COMPANY to increase rates, amend its rate schedules governing the distribution and supply of electric energy, implement Power supply Cost Recovery Case No. U-0 plans, factors and reconciliations in its rate schedules for jurisdictional sales of electricity and for miscellaneous accounting authority and regulatory asset recovery. / Proceedings had in the above-entitled matter before Daniel E. Nickerson, Jr., J.D., Administrative Law Judge, at the Michigan Public Service Commission, Mercantile Way, Lansing, Michigan. APPEARANCES: SESSION OF WEDNESDAY, APRIL, 00 VOLUME JON CHRISTINIDIS, J.D. RICHARD P. MIDDLETON, J.D. MICHAEL J. SOLOCINSKI, JR., J.D. The Detroit Edison Company 000 Second Avenue, WCB Detroit, Michigan Appearing on behalf of The Detroit Edison Company

2 0 APPEARANCES: (Continued) VARNUM, RIDDERING, SCHMIDT & HOWLETT LLP By ERIC J. SCHNEIDEWIND, J.D. 0 N. Washington Square, #0 Lansing, Michigan Appearing on behalf of Energy Michigan SHALTZ & ROYAL, PC By DIANE ROYAL, J.D. 0 W. Saginaw, #C- Lansing, Michigan Appearing on behalf of the Residential Ratepayer Consortium DONALD E. ERICKSON, J.D. Assistant Attorney General P.O. Box 0 Lansing, Michigan 0 Appearing on behalf of Attorney General Michael A. Cox PATRICIA S. BARONE, J.D. Assistant Attorney General Mercantile Way, Suite Lansing, Michigan Appearing on behalf of the Commission Staff - - -

3 I N D E X WITNESS EXAMINER TYPE PAGE Alden M. Hathaway Testimony bound in William G. Aldrich Testimony bound in Ronald J. Ancona Barone Direct Brian Ballinger Testimony bound in Daniel J. Blair Testimony bound in 00 Timothy D. Boyd Testimony bound in 0 Michael L. Collins Testimony bound in 0 Alan Y. Droz Testimony bound in 00 William Kusiak Testimony bound in 0 Kirk D. Megginson Testimony bound in 00 Susan J. Sims Testimony bound in 00 Thomas S. Stanton Testimony bound in 0 George R. Stojic Testimony bound in 0 EXHIBIT NO. MARKED OFFERED REC'D S- (WGA-) Revenue Deficiency for the Year Ended //0 S- (WGA-) Rate Base - Average Net Plant For the Year Ended //0 S-0 (WGA-) Adjusted Net Operating Income For the Year Ended //0 S- (WGA-) Calculation of Pretax Overall Rate of Return For the Year Ended //0 S- (WGA-) Calculation of Regulatory Asset Recovery Surcharges S- (RJA-) Revised, PSCR Base Calculation 0

4 I N D E X (Continued) EXHIBIT NO. MARKED OFFERED REC'D S- (BLB-) Combination Group and DTE Energy Corporate Statistics 00 S- (TDB-) Other O&M Expense 0 0 S- (TDB-) Electric Plant in Service 0 0 S- (MLC-) Staff's Proposed Increases by Rate Schedule 0 0 S- (MLC-) Calculation of SMC Transitional Rates 0 0 S- (MLC-) Schedule E, Staff's Proposed Tariff Sheets 0 0 S-0 (AYD-) Amortization of Regulatory Assets - All Cust. 0 0 S- (WJK-) Stranded Costs for the Year S- (KDM-R) Capital Structure For the Test Year Ended //0 0 0 S- (TSS-) Table : Michigan Low- Income Energy Assistance and Low-Income Energy Efficiency Financial Support S- (TSS-) Report on The Low- Income and Energy Efficiency Fund 0 S- (TSS-) Corrected, Top Ten Utility Green Pricing Programs (As of December 000) 0

5 I N D E X (Continued) EXHIBIT NO. MARKED OFFERED REC'D S- (TSS-) Library of Relevant Publications, Chronological Listing 0 S- (TSS-) Utility Green Pricing Activities 0 S- (TSS-) Summary of Green Pricing Programs 0 S- (TSS-) Graphs re Fuel Mix 0 S-0 (TSS-) Electric Choice Implementation Costs Audited by MPSC Staff and Approved in MPSC Orders 0 S- (TSS-) Electric Choice Customer Participation, September 00 to Present 0 S- (TSS-0) Detroit Edison Performance in Meeting Electric Choice Requirement to Complete Utility Enrollment Responsibilities Within Days 0 S- (GRS-) Detroit Edison's Customer Choice Sales Trend, Primary Customers S- (GRS-) Headroom Calculation for D Customers S- (GRS-) Customer Choice Participation Rates - - -

6 Lansing, Michigan Wednesday, April, 00 0:00 A.M (The hearing was resumed pursuant to the adjournment.) 0 0 JUDGE NICKERSON: On the record. Good morning, everyone. Mr. Schneidewind. MR. SCHNEIDEWIND: Yes, your Honor. I would like to place on the record the direct testimony of Alden M. Hathaway on behalf of Mackinaw Power. The testimony consists of a cover sheet and seven pages of qualifications and testimony and there are no exhibits. JUDGE NICKERSON: All right. Any objection to binding the testimony of Mr. Hathaway into the record? MR. ERICKSON: I believe there are eight pages. Am I wrong? I thought I heard Mr. Schneidewind say seven. MR. SCHNEIDEWIND: I said one cover sheet and seven pages of testimony. The total submission is eight pages. You're right. But one of those pages is a

7 cover sheet. JUDGE NICKERSON: Thank you for the clarification. bound into the record. Any objection? All right. It may be

8 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) THE DETROIT EDISON COMPANY ) To increase rates, amend its rate ) schedules governing the distribution and ) supply of electric energy, implement ) the Power supply Cost Recovery plans, ) Case No. U-0 factors and reconciliations in its rate ) schedules for jurisdictional sales of ) electricity and for miscellaneous ) accounting and regulatory ) asset recovery. ) DIRECT TESTIMONY OF ALDEN M. HATHAWAY ON BEHALF OF MACKINAW POWER, LLC March, 00

9 U-0 Qualifications of Alden M. Hathaway II. Q. Would you please state your name, address and position?. A. My name is Alden M. Hathaway, II. My business address is K Street, NW. Suite 00, Washington, DC 000. I am the Director of Clean Energy Programs,. Environmental Resources Trust (ERT). I have served in this position since CY Q. What is your educational background?. A. I graduated with a Bachelors of Science in electrical Engineering from the University of Virginia.. What are your responsibilities at ERT?. A. I direct ERT s Green Power Program for national accounts, utilities and Great. Lakes States electric customers, including Franklin Park, Purcellville, VA; EPA 0. Computer Data Center, RTP, NC; EPA Cincinnati Lab; Mackinaw City, MI Wind Site. and several of ERT s power generation sites. I developed green power programs for the. City of Chicago; Sterling Planet; Old Mill Power and DTE Energy. In 00, I helped. lead the fifth Solar Lights for Africa trip to Africa installing solar panels in high. schools and hospitals.. Q. Could you describe ERT s structure and purpose?. A. ERT is a national non-profit, which was founded by Environmental Defense, the. National Fish and Wildlife Society, the German Marshall Fund and has been. funded by the Great Lakes Protection Fund. ERT is catalyzing new Green Power markets. throughout the Great Lakes and Eastern Seaboard industrial, commercial and residential 0. customers. See

10 . Q. Have you testified before the Michigan Public Service Commission (the. Commission or MPSC) before?. A. Yes. My Testimony was submitted and bound into the CY 000 evidentiary. record in the MPSC Detroit Edison securitization case; MPSC Case No.U-. I was. granted permission to address the MPSC Administrative Law Judge at the September,. 00 prehearing of the Mackinaw Power application to amend the Consumers Energy. Green Power Pilot Program, MPSC Case No. U-.. Q. What is ERT s role in Michigan and the Great Lakes States?. A. ERT works with the United States Environmental Protection Agency (US EPA) 0. to secure customer commitments to the US EPA s Green Power Partners Program. See. Power Founding Partners of the US EPA Green Power Partnership. include General Motors, Ford Motor Company, Steelcase, Cascade Engineering and the. City of Chicago. Whirlpool, the City of Detroit, Mackinaw City and other Michigan. customers have committed as US EPA Green Power Partners to purchase new renewable. power. ERT has also worked with Mackinaw Power to develop new wind power projects. and to educate the public on the value of new energy efficiency and renewable energy. In. 00, ERT certified the Mackinaw City Wind Power Project s power as complying with. the Commission s Order in Case U-0 that the power sold and delivered be new,. zero-emissions, Michigan-based renewable power. For example, the. million 0. kilowatts of new, zero-emissions wind power now being generated by Michigan s only. privately developed commercial wind power project have been certified by ERT to. Consumers Energy. It markets the power to its. million Michigan customers.. Those customers have paid a premium of $0.0/kWh and have sold out the new

11 . energy capacity generated by the Mackinaw City Wind Power Project since its December., 00 Commercial Operation. Furthermore, ERT is working with the MDEQ,. municipalities and at least one utility to verify the emissions reduction impact of new. wind power. These reductions will be used to meet area requirements or utilities cap and. trade responsibilities under existing and future MDEQ and US EPA regulations.. Q. What is the purpose of your testimony in this case?. A. The purpose of my testimony is to present Mackinaw Power s position regarding. the issues raised by the applicant.. Q. Please summarize your testimony. 0. A. My testimony includes two sections. First, I present Mackinaw Power s position. concerning the need for the Detroit Edison rate case to address the critical issues of. energy efficiency and new renewable power. Second, I set forth specific components. of an MPSC Order which should allow Detroit Edison customers to conserve natural. resources and purchase new renewable power through innovative tariffs that offer a. variety of customer choices and can take advantage of long-term, firm pricing. These. EE/RE tariffs will be supplied through long-term, firm-priced power purchase. Agreements with suppliers. Full cost recovery for Detroit Edison should be assured. through Power Supply Cost Recover (PSCR) provisions, sound marketing, emissions. credits sales and an MPSC-approved Detroit Edison Renewable Power surcharge or 0. deduction from the Low Income Energy Efficiency (LIEE) Fund established in case U-. and addressed in the Commission s recent order. These recommendations. provide a comprehensive Detroit Edison Energy Efficiency and Renewable Energy. (EE/RE) Program and Tariffs that could cut costs and cut air emissions. If these

12 . recommendations are incorporated into the Commissions Order in U-0, the. result could be a true increase in the Triple Bottom Line:..Building energy independence, reducing fuel pricing, emissions and security risks.. Increasing Michigan s sustainable economic development with st century jobs, and.. Protecting our God-given natural resources: cleaner air, cleaner water, prime farm. land, and our Great Lakes for future generations.. Rate Case, U-0.. The Wall Street Journal March, 00 reported that Detroit Edison will spend $.. billion, 00-0 on air pollution control of existing coal plants. This is in addition to 0. the $0 million already spent. Mackinaw Power and ERT recommend that the MPSC. work with the Michigan Department of Environmental Quality and the US EPA to create. a regulatory framework that encourages and promotes a multi-technology response to the. problem of air quality which include EE/RE and distributed generation technologies. The. Commission should encourage the Granholm Administration, the MDEQ and US EPA to. allow Edison to use least cost means including new energy efficiency and renewable. energy to address these concerns and slow rate increases or reduce those rates. Clearly, it. is in the interest of Detroit Edison, its shareholders and ratepayers to have the. Commission s Order in case U-0 incorporate an EE/RE program and tariffs.. Mackinaw Power Recommendations 0. Mackinaw Power recommends that following specific components of an MPSC Order. which could allow Detroit Edison customers to conserve natural resources and purchase. new renewable power:..tariff/ppa Term. The Tariff and Power Purchase Agreement term shall be for 0 years.

13 .. Tariff Quantity of Energy. 0,000 MWh, allocated and delivered through a method to. be determined by Detroit Edison which includes wind, solar, biomass and other forms of. new renewable energy MW blocks and Financiable PPAs: The Detroit Edison EE./RE program and. Tariffs should be authorized to approve 0 year power purchase agreements with. suppliers at rates of $0-$0/MWh, plus an annual % escalation factor for improving. technology and assuring first class operations, maintenance and productivity. Therefore,. the rates, terms and conditions authorized by the Commission should allow the new. renewable projects to secure long-term financing. Act of treatment should be 0. assured so that project financing is available. These new projects are very capital. intensive. Typically, 00% of the capital costs must be financed before Commercial. Operation. Therefore, they depend on long-term, financiable PPAs to secure sufficient. equity and debt to pay the development, construction and capital costs up front. The. Commission would be wisely using its authority under 000 P.A. and will be doing. the State, Edison, its shareholders and customers a service by approving the EE/RE. Program and authorizing financiable PPAs with renewable energy suppliers... Renewable Tariffs: The 0- MW blocks of new renewable power will be brought. on line in an orderly manner, This amounts to an estimated one percent (%). of Detroit Edison s sales. 0..Full Cost Recovery Edison should fully recover its costs and actually earn new. revenues from proposed Energy Efficiency and Renewable Energy Tariffs. There are four. means by which Edison s full cost recovery should take place:. A. Average Cost of Generation or Purchased Power: First, average cost

14 . recovery through tariffs and PSCR cuts the amount of new renewable energy to be sold. through voluntary tariffs. If the sales price is $/MWh, the first recovery comes through. Edison s average cost of generation or purchased power. If this rises above $/MWh. cost recovery should be complete and assured through the PSCR.. B. Marketing: Second, if effectively marketed, the remainder of the sales. price, if any, should be fully recovered. Edison s sold out blocks of new, renewable. power will assure Edison s full recovery and future revenues. Following my example, if. the sales price is $/MWh and the PSCR recovery is $0/MWh, then the remaining. $/MWh can be fully recovered from Edison s Renewable Energy Customers through 0. its MPSC-approved renewable energy tariffs, including (but not limited to):. ). $/month check offs for small blocks of power sold to customers. ). Long-term, firm priced Green Power Sales Agreements (GPSA). of,0, and 0 years. This offers Edison the opportunity to. serve those customers that elect to lock in the benefits of new wind. Power, C. Emissions Credits: Third, to the extent the Detroit Edison PSCR recovery and. the marketing of the EE/RE Program and Tariffs are not sold out, Edison could either. avoid Clean Air Act compliance costs or receive revenues from the sale of green tags. or emissions credits from the new renewable power generated. Continuing my example, 0. if the $/MWh sales price is not fully recovered by PSCR plus the Renewable Energy. Sales, then the balance, if any, could be recovered through sales of emissions credits.. D. Surplus or Balance: Finally, Edison may either realize a program surplus. or have a balance. Edison should be granted MPSC authority to either:

15 . ). Impose a very modest, non-bypassable surcharge, rate-basing the. difference, if any, OR. ). Be authorized to deduct the balance, if any, from the Low Income. and Energy Efficiency Fund.. In the event of a surplus, Edison should be authorized to retain the amounts recovered. above PSCR, marketing and emissions credits sales.. Q. Does this conclude your testimony?. A. Yes

16 JUDGE NICKERSON: Thank you, Mr. Schneidewind. 0 0 Off the record. (A recess was taken.) (Documents were marked Exhibits S- through S- by the reporter.) JUDGE NICKERSON: All right, on the record. Ms. Barone? MS. BARONE: Thank you, your Honor. At this time the staff would like to offer the testimony of William G. Aldrich. His testimony consists of a cover sheet and nine pages and supplemental testimony of one page. And I would also like to note for the record that the testimony being offered today is revised testimony that was filed on March, subsequent to his initial filing of March, 00. I would also like to offer into evidence Mr. Aldrich's exhibits which consist of S- (WGA-), which consists of one page; S- -- I'm sorry, it's not one page -- three pages; S- (WGA-), which consists of two pages; S-0 (WGA-), which consists of nine pages; S- (WGA-), which consists of one page; and S- (WGA- ), which consists of one page.

17 JUDGE NICKERSON: All right, thank you, Ms. Barone. Any objection to binding in Mr. Aldrich's direct testimony and supplemental testimony? It may be bound into the record

18 S T A T E OF M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * In the matter of the application of ) THE DETROIT EDISON COMPANY ) to increase rates, amend its rate ) Case No. U- 0 schedules governing the distribution and ) supply of electric energy, implement ) Power Supply Cost Recovery plans, ) factors and reconciliations in its rate ) schedules for jurisdictional sales of electricity ) and for miscellaneous accounting authority ) and regulatory asset recovery. ) ) QUALIFICATIONS AND DIRECT TESTIMONY OF WILLIAM G. ALDRICH MICHIGAN PUBLIC SERVICE COMMISSION MARCH, 00

19 DIRECT TESTIMONY OF WILLIAM G. ALDRICH CASE NUMBER U-0 PART I 0 0 Q. Please state your name and business address. A. My name is William G. Aldrich. My business address is Mercantile Way, P. O. Box 0, Lansing Michigan 0. Q. By whom are you employed, and in what capacity? A. I am employed by the Energy Operations Division of the Michigan Public Service Commission. I am the Manager of the Rate Section of the Energy Operations Division. Q. What is your employment history with the Commission Staff? A. In, I joined the Commission Staff as an auditor in the Audit Section of the Gas Division. In that position, I participated in numerous audits of gas utilities, and testified before the Commission on a wide variety of rate case accounting issues. In, I transferred to the Rate and Tariff Section of the Gas Division as a tariff analyst and an auditor. In that capacity, I testified before the Commission on rate design issues in numerous contested rate cases, was involved in the implementation of Act 0 of, conducted many GCR reconciliation audits, and testified on GCR-related issues in both GCR plan cases and GCR reconciliation cases. In, I was promoted to the position of Gas Cost of Service Specialist. In February 00 I became Manager of the Rate Section. Q. What are your duties as Manager of the Rate Section? A. I am primarily responsible for planning, direction, and coordination of gas and electric rate case and depreciation case investigations and case presentations. Also, I am responsible for planning, directing, and coordinating all activities

20 DIRECT TESTIMONY OF WILLIAM G. ALDRICH CASE NUMBER U-0 PART I associated with rate design, cost of service studies, and tariff administration for the Energy Operations Division. Q. What is your educational background? A. I graduated from Michigan State University in with a B. A. degree in Business Administration, with a major in accounting. I have participated in numerous continuing professional education courses, including the NARUC Annual Regulatory Studies Program, and a Gas Distribution Engineering course presented by the Institute of Gas Technology.

21 DIRECT TESTIMONY OF WILLIAM G. ALDRICH CASE NUMBER U Q. Please explain the purpose of your testimony. A. The purpose of my testimony is to present evidence in support of Staff s recommended revenue deficiency of $,,000 $,,000. Also, I am sponsoring Staff s proposed surcharge to recover choice implementation costs, and I am providing Staff s response to Edison s Earnings Sharing Mechanism proposal. I have prepared several exhibits to support Staff s revenue deficiency recommendation, as detailed below:. Exhibit S- (WGA-), Schedule A- Revised: Revenue Deficiency. Exhibit S- (WGA-), Schedule A-: Gross Revenue Conversion Factor. Exhibit S- (WGA-), Schedule A-: Production Fixed Cost Allocation. Exhibit S- (WGA-), Schedule B-: Rate Base Average Net Plant. Exhibit S- (WGA-), Schedule B-: Rate Base Adjustments. Exhibit S-0 (WGA-), Schedule C- Revised: Adjusted Net Operating Income. Exhibit S-0 (WGA-), Schedule C-: Staff Revenue Adjustment. Exhibit S-0 (WGA-), Schedule C-: Staff Fuel and Purchased Power Adjustment. Exhibit S-0 (WGA-), Schedule C-: Staff O&M Expense Adjustment 0. Exhibit S-0 (WGA-), Schedule C-: Staff Depreciation Adjustment. Exhibit S-0 (WGA-), Schedule C- Revised: Staff Control Premium Adjustment. Exhibit S-0 (WGA-), Schedule C-: A & G Capitalized. Exhibit S-0 (WGA-), Schedule C-: Pro Forma Income Tax Savings. Exhibit S-0 (WGA-), Schedule C-: Interest Synchronization

22 DIRECT TESTIMONY OF WILLIAM G. ALDRICH CASE NUMBER U Exhibit S- (WGA-), Schedule D-: Calculation of Pretax Overall Rate of Return Q. What projected test year has Staff chosen to base its case upon? A. Staff has chosen a projected 00 test year. However, instead of using the topdown methodology that the Commission criticized in its Interim Order (pp. 0- ), Staff has used the historical test year as the starting point, and has made adjustments for known and measurable changes. Q. Please explain the revenue deficiency calculation shown on Exhibit S- (WGA- ), Schedule A- Revised. A. Staff has calculated a revenue deficiency of $,,000 $,,000 as shown on line of this exhibit. Q. What is the adjustment to revenue deficiency of $,,000 shown on line? A. This is the amount of production fixed costs that is allocated to Edison for recovery through retention of third party sales revenue. The adjustment is the product of jurisdictional production fixed costs and the percentage of choice sales that Staff is projecting that Edison will experience; this calculation is shown on Exhibit S- (WGA-), Schedule A-. Staff witness George Stojic will discuss the policy aspects of Staff s proposal. Q. Please discuss Staff s rate base adjustments. A. There are three rate base adjustments proposed by Staff. Firstly, Staff witness Timothy Boyd has primarily relied upon historical plant additions to forecast 00 and 00 plant additions, rather than using Edison s budgeted additions. This reduces rate base by about $0 million. Secondly, I have removed

23 DIRECT TESTIMONY OF WILLIAM G. ALDRICH CASE NUMBER U-0 0 regulatory asset balances from working capital. The return on these assets is accrued as discussed by Staff witness Alan Droz; inclusion in rate base would constitute a double count of interest on the regulatory assets. This adjustment reduces rate base by about $0 million. Finally, I have recognized the recording of A & G capitalized in 00 and 00. This adjustment increases rate base by about $0 million. The net effect of Staff s rate base adjustments is a reduction of $0 million. Q. Please explain Staff s net operating income adjustments. A. Staff is proposing two adjustments to sales revenue. Staff is recognizing a lower choice sales volume than Edison, thereby increasing revenue by $ million. Also, Staff has removed $ million of interconnection revenue. The net effect of these adjustments is to reduce revenue by $ million. These adjustments are shown on Exhibit S-0 (WGA-), Schedule C-. The change in choice sales volumes also necessitates an increase in fuel and purchased power costs of $ million, as shown on Exhibit S-0 (WGA-), Schedule C-. 0 Staff has proposed three changes to Edison s O & M expense calculation. Firstly, consistent with the historical test year adjusted for known changes method, Staff is proposing that most O & M expense increases be limited to the expected inflation rate for 00 and 00. The exceptions to that rule are the pensions and OPEB expenses. Staff has included the 00 level of these expenses in its O & M expenses; the cost of these items has increased significantly from 00, and the year-to-year costs are largely out of the direct control of Edison. Secondly, Staff

24 DIRECT TESTIMONY OF WILLIAM G. ALDRICH CASE NUMBER U-0 has reduced O&M expenses for additional A & G capitalized. Thirdly, Staff has removed interest on the control premium from O & M expense. The effect of these adjustments is summarized in Exhibit S-0 (WGA-), Schedule C-. The details of the calculation are shown in Exhibit S- (TDB-). I am sponsoring the level of A & G expenses in Staff s case; Staff witness Timothy Boyd is addressing other O & M expenses. Staff has adjusted depreciation expense for the reduced plant levels in Staff s case. This adjustment is shown on Exhibit S-0 (WGA-), Schedule C Staff is proposing an adjustment of $ million to allow recovery of the costs associated with DTE s control premium. The control premium was paid when DTE purchased MCN in 00. Edison claims that the control premium is $ million; this ignores the MCN tax loss of $ million that DTE realized from the purchase. The tax loss generates a tax savings of $0 million, which Edison itself admits was reflected in a dollar-for dollar increase in the price paid for MCN. DTE will retain the benefits of the tax loss, thereby reducing the premium paid by DTE. Staff has recognized the tax loss offset to the control premium, which reduces the control premium to $ $ million. This translates to a financing cost to Edison of $,,000 $,,000. Staff has also removed the proposed 0-year amortization of the control premium. Under generally accepted accounting principles, companies are no longer allowed to amortize acquisition premiums, except through a SFAS exception. The effect of Staff s

25 DIRECT TESTIMONY OF WILLIAM G. ALDRICH CASE NUMBER U-0 adjustments to the control premium reduces it from the $ million requested by Edison to $ $ million. Staff s control premium calculation is shown on Exhibit S-0 (WGA-), Schedule C- Revised. 0 Staff has also proposed a second adjustment for A&G capitalized. This adjustment recognizes that % of the additional pensions and OPEB expenses recognized by Staff will be capitalized rather than expensed in 00. This A & G capitalized has already been recognized in plant, so no additional adjustment to plant is required. This adjustment is detailed in Exhibit S-0 (WGA-), Schedule C-. Staff has also included the income tax effects of interest in the ratemaking formula in the calculation of net operating income. These adjustments are calculated in Exhibit S-0 (WGA-), Schedules C- and C-. The net effect of these adjustments is a net operating income increase of $,, Staff is proposing an elimination of large customer discounts of $0 million; this adjustment is supported by Staff witness George Stojic. Staff is also proposing an adjustment to eliminate double payments of $,00,000; this adjustment is supported by Staff witness Susan Sims. Line eliminates the effects of regulatory asset deferrals from the projected test year. The adjustments are consistent with information provided by Edison.

26 DIRECT TESTIMONY OF WILLIAM G. ALDRICH CASE NUMBER U Finally, lines through of Schedule C- show adjustments that were proposed by Edison, which Staff has adopted for this case. In summary, Staff shows a 00 adjusted net operating income of $0,,000 $,0,000. Q. What is Staff s position regarding Edison s Earnings Sharing Mechanism proposal? A. Staff believes that an Earnings Sharing Mechanism proposal is premature. Until rate caps are lifted in 00, such a mechanism would only further complicate an already complex situation. If the Commission adopts such a proposal, Staff recommends that it be applied solely in situations where Edison s earnings have exceeded the authorized rate of return on equity. Q. What is Staff s recommendation regarding the recovery of choice implementation costs? A. The Commission has stated that choice implementation costs should be recovered from all customers. To simplify the recovery of the costs, the Commission should approve a 0. mill per kwh charge that would be effective in January 00, after all customers are removed from rate caps. The amounts to be recovered from customers would be all choice implementation costs through 00 that have been approved by the Commission, plus carrying costs at %. At present sales levels, a 0. mill charge would recover over $ million per year; this is sufficient for Edison to collect all of the Commission approved choice implementation costs over a reasonable period of time. When Edison has collected the approved choice implementation costs, and the associated % carrying charge, it should be required to file a reconciliation case with the Commission.

27 DIRECT TESTIMONY OF WILLIAM G. ALDRICH CASE NUMBER U-0 0 Q. What is Staff s proposal regarding the LIEEF program? A. Staff has included LIEEF expenses of $,,000 in its revenue deficiency calculation. Therefore, Staff proposes that LIEEF funding approach authorized by the Commission in its Interim Order in this case be continued (U-0, February 0, 00, p. ). Q. In the Interim Order, the Commission required Edison to fund its pension plan at a level at least as high as the prorated annual expense included in Edison s revenue deficiency. Does Staff believe that requirement should continue when final rates are approved in this case? A. Yes. However, the Commission may wish to consider some refinements to the funding requirement. Staff suggests that Edison s funding requirement be linked to actual funds received from customers. In this case, Edison will receive only 0% of the $,00,000 pension expense due to the portion of pension expense capitalized; this 0% is further reduced due to capped customer classes. A requirement by the Commission to pay into its pension fund at levels at least equivalent to cash received by its customers will ensure that Edison s customers are properly protected. Q. Does this conclude your testimony at this time? A. Yes, it does.

28 S T A T E OF M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * In the matter of the application of ) THE DETROIT EDISON COMPANY ) to increase rates, amend its rate ) Case No. U- 0 schedules governing the distribution and ) supply of electric energy, implement ) Power Supply Cost Recovery plans, ) factors and reconciliations in its rate ) schedules for jurisdictional sales of electricity ) and for miscellaneous accounting authority ) and regulatory asset recovery. ) ) SUPPLEMENTAL TESTIMONY AND EXHIBIT OF WILLIAM G. ALDRICH MICHIGAN PUBLIC SERVICE COMMISSION MARCH, 00

29 DIRECT TESTIMONY OF WILLIAM G. ALDRICH CASE NUMBER U-0 0 Q. Are you the same William G. Aldrich who testified previously in this proceeding? A. Yes. Q. Please explain the purpose of your supplemental testimony. A. The purpose of my supplemental testimony is to compute Regulatory Asset Recovery Surcharges to recover the costs calculated by Staff witness Alan Droz in his exhibit S-0 (AYD-), p. of. Q. Have you prepared an exhibit to show the computation of the surcharges? A. Yes, I have. The surcharge calculations are shown in Exhibit S- (WGA-). Q. Are you also responsible for the calculation of the present revenue calculation in column c of Exhibit S- (MLC-)? A. Yes, I am. Q. Does this complete your testimony at this time? A. Yes, it does. MARCH, 00

30 0 0 JUDGE NICKERSON: Any objection to proposed Exhibits S- through S-? They are admitted. Off the record. (There was a pause in the proceedings.) JUDGE NICKERSON: On the record. Ms. Barone. MS. BARONE: Thank you, your Honor. At this time, I would like to offer the testimony of Mr. Ronald J. Ancona. It consists of a cover sheet entitled "Qualifications and Corrected Testimony of Ronald J. Ancona," dated April, 00, and it consists of pages. In addition, Mr. Ancona has an exhibit that's been marked as proposed exhibit S-, RJA-, which consists of one page. And I'd also like to offer Mr. Ancona's testimony to explain the revision to that exhibit, if he could take the stand. MR. ERICKSON: You said RJA-. It's RJA- Revised that's been marked as? MS. BARONE: That's correct R O N A L D J. A N C O N A was called as a witness on behalf of the Commission Staff

31 and, being first duly sworn by the Reporter/Notary Public, testified as follows: DIRECT EXAMINATION BY MS. BARONE: 0 0 Q A Q A Q A Mr. Ancona, are you the individual that filed the testimony I just referenced? Yes. And did you also prepare an Exhibit, S-, RJA- Revised? Yes. And could you briefly explain the changes that were made to this exhibit from your originally filed exhibit? Yes. The primary difference is in my original exhibit I forgot to deduct the expenses related to R-0 SMC, LLC and FERC interruptible sales. The second thing that I did was, reviewing my calculation, I realized that the expenses for transmission and fuel purchased power had different allocating factors that I did not incorporate in my original exhibit. And so to do that I had to switch from what we call the net system output method, where you divide the costs by net system output, into sales method, where you divide the costs by sales. And so I identified the systems sales for each component, transmission and then other, and divided

32 0 0 0 Q that into the expenses for transmission and other, to come up with two components I then added together to become the new PSCR base. Thank you. MS. BARONE: Does anyone have any questions about the corrections? Thank you. I'd ask that Mr. Ancona's testimony be bound into the record and for admission of the exhibit at conclusion of the proceedings today or at this time. JUDGE NICKERSON: Any objection to binding Mr. Ancona's testimony into the record? It may be bound into the record

33 S T A T E OF M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * I In the matter of the application of ) THE DETROIT EDISON COMPANY ) Case No. U- 0 to increase rates, amend its rate ) schedules governing the distribution and ) supply of electric energy, implement ) Power Supply Cost Recovery plans, ) factors and reconciliations in its rate ) schedules for jurisdictional sales of ) electricity and for miscellaneous ) accounting authority and regulatory ) asset recovery. ) ) QUALIFICATIONS AND CORRECTED DIRECT TESTIMONY OF RONALD J. ANCONA MICHIGAN PUBLIC SERVICE COMMISSION April, 00

34 QUALIFICATIONS OF RONALD J. ANCONA CASE NUMBER U-0 PART I Q. Please state your name and business address. A. My name is Ronald J. Ancona and my business address is Mercantile Way, Lansing, Michigan 0. Q. Please give a brief summary of your educational background. A. I earned a Bachelor of Science Degree in Geology in and a Master of Science Degree in Resource Development in, both from Michigan State University. In, I attended the Annual Regulatory Studies Program sponsored by the National Association of Regulatory Utility Commissioners. Q. Where are you employed and what is your present position? 0 A. I am employed at the Michigan Public Service Commission. as a Departmental Specialist within the Competitive Energy Division. I have served in this capacity since the Staff reorganization in November 00. Q. What are your responsibilities as a Departmental Specialist? A. I participate in various Staff assignments involving the cost and supply of fuels 0 and purchased and net interchange power, primarily in the context of Power Supply Cost Recovery and Gas Cost Recovery cases. I have also worked on cases involving special contracts between utilities and large customers, and various issues related to customer choice. Prior to the reorganization I worked in the Electric Division as a Fuels Specialist, primarily on power supply and cost issues. Within this capacity I took part in the negotiations that produced the Emergency Procedures adopted by the Commission in U-. One of my contributions was the development of the Days Supply Formula that is incorporated into the procedures. I participated in

35 QUALIFICATIONS OF RONALD J. ANCONA CASE NUMBER U-0 PART I the formulation of the Staff position as to the regulatory treatment of utility ventures in mining operations. I developed mathematical formulas that were used in forecasting fuel and PNI costs in several rate cases. I have also served as Staff Case Coordinator in several cases including U- and U-0. It was my testimony in U- that led to the Commission's determination of recovery of MCV capacity charges on an energy delivered basis. Q. Have you previously presented testimony to this Commission in addition to that provided in U-? A. Yes.

36 QUALIFICATIONS OF RONALD J. ANCONA CASE NUMBER U-0 PART I Case Number Company Subject/Type U-0/ Consumers Energy (FCAC) Coal Costs U-00 Detroit Edison (rate) Utility Mining Ventures U- Upper Peninsula Power (rate) Projected Fuel Costs U- Detroit Edison (rate) Projected Fuel Costs U- Upper Peninsula Power (rate) Projected Fuel & PNI Costs U- Consumers Power (rate) / Projected Fuel & PNI U- Indiana & Michigan (rate) Test Year Fuel & PNI Costs U- Detroit Edison (rate interim) Greenwood Uneconomic Burn 0 U- Detroit Edison (rate final) / Projected Fuel & PNI U-00/ Detroit Edison (FCAC) Uneconomic Burning of Oil U- Detroit Edison (steam) Projected Fuel Costs U- Detroit Edison (PSCR) Buyback Treatment, Factor U-0-R Detroit Edison (PSCR) Staff Position on PSCR Issues U--R Cloverland Coop (PSCR) Settlement Agreement U-0 Consumers Power (rate) Test Year Fuel & PNI Costs U-00 Detroit Edison (PSCR) Buyback Disallowance U- Alpena Power (PSCR) Plan U- Southeastern Coop (PSCR) Plan 0 U- Consumers Power (Midland) PSCR Cost Treatment of Fuel U- Consumers Power (PSCR) Plan U- Detroit Edison (Complaint) QF Energy Cost Methodology U- Detroit Edison (PSCR) Settlement Agreement

37 QUALIFICATIONS OF RONALD J. ANCONA CASE NUMBER U-0 PART I U- Detroit Edison (PSCR) Plan U-0-R Consumers Power (PSCR) Settlement Agreement U--R Detroit Edison (PSCR) Buyback Disallowance U-00-R Detroit Edison (PSCR) Buyback Disallowance U- Detroit Edison (PSCR) Plan U-0, B Consumers Power (Abandonment) Nuclear Fuel Expense U- Consumers Power (PSCR) Plan U-0 Detroit Edison (PSCR) Plan Adjustment U- Consumers Power (PSCR) Plan 0 U- Consumers Power (PSCR) 0 Plan Adjustment U- Consumers Power (rate) Test Year Fuel & PNI Costs U--R Consumers Power (PSCR) Wheeling Revenue/Disallowance U- Consumers Power (PSCR) Plan Adjustment U--R Consumers Power (PSCR) MCV Disallowance U-0 Consumers Power (PSCR) MCV Capacity Charges U-0/ Consumers Power (Remand) Contested Settlement Support U-0 Consumers Power (rate) Test Year Fuel & PNI Costs U-0 Consumers Power (PSCR) Compliance with U-0 U-0-R Consumers Power (PSCR) Compliance with U-0 0 U-00 Consumers Power (PSCR) Recalculation of Factor U-0 Consumers Power (rate) PSCR Base & MCV Recovery U-0-R Consumers Power (PSCR) Various PSCR Issues U-00-R Consumers Power (PSCR) SO Allowance Revenue

38 QUALIFICATIONS OF RONALD J. ANCONA CASE NUMBER U-0 PART I U-0-R Consumers Energy (PSCR) Adjustments to Consumers Case U- Consumers Energy (suspension) Base Rate Adjustment U-0-R Consumers Energy (PSCR/suspen) Adjustments to Consumers Case U- Wisconsin Electric (PSCR) PSCR Base & Adjustments

39 DIRECT TESTIMONY OF RONALD J. ANCONA CASE NUMBER U-0 Q. What is the purpose of your testimony? A. The purpose of my testimony is to present Staff s recommendation of the PSCR base that would result from this case. In addition I will be presenting a proposal that would provide Detroit Edison stranded cost mitigation on a going forward basis. Q. Has Detroit Edison calculated a 00 PSCR base? A. Yes, their calculation can be found on exhibit A- Schedule E. page of. Q. Has Detroit Edison included any expense as PSCR costs that have not been included in past Detroit Edison PSCR cases? 0 A. Yes. They have included network transmission expense, SO allowance expense, 0 and NOx allowance expense as PSCR costs. Q. What is Staff s position on the inclusion of network transmission expense as PSCR costs? A. In the past few years this issue of cost recovery of transmission expense after transmission assets have been transferred to other entities has come up several times with other utilities. Specifically, they have been utilities doing business in the Upper Peninsula who have transferred their transmission assets to American Transmission Company. The Commission has determined in each instance that transmission expense from assets that were once owned by the utility and part of base rates will now be considered PSCR costs from a third party. At this time, Wisconsin Electric Power Company, Wisconsin Public Service Corporation, Upper Peninsula Power Company, Edison Sault Electric Company, and Cloverland Electric Coop have transmission expense as part of their PSCR costs.

40 DIRECT TESTIMONY OF RONALD J. ANCONA CASE NUMBER U-0 Staff does not view Detroit Edison s situation conceptually different than these other utilities. Therefore, Staff does not oppose the inclusion of network transmission expense as PSCR costs. Q. What is Staff s position on the inclusion of SO allowance expense as PSCR costs? A. The Commission determined in U-, a Wisconsin Electric Power Company PSCR case, that SO allowance expense should not be PSCR costs. Therefore, Staff opposes the inclusion of SO allowance expense as PSCR costs. Q. What is Staff s position on the inclusion on NOx allowance expense as PSCR 0 costs? A. Staff does not oppose the inclusion of NOx allowance expense as PSCR costs. Although the Commission has not allowed SO allowance expense to be included, Staff believes there are differences in the allowance programs that would allow NOx allowance expense to be examined on their own rather than be grouped with SO allowance expense. It is our understanding that NOx allowances will likely carry a higher cost and provide fewer consumption options than SO allowances. In addition, each fossil plant is subject to compliance so that significant swings could occur year-to-year based on system generation requirements. Q. What PSCR base are you recommending? 0 A... mills per kwh at generation level with a loss multiplier of.0, which results in an amount at sales level of 0.. mills per kwh. The calculation can be found on exhibit S- (RJA-) REVISED. Q. Would the new PSCR base apply to all customers subject to the PSCR clause?

41 DIRECT TESTIMONY OF RONALD J. ANCONA CASE NUMBER U-0 A. Yes. It is our intention that all PSCR customers are subject to the same PSCR base and factor. We believe it would make reconciliation cases simpler to conduct. Q. How would the new base be reflected for the rate classes that are capped? A. In effect it is the reassigning of amounts already in base rates from non-pscr to 0 PSCR costs. For example, transmission expense recovery was put into base rates in the interim phase of this case. Reassigning this expense as a PSCR cost would add the appropriate amount to the current PSCR base at sales level of.0 mills per kwh. If the appropriate amount were.. mills per kwh, then the new PSCR base at sales level would be.. mills per kwh. Customers would then be paying.. mills per kwh for all costs subject to the PSCR process, which would then be compared to actual costs in the PSCR reconciliation, including transmission. Q. What is the actual amount that would be reassigned to set the PSCR base at 0.. mills per kwh at sales level? A. The current PSCR base at sales level is.0 mills per kwh. Given the current 0 PSCR factor is.0 mills per kwh, the amount currently being paid by customers for PSCR costs is. mills per kwh. The amount being reassigned is the difference between 0.. and.,.. mills per kwh. Q. The current PSCR factor of -.0 mills per kwh was included in the discussion above. Would it still be the appropriate PSCR factor?

42 DIRECT TESTIMONY OF RONALD J. ANCONA CASE NUMBER U-0 A. No. The new base reflects all power supply costs for 00. Since the 00 costs matches exactly what has been built into base rates, the PSCR factor would become zero mills. Q. What happens to the current PSCR factor of.0 mills for the capped customers? A. As was done in the interim phase of this case, it would be rolled into base rates. It is how the current base at sales level of.0 mills per kwh became. mills per kwh in determining the increment being reassigned to the new PSCR base. Q. Why is there discussion of the PSCR base at sales level and generation level? 0 A. The PSCR tariff shows the PSCR base at generation level and a loss multiplier to convert it to sales level. The calculations discussed above were done at sales level for convenience. The new PSCR base in the tariff would be.. mills per kwh and the new loss multiplier would be.0. Q. By utilizing Detroit Edison s projected fuel and purchased power costs are you A. Yes. concluding that Detroit Edison witnesses have adequately supported those projections? Q. Please describe the proposal referred to earlier that would provide Detroit Edison 0 stranded cost mitigation on a going forward basis. A. The rate increase Staff is recommending for full service customers in this case excludes recovery of the Production Fixed Cost associated with Choice sales. Given that, Detroit Edison must have the opportunity to recover the excluded Production Fixed Cost through other mechanisms. The mechanism of choice is

43 DIRECT TESTIMONY OF RONALD J. ANCONA CASE NUMBER U-0 through the selling of capacity and energy into power supply markets, predominantly the capacity and energy that would have been utilized by customers who have chosen alternative suppliers. During the rate freeze net proceeds from such sales, revenue less power supply costs incurred to make the sales, were used to offset Production Fixed Costs in the Stranded Cost cases. Q. How would this mechanism impact PSCR costs? A. Proceeds from sales to third parties have traditionally been included in PSCR 0 cases and have offset costs, resulting in lower over all PSCR charges to customers. To the extent any of the proceeds are use to offset non-pscr costs, they would no longer be available to offset PSCR costs. Q. Is Staff recommending that 00% of the net proceeds from third party sales be used to offset non-pscr costs, specifically the Production Fixed Costs attributable to Choice sales? A. No, Staff is recommending that the net proceeds from third party sales be split between PSCR customers and Detroit Edison. Q. Why is it important for the net proceeds from third parties be split rather than 0 simply allocated out of PSCR cases? A. Even though Detroit Edison is at risk for the some unrecovered Production Fixed Costs, that would not entitle them to the full benefit of the net proceeds from third party sales. Any sales made by Detroit Edison would be system sales and PSCR customers are also paying for the system. Therefore, PSCR customers would be entitled to benefits derived from the system. Net proceeds from third party sales are a benefit, and some third party sales would be made even without Choice. 0

44 DIRECT TESTIMONY OF RONALD J. ANCONA CASE NUMBER U-0 Q. What percentage of net proceeds from third party sales are you recommending be allocated to PSCR customers? A. I am recommending 0% of the jurisdictional net proceeds be allocated to PSCR customers. The 0/0 split would be applied to third party sales kwh up to 0% of Choice sales, determined annually. The net proceeds would be calculated as was done in the Stranded Cost cases (average revenue less average PSCR cost). Q. Why are you recommending a 0/0 split? A. The split needs to accommodate both the fact that PSCR customers are paying 0 system Production Fixed Cost and the fact they are not paying an additional $ million. The use of system resources to supply their capacity and energy needs, the potentially lower PSCR costs as described by Mr. Byron in their mitigation proposal, and 0% of the net proceeds from third party sales still provide the majority of the benefits of the system to PSCR customers. At the same time Detroit Edison has the opportunity to recover the $ million of Production Fixed Costs. Q. Why would the 0/0 split only apply to third party sales up to 0% of Choice sales? A. The $ million of Production Fixed Cost and the capacity and energy to be sold 0 is directly related to Choice sales. The application of 0% reflects the utilization of the 0/0 split. Q. Does Staff anticipate changes in how Detroit Edison will market capacity and energy?

45 DIRECT TESTIMONY OF RONALD J. ANCONA CASE NUMBER U-0 A. Yes. Detroit Edison has represented in the past that they felt limited to making short term and opportunity sales, which offer lower net proceeds. Staff believes its proposals in this case allow Detroit Edison to be more aggressive in their marketing. This should result in higher levels of net proceeds. Q. Wouldn t more aggressive marketing of capacity and energy have the potential to raise PSCR costs? A. Yes. However, Staff believes Detroit Edison has an incentive for system costs to 0 remain in check, as the proceeds they will retain are net of average system costs. In addition, the 0/0 split will serve as a hedge against it having too severe an impact. Q. Does that complete your testimony? A. Yes.

46 Any objection to proposed Exhibit S-? It is admitted. 0 (The witness was excused.) MS. BARONE: Thank you, your Honor. Shall I proceed, your Honor? JUDGE NICKERSON: Yes, please. MS. BARONE: Thank you. At this time I would like to offer the testimony of Brian Ballinger. It consists of a cover sheet and pages of questions and answers. Mr. Ballinger also has an exhibit that's been marked as proposed Exhibit S- (BLB-), and that consists of pages, and that is his only exhibit. JUDGE NICKERSON: All right. Any objection to binding Mr. Ballinger's testimony into the record? It may be bound into the record