May 14, Enclosed please find a Initial Brief of the Association of Businesses Advocating Tariff Equity with a Proof of Service.

255 South Old Woodward Avenue 3rd Floor Birmingham, MI 48009-6179 Tel. (248) 642-9692 Fax (248) 642-2174 www.clarkhill.com Robert A. W. Strong Phone: (248) 988-5861 E-Mail: rstrong@clarkhill.com May 14, 2004 Via Electronic Filing Ms. Mary Jo Kunkle Executive Secretary Michigan Public Service Commission 6545 Mercantile Way Lansing, Michigan 48909-7721 Re: MPSC Case No. U-13808 Dear Ms. Kunkle: Enclosed please find a Initial Brief of the Association of Businesses Advocating Tariff Equity with a Proof of Service. Very truly yours, CLARK HILL PLC /ag Enclosures Robert A.W. Strong cc (w/enc): Parties of Record Administrative Law Judge Detroit, Michigan Birmingham, Michigan Lansing, Michigan

STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of THE DETROIT EDISON COMPANY to increase rates, amend its rate schedules governing the distribution and supply of electric energy, implement MPSC Case No. U-13808 Power Supply Cost Recovery plans, factors and Reconciliation s in its rate schedules for jurisdictional Sales of electricity and for miscellaneous accounting Authority and regulatory asset recovery. / INITIAL BRIEF OF THE ASSOCIATION OF BUSINESSES ADVOCATING TARIFF EQUITY The Association of Businesses Advocating Tariff Equity ( ABATE ) by its attorneys, Clark Hill PLC, pursuant to the schedule set by the Michigan Public Service Commission ( Commission ) files this Initial Brief. I. INTRODUCTION According to information published by the Energy Information Administration (U.S. DOE), the information posted on the Commission s own website and in Commission materials presented to the Senate Committee on Technology and Energy, The Detroit Edison Company ( Edison ) has the highest retail rates in the Midwest, and now Edison wants even higher rates. Edison is requesting a base rate increase of $553 million, plus recovery of regulatory assets exceeding $109 million. Exhibit A-9, Schedule A1-2 Revised and Exhibit A-24, Schedule A1 Revised.

On the other hand, Governor Granholm is publicly concerned about the loss of manufacturing jobs in the state of Michigan and has initiated a series of meetings to discuss ways of stemming the loss of jobs. A large part of the decision to increase manufacturing production, decrease manufacturing production, or move manufacturing to another state or country is based upon the cost of doing business in the state of Michigan. Obviously, for many of the large companies, including many ABATE members, labor costs are going to be uniform throughout the country as would the cost of parts, but taxes and electric prices vary widely between states and they could be the driving factors for the decisions mentioned above. When viewing the Edison s request for final rate relief, the Commission should keep in mind several factors. First, industrial rates are above cost of service and Edison is seeking to increase them even further. Instead, industrial rates should be going down to prevent further rate skewing. Second, Edison has done nothing in this case to address its concern about rate skewing, which is making customers on above cost of service rates likely targets for participation in the Choice program. Third, Edison has earned in excess of its authorized rate of return since 1994 and has done nothing to make itself more efficient in generating or distributing electricity. Fourth, the Commission s interim order in this case has eliminated the Choice program as an economic alternative to bundled service for all high load factor manufacturers. The order will cause many customers to stop considering open access and participants in the Choice program will be returning to bundled service. The Edison projections of the amount of Choice MWh s are clearly overstated and, if used in ratemaking, will provide a windfall to Edison because Edison will have more bundled sales than it projects. Finally, it is unfair to increase the rates to industrial customers at a time when small commercial and residential rates are capped only 2

because rates may be increased for the uncapped customers. The financial consequences of the Legislature s decisions contained in Act 141 should be borne by Edison and not its customers on rates which are above cost of service. A. The Fundamental Issue. II. ARGUMENT Mr. Champley stated that the fundamental issue that must be addressed in this case is the net margin losses incurred by Edison due to customer choice. According to Exhibit A-13, Schedule E6.3, Page 2 of 9, the net margin lost was estimated to be $273 million prior to any mitigation. Consequently, the claimed lost margin issue is a major component of Edison s rate increase request. 13 TR. 2375. Id. ABATE witness Phillips summed up Edison s position as follows: To the extent DECo s rates are non-competitive, sales will be lost to alternate suppliers. Therefore, DECo is requesting a rate increase that provides for higher charges to customers for margins lost due to non-competitive rates or sales lost to alternative suppliers of power. Mr. Phillips had a number of criticisms of Edison s proposal to be compensated on the basis of lost margins: Edison has no incentive to become competitive. Edison has had healthy earnings for many years. Edison has known for a decade that it had to develop competitive options and yet has not become competitive. There is a fundamental problem with a regulatory policy that provides for additional charges to customers for Edison s failure to become competitive. 3

The collection of lost margins is inappropriate from the perspective of cost-causation and ratemaking principles. Collection of lost margins would severely harm or destroy the economics of open access. 13 TR. 2366-77. Mr. Phillips thought the real fundamental issue was that instead of setting forth a plan to become more competitive, Edison is seeking to raise rates of customers for lost margins presumably caused by non-competitive rates. 13 TR. 2377. He was asked about the rate skewing claim by Edison and responded that Edison proposed to increase rates on an equal percentage basis, ignoring cost based rate making principles. He testified: Id. (emphasis supplied). DECo s rate design proposal in this case will increase the amount of lost sales and the per unit amount of lost margin for each increment of lost sales. To the extent DECo increases lost margins and is allowed to collect lost margins from customers, the problem will be exacerbated. As more sales are lost to more competitive suppliers, more lost margins will be charged to the remaining customers under DECo s approach. Mr. Phillips also testified that this Commission should adopt a regulatory framework that addresses the issue of rate skewing and forces Edison to become competitive. The fundamental policy issue for the Commission is whether it is fair or appropriate to assign payment responsibility for costs incurred by Edison to all uncapped customers on an equal percentage basis instead of on the basis of cost of service principles. Based upon Edison s filed cost of service study, all large commercial and industrial rates are currently paying rates which are above cost of service levels. Further increases would only exacerbate the problem of rate skewing. 4

B. There is a Need For Edison to Offer Competitive Electric Rates. That competition was coming was no surprise for Edison. As far back as 1994, Edison s SEC Form 10-K contained a discussion of competition and noted the interim order adopted by the Commission setting forth a framework for a retail wheeling experiment. 13 TR. 2378. Edison also noted that as a continuing response to the challenge of competition, that it had executed ten-year Special Manufacturing Contracts ( SMC ) with certain of its largest customers. Mr. Phillips testified: [t]here is no less need to offer competitive rates than the need as stated by DECo in 1994. 13 TR. 2379. There was no earnings shortage between 1994 and the historic test year of 2002 that would have prevented Edison from becoming more competitive. According to Exhibit No. A-17, Schedule MEC-9, page 1 of 1, Edison s return on equity has consistently been above the 11.0% ROE authorized by the Commission in 1994. Id. There was absolutely no reason that prevented Edison from addressing the rate skewing problem over the last ten years. Id. Edison could have filed a rate case but did not. It was only because ABATE filed a complaint (docketed as Case No. U-11495) that Edison was brought before this Commission for an examination of its rates. Unfortunately, the case was dismissed due to Act 141 before rates could be lowered to more reasonable levels, so Edison entered the rate freeze with rates that would provide it with a revenue sufficiency. C. Edison s Proposed Rates Are Unjust And Unreasonable. Edison s proposed rates are unjust and unreasonable for a number of reasons. Edison s proposal is to ignore the results of its cost of service study and raise rates to each class by an 5

equal percentage. That is precisely the approach that caused the rate skewing that Edison now blames for its problems. 13 TR. 2380. Edison has performed no real rate design but chooses to basically roll certain bill credits into its base rates and then increase each class on an equal percentage basis. Moreover, the bill credits were used by Edison to reduce demand charges on primary rates which resulted in larger increases to high load factor customers. Id. Third, Edison has not addressed or recalculated the transmission level demand charge to reflect the fact that Edison no longer owns its transmission system. Instead, Edison would include transmission costs in the PSCR charge which ignores cost of service and reallocates revenues among customer classes with no change to the maximum demand charges in the primary rates. Id. Consequently, unless changes are made, large industrial customers will be paying twice for transmission service. Schedule 4 of Exhibit I-70 shows the amount of subsidy based upon allocating the transmission costs using the cost of service study vs on MWh at over $3 million for the SMC class and $8.4 million for the total industrial. The uniform energy surcharges clearly contribute to rate skewing. Under the 2002 actual cost of service study submitted by Edison in Exhibit A-5, Schedule E1, transmission costs are reported as an operating expense included in O&M expenses under MPSC Account No. 565-Transmisison by Others. 13 TR. 2388. Edison s proposal is to include transmission expense in the PSCR factor which is inappropriate for a number of reasons: The change in treatment would be a significant cost shift from low load factor to high load factor customers. There are explicit transmission charges in industrial rates that recover transmission costs that are not being eliminated in the rates proposed by Edison. 6

Transmission expense is not a fuel cost. Transmission expense is not a purchased power cost. Collecting transmission expense on a uniform kwh basis in the PSCR factor provides inaccurate price signals to customers. This proposal would make Edison s high load factor industrial rates even less competitive. 13 TR. 2388. There is also a very real danger that primary customers will be charged twice for transmission. There are charges of maximum demand for transmission-level service, subtransmission, and primary service stated in the rates proposed by Edison and yet when you add additional dollars to the PSCR to pay for transmission, customers will pay twice for this service. According to Mr. Phillips: 13 TR. 2390. Industrial customers would be charged twice for the same transmission service. This is obviously unfair, unreasonable and completely inappropriate. Mr. Phillips testified that Account No. 565-Transmission by Others is a transmission operating expense and not a purchased power cost. Edison books purchased power expense in Account No. 555 and this account is separate and distinct from transmission operating expense which reflects transmission by others in Account No. 565. Therefore, this transmission expense is not a purchased power cost. 13 TR. 2390-91. It is widely recognized that transmission expense is basically a demand-related charge and that Edison and the MPSC have recognized that fact in many cost of service studies filed by many utilities before this Commission. Edison s own filing in this case allocates these costs to classes largely on the basis of demands imposed by customer classes at its peak periods. 7

Transferring these costs to the PSCR would remove the incentive to control maximum demands as contained in Edison s current rates and change these costs inappropriately to be collected on an uniform cents per kwh basis as if they were fuel costs. This will transfer costs to high load factor customers that should not be transferred. Edison admitted that FERC treats transmissions costs almost entirely as demand-related cost. Exhibit I-221. In terms of Edison s own allocation of transmission expense, it was allocated 75% to contribution to peak (Schedule 200) and 25% on energy (Schedule 100). Exhibit I-217. The amount of transmission expense that is allocated on the 2002 Account No. 565 Transmission of Electricity by Others of $116.698 million was allocated based on Schedule 275T. Exhibit I-223. The Commission should reject allocating transmission expense on the basis of energy because it violates normal rate making and cost causation principles. Edison has requested the Commission to give PSCR treatment to the new fees to be paid to ITC. This approval is unlawful in that those fees are not power supply costs as that term is used in 1982 PA 304, and thus are not entitled to PSCR treatment, as a matter of law. Rather such expenses must be collected in base rates, pursuant to a general rate application proving them to be reasonably and prudently incurred. And they may only be adjusted in such a case. The scope of a PSCR clause is defined b6y MCL 460.6j(1)(a). Under that provision, a power supply cost recovery clause is a clause in a utility s rates or rate schedules that: permits the monthly adjustment of rates for power supply to allow the utility to recover the booked costs, including transportation costs, reclamation costs, and disposal and reprocessing costs, of fuel burned by the utility for electric generation and the booked costs of purchased and net interchanged power transactions by the utility incurred under reasonable and prudent policies and practices. MCL 460.6j(1)(a). 8

The items listed in this statute fuel costs, purchased power costs, and net interchanged power costs are the only items for which Act 304 permits... adjustment pursuant to the PSCR process. No court has ever ruled otherwise. In this case, the transmission service at issue is not being used to deliver the power to Edison s service territory. Rather, the costs that are proposed for addition to the PSCR clause are costs for transmission of power within Edison s service territory, including costs for transmission of power that Edison generates at its own plants. Such costs are not part and parcel of the transaction in which power is bought (if it is bought at all), in that they are not necessary to permit the utility to take possession of power that it has bought. By the time these costs (for internal transmission) are incurred, the power has already made it to Edison s service territory. The second category of new expenses to be placed in the PSCR base involves power not purchased from third parties, but generated by Edison itself. In such a case, Edison has not traditionally paid any transmission fees, because all transmission of such power took place over Edison s own facilities. Any cost involved in transmitting that power has never been given PSCR treatment before. Now, however, with ITC owing Edison s former transmission facilities, Edison and Staff have proposed to include ITC s fees for this second category of transmission cost - - i.e., unbundled transmission service within Edison s service territory of power generated by Edison itself - - in the PSCR base. In order to be treated as power supply costs, utility expenses must be either booked costs, including transportation costs, reclamation costs, and disposal and reprocessing costs, of fuel burned by the utility for electric generation or booked costs of purchased and net interchanged power transactions by the utility. MCL 460.6j(1)(a) (emphasis supplied) Nothing else can be given PSCR treatment. No party presented evidence that ITC fees fit into 9

these categories, nor cite any legal authority for giving them PSCR treatment notwithstanding the controlling statute. Transmission costs are power supply costs if, and only if, they are part and parcel of a utility s obtaining of power in either a purchased... power transaction or a net interchanged power transaction. 1 This is what the statute says, unambiguously, and indeed, is the only apparent reason that the definition at subsection (1)(a) appears to be there at all. Elucidating the policy reason s behind this restrictive language, the Michigan Supreme Court has provided an explanation of the policies that led to Act 304 and its sister reforms, Proposals D and H of 1982. And this explanation makes clear that it could not have been the Legislature s intent in Act 304 to allow utility adjustment clauses to have broad application. Quite the contrary: In response to the energy crisis of the 1970 s, the Legislature enacted 1972 PA 300, which permitted utility companies to unilaterally adjust the cost of fuel to utility consumers during the course of the year without having to await the general rate hearing before the Public Service Commission. The adjustment clause mechanism was strongly criticized by various consumer groups. In this milieu the tree proposals at issue in this litigation were drafted. In re Certified Questions, 417 Mich 409, 416-17; 339 NW2d 848 (1983) (emphasis supplied). Having been devised in response to concerns by consumer groups about the accelerated adjustment clauses, it is quite unlikely that Act 304 was designed to permit utilitys to more broadly implement adjustment clauses. Indeed, the Court went on to explain in detail how each on the three proposals at issue, including Ac 304, severely limited adjustment clauses compared to those that had existed previously. Id. at 417-18. Obviously, the Court did not perceive the legislative intent to be to create a mechanism through which the utility could recovery any cost it 1 It goes without saying, of course, that fuel costs can also be power supply costs, but obviously a transmission expense is not a fuel cost. 9 TR. 1123. 10

saw fit, and under which the Commission would have practically unbridled discretion to treat as a power supply cost anything it saw fit, with no limit at all. Yet this is what the Commission s new interpretation of the statute would do. The statute is clear, and the Commission may not ignore it due to past practice, policy considerations, or for any other reason. Deference to an agency interpretation of a statute is appropriate only where that interpretation is consistent with the actual language of that statute. Attorney General v Public Service Comm n, 247 Mich App 35, 41; NW2d 710 (2001); Consumers Power Co v Public Service Comm n, 460 Mich 148, 157 n.8; 596 NW2d 126 (1999). If the language of a statute is clear and unambiguous, the plain meaning of the statute reflects the legislative intent, and no agency interpretation is necessary, much less entitled to deference. Tryc v Michigan Veterans Facility, 451 Mich 129; 545 NW2d 642 (1996). An agency s decision to ignore the plan meaning of the statute, indeed to ignore the statute altogether, may not be upheld. Here, the legislature s intent is clear. It has listed the things that may be treated as PSCR costs. Only those things may be so treated. Thus, it is clear that allowing PSCR treatment of Edison s internal transmission costs, paid through fees to ITC for unbundled transmission service, would contravene the letter of Act 304, the Commission s decisions thereunder, and the policy that underlies that Act. D. ABATE Has Proposed The Appropriate Rate Design Methodology. 1. General Rate Design. As the first step in rate design, Edison s rates should be set at levels which significantly reduce or eliminate all rate subsidies prior to any rate increase. Id. Of the two choices, ABATE s experts recommend elimination of the subsidies due to the uncompetitiveness of Edison s rates. Second, the rates should be increased in a manner to not increase subsidies for 11

the amount of the rate relief granted by Commission. Id. This is the approach followed by the Indiana Utility Regulatory Commission, which reduces the interclass subsidies and then allocates any rate increase based on the proportionate share of rate base for each class. 13 TR. 2381. Mr. Phillips recommended that the first $200 million of any rate increase be allocated to the residential class: Id. I recommend that all interclass subsidies be eliminated in this case. This means that the first $200 million of the rate increase be allocated to the residential class. The elimination of interclass subsidies is a concept that has been endorsed by this Commission. In Case No. U-13000, the Commission eliminated all subsidization from all classes and based rates entirely on cost of service. According to Mr. Phillips, cost based rates could eliminate the lost margin request of $273 million and provide open access in a meaningful fashion. Id. Edison s proposal does just the opposite by assigning above average increases to higher load factor customers on the primary rates. As noted by Mr. Phillips, this fact is shown on Exhibit A-13, Schedule E5 for various primary supply rates. One example is found on page 36 of 56 where the higher the hours use in column (B), the higher percent increase in column (G) for each load size. Id. In order to correct this problem Mr. Phillips recommended that the credits be rolled equally into the demand and energy charges which will result in more uniform percentages for different categories of hours of use. According to Mr. Phillips, there is no cost justification for higher than average increases to higher load factor customers, and below average increases to lower load factor customers. 13 TR. 2382. 12

Exhibit I-69, Schedule 1 show the results of the historic cost of service which identifies the subsidies in the current rates and the percentage change in those rates that would be necessary to bring each primary rate to cost of service. It also shows the subsidy for the residential and commercial secondary classes and the percentage changes needed there to assign proper cost responsibility. Based upon the actual jurisdictional earned rate of return on rate based by Edison of 8.97% for 2002, the residential class is being subsidized by over $200 million and would require an increase of 14% to be at cost of service prior to any rate increases granted by this Commission. The commercial class is paying rates in excess of cost of $148 million and would require a 15% rate decrease in order to be at cost of service levels. The rate D6 primary class is being overcharged by approximately $76 million and would require an almost 11% rate decrease to be at rates based upon cost of service prior to any increase granted by the Commission in this case. 13 TR. 2372. 2. Rate Design For Securitization and Transition Charges. The headroom calculated in Exhibit S-144 show that as a result of the Commission s Interim Order, large usage, high load factor customers will not be able to shop for power in the open market. This is caused in part by ignoring cost of service principles and assigning stranded costs when no stranded costs exist. 13 TR. 2301. Unfortunately, the Staff is not proposing to change the methodology but would extend it to a five year cost recovery collection period instead of one year. According to Mr. Selecky, this will not be enough: Id. Even under this scenario, high load factor industrial customers will not be able to participate in the choice program. There are several reasons that high load factor customers cannot currently participate in the customer choice program, including the Commission s approved rate design for 13

securitization and transition costs, which penalizes high load factor customers. This is because the Commission s rate design allocates demand costs on an energy only allocator. Second, the stranded cost surcharge is not based on a finding as a result of a contested case. Third, the Commission s treatment of the securitization charges can require customers on the choice program to not only pay for generation service from a third party, but also to pay for generation service provided by Edison, even though customers are not using Edison s generation and Edison does not have any stranded costs. 13 TR. 2302. The securitization charges should be allocated to the various rate classes utilizing the Commission s approved allocation method where 75% is allocated to demand and 25% is allocated to energy. This should be done for both bundled and open access customers. Since nearly all of the costs that are securitized are associated with Fermi 2, the traditional allocation methodology should be used for cost of service purposes. Id. Mr. Selecky developed an analysis which compared the uniform surcharge to the traditional methodology used to allocate costs, which is reproduced below: Customer Classes TABLE 12 Comparison of Allocation Percentages Allocation Based on Uniform Surcharge Allocation Based on Cost Causation Residential 35.05% 38.01% Secondary 21.68% 23.89% Primary 42.37% 37.39% Government 0.90% 0.71% Source: Workpaper A5E1, pg. 77 of 307 Mr. Selecky characterized the results in the following fashion: 14

As Table 12 above shows, the primary class is being allocated a disproportionate share of the securitization charges under the currently-approved system. It should be noted that much like the decommissioning surcharges that are currently in place, the Commission should establish surcharges that reflect cost causation. It is important that the Commission reflect cost causation in designing rates if it wants the customer choice program to flourish. Properly designed rates provide proper economic signals. 13 TR. 2303. In summary, the continued use of a uniform surcharge per kilowatt hour to allocate costs, that would normally be allocated on the basis of 75% demand/25% energy, moves rates away from cost of service and eliminates the choice program as an economic option for high load factor manufacturers. As is evidenced by the current nuclear decommissioning surcharges, separate surcharges can be established for the different rates. The Commission should adopt a policy that the costs should be allocated to the customers using the traditional methodology and the surcharges developed are on a rate by rate basis in order to avoid an illegal reallocation of costs. MCL 460.10d(5). E. The Commission Should Approve a New Cost Based Special Manufacturing Rate. The special manufacturing contracts are coming to an end at the end of this calendar year, so ABATE asked its consultants to design a cost based manufacturing rate with instructions to make it available to all customers that meet the size requirements in order to avoid any problems with the anti-discrimination provisions contained in MCL 460.557(4). Mr. Phillips provided the analysis and testimony in connection with a cost-based rate for manufacturing customers with loads greater than 5,000 kw that is similar to the current SMC, but without the current discount and also without the commitment for a ten year term. 13 TR. 2382. He recommended that the cost to serve the firm SMC class be used as a proxy for the class of customers eligible for the 15

new rates for all customers with loads of 5,000 kw and above because the SMC load was significantly large. In addition, Mr. Phillips noted that Mr. Stojic s Exhibit S-144 showed that large high load factor customers have inadequate or even negative headroom which means that choice of alternative suppliers is no longer an option. 13 TR. 2403. Staff proposed a new rate for the SMC customers that is transitional until the rates can be established to reflect the cost to serve these customers. Staff proposes that the transitional rate be established on the basis of one-half the difference between the current contract rates and the bundled service rate. 13 TR. 2403-04. Mr. Phillips developed a cost-based Large Manufacturing Rate using the Staff s framework as a guide. Mr. Phillips recommended that the rate not be identified as transitional and that the rate be open to the current SMC customers and all other large manufacturing customers with loads of at least 5 MW. 13 TR. 2405. Mr. Phillips used Edison s filed cost of service study and developed cost parameters to allow Edison to earn a 7.40% rate of return consistent with the Staff s recommendation. He used both the SMC firm and interruptible components and removed directly assigned O&M expense for special services provided to these customers. On that basis, he increased the present total firm and interruptible SMC rate by 4.49%. Id. The next step in the process was to make an adjustment to base rates to offset the overcharge related to the securitization bond and bond tax charges which are currently collected on the basis of the uniform cents per kwh surcharge. 13 TR. 2406. The next step was to make an adjustment as it relates to transmission costs which the Staff would include in the PSCR factor. He made an adjustment so that the transfer is revenue neutral and does not reallocate cost to the class of customers eligible for the Large 16

Manufacturing Rate. Id. According to Mr. Phillips: [t]hese offsets only bring this class back to cost without the surcharge approach which reallocates and transfers cost to this [sic] classes. After making these changes, he then increased rates by 7.68% as proposed by the Staff in this proceeding. Id. Schedule 1 of Exhibit I-70 depicts Mr. Phillips recommended Large Manufacturing Rate. The resulting increase to the current rate is $24.7 million or 8.83%, and on a unitized basis, 4.364 /kwh which, according to Mr. Phillips, is extremely close to the rate proposed by Staff of 4.455 /kwh. Id. The proposed Large Manufacturing Rate has the following attributes: 13 TR. 2406-07. It is a cost-based permanent rate. This rate will not require correction for rate skewing in a future rate case. The rate is for all large manufacturing customers. It will be Edison s competitive option. It will be good for customers, provide Edison with a fair return and provide Michigan with an opportunity to retain and hopefully create new manufacturing jobs. Mr. Phillips then designed the cost-based Large Manufacturing Rate to obtain the appropriate revenue. That rate design is shown on Schedule 1 of Exhibit I-70. Please note that the maximum demand charges remain unchanged even though ABATE has argued that these charges should be eliminated if transmission is included in the PSCR expense. However, Mr. Phillips has already made an adjustment in base rates to remove the approximately $3.2 million cost shift, so it is reasonable to maintain these charges because Mr. Phillips really developed a percentage increase which he assigned to the components of the rate as shown on Schedule 1 of Exhibit I-70. 17

In summary, the Large Manufacturing Rate provides a reasonable alternative to the expiration of the SMCs later on this year. The rate is cost-based, permanent, and provides the appropriate revenue to Edison, and, in Mr. Phillips words, is a win-win scenario. 13 TR. 2407. This rate will help to maintain manufacturing jobs in Michigan which is the Governor s stated objective. Finally, it is critical that this rate be approved, because participation in open access is not a viable choice for customers which are eligible for the Large Manufacturing Rate as shown on Exhibit S-144. 2. Edison s Proposed Adjustments to The Large Manufacturing Rate Should be Rejected. In addition to ABATE and the Staff recommending that the Commission adopt a large manufacturing rate, Edison also developed a rate which is predicated on changes to the rate developed by Mr. Phillips. As will be discussed below, each one of these adjustments does not make sense and should be rejected. Edison has provided the Commission with misleading data contained in Exhibit A-115, page 1 of 5, entitled Large Manufacturing Tariff Summary of Positions. In column C on line 11 they show an average price of 4.8 /kwh as being ABATE s proposed 5 MW rate with the Staff increase. The rate shown there is three mills too high, because it probably reflects Mr. Phillips initial rate, which included the higher PSCR factor that existed at the time he wrote his initial direct testimony. At the bottom of the page of this Exhibit, Edison sets forth its restatement of both the Staff and ABATE s rates. As can plainly be seen, there is a major reallocation between the energy charge and the on peak demand charge. Edison would increase the energy charge and lower the demand charge, whereas the other two rate designs keep the on peak demand charge approximately $2.00/kW higher. Edison s proposed rate design would penalize high load factor 18

customers which are really the only ones that would be eligible for participating in the Large Manufacturing Rate by having so much cost recovery through the energy charge. This is simply poor rate design and should be rejected. Page 5 of 5 of Exhibit A-115 shows that Detroit Edison s proposed adjustments to ABATE s Large Manufacturing Rate. The first adjustment is shown on line 6 where Edison is proposing that the class not receive any credit for the revenues associated with Late Payment Penalty. Exhibit I-211 is one of the work papers supporting Edison s cost of service study done by Mr. Falletich. Late payment penalty in terms of a revenue credits for the SMC firm load is shown on line 3 and it is clear that Mr. Phillips used exactly what was contained in Edison s cost of service study. Mr. Falletich s adjustment to ABATE s proposed large manufacturing rate simply impugns his own work done in connection with the cost of service study. There is no valid reason from veering away from the numbers found in Edison s cost of service study filed in this case. The second adjustment is in connection with interconnection expense. Again, Mr. Phillips used the number found on line 14, column 26 of Exhibit I-211. There is no reason to have any reduction here and the Commission should use the number found in the cost of service study. Edison s rationale is that it should be able to keep the profit associated with these sales as a mitigation, but nothing has been decided on that aspect of the case. Third, Edison removes a substantial amount of the administrative and general expense from ABATE s analysis to maintain proportions consistent with the filed cost-of-service. 13 TR. 2904. There is absolutely no backup as to how Mr. Falletich arrived at that conclusion, particularly when it was Mr. Phillips opinion that he removed a proportionate amount of A&G from the firm SMC cost of service. 13 TR. 2384. Without a compelling showing that Mr. 19

Phillips analysis is wrong, his calculation should be accepted. Edison has not made its rebuttal case for any changes to that figure, so this adjustment should be rejected. F. Edison s Proposed Earnings Sharing Mechanism (ESM) is Unreasonable. Edison s ESM focused totally on the utility s earned return on equity and provides for a sharing of excess earnings with ratepayers outside of a dead band and would cause rate increases to customers should the return on equity fall below the dead band. 13 TR. 3292. A major problem with this proposal is that it focuses solely on earned rate of return on equity and excludes all other performance factors. The other factors that should be of concern to this Commission and customers are the competitiveness of the rates offered by Edison, reliability, customer complaints, outages, planned interruptions with notice, delivery of product purchased from other sources and power quality. 13 TR. 2393. To make Edison operate as much like a competitive firm as possible, the Commission should insist that Edison offer competitive rates to ratepayers and let the market allow customers to purchase generation services from alternative electric suppliers. The pressure from competing with alternative electric suppliers would present Edison with the emulation of a competitive market, and the incentives embodied in the competitive market process as articulated by Edison witness Mr. McDermott. The problem is that Edison has not made any movement to offer competitive rates and instead wants a regulatory cover to protect it from market forces by eliminating the customer choice option. 14 TR. 2393. Mr. Phillips questioned the benefits claimed by Edison related to the introduction of ESM. As far as competition is concerned, Mr. Phillips pointed out that it has been ten years since there has been a general rate case for Detroit Edison and that last case in 1994 resulted in a reduction. He stated that it was difficult to decrease regulatory costs in a base rate case that 20

occurs once every ten years. 13 TR. 2394. He also noted that collection of stranded costs is not something that one would be able to do in a competitive environment. Id. As far as Mr. Phillips was concerned the only innovations that Edison had introduced was requesting stranded costs be based on lost margins, special PSCR treatment and the recovery of the acquisition premium. Mr. Phillips summarized the situation as follows: 13 TR. 2395. The one thing DECo is not requesting is that it be allowed to compete and that is customers be allowed to purchase power from the most efficient supplier. Therefore, DECo s filing in this case is at complete odds with the benefits of competition set forth by Mr. McDermott. Mr. Phillips also noted the tension between a very simplified ESM proposal and ratemaking by comparing using the simple 14.4% return on equity set forth in Exhibit A-27, Schedule MEC-9, page 1 of 1, and the various adjustments made by Edison to show that instead of over earning, it was actually under earning in 2002. Edison will probably try to graft on numerous adjustments in the proposed annual true up cases which would convert those cases into rate cases. Id. Finally, with the rate skewing contained in Edison s retail rates, Mr. Phillips thought it would be inappropriate to make further adjustments based upon the simplified mechanism. 13 TR. 2396. G. Special Manufacturing Contracts. For the purposes of establishing a revenue requirement in this case, the Commission should impute the difference between tariff and special contract actual revenues from the SMCs to Edison. This would be consistent with the Commission s orders in Case Nos. U-13380, U- 13350 and the Interim Order in this case. 13 TR. 2264-65. The Commission has stated that the 21

burden that must be borne by Edison to avoid imputation of revenues is a clear, convincing and unequivocal demonstration either (1) that the contract prices and terms are justified on the basis of cost of service; or (2) that the benefits for other non-participating ratepayers are substantial and have value that outweighs the cost of the net recovery from the contract customers. 13 TR. 2265. Edison has not made a showing of either of these points, and Edison s cost of service study, Exhibit A-5, Schedule E1, pages 5 and 6 of 6, show both the firm and non-firm services below cost of service. LCC non-firm is also below cost of service. Finally, because the SMC will terminate at the end of 2004, an adjustment is necessary to avoid Edison receiving a windfall of over $40 million as the SMC customers return to standard bundled tariffs. 13 TR. 2265-66. ABATE has calculated an upward adjustment to revenues of $43.541 million, whereas Edison claims that the contract revenue should be increased no higher than $33 million. 13 TR. 2266-67. The difference in these figures is that Edison assumed that some SMC customers would be exercising choice, but it is clear on this record that high load factor customers cannot economically participate in Edison s choice plans. Exhibit S-144. Therefore, the assumption of participation in choice should be eliminated from the calculation which means that ABATE s number should be used to impute revenues to Edison during 2004. Mr. Selecky explained how he arrived at his figure of $43.54 million. He calculated the standard tariff revenue and the special contract revenue and determined what the differences were and then multiplied these differences by 7.243% as approved in the interim order for both SMC and LCC load to arrive at a total of $43.541 million as shown on Table 2 at 13 TR. 2268. If no adjustment were made and the special contracts are not extended, then Edison would realize a windfall in excess of $40 million in revenue commencing January 1, 2005 when the SMCs terminate. 13 TR. 2268. 22

H. Edison s Employee Expense is Inflated. Edison has forecasted employee benefit expense of $329.2599 million which is reduced by $72.222 million as shown on Exhibit A-16, Schedule F5-19. Of the total employee benefit cost, $214.116 million is related to pension and OPEB. 13 TR. 2268-69. Mr. Selecky pointed out that both pension and OPEB expense levels are influenced, in part, by the estimate of future liabilities and the expected return on assets. Edison s expected return on assets is 9%, however, the return on the S&P 500 was approximately 29% in 2003. That high return should reduce the annual funding requirements for the plan. In addition, the interest rate utilized to discount future liabilities under Section 412b(5)(B)(ii)(ll) of the Internal Revenue Code is determined by applying the weighting methodology set forth in Notice 88-73 to the composite corporate bond rates for the 48 months preceding that month. Thus, in determining the 48 month weighted average of the composite corporate bond rate, the composite corporate bond rate for each of the months within the immediately preceding twelve months receives a weight of 4, those that are 13-24 months in the past receive a weight of 3, those that are 25-36 months in the past receive a weight of 2, and those that are 37 or more months before the determination receive a weight of 1. The IRS will publish these rates monthly and this new methodology could have a significant impact on future liabilities and affect funding levels. This law came into being just before the close of the evidentiary record, and ABATE made a hearing room request for a recalculation, but none was forthcoming, presumably because the IRS had not published Internal Revenue Bulletin 2004-18/Notice 2004-34 until May 3, 2004. In light of not having good numbers, it is difficult to arrive at a position regarding the validity of Edison s number, other than it is overstated. 23

ABATE s position is that if the Commission grants Edison any rate increase for pension and OPEB expenses, then the Commission should require Edison to annually make that level of contributions, or in the alternative, any contributions not made should be placed in a regulatory asset/liability account. The treatment of the accumulated balance should be addressed in Edison s next rate case. 13 TR. 2270. The Commission should make this rate increase contingent on Edison s written agreement that it will follow the procedures laid out in the order in light of holding in Consumers Power Co v Public Service Comm, 460 Mich 148 (1999). I. The Cost of The LIEEF Program Should Not be Included in Developing Edison s 2004 Revenue Requirement. Edison is proposing to increase its revenue requirement by $39.659 million to continue to fund the Low Income and Energy Efficient Fund (LIEEF). The LIEEF funding program constitutes an attack on electric customers to fund a problem in the low-income customer s inability to pay their utility bills. There are no real data or statistics that would support such a program, and any support there is is based upon a perception that there may be a problem out there. It certainly hasn t been quantified or thoroughly addressed on the record in this case. Mr. Selecky testified as follows: 13 TR. 2271. While assisting low income customers is a laudable goal, the Commission cannot and should not impose a tax on DECo customers to fund DECo s proposal. Act 141 states that the low income and energy efficiency fund should be funded by excess securitization savings: (6) If securitization savings exceed the amount needed to achieve a 5% rate reduction for all customers, then, for a period of six years, 100% of the excess savings up to 2% of the electric utility s commercial and industrial revenues shall be allocated to the low- 24

MCL 460.10d(6) income and energy efficency fund administered by the commission. If there are not excess securitization savings, then there is no funding source for this program and it should be terminated. In the event that the Commission finds that continued funding of the LIEEF program is appropriate, ABATE has several recommendations. The first one is that funding for LIEEF should be collected from customers as a percent of revenues. For customers exercising choice, Edison should provide the customers annually with a calculation of their bill as if they remained a bundled customer. The LIEEF surcharge would be based on this analysis. Mr. Selecky testified that: 13 TR. 2271. This would eliminate any economic advantage between choice and bundled service as it relates to the LIEEF program. It is appropriate for this charge to be a percentage of the bill as opposed to a uniform cents per kilowatt hour surcharge. J. The Commission Should Reject Edison s Requested Acquisition Premium. Edison has included in its 2004 O&M expense a merger-related cost of $85.193 million, which represents an amortization of Edison s allocated share of the merger cost over 40 years, grossed up for return and taxes on the unamortized balance. According to Edison, it is allocated 66% or $589 million of the acquisition premium. 13 TR. 2272. The control premium is the price that DTE Energy paid to acquire MCN over the market value of MCN stock. Supposedly, DTE Energy paid this premium over MCN s market value for the ability to control MCN and its assets. Mr. Selecky testified: The control premium is generally referred to as a good will or an acquisition premium. In this proceeding, DECo is proposing to 25

recognize the portion of the acquisition premium that it has identified as being related to the merger synergies that are applicable to DECo s operation. Id. rejected: Mr. Selecky testified that there are a number of reasons why this premium should be 13 TR. 2272-73. It does not provide any significant value to Edison s ratepayers. The benefit that Edison contents that results from the merger does not result in a decline in cost from the previous levels, but a reported decline in costs that Edison would hypothetically incur. It is possible that a portion of the claimed synergy savings could have been achieved without the merger. The acquisition premium seems excessive relative to the value of MCN stock and other acquisitions. It is impossible to evaluate over the next 40 years whether the claimed savings will indeed occur. The Commission should exclude the premium from the development of Edison s revenue requirement because Edison s own exhibits indicate that as a result of the merger, customers will be seeing increases in Edison s expenses at a level equal to or greater than the rate of inflation. This increase is occurring at a time when Edison is experiencing lost sales to customer choice. According to Mr. Selecky: Id. Essentially, DECo is telling this Commission that absent the merger with MCN, its O&M expense would be increasing at a rate in excess of the rate of inflation. I believe this is unacceptable for a utility that claims it wants to become competitive. 26

Mr. Selecky made an analysis that led him to the conclusion that it is debatable whether the control premium provides $85 million of reduced costs to Edison s ratepayers. He looked at Edison s controllable operation and maintenance expenses from 1999 through 2002 included on Exhibit A-16, Schedule F-11. Total Edison O&M expenses are increasing at about 11.7% or 3.75% per year, including the merger savings. Without the merger savings, the increase over the same period of time is approximately 20.2% or 6.33% per year, which is totally unacceptable if Edison is trying to become more competitive. 13 TR. 2274. There appears to be a problem with the O&M expense category with Corporate Support. The claimed synergy savings are shown on Exhibit A-16, Schedule F5-6 and the Corporate Support expense is estimated to be $222.222 million in 2004. In 2002, however, Edison s actual level of Corporate Support expense was $210.547 million. This produces an increase in expense of $11.675 million. Reviewing the synergy savings shown on Exhibit A-16, Schedule F5-6, the net synergy savings from 2002 through 2004 is $33.75 million. Therefore, if the claimed synergy savings were eliminated, Edison would be requesting an increase in Corporate Support expense of $45.432 million, or 15.6% from 2002 through 2004. Id. Based upon Table 3 found at 13 TR. 2275, Mr. Selecky concluded that it was difficult to believe that Edison s Corporate Support expense would have increased by 15.6% from 2002 to 2004 absent a merger. He noted that the Corporate Support expense does not include costs associated with health care and pensions. He further concluded the costs associated with Corporate Support should largely be controllable. He urged the Commission to question whether or not there are any merger synergies that would justify including the control premium in rates. Therefore, the Commission should seriously question the savings that DECo is claiming as a result of the merger with MCN. The control premium as proposed by Edison should be excluded from DECo s O&M expense. 27