Direct Testimony And Exhibits of Sebastian Coppola

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 of the application of ) DTE ELECTRIC COMPANY ) for authority to increase its rates, amend ) its rate schedules and rules governing the ) distribution and supply of electric energy ) and for miscellaneous accounting authority ) MPSC Case No. U- Direct Testimony And Exhibits of Sebastian Coppola On behalf of Attorney General Bill Schuette May, 0

2 Qualifications Q. PLEASE STATE YOUR NAME, OCCUPATION, AND ADDRESS. A. My name is Sebastian Coppola. I am an independent business consultant. My office is at Southgate Rd., Rochester, Michigan 0. Q. PLEASE SUMMARIZE YOUR PROFESSIONAL QUALIFICATIONS. 0 A. I am a business consultant specializing in financial and strategic business issues in the fields of energy and utility regulation. I have more than thirty years of experience in public utility and related energy work, both as a consultant and utility company executive. I have testified in several regulatory proceedings before the Michigan Public Service Commission (MPSC or Commission) and other regulatory jurisdictions. I have prepared and/or filed testimony in rate case proceedings, revenue decoupling reconciliations, gas conservation programs, Gas Cost Recovery (GCR) cases and Power Supply Cost Recovery (PSCR) cases. As accounting manager and later financial executive for two regulated gas utilities with operations in Michigan and Alaska, I have been intricately involved in regulatory proceedings related to gas cost recovery cases, gas purchase strategies, rate case filings and power plant cost analysis. I have also supported other witnesses in testimony before the MPSC in various rate setting and other regulatory proceedings. Q. WHAT EXPERIENCE DO YOU HAVE WITH ELECTRIC UTILITIES? U- S. Coppola //

3 A. I have performed rate case analyses and filed testimony in several electric general rate cases addressing issues on revenue requirement, sales level determination, operation and maintenance expenses, cost allocations, cost of capital, cost of service and rate design, and various cost tracking mechanisms. In addition, I have performed analysis of power costs and filed testimony in power supply cost recovery mechanisms, including reconciliation of annual power supply costs. In my position as Senior Vice President of Finance at MCN, I had also responsibility for project financing of independent power generation plants in which MCN was an owner. In this regard, I was intricately involved and became knowledgeable of PURPA qualified 0 cogeneration plants in Michigan and other states. In addition, I was involved in negotiating the development and financing of power generation and electricity distribution plants in other countries, such as India. 0 Q. PLEASE LIST SOME OF THE MORE RECENT CASES YOU HAVE PARTICIPATED IN BEFORE THE MPSC AND OTHER REGULATORY AGENCIES. A. Here is a partial list of the most recent regulatory cases in which I have participated: o Filed testimony on behalf of the Michigan Attorney General in Consumers Energy s (CECo) 0 electric Rate Case U- on a several issues, including sales level, operations and maintenance costs, capital expenditures and infrastructure cost recovery mechanism, cost of capital and other items. o Filed testimony on behalf of the Michigan Attorney General in CECo 0-0 GCR Plan case U-. o Filed testimony on behalf of the Michigan Attorney General in Michigan Gas Utilities Corporation (MGUC) 0-0 GCR Plan case U-0. U- S. Coppola //

4 0 0 0 o Filed testimony on behalf of the Michigan Attorney General in CECo 0 PSCR Plan case U-. o Analyzed the electric rate case filings of Northern States Power in Case U- 0 and Wisconsin Public Service Company U-, and assisted the Michigan Attorney General in settlement of these cases. o Filed testimony on behalf of the Michigan Attorney General in CECo 0-0 GCR Plan reconciliation case U--R. o Filed testimony on behalf of the Michigan Attorney General in Michigan Gas Utilities Corporation (MGUC) 0-0 GCR Plan reconciliation case U- 0-R. o Filed testimony on behalf of the Michigan Attorney General in SEMCO Energy Gas (SEMCO) 0-0 GCR Plan reconciliation case U--R. o Filed testimony on behalf of the Michigan Attorney General in CECo 0 gas general rate case U-. o Filed testimony on behalf of the Illinois Attorney General in Wisconsin Energy merger with Integrys on the Peoples Gas and Coke Company s Accelerated Main Replacement Program in Docket -0. o Filed testimony on behalf of Citizens Against Rate Excess in Wisconsin Public Service Company s 0 Power Supply Cost Recovery (PSCR) plan reconciliation case U-0-R. o Filed testimony on behalf of the Michigan Attorney General in CECo 0 Power Supply Cost Recovery (PSCR) plan case U-. o Filed testimony on behalf of the Michigan Attorney General in CECo 0 OPEB Funding case U-0. o Filed testimony on behalf of the Michigan Attorney General in SEMCO 0-0 GCR Plan case U-. o Filed testimony on behalf of the Michigan Attorney General in MGUC 0-0 GCR Plan case U-. o Filed testimony on behalf of the Michigan Attorney General in CECo 0-0 GCR Plan case U-. o Filed testimony for Citizens Against Rate Excess in Wisconsin Public Service Company s 0 Power Supply Cost Recovery (PSCR) plan case U-. o Filed testimony in March 0 on behalf of the Michigan Attorney General in CECo s electric Rate Case U- on remand from the Michigan Court of Appeals for review of the Automatic Metering Infrastructure (AMI) program. U- S. Coppola //

5 0 0 0 o Filed testimony for Citizens Against Rate Excess in Upper Peninsula Power Company s 0 Power Supply Cost Recovery (PSCR) plan case U-. o Filed testimony on behalf of the Michigan Attorney General in MGUC 0-0 GCR Reconciliation case U-0-R. o Filed testimony on behalf of the Michigan Attorney General in DTE Gas Company 0-0 GCR Reconciliation case U--R. o Filed testimony on behalf of the Michigan Attorney General in CECo 0-0 GCR Reconciliation case U--R. o Filed testimony on behalf of the Michigan Attorney General in SEMCO 0-0 GCR Reconciliation case U--R. o Filed testimony for Citizens Against Rate Excess in Upper Peninsula Power Company s 0 PSCR reconciliation case U--R. o Filed testimony in Puget Sound Energy s 0 Power Cost Only Rate Case on behalf of the Public Counsel Division of the Washington Attorney General in Docket No. UE-0 on the power costs adjustment mechanism. o Filed testimony in PacifiCorp s 0 General Rate Case on behalf of the Public Counsel Division of the Washington Attorney General in Docket No. UE- 00 on power costs, cost allocation factors, O&M expenses and power cost adjustment mechanisms. o Filed testimony on behalf of the Michigan Attorney General in Consumers Energy s 0 electric Rate Case U-0 on a several issues, including cost of service methodology, rate design, operations and maintenance costs, capital expenditures and infrastructure cost recovery mechanism and other revenue/cost trackers. o Filed testimony for Citizens Against Rate Excess in Upper Peninsula Power Company s 0 Power Supply Cost Recovery (PSCR) plan case U-0. o Filed testimony in MichCon s 0 gas Rate Case U- on a several issues, including sales volumes, revenue decoupling mechanism, operations and maintenance costs, capital expenditures and infrastructure cost recovery mechanism. o Filed testimony on behalf of the Washington Attorney General Office of Public Counsel on executive and board of directors compensation in the 0 Avista general rate case. o Filed testimony on behalf of the Ohio Office of Consumers Counsel in AEP Ohio s power supply restructuring case in June 0. Appendix A elaborates further on my qualifications in the regulated energy field. U- S. Coppola //

6 Prepared Direct Testimony Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY? A. I have been asked by the AG to perform an independent analysis of DTE Electric Company s ( Company or DTEE ) Electric Rate Case filing U-. This testimony presents a report of that analysis with related recommendations. Q. WHAT TOPICS ARE YOU ADDRESSING IN YOUR TESTIMONY? 0 0 A. I am addressing the following major topics in this case:. The level of Operations and Maintenance expenses. Uncollectible Expense. Incentive Compensation. Employee Benefits. The level of proposed Rate Base and Capital Expenditures. The Company s Cost of Capital. The AMI/Smart Meter Program. The Company s Revenue Deficiency. The increase in Residential Monthly Service Charge The absence of a discussion of other matters in my testimony should not be taken as an indication that I agree with those aspects of DTEE s rate case filing. The narrow focus of my testimony is, instead, a consequence of focusing on priority issues within the available resources. Q. IS YOUR TESTIMONY ON THESE TOPICS ACCOMPANIED BY EXHIBITS? U- S. Coppola //

7 A. Yes. I am sponsoring the following exhibits, which were either prepared by me or under my direct supervision: 0 0. Exhibit AG- Distribution Operations Expense 0-0. Exhibit AG- Vegetation Management Expense Exhibit AG- Power Interruption Causes Exhibit AG- Fossil Generation O&M Expense 0-0. Exhibit AG- Nuclear Generation Expense 0-0. Exhibit AG- Uncollectible Accounts Expense 0-0. Exhibit AG- Health Care Actual Cost Trend Exhibit AG- OPEB Negative Expense 0-0. Exhibit AG- Fossil Generation Capital Expenditures Actual 0 0. Exhibit AG-0 Customer 0 Project Discovery Responses on Alternatives. Exhibit AG- Corporate Capital Expenditures Actual Exhibit AG- BG&E AMI - Maryland PSC Order Excerpts. Exhibit AG- Overall Cost of Capital. Exhibit AG- Cost of Common Equity. Exhibit AG- Cost of Common Equity-DCF. Exhibit AG- Cost of Common Equity-CAPM. Exhibit AG- Cost of Common Equity-Risk Premium. Exhibit AG- ROE Decisions by Regulatory Commissions. Exhibit AG- AG Revenue Deficiency Calculation 0. Exhibit AG-0 Incentive Pay for the Projected Test Year Q. PLEASE PROVIDE A SUMMARY OF YOUR CONCLUSIONS AND ADJUSTMENTS TO THE COMPANY S REVENUE DEFICIENCY CALCULATION BEFORE YOU ADDRESS EACH TOPIC IN DETAIL. U- S. Coppola //

8 A. The Company filed for a base rate increase of $0. million. It is noteworthy to point out that during the four-year period from 00 to 0, the Company earned a return on common equity on a regulatory basis ranging from 0.% to.% which is higher than the allowed ROE of 0.% and.0% during the same period. Based on the foregoing analysis, I have calculated that the Company has a revenue requirement deficiency of $ million for the forecasted test year ending June 0. My conclusions and related adjustments are summarized below: 0 0. I am proposing a lower level of Operations and Maintenance expenses for the test year. This reduces the revenue deficiency by $0. million.. I am proposing a reduction in capital expenditures of $. million for the test year and a reduction in rate base of $. million. This reduces the revenue deficiency by $. million.. I am recommending an allowed rate of return on equity of.% and a capital structure with % debt and % equity capital. This has the effect of reducing revenue deficiency by $. million.. I recommend that the Commission should defer recovery of the depreciation expense for the AMI/Smart Meter program to mitigate the risk to customers of insufficient cost savings from the program. The impact on revenue deficiency will depend on the Commission s decision.. I recommend that the Residential customer monthly service charge should be increased to no higher than $.0, instead of the Company s proposed $0.00, from the current $.00. Exhibit A-, Schedule I. U- S. Coppola //

9 In total, these adjustments reduce the Company s proposed revenue deficiency by $. million to $ million. I recommend that the Commission not grant any rate relief in this case in excess of $ million. It is also possible that during the rate case briefing process the AG may adopt positions taken by Staff and other parties which may lower the recommended revenue deficiency below $ million. Operations and Maintenance Expenses Q. WHAT ARE YOUR FINDINGS IN ANALYZING THE COMPANY S LEVEL OF O&M EXPENSES INCLUDED IN THIS RATE CASE? 0 A. The focus of my analysis was on controllable components of the Company s O&M expenses. A review of Exhibit A-0, Schedule C, shows that O&M expenses are projected to reach approximately $, million for the test year ending June 0. This is an increase of approximately $ million from the $,0 million adjusted expense level for the year ended December, 0. Included in the increase are inflation cost adjustments of $. million for the two-and-half years from the end of 0 to the end of the forecasted test year in June 0. The inflation cost increases are partially offset by other expense adjustments. In the testimony of witness Teresa Uzenski and in Exhibit A-0, Schedule C, the Company boasts about its ability to control costs well below the rate of inflation during the time period from 00 to the end of the projected test year. Yet, ironically, the U- S. Coppola //

10 Company is requesting additional revenue to cover inflation cost adjustments of $. million that are not likely to occur if history is any guide. Apparently aware of the high and increasing cost structure it has created, primarily driven by ever-increasing capital expenditures, the Company has begun an internal initiative called the Competitive and Affordable Rate Strategy (CARS) in an effort to lower its cost structure and dampen rate increases to customers. 0 In this rate case, I recommend that the Commission set recoverable cost levels that challenge the Company to significantly modify its existing cost structure and help it achieve its CARS objective. Whether it is in employee levels, pay levels, benefit levels or other basic operating and maintenance costs, there is a need for the Company to cut costs. An area where the Commission should modify its policy is in granting inflation adjustments to base operating costs. The Company has presented cost escalators ranging from.% to.% per year in basic operating costs, the higher end of this range being primarily in planned wage increases. Whether related to union represented employees or other employees, the Company should refrain from increasing its labor costs. Freezing pay rates or tempering the rate of increase for multiple years could be a way to accomplishing that objective. With general inflation rates hovering in the -% range, DTEE response to Staff Audit Request BAW-.. U- S. Coppola //

11 the Company should have sufficient tools and flexibility in its cost management arsenal to hold the line on most operating cost increases. As identified more specifically later in my testimony, my overall conclusion and recommendation is that the Commission should not approve recovery of some of the Company's proposed inflation adjustments or wage and salary increases above historical cost levels. Q. IN YOUR ANALYSIS, HAVE YOU DETERMINED SPECIFIC AREAS WHERE O&M COSTS COULD BE REDUCED? 0 A. Yes. I have analyzed O&M costs by major department or area and I have identified more reasonable expense levels that the Commission should consider. Distribution Operations As shown in Exhibit A-0, Schedule C, the Company is proposing recovery of $. million in Distribution Operations expenses. This represents a reduction of $. million from the expense level in 0. The reduction reflects the change in accounting policy to capitalize additional Storm Restoration expenses and the shift of tree clearing expense to capital costs. These two accounting changes reduce expense by nearly $ million. Partially offsetting these credits are $. million of projected cost inflation. In reviewing the actual O&M expenses for this department for 0 against the actual 0 expense level, it is clear that certain expenses in 0 were unusually high. For U- S. Coppola 0 //

12 example, Operation Supervision and Engineering expenses had been in the $. million to $. million range between 00 and 0. However, in 0 this expense category jumped to $0. million. In 0, it returned to a more normal level of $. million. The Company explained the reason for the temporary increase in 0 as a result of storm activities. Yet, the Company used the higher 0 level to project the O&M expense for the projected test year. 0 As shown in Exhibit AG-, total O&M expenses for the Distribution Operations department for 0 were $. million lower than the expense level in 0. Given the unusually high amount of Supervision and Engineering expense in 0 and the fact that actual 0 expenses reflected a more recent and normal level of expense, I propose that test year projected expenses in this department be reduced by $. million. Additionally, the $. million of cost inflation for 0 is no longer applicable and should be removed. Q. WHAT OTHER ADJUSTMENTS TO O&M EXPENSE FOR DISTRIBUTION OPERATIONS ARE YOU PROPOSING? A. In an attempt to reduce power outages from fallen trees and other vegetation, the Company has proposed to nearly double expenditures for tree clearing and vegetation management from the $0. million previously authorized in rates in case No. U- Exhibit A-0, Schedule C., page. U- S. Coppola //

13 to $ million per year. The Company has proposed to capitalize $ million of this amount and expense the remaining $ million. 0 The Company has not put forth any study or analysis to justify this doubling of expenditures other than advocating for a more aggressive program to reduce power outages. Although this is a worthy goal, the erratic pattern of expenditures over the past few years belies the commitment to vigorously address the problem in a consistent manner. As shown in Exhibit AG-, since 00 the Company has spent between $. million and $. million annually on vegetation management. The lowest amount in this range occurred in 0. This decline in spending occurred despite the fact that the Company had received $0. million in rates to spend on this program in the last rate case order in October 0. The up and down pattern of spending on a very critical program from year to year is not helpful. The percentage of power outages caused by trees in 0 increased to.% of the total number of outages from.% in 0, and has been on a steady climb since 00. The Company attributes the higher number in 0 on better reporting, but clearly the trend has been up. It is difficult to go along with a doubling of expenditures on this program without a well defined plan and clear objectives to be achieved. It is not clear what trimming cycle the Company is targeting or why. In response to Staff s data requests, the Company stated it Exhibit AG-. U- S. Coppola //

14 has been pursuing a tree clearing cycle of - years under the current program and does not expect that the Expanded Vegetation Management Program ( EVMP ) will change that cycle. This answer does not seem plausible. Either the current program is not achieving the - year clearing cycle or the doubling of expenditures would have little positive impact. 0 As a point of reference, in its recent general rate case filing, Consumers Energy proposed to spend $. million annually on its tree trimming/vegetation management program targeting a -year cycle. The proposal was supported by a study performed by an outside expert and provided alternative approaches and target cycles to vegetation management with related costs. DTEE has not provided any similar studies to support a proposal to nearly double the size of the program. Although the two utilities are not exactly the same in the territory they cover, they are not all that dissimilar either and if a vegetation management program in the area of $0 million works for one utility than why could it not work for the other? In discovery I asked the Company to identify improvements in power outage metrics, such as SAIDI, CAIDI and SAIFI, that would result from implementing its expanded vegetation management program. The Company s response did not identify any potential improvements and repeated its general objective to reduce tree-caused outages. Therefore, the Commission is faced with the dilemma of potentially approving a DTEE responses to Staff Audit Requests PJD.,.,.. DTEE response to data request AG/DE-.f. U- S. Coppola //

15 doubling of the expense for a program that the Company has not consistently implemented at the level of revenue previously granted and with no clear service improvements to be achieved. My conclusion is that a consistently well managed program at a total annual expenditure level of $0 million, equally split between capital and O&M expense, can achieve the objective of gradually reducing power outages caused by trees. Therefore, I recommend that the Company s proposed O&M Expense for vegetation management should be reduced by $ million and set at $ million. Similarly, I propose a reduction of $0 million to the capital portion resulting in a level of $ million per year. 0 In total, for the Distribution Operations department, I recommend O&M expense reductions of $. million from the level proposed by the Company with a corresponding decrease in the revenue requirement. Fossil Power Generation Under the category of Fossil Generation, the Company includes Steam Power, Hydraulic Power and Other Generation. As shown in Exhibit A-0, C, the Company is proposing O&M expenses of $. million for the forecast test year in contrast to $. million spent in 0, an increase of $. million or.%. General inflation adjustments over the two-and-half years add up to $. million. The Fossil Generation group is forecasting inflation adjustments of.% to % annually. The U- S. Coppola //

16 remainder of the increase is primarily related to higher expenses to operate new emission control equipment and buy additional chemicals for this equipment. Q. ARE YOU PROPOSING ANY ADJUSTMENTS TO O&M EXPENSE FOR FOSSIL GENERATION? 0 A. Yes. I have reviewed the actual O&M expense for the Steam Power Generation department for 0 in comparison to the actual expense for 0 that the Company used as a basis to build up its forecast for the projected test year. My analysis shows that Maintenance expenses declined by $ million from $. million in 0 to $0. million in 0. Exhibit AG- shows this comparison. The decline occurred in all the cost centers under Maintenance. Although increases in Operation expenses partially offset the decline in Maintenance expenses, the 0 actual results are a more recent and a more appropriate base on which to forecast the projected test year expense level. As such, I recommend a reduction of $. million in O&M expense. I have calculated this reduction by taking the difference of $. million in total Steam Power Generation O&M expenses of $0. million in 0 and the $. million in 0, plus removing the $. million of cost inflation the Company has included for 0. Q. ARE YOU PROPOSING ANY OTHER ADJUSTMENTS TO O&M EXPENSE FOR FOSSIL GENERATION? U- S. Coppola //

17 A. Yes. I recommend that the $. million of O&M expense related the acquisition of a new natural gas-fueled 00 MW power plant should be removed. As explained later in my testimony, the acquisition of this new plant is still pending and has not been fully vetted. As such, I recommend that it be excluded from this projected test year. Therefore in total, I recommend that O&M expense for Fossil Generation should be reduced by $. million with a corresponding decrease in revenue requirement. 0 Nuclear Power Generation In Exhibit A-0, C, DTEE shows its test year forecast of $. million in O&M expenses for its Nuclear Power Generation operations. The requested level of expenses is $. million, or %, above the 0 adjusted actual expenses of $. million. Approximately $. million of the increase relates to inflation adjustments over the twoand-half year period from 0 to June 0. The remaining $ million primarily consists of expense normalization adjustments proposed by the Company. One of the normalization adjustments proposed by the Company is intended to synchronize the expense for the next refueling outage to an -month cycle. For refueling outage, which the Company completed between February 0 and April, 0, the Company extended the cycle from the typical months to months. Therefore, according to the Company there is not sufficient expense in 0 on which to base the forecast of O&M expense for the projected test year. To address this shortfall, U- S. Coppola //

18 the Company is proposing an increase in Operation expense of $. million and an increase in Maintenance expense of $. million. 0 My analysis of the actual expense levels for 0 and 0 in the FERC accounts to which the Company is proposing the adjustments shows that no adjustments are warranted. The Company is proposing increasing the 0 expense level in account 0- Steam Expenses and account 0-Maintenance of Reactor Plant Equipment for a total of $. million. As the schedule of 0 and 0 actual expenses in Exhibit AG- shows, the combined expense in those accounts in 0 was $. million versus $. million in 0. If the refueling outage was delayed from 0 to 0, we should see an increase in expenses in 0 over 0 to justify the adjustment. Instead, 0 expenses are higher than 0 for the two accounts in total. Given that the Company has projected test year expenses from the higher cost base of 0, an additional upward adjustment in cost is not warranted. If anything, a case could be made that the forecasted test year expenses are inflated and should be adjusted down even further. My conclusion is that the adjustments to the refueling outage expense proposed by the Company are not necessary or appropriate, and should be removed from the test year forecast. Therefore, I recommend that O&M expenses for Nuclear Power Generation should be reduced by $. million. Exhibit A-0, Schedule C., page, column (i). U- S. Coppola //

19 0 Uncollectible Accounts Expense In Exhibit A-0, Schedule C, the Company included a forecasted amount of $. million for Uncollectible Accounts Expense for the projected year. The amount projected for the test year is the same amount of uncollectible expense recorded by the Company in the 0 historical test year. In her direct testimony, Company witness Renee Tomina did not specifically explain how she arrived at the projected level of uncollectible expense of $. million for the projected test year and why such an amount almost two years removed from the historical test year is still appropriate. Instead, she described a number of challenges and initiatives the Company has undertaken to reduce uncollectible expense over the past few years. I suspect that adopting the $. million of uncollectible expense for 0 to set the forecast of the projected test year was a convenient way to do it without considering current trends. 0 Current trends show that the local economy and customers ability to pay their electricity bills continues to improve. Ms. Tomina refers to unpaid accounts net write-off as a gauge of where the uncollectible expense should be set. In fact, net-write offs have declined in the past three years from $. million in 0 to $. million in 0 and to $. million in 0. It is likely that this trend will continue, although certain future months or periods may be higher or lower than prior years. Gas prices, which are one of the biggest drivers of uncollectible expense, increased in the first half of 0 and the unpaid bills, which will be written off in the first quarter of 0 may drive net-write off up in DTEE response to Staff Audit Request BAW-.. U- S. Coppola //

20 the early part of 0. However, since the second half of 0, gas prices have declined significantly and the beneficial impact of the lower gas prices should be evident in lower net write-offs in the second half of 0 and first half of 0, which coincides with the projected test year. 0 Certainly, reflective of this trend, the improving economy and other information known to management, the internal projections of uncollectible expense for 0 and 0 recently provided by the Company show much lower numbers than the $. million projected in this rate case filing. In response to a data request to provide the uncollectible expense included in the latest earnings projections for 0 and 0 provided to the DTE Energy Board of Directors, the Company disclosed that it has forecasted uncollectible expense amounts of $. million and $0. million for 0 and 0, respectively. The average for the two years is $. million. It is my conclusion that the $. million uncollectible expense level is more representative of the amount that will likely occur in the projected test year than the $. million that the Company has projected in this rate case filing. Therefore, I recommend that the uncollectible expense proposed by the Company should be reduced by $.0 million. Q. WHAT IS YOUR OPINION ABOUT SETTING THE UNCOLLECTIBLE EXPENSE FOR THE PROJECTED TEST YEAR BY AVERAGING THE Exhibit AG-. U- S. Coppola //

21 0 UNCOLLECTIBLE EXPENSE FOR THE PRIOR THREE HISTORICAL PERIODS? A. Such an approach is only appropriate when uncollectible expense has been rather stable from year to year with no major downward or upward trends. In this case there is a clear downward trend and a significant decline that has also been recognized by the Company in its internal projections. It would be grossly inaccurate to use a historical averaging method in this situation and I would advise the Commission against approving such an approach. In this case, the internal forecast from the Company is the best and most recent available information to rely on to set an appropriate level of expense for the projected test year. Corporate Services For the projected test year, the Company has forecasted $. million in Corporate Support O&M expenses. This is in comparison to $. million for the adjusted 0 historical test year. The decline of $. million is the result of a change in the accounting of performance shares subsequent to the historical test year which reduced O&M expense by $. million. Offsetting most of this accounting reduction are $. million of inflation cost adjustments, $. million for expense normalization for injuries and damages, and a $ million projected increase in Information Technology costs. 0 0 Exhibit A-0, Schedule C.. U- S. Coppola 0 //

22 0 According to the testimony of Company witness Teresa Uzenski, the Company has included this $ million of additional cost in the test year projection to cover the structural change in the way software technology is packaged, purchased and deployed. The example she provides is that the Company is planning to use more cloud-based computing for applications such as Microsoft office and . It is not clear why cloud-based computing is more advantageous or cost efficient that current groundbased computing. In discovery, I requested the Company to provide more information as to when the expenditures will begin and to provide a list of planned expenditures and an implementation plan. In response the Company stated that it did not yet have a defined plan and it was still evaluating a project to replace the and calendar system that could be implemented in the second half of 0. From the response it is clear that the $ million of expense is simply a vague idea with no firm plan or solid basis to justify an expense of this magnitude. Therefore, I recommend that this amount be removed from the Corporate Support O&M expense for the projected test year. Combined Operating License Application (COLA) Since 00, the Company has accumulated deferred costs to obtain a combined license from the Nuclear Regulatory Commission to continue to operate its existing Fermi nuclear plant and also to operate the Fermi nuclear plant, if built, for 0 year from Teresa Uzenski direct testimony at page. DTEE response to AG/DE-.. U- S. Coppola //

23 completion of construction. As of the end of 0, $. million in deferred cost have been accumulated and the Company has projected that the deferred costs will grow to $0. million by June 0, 0. In Exhibit A-, B., sponsored by witness Dimitry, the Company stated that receipt of the combined license was expected in the first quarter of 0. In response to a more recent data request, the Company reported that the license was received on May, 0. Based on receipt of the license in early 0, the Company has proposed to amortize the deferred balance of $0. million over 0 years with the first annual amortization of $. million beginning with the projected test year. 0 Q. DO YOU AGREE WITH THE COMPANY S PROPOSED AMORTIZATION? A. No. First of all, the Company has projected approximately $ million in additional costs between the end of 0 and 0. The $0. million includes these estimated costs. It is not clear why the Company projected to spend such large amounts of money on a license that supposedly was due to be issued in the first quarter of 0. Second, the Company has proposed an amortization period of only 0 years for a license that has a minimum operating life of 0 years from completion of construction. Third, it is still highly uncertain if Fermi will ever be built or if the rights to build it will be sold. The key point is that it is premature to begin to amortize any of the deferred cost over any arbitrary period of time before Fermi is built and operating. The Company has DTEE response to data request AG/DE-.. U- S. Coppola //

24 stated that all the costs deferred pertain to Fermi. Therefore, those costs should not be amortized until the plant begins operation and generates revenue. Under the accounting matching principle, such costs should be amortized over the plant s useful life which is the 0-year operating period following completion of construction. It is not fair or reasonable to have current customers pay for costs that are not related to productive generating assets or assets that are not creating value currently. In summary, the amortization of COLA deferred costs is premature. As such, I recommend that the $. million amortized to expense in the projected test year should be removed. 0 Employee Incentive Compensation Q. PLEASE PROVIDE A BRIEF SUMMARY OF THE COMPANY S INCENTIVE PAY PLANS AND THE AMOUNT OF EXPENSE THE COMPANY SEEKS TO RECOVER IN THIS RATE CASE. A. In this rate case, the Company seeks to recover $0. million of incentive payments of which $. million relates to its Long Term Incentive Plan (LTIP), $. million to its Annual Incentive Plan (AIP), and $. million to the Rewarding Employees Plan (REP). DTEE response to data request AG/DE-.. Exhibit AG-0. The incentive compensation information on page of Mr. Wuepper testimony is for the year 0, as adjusted, and does not include the inflation cost adjustment for 0, 0 and to June 0, 0. U- S. Coppola //

25 Annual Incentive Plan - The AIP is an annual bonus program focused on the following major categories and specific measures: 0. 0% on Financial Performance (DTEE Net Income, DTEE Cash Flow and DTE Energy Earning Per Share).. % on Customer Satisfaction (Customer Satisfaction, Improvement in Customer Satisfaction and MPSC Customer Complaints).. % on Employee Engagement (DTE Energy Employee Engagement, DTE Energy OSHA Incidents, Employee Satisfaction survey results).. % on Operating Excellence (Recurring Power Outages, Fossil Power Reliability and Nuclear Power Reliability). These measures are for the year 0. A review of the measures in place for the prior four years reveals that certain measures and target levels have varied from year to year. These changes make a direct comparison over the years more challenging. Of the $. million in expense requested for this incentive plan, 0% is for corporate and support employees outside the electric utility. Rewarding Employees Plan - The REP is very similar in design and function to the AIP with some variations in the non-financial measures. Where the AIP is designed for senior level managers at DTEE and its affiliates, the REP covers all other employees of these companies. 0 Of the $. million in expense requested in rates for this plan, approximately % pertains to non-dtee employees. U- S. Coppola //

26 Long Term Incentive Plan The LTIP is an annual stock grant plan focused on achieving multi-year goals and specifically on the following measures:. 0% - 0% on Common Stock Total Shareholder Return vs. a Peer Group.. 0% Balance Sheet Ratio of Funds from Operations to Debt.. 0 0% DTEE Average Return on Equity over a -year period. The weight of the measures varies depending on whether the employee works for the utility or the parent company and the corporate service group. The testimony of Company witness Jeffrey Wuepper provides more details on the AIP, REP and LTIP. 0 Q. WHAT IS YOUR ASSESSMENT OF EACH OF THESE INCENTIVE PAY PLANS? A. My overall assessment is that the three incentive plans are too heavily skewed toward measures that directly benefit shareholders and not customers. Additionally, the customer benefits presented by the Company are based on a faulty premise of historical cost savings and an expectation that future targets of performance will be achieved. With regard to the AIP and REP, half of the incentive payout at target level relates to the Company and its parent, DTE Energy, achieving net income, earnings per share and cash flow goals. Despite the argument by the Company that achieving these goals somehow benefits customers, there is no direct relationship to customer benefits. These goals are in U- S. Coppola //

27 place to maximize profits and increase cash flow to pay dividends to shareholders. It is even more inappropriate to charge customers for incentive pay costs related to achieving DTE Energy earnings per share since those earnings include earnings from the gas and non-utility businesses of DTE Energy. The Commission should not allow recovery of incentive payments related to these financial goals. 0 As to the Customer Satisfaction grouping of measures, this category has represented between % and % of the relative weight of the total target payout during the past five years. The actual performance has been less than target during this period averaging.% of total payout. This reflects the difficulty that the Company has had in meeting the target measures in a key area that is directly beneficial to customers. With regard to the Employee Engagement category, the measures contained therein, although worthy goals, do not rise to the level of being measures that are visible to customers or create direct customer benefits. They are primarily internal goals related to employee satisfaction and deployment of safe practices in the workplace. 0 As to the Operating Excellence category, the measures contained therein are basic operating goals that the Company is expected to achieve in operating its power plants. Again, these are worthy internal goals to measure performance of the departments responsible for those operations but they have no direct visibility to customers. The only measure that has a direct link to customers is the number of repetitive power interruptions. This measure was implemented in 0 and represents -% of the total U- S. Coppola //

28 measures for the AIP and REP for 0, respectively. Over the past three years, the Company has had difficulty in consistently meeting the targeted performance level. In fact, in both 0 and 0, it did not meet even the threshold level of performance set at % of the target level. Q. WHAT IS YOUR ASSESSMENT OF THE LTIP? A. The LTIP is a plan strictly designed to induce management to create shareholder value. According to Mr. Wuepper s testimony: These measures [are] intended to motivate employees to keep in mind the role of their own contribution in the overall success of 0 DTE [Energy]. Energy. DTEE customers should not pay for the overall success of DTE The LTIP is weighted heavily (0%-0%) on total shareholder return, which is stock price appreciation and dividends paid over a period of time. The Company s total return is then measured against a group of peer companies to trigger a payout. This has nothing to do with creating direct benefits for DTEE customers and everything to do with creating value for DTE Energy shareholders. Similarly, the other two measures, the Debt coverage ratio and DTEE return on equity, are also very removed from any quantifiable benefits that directly accrue to customers. To some degree these last two items are actually duplicative of the Net Income and Cash Flow measures included in the AIP and REP plans. Company witness Wuepper testimony at page. U- S. Coppola //

29 The arguments put forth by Mr. Wuepper in his testimony that some of these measures will create a healthier company and therefore customers should pay for LTIP expenses are not convincing. Q. WHAT IS YOUR OPINION OF THE CUSTOMER BENEFITS CALCULATED BY MR. WUEPPER TO JUSTIFY RECOVERY OF THE INCENTIVE PAYMENTS? 0 A. In Exhibit A-0, Schedule l, Mr. Wuepper has shown a calculation which purports to show that operating and financial cost savings have exceeded adjusted 0 incentive plan payments by $0. million. Unfortunately, his calculations are faulty. First of all, the results of his calculation are based on the premise that the target level of performance is achieved. The largest contributor to the total net benefit, representing % of the total, is the benefit to customers from fewer service interruptions from power outages. Aside from the faulty assumptions about what customers really save by fewer interruptions, the basic premise to this calculated benefit is that the target measure will be achieved. As pointed out earlier, the Company has failed to achieve this measure, even at the lowest threshold level, during the past two years. The Commission should be very skeptical that this measure can be achieved with any consistency in the future and should not base its decision to grant approval for recovery of more than $0 million of incentive compensation costs on such poor historical performance. U- S. Coppola //

30 With regard to the other measures that have more direct visibility with customers, the calculations for the Customer Satisfaction grouping shows that allocated incentive payments to these measures exceed the calculated benefits. So there is no net benefit to customers here. In summary, my assessment is that the Company has failed to show that it has achieved consistent performance at target levels in the key performance measures directly affecting customers (Customer Satisfaction and Customer Service Interruptions) and as a result the calculated potential benefits are purely theoretical and inadequate to justify recovery of incentive pay expenses. 0 Q. WHAT IS YOUR RECOMMENDATION WITH REGARD TO INCENTIVE PAYMENTS BEING RECOVERED IN CUSTOMER RATES? A. I recommend that the Commission deny the Company s request to include $0. million of incentive payments in its forecasted test year O&M expense costs and reduce the revenue requirement by the same amount. Employee Benefit Costs Q. DO YOU HAVE ANY RECOMMENDATIONS PERTAINING TO EMPLOYEE BENEFIT COSTS? A. Yes. As shown in Exhibit A-0, Schedule C., page, the Company is projecting total O&M Employee Benefit expenses of $. million for the projected test year. This is U- S. Coppola //

31 an increase of $. million from the 0 historical period. Included in the Company s estimate of test year expenses are amounts related to Active Employee Health Care, Employee Savings Plan, Non-Qualified Benefit Plans and the Other Post-Employment Employee Benefits ( OPEB ). I will address each of them below. Q. WHAT DID YOU FIND IN YOUR ANALYSIS OF THE PROJECTED EXPENSE FOR HEALTH CARE, DENTAL AND VISION COSTS? 0 A. To determine the projected test year health care, dental and vision costs for active employees, the Company has applied an industry-wide rate of increase provided by Aon Hewitt. The Company used a.% rate for 0 and a.% annual rate for 0 and 0. As such, the Company has projected total medical costs of $0. million for the projected test year, or an increase of $.0 million in expenses from 0. Information provided by the Company in response to discovery shows that the actual average rate of increase in medical costs experienced by DTEE during the most recent five years (00 to 0) has been 0.%. This is considerably less than the forecasted rate used by the Company. Even the % increase experienced in 0 is less than half of the rate of increase projected by the Company. Q. WHAT IS YOUR CONCLUSION AND RECOMMENDATION ON HEALTH CARE AND OTHER MEDICAL COSTS? Exhibit A-0, Schedule C., page, lines 0-. Exhibit AG-. U- S. Coppola 0 //

32 A. The above analysis clearly shows that the Company has applied a rate of increase to medical costs which is considerably higher what the Company has experienced in the most recent three years. Therefore, I believe the Company forecast of medical costs is overstated. Reducing the rate of increase to % for all forecasted periods is a more reasonable projection and yields an increase of $.0 million instead of the $.0 million forecasted by the Company. Therefore, I recommend the O&M expense for the projected test year should be reduced by $0.0 million. 0 Q. WHAT HAS YOUR ANALYSIS UNCOVERED WITH REGARD TO THE FORECASTED COSTS FOR THE COMPANY S SAVINGS PLAN? A. In calculating the projected costs for the Employee Savings Plan on line of Exhibit A-, Schedule C., page, the Company has forecasted a rate of increase for wages of.% for 0 and.% for 0 and 0. The Company based this rate of increase on wage information gathered by Aon Hewitt. The.% and.% increases in base pay seems excessive during a period of economic stagnation and lower household incomes experienced by Michigan residents in the past few years. In my opinion, the Company should hold the line on future pay increases to share the pain and mitigate the effect on customer rates from other increases in operating and capital costs. U- S. Coppola //

33 At most, I would recommend a % increase in line with historical wage increases during the past three years, as reported by HIS Economics. This rate of wage increase is less than half the rate of increase forecasted by the Company. As a reasonable adjustment, I recommend that only half of the $. million increase proposed by the Company be allowed. Therefore, the Commission should remove $. million of expense from the projected test year. Q. WHAT IS YOUR ASSESSMENT OF THE COMPANY S REQUEST TO INCLUDE THE COST OF NON-QUALIFIED BENEFIT PLANS IN CUSTOMER RATES? 0 A. In Exhibit A-0, the Company has included $. million of costs related to the Executive Supplemental Retirement Plan (ESRP), Supplemental Retirement Plan (SRP), the Supplemental Savings Plan (SSP) and the Deferred Compensation Plan. 0 In his testimony, Company witness Wuepper states that the Company believes these costs to be legitimate business costs for retirement programs typically offered to executive management by many corporations. He acknowledges that in past rate cases the Commission has declined the Company s request to recover these costs in rates. However, he feels their continued exclusion to be unreasonable and link to the limitation imposed by the Internal Revenue Code (IRC) to be illogical. DTEE response data request AG/DE-.b. 0 Exhibit A-0, Schedule C., page, lines, and. U- S. Coppola //

34 The Commission has been very consistent in disallowing recovery of costs for nonqualified benefit plans that benefit executive level employees. The same practice is frequently followed by other regulatory commissions around the country. Some of the utilities in Michigan and in other States no longer even attempt to recover such costs in their rate case filings, having clearly understood the reluctance and long track record of rejection of cost recovery from regulatory commissions. 0 It is important to note that the IRC limitations were enacted because legislators wanted to limit the cost to taxpayers of benefits which applied to only a limited number of high income executives. Employers understand that premise but have continued to offer these benefits since they see that they provide value to their executive employees. However, the fact that they provide value to the executive employees or the Company does not mean that the cost of these benefit plans should be paid by customers. There are other examples, such as lobbying and corporate advertising expenses, which are beneficial to the Company, but are not expenses recoverable in rates. Furthermore, the Company has made no attempt to show how non-qualified benefit plans directly benefit customers, other than to say that they are part of a reasonable and competitive set of benefits offered to attract and retain executive management. Q. WHAT IS YOUR RECOMMENDATION WITH REGARD TO RECOVERY OF COSTS FOR NON-QUALIFIED BENEFIT PLANS? U- S. Coppola //

35 A. I recommend that the commission continue to disallow recovery of these costs and therefore remove $. million from projected O&M expense and the Company s revenue requirements. Q. PLEASE DISCUSS THE COMPANY S PROPOSAL TO DEFER THE NEGATIVE EXPENSE RELATED TO THE OPEB PLAN. 0 A. According to the testimony of Company witnesses Wuepper and Uzenski, in 0 and 0 the Company restructured the OPEB plan to freeze participation by new employees and changed the benefits paid for retiree drug and dental coverage. The changes to the plan significantly reduced the accumulated projected obligations and created negative costs. In 0 and 0 combined, the Company recorded $. million of negative OPEB expense, boosting earnings. For 0 and 0, the Company has projected negative OPEB expense of $. million and $. million, respectively. For the projected test year ending June 0, 0, the amount of negative OPEB expense is $. million. Instead of reflecting this negative expense in the projected test year revenue requirement, the Company has proposed to defer the $. million in a liability account and use it to offset any future positive OPEB expense that could occur in the future. Witness Wuepper testimony at page. Exhibit AG-. U- S. Coppola //

36 Q. WHAT IS YOUR ASSESSMENT OF THE COMPANY S OPEB EXPENSE DEFERRAL PROPOSAL? 0 A. My assessment is that the proposal is too late and not in the best interest of customers in the near term. First of all, the Company should have proposed such a deferral in conjunction with the restructuring of the plan that occurred in 0. If deferred from the beginning, the amount accumulated in the deferral account would have been $. million as of the end of 0 and the additional projected negative expense for 0 and 0 would have grown the deferral to $. million by the end of 0. Instead, the Company chose to stay silent on the changes and flow the benefit of $0. million for the first two-and-half years to its bottom line. Although the negative expense may have offset some cost increases the Company experience in its business, it is not a convincing argument to now change approaches at mid-stream. The Company has proposed a significant increase in rates in this general rate case filing, but customers need to see that increase minimized. Therefore, I recommend that the Company s deferral proposal be rejected and the $. million should be applied as a reduction to the Company revenue requirement. Q. WHAT ARE THE TOTAL ADJUSTMENTS THAT YOU RECOMMEND RELATED TO EMPLOYEE BENEFIT PLANS? U- S. Coppola //