S T A T E O F M I C H I G A N MICHIGAN ADMINISTRATIVE HEARING SYSTEM FOR THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * *

Transcription

1 S T A T E O F M I C H I G A N MICHIGAN ADMINISTRATIVE HEARING SYSTEM FOR THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for approval of Amendment 2 of the ) Case No. U Power Purchase Agreement with T.E.S. ) Filer City Station Limited Partnership ) NOTICE OF PROPOSAL FOR DECISION The attached Proposal for Decision is being issued and served on all parties of record in the above matter on December 8, Exceptions, if any, must be filed with the Michigan Public Service Commission, 7109 West Saginaw, Lansing, Michigan 48917, and served on all other parties of record on or before January 2, 2018, or within such further period as may be authorized for filing exceptions. If exceptions are filed, replies thereto may be filed on or before January 16, The Commission has selected this case for participation in its Paperless Electronic Filings Program. No paper documents will be required to be filed in this case. At the expiration of the period for filing exceptions, an Order of the Commission will be issued in conformity with the attached Proposal for Decision and will become effective unless exceptions are filed seasonably or unless the Proposal for Decision is reviewed by action of the Commission. To be seasonably filed, exceptions must reach the Commission on or before the date they are due.

2 MICHIGAN ADMINISTRATIVE HEARING SYSTEM For the Michigan Public Service Commission Martin D. Snider Administrative Law Judge December 8, 2017 Lansing, Michigan

3 FOR THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for approval of Amendment 2 of the ) Case No. U Power Purchase Agreement with T.E.S. ) Filer City Station Limited Partnership ) PROPOSAL FOR DECISION I. PROCEDURAL HISTORY On May Consumers Energy Company (Consumers) filed an application (Application) with the Michigan Public Service Commission (Commission) to grant approval, pursuant to MCL 460.6(j) (13), to amend Consumers Power Purchase Agreement (PPA) with T.E.S. Filer City Station Limited Partnership (Filer City Partnership). On May 26, 2017 a Notice of Hearing was issued by the Commission s Executive Secretary which set a Pre Hearing on this matter for June 27, On June 16, 2017 Attorney General Bill Schuette filed a Notice of Intervention. On June 20, 2017 the Independent Power Producers Coalition of Michigan (IPPC) and the Residential Consumer Group (RCG), filed Petitions to Intervene. On June 26, 2017 Consumers filed an Objection to the Petition to Intervention of the IPPC. 1

4 On June 27, 2017 a pre hearing on this matter was convened. During the prehearing Administrative Law Judge (ALJ) Martin D. Snider heard oral argument on Consumers Objection to IPPC s Petition for Intervention. ALJ Snider ruled that IPPC met the requirements for permissive intervention and granted IPPC s petition for intervention and ruled RGC s petition met the requirements for invention and granted RGC s petition. Also during the pre-hearing the parties mutually agreed upon a schedule for this matter which, among other things, set a date for cross examination of September 22, On August 11, 2017, Staff filed the Direct Testimony of Julie K. Baldwin and Jesse J. Harlow and proposed Exhibits S-1, S-2 and S-3. On September 1, 2017 IPPC filed the Rebuttal Testimony of Thomas V. Vine and Consumers filed the Rebuttal Testimony and Exhibits of David F. Ronk, Jr. On September 8, 2017 IPPC filed a Motion for Leave to File Surrebuttal Evidence, Proposed Surrebtutal Testimony and Exhibits of Thomas V. Vine. On September 8, 2017 Consumers filed a Motion to Strike portions of the Rebuttal Testimony of Thomas V. Vine. On September 15, 2017 IPPC filed a Response to Consumers Motion to Strike. On September 18, 2017 Consumers filed a Response to IPPC s Motion to File Surrebuttal Evidence. On September 21, 2017 Staff filed the Qualifications and Revised Direct Testimony of Jesse J. Harlow. On September 22, 2017, a hearing in this matter was held. After oral argument on Consumers Motion to Strike, ALJ Snider granted Consumers Motion to Strike and the following testimony was stricken from the record: page 2 line 3 through page 3 line 6 of Thomas Vine s Rebuttal Testimony. Also during the prehearing oral argument was heard 2

5 on IPPC s Motion for Leave to File Surrebuttal Evidence. ALJ Snider granted IPPC s Motion for Leave to File Surrebuttal Evidence and allowed Consumers to file responsive second rebuttal. During the hearing, the following testimony was bound into the record and the following exhibits were admitted into the record: For Consumers: Direct, Rebuttal and Second Rebuttal Testimony of David F. Ronk, Jr., who sponsored Exhibits A-1, A-2., A-3, A-4, A-5, A-6, A-7, A-8. A-9, A-10, A-11, A-12 and A-13. For MPSC Staff: Direct Testimony of Julie K. Baldwin, who sponsored Staff Exhibit S-1 and S-2. Revised Direct Testimony of Jesse J. Harlow, who sponsored Exhibit S-3. For IPPC: Rebuttal and Surrebuttal Testimony of Thomas V. Vine, who sponsored IPPC-1 On October 20, 2017, Consumers, and Staff filed Initial Briefs. On November 17, 2017, Consumers filed a Reply Brief. Neither IPPC, RGC nor the AG filed Briefs or Reply Briefs. The record consists of 108 transcript pages and 17 exhibits. II. BACKGROUND On May Consumers filed an application with the Commission to grant approval, pursuant to MCL 460.6(j) (13), to amend Consumers PPA with T.E.S. Filer City Station Limited Partnership (Filer City Partnership). Consumers is a public utility engaged in the business of generating, purchasing, distributing, and selling electric energy to approximately 1.8 million retail customers in the State of Michigan. Consumers retail 3

6 electric business is subject to the jurisdiction of the Commission pursuant to 1939 Public Act (PA) 3, as amended by various acts, including 1982 PA 304 ( Act 304 ), 2000 PA 141, and 2016 PA 341, MCL et seq.; 1909 PA 106, as amended, MCL et seq.; 1909 PA 300, as amended, MCL et seq.; and 2008 PA 286, MCL 460.4a et seq. On July 31, 1986, Consumers and Tondu Energy Systems, Inc. (Tondu) entered into a long-term PPA to purchase electric capacity and energy from Filer City cogeneration plant to be located in or near Filer City, Michigan (Filer City). Pursuant to the terms of the PPA, Filer City would be: Fueled with coal, waste wood, and paper sludge; Equipped with a generator with a nameplate rating not to exceed 60,000 kilowatts; and Capable of extracting up to 280,000 lbs. per hour of 600 psi process steam. On February 19, 1987 the Commission, in its Order in U-8562, approved the PPA between Consumers and Tondu. Subsequently, on April 30, 1987, the PPA was amended (Amendment No. 1) to incorporate capacity payment rates which conformed to the Commission s February 19, 1987 Order. The amended PPA has an initial term which concludes on June 16, 2025 but also allows subsequent one-year terms thereafter unless either Consumers or the Partnership issues a notice of its election to terminate the agreement. On August 10, 1988, Tondu assigned its interest in Filer City and the PPA to the Western Michigan Cogeneration Limited Partnership. Tondu is a General Partner of the Western Michigan Cogeneration Limited Partnership. Also on August 10, 1988, the Western Michigan Cogeneration Limited Partnership assigned its interest in Filer City and the PPA to the Partnership. Western Michigan Cogeneration Limited Partnership and 4

7 CMS Generation Filer City, Inc., an affiliate of Consumers Energy, are General Partners of the Partnership. On May 4, 2017, Consumers and the Partnership executed a second amendment to the PPA (Amendment No. 2). Amendment No. 2 provides that Filer City would be converted from coal, as its primary fuel, to natural gas. In order to be economically feasible the conversion would require the installation of efficient gas combustion turbine technology. Gas turbine technology is a more efficient process of converting heat to electricity and produces less waste heat per watt-hour of electricity generated. The conversion would require Filer City to produce and deliver 50,000 lbs. per hour of 600 psi process steam to Filer City s steam host. The converted Filer City facility would also increase the amount of electric capacity and energy produced. If approved by the Commission Amendment No. 2 would allow Filer City to: Sell additional electric capacity and energy to Consumers at a lower rate than the rate specified under the existing PPA terms; Extend the initial PPA term to 15 years after the completed conversion; Increase net output to approximately 225 megawatts (MW): and Produce 50,000 lbs. per hour of 600 psi process steam. Consumers believes that Amendment No. 2 would provide substantial benefits to Consumers customers. Costs to customers are expected to be reduced over the 15-year term by approximately $45 million on a net present value basis. See 2 TR and Exhibits A-3 and A-4. Consumers indicated in its application that in order to meet and Amendment 2 condition precedent Consumers will make a filing with the Federal Regulatory Energy 5

8 Commission (FERC) requesting a FERC finding that the PPA, as amended by Amendment 2, is a contract executed on or before March 17, 2006 or made pursuant to a state regulatory authority s implementation of Section 210 of the Public Utility Regulatory Policies Act of 1978, 6 U.S.C. 824a-1 or otherwise authorizing sales of Contract Energy by the Filer City Partnership to Consumers under Section 205 of the Federal Power Act. See Exhibit A- 2, pp. 2-3; Section III.C. Of the Commission s Code of Conduct provides, in pertinent part: If an affiliate or other entity within the corporate structure provides services, products, or property to an electric utility or alternative electric supplier offering regulated service in Michigan, compensation for services and supplies shall be at the lower of market price or 10% over fully allocated embedded cost... Consumers Exhibit A-5 provides a calculation of Consumers fully allocated embedded cost of capacity plus 10% of the Consumers fully allocated embedded cost of capacity, and compares that amount to be charged by the Filer City Partnership under Amendment No. 2. According to Exhibit A-5, the highest amount to be charged for capacity under Amendment No. 2 is lower than the Consumers fully allocated embedded cost of capacity plus 10%, and is lower than the market price for capacity to which the Consumers is otherwise exposed. Consumers indicated in the Application that the capacity price of Amendment No. 2 complies with the Commission s Code of Conduct. In the alternative Consumers indicated in the Application that it requests a waiver of the requirement to comply with the Code of Conduct because it believes Amendment 2 resulted from an arms-length transaction with no preferential treatment to the affiliate. Consumers believes, that because its customers would benefit from Amendment 2 any harm the Code of Conduct was intended to prevent, is not present in this case. 6

9 Because Amendment No. 2 extends the PPA s term for a period in excess of six months, Consumers is requesting Commission approval of Amendment No. 2 to the PPA pursuant to Section 6j(13)(b) of Act 304, 1987 PA 81, and all other applicable law. Consumers Exhibit 2 is the filed copy of Amendment No. 2. (See Exhibit A-2) In summary Consumers requests the Commission: Approve Amendment No. 2 of Consumers PPA with Filer City Limited Partnership because Consumers believes it is reasonable and prudent and would provide cost savings to its customers; and Approve recovery of the payments under the PPA as amended by Amendment No. 2, for the kilowatt hours delivered by the Filer City Limited Partnership to Consumers after the Converted Plant Initial Delivery Date for the purposes of Section 6j(13)(b) of 1982 PA , 1987 PA 81, and all other applicable law. A. Consumers III. POSITION OF THE PARTIES 1. Direct, Rebuttal, and Second Rebuttal Testimony of David F. Ronk Jr. BSCE, Executive Director for Electric Transactions and Wholesale Settlements, Consumers Energy. Witness Ronk testified regarding the: Purpose of Amendment No. 2 of the PPA between Consumers and Filer City Partnership (Partnership); Cost and benefits of Amendment No. 2; Purchase of resources from a Consumers Energy affiliate and compliance with the Commission s Code of Conduct; and Implementation of Amendment 2. Witness Ronk sponsored the following exhibits: Exhibit A-1: Previously Sponsored Testimony before the Commission; 7

10 Exhibit A-2: Amendment No. 2, dated May 4, 2017, to PPA between Consumers and Filer City Limited Partnership, dated July 31, 1986; Exhibit A-3: Comparison of Net Present Value of Customer Savings; Exhibit A-4: Customer Cost and Saving by Year; Exhibit A-5: Embedded Capacity Cost Calculation and Comparison to Affiliate Offer Prices; Exhibit A-6: Calculation Of Expense Incurred Under Existing PPA in 2016; Exhibit A-7: Calculation O 1 F Converted Plant Levelized Capacity And Energy Cost; Exhibit A-8: Comparison Of Avoided Cost Calculations; Exhibit A-9: Summary Data for Capped Fuel and Variable Operation and Maintenance Costs Recoverable Under Section 6a of 2016 PA 341, MCL 460.6a (9), (10) & (11) 1 Post 2018 Assuming All Units Eligible to Receive Compensation; Exhibit A-10: Summary Data for Capped Fuel and Variable Operation and Maintenance Costs Recoverable Under Section 6a of 2016 PA 341, MCL 460.6a (9),(10) & (11) Post 2018 Assuming All Units Eligible to Receive Compensation Except Filer City; Exhibit A-11: Summary Data for Capped Fuel and Variable Operation and Maintenance Costs Recoverable Under Section 6a of 2016 PA 341, MCL 460.6a (9), (10) & (11) Post 2018 Assuming All Units Eligible to Receive Compensation Except Hillman, Viking Lincoln, and Viking McBain; Exhibit A-12: Summary Data for Capped Fuel and Variable Operation and Maintenance Costs Recoverable Under Section 6a of 2016 PA 341, MCL 460.6a (9), (10) & (11) Post 2018 Assuming All Units Eligible to Receive Compensation Except Hillman, Viking Lincoln, Viking McBain, and Filer City; and Exhibit A-13: Comparison of Customer Savings (Post 2018) Based on Early Termination of Eligibility of Filer City to Recover Excess Expense Under Section 6a of 2016 PA 341, MCL 460.6a (9), (10), & (11). 8

11 a. Purpose of Amendment No. 2 Witness Ronk testified that the approval of Amendment No. 2 would allow for the conversion of Filer City from coal as a primary fuel source to natural gas. The conversion would require the installation of natural gas combustion turbine technology. 2 TR 42. The converted Filer City would increase amount of energy and capacity produced and maintain the amount of waste steam currently provided to Filer City s steam host. The converted Filer City would have an anticipated net output of approximately 225 MW. 2 TR 45. According to the terms of Amendment No. 2: Filer City will sell additional electric capacity and energy to Consumers. The contract price for the energy and capacity is at a lower rate than the rate specified under the existing terms of the PPA. The initial term of the PPA should be extended to 15 years from the conversion date. 2 TR 42; See Exhibit A-2 Witness Ronk testified that Amendment No. 2 provides for five potential dates where the converted Filer City could commence delivery. June 1, 2018; June 1, 2019; June 1, 2020; June 1, 2021; and June 1, TR 44. Delivery dates are contingent upon Filer City: Providing proof that it has an executed Interconnection Agreement for the Converted Plant and is authorized under the Interconnection Agreement to begin parallel operation with the interconnected system; and Transfer to Consumers the contract capacity for the Midcontinent Independent System Operator, Inc. ( MISO ) Planning Year beginning the following June 1st, on or before three business days prior to the Fixed Resource Adequacy Plan filing date for that Planning Year. 2 TR

12 Amendment 2 also provides: If Filer City is unable to convert the Plant prior to June 1, 2022, then Consumers has the right to terminate this amendment. 2 TR 44. Consumers will purchase capacity and energy from the converted Filer City. Consumers will purchase up to 225 Zonal Resource Credits (ZRCs) from the converted Filer City.2 TR 45. Capacity is priced based on the number of ZRCs purchased. A price schedule for each ZRC purchased based on an initial price applicable for the Planning Year that the Converted Plant Initial Delivery Date occurs between 2018 and Each price schedule includes an annual adjustment beginning on the first year anniversary of one-half the percentage change in the Consumer Price Index from the April preceding the then current Planning Year to April preceding the Converted Plant Initial Delivery Date. 2 TR 47. Energy purchased from the converted Filer City by Consumers will be evaluated using the day-ahead MISO calculated Locational Marginal Price (LMP) for the Filer City node. Consumers will purchase energy delivered from the converted Filer City if the energy price is less than the day-ahead LMP. Every operating day Consumers is entitled to select a Scheduled Delivery Period of at least eight hours to purchase energy when it deems that the maximum positive net energy value is provided or elect to forego any energy purchase if the net energy value is not positive for any delivery period of at least 8 hours. If Consumers does not purchase all of the available converted Filer City energy and capacity, Filer City may sell the unpurchased energy and capacity to others, including the MISO market. 2 TR 45. Witness Ronk testified that according to Amendment 2 the price for energy from the converted Filer City is equal to Cost of Production which includes a fuel and viable component. The fuel component is the product of the gas price and the heat rate. The gas price is the midpoint of the range for the DTE Gas Company s MichCon citygate 10

13 location as published by Platts Daily Gas in the Daily Gas Survey plus the cost to deliver gas from the MichCon citygate location to the Converted Plant meters. The heat rate is 7.6 mmbtu/mwh. The variable cost component is $5.00/MWh adjusted annually, beginning June 1, 2018, by the percentage change in the Consumer Price Index from the prior April to April TR 47. b. Cost and Benefits of Amendment No. 2 Witness Ronk testified that approval of Amendment 2 would: Increase lower Michigan generation capacity; Reduce costs by approximately $45 million on a net present value basis; and Save approximately $100 million on a net present value basis in the period leading up to July TR 42. Witness Ronk testified that over the remaining term of the contract, costs would increase by approximately $60-$70 million on a net present value basis therefore the Amendment 2 savings mentioned above are based on the reduction of the payments under the current PPA and the avoidance of payments under Public Act 286 of 2008 (PA 286). Exhibit A-3 provides a summary of 30 different modeled scenarios, which utilize a range of gas and capacity prices to project potential Amendment 2 savings and costs when compared to the original PPA terms. 2 TR 48. Exhibit A-4 details five of the most likely modeled scenarios based on current gas and capacity price forecasts. Witness Ronk testified that annual savings for 2020 through 2024 would be approximately $18 million. Costs in years 2026 through 2033 would average approximately $7 million per year. 2 TR

14 c. The Code of Conduct Witness Ronk testified that Amendment No. 2 is the result of negotiations initiated by Western Michigan Cogeneration Limited Partnership, a General Partner of Filer City. 2 TR 51. According to witness Ronk the PPA negotiations between Consumers and Western Michigan Cogeneration Limited Partnership were conducted in the same manner as other PPA negotiations. Consumers considered customer benefits and its need for capacity and energy when evaluating PPA modifications. 2 TR 51. Witness Ronk testified that [t]he Company and its affiliate have taken care to maintain separate responsibilities so as to allow for arms-length negotiations on this matter. 2 TR 52. Witness Ronk testified that because Amendment No. 2 is an amendment to an agreement between Consumers and an affiliate, the Commission s Code of Conduct is applicable. Section III.C. of the MPSC s Code of Conduct provides, in relevant part: If an affiliate or other entity within the corporate structure provides services, products, or property to an electric utility or alternative electric supplier offering regulated service in Michigan, compensation for services and supplies shall be at the lower of market price or 10% over fully allocated embedded cost.... Exhibit A-5 provides a comparison of Consumers fully allocated embedded cost of capacity plus 10% of Consumers fully allocated embedded cost of capacity compared to the amount to be charged by Filer City under Amendment No. 2. Witness Ronk testified that Exhibit A-5 shows that the highest amount to be charged for capacity under Amendment No. 2 is lower than Consumers fully allocated embedded cost of capacity plus 10%, and is lower than the market price for capacity 2 TR 51. Witness Ronk testified that Consumers energy payments will be based on the market price. Consumers will only purchase energy if the cost of production during the 12

15 proposed Scheduled Delivery Period is less than the Day-Ahead LMP for the same period. Witness Ronk testified that the Amendment 2 energy payment approach would create a positive net energy value for customers. 2 TR 51. Consumers believes that the proposed Amendment 2 capacity and energy prices are reasonable and prudent, and therefore comply with the Commission s Code of Conduct. d. Consumers Response to Staff Staff witnesses do not disagree with Consumers conclusion that approval of Amendment 2 would result in approximately $45 million in savings. 2 TR Staff witness Baldwin testified in her initial direct testimony that Amendment No. 2 should not be approved because it is discriminatory against other QFs. 2 TR However, Staff indicated in its Brief that, after reviewing witness Ronk s rebuttal testimony, Staff no longer feels that Amendment 2 would be discriminatory against other QF s. In its Brief Staff recommended Commission approval of Amendment 2. See Brief p. 5-6 e. Staff s Comparison of Amendment 2 cost with Avoided Costs in U Staff witness Baldwin indicated in her direct testimony that Amendment 2 proposed rates would be the discriminatory to other QF s because the Amendment 2 rates are not based on avoided costs determined in U Witness Ronk in his Rebuttal Testimony testified that a comparison of U avoided costs and Amendment 2 costs was inappropriate and unnecessary. The converted Filer City would provide capacity of approximately 225 MW and would be a QF for FERC certification purposes. Consumers has or will obtain a FERC waiver of its legal obligation to make purchases from QFs above 20 MW. Therefore, according to witness Ronk, it would is unnecessary and inappropriate 13

16 to compare the rates for the converted Filer City to the rates determined in U TR 60. Staff indicated in its Brief that it had reviewed witness Ronk s Rebuttal Testimony and agrees with Consumers that it is inappropriate and unnecessary to compare and consider the Amendment 2 costs with Consumers avoided cost rates determined in U f. Consumers Response to IPPC IPPC agrees Staff s initial position that Amendment 2 would discriminate against QFs. 2 TR 100. However Staff changed its position after reviewing witness Ronk s Rebuttal Testimony. Staff indicated in its Brief that it no longer believes Amendment 2 would be discriminatory and recommends Commission s approval. Because IPPC did not file a brief or reply brief in this matter, IPPC s final position with regard to the alleged discriminatory effect of Amendment 2 is unknown. IPPC witness Vine testified that be disagreed with Consumers calculation of the customer PA 286 payment savings. Witness Vine testified that his calculations show only approximately $1 million in approximate customer savings and not the $4.5 million calculated by witness Ronk. 2 TR 105. Consumers indicated in its Brief that IPPC s argument is incorrect and should be rejected. Witness Ronk testified that IPPC witness Vine incorrectly calculated the PA 286 payments avoided by Consumers customers if Amendment No. 2 is approved. 2 TR 74. Witness Ronk testified that IPPC witness Vine s analysis does not limit the recoverable amount of remaining BMP units by the lesser of the adjusted capped amount and the actual excess expense incurred during the month. Witness Ronk testified as follows: 14

17 In Exhibit IPP-1 (TV-1), Mr. Vine calculates a variance of $1,014,528 (see page 3) as contrasted with the estimate that I provided of approximately $4.5 million. In performing his calculation, Mr. Vine provides the amount of excess expense incurred by each of the eligible plants. He then prorates the recoverable amount based on the requirement that the aggregated monthly amount not exceed $1 million, and calculates the amount of recovery that would result if the capped amount was increased by the amount of change in the consumer price index. He performs the same calculation assuming that the Filer City Plant is ineligible to receive compensation and then compares the two results. In calculating the amount of recovery that would result if the capped amount was increased by the amount of change in the consumer price index, he erred by not limiting the recoverable amount by the lesser of the adjusted capped amount and the actual excess expense incurred during the month. For instance, on page 2 of Exhibit IPP-1 (TV-1), Cadillac Renewable Energy, LLC is shown to have incurred $159,622 in excess expense in October After performing his analysis assuming the Filer City Plant is ineligible to recover its excess expense, Mr. Vine incorrectly concludes that Cadillac Renewable Energy, LLC should be eligible to recover $178,572 for its expense in October 2016, which is more than its excess expense in a month. 2 TR Witness Ronk testified that IPPC s analysis failed to consider that three current BMP units receiving PA 286 payments would cease receiving future PA 286 payments. 2 TR 75. Consumers currently has contracts with the Hillman, Viking Lincoln, and Viking MacBain units Witness Ronk testified that once the current PPAs expire, any new agreements would preclude recovery of PA 286 payments because the agreements would not have been in existence on or before January 1, See MCL 460.6a (9). After those units become ineligible to receive PA 286 payments, the remaining BMP units will receive a larger share of their excess expenses. 2 TR 75. Witness Ronk testified that because the remaining BMP units, subsequent to the removal of the three ineligible units, would already be receiving full PA 286 compensation for expenses, the removal of Filer City from the pool of eligible BMP units would not materially increase Consumers expenses for the remaining BMP units. 2 TR 76. Witness Ronk testified that, after 15

18 correcting the two errors in witness Vine s analysis, Amendment 2 customer savings would be $5.2 million and not the $1 million savings calculated by witness Vine. 2 TR 76; see also Exhibit a-13. Consumers indicated in its Brief that $5.2 million amount shown in Exhibit A-13 is higher than the $4.5 million amount shown in Exhibit A-6 because the lower amount was a conservative estimate but not an overstatement of savings as alleged by IPPC. Consumers argues that IPPC s criticism of Consumers calculation of PA 286 payments, and customer costs, is flawed and should be rejected. B. Staff 1. Testimony of Julie K. Baldwin, B.S.C.E. Manager of the Renewable Energy Section (Section) of the Electric Reliability Division, Michigan Public Service Commission. Witness Baldwin testified regarding Staff s review of Consumers application and Amendment 2. Witness Baldwin also testified regarding Staff s recommendations regarding whether Amendment 2. Should be approved. 2 TR 83. Witness Baldwin sponsored the following exhibits: Exhibit S-1 (JKB-1): Consumers Energy Purchased Power and Cogeneration Energy and Expense - Total 2016from Case No. U R. Exhibit S-2 (JKB-2): Consumers Energy Purchased Power Contract Rates and MPSC Approval Dates, Energy and Capacity Contracts from Case No. U R. a. Filer City and Amendment 2 Witness Baldwin testified that the Filer Plant began operation in 1990 and is currently a 60 MW cogeneration plant (60 MW and 50,000 lbs./hour of steam) fueled primarily with coal supplemented by wood waste and natural gas. 2 TR 84. The converted Filer City would be a 225 MW facility (with the same pre conversion steam output), 16

19 primarily fueled by natural gas. The converted facility s initial delivery date is on or before June 1, The Amendment 2 15-year term would commence after the converted plant delivery date and continues for one-year terms unless either party gives notice of termination. Id Witness Baldwin testified that the converted Filer City facility would be Public Utility Regulatory Policy Act (PURPA) Qualifying Facility (QF). PURPA Section (c) defines a cogeneration facility as: equipment used to produce electric energy and forms of useful thermal energy (such as heat or steam), used for industrial, commercial, heating, or cooling purposes, through the sequential use of energy. 2 TR 84 Witness Baldwin testified that a PURPA QF may be a cogeneration facility. Exhibit A-2, provides that the Partnership shall obtain a final order from the Federal Energy Regulatory Commission (FERC) approving the recertification of the converted Filer Plant as a QF.Id Exhibit S-1, line 33, column (j), provides the current rate under the existing Filer City PPA. The total cost of the existing PPA for 2016 was $85.36 per MWh. Exhibit S-2, page 2 of 5, line 5, shows the on- and off-peak capacity rates (6.5 cents and 5.5 cents per kwh, respectively) for the existing PPA. 2 TR 85. Witness Baldwin testified that proposed capacity payment under Amendment 2 could be one of five options depending on the Converted Plant Initial Delivery Date. Consumers witness Ronk testified that Exhibit A-5 lines 13 and 14 are based on the assumption that the converted plant delivers energy to Consumers before June 1, According to Amendment 2 terms, the capacity payment is escalated at one-half of the 17

20 CPI each year of the contract. Capacity Payment in 2018: $160,560/ZRC-Year Capacity Payment in 2033: $184,560/ZRC-Year. Id b. PURPA QF Avoided Costs Witness Baldwin testified that on July 31, 2017, the Commission issued an order in U in which the Commission approved Consumers avoided capacity cost calculations. The case was remanded for further information needed to determine energy payments. Subsequently, Jesse Harlow a Staff witness in U and in this matter, calculated Consumers avoided capacity price to be in the range of $129,300 $139,764 per ZRC year. 2 TR Witness Baldwin testified that as of the time of her testimony Staff had not completed the calculations necessary to determine Consumers avoided energy cost. She testified that the Amendment 2 proposed rate, after the Filer City conversion, should be compared to Consumers avoided costs because after the conversion Filer City will essentially be a new QF receiving a 15-year contract with capacity payment certainty. Witness Baldwin testified that the Amendment 2 proposed capacity payments are inconsistent with the avoided capacity cost approved in U because those costs are 15% 32% higher than the high end of the new avoided capacity price range calculated by Staff witness Harlow. See Exhibit A-5. Id Witness Baldwin testified that she feels that the proposed Amendment 2 capacity payments may be discriminatory against other QFs because the payments under the Amendment are inconsistent with Consumers avoided capacity cost methodology approved by the Commission in its May 31, 2017 and July 31, 2017 Orders. Witness Baldwin testified that the Commission in its May 31 Order indicated that accurate avoided 18

21 costs are necessary to evaluate new and existing QFs, PPAs, and certificates of need for new generation. [May 31 Order, pp ] 2 TR To further demonstrate her concerns regarding payments to other QFs witness Baldwin referenced the Hillman biomass plant which at the time of her testimony did not have a PURPA replacement contract. Witness Baldwin testified that the Commission in U ordered that the existing contract terms and conditions would apply to the Hillman biomass plant until a new contract was negotiated after avoided cost rates are approved in U Id Witness Baldwin also testified regarding her concerns regarding the proposed Amendment 2 15-year term for known capacity payments. The Amendment 2 certainty of future capacity payments is the kind of future certainty that would be valued by other QFs contemplating facility upgrade capital expenses. Witness Baldwin testified that Consumers is providing a 15 year term option to an affiliate but not to other QFs. Id Witness Baldwin testified that despite the fact that the capacity payment at the time of the Filer City conversion is higher than the avoided capacity cost payment recently approved by the Commission, Amendment 2 offers the following benefits: Reduction of the number of years Consumers is contractually required to pay the current, higher rates; and Consumers may purchase Filer City generation if the price is lower than the day ahead LMPs (with some limitations). 2 TR 87 Witness Baldwin testified that the cost of capacity used by witness Ronk to calculate Amendment 2 customer savings is based on the MISO Cost of New Entry (CONE). She testified that she agrees with witness Ronk that most likely the MISO Planning Reserve Auction will clear at approximately 50% of CONE. If this assumption 19

22 and Consumers natural gas prices forecasts are accurate, witness Ronk determined that Amendment 2 would result in $45 million in customer savings on a net present value basis. Those savings would be the result of a reduced Amendment 2 contract term and a reduced capacity payment relative to the current contract. In addition the Filer City would be dispatchable. 2 TR In summary, witness Baldwin testified that the benefits of the Amendment 2 do not outweigh her concerns regarding Amendment 2 payments. Witness Baldwin testified that she is concerned that offering a capacity rate to an affiliate QF that is above the avoided cost capacity rate, combined with a 5-year window for the QF to make the conversion and a 15-year term subsequent to the conversion, would be discriminatory. Therefore, at the time of her direct testimony witness Baldwin did not recommend Commission approval of Amendment Revised Direct Testimony of Jesse J. Harlow, BSE, Public Utilities Engineer, Renewable Energy Section of the Electric Reliability Division, Michigan Public Services Commission Witness Harlow testified regarding Consumers avoided capacity value based on the Commission s July 31, 2017 order in U Witness Harlow sponsored Exhibit S-3 Staff s Avoided Cost Calculation. Witness Harlow testified that he determined that Consumers avoided capacity cost to be approximately: $110,900 per megawatt year. On a ZRC basis $129,300 per ZRC year (subject to approximating Consumers calculation of Effective Forced Outage Rate (EFORd) and Summer Derate). 2 TR 96 20

23 Witness Harlow testified that in U Consumers proposed a capacity value of $116,585 per megawatt year and $139,764 per ZRC year. Given that information witness Harlow testified that Consumers avoided capacity cost is within the range of $110,900 - $116,585 per megawatt year and $129,300 $139,764 per ZRC year. Id 3. Staffs Final Position Staff indicated in its Brief that it had reviewed witness Ronk s Rebuttal Testimony and agrees that is not appropriate to compare the capacity payment under Amendment 2 to Consumers avoided capacity cost in U Brief p 5. Witness Ronk testified While the Plant is still considered a QF, but for the existing PPA between the parties, the Company would not have an obligation to purchase from Filer City at the avoided cost rate. See 2 TR 59. In its Brief, Staff agrees that it is neither appropriate nor necessary to compare the capacity payment under Amendment 2 to Consumers avoided cost rate in U Brief p. 5. Staff also indicated in its Brief that it agrees with witness Ronk that Amendment 2 would not be discriminatory to other PURPA QFs. Id Staff agrees with witness Vine that the Amendment 2 capacity payment is above the avoided cost rate, but believes that fact must be considered along with other parts of the transaction, including but not limited, to the dispatchability of Filer City. Witness Vine testified that [t]he proposed capacity payment coupled with the proposed energy payment is less than the combined avoided cost capacity and energy rates. See 2 TR 68. In its Brief Staff agrees with Consumers that after considering the entirety of the PPA transaction, Amendment 2, if approved, would not be discriminatory to other qualifying facilities. Brief p.5 Therefore, based on witness Vine s Rebuttal Testimony, Staff recommends that the Commission approve Amendment 2. Brief p 6. Staff did not file a Reply Brief. 21

24 C. IPPC 1. Surrebuttal Testimony of Thomas V. Vine Witness Vine provided Surrebuttal Testimony to address arguments presented by witness Ronk s Rebuttal Testimony. Witness Vine sponsored Exhibit IPP-1. Witness Vine testified that he believes that witness Ronk overstated the PA 286 savings to Consumers and its customers. 2 TR 104. Witness Vine testified that he does not agree with witness Ronk s conclusion that approval of the PPA Amendment would result in $4.5 million in savings currently paid to the Filer City under according to U R filings. Id. Witness Vine testified that as shown in Exhibit IPP-1 he believes that witness Ronk overstates savings by more than $3.5 million dollars. Witness Vine testified that his calculations are based on the data contained in Exhibit A-6. Exhibit IPP-1 consists of Table A, Table B and a Comparison. Table A shows witness Vine s calculation of the cost recovery amounts under PA 286 for all of the applicable biomass plants, including the Filer City. Table B recalculates using the same data, excluding Filer City. The value from Table B, which is the amount of the payment with the Filer City removed, is then subtracted from the totals at the bottom of Table A. Witness Vine testified that his calculations show a savings of $1,014,528 as a result of the removal of Filer City. The Comparison page contains a month-by month/line-by-line comparison of dollars recovered, with and without the Filer City. 2 TR Witness Vine testified that Sec. 6a (8) of PA 286 of 2008 provides: If the total aggregate amount by which the eligible merchant plants reasonably and prudently incurred actual fuel and variable operation and maintenance costs determined by the commission exceed the amount that the merchant plants are paid under the contract by more than $1,000, per month, the commission shall allocate the additional $1,000, per month payment among the eligible merchant plants 22

25 based upon the relationship of excess costs among the eligible merchant plants. (Emphasis added) See 2 TR 105 and MCL 460.6a (10) Witness Vine incorrectly cited to Sec.6a.The above section is actually Sec.6a (10) of PA 286 of 2008, being MCL 460.6a (10). Witness Vine testified that he recalculated the 2016 shortfalls excluding Filer City and reapportions the payments the Filer City would have received, under the capped amount, to the remaining eligible merchant plants in months where the total shortfall amongst those remaining plants exceeds the $1,000, cap. Witness Vine testified that these calculations are shown in the Comparison for the months of January, February, August, September, October and November of TR 105. D. Positions of Intervenors AG, IPPC and RGC During the June 27, 2017 pre hearing on this matter the AG s Notice of Intervention was acknowledged and IPPC s and RGC s Petitions for Intervention were granted. Subsequently, during the September 22, 2017 hearing, IPPC offered Surrebuttal testimony from witness Vine which, over Consumers objection, was admitted into the record. Neither the AG nor RGC filed any testimony nor did either attend the September 22, 2017 hearing. Neither the AG, IPPC, nor RGC filed Briefs or Reply Briefs. Because of this the final positions of the AG, RGC and IPPC, regarding the approval of Consumers application, save IPPC witness Vines testimony, are unknown. 23

26 IV. DISCUSSION On May 4, 2017, Consumers and the Filer City Partnership executed a second Amendment to their existing PPA (Amendment No. 2). Among other things Amendment No. 2 provides that Filer City would be converted from coal as a primary fuel to natural gas. See Exhibit A-2. In order to be economically feasible the Filer City conversion would require the installation of efficient gas combustion turbine technology. Gas turbine technology is a more efficient process of converting heat to electricity and produces less waste heat per watt-hour of electricity generated. The conversion would also require Filer City to produce and deliver 50,000 lbs. per hour of 600 psi process steam to Filer City s steam host. The converted Filer City would increase the amount of electric capacity and energy produced. Amendment No. 2, if approved by the Commission, would allow Filer City to: Sell additional electric capacity and energy to Consumers at a lower rate than the rate specified under the existing terms of the PPA; Extend the initial term of the PPA to 15 years after the completed conversion; Increase net output to approximately 225 megawatts (MW); and Produce 50,000 lbs. per hour of 600 psi process steam. On May 8, 2017 Consumers Energy Consumers filed an application with the Commission to obtain approval, pursuant to MCL 460.6(j) (13), to amend Consumers PPA with the Filer City Partnership. MCL 460.6j (13) provides in pertinent part: (b) Not disallow the capacity charges for any facilities for which the electric utility would otherwise have a purchase obligation if the commission has approved capacity charges in a contract with a qualifying facility, as that 24

27 term is defined by the Federal Energy Regulatory Commission pursuant to the public utilities regulatory policies act of 1978, Public Law , 92 Stat 3117, unless the commission has ordered revised capacity charges upon reconsideration under this subsection. A contract is valid and binding in accordance with its terms, and capacity charges paid pursuant to that contract are recoverable costs of the utility for rate-making purposes notwithstanding that the order approving that contract is later vacated, modified, or otherwise held to be invalid in whole or in part if the order approving the contract has not been stayed or suspended by a competent court within 30 days after the date of the order, or by July 29, 1987 if the order was issued after September 1, 1986 and before June 29, The commission shall determine the scope and manner of the review of capacity charges for a qualifying facility. Except as to approvals for qualifying facilities granted by the commission before June 1, 1987, proceedings before the commission seeking those approvals shall be conducted as a contested case pursuant to chapter 4 of the administrative procedures act of1969, 1969 PA 306, MCL to The commission, upon its own motion or upon application of any person, may reconsider its approval of capacity charges for a qualifying facility in a contested case hearing after passage of a period necessary for financing the qualifying facility, if both of the following apply: (i) The commission has first issued an order making a finding based on evidence presented in a contested case that there has been a substantial change in circumstances since the commission's initial approval. (ii) The commission finding is set forth in a commission order subject to immediate judicial review. The financing period for a qualifying facility during which previously approved capacity charges are not subject to commission reconsideration is 17.5 years, beginning with the date of commercial operation, for all qualifying facilities, except that the minimum financing period before reconsideration of the previously approved capacity charges is for the duration of the financing for a qualifying facility that produces electric energy by the use of biomass, waste, wood, hydroelectric, wind, and other renewable resources, or any combination of renewable resources, as the primary energy source. MCL 460.6j (13) 25

28 A. Amendment 2 Costs and Benefits Consumers indicated in its Brief and testimony that Commission approval of Amendment 2 would provide a number of benefits. Witness Ronk testified that approval of Amendment 2 would: Increase lower Michigan s generation capacity; Reduce costs by approximately $45 million on a net present value basis, assuming consistent natural gas prices and capacity values average 50% of MISO CONE; and Save approximately $100 million on a net present value basis in the period leading up to July TR 42; Brief p 5. Witness Ronk testified that over the remaining term of the contract, costs would increase by approximately $60-$70 million on a net present value basis. Amendment 2 savings would be the result of the reduction of the payments under the current PPA and the avoidance of payments under Public Act 286 of 2008 (PA 286). Exhibit A-3 provides a summary of Consumers modeled scenarios, which utilize a range of gas and capacity prices to project potential Amendment 2 savings and costs when compared to the original PPA terms. 2 TR 48. Exhibit A-4 details five of the most likely modeled scenarios based on current gas and capacity price forecasts. Witness Ronk testified that annual savings for 2020 through 2024 would be approximately $18 million. Costs in years 2026 through 2033 would average approximately $7 million per year. 2 TR 49. Staff, in its Brief, did not question Consumers data nor conclusions regarding Amendment 2 savings. Neither the AG, nor IPPC submitted any evidence contesting Amendment 2 non PA 286 savings. Neither the AG nor RGC filed any testimony or 26

29 evidence in this matter. The uncontested evidence presented by shows that Commission approval of Amendment 2 would result in substantial savings to Consumers customers. Therefore, I find that Amendment 2, with regard to customer savings, is reasonable and prudent. B. PA 286 of 2008 Savings IPPC witness Vine s testimony questions Consumers witness Ronk s conclusions regarding PA 286 of 2008, being MCL 460.6a (10), savings. Witness Vine testified that his calculations show savings of $1,014, TR Witness Ronk testified that IPPC s analysis and conclusions are incorrect because witness Vine failed to consider the fact that three current BMP units that receive PA 286 payments would cease receiving future PA 286 payments. 2 TR 75. Witness Ronk testified that once the current PPAs expire, any new agreements would preclude recovery of PA 286 payments because the agreements would not have been in existence on or before January 1, See MCL 460.6a (9). After the three units become ineligible to receive compensation under PA 286, each of the remaining BMP units will receive a larger share of their excess expenses. 2 TR 75. Witness Ronk testified that because the remaining BMP units, subsequent to the removal of the three ineligible units, would already be receiving full compensation for expenses as provided by PA 286, the removal of Filer City from the pool of eligible BMP units would not materially increase Consumers expenses for the remaining BMP units. 2 TR 76. Witness Ronk testified that after correcting the two errors made in witness Vine s analysis Amendment 2 savings to customers would be $5.2 million. Consumers indicated in its Brief that $5.2 million savings amount shown in Exhibit A-13 is higher than the 27

30 $4.5 million amount shown in Exhibit A-6 because the lower amount was a conservative estimate and not an overstatement of savings as alleged by IPPC. Brief p 17. The evidence presented shows that IPPC s calculation of Amendment 2 PA 286 payments is flawed and that Consumers calculation of PA 286 payments is reasonable. Therefore, I agree with Consumers that Amendment 2 would result in PA 286 savings of approximately $5.2 million and Amendment 2 is reasonable and prudent with regard to those savings. C. Approval of Amendment 2 Would Not Discriminate Against other PURPA Qualifying Faculties. Staff witness Baldwin indicated in her testimony that that the benefits of Amendment 2 do not outweigh her concerns regarding Amendment 2 payments because the proposed payments are not based on the avoided cost methodology in U TR Witness Baldwin testified that she believed at the time of testimony that offering a capacity rate to an affiliate QF, that is above the avoided cost capacity rate, combined with a 5-year window for the QF to make the conversion and a 15-year term, subsequent to the conversion, would be discriminatory to other PURPA QFs. 2 TR IPPC witness Vine, in his Surrebuttal Testimony, indicated that IPPC believes that Amendment 2 would be discriminatory to QFs for the same reasons given by Staff witness Baldwin. Staff indicated in its Brief that, after reviewing Consumers witness Ronk s Rebuttal Testimony, Staff believes that the Commission s consideration of the avoided costs in U in this matter, is unnecessary and inappropriate. Brief p 5. Staff also indicated in its Brief that after reviewing witness Ronk s Rebuttal Testimony Staff no longer feels that Amendment 2 would be discriminatory to other PURPA QFs. Id 28