S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * *

Transcription

1 S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter, on the Commission s own motion ) establishing the method and avoided cost ) calculation for WISCONSIN PUBLIC ) Case No. U SERVICE CORPORATION to fully comply ) with the Public Utilities Regulatory Policy ) Act of 1978, 16 USC 2601 et seq. ) ) In the matter, on the Commission s own motion ) establishing the method and avoided cost ) calculation for WISCONSIN ELECTRIC ) Case No. U POWER COMPANY to fully comply ) with the Public Utilities Regulatory Policy ) Act of 1978, 16 USC 2601 et seq. ) ) NOTICE OF AMENDED PROPOSAL FOR DECISION The attached Amended Proposal for Decision is being issued and served on all parties of record in the above matter on July 25, Exceptions, if any, must be filed with the Michigan Public Service Commission, 7109 West Saginaw, Lansing, Michigan 48917, and served on all other parties of record on or before October 26, 2018, or within such further period as may be authorized for filing exceptions. If exceptions are filed, replies thereto may be filed on or before November 9, At the expiration of the period for filing exceptions, an Order of the Commission will be issued in conformity with the attached Amended Proposal for Decision and will become

2 effective unless exceptions are filed seasonably or unless the Amended Proposal for Decision is reviewed by action of the Commission. To be seasonably filed, exceptions must reach the Commission on or before the date they are due. MICHIGAN ADMINISTRATIVE HEARING SYSTEM For the Michigan Public Service Commission July 25, 2018 Lansing, Michigan Mark D. Eyster Administrative Law Judge

3 S T A T E O F M I C H I G A N MICHIGAN ADMINISTRATIVE HEARING SYSTEM FOR THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter, on the Commission s own motion ) establishing the method and avoided cost ) calculation for WISCONSIN PUBLIC ) Case No. U SERVICE CORPORATION to fully comply ) with the Public Utilities Regulatory Policy ) Act of 1978, 16 USC 2601 et seq. ) ) In the matter, on the Commission s own motion ) establishing the method and avoided cost ) calculation for WISCONSIN ELECTRIC ) Case No. U POWER COMPANY to fully comply ) with the Public Utilities Regulatory Policy ) Act of 1978, 16 USC 2601 et seq. ) ) AMENDED PROPOSAL FOR DECISION I. PROCEDURAL HISTORY On May 3, 2016, the Michigan Public Service Commission (MPSC or Commission) issued an Order directing Wisconsin Public Service Corporation (WPSC) and Wisconsin Electric Power Company (WEPCo) to file avoided cost methods and calculations to be used for the approval of avoided costs and PURPA 1 contracts. Pursuant to that Order, on June 30, 2016, both companies filed their Applications; WPSC in Case No. U and WEPCo in Case No. U Public Utility Regulatory Policies Act of 1978, 16 USC 2601 et seq.

4 On July 21, 2016, a pre-hearing conference was held before Administrative Law Judge Mark D. Eyster. Counsel appeared on behalf of WPSC and WEPCo, the Michigan Public Service Commission staff (Staff), and, jointly, the Environmental Law & Policy Center, the Ecology Center, the Solar Energy Industries Association, and Vote Solar (collectively referred to as ELPC or Intervenors). At the pre-hearing conference, intervenor status was granted to ELPC and a schedule was adopted. On November 23, 2016, a Motion to Consolidate Case No. U and Case No. U was filed. On December 7, 2016, the motion was granted and a new schedule for the consolidated cases was ordered. 2 An evidentiary hearing was conducted on April 27, 2017, at which the pre-filed testimony of the witnesses was bound into the record and exhibits were admitted into evidence. The parties filed briefs on June 2, 2017 and reply briefs on June 16, The record consists of testimony contained in the 177-page transcript and 14 exhibits. II. BACKGROUND The purpose of PURPA is to encourage the conservation of energy supplied by electric utilities, to encourage the efficient use of facilities and resources by electric utilities, and to encourage equitable rates for electric consumers. 16 USC PURPA requires electric utilities to purchase the energy offered by certain Qualifying Facilities (QFs) at rates that are just and reasonable to the electric consumer of the electric utility and in the public interest and that do not discriminate against qualifying cogeneration and small power production facilities. 18 CFR (a)(1)-(2). However, electric 2 In addition, it was directed that all future filings in the consolidated cases were to be made to Case No. U Page 2

5 utilities are not required to pay more than the avoided costs for purchases. 18 CFR (b)(6). As defined in PURPA, a QF is a small power production facility or cogeneration facility that has a right to be served by, and sell to, its host electric utility at the utility s avoided cost. Cogeneration QFs produce electric energy and steam or other forms of energy, which are used for industrial, commercial, or cooling purposes. There is no maximum size limitation for PURPA qualification for cogeneration facilities. Small power production facilities are defined as facilities that use biomass, waste, or renewable resources, including wind, solar, and water, to produce electric power, and which, together with other facilities at the same site, have a generating capacity equal to or less than 80 megawatts (MW). 3 See 18 CFR Avoided costs are defined as the incremental costs to an electric utility of electric energy or capacity or both which, but for the purchase from the qualifying facility or qualifying facilities, such utility would generate itself or purchase from another source. 18 CFR (b)(6). In determining avoided costs, the Commission is, to the extent practicable, required to consider the following criteria, as set forth in 18 CFR (e): (1) data regarding the utility s cost structure and plans to add capacity; (2) the availability of capacity or energy from a qualifying facility during daily and seasonal peak periods, including: (i) the dispatchability and reliability of the QF; (ii) contract terms; (iii) the extent to which scheduled outages of the qualifying facility can be coordinated with scheduled outages of the utility s facilities; (iv) the usefulness of energy and capacity supplied from 3 Pursuant to the 2005 Energy Policy Act amendments to PURPA, and Federal Energy Regulatory Commission (FERC) Order 688, QFs larger than 20 MW are presumed to have nondiscriminatory access to regional markets. Thus, a host utility may apply to the FERC to terminate its obligation to purchase from QFs with net capacity in excess of 20 MW. Page 3

6 a qualifying facility during system emergencies; (v) the individual and aggregate value of energy and capacity from QFs on the electric utility s system; and (vi) the smaller capacity increments and the shorter lead times available with additions of capacity from QFs; (3) the relationship of the availability of energy or capacity from the QF to the ability of the electric utility to avoid costs, including the deferral of capacity additions and the reduction of fossil fuel use; and (4) the costs or savings resulting from variations in line losses from those that would have existed in the absence of purchases from a qualifying facility, if the purchasing electric utility generated an equivalent amount of energy itself or purchased an equivalent amount of electric energy or capacity. FERC regulations require the establishment of Standard Offer rates for utility purchases from QFs with a design capacity of 100 kilowatts (kw) or less. The 100 kw size limit is a floor for Standard Offers. Uniform contracts and rates for QFs larger than 100 kw may be established. On March 17, 1981, the Commission issued an order in Case No. U-6798 to commence implementation of the provisions of Section 210 of PURPA (16 USC 824a 3), which requires, among other things, that the Commission establish the avoided costs that an electric utility is obligated to pay to certain QFs. By 1993, the Commission had issued over 20 orders approving PURPA contracts, with avoided costs calculated on the basis of a proxy coal-fired generating unit. In 2015 and 2016, at the direction of the Commission, the PURPA Technical Advisory Committee, consisting of Staff and representatives from electric utilities, QFs, small power producers, and distributed generation advocates, met to identify appropriate methods for establishing avoided costs. As a product of those meetings, on April 8, 2016, Page 4

7 Staff issued a report entitled Report on the Continued Appropriateness of the Commission s Implementation of PURPA (PURPA Report). The PURPA Report provides an overview of the Commission s PURPA responsibilities, a history of PURPA implementation in Michigan, and a summary of utility obligations under PURPA. In addition, the PURPA Report addresses the various methods for determining avoided costs and contains Staff s recommendation that a hybrid proxy plant be used to determine avoided costs. On May 3, 2016, shortly after issuance of the PURPA Report, the Commission commenced this case, noting that it had been over two decades since the development of Michigan s avoided costs rates and, because of changes to the energy landscape, it was time to update the methods for establishing avoided costs. III. FINDINGS OF FACT, POSITIONS OF THE PARTIES, AND DISCUSSIONS A. Witnesses Testifying on behalf of UMERC and WEPCo were Jeff Knitter, WEPCo s Director of Planning in the Wholesale Energy and Fuels Department, and Dennis M. Derricks, Director of Regulatory Affairs at WEC Energy Group, Inc. Testifying on behalf of Staff were Julie K. Baldwin, Manager of the Commission s Renewable Energy Section of the Electric Reliability Division, and Merideth Hadala, Department Analyst in the Commission s Renewable Energy Section of the Electric Reliability Division. Testifying on behalf of ELPC were Douglas B. Jester, Principal of 5 Lakes Energy LLC; Karl R. Rábago, Principal of Rábago Energy LLC; Adam Schumaker, Director of Business Development for Sustainable Power Group LLC; and Rand Dueweke, Senior Page 5

8 Research Analyst with Sustainable Partners LLC. No witness was subject to cross-examination. B. General Findings of Fact During the pendency of this case, on January 1, 2017, all of WEPCo s and WPSC s Michigan based electric and gas distribution facilities were transferred to Upper Michigan Energy Resources Corporation (UMERC). 2 Tr 29. UMERC is a wholly owned subsidiary of WEC Energy Group, Inc. serving approximately 36,500 electric customers in Michigan. 2 Tr 29. Under a special contract approved by the MPSC in Case No. U-17862, WEPCo will maintain Tilden Mining Company LC (Tilden) as its lone customer in Michigan. 2 Tr 29. The special contract will continue until UMERC places new generation in service, which is expected in Tr 29. UMERC now has two rate zones; the legacy WEPCo Rate Zone and the legacy WPSC Rate Zone. 2 Tr 30. At 2 Tr 30-31, UMERC witness, Mr. Knitter explained that: The rates and tariff sheets for the legacy WEPCo Rate Zone reflect the rates and tariffs that were in place for WEPCo prior to the formation of UMERC. The rates and tariff sheets for the legacy WPSC Rate Zone reflect the rates and tariffs that were in place for WPS Corp prior to the formation of UMERC. These include the buy-back tariffs that are applicable and available for customers with generation to sell power to the utilities to comply with PURPA. Page 6 * * * Until new generation is placed in service in the UP, UMERC will obtain its power supply from both WEPCo and WPS Corp via full requirements purchase power agreements ( PPA ) pursuant to FERCapproved tariffs. There is one PPA between WEPCo and UMERC to supply the legacy WEPCo Rate Zone load, and another PPA between WPS Corp and UMERC to supply the legacy WPSC Rate Zone load. These PPAs will provide a full slice of system cost and benefits of both the WEPCo and WPS Corp generation portfolios, similar to what the customers in the UP had prior to the formation of UMERC.

9 On October 25, 2017, the Commission granted UMERC certificates of necessity for the construction of two reciprocating internal combustion engine (RICE) electric generation facilities, with combined nameplate capacity of approximately 183 MW; one in Baraga Township, Baraga County, and another in Negaunee Township, Marquette County. See App of Upper Mich Energy Resources Co, U-18224, Opinion and Order, (Oct 25, 2017). With the addition of electric generation from the two RICE plants in 2019, it is projected that UMERC will have excess capacity through Tr 62. C. Uncontested Matters The following issues are uncontested and adopted. The parties agree that, for the purposes of this case, the Commission should use a 10-year PURPA planning horizon. The parties agree that Standard Offer tariffs and avoided costs should be reviewed in biennial contested case proceedings. There appears to be no opposition to Commission review of Standard Offer contracts on an ex parte basis. Staff and UMERC agree that UMERC s Standard Offer tariff language properly provides an option for UMERC to purchase renewable energy credits (RECs) from QFs, consistent with prior orders of the Commission. 4 The parties agree that Standard Offer contracts should be available to QFs with design capacity of up to 5 MW. 4 The proposed tariff language provides QFs the opportunity to sell their RECs to the utility, at the utility s option, or to retain any RECs generated. ELPC did not address the issue in its briefs. Page 7

10 D. Contested Matters 1. Avoided Cost Methodology WEPCo a. Findings of Fact As found above, WEPCo will have Tilden as its only customer in Michigan until 2019, after which it is expected to have no service territory in the State of Michigan. b. Positions of the Parties UMERC argues that, because WEPCo has Tilden as its only Michigan customer and because service to Tilden will end in 2019, determination of avoided costs is a waste of both WEPCo s and the Commission s resources and should not be required. UMERC Br, p 3. Staff agrees with UMERC s position finding it administratively inefficient for the Commission to establish an avoided cost for such a short period. Staff Br, p 5. c. Discussion The facts of this case support UMERC s and Staff s position on this issue. Because of the passage of time, the imminent departure of WEPCo from the State of Michigan, and limited administrative resources, it is unreasonable to establish avoided costs for WEPCo. 2. Avoided Cost Methodology - UMERC a. Findings of Fact The parties provided witnesses to detail their avoided cost methodology proposals as summarized below. Page 8

11 Page 9 i. UMERC s Proposal UMERC presented Mr. Knitter to detail its proposal. Mr. Knitter recommended not adopting both the Hybrid Proxy Plant Methodology and the Transfer Price methodology for determining UMERC s avoided costs. 2 Tr opinion that: As to the Hybrid Proxy Plant Methodology, at 2 Tr 32, Mr. Knitter provided his The value of capacity in the UP in a planning year (June through May) is determined in the MISO Planning Resource Auction. There are no significant barriers to entry for generators of any size to participate in the MISO capacity auction and receive the capacity auction clearing price. Likewise, all MISO market participant generators receive the local energy price (MISO energy market LMP). The Hybrid Proxy Plant Methodology would force UMERC to pay PURPA generators the annualized cost of new entry when all non-purpa and UMERC s own capacity is paid the market price for capacity. As for the Transfer Price methodology, at 2 Tr 33, Mr. Knitter opined: [T]he Transfer Price method... ignores the difference in the value of reliable capacity versus capacity that is intermittent. The Transfer Price Method uses forecasted capacity and energy prices and estimates a long run avoided cost. The MISO capacity and energy markets provide a market-based option that more accurately reflects the current supply and demand balance of annual capacity and hourly energy. UMERC s expected avoided costs are the MISO energy and capacity market prices. Mr. Knitter stated that UMERC prefers retention of its current applicable tariffs; PG- 2M, PG-3M, and PG-4M 5 as its Standard Offers. 2 Tr 34. As explained, by Mr. Knitter, at 2 Tr 33-34: PG-4M... provides the authority for the customer and company to negotiate terms and conditions, including the price for power to be 5 Mr. Knitter provided additional testimony describing and indicating support for continuation of the CGS Large tariff rate for QFs in the legacy WEPCo Rate Zone. UMERC has since abandoned that position and proposes adoption of PG-2M, PG-3M, and PG-4M in both rate zones. Staff recommended this proposal in its direct testimony. 2 Tr 61. However, Mr. Knitter noted that it has one customer selling it power under the WEPCo CGS Large tariff and he indicated UMERC proposes to allow this existing customer to remain on the current rate or opt into the new tariff at a later date. 2 Tr 41. Pragmatism, being a virtue; this arrangement with its current customer is approved.

12 purchased. This tariff option is available to all customers with generation capabilities of up to 20 MW. * * * [The PG-2M and PG-3M] tariffs... both have energy pricing based on the MISO locational prices, capacity reflecting MISO capacity auction clearing prices, and a premium for renewable power based on negotiated prices. The PG-2M tariff is available for customers with generation capabilities of up to 2 MW. The energy price for this tariff uses historical MISO LMP s for the most recent completed November 1 to October 31 time period. The PG-3M tariff is available for customers with generation capabilities of up to 5 MW. Energy is priced under this tariff at the Actual Day Ahead Location Marginal Price for each hour. ii. Staff s Proposal Staff witness Ms. Baldwin did not consider PG-4M to be a Standard Offer because its rates are negotiable and only concerned herself with PG-2M and PG-3M. 2 Tr As for PG-2M, Ms. Baldwin recommended that the tariff be changed to clearly defin[e] line loss factors, to specify the length of the contract, and to include a schedule of energy and capacity payments applicable for the length of the contract. 2 Tr 58. Ms. Baldwin recommended that the parties review the latest line loss study to make sure the appropriate line loss factors for primary and secondary voltage levels are included on the final version of the tariff, or in the alternative, agree to address this matter in the biennial review. 2 Tr 59. To comply with PURPA requirements, Ms. Baldwin believes energy and capacity payments should be based on UMERC s forecast of MISO market capacity and energy, as shown in Exhibit S-2, and should include options for 5, 10 and 15 years. 2 Tr Addressing PG-3M, Ms. Baldwin indicated that its energy payment provision, based on the MISO Day Ahead LMP, complies with PURPA requirements and she 6 In agreement with Staff s position, the PG-4M tariff, by its terms, does not provide a Standard Offer and will not be considered as such for the purposes of this case. Page 10

13 recommended that the tariff include a provision to have UMERC sell the QF s capacity into the MISO capacity market. 2 Tr 60. She made the same line loss recommendations as she did for the PG-2M tariff. 2 Tr 60. Finally, Staff recommended that the final approved version of PG-2M 7, PG-3M 8 and PG-4M tariffs be applicable to both rate zones. 2 Tr 61. iii. Intervenors Proposal Intervenors witness, Mr. Jester, proposed that the Commission base its method for determining avoided costs on the [PURPA Report], with certain exceptions. 2 Tr 91. At 2 Tr 91-92, he explained: Specifically,... the Commission should... use the proxy plant method to determine avoided costs, to use a combined cycle natural gas plant as the proxy plant, and to use the costs of a natural gas combustion turbine as the avoided cost of capacity, with the remaining costs of a combined cycle natural gas plant as the avoided cost of energy generation. In the alternative, since UMERC is currently proposing to install reciprocating internal combustion engine natural gas generation..., the Commission could consider that technology as a proxy in place of the combined cycle natural gas plant. At 2 Tr 91-93, Mr. Jester outlined the exceptions to the PURPA Report: First, pursuant to 2016 PA 342, UMERC is obligated to meet a 10% renewable energy standard in , 12.5% renewable energy standard in 2019 and 2020, and 15% renewable energy standard in 2021 and thereafter. UMERC is also obligated to pursue a 35% clean energy goal, combining energy waste reduction and renewable generation, in 2025 and thereafter. UMERC also is required by 2016 PA 342 to offer customer requested renewable energy.... To the extent that a qualifying facility contributes to UMERC s compliance with any of these requirements and UMERC avoids costs of compliance by some other means, the avoided costs for the qualifying facility must include such costs. Since overall cost minimization requires that a qualifying facility be used to satisfy UMERC s 7 As noted in footnote 5, UMERC adopted Staff s position and proposed PG-2M tariffs for both its WPSC Rate Zone and its WEPCo Rate Zone. The proposed PG-2M tariffs were admitted into evidence as the first two pages of Exhibits A-4 and A-5. 8 As noted in footnote 5, UMERC adopted Staff s position and proposed PG-3M tariffs for both its WPSC Rate Zone and its WEPCo Rate Zone. The proposed PG-3M tariffs were admitted into evidence as the second two pages of Exhibits A-4 and A-5. Page 11

14 most costly requirement to which the qualifying facility contributes, the avoided cost in 2020 and thereafter should be the largest of the avoided costs of meeting one of these requirements or of avoided costs of general service as determined by the proxy plant method recommended in the PURPA Technical Advisory Committee Report. Second, when a qualifying facility will be interconnected at subtransmission, primary distribution, or secondary distribution and its output is reasonably expected to serve load on the same grid segment without flowing onto the transmission grid, then the Commission should recognize reduced losses in both capacity and energy delivery. In addition, the Commission should include in avoided costs any reduction of payments by UMERC to MISO or other parties for transmission and other services avoided by virtue of the operation of the qualifying facility on UMERC s distribution grid. Third, the Commission must allow for the case-by-case determination of avoided costs of transmission and distribution capacity and any other cost categories not included in the Commission s basic methods. Finally, the Commission should include the avoided cost of compliance with carbon regulation in its calculation of avoided energy costs, to the extent that utilities are incurring real costs in response to projected future compliance requirements. 9 b. Positions of the Parties i. UMERC UMERC contends that, because of its unique set of capacity and cost circumstances 10, special consideration is required in the establishment of new avoided cost methodologies/calculations for UMERC... to assure a just and reasonable result for customers rates. UMERC Br, p. 2. For the reasons cited by its witness, Mr. Knitter, UMERC does not support either a Hybrid Proxy Plant Method or a Transfer Price Method for determining its avoided costs. UMERC Br, p Mr. Jester provided extensive testimony supporting his proposal at 2 Tr At UMERC Br, p 2, UMERC lists these special circumstances as: UMERC s establishment, the transfer of assets from WPSC and WEPCo to UMERC, the retention of Tilden as WEPCo s lone customer, and the construction of new electric generation facilities. Page 12

15 UMERC contends that it s expert testimony demonstrates that UMERC s avoided costs are the MISO energy and capacity market prices. UMERC Br, p 2. Therefore, UMERC argues the evidence supports Commission approval, in both rate zones, of Tariffs PG-2M, PG-3M and PG-4M as its Standard Offers. UMERC Br, p 2, 4, ii. Staff Because the Commission has approved construction of the two RICE plants and the resulting excess capacity they create, Staff finds it appropriate for UMERC to use the market values for capacity and energy from Case No. U (See Exhibit S-2, columns (A) & (B).) 11 Staff Br, p 9. For PG-2M and PG-3M, Staff recommends review of the latest line loss study to ensure that the appropriate line loss factors are included in the tariffs or that line loss be referred to the next biennial review. Staff Br, p 6-7. iii. Intervenors ELPC provided extensive arguments favoring Commission adoption of the NGCT proxy plant methodology to calculate avoided capacity cost; arguing that it best reflects the Company s avoided capacity costs, is just and reasonable to its customers, and is supported by substantial evidence on the record. ELPC Br, p 11. Under this methodology, capacity payments to QFs would be based on the forecasted levelized cost of an NGCT proxy. ELPC Br, p 9. ELPC argues that basing capacity payments on market prices exclusively will discriminate against QFs because it requires QFs to accept cost-recovery mechanisms the Company would never accept. ELPC Rep Br, p 5. After 11 In addition, Staff recommended that, for 2017 and 2018, avoided costs be based on the cost of the PPAs between UMERC and both WEPCo and WPSC. Unfortunately, because of the extraordinary regulatory lag associated with this PFD, the issue is rendered largely moot and Staff s proposal will not be adopted. The main question remaining is whether this PFD will be completed in less time than it took to plan and build the RICE plants. Page 13

16 noting UMERC s CON case, ELPC adds, at ELPC Rep Br, p 5: Allowing UMERC to recover over $277 million in costs for building and operating RICE units but relegating QF capacity payments to market prices is... intentional and overt discrimination.... Because QFs are meant to be paid a rate equal to the Company s avoided costs, basing those costs on market metrics that are absent in the Company s own cost recovery scheme would discriminate against QFs. With regard to the avoided cost of energy, ELPC contends that the forecasted variable cost of a RICE plant plus ICE reflects the avoided cost of energy to the Company. ELPC Rep Br, p 7-9. ELPC supports its proposal because the proxy plant methodology provides QFs the option of a forecasted rate, and this is a legal requirement upon any state s implementation of PURPA. ELPC Br, p Further, ELPC finds this option consistent with prior Commission PURPA orders. ELPC takes issue with UMERC s market based approach, arguing that [m]arket prices simply do not include all costs avoided by purchases by a QF and, therefore, fail to comply with PURPA. ELPC Br, p 10. At ELPC Br, p 5, ELPC explains: FERC explicitly sets out factors that must be considered when determining avoided costs, such as reductions in line losses and deferral of capacity additions. See 18 C.F.R (e). Importantly, a rate based on market prices... is not the same as a utility s avoided cost as defined by PURPA. FERC practice explicitly recognizes that market-based rates are different from avoided cost rates. See Bright Light Capital, LLC, 157 F.E.R.C. P61,046, 12 (2016) (differentiating between market-based rates and avoided cost rates for purposes of refund remedies under section 205 of the Federal Power Act); Weyerhaeuser NR Company, International Paper Company, 156 F.E.R.C. P62,028, 64,054 (2016) (differentiating between market-based rates and avoided cost rates for purposes of section 203 of the Federal Power Act). In addition, notwithstanding its arguments above, ELPC argues that avoided costs must be set no less than the utility s cost to meet renewable energy and any other Page 14

17 applicable technology related generation requirements. ELPC explains, at Br, p 14-15, that: As noted by FERC, where a state requires a utility to procure a certain percentage of energy from generators with certain characteristics, generators with those characteristics constitute the sources that are relevant to the determination of the utility s avoided cost for that procurement requirement, and therefore a state may appropriately recognize procurement segmentation by making separate avoided cost calculations. California Public Utilities Commission, 133 F.E.R.C. P61,059, 26, fn. 53 (2010). When Michigan s renewable portfolio standards ( RPS ), integrated resource plans, or customer demand require the Company to build or acquire renewable energy,... the avoided cost should be technology-specific, and the rate should be set at the Company s cost of building and generating renewable energy to meet the state requirements.... PURPA regulations expressly condone this type of technologyspecific avoided cost. See 18 CFR (c)(3)(ii) ( standard rates for purchases... may differentiate among qualifying facilities using various technologies ). This is also consistent with prior FERC rulings allowing state public utility commissions to take into account obligations imposed by the state that require utilities to purchase energy from particular sources of energy such as through a renewable energy standard or other state policy. California Public Utilities Commission, 133 F.E.R.C. P61,059, 26 (2010). Noting Michigan s RPS, ELPC calls for a determination of such avoided costs at biennial reviews using a technology-specific proxy plant methodology and specifically recommends the development of avoided cost methodologies and calculations for solar technologies. ELPC Br, p 4, ELPC argues that the Commission should order [Staff to] study other real costs that are avoided by purchases from a QF, including avoided cost reductions in line losses, avoided environmental costs, hedging value, and other quantifiable costs avoided by QF purchases. ELPC Br, p 3-4. ELPC adds that avoided costs must include transportation, distribution, delivery, and system costs... that are or can be avoided when distributed generation operates. ELPC Rep Br, p 8. Page 15

18 c. Discussion Avoided Costs means the incremental costs to an electric utility of electric energy or capacity or both which, but for the purchase from the qualifying facility or qualifying facilities, such utility would generate itself or purchase from another source. 18 CFR (b)(6) (2017). Pursuant to 16 USCA 824a-3(b), in requiring any electric utility to offer to purchase electric energy from any qualifying cogeneration facility or qualifying small power production facility, the rates for such purchase-- (1) shall be just and reasonable to the electric consumers of the electric utility and in the public interest, and (2) shall not discriminate against qualifying cogenerators or qualifying small power producers. Further, as required by 18 CFR (d)(2), under the Standard Offer, the QF must be given the option of being compensated for energy and capacity at avoided costs calculated at the time of delivery or as projected at the time of the offers execution. In this contested case, accepted projections indicate that UMERC will have excess capacity beginning this next year and extending 30 years thereafter. Thus, after completion of the Commission approved RICE plants, UMERC will have no need for additional capacity during the course of the 10-year PURPA planning horizon. Because of this, it is not appropriate to base avoided costs on a proxy plant methodology, as proposed by ELPC. 12 To do so, would sanction a methodology divorced from the costs actually being avoided and could cause rates paid to QFs to become unreasonable for the utility s electric consumers. Rather, as Staff and UMERC propose, it is reasonable to use market-based 12 It is noted that, should additional capacity needs be projected during any subsequent planning horizon, use of a proxy plant methodology may be appropriate. Page 16

19 methodologies to determine avoided costs. UMERC proposes to do so in both its PG- 2M and PG-3M tariffs. Both tariffs include a capacity payment based on MISO capacity auctions results. PG-2M has energy payments based on average Day Ahead Locational Marginal Prices, calculated annually, while PG-3M has energy payments based on actual average Day Ahead Locational Marginal Prices. Under the circumstances of this case, it is reasonable to begin the calculation of avoided costs in this manner. However, to be PURPA compliant, the tariffs must be amended to include an option for the QF to select payments based on UMERC s forecast of MISO market capacity and energy costs, as shown in Exhibit S-2. Further, Intervenors position that PURPA requires avoided costs be set at no less than the cost to meet mandated renewable and/or technology specific energy requirements is supported both factually and legally and is adopted. The parties shall address these costs at the next biennial review. Finally, as argued by Intervenors, in all cases, the accurate calculation of avoided costs requires that, at each biennial review, a determination be made of any avoided line losses; avoided environmental costs; hedging value; avoided transportation, distribution, delivery, and system costs; and any other quantifiable costs avoided by QF purchases. These costs, too, shall be addressed in the next biennial review. 3. Standard Offer Contract Term a. Findings of Fact In her direct testimony, Staff witness Ms. Baldwin recommended that QFs should have the option to select a 5, 10 or 15 year schedule of payments. 2 Tr 59. During the rebuttal phase of this case, UMERC added a provision to its proposed Page 17

20 PG-2M and PG-3M tariffs requiring customers to select a Standard Offer contract term of 5, 10, or 15 years. 2 Tr 45. Exh A-4. ELPC witness, Adam Schumaker, established that, for solar projects, a PPA is the centerpiece of project financing. 2 Tr 163. At 2 Tr , he added that: [He was] not aware of any solar project that has been financed and built with a term shorter than 15 years. [He considers] 15 years to be the shortest PPA term required to make a solar project financeable, although it is not ideal and requires a higher PPA rate than would be required if a 20-year PPA term were offered, thereby burdening ratepayers with additional cost. Mr. Schumaker added that [g]enerally, debt providers will only lend to a project for the contracted PPA period, and typically subtract an additional two years from the PPA term for amortization purposes. 2 Tr 164. ELPC witness, Rand Dueweke, an expert on combined heat and power projects (CHP), established that CHP projects can have a useful life in excess of 30 years and, for financial reasons, require a contract term of 10 to 20 years for most potential CHP projects. 2 Tr b. Positions of the Parties Staff and UMERC agree that QFs taking service under a Standard Offer tariff should have the option to select 5, 10 or 15 years as the contract term. Staff Br, p 8. UMERC Br, p 4. ELPC prefers that addition of an optional 20-year term, arguing that [a]dequate term length prevents discrimination 13 against QFs and furthers the goals of PURPA. At 13 ELPC argues that the [l]ack of a financeable, long-term standard offer contract... would discriminate against QFs because it treats QF capacity additions less favorably than UMERC s own capacity additions. ELPC Rep Br, p 11. Page 18

21 ELPC Br, p 20, ELPC explains: The Commission recently... held that the standard offer as applied to Consumers Energy should extend up to 20 years in length.... The Commission s... decision... recognizes that a standard offer tariff that provides an adequate term length for QFs to recover costs increases the utilization of cogeneration and small power production facilities and reduces reliance on fossil fuels. See Am. Paper Inst., 461 U.S. at 417. In addition, the term length must put the QF in a position that approximates the position of the utility in resource planning. See Windham Solar LLC and Allco Finance Limited, 157 F.E.R.C. P61,134, 8 ("[A] legally enforceable obligation should be long enough to allow QFs reasonable opportunities to attract capital from potential investors. ). UMERC finds ELPC s proposal lacking in merit, arguing, that it is not similarly situated to Consumers Energy and that there is no evidence that there is any benefit to UMERC customers for taking on the risk associated with such a long-term contract. UMERC Rep Br, p 9. c. Discussion Intervenors arguments favoring the addition of a 20-year term to the Standard Offer are convincing and supported by the evidence. The availability of a Standard Offer term of up to 20 years limits the discriminatory effect of shorter term offers, provides financial stability for QFs and utility customers, and falls squarely in line with the expectations of project financiers. Accordingly, the PG-2M and PG-3M tariffs shall be amended to offer QFs term lengths of 5, 10, 15, and 20 years, or as mutually agreed upon to by the parties. 4. Other Issues At 2 Tr 60, Ms. Baldwin recommended that UMERC incorporate the option to have UMERC... sell the QF s capacity into the MISO capacity market. To avoid discrimination, this recommendation is adopted for tariffs PG-2M and PG-3M It is noted, that UMERC added tariff language regarding capacity payments to QFs. It is not clear, however, that this provision meets the needs that Ms. Baldwin was addressing. Page 19

22 At 2 Tr 88 and 2 Tr 111, Intervenors witnesses point out that UMERC s proposed Standard Offer tariffs require QFs to be behind the meter customers. As noted by Intervenors, at 2 Tr : Nothing in the language of PURPA or FERC s implementing rules suggests that a PURPA qualifying facility needs to be a customer of any utility. For example, a solar array does not generally require station power and would only require supplemental or standby power if it was placed behind the meter of a customer. It is clearly within the intent of PURPA that a solar facility can be developed, be interconnected to UMERC independent of any customer requiring electric service, be designated a qualifying facility, and obtain a contract with UMERC for the off-take of the power from that facility at PURPA rates. Intervenor s evidence and positions on this point are convincing. UMERC must amend its tariffs to separate the capacity and energy rates it pays QFs from the charges it applies for service, if any, that it provides QFs. CONCLUSION 1. UMERC shall present amended tariff s that comply with the findings above, and include, at least, the following: a. Tariffs shall include Standard Offer contracts with terms of 5, 10, 15, or 20-year terms and as otherwise agreed upon by the parties to the transaction. b. Tariffs shall include provisions that recognize compensation for technology specific avoided costs. c. Tariffs shall include provisions for the compensation of avoided costs, including, but not limited to, any avoided line losses; avoided environmental costs; hedging value; avoided transportation, distribution, delivery, and system costs; and any other quantifiable costs avoided by QF purchases. Page 20

23 d. The tariffs shall incorporate the option to have UMERC sell the QF s capacity into the MISO capacity market. 2. To ensure the Standard Offer is not contingent upon taking service from the utility, UMERC shall separate tariff provisions addressing compensation to QFs from the provisions addressing charges to them as customers. 3. Avoided cost calculations and Standard Offer tariffs shall be reviewed in biennial contested cases. 4. UMERC s sole existing customer taking service under the WEPCo CGS Large tariff may remain on that tariff or opt into a new tariff. 5. Any evidence and arguments not specifically addressed in this Proposal for Decision were deemed irrelevant to the findings and conclusions of this matter. 6. For those of you who don t already know, this is the last PFD I plan to write. I am tremendously thankful for having been granted the privilege of working as an ALJ assigned to the Michigan Public Service Commission. I am also thankful for those attorneys who, through their hard work, provided me the challenges that made this work so rewarding. And to everyone who has made my stay with the MPSC special, thanks go out to you, too. It has been a great stage of my life, but it s time for me to go. Best wishes to all. MICHIGAN ADMINISTRATIVE HEARING SYSTEM For the Michigan Public Service Commission ISSUED AND SERVED: July 25, 2018 Mark D. Eyster Administrative Law Judge Page 21

24 S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * STATE OF MICHIGAN ) ) SS. Case No. U and U County of Ingham ) ) P R O O F O F S E R V I C E Meaghan Dobie being duly sworn, deposes and says that on July 25, 2018, she served a copy of the attached Notice of Amended Proposal for Decision and Amended Proposal for Decision via and/or first-class mail, to the persons as shown on the attached service list. Subscribed and sworn to before me this 25 th day of July Meaghan Dobie Lisa Felice Notary Public, Eaton County My Commission Expires April 15, 2020

25 Wisconsin Public Service Corporation Sherri Wellman Michael C. Rampe Environmental Law & Policy Center Margrethe Kearney Case No. U and U Service List Upper Michigan Energy Resources Corporation Theresa A.G. Staley Paul M. Collins Michigan Public Service Commission Amit T. Singh