Attached for electronic filing in the above-referenced matter is Michigan Consolidated Gas Company s Initial Brief and a Proof of Service.

Transcription

1 DTE Energy One Energy Plaza, Detroit, MI RICHARD P. MIDDLETON (313) November 30, 2012 Ms. Mary Jo Kunkle Executive Secretary Michigan Public Service Commission 6545 Mercantile Way Lansing, Michigan Re: In the matter of the application of Michigan Consolidated Gas Company for authority to increase its rates amend its rate schedules and rules governing the distribution and supply of natural gas, and for miscellaneous accounting authority MPSC Case No. U Dear Ms. Kunkle: Attached for electronic filing in the above-referenced matter is Michigan Consolidated Gas Company s Initial Brief and a Proof of Service. Very truly yours, RPM/kbk Attachments cc: Service List Richard P. Middleton

2 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) MICHIGAN CONSOLIDATED GAS COMPANY ) for authority to increase its rates, amend its rate ) Case No. U schedules and rules governing the distribution ) (Paperless e-file) and supply of natural gas, and for miscellaneous ) accounting authority. ) ) MICHIGAN CONSOLIDATED GAS COMPANY S INITIAL BRIEF MICHIGAN CONSOLIDATED GAS COMPANY Legal Department Bruce R. Maters (P28080) Richard P. Middleton (P41278) Jon P. Christinidis (P47352) Michael J. Solo (P57092) David S. Maquera (P66228) One Energy Plaza, 688 WCB Detroit, MI (313) Dated: November 30, 2012

3 TABLE OF CONTENTS I. HISTORY OF PROCEEDINGS II. JURISDICTION, STANDARD OF REVIEW AND RATE SETTING LAW A. Jurisdiction and Standard of Review B. Rate Setting Legal Requirements... 5 III. MICHCON S PROPOSED INFRASTRUCTURE RECOVERY MECHANISM ( IRM ) SHOULD BE APPROVED A. The Proposed IRM is Consistent With Commission Precedent B. To the Extent That the IRM is Considered a Tracking Mechanism, It is Supported by Well-Established Commission Precedent, Which Has Been Repeatedly Affirmed on Appeal C. The IRM Would Not be an Illegal Automatic Adjustment Clause D. It Would Not be Appropriate to File Annual General Rate Cases to Recover Incremental Capital Spending E. MichCon s Proposed Level of Capital Spending and Corresponding Recovery are Appropriate and Should be Approved IV. REQUEST FOR RELIEF i

4 I. HISTORY OF PROCEEDINGS. Michigan Consolidated Gas Company ( MichCon or the Company ) is presently serving its retail natural gas transportation, storage and distribution customers under rates, terms and conditions that the Commission established in its June 3, 2010 Opinion and Order in Case No. U This case began on April 20, 2012, when MichCon filed its Application, direct testimony and exhibits, and published notice of its request to raise distribution revenues by approximately $76.7 million annually. A pre-hearing conference was held on May 23, Administrative Law Judge Mark D. Eyster (the ALJ ) granted petitions to intervene filed by the Association of Businesses Advocating Tariff Equity ( ABATE ); Encana Oil & Gas (USA) Inc. ( Encana ); the Michigan Attorney General ( AG ); the Michigan Community Action Agency Association ( MCAAA ); the Retail Energy Supply Association ( RESA ); and Utility Workers Local 223 ( UWL 223 ) 1 (1 T 6). Staff also participated, and a schedule was set (1 T 6-7). MichCon sponsored the direct testimony and exhibits of 16 witnesses including Daniel G. Brudzynski is DTE Energy Company s ( DTE Energy ) Vice President of Regulatory Affairs (qualifications and direct testimony at 3 T ); 2 Thomas W. Lacey is a Principal Financial Analyst in the Revenue Requirements department of DTE Energy s Regulatory Affairs 1 UWL 223 later withdrew as a party. 2 Mr. Brudzynski has a Bachelor of Science degree in Business Administration with concentrations in finance and accounting, and a Masters degree in Business Administration. Prior to joining The Detroit Edison Company ( Detroit Edison or Edison ) in 1997 as assistant controller, he held several positions of increasing responsibility in the finance area at DaimlerChrysler Corporation from 1984 to In February 2001, he was named Vice President and Controller of Detroit Edison. In November 2005, he was named to his current position, where he is responsible for the development and implementation of regulatory strategy for Detroit Edison and MichCon (3 T ). 1

5 organization (qualifications and direct testimony at 3 T ); 3 Todd F. Persells is MichCon s Director, Asset Management and Engineering (qualifications and direct testimony at 3 T ); 4 Peter M. Rynearson is the Controller of MichCon and other energy gas subsidiaries of DTE Energy (qualifications and direct testimony at 3 T ); 5 and Margaret A. Suchta who is a Principal Financial Analyst in the Revenue Requirement Department of DTE Energy s Regulatory Affairs organization (qualifications and direct testimony at 3 T ). 6 On September 21, 2012, the Commission Staff and Intervenors filed their testimony. On October 9, 2012, MichCon filed rebuttal testimony and exhibits including witnesses Lacey (3 T ), Persells (3 T ), Suchta (3 T ), Rynearson (3 T ), and Brudzynski (3 T ). On that same day, ABATE and the Staff filed the rebuttal testimony. Crossexamination and binding-in of testimony was held on October 23 and 30, The record consists of 1,549 pages of transcript and 80 Exhibits. After the record was closed MichCon, Staff, and Intervenors engaged in settlement discussions. As a result of these discussions, the parties agreed to settle the majority of issues before the Commission in this case and are at this time finalizing and executing that Partial 3 Mr. Lacey has a Bachelor of Science degree in Accounting and a Masters of Business Administration degree. Prior to joining DTE Energy in 2002, he worked for 19 years in several positions of increasing responsibility at ANR Pipeline Company, ultimately rising to the position of Senior Rates Analyst. In his current position, his responsibilities include the preparation of revenue requirements, cost of service and rate design, testimony, exhibits and workpapers in cases for Edison and MichCon (3 T ). 4 Mr. Persells has a Bachelor of Science degree in Mechanical Engineering with a concentration in Management, and a Master of Business Administration degree. Before joining DTE Energy Trading in 2001, he held various positions of increasing responsibility at ANR Pipeline Company, ultimately rising to Assistant Vice President of Project Development and Marketing. He is presently responsible for the system planning, engineering, and major construction activities for MichCon (3 T ). 5 Mr. Rynearson has a Bachelor of Arts degree in Business Administration, with a major in Accounting, and a Master of Business Administration degree. After working for KPMG Peat Marwick and becoming a CPA, he joined DTE Energy in 1990, and was promoted to positions of increasing responsibility. In his current position, he is responsible for all areas of accounting and financial reporting including budgeting, forecasting, financial planning, project analysis, regulatory support and accuracy of financial statements (3 T ). 6 Ms. Suchta has a Bachelor of Business Administration degree with a major in Accounting, and a Master of Business Administration degree with a concentration in Finance. After practicing public accounting, she joined MichCon in She currently is responsible for Edison s and MichCon s revenue requirement studies, and regulatory analysis and research (3 T ). 2

6 Settlement Agreement. The sole issue remaining before the Commission is to consider approval of MichCon s requests for recovery of the investment in both the Meter Move-Out Program ( MMO ) and Main Renewal Program ( MRP ) as well as recovery of incremental capital for main renewal, beyond the level approved by the Commission in U-16407, and for capital associated with Pipeline Integrity through an Infrastructure Recovery Mechanism ( IRM ). 7 If the IRM is not approved as a separate rate in this case, base rates agreed upon in the settlement agreement will have to be increased incrementally to recover the cost of service related to the November 2012 October 2013 IRM capital expenditures. As a result of the Partial Settlement which will be filed with the Commission shortly, MichCon, Staff, and Intervenors have agreed to or are not objecting to limiting their Briefs and the remaining pleadings in this case to the IRM issues referenced above. The reasons and rationale supporting Commission approval of MichCon s proposal for recovery of the investment in both the MMO and MRP programs, as well as recovery of incremental capital for main renewal beyond the level approved by the Commission in U-16407, and for capital associated with Pipeline Integrity through an IRM are discussed in detail in Section III below. II. JURISDICTION, STANDARD OF REVIEW AND RATE SETTING LAW. A. Jurisdiction and Standard of Review. The Commission has jurisdiction over this case pursuant to 1909 PA 106, as amended, MCL et seq.; 1919 PA 419, as amended, MCL et seq.; 1939 PA 3, as amended, MCL et seq.; 1969 PA 306, as amended, MCL et seq.; and the Commission s Rules of Practice and Procedure, as amended, 1999 AC, R et seq. 7 The details and support for this request are presented in the testimony of MichCon s Witnesses Rynearson and Persells. (See 3 T and 3 T ) 3

7 Const 1963, art 6, 28 requires the Commission s findings to be supported by competent, material and substantial evidence on the whole record. Expert testimony is substantial only if it is offered by a qualified expert who has an informed and rational basis for his or her view, even if other experts disagree. Great Lakes Steel v Public Service Comm, 130 Mich App 470, 481; 334 NW2d 321 (1983). The Administrative Procedures Act ( APA ) precludes the Commission from making decisions based on non-record materials. MCL provides: Evidence in a contested case... shall be offered and made part of the record. Other factual information or evidence shall not be considered in determination of the case except as permitted under [MCL ] concerning official notice of judicially cognizable facts and facts within the agency s specialized expertise]. Noncompliance with the APA is reversible error. In re Public Service Commission Guidelines for Transactions Between Affiliates, 252 Mich App 254, 267; 652 NW2d 1 (2002). explained: In Kar v Hogan, 399 Mich 529, 539; 251 NW2d 77 (1976), our Supreme Court "The party alleging a fact to be true should suffer the consequences of a failure to prove the truth of that allegation." Thus, unproven allegations cannot stand in the place of evidence. Things not proven must be taken as not existing, since a decision cannot be based upon conjecture. Star Steel v USF&G, 186 Mich App 475, 481; 465 NW2d 17 (1990); see also, Skinner v Square D Co, 445 Mich 153; 516 NW2d 475 (1994). It is similarly well established that an agency decision may not be based on speculation. Ludington Service Corp v Comm r of Insurance, 444 Mich 481, 483, , , 507; 511 NW2d 661 (1994), amended 444 Mich 1240 (1994) (unanimously reversing agency decision that exceeded the limits of the agency s statutory authority, and that was based on speculation instead 4

8 of the required competent, material and substantial evidence); In re Complaint of Pelland, 254 Mich App 675, ; 658 NW2d 849 (2003); Battiste v Dep t of Social Services, 154 Mich App 486, 492; 398 NW2d 447 (1986) (holding that agency s decision was not supported by evidence that a reasonable person would consider adequate). B. Rate Setting Legal Requirements. All Commission decisions must be authorized by law, and the Commission s findings of fact must be supported by competent, material, and substantial evidence. Const 1963, art 6, 28. MichCon also has constitutional protections against takings and confiscatory rates under the Fifth Amendment to the U.S. Constitution, which is applicable to the states through the Fourteenth Amendment. Similarly, Mich Const 1963, art 10, 2 provides in part, Private property shall not be taken for public use without just compensation therefore being first made or secured in a manner prescribed by law. These constitutional protections have been recognized and applied to public utility rates in well-established case law. 8 The Michigan Supreme Court has provided further guidance that the Commission must use in setting MichCon s rates. Specifically, creating rates that recognize reductions in certain costs, while ignoring the increase in other costs, violates the due process rights of utilities. The Court cited with approval the conclusions of a circuit court judge granting an injunction against such unlawful rates: Certainly at first blush it would appear to anyone steeped in due process considerations that it is grossly unfair to include certain items of decreased cost in rate determination while at the same time to exclude items of increased cost. Michigan Consolidated 8 See generally, Missouri ex rel Southwestern Bell Telephone Co v Public Service Comm of Missouri, 262 US 276; 43 S Ct 544; 67 L Ed 981 (1923); Federal Power Comm v Natural Gas Pipeline, 315 US 575; 62 S Ct 736; 86 L Ed 1037 (1942); Duquesne Light Co v Barasch, 488 US 299; 109 S Ct 609; 102 L Ed 2d 646 (1989). See also, Northern Michigan Water Co v Public Service Comm, 381 Mich 340; 161 NW2d 584 (1968); Consumers Power Co v Public Service Comm., 415 Mich 134; 327 NW2d 875 (1982); ABATE v Public Service Comm, 430 Mich 33; 420 NW2d 81 (1988). 5

9 Gas Company v Public Service Comm, 389 Mich 624, 633; 209 NW2d 210 (1973). As a matter of fundamental ratemaking law, MichCon is entitled to a commensurate return of and on its investment in providing utility service. 9 It is axiomatic that utility rates are overall rates. Federal Power Comm, supra, 320 US at 602; Michigan Bell Telephone Co v Public Service Comm, 332 Mich 7, 37; 50 NW2d 826 (1952); MCL 460.6a(2)(b). MichCon s constitutional rights would be violated by a failure to acknowledge (and establish rates based on) both decreasing and increasing costs. The United States Supreme Court, in construing the Fifth Amendment mandates in conjunction with utility ratemaking, aptly concluded: Regulation may, consistently with the Constitution, limit stringently the return recovered on investment, for investors interests provide only one of the variables in the constitutional calculus of reasonableness (citations omitted). It is, however, plain that the power to regulate is not a power to destroy, (citations omitted) and that maximum rates must be calculated for a regulated class in conformity with the pertinent constitutional limitations. Price control is unconstitutional if arbitrary, discriminatory, or demonstrably irrelevant to the policy the legislature is free to adopt. Permian Basin Area Rate Cases, supra, 390 US at (Emphasis added).. The Commission has an obligation to facilitate MichCon s financial health for the benefit of its customers and shareholders. See, by way of example and not limitation, MCL 460.6a(2)(3); MCL 460.6h(1); 2008 PA 286; Smith v Illinois Bell Telephone Co, 270 US 587, 591; 46 S Ct 408; 70 L Ed 747 (1926). Federal Power Comm, supra, 320 US at 602; Michigan Bell Telephone 9 See Bluefield Waterworks Improvement Co v Public Service Commission of West Virginia, 262 US 679, ; 43 S Ct 675; 67 L Ed 1176 (1923); Federal Power Comm v Hope Natural Gas Co, 320 US 591, 603; 64 S Ct 281; 88 L Ed 333 (1944). See also Permian Basin Area Rate Cases, 390 US 747, ; 88 S Ct 1344; 20 L Ed 2d 312 (1968); FPC v Memphis Light, Gas and Water Division, 411 US 458; 43 S Ct 1723; 36 L Ed 2d 426 (1973); General Telephone Co v Public Service Comm, 341 Mich 620; 67 NW2d 882 (1954); Michigan Consolidated Gas Co v Public Service Comm, 389 Mich 624; 209 NW2d 210 (1973). 6

10 Co, supra, 332 Mich at 37; MichCon, supra, 389 Mich at 633; Michigan Bell Telephone Co v Engler, 257 F3d 587, (CA 6, 2001). Furthermore, our Supreme Court has clearly admonished that: Statutes will be construed in the most beneficial way which their language will permit to prevent absurdity, hardship or injustice; to favor public convenience, and to oppose all prejudice to public interests. Attorney General v Marx, 203 Mich 331, 335; 168 NW 1005 (1918). Under well-established ratemaking law, rates for utility service are set prospectively so that the utility provides service and its customers receive service at established rates, which are based on the estimated costs of providing that service, plus a reasonable return on the utility s investment. See ABATE v Public Service Comm, 208 Mich App 248, ; 527 NW2d 533 (1994). This is part of the regulatory compact, under which the utility dedicates its private property to serve the public, and correspondingly receives a reasonable return on the value of its private property. In Board of Public Utility Comm rs v New York Telephone Co, 271 US 23; 46 S Ct 363; 70 L Ed 808 (1926), the United States Supreme Court explained that the just compensation safeguarded to the utility by the Fourteenth Amendment is a reasonable return on the value of the property used at the time that the property is being used for the public service. Rates that are not sufficient to yield that present return are confiscatory. 271 US at 31. To the extent that the utility might have earned sufficient revenue in the past, such past revenue cannot be used to sustain confiscatory rates in the future. Id. at 32. Thus, it would be unconstitutional for the Commission to use hindsight or otherwise base MichCon s rates on past events. In Michigan, our Supreme Court announced the retroactive ratemaking prohibition in Michigan Bell Telephone Co v Public Service Comm, 315 Mich 533; 24 NW2d 200 (1946). The Court used a statutory analysis, reasoning that the Commission has only limited statutory 7

11 authority, which does not include the authority to retroactively reduce rates. 315 Mich at 547. Further, a lawfully-established rate remains in force until altered by a subsequently-established lawful rate. 315 Mich at 544. A regulatory body cannot penalize a utility for collecting a rate during the period elapsing between the date of the order prescribing the rate and the date of the subsequent order reducing it. Id. at Where the Commission establishes a reasonable rate in its legislative capacity, the Commission cannot later, in its quasi-judicial capacity, find that the utility violated the law because it charged that rate. Id. at In any event, the essential principal of the rule against retroactive ratemaking is that when the estimates prove inaccurate and costs are higher or lower than predicted, the previously set rates cannot be changed to correct for the error; the only step that the MPSC can take is to prospectively revise rates in an effort to set more appropriate ones. The Detroit Edison Co v Public Service Comm, 416 Mich 510, 523; 331 NW2d 159 (1982) (opinion by Fitzgerald, C.J.). III. MICHCON S PROPOSED INFRASTRUCTURE RECOVERY MECHANISM ( IRM ) SHOULD BE APPROVED. MichCon proposes an IRM for recovery of capital investments in the MMO and MRP, 10 as well as incremental capital expenditures for main renewal beyond the level that the Commission approved in Case No. U (incremental MRP), and for capital expenditures associated with Pipeline Integrity. 11 Under the IRM, MichCon would use an IRM charge to recover the cost of service less O&M savings for infrastructure investments. The capital expenditures used to calculate the IRM would be made on a calendar year basis, but the IRM charge would be implemented beginning in May of 2013, in accordance with the expected timing 10 The Commission approved the MMO in its September 13, 2011 Opinion and Order and November 10, 2011 Order Granting Clarification in Case No. U Mr. Persells discussed MichCon s existing and proposed MMO program (3 T ). The Commission approved the MRP in its September 13, 2011 Order in Case No. U Mr. Persells discussed MichCon s existing and proposed MRP program (3 T ). 11 Mr. Persells discussed MichCon s existing and proposed Pipeline Integrity program (3 T ). 8

12 of the Commission s order in this case. The charge would be calculated for each year of the fiveyear investment period based on the cumulative cost of service associated with the capital investment, 12 allocated to each rate schedule, and adjusted for any capital underspent. 13 Beginning May 1, 2013, a monthly charge will be implemented for each rate schedule as indicated on Sheet No. D-2.01, subject to annual reconciliations (3 T ). 14 After the fifth year, the IRM rate would be held stable at the final rate charged until modified by a Commission order (3 T , , ). 15 MichCon further proposes that capital spending for the MMO, MRP, and Pipeline Integrity programs would be reconciled annually on a calendar year basis. The IRM charge would end when new rates are set by Commission order. 16 All capital invested as part of the IRM would be rolled into rate base, and recovery would continue through base rates as part of a base rate case filing. In future rate cases, MichCon may propose to implement an updated IRM to address recovery of future infrastructure investment (3 T , 611). MPSC Staff witness Ms. Janssen testified that Staff is in agreement with MichCon s proposed IRM. This mechanism will allow the Company to recover the costs from the Meter 12 Exhibit A-19, Schedule L1, page 1 identifies the annual incremental Revenue Requirements / Cost of Service for 2013 through 2017 relating to MMO capital costs associated with the IRM. Exhibit A-19, Schedule L2, page 1 identifies the annual incremental Revenue Requirements / Cost of Service for 2013 through 2017 relating to MRP capital costs associated with the IRM (3 T ). 13 Exhibit A-19, Schedule L6 calculates MichCon s proposed customers monthly charge reduction of $ for every $1 million of IRM capital costs that MichCon underspends (3 T ). This rate is based on cost of service and its simplicity would reduce administrative burdens (3 T ). Exhibit A-19, Schedule L7 provides an illustrative example of how an IRM shortfall would be determined and the corresponding impact on the IRM rate (3 T ). 14 Attachment A, page 6, is Exhibit A-19, Schedule L3, page 6 adjusted to reflect the Partial Settlement and displays the proposed IRM rate for each customer class from 2013 through 2017 (3 T ) This assumes the partial Settlement is approved by the Commission. If the Partial Settlement in this case is not approved by the Commission then MichCon supports the monthly charges as originally supported in Exhibit A-19, Schedule L3, page Mr. Coppola s (3 T , 1168) suggested quantification of the impact on customers bills is miscalculated, and the assertion that it could double from years 5 to 10 is unfounded in light of the actual nature of the IRM (3 T ) 16 If no rate case is initiated by 2018, MichCon would continue the IRM at the May 2017 level, adjusted as a result of the 2018 reconciliation, and thereby might be able to avoid filing another rate case until costs other than those covered by the IRM result in the need for rate relief (3 T 491). 9

13 Move Out (MMO) program, which was approved by the Commission in Case No. U-16451, and the Main Renewal Program (MRP), which was approved in Case No. U (4 T 1305). Mr. Chislea testified that Staff recommends that the Commission support the programs that MichCon will fund with the capital expenditures with the IRM as summarized on Exhibit A-19, Schedules L1 and L2 (4 T 1375). A. The Proposed IRM is Consistent With Commission Precedent. The Attorney General has suggested that there is a lack of Commission precedent for the IRM. To the contrary, in MichCon s last general rate case, the Commission directed MichCon to file in a new docket a detailed plan for moving inside meters to outside locations, and a detailed plan for main renewal, including a long term plan to significantly reduce the amount of cast iron main in MichCon s system (June 3, 2010 Opinion and Order in Case No. U-15985, pp , 108). Accordingly, MichCon filed Case No. U (requesting approval of a ten-year MRP), and Case No. U (requesting approval of a ten-year MMO program). The Commission approved the MRP and MMO program (with modifications not relevant to this discussion), as indicated above. The Commission did not provide funding for the programs, however, nor did the Commission limit MichCon s recovery to a single test year. Instead, the Commission found that the proposed surcharges [for the MRP] need to be evaluated in the context of a general rate case (September 13, 2011 Order in Case No. U-16407, p 8), and directed MichCon to provide a proposal for MMO cost recovery in the company s next rate case (September 13, 2011 Opinion and Order in Case No. U-16451, p 14. See also Id at p 16, ordering paragraph C). This is the referenced next rate case, so this is the appropriate forum to address the Commission s recognized need for funding to coincide with the Commission s ordered ten-year programs. 10

14 The Attorney General participated in Case Nos. U and U-16451, but did not appeal the Commission s rulings, so he should not be heard to question or complain about matters that the Commission has resolved. 17 Moreover, although res judicata and collateral estoppel do not apply in the pure sense, the Commission is not required to relitigate its earlier rulings in the absence of new evidence or evidence of a change in circumstances. 18 There is no issue or evidence in this case challenging the ten-year programs that the Commission ordered in Case Nos. U and U The only new issue and evidence in this case concerns MichCon s proposed (1) additional capital spending and (2) recovery mechanism, which if approved by the Commission, would provide for (1) infrastructure improvements in addition to those that the Commission ordered in Case Nos. U and U , and (2) funding that corresponds with the level of infrastructure improvements that the Commission orders in this case. Thus, there is clear Commission precedent (1) establishing the ten-year MRP and MMO programs, (2) directing MichCon to propose a mechanism to recover its capital expenditures in this rate case, and (3) not limiting MichCon s recovery to the single test year used to set other general service rates. This is the appropriate case to address MichCon s proposed IRM, as well as set the IRM recovery level to coincide with the funding necessary to pay for MichCon s infrastructure investments. 17 Wiersma v Michigan Bell Telephone Co, 156 Mich App 176, 185; 401 NW2D 265 (1987) ( The state, as well as an individual, may be estopped by its acts, conduct, silence and acquiescence ). 18 In re Application of Consumers Energy, 291 Mich App 106, 122; 804 NW2d 574 (2010); Pennwalt Corp v Public Service Comm, 166 Mich App 1, 9; 420 NW2d 156 (1988). 11

15 B. To the Extent That the IRM is Considered a Tracking Mechanism, It is Supported by Well-Established Commission Precedent, Which Has Been Repeatedly Affirmed on Appeal. The Commission has repeatedly approved tracking mechanisms, such as the Uncollectible Expense Tracking Mechanism ( UETM ). 19 The Court of Appeals has consistently upheld the Commission s decisions, and rejected the Attorney General s lack of authority and retroactive ratemaking arguments. 20 These appellate decisions are binding precedent. 21 The Court of Appeals has also repeatedly rejected similar lack of authority arguments for nearly three decades in analogous cases involving the Commission s establishment and implementation of continuing rate adjustment mechanisms. 22 Moreover, the Commission has express statutory ratemaking authority, 23 and it is well-established that ratemaking is a legislative function and the Commission is not bound to apply any particular formula or use any specific method in setting rates The Commission adopted a UETM for MichCon in its April 28, 2005 Opinion and Order Granting Rate Relief in Case Nos. U and U-13899, pp and again in Case No. U The Commission adopted a similar UETM for Detroit Edison in its January 11, 2010 Opinion and Order in Case Nos. U and U-15768, pp See, for example, In re Detroit Edison Co Applications, 296 Mich App 101, 114; 817 NW2d 630 (2012) ( our caselaw confirms that the PSC correctly approved [the] use of tracking mechanisms through which future rates are adjusted to take account of actual past expenses ); In re Michigan Consolidated Gas Co to Increase Rates Application, 293 Mich App 360, ; 810 NW2d 123 (2011); Attorney General v Public Service Comm, 281 Mich App 545; 761 NW2d 482 (2008), lv den 483 Mich 1017 (2009). 21 MCR (C)(2); 7.215(J)(1). 22 See, for example, Attorney General v Public Service Comm #1, 133 Mich App 719; 349 NW2d 539 (1984) (affirming MPSC orders implementing the Other Operations and Maintenance Expense Indexing System, under which the MPSC held a full and complete hearing in an initial rate case and established the system for Detroit Edison, and provided for additional, single-factor hearings to apply the established formula); Attorney General v Public Service Comm, 122 Mich App 777, 786; 333 NW2d 131 (1983) (affirming MPSC orders establishing purchased power adjustment clause, and approving monthly increase in Consumers Power Company s rates pursuant to the clause); Attorney General v Public Service Comm #2, 133 Mich App 790, 797; 350 NW2d 320 (1984) (affirming orders allowing Detroit Edison rate increases pursuant to the System Availability Incentive Provision that the MPSC established in Case No. U-5108); Attorney General v Public Service Comm, 136 Mich App 515, ; 358 NW2d 351 (1984) (following cited cases and rejecting Attorney General s duplicative arguments); Attorney General v Public Service Comm, 157 Mich App 198; 403 NW2d 467 (1986). 23 MCL 460.6a. 24 Detroit Edison Co v Public Service Comm, 127 Mich App 499, 524; 342 NW2d 273 (1983); Residential Ratepayer Consortium v Public Service Comm, 239 Mich App 1, 6; 607 NW2d 391 (1999); ABATE v Public Service Comm, 208 Mich App 248, 258; 527 NW2d 533 (1994); Permian Basin Area Rate Cases, 390 US 747, ; 88 S Ct 1344; 20 L Ed 2d 312 (1968). 12

16 The approved tracking mechanisms were typically symmetrical (i.e., there was an opportunity to either increase or decrease future customer rates). The IRM is not symmetrical, but instead is a one-way tracker. 25 Thus, customer rates cannot increase through the IRM s operation. Rates can only stay at the level authorized in this rate case, or they can decline. More specifically, if MichCon does not spend the approved amount of capital, then MichCon must decrease future customer rates to reflect the lower capital investment. If MichCon spends more than the approved level of capital, then MichCon cannot recover that incremental capital until it files another general rate case. 26 Since the IRM will be subject to reconciliations like the approved tracking mechanisms (3 T ; ), any reliance by the Attorney General on the retroactive ratemaking doctrine would be misplaced under controlling case law rejecting the Attorney General s arguments relying on that doctrine. 27 The retroactive ratemaking doctrine provides that rates are prospective, and therefore cannot be applied retroactively. 28 The doctrine is not relevant here, since rates to be applied in the future can plainly be set based on past events, as MichCon proposes. The prohibition is merely against readjusting previously-charged rates, and does not apply here, since this proceeding will produce prospective rates and the annual reconciliations will adjust rates prospectively. 25 The Commission adopted a one-way line clearance expenses tracker for Detroit Edison (December 23, 2008 Opinion and Order in Case No. U-15244, p 55), and continued it in the January 11, 2010 Opinion and Order in Case Nos. U and U-15768, pp The Court of Appeals affirmed in In re Detroit Edison Co Applications, supra, 296 Mich App at Exhibit A-19, Schedule L6 calculates MichCon s proposed customers monthly charge reduction of $ for every $1 million of IRM capital costs that MichCon underspends (3 T ). This rate is based on cost of service and its simplicity would reduce administrative burdens (3 T ). Exhibit A-19, schedule L7 provides an illustrative example of how an IRM shortfall would be determined and the corresponding impact on the IRM rate (3 T ). 27 See, for example, In re Detroit Edison Co Applications, supra, 296 Mich App at 114; In re Michigan Consolidated Gas Co to Increase Rates Application, supra, 293 Mich App at ; Attorney General v Public Service Comm, 281 Mich App ; Attorney General v Public Service Comm, supra, 281 Mich App at See generally, Michigan Bell Tel Co v Public Service Comm, 315 Mich 533, 544; 24 NW2d 200 (1946) ( a lawfully established rate remains in force until altered by a subsequently established lawful rate ). 13

17 In conclusion, the Commission s tracking mechanisms have been repeatedly affirmed in well-established and controlling case law under closely-analogous circumstances. The IRM would annually reconcile capital investment to the level approved by the Commission, but only operate one way, to the benefit of MichCon s customers. Thus, to the extent that the IRM is considered a tracking mechanism, it is lawful. C. The IRM Would Not be an Illegal Automatic Adjustment Clause. The Attorney General has suggested that the IRM would be an "adjustment clause" under on MCL 460.6a, which relevantly states: (2)... The commission shall not authorize or approve adjustment clauses that operate without notice and an opportunity for a full and complete hearing, and all such clauses shall be abolished. As discussed above, MichCon s proposed IRM would provide for capital spending and corresponding rates for the next five years as approved by the Commission in this rate case after notice, hearing, and full contested case proceedings under the Administrative Procedures Act (APA ), 1969 PA 306 as amended, MCL , et seq. Thereafter, under the one-way (use the approved funding or return it) IRM, there could never be a rate increase unless and until a new level of capital spending is approved in a subsequent rate case, again after notice, hearing, and full contested case proceedings under the APA. Annual reconciliation filings will provide only for possible rate decreases, to return unspent rate money to customers in the event that MichCon does not spend the amount of capital that the Commission approves in this full rate case. Thus, the IRM would not be an illegal automatic adjustment clause. 14

18 D. It Would Not be Appropriate to File Annual General Rate Cases to Recover Incremental Capital Spending. The concept of regulatory lag is related to the retroactive ratemaking doctrine, which is inapplicable to MichCon s IRM as discussed above. 29 There is no sound basis to force MichCon to wait and wonder how it will recover the costs of the ten-year MRP and MMO programs that the Commission ordered in Case Nos. U and U Any changes in the scope (but not the length) of those infrastructure improvement programs, as well as the corresponding expenditures needed to pay for those improvements, will be decided in this case. Therefore, the corresponding cost-recovery mechanism should also be established in this case. AG witness Mr. Coppola (3 T ) and ABATE witness Mr. Selecky (3 T ) assert that the IRM is not necessary because 2008 PA 286 reduces regulatory lag. These assertions are overstated and unpersuasive in this context. While 2008 PA 286 provides for the more expeditious resolution of rate cases, and effectively permits the more frequent filing of rate cases, the resulting inefficiencies and administrative burdens should not be ignored as Messrs. Coppola and Selecky have done. Moreover, 2008 PA 286 addresses rate cases, which are relatively short term in nature, in contrast to the long-term infrastructure investment programs that the Commission has approved. Recovery through future rate cases would not adequately mitigate the financial impacts associated with the substantial, multi-year MRP and MMO investments required by the Commission, as well as the Pipeline Integrity program, which similarly is a multi-year program focusing on infrastructure improvements substantially required by Federal and State gas safety regulations. The IRM would allow for a more timely recovery of 29 See also, Detroit Edison Co v Public Service Comm n, 416 Mich 510, 523; 331 NW2d 159 (1982) (opinion by Fitzgerald: the essential principle of the rule against retroactive ratemaking is that when the estimates prove inaccurate and costs are higher or lower than predicted, the previously set rates cannot be changed to correct for the error; the only step that the MPSC can take is to prospectively revise rates in an effort to set more appropriate ones ). 15

19 these costs, and also provide for increased capital investment through greater certainty regarding the level of capital, which would allow MichCon to make and execute long-range plans for a multi-year deployment of capital in a more efficient manner (3 T 364, , ). It bears emphasis that 2008 PA 286 only theoretically allows the filing of annual rate cases. Actual practice involves the use of a future test year, the process required to close the utility s books and records (among other things), and 2008 PA 286 s requirement that the utility cannot file a new rate case until after the Commission has issued its order in the prior rate case. 30 Thus, annual rate cases are impractical if not impossible, so there is likely to be more than 12 months of regulatory lag between a requested recovery of capital and Commission approval of a corresponding rate increase. The proposed IRM is also appropriate because the Commission created regulatory lag by ordering ten years of capital spending on the MRP and MMO programs in Case Nos. U and U-16451, but denying MichCon s corresponding cost recovery. The Commission s determination of a cost recovery mechanism for MichCon has already been delayed until this case, and should not be further delayed now, nor revisited in subsequent rate cases. As discussed above, the nature of the MRP, MMO and Pipeline Integrity programs requires a long-term commitment due to the magnitude of the expenditures (and corresponding cost recovery) needed to pay for the substantial infrastructure improvements, as well as the logistics involved in implementing those improvements (e.g., work force, time required to identify and prioritize work, execution of work plans). Matching the periods of approved expenditures and the recovery of those expenditures in rates would minimize regulatory lag and uncertainty in financing expenditures, while increasing the efficiency of implementing the programs. 30 MCL 460.6a(4). 16

20 Forcing MichCon to recover its infrastructure improvement expenditures in a series of subsequent rate cases would also put all utility costs at risk, and as a practical matter potentially deny MichCon s recovery of the MRP and MMO capital that the Commission has ordered MichCon to spend. This would occur because parties in subsequent rate cases would advocate reductions in other costs that are unrelated to the MRP and MMO programs, but if adopted by the Commission could mean that the overall rates adopted in the cases would not allow MichCon to recover all of the capital spending that the Commission previously approved and ordered. While it could be argued that the Commission is only required to set lawful and reasonable overall rates, reliance on this principle would be questionable in this context, where MichCon cannot adjust its overall expenses. Instead, a result where the Commission requires substantial expenditures over a ten-year period, without providing a mechanism for MichCon s corresponding recovery of those expenditures, could raise significant constitutional and other implications, as indicated above. E. MichCon s Proposed Level of Capital Spending and Corresponding Recovery are Appropriate and Should be Approved. Mr. Coppola suggests (3 T 1176) that significant financial harm could be mitigated by reducing capital spending. To the contrary, even without the increased spending on infrastructure improvements that MichCon recommends, MichCon would have material financial concerns without the IRM because the MRP, MMO and Pipeline Integrity programs require annual spending that cannot be reduced if there are other financial requirements. Moreover, MichCon believes, for this period of time ( ), that its proposed investment in the programs is appropriate to ensure the safety and reliability of MichCon s transmission and distribution systems. As approved by the Commission, annual investments of $22.3 million for the MMO and $17.1 million for the MRP are required (in 2012 dollars). MichCon proposes to increase 17

21 MRP investment to $36 million in 2012 and $46.9 million in 2013, while slightly increasing the 2013 MMO investment to $22.7 million and including recovery of Pipeline Integrity investment of $7.8 million. The capital expenditures will remain at the 2013 levels for the entire five-year period of the IRM. MichCon s MRP increase appropriately accelerates the replacement of aging distribution mains in light of recent pipeline incidents in Michigan and other states and federal regulators interest in expeditiously addressing the replacement of pipe, specifically unprotected main, which is subject to a higher incidence of leaks or material failure. The increased funding will allow MichCon to more than double its annual remediation of main (from 30 to 66 miles), and cut the time to eliminate the vast majority of it unprotected mains to about 60 years instead of over 130 years under the original plan (3 T , 333, 335, , , , 383, , ). Staff concurs, explaining: Given the amount of higher risk metallic material in MichCon s system and MichCon s corrosion leak rate, this increase in the size of the program is justified. MichCon s commitment to a program of this size will help to improve the safety and reliability of the distribution system (4 T 1374). Messrs. Coppola and Selecky s further criticisms of the IRM are similarly unfounded and cannot form a sound basis for a decision. Briefly, concerns about reasonableness and prudence of capital spending are addressed through reporting and annual reconciliations, and the Staff would have oversight over capital spending, efficiency of that spending, and work completed. Risks would not be shifted onto customers; instead, the IRM would provide a better alignment of revenues and costs such that current customers would pay for the incremental costs of current investment in infrastructure, plus customers would have certainty regarding rates and protection from any spending shortfall. The IRM will also ensure that the Company makes the necessary 18

22 investment in relocating meters and renewing and retiring main, while not underinvesting in the balance of the Company s infrastructure (3 T , 658). Mr. Coppola further stated that the Commission should require that the return on investment should be calculated based on the overall pre-tax cost of capital approved in this case (3 T 1179). Ms. Suchta responded that Mr. Coppola would be correct if IRM capital were included in the projected rate base, but it is not. Instead, the IRM capital expenditures are incremental investments for 2013 through 2017 that are not included in the projected test year. Therefore, the Company appropriately proposes to calculate the return on investment for IRM capital using an incremental pre-tax cost of capital rate directly associated with these investments (3 T , 226) 19

23 IV. REQUEST FOR RELIEF Michigan Consolidated Gas Company respectfully requests that the Commission issue its final order: A. Approving the Company s recovery of the requested infrastructure-related capital and the associated infrastructure recovery mechanism ( IRM ); and B. Granting such other lawful relief that the Commission deems reasonable and appropriate. Respectfully submitted, MICHIGAN CONSOLIDATED GAS COMPANY Dated: November 30, 2012 By: Legal Department Bruce R. Maters (P28080) Richard P. Middleton (P41278) Jon P. Christinidis (P47352) Michael J. Solo (P57092) David S. Maquera (P66228) One Energy Plaza 688 WCB Detroit, MI (313)

24 Michigan Public Service Commission Case No. U Michigan Consolidated Gas Company Attachment A Calculation of Monthly Charges For The Proposed Infrastructure Recovery Mechanism Page 1 of Year 1 ($-000) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (l) Line Total Rate Rate Rate Rate No. Description Company GS-1/GS-2 A/AS 2A S Rate ST Rate LT Rate XLT XXLT/DIG Exelon Allocation Factors 1 Average & Peak 1/ A&P Without Exelon Customers 2/ Customers W/O Exelon Customers W/O over $ Revenue Requirement 9 MRP/Pipeline Integrity 3/ 3, , MMO 4/ 1, , Total - Revenue Requirement 5, , Customers 5/ 1,214,002 88,895 1,116,898 7, Monthly Charge $/Meter $ 0.73 $ 0.25 $ 1.10 $ $ $ $ $ 6, Maximum customer charge $500 or $6,000 per year Adjustment for $500 Cap (404) (104) (300) Reallocate using Customer 6/ Revised Rev Req (L. 11,20 & L. 22) 5, , Customers (Line 14) 1,214,002 88,895 1,116,898 7, Revised Monthly Charge $/Meter $ 0.76 $ 0.27 $ 1.12 $ $ $ $ $ / - Per Exhibit A-13 Schedule F1.1 Page 6 Line 3 2/ -Line 14 divided by Line 14 column (c) 3/ - Col. b: Exhibit A-19 Schedule L2 Page 1 Line 18, Cols. c-l: col. b * line 2 4/ - Col. b: Exhibit A-19 Schedule L1 Page 1 Line 17, Cols. c-l: col. b * line 5 5/ - Per Settlement 6/ - Col. b: Line 20, Cols. c-l: col. b * line 6

25 Michigan Public Service Commission Case No. U Michigan Consolidated Gas Company Attachment A Cost of Service Study For Proposed Infrastructure Recovery Mechanism Page 2 of Year 2 ($-000) (a) (b) (c) of (d) (e) (f) (g) (h) (I) (j) (l) Line Total Rate Rate Rate Rate No. Description Company GS-1/GS-2 A/AS 2A S Rate ST Rate LT Rate XLT XXLT/DIG Exelon Allocation Factors 1 Average & Peak 1/ A&P Without Exelon Customers 2/ Customers W/O Exelon Customers W/O over $ Revenue Requirement 9 MRP/Pipeline Intregrity 3/ 12,028 2,219 6, , MMO 4/ 5, , Total - COS 17,201 2,598 10, , Customers 5/ 1,214,002 88,895 1,116,898 7, Monthly Charge $/Meter $ 2.44 $ 0.82 $ 3.67 $ $ $ $ 3, $ 22, Maximum customer charge $500 or $6,000 per year Adjustment for $500 Cap (1,753) (93) (601) (1,059) Reallocate using Customer 6/ 1, , Revised Rev Req (L. 11,20 & L. 22) 17,201 2,727 12, Customers (Line 14) 1,214,002 88,895 1,116,898 7, Revised Monthly Charge $/Meter $ 2.56 $ 0.94 $ 3.79 $ $ $ $ $ / - Per Exhibit A-13 Schedule F1.1 Page 6 Line 3 2/ -Line 14 divided by Line 14 column (c) 3/ - Col. b: Exhibit A-19 Schedule L2 Page 1 Line 18, Cols. c-l: col. b * line 2 4/ - Col. b: Exhibit A-19 Schedule L1 Page 1 Line 17, Cols. c-l: col. b * line 5 5/ - Per Settlement 6/ - Col. b: Line 20, Cols. c-l: col. b * line 6

26 Michigan Public Service Commission Case No. U Michigan Consolidated Gas Company Attachment A Cost of Service Study For Proposed Infrastructure Recovery Mechanism Page 3 of Year 3 ($-000) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (l) Line Total Rate Rate Rate Rate No. Description Company GS-1/GS-2 A/AS 2A S Rate ST Rate LT Rate XLT XXLT/DIG Exelon Allocation Factors 1 Average & Peak 1/ A&P Without Exelon Customers 2/ Customers W/O Exelon Customers W/O over $ Revenue Requirement 9 MRP/Pipeline Intregrity 3/ 20,120 3,713 10, ,201 1,158 1,187 1, MMO 4/ 8, , Total - COS 28,763 4,346 18, ,204 1,159 1,187 1, Customers 5/ 1,214,002 88,895 1,116,898 7, Monthly Charge $/Meter $ 4.07 $ 1.37 $ 6.13 $ $ $ $ 5, $ 37, Maximum customer charge $500 or $6,000 per year Adjustment for $500 Cap (3,425) (559) (1,079) (1,788) Reallocate using Customer 6/ 3, , Revised Rev Req (L. 11,20 & L. 22) 28,763 4,596 21, , Customers (Line 14) 1,214,002 88,895 1,116,898 7, Revised Monthly Charge $/Meter $ 4.31 $ 1.61 $ 6.37 $ $ $ $ $ / - Per Exhibit A-13 Schedule F1.1 Page 6 Line 3 2/ -Line 14 divided by Line 14 column (c) 3/ - Col. b: Exhibit A-19 Schedule L2 Page 1 Line 18, Cols. c-l: col. b * line 2 4/ - Col. b: Exhibit A-19 Schedule L1 Page 1 Line 17, Cols. c-l: col. b * line 5 5/ - Per Settlement 6/ - Col. b: Line 20, Cols. c-l: col. b * line 6