S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter of the application of DTE Gas ) Company for authority to increase its ) Case No. Main Replacement Program spending ) and increase the IRM surcharge ) NOTICE OF PROPOSAL FOR DECISION The attached Proposal for Decision is being issued and served on all parties of record in the above matter on August 17, 2015. Exceptions, if any, must be filed with the Michigan Public Service Commission, 7109 West Saginaw, Lansing, Michigan 48917, and served on all other parties of record on or before September 3, 2015, or within such further period as may be authorized for filing exceptions. If exceptions are filed, replies thereto may be filed on or before September 17, 2015. The Commission has selected this case for participation in its Paperless Electronic Filings Program. No paper documents will be required to be filed in this case. At the expiration of the period for filing exceptions, an Order of the Commission will be issued in conformity with the attached Proposal for Decision and will become effective unless exceptions are filed seasonably or unless the Proposal for Decision is reviewed by action of the Commission. To be seasonably filed, exceptions must reach the Commission on or before the date they are due.
MICHIGAN ADMINISTRATIVE HEARING SYSTEM For the Michigan Public Service Commission Sharon L. Feldman Administrative Law Judge August 17, 2015 Lansing, Michigan
S T A T E O F M I C H I G A N MICHIGAN ADMINISTRATIVE HEARING SYSTEM FOR THE MICHIGAN PUBLIC SERVICE COMMISSION * * * * * In the matter of the application of DTE Gas ) Company for authority to increase its ) Case No. Main Replacement Program spending ) and increase the IRM surcharge ) PROPOSAL FOR DECISION I. PROCEDURAL HISTORY On November 12, 2014, DTE Gas Company filed an application seeking permission to increase the size of its Main Replacement Program (MRP) originally approved in Case No. U-16407 and expanded in Case No. U-16996. DTE Gas s application proposes to increase spending under the program by $46.9 million per year in 2016 and 2017, and to increase the Infrastructure Recovery Mechanism (IRM) surcharge correspondingly. DTE Gas s application was accompanied by the testimony of three witnesses, along with supporting exhibits. DTE Gas, Staff, the Attorney General, and the Association of Businesses Advocating Tariff Equity attended the January 13, 2015 prehearing conference; at the prehearing, the petitions to intervene were granted and a consensus schedule was established. Following the established schedule, on April 10, 2015, Staff filed the
testimony and exhibits of two witnesses; on May 8, 2015, DTE Gas filed the rebuttal testimony of each of its three witnesses. At the June 3, 2015 evidentiary hearing, the testimony of all witnesses was bound into the record by agreement of the parties, without the need for the witnesses to appear, and all proffered exhibits were admitted into evidence. DTE Gas, Staff, and ABATE filed briefs on June 22, 2015; DTE Gas and Staff filed reply briefs on July 8, 2015. 1 II. OVERVIEW OF THE RECORD The evidentiary record is contained in 93 transcript pages and 20 exhibits. 2 This section reviews the evidentiary record, beginning with the direct presentations of DTE Gas and Staff, then turning to the rebuttal testimony. A. DTE Gas Joi M. Harris is Vice President, Gas Operations for DTE Gas. Her educational background includes an undergraduate degree in industrial engineering as well as an M.B.A. She testified to explain the company s proposed additional $46.9 million annual expenditure. 3 Her Exhibit A-1 details the 2013-2015 approved spending and 2016-2017 proposed spending for all infrastructure programs covered by the IRM, including the MRP as well as the meter relocation and pipeline integrity programs. Ms. Harris reviewed the origins of the program in the Commission s June 3, 2010 order in 1 By agreement of the parties, the briefing deadlines were extended by one week from those set at the prehearing conference. 2 Transcript references to the testimony contained in this PFD are to volume 2 unless otherwise specified. 3 Ms. Harris s testimony, including her rebuttal testimony, is transcribed at Tr 18-47. Page 2
Case No. U-15985, further explaining that the initial focus of the MRP first approved in Case No. U-16407 was on southeast Michigan, where the majority of DTE Gas s cast iron and unprotected steel mains are located. Her Exhibit A-2 shows actual MRP spending over the 2011-2013 timeframe. Ms. Harris testified that at the pace originally approved, DTE Gas would retire all its cast iron and unprotected steel main in approximately 133 years, while at the expenditure level approved in Case No. U-16999, DTE Gas could increase the pace of replacement to approximately 60 years. Ms. Harris testified that DTE Gas is proposing a further expansion of the program because: 1) it has gained substantial operational experience; 2) the work to date has reduced leaks compared to historical levels; 3) an increased pace of replacement will reduce the risk of a major leak; 4) currently-low gas prices help mitigate the costs to ratepayers of the program expansion; and 5) the proposed replacement plan will put DTE Gas on a 25-30 year replacement pace, allowing the company to better keep up with its industry peers. 4 Ms. Harris also testified that the unreplaced main is deteriorating at a faster pace than initially projected. 5 Due to this deterioration, she testified that she does not expect the increased expenditures will reduce the projected leak levels until after 2017. 6 Ms. Harris testified regarding the additional resources that will be required to complete the additional work, including additional company and contractor employees as shown in her Exhibit A-3. Ms. Harris testified that the company s proposed additional spending should allow 57 additional miles of main replacement annually in 2016 and 2017, for an annual total of 123 miles, as shown in Exhibit A-4. Ms. Harris also testified 4 See Tr 26-27. 5 See Tr 28. 6 See Tr 32. Page 3
that in increasing the size of the program as proposed, DTE Gas expects to achieve cost savings of 5-7% by using the Modified Grid Approach discussed in Ms. Sandberg s testimony; she testified that she reflected these savings in her Exhibit A-4. Ms. Harris summarized four benefits from DTE Gas s plan as follows: The benefits remain the same as put forth in Case No. U-16407 which approved the original MRP. Specifically, the proposed MRP provides: 1) A systematic, accelerated replacement and retirement of the poorest performing, unprotected mains within DTE Gas s distribution system that will more quickly stabilize distribution system deterioration, thus reducing the threat of a major failure; 2) An improvement in the overall safety and reliability of DTE Gas s distribution system at a level that is affordable to our customer base and the Company; 3) A stabilization of DTE Gas s leak rate allowing existing resources to better manage the leak inventory, minimizing the number of leaks that remain unrepaired in the distribution system; and 4) A reduction in the number of customer reported leaks which should increase customer satisfaction with DTE Gas s natural gas service. 7 And Ms. Harris testified that under the company s proposal, the surcharge will continue to be calculated in the same manner, and DTE Gas will have the same spending flexibility as approved in Case No. U-16999, noting that DTE Gas will be able to increase or decrease expenses by $2.5 million per year, subject to a $124.3 million cap for 2016 and 2017. She also testified that the reporting requirements adopted in Case No. U-16999 will continue to be followed. Alida D. Sandberg is Director of Engineering Services for DTE Gas. Her educational background includes an undergraduate degree in bioengineering as well as 7 See Tr 32-33. Page 4
an M.B.A. 8 Ms. Sandberg testified that DTE Gas currently has 4088 miles of unprotected main and identified the criteria DTE Gas uses to determine when this main needs to be replaced. She testified that DTE Gas has a Main Replacement Prioritization computer program that predicts leak rates for each pipe segment, and a Distribution Integrity Management Program (DIMP) risk model program to assess the potential impact of a leak, and this information is combined into an overall risk score used to identify segment and grid system renewal candidates. 9 She contrasted segment main renewals with grid system main renewals, explaining that segment main renewals replace short segments of main identified as the poorest performing based on risk scoring, while grid system main renewals focus on an area of poorer performing pipe to take advantage of efficiencies, address specific operating issues, and consider the potential for using a higher operating pressure. 10 She also explained the Modified Grid Approach (MGA) DTE Gas proposes to use for main renewals with the increased funding sought in this case: Rather than choosing a variety of different, smaller grids for replacement of cast iron and other unprotected mains and connecting them into piping that will require future replacement, the MGA takes a more comprehensive total system approach that focuses on the replacement of the low pressure distribution system and all the poorer performing, unprotected mains within the system. The MGA focuses on replacing the entire lower pressure distribution systems with a new 60 psig plastic system starting in one area and working into the next adjacent area that predominately consists of cast iron and unprotected steel mains. This method allows for smaller diameter pipe to be installed, minimizes connections to the existing system, reduces the number of complex connections, and eliminates returning to the same areas when the risk ranking of mains in the immediate area increase to the point they must be renewed. The MGA also addresses the larger diameter unprotected mains that transfer gas to numerous district regulators supplying these systems. A strategic 8 Ms. Sandberg s testimony, including her rebuttal testimony, is transcribed at Tr 48-60. 9 See Tr 52. 10 See Tr 52-53. Page 5
replacement strategy for the large diameter transfer mains is important because the current grid system renewals merely replace mains with protected mains that are similar to those in the existing system. The MGA considers a comprehensive total system approach to economically and efficiently address the corresponding larger transfer mains in the same construction process. The capital cost savings from MGA translate into more main renewal mileage each year for the same level of investment. 11 She identified additional benefits from improved system reliability, improved operating flexibility, and greater flexibility for system growth. And she explained that DTE Gas has spent significant time evaluating what areas of its system would be the best candidates for the MGA method, and has determined to concentrate its efforts in southeastern Michigan, while using the current grid approach in central Michigan. 12 In support of DTE Gas s proposed expansion, she also testified that DTE Gas s progress in removing unprotected main from its system has not yet stabilized the number of annual new leaks on the system, further testifying that the quicker the entire cast iron and unprotected steel system is replaced, the sooner the level of main leaks can be stabilized and then reduced. 13 Margaret A. Suchta is Principal Financial Analysis in the Revenue Requirement Department of the Regulatory Affairs Organization of DTE Energy Corporate Services. Her educational background includes an undergraduate degree in business administration as well as an M.B.A. The purpose of her testimony was to provide the calculations of the incremental revenue requirement associated with the $46.9 million annual expansion, and the corresponding increases in the monthly IRM surcharges. 14 Her Exhibit A-5 presents the incremental revenue requirement calculation, including 11 See Tr 54-55. 12 See Tr 56. 13 See Tr 53. 14 Ms. Suchta s testimony, including her rebuttal testimony, is transcribed at Tr 61-70. Page 6
return on ratebase, depreciation and property taxes to determine a total cost of service requirement. She testified that she used the depreciation rate approved in Case No. U-16769 and a pre-tax rate of return of 11.79% based on the Commission s order in Case No. U-16999. Her Exhibit A-6 presents the IRM surcharge calculation separately for July 1, 2016 through June 30, 2017 and July 1, 2017 through June 30, 2018. She testified that she followed the same method of calculation used in Case No. U-16999. Her Exhibit A-7 is the proposed tariff sheet containing the revised surcharges. B. Staff Cynthia L. Creisher is a Public Utility Engineer in the Gas Operations Section of the Operations and Wholesale Markets Division of the MPSC. Her educational background includes an undergraduate degree in mechanical engineering. After describing the MRP approved in Case No. U-16407 and expanded per Case No. U-16999, Ms. Creisher testified regarding the safety requirements applicable to DTE Gas s system, including federal rules incorporated by reference in the Michigan Gas Safety Standards. She testified that although the rules do not require replacement of all higher-risk pipe within any specific time frame, Staff supports the replacement of such pipe through accelerated programs such as the one in place for DTE Gas. 15 She testified that the United States Department of Transportation and its Pipeline and Hazardous Materials Safety Administration also recommend such programs. Ms. Creisher presented Exhibit S-1 to support the continuing need for an accelerated program for DTE Gas, testifying that at the end of 2014, DTE Gas s system 15 Ms. Creisher s testimony is transcribed at Tr 73-86. Page 7
was second in the nation for its high volume of cast or wrought iron main. She also reviewed the expenditures and activities undertaken by DTE Gas since 2011, citing Exhibit A-2 and DTE Gas s annual performance report for 2014, Exhibit S-2. Ms. Creisher testified that DTE Gas did not meet its targets in 2011, the first year of the program, due to the timing of Commission approval and alignment of the resources to do the work. In each of the following years, however, DTE Gas exceeded its target miles. Reviewing the company s plans as presented by Ms. Sandberg and as shown in Exhibit A-4, Ms. Creisher testified that Staff generally supports the expansion of the MRP and the proposed Modified Grid Approach, provided the selection of project areas is based on a risk ranking. She testified that Staff has concerns that DTE Gas cannot realistically double the size of the program and ensure the quality and safety of the work. She also testified that Staff recommends that a doubling of the size of the program be reserved for consideration a general rate case. Ms. Creisher testified that Staff recommends a stepwise approach, proposing that capital expenses be increased from $46.9 million to $58.625 million in 2016; contingent on successful completion of the 2016 target expenditures and renewal mileage, 2017 spending levels would be increased to $70.350 million, with a corresponding increase in the target miles. If 2016 targets are not met, Staff would leave spending levels for 2016 at the $58.625 million level. She explained Staff s concerns: Staff recognizes that the MRP has increased in size and scope significantly since it was implemented in 2011 and that the Company has generally been able to meet the targets set for the program each year; however, DTE s proposed doubling of the size of its main replacement program in a single year raises Staff s concern that the Company will not be able to have adequate resources, particularly construction workforce Page 8
Page 9 employees or contractors, in place to complete the additional main replacement projects as proposed by the Company in this proceeding. Staff is also concerned that an attempt to drastically increase the size of the program in a short period will cause additional strain on the Company s resources already in place to complete work such as the Meter Move Out program or new customer attachments. Staff is aware of the effort and resources required to increase and maintain the replacement programs by other natural gas utilities, such as Consumers Energy, SEMCO Energy Gas Company, and Michigan Gas Utilities; there is a strain on the availability of qualified personnel to perform this type of work as a result of the recent focus on pipeline replacement and other infrastructure programs both inside and outside of Michigan. Staff s position is that the Company has not demonstrated its ability to acquire, train, and maintain the required resources to complete the work as proposed. 16 In formulating mileage targets for the increased spending, Staff recommends a 2016 target of 81 miles (below 2014 actuals) and a 2017 target of 95 miles if 2016 targets are achieved, as shown in Exhibit S-5. Based on Staff s cost review, Ms. Creisher also testified that DTE Gas s unit cost estimates for the Modified Grid Approach do not reflect a reduction over historical unit cost levels for the MRP program. She presented Exhibit S-4 to support this analysis. Finally, Ms. Creisher testified to Staff s recommended reporting and reconciliation requirements: Staff recommends that DTE include in the MRP annual performance reports as filed by March 31 of each year: the risk ranking for all projects completed; the amount of cathodically unprotected pipe replaced; the justification for any planned projects based on risk ranking that were not completed; the number of staff resources dedicated to the MRP; the estimated annual Operations and Maintenance savings for leak survey on mains and services, the leak repair on mains and services, cathodic protection, and lost and unaccounted for gas. Additionally, the performance report should include a summary of the miles replaced delineated by pipe type, data available on service lines broken down by material type consistent with Distribution Integrity Management Program ranking, and a summary of the MRP program total pipe replaced. Staff recommends that DTE include in the MRP annual planning report, as filed by October 31 of each year, the risk ranking for all projects planned and the amount of cathodically unprotected pipe to be replaced. For both the 16 See Tr 83-84.
planned and performance reports submitted, the risk ranked projects, risk ranked grid projects, and MGA projects should be reported separately. 17 And she recommended continuation of the annual reconciliation process for 2016 and 2017 expenditures. Nicholas M. Revere is the Manager of the Rates and Tariffs Section of the Regulated Energy Division of the MPSC. His educational background includes undergraduate degrees in political science and economics. He presented Staff s revised calculation of the increased revenue requirement and surcharges based on Ms. Creisher s recommendations. 18 His calculations are presented in the alternative for 2017, with Exhibits S-6 and S-7 based on the assumption that DTE Gas meets Staff s proposed capital spending and mileage targets and Exhibits S-8 and S-9 based on the assumption that DTE Gas does not meet those targets. Mr. Revere testified that his exhibits also retain the depreciation rate approved in Case No. U-15699, rather than the depreciation rates approved in Case No. U-16769, quoting the Commission s order May 15, 2013 order in Case No. U-16769 to the effect that depreciation rates approved in that later case would not take effect until a final order in DTE Gas s next rate case. C. Rebuttal Ms. Harris presented rebuttal testimony to address Staff s concerns regarding the company s ability to significantly expand the size of the MRP beginning in 2016, disputing that the spending or mileage targets proposed by DTE Gas should be reduced. She testified that DTE Gas has key steps and measures designed to ensure 17 See Tr 85-86. 18 Mr. Revere s testimony is transcribed at Tr 85-91. Page 10
that quality and safety are maintained, further testifying that the Modified Grid Approach provides inherent safety and quality improvements. She testified that DTE Gas will use four incremental contract inspectors and one additional construction supervisor beginning in 2015, with responsibilities for quality control activities including field audits and documentation. She also testified that DTE Gas will perform leak detection surveys after new main is installed. Ms. Harrison also noted that DTE Gas is not proposing an expansion of as many as 60-80 miles, as stated in Staff s testimony, but only 57 miles. 19 She testified that DTE Gas s 400% expansion of the program from 2011 to 2012 shows the company s capability, and additionally testified: The Company has three more years of experience in successfully managing a large capital project that has grown in size each year. During these three years, the Company has utilized its Continuous Improvement capabilities to implement several improvements including increasing the lead time for planning and design forward from 7 months in 2012 to a full 18 months ahead for the 2016 MRP. In addition, DTE Gas has awarded new three-year term contracts to two design firms to retain the necessary resources to complete the incremental pull ahead designs for 2016 and 2017 work. There have also been improvements made within the design process. Improvements include all designs and drawings being reviewed and approved by Engineering and Construction, lessening the possibility of field changes, saving valuable time and increasing productivity during construction. 20 Ms. Harris cited reports filed with the Commission since 2011, showing an increase from 28 to 103 internal employees dedicated to the gas renewal program activities. Ms. Harris reviewed the project management and scheduling improvements implemented since 2012, including weekly check-in meetings between DTE Gas and construction contractor personnel, and she reviewed DTE Gas s plans to hire and train an additional 19 See Tr 37. 20 See Tr 38. Page 11
24 full-time employees by October 2015. She also described the plans in place to recruit and train the new employees. Ms. Harris testified that DTE Gas has implemented a robust contracting strategy to ensure it will have adequate contractor resources in place, describing the company s 2014 RFP, and elements of its subsequent negotiations with potential contractors regarding those contractors other potential commitments and available resources over the pertinent time frame. She testified that by awarding three-year contracts, the company s strategy provides more stability than its historical one-year contract approach. She presented Exhibit A-8 to show DTE Gas s contractor resource allocation by region for both routine distribution and MRP work. She testified that DTE Gas s proposed expansion will not place a strain on its other construction activities including its meter relocation and new customer attachment programs. 21 Ms. Harris also testified that she opposes basing the project scope for a given level of expenditure on the average unit cost for main renewal over 2011-2014, contending that the variability in unit cost experienced historically makes cost-based projections unreliable. She testified that DTE Gas has experienced actual unit costs ranging from $137,523 per mile to $3,374,041 per mile over that time period. Further, she testified that DTE Gas would use any surplus funds from the spending targets to complete additional miles of main renewal work. 22 Ms. Harris also outlined the reporting DTE Gas would be willing to provide, agreeing to all Staff s requests except Staff s request that DTE Gas report lost and unaccounted for gas savings in each performance report. She cited testimony from 21 See Tr 43. 22 See Tr 44-45. Page 12
Case No. U-16999 to show that lost gas savings were not expected from the MRP since DTE Gas uses a five-year historical average to estimate lost and unaccounted for gas in keeping with traditional practice. 23 Ms. Sandberg s rebuttal testimony addressed Staff s testimony recommending the use of risk rankings to select grid or Modified Grid Approach projects. She reviewed her direct testimony that grid system renewals are targeted at poorer performing pipe while the Modified Grid Approach replaces the entire lower pressure distribution system with 60 psig plastic. She testified that risk ranking alone would not provide an adequate basis to select grid or MGA projects. She testified that grid system projects are based on risk ranking as well as consideration of operational issues such as water in the system, the availability of high-pressure mains, and area construction projects. 24 Modified Grid Approach projects are planned to begin with Grosse Pointe and Dearborn based on the availability of high pressure mains, higher leaks, denser population, and a greater concentration of unprotected main. She testified that DTE Gas still plans to renew 15 miles of the highest-risk main annually. 25 Ms. Suchta s rebuttal testimony addressed Mr. Revere s testimony regarding the appropriate depreciation rate to use for transmission main in the incremental revenue requirement and surcharge calculations. She testified that she agreed with Mr. Revere s recommendations to use the depreciation rate from Case No. U-15699, and she accordingly revised her calculations of the incremental revenue requirement and 23 See Tr 46-47. 24 See Tr 58-59. 25 See Tr 59-60. Page 13
monthly surcharge, as well as the proposed tariff sheet, as shown in Exhibits A-9, A-10 and A-11. 26 III. POSITIONS OF THE PARTIES In its initial brief, DTE Gas argues that the Commission has the legal authority to approve its revised MRP. DTE Gas traces the history of its MRP and IRM to the Commission s June 3, 2010 order in Case No. U-15985 directing DTE Gas to file a plan to renew its natural gas system and reduce the amount of cast iron, and to file a plan to move its meters to outside locations. DTE Gas then reviews subsequent Commission decisions in Case Nos. U-16407, U-16451, and U-16999. 27 DTE Gas also cites the Michigan Court of Appeals opinion affirming the Commission s order establishing the IRM in Case No. U-16999. 28 DTE Gas next argues that its proposed increase of $46.9 million annually in 2016 and 2017 capital expenditures is reasonable and prudent. DTE Gas argues that it reasonably estimates this additional expenditure will allow it to renew an additional 57 miles each year, for a program total renewal and retirement of 123 miles each year. In support of its cost estimates, DTE Gas cites Exhibit A-4, and argues that the unit and cost estimates are consistent with the cost assumptions presented in Case No. U-16407. Tracking Ms. Harris s testimony, DTE Gas identifies the following factors as supporting its request: the experience it has gained in two and a half years 26 See Tr 70. 27 See DTE Gas brief, pages 2-4. 28 See In re Application of Michigan Consolidated Gas Company to Increase Rates, unpublished opinion per curiam of the Court of Appeals, issued December 11, 2014 (Docket No. 316141). Page 14
operating the program; sizeable leaks still experienced on its distribution main and service lines; a modest impact on customer bills; and DTE Gas s significantly older infrastructure in comparison to its natural gas industry peers. DTE Gas argues that despite the successful implementation of the current MRP program, DTE Gas has not yet stabilized the number of new leaks on its system, due to cast iron and unprotected steel distribution main deteriorating a pace greater than originally forecast. DTE Gas addresses Staff s proposal, arguing that Staff is proposing to limit MRP expenditures to the average unit cost for 2013-14 main renewal, and further arguing that this position is not well founded because it does not consider the variability of unit costs over that time frame. DTE Gas argues that this cost variability requires it to maintain a large 30% contingency. Arguing that its Modified Grid Approach is more systematic and cost effective than previous methods approved by the Commission and used by the company, based on Ms. Sandberg s testimony, DTE Gas reviews the MGA parameters, and argues that capital cost savings from this program will translate into more main renewal mileage each year. DTE Gas also emphasizes that it will continue to use the Main Replacement Prioritization Program and DIMP risk model approved in prior cases. 29 DTE Gas addresses Staff s stated concern with the company s ability to increase the size of the program as proposed while maintaining safety and work quality, citing Ms. Harris s testimony explaining DTE Gas s capabilities and resources, including its contracting strategies. 30 DTE Gas s brief also indicates that it agrees reporting requirements under the program should include the elements requested by Staff, with 29 See DTE Gas brief, pages 10-12. 30 See DTE Gas brief, pages 12-15. Page 15
the exception of lost and unaccounted for gas, and it agrees otherwise to follow the same program mechanics, including spending caps and Commission review, as approved in Case No. U-16999. In its initial brief, Staff reviews the record evidence including Staff s recommendations as presented by Ms. Creisher. Staff emphasizes its concern with the proposed significant increase in the size of the MRP and associated spending, and argues that DTE Gas has not demonstrated its ability to acquire, train, and maintain the resources necessary to complete the work as proposed in its application. Staff argues in favor of its stepped approach as explained by Ms. Creisher. 31 Staff also argues DTE Gas should revise its spending and miles targets, taking issue with the company s claimed cost savings as presented in Exhibit A-4. Staff also recommends that the same reconciliation process that was adopted in Case No. U-16999 be adopted for expenditures approved in this case, and identifies the information it believes should be included in DTE Gas s annual performance reports. 32 Finally, Staff s brief reviews the surcharge calculations it recommends the Commission adopt, based on Mr. Revere s testimony, as set forth in Exhibits S-6 and S-7 if 2016 targets are met, and in Exhibits S-8 and S-9 if these targets are not met. In its initial brief, ABATE does not take issue with the propriety of DTE Gas s proposed increase in MRP expenditures, but argues that DTE Gas s proposal to implement an IRM through at least 2018 is illegal. Noting that DTE Gas s November 12, 2014 application in this cases was filed less than 6 months after the Commission s June 6, 2014 order in Case No. U-16999 approved DTE Gas s current 31 See Staff brief, page 3. 32 See Staff brief, pages 4-5. Page 16
IRM surcharges, ABATE argues that it has appealed the Commission s approval of the surcharges approved in that order, and the appeal is currently pending before the Michigan Supreme Court. Focusing on Exhibit A-11, ABATE argues that DTE Gas s proposal sets different rates for each year, through the period labeled 2017-beyond, based on expenditures planned far outside of a single 12-month future test period. ABATE characterizes DTE Gas s proposal as based on a 48-month consecutive test period to capture investments alleged to be made in future years. 33 ABATE argues that the IRM would act as an automatic adjustment clause in violation of MCL 460.6a(2), and would violate the 12-month future test year limit in MCL 460.6a(1). Regarding MCL 460.6a(2), ABATE argues that the procedures adopted in Case No. U-16999 do not meet the full and complete hearing requirement of that statutory section. Regarding MCL 460.6a(1), ABATE argues that the statutory amendment adopted in 2008 PA 286 reflects a change to the used and useful approach to ratemaking by allowing the Commission to reflect projected capital costs in rates, but limited to the statutorily-stated 12-month period. 34 Under ABATE s argument, the reconciliation provided for in Case No. U-16999 also demonstrates that the underlying rate increase is not permissible because there is no statutory authority for the reconciliation: Ordering a reconciliation without statutory authority should be giant red flat that the Commission is actually being asked to permit a rate increase which it ought not be allowing since the rate increase logically and fairly needs to be reconciled. Reconciliations are needed in the exceptional circumstances where a rate increase is authorized that cannot be precisely calculated initially and may result in an over-collection or undercollection. The Commission is generally NOT authorized to approve rates that have to be reconciled, and retroactive ratemaking is unlawful! 33 See ABATE brief, page 2. 34 See ABATE brief, pages 3-6. Page 17
Michigan Bell Telephone Co v PSC, 315 Mich 533; 24 NW2d 200 (1946). However, the Legislature knows how to authorize the Commission to approve expenses and then implement a reconciliation. See, for example, the statute authorizing a gas cost recovery plan and reconciliation. MCL 460.6h(12), et seq. There is no similar statutory grant of power to authorize an IRM in the first place, and a reconciliation of the IRM under the case law as cited above. 35 In its reply brief, DTE Gas addresses ABATE s arguments by citing the Michigan Court of Appeals opinion affirming the Commission s April 16, 2013 order in Case No. U-16999. 36 DTE Gas notes that ABATE s arguments are strictly legal, and argues that ABATE has raised no new arguments that were not addressed and rejected by the Court of Appeals. 37 Responding to Staff s arguments, DTE Gas argues that Staff s concerns are inaccurate, unfounded, or are adequately addressed by the MRP process already in place or planned for implementation in conjunction with the proposed expansion. DTE Gas cites Ms. Harris s testimony at Tr 29 in emphasizing that its proposal is to renew an additional 57 miles of pipeline in 2016 and 2017, not 60-80 miles, characterizing Ms. Creisher s testimony using the higher figures as erroneous. 38 DTE Gas further relies on Ms. Harris s rebuttal testimony to establish that DTE Gas is capable of increasing the number of miles as it has proposed. 39 DTE Gas also disputes that the additional resources proposed for the MRP would detract from its customer attachment and meter moveout programs, citing a robust contract strategy and dedicated internal company resources. 35 See ABATE brief, page 6. 36 See In re Application of Michigan Consolidated Gas Company to Increase Rates, unpublished opinion per curiam of the Court of Appeals, issued December 11, 2014 (Docket No. 316141). 37 See DTE Gas reply brief, pages 1-4. 38 See DTE Gas reply brief, page 5. 39 See DTE Gas reply brief, pages 5-7. Page 18
Page 19 Contending that Staff is also proposing to adjust target main renewal miles under the MRP based on DTE Gas s historical main renewal costs, DTE Gas argues that its data fully supports the target miles it has proposed in this case and no adjustments are warranted. DTE Gas cites data from 2011 to 2014 to show the variability of costs, and testimony from Case No. U-16407 presenting a 30% contingency allowance in the cost projections to account for that variability. Also citing Exhibit A-1 from Case No. U-16407, DTE Gas argues that it is clear that the Commission also permitted DTE Gas to use any unspent portion of the 30% contingency allowance to complete additional miles of main renewal work. 40 In its reply brief, Staff emphasizes its concern that DTE Gas s Modified Grid Approach proposal does not target the highest-risk main segments. Staff cites the 30 miles of remediation included in the MRP approved in Case No. U-16407, with 15 miles of highest-risk pipeline to be replaced and another 15 miles retired. Staff responds to DTE Gas s claim that it has gained two-and-a-half years experience since the initial approval of the MRP by arguing that DTE Gas has only operated the MRP program at the $46.9 million level for one year, with 2015 to become the second year, characterizing this as limited experience at the level of capital investment that DTE Gas is now seeking to double. Referencing Exhibit A-6, Staff also argues that surcharges that appear modest at current gas price levels have not been shown to be affordable if gas prices increase. Regarding DTE Gas s argument that the MRP program has not yet stabilized the number of leaks on its system, Staff argues that DTE Gas has not shown that it has a handle on the causes of the new leaks or an explanation for why they are occurring at a higher rate than anticipated. Staff posits, for example, that colder-than- 40 See DTE Gas reply brief, page 8.
normal weather could have contributed to increases in the number of leaks, and notes that DTE Gas has not considered this. 41 Staff acknowledges Ms. Harris s rebuttal testimony at 2 Tr 40-44 explaining DTE Gas s expansion and plans for further expansion of the program, but argues that Staff s stepped approach will allow the Commission to review the effectiveness of the remedial program. 42 Further, Staff characterizes DTE Gas s planned Modified Grid Approach as a significant change in the existing methodology, appropriate for a trial followed by meaningful Commission review. 43 Staff s reply brief also takes issue with the characterization of Staff s proposal in DTE Gas s initial brief. Staff disputes that it is recommending the use of 2013-2014 historical average unit cost as a limit on MRP expenditures. Staff instead clarifies that its recommendation is that DTE Gas reassess its targeted miles based on the performance statistics showing that it has performed better than initially assumed, citing Exhibit S-4 and Ms. Creisher s testimony at 2 Tr 84. 44 Addressing ABATE s arguments, Staff responds that the Commission has already determined it has the authority to approve an IRM, and this decision has been affirmed by the Court of Appeals, which remains the law pending any review by the Michigan Supreme Court. 41 See Staff reply brief, pages 2-3. 42 See Staff brief, pages 3-4. 43 See Staff reply brief, pages 4-5. 44 See Staff reply brief, pages 5-6. Page 20
IV. DISCUSSION The parties agree that the genesis of DTE Gas s Main Replacement Program (MRP) was the Commission s June 3, 2010 order in then-michigan Consolidated Gas Company s rate case, Case No. U-15985. In that case, the Commission directed the company to file in a new docket an application for a detailed plan for main renewal, including a long-term plan to significantly reduce the amount of cast iron main in its system. 45 DTE Gas made the required filing in Case No. U-16407. In reviewing the company s 10-year plan to remediate approximately 300 miles of unprotected main at a proposed annual expenditure of $17.1 million, the Commission found that the plan satisfied its directives and should begin immediately, and the Commission established reporting requirements. The Commission also indicated that surcharges to fund the program needed to be evaluated in the context of a general rate case. 46 In its next rate case, Case No. U-16999, DTE Gas requested a surcharge (the Infrastructure Recovery Mechanism or IRM) to fund the MRP, as well as the company s meter relocation and pipeline integrity programs. DTE Gas also requested an expansion of the MRP mileage and spending plan, proposing to spend a total of $46.9 million per year for the remaining plan period, beginning in 2013, and to remediate approximately 66 miles annually. In its April 16, 2013 order in that rate case, the Commission approved DTE Gas s MRP proposal, and approved an IRM with surcharges that increase annually through 2017. The Commission provided for annual reconciliation proceedings following the company s annual performance reports, with 45 See June 3, 2010 order, Case No. U-25985, page 104. 46 See September 13, 2011 order, Case No. U-16407, page 8. Page 21
the proceedings limited to a review of the work performed, including an assessment of the appropriateness of the costs assigned to the component programs, and consideration of a downward adjustment to the surcharge in the event of underspending on those component programs. Against this background, the parties raise essentially two different issues for resolution. ABATE s legal argument that the Commission lacks authority to grant DTE Gas s application is discussed in section A. The dispute between DTE Gas and Staff regarding the appropriate scope of the MRP expansion is discussed in section B. A. Commission Authority Turning first to ABATE s argument that the Commission lacks the authority to approve the IRM and thus to approve any increase to the IRM, the Commission s April 16, 2013 order discussed its authority extensively in response to the same arguments raised by ABATE and the Attorney General. The Commission expressly found that it had authority to adopt the program, including the IRM. 47 As the parties all recognize, the Commission s order was affirmed by the Court of Appeals. In its December 11, 2014 opinion, the Court of Appeals addressed the same arguments ABATE now raises, explaining the Court s holding affirming the Commission as follows: On appeal, appellants ABATE and the Attorney General argue that the PSC has only that authority granted to it by the Legislature, and that the implementation of an IRM is not authorized by any statute. Appellants assert that the PSC must use the traditional ratemaking process, including the consecutive 12-month test year required by MCL 460.6a(1), to permit Mich Con to recover capital expenditures for the MMO, the MRP, and the PI programs. The PSC did not do so; therefore, its order is unlawful. We disagree. 47 See April 16, 2013 order, pages 22-24. Page 22
MCL 460.6a(1) provides in pertinent part: A gas or electric utility shall not increase its rates and charges or alter, change, or amend any rate or rate schedules, the effect of which will be to increase the cost of services to its customers, without first receiving commission approval as provided in this section. The utility shall place in evidence facts relied upon to support the utility s petition or application to increase its rates and charges, or to alter, change, or amend any rate or rate schedules. The commission shall require notice to be given to all interested parties within the service area to be affected, and all interested parties shall have a reasonable opportunity for a full and complete hearing. A utility may use projected costs and revenues for a future consecutive 12-month period in developing its requested rates and charges. This statute gives the PSC broad authority to regulate rates for public utilities. This authority does not include the power to make management decisions for a public utility. Consumers Power Co v Pub Serv Comm, 460 Mich 148, 157-158; 596 NW2d 126 (1999); Union Carbide Corp v Pub Serv Comm, 431 Mich 135, 148-150; 428 NW2d 322 (1988). These cases do not stand for the proposition that the PSC lacks discretion to approve a cost recovery mechanism absent statutory authority for the creation of that specific mechanism. See, e.g.,great Wolf Lodge v Pub Serv Comm, 489 Mich 27, 42-43; 799 NW2d 155 (2011) (authority to award interest not authorized by statute, but lawful under MCL 460.6(1)). The PSC is not required to use any particular formula when setting rates. Residential Ratepayer Consortium v Pub Serv Comm, 239 Mich App 1, 6; 607 NW2d 391 (1999). We have repeatedly approved the use of a tracker mechanism, i.e., a mechanism that adjusts future rates in light of actual past costs. See In re Applications of Detroit Edison Co, 296 Mich App 101, 112-114; 817 NW2d 630 (2012) (and cases cited therein). The IRM is such a tracker mechanism. The IRM is designed to allow Mich Con to recover capital expenditures made for the MMO, the MRP, and the PI programs. We hold that the PSC did not err by approving the IRM, and that the PSC s order is not unlawful or unreasonable in this regard. Next, ABATE argues that the IRM violates MCL 460.6a(2) and constitutes an unlawful adjustment clause because it does not provide for a full and complete hearing prior to an adjustment in the rates. We disagree. MCL 460.6a(2) provides in pertinent part: Page 23
(2) The commission shall adopt rules and procedures for the filing, investigation, and hearing of petitions or applications to increase or decrease utility rates and charges as the commission finds necessary or appropriate to enable it to reach a final decision with respect to petitions or applications within a period of 12 months from the filing of the complete petitions or applications. The commission shall not authorize or approve adjustment clauses that operate without notice and an opportunity for a full and complete hearing, and all such clauses shall be abolished.... As used in this section: (a) Full and complete hearing means a hearing that provides interested parties a reasonable opportunity to present and crossexamine evidence and present arguments relevant to the specific element or elements of the request that are the subject of the hearing. The PSC acknowledged that if rate adjustments occurred outside the context of a general rate case, caution was required so that MCL 460.6a(2) was not violated. The PSC found that there was no statutory requirement that a hearing under MCL 460.6a(2) must be held if a rate could only be adjusted downward. Nevertheless, the PSC ordered that an annual hearing be held to examine Mich Con s report on its work during the previous year. The amount of the IRM surcharge for the 2013 test year and beyond was established during the contested case hearing. These surcharges cannot increase, but the surcharges can decrease if Mich Con spends less than the sum anticipated on the MMO, the MRP, and the PI programs. ABATE contends that the full and complete hearing required by MCL 460.6a(2) is essentially a contested case hearing like that defined in MCL 24.203(3). ABATE asserts that the type of proceeding ordered by the PSC does not allow parties to cross-examine the evidence or present argument relevant to the specific element or elements of the request that is the subject of the hearing, all in violation of MCL 460.6a(2). However, the annual hearing ordered by the PSC must include notice and the filing of a report by Mich Con. The hearing as described by the PSC would be limited to reviewing the work performed, including an assessment of the appropriateness of the costs assigned to the various IRM programs, and recommending any downward adjustment to the surcharge in the event the company underspends on the various gas safety programs. This description of the hearing required by the PSC order affords the parties the opportunity to cross-examine the evidence, i.e., Mich Con s report detailing the work performed in the various programs, to argue whether Mich Con s spending on that work was appropriate, and to argue for or Page 24
against a downward adjustment to the IRM surcharge. Thus the hearing process set out by the PSC meets the definition of a full and complete hearing in MCL 460.6a(2)(a). 48 While at the time ABATE filed its brief in this case its application for leave to appeal was pending before the Michigan Supreme Court, on July 28, 2015, the Michigan Supreme Court denied ABATE s application for leave to appeal. 49 On this basis, this PFD recognizes that the Commission s order in Case No. U-16999 has been affirmed on appeal, and the Commission thus has clear authority to implement an IRM, and correspondingly the authority to revise the IRM following due notice and a contested case hearing. Due notice was provided and all parties were given the opportunity to present evidence regarding the reasonableness and prudence of DTE Gas s proposal. As ABATE s brief acknowledges, it does not take a position on the reasonableness and prudence of DTE Gas s proposed MRP spending. 50 B. MRP funding The remaining dispute requiring resolution is the difference in the scope of program as advocated by DTE Gas and by Staff. DTE Gas seeks to double the MRP expenditures from their currently approved level. Staff instead recommends that the Commission approve only a 25% increase over the currently approved level beginning in 2016, and a 50% increase over the currently approved level beginning in 2017 if DTE Gas meets the target spending and 48 See In re Application of Michigan Consolidated Gas Company to Increase Rates, unpublished opinion per curiam of the Court of Appeals, issued December 11, 2014 (Docket No. 316141), pages 5-7 (footnotes omitted). 49 See In re Application of Michigan Consolidated Gas Company to Increase Rates, unpublished opinion per curiam of the Court of Appeals, issued December 11, 2014 (Docket No. 316141), lv den Mich (2015). 50 See ABATE brief, page 1 ( ABATE will not at this time, in this Initial Brief, comment on the propriety of the revisions to the MRP nor the increase in expenditures, and will leave such comments, if any, to ABATE s Reply Brief in this proceeding. ) Page 25
miles for 2016. The 2016 review and contested case hearing would determine whether the targets were met. As described by Ms. Creisher and in Staff s briefs, Staff s concerns include whether DTE Gas can realistically increase its spending to the level it has proposed, whether DTE Gas has reasonably assessed the amount of remediation it can accomplish for the proposed level of expenditure, the extent to which its Modified Grid Approach method will remediate high-risk pipeline, and whether such level of expansion should be considered in a general rate case. These concerns, Staff argues, support its stepped approach. DTE Gas views Staff s concerns as unfounded. As described above, DTE Gas s witness Ms. Harris, on rebuttal, provided substantial detail to explain how DTE Gas can meet its proposed mileage targets without other programs suffering. She reviewed in substantial detail DTE Gas s planned contracting and worker training. Although this rebuttal testimony is persuasive that DTE Gas has the ability to ramp up its program significantly, other issues raised by Staff support Staff s stepped approach. First, DTE Gas s program goals are presented in terms of both dollars of spending and miles of renewal or retirement. Staff s analysis shows that program costs on average over all years and in every program year have been below the cost estimates presented in Exhibit A-4. Staff s analysis in Exhibit S-4 shows a significant gap between DTE Gas s unit cost estimates, which use the 2011 estimates presented in Case No. U-16407 minus an adjustment for expected savings from the Modified Grid Approach, and DTE Gas s actual unit costs over the 2011 to 2014 time period. Citing the variability in per-mile remediation costs, Ms. Harris testified that DTE Gas s cost estimates as presented in Case No. U-16407 in 2011 include a 30% Page 26