STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

Transcription

1 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of DTE GAS COMPANY for authority to Case No. U increase its rates for the distribution of (e-file paperless) natural gas and for other relief. / MICHIGAN PUBLIC SERVICE COMMISSION STAFF S REPLY BRIEF DATED: June 12, 2018 MICHIGAN PUBLIC SERVICE COMMISSION STAFF Spencer A. Sattler (P70524) Heather M.S. Durian (P67587) Michael J. Orris (P51232) Assistant Attorneys General Public Service Division 7109 W. Saginaw Hwy., 3rd Floor Lansing, MI Telephone: (517)

2 Table of Contents Page No. I. Introduction... 1 II. Response to the DTE Gas Company... 1 A. Jurisdiction, Standard of Review, and Rate Setting Legal Requirements... 1 B. Capital Structure, Rate Base, Capital Expenditures, and Revenues and Expenses Staff has minor modifications to its previously filed positions on its capital structure, rate base, capital expenditures, and revenues and expenses Staff continues to support its proposed disallowance to transmission O&M expenses for pending rulemaking proceedings Staff and the Company continue to disagree about the appropriate return on equity a. In light of historical adjustments to DTE Gas s ROE, Staff s proposed 50 basis-point reduction is reasonable b. Global and local economic conditions do not justify a higher return or represent a higher-than-average risk c. Staff did not disregard merger and acquisition activities d. Staff stands by its recommended 9.6% ROE reduction III. Response to Detroit Thermal, LLC IV. Response to RESA V. Conclusion i

3 I. Introduction After reviewing the other parties briefs, nothing in them changes Staff s overarching position that its proposed rate base, return on equity, and operating expenses strike the right balance between investors and ratepayers interests. Staff has, however, made changes reflecting revisions that the DTE Gas Company made in its Initial Brief, adopting Staff s and other parties positions, and revisions that Staff has made, adopting a small number of DTE Gas s positions. Those changes are described in this Reply Brief and the attached appendices. After accounting for these changes, Staff projects that the Company will have a $0.8 million total company revenue sufficiency. 1 II. Response to the DTE Gas Company A. Jurisdiction, Standard of Review, and Rate Setting Legal Requirements Generally, DTE Gas has correctly explained the standard of review and rate setting legal requirements, but there were a few issues it glossed over. Most importantly, DTE Gas s statement that the Administrative Procedures Act (APA) precludes the Commission from making decisions based on non-record materials is only partially true. (DTE Gas s Initial Br, p 10 (emphasis added).) The APA prevents the Commission from making findings of fact based on non-record materials (i.e., a fact not on the record and not judicially noticed). MCL , 1 Staff has used this Reply Brief as an opportunity to respond to new arguments that the other parties made in briefs, without repeating arguments that Staff has already made. Unless otherwise noted, Staff continues to stand by the positions it took in its Initial Brief, testimony, and exhibits. 1

4 This limitation does not apply to the Commission s legislative, ratemaking and legislative, policy decisions. See Ass n of Businesses Advocating Tariff Equity v Pub Serv Comm, 205 Mich App 383, 390 (1994) ( Setting rates and fashioning rate structures are legislative and not judicial or quasi-judicial acts. This Court does not therefore review PSC rate decisions under the substantial evidence test, but rather defers to the PSC absent breach of a constitutional standard or statutory mandate or limitation. ) Courts have even upheld Commission policy decisions that lack a detailed explanation of the reasons behind the policy choice. In Consumers Power Co v Pub Serv Comm, 226 Mich App 12 (1997), the Consumers Power Company appealed a Commission order approving Consumers special contract with the James River Corporation for transportation of natural gas. Although the Commission approved the contract, it conditioned the approval on Consumers assuming full responsibility for any revenue shortfall between the contract price and a designated rate floor. Consumers objected because, among other things, the Commission s decision allegedly did not contain sufficient findings of fact in support of its decision to preclude recovery of a portion of the revenue shortfall. Id. at 30. The Court of Appeals disagreed. The Court noted that Consumers objection was to the sufficiency of the PSC s findings regarding a matter of policy choice rather than an adjudication of disputed facts and that the Commission s policy choices are not subject to the substantial evidence test. Id. at 32. It went so far to say that even though the Commission may not have provided a detailed explanation of the reasons for its 2

5 policy choice in this case, that does not necessarily mean that the PSC s decision is... an abuse of discretion. Id. Staff is not suggesting that the Commission decide contested issues in this case without explaining its decisions; rather, Staff is emphasizing that the Commission s legislative, ratemaking decisions and its legislative, policy-making decisions are subject to a different standard of review than its findings of fact. Also, although DTE alluded to language in the APA that allows it to use its experience, technical competence and specialized knowledge in the evaluation of evidence presented to it, MCL , more should be said. Specifically, The Commission is not required to rely upon a witness s testimony, if the Commission s experience, technical competence, and specialized knowledge are at odds with the testimony. Moreover, the courts have repeatedly upheld the Commission s reliance on information available in its records. In re Consumers Energy Co s Application to Recover ROA Costs, MPSC Case No. U-12358, 7/23/2002 Opinion and Order, p 11. Courts also defer to the Commission s technical expertise. In re Application of Consumers Energy Co, 316 Mich App 231, 237 (2016) ( We give due deference to the PSC s administrative expertise and will not substitute our judgment for that of the PSC. ). B. Capital Structure, Rate Base, Capital Expenditures, and Revenues and Expenses Staff already addressed most of the arguments in the Company s Initial Brief related to its capital structure, rate base, capital expenditures, and revenues and expenses. (See Staff s Initial Br, pp 4 68.) With only a few minor modifications, 3

6 which are described below and in the attached appendices, Staff continues to stand by the positions it has taken throughout the course of this proceeding. 1. Staff has minor modifications to its previously filed positions on its capital structure, rate base, capital expenditures, and revenues and expenses. In its Initial Brief, DTE Gas adjusted its capital structure to reflect the Tax Cuts and Jobs Act s (TCJA s) impact on projected deferred taxes. Staff and the Company s amount outstanding varied slightly for several categories, but the amount was immaterial. To reduce the number of contested issues in the instant case, Staff is adopting all of the Company s capital structure amounts outstanding. (Appendix D; DTE Gas s Initial Br, Attachment A, p 4.) Given that the Company accepted Staff s recommendation to remove customer deposits from the capital structure and include it in working capital, the only remaining difference between the Company s and Staff s capital structure is the return on equity, which is discussed further below. In its Initial Brief, DTE Gas also adjusted its rate base, revenues, and expenses. Staff has reviewed the Company s changes and is adopting its $237,000 working capital reduction that is related to interest payable due to the impact of tax reform. (Appendix F). Additionally, Staff is adopting the Company s $762,000 increase to other revenue gas in kind. (Appendix C). The Company updated its gas-in-kind revenue to reflect Staff s proposed cost-of-gas rate as follows: 5,638 Mcf x $ = $762,000 (after rounding). (DTE Gas s Initial Br, Attachment A, p 3 n1.) 4

7 Finally, DTE Gas asks the Commission to treat the financing components of its Pension and OPEB expense as new regulatory liabilities. (DTE Gas s Initial Br, p 70.) Exhibit A-13, Schedule C5.12 illustrates these new liabilities, which are consistent with DTE Electric s accounting request in Case No. U that the Commission approved in its April 18, 2018 Order in that case. In re DTE Electric Co s Rate Case, MPSC Case No. U-18255, 4/18/2018 Order, pp 87, 34 n8. According to the Company, this alternative treatment will comply with the new GAAP rule for SEC reporting and conform to historical rate-making treatment. Staff agrees that the Company s accounting request is reasonable and recommends that the ALJ and the Commission approve it. 2. Staff continues to support its proposed disallowance to transmission O&M expenses for pending rulemaking proceedings. In the Company s Initial Brief, the Company accepted a $1.34 million reduction to transmission O&M related to the Pipeline and Hazardous Materials Safety Administration s (PHMSA s) pending rulemaking. (DTE Gas s Initial Br, p 40.) While Staff appreciates the concession, Staff s proposed adjustment was actually for $2.37 million, based on Company witness Renee Tomina s response to the following audit request: 15. With reference to the testimony of Company Witness Alida Sandberg,... please identify the amount of O&M expense related to the anticipated PHMSA rules that is included in this case for the 12-months ending September 30, Response: $2.37 million. [Exhibit S-10.3.] 5

8 Despite this answer, Ms. Tomina partially rebutted Staff s disallowance by explaining that it includes $1.03 million for distribution remediation related to a 2011 PHMSA advisory bulletin and not to pending rulemaking. 2 (3 TR ) The bulletin encouraged pipeline operators to review pipeline records to, among other things, substantiate Maximum Allowable Operating Pressure (MAOP). (2 TR 465.) The Company s rebuttal testimony is not consistent with its response to Staff s audit request, which clearly asked the Company to identify the amount of O&M expense related to the anticipated PHMSA rules.... (Exhibit S-10.3.) The Company appears to be correcting an error in its response to Staff s audit request, but the Company has not provided evidentiary support for the work it claims is being done in response to the 2011 PHMSA advisory bulletin. Furthermore, Company witness Alida Sandberg testified that limited remediation in response to PHMSA s advisory bulletin would be completed before the final PHMSA rules are released, and the final rules would require more work to remediate defects. (2 TR 466.) Although Ms. Sandberg testified that [t]he final rules will trigger a ramping up of record defect remediation in order to meet the anticipated timeline in the final rules, she did not attempt to place a dollar value on this record defect remediation. (Id.) Ms. Tomina did place a dollar value on this work in her rebuttal testimony ($1.03 million), but she did not did not explain exactly what aspect of the advisory bulletin that the proposed remediation work will 2 In Staff s Initial Brief, it mistakenly said that the Company did not rebut Staff s position, when in fact the Company did partially rebut Staff s recommended disallowance as described in the body of this argument. (See 3 TR ) 6

9 address. (3 TR 1031.) Because she introduced this figure late in the proceeding, without supporting details, Staff was not able to adequately review her claim. Therefore, based on the lack of evidentiary support, Staff can neither agree nor disagree with the Company s proposed O&M expenses of $1.03 million related to distribution remediation in response to the 2011 PHMSA advisory bulletin and maintains its proposed $2.37 million reduction. 3. Staff and the Company continue to disagree about the appropriate return on equity. In its Initial Brief, DTE Gas reiterated its request for a 52.0% permanent equity and a 48.0% debt layer in the Company s ratemaking capital structure. Staff agrees to this equity to debt weighting. Staff also agrees to the Company s request to modify its long-term debt, common equity, and net deferred income tax balances to account for the TCJA s tax impacts. In short, Staff does not propose any changes to the Company s proposed capital structure. Staff, however, disagrees with the Company s recommended 10.50% return on equity (ROE). The Company pointed to past Commission decisions to support its recommendation, but Staff demonstrates below that these decisions actually support its recommendation. DTE Gas relied on a flawed weighted-average cost of capital adjustment and Empirical Capital Asset Pricing Model to support its 10.50% ROE issues Staff addressed in its Initial Brief. One issue that deserves further attention is DTE Gas s decision to use higher data points in its quantitative models. The Company believes that Michigan s economy, particularly Southeastern Michigan s economy, justifies these high data points because the economy in the area is volatile and 7

10 heavily dependent on the auto industry. But there is substantial evidence, discussed below, that Michigan and Detroit are turning their economies around. Economic status is no longer a basis to artificially prop up the Company s return. Another issue that deserves further attention is DTE Gas s claim that Staff ignored merger and acquisition activity when choosing a proxy group. Quite the contrary, Staff did account for this activity by excluding companies from its proxy group that are currently involved in a merger or acquisition, but Staff did not go as far as the Company for good reason. All this is further confirmation that Staff s risk assessment, and ultimately its recommended 9.60% ROE, accurately reflect current market conditions and will allow the Company to earn a fair rate of return. a. In light of historical adjustments to DTE Gas s ROE, Staff s proposed 50 basis-point reduction is reasonable. The Company chronicles recent ROE decisions, pointing out that the Commission has repeatedly approved ROEs for DTE Gas and DTE Electric that were higher than Staff s and the ALJ s recommended ROEs. (DTE Gas s Initial Br, pp ) These same decisions reveal that DTE Gas s and DTE Electric s ROEs have steadily declined since their height at the turn of the century. And for DTE Gas in particular, it has not been uncommon for the Commission to reduce its ROE by 40 or 50 basis points in a single case. These steady and sometimes considerable reductions to DTE Gas s ROE suggest that the risk to utility investors has been steadily declining as well. 8

11 In 1993, the Commission approved an 11.50% return on equity for DTE Gas s predecessor, the Michigan Consolidated Gas Company. In re Michigan Consolidated Gas Co s Rate Case, MPSC Case No. U-10150, 10/28/1993 Opinion and Order, p 27. Mich Con s authorized ROE remained at 11.50% for over 10 years until 2005 when the Commission reduced it by 50 basis points. 3 In 2010, despite the then-recent financial crisis, the Commission refused Mich Con s request to increase its ROE above 11.0%, finding that [t]he poor Michigan economy has caused the utility s ratepayers as much or more hardship than it has the utility. It held that an appropriate ROE is one that balance[s] the interests of the utility with the interests of its ratepayers. In re Michigan Consolidated Gas Co s Rate Case, MPSC Case No. U-15985, 6/3/2010 Opinion and Order, p 35. Following the financial crisis, DTE Gas s ROE has steadily declined. In December of 2012, the Commission approved a settlement agreement in Case No. U reducing Mich Con s ROE to 10.5%, 4 and four years later the Commission reduced it again by 40 basis points to 10.1%. In re DTE Gas Co s Rate Case, MPSC Case No. U-17999, 12/9/2016 Order, p 24. Staff s recommended 50 basis-point reduction is consistent with historical reductions, particularly the 50 basis-point reduction in Case No. U and the 40 basis- 3 In Case No. U-13898, the Commission reduced Mich Con s ROE to 11.0%. In re Michigan Consolidated Gas Co s Rate Case, MPSC Case No. U-13898, 4/28/2005 Opinion and Order Granting Rate Relief, p Staff references the settlement agreement in Case No. U only to complete the historical record. Consistent with that agreement, it is not Staff s intent to use the agreed upon ROE to support its position in this case. In re Mich Con s Rate Case, MPSC Case No. U-16999, 12/7/2012 Settlement Agreement, 12. 9

12 point reduction in Case No. U Staff s 50 basis point reduction also accounts for risk reducing tracking mechanisms the Company currently has in place that were not part of the Company s regulatory basket in previous years. Recently, the Commission urged parties to consider the degree of financial adjustment they are requesting the Commission to undertake in one proceeding, because it is not realistic to make a significant change in ROE absent a radical change in underlying economic conditions. In re Consumers Energy Co s Rate Case, MPSC Case No. U-18322, 3/29/2018 Order, p 44. Staff agrees with the Commission. Since Staff s proposed reduction to DTE Gas s ROE is consistent with historical reductions, Staff does not view it as a significant reduction. b. Global and local economic conditions do not justify a higher return or represent a higher-than-average risk. The Company s ROE witness, Dr. Michael Vilbert, noted in his testimony that higher levels of uncertainty in the global capital markets continue to affect the U.S. economy and capital markets, as do the European Union s and Japan s low interest rates and quantitative-easing policies. (3 TR ). As a result, Dr. Vilbert used high data points (e.g., his market risk premium) in his quantitative models that skewed his results. 5 Current economic conditions are not grounds for these high data points. The United States Federal Reserve halted its quantitativeeasing program years ago and Dr. Vilbert said that U.S. capital markets may 5 When responding to Staff witness Kirk Megginson s recommended 6.23 market risk premium, Dr. Vilbert said, This estimate is too low.... This is particularly true given the current economic conditions I noted above. (3 TR ) 10

13 currently be benefiting from investors fleeing economic turmoil and the potential for negative yields in other parts of the globe. (3 TR 760.) Given that the U.S. economy is the default economy that global investors flock to for investment security, growth, and a more reasonable return on their investments, the Company s data points are unacceptably high. With respect to Michigan s economy, Dr. Vilbert testified that economic conditions are not yet back to normal as measured by their status prior to the credit crisis. (3 TR 756.) At the same time, he acknowledged that the economy is recovering, if slowly, and that Detroit is experiencing a renaissance downtown. (3 TR 765; 4 TR 1167.) These conditions do not merit a higher return on equity. In its Initial Brief, the Company reiterated that its Southeastern Michigan service territory has a weak economy, which is heavily dependent on the auto industry, and declining population base. (DTE Gas s Initial Br, p 31.) This, it said, suggests that the Company has higher-than-average business risk. (Id.) The Company s position conflict with testimony that Michigan s economy is improving, that downtown Detroit and surrounding areas are in the midst of a revival, that Detroit is not as dependent on the auto industry as it has been, and that auto companies are currently experiencing record sales. (3 TR 765; 4 TR 1167, 1489.) In light of this record evidence, the Commission should reject the old argument that the Detroit area is a net-negative for DTE Gas that exposes it to high business risk. Instead, the Commission should adopt an ROE in line with Staff s more reasonable 9.60% recommendation. 11

14 c. Staff did not disregard merger and acquisition activities. DTE Gas said that [i]t was improper for the AG and Staff to disregard merger and acquisition activities, which can bias results, in selecting sample companies. (DTE Gas s Initial Br, p 24, n 31.) Staff did not disregard merger and acquisition activities; on the contrary, Staff looked at mergers and acquisitions when selecting its proxy group. According to Mr. Megginson, to qualify for Staff s proxy group, a company could not currently [be] involved in a merger or major corporate buyout. (4 TR ) Dr. Vilbert took this one step further by excluding companies that were involved in mergers or acquisitions over the past five years. (3 TR , 815.) He felt so strongly about this particular criterion that he included companies in his proxy group from a different industry rather than include companies that were involved in a merger or acquisition within the past five years. Although Dr. Vilbert excluded companies from his proxy group that were involved in mergers or acquisitions potentially affecting the companies stock prices and beta estimates, (3 TR , ), he conceded in discovery that if a company is acquiring another company in a merger, the potential change in stock price is indeterminate and depends upon the market s evaluation of the benefit of the merger relative to the price to be paid. (Exhibit S-29.) Thus, Dr. Vilbert could not determine the impact of a merger or acquisition on a natural gas company s stock price and beta estimate, nor could he determine when the impact to the stock price (if any) would dissipate and the company return to business as usual. He 12

15 nonetheless excluded natural gas companies that were involved in merger or acquisition activity within a five-year period. Given a merger or acquisition s indeterminate impact, (Exhibit S-29), it is possible that the companies Dr. Vilbert believes Staff should have excluded from its proxy group actually had higher returns as a result of prior mergers than they would have had without the mergers. Dr. Vilbert was particularly critical of Staff s decision to include Black Hills Corporation in its proxy group because Black Hills has been categorized as an electric utility (even though it serves both gas and electric customers) and because in 2016 it purchased another gas company. (3 TR 816; Exhibits S-20 and S-21.) But as the acquiring company, Dr. Vilbert concedes that the change in the stock price... is indeterminate. (Exhibit S-29.) And he was not aware of any financial analyses indicating that Black Hills purchase affected its stock prices. (Exhibit S-27.) Given this background, Black Hills, which is not currently involved in a merger or acquisition, is a better proxy company than a water utility from a different industry. If Staff was again faced with a decision between including companies in its proxy group that have been involved in a merger or acquisition over the last five years or including water utilities in its proxy group from an entirely different industry, Staff would make the same decision. The entire purpose of a proxy group is to simulate the market using comparable utility companies to approximate a utility s required cost of equity. (4 TR 1240, 1246.) Choosing companies in DTE Gas s line of business is more important than excluding companies that may have 13

16 been involved in a merger in the not-too-distant past. (See Staff s Initial Br, pp ) d. Staff stands by its recommended 9.6% ROE reduction. Staff s 9.60% ROE recommendation is not only reasonable, it is suitable given the Company s solid credit rating, Michigan s supportive regulatory environment, the current low-interest-rate environment, and the Company s higher-thanauthorized actual returns over the past five years. (4 TR ) Further, the Company is currently benefitting from, and will likely continue to benefit from, substantially reduced business and financial risk stemming from its gas revenue decoupling and infrastructure recovery mechanisms. (4 TR 1262.) In addition to these many favorable factors, Acts 286 and 341 have other provisions that benefit utilities as well (e.g., 10-month rate cases and projected test years). Staff s recommended 9.60% ROE should be viewed in the context of these auspicious statutory provisions. S&P and Moody s continue to give DTE Gas solid credit ratings despite decreases to its ROE over the past decade, which suggests that the Company will continue to have access to capital markets on a reasonable basis, if not a preferred one, to finance its future investments and capital projects. Staff recommends that the Commission reject DTE Gas s inflated 10.50% ROE and instead adopt Staff s more sensible 9.60% ROE recommendation. III. Response to Detroit Thermal, LLC The Commission should reject Detroit Thermal, LLC s (Detroit Thermal s) proposal to eliminate DTE Gas s standby service tariff and related charges in this 14

17 case. Detroit Thermal proposes to eliminate the Standby Charge rate element and recover $423,000 in associated revenue through demand or customer charges. (Detroit Thermal s Initial Br, p 1.) It argues that the Company s proposed standby charge is not cost-based because the Company did not explicitly calculated the charge in its cost of service study (COSS). (Id. at 4.) Detroit Thermal points out the Company s COSS includes standby customers along with other end-use transportation (EUT) customers in developing cost allocation schedules. (Id. at 5.) And because standby customers are combined with other EUT customer classes for general cost allocation and must also pay standby charges, Detroit Thermal claims that standby customers are subsidizing other non-standby EUT customers. (Id.) But a basic tenant of ratemaking is that similarly situated customers should pay the same rate. Since standby customers receive a different form of utility service than non-standby customers, they should be charged differently. While the Company s COSS in the instant case does not address the standby charge calculation, the charge was approved in a previous case, so it should be considered appropriate absent evidence to the contrary. Cf In re Consumers Energy Co s Rate Case, MPSC Case No. U-17735, 11/19/2015 Order, p 128 ( There is no evidentiary basis to alter the status quo by reducing or eliminating the opt-out fees and charges that the Commission approved in Case No. U ). The Company has not proposed to change the previously approved standby charge. Detroit Thermal argues that the Commission should eliminate the charge because the Company made no effort to prove its case, but since previously approved rates 15

18 are presumptively valid, Detroit Thermal has the burden of proving that the charge is no longer cost-based. Simply because the Company did not examine standby customers separately from other EUT customers does not mean the standby charge is now invalid. Detroit Thermal did not provide evidence in support of its proposal, so it has not overcome the presumption in favor of previously approved rates. While it is not clear whether the standby charge is cost-based for the test year in the instant case, this is not cause to eliminate the charge altogether because, if anything, the costs associated with standby service are likely higher than when the charge was first established. Detroit Thermal also argues that certain customers are forced to pay the standby charge at the discretion of the Company and that the vague standby tariff language allows DTE to apply standby charges in a discriminatory manner.... (Detroit Thermal s Initial Br, p ) However, the supposition that the Company s standby tariff language is vague comes only from cross examination of Company witness Henry Decker, who was unfamiliar with the specifics of the tariffs. (Id. at 10.) Detroit Thermal never introduced the actual tariff into evidence that defines standby service, despite its easy retrieval from the Commission s website. Detroit Thermal again bases its position on evidence that is not on the record, but could have been made available for proper analysis. Staff s opposition to Detroit Thermal s proposal in this case does not mean that Staff is opposed to studying the nature of the Company s standby charge in the future. The record in the instant case does not include the data necessary to 16

19 analyze the standby charge, but this could easily be remedied in a future case. Because of this lack of evidence in support of Detroit Thermal s proposal, Staff recommends that the Commission deny Detroit Thermal s request. IV. Response to RESA The Retail Energy Supply Association (RESA) criticized DTE Gas s Customer Notice Letter, otherwise known as an enrollment notification postcard (notification postcard), that it sends to customers leaving DTE Gas for an alternative gas supplier (AGS). Staff does not agree with RESA s criticisms, but it does recommend one addition to the notification. According to RESA, the notification postcard directs customers to DTE Gas s choice webpage, which warns them about shopping with an AGS... to attempt to dissuade customers from enrolling with an AGS. (RESA s Initial Br, p 14 (quoting 2 TR 28).) While Staff disagrees with RESA and finds DTE Gas s choice webpage to be balanced and educational, Staff recommends that the Company also include the Commission s Gas Choice Comparison website 6 somewhere within the notification postcard. Likewise, Staff disagrees with RESA that the notification postcard is anticompetitive and misleading. (RESA s Initial Br, p 13.) RESA says that [t]o the extent that DTE Gas or the Commission wishes to encourage all customers to take advantage of the choices in the marketplace, the messaging to customers should be competitively neutral and not favor GCC or GCR prices. (Id. at 17.) Specifically, [A]ll messages should be the same for both GCC and GCR customers unless there 6 Michigan Public Service Commission, Compare MI Gas, available at 17

20 is a valid cause for a difference. (Id.) When a customer chooses to enroll in the GCC program, Staff believes it is appropriate to provide the customers with a notification confirming the change. As long as the GCR rate information in the notification postcard is accurate, whether the GCR rate is higher or lower than the GCC rate, then it is not designed to unfairly favor one option over another. 7 There is merit to RESA s recommendation that DTE Gas s notification postcard include the 30% discount that is applied to GCC customers supplier of last resort charge, otherwise known as a reservation charge. Similar to the MPSC Gas Choice Comparison website, the notification postcard compares the GCR commodity rate with the GCC contracted rate only, which excludes reservation charges. The Commission should consider suggesting that the Company add the discounted reservation charge to the information in the postcard for a more balanced perspective. RESA is also correct that the notification postcard fails to disclose that, while the GCR rate is only for a commodity product, the GCC rate a customer pays an AGS might come with other attributes beyond just the commodity product. (RESA s Initial Br, p 16). That said, the comparison is still factually accurate and, therefore, legitimate. The GCC rate is the rate that the customer agreed to pay per Ccf in place of DTE s GCR rate, regardless of what additional attributes are included in the GCC rate. 7 The GCR rate is factual information that is publicly available on the MPSC website and the MPSC s Gas Choice Comparison website. 18

21 In sum, the notification postcard is not anti-competitive, but DTE Gas could certainly include more information on it. Staff recommends that the Commission encourage DTE Gas to include the MPSC s Gas Choice Comparison website on the postcard and also possibly information about GCC customers discounted reservation charge. However, because the Commission has concluded that any reference or promotion of the website by the utilities or the AGSs must be discretionary, In re Creation of a Gas Choice Comparison Website, MPSC Case No. U-17580, 9/11/2014 Order, p 9, it is ultimately the Company s decision. V. Conclusion Staff recommends that the ALJ and the Commission find that DTE Gas s total company revenue sufficiency will be $0.8 million. Staff continues to recommend that the ALJ and the Commission adopt Staff s lower rate base, return on equity, and operating expenses, as well as Staff s proposed cost of service, rate design, and tariff revisions. Staff s recommendations strike the right balance between investors interests and ratepayers interests. Respectfully submitted, MICHIGAN PUBLIC SERVICE COMMISSION STAFF DATED: June 12, /Reply Brief Spencer A. Sattler (P70524) Heather M.S. Durian (P67587) Michael J. Orris (P51232) Assistant Attorneys General Public Service Division 7109 W. Saginaw Hwy., 3rd Floor Lansing, MI Telephone: (517)

22 Appendix A Michigan Public Service Commission MPSC Staff Reply Brief DTE Gas Company Case No. U Projected Revenue Deficiency (Sufficiency) Appendix A Projected 12 Month Period Ending September 30, 2019 ($000) (a) (b) (c) (d) (e) Line Applicant Staff Staff No. Description Source Projection (Brief) Adjustment Projection 1 Rate Base Appendix B $ 4,256,671 $ (28,051) $ 4,228,620 2 Projected Net Operating Income Appendix C 216,607 12, ,095 3 Overall Rate of Return Line 2 Line % 0.33% 5.42% 4 Required Rate of Return Appendix D 5.75% -0.34% 5.40% 5 Income Required Line 1 x Line 4 $ 244,742 $ (16,203) $ 228,539 6 Income Deficiency / (Sufficiency) Line 5 - Line 2 $ 28,135 $ (28,691) $ (556) 7 Revenue Conversion Factor Exh. A-13, Sch. C Revenue Deficiency / (Sufficiency) Line 6 x Line 7 $ 38,123 $ (38,876) $ (753)

23 Appendix B Michigan Public Service Commission MPSC Staff Reply Brief DTE Gas Company Case No. U Projected Rate Base Appendix B For the 13-Month Average Period Ending 9/30/2019 ($000) (a) (b) (c) (d) (e) Line Appicant Staff Staff No. Description Source Projection (Brief) Adjustment Projection 1 Plant in Service Exh A-12, Sch B2, L6 5,401,455 (28,935) 5,372,520 2 Plant Held for Future Use Exh A-12, Sch B2, L Construction Work in Progress Exh A-12, Sch B2, L8 97,252-97,252 4 Total Utility Plant 5,498,706 (28,935) 5,469,771 5 Less: Depreciation Reserve Exh A-12, Sch B3, L7 2,248,221 (844) 2,247,377 6 Net Utility Plant 3,250,486 (28,091) 3,222,395 7 Net Capital Lease Property Exh A-12, Sch B4.1, L Gas Stored Underground - non current Exh A-12, Sch B4.1, L7 35,303-35,303 9 Total Utility Property and Plant Line 6 + Line 7 + Line 8 3,285,789 (28,091) 3,257, Less: Capital Lease Obligations Exh A-12, Sch B4.1, L Net Plant Line 9 + Line 10 3,285,789 (28,091) 3,257, Allowance for Working Capital Exh A-12, Sch B4, L47 970, , Total Projected Rate Base Line 11 + Line 12 4,256,671 (28,051) 4,228,620

24 Appendix C MICHIGAN PUBLIC SERVICE COMMISSION DTE Energy Company Projected Net Operating Income Projected 12 Month Period Ending September 30, 2019 ($000) MPSC Staff Reply Brief Case No. U Appendix C Revenue Expenses NOI (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) (q) (r) (s) Line No. Description (Witness) Distribution Revenue Transport Revenue Other Operating Revenue Total Cost of Gas Sold Company Other State & Use & Lost Gas Depreciation Property General Local Gas O&M Uncollectibles & Amort. Taxes Taxes Income Tax FIT Total NOI AFUDC Op. Income Adj. Adjusted NOI Company Filed Operating Income (Initial Filing) 756, , , ,656-26, ,378 41, ,072 63,942 14,830 14,316 61, , ,080 1,094 (1,912) 191,262 Other Revenues - GIK Interest on Customer Deposits (34) (102) 385 (385) (385) Transmission - Pipeline Integrity - (1,340) (989) Company Use and LAUF - 1,099 (72) (216) 811 (811) (811) Federal Income Tax - TCJA - - (24,841) (24,841) 24,841 24,841 Interest Effect on Tax (327) Adjustment to Reconcile (149) (149) Rounding - - (1) (1) 1 Operating Income (Initial Brief) 756, , , ,418-27, ,559 41, ,072 63,942 14,830 14,348 37, , ,099 1,094 (1,585) 216,607 Staff Adjustments 2 FIT Tax Rate 21% Adjustment (Schedule C8) Grantor Trust Income (Krause) 1,245 1, Gas Sales (Krause) 2,925 2, ,159 2,159 5 LAUF (Isakson) Company Use (Isakson) Transmission (Creisher) (1,030) (760) Administrative and General (Welke) (7,160) 471 1,405 (5,284) 5,284 5,284 9 Pension and Benefits (Welke) (791) (584) Meter Reading (Matthews) (3,003) (2,216) 2,216 2, Capital Expenditure Adj. Impact on Depreciation (Gerken) (939) (693) Interest on Security 5% (Gerken) Proforma Interest (Nichols) (127) (127) 17 Interest Synchronization (Nichols) Total Adjustments 2,925-1,245 4, (11,984) - (939) - - 1,157 3,448 (8,318) 12, , Staff NOI - Test Year (Reply Brief) 758, , , ,588-27, ,575 41, ,133 63,942 14,830 15,504 40, , ,587 1,094 (1,585) 229,095

25 Appendix D Michigan Public Service Commission MPSC Staff Reply Brief DTE Gas Company Case No. U Projected Rate of Return Summary Appendix D Projected 12 Month Period Ending September 30, 2019 ($000) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) Capital Structure % Amount % Amount Weighted Cost Weighted Cost Line 13 Mo. Avg. of Permanent of Total Cost Rate of Permanent of Total Pre-tax Pre-tax No. Description Source Amount Capital Capital % Capital (%) Capital (%) Multiplier Cost of Capital 1 Long-Term Debt - net (3) D2 $ 1,510, % 35.36% 4.59% 2.20% 1.62% % 2 Common Equity D5 1,635, % 38.30% 9.60% 4.99% 3.68% % 3 Sub-Total $ 3,146, % 7.19% 4 Short-Term Debt D3 $ 177, % 2.36% 0.10% % 5 Customer Deposits D3 - - % 5.00% - % % 6 Other Interest Bearing Credits D3 8, % 2.36% 0.00% % 7 Net Deferred Income Tax (2) 937, % - % - % - % 8 Deferred Investment Tax Cr. - - % - % - % - % JDITC 9 JDITC - Long-Term Debt % 4.59% 0.00% % 10 JDITC - Common Equity % 9.60% 0.00% % 11 Total JDITC $ 1, Total $ 4,270, % 5.40% 6.71%

26 Appendix E Michigan Public Service Commission MPSC Staff Reply Brief DTE Gas Company Case No. U Summary of Rate Base Adjustments Appendix E Projected 12 Month Period Ending September 30, 2019 ($000) (a) (b) (c) (d) (e) (f) Total Test Year Impacts From Historic and Projected Capital Spend Adj Line Staff Witness Adjustment Description Cap Ex Adj. Plant Adj. Accum Depr. Rate Base Depreciation 1 Matthews Contingency - Distribution Plant / Mains (4,089) (3,102) (61) (3,041) (81) 2 Matthews Contingency - Transmission Plant / Mains (3,292) (2,659) (34) (2,625) (43) 3 Matthews Contingency - Undergorund Storage Plant (2,965) (2,146) (36) (2,110) (49) 4 Matthews Contingency - GP/Structures and improvements (2,033) (1,501) (37) (1,464) (50) 5 Matthews Contingency - GP/Computers and related equipment (1,353) (973) (47) (926) (65) 6 TOTAL CONTINGENCY (13,732) (10,380) (215) (10,165) (287) 7 Matthews GP/Communications and Control Equipment (4,446) (3,393) (217) (3,176) (216) 8 Matthews Computers and related equipment (3,154) (1,577) (50) (1,526) (101) 9 Matthews Other Capital Projects - AMI (1,580) (790) (10) (780) (21) 10 Creisher IRM - Pipeline Integrity (2,013) (2,013) (57) (1,956) (32) 11 Creisher IRM - MMO MAC (4,700) (4,113) (88) (4,024) (107) 12 Creisher Routine Distribution - System Reliability (5,826) (4,524) (166) (4,358) (118) 13 Creisher Revenue Protection (3,002) (2,146) (41) (2,105) (56) 14 TOTAL NON-CONTINGENCY (24,721) (18,555) (629) (17,926) (652) 15 TOTAL (38,453) (28,935) (844) (28,091) (939) Working Capital Adjustments 16 Royal GCC Deferred Asset TOTAL WORKING CAPITAL TOTAL RATE BASE ADJUSTMENTS (28,051)

27 Appendix F MICHIGAN PUBLIC SERVICE COMMISSION MPSC Staff Reply Brief DTE Gas Company Case No.: U Summary of Change in Staff Rate Base Initial Filing to Brief Appendix F Projected 12-Month Period Ending September 30, 2019 ($000) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) Initial Filing Initial Brief & Reply Brief Line Description Change in Rate Base Cap Ex Plant A/D Rate Base Cap Ex Plant A/D Rate Base 1 GP/Communications and Control Equipment - (4,446) (3,393) (217) (3,176) (4,446) (3,393) (217) (3,176) 2 Computers and related equipment - (3,154) (1,577) (50) (1,526) (3,154) (1,577) (50) (1,526) 3 Other Capital Projects - AMI (780) (1,580) (790) (10) (780) 4 Contingency - Distribution Plant / Mains - (4,089) (3,102) (61) (3,041) (4,089) (3,102) (61) (3,041) 5 Contingency - Transmission Plant / Mains - (3,292) (2,659) (34) (2,625) (3,292) (2,659) (34) (2,625) 6 Contingency - Undergorund Storage Plant - (2,965) (2,146) (36) (2,110) (2,965) (2,146) (36) (2,110) 7 Contingency - GP/Structures and improvements - (2,033) (1,501) (37) (1,464) (2,033) (1,501) (37) (1,464) 8 Contingency - GP/Computers and related equipment - (1,353) (973) (47) (926) (1,353) (973) (47) (926) 9 IRM - Pipeline Integrity - (2,013) (2,013) (57) (1,956) (2,013) (2,013) (57) (1,956) 10 IRM - MMO MAC 440 * (5,150) (4,563) (98) (4,464) (4,700) (4,113) (88) (4,024) 11 Routine Distribution - System Reliability 1,298 (7,274) (5,874) (218) (5,656) (5,826) (4,524) (166) (4,358) 12 Revenue Protection - (3,002) (2,146) (41) (2,105) (3,002) (2,146) (41) (2,105) 13 Rate Base Reduction - Staff Initial Filing to Brief 958 (38,771) (29,945) (896) (29,049) (38,453) (28,935) (844) (28,091) Total of Non-Contingency Items Above 958 (25,039) (19,565) (682) (18,884) (24,721) (18,555) (629) (17,926) 16 Total of Contingency Items Above - (13,732) (10,380) (215) (10,165) (13,732) (10,380) (215) (10,165) 17 Rate Base Reduction - Staff Initial Filing to Brief 958 (38,771) (29,945) (896) (29,049) (38,453) (28,935) (844) (28,091) *The staff position on this line item has not changed from initial filing to brief. The change reflected is to align staff's brief appendix with that of the testimony which was initially filed. Description Rate Base Source 18 Initial Filing - Rate Base 4,227,899 Exh. S-1, Sch. A-1 19 Change at Initial Brief 958 Appendix F, Initial Brief & Reply Brief 20 Initial Brief - Rate Base 4,228,857 Appendix B, Initial Brief 21 Change at Reply Brief (237) Adopt DTE Initial Brief adjustment to reduce Interest Payable - TCJA, Attachment A, page 2 of 4 22 Reply Brief - Rate Base 4,228,620 Appendix B

28 Appendix G MICHIGAN PUBLIC SERVICE COMMISSION MPSC Staff Reply Brief DTE Gas Company Case No.: U Summary of Staff Position Appendix G Projected 12-Month Period Ending September 30, 2019 ($ million) (a) (b) (c) (d) (e) (f) (g) Walk from DTE Gas Revenue Deficiency (Intial Brief) to Staff Reply Brief Position Line Description Source Rate Base Pre-Tax Revenue Requirement Impact 1 Company Revenue Deficiency (Initial Brief) DTE Initial Brief, Attachment A, p 1 $ Change in Rate base Appendix E (28,051) 7.18% (2.0) 3 Change in rate of return App. A / App D 4,228, % (19.8) 4 Distribution Revenue Appendix C, line 18 (2.9) 5 Other Revenue (Grantor Trust) Appendix C, line 18 (1.2) 6 O&M adjustment Appendix C, line 18 (12.0) 7 Depreciation adjustment Appendix C, line 18 (0.9) 8 Total Staff adjustments (rev. req. impact) Appendix A, line 8 (38.9) 9 Staff Reply Brief - Revenue Sufficiency Appendix A, line 8 $ (0.8) Walk from Staff Initial Filing Revenue Deficiency to Staff Reply Brief Position Line Description Source Value #1 Value #2 Change Pre-Tax / Rate Base Revenue Requirement Impact 10 Initial Filing - Staff Revenue Sufficiency Exh. S-1, Sch. A-1, App. A $ (3.4) 11 Change in Rate base Exh. S-2, Sch. B-1 / App. B / App. D 4, , % Change in Cost of Capital ($43.3 DFIT Adj.) Appendix D 6.63% 6.72% 0.09% 4, Initial Brief - Staff Revenue Deficiency Appendix A, line 8 $ Change in Rate base Exh. S-2, Sch. B-1 / App. B / App. D 4, ,228.6 (0.237) 7.18% $ (0.0) 1 15 Change in Cost of Capital Appendix D 6.72% 6.71% -0.01% 4,229 $ (0.4) 16 Adopt DTE Other Revenue - GIK Adj. Appendix C $ (0.8) 17 Rounding $ (0.1) 18 Reply Brief - Staff Revenue Sufficiency Appendix A, line 8 $ (0.8) Notes: (1) See Appendix F

29 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of DTE GAS COMPANY for authority to Case No. U increase its rates for the distribution of (e-file paperless) natural gas and for other relief. / STATE OF MICHIGAN ) ) ss COUNTY OF EATON ) PROOF OF SERVICE TINA L. BIBBS, being first duly sworn, deposes and says that on June 12, 2018, she served a true copy of the Michigan Public Service Commission Staff s Reply Brief upon the following parties via only: DTE Gas Company Michael J. Solo Jon P. Christinidis David S. Maquera Andrea E. Hayden DTE Energy Company One Energy Plaza, WCB 688 Detroit, MI solom@dteenergy.com christinidisj@dteenergy.com maquerad@dteenergy.com haydena@dteenergy.com mpscfilings@dteenergy.com Detroit Thermal, LLC Arthur J. LeVasseur Matthew M. Peck Fischer Franklin & Ford 500 Griswold St., Suite 3500 Detroit, MI levasseur@fischerfranklin.com mmpeck@fischerfranklin.com 1

30 Attorney General Bill Schuette Celeste Gill Joel B. King Assistant Attorneys General Environment, Natural Resources and Agriculture Div. G. Mennen Williams Bldg., 6 th Floor 525 W. Ottawa St.; P.O. Box Lansing, MI gillc1@michigan.gov kingj38@michigan.gov ag-enra-spec-lit@michigan.gov Association of Businesses Advocating Tariff Equity Bryan A. Brandenburg Michael J. Pattwell Clark Hill PLC 212 E. Grand River Ave. Lansing, MI bbrandenburg@clarkhill.com mpattwell@clarkhill.com Residential Customer Group Don L. Keskey Brian W. Coyer Public Law Resource Center PLLC University Office Place 333 Albert Ave., Ste. 425 East Lansing, MI donkeskey@publiclawresourcecenter.com bwcoyer@publiclawresourcecenter.com Retail Energy Supply Ass n; AK Steel Corporation; Michigan Power Limited Partnership Jennifer Utter Heston Fraser Trebilcock Davis & Dunlap, PC 124 W. Allegan St., Ste Lansing, MI jheston@fraserlawfirm.com Verso Corporation Timothy J. Lundgren Laura A. Chappelle Varnum Law The Victor Center 201 N. Washington Sq., Ste. 910 Lansing, MI tjlundgren@varnumlaw.com Administrative Law Judge Hon. Martin D. Snider Administrative Law Judge Michigan Public Service Comm W. Saginaw Hwy., 3 rd Floor Lansing, MI sniderm@michigan.gov TINA L. BIBBS Subscribed and sworn to before me this 12th day of June, Pamela A. Pung, Notary Public State of Michigan, County of Clinton Acting in the County of Eaton My Commission Expires: