BOEHM, KURTZ & LOWRY ATTORNEYS AT LAW 36 EAST SEVENTH STREET, SUITE 1510 CINCINNATI, OHIO TELEPHONE (513) TELECOPIER (513)

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1 BOEHM, KURTZ & LOWRY ATTORNEYS AT LAW 36 EAST SEVENTH STREET, SUITE 1510 CINCINNATI, OHIO TELEPHONE ( TELECOPIER ( VIA ELECTRONIC CASE FILING April 5, 2019 Kavita Kale, Executive Secretary Michigan Public Service Commission 7109 W. Saginaw Highway Lansing, MI Re: Case No. U Dear Ms. Kale: Please find attached the REPLY EXCEPTIONS OF THE KROGER CO. and its PROOF OF SERVICE for filing in the above captioned matter. Please place this document of file. Thank you for your assistance in this matter. Very truly yours, Kurt J. Boehm, Esq. Jody Kyler Cohn, Esq. Michael L. Kurtz, Esq., (Michigan ##P67067 BOEHM, KURTZ & LOWRY MLKkew Enclosure Cc: Administrative Law Judge Sally L. Wallace

2 STATE OF MICHIGAN 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. Case No. U REPLY EXCEPTIONS OF THE KROGER CO. On March 6, 2019, Administrative Law Judge Sally Wallace issued her Proposal for Decision ( PFD in this proceeding. The parties filed Exceptions to the PFD on or before March 25, The Kroger Co. ( Kroger submits the following Reply Exceptions addressing the Primary customer charge. PRIMARY CUSTOMER CHARGE 1. The PFD s Recommendation To Adopt A Cost-Based Primary Monthly Customer Charge Using The Commission Approved Staff Method Will Result In Fair, Just And Reasonable Rates. a. DTE s Assertion That There Is No Basis For The PFD s Recommendation Regarding The Primary Customer Charge Is Not Supported By The Record. On page 102 of its Exceptions, DTE states: DTE Electric disagrees [with the PFD s recommendation regarding the Primary customer charge] because there is no basis for the PFD s recommendation. Even Kroger witness Mr. Bieber acknowledged that the Commission rejected using the Staff method to calculate the primary service charge (7T Mr. Lacey testified that there is no merit in Mr. Bieber s reasoning that just because the Commission did not expressly say [that the current $275] charge is cost-based, that it must not be. The PFD agreed with Kroger that the Primary customer charge proposed by DTE in this case is not reasonable because it is not cost-based and recommends that the Commission instead set the Primary customer charge using the method previously approved to calculate Residential and Commerical-Secondary customer charges. The basis for the PFD s recommendation to adopt a cost-based Primary customer charge is well established in the record and cited on pages of the PFD. 1

3 As referenced in PFD, the Commission s Order in Case No. U approved Staff s method of calculating customer-related costs for Residential and Commercial-Secondary customers. The Commission stated in Case No. U-18255: The Commission concurs with the other parties claims that DTE Electric s COSS was flawed because it included a multitude of costs that, although customer-related, are not costs that vary with the number of customers on the system. As the Staff and others pointed out, the Commission has determined that the costs to be included in the customer charge are the marginal costs associated with attaching a customer to the system. In addition, as the Staff observed, the NARUC Manual likewise supports using only the marginal costs of customer attachment in developing a customer charge. 1 Although DTE is opposed to using the Staff Method to determine the Primary service charge, DTE witness Mr. Lacey calculated the Primary customer-related costs using the Staff Method. 2 Mr. Lacey s cost calculations, using the Staff Method, are shown in the Table below and are compared to DTE s current and proposed customer charges. Comparison of Customer-Related Cost to DTE Customer Charges Customer-Related Costs* Current Customer Charge DTE Proposed Customer Charge Residential $8.26 $7.50 $9.00 Commercial-Secondary $10.43 $11.25 $15.00 Primary $53.52 $ $ *Customer-Related Costs using the Commission-Approved Staff Method were calculated by DTE in Exhibit A-13 in Case No. U-18255, p. 5 of 5, see KRO-3. As shown above, Residential and Commercial-Secondary service charges are more or less in line with customer-related costs. However, DTE s current and proposed service charge for Primary customers is over 5 times greater than customer costs using the same Commission-approved method for calculating customer related costs to be included in the monthly service charge. As a result, DTE is over-recovering customer related costs through customer charges for the Primary class. 1 April 18, 2018 Final Order, Case No. U-18255, pp During cross-examination, Mr. Lacey agreed that his Exhibit A-13 from Case No. U shows customer-related costs, by class, using the Commission-approved Staff Method. Transcript (December 18, 2018 p. 3239, lines p. 3240, line 1. 2

4 Contrast this cost-based analysis with DTE s evidence in support of its proposed $275 Primary customer charge. As explained in Kroger s briefs, the Company admitted that it did not perform any analysis in this case to determine if its proposed Primary customer charge is cost-based. 3 Further, as shown in the transcript excerpt below, Mr. Lacey confirmed that the $275 Primary customer charge is not cost-based during cross-examination: Q. I'm asking if the Company performed an analysis to determine a cost-based rate for the primary distribution customer charge in this case? [Mr. Lacey] I did not develop a customer base charge for the primary voltage class. 4 Instead of developing a cost-based customer charge for Primary customers, DTE relied on the Commission s 2017 rate case Order that approved a $275 charge when formulating its Primary customer charge proposed in this case. The Company confirmed this in response to Kroger Second Set of Data Requests to DTE 2-002(b.ii., in which DTE stated that it is not proposing to change the existing $275 Primary monthly customer charge in this case in light of the Commission s April 18, 2018 Order in DTE s 2017 Rate Case, U-18255, which approved the current charge. This point was again confirmed during cross-examination of Mr. Lacey: Q. Would it be correct to say that you relied on the Commission's determination from this prior case [Case No. U-18255] referenced in this DR regarding the primary voltage customer charge? [Mr. Lacey] -- yes. 5 In sum, DTE did not support its proposal to adopt a $275 Primary customer charge in this case. The Commission should reject DTE s proposed misalignment of customer costs with the Primary customer charge. Proper alignment is important for ensuring equity among customers, because properly aligning charges with costs minimizes cross-subsidies among customers. When the customer charge is set significantly above customer-related costs, smaller customers on the rate schedule are over-charged and thereby subsidize the larger customers on the rate schedule. Aligning rate design with underlying cost causation also improves efficiency because it sends proper price signals. 6 3 See DTE s Response to Kroger data requests KCDE-2.2ai and KCDE-2.2bii. 4 Transcript (December 18, 2018 p. 3237, lines Transcript (December 18, 2018 p. 3237, lines P. 3238, lines Direct Testimony of Justin Bieber, p

5 DTE witness Mr. Lacey emphasized the importance of aligning rate design with cost-causation in his Direct Testimony when he stated that demand-related costs should be recovered through a demand charge and customerrelated through a monthly customer charge. This will properly match cost recovery to cost causation. 7 However, DTE did not adhere to its own stated ratemaking principle when designing its monthly customer charge for the Primary rate in this case, choosing to simply propose a customer charge that was approved by the Commission in the past instead of determining Primary customer-related costs in this case and proposing a service charge that aligned with those costs. All, or nearly all, other components of DTE s proposed revenue requirement, rate allocation and rate design were updated to reflect test-year costs and cost-causation. It is unreasonable and inequitable to not also update the Primary customer charge because it will result in a major intra-class subsidy being locked into Primary rates. The PFD is clear that Kroger s position has merit on a cost-of-service basis, and that the customer charge for primary customers should be calculated using the same method that the Commission has consistently approved for Residential and Commercial-Secondary customers. b. The Principles Of Res Judicata And Collateral Estoppel Are Inapplicable To DTE and Kroger s Debate Regarding the Primary Customer Charge And Do Not Apply To The Setting Of Utility Rates. DTE next argues in its Exceptions that because the Commission has previously held that the Primary customer charge should be $275 that the principles of res judicata and collateral estoppel implicitly prevent the Commission from ordering a change to its Primary customer charge in this case. DTE states on page 103 of its Exceptions: Kroger does not offer anything that the Commission has not already considered. Although res judicata and collateral estoppel do not apply in a strict sense to the Commission s ratemaking decision, issues fully decided in earlier proceedings need not by completely relitigated in later proceedings unless the party wishing to do so establishes new evidence or a showing of changed circumstances that the earlier result is unreasonable. First, Kroger is not proposing to change the Commission s methodology for determining customer charges. Kroger is proposing that the same Commission-approved methodology used to determine Residential and Commercial-Secondary customers charges also be applied to determine Primary customer charges. This cost-based approach has been applied to Residential and Commercial-Secondary in DTE s three prior rate cases, Case No. U- 7 Direct Testimony of Thomas W. Lacey, pp

6 18255, U-18014, and U Residential and Commercial Secondary customers benefit from cost-based customer charges that do not create intra-class subsidies. Primary customers would not receive this same benefit if DTE s proposed Primary customer charge is approved. DTE has not offered any explanation of why Primary customers should not also benefit from cost-based rates. DTE s only argument in opposition to Kroger s proposed cost-based Primary customer charge is that a $275 Primary customer charge was approved in DTE s last rate case. This is not a legitimate basis for approving a customer charge that DTE admits is not cost-based. Second, as DTE concedes, res judicata and collateral estoppel do not apply to the Commission s ratemaking decisions. Rates are reset to reflect costs in rate cases. DTE s entire Application is premised on updating its rates and in many instances changing the methodologies and mechanisms that are used to determine customer bills. The evidence in this case clearly shows that the customer charge DTE proposes for Primary customers is not cost-based. Therefore, the Commission should approve the PFD s recommendation that the same method to determine Residential and Commercial-Secondary customer charges be used to calculate the Primary customer charge in order to avoid intra-class subsidies within the Primary rate. c. Kroger Is Not Opposed To Commission Staff s Proposed Alternative To Flow The Final Revenue Requirement Through The Cost-Of-Service Study. On page 8 of its Exceptions Commission Staff argues that if the Commission adopts the PFD s recommendation to set a Primary customer charge consistent with Kroger s recommendation the remaining rate components should also be designed according to the COSS and not simply adjusted by the percentage that the approved revenue requirement differs from DTE s proposed revenue requirement. Staff states: The ALJ erred in failing to specify that, should the Commission adopt Kroger s recommendation, the remaining rate components should also be designed according to the COSS and not simply adjusted by the percentage that the approved revenue requirement differs from Kroger proposed revenue requirement. PFD, p 237. The final Commission approved revenue requirement must be flowed through the cost of service study so that the Commission approved allocation methodologies are applied to each rate class. The results of the cost of service study are then used to guide rate design in providing the appropriate 8 December 11, 2015 Final Order, Case No. U-17767, p

7 price signals that match the manner in which costs are caused. This is not the same as simply adjusting every rate component by an equal percentage as proposed by Kroger witness Bieber. Staff s argument refers to a recommendation contained in Mr. Bieber s Direct Testimony in which Mr. Bieber discusses how the Primary rate components can be adjusted if the Commission adopts a costbased Primary customer charge and a reduced revenue requirement. Mr. Bieber stated on page 13 of his Direct Testimony: to the extent that the authorized revenue requirement is lower than the proposed amount, that reduction should be applied proportionately to all of the rate design elements. In other words, if the authorized revenue requirement is 20% less than the proposed revenue requirement, then each rate element and charge should be reduced by that same percentage. Kroger does not oppose Staff s proposal to re-run the cost-of-service at the final revenue requirement to guide rate design if the Commission adopts the PFD s recommendation on the Primary customer charge. Mr. Bieber s proposal regarding the mechanics of calculating rates at a lower revenue requirement was intended to offer a simple methodology for determining the Primary rate design elements at a lower revenue requirement that would preserve the cost-based methodology that Kroger argued for in the rate design. Mr. Bieber s proposal was an acknowledgement that it is sometimes not feasible to rerun the cost-of-service, especially if there is a settlement. But, this is not a core element of Kroger s proposal regarding Primary customer charges. Kroger s primary concern is that the Commission approve a cost-based Primary customer charge so that smaller Primary customers do not subsidize larger Primary customers. As long as DTE is ordered to calculate the customer charge based on the methodology recommended in the PFD in this case, Kroger does not have any objection to Staff s recommendation to re-run the cost-of-service at the final revenue requirement to guide rate design. It should be noted, that Staff is expressly not opposed to Mr. Bieber and Kroger s substantive proposal regarding the Primary customer charge. In response to Kroger s Second Set of Data Requests to Commission Staff (2-001, Staff confirmed that its opposition to Kroger is limited only to the 6

8 disagreement over Mr. Bieber s suggested methodology for calculating charges at a final approved revenue requirement that is lower than the revenue requirement proposed by DTE and is not opposed to Kroger s more substantive argument recommending a cost-based Primary customer charge to be determined using the Staff Method. Staff stated: ANSWER: Staff Witness Pung s rebuttal testimony is not intended to rebut witness Biebers rate design proposal regarding the methodology used to determine the costs to be included in the primary customer charge. 9 Respectfully submitted, Kurt J. Boehm, Esq. Jody Kyler Cohn, Esq. Michael L. Kurtz, Esq., (Michigan #P67067 BOEHM, KURTZ & LOWRY 36 East Seventh Street, Suite 1510 Cincinnati, Ohio Ph: Fax: KBoehm@BKLlawfirm.com JKylerCohn@BKLlawfirm.com mkurtz@bkllawfirm.com April 5, 2019 COUNSEL FOR THE KROGER CO. 9 Michigan Public Service Commission Staff s Answer To The Kroger Company s Second Set Of Data Requests 2-001, is attached for ease of reference. 7

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12 STATE OF MICHIGAN BEFORE THE PUBLIC UTILITIES 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. Case No. U PROOF OF SERVICE Kurt J. Boehm, Esq. duly sworn, deposes and says that on April 5, 2019 he served (via electronic mail when available or regular U.S. Mail the REPLY EXCEPTIONS OF THE KROGER CO. and a copy of this PROOF OF SERVICE upon those listed on the attached Certificate of Service. Kurt J. Boehm, Esq. Jody Kyler Cohn, Esq. Michael L. Kurtz, Esq., (Michigan #P67067 BOEHM, KURTZ & LOWRY 36 East Seventh Street, Suite 1510 Cincinnati, Ohio Ph: Fax: KBoehm@BKLlawfirm.com JKylerCohn@BKLlawfirm.com mkurtz@bkllawfirm.com COUNSEL FOR THE KROGER CO. Subscribed to and sworn before me this 4 TH day of April, Notary Public My Commission expires:

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15 0ÿ "&&%'ÿ( ÿ!ÿ"#$%ÿ %&*ÿ+ÿ(##%,'ÿ--.ÿ 0123ÿ3567ÿ89ÿÿ 157ÿÿ ÿ.$#7%2'ÿ89ÿ0:;0<ÿ =*#$%>*22? ÿandrea Hayden, Esq. General Counsel, Regulatory DTE Electric Company One Energy Plaza, 1635 WCB Detroit, MI ÿ ÿ