STATE OF MICHIGAN DEPARTMENT OF ATTORNEY GENERAL BILL SCHUETTE ATTORNEY GENERAL. August 17, 2018

STATE OF MICHIGAN DEPARTMENT OF ATTORNEY GENERAL 7109 W. SAGINAW HWY., 3RD FL. LANSING, MICHIGAN 48917 BILL SCHUETTE ATTORNEY GENERAL August 17, 2018 Ms. Kavita Kale Executive Secretary Michigan Public Service Commission 7109 W. Saginaw Highway Lansing, MI 48917 Re: MPSC Case No. U-18999 Revised Replies to Exceptions Dear Ms. Kale: Attached for filing is the Michigan Public Service Commission Staff s Revised Replies to Exceptions. The revisions clarify syntax, add missing citations, and correct grammatical, typographical, and formatting errors. Although some language has been changed and added, none of these changes are intended to alter Staff s arguments; they are intended only for clarification. If any party would like a redline version of the changes, I would be happy to provide it upon request. If you have any questions, please contact me. Sincerely, SAS:tlb Enclosures cc: ALJ Martin D. Snider Parties of Record 18999/Ltr Spencer A. Sattler Assistant Attorney General Public Service Division Telephone: (517) 284-8140

STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of DTE GAS COMPANY for Case No. U-18999 authority to increase its rates for the (e-file paperless) distribution of natural gas and for other relief. / MICHIGAN PUBLIC SERVICE COMMISSION STAFF S REVISED REPLIES TO EXCEPTIONS DATED: August 17, 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 48917 Telephone: (517) 284-8140

TABLE OF CONTENTS Replies to DTE Gas... 2 Rate Base and Capital Expenditures... 3 System Reliability... 3 Infrastructure Recovery Mechanism... 4 Pipeline Integrity... 4 Main Renewal Program (MRP)... 5 Meter Move Out Meter Assembly Check... 6 AMR Program, Fixed Network Solution... 7 Routine General Plant... 7 Contingency... 8 Return on Equity... 8 Historical Adjustments... 9 Risk Factors... 11 The After-Tax Weighted Average Cost of Capital (ATWACC) Method... 14 Merger and Acquisition Activities... 16 ROE Summary... 18 Net Operating Revenue... 19 Other Revenue (Grantor Trust)... 19 O&M Adjustments... 20 Pension and Benefits... 20 Accounting Regulatory Asset Request... 20 Supplemental Savings Plan Expense... 21 Meter Reading Expense... 22 i

Cost of Service and Rate Design... 22 NPV Analysis... 22 Low-Income Assistance and Residential Income Assistance (LIA/RIA)... 24 Monthly Service Charges... 26 Reply to ABATE... 27 Reply to the Attorney General... 27 Reply to Detroit Thermal... 28 Reply to RESA... 29 Conclusion... 30 ii

The DTE Gas Company (DTE Gas or the Company) projects that it will experience a total gas revenue deficiency of $38,121,000 for the test year ending September 30, 2019, (DTE Gas s Reply Br, Attachment A), while Staff projects that DTE Gas will have a $753,000 total gas revenue sufficiency. (Staff s Reply Br, Appendix A.) The difference is primarily attributable to Staff s lower projected rate base, rate of return, and operation and maintenance (O&M) expense: i. DTE Gas s projected rate base is $4,256,671,000, while Staff s projected rate base is $4,228,620,000 $28,051,000 less than the Company s rate base. (Staff s Reply Br, Appendix A.) It is lower primarily because Staff reduced rate base by $10,165,000 for contingency capital expenditure adjustments, by $17,926,000 for non-contingency capital expenditure adjustments, and increased working capital adjustments by $40,000. (Staff s Reply Br, Appendix E.) ii. DTE Gas s proposed ROE is 10.50%, while Staff s recommended ROE is 9.60%. (Compare 4 TR 1261 with 3 TR 743.) The Attorney General s recommended ROE is 9.5%. Staff s proposed ROE is 90 basis points less than the Company proposed because Staff excluded water utilities with different risk profiles from its proxy group, did not use the Empirical Capital Asset Pricing Model, and used different ROE inputs in its models. Staff s lower ROE reduces the Company s projected revenue deficiency by approximately $19.8 million or $2.2 million per 10 basis points. 1 (Staff s Reply Br, Appendix D, G.) iii. DTE Gas projects that its O&M expenses will be $413,559,000 (DTE Gas s Reply Br, Attachment A, page 3), while Staff projects that they will be $401,575,000, (Staff Reply Br, Appendix C, column h), which is $11,984,000 less than the Company projects. Staff s proposed O&M expenses are lower because Staff reduced the Company s transmission expenses, 1 Revenue requirement impact due to change in rate of return calculated as follows: $4,228,620,000 Staff rate base x (0.47%) reduction in pre-tax rate of return (Staff Pre-tax, Reply Brief, Appendix D less Company Pre-tax, Reply Brief, Attachment A, page 4) = ($19.8) million impact for 90 basis point ROE change, or approximately ($2.2) million per 10 basis points. 1

administrative and general expenses, pension and benefit expenses, and meter reading expenses. The ALJ adopted many of Staff s and other parties proposed disallowances in this case, finding that DTE Gas has a total $992,000 revenue sufficiency. (PFD, Appendix A.) DTE Gas has taken exception to these findings, but Staff stands by its proposed disallowances. Ratepayers are entitled to just and reasonable rates, MCL 460.54, just like public utilities are entitled to earn a reasonable rate of return on their investments. ABATE v Public Service Comm, 430 Mich 33, 39 (1988). Staff struck the right balance between DTE Gas s interests and its ratepayers interests. Staff is recommending just and reasonable rates that are fair to both ratepayers and the company. In re Detroit Edison Co, MPSC Case No. U-15244, 12/23/08 Opinion & Order, p 11. The just-and-reasonable-rate doctrine is aimed at navigating the straits between gouging utility customers and confiscating utility property. Verizon Communications, Inc v FCC, 535 US 467, 481 (2002). And the Commission is free to decrease any rate which is not the lowest reasonable rate. Michigan Bell Tel Co v Pub Serv Comm, 332 Mich 7, 36 (1952). Staff s adjustments are well within these bounds. Replies to DTE Gas The $38,874,000 difference between the Company s proposed revenue deficiency ($38,121,000) and Staff s proposed revenue sufficiency ($753,000) is due to the following adjustments (in millions): 2

Rate base (revenue requirement impact) $ (2.0) 2 Change in rate of return $(19.8) 3 Revenue $ (2.9) 4 Other Revenue (Grantor Trust) $ (1.2) 4 O&M adjustment $(12.0) 4 Depreciation adjustment + $ (0.9) 4 Total Staff adjustments (rev. req. impact) $(38.9) 5 Rate Base and Capital Expenditures Staff is addressing the Company s Exceptions relating to system reliability capital expenditures and various aspects for the Company s Infrastructure Recovery Mechanism (IRM), as well as the Advanced Meter Reading (AMR) program, routine general plant, and contingency expenditures. For Staff s remaining adjustments, Staff supports the ALJ s decisions adopting Staff s adjustments and rests on its briefs and reply briefs supporting those adjustments. System Reliability The Company disputes the ALJ s recommendation to disallow $5,826,000 in system reliability capital expenditures to abandon or replace regulator stations that do not have distribution line valves or take-off valves. The Company claims that the ALJ s recommendation, adopting Staff s position, is inappropriate because the 2 Change in rate base of ($28,051,000) x DTE Gas s pre-tax rate of return of 7.18% = ($2.0 million) revenue requirement impact. 3 Change in pre-tax rate of return of (0.47%) x $4,228,620,000 rate base = ($19.8 million) revenue requirement impact. 4 (Staff Reply Brief, Appendix C, line 18.) 5 (Staff Reply Brief, Appendix A, line 8.) 3

ALJ supports disallowing 2016 expenditures and because the Company was unaware that it was not complying with safety regulations. (See DTE Exceptions, pp 12 13.) It argues that it would be improper to use hindsight to disallow DTE Gas s cost recovery. (Id. at 13.) But it is not hindsight to conclude that the Company should have known that it was not complying with the law. See Bomarko, Inc v Rapistan Corp, 207 Mich App 649, 652 (1994) ( A mistake of law is usually not a ground for equitable relief absent inequitable conduct. ). The ALJ was right to adopt Staff position on this issue, (see Staff s Initial Br, pp 34 37), and his PFD was well-reasoned. (See PFD, pp 48 52.) As such, the Commission should adopt the ALJ s recommendation to disallow $5,826,000 in system reliability capital expenditures. Infrastructure Recovery Mechanism Pipeline Integrity In 2016, the Company invested $2,870,000 in an in-line inspection (ILI) expansion project for its Lincoln-Traverse City 10 pipeline, (4 TR 1347; Exhibit S- 10.14), but the Company elected not to make use of its capital investment in these tools and instead opted to request additional funding for a 2017 pipeline replacement project. The Company did not need to do both. Of the two, the ILI expansion project is the preferred method, so Staff recommended disallowing the $2,013,000 related to the 2017 pipeline replacement project. (Staff s Initial Br, pp 20 24.) 4

It only makes sense to use ILI tools to assess the pipeline before spending more money on a less effective direct assessment. (4 TR 1346 1349.) The ALJ agreed, and the Company takes exception, arguing that the costs for the 2016 ILI expansion project and the 2017 pipeline replacement project are not duplicative. (DTE Gas s Exceptions, p 18.) The Company also argues that if it had used its ILI tools as Staff suggested, then the cost for the LNG service would have been approximately $1.9 million. (Id. at 17.) Staff is not persuaded that these costs offset the cost of the replacement project as the Company suggests. The fact remains that the ILI expansion capital expenditures are yet to be used and useful and that the Company will have to incur additional costs before they are. The ALJ was right to disallow $2,013,000 in capital expenditures related to these duplicative projects. Main Renewal Program (MRP) The ALJ agree[d] with Staff that its proposed expenditure level of $167,500,000 to renew approximately 178 miles of high-risk main annually, from 2020 to 2023 in the IRM, would provide a better reasonable and prudent balance between reliability and affordability than DTE Gas s proposed IRM expansion. (PFD, p 47.) In response, the Company argues that it is inappropriate to adjust the timeline for the MRP to align with the Consumers Energy Company s replacement program. As Staff already clarified, Staff did not intend to explicitly tie the two companies programs to the same timeline based on similarities between the systems, but to demonstrate that they are different. (See Staff s Initial Br, p 32.) 5

And since DTE Gas must repair or replace more miles of pipeline, aligning DTE Gas s MRP timeline with Consumers timeline means that DTE Gas will need a more aggressive program to complete more work in nearly the same amount of time. Staff clearly recognizes the differences between DTE s and Consumers distribution systems and supports DTE s efforts to diligently address its deteriorating infrastructure, but this does not change its position. Staff recommends that the Commission approve the Company s proposed capital expenditure for the IRM periods of $169,700,000 for 2019, which includes one-time expansion costs, and Staff s proposed expenditures of $167,500,000 for 2020 through 2023. Meter Move Out Meter Assembly Check The Company takes exception to the ALJ s decision to disallow $4,700,000 for Meter Move Out Meter Assembly Check (MMO MAC) program capital expenditures in the bridge and test year, as well as the disallowance of $12,300,000 in the IRM program years 2019 and 2021 and exclusion of all capital expenditures in 2022 and 2023. The Company makes a number of arguments that Staff has already addressed and that the ALJ already rejected. (See Staff s Initial Br, pp 25 30.) The ALJ s PFD was well-reasoned, and Staff recommends that the Commission adopt it. 6

AMR Program, Fixed Network Solution The Commission should reject DTE Gas s exception to the ALJ s recommendation regarding the investigation of a fixed network for its AMR meters to increase functionality. DTE Gas claims that it has already considered this alternative and concluded that the investment would not be cost effective for customers. (DTE Gas s Exceptions, p 15.) Staff understands that when DTE began installing meters in 2008 it may have investigated a fixed network solution and decided that it would not be cost effective at that time. But due to advances in technology and the overall decline of costs in technology over the ten-year period since DTE began installing AMR meters, it is prudent for the Company to again investigate the potential of installing a fixed network solution for its AMR meters. There are many inherent benefits of automated meter reading, compared to driveby reading, that should be considered. Therefore, Staff continues to support its position. (See Staff s Initial Br, p 61.) Routine General Plant The Commission should reject DTE Gas s exception to the ALJ s recommendation regarding the Company s proposed routine general plant. DTE disagrees with Staff s recommendation that budgets in this category should be based on project-specific projections rather than historical averages. It says that multi-year historical averages are also used for many other categories of recurrent costs. (DTE Gas s Exceptions, p 11.) For costs that the Company does not have discretion to alter in a given year, such as uncollectable expenses, Staff agrees that 7

it may be appropriate to use a multiyear average. But when the Company has complete discretion over work on a project, it is imprudent to simply approve a blank sum of money simply because the Company has spent that amount in the past. Calling an area of work routine does not mean that details about how money will be spent is unnecessary. For this reason, the Commission should reject DTE Gas s exception to the ALJ s recommendation that budgets in this category should be based on project specific information. Contingency In its Exceptions, DTE Gas restates that contingency is an inherent part of forecasted spending for a project. (DTE Gas s Exceptions, p 8.) With no new arguments, Staff continues to support its initial position in its brief. (See Staff s Initial Br, pp 10 13.) Return on Equity DTE Gas takes exception to the 9.60% return on equity (ROE) that Staff recommended and the ALJ adopted. The Company alleges that the ALJ erred by not recommending an ROE of between 10.1% and 10.5% because he did not account for the high risk that the Company faces due to uncertainty in the capital markets, recent federal tax reform, and several other factors. (DTE Gas s Exceptions, p 26.) DTE Gas originally requested a 10.50% ROE, which was at the upper end of its own expert witness Dr. Vilbert s recommended range of 9.75% to 10.75%. (3 TR 798.) 8

The Company listed several reasons why it believes the ALJ is wrong, but it has said most of it before, and Staff has refuted it. (See Staff s Initial Br, pp 42 51, as modified by its errata; see also Staff s Reply Br, pp 7 14.) The ALJ considered the parties quantitative models, estimation methods, and supporting arguments, including the Company s. (PFD, pp 63 86, 240.) And he carefully analyzed these factors before recommending that the Commission approve a 9.6% ROE. Staff disagrees with the Company s Exceptions, but since it has already responded to many of the same arguments before, it will not respond to all of the Company s criticisms here. The Company points to past Commission decisions to support its recommendation, but Staff demonstrates below that these decisions actually support its recommendation. Historical Adjustments 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 Exceptions, pp 36 39; accord Initial Br, pp 29 31.) 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 9

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. 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 1992 1993 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. 6 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 2009 2010 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-16999 reducing Mich Con s authorized ROE to 10.5%, 7 and four years later the Commission reduced it again by 40 basis points to 10.1%. In re DTE Gas Co s 2015 6 In Case No. U-13898, the Commission reduced Mich Con s ROE to 11.0%. In re Michigan Consolidated Gas Co s 2004 2005 Rate Case, MPSC Case No. U-13898, 4/28/2005 Opinion and Order Granting Rate Relief, p 33. 7 Staff references the settlement agreement in Case No. U-16999 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 2011 2012 Rate Case, MPSC Case No. U-16999, 12/7/2012 Settlement Agreement, 12. 10

2016 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-13898 and the 40 basispoint reduction in Case No. U-17999. 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 2017 2018 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. Risk Factors The Company claims that the ALJ did not properly consider the current economic conditions and those expected for the foreseeable future, the Company s lack of a full weather normalization adjustment mechanism, or risks due to Michigan s economy and DTE Gas s Southeastern Michigan service territory. (DTE Exceptions, pp 40 41.) Due to these alleged risk factors, DTE Gas argues that it deserves a higher ROE than other companies in the Company s proxy group. (Id.) The Company s claims are exaggerated, which is why Staff does not agree that the 11

Company is riskier than its peers, at least not to the extent that the Company claims it is. 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 759 760). As a result, Dr. Vilbert used high data points (e.g., his market risk premium) in his quantitative models that skewed his results. 8 Current economic conditions are not grounds for these high data points. The United States Federal Reserve halted its quantitative easing program years ago and Dr. Vilbert said that U.S. capital markets may 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, economic growth, and the need for 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 2008-2009 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 8 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 821 822.) 12

downtown. (3 TR 765; 4 TR 1167.) These conditions do not merit a higher return on equity. In its Initial Brief and Exceptions, 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. (Initial Br, p 31; accord DTE Gas s Exceptions, p 41.) This, it said, suggests that the Company has higher business risk than companies in its proxy group. (DTE Gas s Exceptions, p 41.) The Company s position conflicts 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. DTE Gas s statement that it faces higher risk than companies in its proxy group does not hold up better under the weight of the evidence. Staff witness Kirk Megginson noted in his testimony that DTE Gas is rated A by S&P and Aa3 by Moody s, (4 TR 1241), which is higher than Staff s proxy group s average credit rating of A- (S&P) and A3 (Moody s). (Exhibit S-4, Schedule D-5, p 2.) This suggests that, all other things being equal, the credit rating agencies view DTE Gas as having less business risk than Staff s proxy group of gas utilities. 13

DTE Gas also argues that it faces revenue risk because its End Use Transportation ( EUT ) customers, which are its largest commercial and industrial customers, are able to bypass DTE Gas and take service directly from interstate pipeline companies. (DTE Gas s Exceptions, p 41.) But this risk is not unique to DTE Gas. Many, if not most, regulated utility gas providers face the risk of losing customers to end-use transportation or bypass. Further, it said that the Tax Cut and Jobs Act increases its risk, but again, all US-based utilities will eventually have to deal with these tax changes, so they are no excuse for a higher return. On top of everything else, Dr. Vilbert s proxy group further undermines the Company s arguments. It included only five gas utilities and eight water utilities, so comparing DTE Gas s business risk with the proxy group s business risk is not an apples-to-apples comparison or even an apples-to-oranges comparison; it is more like comparing apples with cottage cheese. Even if DTE was more risky than companies in its proxy group, this would not necessarily mean that it has higher risk than comparable utilities because the companies in DTE Gas s proxy group are not comparable utilities. The After-Tax Weighted Average Cost of Capital (ATWACC) Method Mr. Megginson explained the Company s after-tax weighted average cost of capital (ATWACC) method and testified that it is unreasonable, cumbersome, and produces highly inflated ROE estimates: 14

[T]he Company s ATWACC approach is unreasonable and cumbersome. The methodology takes market values for the permanent capital components in the Company s capital structure and develops an overall rate of return using market value results. The Company then attempts to back-into an ROE estimate using the ratemaking debt and equity weights to calculate the same overall market value rate of return. The ATWACC market weights of equity and debt are volatile and prone to fluctuation not based on corporate management or general business fundamentals. [4 TR 1250.] The ALJ agreed and rejected the Company s ATWACC approach. DTE Gas takes exception, arguing the ATWACC approach recognizes that capital structure affects financial risk (the higher the debt/equity ratio, the higher the financial risk), which affects the estimated cost of equity borne by equity holders. (DTE Gas s Exceptions, p 32). It said it needed to use the ATWACC method in order to accurately compare the returns of sample companies with different capital structures. (Id.) But the ALJ agreed with the Company s recommended 52/48 equity-to-debt capital structure. Since the ALJ did not add any debt or risk to the Company s capital structure, this counteracted the Company s claim that it needed to make an ATWACC adjustment in order to compare different capital structures. For this reason, the ALJ was right to reject the Company s ATWACC method. The Company further argues that [t]he PFD also essentially invites the Commission to rely on DTE Gas s current credit rating as a basis to embark on actions that likely would result in increasing DTE Gas s borrowing costs at a time of increasing market interest rates when DTE Gas s borrowing needs may increase considerably. (DTE Gas s Exceptions, p 40.) In other words, a lower ROE will likely lead to a lower credit rating. This is an unproven and unsupported claim not 15

backed by analysis or evidence. The 9.6% ROE that the ALJ recommended in this case would not signal a reduction in the Company s cash flow or harm its credit rating and access to capital markets. On the contrary, a more reasonable ROE, like a 9.6% ROE, is better suited for this low-interest-rate environment. The Commission should disregard the Company s plea for a higher ROE and agree with the ALJ s more reasonable ROE recommendation. 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 Exceptions, pp 29 30.) 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 1246 1247.) Dr. Vilbert took this one step further by excluding companies that were involved in mergers or acquisitions over the past five years. (3 TR 767 768, 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 16

and beta estimates, (3 TR 767 768, 815 816), 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 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. 17

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 been involved in a merger in the not-too-distant past. (See Staff s Initial Br, pp 43 45.) ROE Summary Staff s 9.60% ROE recommendation, which the ALJ adopted, 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-than-authorized actual returns over the past five years. (4 TR 1261 1262.) 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.) As Mr. Megginson testified, the RDM and IRM are not proposals looking to be approved, they are currently in place and benefiting the Company with substantially reduced business risk. (4 TR 1263.) 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 18

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. For these reasons, Staff stands behind the ALJ s proposed ROE and respectfully requests that the Commission reject the Company s arguments for an inflated 10.5% ROE and instead adopt the ALJ s well-reasoned and more sensible 9.6% ROE recommendation. Net Operating Revenue Other Revenue (Grantor Trust) The Company excepts to the ALJ s recommendation regarding Staff s proposal for Grantor Trust income, stating that the return on the fund is reliant on market performance and the most reasonable projection for return is zero. (DTE Gas s Exceptions, p 43.) The ALJ properly considered all arguments presented on this matter and correctly recommended that the Commission approve Staff s proposal to base the income on a five-year average, as was done in the previous rate case. Staff noted, and the ALJ agreed, that on average the Company does receive income from the Grantor Trust investments. (PFD, p 88.) Therefore, the Company s exception should be rejected and the ALJ s recommendation approved. 19

O&M Adjustments Staff recommended adjustments to the following O&M expenses: 1. Transmission, 2. Administrative and General, 3. Pension and Benefits, 4. Meter Reading, and 5. Interest on Security Deposits. Only a few of these adjustments merit further discussion at this stage of the proceeding. Staff stands by its brief and reply brief for those adjustments not addressed here. Pension and Benefits Accounting Regulatory Asset Request Under Accounting Standards Update (ASU) 2017-07, which took effect in January of 2018, only the service cost component of net periodic benefit costs (pension and OPEB costs) is eligible for capitalization. This aspect of ASU 2017-07 was the impetus for the Company s regulatory accounting request. (3 TR 931 933.) Before ASU 2017-07 took effect, the Company would capitalize a portion of pension and OPEB cost components. Now that is no longer possible. The update requires all cost financing cost components, except current service costs, to be charged to expense with no portion being capitalized. 9 DTE Gas asks to record the financing costs (which would have been capitalized under historical practice) to new regulatory liabilities. (DTE Gas s 9 The financing cost components being expensed include interest, return on assets, and unrecognized gains or losses. (3 TR 931 932.) 20

Exceptions, p 67.) Approval of this request would allow the Company to both use regulatory accounting treatment for these costs and to conform to traditional ratemaking. As such, Staff supports the Company s regulatory accounting request. Supplemental Savings Plan Expense The Supplemental Savings Plan (SSP) is a non-qualified plan that is offered to a select set of highly paid employees. Non-qualified plans are supplemental benefits on top of those provided by a company s qualified retirement plans. Employees who receive these supplemental benefits are generally director level and average $231,915 in salary per year. (See Exhibit S-13, Page 2 of 3). If approved, the Company s SSP would allow it to defer more compensation than several Internal Revenue Code provisions allow for tax qualified plans. Specifically, the SSP would exceed the maximum employee pre-tax contribution limit $18,000 plus $6,000 per year for catch-up contributions in 2015 and 2016 and the compensation limit $265,000 for 2015 and 2016. (4 TR 1232.) Staff recommended disallowing SSP expenses because the SSP is similar to the Company s Executive Supplemental Retirement Plan, which has been routinely excluded from the revenue requirement in numerous past rate cases. (4 TR 1232.) But in light of a recent Commission order relating directly to SSP expenses and the Company s arguments in this case, Staff no longer supports this adjustment. See In re DTE Electric Co s 2017 2018 Rate Case, MPSC Case No. U-18255, 4/18/18 Order, p 52; see also DTE Gas s Exceptions, pp 48 50. 21

Meter Reading Expense While DTE Gas is correct in stating that meter reading services will still be required by the Company, (DTE Gas s Exceptions, pp 47 48), the Company fails to recognize that the projected expenses do not account for the reduction in meter reading expenses. (PFD, p 147.) Therefore, Staff continues to support its position. (See Staff s Initial Br, p 61.) Cost of Service and Rate Design NPV Analysis The Company seems to except to the ALJ s recommended approval of Staff s NPV analysis requirement for fulfillment of criterion 5 of Staff s proposed criteria for determining whether customer retention schedules should be approved and whether the associated discounts should be recovered from other customers. While not directly addressing the ALJ s decision or its stated basis, the Company mainly repeats its arguments against Staff s position. (DTE Gas s Exceptions, pp 64 66.) Staff already addressed most of these arguments, (see Staff s Initial Br, pp 81 84), including the assertion that considering all non-volumetric costs as fixed is generally accepted. As noted by the PFD: DTE Gas provides no evidence to support this assertion, and no argument to help validate its claim. Staff provided testimony from witness Revere which adequately explains why short-term, nonvolumetric costs should not necessarily be considered fixed. I agree with Staff that a 5-year NPV analysis is reasonable and prudent given the potential impact of discounted rate recovery to other customers. [PFD, p 194.] 22

The Company fails to respond to the serious deficiency in its argument, recognized by the ALJ, instead again arguing that the NPV analysis would add needless complexity and controversy and could result in contentious debate that is almost certain. (DTE Gas s Exceptions, pp 65 66.) Recognizing that contentious debate is nearly impossible to avoid in a rate case an adversarial administrative proceeding in which parties argue over billions of dollars that will come out of ratepayers pockets Staff argued that this reason (regardless of the relative certainty) is insufficient reason not to perform an NPV analysis. (Staff s Initial Br, p 83.) Indeed, as the ALJ stated (quoted above), the potential impact to other customers makes such an analysis appropriate, even (in Staff s opinion) necessary. 10 Attempting to avoid argument over the impacts to ratepayers when disagreement exists is antithetical to the purpose of a rate case. Staff did acknowledge the Company s concerns over the increasing speculative nature of an NPV analysis and recommended modifying its initial proposal to match the Company s five-year planning horizon. (Staff s Initial Br, pp 83 84.) The Company acknowledges this modification but claims that not requiring the NPV analysis is better. (DTE Gas s Exceptions, p 66.) Having shown above and throughout the record in this case that the NPV is a necessary consideration in determining the appropriate cost impact of a Company-offered 10 The potential impact to customers of paying costs more properly allocated to other customers is too great to justify avoiding potential arguments in already contentious cases. (3 TR 674.) 23

customer discount on other customers, the Commission should reject the Company s argument and apparent exception on this matter. Low-Income Assistance and Residential Income Assistance (LIA/RIA) The Company excepts to the ALJ s recommended approval of Staff s modifications to the Company s Low-Income Assistance and Residential Income Assistance (LIA/RIA) proposal for two reasons. First, the Company claims that its proposal is supported by the historical data on customers receiving the RIA credit. This is incorrect. The Company s referenced forecast is for the number of total customers receiving the RIA/LIA credit. The total forecast was accepted by Staff and opposed by no other party. The issue is the proposed change to the ratio of RIA to LIA customers. (DTE Gas s Exceptions, p 69.) The Company claims this proposal is due to a projected decrease in the number of customers receiving the RIA credit. (Id.) This is inaccurate. The projected decrease is a direct result of the Company s proposal to move more customers onto the LIA credit from the RIA credit, not a precipitating factor. Second, the Company notes that the ALJ incorrectly stated that the Company agreed with all Staff s modifications, when it was only some of those the Company agreed with. (DTE Gas s Exceptions, p 69.) In support of its position, the Company disagrees that the benefits of the LIA credit have not been shown to be commensurate with the expense, resulting in subsidization of the LSP program (which, it bears noting, is separate and distinct from the LIA or RIA). DTE claims 24

that the LSP program (again, not the RIA or LIA) is effective and benefits all customers by reducing uncollectible and collections expense. (Id.) The Company also claims that, because taxpayer-funded sources of money for programs like the LSP have dwindled, ratepayers should subsidize the LSP program. (Id.) This is inappropriate. As Staff testified: Without a showing that the benefits of the ratepayer funds used to subsidize the program provide a benefit commensurate with the expense, it is inappropriate. Such decisions are made by citizens and their representatives, not ratepayers. Though these two populations overlap quite significantly, the purpose for the groupings vary just as significantly. [4 TR 1397.] The fact that a government agency tasked with advancing the public interest determined that programs such as the LSP should not receive funding from LIHEAP is evidence against the appropriateness of using ratepayer funds to fund it, contrary to the Company s argument. (DTE Gas s Exceptions, p 70.) The Company did not show that the expense reductions it claims for the LSP have occurred, will occur, or are commensurate with the costs that would be incurred as a result of expanding the LIA and limiting it to LSP customers. Absent such a showing, the Company s proposal amounts to subsidization of a social program regardless of its effect on rates. Such a result is unreasonable and inappropriate. The Company also claims that additional reporting requirements for the LIA are unnecessary, as the LSP has detailed grant reporting requirements. (Id.) As these programs should be considered separately, this claim is baseless. 25

In short, the ALJ s recommendation to approve Staff s requested modifications to the LIA/RIA programs are necessary and appropriate. Monthly Service Charges The Company excepts to the PFD regarding its approval of Staff s proposed fixed monthly service charges. (DTE Gas s Exceptions, p 71.) Staff supported its proposed monthly service charges by calculating them in the same manner approved by the Commission. (Staff s Initial Br, p 79.) The ALJ acknowledged and accepted Staff s proposal, and the Commission should continue to approve service charges proposed by Staff. The Company mistakenly claims that Staff disagreed with RESA on the mechanics of its proposal, but indicated that it still saw some theoretical merit in pooling, stating: The Commission should consider RESA s proposal even if it reduces Company revenue and increases rates, as it effectively promotes balance. (DTE Gas s Exceptions, p 74.) Staff does not disagree with the mechanics of RESA s proposal or how pooling would work between gas suppliers and their customers. Instead, Staff disagreed with the single argument of RESA s that claimed there would be no cost impact on other, non-pooling customers. (Staff Initial Br, p 92.) Staff took no position for or against RESA s pooling proposal, and it recommends only that the Commission not deny it because of the possible resulting change in cost burden. (Staff s Initial Br, p 93.) 26

Reply to ABATE ABATE takes exception to the PFD for rejecting ABATE s cost allocation recommendations. The ALJ disagreed with ABATE s contention that the average and peak method of allocating certain costs is improper. (PFD, p 186.) As described by Staff, the average and peak allocator has been upheld by the Commission for decades and represents a fair allocation of costs to customers of all load factors; ABATE s proposed 75/25 method is inappropriate because it relates only to the electric utility industry. (Staff s Initial Br, pp 70 71, 75.) The ALJ did not disregard ABATE s arguments, as it claims in its Exceptions. (ABATE s Exceptions, p 4.) Rather, the ALJ found Staff s arguments convincing. Staff continues to advocate that the Company provide a storage utilization study if and only if the Company proposes a new storage cost allocation method. (4 TR 1279.) Reply to the Attorney General In his Exceptions, the Attorney General claims that the ALJ provided no support for his recommendation that the Commission adopt Staff s Lost and Unaccounted For (LAUF) gas expense. (Attorney General s Exceptions, pp 32 33.) Staff and the Company s LAUF expense rely on a five-year historical average of LAUF gas volumes, while the Attorney General used only the previous three years of volumes. The ALJ did support his decision to agree with Staff and the Company s position on LAUF volumes by noting, among other things, that DTE Gas s positive efforts to improve and control these factors [affecting future LAUF 27

volumes] do not guarantee future LAUF volume. (PFD, p 115.) In other words, relying on a shorter historical period ignores the fact that system conditions in the test year do not necessarily reflect only the last three years. If LAUF volumes continue to trend downward because of the Company s changing operations, then those effects will be incorporated into future test years eventually anyway. The ALJ also noted that a five-year historical average of LAUF volumes has been approved by the Commission in the past. (PFD, p 114.) The Commission should continue to approve this method so that annual fluctuations will always be accounted for in both the instant case s test year and test years to come. The Attorney General correctly points out that changes to LAUF volumes affect the overall calculation of gas-in-kind (GIK). (Attorney General Exceptions, p 33.) Concordantly, because the Commission should reject the Attorney General s projected LAUF volumes, the Commission should also reject the Attorney General s projected GIK rates in favor of the ALJ s recommendation adopting Staff s position. Reply to Detroit Thermal Detroit Thermal takes exception to the ALJ s recommendation not to eliminate the standby service charge and restates its various arguments in support of its recommendation. The ALJ rejected Detroit Thermal s recommendation, and Staff agrees. (PFD, p 236.) Specifically, Staff notes that the standby charge should be considered reasonable because the Commission previously accepted it and that an alteration or elimination of the charge should require evidence. (Staff s Reply 28

Br, p 15.) Furthermore, customers receiving standby service, as it is clearly defined in the Company s tariffs, should be subject to rates differing from standard service customers because they are receiving a different service from the Company. (Staff s Reply Br, p 15.) The Commission should continue to approve the standby service charge, and Staff supports the ALJ s recommendation that the Company be directed to examine the charge in further detail in its next general rate case. Staff notes, however, that if the standby charge has not been updated to reflect actual costs in many years, that it likely should be adjusted higher, if only for simple, general inflationary pressure on prices. (Staff s Reply Br, p 16.) Reply to RESA In its exceptions, RESA argues that the ALJ was wrong to conclude that the gas customer choice (GCC) enrollment notification postcard (notification postcard) is not misleading or anticompetitive. The ALJ s proposal on this issue is tempered by his recommendation that the Commission encourage DTE Gas to include the MPSC s Gas Choice Comparison website and information about GCC customers discounted SOLR reservation charge on the notification. RESA took exception to the ALJ s recommendation, repeating the same arguments that the ALJ rejected and that Staff refuted in its testimony, brief, and particularly its reply brief. (RESA s Exceptions, pp 2 9; Staff s Reply Br, pp 17 19). RESA states that the actual pricing should not be on the postcard; rather, it should 29

refer to the MPSC s Gas Choice Comparison website. RESA argues that pricing alone does not illustrate the entire value of the product. (RESA s Exceptions, pp 3 5.) Staff maintains that the notification postcard is not anticompetitive, but DTE Gas could certainly include more information on it, as the ALJ recommended. (Staff s Reply Brief, p 19; PFD, p 221.) The ALJ was right to concluded that DTE s notification postcard is not anticompetitive and in recommending that the Commission encourage DTE to include the MPSC s Gas Choice Comparison website and information about GCC customers discounted reservation charge on the notification. For these reasons, the Staff recommends that the Commission reject RESA s exception to the PFD regarding the notification postcard. Conclusion Staff recommends that the Commission reject the parties Exceptions described above and adopt Staff s recommendations. Respectfully submitted, MICHIGAN PUBLIC SERVICE COMMISSION STAFF DATED: August 17, 2018 18999/Revised Replies to Exceptions 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 48917 Telephone: (517) 284-8140 30

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-18999 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 August 17, 2018, she served a true copy of the Michigan Public Service Commission Staff s Revised Replies to Exceptions upon the following parties via e-mail 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 48226 michael.solo@dteenergy.com christinidisj@dteenergy.com david.maquera@dteenergy.com andrea.hayden@dteenergy.com mpscfilings@dteenergy.com Detroit Thermal, LLC Arthur J. LeVasseur Matthew M. Peck Fischer Franklin & Ford 500 Griswold St., Suite 3500 Detroit, MI 48226-3808 levasseur@fischerfranklin.com mmpeck@fischerfranklin.com 1