STATE OF MICHIGAN DEPARTMENT OF ATTORNEY GENERAL P.O. BOX 30755 LANSING, MICHIGAN 48909 BILL SCHUETTE ATTORNEY GENERAL November 16, 2018 Ms. Kavita Kale Michigan Public Service Commission 7109 West Saginaw Highway Lansing, MI 48917 Dear Ms. Kale: Re: MPSC Case No. U-17941-R Enclosed for filing in the above-captioned case please find the Attorney General's Reply Brief, and related Proof of Service. This filing is being submitted electronically pursuant to the Commission s Paperless Electronic Filings Program. Sincerely, Joel B. King (P81270) Assistant Attorney General Special Litigation Division (517) 373-1123 cc: All Parties
STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of DTE Gas Company for a Gas Cost Recovery Reconciliation proceeding for the 12 months ending March 31, 2017. / MPSC Case No. U-17941-R ATTORNEY GENERAL S REPLY BRIEF Bill Schuette Attorney General Joel B. King (P81270) Assistant Attorney General Special Litigation Division 525 W. Ottawa Street P. O. Box 30755 Lansing, MI 48909 (517) 373-1123 KingJ38@michigan.gov Dated: November 16, 2018
TABLE OF CONTENTS Page INTRODUCTION... 1 LEGAL STANDARD OF REVIEW... 2 ARGUMENT... 5 I. The Attorney General continues to argue that the Commission should disallow park service costs attributable to customers other than GCR and GCC customers, an argument the Company agrees with in its initial brief. The AG disagrees with the Company s second argument on this point, which it brought up for the first time in its initial brief, and replies that the Commission cannot, in this proceeding, commit to those disallowed costs being recoverable in a future proceeding or otherwise make decisions about those expenses that are outside the scope of this GCR reconciliation... 5 II. The Attorney General disagrees with the Company s initial brief and continues to argue that the Commission should disallow $449,775 of costs pertaining to the ANR-Alpena transportation contract... 8 III.The Attorney General disagrees with the Company s initial brief and continues to argue that the Commission should disallow $348,285 relating to the amendment of a fixed price gas purchase agreement, regardless of whether the amendment ultimately resulted in customer savings.... 10 IV. The Attorney General agrees with the Company s argument in its initial brief that the AG s base gas recommendation is now a moot issue.... 12 V. The Attorney General disagrees with the Company s initial brief and continues to argue that the Commission should issue a directive to the Company to more adequately support its early month purchase practice on the GCR cost of gas.... 12 CONCLUSION AND RELIEF REQUESTED... 16 i
INTRODUCTION On June 28, 2017, DTE Gas Company ( DTE Gas, DTE, or the Company ) filed its application for approval of its Gas Cost Recovery (GCR) Reconciliation application for the 12 months ending March 31, 2017. Initial Briefs were filed on October 23, 2018 by the Attorney General (AG), Retail Energy Supply Association (RESA), MPSC Staff (Staff), and DTE. According to the schedule set in this matter by the Administrative Law Judge (ALJ), reply briefs are due on or before November 16, 2018. In his initial brief, the Attorney General raised five arguments regarding the Company s GCR Reconciliation proposal. 1 Over the course of its initial brief the Company addressed each of those five issues to a certain extent, and it is those sections of the Company s initial brief that the Attorney General would like to touch on in this reply brief. Specifically, the Attorney General: I. Continues to argue that the Commission should disallow park service costs attributable to customers other than GCR and GCC customers, an argument the Company agrees with in its initial brief. The AG disagrees with the Company s second argument on this point, which it brought up for the first time in its initial brief, and replies that the Commission cannot, in this proceeding, commit to those disallowed costs being recoverable in a future proceeding or otherwise make decisions about those expenses that are outside the scope of this GCR reconciliation. II. III. Disagrees with the Company s initial brief and continues to argue that the Commission should disallow $449,775 of costs pertaining to the ANR-Alpena transportation contract. Disagrees with the Company s initial brief and continues to argue that the Commission should disallow $348,285 relating to the 1 Attorney General s Initial Brief p. i. 1
amendment of a fixed price gas purchase agreement, regardless of whether the amendment ultimately resulted in customer savings. IV. Agrees with the Company s argument in its initial brief that the AG s base gas recommendation is now a moot issue. V. Disagrees with the Company s initial brief and continues to argue that the Commission should issue a directive to the Company to more adequately support its early month purchase practice on the GCR cost of gas. LEGAL STANDARD OF REVIEW Before addressing the substantive points of his argument, the Attorney General would like to clarify some of the points raised in the Company s initial brief in the standard of review section. 2 For the most part, the AG agrees with the Company s summary and discussion of the standard of review. However, there are several points where DTE s analysis and discussion either muddies or misstates the standard of review in a manner that is advantageous to the Company s position. For example, when discussing the standard of review that applies to GCR Reconciliations, the Company concludes that, unless the Commission disallowed certain portions of the gas utility s GCR plan, the presumption in the GCR reconciliation proceeding is that the Commission-approved GCR plan is reasonable and prudent and the costs incurred consistent with execution of the Commissionapproved GCR plan are recoverable. 3 The Company cites to MCL 460.6h(12) in support of this conclusion. That summary overstates the extent to which the 2 DTE Gas Initial Brief pp. 3-7. 3 Id. p. 5. 2
Commission must presume that the costs incurred during the year are recoverable, and inappropriately attempts to shift the burden to demonstrate that costs were reasonable and prudent from the Company to Staff and Intervenors. Approval of a GCR plan is not preapproval of actual costs. Utilities must still demonstrate that actual expenditures are reasonable and prudent. 4 While the GCR Plan does help to give guidance to all parties throughout the year and helps to give the Commission a solid framework in which to examine the Company s requested recovery, it is not true that any and all costs the Company incurs throughout the year that could conceivably fall within the language of the GCR Plan are recoverable. Rather, the Company still carries the burden of proving, by a preponderance of the evidence, that the costs it seeks recovery for were reasonably and prudently incurred. 5 The Company can use the GCR Plan to help it argue the prudence and reasonableness of costs, but there is no blanket presumption that those costs are recoverable. MCL 460.6h(12) does not support the Company s assertion in this instance. It simply provides an outline for the GCR reconciliation proceeding as a contested case and instructs the Commission to consider the reasonableness and prudence of expenses that could not have adequately been considered during the planning stage. This latter instruction permits the Commission latitude to consider the variety of expenses and issues that arise between the plan case and reconciliation case and how the utility dealt with those 4 MCL 460.6h(14) 5 MCL 460.6h(12) 3
issues. It does not shift the burden to show reasonableness and prudence from the Company to Staff and Intervenors. The Company also makes numerous other references to the burden of proof throughout its brief, that if followed by the Commission would inappropriately shift the burden from the Company to Staff and Intervenors. Throughout its initial brief, the Company states that the ALJ should find, and the Commission should determine, that the Company s decisions were reasonable and prudent and that its requested costs should be approved, simply because no party addressed or disputed that part of the Company s testimony. 6 Simply because the Company s testimony goes uncontested or unrebutted does not mean that the Company s position and/or request is reasonable and prudent and should be granted by the Commission. Such a conclusion would inappropriately shift the Company s burden to prove that requested expenses it incurred were reasonable and prudent squarely onto Staff and Intervenors. As mentioned in the AG s initial brief, utilities have the burden of proof by a preponderance of the evidence. 7 Moreover, the MPSC may disbelieve 6 See e.g., DTE Gas Initial Brief pp. 8, 11, and 13. For example, on page 11 of its initial brief the Company states, DTE Gas s actual system operations for the 2016-2017 GCR year are undisputed. Therefore, the ALJ should find, and the Commission should determine, that DTE Gas s actual system operations during the 2016-2017 GCR Year were reasonable and prudent. 7 In re Michigan Gas Utilities Co, MPSC Case No. U-7484, Opinion & Order dated 8-30-83, p. 10, and In re Detroit Edison Co, MPSC Case No. U-8030-R, Opinion & Order dated 7-9-87, pp. 16-17. 4
even uncontradicted evidence. 8 When the burden of proving a fact falls on one party, then the other party does not have the burden of proving the opposite fact. 9 The ALJ and the Commission should keep those tenets in mind when considering DTE s requests in this case. ARGUMENT I. The Attorney General continues to argue that the Commission should disallow park service costs attributable to customers other than GCR and GCC customers, an argument the Company agrees with in its initial brief. The AG disagrees with the Company s second argument on this point, which it brought up for the first time in its initial brief, and replies that the Commission cannot, in this proceeding, commit to those disallowed costs being recoverable in a future proceeding or otherwise make decisions about those expenses that are outside the scope of this GCR reconciliation. Through his expert s testimony and in his initial brief, the AG recommended that the Commission disallow $181,030 of park service costs attributable to customer groups other than GCR and GCC customers. 10 This issue was covered in DTE Gas previous GCR Reconciliation case, U-17691-R, and the facts and circumstances surrounding that issue have not changed. As mentioned in the AG s initial brief, the Commission s Order in U-17691-R agreed with the AG that the storage deliverability, inclusive of the park services at issue, benefitted all customers, and therefore the GCR and GCC customers should not be responsible for 8 Woodin v Durfee, 46 Mich 424, 427; 9 NW 457 (1881). Accord, Yonkus v McKay, 186 Mich 203, 211; 152 NW 1031 (1915), and Cuttle v Concordia Mut Fire Ins Co, 295 Mich 514,519; 295 NW 246 (1940). 9 S C Gary, Inc v Ford Motor Co, 92 Mich App 789, 803-804; 286 NW 2d 34 (1979). 10 Attorney General s Initial Brief pp. 5-12. 5
all of those costs. 11 The same reasoning and conclusions continue to apply in this case. In its initial brief, the Company agrees with the AG s recommended disallowance of $181,030 in this GCR reconciliation proceeding. 12 Based on the Company s agreement and the Commission s Order in U-17691-R, the AG recommends that the ALJ and the Commission disallow the $181,030 of third-party park service costs from this case. After agreeing in its initial brief with the AG s conclusion with regard to the $181,030, the Company goes on to request that the Commission rule that, despite the disallowance in this proceeding, the Company should not be precluded from seeking recovery for those costs. 13 The Company states, if the AG s recommended disallowance is intended to forever deny DTE Gas the opportunity to recover the $181,030 third party park service costs, then such recommendation would be unlawful. 14 However, the Company then fails to give any explanation for why such a recommendation would be unlawful. Instead, the Company discusses that the costs were incurred for the benefit of EUT and off system storage service customers and goes on to recommend that the Commission limit the disallowance to only this 11 MPSC Order Case No. U-17961-R, pp. 8-9. 12 DTE Gas Initial Brief p. 23. 13 Id. 14 Id. 6
case and not bar a future grant of regulatory accounting authority for recovery of the $181,030. 15 This request by the Company is inappropriate and is not something that the Commission can decide in the context of a GCR reconciliation proceeding. GCR reconciliation proceedings are used to determine the reasonableness and prudence of the Company s expenditures in the GCR context and the amounts collected pursuant to the gas cost recovery clause. 16 The Commission can require utilities to refund over-recoveries to customers 17 or authorize utilities to recover underrecoveries from customers. 18 However, the expenditures and amounts collected that the Commission can consider are only those that are deemed to be reasonable and prudent and within the GCR framework. 19 Those expenses and amounts collected outside of the GCR framework are not dealt with in a GCR reconciliation process, other than to exclude them from refund or recovery. Therefore, it would be inappropriate for the Commission to make a determination or conclusion about the future bar or grant of certain costs that are not properly within the scope of the GCR reconciliation proceeding. Accordingly, the Attorney General argues that DTE Gas recommendation that the Commission make a determination on a future grant of regulatory accounting authority of disallowed parking service costs is 15 Id. pp. 23-24. 16 MCL 460h (12). 17 MCL 460h (13). 18 MCL 460h (14). 19 MCL 460h (12)-(14). 7
inappropriate for this proceeding and requests that the Commission decline to follow the Company s request. II. The Attorney General disagrees with the Company s initial brief and continues to argue that the Commission should disallow $449,775 of costs pertaining to the ANR-Alpena transportation contract. Through his expert s testimony and in his initial brief, the AG recommended that the Commission disallow $449,775 of costs pertaining to the ANR-Alpena transportation contract. 20 In its initial brief, the Company disagrees with the AG s recommendation and makes conclusory statements that the Commission should reject the AG s proposed disallowances because the Company has shown by a preponderance of the evidence that the expenses at issue were reasonably and prudently incurred. 21 Again, just because DTE Gas states that certain expenses were reasonably and prudently incurred does not make it true. To support its assertion that the Commission should reject the AG s proposed disallowances, the Company cites to the Commission s Order in U-18999 and cites to Mr. Lawshe s direct testimony. 22 There is no new argument contained in those citations so the AG will not spend much time on those in this reply brief, but mostly rest on his initial brief. In the portion of the U-18999 Order cited by the Company, the Commission notes that the history and path of the expenses at issue here have become 20 Attorney General s Initial Brief pp. 12-16. 21 DTE Gas Initial Brief p. 24. 22 Id. pp. 24-27. 8
convoluted due to the nature of staggered cases and the reality of continuous new filings. 23 This is certainly true and has led to confusion over the classification and recovery of certain expenses while allowing DTE Gas to argue recovery through both base rates and the GCR mechanism, whichever is more advantageous to the Company at the time. 24 In DTE s initial brief, it is clear that the Company is attempting to engage in the retroactive ratemaking that the AG discussed in his initial brief. 25 The Company attempts to justify including this expense in the GCR reconciliation by stating that [a]ny incremental amount above and beyond the $2.9 million of ANR-Alpena costs in base rates are properly recovered through the GCR so long as they are supported by a preponderance of the evidence. 26 However, it is simply not true that these costs should be included in a GCR reconciliation proceeding. As descried in the AG s initial brief, these are O&M costs that the Company did not receive approval to recover through base rates. 27 The Company is now attempting to get a second bite at the apple and recover these costs through the GCR mechanism, despite the fact that the Company litigated this issue in Case Nos. U-17691 and U-17941 and the Commission determined that only the incremental 30,000 Dth/day of summer capacity of Contract #122065 should be 23 Id. p. 25. 24 See the history of this expense as laid out by the Commission in its U-18999 Order, which starts on the bottom of page 25 of DTE Gas Initial Brief in this case and continues onto page 26. 25 Attorney General s Initial Brief pp. 13-14. 26 DTE Gas Initial Brief pp. 26-27. 27 Attorney General s Initial Brief pp. 13-15. 9
included for cost recovery in the GCR mechanism, as opposed to the 50,000 Dth/day which the Company now asks recovery for. 28 It would be prohibited retroactive ratemaking for the Company to recover increases in O&M expenses previously established in base rates. Therefore, the AG recommends that the Commission disallow $449,775 of costs pertaining to the ANR- Alpena contract. In his initial brief, the AG also recommended that the Commission disallow an unsupported $96,175 discrepancy in the transportation cost detail for the ANR-Alpena contract #122065 for the month of May 2016. 29 Based on the information provided in Exhibit A-23 filed with Mr. Lawshe s rebuttal testimony, the Company provided sufficient information to support the previously unsupported amount of $96,175 and the AG withdraws this disallowance amount. Removing the $96,175 from the AG s original recommended disallowance of $545,950, the AG continues to recommend that the Commission disallow the $449,775 of O&M costs pertaining to the ANR-Alpena transportation contract. III. The Attorney General disagrees with the Company s initial brief and continues to argue that the Commission should disallow $348,285 relating to the amendment of a fixed price gas purchase agreement, regardless of whether the amendment ultimately resulted in customer savings. Through his expert s testimony and in his initial brief, the AG recommended that the Commission disallow $348,285 relating to an amendment to one of the 28 Id. p. 15. 29 Id. p. 16. 10
Company s fixed price gas purchase agreements. 30 In its initial brief, the Company cited to the testimony and rebuttal of Mr. Lawshe for support for its contention that the Commission should disregard the AG s recommendation because the Company s decision to amend its gas purchase agreement for a higher fixed price of gas actually saved GCR customers money. 31 Because the Company relies on its direct and rebuttal testimony in its initial brief, the AG primarily continues to rely on the analysis and conclusion in his initial brief. The Company made an imprudent decision in contracting for fixed-price gas supply to be transported on pipeline capacity that it knew or should have known would be expiring prior to the start of delivery of the contract gas supply. As a result of that decision, the Company unnecessarily increased the cost of GCR gas supply by $348,285. The Company s claim that it saved customer money in the amount of $248,498 is disingenuous, because it reduces the higher gas costs by the savings from not renewing the PEPL contract but does not take into consideration the higher pipeline transportation costs it had to pay ANR-SW to transport the gas to the Company s Michigan gate station. 32 The calculation performed by Mr. Coppola is the correct incremental cost incurred by GCR customers. 33 Therefore, the AG continues to argue that the Company s decision in this case was neither 30 Id. pp. 16-18. 31 DTE Gas Initial Brief pp. 27-28. 32 2T 153-54; see also Ex. AG-7. 33 2T 154. 11
reasonable nor prudent and cost ratepayers an extra $348,285, which the Commission should not allow the Company to recover. IV. The Attorney General agrees with the Company s argument in its initial brief that the AG s base gas recommendation is now a moot issue. In his initial brief, the Attorney General alleged that the Company had not confirmed the AG s conclusion and recommendation regarding specific accounting entries to Base Gas and their impact on the GCR cost of gas. 34 Due to that, the AG argued, the Commission should disallow any residual costs remaining in the GCR cost of gas for the 2016-2017 GCR period or in working gas inventory. 35 Upon further review of the Company s rebuttal testimony and after review of the Company s initial brief, the AG agrees with the Company that the requested confirmation of the AG s conclusion and recommendation in this area was provided by the Company in its rebuttal. 36 Based upon that conclusion, the AG agrees with the Company that this is no longer a controversy and is therefore a moot issue. V. The Attorney General disagrees with the Company s initial brief and continues to argue that the Commission should issue a directive to the Company to more adequately support its early month purchase practice on the GCR cost of gas. In his initial brief, the Attorney General discussed his concerns with the Company s practice of purchasing gas under fixed-price contracts only during the first week or so of the month, and typically only on a single day during that 34 Attorney General s Initial Brief pp. 18-20. 35 Id. p. 20. 36 2T 130. 12
timeframe. 37 The AG recommended that the Commission issue a directive to the Company to provide evidence to show that its practice of making fixed-price purchases on one or two days during only the first 10 days of the month does not result in higher gas costs to GCR customers. 38 As stated, the AG s concern is that this practice is highly unusual and fails to spread out the risk associated with largevolume gas purchases, leaving customers vulnerable to unnecessarily high prices. 39 In its initial brief, the Company recommends that the Commission reject the AG s recommendation because the AG has a poor understanding of the gas industry, and because DTE Gas VCA Program facilitates 75% of the Company s annual gas supply being purchased over 24 months in approximately 3% increments. 40 For the most part, in its initial brief the Company relies on its direct and rebuttal testimony to support its assertions, and therefore the AG continues to rely on his analysis and conclusions from his initial brief. It is true, as the Company says, that the AG has historically argued against the VCA Program. 41 This is because it has been and continues to be a bad system for customers, one that leads to higher prices paid by customers and an increased risk of market manipulation by natural gas supply counterparties. 42 Page 3 of Exhibit A-2 Revised provides 37 Attorney General s Initial Brief pp. 20-23. 38 Id. p. 23. 39 Id. pp. 20-23. 40 DTE Gas Initial Brief p. 29. 41 Id. 42 Attorney General s Initial Brief pp. 21-22. 13
corroborating evidence that for the 2016-2017 GCR year, the Company s VCA program increased customer gas costs by nearly $90 million over monthly market prices. The Company claims in its initial brief that the industry standard is to finalize gas purchases during bid week of the month, and so DTE Gas choice to do so is therefore reasonable. 43 In support of this being the industry standard the Company s initial brief cites back to Mr. Lawshe s rebuttal testimony, where he does make that statement but does not provide any evidence of its veracity. 44 Even assuming that it is the industry standard to make relevant gas purchases early in the month, that does not mean that the industry standard is to make those purchases only on one day. As noted in the AG s initial brief, typically the purchase volumes would be divided into at least two or three transactions to mitigate the risk of temporary price spikes in the gas futures market. 45 As discussed in the AG s initial brief, the Commission has previously issued a warning to DTE Gas (in Case No. U-16921) that the Company: should provide more substantial and detailed support in future GCR reconciliation proceedings confirming that the number, timing, and size of its monthly FPPs is, indeed, both reasonable and prudent. While the Commission does not extend this conclusion to directing the utility to spread its purchases over a particular number of days, the Commission agrees with the ALJ that there may be value to GCR customers in having purchases spread over more time. There will certainly be value to customers and parties in having a more 43 DTE Gas Initial Brief p. 29. 44 2T 68. 45 Attorney General s Initial Brief p. 20. 14
complete record to work with. The Commission finds the ALJ s recommendation to be sensible and evenhanded. 46 The Company has not adequately addressed the Commission s directive from U-16921 and has continued to make gas purchases in a manner that is more costly and riskier for customers. The Attorney General continues to recommend that the Commission issue a directive to the Company to provide evidence, beginning with its next GCR reconciliation proceeding, to show that its practice of making fixedprice purchases on one or two days during only the first 10 days of the month does not result in higher gas costs to GCR customers. The Commission should again warn the Company that, lacking such evidence, all or a portion of the fixed price transactions may be disallowed in future GCR cost recovery proceedings. 46 MPSC Case No. U-16921, Commission order of May 14, 2015, p. 8. 15
CONCLUSION AND RELIEF REQUESTED The Attorney General requests that the ALJ issue a proposal for decision that is consistent with the conclusions and recommendations presented in his Initial and Reply Brief, along with his filed direct testimony and exhibits of his witness in this case. Respectfully submitted, Bill Schuette Attorney General Joel B. King (P81270) Assistant Attorney General Special Litigation Division 525 W. Ottawa Street P. O. Box 30755 Lansing, MI 48909 (517) 373-1123 KingJ38@michigan.gov Dated: November 16, 2018 16
PROOF OF SERVICE - U-17941-R The undersigned certifies that a copy of the Attorney General s Reply Brief was served upon the parties listed below by e-mailing the same to them at their respective email addresses on the 16th of November 2018. MPSC Staff: Amit Singh singha9@michigan.gov ALJ: Hon. Jonathan Thoits thoitsj@michigan.gov Attorney General: Joel B. King Kingj38@michigan.gov ag-enra-spec-lit@michigan.gov Sebastian Coppola sebcoppola@corplytics.com DTE Energy Company: Andrea Hayden David Maquera Lauren Donofrio Andrea.hayden@dteenergy.com David.maquera@dteenergy.com Lauren.donofrio@dteenergy.com mpscfilings@dteenergy.com RESA: Jennifer Utter Heston jheston@fraserlawfirm.com Joel B. King