STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of Case No. U-20164 CONSUMERS ENERGY COMPANY (e-file paperless) for reconciliation of its 2017 demand response program costs. / I. Introduction MICHIGAN PUBLIC SERVICE COMMISSION STAFF S INITIAL BRIEF On May 31, 2019, Consumers Energy Company (Consumers or the Company) filed its application to reconcile its 2017 demand response (DR) program. The Company s filing in this DR reconciliation covered programming outcomes, costs, and a DR financial incentive mechanism (FIM). The Company chose only 2017 as its reconciliation period, and requests that the FIM apply for that year. On July 24, 2018, Administrative Law Judge (ALJ) Sally Wallace presided over a prehearing and granted intervention to the Natural Resources Defense Council (NRDC). All parties, including Staff, NRDC and the Company filed testimony and exhibits, in accordance with the scheduling order. On February 28, 2019, the parties conducted cross-examination, and all exhibits were entered into the record, which closed on the same date. In accordance with the scheduling order, Staff submits its initial brief. Although the Company s filed DR reconciliation meets the minimum requirements of the September 15 th Order in MPSC Case No. U-18369, Staff s three alternative proposals should be 1
approved by the Commission as explained below. In re, on the Commission s own motion, initiating a process to address demand response issues for regulated electric utilities, MPSC Case No. 18369, 9/15/2017. II. The Commission should reject the Company s: (1) proposed 1-year reconciliation period; (2) proposed overly generous and too soon financial incentive mechanism (FIM); and (3) the Company s filed request for a regulatory liability of $489,633, in favor of the Staff s three alternatives with respect to those items. In testimony, Staff witness Katie Smith addressed three primary issues in this case. The recommendations by Staff encompass: (1) a demand response (DR) reconciliation period of 3 years, based on a financial audit of that period; (2) a proposed alternative financial incentive mechanism (FIM) that is appropriate in scope and amount; and (3) a proposal that the Company recalculate its regulatory liability over a 3-year period accordingly. A. The one-year reconciliation period proposed by the Company is too short, given that the program dates 3 years back, and based on the audit results over that period. First, Staff takes issue with the improper brevity of the Company s proposed reconciliation period. In its testimony, Staff addressed that the Company filed a reconciliation for only the DR program year 2017. Although, this is typical of many reconciliations to cover a 1-year period, this is the first DR reconciliation and the Company has had a record of spending approved program funds on other capital projects and not achieving the Commission identified DR target program size for specifically approved DR capital projects in the past. Thus, Staff submits that it is most appropriate for the first DR program reconciliation to cover calendar years 2
2015-2017. The DR programs were first acknowledged and funded in 2015. (2 TR 88.) Staff firmly maintains that the reconciliation period be calendar years 2015-2017 for this first DR reconciliation. In 2015, the Company was approved to spend $5,185,833 in capital and $3,700,000 in Operation and Maintenance expenses (O&M) for the AC Peak Cycling program. (2 TR 88.) During the 2015 timeframe the Company spent less than $1,000,000 on its AC Peak Cycling program. In its 2016 general rate case U-17990, Order dated February 28, 2017, the Commission granted the Company an additional $4,892,000 in capital. In re Consumers Energy Company s 2016 General Rate Case, 2/28/2017 Order, p 40. The Commission also granted $1,845,667 in O&M to expand the AC Peak Cycling program. (2 TR 88.) The Company eventually spent approved amounts between 2016 and 2017, and unfortunately fell short in Megawatt savings, but did ramp up customer enrollment. The Commission provided additional guidance on allocation of DR funds in Consumers Energy Company s electric general rate case U-18322 for a 2018 test year, as quoted in Staff testimony in this case: Given the Commission s prior approvals, Consumers is expected to have at least 42 MWs of ratepayer-funded AC switch DR available by May 2018, to use as a substitute for more costly market energy. The Commission has been supportive of Consumers efforts to expand its DR portfolio, but after increasing funding levels in the past two rate cases, it is clear that results need to be demonstrated first before additional funding can be authorized. (2 TR 89.) 3
In light of this history, Staff believes it is most appropriate to reconcile calendar years 2015-2017 in this case to see if the results have been demonstrated. (2 TR 89.) Staff recommends the Commission direct the Company to recalculate its regulatory liability to include the entire program, spanning calendar years 2015 through 2017. Then, Staff can better evaluate the Company s reconciliation. The Company addressed the Staff s testimony on the reconciliation period in their rebuttal testimony. In Company witness Ennis argument he uses the Commission s September 15, 2017 Order in Case No. U-18369 initiating a threephase framework to address DR resources for regulated electric utilities. He quotes the Order, which stated the following, at pages 9 and 10: Rather than reconcile capital and O&M costs approved in IRPs and rate cases, respectively, until an IRP is approved by the Commission, there shall be annual, stand-alone reconciliation cases as explained by the Staff, that match actual spending on DR programs with the amounts approved in the previous general rate cases. This mechanism will apply to all ongoing and future rate case applications. (2 TR 33.) The Company makes the argument that the Commission s September 15 Order in Case No. U-18369 did not provide for a reconciliation period beginning with the start of a utility s DR program. (2 TR 33.) The September 15 Order clearly states that reconciliations should be used to match actual spending on DR programs with the amounts approved in the previous general rate cases. Nowhere in the Order did the Commission require the reconciliation period be only the previous year. Therefore, Staff requests that the reconciliation period, and, thus, the regulatory 4
liability discussed in greater detail at Section C. below, be for the full three years of the program (2015-2017), in order to address the entire period holistically. B. Staff proposes that the Commission reject the Company s FIM and adopt Staff s alternative FIM, to begin after program year 2017. Second, the Company requested a FIM for DR for program years 2017 and beyond, which fails in several respects. In testimony, Staff agreed that a FIM is an appropriate ask based on the Commission s Order of September 15 th in U-18369. In re, on the Commission s own motion, initiating a process to address demand response issues for regulated electric utilities, MPSC Case No. 18369, 9/15/2017, p 10. However, Staff does not agree that an incentive should be granted for program year 2017 because no FIM has been structured or approved. Staff also believes the Company s proposed FIM is far too generous and it does not promote aggressive, positive, and balanced actions by the Company to appropriately harness the benefits of DR. (2 TR 90.) 1) The Company s proposed FIM is both overgenerous and not calculated to achieve the desired results of the DR program. Company witness Miller discussed the Company s DR FIM proposal in his direct testimony. (2 TR 51.) A review of his testimony reveals that the Company s proposed FIM is overly generous. The FIM the Company is requesting is a two-part incentive that allegedly encourages the further development and implementation of DR resource and optimizes the use of the resource by allowing a return on the 5
payments used to prompt customer action to shift and shed load during peak system hours. Staff is concerned that this type of FIM could be problematic. For instance, a FIM based on annual incentive payments to customers may result in the Company maximizing those payment amounts to be higher than necessary to develop or maintain a certain level of DR, which would not necessarily be cost-effective nor in the best interests of its customers. (2 TR 91.) The first part of the Company s FIM would allow the utility to earn a financial incentive of 20% on all operational and capital expenses to implement, manage, and enroll customers in the DR programs. (2 TR 51.) Staff is concerned that a 20% incentive on all cost to run the program is extremely generous, especially considering the portion of DR capital, as proposed by the Company, would allow for capitalization of all customer acquisition costs at a 20% rate of return amortized over a 10-year period. Staff s alternative FIM is set up similar to an energy waste reduction (EWR) Plan s FIM, which is based only on O&M costs and has grown over the past 10 years from 15% of O&M spend on the program to 20% of O&M spend. The EWR incentive also has a MWh reduction goal attached to it. The Company s proposed DR FIM does not have a MW goal attached to it and Staff is concerned that increasing spending without showing results could be detrimental to customers. The Company is also requesting to earn a 20% incentive on payments to cost effectively use the DR resources. (2 TR 52.) Staff understands the motivation behind getting a FIM to motivate customers to use DR but asking for a FIM on the payments received by 6
customers could motivate the utility to have high cost payments to DR participants, spread to all customers. By contrast, Staff s DR FIM incentivizes the Company to receive an award to build or acquire capacity. The Company would earn the normal rate of return on DR capital costs. Regarding all non-capitalized costs, the Company could receive up to a 10% incentive reward of those non-capitalized costs (based on a sliding scale method) for reaching up to 100% of the incremental DR goal in MWs. (2 TR 91.) As is the case for an EWR Plan FIM, the Company could also receive an additional incentive payment for economic dispatch of DR capacity equal to the less of 10% of cost savings or 3% of total non-capitalized costs incurred each year. (2 TR 92.) Staff is also open to the Company receiving a 2% bonus incentive payment of noncapitalized costs for demonstrated assessment of DR as part of a non-wires alternative solution. Staff s proposed FIM in total could award the Company a 15% incentive on non-capitalized spending. Staff s alternative FIM functions to incentivize the utility to provide reasonable and prudent DR programs to its customers. NRDC filed testimony pertaining to the Company s proposed FIM. NRDC did not agree with the Company s position and made the case that over time the Company s proposed FIM would earn more than the EWR FIM. NRDC s witness Neme explained: In Exhibit A-7 (HWM-2), Consumers witness Miller shows how much the Company would earn in shareholder incentives in 2017, if its proposed mechanism were applied retroactively to that year. The total incentive $1.46 million represents about 9% of its $16.4 7
million total DR spending in 2017. However, that is not the total incentive the Company would earn on its 2017 spending because the Company would continue to earn incentives on most of its 2017 DR spending (the 89% of it that would become a Regulatory Asset) for about another 25 years. (2 TR 110.) Witness Neme then went on to estimate that the net present value (NPV) of the Company s total incentive associated with just its 2017 DR spending would be $18.54 million. That is 113% of its 2017 DR spending, or an incentive that is more than five times what the Company can earn on its annual energy efficiency program spending. (2 TR 110.) The amount of money that would flow through the Company s proposed incentive is astounding. NRDC also filed an alternative FIM. The FIM provided by witness Neme is set up similar to Staff s proposed FIM. NRDC did not include a possible bonus incentive for economic dispatch of DR, equal to the lesser of 10% of cost savings (energy cost savings minus cost of dispatch of DR) and 3% of total non-capitalized costs incurred each year as shown in Staff s alternative. But, NRDC did increase the incentive on non-capitalized cost for achieving DR capacity growth targets to 13% as opposed to the 10% offered by Staff. NRDC also offered a 2% incentive on non-capitalized DR costs for assessment of DR as part of a potential non-wires alternative. In total NRDC s alternative FIM would allow the Company to earn a 15% incentive on all non-capital cost related to DR, similar to the Staff s mechanism. Therefore, Staff submits that based on all of the evidence and testimony in the 8
record, its proposed FIM is the most reasonable and recommends that it be adopted on a going forward basis by the Commission. 2) Staff opposes a FIM that reaches back to the beginning of 2017, which was not prior approved. Staff would like to see an approved FIM structure on a going forward basis before a financial incentive is granted. Currently there is no approved FIM for DR, and the program year 2017 was already completed at the time the Company filed for a FIM. It is incongruous to incentivize the Company to do something that has already been completed. In the rebuttal testimony of Company witness Miller, he disagreed with Staff s recommendation of rejecting the Company s ability to earn a DR FIM, until after an incentive is constructed and approved. The Company purportedly relied on the Commission s September 15 th Order that stated: [A] financial incentive for DR is reasonable and finds that providers and other interested parties may propose appropriate incentives as part of the DR reconciliation proceeding. (2 TR 68.) Just because a FIM is proposed during this reconciliation does not warrant the Company to receive one for program year 2017. Staff strongly recommends the Commission postpone awarding a FIM until a proper FIM structure has been approved. As a FIM is produced to motivate action, it would be inconsistent to incentivize actions prior to an approved FIM. The Company also stated in Miller s rebuttal testimony that the Company responded to the possibility of earning a DR financial incentive in 2017 by aggressively increasing enrollments in its residential and business DR 9
programs from less than 1,800 customers in 2016 to almost 48,000 customers by the end of 2017. (2 TR 68.) The Company also made the statement that they would have been much less aggressive in its use of demand-side options in the early stages of its Integrated Resource Plan (IRP), Case No. U-20165, had it believed the Commission intended to ignore these efforts. (2 TR 69.) These statements imply that the Company would not have made DR investments without a FIM. Staff finds this position to be disappointing, when the Company is well aware that they should be investing in the most reasonable and prudent resources with or without an incentive, as required by 2016 PA 341, amending 1939 PA3, at MCL 460.6(t). An approved FIM would motivate the Company to do more than what has already been done. Staff reiterates that it agrees with developing an appropriate FIM on a going forward basis; however, it might be worth noting that DR aggregators are willing to do DR programs for State of Michigan customers without receiving a Financial Incentive and currently are working with alternative electric suppliers (AESs). The current Commission ordered ban in Case No. U-16020 prohibits Michigan retail customers, or aggregators of retail customers on behalf of retail customers, from participating in any regional transmission organization wholesale power market until further order of the Commission. In light of the facts in this case, Staff suggests that the Commission reject the Company s proposal to earn a FIM for program year 2017, as well as reject the Company s proposed FIM for DR. The Commission should accept Staff s proposed 10
alternative FIM that could allow the Company to receive up to 15% of non-capital spent on DR programs once they have met their goals. C. The Company s request for regulatory liability is not proper, as it does not cover the entire reconciliation period. Finally, the Company is requesting a regulatory liability for program year 2017 of $489,633, which Staff submits should be recalculated to address years 2015 and 2016. The Company requests a rather small regulatory liability based on expenditures incurred solely during program year 2017. Company witness Ennis discussed that residential DR actual capital expenditures were higher than expected for a number of reasons. He explained that $8.1 million of the capital expenditures requested in Case No. U-18322 was disallowed by the Commission. As such, planned capital expenditures were adjusted to reflect this disallowance as shown on line 6, of Exhibit A-1 (PCE-1). Then, the Company installed an additional 2,765 switches in 2017 beyond the target of 25,700 for a total of 28,465 installed switches. (2 TR 28.) Staff does not agree that basing the size of the regulatory liability on the capital expenditures that were disallowed by the Commission in Case No. 18322 is a proper analysis in this case. Based on Staff s analysis of cases dating back to 2015, funds were approved and never spent on DR programs, therefore, the disallowance of certain funds in one case was not problematic for the Company in terms of spending on the program. The prior funds should also be included for a correct regulatory liability, despite the fact that there was a delay in their being spent by the Company. 11
The Company also explained that their residential DR costs for O&M were lower than expected, which resulted in the Company s regulatory liability. Staff agrees that the Company should have a regulatory liability, but it should be based on expenditures trailing back to calendar year 2015. Staff also completed a thorough financial audit to verify DR program enrollments from 2015 through 2017. Thus, Staff is recommending that the Commission direct the Company to recalculate its regulatory liability to include the entire program, spanning calendar years 2015 through 2017. (2 TR 90.) 12
III. Conclusion The DR period, the proposed FIM, and the regulatory liability calculation each suffer from timing, as well as possible quantitative discrepancies, as explained above. Because of these issues, the ALJ and Commission should: (1) cause the Company to make its reconciliation for a three-year period; (2) reject the Company s request for a financial incentive mechanism as filed in this case for 2017, adopting Staff s recommended FIM going forward; and (3) order the recalculation of the Company s filed request for a regulatory liability of $489,633, to cover the entire period, starting in 2015. Respectfully submitted, MICHIGAN PUBLIC SERVICE COMMISSION STAFF DATED: March 29, 2019 Heather M. S. Durian (P67587) Daniel E. Sonneveldt (P58222) Assistant Attorneys General Public Service Division 7109 W. Saginaw Hwy., 3rd Floor Lansing, MI 48917 Telephone: (517) 284-8140 13
STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of Case No. U-20164 CONSUMERS ENERGY COMPANY (e-file paperless) for reconciliation of its 2017 demand response program costs. / PROOF OF SERVICE STATE OF MICHIGAN ) ) ss COUNTY OF EATON ) Pamela A. Pung, being first duly sworn, deposes and says that on March 29, 2019, she served a true copy of the Michigan Public Service Commission Staff s Initial Brief upon the following parties via email only: Consumers Energy Company Robert W. Beach Gary A. Gensch, Jr. One Energy Plaza Jackson, MI 49201 robert.beach@cmsenergy.com gary.genschjr@cmsenergy.com mpscfilings@cmsenergy.com Administrative Law Judge Hon. Sally L. Wallace Administrative Law Judge Michigan Public Service Comm. 7109 W. Saginaw Hwy., 3 rd Floor Lansing, MI 48917 wallaces2@michigan.gov Natural Resources Defense Council Christopher M. Bzdok 420 E Front Street Traverse City, MI 49686 chris@envlaw.com Kimberly Flynn, Legal Ass t kimberly@envlaw.com Karla Gerds, Legal Ass t karla@envlaw.com
Pamela A. Pung Subscribed and sworn to before me this 29 th day of March, 2019. De Ann M. Payne, Notary Public State of Michigan, County of Eaton Acting in the County of Eaton My Commission Expires: 11-29-24 2