STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * *

Transcription

1 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter, on the ) Commission s own motion, ) Case No. regarding the regulatory reviews, ) revisions, determinations, and/or ) approvals necessary for ) INDIANA MICHIGAN POWER ) COMPANY to fully comply with ) Public Act 295 of ) NOTICE OF PROPOSAL FOR DECISION The attached Proposal for Decision is being issued and served on all parties of record in the above matter on June 6, Exceptions, if any, must be filed with the Michigan Public Service Commission, 7109 West Saginaw, Lansing, Michigan 48917, and served on all other parties of record on or before June 27, 2018, or within such further period as may be authorized for filing exceptions. If exceptions are filed, replies thereto may be filed on or before July 11, At the expiration of the period for filing exceptions, an Order of the Commission will be issued in conformity with the attached Proposal for Decision and will become effective unless exceptions are filed seasonably or unless the Proposal for Decision is

2 reviewed by action of the Commission. To be seasonably filed, exceptions must reach the Commission on or before the date they are due. MICHIGAN ADMINISTRATIVE HEARING SYSTEM For the Michigan Public Service Commission June 6, 2018 Lansing, Michigan Sally L. Wallace Administrative Law Judge

3 S T A T E O F M I C H I G A N MICHIGAN ADMINISTRATIVE HEARING SYSTEM FOR THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter, on the ) Commission s own motion, ) Case No. regarding the regulatory reviews, ) revisions, determinations, and/or ) approvals necessary for ) INDIANA MICHIGAN POWER ) COMPANY to fully comply with ) Public Act 295 of ) PROPOSAL FOR DECISION I. HISTORY OF PROCEEDINGS On September 28, 2017, the Commission issued an order (September 28 order) in Case Nos. U-17283, U-17603, and describing the long and complicated history that led to the instant case: On January 27, 2010, Indiana Michigan Power Company (I&M) filed a general rate case application in Case No. U The application relied on a projected 2010 test year and included a proposal for a pilot net lost revenue tracker (NLRT). On October 14, 2010, the Commission issued a final order (October 14 order) approving a settlement agreement which included a rate increase of $35 million and a pilot NLRT. See, October 14 order, Attachment 1, p. 4, 15.k. In accordance with the October 14 settlement agreement, I&M filed an application in the company s energy optimization (EO) plan reconciliation on April 29, 2011, in Case No. U In its application, the company requested authority to reconcile its EO

4 costs and revenues for 2010 and requested authority to include a surcharge to collect net lost revenues for January 2011 through September 2012, as calculated using the method approved in the October 14 order. On January 12, 2012, the Commission issued an order approving a settlement agreement in Case No. U The settlement agreement deferred consideration of NLRT amounts until I&M s 2012 EO reconciliation proceeding. On July 1, 2011, while Case No. U was pending, I&M filed a general rate case, docketed as Case No. U The company s application relied on a projected 2012 test year and requested a rate increase of $24.5 million. I&M s application also requested approval of proposed changes to its terms and conditions for service as well as its proposed rate adjustment mechanisms. The testimony filed with the case, however, did not include or otherwise discuss the NLRT. On February 15, 2012, the Commission issued a final order approving a settlement agreement in I&M s rate case, Case No. U Neither the order nor the settlement agreement contained any reference to the NLRT. Shortly thereafter, on April 10, 2012, the Court of Appeals issued its opinion in In re Detroit Edison Co, 296 Mich App 101; 817 NW2d 630 (2012). In that order, the Court determined that the Commission exceeded its statutory authority in authorizing The Detroit Edison Company to adopt a revenue decoupling mechanism (RDM) as part of a contested rate case. The Court based its holding on the contrast between the language in MCL (6), which requires the Commission to establish an RDM for gas utilities under certain conditions, and the language in MCL (4), which directs the Commission to submit a report on the potential rate effects of electric decoupling. The Court noted that a plain reading of MCL (4) does not empower the PSC to approve or direct the use of an RDM for electric providers. If the Michigan Legislature had wanted to do so, it is plain from the language applicable to gas utilities in MCL (6) that it could and would have made its intention clear. Detroit Edison, supra, at 110. On April 27, 2012, I&M filed an application in Case No. U requesting authority to reconcile its EO revenues and expenses for 2011 and to recover net lost revenues of $1,137,616 for the same period. On December 20, 2012, the Commission approved a settlement agreement in that case, which, inter alia, authorized I&M to collect $1,137,616 in lost revenues based on the NLRT approved in the October 14 order. Page 2

5 On April 30, 2013, I&M filed an application in Case No. U requesting authority to reconcile its EO revenues and expenses for 2012 and to recover net lost revenues for the same period. On December 19, 2013, the Commission approved a partial settlement agreement that authorized I&M to reconcile its EO revenues and expenses. The partial settlement agreement provided that the parties would address NLRT issues in briefing. On September 26, 2014, the Commission issued a final order (September 26 order) in which it denied recovery of purported lost revenues on grounds that I&M failed to request or obtain authority to continue the NLRT approved in Case No. U in its subsequent rate case, Case No. U In addition, the Commission rejected I&M s argument that the NLRT was not linked to the revised sales used in establishing rates in Case No. U The Commission also raised concerns about adjustments made to I&M s projected sales in Case No. U-16801, to reflect cumulative past losses, which were not reported and therefore could not be validated by other parties to the case. Finally, the Commission tacitly agreed with the Administrative Law Judge that a determination regarding whether the NLRT was an illegal RDM of the type addressed in Detroit Edison was unnecessary to the disposition of the case. On October 24, 2014, I&M filed a petition for rehearing, which the Commission rejected in an order issued on February 12, On March 13, 2015, I&M filed a claim of appeal in the Court of Appeals. While Case No. U was pending, on April 30, 2014, I&M filed an application in Case No. U-17603, requesting authority to reconcile EO revenues and expenses for 2013, as well as approval to collect net lost revenues for the same year. On May 14, 2015, the Commission issued an order (May 14 order) approving the reconciliation of EO revenues and expenses and denying I&M s request for net lost revenues. The Commission found that I&M had not provided any new evidence or arguments that would support reversal of the September 26 order. On September 3, 2015, I&M filed a claim of appeal in the Court of Appeals, which was later consolidated with the company s appeal of the September 26 order. (Court of Appeals Docket Nos and ). On April 30, 2015, I&M filed an application in Case No. U-17833, requesting authority to reconcile its EO revenues and expenses for 2014, along with authority to collect net lost revenues for the same year. On November 5, 2015, the Commission approved a settlement agreement and authorized I&M to reconcile its EO revenues and expenses for With respect to the NLRT, the settlement agreement acknowledged the two pending appeals in the Court of Page 3

6 Page 4 Appeals, and the parties agreed that the outcome of these appeals in the Court of Appeals or Supreme Court would control the treatment of net lost revenues. Similarly, on May 2, 2016, I&M filed an application in Case No. U requesting authority to reconcile EO revenues and expenses for In the settlement agreement, the parties again acknowledged the pending appeals and agreed that the outcome after all appeals were resolved would control the disposition of net lost revenues. Finally, on May 1, 2017, I&M filed an application in Case No. U requesting authority to reconcile its EO revenues and expenses for 2016, along with approval to renew the NLRT (now Certified Net Lost Revenues (CNLR) tracker) and authorize related deferred accounting. 1 The Commission then summarized the history of the various proceedings as follows: I&M requested and received approval to implement an NLRT in Case No. U beginning after the test year in that rate case ended. I&M did not request and did not receive approval for an NLRT in Case No. U-16801, the company s next rate case. In Case No. U-16739, I&M received approval to collect net lost revenues associated with the NLRT approved in Case No. U In Case No. U-17283, I&M requested authority to collect net lost revenues that accrued after the company implemented new rates in Case No. U The Commission denied the request as discussed above. I&M appealed. In Case No. U-17603, the Commission again denied I&M s request for net lost revenues on grounds that the company presented no new evidence or arguments to support a reversal of the Commission s decision in Case No. U I&M appealed. Subsequent EO reconciliation cases (i.e., Case Nos. U and U-18022) have resulted in settlement agreements that deferred any decision on the NLRT until all appeals are exhausted. As discussed in more detail below, in In re Application of Indiana Michigan Power Company to Reconcile Costs, unpublished opinion 1 September 28 order, pp. 1-5.

7 Page 5 per curiam of the Court of Appeals issued November 29, 2016 (Docket Nos and ), the Court remanded Case Nos. U and U for further proceedings. 2 The Commission continued, providing additional background information: 2 Id. pp While the issues concerning I&M s NLRT were being litigated, another series of proceedings was ongoing, which culminated in Enbridge Energy Ltd Pship v Upper Peninsula Power Co, 313 Mich App 669; 884 NW2d 581 (2015), lv den Mich ; 894 NW2d 605 (2017). In Enbridge, the Court explained, This case raises the issue of whether the PSC possessed the authority to approve a settlement agreement between the PSC staff and the Upper Peninsula Power Company (UPPC) that established an RDM for UPPC for the test year Id. at The Court rejected the Commission s claim that the law regarding electric decoupling was uncertain at the time the settlement agreement was approved in Case No. U-16568, holding: [T]he PSC exceeded its clear statutory authority when it approved the RDM in Case No. U The fact that the approval was accomplished in the context of a settlement agreement does not transform the PSC s ultra vires act into a legal one. See, e.g., Timney v. Lin, 106 Cal.App.4th 1121, , 131 Cal.Rptr.2d 387 (2003) ( [E]ven though there is a strong public policy favoring the settlement of litigation, this policy does not excuse a contractual clause that is otherwise illegal or unjust. ). We stress that our holding is based on the fact that reasonable minds could not have disputed the extent of the PSC s authority at the time it approved the settlement agreement. Enbridge, supra. at 678. Although the issue before the Court of Appeals in Indiana Michigan primarily concerned whether or not the previously-approved NLRT continued after rates were reset in a new rate case, where the NLRT was not raised or reauthorized in the subsequent case, the Court nevertheless found that the cases should be remanded for reconsideration in light of the Court s decision invalidating the RDM approved in Enbridge. The Court explained: The PSC has only that authority granted to it by the Legislature. Mich Elec.Coop. Ass n v. Pub. Serv. Comm., 267 Mich. App 608, 616; 705 NW2d 709 (2005). No statutory

8 authority allows the PSC to approve an RDM for an electric utility. In re Application of Detroit Edison, 296 Mich. App at The relevant question, then, is whether the definition of an RDM is sufficiently expansive to include the NLRT approved in Case No. U The issue whether the NLRT is factually distinct from RDMs approved by the PSC in other cases requires analysis of the specific structure of the NLRT and comparison of that structure to RDMs approved by the PSC. The performance of such an analysis is more suited to the PSC in the first instance. We defer to the administrative expertise of the PSC. Attorney General, 237 Mich. App at 88. Moreover, it is apparent that the PSC approves a number of RDMs and similar mechanisms. To have the PSC rule on the validity of the NLRT in light of Enbridge Energy would provide guidance for future cases. Whether these cases continue is entirely dependent on the applicability of Enbridge Energy. Therefore, an analysis of the issues raised by I & M is premature. Indiana Michigan, supra, slip op at 8. 3 Consistent with the Court of Appeals remand, the Commission directed the parties to address the heretofore unaddressed issue of whether the NLRT approved in Case No. U was an illegal RDM under Detroit Edison Co and Enbridge. 4 On May 1, 2017, I&M filed testimony and exhibits requesting authority to reconcile EO revenues and expenses for calendar year I&M s application also requested approval of a financial incentive, and: that the Commission renew I&M s CNLR tracker as approved in Case No. U and implemented in Case No. U I&M also requests related authority to create a regulatory asset for net lost revenues and associated carrying charges realized during 2015 and for the future period through the conclusion of I&M s appeal from the Commission s Opinion and Order in Case No. U I&M s EO Plan efforts, in compliance with [2008 PA 295] Act 295, create substantial financial harm that can be addressed and remedied by the CNLR tracker. I&M s testimony and exhibits demonstrate I&M 3 Id. pp September 28 order, p. 7. Page 6

9 realized for the period 2012 through 2016, $18, in net lost revenues as a result of its EO program efforts. Without a CNLR tracker I&M s rates, as a result of efforts to comply with Act 295, are confiscatory because those rates are designed on a sales level which does not take into account the lower sales caused by the EO Plan and therefore do not afford I&M an opportunity to recover its costs and earn its authorized return. 5 I&M and the Commission Staff (Staff) appeared at the prehearing conference on June 27, 2017, before Administrative Law Judge Mark D. Eyster. 6 A second prehearing conference was held on August 8, On October 10, 2017, the Staff filed testimony and exhibits concerning both the EO reconciliation and the NLRT. A third prehearing conference was held on October 30, On November 10, 2017, I&M filed rebuttal testimony and exhibits in response to the September 28 order, and an evidentiary hearing was held on January 9, 2018, where the testimony and exhibits were bound into the record without crossexamination. On January 17, 2017, the parties filed a partial settlement agreement concerning the EO reconciliation and financial incentive. The Commission approved the partial settlement agreement on February 22, On February 6, 2018, the Staff and I&M filed initial briefs, and on February 20, 2018, I&M filed a reply brief. II. OVERVIEW OF THE RECORD AND POSITIONS OF THE PARTIES The evidentiary record is contained in 106 transcript pages, in four volumes, and 22 exhibits. This PFD will only address the testimony and exhibits concerning 5 I&M s Application 9, p.3 6 On May 24, 2018, this case was transferred to Administrative Law Judge Sally L. Wallace (ALJ). Page 7

10 the legality of the NLRT because the issues regarding the company s EO program were fully addressed by the settlement agreement. 7 Jon Walter, Manager of Energy Efficiency Consumer programs for I&M testified that I&M s filing included certified net lost revenues (CNLR) for totaling $18,359,192. Mr. Walter noted that I&M filed a reconciliation of net lost revenues in Case No. U-17756, but that reconciliation only covered through October Mr. Walter presented I&M s cumulative lost revenue calculation in Exhibit IM-7. 8 In this case, Mr. Walter testified that I&M is requesting that the Commission renew the NLRT and authorize the company to record a regulatory asset, including carrying charges, for CNLR for 2016 going forward, pending the conclusion of the company s appeal in Case No. U Mr. Walter testified that I&M s finances are adversely affected by ongoing energy optimization (EO) savings without commensurate recovery of CNLR. Mr. Walter explained: Exhibit IM-8 (JCW-8) reveals the impact to I&M s financial position caused by continued EO savings attainment without full recovery of the associated lost revenue. The graph in the exhibit demonstrates that as EO savings are incurred cumulatively, retail revenue decreases but I&M s cost obligations do not fall, or decrease at the same rate, but instead fall at a slower, less dramatic rate. This disconnect is caused, in part, by retail electric rates comprised of 60% variable pricing (cents/kwh). When energy sales (kwh) fall due to the incurrence of EO energy savings, I&M revenue falls below that required to cover existing fixed cost obligations. As a result, I&M is 7 As noted above, in the September 26, 2014 order in Case No. U-17823, the Commission held that the NLRT approved in Case No. U ended when new base rates were set in I&M s subsequent rate case, Case No. U-16801, because the company failed to request the NLRT in the subsequent case. Although there is some testimony and argument regarding the continuation of the NLRT in the instant case, this issue appears to have been resolved by the Commission. 8 4 Tr 49. Page 8

11 harmed financially until either base rates can be adjusted to reflect lower sales, or concurrent recovery such as that which was afforded in I&M s CNLRT Surcharge is authorized by the Commission. 9 Mr. Walter also stated that a financial incentive, capped at 15% of program revenue, does not offset the revenue lost through EO program savings. Mr. Walter explained that the financial incentive is constant whereas EO savings are cumulative. He added that: Net Lost Revenue recovery serves to make a utility whole to cover fixed cost obligations while a Financial Incentive serves to make the utility financially indifferent about supply side options, whether the option is EO program end use conservation or supply from a generation resource. Without both forms of revenue, EO programs financially harm the utility. 10. Katie J. Smith, an Economic Analyst in the Energy Efficiency Section of the Commission s Electric Reliability Division, presented the Staff s analysis and recommendations concerning the Court of Appeals remand. Ms. Smith provided a reference to Revenue Regulation and Decoupling: A Guide to Theory and Application (RAP Guide). 11 Ms. Smith testified that the RAP Guide defines revenue decoupling as: [A] tool intended to break the link between how much energy a utility delivers and the revenues it collects. Decoupling is used primarily to eliminate incentives that utilities have to increase profits by increasing sales, and the corresponding disincentives that they have to avoid reductions in sales. It is most often considered by regulators, utilities, and energy-sector stakeholders in the context of introducing or expanding energy efficiency efforts[.] Tr Tr Tr 102. Report by the Regulatory Assistance Project (RAP) 2011, available at Tr 102. Page 9

12 According to Ms. Smith, based on this definition, I&M s NLRT is an RDM because, [t]he Company s NLRT, as approved in U-16180, calculates the Company s net lost revenues by taking the difference in their projected rate case revenues and actual revenues related to the Company s EO program. 13 Ms. Smith further testified that in the settlement agreement in Case No. U-16180, where the NLRT was first approved, the mechanism was described as a pilot Energy Optimization (EO) decoupler that limits recovery to lost sales resulting from I&M's EO plan approved in U Ms. Smith testified that the Staff believes that the NLRT approved in Case No. U was, in fact, an illegal RDM. Ms. Smith quoted the Staff s previous arguments on this issue: I&M attempts to distinguish its proposed Energy Optimization decoupler, from other true revenue decoupling mechanism[s], (2 TR 35), presumably to avoid comparisons with revenue decoupling mechanisms that the court has invalidated. I&M fashions its Energy Optimization decoupler a Net Lost Revenue Tracker and proposes a surcharge to recover lost revenues. Staff does not agree that there is a significant distinction between I&M s Energy Optimization decoupler and revenue decoupling mechanisms that have been invalidated. They share the same goal. Moreover, I&M s own statements demonstrate that its proposed decoupler (i.e., its Net Lost Revenue Tracker ) is really a revenue decoupling mechanism. In I&M s first reconciliation proceeding following approval of its Energy Optimization decoupler, I&M referred to the resulting surcharge as a Revenue Decoupling Surcharge. (MPSC Case No. U-16311, 08/03/11 Stegall Pre-filed Direct Test, p 7.) 15 Ms. Smith explained that under 2016 PA 341 (Act 341) certain small electric utilities may request an RDM, and that I&M has requested such a mechanism in 13 Id Tr Staff s initial brief filed on January 9, 2014 in Case No. U-17823, p. 9. Page 10

13 Case No. U-18370, the company s most recent rate case. I&M also characterizes the RDM requested in that proceeding as an NLRT, and Ms. Smith testified that it was consistent with the NLRT approved in Case No. U Ms. Smith stated that the Staff believes that the Commission should deny I&M s request in this case, to renew the NLRT approved in Case No. U-16180, because the RDM is on appeal. According to Ms. Smith, It is Staff s opinion that it is inappropriate for the Company to request to renew an illegal RDM while also requesting a new RDM in its rate case filed in Case No. U With respect to I&M s request for a regulatory asset for CNLR and carry charges, Ms. Smith similarly recommended that the Commission deny the request pending the decision by the Court of Appeals regarding the legality of the NLRT. 18 Andrew J. Williamson, Director of regulatory services for I&M filed rebuttal testimony in response to the Court of Appeals remand and to Ms. Smith. According to Mr. Williamson: I&M s NLRT is intended to recognize that by implementing EO programs, there is a bill savings to participating customers that exceeds the variable costs included in the rates under which they are billed. This lost fixed cost recovery is a direct result of the EO program and is also known as a throughput issue. Since I&M was required to implement EO programs, it is entirely appropriate to allow I&M to implement a mechanism to recover those prudently incurred costs (lost revenues) that would not be collected because of the implementation of the EO programs by design. Failing to do so or account for the lost sales due to EO programs means that I&M is denied a reasonable opportunity to recover its costs of doing business and earn a reasonable return Tr Tr Id Tr Page 11

14 Mr. Williamson averred that requiring the company to implement EO programs without allowing the company to recoup lost sales through an NLRT results in rates that are confiscatory. Mr. Williamson added that he disagreed with Staff that the NLRT is in fact an RDM, noting that the NLRT does not result in full decoupling because the company is still subject to sales losses due to weather, economic cycles, or loss of customers. 20 Mr. Williamson pointed to the guidance from the National Association of Regulatory Commissioners (NARUC) which explains that Decoupling is one of three major approaches for dealing with the throughput issue[,] 21 adding that NLRT is one of the other methods. 22 According to Mr. Williamson, The NLRT is focused on a single issue, the reduction in the recovery of fixed costs that were the direct result of mandated Energy Optimization (EO) efforts. Absent the NLRT, the EO programs which require I&M to reduce its sales from a level set in its rate case produce confiscatory rates. 23 Mr. Williamson testified that while an NLRT could be described as a limited form of decoupling, there are many other mechanisms, including fixed service charges and the power supply cost recovery (PSCR) mechanism that also, to some degree, break the link between sales and 20 4 Tr Decoupling for Electric and Gas Utilities: Frequently Asked Questions, NARUC, 2007 (NARUC FAQs). Exhibit IM-17, p Tr Id. Page 12

15 revenues. Mr. Williamson contended that, to his knowledge, these longstanding methods have never been deemed illegal RDMs. 24 Mr. Williamson testified that I&M has not treated the NLRT as a form of decoupling, pointing to company witness testimony in Case Nos. U and U-17603, which described the CNLR surcharge as limited to the recovery of the Company s net lost revenues realization on the certified lost sales directly resulting from implementation of energy optimization measures. 25 Mr. Williamson explained that he reviewed RDMs that were approved for Detroit Edison Company in Case No. U and Upper Peninsula Power Company in Case No. U According to Mr. Williamson, the mechanisms approved in those cases were designed to reconcile actual sales to sales levels set in the rate case, a different approach than the NLRT, which does not track actual sales revenue, which may vary due to a number of different factors: I&M s NLRT only replaces the fixed cost recovery that has been lost due to verified savings from EO programs. I&M s NLRT does not follow actual sales revenue which can and does vary based upon a number of other factors, such as weather, the economy, etc. As such, unlike Edison or UPPCO, I&M is in a much different position and has not broken the link between how much energy a utility delivers and the revenue it collects. 26 Mr. Williamson testified that in Case No. U-16180, Ms. Smith described the NLRT as more limited in scope than what the Commission has approved in the 24 4 Tr Id Tr 72. Page 13

16 past[,] thus, even the Staff has characterized the NLRT as something other than an RDM. Mr. Williamson further observed that the Attorney General and the Association of Businesses Advocating Tariff Equity signed the settlement agreement in Case No. U-16180, while at the same time they were appealing the RDM that was found illegal in Detroit Edison. Mr. Williamson posited that, [i]t would be difficult to understand how ABATE and the AG could agree to I&M s NLRT if it was the same as the RDM they were appealing. 27,28 Finally, Mr. Williamson disputed Ms. Smith s recommendation to deny I&M s request to renew the NLRT and its request for regulatory asset treatment. Mr. Williamson testified that neither the Court of Appeals nor the Commission has determined that the NLRT approved in Case No. U is illegal. And, because that issue has been remanded, there is no court decision pending. Mr. Williamson added that under the new energy legislation, the company is asking for an RDM to be approved in its pending rate case, Case No. U-18370, but that this mechanism is proposed to address matters going forward, consistent with the new legislation. 29 In its initial brief, I&M characterizes the issues to be addressed as: (1) whether the NLRT is factually distinct from RDMs approved by the Commission; and (2) whether the NLRT is subject to the unlawfulness determinations of Detroit Edison and Enbridge. 30 I&M asserts that the record demonstrates that the NLRT is distinct from other RDMs approved by the Commission and argues that the 27 4 Tr Mr. Williamson continued, testifying that the NLRT approved in Case No. U did not have an explicit sunset, and therefore did not need to be renewed and approved in the company s subsequent rate case, Case No. U As discussed above, the Commission has already addressed and rejected this claim in the September 26, 2014 order in Case No. U Tr I&M s initial brief, p. 2. Page 14

17 Staff s presentation failed to provide an analysis of the specific structure of the NLRT and comparison of that structure to RDMs approved by the PSC, as required by the Court of Appeals in its order on remand. I&M points to Staff testimony in Case No. U-16180, wherein Ms. Smith stated that I&M s decoupling mechanism was more limited in scope than other RDMs that had been approved in the past and reiterated that other parties in that case, including the Attorney General and ABATE, signed the settlement agreement despite their objections to the RDM approved for DTE Electric. Specifically, I&M contends that the NLRT relies on a computation of lost sales that directly resulted from energy efficiency programming efforts. This is not an after the fact rationalization. 31 I&M explains: While there may be a common assumption that tracking mechanisms like the NLRT and RDMs have at least one similar goal reducing the incentive that utilities have to sell as much electricity as possible (referred to as the throughput issue ) that does not mean that the two mechanisms function the same way, have the same effect, or are treated similarly by the Commission or courts. RDMs, which were at issue in Detroit Edison and Enbridge, deals with the throughput issue by separating all of the utility s fixed cost recovery from the amount of electricity or gas it sells. Staff calls this decoupling[.] 32 I&M reiterates that an NLRT is one method of dealing with decreasing throughput and that NARUC recognizes this approach as distinct from an RDM. I&M points to other ratemaking mechanisms such as PSCR factors and meter charges as other methods to break the link between sales and revenues that have never been found illegal. Thus, I&M maintains that the NLRT is factually different from the RDMs held illegal in Detroit Edison and Enbridge. 31 I&M s initial brief, p I&M s initial brief, p. 11. Page 15

18 Next, I&M asserts that because the NLRT can be distinguished from the RDMs approved for Detroit Edison and UPPCo, the Commission had authority to approve the mechanism as it has approved other trackers that have been challenged and found legal. I&M highlights the choice incentive mechanism (CIM) approved for Consumers Energy contending: The CIM is designed to smooth the effect of fluctuations in a utility s retail open access sales. If sales increase or decrease more than a set amount, a charge or credit applies to the rates where the change occurred. This is similar to I&M s NLRT, which accounts for lost sales year-after-year for energy optimization measures implemented by customers during the year. Both mechanisms account for lost sales based on somewhat unpredictable customer behavior. In Detroit Edison, the Court of Appeals affirmed Detroit Edison s CIM, stating it was well settled that the Commission may authorize the use of a CIM as a natural element of its ratemaking authority. 296 Mich App at 113. Accordingly, it is well settled that the Commission can authorize use of tracking mechanisms to cover fluctuations in sales, and that such mechanisms are lawful mechanisms. Id. at I&M points out that neither Detroit Edison nor Enbridge provide a definition of an RDM, and that the Staff s position turns on the notion that anything that might be described as an RDM is now suspect based on Enbridge. 34 I&M repeats that the Commission could allow for the collection of more fixed costs through the customer charge and that this adjustment would also decouple revenues from costs, like an RDM. Yet such an adjustment would not likely be deemed an illegal RDM. Next, I&M posits that even if the Commission lacked authority to approve the NLRT (which it did not) the settlement agreement in Case No. U that 33 I&M s initial brief, p I&M s initial brief, p. 15. Page 16

19 contained the NLRT is nevertheless lawful under Clohset v No Name Corporation, 302 Mich App 550; 840 NW2d 375 (2013). According to I&M, In Clohset, the Court of Appeals considered the issue of subject matter jurisdiction and the validity of a consent judgment (settlement agreement) that exceeded the lower court s jurisdiction. The Court of Appeals held that the district court had subject matter jurisdiction and that the court s entry of a consent judgment was appropriate, despite the fact that the judgment exceeded the district court statutory limit for the amount in controversy. The Clohset Court noted that no party to the consent judgment appealed or properly moved to alter or amend the consent judgment and a challenge later was an improper collateral attack because a party may not properly create error in a lower court and then claim on appeal that error requires reversal. 35 Consistent with Clohset, I&M maintains that the settlement agreement containing the NLRT, approved in Case No. U-16180, should be enforced. Unlike the circumstances presented in Enbridge, here, no party claimed that the NLRT was unlawful and the Staff s argument in the remand proceeding was improper. I&M contends: The Commission should take a dim view of any state agency avoiding judicial review because the agency itself, instead of defending the lawfulness of its decisions, says its conduct was originally unlawful. It is simply an improper collateral attack and because a party may not properly create error and then later claim on appeal that error requires reversal. Clohset. If the Staff were correct with respect to the adoption of the NLRT, then all of the bargain struck by all of the parties to the settlement agreement in Case No. U and which formed the record basis the approval of the NLRT is likewise void in its entirety. This result would leave parties without bargained-for benefits I&M s initial brief, p I&M s initial brief, p. 18. Page 17

20 Accordingly, I&M urges the Commission to find that the NLRT is a limited rate adjustment mechanism, factually distinct from those found unlawful in Detroit Edison and Enbridge. Further, the Commission should recognize that because there was no direct challenge to the NLRT, Enbridge does not apply. Finally, I&M argues that it should have its NLRT mechanism fully reconciled to allow full recovery of net lost revenues through September 26, 2014, the date of the MPSC s order terminating the NLRT. 37 The Staff asserts that the Court of Appeals holdings in Detroit Edison and Enbridge make clear that because the Legislature did not grant the Commission authority to approve an RDM for an electric utility (whether in a contested case or settlement agreement), and because the NLRT operates as an RDM by severing the link between sales and revenue, the NLRT is illegal. The Staff points to the definition of decoupling from RAP, highlighting the fact that the definition states that decoupling is often used in the context of energy efficiency programs. And the Staff argues the intent of I&M s NLRT is to recover revenues that I&M has lost due to EO efforts. 38 The Staff further points out that MCL 460.6a(12), amended as part of Act 341, permits smaller electric utilities to request an RDM to adjust for lost revenues due to EO program savings, exactly what the NLRT was intended to do. Accordingly, the Staff requests that the Commission find that the NLRT is an illegal RDM under Enbridge, and bar I&M from collecting any lost revenues through the NLRT. 37 I&M s initial brief, p Staff s initial brief, p. 6. Page 18

21 In its reply brief, I&M asserts that, like the Staff s testimony, the Staff s brief fails to address the Court of Appeals issue on remand regarding the factual differences between the NLRT and the unlawful RDM s previously approved by the Commission. I&M points to language in the remand order stating that the relevant issue is whether the definition of an RDM is sufficiently expansive to include the NLRT approved in Case No. U In contrast, to the Staff s presentation, the company claims that its brief explicitly addressed the factual distinctions between the RDMs approved for Detroit Edison and UPPCo and the NLRT. I&M also contends that the Staff s definition of revenue decoupling is overbroad. According to I&M, Staff essentially interprets this [definition] to mean that, because energy efficiency efforts are a common context in which RDMs are used, and because the NLRT tracks lost cost recovery due to verified savings from the EO programs (an energy efficiency effort), the NLRT must be an unlawful RDM. 40 I&M thus posits that, the Staff appears to believe that, because the NLRT has the same end-goal as other RDMs to reduce the incentives that utilities have to sell as much electricity as possible the factual distinctions as to how the mechanisms actually operate to achieve that goal are irrelevant. Finally, I&M reiterates that the decision in Enbridge does not control the outcome here. I&M maintains that the Enbridge court did not hold that all mechanisms that track costs are unlawful, only that the RDM approved for UPPCo was an illegal RDM. I&M adds: It is also important to note further distinctions between the RDM discussed in Enbridge and the NLRT approved by the Commission 39 I&M s reply brief, p. 2, quoting Indiana Michigan, p I&M s reply brief, p. 4. Page 19

22 in Case No. U The court in Enbridge took care to note that its decision that the RDM was unlawful was based on the fact that reasonable minds could not have disputed the extent of the PSC s authority at the time it approved the settlement agreement. 313 Mich App at 678. The same is not true here. Unlike the RDMs found unlawful in Detroit Edison and Enbridge, which were intended to reconcile actual revenue levels to those used to set base electric rates and, therefore, clearly within the definition of a RDM, the NLRT only replaces the fixed cost recovery that has been lost due to verified savings from EO programs, and does not follow actual sales revenue. (I&M s Initial Brief, p 5.) Thus, while the mechanisms in Detroit Edison and Enbridge clearly fell under the definition of a RDM, the NLRT does not. 41 Finally, I&M asserts that at the time the Commission approved the settlement agreement in Case No. U-16180, there was no prohibition on the use of RDMs and certainly nothing to prohibit the implementation of an NLRT. The Commission s approval of the NLRT fell within the Commission s general ratemaking authority noting that the lack of a statute authorizing the PSC to take a specific action does not mandate a conclusion that the PSC cannot take that action. 42 III. DISCUSSION In Indiana Michigan, the Court of Appeals held that: [t]he relevant question, then, is whether the definition of an RDM is sufficiently expansive to include the NLRT approved in Case No. U The issue whether the NLRT is factually distinct from RDMs approved by the PSC in other cases requires analysis of the specific structure of the NLRT and comparison of that structure to RDMs approved by the PSC. 41 I&M s reply brief, pp I&M s reply brief, p. 8, quoting In re Application of Detroit Edison Company re Licensing Issues, unpublished opinion per curiam of the Court of Appeals, issued February 8, 2018 (Docket No ), p 8. Page 20

23 Thus, the issue presented here is whether the NLRT is sufficiently distinct from the RDMs approved for Detroit Edison and UPPCo, such that it is not an RDM and is therefore lawful. I&M claims that the NLRT is a rate adjustment mechanism, and not a true RDM, because the NLRT is not tied to sales and is limited to recovery of fixed costs lost as a direct result of EO efforts. I&M highlights Staff testimony in Case No. U-16180, where the Staff admitted that the NLRT was more limited in scope than other mechanisms that had been approved by the Commission. In addition, I&M points to the fact that ABATE and the Attorney General signed the settlement agreement that approved the NLRT, despite the fact that these parties were at the same time challenging the RDM approved for Detroit Edison. According to I&M, this is evidence that the Attorney General and ABATE recognized that the NLRT was factually distinct from the Detroit Edison RDM that the Court of Appeals later found unlawful. In addition, I&M contends that NARUC recognizes that an NLRT is different from revenue decoupling, noting that the term decoupling is often used imprecisely to describe several methods that break the link between sales and revenues. I&M argues that such ill-defined usage could render any mechanism that tracks a specific cost, such as a PSCR mechanism or a system access charge, a potentially Illegal RDM I&M s comparison of the lawfulness of revenue decoupling to the PSCR mechanism or a fixed system access charge is inapposite. The PSCR cost recovery and reconciliation mechanism is specifically provided for by statute in MCL 460.6j and meter charges or system access charges are rates, not mechanisms, and Commission has plenary authority to establish rates under MCL Page 21

24 The Staff asserts that the NLRT and RDM share the same goal: to recover lost revenue due to EO programs that reduce customer energy use. As discussed in the RAP Guide, revenue decoupling is more common where energy efficiency efforts are introduced or expanded, and labeling an RDM an NLRT does not change its nature. 44 The Staff further points out that I&M is requesting an identical NLRT under MCL 460.6a(12). According to the Staff, Section 6a(12), as amended by Act 341, clearly brings the NLRT under the ambit of revenue decoupling. Thus, from definition, to methodology, to purpose the NLRT is an RDM, and under Enbridge Energy, it is illegal. 45 The Staff s analysis of this issue is correct, and the NLRT is simply a limited form of decoupling and is one of the many different revenue decoupling mechanisms that the Commission approved for gas and electric utilities after the enactment of Act 295. Accordingly, the NLRT is unlawful ab initio under the holdings in Detroit Edison and Enbridge. In the November 2, 2009 order in Case No. U (November 2 order), the Commission approved a pilot RDM for Consumers that was described as follows: The pilot decoupling mechanism shall be symmetrical and shall reconcile non-fuel/non-purchase power revenue. In the utility s annual decoupling mechanism reconciliation proceeding, which shall be filed on or before March 1 of each year, Consumers actual (non-weather adjusted) sales per customer during the 12-month period from December 1 to November 30 will be compared with the base sales per customer level amount established in this case. Any sales per customer variance will be multiplied by the non-fuel 44 Staff s initial brief, p Staff s initial brief, p. 7. Page 22

25 revenue (distribution charge) per kwh in order to obtain the nonfuel revenue variance per customer. Then, multiply the non-fuel revenue variance per customer by the average monthly number of customers established in this rate case in order to obtain the resulting nonfuel revenue variance. Any overage or shortfall shall be credited or surcharged on a per kwh basis going forward. A deadband is not included in the pilot mechanism. 46 It is worth noting that in that case, the Staff recommended an RDM that was a lost revenue tracker, similar to the one at issue here. As described in the November 2 order: The EO lost revenue tracker removes any disincentive that Consumers may have to exceed the statutory minimum energy efficiency requirements. Lost sales would be estimated annually by reference to the Michigan Energy Measures Database and Energy Optimization program participation rates. The annual lost sales would also be calculated by customer class, and with regard to whether a customer is a bundled customer or an ROA customer. This calculation uses the rate case billing determinants and revenue requirements for each customer class, minus surcharges such as the PSCR surcharge. The EO lost revenues tracker does not include federal energy tax credits, federal compliance efficiency standards, or updated building codes. However, the mechanism could be amended in the future by the Commission to include similar items for which Consumers had direct involvement. 47 In the December 16, 2009 order in Case No. U et al, (December 16 order) the Commission approved a settlement agreement in UPPCo s rate case, which included a pilot RDM, [c]onsistent with the Commission s approval granted in Case No. U establishing a pilot decoupling mechanism, it is 46 November 2, 2009 order in Case No. U-15645, p. 53. Consistent with the holding in Detroit Edison, the RDM in this case was found unlawful in In re Application of Consumers Energy Co to Increase Rates, unpublished opinion per curiam of the Court of Appeals issued October 30, 2012 (Docket Nos , , , , and ) 47 November 2 order, pp Page 23

26 agreed that an identical mechanism should be approved for UPPCO effective January 1, In the January 11, 2010 order in Case No. U-15768, the Commission approved a pilot RDM for Detroit Edison that was substantially similar to the one adopted by the November 2 order. In Case No. U-15768, Detroit Edison proposed a decoupler that addressed all losses in sales, including losses unrelated to energy efficiency, whereas the Staff again proposed a lost revenue tracker that would account for sales losses from energy efficiency programs. While the RDMs initially approved for Detroit Edison, UPPCo, and Consumers were the same, what is clear from a review of the records in those cases is that the parties had widely differing views on the appropriate mechanism for decoupling sales from revenues, views that ranged from the more limited NLRT proposed by the Staff to full revenue decoupling proposed by the companies. Moreover, in Detroit Edison s subsequent rate case the Commission adopted a much simpler RDM that compared rate case sales projections to actual revenues with revenue shortfalls capped at 1.5%, a percentage of sales that represented the maximum expected sales losses due to energy efficiency programs. Among other limitations, both projected and actual revenues were weather-normalized, thereby keeping weather-related variations out of the calculation, and, as noted, under-recoveries were capped at 1.5%. Consistent with these changes, this RDM, like the NLRT, was also more limited than full revenue decoupling. Despite the significant restrictions on the operation of the 48 December 16 order, settlement agreement, 10.h. Page 24

27 mechanism, this later RDM was also found unlawful by the Court of Appeals. 49 Thus, I&M s argument, that because the NLRT is more limited in scope than full revenue decoupling it is not an RDM, is unpersuasive. In further support for its claim that the NLRT is different than the RDMs approved for Detroit Edison and UPPCo, I&M points to an explanation in the NARUC FAQs that describes Full or Per-Customer Adjustment Revenue Decoupling as one of three major approaches for dealing with the throughput issue[] with NLRT and straight-fixed variable rate design (i.e., fixed delivery service charges or increased system access charges) as the other two. I&M therefore asserts that this is dispositive that the NLRT is not an RDM like those that were found unlawful in Detroit Edison and Enbridge. Conversely, the Staff relies on the RAP Guide which describes both revenue decoupling in general, as well as lost-margin mechanisms which recover only the lost distribution margin related to utility-operated energy efficiency programs. 50 The RAP Guide further explains that [l]imited decoupling is synonymous with net lost revenue adjustments. Net lost revenue adjustments is the term of art that describes earlier methods of compensating a utility for the revenue to cover non-production costs that it would have collected had specified sales-reducing events or actions (e.g., cooler-than-expected 49 See, e.g., October 20, 2011 order in Case Ns. U and U-16489, pp , rev d by In re Application of Detroit Edison Company to Increase Rates, unpublished opinion per curium of the Court of Appeals issued July 30, 2013 (Docket Nos , , and ) (Detroit Edison II). 50 RAP Guide, p. 13. Page 25

28 summer weather, or government-mandated end use energy investments) not occurred. 51 This PFD finds that the RAP Guide is a more authoritative source for determining whether the definition of an RDM is sufficiently expansive to include the NLRT because it is both more recent and much more comprehensive than the NARUC FAQs. And the RAP Guide confirms the Staff s view that revenue decoupling is a broad term that includes a number of methods designed to eliminate incentives that utilities have to increase profits by increasing sales, and the corresponding disincentives that they have to avoid reductions in sales. 52 Thus, although the NLRT is factually different from the RDMs initially approved for Consumers, Detroit Edison, and UPPCo, this PFD finds that, based on the record here, the NLRT is an RDM and is one of myriad forms of decoupling. Accordingly, as discussed below, the NLRT is unlawful under the holdings in Detroit Edison and Enbridge. In Detroit Edison, the Court examined the language in MCL (6), which required revenue decoupling for gas utilities under certain circumstances related to EO program spending. In contrast the language in MCL (4), mandated that, within one year, the Commission, shall submit a report on the potential rate impacts on all classes of customers if the electric providers whose rates are regulated by the commission decouple rates.... The commission's report shall review whether decoupling would be cost-effective and would reduce the overall consumption of fossil fuels in this state. The Court held: 51 Id. fn RAP Guide, p. 2. Page 26