April 12, Ms. Kavita Kale Executive Secretary Michigan Public Service Commission 7109 West Saginaw Highway Lansing, Michigan 48917

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1 DTE Gas Company One Energy Plaza, WCB Detroit, MI - David S. Maquera () - david.maquera@dteenergy.com April, 0 Ms. Kavita Kale Executive Secretary Michigan Public Service Commission 0 West Saginaw Highway Lansing, Michigan Re: In the matter of the Application of DTE 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 U- Dear Ms. Kale: Attached for electronic filing in the above captioned matter is DTE Gas Company s Rebuttal Testimony of Witnesses, Mark C. Johnson, George H. Chapel, Alida D. Sandberg, Catherine Stafford, Kenneth Slater, Renee M. Tomina, and Sherri L. Wisniewski, and Rebuttal Testimony and Exhibits of Witnesses, Jennie A. Aud, Michael S. Cooper, Henry J. Decker, Margaret A. Suchta, Edward J. Solomon, Joi M. Harris, Theresa M. Uzenski, and Michael Vilbert. Also attached is the Proof of Service. Very truly yours, DSM/lah Encl. cc: Service List David S. Maquera

2 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) DTE GAS COMPANY for authority to ) to increase its rates, amend its rate ) schedules and rules governing the ) Case U- distribution and supply of natural gas, ) and for miscellaneous accounting authority ) ) REBUTTAL TESTIMONY OF JENNIE A. AUD

3 Line DTE GAS COMPANY REBUTTAL TESTIMONY OF JENNIE A. AUD Q. What is your name, business address and by whom are you employed? A. My name is Jennie A. Aud. My business address is: One Energy Plaza, Detroit, Michigan. I am employed by DTE Gas as the Director, Gas Control and Planning. Q. Did you file direct testimony in this proceeding on behalf of DTE Gas (DTE Gas or Company)? A. Yes, I did. 0 Q. What is the purpose of your rebuttal testimony? A. My testimony rebuts the Attorney General s (AG) proposed use of a three-year historical average for calculating lost and unaccounted for gas (LAUF). Q. Are you sponsoring any exhibits? A. Yes. I am sponsoring the following exhibit. Exhibit Schedule Description A- N Historical LAUF as a Predictor for Future LAUF 0 Q. Was this exhibit prepared by you or under your direction? A. Yes, it was. Q. Why does AG Witness Mr. Coppola support a three-year average to calculate LAUF volume in this proceeding? A. Witness Coppola makes the following assertions supporting his proposal: JAA Rebuttal -

4 J. A. AUD Line U-. A declining trend in the past years may justify a different approach to forecasting LAUF than using a five-year average, (S. Coppola Direct, lines -, and, lines-). The Company has experienced an overall downward trend in LAUF, (S. Coppola Direct, lines -). The five corrective actions that the Company has taken have had a major impact in reducing the amount of LAUF in the Transmission system (S. Coppola Direct, lines -). 0 0 Q. Does DTE Gas agree that a three-year average should be used to calculate LAUF volume? A. The Company believes a five-year average should be used to forecast LAUF. LAUF forecasts in general rate proceedings have longstanding support from DTE Gas, the Commission Staff and approval of the Commission. My testimony in Case U- supported the five-year average and it should continue to be used for setting LAUF volumes in this case. Contrary to this precedent, Witness Coppola argues that a three-year average rather than the Commission-approved five-year average period be used by DTE Gas as the basis for setting LAUF volumes. In support of his position Witness Coppola incorrectly maintains that a major shift in the amount of reported LAUF gas has occurred and that it warrants a three-year average approach. Q. Why has the Commission approved a five-year average calculation to project LAUF volumes in general rate cases? JAA Rebuttal -

5 J. A. AUD Line U- A. The Company and MPSC Staff have consistently recommended, and the Commission has adopted, a five-year average for LAUF in general rate cases. The Commission has a long tradition of adopting this time frame as a means of smoothing out any abnormalities in using a single year or any other period shorter than five years. The inability to accurately measure the loss resulting from items such as leaking mains and services, residential and commercial metering equipment, theft, economic downturns and the impact of cost of gas on some of these components has dictated the use of a five-year average for LAUF for determination of a projected test year cost of service component. 0 Q. Are Witness Coppola s assertions correct? A. Witness Coppola draws conclusions from his representation of the -year declining trend that do not consider the volatility that is evident in the data he cites. 0 Q. Why is considering this volatility important? A. As shown in Exhibit A-, Schedule N, Historical LAUF as a Predictor for Future LAUF, column (d) shows the percentage change that the amount in column (c) represents from the previous year LAUF to the present year. As shown in the exhibit, over the last six years the LAUF has fluctuated and: - decreased by 0. Bcf or 0% between 0 and 0, - increased by 0. Bcf or % between 0 and 0, - decreased by 0. Bcf or % between 0 and 0, - decreased by. Bcf or % between 0 and 0, and - increased by 0. Bcf or % between 0 and 0. JAA Rebuttal -

6 J. A. AUD Line U- This volatility demonstrates that there is no trending change as Witness Coppola states and LAUF could be higher or lower than any of the three previous years. Witness Coppola is effectively requesting the MPSC to treat higher LAUF years as an excludable abnormality. However, it is due to this very unpredictable volatility that the Commission approved five-year average methodology for LAUF addresses. 0 Q. Does actual history of LAUF over the past seven years represent a trending change as asserted by Witness Coppola? A. Witness Coppola begins with 0 to say that there has been a declining trend, but 0 was the peak LAUF year. If 0 is excluded, the changes in years 0-0 do not show a downward trend, instead the trend is variable and fluctuates, followed by a decrease in 0 and then an increase in 0. 0 Furthermore, a review of LAUF over the past several years provides evidence that a three-year period does not provide an improvement in LAUF volume forecasts over a five-year period. Exhibit A-, Schedule N, Historical LAUF as a Predictor for Future LAUF, shows the variation in yearly LAUF and the difficulty in projecting a test year LAUF. Columns (c) and (d) of this Exhibit highlight the fact that LAUF is an unknown factor because as soon as we see data that appears to support some level of consistency or show a trend, the next period of LAUF will reflect a reversal of that trend. This lack of consistency can also be seen in prior years actual LAUF data. The years 000 and 00 showed some consistency, but in 00 LAUF decreased by. Bcf or 0% and then increased by. Bcf in 00. Over the period, LAUF JAA Rebuttal -

7 J. A. AUD Line U- averaged. Bcf but in 0 the LAUF increased by. Bcf or % from this period only to drop by. Bcf in 0. There is no logic to explain the unaccounted-for portion of LAUF and looking at the last three years of actual LAUF does not create a trending change that is any different that would necessitate a change in the current five-year average methodology for calculating a projected LAUF for the test period. 0 Q. What other factors are considered in the five-year average methodology that DTE Gas uses to project LAUF? A. The over-arching consideration is that the current five-year methodology is a better predictor of this cost component of the rate case that is basically unpredictable. More specifically a five-year average:. Evens out fluctuations in yearly LAUF over time and,. The data since the beginning of this century continues to support a five-year average over any other reasonable methodology including Witness Coppola s proposed three-year average. 0 Q. What reason has Witness Coppola given that would warrant a five-year average as maintained by the Company? A. Starting on page, line of his direct testimony, Witness Coppola states when LAUF gas randomly varies up and down over prior years, the five-year averaging approach has merit. The Company agrees with this statement and maintains that the recent data indeed shows that LAUF randomly varies up and down and warrants the traditional five-year approach. JAA Rebuttal -

8 J. A. AUD Line U- 0 Q. Is there a reason to change the LAUF five-year average methodology due to the Company taking corrective actions in the gas transmission system as proposed by Mr. Coppola? A. The Company disagrees with Witness Copploa s statements (S. Coppola Direct, Line ) that some major structural changes have occurred, or that (S. Coppola Direct, Line ) the five corrective actions (the Company) has taken.have had a major impact in reducing the amount of LAUF in the transmission system since 0. Witness Coppola has drawn an incorrect conclusion from the five actions, since some of these actions to improve the accuracy of measurement will eliminate the gain in LAUF, therefor increasing system LAUF. All of the positive steps the Company has taken over the last five years are included in the five-year average LAUF calculation supported by the Company. However, it is important to remember that efforts to improve and control these factors does not guarantee a projected test year LAUF volume. More importantly, over time, DTE s customers benefit from the programs undertaken by DTE Gas and the five-year average LAUF will reflect these accomplishments. 0 Q. Do all five corrective actions identified in the response to the Attorney General question AGDG-.a reduce LAUF? A. The Attorney General s request in AGDG-.a referred to the transmission system LAUF. The LAUF gas on the DTE Gas Transmission system is a subset of the overall DTE Gas LAUF. The upgrade from orifice to ultrasonic metering at the Loreed Ludington delivery point that delivers gas from the DTE Gas Primary JAA Rebuttal -

9 J. A. AUD Line U- Transmission system to a secondary transmission system has no impact on the overall total of DTE Gas LAUF, but does affect the DTE Gas Transmission LAUF. 0 Q. Do all five corrective actions identified in the response to the Attorney General question AGDG-.a result in permanent reductions in LAUF? A. Not all five corrective actions can be considered permanent. The upgrades identified in the response for ANR Columbus Link (0) and Loreed Ludington (0) can be considered permanent. The error in measurement at ANR Willow (0) and ANR Columbus Link (0) are reductions in LAUF for the DTE Gas Transmission system, however, they cannot be considered as permanent due to any future variation in the nature in which ANR maintains the meter. In addition, the reduction in the 0 and 0 LAUF at ANR Woolfolk are driven by operational changes and cannot be considered permanent. 0 Q. Can a change in operations be relied upon by DTE Gas to result in reduction of LAUF going forward? A. Based on customer nominations, Bcf more gas flowed to DTE Gas than flowed to ANR at Woolfolk, creating an operational change from previous annual activity. Going forward, because DTE Gas does not control the volume of gas nominated by customers at interconnects, the net activity of receipt and delivery of gas at ANR Woolfolk could: ) continue to reduce LAUF on DTE Gas if there are more gas deliveries to DTE Gas than ANR, or ) have no impact at all on DTE LAUF if the delivered gas equals the received gas, or ) increase LAUF on DTE Gas if more gas is delivered to ANR than DTE Gas. JAA Rebuttal -

10 J. A. AUD Line U- 0 Q. What is the most significant factor that affects LAUF volumes? A. The most significant factor affecting LAUF is the magnitude of natural gas entering the DTE Gas system that is then transported and consumed throughout its system. As supported in Exhibit A-, Schedule E, DTE Gas moved between 0 Bcf through its system in each of the last five years. LAUF is the difference between the inputs to the system, its sources, and the outputs of the system, its disposition. Over the last five years, DTE Gas balanced its sources and dispositions to within 0.-.% of its total sources. A minimal change of 0.% in the percent of LAUF compared to total throughput amounts to approximately MMcf. The change in LAUF volume can be significant yet yield a very small change in the percent of LAUF as compared to throughput. The consistent use of a five-year methodology averages a wider range of historical LAUF outcomes and is thus a better proxy for the projected test year than Mr. Coppola s proposed three-year average. Q. Does the Company agree that it would be unreasonable and imprudent to calculate a forecasted expense amount based on a five-year period as Witness Coppola has concluded? A. The Company disagrees that maintaining the five-year average is unreasonable or imprudent. The Company maintains that it is more than 0 reasonable and prudent to continue with the five-year LAUF approach, considering that it is on the verge of doubling system throughput due to future NEXUS volumes, and that zero volumes of LAUF attributed to those NEXUS volumes are calculated in the projected expense calculation. JAA Rebuttal -

11 J. A. AUD Line U- 0 Q. Why does the company maintain that it is more than reasonable and prudent to continue with the five-year LAUF approach considering increased throughput due to the addition of NEXUS? A. The addition of NEXUS volumes will increase annual system throughput by 0,000 MMcf. Higher system throughput increases the risk of LAUF volatility, and yet the Company has assigned a 0% increase in LAUF for NEXUS volumes due to having no experience with the impact that these volumes will have on DTE Gas Operations and LAUF. So even considering Witness Coppola s proposed three-year average based on system throughput (Exhibit AG-, line, columns (c) & (d)), total system throughput would then increase by 0,000 MMcf from an average,0 MMcf to 0,0 MMcf due to NEXUS volumes. Applying Witness Coppola s three-year average 0.% LAUF factor to this increased throughput volume, the Company could have projected an even higher LAUF of, MMcf instead of the projected, MMcf. This disparity only increases if applying a five-year average (0.% LAUF) approach based on throughput, where the Company could have projected, MMcf based on the throughput increase due to NEXUS. DTE Gas maintains that the Company s five-year average LAUF approach has resulted in a reasonable projected LAUF of, MMcf. 0 Q. Does this complete your rebuttal testimony? A. Yes, it does. JAA Rebuttal -

12 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) DTE GAS COMPANY for authority to ) to increase its rates, amend its rate ) schedules and rules governing the ) Case U- distribution and supply of natural gas, ) and for miscellaneous accounting authority ) ) REBUTTAL TESTIMONY OF GEORGE H. CHAPEL

13 Line DTE GAS COMPANY REBUTTAL TESTIMONY OF GEORGE H. CHAPEL Q. What is your name, business address and by whom are you employed? A. My name is George H. Chapel. My business address is: One Energy Plaza, Detroit, Michigan. I am employed by DTE Gas as Manager, Market Forecasting. Q. Did you file direct testimony in this proceeding on behalf of DTE Gas Company (DTE Gas or Company)? A. Yes, I did. 0 Q. What is the purpose of your rebuttal testimony? A. The purpose of my rebuttal will address certain inconsistencies in the direct testimony of AG Witness Mr. Coppola and will also rebut the conclusions that he derives on page of his testimony. 0 Specifically, I will rebut: ) Mr. Coppola s recommended test-year sales forecast volumes for residential, commercial, and small industrial customers. ) Mr. Coppola s dismissal of expected reductions in the Company s sales volumes due to the Company s MPSC-approved Energy Waste Reduction (EWR) plan. ) Mr. Coppola s incorrect assumptions regarding the expected system-average heating value when NEXUS supply is planned beginning in late 0. ) Mr. Coppola s recommendation to remove the entire $. million instead of the Company s recommended removal of $. million of O&M expense included in this rate case for ANR/Alpena transportation costs for recovery of these costs through the GCR mechanism. GHC Rebuttal -

14 G. H. CHAPEL Line U- Q. Are you sponsoring any rebuttal exhibits? A. No, I am not. AG WITNESS COPPOLA RECOMMENDED TEST YEAR VOLUMES Q. What does Witness Coppola recommend for the Company s projected test-year sales volumes for residential, commercial, and small industrial customers? A. On Exhibits AG-, AG-, and AG-, Witness Coppola recommends test year sales volumes of,,0 Mcf,,0, Mcf, and,0 Mcf for the residential, commercial, and small industrial customer classes, respectively. 0 Q. How did Witness Coppola arrive at these volumes? A. On Exhibit AG-, he calculated a five-year average change in the use per customer for residential, commercial, and small industrial customers. He then applied those five-year change percentages in Exhibits AG-, AG-, and AG- to make an estimate of the change in usage per customer by customer class for the projected test year. He then multiplied his projected use per customer by the forecasted number of customers by customer class to derive his volumetric forecast. 0 Q. Do you agree with Witness Coppola s sales projections? A. No, I do not. Q. Why do you disagree with Witness Coppola s sales projections? A. His methodology consists of taking the most recent year of normalized actuals and factors in a five-year average annual change in consumption per customer to arrive at a projected consumption per customer. GHC Rebuttal -

15 G. H. CHAPEL Line U- Q. Why does he use a five-year average to make his projections? A. He does not give his rationale for using a five-year average. He only states that he uses data that he requested from the Company. Note, however, that in the residential and the commercial customer classes - the two largest classes volumetrically, by far, of the three - that the average change from five years ago (0 to 0) showed the largest positive change in each group. While he does not give his rationale for using this five-year basis, it appears that Witness Coppola has included these changes from up to five years ago to increase his sales forecasts by using customer behavior from quite some time ago. 0 0 Q. Would Witness Coppola have received a different answer had he used a shorter period to project his change in consumption per customer? A. Yes, he would have. Using more recent years that are more reflective of current customer behavior, the following percentage changes are: Residential: from -0.% (-year) to -.% (-year) Commercial: from 0.% (-year) to -.% (-year) Industrial: from -.% (-year) to -.% (-year) Volumetrically, these changes to Witness Coppola s projected sales would be as follows: Residential: from, MMcf (-year) to, MMcf (-year) Commercial: from, MMcf (-year) to 0, MMcf (-year) Industrial: from MMcf (-year) to MMcf (-year) Witness Coppola s arbitrary choice of a five-year average included anomalous data from the furthest year away which considerably skewed his results. This result is particularly true in his results for the commercial customer class. His positive GHC Rebuttal -

16 G. H. CHAPEL Line U- projected change of 0.% is directly related to the two oldest years in his analysis: 0 to 0 and 0 to 0. The past three years in the commercial customer class, all changes were negative and more indicative of recent customer behavior. Witness Coppola has proposed to utilize a three-year average (as opposed to fiveyear) in his calculation of lost and unaccounted for volumes. 0 Q. Are you proposing to adopt this amended three-year average approach in forecasting the projected Test Year volumes? A. No, I am not. I stand by the Company s forecast as presented in its direct filing. I simply point this out to illustrate the consequences of including a fifth year in the Attorney General s analysis. Should the Commission consider adopting Witness Coppola s approach and methodology, then a -year average is more reflective of recent customer behavior and, furthermore, produces results more closely aligned with the Company s most recent Energy Waste Reduction ( EWR ) Plan (U-). 0 Q. On page of his direct testimony, Witness Coppola notes that the Company s sales forecast for small (i.e. non-eut) industrial customers drops dramatically from recent years normalized actuals and that the Company has not provided any explanation for this dramatic decline in average gas usage by industrial sales customers. Do you have a response to this? A. Yes, I do. The Company performs its sales forecasts by regressing the sales data by rate class (i.e. Rate A, Rate A, GS-, GS-, Rate S) and not by customer class (i.e. Residential, Commercial, Industrial). As such, all commercial and industrial GS- customers are grouped together for analysis and all commercial and industrial GS- GHC Rebuttal -

17 G. H. CHAPEL Line U- customers are grouped together, as well. This assures that the correct volumes are forecast for both the GS- and the GS- rate classes. 0 Q. Why does the Company group customers by rate class and not by customer class? A. In this rate case proceeding, it is necessary for rate design purposes to forecast the correct volumes by rate class to develop the proper rates for each. The volumes for Commercial GS- and Industrial GS- customers, being of similar relative size to each other, are regressed together as they will be using the same rates. The volumes for Commercial GS- and Industrial GS- customers, likewise, are regressed together as they will be using the same rates. 0 Q. What is the explanation, then, for the dramatic decline in the forecast for industrial usage? A. Because the Company forecasts by rate class and not by customer class, some of the forecasted industrial volumes have been reallocated to the commercial forecast. This is, however, irrelevant in the context of developing the proper rates. Assigning the proper volumes to the various rate classes (not necessarily the customer classes) assures that the Company will develop the proper rates, whether those customers be commercial or industrial. A grouping by rate class rather than by customer class would show a more natural progression in sales volumes from historical to forecast. AG WITNESS COPPOLA EWR ASSUMPTIONS Q. Does Witness Coppola incorporate the EWR assumptions from the Company s latest EWR filing before the MPSC? GHC Rebuttal -

18 G. H. CHAPEL Line U- A. No, he does not. As discussed before, he simply takes a five-year average annual change in customer consumption and applies those changes to 0 normalized actual sales. In this way, Witness Coppola is not recognizing the steps that the Company intends to take in the coming years to assist its customers in reducing their normalized consumption. 0 Q. How should Witness Coppola incorporate the EWR assumptions from the Company s latest EWR filing? A. Given the approach that he is taking in using 0 calendar year normalized sales as a base, he should apply a % annual reduction to those volumes to stay true to the assumptions laid forth in the EWR filing. 0 Q. Are you suggesting that this approach be adopted to forecast the Test Year volumes? A. No, I am not. I only mention this here to illustrate that Witness Coppola s proposed Test Year forecast volumes are overstated due to his exclusion of the assumptions laid out in the Company s latest EWR filing, Case No U-. Should the Commission adopt Witness Coppola s approach in this proceeding, then it should at least acknowledge the proper adjustment to his forecast volumes that reflect the Company s EWR filing. AG WITNESS COPPOLA HEATING VALUE (BTU) ASSUMPTIONS Q. What does Witness Coppola recommend as an assumed heating value for the projected Test Year in this case? GHC Rebuttal -

19 G. H. CHAPEL Line U- A. Witness Coppola recommends a heating value of,0 Btu/cf for the projected Test Year. He makes this recommendation because,0 Btu/cf was the Company s system-weighted heating value for Calendar 0. 0 Q. Is the system-weighted heating value for 0 an adequate proxy to estimate the Company s system-weighted heating value for the projected Test Year? A. No, it is not. Witness Coppola dismisses one key change in the way that the Company s system will be integrated in the projected Test Year in relation to Calendar 0. That change is the commencement of delivery service from the Nexus Pipeline in 0. 0 Q. How will the introduction of supply from the Nexus Pipeline alter the Company s system-weighted heating value for the projected Test Year? A. With the introduction of supply from the Nexus Pipeline, the overall mix of supply into the Company s distribution system will change with greater volumes expected from the Utica/Marcellus region. In rejecting DTE s projected BTU factor increase to,0 Btu/cf, Witness Coppola cites the GCR Plan forecast in Case U- to say that DTE only sources % of its gas from the Utica/Marcellus region. But this neglects the fact that in addition to DTE, other parties will also bring supply from Nexus in at DTE s Willow Gate Station in Ypsilanti. DTE supply will be only a portion of the total gas received into the system via Nexus. In 0, DTE GCR gas was % of total market sendout, so DTE Gas is not the only company who will be delivering Utica/Marcellus gas to DTE s gas system via the Nexus Pipeline. GHC Rebuttal -

20 G. H. CHAPEL Line U- 0 Furthermore, DTE believes that Witness Coppola has assumed that all higher heating value volumes received from Nexus are completely mixed with all other lower heating value sources of gas coming into the DTE Gas system before being sent to market, however, this is not the case. The proximity to DTE s largest market of the received Nexus volumes at DTE s Willow Gate Station in Ypsilanti will prevent the complete mixing Witness Coppola assumes. As it is, upon receipt the higher heating value Nexus gas will immediately enter the SE Michigan Detroit market directly from the point of receipt in Ypsilanti and would not necessarily mix with other sources. For instance, on a January peak day, the market demand from DTE s Willow Gate Station that would be supplied by Nexus gas is approximately 00 MMcf. This means that any receipts from Nexus up to 00 MMcf would go directly to market upon receipt from Nexus. This higher heating value gas directly displaces the traditional lower heating value supply which the Company has utilized in the past (ANR, PEPL, storage) at that point, thus reducing volumetric sales in the SE Michigan market. 0 AG WITNESS COPPOLA ANR/ALPENA TRANSPORTATION COSTS Q. Why does Witness Coppola recommend that the entire $. million of O&M expense included in this rate case for ANR/Alpena transportation be removed and recovered through the GCR mechanism instead of the $. million amount proposed by the Company? A. Witness Coppola gives no reason for the higher amount to be removed from O&M expense and recovered through GCR other than his reference to my direct testimony which states that ANR/Alpena O&M costs for the projected test year are forecasted to reach $. million. However, he failed to reference the portion of my testimony GHC Rebuttal -

21 G. H. CHAPEL Line U- which states that only $. million of these costs are incurred for its GCR supply portfolio, and he also failed to reference Company Witness Mr. Telang s testimony supporting the removal of only $. million ANR/Alpena transport costs from its rate request because it is more appropriately recovered as part of the cost of gas in the GCR. 0 0 Q. Why does the Company recommend only $. million of the $. million O&M expense for ANR/Alpena transportation be removed and recovered through the GCR mechanism? A. Only $. million of the total $. million ANR/Alpena transportation costs are incurred for the purchase of GCR gas supply. Therefore, the Company has recommended that only $. million be removed from its base rate request and instead recovered through the GCR mechanism. The remaining $0. million of ANR/Alpena transportation costs are incurred for purposes other than the purchase of GCR gas supply, and therefore appropriately recovered through base rates and not removed for recovery through the GCR mechanism. This $0. million of ANR/Alpena transportation costs are incurred for (a) system integration, which is for the delivery of gas from the DTE Gas storage facilities into its Alpena system for service to all customer classes, and (b) midstream exchange services, which also is not a GCR gas supply cost, both of which are properly recovered through base rates. Q. What does the Company recommend with respect to ANR/Alpena transportation costs? A. The Commission should reject Witness Coppola s recommendation to remove the entire $. million of O&M expense included in this rate case for ANR/Alpena GHC Rebuttal -

22 G. H. CHAPEL Line U- transportation costs. Consistent with the prefiled testimony of the Company, the Commission should remove only $. million of O&M expense from the Company rate request, and make clear that recovery of these costs should be made through the GCR mechanism. Q. Does this complete your rebuttal testimony? A. Yes, it does. GHC Rebuttal - 0

23 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) DTE GAS COMPANY for authority to ) to increase its rates, amend its rate ) schedules and rules governing the ) Case U- distribution and supply of natural gas, ) and for miscellaneous accounting authority ) ) REBUTTAL TESTIMONY OF MICHAEL S. COOPER

24 Line DTE GAS COMPANY REBUTTAL TESTIMONY OF MICHAEL S. COOPER Q. What is your full name and business address? A. My name is Michael S. Cooper. My business address is One Energy Plaza, Detroit, Michigan. Q. Did you file direct testimony in this proceeding on behalf of DTE Gas Company (DTE Gas or Company)? A. Yes, I did. 0 Q. What is the purpose of your rebuttal testimony? A. My testimony rebuts Michigan Public Service Commission (MPSC) Staff Witness Mr. Welke s proposal to exclude the Supplemental Savings Plan expense, Witness Welke s proposal to exclude incentive compensation expense related to financial measures and Attorney General (AG) Witness Mr. Coppola s proposal to exclude the Company s incentive compensation expense related to financial measures and 0% of the operating measures. 0 Q. Are you sponsoring any exhibits? A. Yes, I am supporting information on the following exhibit: Exhibit Schedule Description A- O AIP & REP Operating Measure Performance Q. Was this exhibit prepared by you or under your direction? A. Yes, it was. MSC Rebuttal -

25 M. S. COOPER Line U- Incentive Compensation Q. What is Staff Witness Welke s proposal regarding the treatment of incentive compensation costs? A. Witness Welke proposes the exclusion of $.0 million of incentive compensation. Witness Welke describes this amount as the portion of the Company s incentive compensation expense related to financial measures. 0 Q. What is your understanding of the basis of Witness Welke s exclusion of the portion of incentive compensation expense related to the financial measures? A. Witness Welke s proposed exclusion of $.0 million of incentive compensation expense is premised on the Commission s decision in Case U-, DTE Gas s most recent rate case. In that decision, the Commission concluded that while the customer benefits of the operational measures exceeded the expense of the short-term incentive compensation plans, the customer savings related to the financial measures were less than the related expense. Thus, the Commission disallowed recovery of the short-term incentive compensation expense related to the financial measures as well as the expense related to the Company s Long Term Incentive Plan (LTIP). (Welke p. and Order, Case U-, December, 0, pp. -). 0 Q. Do you agree with Witness Welke s proposal? A. Witness Welke s proposal is flawed for two reasons. First, it appears Witness Welke has disregarded the customer savings quantified related to the financial measures. Second, Witness Welke excludes incentive compensation expense related to the financial measures without any explicit regard to the overall reasonableness of the Company s compensation practices. MSC Rebuttal -

26 M. S. COOPER Line U- 0 Q. What are the financial measures included in the Company s incentive compensation plans? A. The financial measures of the Company s incentive compensation plans relate to three categories: ) earnings, ) cash flow and ) total shareholder return. Specifically, the LTIP measures include DTE Energy s total shareholder return relative to its peer group, DTE Energy s Funds from Operations relative to its debt and DTE Gas s average return on equity. These measures are evaluated over a threeyear period to foster an emphasis on sustained performance. The Company s Annual Incentive Plan (AIP) and Rewarding Employees Plan (REP) for DTE Gas employees include financial measures related to DTE Gas s Operating earnings, DTE Gas s Adjusted cash flow and DTE Energy Operating earnings per share. The financial measures for employees of DTE Energy Corporate Services LLC (DTE LLC) relate to DTE Energy s Operating earnings per share and DTE Energy s Adjusted cash flow. 0 Q. Have you quantified the customer benefits related to these measures? A. Yes. As reflected on Exhibit A-, Schedule I and explained in my Direct Testimony, the total quantified customer benefits of the Company achieving Target performance levels for its financial measures are $0. million compared to the related incentive compensation expense of $.0 million, which produces a net customer benefit of $. million, as summarized in the table below: MSC Rebuttal -

27 M. S. COOPER Line U- LTIP AIP REP Total ($000's Omitted) Cash Flow Measures,0,0,00, Earnings Measures,, Total,0,0,0 0, Incentive Expense,0,00,0 Net Benefit/(Cost) (0),0, While the net customer benefit related to the LTIP is negative, that net cost is more than offset by the net customer benefit related to the AIP and REP. Since the financial measures produce an overall net customer benefit, the incentive compensation expense related to financial measures should be included in the Company s projected revenue requirement. 0 Q. What are your thoughts about excluding the portion of incentive compensation expense related to the financial measures from the Company s projected revenue requirements without regard to the overall reasonableness of the Company s total compensation practices? A. Excluding incentive compensation related to financial measures without regard to the overall reasonableness of the Company s total compensation practices cannot be justified and misses the forest for the trees. The Company s compensation policy is to provide total compensation that is sufficient to attract and retain employees with the skills, training and expertise necessary to perform effectively. This total MSC Rebuttal -

28 M. S. COOPER Line U- compensation for non-represented employees consists of base salaries and variable compensation, consisting of both short and long-term plans. While the Company could opt to deliver this total compensation solely through base salaries, without any variable components, this would have the adverse effect of both eliminating the motivational value of providing employee performance incentives but would also increase the Company s benefit costs that are based on annual salaries (i.e., Savings Plan, Life Insurance, etc.). Instead, the Company has opted to design a total 0 compensation program that places a portion of the total compensation into variable compensation plans, which provides the proven performance enhancements related thereto, while also reducing its overall fixed compensation and benefit costs. The fact that a portion of that variable compensation is based on financial measures should not be determinative of whether these costs should be included in the Company s projected revenue requirement. 0 Q. Is the Company s total compensation program reasonable? A. Yes. As reflected on Exhibit A-, Schedule I, total compensation consisting of base salary and short-term incentive for employees as of December, 0 is only 0.% higher than the market median for matched positions. Moreover, for executives, a separate analysis performed by Aon Hewitt shows that total compensation, inclusive of base salaries and all variable compensation is about % less than the average of a group of peer companies. This demonstrates that the Company s compensation practices have resulted in total compensation that is both reasonable and prudent. Thus, there is no reasonable basis to exclude the portion of total compensation that is dependent on financial measures. MSC Rebuttal -

29 M. S. COOPER Line U- Q. What is AG Witness Coppola s proposal regarding the Company s incentive compensation expense? A. Witness Coppola proposes excluding all of the Company s projected incentive compensation expense related to financial measures, or $.0 million, and 0% of the incentive compensation expense related to operating measures, or $. million, for a total proposed exclusion of $. million. 0 Q. What is the basis for Witness Coppola s proposal to exclude all incentive compensation expense related to financial measures from the Company s revenue requirement? A. The apparent basis for Witness Coppola s exclusion of incentive compensation expense is his claim that the plans are too heavily skewed toward measures that he contends only benefit shareholders rather than customers. 0 Q. Do you agree that financial measures disproportionately benefit shareholders rather than customers? A. Witness Coppola summarily concludes that the earnings and cash flow related measures have no direct relationship to customer benefits. Witness Coppola s unsupported conclusion ignores the customer benefits related to ) the maintenance of the Company s current debt ratings and the related avoided increased interest costs and ) the operating and capital cost savings enabled by an organizational emphasis on both short and long term earnings and cash flow targets. These factors result in the quantified customer benefits of $0. million compared to the related incentive compensation expense of $.0 million for a net customer benefit of $. million, as reflected on Exhibit A-, Schedule I and described in my Direct Testimony. MSC Rebuttal -

30 M. S. COOPER Line U- Q. What are Witness Coppola s objections to the identified savings associated with the operating measures? A. Witness Coppola observes that Exhibit A-, Schedule I reflects net customer benefits of $.0 million, which reflects total quantified benefits of $. million. Of the $. million of total benefits, the largest savings were $0. million related to the Financial Measures and $. million related to the measure of Employee Engagement. Witness Coppola then concludes, These metrics relate more to achieving bottom line operating performance than customer benefits. 0 Q. What are your thoughts concerning Witness Coppola s assertion that the Financial measures and Employee Engagement measures relate more to bottom line operating performance rather than customer benefits? A. I disagree. As I have already explained, the quantifiable customer benefits of the financial measures result from avoided interest costs and reduced revenue requirements arising from the achievement of operating efficiencies. Further, the benefits of improved Employee Engagement relate to improved productivity, reduced absenteeism and fewer safety incidents. These factors allow for both improved customer service and lower operating costs. 0 Q. Did Witness Coppola make any additional observations about your measurement of customer benefits? A. Witness Coppola also observed that the Customer Satisfaction measure reflected quantifiable benefits that were much lower than the related costs. MSC Rebuttal -

31 M. S. COOPER Line U- 0 Q. Is it unusual that the quantified benefits of improved customer satisfaction are low relative to the costs? A. While some measures produce readily quantified benefits, such as a reduction in the level of lost and unaccounted for gas, other measures have customer benefits that are less tangible. The quantified customer benefits of the Customer Satisfaction measures arise as reduced costs of the Company s customer service representatives and less time spent by customers interacting with the Company s customer service representatives, but these benefits fail to capture the entire value of improved customer satisfaction. The frustration realized by customers from billing and service issues are far greater than merely the opportunity costs resulting from the time it takes for customers to talk to a Company representative. The fact that the precise measurement of these savings is not possible, does not imply that the benefits are insignificant. 0 Q. What is the basis for Witness Coppola s proposal to exclude 0% of the incentive compensation expense related to Operating measures? A. Witness Coppola relies on his analysis of the operating performance levels achieved for each of the years 0 through 0. From this analysis he observes that during this period approximately 0% of the Operating measures had achieved Target performance levels or above, as reflected on Exhibit AG-. Q. Do you agree with Witness Coppola s analysis of actual operating performance measures? A. Witness Coppola s calculation of the number of operating measures that achieved performance at Target or above fails to recognize that while certain MSC Rebuttal -

32 M. S. COOPER Line U- measures may produce results that are less than Target, other measures can produce results that are greater than Target. Witness Coppola s exclusive reliance on the achievement of Target fails to recognize the gradients of performance between the Threshold and Maximum performance levels. 0 Q. Have you computed the actual operating performance levels that recognizes the gradients of performance between Threshold and Maximum levels? A. Yes. Exhibit A-, Schedule O, reflects the actual operating measures performance for the years 0 through 0 for both the AIP and REP for all employee groups. Exhibit A-, Schedule O also provides the actual performance relative to not only Target levels, but also in relation to Threshold and Maximum levels. Q. What conclusion do you draw from Exhibit A-, Schedule O? A. This exhibit shows that from 0 through 0, the annual average performance in the Operating measures for the AIP was.% and the annual average performance for the REP was.% for an overall average of 0.%. 0 Q. How were the Average Performance percentages on Exhibit A-, Schedule O determined? A. The Average Performance percentages on Exhibit A-, Schedule O represent simple averages of each actual performance payout for the year. Specifically, the Average Performance for each year was determined by summing the performance percentages for each measure and dividing by the number of measures. For example, for the AIP for DTE Gas in 0, there were eight measures and the actual performance payout percentages ranged from zero to %. The sum of the MSC Rebuttal -

33 M. S. COOPER Line U- percentages for the eight measures was 0%, which is reflected in column (b), line 0 on Exhibit A-, Schedule O as.0. Dividing.0 by eight results in an Average Performance of.%, as reflected on column (b), line on Exhibit A-, Schedule O. The use of a simple average of performance is consistent with Witness Coppola s approach, whereby each individual measure is accorded equal weight. 0 0 Q. Is the use of average annual performance, as reflected on Exhibit A-, Schedule O a more accurate depiction of the Company s historical performance than the method used by Witness Coppola on Exhibit AG-? A. Yes. The average annual performance method reflected on Exhibit A-, Schedule O is a more accurate method of measuring historic performance than the approach used by Witness Coppola. Under the AIP, payouts range from % for Threshold performance to % for Maximum performance with 00% payouts for Target performance. Payouts under the REP range from 0% for Threshold performance to 0% for Maximum performance with 00% payouts for Target performance. Thus, if the actual performance is less than Target but higher than Threshold, payouts under the AIP would range between % to 00% and the REP payouts would range between 0% and 00%. For example, if the actual number of MPSC Complaints in 0 is,, or only one higher than the,0 Target, the payouts under the AIP and REP would be.%. In contrast, Witness Coppola s approach would deem the same actual performance for MPSC Complaints to be less than Target and therefore presume zero payout. Similarly, Witness Coppola s method ignores the impact of performance above Target, which could result in payouts of 0% for the REP and % for the AIP when Maximum performance levels are achieved. MSC Rebuttal - 0

34 M. S. COOPER Line U- While Witness Coppola s approach relies on a simplistic binary model, wherein either Target was met or it was not, the methodology reflected on Exhibit A-, Schedule O recognizes that actual payouts can fall within a wide spectrum of performance. In addition, year-to-year variations in actual Operating measure performance relative to Targets reflect the ambitious goals that are set each year to motivate ever improving operating performance, since performance Targets are generally increased in each year. Thus, even if Targets are not met in one year, customers still benefit from improved performance levels. 0 Q. Is it reasonable to assume that only 0% of the operating performance measures will be achieved in the projected test year? A. The establishment of costs to be reflected in the Company s revenue requirement is subject to various uncertainties, but the goal is to establish costs within the revenue requirement at the levels that are most likely to be incurred. In this instance, it is reasonable to assume that the Company will achieve overall Target performance levels for the AIP and REP, even if some individual Target outcomes may be below Target and others may be above Target. Thus, it is reasonable to include all the incentive compensation expense related to the operating measures in the Company s projected revenue requirement. 0 Supplemental Savings Plan Q. What adjustment did the MPSC Staff make to the Company s projected benefits expense? A. Witness Welke proposes the elimination of $0. million of expense related to the Supplemental Savings Plan (SSP). MSC Rebuttal -

35 M. S. COOPER Line U- Q. What was the basis for Witness Welke s elimination of the SSP expenses? A. Witness Welke characterized the costs as being a supplement offered to a select and highly compensated group of employees and similar to the Executive Supplemental Retirement Plan (ESRP) expenses disallowed by the Commission in its Order in Case U- in a Consumers Energy electric rate case and other cases. 0 Q. What are your thoughts with regard to Witness Welke s recommendation? A. I disagree. Witness Welke s proposed exclusion of the SSP expenses based on his conclusion that it is similar to the ESRP overlooks the fact that the benefits provided through the SSP are exactly the same for these plan participants as any other employee and thus the incremental expense of providing SSP benefits is no different than for the benefits provided to all other employees. In contrast, the ESRP in dispute in the cases cited by Witness Welke represented supplemental retirement benefits in excess of those provided under the qualified retirement benefit plans. 0 The only reason these benefits are provided through the SSP is that the Internal Revenue Code (IRC) prescribes certain annual limits on either earnings or contributions within qualified benefit plans. Because of the limitations of the IRC, the Company has the SSP, as a non-qualified plan, to enable employees who exceed either the annual earnings or contribution levels of the IRC to continue to participate with the same benefits of the qualified savings plan. The SSP is merely a makewhole plan to avoid employees being deprived of savings plan benefits that they would have earned in the absence of the IRC limitations. Since there has been no demonstration that the qualified savings plan is unreasonable, which serves as the basis of the SSP, it is unreasonable to exclude the costs of the SSP just because of the MSC Rebuttal -

36 M. S. COOPER Line U- IRC limitations. Q. Has the Commission addressed the issue of the SSP in prior cases? A. Yes. In the Commission s Order in Case U-, a Detroit Edison rate case filed on April, 00, the Commission disallowed the costs related to the Company s non-qualified pension plans, but allowed the inclusion of the SSP in the Company s revenue requirement. The circumstances that allowed for a different treatment of the SSP have not changed. 0 Q. Does this conclude your rebuttal testimony? A. Yes, it does. MSC Rebuttal -

37 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) DTE GAS COMPANY for authority to ) to increase its rates, amend its rate ) schedules and rules governing the ) Case U- distribution and supply of natural gas, ) and for miscellaneous accounting authority ) ) REBUTTAL TESTIMONY OF HENRY J. DECKER

38 Line DTE GAS COMPANY REBUTTAL TESTIMONY OF HENRY J. DECKER Q. What is your name, business address and by whom are you employed? A. My name is Henry J. Decker. My business address is: One Energy Plaza, Detroit, Michigan. I am currently employed at DTE Gas Company (DTE Gas or Company) as Director, Gas Sales and Marketing. Q. Did you file direct testimony in this proceeding on behalf of DTE Gas? A. Yes, I did. 0 Q. What is the purpose of your rebuttal testimony? A. The purpose of my testimony is to rebut the testimony of: ) The Retail Energy Supply Association (RESA), specifically Witness Joseph Oliker s, position on the content and intent of the Gas Customer Choice enrollment notification postcard utilized by DTE Gas, ) RESA Witness Mehling s proposal to allow EUT customers to be combined into groups or pools for purposes of nominations and storage balancing, ) The Attorney General s (AG) Witness Coppola s recommended End-Use Transportation sales forecast volumes for the projected test year, and ) Witness Coppola s recommended Off-system Transportation and Exchange Revenue. 0 Q. Are you sponsoring any exhibits? A. Yes. I am sponsoring the following exhibit. Exhibit Schedule Description A- P Compare MI Gas Website HJD Rebuttal -

39 H. J. DECKER Line U- Q. Was this exhibit prepared by you or under your direction? A. Yes, it was. 0 Enrollment Notification Postcard Rebuttal Q. Does DTE Gas send a Customer Notice Letter to customers who switch to an Alternative Gas Supplier (AGS) as stated on page line of Witness Oliker s Direct testimony? A. DTE Gas sends the customers who have been enrolled with an AGS an enrollment notification postcard, not a letter. My testimony will henceforth reference the enrollment notification postcard. Q. When did DTE Gas start sending customers the notification postcard? A. DTE Energy started sending the notification postcard the second quarter of 0, approximately six years ago. 0 Q. Was the content of the notification postcard formally approved by the MPSC? A. DTE Gas is not required to obtain MPSC approval prior to communicating with its customers. However, prior to releasing the postcard, DTE Gas and the MPSC Staff engaged in dialogue about the postcard, and DTE Gas incorporated the Staff s input into the message. Q. What information does DTE Gas convey to customers via the enrollment notification postcard? A. As depicted on Witness Oliker s Exhibit RES-, the postcard contains the following facts: HJD Rebuttal -

40 H. J. DECKER Line U-. The name of the AGS who enrolled the customer. When the $0 switching fee will apply. DTE Gas s currently effective GCR rate, and the fact that the rate may vary monthly. The phone number of the AGS where customers may call to obtain more information. The duties DTE will continue to perform after the customer switches to the AGS. Additional sources of information pertaining to the lock in feature and the gas choice program in general 0 0 Q. Why does DTE Gas send customers the enrollment notification postcard? A. There are several reasons, all of which are tied directly to customer satisfaction. First and foremost, customers complained that they were switched without their knowledge. The postcard addresses this concern by providing the customers with a timely and official notice of the enrollment. Second, customers complained about the $0 switching fee, stating they were unaware of this fee at the time of enrollment. The postcard clearly explains when the $0 fee will apply. Third, the postcard provides customers with a point of reference for rate comparison purposes. This is achieved by including DTE Gas s currently effective GCR price in the message. Finally, the postcard serves to educate customers about the lock in option, and to direct customers to visit DTE s website to learn more about the Gas Choice program. In summary, the notification postcard is designed to convey critical facts to customers in a clear and concise manner. Q. Is the content of DTE Gas s enrollment notification letter anti-competitive and misleading? HJD Rebuttal -

41 H. J. DECKER Line U- A. No, it is not. On page, lines, Witness Oliker states the notification postcard is anti-competitive and misleading, and argues that the inclusion of the GCR price creates an anti-competitive environment in Michigan. There is nothing misleading or anti-competitive about the message. DTE clearly provides its currently effective GCR rate, and states that the rate may vary monthly. The postcard provides the AGS name and phone number, and advises customers to contact the AGS with questions related to pricing and conditions. Contrary to Witness Oliker s statements, the content of the notification postcard is entirely factual, and provides the customer with transparency. 0 0 Q. Should the notification postcard include information about the various characteristics or potential benefits of an AGS s offering? A. The AGS is ultimately responsible for explaining to customers the terms and conditions of its offering(s) and the potential benefits. On page, lines, Witness Oliker references a convoluted plethora of AGS product attributes that may be important to customers, and complains that the notification postcard does not disclose these attributes. It is not the utility s role to educate customers on the AGSs products or offerings. Rather, the logical entity to provide this information is the merchant itself that is, the AGS. Hence, DTE Gas includes the AGS s name and phone number on the postcard, and advises the customer to call the AGS for additional information. A customer call of this nature presents an opportunity for the AGS to fully explain its offer and ensure the customer understands the benefits. Q. Is it appropriate for DTE to include its currently effective GCR price in the notification postcard? HJD Rebuttal -

42 H. J. DECKER Line U- 0 A. Yes. On page, lines 0, Witness Oliker states that the postcard should not include the GCR price as a comparison rate. He further states that customers should be directed to compare prices on the MPSC s website. The website in question is the Compare MI Gas website which is administered by the MPSC Staff. As shown on Exhibit A-, Schedule P, this website prominently displays the price to compare as the utility s effective GCR rate. As Witness Oliker himself states on page lines and page, line, of his Direct testimony, the Staff spent considerable time and resources developing the website, and hosted a collaborative session as part of the endeavor. Part of the outcome was the decision to include the utility s GCR rate as the comparison rate at the top of the Compare Offers page. Because the Company s GCR rate is publicly posted by the MPSC for comparison purposes, it is appropriate for DTE Gas to include the rate in the enrollment notification postcard. 0 Q. Does the enrollment postcard contain disparaging messages regarding AGS offerings? A. On page, lines, Witness Oliker claims that DTE s notification postcard clearly encourages customers to remain on the GCR rather than shop for their natural gas with an AGS. He goes on to assert that DTE is sending customers disparaging messages regarding AGS offerings, yet provides no specific evidence supporting his accusations. As I previously stated, the notification postcard is factual and concise. Nowhere does the message serve to encourage or discourage customers from enrolling with an AGS, and contains no disparaging comments about AGS offerings. Q. What is the nature and intent of the content included in DTE Gas s Gas Choice webpage? HJD Rebuttal -

43 H. J. DECKER Line U- 0 A. The information included on the webpage is informative, factual, and educational in nature. The intent is to educate customers to inform their decision-making process. As shown on Exhibit RES- (JOL-), the opening statement on the webpage clearly informs customers that Gas Customer Choice is a program approved by the MPSC, and that customers may now choose their natural gas supplier. The first paragraph after the opening statement again references that the program is approved by the MPSC. Witness Oliker claims the website information is warning of shopping with an AGS (page line 0). This is incorrect. The information is largely framed in a Q and A format intended to educate. Moreover, the webpage encourages customers to compare regulated utilities to alternative gas suppliers, and provides a link to the MPSC s Compare MI Gas website. 0 Q. Should the Commission accept RESA s objection to the postcard? A. RESA s objection to DTE Gas s enrollment notification postcard is perplexing. As explained above, the content of the postcard is solely factual and provided for educational purposes only. It is not anti-competitive, and Witness Oliker has not identified any content that could be construed as anti-competitive. If the customer understands the terms and conditions of the agreement they ve entered in to, all parties benefit. On the other hand, if uncertainty exists, and the customer calls the AGS for clarification, an opportunity is created. Specifically, the AGS may use this personal customer touch point to clarify its offer and explain the benefits of enrollment. HJD Rebuttal -

44 H. J. DECKER Line U- 0 RESA Witness Mehling EUT Pooling Rebuttal Q. What is your understanding of RESA s EUT pooling proposal? A. Witness Mehling s explanation of pooling is vague and inconsistent with NAESB s formal definition of pooling. It appears his proposal consists of two primary elements. The first element relates to nominations. It appears RESA proposes to permit suppliers to nominate gas supply for multiple EUT customers to a single virtual delivery point. The second element would allow a supplier to group the storage allocations for specific EUT customers into a single aggregated group. This grouping would allow the supplier to net deliveries and usage for those customers to minimize Unauthorized Gas Usage and Load Balancing charges. 0 Q. Does the Company support RESA s EUT pooling proposal? A. As explained subsequently, RESA s position is vague, devoid of factual evidence, simplistic, and based on inaccurate assumptions. Additionally, Witness Mehling makes numerous unsupported claims that RESA s proposal will reduce time, effort and administrative costs for the suppliers, and asserts that the associated savings will trickle down to EUT customers in the form of more competitive pricing. RESA has significantly understated the complexity and cost of its pooling proposal. RESA s proposal appears to be an attempt to leverage Company load balancing storage assets, the costs of which are in customers rates, under the guise of benefits to EUT customers. This proposal would be detrimental to the Company s customers and would not be subject to Commission oversight. Q. Has pooling been proposed in a prior Company general rate case? A. Yes. An affiliate of one of RESA s members, Constellation New Energy-Gas HJD Rebuttal -

45 H. J. DECKER Line U- (CNEG), intervened in the Company s general rate case U- proposing pooling for the Company s EUT customers. 0 Q. What position did the Company take with respect to CNEG s EUT pooling proposal in Case U-? A. In Case U-, the Company testified that CNEG s pooling proposal did not justify any benefit to the Company s EUT customers. The Company also stated that the pooling proposal shifted an administrative burden to the utility, would require costly changes to the Company s nomination and billing systems, and would primarily benefit the gas suppliers. The Staff also opposed the pooling proposal in U-. Q. What did the Commission rule in the Company s Case U- with respect to CNEG s pooling proposal? A The Commission denied CNEG s request for pooling in Case U-. The Commission found that pooling would reduce customer flexibility. The Commission also found that CNEG had failed to demonstrate that pooling would benefit anyone other than the gas suppliers. 0 Q. Has pooling been proposed in other Michigan Public Service Commission proceedings? A. Yes. CNEG also advocated for EUT pooling in Consumers Energy s general rate case U-. RESA also filed a request for pooling in Consumers Energy s current general rate case U-. Consumers Energy objects to RESA s pooling proposal in case no. U-. HJD Rebuttal -

46 H. J. DECKER Line U- Q. What did the Commission rule in Consumers Energy s Case U- with respect to the EUT pooling proposal? A. The Commission s order in Consumers Energy s Case U- also denied CNEG s request for pooling. The Commission found that the weight of the evidence showed the suppliers would benefit from pooling because it would make it easier for suppliers to manage supplies, but could harm Consumers EUT customers by limiting flexibility within a particular month. The Commission also raised serious concerns about the potential effects pooling could have on GCR customers. 0 Q. How does RESA s pooling proposal in this case compare to the pooling proposed in prior Case Nos. U- and U-? A. There is no identifiable difference. RESA s proposed pooling in this case makes numerous unsupported claims identical to the pooling proposal in the Company s Case U- and Consumers Energy s Case U-. In both cases, the Commission found that the pooling proposal was not supported. The Commission should conclude the same in this case. 0 Q. Do you agree with RESA s assertions that the Company has no pooling? A. On page, lines, Witness Mehling claims there is no pooling today on the Company s system. As explained below, the Company does currently provide pooling. Q. How does Witness Mehling define pooling? A. Witness Mehling, on page, lines through, defines pooling as simply the grouping of transportation service customers that are all being supplied by the same HJD Rebuttal -

47 H. J. DECKER Line U- supplier. It allows suppliers to make a single supply nomination to a group of customers instead of numerous individual nominations. The customers usage is then offset by the pool supply. Q. How does NAESB formally define pooling? A. NAESB defines pool balancing as: () The aggregation of gas from multiple physical and/or logical points to a single physical or logical point, and/or () the disaggregation of gas from a single or logical point to multiple physical and/or logical points. (NAESB Nominations Related Standards.., See C.F.R. 0.(a)()(ii)(00) incorporating by reference NAESB Standards) Q. Does the Company currently provide pooling as formally defined by NAESB? A. Yes. Currently, each EUT supplier on the Company s system has a virtual (or logical) pooling point. The supplier nominates gas from physical receipt points on the Company s system (typically interconnects with interstate pipelines or Michigan production points) to its logical pooling point. Once the supply has been entered, the supplier nominates gas from its logical point to the delivery points associated with the specific EUT customers it serves. This practice is consistent with NAESB s definition of pooling. 0 Q. Do you agree with RESA s assertions regarding the administrative burden associated with the current EUT nomination process? A. On page, lines, Witness Mehling insinuates that the current EUT nomination process is overly burdensome. It is unclear to DTE Gas why RESA believes the process is overly burdensome. To nominate on DTE Gas s system, a HJD Rebuttal - 0

48 H. J. DECKER Line U- 0 supplier nominates gas from physical receipt points to its logical receipt point, then the supplier nominates to the delivery points associated with the specific EUT customers it serves. These nominations can be entered once into enominator (The Company s electronic nomination system) with a date range encompassing the entire calendar month. Because the EUT customers enjoy the benefits of monthly balancing, their suppliers seldom change the nominations during the month. If a midmonth change is required, the supplier only needs to change the quantity associated with the EUT delivery point, and resubmit the nomination. The nominations may also be copied to a subsequent month, allowing the supplier to automate every aspect of the nominations process apart from changing the supply volume, if necessary. 0 Q. Is Mr. Mehling s implication that the Company s Gas Choice program is a comparable pooling concept true? A. The Company s Gas Choice program is designed to serve residential and smaller commercial customers. These customers do not enter into contracts with the Company, nor are they allocated self-managed storage rights. Moreover, Gas Choice suppliers are subject to specific daily flowing supply requirements that are predetermined by the Company, and do not manage storage or other assets necessary to serve their customers. Rather, this function is performed by the Company. Also, the Gas Choice customers are not subject to penalties and are billed based solely on their actual consumption, with no need to identify specific quantities nominated on behalf of each customer. The profile of a Gas Choice customer is starkly different than that of an EUT customer. It is inappropriate to compare EUT pooling to the Company s Gas Choice program. HJD Rebuttal -

49 H. J. DECKER Line U- 0 Q. Are Mr. Mehling s allegations that pooling is a common industry practice and many monthly balanced utilities offer pooling useful in determining if DTE Gas should offer pooling? A. Mr. Mehling identifies two gas utilities that have pooling rate riders but does not explain why these two examples support pooling for the Company s EUT customers. Nor does he explain how these other utilities pooling mechanisms compare with the NAESB definition. One rate rider became effective mid-year 0, so the effectiveness of this mechanism has not yet been demonstrated. The second rate rider is only available to a customer that takes service at a single point of metering. Mr. Mehling does not explain how this limited availability rider parallels the Company s EUT customers situation, many of which have multiple meters. He also points to other utilities located in the Midwest that have some form of pooling, but does not support why this vague statement has any relevance to the Company s system or the Company s customers. 0 Q. Witness Mehling asserts on Page, lines - 0 that pooling will reduce costs to the supplier and customer. Do you agree? A. First, as explained above, Witness Mehling s unsupported cost savings claim is based largely on his false assertions that RESA s version of pooling will significantly reduce administrative time associated with the Company s current EUT nomination process. He then asserts that by reducing the supplier s scheduling overhead, the cost savings will trickle down to the customers. There is no transparency for customers, or the Commission, to determine if any cost savings will trickle down. Even assuming his argument was true, which is unlikely based on DTE Gas s nomination HJD Rebuttal -

50 H. J. DECKER Line U- process, Witness Mehling provides no proof of cost savings. His assertion is unsubstantiated and without merit. Q. Witness Mehling provided a balancing example on Page of his testimony. Do you agree with Mr. Mehling s example? A. This overly simplistic example does not demonstrate any meaningful cost savings for the suppliers or customers and there is no basis as to why this example is relevant. 0 Q. Do you agree with Witness Mehling s, proposal on page, lines and page, lines that balancing charges be netted within a pool and assessed to the supplier versus the specific EUT customers? A. Under RESA s proposal, the supplier would determine how to allocate penalty costs among the EUT customers within the pool. The methodology would be based solely on the supplier s discretion, and the Commission would have no oversight. It should be concerning to the Commission that RESA provides no explanation of how such an allocation would be calculated, nor does Witness Mehling provide any evidence that the chosen allocation methodology would be fair to customers. 0 Q. Do you agree with Witness Mehling s claim that the Company should experience reduced administrative costs if pooling were adopted? A. On page, lines, Witness Mehling alleges that if EUT pooling were adopted, the Company would monitor fewer accounts, verify fewer nominations and storage banks. He goes on to claim that after initial start-up costs, the utility should experience reduced manpower and invoicing costs. This is false. As demonstrated HJD Rebuttal -

51 H. J. DECKER Line U- earlier, the Company s existing EUT nomination process is flexible and time effective. Additionally, the number of accounts reviewed and invoices generated each month would be unaffected under RESA s proposal. 0 Q. Do you agree with Witness Mehling s assertion that pooling would likely increase supplier options for EUT customers? A. In his direct testimony, page, lines 0, Witness Mehling states it is likely that there are suppliers who simply do not participate in DTE Gas gas transportation program today because pooling is not allowed. Witness Mehling s claim is pure speculation, and again based on the mistaken belief that the Company does not allow suppliers to submit a single nomination to serve multiple EUT customers. One could likewise speculate that there are suppliers who would not participate in the Company s gas transportation program if the Company allowed pooling. Moreover, approximately 0 suppliers are currently nominating on behalf of EUT customers. The Company s EUT customers have plentiful options in selecting a supplier. 0 Q. Does Mr. Mehling s testimony sufficiently address the system and administrative changes and associated costs required to implement RESA s pooling proposal? A. On page, lines, with no proof whatsoever, Witness Mehling casually mentions that after initial start-up costs, the utility should experience reduced manpower costs and lower invoicing costs. He completely ignores the fact that startup costs would include significant modifications to the current nomination and billing systems, the cost of which is unknown. HJD Rebuttal -

52 H. J. DECKER Line U- 0 Q. Are you persuaded by Witness Mehling s claim on page, lines, that suppliers can extract more value from the same amount of storage and pass that value back to the EUT customers? A. Witness Mehling s comments reveal the self-serving nature of RESA s proposal. The Company maximizes its assets to generate additional revenue, resulting in measurable cost savings to all customers in the form of reduced rates. Allowing an unregulated third party to extract value from these assets would deprive the Company s customers of the cost offsets they currently enjoy. Furthermore, Witness Mehling offers no proof of how, or if, such benefits would be returned to EUT customers. In Case Nos. U- and U-, the Commission also recognized that pooling would benefit no-one other than the suppliers. Q Does Mr. Mehling s testimony on Page, lines adequately address how his pooling proposal will impact other customers or system reliability? A. Witness Mehling offers no evidence supporting his claim that pooling will not impact other customers and will have no adverse impact on system reliability. 0 Q. Do you have any concerns with Mr. Mehling s statement that pooling should not result in suppliers adjusting their pool nominations in response to market prices? A. Yes. On page, lines of his testimony, Witness Mehling states that should suppliers engage in such behavior, the Company can implement critical period restrictions. The Company s critical gas operation plan, which includes operational flow orders (OFO) for EUT customers, is designed to protect the integrity of the system and to prevent customer curtailments during extreme conditions. Mr. HJD Rebuttal -

53 H. J. DECKER Line U- Mehling s comment is cavalier and irresponsible. The Company has never subjected its EUT customers to an OFO because it has always taken all measures necessary to prevent such action. Witness Mehling s testimony calls attention to the fact that the presence of one or two very large EUT pools could seriously disrupt the Company s system operations leading to serious consequences for all customers. 0 0 Q. On Page of Witness Mehling s testimony, he lists out several recommended pooling conditions. Do you agree with these conditions? A. The Company has soundly demonstrated why Mr. Mehling s pooling proposal should be rejected in its entirety. The list of items on Page of Mr. Mehling s testimony reflect a continuation of inaccurate and unsubstantiated facts. For example, Item on Page of his testimony states the Company should be required to Calculate and assess any excess pipeline costs surcharge based upon the net imbalance of a supplier s pool. The term pipeline costs surcharge has absolutely no meaning in the Company s EUT tariffs. Further, Item on the list would require the Company to Establish the Pool Contracted Storage ( PCS ) as the sum of all of the individual pool member Annual Contract Quantity ( ACQ ) times 0%. This requirement is entirely off base, as the Company s current XXLT rate allocates just % of ACQ to the XXLT rate customers. Finally, there is no support for Item which states that monthly injection rights should be tallied based on the sum of individual pool members, and RESA s proposal completely overlooks withdrawal limitations. Q. What is the Company s position on the tariff changes proposed by Witness Mehling? HJD Rebuttal -

54 H. J. DECKER Line U- A. The Company has demonstrated that RESA s pooling proposal is inconsistent with NAESB s definition of pooling, and that the Company currently provides pooling as defined by NAESB. Moreover, the Company has demonstrated that RESA s proposal is vague, devoid of factual evidence, self-serving, and based on inaccurate assumptions and unsupported trickle down benefits. As such, the corresponding tariff changes reflect these inconsistencies, omissions and errors in RESA s proposal and should not be adopted. 0 0 Q. What are your conclusions concerning RESA s pooling proposal? A. RESA s pooling proposal should be rejected in its entirety. RESA s proposal is similar to that proposed by CNEG in the Company s Case U- and Consumers Energy s Case U-. In both cases, the Commission rejected the pooling proposal for the reasons described earlier. Moreover, the Company is concerned, and the Commission should be as well, that RESA s pooling proposal would transfer control of Company assets to unregulated suppliers who are not regulated by the Commission, and would also deprive the Company s other customers of the cost offsets they receive today. The Company s EUT program has worked extremely well for customers and suppliers for several decades. RESA has not demonstrated that the changes embedded in its pooling proposal would add any value to anyone other than suppliers. AG Witness Coppola EUT Volumes and EUT EWR Rebuttal Q. The AG s Witness Coppola proposes increasing the Company s EUT projected volumes by 0. Bcf. Do you agree with the AG s proposed increase to the EUT volumes? HJD Rebuttal -

55 H. J. DECKER Line U- A. 0 Q. Why are the Company s and the AG s EUT volume projections different? A. There are two reasons. First, for the reason provided in my direct testimony in this case, the Company s EUT volume forecast for the projected test year includes adjustments to EUT volumes for power generation customers. I use a -year historical average volume calculation for this adjustment. The AG s EUT volume projection is based on using a -year historical volume calculation. Second, Witness Coppola rejects that EUT volumes are reduced through EUT customer participation in the Commission approved Energy Waste Reduction program. Q. What is Witness Coppola s basis for using -year average historical volumes in projecting the Company s EUT volumes used by its power generation customers? A. Witness Coppola claims there is an uptrend in usage by these customers over the past years and will continue to increase as natural gas becomes the generation fuel of choice to replace coal. 0 Q. Is Witness Coppola s claim that the trend into natural gas for power generation will result in these customers using more gas in the test year correct? A. Witness Coppola provides no facts to support why the specific power generation EUTs on DTE Gas s system will increase as more power generation moves away from coal fueled generation to natural gas fueled generation. It is well publicized that new power generation in the State is evolving toward a balance between renewables and natural gas rather than almost entirely to natural gas fueled. Only one natural gas HJD Rebuttal -

56 H. J. DECKER Line U- power plant has been commercialized from the historical test year to the projected test year and that natural gas plant was not constructed in the Company s gas service territory. Further, no new natural gas fired power plants are targeted for commercial operation within the Company s natural gas service territory by the end of the projected test year. Witness Coppola s generalization concerning replacement natural gas power plants has no impact in this case. 0 0 Q. Is Witness Coppola s claim that warm weather has no impact on power generation usage correct? A. On page of Witness Coppola s testimony, he claims that the warm weather experienced during 0 had no impact on the Company s projected EUT volumes used by its power generation customers because warm weather in 0 did not result in similarly higher power generation usage. This conclusion is incorrect. The cooling degree days (CDD s) recorded during 0 ( CDDs) were % higher than 0 ( CDDs), % higher than the 0-year average CDD s (0 CDD s), and % higher than the CDD s recorded in 0 ( CDDs). These facts show that valid comparison cannot be made between 0 s warmer weather and 0 s warmer weather without adjusting for the difference in the CDDs. In fact, the CDD s during 0 were the highest recorded by DTE Electric Company since it started capturing CDD data in the past years. As evidenced by the data, very warm 0 weather had an impact on the Company s EUT historical test year volumes used by its power generation customers. Q. Why has the Company used a -year historical average calculation to project the EUT volumes consumed by the Company s power generation customers? HJD Rebuttal -

57 H. J. DECKER Line U- 0 A. The Company s power generation customer volumes vary significantly due to weather, gas prices, and power plant outages that are not easily forecasted. The Company s -year average methodology captures a broad a range of warm and cold winter weather conditions including the historically cold winter of 0, warm and cool summer weather conditions including the warm summers of 0 and 0 and the cool summer of 0, higher gas prices experienced during 0 to 0 and low gas prices of early 0. This wide variety of factors provides a more representative reflection of average usage for these customers than the AG s calculation. Limited to using only 0 to 0 gas volumes, AG s calculation does not represent the variability in the Company s EUT power generation volumes. Q. What basis does Witness Coppola use to propose increasing the Company s EUT volumes by. Bcf for energy waste reduction (EWR) initiatives? A. Witness Coppola completely rejects the Company s Commission approved EWR program as it has been applied to the Company s EUT volume forecast. He does not provide an alternative EWR calculation or volume projection. 0 Q. What is your recommendation on EUT volume reductions due to the Company s EWR initiatives? A. Witness Coppola s proposal concerning EWR volume reductions should be rejected since it is absent any basis or supported facts. The Company s EWR reductions for EUT customers should be accepted. HJD Rebuttal - 0

58 H. J. DECKER Line U- Q. What is your recommendation on EUT volumes? A. Witness Coppola s proposals to adjust the Company s EUT power generation customer volumes and eliminate EWR volume reductions for the projected test year s forecast should be rejected. My testimony supports a total EUT volume forecast during the projected test year of. Bcf, as filed. 0 AG Witness Coppola Off System Transportation and Exchange Revenue Q. Do you agree with Witness Coppola s testimony indicating Off-System Transportation revenue should be $. million rather than $. million? A. Witness Coppola s $. million increase to Off-System Transportation revenue is overstated. Witness Coppola made several erroneous calculations and assumptions, overstating revenue by $. million. My testimony below will show that the appropriate Off-System Transportation revenue projection is $. million. Q. How does Witness Coppola calculate his total revenue projection of $. million? A. Witness Coppola calculated his revenue projection as follows: Historical Revenue: $. M 0 NEXUS Revenue:. M (incorrect, should be $.) 0 Forecast: $. M DTE Gas does not use this method to calculate its forecasted revenues nor is it an appropriate method to use to forecast Off-System Transportation revenues. As noted on page of my direct testimony, $. million is the amount of Off-System transportation that is currently sold and under contract. This amount includes the NEXUS Capacity lease agreement. HJD Rebuttal -

59 H. J. DECKER Line U- 0 Q. Why isn t historical revenue adjusted for known changes an appropriate method to use to forecast Off-System Transportation? A. As explained in my direct testimony, page, Off-System Transportation revenue is a result of assets available for sale and market demand for services. Prior period revenues are not a reliable predictor of future revenues. Using volume and revenue achieved historically as a predictor of future Off-System Transportation revenue is irrelevant, given significant changing market dynamics, specifically production resulting from the prolific Utica and Marcellus shale formations. Because of these changing market dynamics, in 0, long-term contracts expired and were unable to be replaced. There is an additional contract expiring in 0 that will not be renewed. 0 Q. Is Witness Coppola correct in concluding that existing capacity was not sold to NEXUS as part of the NEXUS Capacity Lease Agreement, resulting in a $. million understatement of revenue in DTE s forecast? A. In Sections.0(a) and (b) of the NEXUS lease agreement (Exhibit A-, Schedule M), tiered rates for deliveries to Union St. Clair (0,000 Dth/d at $0.0/Dth) and Vector Belle River (,000 Dth/d at $0.0/Dth and,0 at $0./Dth) represent the step change for existing capacity at the time the lease agreement was executed versus incremental capacity. The $. million represents contracts along the existing path sold to NEXUS as outlined in the lease agreement. Therefore, $. million is part of the $. million Witness Coppola adds to historical revenues in addition to NEXUS revenues. The $. million is not in addition to the NEXUS revenues. HJD Rebuttal -

60 H. J. DECKER Line U- Q. Does Company Witness Mr. Sloan s testimony in GCR and PSCR cases support incremental revenues above what DTE has forecasted for the test period? A. Witness Coppola points to Witness Sloan s testimony regarding incremental Midstream revenue associated with NEXUS. The incremental revenue referenced by Witness Sloan is part of the $. million annual revenue stream from the NEXUS Capacity Lease Agreement. NEXUS does not otherwise result in incremental revenue for Midstream, and to suggest otherwise is not supported by facts provided by DTE Gas in this case. 0 Q. Do you agree with Witness Coppola s testimony indicating exchange revenue should be $0. million rather than $.0 million? A. Witness Coppola challenges the rate and volumes used for the exchange projection and arbitrarily develops a forecast that is $. million higher than our projection and $. million higher than the historical test period of $. million. 0 Q. Is Witness Coppola correct to claim it is unreasonable and contradictory to project exchange revenues of $.0 million during the test period? A. During the projected test period, NEXUS and Rover pipelines will be flowing Bcf per day through Michigan for delivery to Ontario, Dawn, which will have an impact on the MichCon to Dawn spread. We expect this spread to be lower; however, it is difficult to predict the magnitude. Therefore, we used the historical rate for the forecast period and assumed the volume that we will be able to transact will be lower given the lower spread between MichCon and Dawn. In the historical test period, more than 0% of the exchange volumes were predicated on the MichCon to Dawn spread. HJD Rebuttal -

61 H. J. DECKER Line U- 0 Q. Why is the assumption that volumes will be lower in the projected test period reasonable? A. Union Gas has informed DTE Gas that once NEXUS and Rover pipelines (they are connected to both) are in service, they will no longer be engaging in exchange activity on our system. In the historical test period, 0% of the exchange volumes between MichCon and Dawn were at the Union St. Clair point. The Company does not expect to transact for these volumes in the projected test period. In addition to the Union St. Clair point, another exchange point between MichCon and Dawn has been the Great Lakes St. Clair point. Exchanges at this point were facilitated by a DTE Gas transportation contract for 0,000 Dth/d on Great Lakes Gas Transmission, which expired March, 0 and was not renewed. In summary, we expect a lower MichCon to Dawn spread and fewer opportunities for exchange transactions given changing market dynamics. In our projection, we assumed a 0% reduction to the historical test period volumes to account for the lost opportunity at Union St. Clair, and an additional 0% reduction to account for reduced volumes due to a lower spread. Therefore, the Company maintains an Exchange revenue projection of $.0 million. 0 Q. What is your recommendation for Off-System Transportation and Exchange revenue? A. Witness Coppola s proposals to increase the Company s Off-System Transportation and Exchange revenue for the projected test year should be rejected. I stand by my testimony that supports a total Off-System Transportation forecast of $. million and an Exchange forecast of $.0 million during the projected test year. HJD Rebuttal -

62 H. J. DECKER Line U- AG Witness Coppola Gas In Kind ( GIK ) Rate & Revenue Q. Do you agree with Witness Coppola s proposal to apply a % GIK rate to all transportation customers? A. Witness Coppola s proposal to apply a % GIK rate to all transportation customers is entirely based on his proposal to lower the Lost and Unaccounted For ( LAUF ) Gas expense. Company Witness Ms. Aud s rebuttal testimony addresses Witness Coppola s proposal to lower LAUF Gas expense. Witness Aud stands by her projected LAUF Gas expense and therefore the GIK rate for transportation customers should not be changed. 0 Q. Does this complete your rebuttal testimony? A. Yes, it does. HJD Rebuttal -

63 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) DTE GAS COMPANY for authority to ) to increase its rates, amend its rate ) schedules and rules governing the ) Case U- distribution and supply of natural gas, ) and for miscellaneous accounting authority ) ) REBUTTAL TESTIMONY OF JOI M. HARRIS

64 Line DTE GAS COMPANY REBUTTAL TESTIMONY OF JOI M. HARRIS Q. What is your name, business address and by whom are you employed? A. My name is Joi M. Harris. My business address is One Energy Plaza, Detroit, Michigan. I am employed by DTE Gas Company, (DTE Gas or Company) as Vice-President, DTE Gas, Gas Operations. Q. Did you file direct testimony in this proceeding on behalf of DTE Gas? A. Yes, I did. 0 0 Q. What is the purpose of your rebuttal testimony? A. The purpose of my testimony is to rebut:. The Michigan Public Service Commission (MPSC) Staff Witness Creisher s testimony regarding the acceleration of the Main Renewal Program (MRP) beyond the 0 level of spending.. The Attorney General Witness Coppola s and ABATE Witness Phillips testimonies that the Company s proposal to increase capital spending for the MRP be rejected.. The Attorney General Witness Coppola s testimony that $. million of MRP capital costs in 0 and 0 be disallowed.. The Michigan Public Service Commission (MPSC) Staff Witness Creisher s testimony regarding the disallowance of DTE Gas s full recovery of the proposed MAC MMO program.. The Attorney General Witness Coppola s testimony regarding the disallowance of contingency.. The ABATE Witness Phillips testimony that the IRM surcharge be ended. JMH Rebuttal -

65 J. M. HARRIS Line U- Q. Are you sponsoring any exhibits? A. Yes. I am sponsoring the following exhibit. Exhibit Schedule Description A- R Affordability Analysis 0 Q. Was this exhibit prepared by you or under your direction? A. Yes, it was. MRP Q. What completion date is Staff Witness Creisher proposing for DTE Gas s Main Renewal Program? A. Witness Creisher proposes that DTE Gas complete its MRP program in 0, which results in a -year timeline. However, DTE Gas is proposing to increase funding to achieve a -year timeline. 0 Q. Why does Witness Creisher propose to extend the Company s MRP by six years? A, It is unclear why Witness Creisher believes a year timeline is appropriate. Her testimony claims that given DTE Gas s MRP size and scope in relation to Consumers Energy Company s main replacement program DTE should alter its timeline to achieve the same end date as Consumers Energy Company s (Consumers ) MRP. Q. Do you agree with Witness Creisher s recommendation to extend the Company s MRP by six years? A. No, this recommendation is inappropriate because DTE Gas and Consumers have different risk factors. First, as Witness Creisher notes, DTE Gas has more high-risk JMH Rebuttal -

66 J. M. HARRIS Line U- main than any other gas utility in Michigan. Second, as noted in my direct testimony, DTE Gas s corrosion leaks per mile of metallic main continue to exceed the rate of similar leaks statewide. Exhibit A- Schedule B. demonstrates that DTE Gas experiences. leaks from corrosion per 00 miles of metallic main, which exceeds Consumers rate of. by more than. times. However, Staff does not provide facts that explain why DTE Gas s MRP, which addresses a different system with different risk factors, should be determined by Consumers timeline. 0 Q. Why is the Company proposing 0 as the MRP s completion date? A. The Company proposes increasing the Infrastructure Recovery Mechanism (IRM) capital expenditure levels to achieve completion of the MRP in years or by 0. The Company believes that the level of investment required to complete the MRP in years reflects an optimal balance of operational capabilities and customer affordability with leak reduction and risk. My direct testimony, pages and, provides additional detail on the factors DTE Gas considered when determining how to expand its MRP. 0 Q. Do the historically low natural gas supply costs further support the -year pace from a customer affordability perspective? A. Yes. As referenced in my direct testimony, customer bills are expected to remain flat into 0 compared to rates approved in MCPS Case U-. This stability is due to lower forecasted gas costs offsetting the higher IRM surcharge. The $. per Mcf projected cost of gas for the test period, provided by Company Witness Mr. Chapel, is % lower than the GCR period reflected in MPSC Case U- where the MRP was originally proposed and approved. This cost is the second lowest since the 00 GCR plan in Case U- and only a $0.0 per Mcf above the JMH Rebuttal -

67 J. M. HARRIS Line U- lowest GCR rate during that time. Historically low gas prices will reduce the average residential customer bill to approximately % less than it was in 00, even when coupled with the IRM surcharge. In response to discovery question ADGD-.b, we provided additional customer affordability analysis that supports the low natural gas supply and the -year pace. This analysis is included as Rebuttal Exhibit A- Schedule R. 0 Q. What level of MRP spending do Attorney General Witness Coppola and ABATE Witness Phillips recommend? A. Witness Coppola and Witness Phillips recommend the Commission reject the Company s proposal to include increased capital spending for the MRP in the IRM Surcharge. Q. Do you agree with the recommendation to maintain MRP current spending levels? A. No, increasing the capital spending for the MRP accelerates cycle-time for the retirement of cast iron and unprotected steel distribution main. Every increase in the number of miles renewed and the speed of renewal reduces the risk of a major leak situation. 0 Q. Why does Witness Coppola believe that no increase in MRP investment is necessary? A Witness Coppola claims that DTE Gas has provided no hard evidence or analysis of increased gas leaks. He claims that gas leaks are decreasing over time. However, Witness Coppola s assertions are incorrect. JMH Rebuttal -

68 J. M. HARRIS Line U- Q. What analysis and hard evidence has DTE Gas provided regarding the level of gas leaks? A. DTE Gas has provided leak data, by material type, for both mains and services from 00 through 0. DTE Gas has also provided leak data by region from 0 through 0. This information was originally provided in Exhibit A-, Schedule B. and was also provided to Staff through audit responses. Witness Coppola has included these audit responses as Exhibit AG-. DTE Gas has further provided information showing that MRP eliminates leaks. 0 0 Q. What does DTE Gas s data and analysis reveal? A. Data shows that DTE Gas s system continues to deteriorate even as metallic mains and services are replaced through the MRP. The total number of leaks and the continued incoming number of leaks on DTE s system support the acceleration of the pace of main replacement. In fact, the rate of leaks from corrosion per 00 miles of metallic main for DTE Gas far exceeds that of the state average. See Exhibit A-, Schedule B.. Also, as detailed on pages JMH-0 and of my direct testimony, that rate has not stabilized and has increased at compound annual growth rate of.% for DTE Gas from 00 versus a -.% for the statewide average excluding DTE Gas. This rate showing number of leaks as a factor of metallic main in the system indicates that the remaining cast iron and steel in the DTE Gas system continues to deteriorate. Even when comparing just the quantity of total leaks year over year, as Witness Coppola does in his Exhibit AG-, it is clear that total leaks on DTE Gas s system have not improved nor stabilized. The first page of Witness Coppola s Exhibit AG-, shows, total leaks in 0 versus, total leaks in 0 when the MRP began. In JMH Rebuttal -

69 J. M. HARRIS Line U- the third page of this same exhibit, data shows, main leaks in 0 versus,0 main leaks in 0. 0 If DTE Gas s system was not deteriorating at an accelerating pace, then total leaks would be decreasing more at an increasingly swift rate, thereby showing the impact of the MRP as it has grown over the years. Conversely, if DTE Gas s existing system was not deteriorating at an accelerating pace, then it would be logical to expect the leaks per 00 miles of metallic main to remain steady over the years of the program. However, neither of these outcomes are being observed as the data provided in DTE Gas s exhibits and testimony shows. Q. Are independent engineering studies necessary to determine the rate of deterioration of mains or materials conditions, as Witness Coppola asserts? A. Spending money on engineering studies when data and direct observation provide direct evidence of deterioration would be imprudent. DTE Gas has adequate data to determine that its system is deteriorating at an increasing pace. 0 Q. What does Witness Coppola propose regarding MRP expenditures for 0 and 0? A. Witness Coppola s testimony recommends that $. million of MRP capital costs in 0 and 0 be disallowed. He states that capital expenditures exceeding the amount included in determining the revenue requirements in a prior base rate case should not be allowed to be reflected in the revenue requirement in this case. JMH Rebuttal -

70 J. M. HARRIS Line U- 0 Q. What support does Witness Coppola use to support his recommended disallowance? A. Witness Coppola provides no facts or arguments in support of this recommendation. The capital expenditures included in the U- revenue requirement and the MRP surcharge are amounts approved by the Commission based on what it projects DTE will spend in the test year. However, the Commission s order sets rates; it does not establish a budget for DTE Gas. The IRM limits spending levels as reflected in the surcharge for purposes of contemporaneous recovery. However, additional expenditures not included in the base rate or surcharge revenue requirement are subject to regulatory lag. The additional investments made in 0 MRP expenditures were beyond levels approved to determine the IRM surcharge and were reasonable based on the factors explained in my testimony. 0 MAC MMO Q. What does Staff Witness Creisher recommend regarding recovery of MAC MMO costs? A. Witness Creisher recommends that DTE Gas should only be authorized to recover 0% of the MAC MMO unit costs with a maximum recovery of $,000 per unit. A MAC MMO costs DTE Gas $,00 per unit. Further, Witness Creisher recommends that the Commission require that,000 meters be moved under this program. This recommendation would result in a $ million reduction to rate base annually. Q. Is the $,00 unit cost reasonable for a MAC MMO? A. Yes. The $,00 unit cost is less than what DTE Gas spent on a service renewal (leak) in 0 ($,). DTE Gas is projecting a slightly lower cost for a MAC MMO JMH Rebuttal -

71 J. M. HARRIS Line U- compared to a service renewal as the Company will be focusing on areas where it has the highest number of overdue MAC inspections within close proximity. 0 Q. Why does Witness Creisher propose this disallowance? A. It is unclear why Witness Creisher is proposing this disallowance. She notes that the size of the backlog indicates that the Company failed to conduct MAC inspections when the size and scope of the backlog was more manageable. It is unclear why the size of the backlog should impact the recovery of costs that DTE Gas is going to incur for any expenditure, much less an expenditure that will address an issue that the Staff finds is imperative that the Company take action on. Witness Creisher provides no facts or support regarding why 0% up to a maximum of $,000 is the proper amount for recovery. Witness Creisher cites no facts or generally established regulatory principles that recommend allowing only partial recovery of a cost that is reasonably and prudently incurred for capital that will be used and useful 0 Q. Does Witness Creisher find that the Company s proposed cost for a MMO MAC is excessive on imprudent in some way? A. Witness Creisher s recommendation that only 0% of the costs for a MAC MMO be recovered, at a maximum, indicate that this reduction is arbitrary and not related to any actual cost calculation or prudency adjustment. Q. What is the revenue requirement impact of the cost recovery limit recommended by Witness Creisher? A. Moving,000 inside meters outside at a cost of $,00 would be $0 million annually. Witness Creisher s recommendation includes only $ million of that cost in rate base, a JMH Rebuttal -

72 J. M. HARRIS Line U- permanent $ million rate base reduction. Witness Suchta has calculated that this $ million reduction in rate base has $ million revenue requirement impact. Under Witness Creisher s recommendation, DTE would not be allowed any chance to recover approximately $ million every year, for each year the meters are included at a $,000 cost. In year three of this program, DTE would absorb approximately $. million in costs. 0 Q. Is Witness Creisher consistent in her testimony regarding costs to the Company from the MAC inspection issue? A. On page of her direct testimony, Witness Creisher states that civil penalties would not help the Company ) move meters out or ) complete MAC inspections nor ) would it benefit customers through increased safety or direct rate impacts. The maximum civil penalty the Commission can assess is $00,000. However, Witness Creisher then proposes an even larger penalty for the Company. This penalty will also not ) help the Company move meters out, ) complete MAC inspections or ) increase safety. What this penalty will do is have a direct rate impact. Witness Creisher notes that civil penalties are paid to the general fund, not included in rates. The civil penalties are supported by facts and legislation, unlike the limit on MMO MAC costs. 0 Q. Why has the size and scope of the MAC backlog become less manageable. A. As I describe in my direct testimony, DTE Gas is unable to meet the requirements of CFR Part due to issues with gaining access to customer homes. The inability to access meters is why the Company has implemented the MAC MMO program to move the inside meters outside and recover that cost through the Infrastructure Recovery Mechanism (IRM). JMH Rebuttal -

73 J. M. HARRIS Line U- Q. Is the MAC MMO program the optimal path to eliminate the MAC backlog? A. Yes. The MAC MMO program directly addresses the primary driver for the growth of the backlog which is access to meters located inside the residence. As outlined, this program is a customer-centric approach that reduces risk and minimizes cost by systematically relocating inside meters in areas with high concentrations of overdue inspections. In addition, this process will eliminate the need to coordinate access for any future meter related activities and provides a safe and efficient means to shut-off the gas service in the event of an emergency. 0 0 Q. What other options are available for DTE Gas to eliminate the MAC backlog? A. If DTE Gas is not granted access to customer homes to complete the overdue MAC safety inspections, the Company will be forced to cut and cap approximately,000 gas services to comply with CFR. and. related to service lines and meter assemblies located inside residences or structures. As Witness Creisher states, each inside meter lacking a MAC inspection may be subject to a civil penalty for each rule that is in violation up to the maximum civil penalty level of $00,000. If a customer wishes to have their gas service restored, DTE Gas will make a second visit to the location to renew the service line and relocate the meter resulting in a highly inefficient process driven by customer behavior rather than system risk. The customer will incur a fee of $00. Ultimately, the Company will seek recovery for the remaining cost to reconnect the service and relocate meter to the outside through rate proceedings. Q. What is the cost of a cut and cap and a service alteration-reconnect? A. The 0 unit cost for a service abandonment (cut and cap) was $, and the cost for a service alteration-reconnect was $,. JMH Rebuttal - 0

74 J. M. HARRIS Line U- 0 Overall Q. Do you agree with AG Witness Coppola s testimony recommendations that no contingency should be included for the MRP and MMO programs? A. Yes. There is no contingency included in the capital expenditures for the MRP and MMO programs submitted by the Company in Case U-. As noted in exhibit AG- of Witness Coppola s testimony showing the Company s response to audit request JSG-., the Company had included 0% contingency in the MRP and MMO programs in past cases. However, as shown in the attachments for the Company s response to audit request JSG-., no contingency was included for MMO and MRP in U-. 0 Q. Do you agree with ABATE Witness Phillips testimony that the IRM surcharge should be terminated? A. The IRM surcharge allows DTE Gas to improve the safety of its system. The Commission noted in its order in Case U-0 that the Commission has only two choices either approve a surcharge coincident with implementation of the MRP, or approve the MRP but fix an implementation date that coincides with the issuance of the next rate case order In support of the first option, Mich Con notes that the Commission has already found that cast iron gas main renewal is an important public safety issue and a matter of significant public interest. In U-0, ABATE argued that that Mich Con should get paid for [implementing an MRP] contemporaneously with the construction activities. The use of a surcharge mechanism was approved by the Commission in Case U-0 and the surcharge was re-affirmed in the orders for Case U-, Case U-0 and Case U-. Public safety remains just as paramount today as it did when the Commission approved the JMH Rebuttal -

75 J. M. HARRIS Line U- MRP and IRM in these past cases. For this reason, ABATE s recommendation to terminate the IRM surcharge should be rejected. Q. Does this complete your rebuttal testimony? A. Yes, it does. JMH Rebuttal -

76 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) DTE GAS COMPANY for authority to ) to increase its rates, amend its rate ) schedules and rules governing the ) Case U- distribution and supply of natural gas, ) and for miscellaneous accounting authority ) ) REBUTTAL TESTIMONY OF MARK C. JOHNSON

77 Line DTE GAS COMPANY REBUTTAL TESTIMONY OF MARK C. JOHNSON Q. What is your name, business address and by whom are you employed? A. My name is Mark C. Johnson. My business address is One Energy Plaza, Detroit, Michigan. I am employed by DTE Gas. Q. Did you file direct testimony in this proceeding on behalf of DTE Gas Company (DTE Gas Company)? A. Yes, I did. 0 Q. What is the purpose of your rebuttal testimony? A. The purpose of my testimony is to rebut the following: Attorney General s recommendation to reduce the uncollectible expense revenue requirement Attorney General s recommendation to decrease the Meter Reading O&M expense for the future test year. Staff s position on the LIA Credit 0 Q. What is the Attorney General s recommendation for uncollectible expense? A. The Attorney General is recommending that the Commission adopt a $. million expense level for uncollectible accounts expense on page 0, lines - in Witness Mr. Coppola s Direct Testimony instead of DTE Gas s proposed expense of $. million. Q. What is the lower uncollectible expense amount in 0 referenced in Witness Coppola s direct testimony on page 0, lines -? A. The actual 0 uncollectible expense is $. million. MCJ Rebuttal -

78 M. C. JOHNSON Line U- Q. Is 0 actual uncollectible expense a good indicator of future performance? A. The $. million expense for 0 reflects an atypical result due to different factors that primarily includes warmer than normal weather. Q. How was the projected test period for $. million uncollectible accounts expense calculated in Exhibit A-, Schedule C., column (l), line? A. The projected test period was calculated by using the -year average of uncollectible expense actuals for 0-0, which has been the same methodology employed in previous rate cases. 0 Q. Why is a -year average amount used for the projected test period for uncollectible expense? A. A -year average takes into account the many different factors that drive uncollectible expense to increase or decrease year to year. These factors include weather, economic conditions, and federal low income assistance amounts made available to our customers. Due to the variability of these items, an average is a better representative for future results. For instance, uncollectible expense in Q 0 is up % over Q 0 s performance in part due to the very different weather experienced during those two periods. 0 Q. What is the Attorney General s recommendation in Witness Coppolla s direct testimony on page, lines 0- for forecasted Meter Reading O&M expense for the future test year? MCJ Rebuttal -

79 M. C. JOHNSON Line U- A. The Attorney General is recommending that the Commission remove the amount of $,,000 from the Company forecasted Meter Reading O&M expense for the future test year. 0 Q. How does the Attorney General support that recommendation? A. The Attorney General supports the recommendation using the following assumptions: There will be fewer meter readers needed in the projected test year than in 0. The Company completed the installation of AMI/ Smart meters and new AMR meters in the southeast Michigan service area. Q. Are the Attorney General s assumptions accurate? A. There are close to 0,000 non-ami and non-amr meters that will need to be read manually in 0. This number declines to,000 for 0. These are meters that are still pending AMI or AMR installs. Meter reading services will continue to be responsible for obtaining manual meter reads for non-ami meters (including optout customers and sites where AMI has not yet been installed), and collecting AMR reads using drive-by mobile collection technology. 0 Q. What is Staff s position as stated in Witness Nicholas M. Revere s direct testimony on page, lines - on the Company s request for expanding the LIA Credit? A. Staff s position is that the Company s request for additional funds to expand the LIA Credit amounts to a request for ratepayers to subsidize the LSP program as ratepayers, rather than as taxpayers. MCJ Rebuttal -

80 M. C. JOHNSON Line U- Q. Have LIA credits been shown to be effective? A. As acknowledged in MPSC Staff Witness Mr. Revere s testimony on page, line, the LSP program has proven to be effective to help low income customers, showing lower disconnection rates than customers receiving the LIA or RIA credit without LSP. The primary use of LIA credits has been to support the LSP program which provides benefits to all ratepayers by helping reduce uncollectible expense and collection related operational expenses for the Company. The small number of customers who received LIA credits who were not enrolled on LSP was an insufficient short time frame to draw conclusions about its unique effectiveness. 0 Q. In Witness Revere s testimony on page, lines 0-, why does the Company find it more effective to only apply LIA credits to LSP customers? A. Low income credits alone cannot assist in keeping our most vulnerable customers from disconnection of service. The most vulnerable customers receiving low income credits and the benefits of the LSP program are less likely to be disconnected for nonnonpayment. 0 Q. How does the Company identify who qualifies for LSP enrollment? A. The Company works with agencies who work according to DHHS guidelines to determine who qualifies for LSP enrollment. Funds are not being directed to the LSP program. These agencies conduct LSP enrollments, not the Company. Q. Why should LIA credits be expanded? A. In 0, policy decisions by DHHS to exclude affordable payment plans from receiving any LIHEAP funding dramatically reduced funding sources for low income MCJ Rebuttal -

81 M. C. JOHNSON Line U- payment programs. The low income payment programs have proven to be effective. The only sources to fund these necessary programs are the meter surcharge (which is legislative and not included in base rates) component of MEAP and rate-based credits such as LIA. It is important to note that no taxpayer money is used to fund affordable payment plans. Q. Should LIA have unique reporting requirements? A. No, LIA credits used to support affordable payment plans have a very detailed reporting requirement as part of the grant process. This will be a duplicative request. 0 Q. Do you agree with Staff s recommendation on page, lines - that LIA credits should be directed to LSP graduates? A. While Staff s recommendation may have merit, there is no data to suggest that it would be the best way to use the funds or would prove to be effective. The absence of the scope or size adds to the difficulty in assessing the potential effectiveness. Q. Does this complete your rebuttal testimony? A. Yes, it does. MCJ Rebuttal -

82 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) DTE GAS COMPANY for authority to ) to increase its rates, amend its rate ) schedules and rules governing the ) Case U- distribution and supply of natural gas, ) and for miscellaneous accounting authority ) ) REBUTTAL TESTIMONY OF ALIDA D. SANDBERG

83 Line DTE GAS COMPANY REBUTTAL TESTIMONY OF ALIDA D. SANDBERG Q. What is your name, business address and by whom are you employed? A. My name is Alida D. Sandberg. My business address is: One Energy Plaza, Detroit, Michigan. I am employed by DTE Gas Company as Director, Engineering Services. Q. Did you file direct testimony in this proceeding on behalf of DTE Gas Company (DTE Gas or Company)? A. Yes, I did. 0 0 Q. What is the purpose of your rebuttal testimony? A. The purpose of my rebuttal testimony is to address the following:. Staff and Attorney General s (AG) proposals to exclude capital expenditures classified as contingency. I will show that DTE Gas contingency is an inherent part of project estimates.. Staff s proposal to exclude the capital expenditures for the Lincoln Traverse City 0 Pipe Replacement Project. I will show that the expenditure for the pipe replacement project was prudent.. Attorney General s recommendation to disallow capital expenditures for seven Highest Cost Projects. I will show why the expenditures should be included in rate recovery.. Staff s proposal to exclude capital expenditures from System Reliability for district regulators without take-off valves (TOV). I will show that the expenditures for the compliance related work is justified. ADS Rebuttal -

84 A. D. SANDBERG Line U-. Staff s proposal to exclude capital expenditures from Routine General Plant, Communications and Control Equipment. I will show that DTE provided the information requested.. Staff s proposal to exclude capital expenditures from Routine General Plant, Computers and Related Equipment. I will show that despite not having a detailed workplan for 0, the projected capital expenditures are consistent with the - year historical average. 0 Q. Are you sponsoring any rebuttal exhibits? A. No, I am not. Contingency Q. What contingency expenditures is MPSC Staff proposing for disallowance in this case? A. Staff is recommending that contingency capital expenditures of $. million in the bridge and projected test years be disallowed. 0 Q. Why is Staff recommending contingency expenditures be disallowed? A. Witness Matthews states in his testimony (page, lines -) that Staff recognizes contingency dollars may be important for budgeting purposes. However, due to the uncertainty that they will be spent, does not find the contingency expenditures reasonable and prudent at this time. He, also, shows that the Commission has approved Staff s recommendation for disallowing recovery of contingency expenditures in various cases. ADS Rebuttal -

85 A. D. SANDBERG Line U- Q. Why is it appropriate for the Company to include project contingency in its total capital expenditures request in this proceeding? A. DTE Gas considers contingency an inherent part of project estimates. It is not uncommon to have certain cost categories, such as, labor, outside services, and material, undefined at the time the estimate is prepared. The project estimate, including contingency, is the forecasted spend for the project. Because the Company has full intention of spending the entire project estimate including contingency, it budgets for the full amount. 0 Q. What contingency expenditures is Witness Coppola proposing for disallowance in this case? A. In addition to the $. million disallowance recommended by Staff, Witness Coppola is recommending that IRM contingency capital expenditures of $. million in the bridge and projected test years be disallowed for the IRM Main Renewal and Meter Move Out Programs. Company Witness Ms. Harris addresses these proposals in her rebuttal testimony. 0 Infrastructure Recovery Mechanism Pipeline Integrity Q. What Pipeline Integrity expenditures is MPSC Staff proposing for disallowance in this case? A. Staff is recommending $.0 million be disallowed for the Lincoln-Traverse City 0 pipe replacement (Witness Creisher testimony, page, lines -). Q. Why is Staff recommending capital expenditures for the Lincoln-Traverse City 0 pipe replacement be disallowed? ADS Rebuttal -

86 A. D. SANDBERG Line U- A. Staff s position is that the pipeline replacement completed in 0 was an imprudent and potentially unnecessary capital expenditure because: DTE Gas made modifications to accommodate ILI tools on the pipeline The pipe replacement was speculative without data analysis from an ILI assessment Prior to modifying the pipeline, DTE Gas should have conducted a feasibility review of the risk factors that would make ILI inspection unwise 0 Staff notes that DTE was correct to identify the importance of an outage on the Lincoln-Traverse City pipeline and then goes on to imply that the Company should have used ILI assessment instead of pipe replacement. This argument appears to ignore that by the time the pipeline replacement occurred, DTE Gas had determined that ILI was too risky to use, even if it was available. 0 Q. Does staff understand the facts surrounding the pipe replacement and the Company s decision to reevaluate ILI alternatives? A. It does not appear so. Staff s argument relies on Exhibit S-0., which is an audit response provided by the Company regarding the Lincoln-Traverse City project. It appears the response to Exhibit S-0., page of, was unclear and communicated information that could be misinterpreted. It appears that Staff interpreted it to say external and internal corrosion was identified when the entire. miles was inspected in 0, which resulted in the Company electing to assess the HCA in 0, three years earlier than the required date in 00. This is not what DTE Gas intended to communicate. ADS Rebuttal -

87 A. D. SANDBERG Line U- Q. What did the Company intend to communicate in the Audit response? A. The Company intended to say that external and internal corrosion are considered threats requiring assessment on all DTE Gas pipelines with high consequence areas. The Lincoln-Traverse City 0 Pipeline is susceptible to these threats and, therefore, must be assessed for them. 0 Q. Has the Company found internal or external corrosion on the Lincoln-Traverse City 0 Pipeline? A. Results of previous assessments on the Lincoln-Traverse City 0 pipeline have not required any remediation for internal or external corrosion threats. Baseline assessment using direct assessment in 00 and 00 found no internal or external corrosion. Reassessment in 0 using direct assessment found no internal or external corrosion. Expanded direct assessment in 0 of the entire Lincoln- Traverse City 0 pipeline found no internal or external corrosion. 0 Q. Did the Company perform a reassessment earlier than required due to identified internal and external corrosion on the Lincoln-Traverse City 0 Pipeline? A. Staff s assumption is incorrect. There are two HCA areas in the Lincoln- Traverse City 0 pipeline. Pipe was replaced in one HCA in 0 due to an audit revealing that the previous use of DA was not an acceptable method of assessment to detect potential manufacturing seam threats. The second HCA direct assessment was performed three years early not due to identified corrosion, rather to better align the assessment dates of the two HCA s in future years, while the Company continues to review other alternatives that would allow in-line inspection (ILI) of the pipeline. ADS Rebuttal -

88 A. D. SANDBERG Line U- Q. Did the Company perform a feasibility study on the Lincoln-Traverse City 0 pipeline? A. Yes. The Company performed a mechanical feasibility study of the Lincoln-Traverse City 0 pipeline in 0. This included a detailed review of the pipeline to identify all known features on the pipeline before proceeding with the design and construction of the facility modifications necessary to make the pipeline ILI assessable. At that time, no issues were identified that would interfere with an ILI assessment. 0 Q. What changed between the time of the initial mechanical feasibility study and when the Company determined that it was too risky to use ILI? A. Following the mechanical feasibility study, the Company conducted a review of LNG vendors and discovered that: Only two of eight contacted LNG companies that provide this service could meet the system supply requirements and both indicated that DTE Gas s project would represent the largest effort they had undertaken The LNG equipment could not provide 00% back up supply in the event of an equipment failure, such as a vaporizer pump 0 Q. Was the Company s decision to defer the ILI assessment and evaluate alternative solutions prudent? A. Yes. While the Company recognizes Staff s position regarding the benefits of assessing the Lincoln-Traverse City 0 pipeline by ILI, the Company contends that it was prudent to reevaluate the project given its complexity and the associated risks. Therefore, the $.0 million capital expenditure for the pipe replacement to address the potential manufacturing seam threat was a prudent expenditure. ADS Rebuttal -

89 A. D. SANDBERG Line U- Q. What is the cost of the pipe replacement compared to the cost of LNG service if the line were ILI assessed? A. The cost for the LNG service would have been approximately $. million of O&M expense had the Company performed the in-line inspection. While Staff s position is that the $.0 million spent for the pipeline replacement was an imprudent and potentially unnecessary capital expenditure, it is equivalent to the cost that would have been incurred for the LNG service if an ILI assessment had been performed. 0 Q. Does the Company agree with Staff s additional recommendation to expeditiously ILI assess the Lincoln-Traverse City pipeline, preferably before the end of 0 integrity assessment period? A. As stated previously, the Company is reviewing other alternatives that would allow in-line inspection (ILI) of the pipeline. Expediting an ILI assessment without ensuring the complexities and associated risks are eliminated would be imprudent and wouldn t provide the safe reliable level of service that our customers expect of the Company. 0 Highest Cost Projects Q. Is there a proposal to disallow capital expenditures for any of DTE Gas s highest cost projects? A. Yes. Witness Coppola is recommending disallowance of $. million for the following seven () highest cost projects:. Chelsea 0 psig System Supply: $. M. Ford Central Energy Plant: $. M. BRM Unit # Rebuild: $.0 M ADS Rebuttal -

90 A. D. SANDBERG Line U-. Northeast Beltline ILI Expansion: $. M. Loreed Ludington ILI Expansion: $. M. Rogers City ILI Expansion: $. M. Loreed Ludington Tie Line ILI Expansion: $. M 0 Q. Why is witness Coppola recommending disallowance of $. million in capital expenditures for Chelsea System Supply and Ford Central Energy Plant (#- above)? A. Witness Coppola indicates that because the 0 actuals for these projects came in below the projected 0 spend, the variance should be disallowed. Q. Does the Company agree with the proposed disallowance of the Chelsea System Supply and Ford Central Energy Plant projects? A. In both cases, although the single project was accomplished under the forecast, the capital expenditures of the programs they were performed under exceeded the forecast and are reflected in the revenue requirement in this case. The savings on these projects were spent and used to accomplish additional work and not given to DTE s Shareholders. 0 The Chelsea System Supply project is a System Reliability project. The 0 System Reliability forecast was $. million. The 0 System Reliability preliminary actuals are $. million, exceeding the forecast. Therefore, despite the actuals for that single project coming in under forecast, the System Reliability capital expenditures forecast were spent. See Witness Creisher s Exhibit S-0., page of ADS Rebuttal -

91 A. D. SANDBERG Line U-, column g, line. See Exhibit A-, Schedule B., page of, column (d), line. The Ford Central Energy Plant is a New Markets Attachment project. The 0 New Market Attachment forecast was $.0 million. The 0 New Markets Attachment preliminary actuals are $. million, exceeding forecast. Therefore, despite the actuals for the project coming in under forecast, the New Market Attachments capital expenditures were spent. See Witness Creisher s Exhibit S-0., page of, column g, line. See Exhibit A-, Schedule B., page of, column (d), line. 0 Q. Why is witness Coppola recommending disallowance of $.0 million in capital expenditures for BRM Unit # Engine Rebuild (#)? A. Witness Coppola states in his testimony (S. Coppola Direct, lines -) that it makes more sense to complete the rebuild in October at the end of the injection season and, therefore, the project is likely to be delayed past the end of the projected test year. 0 Q. Is the schedule for BRM Unit # Engine Rebuild Project stated in Witness Coppola s testimony correct? A. Witness Coppola incorrectly states in his testimony that the engine rebuild is scheduled to start in July and take place over a 0-day period. July is not the construction start date. It is the construction completion date as identified in in Exhibit A-, Schedule B., page 0 of. The rebuild will take approximately four () months, which is typical for large engine rebuild projects, not 0 days. ADS Rebuttal -

92 A. D. SANDBERG Line U- Q. Does the Company agree with Witness Coppola s assessment to complete the engine rebuild in October? A. This recommendation illustrates a lack of understanding regarding DTE Gas s operations. Based on DTE Gas s storage injection plan, BRM Unit # is needed for end of gas injection cycle, August to October, when storage balances and field pressures are higher. Starting the rebuild project at end of gas injection cycle in October, per witness Coppola s recommendation, would require BRM Unit # to be out of service from July through October when the unit is needed. 0 Q. Does the Company agree with the proposed disallowance of the BRM Unit # project? A: The Company will incur the capital expenditures for BRM Unit # Engine Rebuild within the test period ending /0/0 based on the schedule identified in Exhibit A-, Schedule B., page 0 of. 0 Q. Why is witness Coppola recommending disallowance of $. million in capital expenditures for the four ILI Expansion projects (#- above)? A. Witness Coppola assumes that the projects are dependent on issuance of PHMSA rules and, because the timing of the final rules is uncertain, the projects will be deferred. Q. Does the Company agree with the proposed disallowance of the ILI Expansion projects? A. None of the ILI Expansion projects is dependent on PHMSA s issuance of final rules. As described in my direct testimony, the Company s ILI Expansion program ADS Rebuttal - 0

93 A. D. SANDBERG Line U- is one sub-program under the Commission approved Pipeline Integrity IRM. DTE Gas sought recovery for the Pipeline Integrity capital expenditures through the IRM in Case U-, and the Commission approved the request in its final order. The Commission s order in Case U- included a provision that all capital invested as part of IRM would be rolled into rate base when DTE Gas filed a rate case and DTE Gas may propose an updated IRM to address recovery of future infrastructure investment. Also, Witness Coppola incorrectly states the project construction dates for the ILI Expansion projects are start dates. The construction dates are completion dates as identified in Exhibit A-, Schedule B-.. 0 Routine Distribution Plant, System Reliability Q. Why does Staff recommend disallowance of $. million for the System Reliability district regulators without take off valve (TOV) project, (Witness Creisher, page, lines 0-)? A. The basis for Staff s argument is that DTE Gas should have installed TOV s whenever new district regulators were installed, since the implementation of the Michigan Gas Safety Code in. Therefore, any costs to add a TOV or replace a district regulator to facilitate adding a TOV should not be included in rates and paid for by customers. 0 Q. Does the Company agree with Staff s position? A. The Company does not agree with Staff s position for five () reasons. District regulators without TOVs should be included in rate base because: ) Some district regulators were installed prior to the Michigan Gas Safety Code; ADS Rebuttal -

94 A. D. SANDBERG Line U- 0 ) Some district regulators are, also, obsolete and will be replaced or abandoned despite the lack of a TOV; ) DTE Gas believed above grade district regulators were compliant with the Michigan Gas Safety Standards (MGSS) and were not found to be out of compliance prior to a 0 MPSC audit; ) DTE Gas s records indicate that Staff audits of DTE Gas s safety standards between and 0 did not indicate that DTE Gas s interpretation of the standard was incorrect or out of compliance with MGSS; and ) Costs for System Reliability compliance related work has been included for recovery in prior rate cases and, specifically, costs for district regulators without TOVs were included in the previous Case U-. 0 Q. How many district regulators being replaced during the bridge or test period were installed before? A. Two of the district regulators being replaced before September 0, 0 were installed before. See Table below for details on these regulators. District regulators originally installed prior to the Michigan Gas Safety Code should be included in rates, because the facility was installed before the implementation of the Michigan Gas Safety Code. Staff supports inclusion of capital expenditures for pre- installations. Q. Why should capital expenditures for district regulators that are obsolete be included in rate base? A. System Reliability general work types are described as compliance, obsolescence, and system growth. Some district regulators without TOV s were included in the ADS Rebuttal -

95 A. D. SANDBERG Line U- compliance work type, but are also obsolete and will be replaced or abandoned despite the lack of a TOV. The costs related to TOVs for these district regulators would be incurred regardless of the date they were installed, because the district regulators are now obsolete. New TOVs are installed when replacing obsolete district regulators regardless of if they currently have a TOV. Because these capital expenditures would be incurred no matter what, these costs should be included in rate base. See Table for additional details about these district regulators. 0 Q. What is the value of the capital expenditures related to district regulators that were installed before or that are being replaced or abandoned for obsolescence? A. DTE Gas will spend $. million on TOVs for such district regulators. The following table summarizes $. million in specific TOV work that should be included in rates from the System Reliability district regulators without TOV project due to pre- construction or obsolescence. ADS Rebuttal -

96 A. D. SANDBERG Line U- Table Const. Year Install Year Pre Code Obsolete Facility District Regulator w/o TOV Project 0 Raymo & Bass Lake, #00 No Yes $0, 0 M- & Ridge, #00 No Yes $, 0 St. Martin Hill & Munising Gate #00 No Yes $, 0 Co Rd & Millyard, #00 No Yes $, 0 Artesia Beach and Windywood / No Yes $, 0 Quinnesec-Lake Antoine Rd #00 No Yes $,00 0 M- & SETTERBO, #0 / No Yes $, 0 New Bristol / US #000 No Yes $, 0 Houghton Lake Gate 0-0 psig No Yes $0,000 0 Lafranier Rd. Yes No $, 0 Cherry & Harrison Yes Yes $,0 0 Dix & Outer Drive #0 No Yes $0, 0 Amber / Washington No Yes $, 0 Arkona & US No Yes $, / newer district regulators replaced due to damage to assembly and obsolete equipment (regulators) Total $,,0 Cost 0 Q. Should 0 capital expenditures related to district regulators without TOVs be removed from rate base, as recommended by Staff? A. Staff is recommending disallowance of $. million from 0 spend related to district regulators without TOVs. The Company disagrees with the recommendation for disallowance, because these expenditures were identified in Case U-, and no party raised any concerns regarding these costs. It is inconsistent with the final order of Case U- to exclude costs related district regulators without TOVs from rate recovery. Q. Why should the remaining $. million of the $. million be included in rates? A. The remaining district regulators without TOVs are above grade. DTE Gas believed the requirements of the Michigan Gas Safety Standards were met at the time the ADS Rebuttal -

97 A. D. SANDBERG Line U- above grade district regulators were constructed. DTE Gas included measures in the design of above grade district regulators that provided alternative methods to shut off gas supply to the district regulators. At no point when these district regulators were being installed did DTE Gas have any indication that these installations were not in compliance. 0 0 Q. What measures did DTE Gas include in the design of above grade districts that led to the belief that the requirements of the Michigan Gas Safety Standards were being met? A. DTE Gas interpreted the Michigan Gas Safety Standards in such a manner that the code requirement for a TOV was met as outlined in the DTE Gas Standard 0A Section (C)(i) in 0, which read: For above-grade district regulators, a valve must be provided in the inlet piping of the regulator assembly. Engineering will determine the necessity of a remote valve for above-grade district regulators and larger in size. For above-grade districts under in size, Engineering may consider a valve in the above grade inlet piping to be designated as the required inlet valve under the following conditions: a) The valve must be the first component out of the ground in the above grade piping, b) The valve must be oriented with its inlet and outlet in the vertical position, and c) The connection to the pipeline must be made with a punch-type or valve-type tee that could be operated in an emergency to shut off or control the flow of gas or the inlet piping must be able to be squeezed shut using available hand powered or power-assisted tools. 0 Q. When did DTE Gas determine that these measures were inadequate and begin to consistently install above grade districts with TOV s? A. During a 0 audit, the MPSC Gas Safety Staff identified that the DTE Gas practice regarding TOV s detailed in DTE Gas Standard 0A shown above did not meet the ADS Rebuttal -

98 A. D. SANDBERG Line U- Michigan Gas Safety Standards requirement for providing a remote shut off valve. DTE Gas began consistently installing TOV s immediately after the 0 audit. The MPSC Staff routinely audits DTE Gas s safety standards. Of the numerous audit cycles where this practice for above grade district regulators was reviewed by MPSC Staff, the Company finds no record prior to 0 that indicates this standard did not align with the MGSS. Our records indicate that no violations were issued regarding this standard until the 0 MPSC audit. 0 Routine General Plant, Communications and Control Equipment Q. What capital expenditures is Witness Matthews proposing for disallowance in this case? A. Witness Matthews is recommending a disallowance of $.0 million in 0, $. million in the nine months ending /0/0, and $. million in the test year for Routine General Plant, Communications and Control Equipment. 0 Q. Why is Witness Matthews recommending the capital expenditure disallowance for Communications and Control equipment? A. Witness Matthews states in his testimony (page, lines -, and page 0, lines - ) that Staff requested a breakdown of projects included in communications and control equipment and, because the Company only provided a breakdown for a single project and was unable to provide any further details about any other spending, he is recommending disallowance of the remaining expenditures. Q. Does the Company agree with Witness Matthews recommendation of disallowance for Communications and Control equipment? ADS Rebuttal -

99 A. D. SANDBERG Line U- A. DTE Gas provided Witness Matthews with the information he requested regarding Communications and Control Equipment capital expenditures. The remainder of the capital expenditures were not considered projects and were not detailed in the audit response. The remainder of the expenditures were primarily routine work. 0 Q. What is routine Communications and Control Equipment work? A. Routine communications and control equipment work include purchases of materials and upgrades for SCADA system (Supervisory Control and Data Acquisition), communication network, compressor station process control systems, and city gate station and field devices used to monitor flow rates, pressures, and gas quality. 0 Q Is a detailed workplan breakdown available for 0? A. As stated in Witness Matthews Exhibit S-., page of, In general DTE Gas does not begin planning Communications and Control projects until to months prior to the new year. As of //, no projects are being developed for 0 Communications and Control. Despite not having a detailed workplan for 0, the capital expenditures of $. million for 0 is consistent with the -year historical average capital spend for Communications and Control Equipment. It is unreasonable for Staff to assume that a routine level of capital expenditures will not be spent because a detailed workplan has not yet been formulated. Routine - General Plant, Computers and Related Equipment Q. What capital expenditures is Witness Matthews proposing for disallowance in Routine General Plant, Computers and Related Equipment? ADS Rebuttal -

100 A. D. SANDBERG Line U- A. Witness Matthews is recommending a disallowance of $. million for months ending /0/0 in Routine General Plant, Computers and Related Equipment. Q. Why is Witness Matthews recommending the capital expenditure disallowance for Computers and Related Equipment? A. Witness Matthews states in his testimony (page 0, lines -) that because the Company has yet to develop projects for this category in 0, Staff does not find the capital request reasonable and prudent and should not be approved for recovery in rates. 0 0 Q. Does the Company agree with Witness Matthew s recommendation of disallowance for Routine General Plant, Computers and Related Equipment? A. Detailed project plans are generally developed months prior to the next year and as stated in Witness Matthews Exhibit S-., Page of, column h, line, The 0 IT detailed project list including routine projects has not been developed as of //. Despite not having a detailed workplan for 0, the capital expenditures of $.0 million for 0 is consistent with the -year historical average capital spend for Computers and Related Equipment. It is unreasonable for Staff to assume that a routine level of capital expenditures will not be spent because a detailed workplan has not yet been formulated. Furthermore, Witness Matthews states in his testimony that Staff acknowledges that not all expenditures for a given year can be projected. ADS Rebuttal -

101 A. D. SANDBERG Line U- Q. Does this complete your rebuttal testimony? A. Yes, it does. ADS Rebuttal -

102 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) DTE GAS COMPANY for authority to ) to increase its rates, amend its rate ) schedules and rules governing the ) Case U- distribution and supply of natural gas, ) and for miscellaneous accounting authority ) ) REBUTTAL TESTIMONY OF KENNETH L. SLATER

103 Line DTE GAS COMPANY REBUTTAL TESTIMONY OF KENNETH L. SLATER Q. What is your name, business address and by whom are you employed? A. My name is Kenneth L. Slater. My business address is: One Energy Plaza, Detroit, Michigan. I am employed by DTE Energy Corporate Services, LLC within Regulatory Affairs as Manager of Revenue Requirements. Q. Did you file direct testimony in this proceeding on behalf of DTE Gas Company (DTE Gas or Company)? A. Yes, I did. 0 Q. What is the purpose of your rebuttal testimony? A. The purpose of my testimony is to rebut the following issues: The Michigan Public Service Commission Staff s (Staff) position on the analysis required to support its criterion five that customers make a significant contribution to the utility s fixed costs and what constitutes fixed costs and long-term - in evaluating whether the Commission should allow the Company to recover discounts provided to gas transportation customers to retain those customers. 0 Q. Have you reviewed the direct testimony of Staff witness Revere? A. Yes, I have. Q. What is your understanding of Staff s recommendation regarding the Company s request to recover the discounts provided to at-risk customers? A. Staff presents an approach consisting of five criteria that it then applies using information that the Company supplied with its application in this case to evaluate KLS Rebuttal -

104 K. L. SLATER Line U- 0 whether the Company s proposed customer retention rates or contracts should be recoverable under MCL0.a(). Staff concludes that for purposes of this case, the customer retention rates or discounts should be recoverable. Staff developed their own method of allocating the discounts to other classes of customers that allocates the associated costs only to the classes that, according to their analysis, are better off for having retained the at-risk customers. Regarding the fifth criterion, That customers make a significant contribution to the utility s fixed costs, Staff accepts for purposes of this case a definition of fixed costs that regards non-volumetric costs as fixed but recommends that for future cases the Commission require utilities to conduct a Net Present Value (NPV) analysis considering all changes in costs to other customers over both the short- and long-term resulting from the decision to be made, and file the information necessary to take long-term changes in costs into account in future requests. Staff further asserts that some non-volumetric costs could be considered variable if examined over a long-term horizon, citing as an example that pipes can potentially stay in the ground for 00 years. 0 Q. What is your opinion of Staff s proposal? A. I agree with Staff s conclusion that the customer retention rates or discounts should be recoverable. I believe that most aspects of Staff s approach are reasonable. However, I take exception to the following recommendations regarding the evaluation of criterion five: ) that an evaluation of fixed costs should involve a more complex analysis than the current generally accepted practice of considering nonvolumetric costs as fixed; and ) that an NPV analysis is needed. KLS Rebuttal -

105 K. L. SLATER Line U- Q. Why do you take exception to evaluating fixed costs using a long-term perspective? A. Cost of service studies are for the near-term setting of rates, with a time horizon stretching out to the end of the projected test year. The Company s projections over this near-term horizon is often contentious and has often been the subject of dispute among parties. Extending the horizon to 00 years or more would require numerous assumptions which could be called into question, give rise to lengthy debate, and needlessly complicate the case. 0 Q. Does Staff Witness Revere define what he considers to be fixed costs? A. On page, line, he asks himself the question What constitutes fixed costs?. Then on page, line 0 through page, line he indicates that the answer to this question is not simple and states that all non-volumetric costs are not fixed, at least not in the long-term. Q. Do you agree that the answer to this question is not simple? A. Yes. 0 Q. Does he define what he considers long-term to be? A. He states that the planning horizon of a utility is quite long and then by analogy states (pipes can potentially stay in the ground for 00 years, contracts with interstate pipelines may have long terms, etc.), but he does not define what he considers longterm to be. KLS Rebuttal -

106 K. L. SLATER Line U- Q. Does he provide a specific example of what he is considering to be a long-term change in cost? A. Yes. He provides the example that if the Company loses a large customer, costs associated with storage assets previously allocated to the customer may have to be borne by other customers over some period of time, but that the Company may be able to sell the storage previously utilized for the customer on the market offsetting the increased costs borne by other customers. 0 Q. Do you agree that for DTE Gas this example is a long-term change? A. No, this is not a long-term fixed change, at least for DTE Gas. It is a short-term variable change that DTE Gas has reflected in its COSS analysis on Exhibit A-, Schedule L., page, line, by increasing its projected off-system storage revenue by $0. million to reflect the sale of the storage capacity that would be available if the discounted customers were no longer DTE Gas customers. 0 Q. Why shouldn t an NPV analysis be required to assess whether at-risk customers make a significant contribution to fixed costs? A. Performing a long-term NPV study on fixed-costs would be of questionable value because a NPV study is substantially dependent on the imputed discount rate and inflation assumptions. The value of such a study becomes more speculative when the time horizon is extended to include assumptions about the future cost to replace long-lived assets and the design criteria that would apply. Q. Without some parameters regarding what long-term means, is it possible to do an NPV analysis? KLS Rebuttal -

107 K. L. SLATER Line U- A. Not one that wouldn t be subject to a significant amount of controversy. In addition, the Company does not create long-term plans (beyond five years out) on a level of detail sufficient to support the impact of losing one or two customers, despite their large size. 0 Q. What is your recommendation regarding the level of analysis required to satisfy Staff s proposed criterion five That customers make a significant contribution to the utility s fixed costs? A. I recommend that the Commission require a showing similar to the one that Staff performed and presented on its Exhibits S-. and S-.. Such analysis relies on obtainable information and avoids the potentially contentious debate that could otherwise result. Q. Does this complete your rebuttal testimony? A. Yes, it does. KLS Rebuttal -

108 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) DTE GAS COMPANY for authority to ) to increase its rates, amend its rate ) schedules and rules governing the ) Case U- distribution and supply of natural gas, ) and for miscellaneous accounting authority ) ) REBUTTAL TESTIMONY OF EDWARD J. SOLOMON

109 Line DTE GAS COMPANY REBUTTAL TESTIMONY OF EDWARD J. SOLOMON Q. What is your name, business address and by whom are you employed? A. My name is Edward J. Solomon. My business address is DTE Energy, One Energy Plaza, Detroit, Michigan. I am employed by DTE Energy Corporate Services, LLC, as Assistant Treasurer and Director of Corporate Finance, Insurance and Development for DTE Energy and its subsidiaries. Q. Did you file direct testimony in this proceeding on behalf of DTE Gas Company (DTE Gas or Company)? A. Yes, I did. 0 Q. What is the purpose of your rebuttal testimony? A. The purpose of my rebuttal testimony is to rebut the Attorney General Witness Mr. Coppola s position that the capital structure of DTE Gas should be 0.0% common equity and 0.0% debt. Q. Are you sponsoring any exhibits? A. Yes, I am supporting information on the following exhibit: Exhibit Schedule Description A- Q Discovery Request U- MPSC-. 0 Q. Was this exhibit prepared by you or under your direction? A. Yes, it was. EJS Rebuttal -

110 E. J. SOLOMON Line U- 0 Capital Structure Q. What are your thoughts with regard to Witness Coppola s recommended capital structure of 0% common equity and 0% long-term debt used in the overall rate of return calculation? A. I disagree with Witness Coppola s proposed capital structure. Witness Coppola states that the average common equity of the peer group he used to assess the cost of common equity is slightly above 0%. The average common equity of Witness Coppola s peer group as shown in Exhibit AG- is 0.%. This sample includes NiSource, which is a highly levered company that Company Witness Dr. Vilbert did not include in his peer sample. If you remove NiSource from the sample, the average common equity percentage is.%, a level much closer to DTE Gas capital structure of % common equity. In addition, Witness Vilbert observes in his rebuttal testimony that the average book equity ratio for the expanded sample of peer companies is. % for the second quarter of 0. Restricting the sample to gas LDCs only, the average book equity ratio is.%, substantially higher than the 0 percent recommended by Witness Coppola. The Company has stated its commitment to maintaining the capital structure at the targeted % equity % debt level. The Company has demonstrated this 0 commitment by maintaining a % equity level or higher consistently since 00, including obtaining equity infusions when necessary. The Company will continue to maintain the targeted % equity level and the parent, DTE Energy, will infuse the amount of equity needed to maintain that level. EJS Rebuttal -

111 E. J. SOLOMON Line U- 0 Impacts of the 0 Tax Cut and Jobs Act ( TCJA ) Q. Is there any impact to the filed capital structure resulting from the TCJA tax law implementation? A. Yes. Implementing tax law changes will change (reduce) deferred taxes. Deferred taxes are a liability on DTE s balance sheet. Reducing deferred taxes will not result in a corresponding change in assets. To offset this reduction and maintain % equity % debt structure, it is necessary to increase debt and equity by $. million in total. To achieve this capital structure, long term debt must increase by $0. million and common equity must increase by $. million. See Exhibit A-, Schedule Q for the details of the impact on Long-Term Debt. Q. Does this complete your rebuttal testimony? A. Yes, it does. EJS Rebuttal -

112 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) DTE GAS COMPANY for authority to ) to increase its rates, amend its rate ) schedules and rules governing the ) Case U- distribution and supply of natural gas, ) and for miscellaneous accounting authority ) ) REBUTTAL TESTIMONY OF CATHERINE M. STAFFORD

113 Line DTE GAS COMPANY REBUTTAL TESTIMONY OF CATHERINE M. STAFFORD Q. What is your name, business address and by whom are you employed? A. My name is Catherine M. Stafford. My business address is: One Energy Plaza, Detroit, Michigan. I am employed by DTE Gas (DTE Gas or the Company) as Director of Productivity and Work Standards in Gas Operations. Q. Are you adopting direct testimony and exhibits filed in this proceeding on behalf of DTE Gas Company (DTE Gas or Company)? A. Yes, I am adopting Witness Robert Sitkauskas direct testimony and exhibits. 0 Q. What is the purpose of your rebuttal testimony? A. The purpose of my testimony is to rebut Staff Witness Matthews recommendations concerning:. Adjustments to AMI capital expenditures during the test period.. Ongoing cost benefit analysis requirements. Staff s suggestion that DTE Gas transition its AMR meters to an AMI network Q. Are you sponsoring any exhibits? A. No, I am not. 0 Q. What adjustment is Witness Matthews proposing for AMI capital expenditures in the test year? A. Witness Matthews proposes to disallow costs related to purchasing and installing AMI meters if those meters are not installed during the test period. Witness Matthews notes that if he receives information that these meters are going to be installed during CMS Rebuttal -

114 C. M. STAFFORD Line U- the test period, then he will revise his position to allow recovery of these purchase and installation costs. Q. Is the information Witness Matthews uses to support his recommendation correct? A. Regardless of what Mr. Matthews may have been told verbally, DTE Gas has only included costs related to meters installed before or during the test period. Enough modules were purchased for the installation of the number of units planned for in the current year and to allow work to commence in the subsequent year. 0 Q. What has Witness Matthews proposed regarding AMI cost benefit reporting? A. Witness Matthews has recommended requiring DTE Gas to continue providing its cost benefit analysis ad infinitum. 0 Q. Do you agree with Witness Matthews proposal for ongoing AMI cost benefit reporting? A. No, I do not for the following reasons: First, as detailed in Witness Sitkauskas direct testimony, in the order introducing AMI, Case U-, the Commission specifically noted that cost/benefit analysis should be required until implementation is complete. The termination of reporting was anticipated at that time. Nothing has changed since that order was filed that would indicate that ongoing reporting would be necessary. Secondly, Witness Matthews suggests that even after the program is fully deployed, the Company should continue to provide analysis to reaffirm the annualized and monetized benefits of the program. As well as, explain where the benefits occur to provide assurance that the expected benefits of the expenditure are CMS Rebuttal -

115 C. M. STAFFORD Line U- being realized. However, it is unclear what benefit will accrue to customers from this report. Third, the Company invests in many large projects requiring capital investments. The AMI project is the only project that is required to have an ongoing analysis of cost benefit once it has been approved and found to be reasonable and prudent in a rate case. Once the investment is made, in service and allowed recovery, such analysis provides little value on a going forward basis. Fourth, the Company would have had to incur some level of costs for meter replacements, even if not AMI costs, because, as Witness Matthews notes, the technology used to read inside meters was failing and had to be replaced. 0 0 Q. Do you agree with Witness Matthews recommendation that the Company should be investigating installing a fixed network allowing AMR meters to function as AMI meters? A. I do not. The Company has considered this alternative and concluded that the investment of a fixed network in the Gas only DTE territory would not be cost effective for our customers. In addition to the set-up cost, there would be ongoing maintenance costs that would not be offset by the savings in drive-by meter reading. Also, given the distribution of customers (further apart) the reliability of a fixed network would be diminished when compared to the Southeast Michigan network and drive-by collection. Q. Does this complete your rebuttal testimony? A. Yes, it does. CMS Rebuttal -

116 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) DTE GAS COMPANY for authority to ) to increase its rates, amend its rate ) schedules and rules governing the ) Case U- distribution and supply of natural gas, ) and for miscellaneous accounting authority ) ) REBUTTAL TESTIMONY OF MARGARET A. SUCHTA

117 Line DTE GAS COMPANY REBUTTAL TESTIMONY OF MARGARET A. SUCHTA Q. What is your name, business address and by whom are you employed? A. My name is Margaret A. Suchta. My business address is One Energy Plaza, Detroit, Michigan. I am employed by DTE Energy Corporate Services, LLC, a subsidiary of DTE Energy Company (DTE Energy) within Regulatory Affairs as Consultant, Regulatory Economics. Q. Did you file direct testimony in this proceeding on behalf of DTE Gas Company (DTE Gas or Company)? A. Yes, I did. 0 Q. What is the purpose of your rebuttal testimony? A. The purpose of my rebuttal testimony is to rebut Staff Witness Mr. Nichols treatment of deferred taxes as impacted by TCJA and how the capital structure should be impacted. Q. Are you sponsoring any exhibits? A. Yes, I am supporting information on the following exhibit: Exhibit Schedule Description A- Q Capital structure adjusted for 0 TCJA 0 Q. Was this exhibit prepared by you or under your direction? A. Yes, it was. Q. What is Staff Witness Nichols proposed treatment of the impacts of TCJA on deferred taxes? MAS Rebuttal -

118 M. A. SUCHTA Line U- A. On page of Witness Nichols testimony he states that Staff recommends the impacts of TCJA on deferred taxes should not be included in the instant case, due to the lack of timely, accurate information required to make the necessary calculations. 0 0 Q. Do you agree with Staff s proposed treatment? A. No, I do not agree with his entire position. I do agree with Witness Nichols that the remeasurement of deferred taxes as of December, 0 should be addressed in accordance with the order in Case U-. However, I do believe that the impact of the TCJA on deferred taxes on the projected incremental activity for the time-period between December, 0 and September 0, 0 is determinable and the Company has adequately quantified the impact on its filed position in provided by in response to Staff s discovery request. Deferred Taxes for the test period are not significantly more complicated and should be reflected in this case because it is forward looking, reasonably determinable, and no different than any case we have done in the past. I believe that impact has been accurately determined by Company Witness Ms. Wisniewski. Witness Wisniewski s rebuttal testimony supports a $. million decrease in incremental deferred tax related to the projected time-period ended September 0, 0. To maintain a balanced capital structure, debt and equity needs to be proportionately increased by the $. million (Long-term debt increases by $0. million and Common Equity increases by $. million). The impact of the changes on the Company s filed overall rate of return is an increase from.% to.%. Exhibit A-, Schedule Q shows how the capital structure changes with these adjustments. Page reflects the impact on the Company s proposed capital structure provided to Staff in its discovery response. Page shows how those changes impact the Staff s proposed capital structure from a.% overall rate to.%. MAS Rebuttal -

119 M. A. SUCHTA Line U- Q. What is the revenue requirement impact on Staff s filed position of this increase in the overall rate of return of the impact of the TCJA on deferred taxes in the projected test year? A. The Staff s filed revenue requirement would increase by $.0 million (Rate Base of $,,0,000 multiplied by 0.0% (.% less.%) multiplied by revenue multiplier of.0. Q. Does this complete your rebuttal testimony? A. Yes, it does. MAS Rebuttal -

120 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) DTE GAS COMPANY for authority to ) to increase its rates, amend its rate ) schedules and rules governing the ) Case U- distribution and supply of natural gas, ) and for miscellaneous accounting authority ) ) REBUTTAL TESTIMONY OF RENEE M. TOMINA

121 DTE GAS COMPANY REBUTTAL TESTIMONY OF RENEE A. TOMINA Q. What is your name, business address and by whom are you employed? A. My name is Renee M. Tomina. My business address is: One Energy Plaza, Detroit, Michigan. I am employed by DTE Gas Company (DTE Gas or Company) as Director of Southeast Michigan Gas Operations. Q. Did you file direct testimony in this proceeding on behalf of DTE Gas Company (DTE Gas or Company)? A. Yes, I did. 0 Q. What is the purpose of your rebuttal testimony? A. The purpose of my rebuttal testimony is to address the MPSC Staff s proposed $. million disallowance related to the current pending Pipeline and Hazardous Materials Safety Administration (PHMSA) rule for Distribution and Transmission system record remediation. Q. Are you sponsoring any rebuttal exhibits in the proceeding? A. No, I am not. 0 Q. What is Staff s proposed $. million disallowance? A. Staff is recommending a disallowance of $. million in O&M expenses related to the pending PHMSA rulemaking process as outlined in MPSC Staff Witness Ms. Creisher s testimony. Staff finds that the federal rulemaking process has not yet been completed and believes it is not reasonable to include any O&M expenditures related to the pending Notice of Proposed Rulemaking (NPRM) at this time. RMT Rebuttal -

122 R. M. TOMINA Line U- Q. What is included in these expenditures that Staff is proposing for disallowance? A. These expenditures include the Distribution system records remediation for $.0 million and Transmission system record remediation for $. million. 0 Q. Does the Company agree with Staff s recommendation to disallow the entire $. million in O&M expenditures? A. The proposed new rules, regardless of the effective date, do not pertain to the Distribution record defect remediation, only to Transmission record defect remediation. Therefore, costs included in the $. million related to 0 Distribution records remediation should be included in calculating the revenue requirement. Q. How much of the $. million in O&M expenditures is related to 0 Distribution records remediation? A. $.0 million will be incurred for 0 Distribution records remediation. 0 Q. Why is the Company requesting $.0 million in O&M expenditures for Distribution record defect remediation? A. As noted in Witness Sandberg s original testimony (page ) the Distribution records review program was implemented in response to the 0 PHMSA advisory bulletin. The bulletin advised pipeline operators of their obligations to ensure that data used to establish pipeline MAOP are reliable. The review has generated record defects that require remediation. The Company will begin remediation of identified record defects starting in 0. This remediation is in response to the advisory bulletin, not a proposed rule and should be included in calculating the revenue requirement. RMT Rebuttal -

123 R. M. TOMINA Line U- Q. Does this complete your rebuttal testimony? A. Yes, it does. RMT Rebuttal -

124 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) DTE GAS COMPANY for authority to ) to increase its rates, amend its rate ) schedules and rules governing the ) Case U- distribution and supply of natural gas, ) and for miscellaneous accounting authority ) ) REBUTTAL TESTIMONY OF THERESA M. UZENSKI

125 Line DTE GAS COMPANY REBUTTAL TESTIMONY OF THERESA M. UZENSKI Q. What is your name, business address and by whom are you employed? A. My name is Theresa M. Uzenski. My business address is One Energy Plaza Detroit, Michigan. I am employed by DTE Energy Corporate Services, LLC, as manager of the Regulatory Accounting and Strategy Department within the Controllers Organization. Q. Did you file direct testimony in this proceeding on behalf of DTE Gas Company (DTE Gas or Company)? A. Yes, I did. 0 0 Q. What is the purpose of your rebuttal testimony? A. The purpose of my rebuttal testimony is to address certain positions taken by the Attorney General as follows: The Attorney General s proposed inflation based on one half of CPI-U should be rejected because there is no quantifiable basis or support for this arbitrary adjustment. The Attorney General s proposed exclusion of $0,000 of amortization related to the regulatory asset of $. million for C0 post-implementation costs should be rejected. My rebuttal testimony will show that the Commission approved the inclusion of post-implementation costs as part of the regulatory asset in Case U-, and that the costs were in fact incurred. The Attorney General s $. million reduction in rent expense should be rejected because it includes shared asset charges for specific projects within the Corporate Support and Customer Services organizations. TMU Rebuttal -

126 T. M. UZENSKI Line U- 0 The Attorney General s proposed disallowance of $0,000 of O&M costs for employees returning from the C0 project should be rejected because his assumption that the projects delayed during the C0 implementation must have been unnecessary is neither supported nor accurate. The Attorney General s proposed $. million reduction in working capital should be rejected. The reduction includes changes to three line items: Accounts Receivable, Unbilled Revenue, and Accounts Payable for the months of October through December 0. My testimony will demonstrate that the Company s forecast was reasonable because after updating it with actual balances for 0, the forecast was within $. million. Q. Are you sponsoring any rebuttal exhibits? A. Yes. I am sponsoring the following rebuttal exhibits. Exhibit Schedule Description A-0 T- Shared Assets Rent Expense A-0 T- Select Working Capital Items Q. Were these exhibits prepared by you or under your direction? A. Yes, they were. 0 Q. What does the AG propose for inflation? A. On page of his direct testimony, AG Witness Mr. Coppola recommends the Commission exclude all inflation from forecasted O&M, but suggests that if inflation is approved, it be limited to $. million, compared to the Company s $. million projection. TMU Rebuttal -

127 T. M. UZENSKI Line U- 0 Q. Do you agree with his proposed reduction? A. On pages and of his direct testimony, Witness Coppola argues that since the Company mitigated the impacts of inflation in prior years, it will be able to do so in the future. This assumption is unreasonable because the mitigation included onetime opportunities, such as a temporary reduction in Other Post-Employment Benefits (OPEB) expense recognized in 0 through 0. As shown on Witness Cooper s Exhibit A-, Schedule C., line, column (b), OPEB expense in 0 was a negative $. million. Furthermore, Witness Coppola ignores the fact that labor cost increases are driven in part by union contracts, and simply asserts without factual support on page, that the Commission should allow no more than 0% of inflation increases based on CPI-U inflation factors. Witness Coppola has not provided any quantitative basis for choosing 0%; thus, the Commission should reject his proposed disallowance. 0 Q. What does the AG recommend for amortization expense of the C0 Regulatory Asset? A. The C0 Regulatory Asset is carried on DTE Electric Company s books and DTE Gas is billed for its share of the amortization expense. I had assumed that the regulatory asset balance would include $. million of post-implementation costs and reflected $0,000 for DTE Gas s share of the related amortization expense in the projected period. On page of his direct testimony, Witness Coppola suggests the $0,000 be disallowed because, in his opinion, the costs that occurred after the system went live do not add significant value and should be charged directly to expense. TMU Rebuttal -

128 T. M. UZENSKI Line U- Q. Do you agree? A. In Case U-, DTE Electric s application for deferred accounting explicitly outlined that the deferred costs would include post implementation refinement and stabilization expenses, and the Commission approved deferral treatment for those types of costs in its September, 0 order. DTE Electric spent $. million on post golive efforts for additional staffing to handle increased call volumes, fixing system defects, and addressing billing exceptions. The Commission should reject the AG s proposed $0,000 disallowance because the expense is for costs incurred that are consistent with the types of costs approved in Case U Q. What reduction did the AG propose for rent expense? A. On pages and of his direct testimony, Witness Coppola proposes a $. million reduction in rent expense for net cost increases in shared asset charges (unrelated to the Customer 0 implementation). The net amount is made up of $. million of cost increases from new shared assets and $.0 million of cost reductions from asset retirements. On page, lines through 0, he states, It is not known if the incremental costs are for IT systems already installed or for new proposed systems to be developed and installed after the historical test year. Without further explanation and evidence of what makes up this incremental cost of $. million, it is not possible to accept the inclusion of this expense in the projected test year. Q. Can you explain the $. million increase? A. Yes. As noted by Witness Coppola on lines 0 and of page of his direct testimony, the $. million is related to Customer Service and Corporate IT systems. TMU Rebuttal -

129 T. M. UZENSKI Line U- Q. What is driving the Customer Service and Corporate IT cost increase? A. Most of the increase is driven by projects going into service during 0 through 0, as shown on my rebuttal Exhibit A-0, Schedule T-, Shared Asset Rent Expense. The balance is based on expected IT spend with specifics yet to be identified. 0 Q. Does the AG propose a reduction related to Corporate O&M costs? A. Yes. Witness Coppola suggests a $0,000 reduction in labor costs for four employees returning from the Customer 0 project. He assumes, starting on page, line of his direct testimony, if the tasks were delayed for two years or longer, they are probably of little value. He also states that if the positions were either filled by temporary employees or by other employees working overtime during that time-period, then those costs will no longer be incurred 0 Q. Are his assumptions correct? A. As stated in the Company s discovery response included as Witness Coppola s Exhibit AG-, the employees returning to their home organizations are now working on projects delayed during their absence, taking back tasks that were being completed by other employees working overtime, or filling positions left open while they were on the C0 project. Witness Coppola s assumption that work delayed during the C0 project is not valuable is baseless. Simply because some projects were delayed during the C0 implementation does not mean they are not value added. The Company has limited resources and must make difficult prioritization decisions among numerous projects. As the Commission well knows, C0 was a huge endeavor that impacted all the Company s customers. Delaying other worthy projects to ensure the success of C0 was the most prudent course of action. TMU Rebuttal -

130 T. M. UZENSKI Line U- In addition, Witness Coppola s assumption that the home organization incurred additional costs to cover work usually completed by employees who were temporarily on the project is also unsupported. Approximately % of the positions left open in the home organization were for professional, salaried roles (i.e., overtime is unpaid). Assuming similarly positioned exempt employees in the home organization worked additional hours to cover the reassigned tasks, any incremental costs would be minimal because exempt employees are not paid overtime. Therefore, since Witness Coppola s assumptions regarding the value of the work and the cost of coverage in the home organization are unsupported, his proposed disallowance of $0,000 must be rejected. 0 Q. Does the AG propose adjustments to working capital? A. Yes. On page of his direct testimony, Witness Coppola suggests a decrease of $. million in Accounts Receivable (A/R), Unbilled Revenue (Unbilled), and Accounts Payable (A/P). 0 Q. How does the AG explain his proposed $. million reduction? A. Witness Coppola takes issue with the Company s methodology. The Company forecasted the three balances, A/R, Unbilled, and A/P for the projected period ending September 0, 0 by using 0 adjusted balances by month. Actual balances for January through September 0 (the balances available at the time the projections were made) were weather normalized and then assumed to repeat during 0 and 0. The balances for October through December 0 were based on the percentage change from the prior month that occurred during 0. TMU Rebuttal -

131 T. M. UZENSKI Line U- 0 It is the trending method for October through December with which Witness Coppola takes issue. He argues on page of his direct testimony that the Company double counted the impact of rate relief that became effective in November 0 because the percentage increase in 0 reflects the impact of rate relief, and that trend is applied to a September 0 balance that already has rate relief embedded in the balance. He attempts to remedy the issue by recalculating September through December 0 based on the ratio of actual sales in September through December 0 to sales in 0. He then uses his updated calculation of September through December 0 to derive a new -month average as shown on his Exhibit AG-. The difference between the two methods of $. million is shown on line. 0 Q. Do you agree with his calculation? A. Witness Coppola makes a reasonable argument with regards to the impact of rate relief. However, it does not necessarily follow that his estimation method provides a more accurate result. Now that actual balances for October through December 0 are available, the -month average can be updated and compared to Witness Coppola s projection, and the Company s projection. My rebuttal Exhibit A-0, Schedule T-, calculates a new projection using actual 0 balances through December adjusted by the annual weather factor as of December 0. Lines through show the actual balances by month for 0. Lines through calculate the weather normalization factor. Lines through 0 show an updated projection for the months, September 0 through September 0 based on weather normalized 0 balances. As shown on line, the updated projection for the three working capital items in total is $. million. This compares to the Company s original projection of $. million and the AG s projection of $. million. TMU Rebuttal -

132 T. M. UZENSKI Line U- Q. What conclusions do you draw from this analysis? A. Given that the Company s original projection was within.% of the latest estimate, and the AG s projection was within.%, both appear to be reasonable forecasts of what will occur in the projected period, given normal weather. I recommend the Commission approve the Company s original projection as the amount was reasonable based on the data available at the time. If the Commission decides to incorporate new information, then my updated forecast of $. million is a better estimate than Witness Coppola s recommendation because it reflects the latest actual balances and weather data available. 0 Q. Does this complete your rebuttal testimony? A. Yes, it does. TMU Rebuttal -

133 BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION DTE GAS COMPANY CASE NO. U- REBUTTAL TESTIMONY OF MICHAEL J. VILBERT LIST OF TOPICS ADDRESSED COST OF COMMON EQUITY CAPITAL CAPITAL STRUCTURE

134 DTE Gas Company Case TABLE OF CONTENTS I. INTRODUCTION AND SUMMARY... A. Recommended Capital Structure... B. Capital Attraction... II. Update to capital market conditions... A. Update of Economic Conditions Since August 0... B. The Effect of the Tax Cuts and Jobs Act... III. COST OF CAPITAL ESTIMATION METHODOLOGIES... A. Sample Selection... B. DCF Model... C. CAPM The Market Risk Premium The Empirical CAPM... D. Risk Premium Method... IV. Credit Ratings, REGULATORY ENVIRONMENT, and Relative Risk...0 A. Credit Ratings Are Not A Measure of the Risk of Equity... 0 B. The Effect of Michigan s Regulatory Framework on DTE Gas s Cost of Capital... V. AFTER-TAX WEIGHTED-AVERAGE COST OF CAPITAL... A. The ATWACC Method for Adjusting for Financial Risk in the Cost of Capital... B. Responses to Witnesses Criticisms of the ATWACC... MJV Rebuttal - i

135 Rebuttal Testimony of Michael J. Vilbert U- 0 0 I. INTRODUCTION AND SUMMARY Please state your name and address for the record. A. My name is Michael J. Vilbert. My business address is The Brattle Group, 0 Mission Street, Suite 00, San Francisco, CA 0, USA Did you submit direct testimony in this proceeding? A. Yes. Appendix A to my direct testimony provides detail on my qualifications. What is the purpose of your rebuttal testimony in this proceeding? A. I have been asked by DTE Gas Company ( DTE or the Company ) to respond to the testimonies of Mr. Sebastian Coppola ( Coppola Testimony ) on behalf of the Attorney General and Mr. Kirk Megginson ( Megginson Testimony ) on behalf of the Staff of the Michigan Public Service Commission (the PSC or Commission ), regarding their respective cost of capital estimates and capital structure recommendations for the Company. Specifically, I critique their methodologies and comment on their recommendations for the appropriate return on equity ( ROE ) and capital structure for the Company. In addition, I respond to their criticisms of my methodologies and recommendation. Are you sponsoring any exhibits? A. Yes, I am sponsoring Exhibit A-, Schedule R, ACADEMIC ARTICLES ON THE TESTS OF THE CAPM. Were these exhibits prepared by you or under your direction? A. Yes. What are the ROE and capital structure recommendations in this proceeding? A. Table R- below shows the recommendations of the cost-of-capital witnesses in this proceeding. In this proceeding, only Mr. Coppola disputes the Company s proposed capital structure of percent debt and percent equity. MJV Rebuttal -

136 Rebuttal Testimony of Michael J. Vilbert U- Table R- Witnesses' Proposed ROEs Witness ROE (%) Capital Structure (% Equity) Vilbert 0. Megginson. Coppola. 0 0 Would you please summarize your response to the intervenors cost of capital testimony in this proceeding? A. Yes. The main points of my rebuttal are the following:. I continue to recommend an ROE of 0½ percent.. The passage of the Tax Cuts and Jobs Act of 0 (Public Law -) ( TCJA ) has made regulated utilities more risky and will put downward pressure on regulated companies credit metrics. This downward pressure can be alleviated either by an increase in the allowed ROE or an increase in the equity ratio.. The capital structure for the Company should be set at the Company s proposed structure of percent equity and percent debt. Mr. Megginson and I support the Company s proposed capital structure; however Mr. Coppola has recommended lowering the equity capitalization to 0 percent. The Commission should reject Mr. Coppola s recommendation in part because of the effect of the Tax Cuts and Jobs Act of 0 which will put pressure on the credit metrics of all regulated utilities.. Economic conditions in the U.S. and the world remain uncertain and therefore continue to justify the use of a conditional market risk premium ( MRP ). Under more certain, equilibrium market conditions, I have used an MRP of. percent the long-term average since, but current economic conditions MJV Rebuttal -

137 Rebuttal Testimony of Michael J. Vilbert U- 0 0 continue to warrant the use of a conditional MRP estimate of. percent. Mr. Megginson s restriction to use of data beginning in is unjustified because Ibbotson publishes reliable data for the period beginning. The Corporate Finance textbook by Ross, Westerfield, and Jaffe presents MRP averages for U.S. and several other countries dating back even further to 00. Using the longest available period for which reliable data is available is recommended for estimating the MRP. Mr. Megginson s concern that interest rates were pegged to structured interest rates until, is not generally recommended in the financial literature regarding how to estimate the MRP.. The ECAPM method corrects for the empirical fact that the CAPM tends to underestimate the expected return for companies with betas less than.0 and overestimate the expected return for companies with betas more than.0. Empirical tests have repeatedly demonstrated this result. Use of adjusted betas and modifications to the Security Market Line ( SML) through the ECAPM are separate, non-redundant adjustments as I explained in Section V.A. in my direct testimony. I provide more detail in Section III.C. below.. I use the after-tax weighted-average cost of capital ( ATWACC ) method to recognize differences in financial risk among the sample companies in comparison to the Company. The WACC is discussed in every textbook on corporate finance or investments of which I am aware. The developers of the underlying theories both won the Nobel prizes in economics. Although not in wide spread use by regulators in the U.S., the ATWACC is used extensively throughout much of the rest of the world. Vilbert Direct Testimony, p.. Corporate Finance, Stephen A. Ross, Randolph W. Westerfield, and Jeffery Jaffe, 0 th Edition, 0. Megginson Testimony, p.. The ATWACC is commonly referred to as the weighted-average cost of capital ( WACC ) in corporate finance textbooks. I use ATWACC to distinguish it from the regulatory WACC which is the weighted-average of the after-tax cost of equity and the pre-tax cost of debt. Professor Franco Modigliani won the Nobel Prize in, and Professor Merton Miller won the Nobel Prize in 0. MJV Rebuttal -

138 Rebuttal Testimony of Michael J. Vilbert U- 0 0 Is the difference in your ROE recommendation compared to those of the other witnesses in this proceeding due solely to the fact that their analyses employ more recent data? A. There are other differences in our fundamental inputs and methodological practices that lead to differing results. Some of these differences include the treatment of the timing of dividend payments, the adjustment for financial risk, and the modifications to the CAPM model that adjust for the consistent empirical observations on the estimates from the model. These differences are discussed in Section III below. A. Recommended Capital Structure Do you support the Company s requested capital structure? A. Yes. The Company has requested that its permanent capital structure include percent long-term debt and percent equity. Mr. Megginson and I support that request, while Mr. Coppola recommends a capital structure with 0 percent long-term debt and 0 percent equity. The Commission should reject Mr. Coppola s capital structure adjustment. What are your concerns about Mr. Coppola s assertions on changing the capital structure? A0. Both Mr. Coppola and Mr. Megginson refer to the Commission s recommendation in the Consumers Energy Case U-0 that the capital structures of regulated gas LDCs in Michigan move to 0 percent equity and 0 percent debt. 0 However, equity ratios for regulated companies may need to increase in the future due, in part, to the effects of the Tax Cuts and Jobs Act of 0 ( TCJA ) discussed below. All credit rating agencies have commented on the negative effect that the TCJA will have Although Mr. Megginson supports the Company s requested capital structure in the current proceeding, the Staff recommends moving to a 0 equity ratio in the future. Coppola Testimony, pp.,. Coppola Testimony, p.. Megginson Testimony, p.. 0 Coppola Testimony, p., lines -, Megginson Testimony, p., lines -. MJV Rebuttal -

139 Rebuttal Testimony of Michael J. Vilbert U- 0 0 on the credit metrics for regulated companies. The pressure on the credit metrics can be alleviated by either an increase in the allowed ROE or an increase in the equity ratio or a combination of both. Is a capital structure with percent equity consistent with the sample? A. Yes. The average book equity ratio for the expanded sample is. percent for the second quarter of 0. Restricting the sample to gas LDCs only, the average book equity ratio is. percent, substantially higher than the 0 percent recommended by Mr. Coppola. The sample average book equity ratio is comparable to the Company s requested long-term equity ratio of percent. Therefore, I believe Mr. Coppola s capital structure recommendation should be rejected as inconsistent with the sample evidence as well as not being sufficiently supportive of the Company s credit rating due to the effects of the TCJA. (See discussion on the TCJA in Section II.B below.) What are your thoughts with regard to Mr. Coppola s assertion that companies in the peer group are more risky than DTE Gas? A. I disagree. Regarding his sample companies, Mr. Coppola says that the lower average common equity level supports these companies utility operations, as well as non-utility operations which tend to be somewhat riskier. These riskier non-utility operations require a higher common equity cushion to maintain similar credit ratings. Effectively, Mr. Coppola is suggesting that the presence of any nonregulated assets in the sample group makes DTE Gas less risky than the sample, but the sample has a relatively small percentage of non-regulated assets. The companies within the peer group have substantial regulated assets on average greater than 0 percent or more of the assets of the companies in the peer group are regulated. The sample is very nearly a pure play sample of regulated utilities, with less than 0 See discussion of the TCJA in Section II.B below. See Vilbert Schedule D., Panels A through M. Coppola Testimony, p.. See Vilbert Schedule D.. MJV Rebuttal -

140 Rebuttal Testimony of Michael J. Vilbert U- 0 0 percent of their assets on average devoted to non-regulated assets. A. Capital Attraction What is your response to Mr. Coppola s assertion that because companies with an authorized ROE less than 0 percent have been able to raise capital, it is evidence of the appropriateness of his ROE recommendation? A. I disagree with the implications of Mr. Coppola s assertions. The ability to raise capital is more complicated than whether the allowed ROE is at a particular level. The ability to raise capital, whether debt or equity, depends upon the company s current capital structure, the company s credit ratios, its reasons for requiring capital, and the terms and conditions under which it is willing to issue debt or equity. A company may almost always raise additional debt/equity if it is willing to pay a high enough interest rate, accept more onerous covenant agreements, or issue stock at a discount. Even if the terms and conditions were reasonable, it would still only provide limited information because the company s credit metrics may have been weakened but perhaps not by enough to result in a rating change. Do you agree with Mr. Coppola s assertion that a market-to-book ratio greater than.0 prevailing for utilities indicates that the company can easily raise equity capital? A. It is true that current market-to-book ratios are greater than.0, not just for utilities but for most stocks in the U.S. However, this is not indicative of a company s ability to raise equity capital. Moreover, the market-to-book ratios are falling and now average. for the sample (compared to an average of. at the time of the analysis undertaken for my Direct Testimony). What are your thoughts with regard to Mr. Coppola s assessment that stock investors continue to migrate to utility stocks recognizing that authorized ROEs The minimum percentage of regulatory assets is Chesapeake Utilities with 0. percent. Coppola Testimony, pp Coppola Testimony, p. 0. MJV Rebuttal -

141 Rebuttal Testimony of Michael J. Vilbert U- 0 0 are still above the true cost of equity as reflected by an average Market-to-Book ratio of. times? A. I strongly disagree. First, we cannot observe the true cost of capital. It must be estimated. Second, if the expected return were truly above cost of capital, the market would react very quickly, days at most. Finally, financial economists do not have a good model for determining a company s stock price. If Mr. Coppola s assertion were true, regulators theoretically could reduce the allowed ROE and force the market-to-book ratio to.0. However, the estimated discount rate necessary to result in a market-to-book ratio of.0 often results in a discount rate of much less than the cost of debt which simply can t be the correct cost of equity. The implication is that there must be something else going on with the level of stock prices. In fact, Professor Robert Shilling won the Nobel Prize in Economics for his work in this area demonstrating that the long run variability of stock prices is much higher than the long run variability of dividends, indicating that we do not have a good model for predicting stock prices. Although we know some factors that affect market prices, we don t have a model that adequately explains the level of stock prices. A marketto-book ratio greater than.0 is simply not a reliable indicator of whether an allowed ROE is adequate or whether the true cost of capital is less than the allowed ROE. After reviewing the intervenors testimony in this proceeding, have you changed your ROE recommendation for the Company? A. I recommend that the Company be allowed an ROE of 0½ percent on its proposed percent equity ratio. 0 This is slightly above the mid-point of the ¾ percent to 0¾ percent range of reasonable estimates that I calculated for the sample of companies comparable to DTE Gas Company s financial and business risk. Further, I continue to believe that DTE Gas is of greater risk than the average company in the sample, and note that the cost-of-capital estimates from the standard Coppola Testimony, p. 0, lines -. Professor Robert Shiller won the Nobel Prize in 0 for his work on stock price bubbles. 0 I report my recommended ROE to the nearest ¼ percentage point because I do not believe that the cost of capital can be estimated more precisely than that even though the model results can be calculated to several decimal places. MJV Rebuttal -

142 Rebuttal Testimony of Michael J. Vilbert U- models continue to be downward biased given the current economic uncertainties domestically and abroad. How is your rebuttal testimony organized? A. Section II updates capital market conditions and describes the effect of the Tax Cuts and Jobs Act on regulated utilities. Section III critiques the estimation methodologies used by the intervenor witnesses and responds to criticisms of the methodologies I used. Section IV discusses credit ratings and the importance of the regulatory environment. Section V responds to criticisms of my use of the after-tax weightedaverage cost of capital ( ATWACC ) as a tool to address differences in financial risk. 0 II. UPDATE TO CAPITAL MARKET CONDITIONS A. Update of Economic Conditions Since August 0 0 Have forecast long-term government bond interest rates changed since you filed your direct testimony in August 0? A. In August 0, the forecast yield for a 0-year Treasury bond was. percent for 0. The updated forecast published in March 0 maintained a yield of. percent for 0. Do you believe the capital markets are now back to normal? A. The Federal Reserve decided to raise the target range for the federal funds rate to to ¼ percent. Until recently, volatility in the financial markets had lessened, but economic conditions are not yet back to normal as compared to their status prior to the credit crisis. More importantly, recent developments in global trade policy related to the potential for imposition of tariffs on imports to US (and, in retaliation, on exports on US goods), have rattled global capital markets and significantly increased market volatility, adding new uncertainties to financial markets across the globe. Forecast by Blue Chip Economic Indicators, Edition October 0 See Federal Open Market Committee, Press Release, September 0, 0. MJV Rebuttal -

143 Rebuttal Testimony of Michael J. Vilbert U- 0 0 Haven t the U.S. stock markets reached record highs and interest rates begun to rise recently? A0. Yes, however, there has recently been a sell-off triggered by the increasing potential for a trade war between the two largest economies of the world as well as pressure on trade with other nations. Prior to the U.S. administration s decision in January 0 to impose tariffs on several imported goods, primarily from Asian economies, the U.S. stock market has been trading at Price-to-Earnings ( P/E ) levels which are above historical medians. At the same time, government bond yields have increased since the U.S. presidential election and the Fed s increase of the federal funds rate. The recent volatility in the capital markets demonstrates that the substantial uncertainty remains and is perhaps increasing with the rhetoric on trade. What evidence can you provide that U.S. medium- and long-term government bond yields remain depressed relative to the yields on corporate debt? A. Annual yields on long-term U.S. government bonds have continued to be lower than historical values. For instance, the historical average of annual yields on long-term government bonds was. percent from to 00, but the long-term government bond yield declined to just. percent in 0. The most recent - day average of long-term government bond yield is at.0 percent. Although the U.S. Federal Reserve has discontinued its large-scale asset purchases program, which pushed down yields on medium and long-term U.S. government bonds, it still holds almost $. trillion in assets from this purchasing program. Until there is an intended unwinding of these holdings, uncertainty will persist. Furthermore, elevated levels of uncertainty in the global capital markets continue to affect the U.S. economy, which remains sensitive to those disruptions. In other words, major capital markets globally have not yet returned to their pre-credit crisis status, See Duff & Phelps s Ibbotson Stocks, Bonds, Bills, and Inflation ( SBBI ) 0 Valuation Yearbook at -. -day average between March and April, 0. Board of Governors of the Federal Reserve System, Credit and Liquidity Programs and the Balance Sheet, as of February, 0. MJV Rebuttal -

144 Rebuttal Testimony of Michael J. Vilbert U- 0 0 and they continue to affect the U.S. capital markets. The European Central Bank (ECB) continues its accommodative stance, which targets a negative 0.% interest rate on banks deposit facility at the ECB, and continues to purchase billions of euros worth of assets each month (0 billion euros of assets purchased each month of the first quarter of 0). Similarly, the Bank of Japan, which has maintained a policy to keep yields on government debt around zero percent since September 0, also represents a divergent approach from that currently maintained by the US Federal Reserve ( Fed ), which halted its asset purchases and has recently decided on a modest increase in interest rates. Dr. Janet Yellen s term as the chairman of the Fed came to a close in early February 0, and Jerome Powell has replaced her as chairman. Mr. Powell is expected to maintain Dr. Yellen s policy of gradual interest rate increases. However, uncertainty persists concerning how monetary policy may change with the transition. Finally, increased testing of ballistic missiles by North Korea has had noticeable impacts on the market, such as pushing down yields on 0-year U.S. Treasury Bonds as investors sought safety. 0 While U.S. capital markets may have been benefiting from investors fleeing economic turmoil elsewhere, these global weaknesses underscore investors lack of confidence in the global economy. These global weaknesses can affect the relatively more stable U.S. economy just as has occurred in recent weeks with the new trade tariffs imposed by the U.S., and in retaliation, by China. At the same time, any European Central Bank, Key ECB Interest Rates, EUROPEAN CENTRAL BANK, (last visited on February, 0). European Central Bank, Asset purchase programmes, EUROPEAN CENTRAL BANK, (last visited April 0, 0). See Roger Blitz, Leo Lewis, and Robin Harding, Nervous investors put the Bank of Japan in the spotlight, Financial Times, January, 0. See Heather Long, Who is Jerome Powell, Trump s pick for the nation s most powerful economic position?, Washington Post, November, See Financial Times article Flight to havens after North Korea missile launch, MJV Rebuttal - 0

145 Rebuttal Testimony of Michael J. Vilbert U- 0 0 aggressive action by the Fed on interest rates can further exacerbate these weakened global economies, which in turn will further affect U.S. capital markets. Are interest rates and treasury yields expected to rise in the future? A. Yes. However, it remains to be seen what the implications of the recent developments in tariffs would be. At the moment, there is significant uncertainty in the financial markets as evidenced by heavy losses in stock markets in the U.S. and around the globe in the recent weeks. The Dow Jones Industrial Average is down percent since the beginning of the year, largely driven by the uncertainties brought about by imposition of import tariffs by U.S. and China. With respect to the interest rate, since the beginning of 0, the Fed has increased the federal funds target interest rate three times, which has increased yields on U.S. Treasury notes briefly, but for many reasons discussed above, yields on 0-year U.S. Treasury bonds are currently lower than at the beginning of 0. While yields on the 0-year Treasury bond have increased from. percent in January 0 to. percent in early February 0, yields on the 0-year Treasury bond have declined from.0 percent to. percent. However, economists and investors do not expect yields to persist at these unprecedented low levels indefinitely. According to the Blue Chip Economic Indicators report dated March 0, 0, the consensus economic forecast yield on 0-year U.S. Treasury notes are. percent on average in 00 to 0 and. percent on average from 0 to 0. These forecasts are substantially higher than the current yield on 0-year U.S. government notes. This highlights the fact that current long-term and medium-term U.S. government bond yields are low relative to historical levels as well as compared to consensus forecasts of future rates. The unusually low current long-term government bond yields, along with elevated yield spreads due to risk aversion, must be considered when evaluating the results of the risk-positioning model, because the downward bias in the long-term Bloomberg accessed as of January, 0. See Blue Chip Economic Indicators, dated March 0, 0, page. MJV Rebuttal -

146 Rebuttal Testimony of Michael J. Vilbert U- 0 0 risk-free interest rate will inappropriately lower the sample companies ROE estimates generated by the CAPM method. What is the current evidence regarding market volatility? A. A measure of the market s expectations for volatility is the VIX, which measures the 0-day implied volatility of the S&P 00 index. This index is sometimes called the investor fear gauge because it provides a market indication of how investors in stock index options perceive the likelihood of large swings in the stock market within the next month. In 0 and 0, the VIX displayed considerable short-term volatility. During that period the index reached as high as and fell as low as. At the end of January 0, the VIX stood at. but increased dramatically, reaching a high of. on February, 0. As of the close of trading on April, 0, the VIX stood at., substantially higher than the 0-present average of or the two year average of.. Consistent with recent movements in the stock market, investors expect a high level of market volatility over the coming 0 days, according to the VIX. Are there other indications that investors are exhibiting elevated signs of risk aversion? A. Yes, the SKEW index measures the market s willingness to pay for protection against negative black swan stock market events (i.e., sudden substantial downturns). A SKEW value of 00 indicates outlier returns are unlikely, but as the SKEW value increases, the probability of outlier declines also increases. The SKEW currently stands at almost, while the index has averaged since 0, and in the past two years. This indicates that in addition to short-term volatility expectations being high, investors are exhibiting signs of elevated risk aversion over concerns of downside tail risk. See Rachel Koning Beals, Stock market 'fear gauge' VIX remains up over 0% in wake of latest North Korean action, MarketWatch, August, 0. Yahoo Finance, April, 0. Bloomberg as of February, 0. Ibid. MJV Rebuttal -

147 Rebuttal Testimony of Michael J. Vilbert U B. The Effect of the Tax Cuts and Jobs Act Will the recently enacted Tax Cuts and Jobs Act of 0 affect regulated utilities? Please Explain. A. Yes. The Tax Cuts and Jobs Act of 0 (Public Law -) ( TCJA ), signed into law on December, 0, reduces the federal corporate marginal tax rate from percent to percent. Although the tax law is likely to be a net positive for investors in unregulated companies, it is likely that customers, rather than shareholders, of regulated companies will reap the majority of the benefits because the savings in income taxes will flow through to customers. The reduction in income tax will likely increase the risks facing regulated companies because the effect of the law will be a reduction in their cash flows. How will the TCJA of 0 affect the expected volatility of cash flows for regulated companies? A. For regulated companies, the change in the income tax allowance will result in greater volatility of net income (and cash flow) because the regulatory income tax allowance ( ITA ) provides a cushion against the impact of variations in expected costs and expected revenue on net income. Recall that ITA is the amount of additional return on equity necessary to allow a company to earn its allowed ROE after paying corporate income taxes. Consider for example the effect on net income of a 0 percent increase in sales. All else equal, net income would increase by about. percent for a percent income tax rate, (i.e. 0.0 times ( 0.)), but would increase by. percent for a percent income tax rate. The change would be similar for a decrease in revenue. Moreover, the variation in net income is likely to be systematic in that variations in revenue are generally related to variations in the economy. Systematic risk is the type of risk that affects the cost of capital. How will the TCJA of 0 affect a regulated company s credit metrics? A. Credit metrics are likely to be negatively impacted due to a reduction in the regulated utilities cash flow because cash flow metrics are closely observed by the ratings agencies. The reduction in income tax allowance, the expected refunds of EDIT, and the loss of bonus depreciation will reduce cash flow. Yet the tax reform has not MJV Rebuttal -

148 Rebuttal Testimony of Michael J. Vilbert U- 0 impacted the amount of assets, a portion of which will be debt-financed, necessary to serve the utilities customers. Decreases to the cash flow metrics, such as cash flow to debt ratios closely monitored by credit rating agencies to inform their credit opinions, negatively impacts the credit profile of many regulated utilities. These effects suggest that the allowed ROE, the amount of equity in the capital structure, or possibly both should be increased to offset the negative effects of the income tax law. While the uncertainty surrounding the passage of a tax reform bill has been removed, it is unlikely that these impacts on the cost of capital will immediately appear in the estimation models. The law has only been in place for one fiscal quarter. A longer period of market data and updates of analyst forecasts is needed before the cost of capital estimation models will begin to show the impacts of the new tax law. III. COST OF CAPITAL ESTIMATION METHODOLOGIES A. Sample Selection 0 How do Mr. Coppola and Mr. Megginson select their proxy groups? A. Mr. Coppola used eight of the eleven regulated natural gas local distribution companies ( gas LDCs ) from Value Line, five of which I used in my analysis. When selecting a sample, it is important to consider factors that may affect the ROE estimation methods such as dividend cuts and substantial merger and acquisition ( M&A ) activity. I therefore disagree with Mr. Coppola s inclusion of New Jersey Resources, NiSource Inc., South Jersey Industries, and Spire Inc. Each of these gas LDCs were excluded from my proxy group due to significant M&A activities in the past five years. Additionally, NiSource Inc. would have been excluded due to having a dividend cut in the past five years. Mr. Coppola excludes Chesapeake Utilities, which I included in my proxy group because its revenues of $00 million exceeded Moody s changes outlooks on US regulated utilities primarily impacted by tax reform, Moody s Investor Service, Global Credit Research, January, 0, and Tax reform is credit negative for sector, but impact varies by company, Moody s Investor Service, Sector Comment, January, 0. Also U.S. Tax Reform: For Utilities Credit Quality, Challenges Abound, S&P Global Ratings, Rating Direct, January, 0; and Tax Reform Impact on the U.S. Utilities, Power & Gas Sector: Tax Reform Creates Near-Term Credit Pressure for Regulated Utilities and Holding Companies, Fitch Ratings, Special Report, January, 0. MJV Rebuttal -

149 Rebuttal Testimony of Michael J. Vilbert U- 0 0 my criteria of $00 million in revenues. The measure I use for estimating the size of M&A activity is calculated by dividing the company s largest M&A transaction in the last five years by the beginning of year market capitalization values for the year of the transaction. I exclude any companies that have M&A activity exceeding 0 percent of their relevant beginning year market capitalization. New Jersey Resources and South Jersey Industries had a proposed M&A of $, million that was percent and 0 percent of their 0 market capitalizations, respectively. NiSource Inc. had an M&A transaction valued at $, million, or percent of its 0 market valuation. Spire Inc. had an M&A transaction with an announced value of $,00, or 0 percent of its 0 market capitalization. Mr. Megginson s proxy group also includes the eight gas LDCs that Mr. Coppola uses in his proxy group, but also includes Black Hills. Black Hills was not in my sample because Value Line characterizes Black Hills as an electric utility not a gas LDC. Additionally, I would have excluded Black Hills because it was purchased by Source Gas for $. billion in 0. Neither Mr. Coppola nor Mr. Meggison report any investigation they may have performed on whether the M&A activity affected the companies stock prices which would affect their beta estimates. Value Line s beta estimates are based upon five years of historical data, so M&A activity within the five year estimation window may have affected the estimates. How do you respond to Messrs. Coppola and Megginson s criticisms of your inclusion of water utilities in your proxy group? A. After applying my standard sample selection procedures, there were only five gas LDCs in the sample, which I regard as too few to provide sufficiently reliable results. Previously when estimating the cost of capital for water utilities, I used a sample of gas LDCs as a check on the results of the water utilities sample. Gas LDCs and water utilities are both capital intensive, network industries regulated by the respective state Coppola Testimony, pp. -. Megginson Testimony, pp. -. MJV Rebuttal -

150 Rebuttal Testimony of Michael J. Vilbert U- 0 0 commission. Generally, both types of utilities have an exclusive service area. The average beta for my expanded sample is 0. which is the same average beta for both Mr. Coppola s and Mr. Megginson s samples, indicating that the companies are of comparable systematic risk. Contrary to Mr. Megginson s belief, 0 I determined that combination electric and gas utilities are not comparable at this time because the regulated assets of those entities are primarily electric utility assets. The regulated electric industry is currently unsettled because of the evolution of distributed generation, increasing energy conservation and falling sales, emergence of substantial community aggregation for some utilities and the rapid development of renewable energy with significant shifts in their supply mix. Water utilities are usually considered to be less risky than gas LDCs so expanding the sample by adding comparable risk water utilities is the best available alternative to having a sample that is either too small or one that includes companies with characteristics that may bias the ROE estimation process. How do you respond to Mr. Coppola s claim that the screening process for water utilities is questionable? A0. The water utilities in my expanded sample are all state regulated utilities. Although somewhat smaller on average than the average gas LDCs in the sample, they are not small companies in the sense that matters for cost of capital estimation. The average market capitalization for deciles eight and nine according to Duff & Phelps is about range between $ million and $ million. So, the smallest company I would consider including in my sample would be a decile or decile company which is not small as used in the sense of higher expected returns. As noted above, all utilities are capital intensive so it is not clear how mandates for water utilities are 0 Megginson Testimony, p., lines -0. Coppola Testimony, pp. -. See Duff & Phelps s Ibbotson Stocks, Bonds, Bills, and Inflation ( SBBI ) 0 Valuation Yearbook at Chapter. Note that decile is made up of 0 companies, and it is reasonable that the smallest company in my sample could fall within the range of decile. Duff and Phelps does not provide size cutoffs for the deciles. MJV Rebuttal -

151 Rebuttal Testimony of Michael J. Vilbert U- 0 0 significantly different than the mandates on other utilities such as gas LDCs need to replace aging pipes. Why didn t you simply ignore the sample selection criteria and include the gas LDCs with substantial M&A activity or with a dividend cut in the last five years? A. The purpose of setting criteria for inclusion in the sample is to select companies of comparable risk while avoiding factors that may bias the cost of capital estimates. Nearly all cost of capital witnesses exclude companies involved in M&A activity or which experience a dividend cut. Typically the stock prices of companies involved in a merger or an acquisition decouple from the market, meaning that the stock price is often much more affected by the latest news regarding the M&A than by events in the capital markets. The effect on the cost of capital is unknown, but it is not likely to have no effect. Neither Mr. Coppola nor Mr. Megginson reported any tests that they may have done to determine whether the companies stock prices or beta estimates were affected. Before deciding to include companies affected by these factors, they should have conducted a test on the effect of the M&A and/or dividend cut on the companies stock price. B. DCF Model What is the main difference among the DCF methodologies used by Mr. Coppola, Mr. Megginson, and yourself? A. Mr. Coppola and Mr. Megginson both use the single-stage (constant growth) DCF model, as do I. However, their implementations of the single-stage DCF model utilize annualized dividend yields and growth rates, whereas I use quarterly dividend yields and growth rates. How do these differing assumptions affect the single-stage DCF model? A. These differing assumptions affect the model through the timing and growth of cash flows to investors. For example, Mr. Coppola uses a forecast of the dividend level one year from now (i.e. the average projected dividend for 0 from Value Line) to MJV Rebuttal -

152 Rebuttal Testimony of Michael J. Vilbert U- compute his dividend yield. In the simple DCF model, this implies that the first dividend received by investors comes one year from now and subsequent dividends (growing at a constant annual rate) come at one-year intervals thereafter, but investors receive dividends quarterly. 0 0 Mr. Megginson uses the most recent quarterly dividend from Yahoo Finance as of February, 0 and annualizes it (Exhibit S-, Schedule D- of Mr. Megginson s testimony labels it as Most Recent Quarterly Dividend ) for his dividend calculation. He then multiplies the dividend yield by ( + 0. x annual growth rate) and finally adds the growth rate to compute the adjusted DCF formula. This ½ growth rate adjustment implies an assumption that dividends are paid quarterly but are grown on an annual basis, with growth occurring on average during the middle of each year. However, the full amount of the adjusted dividend is still assumed to reach investors at the end of the first year. Are there advantages of using quarterly dividends and growth rates in the single-stage DCF model as you do? A. The quarterly estimates correspond to the frequency and timing of actual dividend payments. There is no principled reason not to match the period in the DCF model to the actual payment of dividends by the sample companies. For the companies in the gas LDC sample, dividends are paid on a quarterly rather than annual basis. This pattern can be properly captured by using the historical actual quarterly dividend increased by the compound quarterly forecast growth and then adding the quarterly growth rate to obtain the quarterly estimate of the ROE, which can then easily be annualized to derive the annual ROE estimate. The DCF model does not specify the period between dividends. My use of quarterly dividends and the quarterly compound growth rate matches the actual payment of dividends reflected in stock prices and provides a more accurate estimate of the ROE than does either Mr. Coppola Testimony, Exhibit AG-0. Other reasons are sometimes claimed, but the basic issue is the analyst s belief that the use of the full forecast growth rate risks overestimating the ROE. MJV Rebuttal -

153 Rebuttal Testimony of Michael J. Vilbert U- 0 0 Coppola s annual model or Mr. Megginson s approximation using ½ the annual growth rate to estimate the expected dividend yield. Does the fact that companies do not adjust their dividends on a quarterly basis invalidate your use of a quarterly model? A. The DCF model is based upon an assumption that dividends grow at a constant rate. The period is not specified, and the quarterly model is closer to reality than the annual model used by Mr. Coppola or the adjusted annual model used by Mr. Megginson. Any model that does not recognize that dividends are actually paid quarterly is an abstraction from reality. How do differing assumptions about timing impact the ROE estimates in the DCF model? A. In the DCF model, the ROE is the implied discount rate necessary to make the present value of forecasted cash flows (dividends) match the observed market price. If cash flows are assumed to reach investors later, they are discounted over a longer period of time, meaning the discount rate will have to be lower to match the observed market price. By delaying the growth and delivery of dividends, which is inconsistent with the actual payout schedule of companies, Mr. Coppola s and Mr. Megginson s use of an annualized model artificially lowers the ROE estimate, although the difference is relatively small. Had they used the quarterly version of the DCF model, the estimates would increase by about 0 bps. Do you have any other comments about Mr. Megginson s DCF analysis? A. I do not agree with the way Mr. Megginson calculates growth rate inputs for his DCF analysis, which involves computing an (equally weighted) average of the -year EPS growth rate estimates from three services: Zacks, Yahoo Finance, and Value Line. This approach is flawed because there is substantial overlap of the analysts reported in Zacks and Yahoo Finance. Note that this is especially true in Mr. Megginson s implementation, since he implicitly assumes only ½ a year s worth of dividend growth in the first period, but still discounts the cash flow by a full year. Megginson Testimony, p.. MJV Rebuttal -

154 Rebuttal Testimony of Michael J. Vilbert U- 0 0 While Value Line is a separate and independent forecasting service, Zacks and Yahoo Finance compute consensus numbers by averaging the estimates of various analysts that report to them. Since some analysts may report to both services, averaging the two may more heavily weight the opinions of certain analysts. To the extent these analysts estimates are higher or lower than average, this may bias the growth rate inputs up or down. C. CAPM. The Market Risk Premium Is Mr. Megginson s estimate of. percent as the market risk premium ( MRP ) input to his CAPM analysis reasonable at this time? A. This estimate is too low, and is inconsistent with the MRP estimates employed by Mr. Coppola and me. This is particularly true given the current economic conditions I noted above. Mr. Coppola used a MRP estimate of. percent in his calculations. While I do not disagree with Mr. Megginson s data source or methodology for calculating the historical MRP, 0 I question his selective use of the period -0. Although Mr. Megginson also uses a MRP of. percent in his workpapers, he lowers his final recommendation by including the estimates from the lower MRP of. percent as well. However, as illustrated in Table R- below, use of different periods for the historical average yields different values for the MRP. While historical averages starting in the 0s and 0s, such as the one calculated by Mr. Megginson, tend to give lower results, looking back over either longer (e.g., Megginson Testimony, p., but he actually uses. percent in his calculations. See Megginson, Schedule D-, Schedule S-, p. of. My CAPM estimates employ scenarios using inputs of. and. percent for the MRP. Mr. Coppola uses. percent in his CAPM analysis. Coppola Testimony, Exhibit AG-, p. of. He says that he uses an MRP of. on p., but his calculations use.. 0 Mr. Megginson uses Ibbotson s data and calculates the arithmetic average return on the stock market in excess of income returns on long-term government bonds. Duff & Phelps changed the 0 Valuation Handbook to exclude the information necessary to calculated historical market risk premiums over other periods. The information in Table R- is from the 0 Classic Yearbook. MJV Rebuttal - 0

155 Rebuttal Testimony of Michael J. Vilbert U- the post-world War II era) or shorter (e.g., the last years) periods yield an average historical MRP in the. to.0 percent range. Table R-: Historical Market Risk Premium Estimates Period Length (yrs) Historical Average MRP - 0.% - 0.0% - 0.% - 0.% - 0.% - 0.% 0 Because market returns vary, it is not surprising that use of different historical periods results in different averages. However, it creates the possibility that an analyst may intentionally or unintentionally select a period based on the MRP estimate it yields. Relying upon returns starting in (the longest period of reliable data) is a way to side-step the potential for bias. As Professor Roger Morin states in his textbook, New Regulatory Finance: Source: Duff & Phelps 0 SBBI Yearbook Notes: Arithmetic average of stock market returns less income returns on long-term government bonds. To avoid data mining, a reasonable solution is to use the entire period for which reliable data is available. My estimate is. percent based upon the historical average realized MRP over the longest period reported by Duff & Phelps. However, for reasons stated in Section III of my direct testimony, I believe the MRP remains elevated in the current economic environment, leading me to also estimate the CAPM using an MRP of. percent. Roger A. Morin, New Regulatory Finance, Public Utilities Report, Inc., 00, p.. MJV Rebuttal -

156 Rebuttal Testimony of Michael J. Vilbert U- 0 0 What would be the impact of using a more reasonable MRP on Mr. Megginson s and Mr. Coppola s CAPM results? A. The average beta in Mr. Megginson s proxy group is 0.. Therefore, using an MRP in the.-. percent range approximately percentage points higher than the. percent he used would raise his CAPM cost of equity estimates by approximately bps to bps. The average beta for my sample (and Mr. Coppola s) is also 0., so the change in Mr. Coppola s estimates from using an MRP of. percent (as opposed to only his. percent MRP) would increase by about bps. Note that this estimated increase is prior to adjusting for differences in the financial risk of DTE Gas and those of the sample companies. To properly estimate the true cost of equity capital for the Company, it is necessary to decouple the impact of differing financial risk of the sample companies as compared to that of DTE Gas. I do this in my Direct Testimony using the Hamada Adjustment methodology as well as the ATWACC methodology. What is your response to Mr. Coppola s and Mr. Megginson s position that an MRP as high as. percent should be rejected, because it is too high, deviating from historical MRP average? A0. If economic conditions were more stable, perhaps I would agree with them. However, the effect of continued uncertainty in economic conditions both globally and to a lesser extent in the US continues to indicate higher risk aversion and flight to safety among investors. This uncertainty has increased recently, as discussed above, due to the potential for a trade war. The yield spread between an index of 0-year U.S. utility bonds and the 0-year U.S. Treasury bonds remains elevated. The effect of this abnormal yield spread is observable, and I have illustrated those observed changes in yield spreads over various historical periods as well as currently. Significant deviations from yield spreads that have historically persisted during normal economic conditions have to be accounted for in ROE estimation; else we risk These values are calculated as the product of the beta estimate (i.e., 0.) and the difference in MRP (i.e., 0.0 to.0 percent). These values are calculated as the product of the beta estimate (i.e., 0.) and the difference in MRP (i.e.,.0 percent). MJV Rebuttal -

157 Rebuttal Testimony of Michael J. Vilbert U- estimating artificially low ROEs compared to what equity investors demand during such times. Are the yield spreads still elevated such that they warrant adjustments to riskfree rates and the MRP? A. Yes, my current assessment of A-rated yield spreads, illustrated in Table R- below indicates that the average yield spreads continue to be elevated relative to their levels during normal economic conditions. Therefore, they continue to warrant an adjustment to the risk-free rate, the MRP, or both. Table R- Spreads between U.S. Utility Bond (0 year maturity) and U.S. Government Bond (0 year maturity) - bps Periods A-Rated Utility and Treasury BBB-Rated Utility and Treasury Notes Period - Average Apr [] Period - Average Aug-00 - Mar-0 [] Period - Average Mar [] Period - Average -Day (Mar, 0 to Apr 0, 0) [] Spread Increase between Period and Period [] = [] - [] Spread Increase between Period and Period [] = [] - [] Spread Increase between Period and Period [] = [] - [] Sources and Notes: Spreads for the periods are calculated from Bloomberg's yield data. Average monthly yields for the indices were retrieved from Bloomberg as of April, 0. 0 A-rated yield spreads have decreased slightly from bps in August 0 to bps as of April, 0. As I explained in my direct testimony, a bps yield spread could be a result of either the elevated market risk premium relative to its normal level or the underestimation of the risk-free rate, or both. Vilbert Direct Testimony, pp. -. MJV Rebuttal -

158 Rebuttal Testimony of Michael J. Vilbert U The Empirical CAPM Can you discuss the second major difference in the implementation of the CAPM between you and Messrs. Coppola and Megginson, namely the use of the empirical version of the CAPM? A. As I noted in my direct testimony, empirical tests of the CAPM have long shown that it underestimates the expected return for companies with betas less than the market average of.0 and overestimates the expected return for companies with betas greater than.0. The ECAPM is a way to correct for this problem. Equation from my direct testimony displays the ECAPM, ( α ) rs = rf + α + βs MRP () where α is the alpha adjustment of the risk-return line, a constant, and the other symbols are defined as above. What academic evidence are you referencing when you cite the need for a correction to the CAPM? A. I have attached Exhibit A-, Schedule R, which is a discussion of the academic tests of the CAPM and provides an estimate of the size of the adjustment (α in Equation ) that resulted from the tests. Although many of the articles are older, it is because repeated tests have generated the same result, so current research has turned to developing a replacement model that better fits the empirical data. For example, the model developed by Professor Eugene F. Fama and Kenneth R. French (the Fama-French Model) is a direct result of the search for a replacement model. Do the empirical tests of the CAPM you reference invalidate use of the CAPM estimates? A. That is the attractive feature of the ECAPM. It is a correction to the results of Vilbert Direct, Section IV.A., pp. -0. Professors Fama and French have published a series of articles dealing with issues associated with their modifications to the CAPM. See for example, Size and Book-to-Market Factors in Earnings and Returns, Eugene F. Fama and Kenneth R. French, The Journal of Finance, Vol. 0,, p. -, March. MJV Rebuttal -

159 Rebuttal Testimony of Michael J. Vilbert U- 0 the CAPM that is simple to implement and consistent with the empirical findings in the articles I reference in Exhibit A-, Schedule R. The result is that the estimates (of ECAPM) more closely replicate the results of the empirical tests of the CAPM. As noted in my testimony, I rely more on the results of the ECAPM because it adjusts for the empirical findings. How do you respond to Mr. Megginson s assertion that making your empirical adjustments to the CAPM while using adjusted beta estimates from Value Line is inappropriate? A. He is not correct. These are two fundamentally different and complementary adjustments. This can be shown by reference to Figure R- below which illustrates the empirical security market line ( SML ). The adjustment to beta corrects the estimate of the relative risk of the company, which is measured along the horizontal axis of the SML. The ECAPM adjusts the risk-return tradeoff (i.e., the slope) in the SML, which is on the vertical axis. In other words, the expected return (measured on the vertical axis) for a given level of risk (measured on the horizontal axis) is different from the predictions of the theoretical CAPM. Getting the relative risk of the investment correct does not adjust for the slope of the SML, nor does adjusting the slope correct for errors in the estimation of relative risk. Vilbert Direct Testimony, p.. Megginson Testimony, pp. -0. MJV Rebuttal -

160 Rebuttal Testimony of Michael J. Vilbert U- Figure R-: The Empirical Security Market Line 0 Can you explain further why using Value Line s adjusted betas do not correct for the issues raised by empirical tests of the CAPM? A. Yes. I explained on pp. -0 of my direct testimony why the use of Value Line s betas and an estimate of the long-term risk-free rate do not remove the need to use the empirical version of the CAPM. I recognize that the increased average yield of longterm Treasury bonds relative to Treasury bills reduces the size of the required alpha adjustment in the CAPM, but it does not eliminate the need for an adjustment. I further explained why use of adjusted betas from Value Line is not double counting. Mr. Coppola and Mr. Megginson criticize my use of the ECAPM, but neither responds directly the explanation in my direct testimony on why the ECAPM is still needed even when using the long-term risk free rate and Value Line betas. Mr. Megginson says that his CAPM analysis already accounts for many of the shortcomings that ECAPM attempts to correct, therefore rendering it unnecessary. He references Professor Morin s book 0 which notes (as I do) that use of a long-term risk-free rate reduces the alpha adjustment, but Dr. Morin does not conclude that 0 Megginson Testimony, pp. -. MJV Rebuttal -

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