124 west allegan street, suite 1000 lansing, michigan

124 West Allegan Street, Suite 1000 Lansing, Michigan 48933 T (517) 482-5800 F (517) 482-0887 www.fraserlawfirm.com

Jennifer Utter [email protected]

(517) 377-0802

F R A S E R T R E B I L C O C K D A V I S & D U N L A P | P C LANSING DETROIT

September 28, 2009

Ms. Mary Jo Kunkle Executive Secretary Michigan Public Service Commission 6545 Mercantile Way, Ste 7 Lansing, MI 48911

Re: MPSC Case No. U-15645 Dear Ms. Kunkle:

Enclosed herewith for filing in the above-referenced matter, please find Hemlock Semiconductor Corporation’s Replies to Exceptions and Certificate of Service. If you have any questions, please feel free to contact my office. Thank you.

Very truly yours,

Fraser Trebilcock Davis & Dunlap, P.C.

Jennifer Utter Heston

JUH/cdb Enclosure cc: All Parties of Interest

STATE OF MICHIGAN

BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for authority to increase its rates for ) Case No. U-15645 the generation and distribution of ) electricity and for other relief. ) ____________________________________)

CERTIFICATE OF SERVICE

Carolyn D. Biegalski hereby certifies that on the 28th day of September, 2009, she served Hemlock Semiconductor Corporation’s Replies to Exceptions and Certificate of Service in the above docket on the persons identified on the attached service list by electronic mail.

Carolyn D. Biegalski

FRASER TREBILCOCK

DAVIS & DUNLAP,

P.C. LAWYERS LANSING, MICHIGAN

48933

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Service List for U-15645 Counsel for Consumers Energy Company Jon R. Robinson H. Richard Chambers Raymond E. McQuillan John C. Shea M. Bryan Little Consumers Energy Company One Energy Plaza Jackson, MI 49201 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] Counsel for the Kroger Co. Michael L. Kurtz Kurt J. Boehm Boehm, Kurtz & Lowry 36 East Seventh Street, Suite 1510 Cincinnati, OH 42502 [email protected] [email protected] Counsel for Attorney General Michael A. Cox Donald E. Erickson Michael E. Moody Assistant Attorney General 525 W. Ottawa St., 7th Floor P.O. Box 30212 Lansing, MI 48909 [email protected] [email protected]

Counsel for Michigan Public Service Commission Staff Patricia S. Barone Michael J. Orris Anne M. Uitvlugt Colleen Ellis Assistant Attorney General Public Service Division 6545 Mercantile Way, Suite 15 Lansing, MI 48911 [email protected] [email protected] [email protected] [email protected] Counsel for Energy Michigan, Inc. Eric J. Schneidewind Varnum, Riddering, Schmidt & Howlett The Victor Center, Suite 810 201 N. Washington Square Lansing, MI 48933 [email protected] Counsel for ABATE Robert A. W. Strong Clark Hill PLC 151 S. Old Woodward Ave., Suite 200 Birmingham, MI 48009 [email protected] Counsel for Constellation NewEnergy, Inc. John M. Dempsey Dickinson Wright PLLC 215 S. Washington Square, Suite 200 Lansing, MI 48933-1816 [email protected]

Phil Forner, in pro per POB 296, Allendale, MI 49401 Email: [email protected]

mailto:[email protected]




Counsel for Michigan Cable Television Association David E.S. Marvin Fraser Trebilcock Davis & Dunlap, P.C. 124 W. Allegan, Suite 1000 Lansing, Michigan 48933 [email protected] Counsel for Midland Cogeneration Venture Limited Partnership Ross K. Bower II Richard J. Aaron Fahey Schultz Burzych Rhodes PLC 4151 Okemos Road Okemos, Michigan 48864 [email protected] [email protected] Counsel for Michigan State Utility Workers Council Steven D. Wehing Kelley Cawthorne, PLLC 208 N. Capitol Ave., 3rd Floor Lansing, Michigan 48933 [email protected]

Counsel for Michigan Municipal League, The Michigan Townships Association, The City of Wyoming, The City of Grand Rapids, and Other Member Municipalities Leland R. Rosier Roderick S. Coy Clark Hill 212 East Grand River Avenue Lansing, Michigan 48906 [email protected] [email protected] Counsel for Gerdau MacSteel Jennifer L. Copland Dickinson Wright PLLC 301 E. Liberty, Suite 500 Ann Arbor, Michigan 48104 [email protected] Counsel for Metal Technologies and Ravenna Casting Center Jeffrey L. Turner 1401 South Grandstaff Drive Auburn, Indiana 46706 [email protected] Counsel for Michigan Environmental Council and Public Interest Research Group in Michigan Don L. Keskey Clark Hill PLC 212 East Grand River Avenue Lansing, Michigan 48906 [email protected] Counsel for Metal Technologies, Inc. and Ravenna Casting Center, Inc.

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Robert B. Nelson Fraser Trebilcock Davis & Dunlap, P.C. 124 W. Allegan, Suite 1000 Lansing, Michigan 48933 [email protected]

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STATE OF MICHIGAN

BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for authority to increase its rates for the ) Case No. U-15645 generation and distribution of electricity and ) for other relief. ) )

HEMLOCK SEMICONDUCTOR CORPORATION’S REPLIES TO EXCEPTIONS

Dated: September 28, 2009 FRASER TREBILCOCK DAVIS & DUNLAP, P.C. David E. S. Marvin (P26564) Jennifer U. Heston (P65202) Fraser Trebilcock Davis & Dunlap, P.C. 124 W. Allegan, Suite 1000 Lansing, MI 48933 Telephone: (517) 482-5800 E-mail addresses: [email protected] [email protected]



i

TABLE OF CONTENTS

I. SUMMARY OF REPLIES TO THE EXCEPTIONS................................................................................ 1

II. THE ALJ CORRECTLY DETERMINED THAT CONSUMERS’ PROPOSAL TO PREMATURELY TERMINATE RATE E-1 SHOULD BE REJECTED. THE COMMISSION SHOULD MAKE CLEAR THAT HSC’S RATE E-1 SERVICE WILL CONTINUE THROUGH NOVEMBER 30, 2015 AS SPECIFIED IN BOTH THE CURRENT RATE E-1 TARIFF AND HSC’S RATE E-1 CONTRACT. .............................................................................................................. 1 A. BACKGROUND.............................................................................................................................. 3 B. CONSUMER’S PROPOSED CHANGE TO RATE E-1 IS NOT SUPPORTED BY COMPETENT,

MATERIAL, AND SUBSTANTIAL EVIDENCE ON THE WHOLE RECORD. ............................................. 4 C. ECONOMIC DEVELOPMENT RATE E-1 IS NOT BEING SUBSIDIZED; RATE E-1 IS RECOVERING

ALL INCREMENTAL COSTS FOR PROVIDING SERVICE AS WELL AS MAKING A SIGNIFICANT CONTRIBUTION TO CONSUMERS’ FIXED COSTS. ............................................................................ 5

D. PUBLIC ACT 286 OF 2008 DOES NOT REQUIRE THE PREMATURE TERMINATION OF RATE E-1; CONSUMERS NEED NOT PREMATURELY TERMINATE RATE E-1 IN ORDER TO FULFILL ITS OBLIGATION TO ELIMINATE CLASS SUBSIDIES WITHIN 5 YEARS. ................................................... 9

E. THE COMMISSION SHOULD CONTINUE TO RECOGNIZE THE IMPORTANCE OF ECONOMIC DEVELOPMENT RATES TO MICHIGAN’S ECONOMY...................................................................... 11

F. HYPOTHETICAL CONCERNS THAT RATE E-1 MAY NOT ALWAYS RECOVER THE COSTS TO PROVIDE SERVICE TO THE RATE E-1 CUSTOMER ARE PREMATURE AND SPECULATIVE................ 14

G. THE RATE E-1 CUSTOMER, HSC, HAS MADE SIGNIFICANT INVESTMENTS IN MICHIGAN AND HAS CREATED MICHIGAN JOBS. MICHIGAN’S ABILITY TO ATTRACT ADDITIONAL INVESTMENTS AND HIGH-PAYING JOBS TO THIS STATE COULD BE JEOPARDIZED IF THE STATE REPUDIATES ITS COMMITMENT TO PROVIDE RATE E-1 FOR ITS ORIGINAL TEN-YEAR TERM.......................................................................................................................................... 16

H. HSC HAS A VALID RATE E-1 CONTRACT THAT SHOULD NOT BE BREACHED. .............................. 18 I. THE COMMISSION STAFF OPPOSES CONSUMERS’ PROPOSAL TO PREMATURELY TERMINATE

RATE E-1. .................................................................................................................................. 19 J. SUMMARY.................................................................................................................................. 19

III. THE ALJ CORRECTLY RECOMMENDED THAT THE COMMISSION AMEND CONSUMERS’ RATE GSG-2 TO PREVENT AN OVER-RECOVERY OF DISTRIBUTION COSTS WHERE CUSTOMERS COMPENSATE CONSUMERS FOR DISTRIBUTION COSTS THROUGH SEPARATE FACILITIES AGREEMENTS....................................................................... 20 A. BACKGROUND............................................................................................................................ 22 B. CONSUMERS’ BELATED EFFORT TO ADDRESS HSC’S PROPOSED AMENDMENT SHOULD NOT

BE PERMITTED. ........................................................................................................................... 23 C. RATE GSG-2 SHOULD BE AMENDED TO AVOID AN OVER-RECOVERY OF DISTRIBUTION

COSTS WHERE CONSUMERS HAS BEEN OTHERWISE FULLY COMPENSATED FOR DELIVERY SERVICE. .................................................................................................................................... 24

D. HSC’S PROPOSED RATE GSG-2 AMENDMENT IS FULLY SUPPORTED BY THE RECORD. ............... 27 E. THE PROPOSED AMENDMENT IS WITH RESPECT TO RATE GSG-2, NOT RATE E-1. ...................... 27 F. THE PROPOSED AMENDMENT DOES NOT DISREGARD CONSUMERS’ DISTINCTION BETWEEN

NORMAL AND PREMIUM FACILITIES. ........................................................................................... 28 G. APPROVING THE PROPOSED AMENDMENT WOULD NOT BE INCONSISTENT WITH ADOPTING

THE STAFF’S COST OF SERVICE................................................................................................... 29 H. APPROVING THE PROPOSED AMENDMENT WOULD NOT CREATE AN INCONSISTENCY IN THE

TREATMENT OF PREMIUM FACILITIES WITHIN CONSUMERS’ TARIFF. .......................................... 30 I. SUMMARY.................................................................................................................................. 32

IV. CONCLUSION AND PRAYER FOR RELIEF...................................................................................... 33

NOW COMES Hemlock Semiconductor Corporation (“HSC”), by and through its

attorneys, Fraser Trebilcock Davis & Dunlap, P.C., and pursuant to the schedule established

by Administrative Law Judge Sharon L. Feldman (“ALJ”), hereby respectfully submits its

replies to the exceptions to the Proposal for Decision (“PFD”) issued on September 2, 2009.

I. SUMMARY OF REPLIES TO THE EXCEPTIONS

HSC responds to the exceptions identified by Consumers Energy Company

(“Consumers”), and hereby supports the ALJ’s recommendations made in the September 2,

2009 PFD, in the following particulars:

1. The ALJ correctly recommended that the Commission reject Consumers’

proposed early termination of Rate E-1. The Commission should make clear

that HSC’s Rate E-1 service will continue through November 30, 2015 as

provided for under the current Rate E-1 tariff and as identified in HSC’s Rate

E-1 contract with Consumers.

2. The ALJ correctly recommended that the Commission amend Consumers’

Rate GSG-2 to prevent an over-recovery of distribution costs where

customers compensate Consumers for distribution costs through separate

facilities agreements.

II. THE ALJ CORRECTLY DETERMINED THAT CONSUMERS’ PROPOSAL TO PREMATURELY TERMINATE RATE E-1 SHOULD BE REJECTED. THE COMMISSION SHOULD MAKE CLEAR THAT HSC’S RATE E-1 SERVICE WILL CONTINUE THROUGH NOVEMBER 30, 2015 AS SPECIFIED IN BOTH THE CURRENT RATE E-1 TARIFF AND HSC’S RATE E-1 CONTRACT.

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On pages 204-206 of her PFD, the ALJ addressed Consumers’ proposal to

prematurely terminate Rate E-1 on October 5, 2013 rather than permitting the rate to

continue through November 30, 2015, as provided. The ALJ noted that Consumers relied

1

exclusively on MCL 460.11 for justification. PFD, p. 204. The ALJ summarized HSC’s

concerns that Consumers’ proposal would interfere with HSC’s contractual rights, that

Consumers was contractually estopped from seeking changes to the Rate E-1 tariff without

HSC’s approval, and that it would be poor publicly policy to rescind the state’s commitment

to provide Rate E-1 for a period of ten years after having induced significant investment by

HSC. Id., p. 205. The ALJ further noted HSC’s careful analysis indicating that MCL 460.11

does not require the termination of Rate E-1 within five years. Id. The ALJ noted that

Consumers failed to respond to HSC’s arguments other than to provide a “cursory analysis”

of MCL 460.11. Id The ALJ therefore concluded,

Given the obvious potential policy and constitutional issues raised by Consumers Energy’s interpretation of MCL 460.11, given the absence of clearly expressly legislative intent to alter the existing tariff and contract, and given the lack of any explanation why the utility chose to ignore its contractual commitment not to seek modification of the tariff, this PFD recommends that the Commission find any consideration of the proposed Rate E-1 tariff modification to be unnecessary and premature.

Id., p. 206. The ALJ correctly determined that Consumers’ proposal to prematurely

terminate Rate E-1 should be rejected.

Consumers was the only party to file exceptions to the ALJ’s recommendation with

respect to the premature termination of Rate E-1. Consumers, again, asserts that MCL

460.11 requires “that Rate E-1 be moved to cost-based rates within the five year statutory

period, i.e. October 2013.” Consumers’ Exceptions, p. 84. Consumers asserts that there is

no legal basis to suggest that the Rate E-1 tariff language takes precedence over the statute.

Id. Consumers fails to provide a sophisticated analysis of MCL 460.11 or the legally

significant difference between the Legislature use of the terms “rate schedule” and

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“customers class” within MCL 460.11. Consumers likewise fails to address any of the other

numerous arguments presented by HSC, and cited by the ALJ, in favor of rejecting

Consumers’ proposal. Nevertheless, Consumers recommends that the Commission reject the

ALJ’s recommendation, and thereby renege on the state’s commitment to provide Rate E-1

service for the prescribed ten-year period.

HSC urges the Commission to adopt the ALJ’s recommendation, and put an end to

Consumers’ efforts to prematurely terminate Rate E-1. The arguments put forth by

Consumers are without merit. The ALJ correctly decided that the Commission should reject

Consumers’ proposal to prematurely terminate Rate E-1. For the numerous reasons

described below, the Commission should maintain the existing ten-year term for Rate E-1.

A. Background

On November 22, 2005, the Commission approved Rate E-1. Rate E-1 is

Consumers’ economic development rate for very large industrial customers. When

approving Consumers’ Rate E-1, the Commission stated,

Consumers observes that the State of Michigan faces intense competition both nationally and internationally, to attract new industrial development, and notes that growth in Michigan’s industrial base is critical to the State’s economic health. Consumers further notes that the price of electricity can influence decisions concerning industrial development.

November 22, 2005 Order, MPSC Case No. U-14692, p. 1. Thus, Rate E-1 was specifically

designed to attract new industrial economic development to Michigan. New economic

development means new jobs. Economic development is an even greater concern for

Michigan today than it was when the Commission approved the rate.

FRASER TREBILCOCK

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48933 When adopted in 2005, Rate E-1 was approved for a ten-year term. “This rate

becomes effective with the first full calendar month following the date of the Commission

3

Order approving this rate, and remains in effect for ten years from the effective date of Rate

E-1.” Exhibit A, Sheet No. E-30.00, November 22, 2005 Order, MPSC Case No. U-14692.

As a result, Rate E-1 is currently set to expire on November 30, 2015. Now, less than four

years into the rate’s ten-year term and after significant investments have been made by

Consumers’ only Rate E-1 customer in reliance upon the terms of Rate E-1, Consumers is

seeking to prematurely terminate the rate. Consumers is proposing, as part of this

proceeding, to amend the terms of the Rate E-1 tariff to terminate Rate E-1 on October 5,

2013 – over 25 months early. The Commission should reject any attempt to modify the

existing terms and conditions of economic development Rate E-1.

B. Consumer’s proposed change to Rate E-1 is not supported by competent, material, and substantial evidence on the whole record.

A final order in a contested proceeding must be supported by competent, material and

substantial evidence on the whole record. Const. 1963, art. 6, § 28; Attorney Gen v Public

Service Comm, 165 Mich App 230, 235; 418 NW2d 660 (1987). Substantial evidence is that

which a reasonable mind would accept as adequate to support a decision. Substantial

evidence is more than a mere scintilla but less than a preponderance of the evidence. In re

Payne, 444 Mich. 679, 692, 698 (1994). A Commission order is “unlawful” when it applies

an erroneous interpretation or application of the law and “unreasonable” when not supported

by the evidence. Associated Truck Lines, Inc v Public Service Comm, 377 Mich 259 (1966).

The record in this proceeding is not legally adequate to support Consumers’ proposal

to prematurely terminate Rate E-1. In fact, there is no evidence in the record to support the

proposed change. Rather, Consumers simply provided an exhibit with the proposed

modifications identified. Consumers did not provide an explanation for the proposed

changes to Rate E-1, other than to simply cite Public Act 286 in one sentence of rebuttal

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testimony. Consumers’ single-sentence statement is merely a conclusory and unsupported

statement of legal opinion. Consumers did not even attempt to offer any factual support for

the proposed change in Rate E-1. As explained in section III E of this brief, infra,

Consumers' one-sentence legal opinion is inherently based on numerous factual assumptions

about conditions on October 5, 2013 that are nothing more than pure speculation and

conjecture at this point. For example, even if one assumes that Section 11 of Public Act 286,

MLC 460.11, requires each individual rate schedule to equal its fully embedded cost to

provide service within five years of the effective date of that statute (i.e., by October 5,

2013), there is simply no evidence in this record to support the conclusion that Rate E-1 will

not comply with the statute on that date. Future revenues, future costs and future statutory

requirements are all unknown at this time, and are certainly not supported in the record of

this case.

The record in this proceeding is simply not adequate to support Consumers’ proposal

to prematurely terminate Rate E-1. Consumers’ exhibits and conclusory statement are not

substantial evidence that a reasonable mind would accept as adequate to support a decision.

Consequently, Consumers’ proposal should be rejected.

C. Economic development Rate E-1 is not being subsidized; Rate E-1 is recovering all incremental costs for providing service as well as making a significant contribution to consumers’ fixed costs.

Implicit in Consumers' proposal to prematurely terminate Rate E-1 is the assumption

that the charges under Rate E-1 are not sufficient to enable Consumers to fully recover its

costs of providing service under that rate. Consumers' underlying assumption in this regard

is misguided and inaccurate. When considering whether a rate is based on the cost to

provide service, it is important to understand the nature of the rate itself. The fact that Rate

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E-1 is an economic development rate is significant. Economic development rates are

designed to encourage business growth and jobs in Michigan by providing a discount from

full-service rates. Consumers, itself, stated the following in its application seeking approval

of the Rate E-1 tariff:

The State of Michigan faces intense competition, both nationally and internationally, to attract new industrial customers. In addition, growth within Michigan’s existing industrial base is critical to the State’s future economic success. To varying degrees, electric energy prices have an impact on the ability to do so. The proposed tariff is intended to encourage industrial customers to select Michigan for new facilities or the expansion of existing facilities by offering a rate discounted below otherwise applicable tariffs. Consumers Energy believes that significant industrial development would qualify for the proposed tariff, and such development offers many advantages to the State of Michigan including increased employment, tax revenues and enhanced economic vitality.

Consumers’ Application, MPSC Case No. U-14692, ¶ 4. The Commission also recognized

the importance of discounted electricity prices to promote business growth when it approved

the rate.

Consumers observes that the State of Michigan faces intense competition both nationally and internationally, to attract new industrial development, and notes that growth in Michigan’s industrial base is critical to the State’s economic health. Consumers further notes that the price of electricity can influence decisions concerning industrial development.

November 22, 2005 Order, MPSC Case No. U-14692, p. 1. Simply because a rate is

discounted from full-service rates, however, does not mean that the rate is being subsidized

by other customers nor that the rate is not recovering the utility’s cost to provide the service.

Economic development rates are intended to attract new load and the costs to provide service

to the new load are the utility’s incremental costs, not the utility’s fully embedded costs.

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Rate E-1 is a variable cost rate that fully recovers Consumers’ incremental cost to provide

Rate E-1 service.

It is inappropriate to evaluate Rate E-1 from a fully embedded cost to serve

perspective. As explained by Mr. Gorman,

Consumers’ Rate E-1 service is an economic development rate that was specifically designed to foster incremental load growth and create new jobs. Since Rate E-1 is an incremental rate, it stands to reason that one would use an incremental cost methodology for determining the cost to provide service to any customers on this rate. In fact, the Commission itself recently stated that where an economic development rate recovers all incremental cost, the rate is not being subsidized. “The rate creates no new subsidy as long as the new load’s resulting GED rate recovers the incremental costs of providing service.” Order dated June 10, 2008, MPSC Case No. U-15245, p. 89.

The Commission's conclusion is correct. An economic development rate is significantly different than a standard rate. An economic development rate is a special rate that is designed to attract new jobs by attracting new electric load. Thus, an economic development rate is inherently incremental in nature. The purpose of the rate is to attract incremental load at incremental cost. Other ratepayers are not adversely affected by the new rate, as long as the rate covers the incremental cost of that incremental load. In fact, other ratepayers benefit directly from any over-recovery beyond incremental cost and they also benefit indirectly from the many benefits of new economic development in the utility's service territory.

Tr. 249-250. Thus, the Commission should reject attempts to suggest that Rate E-1 is not

recovering its costs to provide service where those analyses are inappropriately based on a

fully embedded cost to serve methodology, instead of the correct incremental cost

methodology. FRASER

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Mr. Gorman completed a detailed analysis of Consumers’ incremental cost using an

incremental cost methodology. See, Tr. 250-258. Relying upon data available in

Consumers’ own cost of service study, Mr. Gorman concluded that Rate E-1 is recovering all

7

of Consumers’ variable costs and contributing to Consumers’ fixed costs. Tr. 250.

Recognizing that Rate E-1 is a variable cost economic development rate, Mr. Gorman

focused on whether the Rate is recovering Consumers’ incremental costs to provide service.

After determining Consumers’ incremental distribution, production, and transmission costs

to provide service to Rate E-1, Mr. Gorman concluded that Rate E-1 is recovering all of

Consumer’s incremental cost to provide Rate E-1 service and is contributing 29 cents per

MWh to Consumers’ fixed costs. Tr. 255.

Where an economic development rate recovers its incremental costs, there is no

subsidy. With respect to the General Economic Development (“GED”) provision within

Rate GPD, the Commission stated, “The rate creates no new subsidy as long as the new

load’s resulting GED rate recovers the incremental cost of providing service.” Order dated

June 10, 2008, MPSC Case No. U-15245, p. 89. Moreover, Rate E-1’s extra contribution to

Consumers’ fixed costs is to the benefit of all other ratepayers. Tr. 257.

Mr. Gorman also completed the same analysis using the Commission Staff’s cost of

service study. Tr. 270-275. The Commission Staff’s cost of service study differed from

Consumers’ cost of service study in several important respects, including the recommended

demand allocation methodology. Consumers used a MH4CP 50-25-25 cost allocation

methodology; whereas, the Commission Staff proposed allocating costs on the basis of

coincident 12 monthly peak (“12 CP”) demand 50-25-25. Tr. 271. Mr. Gorman found that,

under the Staff’s cost allocations, Rate E-1 is recovering its incremental cost to provide

service, and contributes $9.29/MWh to Consumers’ fixed costs. Tr. 273.

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48933 The Commission should disregard any analysis of the cost to serve Rate E-1 that is

improperly based upon a fully embedded cost to serve methodology. It is illogical and

8

incorrect to evaluate a variable cost economic development rate using a fully embedded cost

methodology. Mr. Gorman’s thoughtful incremental cost analysis shows that Rate E-1

recovers all of Consumers’ costs to provide service under that rate. The Commission should

reject any misleading testimony asserting or implying that Rate E-1 is not recovering its

costs to provide service and/or is being subsidized by other customers.

D. Public Act 286 of 2008 does not require the premature termination of Rate E-1; Consumers need not prematurely terminate Rate E-1 in order to fulfill its obligation to eliminate class subsidies within 5 years.

On October 6, 2008, the Governor signed into law Public Act 286 of 2008. Section

11(1) of Public Act 286 requires the Commission to “phase in electric rates equal to the cost

of providing service to each customer class over a period of five years from the effective date

of the amendatory act that added this section.” MCL 460.11(1). Consequently, under

present law, the Commission must phase in electric rates equal to the cost of providing

electric service to each customer class by October 5, 2013. While Consumers has never

thoroughly explained or supported its proposal to prematurely terminate Rate E-1, it’s clear

that Consumers’ proposal is based on a misreading of section 11(1) of Public Act 286.

Consumers, however, is clearly misunderstanding the requirements of Section 11(1)

of Public Act 286 and how they apply to Rate E-1. Section 11(1) of Public Act 286 requires

the Commission to “phase in electric rates equal to the cost of providing service to each

customer class over a period of five years from the effective date of the amendatory act that

added this section.” MCL 460.11(1). In other words, this statutory provision requires the

elimination of inter-class subsidies within five years. As explained above, however, Rate

E-1 is recovering its cost to provide service. Because Rate E-1 is a variable cost economic

development rate, the cost to provide service to Rate E-1 is Consumers’ incremental cost.

On page 9 of his rebuttal testimony, Consumers’ witness Mr. Stubleski acknowledged that

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evaluating Rate E-1 from an incremental cost perspective is appropriate. Tr. 726.

Mr. Stubleski stated, “I believe that the use of an incremental cost approach for new load

may have some merit for rate design purposes.” Id. Because Rate E-1 is recovering its

incremental cost to provide service, Rate E-1 is not being subsidized. Thus, no changes to

Rate E-1 are necessary for Consumers’ to comply with Section 11(1) of Public Act 286.

Even if it were assumed that Rate E-1 is under-recovering the cost to provide Rate

E-1 service, which it is not, Public Act 286 does not require the Commission to terminate the

rate. Public Act 286 requires the Commission to phase in electric rates equal to cost of

service for each customer class over five years. MCL 460.11(1). Rate E-1 is not a customer

class. As explained by Mr. Gorman, Consumers groups its individual rate schedules into five

rate classes: 1) Residential Class; 2) Secondary Business Class; 3) Primary Business Class;

4) Lighting and Unmetered Class; and 5) Self-Generation Class. Tr. 251. Rate E-1 is a rate

schedule within Consumers’ Primary Business Class. Consumers’ Primary Business Class

currently collects revenues above Consumers’ cost of providing service to the class. Tr. 251.

The distinction between “rate schedule” and “customer class” is a meaningful distinction that

the Legislature made in drafting Public Act 286.

While the Act requires electric rates equal to cost of service for each customer class,

perfectly cost-based rates are not, in fact, required for all customers nor for all rate schedules.

As an example, Section 11(3) expressly authorizes the Commission to establish certain low-

income and senior citizen customer rates without regard to any other provision of the Act and

to allocate the revenue shortfall from those rates upon all customer classes. MCL 460.11(3).

Moreover, it is very significant that Section 11(4) expressly requires the Commission to

establish “rate schedules” ensuring that certain schools are charged rates that reflect the cost

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to serve them. MCL 460.11(4). If the Legislature had intended subsection 11(1) to

require the Commission to set all rate schedules at their individual cost of service, then

there would have been no need for the Legislature to add subsection 11(4) requiring the

Commission to set the schools' rate schedules at cost of service. If subsection 11(1) truly

meant what Consumers apparently claims it means, then subsection 11(4) would have been

unnecessary and redundant. Clearly, the term, “rate schedule”, is not the same as the

term, “customer class”. To properly follow the law, the Commission must give effect to

the Legislature’s specific intent in using each term. State Farm Fire & Casualty Co v.

Republic Ins Co, 466 Mich 142, 146; 644 NW2d 715 (2002) (“Courts must give effect to

every word, phrase, and clause in a statute and avoid an interpretation that would render any

part of the statute surplusage or nugatory.”) Although the Commission must establish cost-

based rates for each customer class, the Commission has discretion to determine the

appropriate costs to be allocated to each individual rate schedule within the class (except

for certain schools). Thus, while cost-based rates may be an important rate making goal, the

Commission should use its discretion to give consideration to other worthy goals as well,

such as fostering the growth of Michigan’s economy.

E. The Commission should continue to recognize the importance of economic development rates to Michigan’s economy.

Public Act 286 did not eliminate all ratemaking discretion, nor did it eliminate the

possibility of economic development rates. In fact, Public Act 286 was passed as part of a

package of energy bills designed to promote economic development in Michigan.1 The

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48933 1 Public Act 286 was enacted along with Public Acts 295 and 287. Public Act 286 amends MCL 460.10, Michigan’s “Customer Choice and Electricity Reliability Act.” A stated purpose of the Customer Choice and Electricity Reliability Act is, “To improve the opportunities for economic development in this state and to promote financially healthy and competitive utilities in this state.” MCL 460.10(2)(e) (emphasis added).

11

Commission continues to have considerable discretion to craft appropriate rates that are in

the public interest. The Commission has recognized the importance of economic

development rates, and should continue to promote the substantial benefits of economic

development within the state.

Public Act 286 did not eliminate the Commission’s discretion to craft appropriate

rates for Michigan. As an example, Public Act 286 expressly gave the Commission the

ability to adjust how it determines each customer class’ cost of providing service. The

Legislature expressly permitted the Commission to change the allocation of costs between

classes where doing so would not result in more costs being shifted to the primary class. The

statute provides:

Sec. 11. (1) This subsection applies beginning January 1, 2009. Except as otherwise provided in this subsection, the commission shall phase in electric rates equal to the cost of providing service to each customer class over a period of 5 years from the effective date of the amendatory act that added this section. If the commission determines that the rate impact on industrial metal melting customers will exceed the 2.5% limit in subsection (2), the commission may phase in cost-based rates for that class over a longer period. The cost of providing service to each customer class shall be based on the allocation of production-related and transmission costs based on using the 50-25-25 method of cost allocation. The commission may modify this method to better ensure rates are equal to the cost of service if this method does not result in a greater amount of production-related and transmission costs allocated to primary customers.

MCL 460.11(1) (emphasis added). Thus, the Commission retains considerable authority to

determine cost allocations and appropriate rates for each customer class. FRASER



48933

Additionally, the Legislature directed the Commission to provide recommendations on how to improve power quality. The express purpose of the recommendations is, “to provide methods to ensure that this state can obtain optimal and cost effective end-use customer power quality to attract economic development and investment into this state. MCL 460.10p(8) (emphasis added). Similarly, Public Act 295 is Michigan’s “Clean, Renewable and Efficient Energy Act” establishing a new renewable energy standard. A primary purpose of the

12

Even if one were to assume that an individual economic development rate within a

larger customer class resulted in a revenue shortfall, recovery of that shortfall from other

customers would be justified by the substantial benefits of the economic development

created by the rate. After approving the Rate E-1 tariff, J. Peter Lark, then Chair of the

Michigan Public Service Commission noted, “‘A top priority of the Michigan Public Service

Commission is taking all reasonable steps to improve Michigan’s economic health. . . . The

tariff my fellow Commissioners and I approved today will contribute to attracting much-

needed, new economic development to Michigan.’” MPSC Press Release, dated

November 22, 2005, Exhibit HSC-3 (MPG-3).

More recently, the Commission reaffirmed its support for Consumers’ economic

development rates when it approved Consumers’ proposed GED (“General Economic

Development”) provision for Rate GPD. Order dated June 10, 2008, MPSC Case No.

U-15245, p. 89. Despite opposition to the GED provision, the Commission stated,

[T]he Commission is persuaded that the time is right for encouraging business development, job creation, and economic growth in Michigan. Economic development, particularly in the difficult economic times that we are currently experiencing in Michigan, is in the best interests of all ratepayers.

Id. It is clear that the Commission recognizes the important role that economic development

rates can play in support of long term investment in Michigan’s economy. The existence of

economic development rates is a key component in Michigan’s economic recovery and

should continue to be supported by the Commission. Accordingly, in the current case, the

Commission should continue to use its authority to support economic development by

rejecting Consumers' proposal to prematurely terminate Rate E-1.

FRASER TREBILCOCK

DAVIS & DUNLAP,


48933

Clean, Renewable and Efficient Energy Act is to, “Encourage private investment in renewable energy and energy efficiency.” Section 1(2)(c) of Public Act 295 of 2008.

13

F. Hypothetical concerns that Rate E-1 may not always recover the costs to provide service to the Rate E-1 customer are premature and speculative.

While neither Consumers nor any other party has offered any substantive testimony

in support of Consumers’ proposal to prematurely terminate Rate E-1, it is apparent that

Consumers has assumed that Rate E-1 will not comply with the terms of Public Act 286 after

October 5, 2013. Even if one assumes that Section 11 of Public Act 286 requires each

individual rate schedule to equal its fully embedded cost to provide service within five years

of the effective date of the statute, which it does not, there is simply no evidence in this

record to support the idea that Rate E-1 will not comply with the statute after that date.

Consumers’ costs and revenues, as presented in this case, are for test year 2009.

There is no record evidence of what Consumers’ cost to provide Rate E-1 service will be in

2013 and beyond. Likewise, there is no record evidence of what the Rate E-1 revenues will

be in 2013 and beyond. Rate E-1 revenues are certainly not static. Rate E-1 revenues vary

based on several factors. First, of course, future revenues under Rate E-1 will depend upon

future Rate E-1 sales. Also, Rate E-1 includes an annual adjustment factor that changes the

rate based on Consumers' annual average variable energy cost. Moreover, Rate E-1 includes

an adjustment for power factor. It is simply impossible to know today what the Rate E-1

revenues will be in 2013 and beyond.

It is similarly impossible to know today the relationship between those uncertain

future revenues and Consumers’ uncertain future costs to provide service under Rate E-1. As

a result, the hypothetical basis that is underlying Consumers’ proposed tariff amendment,

i.e., that Rate E-1 revenues will not equal the costs to provide Rate E-1 service after October

5, 2013, is completely unfounded and speculative.

FRASER TREBILCOCK

DAVIS & DUNLAP,


48933

14

Speculation and conjecture are not appropriate substitutes for data and facts, and are

legally insufficient bases to support a Commission decision to prematurely terminate Rate

E-1. An agency’s decision may not be based on speculation. Ludington Service Corp v

Commissioner of Insurance, 444 Mich 481, 483, 494-97, 500-501, 507; 511 NW2d 661

(1994), amended 444 Mich 1240 (1994), (unanimously reversing agency decision that

exceeded the limits of the agency’s statutory authority, that was based on speculation instead

of the required competent, material and substantial evidence); In Re Complaint of Pelland,

254 Mich App 675, 685-86; 658 NW2d 849 (2003); Battiste v Dept of Social Services, 154

Mich App 486, 492; 398 NW2d 447 (1986) (holding that an agency’s decision was not

supported by evidence that a reasonable person would consider adequate). Moreover, things

not proven must be taken as non-existing since a decision cannot be based upon conjecture.

Star Steel v USF&F, 186 Mich App 475, 481; 465 NW2d 17 (1990); See also, Skinner v

Square D Co, 445 Mich 153; 516 NW2d 475 (1994). Unproven allegations simply cannot

stand in the place of evidence. There is simply no evidence in this record to support the idea

that Rate E-1 will not comply with Public Act 286 after October 5, 2013.

Additionally, Consumers’ request to prematurely terminate Rate E-1 on October 5,

2013 assumes that Section 11 of Public Act 286 will still be in effect nearly five years from

now. Even if one assumes that the current terms of Public Act 286 require each individual

rate to equal its fully embedded cost to provide service within five years after the effective

date of the statute, there is no basis to believe that the current terms of Section 11 of Public

Act 286 will be unchanged when October 5, 2013 arrives. The state’s laws are continually

subject to amendment. It is premature to amend the duration of the Rate E-1 tariff as part of

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DAVIS & DUNLAP,


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15

this proceeding, in a misguided effort to supposedly ensure Rate E-1’s compliance with what

is assumed will be state law five years from now when compliance must be achieved.

Consumers’ proposed change to the term of Rate E-1 is baseless and unnecessary

within the context of this proceeding. Whether Rate E-1 will be in compliance with state law

five years from now is an issue that is simply not ripe for decision at this time. A claim is

not ripe for decision if it rests upon contingent future events that may not occur as

anticipated, or indeed may not occur at all. Texas v United States, 523 U.S. 296, 300 (1998).

In this proceeding, Consumers is seeking a remedy for relief that it anticipates may be

necessary in the future. It is simply inappropriate for the Commission to provide such relief

within the context of this case.

The Commission should reject any invitation to decide such an important and

consequential issue on the basis of allegations or implications that are patently premature,

clearly speculative, and totally unsupported in the record. A far better course of action

would be for the Commission to use its order in this case as an opportunity to make a clear

and definitive statement of its continuing support for Michigan's economic development and

for the important role of Rate E-1 in that development over the full term of the rate, as

originally approved by the Commission.

G. The Rate E-1 customer, HSC, has made significant investments in Michigan and has created Michigan jobs. Michigan’s ability to attract additional investments and high-paying jobs to this state could be jeopardized if the state repudiates its commitment to provide Rate E-1 for its original ten-year term. FRASER



48933

Rate E-1 was intended to induce economic development in Michigan, and it worked.

Less than two months after Rate E-1 was approved, HSC entered into a Rate E-1 contract

with Consumers committing to make the investments necessary to qualify for the new Rate.

16

See, Exhibit HSC-2 (MPG-2). To qualify for the rate, a customer had to increase its load at a

single location by at least 70,200,000 kWh per year. Tr. 246.

Over the past four years that Rate E-1 has been in effect, HSC has fulfilled its

commitments. It is undisputed that HSC made significant investments in Michigan,

increased its electric load, and added many new jobs. First, in June 2006, it was announced

that HSC would invest $327 million in Michigan over the following three years creating 463

jobs. Exhibit HSC-4 (MPG-4). Then, in March 2007, HSC announced further plans to

invest up to $1 billion in its manufacturing facility in Hemlock, Michigan, creating 589 new

jobs. Exhibit HSC-5 (MPG-5). Governor Granholm was quoted as saying, “‘Hemlock

Semiconductor is a great example of the types of high-tech, high-growth companies we are

working to bring to Michigan to invest and grow . . . This Company chose to expand in

Michigan twice already, and we look forward to continuing to work with them to transform

our economy and create good-paying jobs for workers in Saginaw County.’” Id.

More recently, HSC announced a third major expansion for its Hemlock facility

committing to invest nearly another $1 billion in this state. Exhibit HSC-7 (MPG-7). In just

the past few years, HSC committed to invest approximately $2.5 billion in Michigan creating

nearly 1,100 new jobs. Id. In another MPSC case, Consumers' witness Mr. Miller has

admitted that Rate E-1 was an important factor contributing to the investments by HSC in

Michigan, which generated $39 million in state revenue. Direct Testimony of Hubert W.

Miller III, MPSC Case No. U-15675, pp. 2-4. Despite the success of Rate E-1, Consumers is

now proposing to unnecessarily and prematurely terminate the rate.

FRASER TREBILCOCK

DAVIS & DUNLAP,


48933 If the Commission approves Consumers’ proposal to terminate Rate E-1 prior to the

expiration of its stated ten-year term, the impact on Michigan’s ability to attract new

17

investment could be great. As Mr. Gorman explained, premature termination of Rate E-1

would essentially constitute the State of Michigan reneging on its promise to HSC, which

would have serious policy implications:

Economic development rates are important tools for encouraging investment and creating jobs. It is not uncommon for commitments to be made to businesses to encourage economic development. Rate E-1 was such a commitment. The Rate E-1 customer was encouraged to invest in Michigan and create jobs in Michigan in return for discounted rates through November 30, 2015. Business decisions were made based upon the understood terms of Rate E-1. If Consumers’ proposal to prematurely terminate Rate E-1 is approved, that would send a terrible message to businesses that they cannot rely upon those economic development commitments in Michigan.

Tr. 249. It would be terrible public policy for the state to induce investment in Michigan

with economic development policies, and then repudiate those policies once the investments

have been made. Therefore, Consumers’ proposal to prematurely terminate Rate E-1 should

be rejected.

H. HSC has a valid Rate E-1 contract that should not be breached.

Consumers entered into a valid Rate E-1 service contract with HSC effective

January 1, 2006 with a term ending November 30, 2015. See, Exhibit HSC-2 (MPG-2).

Under the terms and conditions of that contract, Consumers agreed to the following

commitment: “The Company will not seek modifications of this tariff during the term of this

tariff without the Customer’s consent.” Id., p. 2, ¶ 1. Despite this contractual commitment,

Consumers proposed in this proceeding to change the duration of the Rate E-1 tariff. HSC

was not consulted and did not consent to the proposed modification. Tr. 245. Consumers’

conduct is a clear breach of its contractual obligations that should not be tolerated or

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18

condoned by this Commission. This fact provides yet another reason why Consumers’

proposal should be rejected.

I. The Commission Staff opposes Consumers’ proposal to prematurely terminate Rate E-1.

The Commission’s own Staff has consistently supported economic development rates

and opposes Consumers’ proposal to prematurely terminate Rate E-1. For instance, the

Commission opened a proceeding requesting comments on the implementation of Public Act

286 for Consumers Energy in MPSC Case No. U-15681. In that proceeding, the

Commission Staff expressly opposed Consumers’ proposed elimination of economic

development rates. “Staff supports Consumers Energy's proposal that in its next rate case,

Consumers Energy should propose a means of phasing out the existing rate skewing in these

rate schedules except for any existing economic development rate(s) and for any overlapping

period that exceeds the five year requirement.” Staff’s Reply Comments, MPSC Case No.

U-15681, p. 2 (emphasis added).

The Commission Staff also expressly opposes Consumers’ efforts to shorten the term

of Rate E-1 in this proceeding. Commission Staff witness Mr. Mark J. Pung testified in

direct opposition to Consumers’ proposal to prematurely terminate Rate E-1. Tr. 1271. The

Staff's position provides a clear indication that the Staff recognizes the critical importance of

the State of Michigan honoring its commitment to HSC and maintaining its support for the

economic development that Michigan so desperately needs. FRASER

TREBILCOCK J. Summary. DAVIS &

DUNLAP, P.C.

LAWYERS LANSING, MICHIGAN

48933

The Commission should maintain the existing termination provision in Consumers'

Rate E-1. Consumers’ proposal to prematurely terminate Rate E-1 should be firmly and

expressly rejected because: (1) the proposed change is not supported by competent, material,

19

and substantial evidence; (2) Rate E-1 is a variable cost economic development rate that fully

recovers all of Consumers’ incremental costs to provide service; (3) Public Act 286 does not

require the early termination of Rate E-1 and Consumers need not terminate Rate E-1 in

order to satisfy the act’s requirement to eliminate inter-class subsidies within five years; (4)

economic development rates provide substantial economic benefits and are an important part

of Michigan's public policy, which the Commission has recognized in the past and should

continue to support going forward; (5) hypothetical concerns that Rate E-1 may not recover

its cost to provide service in the future are baseless and speculative; (6) it would be poor

public policy for the state to repudiate its economic development commitments after the

induced investments have been made; and (7) the Commission should not condone or

support Consumers’ breach of HSC's valid contract for Rate E-1 service for a term of ten

years. The Commission’s own Staff recognizes the importance of continuing Rate E-1 and

expressly opposes Consumers’ unsupported proposal to prematurely terminate Rate E-1 prior

to the end of its previously authorized term. The Commission should adopt the

recommendation of the ALJ and direct Consumers to maintain the existing ten-year term of

the Rate E-1 tariff.

III. THE ALJ CORRECTLY RECOMMENDED THAT THE COMMISSION AMEND CONSUMERS’ RATE GSG-2 TO PREVENT AN OVER-RECOVERY OF DISTRIBUTION COSTS WHERE CUSTOMERS COMPENSATE CONSUMERS FOR DISTRIBUTION COSTS THROUGH SEPARATE FACILITIES AGREEMENTS.

On page 209 of her PFD, the ALJ addressed HSC’s proposal to amend Rate GSG-2

to prevent an over-recovery of Consumers’ distribution costs for customers that have entered

into certain separate facilities agreements with the utility. The ALJ summarized HSC’s

arguments in support and correctly noted that no party opposed HSC’s proposed amendment,

FRASER TREBILCOCK

DAVIS & DUNLAP,


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20

either in testimony or in briefs. Id. The ALJ recommended that the requested tariff change

be adopted. Id.

Rather inexplicably, Consumers filed exceptions to the ALJ’s recommendation.

Consumers’ Exceptions, pp. 86-87. For the first time in this proceeding, Consumers

expressed concern with HSC’s proposed amendment. It is clear from Consumers’

exceptions, however, that Consumers fails to understand the amendment or its implications.

Consumers complains that HSC failed to show that Consumers will over-recover its costs

without the amendment. Id., p. 86. HSC’s witness, Mr. Gorman, however, carefully

explained how the amendment is needed to avoid an over-recovery of Consumers’

distribution costs. Tr. 260-261. Consumers mischaracterizes HSC’s proposal as merely an

“attempt to obtain further benefits for Rate E-1” when HSC’s proposal is clearly with respect

to Rate GSG-2, and not Rate E-1. Consumers’ Exceptions, p. 86. Consumers further argues

that HSC ignores the distinction between normal and premium facilities, however, the

distinction was not ignored. The distinction, in this instance, is not relevant. Consumers also

argues, in cursory fashion, that the ALJ’s recommendation is inconsistent with her

recommendation to adopt the Staff’s cost of service wherein the cost of service allocates

distribution costs to Rate GSG-2. Id., pp. 86-87. Consumers’ argument, however, is simply

false. There would be no inconsistency in adopting both the Staff’s cost of service and the

proposed tariff language. Further, Consumers argues that adopting the proposed amendment

would create “inconsistencies with the treatment of premium facilities under the Company’s

other tariffs.” Id., pp. 86-87. Not only does Consumers not even bother to identify, or

describe, the alleged “inconsistencies” that would be created by adopting HSC’s proposed

FRASER TREBILCOCK

DAVIS & DUNLAP,


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21

amendment, but there would be no inconsistencies. Nevertheless, Consumers recommends

that the Commission reject the ALJ’s recommendation.

HSC urges the Commission to adopt the ALJ’s recommendation. The arguments

belatedly put forth by Consumers are entirely without merit. The record clearly explains

how Consumers will over-recover its distribution costs without the proposed amendment.

HSC’s proposed amendment is clearly with respect to Rate GSG-2, and not Consumers’ Rate

E-1. HSC clearly understands the difference between normal and premium facilities, and its

proposed amendment does not ignore that distinction. The ALJ’s recommendation to adopt

HSC’s tariff amendment is not inconsistent with the ALJ’s recommendation to adopt the

Staff’s cost of service. Consumers’ bald allegation that there will be inconsistencies in the

treatment of premium facilities resulting from HSC’s proposed tariff language is entirely

unsupported and simply false. The ALJ appropriately determined that Rate GSG-2 should be

amended as HSC suggests. Self-generation customers should only be charged for

Consumers’ actual costs of providing standby service under Rate GSG-2. The Commission

should adopt the ALJ’s recommendation and amend Rate GSG-2.

A. Background.

Consumers’ General Service Self Generation rates, Rates GSG-1 and GSG-2, are

available to customers who have their own generation. A customer is able to choose one of

these rates for standby service to provide back-up power for those times when its own

generation is not available, or supplemental power when the customer’s consumption

exceeds the generator’s capacity. Rate GSG-1 is available to customers with small

generators, less than 100 kW, receiving service at secondary voltage levels. Rate GSG-2 is

available to customers receiving service at primary voltage levels. In most cases, the charges

FRASER TREBILCOCK

DAVIS & DUNLAP,


48933

22

in Rate GSG-2 are appropriate. In some cases, however, the Rate GSG-2 charges result in

Consumers’ double-recovery of costs because the customer has already paid for those costs

pursuant to the terms of a separate facilities agreement. Accordingly, Rate GSG-2 should be

amended to avoid an over-recovery of distribution costs in those cases where Consumers has

been otherwise fully compensated for its distribution costs.

B. Consumers’ belated effort to address HSC’s proposed amendment should not be permitted.

On April 27, 2009, HSC’s filed the testimony of its witness Mr. Gorman. In his

April 27 filing, Mr. Gorman advocated for an amendment to Consumers’ Rate GSG-2 that

would ensure that Consumers would not over-recover its distribution costs where Consumers

has otherwise been fully compensated for delivery service. On September 17, 2009, in its

exceptions, Consumers raised concerns with HSC’s proposed amendment for the very first

time in this proceeding. Consumers’ belated effort to oppose HSC’s proposed amendment, if

permitted, would circumvent the contested case process. Consumers’ effort is fundamentally

unfair and should be rejected.

Consumers had notice of the proposed amendment once the proposed language was

filed in the docket over five months ago. If Consumers had concerns with the proposed

amendment, it should have responded in its rebuttal testimony filed on May 18, 2009.

Consumers did not do so. Had Consumers expressed its opposition in rebuttal testimony,

HSC would have had the opportunity to address Consumers’ concerns during the hearing. At

the June hearing, HSC could have cross-examined Consumers’ witnesses on the matter, and

admitted into evidence additional exhibits, to rebut Consumers’ concerns and to further

illuminate the facts for the ALJ and the Commission. Consumers’ conduct denied HSC that

opportunity.

FRASER TREBILCOCK

DAVIS & DUNLAP,


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23

Consumers could have also addressed HSC’s proposed amendment in Consumers’

initial brief filed on July 9 in this case. Consumers, likewise, did not do so. Had Consumers

raised its concerns that at time, HSC could have responded two weeks later in its reply brief.

In preparing her PFD, and making her recommendations to the Commission, the ALJ could

have considered the arguments put forth. Consumers’ conduct deprived the Commission

from receiving the benefit of the ALJ’s consideration of Consumers’ arguments.

Consumers had months with which to consider and respond to the proposed

amendment, but chose not to do so. Instead, Consumers chose to hide its position in this

case until it filed its exceptions on September 17, 2009. In so doing, Consumers deprived

HSC from having an effective opportunity to further develop the record, deprived the ALJ

from having further evidence and arguments upon which to make her recommendation, and

deprived the Commission of the benefit of further evidence and the ALJ’s recommendation

considering the new arguments. Instead, the Commission is now left to the resolve the issue

entirely on its own, based on a lesser developed record. Consumers seeks to circumvent the

contested case process, a process that is designed to illuminate the facts and provide the

parties with a fair opportunity to be heard. Consumers’ efforts to raise new issues, for the

very first time, in its exceptions to the PFD should not be permitted. The Commission

should adopt the ALJ’s recommendation and approve the proposed Rate GSG-2 amendment.

C. Rate GSG-2 should be amended to avoid an over-recovery of distribution costs where Consumers has been otherwise fully compensated for delivery service. FRASER

TREBILCOCK DAVIS &

DUNLAP, P.C.

LAWYERS LANSING, MICHIGAN

48933

HSC has entered into a written facilities agreement with Consumers to separately

compensate Consumers for its costs to build and maintain certain additional facilities

necessary to provide delivery service to HSC. Tr. 260. Under Rate GSG-2, Consumers

24

collects these same costs a second time. To prevent this unfair double-billing, Consumers’

Rate GSG-2 tariff needs to be amended to ensure that Consumers does not over-recover its

costs to provide distribution service. As Mr. Gorman testified, the tariff currently does not

provide an adequate credit for situations where a customer such as HSC separately

compensates Consumers for all incremental distribution costs to provide delivery service:

The rate does not contemplate a situation, such as that which currently applies to the Rate E-1 customer, where the customer compensates Consumers for all incremental distribution cost, e.g. additions and modifications to facilities, and monthly O&M separately in a facilities charge payment. In such a situation, the duplicative charges in Rate GSG-2 over-recover Consumers' actual costs to provide service. While Consumers does provide a Substation Ownership Credit, that credit alone is not sufficient to bring Consumers' charges down to a level that accurately reflects Consumers’ actual costs to provide delivery service. Rate GSG-2 should be amended to address this defect.

Tr. 260. To address this problem, Consumers’ Rate GSG-2 tariff should be amended.

The Rate GSG-2 Delivery Standby Charges should apply only to load served under

standard tariff service rates where Consumers has not been separately compensated for its

distribution costs. In those instances where Consumers has already received full

compensation for its delivery costs, the delivery capacity charge and the delivery distribution

charge under Rate GSG-2 should not apply. For example, HSC already makes separate

payments to Consumers to cover all of the costs of the distribution facilities that serve its

load under Rate E-1. That load is incremental new load that has been added in connection

with HSC's new expansion in Michigan. Under Rate E-1, HSC's new load is the load over

the base levels of usage specified in its contact for service under Rate E-1. All "old" load

below the base levels of usage is provided under Consumers’ Rate GPD.

FRASER TREBILCOCK

DAVIS & DUNLAP,


48933

25

If HSC were to employ self-generation to serve a portion of its new load, and then

contract for stand-by service under Consumers' Rate GSG-2, then the distribution facilities

used to provide that stand-by service would be facilities for which Consumers has already

been paid in full under the terms of its separate facilities agreement. Accordingly, if

Consumers were allowed to impose additional distribution charges for those same facilities

under Rate GSG-2, those charges would result in double recovery of Consumers' costs.

Therefore, with respect to the new load served through those facilities, the delivery capacity

charge and the delivery distribution charge under Rate GSG-2 should not apply. As Mr.

Gorman explained,

For the Rate E-1 customer, the delivery capacity charge should apply only to this customer’s contractually specified maximum demand base currently served under Rate GPD. All capacity in excess of the maximum base demand, i.e. Rate E-1 load, should not incur a delivery capacity charge in Rate GSG-2. Similarly, the Rate GSG-2 distribution charge should likewise only apply to the Rate E-1 customer's contractually specified monthly kWh base. As such, I recommend the following be inserted in Rate GSG-2 under the category “Maximum Standby Demand.”

The delivery capacity charge and delivery distribution charge shall not apply to load served through facilities for which a customer has a separate distribution facilities agreement with Consumers. For such a customer, the capacity and distribution charges shall be limited as follows:

1. The delivery capacity charge shall be applied up to the maximum monthly demand base as identified in the customer’s contract. Delivery capacity charges shall not apply to kW in excess of the monthly demand base.

FRASER TREBILCOCK

DAVIS & DUNLAP,


48933 2. The delivery distribution charge shall be applied up to the monthly kWh base as identified in the customer’s contract. Delivery

26

distribution charges shall not apply to kWh in excess of this kWh base.

With these changes, Rate GSG-2 will fully recover Consumers’ distribution cost. Without these rate modifications, Consumers will over-recover its distribution cost for customers that have separately compensated Consumers for distribution-related cost in a facilities agreement.

Tr. 261. Mr. Gorman’s proposed Rate GSG-2 tariff amendment was unrebutted and

should be approved.

D. HSC’s proposed Rate GSG-2 amendment is fully supported by the record.

Consumers complains that HSC’s proposed amendment was unsupported by the

record. Consumers’ Exceptions, p. 86. Consumers’ arguments are simply false. As

explained above, Mr. Gorman carefully explained how Consumers would over-collect its

distribution costs if Rate GSG-2 is not amended to address those cases where Consumers is

separately compensated for certain distribution facilities through separate facilities

agreements. Mr. Gorman’s testimony is clearly part of the record and was entirely

unrebutted. See, Tr. 260-261.

E. The proposed amendment is with respect to Rate GSG-2, not Rate E-1.

Consumers complains that HSC’s proposed amendment is simply another attempt to

obtain “benefits for Rate E-1.” Consumers’ Exceptions, p. 86. This is also simply false.

The proposed amendment is clearly with respect to Rate GSG-2, not Rate E-1. An

examination of the proposed tariff language clearly shows that the amendment would be

applicable to any load served through facilities for which a customer has already paid

Consumers’ costs pursuant to the terms of the separate facilities agreement. Mr. Gorman’s

reference to Rate E-1 was simply an explanatory example of how one particular customer

FRASER TREBILCOCK

DAVIS & DUNLAP,


48933

27

would be unjustly and unreasonably impacted by Rate GSG-2 without the proposed

amendment.

Additionally, the proposed amendment would only apply if a customer has self-

generation and is taking service pursuant to Rate GSG-2. If HSC’s load continues to receive

service under Rate E-1, then the Rate GSG-2 amendment would not apply. The amendment

would only benefit HSC when HSC engages in self-generation and takes Rate GSG-2

service. It is nonsensical to suggest that the same load could be simultaneously served under

both Rate E-1 and Rate GSG-2, and that the Rate GSG-2 amendment could secure additional

benefits for Rate E-1. Consumers’ argument is without merit, and should be rejected.

F. The proposed amendment does not disregard Consumers’ distinction between normal and premium facilities.

Consumers also complains that the proposed amendment ignores the distinction

between normal and “premium” facilities. Consumers’ Exceptions, p. 86. Consumers

provided no further explanation. Apparently, the drafter of Consumers' exceptions has

assumed that the distribution costs recovered through a separate facilities agreement are

always strictly limited to the incremental costs of premium facilities. Indeed, that was

Consumers' policy in the past. If that were still Consumers' policy, then it would be

appropriate to charge Rate GSG-2 delivery charges to compensate the utility for the costs of

the standard, non-premium facilities serving the customers. The unfortunate reality,

however, is that Consumers has unilaterally changed its policy, at least with respect to HSC. FRASER

TREBILCOCK In the past, Consumers distinguished between standard distribution facilities and

extraordinary facilities. Consumers' costs for the standard distribution facilities were

recovered through Consumers' published tariff rates, while Consumers' costs for the

extraordinary facilities (i.e., redundant facilities) were paid separately to Consumers pursuant

DAVIS & DUNLAP,


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28

to written facilities agreements. Recently, however, Consumers has insisted that HSC

separately pay for all of the new distribution facilities installed to serve HSC's expanded

load. In other words, Consumers has insisted that HSC enter into a facilities agreement

requiring HSC to pay for both (1) the facilities required to provide HSC with a standard level

of service and (2) the so-called "premium" facilities required to provide HSC with redundant

service. Since HSC makes payments under its facilities agreement for all of Consumers'

costs related to these new distribution facilities, any additional charges imposed for these

same facilities under Rate GSG-2 would constitute a double recovery.

Mr. Gorman’s analysis carefully draws a distinction between existing distribution

facilities, and facilities added to serve new load pursuant to a separate facilities agreement.

Under Consumers’ new practice (at least with respect to HSC), the recovery of distribution

costs through a separate facilities agreement is not limited to the costs of premium facilities

that are incremental to the costs of comparable standard service facilities. As Mr. Gorman

explained, Consumers is compensated for all of its distribution costs, including O&M,

through the separate facilities agreement. Tr. 261. If Consumers is permitted to charge Rate

GSG-2 delivery charges for load served through facilities subject to a separate facilities

agreement, then Consumers will over-collect its distribution service costs. Id. Consumers

will collect for its distribution service via both the Rate GSG-2 delivery charges, and the

separate facilities agreement. The result would be an unjust and unreasonable rate for these

customers. FRASER TREBILCOCK

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G. Approving the proposed amendment would not be inconsistent with adopting the Staff’s cost of service.

Consumers also asserts that adopting the ALJ’s recommendation to approve the

proposed tariff language would conflict with the ALJ’s other recommendation that the

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Commission adopt the Staff’s cost of service. Consumers’ Exceptions, p. 86. Consumers

observes that the Staff’s cost of service allocates distribution net plant and O&M costs to

Rate GSG. Id. Consumers suggests that if the Commission adopts the proposed tariff

amendment, then the Commission should ensure that no distribution costs are allocated to

Rate GSG. Consumers’ argument should be rejected.

Consumers’ argument demonstrates that Consumers does not understand the

proposed amendment. The amendment clearly applies only in those cases where a Rate

GSG-2 customer has entered into a separate facilities agreement with the Company for

certain loads. Certainly, the amendment would not apply to all loads for all Rate GSG-2

customers. Where a customer does not compensate the utility for distribution costs through a

separate facilities agreement, Rate GSG-2 delivery charges are appropriate to recover the

utility’s distribution costs. An allocation of distribution costs to Rate GSG would be

appropriate even where the Commission adopts the proposed amendment.

H. Approving the proposed amendment would not create an inconsistency in the treatment of premium facilities within Consumers’ tariff.

Consumers also complains that the proposed amendment would create an

inconsistency in how premium facilities are treated in Consumers’ other tariffs. Consumers’

Exceptions, p 87. Consumers, again, provided no further explanation. Consumers’ argument

is reflective of the drafter’s mistaken assumption that separate payments for distribution

service pursuant to facilities agreements are limited to recovering the utility’s costs of

“premium” facilities. As explained above, that is simply untrue, at least with respect to HSC.

HSC’s separate facilities agreement requires HSC to pay for all of Consumers’ distribution

costs for the new load served through those facilities, not merely the incremental costs

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beyond those that would be associated with normal facilities. Thus, the proposed

amendment would not create an inconsistency in the treatment of “premium” facilities.

The proposed amendment would also not create an inconsistency in the treatment of

“premium” facilities under Consumers’ other tariffs because the concept of “premium”

facilities does not exist within any of Consumers’ tariffs. The Commission should note that

Consumers fails to identify any inconsistent tariff provision, or cite any examples of where

or how an inconsistency might occur. The reason for Consumers’ failure is that Consumers’

tariffs do not contain the concept of “premium” facilities. A search of Consumers’ entire

rate book reveals that the term “premium” is never used with respect to facilities.

Consumers, itself, created the concept of “premium” facilities, and uses the term in a manner

that is separate and distinct from the tariff defined term of “extraordinary” facilities. See,

Section C1.4, First Revised Sheet No. C-3.00, Consumers’ Rate Book (definition of

extraordinary facilities). There can be no inconsistency in the treatment of such facilities in a

tariff that does not recognize the concept to begin with.

Consumers asserts, without any support, that the proposed amendment, if adopted,

would result in an inconsistent treatment of premium facilities in Consumers’ tariffs. It is

not incumbent upon the Commission, or other parties, to ascertain whatever merit may exist

in the Company’s arguments. For that reason alone, Consumers’ argument should be

rejected. Nevertheless, a careful examination of Consumers’ tariff shows that there are no

other tariff provisions pertaining to “premium” facilities. Furthermore, Consumers’ drafter is

mistaken in his assumptions about the recovery of costs under the separate facilities

agreements. Consumers’ argument is without merit and should be rejected.

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I. Summary.

HSC urges the Commission to adopt the ALJ’s recommendation to approve the

proposed amendment to Rate GSG-2. As a procedural matter, Consumers should not be

permitted to subvert the contested case process. Consumers’ belated arguments deprived

HSC of the opportunity to rebut Consumers’ positions by filing rebuttal testimony, through

cross-examination of witnesses or the admission of evidence at the hearing, or in briefs.

Moreover, Consumers’ conduct deprived the Commission of having a more fully developed

record upon which to determine that Consumers’ arguments are entirely without merit, and

the benefit of the ALJ’s recommendation concerning the same.

Moreover, Consumers’ arguments are substantively without merit. HSC’s proposed

amendment was fully supported by the record and unrebutted by any other party. The

amendment would apply on a non-discriminatory basis to all similarly situated Rate GSG-2

self-generation customers who receive standby service over separate facilities for which they

have already paid pursuant to the terms of a separate facilities agreement. The amendment

would not apply to Rate E-1. HSC clearly understands the difference between normal and

premium facilities, and does ignore that distinction. The ALJ’s recommendation to adopt

HSC’s tariff amendment is not inconsistent with the ALJ’s recommendation to adopt the

Staff’s cost of service. Moreover, Consumers’ bald allegation that there will be

inconsistencies in the treatment of premium facilities resulting from adopting HSC’s

proposed tariff language is entirely unsupported and without merit. The ALJ appropriately

determined that Rate GSG-2 should be amended as HSC suggests. Self-generation

customers should only be charged the costs of providing self-generation service. The

Commission should adopt the ALJ’s recommendation and amend Rate GSG.

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FRASER TREBILCOCK

IV. CONCLUSION AND PRAYER FOR RELIEF

HSC respectfully requests that the Commission adopt the ALJ’s recommendations

made in the Proposal for Decision, with respect to the following:

1. The Commission should reject Consumers’ proposed early termination of

Rate E-1. The Commission should make clear that HSC’s Rate E-1 service

will continue through November 30, 2015 as provided for under the current

Rate E-1 tariff and as identified in HSC’s Rate E-1 contract with Consumers.

2. The Commission should amend Consumers’ Rate GSG-2 tariff to prevent an

over-recovery of distribution costs where customers compensate Consumers

for distribution costs through separate facilities agreements.

Respectfully submitted,

FRASER TREBILCOCK DAVIS & DUNLAP, P.C. ATTORNEYS FOR HEMLOCK SEMICONDUCTOR CORPORATION

Date: September 28, 2009 By: David E. S. Marvin (P26564) Jennifer U. Heston (P65202) Business Address: 124 W. Allegan, Suite 1000 Lansing, MI 48933 Telephone: (517) 482-5800 E-mail: [email protected] [email protected]

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124 west allegan street, suite 1000 lansing, michigan

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