Miller, Canfield, Paddock and Stone, P.L.C. One Michigan Avenue, Suite 900 Lansing, Michigan TEL (517) FAX (517)

Transcription

1 Founded in 1852 by Sidney Davy Miller SHERRI A. WELLMAN TEL (517) FAX (517) Miller, Canfield, Paddock and Stone, P.L.C. One Michigan Avenue, Suite 900 Lansing, Michigan TEL (517) FAX (517) MICHIGAN: Ann Arbor Detroit Grand Rapids Kalamazoo Lansing Troy FLORIDA: Tampa ILLINOIS: Chicago NEW YORK: New York CANADA: Windsor CHINA: Shanghai MEXICO: Monterrey POLAND: Gdynia Warsaw Wrocław April 20, 2018 Ms. Kavita Kale Executive Secretary Michigan Public Service Commission 7109 W. Saginaw Highway, 3rd Floor Lansing, MI Re: SEMCO Energy Gas Company Tax Reform Credit A Case No. U Dear Ms. Kale: Enclosed for electronic filing are the Supplemental Direct Testimony and Exhibits of Steven Q. McLean on behalf of SEMCO Energy Gas Company in the above matter. Also enclosed is the Proof of Service. Should you have any questions, please kindly advise. Very truly yours, Miller, Canfield, Paddock and Stone, P.L.C. SAW/clc Enclosures cc: Parties of Record Steve McLean Jennifer Dennis By: Sherri A. Wellman

2 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter on the Commission s own ) motion, to consider changes in the rates ) of all the Michigan rate-regulated ) electric, steam and natural gas utilities ) Case No. U to reflect the effects of the federal Tax ) Cuts and Jobs Act of 2017: ) SEMCO ENERGY GAS COMPANY ) files an application for determination of Credit A ) as described in order U ) SUPPLEMENTAL DIRECT TESTIMONY AND EXHIBITS OF STEVEN Q. MCLEAN ON BEHALF OF SEMCO ENERGY GAS COMPANY April 20, 2018

3 Supplemental Direct Testimony of Steven Q. McLean On Behalf of SEMCO Energy Gas Company Q. Please state your name and business address. A. My name is Steven Q. McLean. My business address is 1411 Third Street, Suite A, Port Huron, Michigan Q A By whom are you employed and what is your position? I am employed by SEMCO Energy Gas Company ( SEMCO Gas or the Company ), a division of SEMCO Energy, Inc. ( SEMCO ), as its Director of Regulatory Affairs Q. Are you the same Steven Q. McLean that filed direct testimony and exhibits in this proceeding on March 29, 2018? A. Yes. Q. What is the purpose of your supplemental testimony? A. The purpose of my supplemental testimony is to address the impact of the federal Tax Cuts and Jobs Act of 2017 ( TCJA ) on the Company s Main Replacement Program ( MRP ) revenue requirement and associated surcharges. Q. Please identify the exhibits which you are sponsoring in this case. A. I am sponsoring: Exhibit A-9 (SQM-9) Adjusted MRP Revenue Requirement Exhibit A-10 (SQM-10) Adjusted MRP Customer Surcharges Exhibit A-11 (SQM-11) MRP Tariffs Sheets Q. Were these exhibits prepared by you or under your direction and supervision? A. Yes. 1

4 Supplemental Direct Testimony of Steven Q. McLean On Behalf of SEMCO Energy Gas Company Q. Please describe Exhibit A-9 (SQM-9). A. Exhibit A-9 (SQM-9) is the MRP revenue requirement calculation approved by the Commission in its June 3, 2015 order in Case No. U for the period , adjusted to reflect lower federal taxes for the years The revenue requirement components consist of Return on Net Rate Base, Depreciation, Property Taxes and O&M savings. Q. How does the TCJA impact the revenue requirement calculation for the MRP? A. The MRP revenue requirement calculation is impacted in two ways. First, the currently approved pre-tax rate of return of 11.66% is lowered to 10.01% for the years to reflect the decrease in federal corporate income taxes from 35% to 21%. Second, the deferred federal tax calculation is adjusted to reflect the lower federal tax for the same period. Overall, the annual revenue requirement is reduced by $564,717, thereby changing from $8,479,141 to $7,914,424. This reduced revenue requirement is used to calculate the updated surcharges necessary to pass the TCJA savings onto customers. Q. How are the proposed updated MRP surcharges calculated? A. The updated MRP surcharge calculation illustrated in Exhibit A-10 (SQM-10) is the exact same methodology and allocation factors approved in Case No. U The only difference is the lowered revenue requirement reflecting the federal tax savings. These surcharges are also reflected in the MRP Tariffs included as Exhibit A-11 (SQM-11). 2

5 Supplemental Direct Testimony of Steven Q. McLean On Behalf of SEMCO Energy Gas Company Q. Why do the MRP surcharges for TR-2, TR-3 and special contracts remain at $500 per month? A. The currently approved methodology used to calculate the MRP surcharges limits the surcharge to $500 per month. This is done through a twostep process. In the first step each rate schedule is allocated costs using a traditional cost of service allocation factor for distribution main. If any rate schedule is allocated enough costs in the first step to exceed a $500 per month surcharge a second step is used to reallocate those cost back to other rate schedules so that no MRP rates exceed $500 per month. The MRP federal tax savings do not cause the TR-2, TR-3 or special contract to fall below the $500 per month cap. Q. Does this conclude your supplemental testimony? A. Yes. 3

6 SEMCO Energy Gas Company Case No.: U Adjusted MRP Revenue Requirement Witness: Steven McLean Exhibit: A-9 (SQM-9) Page: 1 of 2 Line No. Description Source Avg. Capital Investment (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) 1 Annual MRP Investment U $ 4,722,706 $ 4,134,812 $ 8,884,577 $ 9,900,000 $ 8,202,158 $ 9,508,892 $ 9,794,159 $ 10,087,984 $ 10,390,623 $ 10,702,342 $ 10,096,800 Net Rate Base 2 Cumulative Capital Investment Prior Yr Plus L1 $ 4,722,706 $ 8,857,518 $ 17,742,095 $ 27,642,095 $ 35,844,253 $ 45,353,145 $ 55,147,304 $ 65,235,287 $ 75,625,910 $ 86,328,252 3 Accumulated Depreciation Prior Yr - L8 $ (59,543) $ (230,758) $ (566,119) $ (1,138,310) $ (1,938,729) $ (2,962,443) $ (4,229,525) $ (5,747,276) $ (7,523,215) $ (9,565,088) 4 Accum. Deffered Taxes Pg.2 L5 $ (45,730) $ (172,067) $ (409,994) $ (802,199) $ (1,323,569) $ (1,953,991) $ (2,694,170) $ (3,250,142) $ (3,869,721) $ (4,568,273) 5 Ending Net Rate Base Sum L2-L4 $ 4,617,433 $ 8,454,693 $ 16,765,982 $ 25,701,586 $ 32,581,956 $ 40,436,711 $ 48,223,609 $ 56,237,870 $ 64,232,975 $ 72,194,890 6 Average Net Rate Base L5 (PY+CY)/2 $ 2,308,717 $ 6,536,063 $ 12,610,338 $ 21,233,784 $ 29,141,771 $ 36,509,333 $ 44,330,160 $ 52,230,739 $ 60,235,422 $ 68,213,933 Total Cost of Service 7 Return on Net Rate Base % $ 269,196 $ 762,105 $ 1,470,365 $ 2,475,859 $ 3,397,930 $ 4,256,988 $ 5,168,897 $ - $ - $ - $ 1,885,177 8 Return on Net Rate Base % $ 5,227,879 $ 6,029,084 $ 6,827,669 $ 3,616,926 9 Depreciation (1/2 yr conv.) 2.52% $ 59,543 $ 171,216 $ 335,361 $ 572,191 $ 800,418 $ 1,023,714 $ 1,267,082 $ 1,517,751 $ 1,775,939 $ 2,041,873 $ 1,525, Property Taxes pg. 2 $ - $ 109,803 $ 198,853 $ 392,133 $ 596,876 $ 748,327 $ 921,259 $ 1,090,068 $ 1,255,290 $ 1,417,267 $ 1,086, Total Accumulated Savings U $ (12,925) $ (26,238) $ (52,864) $ (80,289) $ (108,537) $ (137,632) $ (167,600) $ (198,467) $ (230,260) $ (263,007) $ (199,393) 12 Total Revenue Requirement L7 thru L10 $ 315,814 $ 1,016,886 $ 1,951,715 $ 3,359,895 $ 4,686,688 $ 5,891,398 $ 7,189,637 $ 7,637,231 $ 8,830,053 $ 10,023,803 $ 7,914,424 Weighted Cost Permanent Tax Permanent Capital Mulitiplier Capital Long Term Debt 2.32% % Common Equity 5.71% % 8.03% 10.01% Approved Rev. Requirement (U-17824) $ 8,479,141 Pre-Tax Annual Savings $ 564,717

7 SEMCO Energy Gas Company Case No.: U Adjusted MRP Revenue Requirement Witness: Steven McLean Exhibit: A-9 (SQM-9) Page: 2 of 2 Line No. Description Source Deffered Tax Expense 1 Tax Depreciation Line 17 $ 177,101 $ 495,988 $ 946,999 $ 1,580,431 $ 2,140,701 $ 2,644,337 $ 3,169,856 $ 3,677,703 $ 4,183,006 $ 4,755,753 2 Book Depreciation Pg 1 L8 $ 59,543 $ 171,216 $ 335,361 $ 572,191 $ 800,418 $ 1,023,714 $ 1,267,082 $ 1,517,751 $ 1,775,939 $ 2,041,873 3 Time Difference Line 2 -Line 1 $ 117,559 $ 324,772 $ 611,638 $ 1,008,239 $ 1,340,282 $ 1,620,623 $ 1,902,774 $ 2,159,952 $ 2,407,067 $ 2,713,880 4 Deffered Tax Expense 38.9% $ 45,730 $ 126,336 $ 237,927 $ 392,205 $ 521,370 $ 630,422 $ 740,179 5 Deffered Tax Expense 25.7% $ 555,972 $ 619,579 $ 698,553 5 Accum. Deffered Tax Expense Prior year plus L4 $ 45,730 $ 172,067 $ 409,994 $ 802,199 $ 1,323,569 $ 1,953,991 $ 2,694,170 $ 3,250,142 $ 3,869,721 $ 4,568,273 Tax Depreciation Year 1 Year 2 Year 3 Year 4 year 5 year 6 Year 7 Year 8 Year 9 Year 10 6 MACRS Tax Depr Rate (20 year) 3.750% 7.219% 6.677% 6.177% 5.713% 5.285% 4.89% 4.52% 4.46% 4.46% 7 Year 1 Additions Cost X MACRS Tax Rate $ 177,101 $ 340,932 $ 315,335 $ 291,722 $ 269,808 $ 249,595 $ 230,846 $ 213,561 $ 210,727 $ 210,680 8 Year 2 Additions Cost X MACRS Tax Rate $ 155,055 $ 298,492 $ 276,081 $ 255,407 $ 236,222 $ 218,525 $ 202,110 $ 186,976 $ 184,495 9 Year 3 Additions Cost X MACRS Tax Rate $ 333,172 $ 641,378 $ 593,223 $ 548,800 $ 507,576 $ 469,550 $ 434,278 $ 401, Year 4 Additions Cost X MACRS Tax Rate $ 371,250 $ 714,681 $ 661,023 $ 611,523 $ 565,587 $ 523,215 $ 483, Year 5 Additions Cost X MACRS Tax Rate $ 307,581 $ 592,114 $ 547,658 $ 506,647 $ 468,589 $ 433, Year 6 Additions Cost X MACRS Tax Rate $ 356,583 $ 686,447 $ 634,909 $ 587,364 $ 611, Year 7 additions Cost X MACRS Tax Rate $ 367,281 $ 707,040 $ 653,956 $ 604, Year 8 Additions Cost X MACRS Tax Rate $ 378,299 $ 728,252 $ 673, Year 9 Additions Cost X MACRS Tax Rate $ 389,648 $ 750, Year 10 Additions Cost X MACRS Tax Rate $ 401, Total Tax Depreciation Sum of L7 Thru L16 $ 177,101 $ 495,988 $ 946,999 $ 1,580,431 $ 2,140,701 $ 2,644,337 $ 3,169,856 $ 3,677,703 $ 4,183,006 $ 4,755,753 Proptry Tax Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year Factor Year 1 Taxable Value Cost x Factor x 50% $ 2,196,058 $ 2,054,377 $ 1,912,696 $ 1,794,628 $ 1,676,561 $ 1,582,107 $ 1,487,652 $ 1,393,198 $ 1,298,744 $ 1,204, Year 2 Taxable Value Cost x Factor x 50% $ 1,922,688 $ 1,798,643 $ 1,674,599 $ 1,571,229 $ 1,467,858 $ 1,385,162 $ 1,302,466 $ 1,219,770 $ 1,137, Year 3 Taxable Value Cost x Factor x 50% $ 4,131,328 $ 3,864,791 $ 3,598,254 $ 3,376,139 $ 3,154,025 $ 2,976,333 $ 2,798,642 $ 2,620, Year 4 Taxable Value Cost x Factor x 50% $ 4,603,500 $ 4,306,500 $ 4,009,500 $ 3,762,000 $ 3,514,500 $ 3,316,500 $ 3,118, Year 5 Taxable Value Cost x Factor x 50% $ 3,814,003 $ 3,567,939 $ 3,321,874 $ 3,116,820 $ 2,911,766 $ 2,747, Year 6 Taxable Value Cost x Factor x 50% $ 4,421,635 $ 4,136,368 $ 3,851,101 $ 3,613,379 $ 3,375, Year 7 Taxable Value Cost x Factor x 50% $ 4,554,284 $ 4,260,459 $ 3,966,634 $ 3,721, Year 8 Taxable Value Cost x Factor x 50% $ 4,690,912 $ 4,388,273 $ 4,085, Year 9 Taxable Value Cost x Factor x 50% $ 4,831,640 $ 4,519, Year 10 Taxable Value Cost x Factor x 50% $ 4,976, Total Taxable Value Sum of L19 thru L28 $ 2,196,058 $ 3,977,065 $ 7,842,667 $ 11,937,518 $ 14,966,546 $ 18,425,178 $ 21,801,365 $ 25,105,790 $ 28,345,347 $ 31,508, Millage 50 $ $ $ $ $ $ $ $ $ $ Property Tax Assessed (L19 x L30)/1000 $ 109,803 $ 198,853 $ 392,133 $ 596,876 $ 748,327 $ 921,259 $ 1,090,068 $ 1,255,290 $ 1,417,267 $ 1,575, Property Tax Expense $ 109,803 $ 198,853 $ 392,133 $ 596,876 $ 748,327 $ 921,259 $ 1,090,068 $ 1,255,290 $ 1,417,267

8 SEMCO Energy Gas Company Case No.: U Adjusted MRP Customer Surcharges Witness: Steven McLean Exhibit: A-10 (SQM-10) Page: 1 of 1 Customer charge per month no maximum Total Special Company Residential GS-1 GS-2 GS-3 TR-1 TR-2 TR-3 Contracts 1 Mains Allocator (Avg & Peak) Adj. Avg Cum Costs $ 7,914,424 $ 4,010,010 $ 725,490 $ 622,550 $ 781,774 $ 326,147 $ 780,224 $ 253,198 $ 415,032 3 Number of Customers 284, ,669 21,246 2, COSS-Throughput 48,092,435 23,110,534 3,733,729 3,884,581 5,183,858 2,632,070 6,473,520 2,620, ,943 5 Avg Usage per Customer ,342 6,762 22, , ,040 75,657 6 Annual Cost per Cust $ $ $ $ 1, $ 2,824 $ 14,516 $ 50,640 $ 69,172 7 Proposed Monthly Surcharge $ 1.29 $ 2.85 $ $ $ $ 1, $ 4, $ 5, Maximum customer charge per month is $ or $ per year Total Special Company Residential GS-1 GS-2 GS-3 TR-1 TR-2 TR-3 Contracts 8 Mains Allocator (Average & Peak) Mains Alloc (Avg & Peak)>$ Adj. Avg Cum Costs $ 7,914,424 $ 4,010,010 $ 725,490 $ 622,550 $ 781,774 $ 326,147 $ 780,224 $ 253,198 $ 415, Number of Customers 284, ,669 21,246 2, COSS-Throughput 48,092,435 23,110,534 3,733,729 3,884,581 5,183,858 2,632,070 6,473,520 2,620, , Avg Usage per Customer ,342 6,762 22, , ,040 75, Annual Cost per Cust $ $ $ $ 1, $ 2,824 $ 14,516 $ 50,640 $ 69, Maximum charge charge per customer $ 6,000 $ 6,000 $ 6, Cumulative Costs $ 322,500 $ 30,000 $ 36, Amount to be redistributed $ 1,059,954 $ 457,724 $ 223,198 $ 379, Additional redistribution $ 1,059,954 $ 657,353 $ 118,928 $ 102,053 $ 128,155 $ 53, Cumulative Costs $ 4,667,363 $ 844,418 $ 724,604 $ 909,929 $ 379,611 $ 322,500 $ 30,000 $ 36, Annual Cost per Cust $ $ $ $ 1, $ 3,287 $ 6,000 $ 6,000 $ 6, Proposed Monthly Surcharge $ 1.50 $ 3.31 $ $ $ $ $ $

9 M.P.S.C. - No. 1 Gas Case No: U SEMCO ENERGY GAS COMPANY Witness: Steven McLean (Case No. U-20115) Exhibit: A-11 (SQM-11) Page: 1 of 1 Continued From Sheet No. C RIDER MRP MAIN REPLACEMENT PROGRAM RIDER APPLICABILITY Applicable to all customers receiving service under the Company s sales and transportation rate schedules and Special Contract Customers. MAIN REPLACEMENT PROGRAM (MRP) This MRP Rider as approved by the MPSC recovers the cost of the MRP not included in SEMCO s base rates. These projects included pipeline replacements and related costs. By having this surcharge in place, SEMCO recovers over time the costs associated with these replacement projects, which should reduce the frequency of expensive general rate cases in the future. All customers receiving service under Rate Schedules Residential, GS-1, GS-2, GS-3, TR-1, TR-2, TR-3 and Special Contract shall be assessed a monthly charge in addition to the Customer Charge component of their applicable rate which will enable the Company to begin and complete their cast iron/unprotected steel/ vintage plastic (pre 1978) MRP. The company can bill this surcharge to all of its customers monthly. The program will be reviewed annually, in order to reflect the impact on the Company s revenue requirements of net plant additions as offset by the operation and maintenance expense reductions during the most recent twelve months ended December 31 of each calendar year. This Rider surcharge will become effective with the first billing cycle of June 2015, and will reflect the allocation of the required revenue increase needed based upon the main allocation factor of average and peak and the number of customers per rate group as defined and approved in the Company s last rate proceeding. The Rider MRP charge will be implemented on a bill rendered basis beginning in June The charge for the specific Rate Schedule is: Customer Class Per Customer Meter Residential $1.50/month GS-1 General Service $3.31/month GS-2 General Service $20.87/month GS-3 General Service $98.91/month TR-1 Small Volume Transportation $273.89/month TR-2 Large Volume Transportation $500.00/month TR-3 Extra Large Volume Transportation $500.00/month Special Contract $500.00/month Rider MRP surcharges will continue until the earlier of either: (i) base rates are established in a future contested case addressing the MRP through self-implementation or Commission Order, or (ii) May 30, Effective for bills rendered on Colleen Starring and after. Issued under President authority of the Michigan Public Service Port Huron, MI Commission dated in Case No. U

10 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter on the Commission s own ) motion, to consider changes in the rates ) of all the Michigan rate-regulated ) electric, steam and natural gas utilities ) Case No. U to reflect the effects of the federal Tax ) Cuts and Jobs Act of 2017: ) SEMCO ENERGY GAS COMPANY ) files an application for determination of Credit A ) as described in order U ) STATE OF MICHIGAN ) ) ss COUNTY OF INGHAM ) PROOF SERVICE Crystal L. Chacon, being first duly sworn, deposes and says that on April 20, 2018 she served a copy of the Supplemental Direct Testimony and Exhibits of Steven Q. McLean on behalf of SEMCO Energy Gas Company on the parties listed on the attached service list via electronic mail Subscribed and sworn before me on this 20 th day of April, Crystal L. Chacon Jennifer Joy Yocum, Notary Public State of Michigan, Ingham County My Commission Expires: December 17, 2018

11 SERVICE LIST Administrative Law Judge Honorable Sharon L. Feldman Michigan Public Service Commission 7109 W. Saginaw Highway, 3rd Floor Lansing, MI Michigan Public Service Commission Staff Heather M.S. Durian Michigan Public Service Commission 7109 W. Saginaw Highway, 3rd Floor Lansing, MI Association of Businesses Advocating Tariff Equity Bryan A. Brandenburg Clark Hill PLC 212 E. Cesar E. Chavez Avenue Lansing, MI Michigan Attorney General Bill Schuette John A. Janiszewski Michigan Department of Attorney General Assistant Attorney General Special Litigation Division P.O. Box Lansing, MI \