Founded in 1852 by Sidney Davy Miller SHERRI A. WELLMAN TEL (517) 483-4954 FAX (517) 374-6304 E-MAIL wellmans@millercanfield.com Miller, Canfield, Paddock and Stone, P.L.C. One Michigan Avenue, Suite 900 Lansing, Michigan 48933 TEL (517) 487-2070 FAX (517) 374-6304 www.millercanfield.com MICHIGAN: Ann Arbor Detroit Grand Rapids Kalamazoo Lansing Troy FLORIDA: Tampa ILLINOIS: Chicago NEW YORK: New York CANADA: Windsor CHINA: Shanghai MEXICO: Monterrey POLAND: Gdynia Warsaw Wrocław April 20, 2018 Ms. Kavita Kale Executive Secretary Michigan Public Service Commission 7109 W. Saginaw Highway, 3rd Floor Lansing, MI 48917 Re: SEMCO Energy Gas Company Tax Reform Credit A Case No. U-20115 Dear Ms. Kale: Enclosed for electronic filing are the Supplemental Direct Testimony and Exhibits of Steven Q. McLean on behalf of SEMCO Energy Gas Company in the above matter. Also enclosed is the Proof of Service. Should you have any questions, please kindly advise. Very truly yours, Miller, Canfield, Paddock and Stone, P.L.C. SAW/clc Enclosures cc: Parties of Record Steve McLean Jennifer Dennis By: Sherri A. Wellman
STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter on the Commission s own ) motion, to consider changes in the rates ) of all the Michigan rate-regulated ) electric, steam and natural gas utilities ) Case No. U-20115 to reflect the effects of the federal Tax ) Cuts and Jobs Act of 2017: ) SEMCO ENERGY GAS COMPANY ) files an application for determination of Credit A ) as described in order U-18494. ) SUPPLEMENTAL DIRECT TESTIMONY AND EXHIBITS OF STEVEN Q. MCLEAN ON BEHALF OF SEMCO ENERGY GAS COMPANY April 20, 2018
Supplemental Direct Testimony of Steven Q. McLean On Behalf of SEMCO Energy Gas Company 1 2 3 Q. Please state your name and business address. A. My name is Steven Q. McLean. My business address is 1411 Third Street, Suite A, Port Huron, Michigan 48060. 4 5 6 Q A By whom are you employed and what is your position? I am employed by SEMCO Energy Gas Company ( SEMCO Gas or the Company ), a division of SEMCO Energy, Inc. ( SEMCO ), as its Director of Regulatory Affairs. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Q. Are you the same Steven Q. McLean that filed direct testimony and exhibits in this proceeding on March 29, 2018? A. Yes. Q. What is the purpose of your supplemental testimony? A. The purpose of my supplemental testimony is to address the impact of the federal Tax Cuts and Jobs Act of 2017 ( TCJA ) on the Company s Main Replacement Program ( MRP ) revenue requirement and associated surcharges. Q. Please identify the exhibits which you are sponsoring in this case. A. I am sponsoring: Exhibit A-9 (SQM-9) Adjusted MRP Revenue Requirement Exhibit A-10 (SQM-10) Adjusted MRP Customer Surcharges Exhibit A-11 (SQM-11) MRP Tariffs Sheets Q. Were these exhibits prepared by you or under your direction and supervision? A. Yes. 1
Supplemental Direct Testimony of Steven Q. McLean On Behalf of SEMCO Energy Gas Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Q. Please describe Exhibit A-9 (SQM-9). A. Exhibit A-9 (SQM-9) is the MRP revenue requirement calculation approved by the Commission in its June 3, 2015 order in Case No. U-17824 for the period 2016-2020, adjusted to reflect lower federal taxes for the years 2018-2020. The revenue requirement components consist of Return on Net Rate Base, Depreciation, Property Taxes and O&M savings. Q. How does the TCJA impact the revenue requirement calculation for the MRP? A. The MRP revenue requirement calculation is impacted in two ways. First, the currently approved pre-tax rate of return of 11.66% is lowered to 10.01% for the years 2018-2020 to reflect the decrease in federal corporate income taxes from 35% to 21%. Second, the deferred federal tax calculation is adjusted to reflect the lower federal tax for the same period. Overall, the annual revenue requirement is reduced by $564,717, thereby changing from $8,479,141 to $7,914,424. This reduced revenue requirement is used to calculate the updated surcharges necessary to pass the TCJA savings onto customers. Q. How are the proposed updated MRP surcharges calculated? A. The updated MRP surcharge calculation illustrated in Exhibit A-10 (SQM-10) is the exact same methodology and allocation factors approved in Case No. U-17824. The only difference is the lowered revenue requirement reflecting the federal tax savings. These surcharges are also reflected in the MRP Tariffs included as Exhibit A-11 (SQM-11). 2
Supplemental Direct Testimony of Steven Q. McLean On Behalf of SEMCO Energy Gas Company 1 2 3 4 5 6 7 8 9 10 11 Q. Why do the MRP surcharges for TR-2, TR-3 and special contracts remain at $500 per month? A. The currently approved methodology used to calculate the MRP surcharges limits the surcharge to $500 per month. This is done through a twostep process. In the first step each rate schedule is allocated costs using a traditional cost of service allocation factor for distribution main. If any rate schedule is allocated enough costs in the first step to exceed a $500 per month surcharge a second step is used to reallocate those cost back to other rate schedules so that no MRP rates exceed $500 per month. The MRP federal tax savings do not cause the TR-2, TR-3 or special contract to fall below the $500 per month cap. Q. Does this conclude your supplemental testimony? A. Yes. 3
SEMCO Energy Gas Company Case No.: U-20115 Adjusted MRP Revenue Requirement Witness: Steven McLean Exhibit: A-9 (SQM-9) Page: 1 of 2 Line No. Description Source 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2016-2020 Avg. Capital Investment (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) 1 Annual MRP Investment U-17824 $ 4,722,706 $ 4,134,812 $ 8,884,577 $ 9,900,000 $ 8,202,158 $ 9,508,892 $ 9,794,159 $ 10,087,984 $ 10,390,623 $ 10,702,342 $ 10,096,800 Net Rate Base 2 Cumulative Capital Investment Prior Yr Plus L1 $ 4,722,706 $ 8,857,518 $ 17,742,095 $ 27,642,095 $ 35,844,253 $ 45,353,145 $ 55,147,304 $ 65,235,287 $ 75,625,910 $ 86,328,252 3 Accumulated Depreciation Prior Yr - L8 $ (59,543) $ (230,758) $ (566,119) $ (1,138,310) $ (1,938,729) $ (2,962,443) $ (4,229,525) $ (5,747,276) $ (7,523,215) $ (9,565,088) 4 Accum. Deffered Taxes Pg.2 L5 $ (45,730) $ (172,067) $ (409,994) $ (802,199) $ (1,323,569) $ (1,953,991) $ (2,694,170) $ (3,250,142) $ (3,869,721) $ (4,568,273) 5 Ending Net Rate Base Sum L2-L4 $ 4,617,433 $ 8,454,693 $ 16,765,982 $ 25,701,586 $ 32,581,956 $ 40,436,711 $ 48,223,609 $ 56,237,870 $ 64,232,975 $ 72,194,890 6 Average Net Rate Base L5 (PY+CY)/2 $ 2,308,717 $ 6,536,063 $ 12,610,338 $ 21,233,784 $ 29,141,771 $ 36,509,333 $ 44,330,160 $ 52,230,739 $ 60,235,422 $ 68,213,933 Total Cost of Service 7 Return on Net Rate Base 2011-2017 11.66% $ 269,196 $ 762,105 $ 1,470,365 $ 2,475,859 $ 3,397,930 $ 4,256,988 $ 5,168,897 $ - $ - $ - $ 1,885,177 8 Return on Net Rate Base 2018-2020 10.01% $ 5,227,879 $ 6,029,084 $ 6,827,669 $ 3,616,926 9 Depreciation (1/2 yr conv.) 2.52% $ 59,543 $ 171,216 $ 335,361 $ 572,191 $ 800,418 $ 1,023,714 $ 1,267,082 $ 1,517,751 $ 1,775,939 $ 2,041,873 $ 1,525,272 10 Property Taxes pg. 2 $ - $ 109,803 $ 198,853 $ 392,133 $ 596,876 $ 748,327 $ 921,259 $ 1,090,068 $ 1,255,290 $ 1,417,267 $ 1,086,442 11 Total Accumulated Savings U-17824 $ (12,925) $ (26,238) $ (52,864) $ (80,289) $ (108,537) $ (137,632) $ (167,600) $ (198,467) $ (230,260) $ (263,007) $ (199,393) 12 Total Revenue Requirement L7 thru L10 $ 315,814 $ 1,016,886 $ 1,951,715 $ 3,359,895 $ 4,686,688 $ 5,891,398 $ 7,189,637 $ 7,637,231 $ 8,830,053 $ 10,023,803 $ 7,914,424 Weighted Cost Permanent Tax Permanent Capital Mulitiplier Capital Long Term Debt 2.32% 1.000 2.32% Common Equity 5.71% 1.347 7.69% 8.03% 10.01% Approved Rev. Requirement (U-17824) $ 8,479,141 Pre-Tax Annual Savings $ 564,717
SEMCO Energy Gas Company Case No.: U-20115 Adjusted MRP Revenue Requirement Witness: Steven McLean Exhibit: A-9 (SQM-9) Page: 2 of 2 Line No. Description Source 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Deffered Tax Expense 1 Tax Depreciation Line 17 $ 177,101 $ 495,988 $ 946,999 $ 1,580,431 $ 2,140,701 $ 2,644,337 $ 3,169,856 $ 3,677,703 $ 4,183,006 $ 4,755,753 2 Book Depreciation Pg 1 L8 $ 59,543 $ 171,216 $ 335,361 $ 572,191 $ 800,418 $ 1,023,714 $ 1,267,082 $ 1,517,751 $ 1,775,939 $ 2,041,873 3 Time Difference Line 2 -Line 1 $ 117,559 $ 324,772 $ 611,638 $ 1,008,239 $ 1,340,282 $ 1,620,623 $ 1,902,774 $ 2,159,952 $ 2,407,067 $ 2,713,880 4 Deffered Tax Expense 38.9% $ 45,730 $ 126,336 $ 237,927 $ 392,205 $ 521,370 $ 630,422 $ 740,179 5 Deffered Tax Expense 25.7% $ 555,972 $ 619,579 $ 698,553 5 Accum. Deffered Tax Expense Prior year plus L4 $ 45,730 $ 172,067 $ 409,994 $ 802,199 $ 1,323,569 $ 1,953,991 $ 2,694,170 $ 3,250,142 $ 3,869,721 $ 4,568,273 Tax Depreciation Year 1 Year 2 Year 3 Year 4 year 5 year 6 Year 7 Year 8 Year 9 Year 10 6 MACRS Tax Depr Rate (20 year) 3.750% 7.219% 6.677% 6.177% 5.713% 5.285% 4.89% 4.52% 4.46% 4.46% 7 Year 1 Additions Cost X MACRS Tax Rate $ 177,101 $ 340,932 $ 315,335 $ 291,722 $ 269,808 $ 249,595 $ 230,846 $ 213,561 $ 210,727 $ 210,680 8 Year 2 Additions Cost X MACRS Tax Rate $ 155,055 $ 298,492 $ 276,081 $ 255,407 $ 236,222 $ 218,525 $ 202,110 $ 186,976 $ 184,495 9 Year 3 Additions Cost X MACRS Tax Rate $ 333,172 $ 641,378 $ 593,223 $ 548,800 $ 507,576 $ 469,550 $ 434,278 $ 401,761 10 Year 4 Additions Cost X MACRS Tax Rate $ 371,250 $ 714,681 $ 661,023 $ 611,523 $ 565,587 $ 523,215 $ 483,912 11 Year 5 Additions Cost X MACRS Tax Rate $ 307,581 $ 592,114 $ 547,658 $ 506,647 $ 468,589 $ 433,484 12 Year 6 Additions Cost X MACRS Tax Rate $ 356,583 $ 686,447 $ 634,909 $ 587,364 $ 611,425 13 Year 7 additions Cost X MACRS Tax Rate $ 367,281 $ 707,040 $ 653,956 $ 604,985 14 Year 8 Additions Cost X MACRS Tax Rate $ 378,299 $ 728,252 $ 673,575 15 Year 9 Additions Cost X MACRS Tax Rate $ 389,648 $ 750,099 16 Year 10 Additions Cost X MACRS Tax Rate $ 401,338 17 Total Tax Depreciation Sum of L7 Thru L16 $ 177,101 $ 495,988 $ 946,999 $ 1,580,431 $ 2,140,701 $ 2,644,337 $ 3,169,856 $ 3,677,703 $ 4,183,006 $ 4,755,753 Proptry Tax Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 18 Factor 0.93 0.87 0.81 0.76 0.71 0.67 0.63 0.59 0.55 0.51 19 Year 1 Taxable Value Cost x Factor x 50% $ 2,196,058 $ 2,054,377 $ 1,912,696 $ 1,794,628 $ 1,676,561 $ 1,582,107 $ 1,487,652 $ 1,393,198 $ 1,298,744 $ 1,204,290 20 Year 2 Taxable Value Cost x Factor x 50% $ 1,922,688 $ 1,798,643 $ 1,674,599 $ 1,571,229 $ 1,467,858 $ 1,385,162 $ 1,302,466 $ 1,219,770 $ 1,137,073 21 Year 3 Taxable Value Cost x Factor x 50% $ 4,131,328 $ 3,864,791 $ 3,598,254 $ 3,376,139 $ 3,154,025 $ 2,976,333 $ 2,798,642 $ 2,620,950 22 Year 4 Taxable Value Cost x Factor x 50% $ 4,603,500 $ 4,306,500 $ 4,009,500 $ 3,762,000 $ 3,514,500 $ 3,316,500 $ 3,118,500 23 Year 5 Taxable Value Cost x Factor x 50% $ 3,814,003 $ 3,567,939 $ 3,321,874 $ 3,116,820 $ 2,911,766 $ 2,747,723 24 Year 6 Taxable Value Cost x Factor x 50% $ 4,421,635 $ 4,136,368 $ 3,851,101 $ 3,613,379 $ 3,375,657 25 Year 7 Taxable Value Cost x Factor x 50% $ 4,554,284 $ 4,260,459 $ 3,966,634 $ 3,721,780 26 Year 8 Taxable Value Cost x Factor x 50% $ 4,690,912 $ 4,388,273 $ 4,085,633 27 Year 9 Taxable Value Cost x Factor x 50% $ 4,831,640 $ 4,519,921 28 Year 10 Taxable Value Cost x Factor x 50% $ 4,976,589 29 Total Taxable Value Sum of L19 thru L28 $ 2,196,058 $ 3,977,065 $ 7,842,667 $ 11,937,518 $ 14,966,546 $ 18,425,178 $ 21,801,365 $ 25,105,790 $ 28,345,347 $ 31,508,117 30 Millage 50 $ 50.000 $ 50.00 $ 50.00 $ 50.00 $ 50.00 $ 50.00 $ 50.00 $ 50.00 $ 50.00 $ 50.00 31 Property Tax Assessed (L19 x L30)/1000 $ 109,803 $ 198,853 $ 392,133 $ 596,876 $ 748,327 $ 921,259 $ 1,090,068 $ 1,255,290 $ 1,417,267 $ 1,575,406 32 Property Tax Expense $ 109,803 $ 198,853 $ 392,133 $ 596,876 $ 748,327 $ 921,259 $ 1,090,068 $ 1,255,290 $ 1,417,267
SEMCO Energy Gas Company Case No.: U-20115 Adjusted MRP Customer Surcharges Witness: Steven McLean Exhibit: A-10 (SQM-10) Page: 1 of 1 Customer charge per month no maximum Total Special Company Residential GS-1 GS-2 GS-3 TR-1 TR-2 TR-3 Contracts 1 Mains Allocator (Avg & Peak) 1.00000 0.50667 0.09167 0.07866 0.09878 0.04121 0.09858 0.03199 0.05244 2 Adj. Avg Cum Costs $ 7,914,424 $ 4,010,010 $ 725,490 $ 622,550 $ 781,774 $ 326,147 $ 780,224 $ 253,198 $ 415,032 3 Number of Customers 284,755 259,669 21,246 2,894 767 116 54 5 6 4 COSS-Throughput 48,092,435 23,110,534 3,733,729 3,884,581 5,183,858 2,632,070 6,473,520 2,620,199 453,943 5 Avg Usage per Customer 89.0 175.7 1,342 6,762 22,788 120,438 524,040 75,657 6 Annual Cost per Cust $ 15.44 $ 34.15 $ 215.12 $ 1,019.73 $ 2,824 $ 14,516 $ 50,640 $ 69,172 7 Proposed Monthly Surcharge $ 1.29 $ 2.85 $ 17.93 $ 84.98 $ 235.32 $ 1,209.65 $ 4,219.97 $ 5,764.33 Maximum customer charge per month is $500.00 or $6000.00 per year Total Special Company Residential GS-1 GS-2 GS-3 TR-1 TR-2 TR-3 Contracts 8 Mains Allocator (Average & Peak) 1.00000 0.50667 0.09167 0.07866 0.09878 0.04121 0.09858 0.03199 0.05244 0.81699 0.50667 0.09167 0.07866 0.09878 0.04121 9 Mains Alloc (Avg & Peak)>$500 1.00000 0.62017 0.11220 0.09628 0.12091 0.05044 10 Adj. Avg Cum Costs $ 7,914,424 $ 4,010,010 $ 725,490 $ 622,550 $ 781,774 $ 326,147 $ 780,224 $ 253,198 $ 415,032 11 Number of Customers 284,755 259,669 21,246 2,894 767 116 54 5 6 12 COSS-Throughput 48,092,435 23,110,534 3,733,729 3,884,581 5,183,858 2,632,070 6,473,520 2,620,199 453,943 13 Avg Usage per Customer 89.0 175.7 1,342 6,762 22,788 120,438 524,040 75,657 14 Annual Cost per Cust $ 15.44 $ 34.15 $ 215.12 $ 1,019.73 $ 2,824 $ 14,516 $ 50,640 $ 69,172 15 Maximum charge charge per customer $ 6,000 $ 6,000 $ 6,000 16 Cumulative Costs $ 322,500 $ 30,000 $ 36,000 17 Amount to be redistributed $ 1,059,954 $ 457,724 $ 223,198 $ 379,032 18 Additional redistribution $ 1,059,954 $ 657,353 $ 118,928 $ 102,053 $ 128,155 $ 53,465 19 Cumulative Costs $ 4,667,363 $ 844,418 $ 724,604 $ 909,929 $ 379,611 $ 322,500 $ 30,000 $ 36,000 20 Annual Cost per Cust $ 17.97 $ 39.75 $ 250.38 $ 1,186.89 $ 3,287 $ 6,000 $ 6,000 $ 6,000 21 Proposed Monthly Surcharge $ 1.50 $ 3.31 $ 20.87 $ 98.91 $ 273.89 $ 500.00 $ 500.00 $ 500.00
M.P.S.C. - No. 1 Gas Case No: U-20115 SEMCO ENERGY GAS COMPANY Witness: Steven McLean (Case No. U-20115) Exhibit: A-11 (SQM-11) Page: 1 of 1 Continued From Sheet No. C-36.00 RIDER MRP MAIN REPLACEMENT PROGRAM RIDER APPLICABILITY Applicable to all customers receiving service under the Company s sales and transportation rate schedules and Special Contract Customers. MAIN REPLACEMENT PROGRAM (MRP) This MRP Rider as approved by the MPSC recovers the cost of the MRP not included in SEMCO s base rates. These projects included pipeline replacements and related costs. By having this surcharge in place, SEMCO recovers over time the costs associated with these replacement projects, which should reduce the frequency of expensive general rate cases in the future. All customers receiving service under Rate Schedules Residential, GS-1, GS-2, GS-3, TR-1, TR-2, TR-3 and Special Contract shall be assessed a monthly charge in addition to the Customer Charge component of their applicable rate which will enable the Company to begin and complete their cast iron/unprotected steel/ vintage plastic (pre 1978) MRP. The company can bill this surcharge to all of its customers monthly. The program will be reviewed annually, in order to reflect the impact on the Company s revenue requirements of net plant additions as offset by the operation and maintenance expense reductions during the most recent twelve months ended December 31 of each calendar year. This Rider surcharge will become effective with the first billing cycle of June 2015, and will reflect the allocation of the required revenue increase needed based upon the main allocation factor of average and peak and the number of customers per rate group as defined and approved in the Company s last rate proceeding. The Rider MRP charge will be implemented on a bill rendered basis beginning in June 2015. The charge for the specific Rate Schedule is: Customer Class Per Customer Meter Residential $1.50/month GS-1 General Service $3.31/month GS-2 General Service $20.87/month GS-3 General Service $98.91/month TR-1 Small Volume Transportation $273.89/month TR-2 Large Volume Transportation $500.00/month TR-3 Extra Large Volume Transportation $500.00/month Special Contract $500.00/month Rider MRP surcharges will continue until the earlier of either: (i) base rates are established in a future contested case addressing the MRP through self-implementation or Commission Order, or (ii) May 30, 2020. Effective for bills rendered on Colleen Starring and after. Issued under President authority of the Michigan Public Service Port Huron, MI Commission dated in Case No. U-20115.
STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter on the Commission s own ) motion, to consider changes in the rates ) of all the Michigan rate-regulated ) electric, steam and natural gas utilities ) Case No. U-20115 to reflect the effects of the federal Tax ) Cuts and Jobs Act of 2017: ) SEMCO ENERGY GAS COMPANY ) files an application for determination of Credit A ) as described in order U-18494. ) STATE OF MICHIGAN ) ) ss COUNTY OF INGHAM ) PROOF SERVICE Crystal L. Chacon, being first duly sworn, deposes and says that on April 20, 2018 she served a copy of the Supplemental Direct Testimony and Exhibits of Steven Q. McLean on behalf of SEMCO Energy Gas Company on the parties listed on the attached service list via electronic mail Subscribed and sworn before me on this 20 th day of April, 2018. Crystal L. Chacon Jennifer Joy Yocum, Notary Public State of Michigan, Ingham County My Commission Expires: December 17, 2018
SERVICE LIST Administrative Law Judge Honorable Sharon L. Feldman Michigan Public Service Commission 7109 W. Saginaw Highway, 3rd Floor Lansing, MI 48917 feldmans@michigan.gov Michigan Public Service Commission Staff Heather M.S. Durian Michigan Public Service Commission 7109 W. Saginaw Highway, 3rd Floor Lansing, MI 48917 durianh@michigan.gov Association of Businesses Advocating Tariff Equity Bryan A. Brandenburg Clark Hill PLC 212 E. Cesar E. Chavez Avenue Lansing, MI 48906 bbrandenburg@clarkhill.com Michigan Attorney General Bill Schuette John A. Janiszewski Michigan Department of Attorney General Assistant Attorney General Special Litigation Division P.O. Box 30755 Lansing, MI 48909 janiszewskij2@michigan.gov 31315113.1\129584-00106