STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of DTE ELECTRIC COMPANY for approval Case No. U-18150 of depreciation accrual rates and other (e-file paperless) related matters. / I. Introduction MICHIGAN PUBLIC SERVICE COMMISSION STAFF S INITIAL BRIEF On November 1, 2016, the DTE Electric Company (DTE or the Company) filed this depreciation case, using a depreciation study based on ending 2015 plant balances. (Exhibit A-15) The result of DTE s proposed depreciation accrual rates would increase depreciation expenses by $156,385,000 based on those 2015 plant balances. Per the Application, the effective depreciation rates from this case will not be put into effect until there is an order in DTE s next filed general rate case. Since the current DTE Electric general rate case, Michigan Public Service Commission (MPSC or Commission) Case No. 18255, has not concluded, that would likely be in 2019. DTE submits that its depreciation study is a competent, reasonable representation. Staff points out limitations of DTE s analysis. Depreciation recovery is more of an art form than a precise task, and there is a zone of reasonableness. The issue of the retirement dates for DTE coal units, contrary to what ABATE may state, is not one of recovery or no recovery, but rather it is recovery over a more immediate time frame or a longer term time frame.
Depreciation rates currently in place contemplated full recovery of plant in service, and whether that recovery is sped up or not is more an issue of timing, than that the Company should not recover at all. II. Overview of Staff s Recommendation Staff presented its recommendation in this case through its witness, Ronald J Ancona. Mr. Ancona did not submit an independent depreciation study, but reviewed and analyzed DTE s submission. Based on his review and analysis, he pointed to the following primary concerns: The proposed earlier retirement dates for the St. Clair, River Rouge, and Trenton Channel power plants have not yet been subject to full MPSC review in a concluded, contested case addressing power supply resources. It would be speculative to assume any particular action the Commission may determine regarding retirement of those plants. (2 TR 212) The Net Salvage projections assume dismantlement will not begin until five years after retirement, thus incorporating five additional years of cost escalation. Staff is concerned that this decision is arbitrary and increases estimated costs. (2 TR 212-213) The costs for obsolete inventory are likely overstated because they are primarily projections for plants not yet retired rather than concrete amounts; thus, the remaining value at the end of their lives are not known and the salvage amounts, if any, are unclear. (2 TR 212-213) Staff, nonetheless, believes that an increase at the present time is reasonable, as detailed below. 2
a. Early retirement and net salvage concerns can be addressed in part in Case No. U-18419, as well as in a future depreciation case. As stated above, one of Staff s major concerns was the earlier retirement dates for the St. Clair, River Rouge, and Trenton Channel power plants. These concerns may be resolved soon. Subsequent to the filing of this case, DTE filed U- 18419, a Certificate of Necessity (CON) case. Included within that filing is an Integrated Resource Plan (IRP) that includes the assumption that River Rouge, St. Clair, and Trenton Channel will be retired as assumed in this case. Thus, the MPSC will have the opportunity to review these retirement dates in MPSC Case No. U-18419, obviating Staff s concern regarding definiteness. Therefore, Staff modifies its recommendation in this matter. Staff recommends that the proposed dates be dealt with in MPSC Case No. 18419 rather than the instant case. Staff maintains its recommendation of depreciation rates that would result in a depreciation expense increase of $39,218,444. If the MPSC accepts, or otherwise does not challenge, these retirement dates in U-18419, Staff recommends depreciation rates that would result in a depreciation expense increase of $65,508,120, derived as follows: 3
Current and Proposed Impact on Depreciation Expense from Exhibit A-15, Statement B proposed investment investment adjusted adjusted current proposed difference % inc. net salvage difference investment net salvage total investment (prop - cur) from current (% inc * cur) total River Rouge $4,595,912 $130,301 $4,726,213 $16,067,338 $11,471,426 249.6% $325,232 $11,796,658 St Clair $19,251,422 $529,889 $19,781,311 $52,887,689 $33,636,267 174.7% $925,827 $34,562,094 Trenton Channel $5,652,401 $126,160 $5,778,561 $17,748,259 $12,095,858 214.0% $269,976 $12,365,834 total RR,StC,TC $29,499,735 $786,350 $30,286,085 $86,703,286 $57,203,551 $1,521,035 $58,724,586 Nuclear $1,906,570 Other Production -$11,925,849 Renewable $3,006,268 Transmission $718,250 Distribution $3,342,711 General Plant $9,735,584 $65,508,120 River Rouge, St. Clair, and Trenton Channel balances would serve as representative for Steam Plant. The remaining Steam Plants (Belle River, Monroe, and Greenwood) presumed retirement dates for both the current and proposed scenarios are farther in the future and do not need to be addressed in this case. In order to remove the impacts of the remaining Staff concerns (additional five years of escalation and the projected amounts for obsolete inventory), net salvage for River Rouge, St. Clair, and Trenton Channel was determined by increasing the current amount attributable to net salvage by the percent increase in depreciation expense between proposed investment and current investment. In addition, addressing River Rouge, St. Clair, and Trenton Channel directly, as they are subject to the more immediate retirement dates, should minimize accounting concerns DTE may foresee with putting off an increase in depreciation expenses. 4
b. Staff s obsolete inventory concerns can be ameliorated. Specifically addressing obsolete inventory, Staff believes DTE misunderstood its concerns, as it is not asking DTE to expense depreciation amounts. Staff s concerns are that the included amounts, in this case, for obsolete inventory are projections for plant not yet retired, rather than actual obsolete inventory, as the date of obsolescence is not yet determined. DTE s rebuttal contains a laundry list of items it wishes to include in obsolete inventory upon retirement, whenever that may be. (Exhibit A-16) But, DTE does not, and cannot, know if those will be the residual amounts, which would offset costs, at the time of actual retirement. Staff is proposing that recovery of obsolete inventory be approved and allowed after it has become obsolete, and the amounts are certain, not projected. Staff, thus, submits that contingency, such as unknown amounts of obsolete inventory, should be removed from any increase at this time. Staff s approach is reasonable and similar to how manufactured gas plant (MGP) expenses are determined. Staff s approach is also in accordance with the Order in MPSC Case No. 18033, which stated that the Commission found it reasonable that the inventory O&M expenses resulting from the write-down of inventory value to be charged as accumulated depreciation. 5/20/2016 Order, MPSC Case No. 18033, pp 2-3. The Order contemplate its later recovery in a depreciation case, once the amounts, including any residual value, are determined. The Order, by contrast, did not state that residual amounts of obsolete inventory could be known before actual retirement, which is an issue of timing. Contrary to the Company s statements (2 5
TR 161), Staff is not asking that any write-down be expensed, but continue to accrue until the final quantities at issue are known. In sum, MPSC Order No. 18033 approved an accounting mechanism but did not pre-determine the outcome of this depreciation case, which is based on the amounts knowable now. ABATE s witness makes a similar point. (2 TR 187-188) The amounts should be recognized over the remaining useful life of the asset, which is not currently known, nor are the residual amounts at the time of obsolescence known. Staff agrees with ABATE s witness that the MPSC Order in Case No. 18033, allowing for future recovery of depreciation, does not mean that the amounts should be included before they are known amounts, such as including obsolete inventory when its useful life is presently unknown because the plants are still in-service. Staff, however, does not believe that the amounts will be written off in their entirety, just that they are not known amounts at this time. Staff takes a balanced approached to the obsolete inventory, and its approach should be adopted. Although Staff did not quantify the effects of these concerns on DTE s requested increase of depreciation expense of approximately $156 million, Staff believes these concerns call into question DTE s estimates, and illustrate why Staff s estimate is more reasonable. III. Conclusion Staff does, however, believe some increase is presently warranted. As shown on Exhibit S-1, the gap between Plant in Service and Depreciation Reserve has widened each year from 2005 through 2015. 6
While the widening gap may be an expected outcome, as ABATE offered in rebuttal (2TR 203), kicking the can will not work forever and ultimately depreciation will come due. Due to this fact, and DTE s quantification of the reserve imbalance at $410,160,454, Staff recommended depreciation rates that would increase depreciation expense by $39,218,444, the amount attributable to the $410,160,454 reserve imbalance. (2 TR 213) This recommendation represents a significant increase to current depreciation rates and eventually tariff rates, it corrects for the identified imbalance, and it excludes Staff s areas of concern, as pointed out above. DTE has submitted a case that would seem to address all outstanding deficiencies, some due to decisions in past cases, and some due to new assumptions. The result is an increase in depreciation expense of over $156 million, potentially a future rate case in and of itself. Staff recommends that the request be examined closely, and, at a minimum, these increases be accomplished over at least one additional depreciation case to minimize the impact to customers. Staff has proposed a lesser but still significant increase toward lessening the gap between plant in service and the depreciation reserve. Staff s $39,218,444 (2 TR 213) covers the current imbalance and is close to the amount calculated by ABATE of about $55 million ($100,999,000 reduction from DTE s request 2 TR 195). In addition, the issue of earlier coal plant retirement dates may be resolved in U- 18419, which Staff believes could allow for an additional depreciation increase to $65,508,120 total. 7
Respectfully submitted, MICHIGAN PUBLIC SERVICE COMMISSION STAFF Heather M.S. Durian (P67587) Monica M. Stephens (P73782) Assistant Attorneys General Public Service Division 7109 W. Saginaw Hwy., 3rd Floor Lansing, MI 48917 Telephone: (517) 284-8140 Dated: December 1, 2017 18150/Initial Brief 8
STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of DTE ELECTRIC COMPANY for approval Case No. U-18150 of depreciation accrual rates and other (e-file paperless) related matters. / STATE OF MICHIGAN ) ) ss COUNTY OF EATON ) PROOF OF SERVICE CORINNA C. SWAFFORD, being first duly sworn, deposes and says that on December 1, 2017, she served a true copy of the Michigan Public Service Commission Staff s Initial Brief upon the following parties via e-mail only: DTE Electric Company Jon P. Christinidis Andrea E. Hayden DTE Energy One Energy Plaza, 688 WCB Detroit, MI 48226 jon.christinidis@dteenergy.com andrea.hayden@dteenergy.com mpscfilings@dteenergy.com ABATE Michael J. Pattwell Stephen A. Campbell Sean P. Gallagher Clark Hill PLC 212 E. Grand River Ave. Lansing, MI 48906 mpattwell@clarkhill.com scampbell@clarkhill.com sgallagher@clarkhill.com Robert A.W. Strong Clark Hill PLC 151 S. Old Woodward Ave., Ste. 200 Birmingham, MI 48009 rstrong@clarkhill.com Administrative Law Judge Hon. Sharon L. Feldman Administrative Law Judge Michigan Public Service Comm. 7109 W. Saginaw Hwy., 3 rd Floor Lansing, MI 48917 feldmans@michigan.gov
CORINNA C. SWAFFORD Subscribed and sworn to before me this 1st day of December, 2017. Pamela A. Pung, Notary Public State of Michigan, County of Clinton Acting in County of Eaton My Commission Expires: 05/07/2018 2