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

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1 BOEHM, KURTZ & LOWRY ATTORNEYS AT LAW EAST SEVENTH STREET, SUITE 0 CINCINNATI, OHIO 0 TELEPHONE () - TELECOPIER () - VIA ELECTRONIC CASE FILING November, 0 Kavita Kale, Executive Secretary Michigan Public Service Commission 0 W. Saginaw Highway Lansing, MI 0 Re: Case No. U-0 Dear Ms. Kale: Please find attached the DIRECT TESTIMONY AND EXHIBITS OF JUSTIN BIEBER on behalf of THE KROGER CO. and its PROOF OF SERVICE for filing in the above captioned matter. Please place this document of file. Thank you for your assistance in this matter. Very truly yours, Kurt J. Boehm, Esq. Jody Kyler Cohn, Esq. Michael L. Kurtz, Esq., (Michigan ##P0) BOEHM, KURTZ & LOWRY MLKkew Enclosure Cc: Administrative Law Judge Sally L. Wallace (wallaces@michigan.gov)

2 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the Matter of the Application of ) DTE Electric Company ) for Authority to Increase its Rates for ) Case No. U-0 the Generation and Distribution of ) Electricity and for Other Relief ) Direct Testimony of Justin Bieber on behalf of The Kroger Co. November, 0

3 DIRECT TESTIMONY OF JUSTIN BIEBER 0 0 Introduction Q. Please state your name and business address. A. My name is Justin Bieber. My business address is South State Street, Suite 00, Salt Lake City, Utah. Q. By whom are you employed and in what capacity? A. I am a Senior Consultant at Energy Strategies, LLC. Energy Strategies is a private consulting firm specializing in economic and policy analysis applicable to energy production, transportation, and consumption. Q. On whose behalf are you testifying in this proceeding? A. My testimony is being sponsored by The Kroger Co. ( Kroger ). Kroger is one of the largest retail grocers in the United States, and operates more than 0 facilities in the territory served by DTE Electric Company ( DTE or the Company ). DTE delivers more than 00 million kwh annually to Kroger s facilities, which are mostly served under Rate Schedule No. D, Primary Supply Rate. The majority of Kroger s accounts receive Retail Access Service, but some of Kroger s accounts receive Full Service from DTE. Q. Please describe your professional experience and qualifications. A. My academic background is in business and engineering. I earned a Bachelor of Science in Mechanical Engineering from Duke University in 00 and a Master of Business Administration from the University of Southern California in 0. In 0, I completed Practical Regulatory Training for the Electric Industry sponsored by the New Mexico State University Center for BIEBER /

4 0 0 Public Utilities and the National Association of Regulatory Utility Commissioners. I am also a registered Professional Civil Engineer in the state of California. I joined Energy Strategies in January 0, where I provide regulatory and technical support on a variety of energy issues, including regulatory services, transmission and renewable development, and financial and economic analyses. During the time I have worked at Energy Strategies I have filed and supported the development of testimony before several different state utility regulatory commissions. Prior to joining Energy Strategies, I held positions at Pacific Gas and Electric Company as Manager of Transmission Project Development, ISO Relations and FERC Policy Principal, and Supervisor of Electric Generator Interconnections. During my career at Pacific Gas and Electric Company, I supported multiple facets of utility operations, and led efforts in policy, regulatory, and strategic initiatives, including support developing testimonies and comments at the FERC, California ISO, and the California Public Utility Commission. Q. Have you testified previously before this Commission? A. Yes. I filed testimony in Consumers Energy Company s 0 Rate Case, Case No. U-0. Q. Have you filed testimony previously before any other state utility regulatory commissions? BIEBER /

5 A. Yes. I have filed testimony before the Indiana Utility Regulatory Commission, the Kentucky Public Service Commission, the North Carolina Utilities Commission, and the Public Utility Commission of Oregon. 0 0 Overview and Conclusions Q. What is the purpose of your testimony in this proceeding? A. My testimony addresses the following issues in DTE s general rate case filing: ) DTE s proposed delivery rate design for primary voltage customers; ) DTE s proposed methodology to determine the State Reliability Mechanism (SRM) capacity charge; ) Service reliability issues; ) DTE s proposed Infrastructure Recovery Mechanism (IRM); and, ) DTE s inclusion of inflation in calculating its projected test period non-labor O&M expenses. Q. What recommendations do you present in your testimony? A. Based on my review of DTE s direct filing: ) I recommend that the Commission order DTE to utilize a costbased primary monthly customer charge. This charge should be developed using the Commission s previously approved methodology regarding the costs to be included in the customer charge. BIEBER /

6 0 ) I recommend that DTE deduct all energy sales from the net production costs to determine the capacity revenue requirement to be recovered through the SRM capacity charge. This methodology is consistent with Commission precedent and will better align the charges with the underlying cost causation. ) In its filing DTE acknowledges its poor reliability performance. I recommend that in approving any rate increase for DTE, the Commission direct the Company to take reasonable remedial actions to address its known service quality problems. ) I recommend that the Commission reject the Company s requested IRM. The requested mechanism amounts to single-issue ratemaking without consideration of whether the Company would experience offsetting decreases in expenses or increases in revenues. Further, it reduces the inherent incentive for the Company to minimize expenses and maximize revenues between general rate cases. ) I recommend that inflation be removed from DTE s projected test year non-labor Operations and Maintenance (O&M) expense. 0 PRIMARY DISTRIBUTION RATE DESIGN Q. How does DTE propose to allocate distribution costs? A. According to DTE witness Thomas Lacey, DTE allocates distribution costs using demand and customer allocators, as well as special studies. Mr. Lacey BIEBER /

7 0 0 explains that DTE uses demand-based allocators for poles, wires, conduit, substations, transformers, and other distribution equipment. He uses customerbased allocators for service drops and special studies to allocate meter costs and uncollectible expense. This allocation method is used to allocate costs by voltage level class, as opposed to individual rate classes. Q. How is DTE proposing to recover distribution costs from primary customers? A. First, DTE allocates distribution costs in its Unbundled Cost of Service study (UCOS) by voltage level to determine the distribution revenue requirement for primary voltage customers. Next, DTE proposes a $ monthly service charge for all primary voltage customers, which is equal to the current primary customer service charge. Then, DTE witness Timothy A. Bloch designs a single primary distribution demand charge to collect the remainder of the proposed primary distribution revenue requirement. Q. Are these primary distribution rates cost-based? A. No, they are not. According to the Company s response to Kroger data requests KCDE-.ai and KCDE-.bii, which are included in exhibits KRO- and KRO- respectively, the Company did not perform any analysis to determine if its proposed customer charge is cost based. In fact, the Company did not even classify distribution costs as demand-related and customer-related. Q. What reasons does DTE provide to explain why it did not perform any analysis to determine whether the primary customer charge is cost-based? Direct Testimony of Thomas W. Lacey, p.. Direct Testimony of Timothy A. Bloch, pp. -. BIEBER /

8 0 0 A. According to DTE s response to KCDE-.bii, the Company is not proposing to change the existing primary monthly service charge in this case in light of the Commission s April, 0 Order in DTE s 0 Rate Case, U-, which approved the current charge. Q. What did the Commission specify regarding the primary monthly service charge in its April, 0 Order in DTE s 0 Rate Case, U-? A. On page of the Final Order the Commission states that: The Commission finds that the primary monthly service charge should also be retained. The Commission reviewed this charge in the December, 0 order in Case No. U-, pp. - (as well as reviewing DTE Electric s calculation method in the 0 order, pp. 0-0), and found the primary monthly charge to be reasonable. Kroger has presented no new evidence in this case that persuades the Commission to change that finding. Q. What is your assessment of the Commission s Order regarding the primary monthly service charge in U-? A. The Commission relied on its previous orders in DTE s 0 Rate Case, U-, and its 0 Final Order (in DTE s 0 Rate Case, U-0) which determined that the monthly service charge was reasonable, and was not persuaded otherwise by the arguments on the record. However, it is important to note that although the Commission determined that the primary monthly service April, 0 Final Order, Case No. U-, p.. BIEBER /

9 0 0 charge should be retained, it did not determine that the primary monthly service charge was cost-based. Q. Was there any evidence on the record in DTE s last rate case, U-, that alleged that the primary customer charge was cost-based? A. No, there was no evidence that alleged to show that the $ primary customer service charge was cost-based. In fact, DTE provided evidence to the contrary. According to Mr. Lacey s analysis of customer-related costs, using the Staff Method, the cost-based customer rate for primary customers was only $., less than 0% of the $ primary customer service charge. The Staff Method that Mr. Lacey utilized is generally consistent with the Commission s approved methodology regarding which costs should be included in the monthly customer charge. Mr. Lacey s customer charge cost calculations from DTE s 0 Rate Case, U-, using the Staff Method, are provided in Exhibit KRO-. Q. In its Final Order in Case No. U- the Commission relied on its review of the primary monthly customer charge in DTE s 0 Rate Case, U-. What did the Commission order regarding the primary monthly service charge in that case? A. On page of the Commission s Final Order in Case No. U-, the Commission stated: The Commission agrees that there does seem to be an error in the PFD in the discussion about proposed revisions to customer charges Case No. U-, Exhibit A-, Schedule F.. BIEBER /

10 0 0 for primary customers. The Commission nevertheless agrees with the ALJ s central recommendation that monthly customer charges for primary customers should remain at $, Further, the Commission ordered: The Commission concurs with the other parties claims that DTE Electric s COSS was flawed because it included a multitude of costs that, although customer-related, are not costs that vary with the number of customers on the system. As the Staff and others pointed out, the Commission has determined that the costs to be included in the customer charge are the marginal costs associated with attaching a customer to the system. In addition, as the Staff observed, the NARUC Manual likewise supports using only the marginal costs of customer attachment in developing a customer charge. Q. What is your assessment of the Commission s Order regarding the primary monthly service charge in DTE s 0 Rate Case, U-? A. In Case No. U-, the Commission ordered the primary monthly service charge to be maintained at $. However, it did not determine that it was cost-based. The Commission was clear that the costs to be included in the customer charge are the marginal costs associated with attaching a customer to the system. This direction is generally aligned with Staff s proposed methodology for determining customer costs. In its rebuttal, DTE performed a customer cost analysis using the Staff s proposed method which indicated that the primary December, 0 Final Order, Case No. U-, p.. Id, pp. -0. BIEBER /

11 0 0 monthly customer charge should be $., only about % of the $ primary monthly customer charge. DTE s rebuttal analysis of customer-related costs using this method is included in Exhibit KRO-. Q. In its Final Order in Case No. U- the Commission also relied on its review of the primary monthly customer charge in Case No. U-0. What did the Commission order regarding the primary monthly service charge in U-0? A. In its Final Order in Case No. U-0, the Commission refers to its prior December, 0 Order, in DTE s prior rate case U- discussed above, and adopts the recommendations and findings of the ALJ on the issue. In the December order, the Commission found that DTE Electric s COSS included a multitude of costs that, although customer-related, are not costs that vary with the number of customers on the system. The Commission also stated that the costs to be included in the customer charge are the marginal costs associated with attaching a customer to the system. In addition, as the Staff observed, the NARUC Manual likewise supports using only the marginal costs of customer attachment in developing a customer charge. December order, pp. -0. DTE Electric has not provided any new evidence or analysis in comparison to the evidence presented in the December order. Therefore, the Commission declines to approve DTE Electric s proposed customer charge calculation and adopts the findings and recommendation of the ALJ. The ALJ s findings and recommendation on the primary monthly customer charge issue, which the Commission adopts above, state that: January, 0 Final Order, Case No. U-0, p. 0. BIEBER /

12 0 0 Recognizing that the Commission set this monthly charge at $ in Case No. U-, after considering Kroger s recommendation for a lower charge and DTE s recommendation for a higher charge, this PFD recommends that the Commission retain the $ monthly charge in this case, and revisit the charge again in DTE s next rate case. Q. What is your assessment of the Commission s Order regarding the primary monthly service charge in DTE s 0 Rate Case, U-0? A. Again, the Commission approved the primary monthly customer charge, but did not determine that it was cost-based. Further, the order states that DTE did not provide any new evidence or analysis in comparison to the evidence presented in the prior rate case. As I explained above, DTE s own analysis of the costs to be included in the monthly customer charge in the prior rate case, Case No., using the Staff s methodology which was supported by the Commission s order, indicated a primary monthly customer charge of $.. Q. What is your assessment of DTE s primary distribution rate design in this instant case? A. I have concerns with DTE s proposed primary distribution rate design. Although the Commission determined the current $ primary monthly service charge to be reasonable in the past, it has not been shown to be cost-based in the past three rate cases. Further, DTE s own analyses utilizing the Staff Method have shown that the primary monthly service charge should be significantly lower than the current rate of $. The current primary monthly customer charge is clearly not cost-based or consistent with the Commission s past orders which November, 0 Notice of Proposal for Decision, Case No. U-0, p.. BIEBER / 0

13 0 0 determined that the customer charge should include the marginal costs associated with attaching a customer to the system. I find it troubling that DTE did not find it necessary to analyze or demonstrate whether the primary monthly customer charge is reasonable or costbased in this instant case, especially given DTE s significant proposed increase to customer rates. While the current primary monthly customer charge may have been shown to be reasonable in the past, it is reasonable to reevaluate this charge now in this instant case. Q. Why is it important for rate design to be representative of underlying cost causation? A. Aligning rate design with underlying cost causation improves efficiency because it sends proper price signals. This alignment is also important for ensuring equity among customers, because properly aligning charges with costs minimizes cross-subsidies among customers. When the service charge is set significantly above customer-related costs, smaller customers on the rate schedule are over-charged and thereby subsidize the larger customers on the rate schedule. In fact, DTE witness Mr. Lacey reiterates the importance of this rate design principle in his direct testimony, stating that demand-related costs should be recovered through a demand charge and customer-related through a monthly customer charge. This will properly match cost recovery to cost causation. Q. What is your recommendation regarding the primary voltage service charge in this case? Direct Testimony of Thomas W. Lacey, pp. -. BIEBER /

14 0 0 A. I recommend that the Commission order DTE to design its primary monthly customer charge consistent with the Commission s orders in DTE s three prior rate cases, Case No. U-, U-0, and U- regarding which costs should be included in the customer charge. According to the Commission s U- Final Order: As in the past, the Commission rejects DTE Electric s inclusion in fixed monthly costs of items that are unrelated to the marginal cost of customers connecting to the system. 0 Alternatively, since DTE did not find it necessary to perform a cost-based analysis for the primary monthly customer charge in this case, the Commission should order DTE to use its customer cost analysis from its prior 0 Rate Case, Case No. U- to determine the primary monthly customer charge. As I discuss above, DTE s analysis of customer-related costs in Case No. U-, included in Exhibit KRO-, indicates a primary monthly customer charge of $. per month. Q. Have you performed an analysis to determine the rate design and bill impacts based on your recommendation to move to a cost-based primary monthly customer charge? A. Yes. I performed an analysis utilizing DTE s analysis of customer related costs in U-. Utilizing the primary monthly customer charge of $., I determined that the primary distribution demand charge should be $. per kw of demand, in order to collect the remaining primary distribution revenue 0 April, 0 Final Order, Case No. U-, p.. BIEBER /

15 0 requirement. This would be an increase of $0. relative to DTE s proposed primary distribution demand rate. I have included this analysis, as well as a revised rate design and bill comparison for Rate D in Exhibit KRO-. Q. The rate design you have proposed and presented in Exhibit KRO- reflects DTE s proposed increase to the revenue requirement. If the Commission authorizes an increase that is less than that amount, what impacts will that have on your proposed rate design? A. While I am not taking a position on the revenue the requirement, to the extent that the authorized revenue requirement is lower than the proposed amount, that reduction should be applied proportionately to all of the rate design elements. In other words, if the authorized revenue requirement is 0% less than the proposed revenue requirement, then each rate element and charge should be reduced by that same percentage. 0 State Reliability Mechanism and Capacity Cost Q. Please provide a brief description of the SRM and capacity charge. A. The SRM was put in place to ensure reliable electric service and sufficient capacity resources for Michigan s customers. The SRM requires all electric providers to demonstrate that they have sufficient capacity resources to serve their customers. A Choice Customer whose Alternative Energy Supplier does not demonstrate sufficient capacity will be assessed an SRM capacity charge by the utility. As required by the 0 Public Act (PA ), DTE is proposing the Direct Testimony of Timothy A. Bloch, pp. -. BIEBER /

16 0 0 same SRM capacity charge for all similarly situated customers, regardless of whether they are Choice Customers or bundled service customers. Q. Please provide some background regarding DTE s participation with MISO. A. The MISO operates a day ahead and real time wholesale energy market. Generating resources bid into the market by submitting bids which indicate the price at which the resource is willing to generate. MISO then determines a least cost dispatch, based on the generation resource bids, to efficiently serve the aggregate load, taking into consideration the generation costs, congestion (transmission constraints) and losses. The MISO also helps determine the capacity requirements necessary for electric reliability and operates a voluntary capacity auction. A generator that provides capacity credits has an obligation to offer its energy into the MISO market. The recipient of that capacity credit purchases its energy through the MISO market, but it does not have a direct entitlement to the energy produced from the specific capacity resource. DTE has two key roles within the MISO construct. As a load serving entity, DTE purchases energy through the MISO wholesale energy market to meet the energy requirements of its bundled customers. DTE also is required to acquire sufficient capacity for its bundled customers, or pay a capacity deficiency charge. DTE can self-supply its own capacity from its production resources, purchase it from another party through a bilateral agreement, or it can purchase capacity through the MISO s voluntary capacity auction. Direct Testimony of Don M. Stanczak, p.. BIEBER /

17 0 As the owner of generation resources, DTE is enabled to sell both capacity and energy from its production fleet. DTE sells energy from its production fleet by bidding its generation resources into the MISO wholesale market. To the extent that its resources are economic to generate in a given hour, the MISO will dispatch DTE s production resources and DTE will receive the revenues from its energy market sales at a price dictated by the MISO market conditions. If DTE has excess capacity after meeting the capacity requirements of its customers, it can sell the excess capacity through bilateral agreements or the MISO s voluntary capacity auction. Q. What does PA specify regarding the calculation of the SRM capacity charge? A. Section w() describes two components of the SRM charge, in subparagraphs (a) and (b): 0 (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 non-capacity-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. BIEBER /

18 0 0 (iv) Energy sales under unit-specific bilateral contracts. Q. How does DTE calculate the Capacity Charge Revenue Requirement? A. According to Mr. Lacey, DTE included all production related costs, except fuel, variable O&M, and certain purchase power costs in the capacity revenue requirement. According to Mr. Lacey, the Commission s April, 0 Order in Case U- supported this approach, except that it differed in the amounts to be subtracted and the methodology used to calculate the 0 energy sales net of fuel. Q. How does DTE propose to calculate the projected 0 energy sales revenue net of projected fuel costs? A. DTE proposes to use the Net Method to determine the energy sales revenue net of projected fuel costs. According to DTE witness Derek Arnold, this method considers the energy sales to be the excess generation, or net energy sales, sold into the MISO energy market, after serving the Company s bundled load. DTE uses this methodology as well to calculate the ancillary service sales to be deducted from the production costs. Mr. Arnold calculates the portion of ancillary service sales and fuel and fuel related costs associated with the excess generation by multiplying the total projected ancillary services and fuel and fuel related costs by the ratio of net energy sales to gross generation sales. According to witness Arnold, the projected 0 off-system sales and sales of unit specific bilateral contracts are zero. Direct Testimony of Thomas W. Lacey, pp. 0-. Direct Testimony of Derek M. Arnold, pp. -. Id, p.. BIEBER /

19 0 0 Q. What is your assessment of DTE s methodology to calculate the projected 0 energy sales revenue net of projected fuel costs? A. DTE s proposed methodology is flawed because it only deducts the excess, or net energy sales after serving its bundled load, from the capacityrelated generation costs. PA Section w()(b) states the projected revenues, net of fuel costs, for all energy market sales should be subtracted from the capacity-related generation costs in order to determine the SRM capacity charge. However, DTE is proposing to only deduct the net energy sales. In Case No. U-, the Commission ordered DTE to utilize the methodology proposed by Energy Michigan, to deduct the gross energy and ancillary service sales, net of fuel, because it was logical and consistent with the plain reading of the law. Further, the Commission determined that the energy sales in the market, less fuel costs, represent in some fashion the energy value of the generation portfolio. It serves as a proxy for determining how to separate out the energy costs from the overall production costs to arrive at a capacity-only cost. The fact that the utility is buying some or all of its energy in the same wholesale market to serve its own customers is immaterial. As Mr. Lacey indicates in his testimony, the Commission approved this methodology again in Case No. U-. DTE does not provide any explanation or indicate a change in circumstances that would justify a departure from this approved methodology. November, 0 Final Order in Case No. U-, p.. Direct Testimony of Thomas W. Lacy, p.. April, 0 Final Order in Case No. U-, p.. BIEBER /

20 0 0 DTE s production fleet provides capacity, but it also enables DTE to make energy sales in the MISO market. The energy and the associated revenues are separate and discrete from the capacity value of the production resources. It is reasonable that all of the energy revenues that DTE receives from its production fleet should properly be counted as an offset to determine its capacity-related costs. Otherwise, the capacity-related costs will be overstated. Further, DTE s capacity-related costs for its production fleet are fixed. The amount of energy that DTE purchases in the MISO market to serve its bundled load relative to the gross energy sales it makes from its production fleet has no impact on its capacity-related generation costs. Therefore, the production capacity-related revenue requirement should not vary based on the proportion of net energy sales relative to gross energy sales. Q. Can you provide an example that demonstrates the flaw in DTE s proposed methodology to calculate the 0 energy sales revenue? A. We can use a simple example to illustrate the inherent flaw in DTE s proposed methodology which would inappropriately vary the capacity revenue requirement for DTE s fixed production costs and overstate the capacity-related costs used to derive the SRM capacity charge. Assume we have a utility with a fixed production fleet and fixed capacity-related production costs that participates in a wholesale market. The net production costs are $,000, the gross energy market sales (net of fuel) are $00, the fuel and fuel related costs are $00, and the variable O&M costs are $0. In Scenario, assume that the utility s net energy sales are equal to 0% of its gross energy sales. Under DTE s proposed BIEBER /

21 0 0 methodology, the deduction for net energy market sales would be $0, since only 0% of the utility s $00 gross energy sales would be considered excess energy sold into the wholesale market to other market participants. Using DTE s methodology, we would determine the capacity revenue requirement by subtracting the net energy sales (net of fuel), fuel, and variable O&M from the total net production costs. The resulting capacity revenue requirement would be $0. The remaining net production costs would constitute the non-capacity production revenue requirement of $0. In Scenario, assume that the utility s bundled customer load is equal to its gross energy sales from its production fleet, so there are zero net energy sales. Using DTE s proposed methodology for calculating the capacity revenue requirement, the deduction for net energy market sales would be zero, since there would be zero excess, or net energy market sales beyond what is required to serve the utility s bundled load. The resulting capacity revenue requirement would be $0 and the non-capacity revenue requirement would be $0. In Scenario, the utility s claimed capacity revenue requirement has increased, but its capacity-related production costs have not. Further, the deduction for energy sales is zero, despite the fact that the utility s production fleet allows it to earn energy revenues that are separate from the capacity benefits. The claimed non-capacity revenue requirement has decreased because the energy sales revenues that are not deducted from the capacity-related generation costs are effectively offsetting the non-capacity revenue requirement. BIEBER /

22 Table JDB- below illustrates these two scenarios in columns and. The third column represents the proper gross energy sales deduction methodology (approved in U- and U-), which deducts the gross energy sales from the net production costs. Table JDB- Gross Sales Scenario Scenario Capacity Cost Determination Methodology Net Production Costs Revenue Requirement,000,000,000 Energy Market Sales (Net of Fuel) (0) 0 (00) Fuel (00) (00) (00) Variable O&M (0) (0) (0) Capacity Revenue Requirement Non-Capacity Revenue Requirement Q. Why does it matter if DTE overstates the capacity-related production costs? A. As I explained above, it is important for rate design to be aligned with the underlying costs to send proper price signals and minimize subsidies between customers. In this circumstance, the net production costs are allocated to either the capacity revenue requirement or the non-capacity revenue requirement. If the capacity revenue requirement is overstated, then the non-capacity revenue requirement will be understated by a corresponding amount. DTE s bundled customers pay both capacity and non-capacity charges. If the capacity charge is overstated, then the non-capacity charge will be understated by a corresponding amount and the impacts would be offsetting. This does not align rate design with cost causation, but it can be revenue neutral for bundled customers. However, Choice Customers only pay the SRM capacity charge. If the capacity charge is overstated, and the non-capacity charge is understated, DTE BIEBER / 0

23 0 0 will over-recover capacity costs from Choice Customers that only pay the capacity charge. Choice Customers will not benefit from a corresponding decrease in the non-capacity charge and will effectively subsidize the bundled customers by paying an overstated capacity revenue requirement. Q. What do you recommend? A. Consistent with the Commission s prior orders in Case Nos. U- and U-, I recommend that the Commission order DTE to deduct the gross energy sales (net of fuel) from the total production costs to determine the SRM capacity charge. This previously approved methodology is consistent with the plain reading of the law, and will align the capacity charge with the underlying capacity costs. Q. Have you performed an analysis to determine the impacts of your recommendation to deduct the gross energy sales from the total production costs to determine the SRM capacity charge? A. Yes. I calculate the gross energy sales (net of fuel) by dividing DTE s proposed net energy sales revenue (net of fuel) by the ratio of net energy sales volumes to the gross energy sales volumes. This is the same ratio that DTE proposes to use to multiply by the total ancillary services revenue to determine the net ancillary services revenues. I deduct the gross energy sales (net of fuel), including the gross ancillary services sales, from the net production costs to determine the proper capacity revenue requirement. Then I utilize DTE s proposed UCOS to determine the revised capacity and non-capacity revenue Direct Testimony of Derek M. Arnold, pp. -. BIEBER /

24 0 targets for Rate D. I have included this analysis, as well as a revised rate design and bill comparison for Rate D in Exhibit KRO-. Q. The rate design you have proposed and presented in Exhibit KRO- reflects DTE s proposed increase to the revenue requirement. If the Commission authorizes an increase that is less than that amount, what impacts will that have on your proposed rate design? A. As I explain above, while I am not taking a position on the revenue the requirement, to the extent that the authorized revenue requirement is lower than the proposed amount, that reduction should be applied proportionately to all of the rate design elements. In other words, if the authorized revenue requirement is 0% less than the proposed revenue requirement, then each rate element and charge should be reduced by that same percentage. 0 SERVICE RELIABILITY ISSUES Q. How does DTE measure its service reliability? A. According to DTE witness Marco Bruzzano, the Company s primary focus is on the System Average Interruption Duration Index (SAIDI). SAIDI measures the average time that customers are without power in a year because it measures both the frequency and the duration of the interruptions. DTE measures an all-weather SAIDI, which includes all outages, and SAIDI excluding major event days (MEDs), which excludes days with outages that exceed a size threshold in order to isolate the impact of severe weather events. 0 0 Direct Testimony of Marco A. Bruzzano, p.. BIEBER /

25 0 0 Q. What is DTE s assessment of its own reliability service performance? A. According to Mr. Bruzzano, DTE s SAIDI excluding MEDs has been in the fourth (worst) quartile of the industry for the past several years. Q. Has Kroger received reliable service? A. Kroger has informed me of service issues at its stores and one of its major facilities, the Kroger Michigan Dairy. Kroger has experienced a history of outages that have caused significant disruption to its operations. Kroger incurs substantial costs when it is required to dispatch generators for store outages. Additionally, at the Kroger Michigan Dairy, in the time period from August 0, 0 through August, 0, the facility experienced a total of 0 significant power quality and power reliability events. I ve included the outage history report for the Kroger Michigan Dairy in Exhibit KRO-. Many of these instantaneous events at the dairy can shutdown most of the processes at the facility that run with variable frequency AC drives (VFDs). Q. Can you provide some recent examples of reliability events and the associated impacts at the Kroger Michigan Dairy facility? A. Yes, Kroger has informed me of several recent reliability issues that occurred at its facility. On September, 0, four instantaneous events were recorded as separate events by the facility s monitors, but essentially impacted the facility as a single brown out. The reliability events caused all of the milk storage cooler conveyors to shut down, one of two boilers had to be restarted, the recirculated glycol system used to cool the product after pasteurization stopped, Id. BIEBER /

26 0 0 all of the overhead door controllers faulted, and it caused one of four of the Blowmolding machines (production of empty milk bottles) to stop. Additionally, computers had to be restarted in different areas around the plant due to problems caused by the interruption in network connections during the event. Not all of the computers around the plant were impacted, but approximately 0 0% of computers experienced some downtime. I understand there were also several instantaneous power quality events on October and October, 0. These events had less impact because of the time and/or day that they occurred, but were still impactful. Overhead door controllers were once again all faulted. Some cleaning circuits with VFDs driving pumps were stopped. And the few conveyors that were running at these times were also stopped. Boiler operations and refrigeration controls also had to be restarted to some degree after both October events. The multiple, consecutive power sags in September had more impact than the short duration, single events in October. But none of them are good things to experience when the dairy facility essentially has continuous processing, cooling and storage of a perishable product. When the processing systems stop, 00,00 gallons of product is instantly lost, depending upon how many pasteurizers are in operation. The ammonia refrigeration system at the facility is regulated by the EPA under the Process Safety Management federal regulations. Safe, reliable operation of such systems is mandated to be Kroger s responsibility under those regulations. Without reliable power, that is a difficult and unnecessarily expensive task. BIEBER /

27 Q. What actions do you recommend regarding DTE s service reliability issues? A. DTE admittedly has poor reliability performance and there are specific service issues, such as the outages experienced by Kroger Michigan Dairy, that need to be addressed. It is frustrating for customers such as Kroger to be contending with significant proposed rate increases in the face of sub-par service quality that negatively impact its operations. I recommend that in approving any rate increase, the Commission direct DTE to take reasonable remedial actions to address its known service quality problems at facilities such as Kroger s stores and the Kroger Michigan Dairy. 0 0 Investment Recovery Mechanism ( IRM ) Q. Please describe the Company s IRM proposal. A. DTE is proposing an IRM to recover the incremental revenue requirement for certain distribution, fossil and nuclear generation capital expenditures through 0. According to DTE witness Don M. Stanczak, the Company believes that with the proper IRM in place, it may be able to defer filing for a rate increase until 0. Mr. Stanczak asserts that deferring the need to file a rate case will reduce the workload at the Commission and reduce costs for other parties that participate in rate cases. Further, Mr. Stanczak asserts that the IRM should allow for more orderly and potentially smaller rate increases compared to a rate case, and that the IRM will support critical infrastructure improvements. Direct Testimony of Don M. Stanczak, p.. BIEBER /

28 0 0 Q. What is the proposed incremental revenue requirement to be recovered through the IRM? A. The proposed incremental revenue requirement to be recovered through the IRM is $. million in 00. In 0, the proposed incremental revenue requirement is $. million, an increase of $. million over the proposed 00 amount. And in 0, the proposed incremental revenue requirement is $. million, an increase of $. million over the proposed 0 amount. Q. Are there circumstances in which DTE would not defer its next general rate case filing until 0? A. According to Mr. Stanczak, DTE faces many cost pressures, beyond what it is proposing to cover with the IRM that may require it to file a rate case before 0, even if the IRM is approved by the Commission. These cost pressures include incremental capital expenditures not included in the proposed IRM, O&M cost increases and O&M inflation, reductions in sales, and unforeseen events. Q. How will the proposed IRM operate? A. According to Mr. Stanczak, the IRM is proposed to recover a revenue requirement for certain capital expenditures incurred beginning May, 00 through December, 0. DTE proposes the IRM surcharge to be implemented January, 00 to cover capital expenditures from May, 00 through December, 00 in addition to capital expenditures for the second half of the projected test year in this case. DTE also proposes to implement Exhibit A-0, Schedule T-0, p.. Id, p.. BIEBER /

29 0 0 incremental IRM surcharges on January, 0 and January, 0 for the IRM capital expenditures in those years. Q. How does DTE propose to reconcile the IRM? A. DTE proposes that if it does not spend all of the capital that is reflected in the IRM surcharge that it will refund the IRM surcharge associated with that underspending. If DTE spends more than the level approved by the Commission, then it does not propose to increase the surcharge. DTE also proposes that if it under-recovers or over-recovers the expected revenue, then it will refund or surcharge that difference. DTE proposes to defer those amounts as a regulatory liability or asset until the next IRM reconciliation. Mr. Stanczak characterizes the Company s proposal as an asymmetrical reconciliation relative to capital spend and a symmetrical reconciliation for revenue recovery up to the maximum allowed IRM revenue. DTE proposes the initial reconciliation will be filed by April 0, 0 for the capital expenditures from May, 00 through December, 00. DTE proposes similar reconciliations for 0 and 0 to be filed by April 0 for the subsequent years of the proposed IRM. Q. What kind of review does DTE propose for the IRM? A. DTE proposes to provide Staff with a summary of the actual work completed, including the results of program metrics. DTE also proposes that it will meet with Staff each fall to review expected IRM expenditures and the scope Id, pp. -. Id, p.. Id, p.. BIEBER /

30 0 0 of IRM work to be accomplished for the upcoming IRM year, and to meet with Staff throughout the year to review progress relative to the plan. Q. What kind of flexibility does the Company propose regarding the amount of IRM spending in a particular category? A. DTE does not propose to move any capital between the broad business units, but does propose to have flexibility to move up to 0% of the capital dollars to or from discrete categories of work. Q. What is your assessment of the Company s proposed IRM? A. The Company s IRM proposal amounts to single-issue ratemaking and reduces the Company s incentive to manage its costs effectively. Q. What is single-issue ratemaking? A. Single-issue ratemaking occurs when utility rates are adjusted in response to a change in a single cost or revenue item considered in isolation. It ignores the multitude of other factors that otherwise influence rates, some of which could, if properly considered, move rates in the opposite direction from the single-issue change. Setting rates based on a single cost or revenue item runs contrary to the basic principles of traditional utility regulation. When regulatory commissions determine the appropriateness of a rate or charge that a utility seeks to impose on its customers, the standard practice is to review and consider all relevant factors, rather than just a single factor. To consider some costs in isolation might cause a commission to allow a utility to increase rates to recover higher costs in one area without recognizing counterbalancing savings in another area. Alternatively, a BIEBER /

31 0 0 single revenue item considered in isolation might cause a decrease in rates without recognizing counterbalancing cost increases in other areas. For these reasons, single-issue ratemaking, absent a compelling public interest, is generally not sound regulatory practice. Q. Are there certain principles that should be evaluated to determine whether the adoption of a single-issue cost tracking rider, such as the proposed IRM, is warranted? A. There are some generally accepted criteria that can be used to determine the appropriateness of cost tracking and rider mechanisms. Generally, an appropriate single-issue cost tracker should meet all three of these criteria. ) The anticipated costs or revenues are subject to significant volatility from year to year, ) The anticipated costs or revenues are not reasonably controllable by management, and ) The anticipated costs or revenues are substantial enough to have a material impact on the utility s revenue requirement and financial health between rate cases. Q. Does the Company s proposed IRM meet these three criteria? A. No, it does not. In fact, the Company s proposal fails to meet two of these criteria. DTE provides significant details in its direct filing regarding the proposed capital costs to be recovered through the IRM, which also include $0.0 million of capital investments that are planned to occur in the last BIEBER /

32 0 0 months of the test period. Given the level of detail that DTE has provided regarding planned capital investments proposed to be recovered through the IRM, the anticipated costs do not appear to be subject to significant volatility from year to year. Further, it is reasonable to expect that these anticipated costs are reasonably controllable by DTE management. Q. Does the Company s proposal to utilize the IRM to defer future rate cases represent a compelling public interest? A. No, in my opinion, the potential deferral of a future rate case does not represent a compelling public interest that justifies adoption of the IRM. Further, as Mr. Stanczak describes, there are a multitude of factors and events that could cause DTE not to defer a future rate case filing until 0. Q. Does the Company s proposed IRM reconciliation and Staff review process alleviate your concerns about single-issue ratemaking? A. No, they do not. As I describe above, single-issue cost trackers reduce the Company s incentive to manage costs effectively. When costs are considered in the context of a general rate case, there is an incentive between rate cases to reduce costs as much as possible to offset counterbalancing cost overruns in other areas or otherwise improve the Company s earned rate of return. Under the proposed IRM, as long as the Company s IRM spending is less than the maximum approved IRM amount, then those dollars will be subject to recovery at the approved ROE. This reduces the Company s incentive to be more efficient than the minimum level of what is required to control its spending within a specified Exhibit A-0, T, Exhibit A-0, T, and Exhibit A-0, T. $.M Distribution Operations +.0M Generation + $.M New,00 MW CC = $0.0M. BIEBER / 0

33 0 0 range. Further, DTE s proposal to meet with Staff and provide a summary report, including program metrics, does not appear to provide a comparable prudency review to a general rate case. Q. Do you have any other concerns? A. Yes, I do. DTE has proposed to reconcile the revenues that it receives through the IRM against the expected amount of revenues. If customer usage is lower than expected, due to weather, or other factors, then DTE would impose a surcharge to make up those revenues. This would reduce DTE s risk relative to cost recovery through base rates. According to DTE witness Michael Vilbert, DTE s proposal to reconcile the IRM revenues due to volumetric consumption different from forecasts would function like a decoupling mechanism on the IRM subset of the Company s operations. This component of the proposed IRM would cause an unreasonable shift of additional risk from the Company to its customers. In addition to recovering certain capital costs incurred after the end of the test year through the IRM, DTE has also proposed to include over $00 million of capital spend that is expected to occur during the last months of the test period for recovery through the IRM. The Company does not provide justification for this shift of cost recovery from base rates to the proposed IRM. If the IRM is ultimately approved, this would constitute an unnecessary expansion of cost recovery through the mechanism. It also conceals the magnitude of DTE s Direct Testimony of Michael J. Vilbert, p.. BIEBER /

34 0 0 requested rate increase by the shifting proposed recovery of costs that occur in the test period from base rates to the proposed tracking mechanism. Further, DTE s proposed IRM appears to provide cost recovery for capital dollars spent on assets before they are used and useful. For example, DTE is proposing to earn a return on its cumulative capital investment of $. million in 00 and $. million in 0 for its proposed Blue Water Energy Center,00 MW combined cycle gas turbine. 0 The facility is not expected to be in service until 0. Q. What do you recommend with respect to the proposed IRM? A. I recommend that the Commission reject the proposed IRM. The proposed recovery of DTE s specified capital costs to be collected through this mechanism amounts to single-issue ratemaking and the proposed mechanism does not meet the generally accepted prerequisites for that kind of regulatory treatment. Further, it reduces the inherent incentive for DTE to manage its costs. DTE has proposed the IRM as a mechanism to recover the costs of infrastructure necessary to safely and reliably serve its customers. Investing in and maintaining infrastructure for safety and reliability are fundamental responsibilities for a utility company. In carrying out this responsibility, utilities are entitled to an opportunity to recover their prudently-incurred costs. Rather than relying on expanded cost recovery under a new tracking mechanism, any incremental costs should be considered in the context of a general rate case. 0 Exhibit A-0, Schedule T, p.. BIEBER /

35 0 0 Inflation Adjustment Q. What has DTE proposed with respect to inflation in this case? A. The Company used its labor and non-labor rates to derive a composite inflation factor that is applied to DTE s test year O&M expenses. DTE witness Theresa Uzenski explains that the Company utilized an inflation rate of % for internal labor and contractor labor. DTE utilized an inflation rate for non-labor costs based on the consumer price index (CPI)-Urban. Ms. Uzenski used the labor and non-labor rates to calculate a composite rate of inflation for 0, 0, and 00. Q. Do you agree with the Company s treatment of inflation? A. No. I do not agree with the application of a generic inflation factor to non-labor O&M expense. While I recognize that the company s labor cost increases are driven in part by collective bargaining agreements and other contractual arrangements that may contain cost escalation provisions, I have concerns regarding the inclusion of a generic inflation factor in calculating test year nonlabor O&M expense. Q. Please explain your concerns regarding the inclusion of general inflation assumptions in a forecasted test period. A. From a ratemaking perspective, I have two serious concerns with DTE s inclusion of inflation in its forecasted test period revenue requirement. First, at a broad policy level, I have concerns about regulatory pricing formulations that reinforce inflation. This occurs when projections of inflation are built into formulas that Direct Testimony of Theresa M. Uzenski, p. 0. BIEBER /

36 0 0 are used to set administratively-determined prices, such as utility rates. Such pricing mechanisms help to make inflation a self-fulfilling prophecy. As a matter of public policy, this is a serious concern. It is one thing to adjust for inflation after the fact; it is another to help guarantee it. For this reason, I believe that regulators should use extreme caution before approving prices that contribute to inflation before it occurs. Q. What is your second major concern? A. A related, but distinct, concern involves the building of this cost cushion into the Company s test period costs. Allowing this type of systemic uplift in rates goes well beyond the basic rationale advanced by advocates for using a projected test period, which is to ameliorate the effect of regulatory lag on the recovery of investment in new plant. Q. Please explain. A. The primary justification for utilizing a projected test period is to allow a utility with expanding rate base the ability to avoid regulatory lag; that is, the use of a projected test period is intended to provide a utility a better opportunity to recover its investment cost than might occur with an historical test period. By including inflation in its non-labor O&M expenses, DTE is attempting to go well beyond simply aligning the test period with its projected test year investment to mitigate regulatory lag; the Company is also attempting to gain an additional benefit by inflating its baseline costs by applying an inflation factor. DTE should not be rewarded for the use of a forecasted test period with a windfall mark-up of its baseline costs. The Commission should not allow the utilization of BIEBER /

37 0 0 a forward-looking test period to also become a vehicle for utility recovery of such pseudo costs. The best evidence of what it costs DTE for non-labor O&M is the Company s actual costs recorded in the historical period, adjusted for certain known and measurable changes. The cost increases represented by DTE s inflation assumption may or may not come to fruition. In any case, DTE should be expected to strive to improve its O&M efficiency on a continuous basis, and thereby lessen the net impact of inflation on its O&M costs. It is not reasonable to simply gross up the Company s historical period costs by an inflation factor and pass these costs on to customers. Q. Does DTE project that it can achieve any O&M efficiencies that could partially offset the cost increases from inflation? A. No, it does not. According to DTE s data response to ABATE, ABDE-., DTE Electric s budget does not assume any efficiencies for 0 or 00. Q. What are the limited situations in which projected inflation should be considered in ratemaking? A. The United States experienced major inflation during the late 0s. In that type of severe increasing-cost environment, some consideration for O&M inflation in a forecasted test period would probably be necessary. However, we are very far from such a cost environment. Inflation in the United States has been at very low levels for several years. The prospects for core inflation, which excludes the relatively volatile pricing components of energy and food, remain subdued. BIEBER /

38 0 Q. Can you cite to any independent sources to support your contention that the prospects for core inflation remain subdued? A. Yes. I have reviewed the Minutes of the Federal Open Market Committee for September -, 0. The published Minutes of that meeting indicate that the Fed s central tendency forecast for Core personal consumption expenditures (PCE) inflation is.% to.0% for 0 and.0% to.% for 00. The Congressional Budget Office April 0 forecast for core PCE inflation is.0% in 0 and.% in 00. Q. What alternative for establishing non-labor O&M expense for the forecasted test period do you recommend? A. I recommend removing general inflation from DTE s projected test year nonlabor O&M expense. According to DTE s data response KCDE-.b, DTE has included approximately $. million of inflation in its calculation of non-labor, non-fuel O&M expense. Q. Does this conclude your direct testimony? A. Yes, it does. Minutes of the Federal Open Market Committee for September -, 0, Table. The Budget and Economic Outlook: 0 to 0, Table D-, CBO s Economic Projections, by Calendar Year, inflation forecast for Core PCE price index. BIEBER /

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