FISCHER, FRANKLIN & FORD Attorneys and Counsellors GUARDIAN BUILDING, SUITE GRISWOLD STREET DETROIT, MICHIGAN

Transcription

1 ARTHUR J. LeVASSEUR MATTHEW M. PECK TROY C. OTTO SIDNEY M. BERMAN* * Of Counsel FISCHER, FRANKLIN & FORD Attorneys and Counsellors GUARDIAN BUILDING, SUITE GRISWOLD STREET DETROIT, MICHIGAN Telephone (313) Facsimilie (313) HARVEY A. FISCHER ( ) LEO I. FRANKLIN ( ) RICHARD C. FORD ( ) January 19, 2018 Ms. Kavita Kale Executive Secretary Michigan Public Service Commission P.O. Box Lansing, MI RE: MPSC Case No. U Dear Ms. Kale: Attached for paperless electronic filing are Detroit Thermal, LLC s Initial Comments regarding Case No. U If you have any questions, please do not hesitate to contact me. Thank you. Very truly yours, AJL:dmm Attachment Arthur J. LeVasseur

2 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter, on the Commission s own motion, ) to consider changes in the rates of all of the ) following Michigan rate-regulated electric, ) steam, and natural gas utilities to reflect the effects ) of the federal Tax Cuts and Jobs Act of 2017; ) ALPENA POWER COMPANY, CONSUMERS ) ENERGY COMPANY, DETROIT THERMAL, LLC, ) DTE ELECTRIC COMPANY, DTE GAS COMPANY, ) Case No. U INDIANA MICHIGAN POWER COMPANY, ) NORTHERN STATES POWER COMPANY, ) UPPER PENNINSULA POWER ) COMPANY, UPPER MICHIGAN ENERGY ) RESOURCES CORPORATION, ) WISCONSIN ELECTRIC POWER COMPANY, ) PRESQUE ISLE ELECTRIC & GAS CO-OP, ) MICHIGAN GAS UTILITIES CORPORATION, and ) SEMCO ENERGY GAS COMPANY. ) ) DETROIT THERMAL, LLC S INITIAL COMMENTS Pursuant to the Commission s December 27, 2017 Order in this matter, Detroit Thermal, LLC ( Detroit Thermal or Company ) submits the following comments. A. Background Detroit Thermal operates a district heating system that provides steam for heating, cooling and industrial processing. The steam is distributed through a network of underground steam pipes to hospitals, offices, schools, government buildings and other facilities in Detroit s central business district and up the Woodward corridor/midtown as far as the New Center area. Detroit Thermal is unique in that it is the only steam utility whose rates are regulated by the Commission.

3 Detroit Thermal purchased the steam system from The Detroit Edison Company in 2003 and subsequently applied for approval of its initial tariff rates. Following a contested case proceeding, the MPSC issued its order setting Detroit Thermal s rate in MPSC Case No. U on September 8, One issue addressed in the case was whether Detroit Thermal should be allowed to include a tax multiplier in calculating its revenue requirement. As a limited liability company Detroit Thermal does not pay federal income taxes at the entity level. Instead profits (or losses) are passed through to its members. To the extent a member of Detroit Thermal is also a pass through entity for tax purposes its income is likewise not taxed at the entity level. The income is passed up the chain of ownership until it reaches an entity such as a C corporation that does pay federal income taxes. Therefore, Detroit Thermal does not record federal income taxes as an expense in its accounting records. Nevertheless, the Commission determined that because income taxes are ultimately paid by an upstream owner on income earned by Detroit Thermal it was appropriate for ratemaking purposes to apply a tax multiplier or tax allowance as part of the calculation of the Company s total revenue requirement. Commission Order, MPSC Case No. U , 9/8/2005 p. 34. Detroit Thermal s most recent general rate case was filed in July, In the matter of the application of Detroit Thermal, LLC for authority to redesign and increase its rate for steam service and for other relief, MPSC Case No. U In its filing, Detroit Thermal demonstrated that its total revenue requirement was approximately $45 million and its revenue deficiency was approximately $10 million. Id. Exhibit A-6, Schedules F1 and F2. However, because Detroit Thermal s customers are both price sensitive and may opt to install boilers in their facilities if steam rates rise by too much, the Company elected not to seek approval to increase its rates in an amount sufficient to recover 100% of its revenue requirement. Instead, it sought to restructure its 2

4 rates and implement rates that were designed to recover a total of $40,096,343, leaving it short of its total revenue requirement by nearly $5 million. Id. Following an investigation by Staff, Staff agreed to Detroit Thermal s proposed rates and entered into a settlement agreement. The Commission approved the settlement agreement and authorized Detroit Thermal to implement the new rates by Order dated October 11, On September 5, 2017 Detroit Thermal and Project Mist Holdco, LLC filed a joint application for transfer of control of Detroit Thermal. In the matter of the joint application of DETROIT THERMAL, LLC and PROJECT MIST HOLDCO L.L.C. for approval pursuant to MCL 460.6q of transfer of control of Detroit Thermal, LLC, MPSC Case No. U During the course of that proceeding Staff requested information regarding income tax matters and the use of the federal corporate income tax rate of 35% for rate-making purposes. In responding to Staff s inquires the joint applicant s first noted that because Detroit Thermal is a pass through entity it does not record a federal income tax expense on its books and, likewise, does not record any accumulated deferred income tax balances. Secondly, because in its most recent rate case Detroit Thermal had elected not to seek to recoup 100% of its total revenue requirement, joint applicants showed that even if no tax multiplier were applied (which would, in effect, apply a federal income tax rate of 0%), Detroit Thermal would still have a revenue deficiency of $3.2 million. U-18443, Joint Applicant s Response to MPSC Staff Audit Requests RFN-1 and RFN-3. B. Commission s Authority The authority of the Commission to conduct a proceeding limited to examining the impact of a reduction in federal tax rates on utility rates is clear, notwithstanding the fact that such a proceeding is limited to a single issue. Consumers Power Co v Pub Serv Com, 181 Mich App 261, , 448 NW2d 806, 809 (1989) (reduction in federal income tax rates under the 1986 Tax 3

5 Reform Act). Nevertheless, the Commission must also be cognizant that an order that establishes a rate so low as to be confiscatory is unconstitutional. Verizon North v Michigan Public Service Comm, 260 Mich App 432 (2004). Indeed, in Duquesne Light Co v Barasch, 488 US 299, 314; 109 S Ct 609; 102 LEd 2d 646 (1989), the Court held that the United States Constitution "protects the utility from the net effect of the rate order on its property." In Michigan Consolidated Gas Co v PSC, 264 Mich App 434, 428; 691 NW2d 29, the Court explained that this means that a utility's constitutional protection against a confiscatory rate is satisfied if the overall rate allowed to the utility during the relevant period provides a fair return. On the other hand, if the effect of the order is to deprive the utility of a fair return on its investment it constitutes a violation of the Fourteenth Amendment. Therefore, it is important for the Commission to recognize that Detroit Thermal is unique among the regulated utilities and any decision the Commission renders should take into consideration the fact that Detroit Thermal s existing rates were intentionally designed to recover less than its full revenue requirement. C. Impact of Tax Cuts and Jobs Act of 2017 In its December 27, 2017 Order in the instant docket the Commission directed all of the utilities identified in the caption to file comments that include the impacts of the Tax Cuts and Jobs Act of 2017, including the impacts on current and deferred tax, and the impact on revenue requirements with and without the Tax Cuts and Jobs Act of 2017, effective as of January 1, Utilities shall also outline the preferred method to flow the benefits of those impacts to ratepayers. As noted above, because Detroit Thermal is a pass through entity it does not pay federal income tax at the entity level. Therefore, it does not record federal income tax as an expense in its accounting records nor does it record accumulated deferred income tax balances. Accordingly, at 4

6 the entity level the reduction in corporate income tax rate from 35% to 21% will have no direct impact on Detroit Thermal in terms of current tax or deferred tax. The total impact of the Act upon Detroit Thermal s revenue requirements will be affected by a number of items and has yet to be fully quantified. While the reduction in the corporate income tax rate from 35% to 21% can be expected to slightly reduce total revenue requirements, the elimination of other deductions, including the limit on the deductibility of interest expense to 30% of earnings before interest, taxes, depreciation and amortization may offset that reduction in whole or in part. In its most recent rate case Detroit Thermal determined that its total revenue requirements were $44,936,213 which included a tax allowance of $1,637,287. See U-18443, Response to Staff Audit Request RFN-3. This was based on a revenue multiplier of See U , Exhibit A-3, Schedule C2. Simply changing the input for the federal tax rate from.35 to.21 in the latter exhibit reduces the multiplier from 1.67 to However, the rates approved in Detroit Thermal s most recent rate case and currently in effect provide for recovery of only $40,096,343. Thus, even if the entire tax allowance of $1,637,287 were eliminated that would only reduce Detroit Thermals revenue requirement to $43,298,926 as shown on line 10 of the Response to Staff Audit Request RFN-3 in U This would still leave Detroit Thermal with a revenue deficiency of $3,202,583. Under these circumstances, because current rates do not provide for full recovery of Detroit Thermal s total revenue requirements any reduction in the corporate tax rate does not result in any actual benefit for Detroit Thermal to flow through to ratepayers. 5

7 D. Conclusion Detroit Thermal s existing rates do not provide sufficient revenue to recover any federal income tax allowance. Therefore, there is no current benefit to Detroit Thermal resulting from the Tax Cuts and Jobs Act of 2017 and no benefit to flow through to ratepayers. Dated: January 19, 2018 Respectfully submitted, FISCHER, FRANKLIN & FORD By: Arthur J. LeVasseur (P29394) Matthew M. Peck (P66361) Attorneys for Detroit Thermal, LLC 500 Griswold Street, Suite 3500 Detroit, MI (313)