consumers energy companyfor ) approval of a power supply...

S T A T E O F M I C H I G A N

BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

* * * * *

In the matter of the application of ) CONSUMERS ENERGY COMPANY for ) approval of a power supply cost recovery plan and ) Case No. U-17918 for approval of monthly power supply cost recovery ) factors for the year 2016. ) ) At the October 11, 2016 meeting of the Michigan Public Service Commission in Lansing,

Michigan.

PRESENT: Hon. Sally A. Talberg, Chairman

Hon. Norman J. Saari, Commissioner Hon. Rachael A. Eubanks, Commissioner

ORDER

History of Proceedings On September 30, 2015, pursuant to 1982 PA 304, MCL 460.6j et seq. (Act 304), Consumers

Energy Company (Consumers) filed an application, with supporting testimony and exhibits,

requesting authority to implement a power supply cost recovery (PSCR) plan in its rate schedules

for 2016 metered jurisdictional sales of electricity. In its initial application, Consumers requested

approval of a uniform monthly maximum PSCR factor of $(0.00014)1 per kilowatt-hour (kWh) for

all classes of customers. Consumers also requested approval of its PSCR plan for 2016. The

company’s filing was accompanied by the testimony of witnesses Natalie N. Busack,

1 Also written as “negative $0.00014.”

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Daniel S. Alfred, Jim K. Chilson II, David F. Ronk, Robert C. Schram, Jason M. Shore, and

Sara T. Walz.

A prehearing conference was held on December 4, 2015, before Administrative Law Judge

Sharon L. Feldman (ALJ). The ALJ granted petitions for leave to intervene filed by the

Association of Businesses Advocating Tariff Equity (ABATE); the Great Lakes Renewable

Energy Association (GLREA); the Independent Power Producers Coalition of Michigan (IPPC-

Mi); the Michigan Environmental Council and the Sierra Club (MEC/Sierra); the Michigan

Department of the Attorney General (Attorney General); the Michigan Power Limited Partnership

and Ada Cogeneration Limited Partnership, jointly (MPLP/Ada); and the Midland Cogeneration

Venture Limited Partnership (Midland). The Commission Staff (Staff) also participated in the

proceedings.

Subsequently, on February 23, 2016, MEC/Sierra filed a motion to compel discovery.

Consumers filed a response on February 29, 2016. At the March 3, 2016 motion hearing, the ALJ

granted the motion with the proviso that the parties work to craft a protective order. On March 30,

2016, MEC/Sierra filed the testimony of James Clift and Melissa Whitten, with proposed exhibits

filed in part under seal. Also on March 30, 2016, the Attorney General filed the testimony of

Sebastian Coppola, with proposed exhibits filed in part under seal. On April 4, 2016, the ALJ

entered a protective order.

On April 29, 2016, Consumers filed the rebuttal testimony and exhibits of Brian D. Galloway

and Keith G. Troyer. Consumers also filed the rebuttal testimony and exhibits of Ms. Walz, and

Messrs. Alfred, Chilson, and Ronk, with portions of Ms. Walz’ and Mr. Ronk’s testimony

designated as confidential and filed pursuant to the protective order in the docket.

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On May 18, 2016, MEC/Sierra filed a motion to unseal portions of documents designated

under protective order. On May 23, 2016, Consumers filed its response. The parties resolved the

matter prior to the evidentiary hearing.

An evidentiary hearing was held on May 25 and May 26, 2016. At the hearing, Ms. Walz and

Messrs. Alfred, Chilson, Clift, Gallaway, and Ronk appeared and were cross-examined, while

testimony of the remaining witnesses was bound into the record without need for them to appear in

person. On July 15, 2016, Consumers, GLREA, MEC/Sierra, the Attorney General, and the Staff

filed initial briefs, portions of which were redacted or filed under seal. On July 18, 2016,

MPLP/Ada submitted a letter advising that they did not intend to file an initial brief. Reply briefs

were filed by Consumers, GLREA, MEC/Sierra, the Attorney General, and the Staff on August 17,

2016, portions of which were redacted or filed under seal. The record consists of 597 pages of

transcript and 63 exhibits.

On June 9, 2016, the Commission issued an order indicating that, in order to ensure a timely

resolution to this pending matter, and pursuant to MCL 24.281(1), the Commission would read the

hearing record in this case.2 As such, no proposal for decision (PFD) will be issued and the parties

will not file exceptions to a PFD or replies to exceptions.

Overview of the Record and Disputed Issues

Consumers offered testimony from nine witnesses. GLREA offered one witness, as did the

Attorney General. MEC/Sierra offered testimony from two witness. A summary of each witness’s

testimony is set forth below, with Consumers’ testimony summarized in Section A, GLREA

summarized in Section B, MEC/Sierra in Section C, and the Attorney General in

2 See, the June 9, 2016 order in Case No. U-17918.

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Section D. Rebuttal testimony from any party is set forth below the section of testimony that is

being rebutted.

A. Consumers

Natalie N. Busack, Senior Rate Analyst II in the Revenue Requirements Section of

Consumers’ Rates Department, testified regarding the calculation of the 2016 PSCR factor.

Ms. Busack stated that she is responsible for forecasting the company’s monthly PSCR factor, as

well as its revenue requirement. She described the mathematical calculations involved to establish

the company’s proposed uniform monthly maximum PSCR factor of $(0.00014) per kWh for all

classes of customers and noted that she employed data supplied by Consumers’ employees and

witnesses Messrs. Alfred, Schram, Shore, and Walz. 3 Tr 46-50; Exhibit A-2.

Daniel S. Alfred, Senior Business Support Consultant for Consumers’ Transmission and

Regulatory Strategies Department, testified regarding transmission and energy market expenses,

generation-related credits to PSCR costs, and the company’s effort to manage transmission-related

costs. Mr. Alfred stated that Consumers seeks recovery of all transmission- and energy-related

expenses imposed under the Midcontinent Independent System Operator, Inc.’s (MISO) Open

Access Transmission, Energy, and Operating Reserve Markets Tariff (Tariff), which is approved

by the Federal Energy Regulatory Commission (FERC). He stated that his projections were based

on the demand and sales information provided by Consumers’ employee, Jason Shore, and include

charges for the Michigan Joint Zone (MJZ). Consumers will be a transmission owner during the

2016 PSCR plan year and will become a new member of MJZ. This change will result in

additional transmission revenue requirements, for a total of approximately $9 million. Mr. Alfred

also explained the various MISO charges to the company. Consumers’ total transmission expenses

for 2016 are expected to be approximately $407 million. Energy market administration expenses

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for 2016 are expected to be approximately $6.4 million. Mr. Alfred projects that transmission

expenses will rise to approximately $470 million annually by 2020. During the forecast period

through 2020, energy market administration expenses are expected to remain relatively stable

approximately $6 million. 3 Tr 267-291; Exhibit A-1.

Mr. Alfred asserted that Consumers mitigates transmission-related costs by actively

monitoring and intervening in MISO tariff filings, by making sure new transmission investments

are justified and allocated on a cost causation basis, and by recovering appropriate expenses such

as depreciation, as permitted by the FERC-approved MISO tariff. 3 Tr 280-281.

Jim K. Chilson II, Fuels Transportation & Planning Director for Consumers’ Energy Supply

Operations Department, provided testimony regarding the company’s projected costs of coal, oil,

and natural gas used for electric generation for calendar years through 2020. Consumers’

projected coal costs are based on present coal contracts with fixed pricing, present coal contracts

tied to an index using projected index pricing, and market projection for any period of open

position. Mr. Chilson stated that the company maintains a portfolio of coal purchase contracts that

enable the company to secure approximately 70% to 90% of its anticipated total volume of coal by

the fall of each year for the following calendar year, approximately 40% to 50% for the next

calendar year, and approximately 20% to 25% for the third calendar year. Consumers has

commitments for approximately 3.65 million tons of coal for 2016 and anticipates it will need to

purchase more to meet its fuel needs. Up to 1.9 million tons of coal are expected to be purchased

on a spot basis for 2016. In order to meet Environmental Protection Agency (EPA) and U.S.

Department of Justice (DOJ) emission limits for nitrogen oxides (NOX), sulfur dioxides (SO2),

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and particulate matter (PM),3 the company intends to purchase only western coal and low-sulfur

eastern coal. 3 Tr 121-127; Exhibits A-3 through A-7.

Mr. Chilson testified that Consumers is currently in litigation against CSX Transportation

(CSXT), one of its coal transportation providers. He explained that Consumers believes CSXT

charges the company an unfair rate for coal transportation to its Campbell plant and that attempts

to resolve the matter have been unsuccessful. Consumers projects approximately $2.2 million in

litigation expenses for the 2016 PSCR year. Mr. Chilson testified that, if the litigation is

successful, Consumers’ customers may benefit from minimized cost of coal. Accordingly,

asserted Mr. Chilson, the litigation costs are appropriate for inclusion in Consumers’ PSCR plan.

3 Tr 127-129.

Regarding oil and natural gas, Mr. Chilson testified that much of Consumers’ oil and gas for

the 2016 plan year are purchased on a spot basis rather than by contract. A portion of the gas for

Karn 3 and 4 (plants that can burn either natural gas or No. 6 fuel oil) will be purchased on a spot

basis, with the remainder under third-party contract, but with spot-pricing terms. The oil needed

for these plants will be purchased on a spot basis. Gas for the Cobb plant will be purchased on a

spot basis and any fuel oil for the combustion turbines will also be purchased on a spot basis. Any

gas used for the remaining combustion turbines will be obtained from Consumers’ gas utility or

DTE Gas Company pursuant to Commission approved tariff rates. 3 Tr 134-137.

Mr. Chilson explained that the fuel cost estimates are based on price information from the

company’s Corporate Risk Management Department, including the New York Mercantile

Exchange (NYMEX) Henry Hub projections, with transportation costs for natural gas reflecting

3 Consumers reached an agreement with the EPA and the DOJ in September 2014, wherein it

agreed to purchase only western coal and low-sulfur eastern coal. A discussion of the agreement can be found on the DOJ website at the “NEWS” tab.

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firm transportation through DCP Midstream Partners Bay Area Pipeline, interruptible

transportation through Consumers’ gas distribution system, transportation on the SEMCO Energy

Pipeline (SEMCO) lateral pipeline to the Zeeland plant (a natural gas fueled plant), and

transportation to the Jackson plant (also, a natural gas fueled plant) on Consumers’ lateral, as

appropriate. The witness included projected costs for the Zeeland agency agreement, and stated

the company’s expectation that projected costs for the Jackson plant agency agreement will be

similar to the Zeeland plant agreement. 3 Tr 134-142.

Mr. Chilson testified that it is difficult to accurately predict the demand for the higher-cost oil-

and gas-fired units because these units are among the last to be dispatched and utilization depends

on difficult-to-predict variables such as weather and the volatile nature of the oil and gas markets.

Mr. Chilson stated that Consumers has limited storage for oil or gas and believes it is prudent not

to purchase significant volumes ahead of time. He added that Consumers takes steps to minimize

the cost of these fuels by storing what it is able and through use of gas transportation contracts. Id.

David F. Ronk, Jr., Executive Director for Consumers’ Transactions and Wholesale

Settlements Division, testified regarding planning reserves and resources, including resources that

have not been previously approved by the Commission, resources that have been purchased, and

those remaining to be purchased for the plan period. Mr. Ronk explained that a capacity planning

reserve margin target is the amount of capacity that a load serving entity (LSE) maintains to assure

that sufficient capacity exists to provide adequate electric supply in each plan year. He stated that

the company relies on MISO to provide a loss of load expectation (LOLE) report to establish the

amount of generation resources that would be necessary to achieve an LOLE of less than one

occasion every 10 years. MISO then establishes and assigns to all LSEs a reserve margin,

expressed as a percentage of peak firm demand. Mr. Ronk related that, for the 12 months

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beginning June 2015, MISO established a capacity planning reserve margin target of 7.1% of the

company’s demand at the time of MISO’s coincident peak demand and for the period beginning

June 2016, MISO established a capacity planning reserve margin target of at least 7.6%. The

witness indicated that Consumers assumed a capacity planning reserve margin of 7.6% for the

2016 plan year. 4 Tr 301-308.

Mr. Ronk went on to explain that Consumers relies on Zonal Resource Credits (ZRCs) to

facilitate compliance with the planning reserve margin target and one ZRC is considered sufficient

to serve one megawatt (MW) of forecasted demand. Relying on Consumers’ employee,

Jason Shore’s forecasted demand of 8,382 MW and other factors (Exhibit A-19), Mr. Ronk stated

the company’s capacity requirement of ZRCs for 2016 to be 7,539, rising to 7,563 for 2020.

Mr. Ronk said that the company acquired 150 ZRCs in a reverse auction, anticipates purchasing

another 100 ZRCs prior to April 2016, and has long-term contracts with several non-utility

generators (NUGs) for 2,444 ZRCs, as well as the expectation that it will be awarded 92 ZRCs

from MISO due to the company’s use of load modifying resources. Mr. Ronk testified that the

company is approximately 100 ZRCs short of its reserve planning margin target, but anticipates

purchasing capacity through various demand response initiatives currently being tested and

through MISO’s planning resource auction to be conducted in March 2016. He also explained

additional options Consumers has for meeting its planning resource requirements. 4 Tr 308-315;

Exhibit A-9.

Mr. Ronk testified that the company has planned for an upset condition where frequency or

voltage disruption may cause generators over a broad area to interrupt service, resulting in loss of

transmission service and the absence of external power to re-start generators, which in turn, may

cause a lengthy system restoration process. He explained that Consumers has identified the plants

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that have the capability to start without an external power supply. The witness stated these plants

have the capability to supply power to those plants that require external power to start and thus

restore normal conditions. 4 Tr 315.

Mr. Ronk indicated that Consumers has included all charges incurred and revenues received

by Consumers under MISO’s transmission, energy, and operating reserve market tariff in net

PSCR costs to be recovered in the 2016 PSCR plan year and thereafter through 2020. He asserted

that, based on experience with the market to date, Consumers is seeing the largest level of costs in

the “day-ahead asset energy amount” (Exhibit A-10, line 5) and in the “non-excessive energy

amount” (Exhibit A-10, line 32). Mr. Ronk observed that Consumers is seeing the highest

revenues in the “day ahead non-asset energy amount” (Exhibit A-10, line 13) and in the “real time

asset energy amount” (Exhibit A-10, line 33). 4 Tr 317-319.

Mr. Ronk testified that Consumers participates in a renewable resource program that was

approved by the Commission’s January 25, 2005 order in Case No. U-13843. Consumers also has

a renewable energy plan (REP) that was approved by the Commission in the May 26, 2009 order

in Case No. U-15805 and amended by orders in Case Nos. U-16543, U-16581, U-17301, and

U-17752.4 Consumers has developed an energy optimization plan that was initially approved by

the Commission in Case No. U-15805, and subsequently amended by orders in Case

Nos. U-16412, U-16670, U-17138, and U-17351. 4 Tr. 319-324.

Robert C. Schram, Director of Compliance and Quality Systems, Energy Resources Business

Services for Consumers, testified regarding Consumers’ periodic outage plans and random outage

rate (ROR) projections for the 2016 PSCR plan, the availability of generating units, and forecasted

4 It should be noted that the plan has again been amended by the March 29, 2016 order in

Case No. U-17792.

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expenses for urea, aqueous ammonia, lime, and activated carbon for the 2016 plan year and the

five-year forecast period of 2016 through 2020. 3 Tr 51-57.

Mr. Schram stated that seven plants had major outages5 in 2016 resulting in a total of 734

outage days. All major outages were due to repair, overhaul, replacement, and/or upgrades of

major equipment. Outages of shorter duration than 28 days have been planned so that equipment

maintenance can be performed. Now in extended reserve shutdown, four combustion turbine units

are being maintained so that they can be returned to service and available for dispatch in February

2016. 3 Tr 53-56; Exhibit A-11.

Mr. Schram testified that ROR projections were developed using a five-year average from the

years 2010 through 2014, modified to reflect current operating conditions. Some exceptions to the

five-year average were made; for example, Campbell 2 is expected to have a 4.44% higher ROR

due to the urea-based ammonia system (UBAS). Two additional units, Cobb 4 and 5, are

anticipated to have an ROR exceeding 9%. Karn 2 is projected to have a decreased ROR of just

over 4%. The witness noted that the company expects the overall availability of all generating

units will average about 85% over the five-year forecast period. 3 Tr 56-58; Exhibit A-12.

Mr. Schram disclosed that Consumers projects it will spend $2.74 million for urea in 2016,

increasing to $2.97 million over the period 2017 through 2020; $1.47 million for aqueous

ammonia in 2016, increasing to $1.59 million over the period 2017 through 2020; $11.06 million

for lime in 2016, increasing to $16.36 million over the period 2017 through 2020; and $2.69

million for activated charcoal in 2016, increasing to $4.83 million by 2020. These expenditures

are needed to meet air quality and emissions standards. Consumers does not expect to incur

5 A major outage is defined as an outage of 28 days duration or longer. See, 3 Tr 54.

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expenses or generate revenue related to NOX or SO2 in 2016. 3 Tr 58-64; Exhibits A-13 through

A-16.

Jason M. Shore, Director of Planning and Analysis for Consumers, testified regarding the

company’s electric deliveries, generation requirements, and peak demand forecasts for the years

2016 through 2020. Mr. Shore stated that the key variables that affect electric deliveries and

demand forecasts are weather, the economy, and demographics. Forecasts of anticipated growth in

employment, industry, and population provided by IHS Global Insight were used to develop

Consumers’ demographic forecasts for PSCR purposes. Historical data regarding class-level

monthly usage and peak demand was gathered, as well as data related to wholesale, electric

vehicles, polycrystalline production, and energy savings from the company’s smart energy and

energy efficiency programs. The company deduced seasonal variations in demand due to weather

by using a 15-year average of heating degree days and cooling degree days in its econometric

models. Steps were taken to ensure that erroneous data was corrected or removed from the

forecasting models. Based on analysis of all data, Consumers projects that total electric deliveries

will increase in the short-term as the polycrystalline industry returns to 2012 levels by 2018.6 In

the long-run, electric deliveries are expected to return to pre-2013 levels,7 with total electric

deliveries expected to increase 0.04% per year from 2014 through 2020. Energy efficiency

savings are predicted to continue growing at 1% per year throughout the forecast period.

3 Tr 65-70; Exhibits A-17 through A-21.

Sara T. Walz, General Engineering Technical Analyst in the Electric Sourcing and Resource

Planning Section of Consumers’ Energy Supply Operations Department, testified regarding the

6 See, 3 Tr 71-72.

7 See, historic yearly electric and industrial sales graphs at 3 Tr. 71-72.

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company’s forecasts of fuel and net purchased power requirements and costs for the 2016 PSCR

plan and the five-year forecast period, as summarized in her exhibits A-22 through A-24.

Exhibit A-19 was entered into the record as being confidential. Ms. Walz stated that she prepared

both the 2016 plan and the five-year forecast using the PROMOD production costing program and

included Mr. Chilson’s fuel cost projections, Mr. Shore’s system load and system generation

requirements data, and Mr. Schram’s projections regarding unit availability and sorbent cost

estimates. The witness indicated that her projections reflect the planned retirement of seven of the

company’s coal units, and the mothballing or extended service shutdown status of several

combustion turbine units. Ms. Walz discussed some of the permit limitations that could affect the

dispatch of the Jackson plant, and explained how the plant’s NOX emission limit was modeled in

PROMOD. 3 Tr 226-231; Exhibits A-3 through A-7, A-11 through A-22.

Addressing the company’s power purchase agreements, Ms. Walz identified changes in

purchased power agreements with NUGs, and how purchases from these suppliers were estimated.

She also discussed the reduced dispatch agreements (RDAs) for the Cadillac, Genesee, and

Grayling wood-fueled units. According to Ms. Walz, these three plants are dispatched using the

cost of production based on a wood price, rather than the 12-month rolling average coal price that

is the contract dispatch price. Ms. Walz testified that the RDAs for the wood-fired units were

submitted as Exhibit A-38 in Case No. U-15001-R.8 Ms. Walz asserted the projected net customer

benefit due to the implementation of RDAs for the wood-fired units is approximately $1 million.

3 Tr 233-235; Exhibit A-24.

8 Ms. Walz’ sponsored Exhibit A-24 indicates the units are being dispatched at the 12-month

rolling average cost of coal generation. No documentary evidence of the RDA’s was offered to the record for consideration in this case.

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Regarding the net interchange power, Ms. Walz reviewed the elements set forth in Exhibit

A-22, and explained that increased generation projected to meet the forecasted MISO lead each

day for the following day as part of the MISO Reliability Assessment Commitment process is

treated as a sale to MISO in her exhibits. 3 Tr 235-236.

B. Great Lakes Renewable Energy Association

Geoffrey C. Crandall, Vice President of MSB Energy Associates, Inc., provided expert

testimony on behalf of GLREA. He asserted that Consumers’ proposed PSCR forecast and five-

year plan are flawed and erroneous because they exclude consideration of customer-owned solar

photovoltaic (PV) energy resources. Mr. Crandall stated that customer-owned PV resources are

increasingly used by customers. He estimates that, in 2016, the result of this increasing use would

be a decrease in Consumers’ fuel and purchased power and capacity costs in the amount of

$5.6 million, a reduction in energy sales of 100 gigawatt hours (GWh), and a decrease in the PSCR

rate of $0.001 per MWh. The expected solar PV use is anticipated to be greater as time passes and

can be projected to reduce fuel and purchased power and capacity costs for 2019 by $9.2 million,

and reduce the 2019 PSCR rate by $0.09 MWh. Mr. Crandall believes these reduced costs and

sales should be, but are not, included in the company’s 2016 forecast and five-year plan.

4 Tr. 416-432; Exhibits GLREA-1 through GLREA-10. Exhibits GLREA-1,-2,-5 and -10 are

confidential.

Keith G. Troyer, a General Engineer in the Renewable Energy Section of Consumers’ Energy

Supply Operations Department, provided rebuttal testimony to address GLREA witness

Mr. Crandall’s assertion that Consumers’ PSCR forecast and five-year plan are flawed and

erroneous due to exclusion of consideration for customer-owned solar PV resources. Mr. Troyer

asserted that Consumers is in full compliance with the renewable energy

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standards of 2008 PA 295 (Act 295),9 and will continue to meet its obligations through the PSCR

plan and five-year forecast period. He added that Consumers has a number of solar programs and

projects underway, including customer-owned solar generation, with the goal of increasing

reliance on solar power, but the projects will have an insignificant effect on the company’s

forecasts. 3 Tr 75-86.

C. The Michigan Environmental Council/Sierra Club

James Clift, Policy Director and expert witness for MEC/Sierra, testified regarding

Consumers’ inclusion of a coal transportation litigation cost in its PSCR plan and Consumers’

choice of wind power purchase agreements. Mr. Clift cited MCL 460.6j and asserted that the

litigation cost is not a transportation cost for fuel under the statute and, therefore, cannot be

included in Consumers’ PSCR plan. He opined that while there is a possibility that a successful

outcome could result in lower prices for PSCR customers, it is by no means certain to occur.

4 Tr 433-439; Exhibit MEC-1. Exhibits MEC-2 and MEC-3 are confidential and not part of the

public record.

Mr. Clift also testified regarding Consumers’ selection of the Apple Blossom Wind Farm

project and the company’s rejection of two other wind power projects. He discussed Consumers’

method of determining the value of a particular project, a process known as a net present value

(NPV) analysis. Mr. Clift indicated his conviction that the projects could have been evaluated in

light of their ability to offset the costs of natural gas facilities, rather than by the NPV analysis,

thus revealing a potential for savings during the five-year forecast period that was not obvious in

the NPV. Under cross-examination, the witness conceded that the Apple Blossom Wind Farm

contract was approved by the Commission. 4 Tr 440-464.

9 Also known as the Clean, Renewable, and Efficient Energy Act, MCL 460.1001 et seq.

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Brian D. Gallaway provided rebuttal testimony on behalf of Consumers regarding the

inclusion of the CSXT litigation costs in Consumers’ PSCR plan. A summary of that testimony

can be found following the Attorney General’s witness testimony summary, below.

Melissa Whitten, Senior Consultant at Daymark Energy Advisors and expert witness for

MEC/Sierra, testified to “substantial price and volume risks for PSCR customers” (MEC/Sierra’s

initial brief, p. 1) resulting from the terms of the gas service agent contract Consumers entered into

for the New Zeeland plant, and expects to enter into for the Jackson plant. Ms. Whitten asserted

three areas of price risk: (1) lack of contractual designation regarding use of high-, low-, or mid-

point pricing on Platt’s Daily for “first tier” timely day-ahead natural gas purchases, (2) “second-

tier” volume purchase prices are to be agreed upon by the parties, but the contract contains no

provisions to address the potential inability of the parties to come to an agreement or how

Consumers will determine whether the quoted price is competitive, and (3) it is unclear to what

extent contractual price “adders” are actually all-inclusive of the commodity cost of gas plus all

costs incurred by the agent to deliver the gas and manage daily balancing. 4 Tr 467- 482;

MEC/Sierra’s reply brief, pp. 11-15.10

Ms. Whitten also stated her opinion that the GSA agreement terms effectively allocate volume

risk away from the seller to the buyer and provides essentially interruptible service. This could

lead to the possibility of imbalances between the volumes of gas that are nominated and the

volumes that are delivered. For these reasons, the witness believes that Consumers’ projections

based on these contracts are too vague to be verified as competitive. She recommends that the

10 A portion of Ms. Whitten’s testimony on the record is redacted and/or designated

confidential. MEC/Sierra’s initial and reply briefs provide non-confidential summaries of all her testimony.

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Commission disallow in the reconciliation any excess natural gas costs attributable to the tier one

price risks described in her testimony, and disallow all or a substantial part of the fixed-price adder

for recovery from PSCR customers, or in the alternative, that the Commission indicate that it will

disallow in the reconciliation any excess natural gas costs that may be attributed to the volume

risks discussed in her testimony. Id.

Consumers’ witness Jim Chilson, provided rebuttal testimony to address Melissa Whitten’s

testimony asserting price and volume risks built into Consumers’ fuel supply and fuel management

services agreements for the Jackson and Zeeland combined cycle generating plants.11 Mr. Chilson

testified that Consumers’ use of a GSA whose responsibilities include purchasing, transporting,

and daily gas balancing services, was competitively bid and provides the company with multiple

pricing terms that are based on a published price index that is used for offering the plant to MISO

in the day-ahead market or on an agreed upon fixed-price quote. Gas is purchased on a day-ahead

and real-time basis and is stored on an as-needed basis against dispatch requests from MISO.

Consumers expects the GSA to bill Consumers at a midpoint charge based on the Platt’s Gas

Daily, Daily Price Survey. Unless MISO accepts the unit pricing offer and dispatches the plant, no

gas is purchased for the plant and the GSA earns nothing. Consumers believes that the GSA will

provide competitive pricing on intraday purchases under these circumstances because it is in the

GSA’s best interest to do so. The witness argued that if the company were to attempt to duplicate

the GSA’s expertise, resources, and labor in-house, the cost would be higher than the cost of the

GSA services via the GSA contract. 3 Tr 147-150.

11 It should be noted that specific GSA contractual provisions were admitted to the record as

Exhibit MEC-6, a confidential exhibit filed under seal, and are not part of the public record.

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Mr. Chilson further explained that, although the company projected Jackson and Zeeland to

have a relatively high utilization, neither plant is a base-load plant. As cycling plants, they have

low start-up costs compared to coal and short start-up times, so the company is able to take

advantage of market conditions and provide MISO with a competitive gas price. The company

expects that with increased use, the plants’ utilization amounts will become more predictable.

3 Tr 150-158.

As provided in their agreements, Consumers and the GSA work together to prevent

imbalances in gas volume and consumption. Curtailments in gas transportation have not occurred

in the previous 24 months and are not expected to occur in the coming 12 months; however,

Mr. Chilson pointed out that Consumers considers volume risk when selecting a seller.

Mr. Chilson testified that the company’s agreement with the GSA provides for acceptable levels of

imbalance. According to Mr. Chilson, if the GSA were to attempt to gouge the company on sell-

back of volumes outside the contract balancing tolerances, the GSA would damage its standing as

a valued supplier. Imbalance charges imposed by pipeline companies are the GSA’s

responsibility. Id.

D. Attorney General

The Attorney General’s expert witness, independent business consultant, Sebastian Coppola,

testified to his opinion that Consumers’ total forecasted PSCR expense for 2016 should be reduced

by $42,004,579, and recommended that Consumers’ proposed 2016 PSCR factor be revised from

$(0.00014) per kWh to $(0.00139) per kWh. Mr. Coppola believes that Consumers’ forecasted

natural gas fuel costs are no longer reasonable because of the significant decline in natural gas

prices since the forecast was prepared in August 2015; and that figures for these costs should be

reduced by approximately $29 million. Mr. Coppola also faulted the fuel purchase projections for

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the Karn 3-4 plants, indicating that the forecast price should be adjusted by the same market price

reductions applicable to the other natural gas-fueled power plants. Portions of Mr. Coppola’s

testimony are not part of the case’s public record. 3 Tr. 505-515; Exhibits AG-1 through AG-3,

-5, -7. Exhibit AG-6 is confidential and not part of the public record.

Further, Mr. Coppola testified that Consumers has not accurately calculated the most

economical blend of power generation from its fleet of power plants. He stated his opinion that,

even considering the closure of the Classic Seven plants, Consumers should shift more power

generation to coal-fueled plants and less to natural-gas fueled plants for the 2016 plan, resulting in

a reduction of approximately $10.8 million in power costs. 4 Tr 526-533; Exhibit AG-7.

Finally, Mr. Coppola recommended that the approximately $2.2 million in litigation costs

related to a claim filed with the Surface Transportation Board (STB) that alleges unlawful and

unreasonable tariff rates charged by CSXT for railway coal transportation, be removed from the

PSCR projection for 2016, and instead be deferred for recovery in a future rate case to the extent

of any cost savings from a resolution of the litigation. He asserted that litigation costs are not a

direct cost of delivered fuel and, accordingly, should not be part of a PSCR proceeding.

3 Tr 516-519.

In addition, Mr. Coppola testified to the “alarming”12 increase in Consumers’ transmission

costs over the past ten years and the potential for negative effect on customers from continuing

escalations at the current rapid rate. He recommended that the Commission open a docket and

direct the Staff to convene a task group composed of the Staff, Consumers’ representatives, and

interested parties to thoroughly investigate the key drivers of transmission cost escalations and to

recommend initiatives with MISO and the FERC that would mitigate transmission cost increases.

12 See, 4 Tr 523.

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Mr. Coppola also advised that the Commission direct Consumers to more carefully consider

lower-cost power generation sources to ensure an accurate PSCR factor and an economic outcome

that will minimize power costs to its customers. 4 Tr 519-525; Exhibits AG-2 through G-5.

Consumers’ witness, Ms. Walz, filed partially redacted rebuttal testimony to address

Mr. Coppola’s proposal that Consumers should be disallowed $10,827,794 attributable to the

company’s projected mix of power generation and purchases, and his recommendation that

Consumers should rely more heavily on coal than is projected. Ms. Walz asserted that

Mr. Coppola’s analysis fails on three points, thus invalidating all his relative comparisons. First,

the incremental cost of production is not the only determinate of which resources provide for the

lowest-cost mix of generation and purchased power. Second, Mr. Coppola inaccurately assumes

that if natural gas-fueled generation decreased, coal generation would increase. And third, the

incremental costs of production have since been revised, invalidating all his relative comparisons.

PROMOD IV logic considers the incremental cost of production, as well as applicable start-up and

no-load costs and operational constraints or characteristics, such as availability, minimum and

maximum capabilities, economic hours of operation, minimum run times and minimum down

times, and must-run status. The witness went on to say that, if the PROMOD IV reduces

generation from natural gas-fueled resources, other generating units’ costs are affected, and so

PROMOD IV does not generally displace all of the gas-fueled generation with coal generation.

She continued with a discussion of the revised figures, some of which were redacted from the

transcript. During cross-examination, Ms. Walz conceded that most of Consumers’ coal plants are

baseload plants and classified as must-run. Part of Ms. Walz’ remaining testimony is confidential

and not included in the public record. 3 Tr 237-243, 254-267.

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Mr. Chilson provided testimony to rebut Mr. Coppola’s assertion that Consumers’ projected

cost for natural gas fuel is too high. Mr. Chilson stated that natural gas is a commodity that is

traded daily, and being less stable market-wise than coal, its price is more difficult to predict.

Mr. Chilson asserted that Mr. Coppola’s analysis of gas prices as of March 24, 2016, as being 11%

less than Consumers’ projection does not take into account that gas prices had risen by 8% three

weeks later on April 13, 2016. Mr. Chilson explained that this example illustrates why it is

unproductive to continuously reforecast cost whenever the natural gas prices change.

3 Tr 144-146, 201-220.

Mr. Ronk also provided rebuttal testimony to address Mr. Coppola’s assertion that Consumers

should update its forecasted fuel costs. That testimony is not part of the proceeding’s public

record. During Mr. Ronk’s cross-examination regarding his rebuttal testimony, he stated that it is

the company’s practice to use the most recent information available for the plan year prior to the

date in which the plan is required to be filed, allowing adequate time for preparation of the overall

plan, and review and verification of results. Typically, that means using information from either

the end of July or end of August as the basis for the forecasts. Mr. Ronk explained that the

company cannot use new gas prices without revising all other factors relating to the PSCR plan,

causing more work for the company and delays in filing. He expressed his belief that there is

protection within the law to assure the lowest price is achieved through the reconciliation

mechanism. Mr. Ronk opined that there is little to be gained by updating prices, except the

potential of underrecovery. A portion of Mr. Ronk’s cross-examination is confidential and not

part of the public record. 4 Tr 335-354.

Mr. Alfred provided testimony to rebut the Attorney General’s suggestion that an investigation

into rising transmission costs should be launched. He asserted that, while he shared the Attorney

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General’s concern about rising transmission costs, an investigation is unnecessary because a

process to address transmission costs is in place with MISO. He said that Consumers, Staff,

transmission owners, and customers can and do participate in the process routinely throughout the

year. The Attorney General can also participate and has done so. Mr. Alfred went on to describe a

variety of projects in which the stakeholders have participated. 3 Tr 282-291.

Brian D. Gallaway provided rebuttal testimony regarding the Attorney General’s and

MEC/Sierra’s objection to Consumers’ inclusion of litigation costs in its PSCR plan.

Mr. Gallaway explained that he is actively involved in the litigation process against CSXT and that

CSXT is the only available transportation for coal to the Campbell plant. Through a series of

formulas and calculations, the CSXT rates were determined to be much higher than was

reasonable. Consumers has no bilateral contract with the company, but has actively attempted to

negotiate better price terms. Mr. Gallaway asserted that there is no other reason to enter into

litigation with CSXT other than to secure lower costs for customers. In doing so, Consumers is

protecting the rights of PSCR customers. On cross-examination, the witness conceded that he

does not have any level of confidence as to the probable outcome of the action. 3 Tr 87-117.

Discussion

Based on their briefs, the parties raise essentially seven contested issues for resolution in this

proceeding. As such, the discussion portion of this order is presented in seven sections, each to

address one issue. Section one addresses GLREA’s contention that Consumers has failed to

adequately include solar resources in its 2016 PSCR plan and in its five-year forecast. Section two

addresses MEC/Sierra’s concern that Consumers’ gas agency agreements result in unreasonable

price and volume risks to PSCR customers. Section three addresses the objections of MEC/Sierra

and the Attorney General to Consumers’ inclusion in its PSCR plan of litigation costs for an action

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filed with the STB alleging excessive coal transportation costs against CSXT. Section four

addresses MEC/Sierra’s allegation that Consumers has not adequately explained its selection of

wind power purchase agreement offers. Section five addresses the Attorney General’s objection to

Consumers’ forecast blend of power generation from its fleet of plants. Section six addresses the

Attorney General’s concerns that Consumers’ forecast natural gas prices do not reflect that gas

prices have fallen significantly after the projections were prepared. Finally, Section seven

addresses the Attorney General’s concerns over the escalating cost of electric transmission.

1. Solar Resources

As in Consumers’ 2014 and 2015 PSCR plan, GLREA argued in this proceeding that

Consumers has failed to consider the growth of solar resources in its 2016 plan year and in its five-

year forecast, thus rendering both the plan and the forecast flawed and erroneous as demonstrated

in Exhibits GLREA-2 through GLREA-5. GLREA contends that the increasing use of solar

energy in 2016 will result in a $5.6 million reduction in Consumers’ fuel and purchased power and

capacity costs, a reduction in energy sales of 100 GWh, and a decrease in the PSCR rate of $0.001

per MWh. The expected solar PV use is anticipated to be greater as time passes and can be

projected to reduce fuel and purchased power and capacity costs for 2019 by $9.2 million, and

reduce the 2019 PSCR rate by $0.09 per MWh. GLREA believes these reduced costs and sales

should be, but are not, included in the company’s 2016 forecast and five-year plan. GLREA’s

initial brief. See, summary of the witness’s testimony, above.

Consumers argues that GLREA formulated its solar use figures and projected savings from

nation-wide data, and not Michigan data. Consumers claims that Michigan solar use is far less

than GLREA projections, i.e., approximately 5 MW of total customer-owned generation by the

end of 2016, rather than the 69 MW GLREA predicts. Consumers asserts that, accordingly,

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GLREA’s claim that a reduction in power supply cost of $0.001 per MWh is neither supported nor

warranted. In any case, Consumers’ contends, the expected effect of new customer-owned solar

generation is insignificant and the company should not have to litigate its renewable energy

portfolio in two separate proceedings, e.g., both its PSCR plan case and its Act 295 case.

Consumers’ initial brief. See, summary of the witness’s testimony, above.

In reply, GLREA maintains that Consumers has considered only company-owned solar

resources, without considering other overall projections of increases in customer-owned solar

facilities, including those separate from Consumers’ solar programs. GLREA cites Act 304,

Section 460.6j(4), stating that a realistic and objective analysis and discussion of growing

customer-owned solar facilities falls within requirements that dictate that a forecast should include

anticipated sources of supply and projections of supply costs, in light of its existing sources of

electrical generation and electrical generation under construction. GLREA’s reply brief. See,

summary of the witness’s testimony, above.

Based on the testimony in this proceeding, the Commission does not find GLREA’s estimate

of customer-owned solar generation for the 2016 plan year to be accurate. The Commission

accepts Consumers’ projection of solar resources as reasonable at this time for purposes of setting

the PSCR factor in accordance with Act 304.

Earlier this year, the Commission addressed in Case No. U-17792, its reluctance to undertake

the examination of solar resources requested by GLREA in the context of a PSCR plan

proceeding. The Commission rejected GLREA’s request in light of uncertainties about legislative

changes in the area of resource planning. The Commission maintains this position given the

ongoing legislative discussions on integrated resource planning, pricing for customer-owned

generation, and related issues. See, the March 19, 2016 order in Case No. U-17792, p. 24.

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2. Gas Agency Agreements

MEC/Sierra argues that Consumers’ gas agent contract is not economical and introduces

unreasonable risk and cost into the PSCR plan. MEC/Sierra identifies three price risks and a

volume risk. First, MEC/Sierra asserts that the gas pricing terms set forth in the contract are not

clearly defined and thus do not allow a price to be verified as competitive. Second, the terms do

not indicate how the company will determine whether a second tier price is a fair market price.

And third, MEC/Sierra objects to the so-called “fixed-price adder.” MEC/Sierra contends that the

GSA agreement also includes an unreasonable level of volume risk through the use of a

Commercially Reasonable Efforts standard of performance for transportation obligations. Finally,

MEC/Sierra does not believe Consumers’ new contract is substantially similar to the previous

contract, as claimed. MEC/Sierra’s initial brief, pp. 13-19; MEC/Sierra’s reply brief, pp. 10-14.

See, summary of witness’s testimony, above. Portions of MEC/Sierra’s initial brief are redacted.

MEC/Sierra asserts that the two-tier pricing scheme provides for first tier prices to be as stated

on an independently published index, but does not specify which price from the index is to be used

and thus, the GSA could be free to quote the highest price. The second tier purchases, often made

on the intraday market to provide for additional capacity not accepted in the day-ahead market, are

to be made at an agreed-upon price, but there is no explanation for how the company will be able

to determine that the price agreed upon is a fair market price. Additionally, second tier volumes

purchased on the timely day-ahead market are not made to offer additional capacity into market

that was not accepted in the day-ahead market. Therefore, incentives for intraday pricing do not

exist in this case. Id.

MEC/Sierra disagrees that the adder includes all added costs over and above the cost of the gas

commodity as Consumers claims. MEC/Sierra believes that the contract is worded as such that it

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is not clear what the adder includes other than the daily act of submitting nominations once to the

interstate pipelines. MEC/Sierra insists that the adder should provide for at least some firm gas,

but does not do so. Id.

Finally, MEC/Sierra claims that the GSA contract shifts volume risk away from the seller and

onto the buyer, due to the Commercially Reasonable Efforts standard of performance for the seller.

Such service raises the possibility of imbalances between the volumes of gas that are nominated

and those that are delivered. Consumers expects the seller to provide secondary firm service for

gas nominated on a timely basis and stated its belief that failure to do so would constitute a breach

of the seller’s commercially reasonable standards obligation. However, on cross examination,

Consumers’ witness Mr. Chilson conceded that the definitions of the pertinent terms in the

contract do not support his interpretation. Id. Mr. Chilson’s cross examination is located at 3 Tr

163-246. This part of the transcript is confidential and not part of the public record.

In its initial brief, Consumers notes that the contract addressed by MEC/Sierra was not in place

at the time the PSCR plan and forecast was submitted to the Commission. The company’s initial

presentation included only the contract in effect at the time of plan submission and notes that the

contract was approved in the company’s 2010 and 2011 PSCR reconciliation cases and its 2013

PSCR plan case.13 However, Consumers indicated that it expected to enter into a GSA agreement

for the Jackson plant similar to the Zeeland plant agreement and ultimately included testimony

regarding the new contract in its case presentation. The company finalized the agreement for the

Jackson plant after the PSCR case was filed. Said contract provides for the continuation of the

agreement with the Zeeland plant, an agreement which, as stated above, has been approved by the

Commission. The company maintains that use of gas agent services for the Jackson and Zeeland

13 See, Case Nos. U-16045-R, U-16432-R, U-16890, and U-17095.

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plant costs less than providing the same services in-house. Consumers’ initial brief, pp. 13-22;

Consumers’ reply brief, pp. 2-119. Portions of Consumers’ reply brief were redacted. See,

summary of Consumers’ witnesses’ testimony, above.

In its case presentation, Consumers explained that the pricing terms of the agreement is such

that a different method is used depending on the time of day or the need for additional volume.

Timely day-ahead purchases are priced based on a published index which is used for offering the

plant to MISO in the day-ahead market. Intraday purchases are based on the price index if

nominated prior to 10:00 a.m. on the actual day of gas delivery or by an agreed-upon fixed-price

quote for intraday purchases for the remainder of the day. The purpose of the differing price

points is to allow the company to offer any additional capacity the plants may have that was not

accepted on the day-ahead market. Consumers only purchases gas based on the dispatch of the

plants, which the MISO market determines, and the company only pays the GSA for gas that is

purchased for the plants. All purchases for the two plants are aligned with the plants being offered

to the MISO market. Thus, the plants operate only when economical to do so. Id.

Consumers disagrees with MEC that pricing risks are inherent in the GSA contract terms and

insists that MEC has misunderstood how the contract operates. The company explains that the

plants are intended to operate when market conditions are such that they are economic. Pricing

against a published index ensures a competitive market price and also ensures that the gas

generation offered into the MISO day-ahead market is competitive compared to other alternatives.

For intraday purchases, when the price offered by the GSA is not competitive, the plant will not be

selected for generation, and the GSA will receive no payment. Thus, it is in the GSA’s best

interest to provide the best price. Id.

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In response to MEC’s claims that the day-ahead pricing terms are not necessarily competitive,

Consumers states that the parties use the published midpoint in the published indices that is

consistent with other gas management agreements the company has in place. As to the so-called

“second-tier” purchases, Consumers dismisses MEC’s concern over the intraday price being

“agreed upon” at the time of purchase. Consumers insists that a competitive price is built into the

nature of the process in that when prices are not competitive, the plant does not operate. The

company, itself, has no need to involve itself in a determination of fair pricing because the GSA

has the incentive of being paid only if the plant operates and economic plant operation is

determined by MISO. Id.

Regarding, the fixed-price “adder”, Consumers argues that there really is no adder as such,

however, the GSA is paid an all-inclusive price that includes the cost of the natural gas

commodity, and all other costs incurred by the GSA to deliver the commodity to the

interconnection point and manage daily gas balancing. Other costs included in the all-inclusive

price are those associated with maintaining transportation and storage assets on the gas

transmission system and securing and providing all necessary natural gas supplies for the two

plants to operate. Again, the GSA receives nothing if the plants do not operate. Id.

With respect to MEC/Sierra’s argument that volume risks are unreasonably shifted to the

consumer, Consumers contends that the concern is without merit. The company claims that it is

not possible to require the GSA to provide firm transportation because no proposals during the

competitive bidding process provided for such service. Consumers argues that its Gas Master

agreements, intended for use in procuring natural gas for customers, cannot be fairly compared to

the GSA agreement that is intended to procure gas to operate its electric generation plants. The

Gas Master agreement provides for volume risks and imbalance charges to be shared in a

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particular way by the parties, but the GSA agreement provides that the GSA itself is responsible

for balancing services. The contract provides for a wide range of daily imbalances and, the

company asserts, if the gas is not provided, the plant does not operate and no imbalance can occur.

Further, the GSA aggregates the company’s daily gas nominations with the GSA’s other customer

nominations to the company that owns the pipeline. If an imbalance occurs in this situation, the

GSA is responsible for that imbalance. Finally, Consumers contends that the Jackson and Zeeland

plants are being used more consistently, thus making needed gas volumes more predictable. The

company professes that there have been no curtailments in natural gas transportation in the

previous 24 months. Id.

The Commission finds that the record supports that Consumers’ use of a gas agent at the

Jackson and Zeeland plants is reasonable and prudent. Consumers has provided evidence that the

former and current contracts were competitively bid and that the contractual terms are consistent

with the economical operation of the two plants for PSCR purposes. The Commission appreciates

the intervenors’ concerns and objections, but finds that the issues raised do not outweigh the

benefits of the contracts or render the terms to be unreasonable and imprudent. Accordingly, the

Commission accepts Consumers’ GSA agreements for purposes of setting the PSCR factor in

compliance with Act 304. Because many of the issues presented were somewhat hypothetical, the

Commission finds it is appropriate to evaluate these agreements over time under different market

conditions to determine if risks raised by MEC/Sierra materialize, and to ensure the agreements

are adequate for fuel assurance purposes while still representing the best value for customers.

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3. Inclusion of Litigation Costs

Consumers proposed that approximately $2.2 million in expected litigation costs incurred

during an action filed against one of its coal transportation companies be included in the PSCR

case. Consumers reasoned that, if the legal action were to be successful, customers may benefit

from the reduced cost of coal. In support of its position, Consumers cited the Commission’s

support of including transmission costs and the costs related to emission control in past PSCR

cases. Consumers’ initial brief, pp. 22-24, 32-34; Consumers’ reply brief, pp. pp. 19-24. See,

summary of the witness’s testimony, above.

MEC/Sierra disagrees, stating that litigation costs, even though related to fuel transportation,

are not authorized by MCL 460.6j, wherein it states:

Power supply cost recovery clause means a clause in the electric rates or rate schedule of a utility which 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.

MEC/Sierra maintains that Consumers’ argument that costs having some degree of relationship to

transportation expense runs afoul of the specific and clear directive from the Michigan Supreme

Court.14

The Attorney General objects to the inclusion of the CSXT litigation costs, as well, on grounds

that the expense is precluded in the PSCR statutory scheme. He notes that Consumers continued to

use CSXT tariff rates in its 2016 plan and did not include any projected savings to be gained from

the litigation. He opines that such costs would be more appropriate in a rate case as they appear to

be a one-time occurrence and any damages or cost savings awarded could be received over the

14 See, In re Application of Detroit Edison Co., 483 Mich 993; 764 NW 2d 272 (2009).

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course of the new rates with CSXT. Consumers’ initial brief, pp. 9-12; Consumers’ reply brief, pp.

4-6. See, summary of the witness’s testimony, above.

In its reply brief, the Staff asserts its agreement with MEC/Sierra and the Attorney General on

this issue. However, the Staff proposes that if Consumers is successful in securing a lower

transportation rate through a favorable outcome of the litigation that results in a refund, then

litigation expenses incurred by the company may be recovered through an offset up to any credit or

reduction in rates experienced by PSCR customers following the favorable outcome.

The Commission finds that Consumers’ approximately $2.2 million in litigation costs with

CSXT over the rates charged for coal transportation are not appropriate for inclusion in its PSCR

case. As stated In re Application of Detroit Edison Co. to Increase Rates (see footnotes 14 and

15), “Electric utilities can recover two types of power supply costs through a PSCR clause:

(1) ‘through booked costs, including transportation costs, reclamation costs, and disposal and

reprocessing costs, of fuel burned by the utility for electric generation,’ or (2) ‘booked costs of

purchased and net interchanged power transactions.’”483 Mich App at 993. Consumers’ litigation

costs are too distantly related to the above delineated parameters to be included in a PSCR plan or

five-year forecast. The recovery of this type of expense is more suitable in a rate case.

Accordingly, Consumers’ PSCR plan is amended by the removal of the projected $2,188,247 in

litigation costs.

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4. Wind Power Supply Contracts

The parties agree that during 2015, Consumers received three unsolicited proposals to supply

wind-generated power, rejected two of the proposals, and entered into a contract with the third, the

100 MW Apple Blossom Wind Farm. MEC/Sierra contends that Consumers must explain in its

PSCR plan why it rejected two of the contracts, but did not do so. MEC/Sierra argues that the two

rejected contracts would have provided opportunities to reduce PSCR costs, as required under

Act 304. The company need not have limited itself to only one project. MEC/Sierra’s initial brief;

MEC/Sierra’s reply brief. See, summary of the parties’ testimony, above.

Consumers asserts that it has fully explained its decisions surrounding the wind proposals, and

no additional explanation is required. Consumers contends that, even though the Apple Blossom

project did not initially offer the lowest market price of the three proposals, it was the closest to

being ready to build, having obtained agreement with the township and county that exempted the

project from a permitting moratorium that was affecting one of the other projects. The second

rejected project had not acquired all the land easements needed for that project to proceed. One of

the rejected projects may have offered potentially better value than did Apple Blossom, but it

required an undesirable greater commitment (200 MW instead of 100 MW), and the potential that

the project might not be built at all was significantly greater. The company insists that the other

rejected project did not offer as great a value as did Apple Blossom. Consumers’ initial brief,

pp. 24-28. See, summary of witness’s testimony, above.

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The Commission finds that, for PSCR plan and five-year forecast purposes, Consumers has

adequately explained its reasons for accepting the Apple Blossom Wind Farm project. This

contract was already approved by the Commission and is consistent with Consumers’

Commission-approved renewable energy plan. Accordingly, the section of Consumers’ PSCR

plan that relates to the wind power supply proposals is reasonable and prudent, and in compliance

with Act 304 requirements.

5. Economic Blend of Fuel

Consumers argues that the Attorney General’s claim that the company’s mix of power

generation is not economical must be rejected. The company cannot rely on price alone to decide

whether a fuel is economical, as the Attorney General has suggested. There are numerous

determinants of which generating resources provide the lowest cost mix of generation and power,

all of which the PROMOD IV production cost model takes into account. In addition, Consumers

claims that the Attorney General made errors in his cost figures relating to the Jackson Unit 1

plant, as well as in other areas of analysis. Consumers reminds the Commission of the

reasonableness standard and the impossibility of being 100% accurate in a projection. Consumers’

initial brief, pp. 36-39; Consumers’ reply brief, pp. 39-43. See, summary of witness’s testimony,

above.

The Attorney General counters that Consumers is planning to operate its coal plants at 55% to

70%, while operating higher cost gas-fired plants at twice the rate projected for 2015. Although

gas prices have fallen, the Attorney General asserts, the company fails to take into account that

lower priced gas has put downward pressure on coal prices. Consumers has the capacity to

generate more power with coal than it projected rather than relying so heavily on higher price gas.

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Attorney General’s initial brief, pp. 17-21; Attorney General’s reply brief, pp. 6-7. Portions of the

Attorney General’s initial brief are confidential. See, summary of the witness’s testimony, above.

The Commission finds that Consumers’ projected mix of fuel generation is reasonable and

prudent. As laid out by Consumers’ witness, price is only one of many factors that determines

whether a fuel generation mix is economical. The use of the PROMOD IV production costs model

provides a comprehensive prospective picture on the issue and captures various factors and

interdependencies. Consumers has provided ample evidence to support its 2016 PSCR projection

of its fuel generation costs. Accordingly, Consumers’ 2016 projected fuel generation costs

provide a reasonable basis for setting the PSCR factor is in compliance with Act 304 PSCR

requirements.

6. Forecast Natural Gas Prices

In this case, as in Consumers’ 2015 PSCR plan, Case No. U-17678, the parties disagree

whether an apparent downward trend in natural gas prices is cause to amend plan projections. The

Attorney General argues that the downward trend in gas prices should result in an approximately

$29 million reduction in Consumers’ power supply costs for 2016. Consumers argues that the

natural gas market is volatile, experiencing frequent upward and downward trends and argued that

it is not reasonable to reforecast for each price change. Attorney General’s initial brief, pp. 7-9;

Attorney General’s reply brief, pp. 7-8; Consumers’ initial brief, pp. 29-32. See, summary of the

parties’ testimony above.

The reasoning set forth in the June 9, 2016 order in Case No. U-17678 (June 9 order) is on

point for this case. The Commission recognizes the value of more recent information to set PSCR

factors and has the discretion under Act 304 to amend them, based on the record evidence, to

ensure that the factor reflects reasonable cost estimates based on the record as a whole. However,

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it has cautioned against overly scrutinizing mere projections in plan case proceedings on more than

one occasion, in particular in the December 17, 1986 order in Case No. U-8286, wherein the

Commission stated that “in PSCR plan proceedings . . . . the projections put forth are just that –

projections, and, as such, rarely turn out to be accurate.” The June 9 order also cites the March 29,

1990 order in Case No. U-9172, in which the Commission found that given the passage of time

and the roll-in refund method15 the Commission has adopted, there is little value in amending the

company’s proposed factors to incorporate the revised natural gas projection. This reasoning is

distinguished from the May 3, 2016 order in Case No. U-17693 (May 3 order),16 a gas cost

recovery (GCR) plan case wherein the Commission agreed with the Attorney General that

Consumers should lower its GCR factor due to falling gas prices. In that case, the Commission,

recognizing that the GCR plan year was ended, stated that it was “reasonable and practical to use

the updated price forecast because the timing of the price forecasts coincides with the start of the

plan year.” May 3 order, pp. 18. The Commission acknowledged that it “was deviating somewhat

from its determination in Case No. U-17334 in which the Commission rejected the Attorney

General’s request to use more recent price forecasts.” Id. Even so, the May 3 order cautioned that

“this is not an open invitation to constantly update the numbers during the course of the

proceeding. After all, this is a plan case and the numbers will ultimately be reconciled based on

actuals.” Id. In the instant case, the Commission declines to order the forecasted natural gas fuel

cost projection be lowered. Accordingly, Consumers’ projection for natural gas fuel costs shall

remain at the figure stated in the Consumers’ PSCR plan as submitted on September 30, 2015.

15 See, the December 21, 2010 order in Case No. U-16384, pp. 3-4; and In re Application of the

Detroit Edison Company to Increase Rates, 297 Mich App 377; 833 NW2d 433 (2012) for a discussion of the roll-in refund method.

16 See, the May 3, 2016 order in Case No. U-17693, pp. 16-18.

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7. Electric Transmission

The Attorney General requested that the Commission convene a task group composed of

Consumers employees, Staff experts, and interested intervenors to thoroughly investigate the key

drivers of transmission cost escalations to rising transmission costs. Power supply costs over the

past ten years have increased a cumulative 51%, however, transmission costs over the same period

of time have increased a cumulative increase of 258%. Consumers projects approximately

$407 million in transmission costs for 2016, but such costs are projected to exceed $476 million by

2020, representing a cumulative 17% increase in the five-year period. Attorney General’s initial

brief, pp. 13-17.

Three categories of costs account for nearly all of the increase. First, costs for network

transmission service within the MJZ, primarily through the Michigan Electric Transmission

Company (METC), have increased from $0.4 million in 2006 to $242.1 million in 2016. Second,

network upgrade transmission charges have increased from $8.3 million annually in 2009 to

$86.2 million in 2016. And third, system expansion costs began in 2012 at $796,000 annually and

has reached $34.7 million in 2016. The Attorney General is very concerned over the cost

escalation and sees no relief in sight. Surely, this escalation in cost will have a negative effect on

customers’ ability to pay their power bills. Id.

Consumers agrees that transmission costs are concerning, but argues that a task group is not

necessary because MISO has numerous processes through which transmission issues are

addressed. Utility companies, the Staff, and other stakeholders, including the Attorney General

are able to participate in these processes. For example, stakeholders have participated in the

MISO group responsible for reviewing, commenting, and proposing alternatives to proposed

transmission projects. Consumers believes that the number of opportunities available to review

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and mitigate transmission expenses are sufficient. Further, the company does what it is able to

control transmission costs and is actively involved in activities with that goal in mind.

Consumers’ initial brief, pp. 34-35; Consumers’ reply brief, pp. 37-39. See, summary of the

witness’s testimony, above.

The Commission agrees with Consumers that there are numerous and sufficient opportunities

to address transmission costs. Certainly, the rapidly increasing cost of transmission is a concern

and the Commission does not rule out that a task group may be formed at a later date. However, at

this time, the Commission is not persuaded that it should convene a task group to study the issue.

The Commission also notes that transmission investments must not be evaluated in a vacuum,

without considering benefits such as reliability and changes to the delivered cost of power.

In summary, with one exception, the Commission finds Consumers’ PSCR plan for 2016 and

its projections through the year 2020 to be well-supported by the evidence presented in the

contested case proceeding, and to be reasonable and prudent, and in compliance with Act 304

requirements. As discussed above, Consumers’ projected litigation cost of $2,188,247 is

disallowed, resulting in a new factor of $(0.00021) per kilowatt-hour for all classes of customers.

The Commission declines to order a task group to study rising transmission costs.

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THEREFORE, IT IS ORDERED that: A. The power supply cost recovery plan for calendar year 2016, filed by Consumers Energy

Company, is approved, as modified by this order. A factor of $(0.00021) is approved.

B. Consumers Energy Company’s five-year forecast is accepted.

The Commission reserves jurisdiction and may issue further orders as necessary.

Any person desiring to appeal this order must do so by in the appropriate court within 30 days

after the issuance and notice of this order, pursuant to MCL 462.26. To comply with the Michigan

Rules of Court’s requirement to notify the Commission of an appeal, appellants shall send required

notices to both the Commission’s Executive Secretary and to the Commission’s Legal Counsel.

Electronic notifications should be sent to the Executive Secretary at [email protected]

and to the Michigan Department of the Attorney General - Public Service Division at

[email protected]. In lieu of electronic submissions, paper copies of such notifications may

be sent to the Executive Secretary and the Attorney General - Public Service Division at 7109

W. Saginaw Hwy., Lansing, MI 48917.

MICHIGAN PUBLIC SERVICE COMMISSION

________________________________________ Sally A. Talberg, Chairman

________________________________________ By its action of October 11, 2016. Norman J. Saari, Commissioner ________________________________ ________________________________________ Kavita Kale, Executive Secretary Rachael A. Eubanks, Commissioner

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