STATE OF MICHIGAN DEPARTMENT OF ATTORNEY GENERAL MIKE COX ATTORNEY GENERAL. November 30, 2010

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1 STATE OF MICHIGAN DEPARTMENT OF ATTORNEY GENERAL P.O. BOX 0 LANSING, MICHIGAN 0 MIKE COX ATTORNEY GENERAL November 0, 00 Ms. Mary Jo Kunkle Executive Secretary Michigan Public Service Commission Mercantile Way Lansing, MI Dear Ms. Kunkle: Re: MPSC Case No. U--R I am attaching for filing the Direct Testimony and Exhibits of Michael J. McGarry, Sr., on Behalf of Attorney General Michael A. Cox. This filing is being submitted electronically pursuant to the instructions in the Commission's notice of hearing. I am also attaching a proof of service. Sincerely, Donald E. Erickson Assistant Attorney General c All Parties

2 PROOF OF SERVICE - U--R The undersigned certifies that a copy of the Direct Testimony and Exhibits of Michael J. McGarry, Sr., on Behalf of Attorney General Michael A. Cox was served upon the parties listed below by mailing the same to them at their respective addresses with first class postage fully prepaid thereon on the 0th day of November 00. Wendy J. Cadwell Administrative Law Judge: SHARON L. FELDMAN PUBLIC SERVICE COMMISSION MERCANTILE WAY, SUITE PO BOX 0 LANSING, MI 0- MPSC Staff: PATRICIA S. BARONE ASSISTANT ATTORNEY GENERAL PUBLIC SERVICE DIVISION MERCANTILE WAY, SUITE LANSING MI MEC: CHRISTOPHER M. BZDOK OLSON BZDOK & HOWARD PC 0 E. FRONT ST TRAVERSE CITY MI Cadillac Renewable Energy LLC et al DAVID E. S. MARVIN THOMAS J. WATERS FRASER TREBILCOCK DAVIS & DUNLAP PC W. ALLEGAN SUITE 000 LANSING MI Consumers Energy Company: JOHN C. SHEA CONSUMERS ENERGY COMPANY ONE ENERGY PLAZA JACKSON, MI 0 Midland Cogeneration Venture Ltd Partnership (MCV): RICHARD J. AARON WARNER NORCROSS & JUDD LLP 0 N. WASHINGTON SQ., STE. 0 LANSING, MI GARY B. PASEK MIDLAND COGENERATION VENTURE LTD PARTNERSHIP 00 PROGRESS PLACE MIDLAND MI 0 Hemlock Semiconductor Corp.: JENNIFER U HESTON FRASER TREBILCOCK DAVIS & DUNLAP PC W. ALLEGAN SUITE 000 LANSING MI MCAAA: DON L KESKEY (P00) PUBLIC LAW RESOURCE CENTER PLLC 0 N CAPIT0L AV LANSING MI -0

3 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter, on the Application of CONSUMERS ENERGY COMPANY for the Reconciliation of Power Supply Cost Recovery (PSCR) Costs and Revenues for the Calendar Year 00 ) ) ) ) ) ) ) Case No. U--R DIRECT TESTIMONY AND EXHIBITS OF ON BEHALF OF ATTORNEY GENERAL MICHAEL A. COX November 0, 00

4 Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is Michael J. McGarry, Sr. My business address is Woodruff Road, Suite 00, PMB 0 Greenville, SC 0. Q. BY WHOM ARE YOU EMPLOYED AND WHAT IS YOUR POSITION? A. I am employed by Blue Ridge Consulting Services, Inc. located in Greenville, South Carolina, as President and Chief Executive Officer. 0 0 QUALIFICATIONS Q. PLEASE STATE YOUR EXPERIENCE AND EDUCATIONAL BACKGROUND. A. Prior to assuming my present position, I was Vice President of East Coast Operations from July 00 to June 00 with Hawks, Giffels & Pullin (HGP), Inc. In that position, I was responsible for developing and overseeing client engagements in utility regulatory affairs, management audit, and rate case management. From August 00 to July 00, I was an independent consultant working on a number of different projects, including a renewal/update of delivery service tariffs for Illinois Power and several utility street lighting cost benefit assessment projects. From June 000 until August 00, I was a senior consultant with Denali Consulting, Inc., a utility supply chain and e-procurement strategy and implementation firm. From October through June 000, I was employed by Navigant Consulting, Inc. and several of its predecessors or acquired firms working on a number of different projects, including a management audit of Southern Connecticut Gas Company and the original delivery service tariff filing MJM-

5 0 for Illinois Power. From July through October, I was with the New York State Department of Public Service (NYSDPS) in its Utility Operational Audit Section where we conducted focused, operational audits in many facets of utility operations for all sectors of the utility industry including gas, electric, telecommunications, and water. Prior to my employment with the NYSDPS, I was a rate analyst with Orange and Rockland Utilities ( to ) and then Seminole Electric Cooperative ( to ). I received my Masters of Business Administration from the State University of New York at Buffalo in and a Bachelor of Arts in Economics from Potsdam College (SUNY) in. 0 Q. HAVE YOU TESTIFIED BEFORE? A. Yes. I have presented or supported testimony in Colorado, Delaware, Illinois, Maine, Michigan, Maryland, New York Nova Scotia, Pennsylvania and Utah. These proceedings included testimony involving management decision and prudence impacts, operations and maintenance expenses, capital investments, revenue requirements, project management, and other areas. Most recently, I provided testimony in response to Consumers Energy Company s filing regarding its compliance with Public Acts and in Case No. U-0 and U-, Detroit Edison Company s filing in Case No. U-0. I have testified in a number of proceedings before the Michigan Public Service Commission (Commission or MPSC) on behalf of the State Attorney General and before the Maryland Public Service Commission on behalf of Staff. These cases have MJM-

6 Q. HAVE YOU INCLUDED A MORE DETAILED DESCRIPTION OF YOUR QUALIFICATIONS? A. Yes. A description of my qualifications is included as Appendix A. Q. ON WHOSE BEHALF ARE YOU TESTIFYING? A. I am appearing on behalf of Attorney General Michael A. Cox. 0 Q. ARE YOU SPONSORING ANY EXHIBITS IN CONNECTION WITH YOUR TESTIMONY? A. Yes. Exhibit AG- (MJM-) CECo Response to R-AG-CE- Exhibit AG- (MJM-) CECo Response to R-ST -CE- Exhibit AG- (MJM-) CECo Response to R-ST -CE- PURPOSE AND SUMMARY OF TESTIMONY 0 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY? A. The purpose of my testimony is to present positions on behalf of the Attorney General of significant concern with respect to () the transfer price for renewable energy sources that are flowing into the PSCR proposed by Consumers Energy Company (CECo or Company), () the inclusion of the replacement power cost during the Karn planned stator replacement outage in fall 00, and () MJM-

7 comment on the reasonableness of including the excess fuel and variable O&M expenses proffered by the various interveners known as BioMass Merchant Plants. Q. WHAT HAVE YOU REVIEWED IN THE PREPARATION OF YOUR TESTIMONY? A. I have reviewed the Company s and BioMass Merchant Plants intervenor testimony, supporting exhibits and workpapers, responses to data requests, and previous orders of the Commission. 0 Q. WAS THIS TESTIMONY PREPARED BY YOU OR UNDER YOUR A. Yes. DIRECT SUPERVISION? Q. PLEASE SUMMARIZE YOUR CONCLUSIONS AND RECOMMENDATIONS A. In general, I conclude that () the transfer price for renewable energy resources included in PSCR expense for each PSCR reconciliation should reflect the lower of the actual cost under the related renewable energy power purchase agreements or the reasonable-and-prudent, economically-dispatched, LMP price for electricity Testimony includes Direct Testimony of Timothy R. Schimke on Behalf of Cadillac Renewable Energy, LLC, Direct Testimony of William (Bill) E. Smith on Behalf of Genesee Power Station Limited Partnership, Direct Testimony of Edward P. ("Ted") Barrett Jr. on Behalf of Genesee Power Station Limited Partnership as Well as the Biomass Merchant Plants, Collectively, Direct Testimony of Philip E. Lewis on Behalf of Grayling Generating Station Limited Partnership, Direct Testimony of Keith A. Mulka on Behalf of Hillman Power Company, LLC, Direct Testimony of Robert Joe Tondu on Behalf of TES Filer City Station, Limited Partnership, Direct Testimony of Neil R. Taratuta on Behalf of Viking Energy of Lincoln, Inc., Direct Testimony of Thomas V. Vine on Behalf of Viking Energy of McBain, Inc., Direct Testimony of Donald Adams on Behalf of Viking Energy of McBain, Inc., Viking Energy of Lincoln, Inc., and Exhibits to the above testimony MJM-

8 thereby reducing PSCR s expenses by $,, () the replacement power costs that totaled $,, required by the Karn fall 00 outage should be removed from the 00 PSCR case, and () reduce PSCR expenses for the amount paid to BioMass Merchants Plants of $,,. In total, I am recommending the PSCR expense be reduced by $,,. TRANSFER PRICE 0 Q. WHY HAVE YOU REACHED THE CONCLUSION CONCERNING THE TRANSFER PRICE? A. In combination, a utility should not recover more under PA 0 and under 00 PA than the costs it actually incurred for renewable energy delivered. On the other hand, a utility should not recover in a PSCR reconciliation any portion of actual renewable energy expense that exceeds the costs the utility would have incurred if the utility had dispatched available, alternative, and more economic energy. 0 Q. DOESN'T 00 PA REQUIRE CECO TO SATISIFY MINIMUM RENEWABLE PORTFOLIO STANDARDS (RPS)? A. Yes, but in my opinion only actual renewable energy costs up to the available, alternative, and more economic energy resources should be transferred to PSCR expenses. The cost, if any, of renewable energy resources that exceeds the economic dispatch cost should remain in and be recovered as an incremental cost of compliance via renewable energy surcharges under 00 PA. MJM-

9 0 0 Q. PLEASE PROVIDE THE RELEVANT INFORMATION AND BACKGROUND THAT SUPPORTS YOUR CONCLUSION. A. MCL 0.0() provides in relevant part: () For an electric provider whose rates are regulated by the commission, the commission shall determine the appropriate charges for the electric provider's tariffs that permit recovery of the incremental cost of compliance subject to the retail rate impact limits set forth in subsection (). () An electric provider shall recover the incremental cost of compliance with the renewable energy standards by an itemized charge on the customer's bill for billing periods beginning not earlier than 0 days after the commission approves the electric provider's renewable energy plan under section or or determines under section that the plan complies with this act. An electric provider shall not comply with the renewable energy standards to the extent that, as determined by the commission, recovery of the incremental cost of compliance will have a retail rate impact that exceeds any of the following: (a) $.00 per month per residential customer meter. (b) $. per month per commercial secondary customer meter. (c) $.0 per month per commercial primary or industrial customer meter. () The retail rate impact limits of subsection () apply only to the incremental costs of compliance and do not apply to costs approved for recovery by the commission other than as provided in this act. () The incremental cost of compliance shall be calculated for a 0-year period beginning with approval of the renewable energy plan and shall be recovered on a levelized basis. 0 MCL 0.0() provides in relevant part: () Subject to the retail rate impact limits under section, the commission shall consider all actual costs reasonably and prudently incurred in good faith to implement a commission-approved renewable energy plan by an electric provider whose rates are regulated by the commission to be a cost of service to be recovered by the electric provider. Subject to the retail rate impact limits under section, an electric provider whose rates are regulated by the commission shall recover through its retail electric rates all of the electric provider's incremental costs of compliance during the 0-year period beginning when the electric MJM-

10 provider's plan is approved by the commission and all reasonable and prudent ongoing costs of compliance during and after that period. The recovery shall include, but is not limited to, the electric provider's authorized rate of return on equity for costs approved under this section, which shall remain fixed at the rate of return and debt to equity ratio that was in effect in the electric provider's base rates when the electric provider's renewable energy plan was approved. () Incremental costs of compliance shall be calculated as follows: (a) Determine the sum of the following costs to the extent those costs are reasonable and prudent and not already approved for recovery in electric rates as of the effective date of this act: (i) Capital, operating, and maintenance costs of renewable energy systems or advanced cleaner energy systems, including property taxes, insurance, and return on equity associated with an electric provider's renewable energy systems or advanced cleaner energy systems, including the electric provider's renewable energy portfolio established to achieve compliance with the renewable energy standards and any additional renewable energy systems or advanced cleaner energy systems, that are built or acquired by the electric provider to maintain compliance with the renewable energy standards during the 0-year period beginning when the electric provider's plan is approved by the commission. (ii) Financing costs attributable to capital, operating, and maintenance costs of capital facilities associated with renewable energy systems or advanced cleaner energy systems used to meet the renewable energy standard. (iii) Costs that are not otherwise recoverable in rates approved by the federal energy regulatory commission and that are related to the infrastructure required to bring renewable energy systems or advanced cleaner energy systems used to achieve compliance with the renewable energy standards on to the transmission system, including interconnection and substation costs for renewable energy systems or advanced cleaner energy systems used to meet the renewable energy standard. (iv) Ancillary service costs determined by the commission to be necessarily incurred to ensure the quality and reliability of renewable energy or advanced cleaner energy used to meet the renewable energy standards, regardless of MJM-

11 the ownership of a renewable energy system or advanced cleaner energy technology. (v) Except to the extent the costs are allocated under a different subparagraph, all of the following: (A) The costs of renewable energy credits purchased under this act. (B) The costs of contracts described in section (). (vi) Expenses incurred as a result of state or federal governmental actions related to renewable energy systems or advanced cleaner energy systems attributable to the renewable energy standards, including changes in tax or other law. (vii) Any additional electric provider costs determined by the commission to be necessarily incurred to ensure the quality and reliability of renewable energy or advanced cleaner energy used to meet the renewable energy standards. (b) Subtract from the sum of costs not already included in electric rates determined under subdivision (a) the sum of the following revenues: (i) Revenue derived from the sale of environmental attributes associated with the generation of renewable energy or advanced cleaner energy systems attributable to the renewable energy standards. Such revenue shall not be considered in determining power supply cost recovery factors under section j of PA, MCL 0.j. (ii) Interest on regulatory liabilities. (iii) Tax credits specifically designed to promote renewable energy or advanced cleaner energy. (iv) Revenue derived from the provision of renewable energy or advanced cleaner energy to retail electric customers subject to a power supply cost recovery clause under section j of PA, MCL 0.j, of an electric provider whose rates are regulated by the commission. After providing an opportunity for a contested case hearing for an electric provider whose rates are regulated by the commission, the commission shall annually establish a price per megawatt hour. In addition, an electric provider whose rates are regulated by the commission may at any time petition the commission to revise the price. In setting the price per megawatt hour under this subparagraph, the commission shall consider factors including, but not limited MJM-

12 0 0 0 to, projected capacity, energy, maintenance, and operating costs; information filed under section j of PA, MCL 0.j; and information from wholesale markets, including, but not limited to, locational marginal pricing. This price shall be multiplied by the sum of the number of megawatt hours of renewable energy and the number of megawatt hours of advanced cleaner energy used to maintain compliance with the renewable energy standard. The product shall be considered a booked cost of purchased and net interchanged power transactions under section j of PA, MCL 0.j. For energy purchased by such an electric provider under a renewable energy contract or advanced cleaner energy contract, the price shall be the lower of the amount established by the commission or the actual price paid and shall be multiplied by the number of megawatt hours of renewable energy or advanced cleaner energy purchased. The resulting value shall be considered a booked cost of purchased and net interchanged power under section j of PA, MCL 0.j. (v) Revenue from wholesale renewable energy sales and advanced cleaner energy sales. Such revenue shall not be considered in determining power supply cost recovery factors under section j of PA, MCL 0.j. (vi) Any additional electric provider revenue considered by the commission to be attributable to the renewable energy standards. (vii) Any revenues recovered in rates for renewable energy costs that are included under subdivision (a). Q. WHAT RENEWABLE ENERGY COSTS HAVE YOU CONCLUDED CAN BE SUBTRACTED FROM REASONABLY AND PRUDENTLY INCURRED ACTUAL RENEWABLE ENERGY COSTS AND TRANSFERRED TO PSCR EXPENSE IN DETERMINING THE INCREMENTAL COST OF COMPLIANCE? A. I have concluded that to establish the so-called transfer price the Commission must consider factors including, but not limited to, projected capacity, energy, maintenance, and operating costs; information filed under section j of PA MJM-

13 , MCL 0.j; and information from wholesale markets, including, but not limited to, locational marginal pricing (LMP). Furthermore, relying upon MCL 0.0()(c), I have concluded that the Commission must set an annual actual transfer price in each annual RE plan reconciliation case. 0 Q. WHAT POLICY SHOULD THE MPSC ADOPT? A. The MPSC should transfer to this PSCR reconciliation for renewable energy received and redelivered to PSCR customers a price not exceeding the marginal costs that CECo would have incurred if the electricity the Company received from renewable energy resources had been received from available alternative resources. Q. WHY DID YOU REACH THAT CONCLUSION? A. I reached that conclusion because PSCR customers should not be forced to pay PSCR expenses greater than they would have paid under CECo's economic dispatching procedure. Q. DOESN'T THIS MEAN THAT YOU ARE PROPOSING TO DENY RENEWABLE COSTS RECOVERABLE UNDER SECTIONS AND? A. No. The difference between costs recoverable under those statutes and the socalled transfer price would be recoverable incremental costs of compliance under Section. 0 Q. DO YOUR CONCLUSIONS CONFLICT WITH PRIOR ORDERS ISSUED BY THE COMMISSION? MJM-0

14 0 A. No. On page in its May, 00, order in U-0, the Commission stated: "The Commission reiterates that in approving this plan, it is not approving any actual costs. All actual costs incurred for PPAs or self-build renewable generation are subject to Commission review for reasonableness and prudence. Moreover, the Commission will have the advantage of knowing not only what Consumers proposes to spend, but also what other Michigan utilities are proposing to pay for renewable generation equipment and PPAs." Therefore, in my opinion, the Commission's prior orders do not prohibit in PSCR reconciliation cases making an appropriate, just-and-reasonable allocation of renewable energy costs between PSCR expense and recovery of the incremental cost of compliance. 0 Q. IS THERE ANY ADDITIONAL RELEVANT HISTORY THAT YOU'VE CONSIDERED? A. Yes. In the Company s compliance filing in Case No. U-0/U-, in response to the question Please describe how the Transfer Price for each resource is to be calculated, CECo witness Ronk stated, Each generation resource used to comply with PA will produce electric energy, electric capacity, and electric ancillary services which will offset the provision of energy, capacity and ancillary services from other conventional facilities. Each of these attributes has a market value which is currently recovered in each electric provider s rates. To the extent the new renewable resources offset the cost incurred for energy, capacity and ancillary services, the December, 00 Temporary Order issued by the Commission indicates that those costs are to be transferred to the electric provider s PSCR rates. On January, 00 the Company sent a letter to the Commission Staff providing the results of an energy and capacity value MJM-

15 forecasting effort undertaken with The Detroit Edison Company and other Michigan Electric Providers. That letter is provided as Exhibit A- (DFR-). That letter and its various attachments provide the basis for the transfer price calculation used by the Company in preparing its Renewable Energy Plan. Jennifer Rose provides additional testimony applying the energy and capacity price forecast to the Company s Renewable Energy Plan. (U-0 Direct testimony of David F. Ronk, Jr. pages & ) Witness Ronk then continues, asking and then answering the question, In what way will the Commission reconcile the Transfer Price? At the time the Commission approves EPC contracts associated with each Electric Provider s Renewable Energy Plan, we anticipate that in accordance with section XI () of the Commission s December, 00 order in MPSC Case No. U-00, the Commission will also lock in the transfer price forecast that will apply to each such Providerowned resource. The forecast, as provided and summarized in Attachment of Exhibit A- (DFR), provides an energy value for each period over the 0 year plan. Thereafter, as part of the Electric Provider s PSCR plan and reconciliation cases, the Commission would determine the revenue requirements associated with the approved Provider-owned resource that will be recovered through the PSCR process by applying the locked in price forecasts to the quantities of energy, capacity, and ancillary resources delivered in each year. For resources that are not Provider owned, we anticipate that the transfer price will be based on the actual energy and capacity values observed at the time energy is delivered. The remainder of the Renewable Energy Plan cost is the Incremental Cost of Compliance that is recovered through the Renewable Energy Plan surcharge discussed in the testimony of Hubert Miller. (U- 0 Direct testimony of David F. Ronk, Jr. pages & ) Q. WHAT IS YOUR OPINION CONCERNING THIS TESTIMONY? A. CECo witness Ronk envisioned locking in the transfer price based on 0-year forecast provided in analysis prepared in response to the Commission Order in U-00 and provided by the Company in a letter dated January, 00. MJM-

16 However, witness Ronk did distinguish between Provider contracts, in which the transfer price for Provider owned contracts would be locked, and non-provider purchases, in which non-provider owned contracts would be based on actual. Even if the transfer price should be or is locked-in for purposes of determining the total recoverable renewable energy cost under each contract, the actual amount transferred to reconciled PSCR expenses should not be based upon the total recoverable renewable energy cost. 0 Q. WHY? A. Based on the analysis submitted on January, 00, the Company intended to use the MISO LMP as the cost of the energy from renewable sources that would flow through the PSCR. But those prices were forecasted and as a result would most likely result in either an over or under recovery situation when actual prices were later compared to the forecast. Q. WHAT WAS THE PROJECTED TRANSFER PRICE IN U-0? A. The Company used monthly peak and off-peak prices from the January 00 analysis for each of the sources it procured renewable energy from in the months that it purchased power, specifically October and November of 00. On average the projected transfer price for that period was approximately $.0 per megawatt hour. 0 Q. WAS THIS PRICE DERIVED FROM A MISO LOCATIONAL MARGINAL PRICE (LMP)? U-0 Exhibit No. A- (TPC-) (col e, line ). MJM-

17 A. Yes. It was based on an analysis done by the Company and submitted to the Commission on January, 00. That analysis was included as an exhibit in Case U-0. 0 Q. WHAT IS YOUR POSITION REGARDING WHAT TRANSFER PRICE SHOULD BE REFLECTED IN THIS PSCR RECONCILIATION? A. The amount of dollars that should flow into the annual PSCR reconciliation should be based on the lower of the actual price for renewable energy or the alternative LMP price. If the actual cost is higher than the LMP price, then the remainder of the costs stays in the renewable energy plan reconciliation so that the balance of the total reasonable and prudent costs incurred for a renewable energy contract is recovered through that mechanism, not through the PSCR reconciliation. To determine whether the actual cost paid is higher or lower than the LMP price requires coordination with CECo's RE plan reconciliation to know what PSCR expense should be included in this PSCR reconciliation. 0 Q. WHY SHOULD THIS BE DONE? A. Transferring to this PSCR reconciliation a price above an avoided and lower alternative PSCR expense would create a situation in which PSCR expense would reduce and subsidize the total costs that flow through the RE plan and reconciliation surcharge as part of the incremental costs of compliance. By way of example, assume that a renewable contract price is based upon a $0 per MWh transfer price and that the actual LMP price in a related PSCR reconciliation is U-0 Exhibit No. A- (DFR-). MJM-

18 0 also $0. In that case, there is no problem. But transferring the contract price when the actual LMP price is lower than the renewable contract price would increase recoverable PSCR expense because renewable energy was an uneconomic source of the electric energy. On the other hand, if the LMP price exceeds the transfer price, then the PSCR expense would exceed actual costs if the LMP price is used as the transfer price. Neither of these results is just and reasonable, and MCL 0.0() does not require either result. MCL 0.0()(b)(iv) says that the Commission shall annually establish a price per megawatt hour and that the Commission shall consider factors, including but not limited to, projected capacity, energy, maintenance, and operating costs. The actual LMP price reflects those factors. In other words, the LMP price is the price that the Commission should use to annually determine the transfer price under MCL 0.0()(c) and to determine the annual PSCR expenses for renewable energy under MCL 0.0()(b)(iv). 0 Q. DOES THIS MEAN THAT CECO WOULD NOT RECOVER ALL OF THE COSTS ITS INCURS UNDER ITS RENEWABLE ENERGY CONTRACTS? A. No. When the contract price equals or is less than the LMP price, then CECo will recover the full contract price as a PSCR expense. When the contract price is higher than the LMP price, CECo will recover the LMP price as a PSCR expense and the balance of the contract price as an incremental cost of compliance under MCL 0.0() assuming the contract price was reasonable and prudent as required by MCL 0.0(). MJM-

19 Q. DO YOU KNOW WHAT SITUATION EXISTS WITH RESPECT TO THE INSTANT PROCEEDING? A. Yes. In Detroit Edison s PSCR reconciliation filing in Docket No. U--R Exhibit A-, Detroit Edison included a table that shows the MISO 00 Plan Case LMP Prices as well as the 00 actuals both for the Detroit Edison Load Node and Michigan Hub. Q. WHAT DOES THIS TABLE SHOW? A. For ease of reference, I have and reproduced it below. MJM-

20 A. As shown at line, for the 00 Plan Case in U-0, the average monthly On- Peak price was estimated to be $. per megawatt hour. The Off-Peak price was expected to be $0.0, and the RTC (round the clock) was $.0. On line, Detroit Edison reported that the actual MISO LMP prices at the Michigan Hub for 00 were $. On-Peak, $. Off-Peak and $0. RTC, respectively. This represents a reduction of %, 0%, and % respectively compared to the previous forecast. This is by no means insignificant. I recognize that the way that the transfer price was set is slightly different from that reported here. However, MJM-

21 both analyses are based on the hourly load and cost data at MISO, and a recasting of the 00 transfer price, using the same methodology utilized by the Company in its 00 analysis, should show a similar reduction relationship. 0 Q. HOW DOES THIS AFFECT CECO's REQUESTED RECOVERY FOR RENEWABLE ENERGY IN THIS CASE? A. The price used by CECo to report PSCR expense for renewable energy costs should be reduced to the applicable LMP prices unless approved actual renewable energy contract prices fall below those actual prices. In that case, the lower actual prices should be included in the renewable energy expense calculation. The result of my analysis shows that the renewable energy expense should be lowered by $,.. 0 Q. HOW HAVE YOU CALCULATED THE DIFFERENCE? A. As shown in the table below, I have applied the average reduction percentage of the MISO LMP price between the 00 plan and the actual reports for 00, as I described early. In that discussion, I mentioned calculating the reduction of the plan to actuals of %, 0%, and % for on-peak, off-peak and RTC energy costs, respectively. To determine the reasonable renewable energy costs to pass through to the Company s PSCR reconciliation in this case, I reduced the plan Transfer Price of $. by % (using the MISO LMP RTC price reduction 00 plan to actual). This results in a per megawatt hour price of $.. I then applied this number to the Actual 00 purchases (00. MWhrs) as shown in Exhibit A- (TPC-). When added to the capacity costs, this results in a total MJM-

22 transfer cost of $,.. I then subtracted this amount from the Company s proposed expense of $0, as shown on Exhibit A- (TPC-) to arrive at my proposed reduction in PSCR expense in this case of $,.. The following table shows the derivation of this amount. AG s Derivation of PSCR Expense Reduction for Transfer Price Reduction Line No. Description Amount Note 00 Plan Transfer Price $ per megawatt Hour $.0 Percentage Reduction 00 Plan to 00 Actual % Adjusted Transfer Price $. Line x ( line ) 00 Actual Volume (MWhrs),00. Exhibit A (TPC ) Column C, Line Actual Renewable Energy PSCR expense $ 0,0. Line x line Capacity Costs $,.00 Exhibit A (TPC ), Column H, Line ) Total Transfer Costs per AG $,. Less: DECo proposed renewable energy PSCR expense $0,.00 Exhibit A (TPC ), Column K, Line ) AG Proposed Adjustment to CECo 00 PSCR Expense $ (,.) Line Line KARN FALL 00 OUTAGE 0 Q. PLEASE PROVIDE BACKGROUND ON THE KARN OUTAGE ISSUE. A. According to the testimony of Company Witness David B. Kehoe, (Witness Kehoe), Karn was shut down on September 0, 00, to replace the stator coils. Inspection and testing of the insulation surrounding the coils during the previous Karn outage ending February, 00, indicated deterioration for which safe and uninterrupted operation of the coils required replacement as soon as possible. The unit was returned to service 0 days later on December, 00. Direct Testimony of David B Kehoe page Lines 0- MJM-

23 Q. WHY WERE THE STATOR COILS NOT REPLACED DURING THE PREVIOUS KARN OUTAGE ENDING FEBRUARY, 00? A. Witness Kehoe stated that the Company could not perform the work during the earlier outage because at the time of the previous outage when the deterioration was discovered the material and vendor support was not available. 0 Q. WAS THE FALL 00 STATOR COILS REPLACEMENT OUTAGE THEREFORE NECESSARY? A. Although the decision to replace the stator coils was necessary, the Company should have inspected, tested, and decided to replace the stator coils during an earlier outage. 0 Q. DID CECO REASONABLY KNOW THAT IT SHOULD HAVE INSPECTED AND TESTED THE STATOR COILS AND INSULATION DURING AN EARLIER OUTAGE? A. Yes. The manufacturer estimates the life expectancy of the insulation surrounding the coils to be 0 to 0 years. The stators on Unit were 0 years old.. The Company had reasonable knowledge about the potential breakdown of the insulation long before actual discovery during the Karn outage. In other words, with reasonable and prudent planning, the Company could have secured the material and vendor support for availability during the previous outage. A separate outage could have then been avoided. Direct Testimony of David B Kehoe page Lines - Direct Testimony of David B Kehoe page Lines 0- MJM-0

24 Q. WHAT WAS THE COST OF REPLACEMENT POWER FOR THIS OUTAGE? A. According to the Company, the net replacement power cost for the outage (replacement power cost minus variable operating expense that would have occurred had the unit been operational) is $,,. 0 0 Q. WHAT IS YOUR CONCLUSION CONCERNING THE KARN 00 FALL OUTAGE? A. Considering the information available about the life expectancy of the stator coil insulation, the Company could and should have reasonably foreseen the problem and should have planned to address this problem during the prior outage to avoid a subsequent outage. Ratepayers should not bear the burden of incremental costs for replacement power during this outage. The Commission should disallow the net replacement power cost of $,,. BIO MASS MERCHANT PLANT EXPENSES Q. HAVE YOU DETERMINED WHAT CECO IS INCLUDING RELATED TO PAYMENTS MADE TO BIOMASS MERCHANT PLANTS IN THIS PSCR RECONCILIATION? A. Yes. Included in CECo witness David F Ronk, Jr s Testimony is a statement that the Company is including $,, for payment made to Biomass Merchant Plants (BMP) per the Commission order in U-0. Q. HAVE YOU DETERMINED WHAT IS INCLUDED IN THIS AMOUNT? Exhibit AG- (MJM-) CECo response to R-AG-CE- MJM-

25 A. Yes. This amount consists of the following items: Line Description Amount Source 00 Annual payment to BMP s $,000,000 payment x $,000,000 months 00 Prorated Amount (0//0- //0) $,,0 Exhibit BMP- Line 00 NOx Payment to TES Filer City LP $,0 Exhibit BMP- Line Total: $,, Sum lines - Q. IS THERE ANY PORTION OF THIS AMOUNT THAT SHOULD NOT BE INCLUDED IN THE COMPANY S 00 PSCR RECONCILIATION? A. Yes. For the reasons I will discuss below, in my opinion the Commission should not allow CECo to recover the $,, in payments to the BMP as part of its 00 PSCR reconciliation. 0 Q. PLEASE EXPLAIN. A. From my review of the Company s testimony and that of the various BMP witnesses, this testimony fails to adequately show these expenses were reasonable and prudent. And those witnesses do not present objective benchmarks or standards upon which the Commission could base a conclusion that BMP reasonably and prudently incurred costs above the amount of energy charge reimbursements that CECo paid to them. Also, I have included the Company s reply to Staff data request R-ST-CE- as my Exhibit AG- (MJM-), and the Company admits that it did not audit the BMP expenses. Further, there is no Off $ due to rounding There might also be legal objections to including these costs; however, such issues should be addressed in briefs submitted by the parties. MJM-

26 justification for including the NOx payment ($,0) to one BMP intervener, TES Filer City, LP. The witness for TES Filer City, Robert Joe Tondu, simply states that TES incurred the NOx expense and its amount. 0 Mr. Tondu does not state why TES Filer City incurred that expense, and CECo does not mention the TES Filer City LP NOx expense in its testimony. 0 Q. PLEASE EXPLAIN WHY YOU BELIEVE THESE WITNESSES HAVE NOT PROVIDED ADEQUATE SUPPORT TO SHOW THAT THESE EXPENSES WERE REASONABLY AND PRUDENTLY INCURRED. A. First, the provisions in 00 PA that allow specified merchant plants who generate electricity from wood or wood by-products to recover additional costs took effect on October, 00, but under MCL 0.0j(). But under MCL 0.j() this reconciliation case covers only January, 00, through December, 00. Therefore, the prorated dollars for the end of 00 cannot be recovered in this case even if each of the plants of the BMPs reasonably and prudently incurred those excess costs. 0 Direct testimony of Robert Joe Tondu, TES Filer City LP, page, line. MJM-

27 0 0 A. Subsection () of 00 PA provides: () If, on or before January, 00, a merchant plant entered into a contract with an initial term of 0 years or more to sell electricity to an electric utility whose rates are regulated by the commission with,000,000 or more retail customers in this state and if, prior to January, 00, the merchant plant generated electricity under that contract, in whole or in part, from wood or solid wood wastes, then the merchant plant shall, upon petition by the merchant plant and subject to the limitation set forth in subsection (), recover the amount, if any, by which the merchant plant s reasonably and prudently incurred actual fuel and variable operation and maintenance costs exceed the amount that the merchant plant is paid under the contract for those costs. This subsection does not apply to landfill gas plants, hydro plants, municipal solid waste plants, or to merchant plants engaged in litigation against an electric utility seeking higher payments for power delivered pursuant to contract. (emphasis added). So in order for merchant plants to recover excess costs from CECo and in order for CECo to recover excess costs via a PSCR reconciliation, each BMP must accurately identify any excess costs and must prove that they reasonably and prudently incurred the excess costs. Q. PLEASE CONTINUE. A. From my review of the pre-filed testimony and exhibits, CECo simply relies on the BMP s cost projections for dispatch and has not audited the actual costs. The only witnesses supporting claims that excess costs were reasonably and prudently incurred are the BMP witnesses. For example, the BMPs witness Edward P. ( Ted ) Barrett Jr proffered the following line of questions and answers: Exhibit AG- (MJM-) CECo Response to R-ST -CE- Exhibit AG- (MJM-) See earlier footnote for list of witnesses for the BIOMASS Merchant Plants. MJM-

28 0 0 0 Q. IN CONNECTION WITH YOUR FUEL PROCUREMENT DECISIONS, DID YOU EXERCISE YOUR BEST JUDGMENT? A. Yes. Q. ARE YOU FAMILIAR WITH THE PROCUREMENT PRACTICES IN YOUR INDUSTRY? A. Yes. Q. IN YOUR OPINION, WERE YOUR FUEL PROCUREMENT PRACTICES CONSISTENT WITH INDUSTRY-ACCEPTED PRACTICES? A. Yes, they were. Q. IN YOUR OPINION, WERE YOUR FUEL PURCHASING PRACTICES REASONABLE AND PRUDENT? A. Yes, definitely. Q. IN YOUR OPINION, WERE MMR s ACTUAL FUEL CHARGES FOR THE PERIOD FROM OCTOBER, 00 THROUGH DECEMBER, 00 REASONABLE AND PRUDENT? A. Yes. Q. IN YOUR OPINION, AS A PERSON WITH EXTENSIVE EXPERIENCE IN THE FIELD OF FUEL PROCUREMENT, DO YOU THINK THAT ANY OF MMR S ACTUAL FUEL COSTS WERE EXTRAVAGANT, UNNECESSARY, INEFFICIENT OR IMPRUDENT? A. Absolutely not. Beyond these conclusory statements, the evidentiary record does not present comparative benchmark costs in the industry or comparable prices from other suppliers. Direct Testimony of Edward P. ( Ted ) Barrett Jr, ON BEHALF OF GENESEE POWER STATION LIMITED PARTNERSHIP AS WELL AS THE BIOMASS MERCHANT PLANTS, COLLECTIVELY MJM-

29 0 Q. PROVIDE AN EXAMPLE OF THE TYPE OF ANALYSIS AND/OR AUDIT YOU WOULD EXPECT TO SHOW THE REASONABLENESS AND PRUDENCY OF THE BMP S PROCUREMENT PRACTICES? A. Supporting testimony should identify the contract/spot strategy used to obtain the fuel, and each witness should have compared and analyzed the industry best practice to demonstrate () that each company s strategy was consistent with strategies used by similarly situated biomass generators who are not seeking relief in this case and () that unrelated generators experienced similar total costs. One BMP witness stated that either a spot or contract would have been reasonable; nevertheless,, without specifically explaining why, the witness stated that spot fuel purchases are most advantageous. Logically, these positions conflict. Since these expenses to BMPs exceed $ million, the Commission should require more evidentiary support before ruling that the excess expenditures were reasonably and prudently incurred. 0 Q. WHAT IS YOUR OPINION CONCERNING THE BMP s REQUEST TO INCLUDE FUEL AND VARIABLE EXPENSES ABOVE THE ALLOWED CAP? A. MCL 0.a() states: The total aggregate additional amounts recoverable by merchant plants pursuant to subsection () in excess of the amounts paid under the contracts shall not exceed $,000, per month for each affected electric utility. The $,000, per month limit specified in this subsection shall be reviewed by the commission upon petition of the merchant plant filed no more than Direct Testimony of TIMOTHY R. SCHIMKE ON BEHALF OF CADILLAC RENEWABLE ENERGY, LLC page MJM-

30 0 0 0 once per year and may be adjusted if the commission finds that the eligible merchant plants reasonably and prudently incurred actual fuel and variable operation and maintenance costs exceed the amount that those merchant plants are paid under the contract by more than $,000, per month. The annual amount of the adjustments shall not exceed a rate equal to the united states consumer price index. An adjustment shall not be made by the commission unless each affected merchant plant files a petition with the commission. As used in this subsection, "united states consumer price index" means the united states consumer price index for all urban consumers as defined and reported by the united states department of labor, bureau of labor statistics. If the total aggregate amount by which the eligible merchant plants reasonably and prudently incurred actual fuel and variable operation and maintenance costs determined by the commission exceed the amount that the merchant plants are paid under the contract by more than $,000, per month, the commission shall allocate the additional $,000, per month payment among the eligible merchant plants based upon the relationship of excess costs among the eligible merchant plants. The $,000, limit specified in this subsection, as adjusted, shall not apply with respect to actual fuel and variable operation and maintenance costs that are incurred due to changes in federal or state environmental laws or regulations that are implemented after the effective date of the amendatory act that added this subsection. The $,000, per month payment limit under this subsection shall not apply to merchant plants eligible under subsection () whose electricity is purchased by a utility that is using wood or wood waste or fuels derived from those materials for fuel in their power plants. Under this statute, the evidence may or may not justify adjustments to the ceilings, but since the BMPs have not presented objective grounds for ruling that the reported excess costs were reasonably and prudently incurred, the Commission should not grant their request to adjust the statutory ceilings. Q. PLEASE SUMMARIZE YOUR POSITIONS. A. I recommend the following reductions to CECo s 00 recoverable PSCR reconciliation expense: MJM-

31 ) Remove $, associated with the renewable energy transfer price issue ) Remove $,, for replacement power costs associated with the extended Karn outage ) Remove $,, for payments to the BMP because the evidence does not prove that the excess costs reported by them were reasonably and prudently incurred. In total, I request the Commission to reduce CECo s recoverable 00 PSCR expense reconciliation by $,,. 0 Q. DOES THIS CONCLUDE YOUR TESTIMONY? A. Yes it does. MJM-

32 Appendix A - Qualifications of Michael J. McGarry, Sr. Summary Mr. McGarry s professional experience spans twenty-nine years within the private and public sectors. He has conducted over thirty comprehensive management and operational audits of investor-owned energy, telecommunications, and water utilities. These audits have included comprehensive management audits and/or operational audits on most utility functions including corporate governance, strategic planning, internal auditing, capital and operating budget process and practices, distribution operations and maintenance, fuel procurement, supply chain management, demand side management, crew operations, affiliates transactions, commodity trading and construction program practices. Project Management Mr. McGarry s experience includes management of multi-discipline teams for a wide range of client engagements, development and implementation of detailed work plans and project schedules. He has analyzed and planned interdivisional resource utilization, supervised, developed and coached interdivisional team members and created numerous executive reports, briefings, and presentations. Regulatory and Rate Case Management Mr. McGarry has worked with clients to manage all aspects of the regulatory and rate case process. He has developed efficient processes to prepare supporting analyses and testimony for submission to the regulatory bodies and interveners. He is a seasoned project manager and has analytical expertise to respond to interrogatories and data requests from all rate case interveners in a timely manner. Mr. McGarry has assisted a number of clients in preparing revenue requirement and cost of service analyses. He has also developed rate structure and billing determinant information analyses, time of day and interruptible rates analyses, fuel and purchased power reports and annual wholesale rates for member cooperatives. He has developed complex revenue requirement models to present alternative positions to a utility s proposed rate request. Testimony and Witness Preparation Mr. McGarry has proffered and /or supported testimony in Colorado, Delaware, Illinois, Maine, Michigan, Maryland, New York, Nova Scotia, Ohio, Pennsylvania and Utah. These proceedings included testimony involving management decision and prudence impacts, operations and maintenance expenses, capital investments, revenue requirements, project management and others. Utility Management and Operational Audits Mr. McGarry has conducted over thirty comprehensive management and operational audits of investor-owned energy and telecommunications utilities. These audits have included comprehensive management audits and/or operational audits on most functions with the utility environment including corporate governance, strategic planning, internal auditing, capital and operating budget process and practices, distribution operations and maintenance, fuel procurement, supply chain management, MJM-A-

33 Appendix A - Qualifications of Michael J. McGarry, Sr. demand side management, crew operations, affiliates transactions, commodity trading and construction program practices. Restructuring, Unbundling, and Cost Allocation Mr. McGarry has developed the supporting analyses and regulatory filing requirements needed to support unbundling rates for utilities. This has included detailed studies where the company s plant-in-service and depreciation reserve was allocated to each unbundled function. He has assessed utility management actions to prepare the company for competition, including the processes and practices used by the utility to prepare to enter new markets and offer new services. Training and Public Speaking Mr. McGarry has presented topics before Commission staff groups, NARUC subcommittee groups, and as a program faculty member (00) for the Institute of Public Utilities at Michigan State University. Topics presented include management auditing and prudence reviews, service company costs and allocations, forecasting methodology and modeling, revenue requirements, rate base, and price regulation theory. Education Potsdam College, B.A., Economics, University at Buffalo School of Management, MBA, Regulatory Experience Before the Connecticut Department of Utility Control Docket 0-0- Application of Aquarion Water Company to Amend its Rate Schedules On behalf of the Connecticut Department of Public Utility, April 00 August 00 Project Manager. Oversaw rate case analysis and assessment of company s proposed revenue requirement specifically related to cash working capital and test year expenses. Assisted with analysis of specific issues and preparation of Commission s recommended decision. Docket Diagnostic Management Audit of Connecticut Light and Power Company. On behalf of the Staff of the Connecticut Department of Public Utility, July 00-June 00 Project Manager. Performed overall day to day project management responsibilities to conduct a diagnostic management audit of the Connecticut Light & Power Company (CL&P). Managed a project team of accountants, engineers and industry specialists who were responsible for evaluating the effectiveness of the management and operations of all aspects of the company. In addition, managed a focused prudency review of Northeast Utilities (CL&P s parent company) development and implementation of a $ million customer information system known as CustomerCentral or C. MJM-A-

34 Appendix A - Qualifications of Michael J. McGarry, Sr. Before the Delaware Public Service Commission Docket No. 0- On behalf of the Staff of the Delaware Public Service Commission in the matter of the application Delmarva Power & Light Company for approval of modifications to its electric base rates, September 00 - May 00 Project Manager. Oversaw rate case analysis and assessment of company s proposed revenue requirement. Assisted with analysis of specific issues and preparation of witness testimony. Docket No. 0-F On behalf of the Staff of the Delaware Public Service Commission in the matter of the application Delmarva Power & Light Company for approval of modifications to its gas cost rates, October 00-April 00 Project Manager. Oversaw a review of Delmarva Power and Light s gas hedging program. Docket No. 0- On behalf of the Staff of the Delaware Public Service Commission in the matter of Chesapeake Gas Corporation s implementation of a Gas Hedging program, June-August 00 Project Manager. Provided industry expertise and suggestions to the Commission on a proposal plan to implement a gas hedging procurement program at the Company. Docket No. 0- On behalf of the Staff of the Delaware Public Service Commission in the matter of Delmarva Power and Light Company s request for a $ million increase in gas base rates, October 00-March 00 Project Manager and testifying witness. Provide expert testimony on several rate base and revenue requirement issues. Recommended Commission reduce proposed rate increase request to $. million (%). Before the District of Columbia Public Service Commission Formal Case No. 0 In the Matter of the Application of the Potomac Electric Power Company for Authority to Increase Existing Retail Rates and Charges for Electric Distribution Service. On Behalf of the DCPSC, July-June 00 Project Manager: Advised Commission Staff on the Company s and intervener s filings and testimony regarding revenue requirements, rate base, cost of service, rate design, bill stabilization, and depreciation. Formal Case No. 0 - Technical consultant for the Commission in the matter of Potomac Electric Power Company s request for a $0. million increase in base rates, February 00-June 00 Project Manager. Provide technical expertise to Commission in evaluating the Company s rate case filing. Commission accepted adjustments which reduced the allowed increase by a significant percentage. Formal Case No. 0 In the Matter of the Investigation into Potomac Electric Power Company s Distribution Service Rates On Behalf of the DCPSC, January-March 00 MJM-A-