corrected - force.com

December 7, 2017 Ms. Kavita Kale Via Efiling Michigan Public Service Commission 7109 W. Saginaw Hwy. P. O. Box 30221 Lansing, MI 48909 RE: MPSC Case No. U-18268 Dear Ms. Kale: The following is attached for paperless electronic filing:

CORRECTED Direct Testimony of Chris Neme on behalf of Natural Resources Defense Council (corrections are listed on the enclosed Errata)

Proof of Service Sincerely, Lydia Barbash-Riley [email protected] xc: Parties to Case No. U-18268 ALJ Lauren G. Van Steel ([email protected])

Laura Goldberg, NRDC ([email protected]) Ariana Gonzalez, NRDC ([email protected]) Samantha Williams, NRDC ([email protected])

mailto:[email protected]





STATE OF MICHIGAN

MICHIGAN PUBLUC SERVICE COMMISSION

In the matter on the Commission’s own Case No. U-18268 Motion, regarding the regulatory review, Revisions, determinations, and/or approvals ALJ Lauren G. Van Steel Necessary for DTE Gas Company to fully comply with Public Act 295 of 2008, as amended by Public Act 342 of 2016

CORRECTED DIRECT TESTIMONY OF CHRIS NEME ON BEHALF OF THE NATURAL RESOURCES DEFENSE COUNCIL

December 7, 2017

ERRATA

to the

DIRECT TESTIMONY OF CHRIS NEME

ON BEHALF OF THE NATURAL RESOURCES DEFENSE COUNCIL

Page(s) Location Change

6 Line 11 “electricity” replaced with “gas” 12 Line 4 “2018-2021” replaced with “2018-2019” 12 Line 8 “1.00% electric” replaced with “0.75% gas” 14 Line 6 “electric” replaced with “gas” 14 Line 7 “electric” replaced with “gas” 14 Line 8 “electric” replaced with “gas” 14 Line 12 “electricity” replaced with “gas” 14 Line 15 “electric” replaced with “gas” 16 Line 5 Table 2 replaced with corrected Table 16 Lines 10-11 “(i.e., 1.00% to 1.50% of electric sales)” replaced with

“(i.e., 0.75% to 1.00% of gas sales)” 16-17 Line 12-Line 2 “I understand that NRDC witness Mellinger is suggesting

in his testimony that DTE has overstated the lifetime savings of standard LED light bulbs. A modest downward adjustment to the lifetime electric savings targets in Table 2 would be appropriate if the Commission agrees with his recommendations.” Deleted

22 Line 4 The word “gas” added to sentence

U-18268

i

Table of Contents

I. Introductions and Qualifications ............................................................................................. 1

II. Testimony Overview ............................................................................................................ 6

III. DTE’s Shareholder Incentive Performance Metrics ............................................................ 8

IV. Education and Pilot Program Savings Assumptions .......................................................... 21

1

I. Introductions and Qualifications1

Q: Please state your name, employer and business address. 2

A: My name is Chris Neme. I am a co-founder and Principal of Energy Futures Group, a 3

consulting firm that provides specialized expertise on energy efficiency and renewable energy 4

markets, programs and policies. My business address is P.O. Box 587, Hinesburg, VT 05461. 5

Q: Please describe your educational background. 6

A: I received a Master of Public Policy (“MPP”) degree from the University of Michigan (Ann 7

Arbor) in 1986. That is a two-year, multi-disciplinary degree focused on applied economics, 8

statistics and policy development. I also received a Bachelor’s degree in Political Science from 9

the University of Michigan (Ann Arbor) in 1985. My first year of graduate school counted 10

towards both my Masters’ and Bachelor’s degrees. 11

Q: Please summarize your business and professional experience. 12

A: As a Principal in Energy Futures Group, I play major roles in a variety of energy efficiency 13

consulting projects. Recent examples include: 14

• Representing NRDC in consultations with utilities and other parties in three Midwestern15

states – Michigan, Illinois and Ohio – on efficiency program and portfolio design, cost-16

effectiveness screening, evaluation, shareholder incentive structures and other related17

topics;18

• Serving as an appointed expert representative on the Ontario Energy Board’s Evaluation19

and Audit Committee for natural gas demand-side management;20

U-18268 - December 7, 2017CORRECTED Direct Testimony of C. Neme on behalf of NRDC

Page 1 of 24

2

• Serving on the Management Committee and leading strategic planning and program 1

design for a team of firms, led by Applied Energy Group, that was hired by the New 2

Jersey Board of Public Utilities to deliver the electric and gas utility-funded New Jersey 3

Clean Energy Programs; 4

• Serving on a five-person national drafting committee for development of a new National5

Standard Practice Manual for cost-effectiveness screening of energy efficiency measures,6

programs and portfolios which was published in May 2017;7

• Helping the National Association of Regulatory Utility Commissioners and the Michigan8

Public Service Commission staff assess the relative merits of alternative approaches to9

defining savings goals for utility efficiency programs (focusing on lifetime rather than10

just first year savings);11

• Leading a project for the Northeast Energy Efficiency Partnerships (NEEP) to document12

lessons learned from utility and other efforts across the United States over the past 2513

years to use geographically targeted efficiency programs (sometimes in concert with14

other distributed resources) to cost-effectively defer capital investment in transmission15

and/or distribution system infrastructure; and16

• Drafting policy reports for the Regulatory Assistance Project on a variety of energy17

efficiency and related regulatory policy issues, such as whether 30% electric savings is18

achievable in ten years, the history of efforts across the United States to use19

geographically targeted efficiency programs to cost-effectively defer transmission and20

distribution system investments, the history of bidding of efficiency resources into the21

PJM and New England capacity markets, and other topics.22


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3

Prior to co-founding Energy Futures Group in 2010 I worked for 17 years for the Vermont 1

Energy Investment Corporation (“VEIC”), the last 10 as Director of its Consulting Division 2

managing a group of 30 professionals with offices in three states. Most of our consulting work 3

involved critically reviewing, developing and/or supporting the implementation of electric, gas, 4

and multi-fuel energy efficiency programs for clients across North America and beyond. 5

During my career in energy efficiency I have worked in numerous jurisdictions to develop or 6

review energy efficiency potential studies, develop or review Technical Reference Manuals 7

(“TRM”) of deemed savings assumptions (including the Ohio, Michigan and Illinois TRMs), 8

support utility-stakeholder “collaboratives” (including those in Michigan, Illinois and most 9

recently Ohio), negotiate or support development of efficiency program performance incentive 10

mechanisms (including the current Michigan and Ontario mechanisms, as well as the mechanism 11

included in recently passed Illinois legislation), and review or develop efficiency programs. All 12

told, I have worked on these and/or other efficiency policy and program issues for clients in 13

more than 30 states and provinces as well as parts of Europe. I have also led courses on 14

efficiency program design, published widely on a range of efficiency topics and served on 15

numerous national and regional efficiency committees, working groups and forums. A copy of 16

my curriculum vitae is attached as Exhibit NRD-1. 17

Q: Have you previously filed expert witness testimony in other proceedings before the 18

Commission? 19

A: Yes. I filed testimony in the following Michigan Public Service Commission Dockets: 20

• U-18261, regarding Consumers Energy Company’s proposed 2018-2021 energy21

efficiency programs (Energy Waste Reduction) plan;22


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4

• U-17771, regarding Consumers Energy Company’s proposed amendment to its 2017 1

energy efficiency programs (Energy Waste Reduction) plan; 2

• U-17762 regarding DTE’s proposed amendment to its 2017 energy efficiency programs3

(Energy Waste Reduction) plan;4

• U-17429 regarding Consumers Energy’s estimates of energy efficiency potential in its5

assessment of alternatives to its proposal at the time to construct a new 700 MW gas-fired6

power plant (Thetford).7

• U-17138, regarding Consumers Energy’s proposed modifications to its 2013-20158

Energy Optimization plans;9

• U-17049, regarding DTE’s proposed modifications to its 2013-2015 Energy Optimization10

plans;11

• U-16670, regarding Consumers Energy’s biennial review and Amended Energy12

Optimization plan; and13

• U-16671, regarding DTE’s biennial review and Amended Energy Optimization plan;14

Q: Have you been an expert witness on energy efficiency matters before other regulatory 15

commissions? 16

A: Yes, I have filed expert witness testimony on more than 35 other occasions before similar 17

regulatory bodies in nine other states and provinces, including the neighboring jurisdictions of 18

Ohio, Illinois and Ontario. 19

Q: Are you sponsoring any exhibits? 20


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5

A: Yes. 1

Exhibit NRD-1 C. Neme CV2

Exhibit NRD-2 Optimal Energy and Energy Futures Group, “Final Report: 3 Alternative Michigan Energy Savings Goals to Promote Longer 4 Term Savings and Address Small Utility Challenges” 5

Exhibit NRD-3 Discovery Response NRDC-1.8a 6

Exhibit NRD-4 Discovery Response NRDC-1.4 with Attachment U-18268-NRDC-7 1.4 8

Exhibit NRD-5 Discovery Response NRDC-1.8ci 9

Exhibit NRD-6 Discovery Response NRDC-1.9a 10

Exhibit NRD-7 Discovery Response NRDC-1.10 with Attachment U-18268-11 NRDC-1.10 Pilot List-Gas.xlsx. 12


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II. Testimony Overview1

Q: What is the purpose of your testimony? 2

A: My testimony addresses several aspects of DTE Gas Company’s (DTE’s) proposed 2018-3

2019 Energy Waste Reduction plan: 4

1. The Company’s proposal to substantially increase the scope – budget and savings – of5

its efficiency program portfolio;6

2. The Company’s proposal to change its shareholder performance incentive mechanism7

from one with multiple performance metrics, of which lifetime savings was most8

important, to one with a single metric focused on first year savings;9

3. DTE’s assumption that both its portfolio-level education programs and its pilot10

programs will produce electricity gas savings at the same rate per dollar spent as the11

rest of its programs.12

Q: Please summarize your response to the first issue – the Company’s proposal to 13

substantially expand its energy efficiency effort. 14

A: The Company’s proposal to significantly increase the energy savings from its energy 15

efficiency program portfolio should be supported. While an increase in budget is necessary to 16

acquire the increased savings, the benefits of the additional spending far outweigh the costs. 17

Indeed, the Company is forecasting that its non-low income efficiency programs will provide 18

nearly $2 in benefits for every $1 spent on gas efficiency.1 19

1 Exhibit A-7.


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7

Q: Please summarize your responses to and recommendations for each of the other issues 1

you are addressing. 2

I find each of the other Company proposals to be problematic. My summary responses to each 3

are as follows: 4

• Shareholder incentive mechanism: The Company’s proposal to shift from multiple5

performance metrics with a primary focus on lifetime savings to a single metric focused6

on just first year savings will create perverse incentives and undermine Michigan’s long-7

term efficiency goals. The Commission should instead require that the Company (1)8

retain lifetime savings as its primary performance metric; and (2) include secondary9

metrics related to (a) comprehensive treatment of energy savings opportunities in low10

income single family homes and multi-family buildings, and (b) the level of savings from11

small businesses.12

• Education and Pilot Program Savings Assumptions: DTE’s assumption that its13

portfolio-level education and pilot programs are producing savings at the same rate, per14

dollar spent, as its other efficiency programs is not supported by any data or analysis, is15

extremely unlikely, and therefore is problematic if the Company intends to make the16

same assumption when claiming progress towards its statutory and shareholder incentive17

mechanism savings goals. The Commission should revisit its policy on this issue and18

allow only those savings that can be documented from pilot and general education19

programs through standard evaluation processes to count towards the Company’s savings20

goals and shareholder incentive calculations.21

I discuss each of these issues in more detail in the following sections of my testimony.22


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III. DTE’s Shareholder Incentive Performance Metrics 1

Q: What is DTE’s proposed shareholder incentive mechanism? 2

A: DTE is proposing that its shareholder incentive be tied solely to the level of first year savings 3

its efficiency program portfolio produces each year. The Company would earn an incentive 4

equal to 15% of program spending if it achieved first year savings between 0.750% and 0.875% 5

of sales, an incentive equal to 17.5% of program spending if it achieved first year savings 6

between 0.875% and 1.000% of sales, and a performance incentive equal to 20% of program 7

spending if it achieved savings in excess 1.000% of sales.2,3 8

Q: How is that different from the Company’s performance incentive structure in recent 9

years? 10

A: At a high level, it is different in at least three key ways from the performance incentive 11

structure that was in place from 2014 through 2016: 12

1. The Company’s maximum shareholder incentive was historically equal to only 15%13

of its program spending; the Company is now proposing to increase the maximum to14

20%;15

2. The Company previously had six different performance metrics; the Company is now16

proposing only one metric; and17

2 Though I discuss the magnitude of the potential incentive in terms of percent of efficiency program spending, it is possible for it to be less than that because the law states that the incentive will be the lesser of (1) a percentage of program spending and (2) a percentage of the net present value of net benefits provided by those programs. For example, at the highest tier (i.e. at a level of savings exceeding 1.00% of sales), the incentive that can be earned is the lesser of 20% of program spending or 30% of economic net benefits. However, as discussed in more detail below, the magnitude of the economic net benefits the Company’s programs are projected to produce suggests that the percent of budget will likely be the constraining factor. 3 Exhibit A-8.


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3. The Company’s primary performance metric – the one to which the largest portion of 1

shareholder incentive was tied – was the amount of lifetime savings its programs 2

produce; the Company is now proposing to shift to a sole focus on first year savings 3

(i.e., the amount of savings efficiency measures installed in a given year will produce 4

during just their first year of operation – making the number of years they would 5

produce savings irrelevant); 6

Q: What is your view regarding DTE’s proposal to increase the maximum shareholder 7

incentive from 15% to 20%? 8

A: This change is clearly permitted by the new law, Public Act 342 of 2016 (PA 342). Further, 9

the Company must achieve a higher level of performance than it has in the past in order to earn 10

the full 20%. Thus, I think the Commission should accept it. 11

Q: What is your view of DTE’s proposal to replace multiple performance metrics with just 12

one metric? 13

A: Utility shareholder incentives should ideally be based on the policy objectives of a state. If 14

the state has multiple policy objectives for efficiency programs – particularly if some of those 15

objectives compete with each other – then the shareholder incentive structure should ideally have 16

multiple performance objectives tied to those different objectives, encouraging the utility to 17

effectively manage its efficiency programs to achieve each of the competing objectives. 18

Given that there are compelling policy arguments for addressing the energy needs of low income 19

customers and ensuring equitable treatment of all customers (including small businesses which 20

are least likely to participate in business efficiency programs), it would be reasonable to have 21

secondary performance metrics tied to these policy goals. 22


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Q: What is your view of DTE’s proposal to replace the lifetime savings with first year 1

savings as the sole performance metric? 2

A: I have significant concerns about this proposal. First year savings can be a poor indicator of 3

the value of efficiency because it treats the savings from a measure that lasts one year or two 4

years the same as savings from a measure that lasts 10 or 20 years. As a result, it can create 5

perverse incentives for utilities to increase promotion of efficiency measures and/or programs 6

that have relatively low costs per first year MCf saved even if they have relatively high costs per 7

unit of lifetime savings and therefore less value to ratepayers. This point was made, with several 8

concrete examples from past Michigan utilities’ efficiency program portfolios, in a report I co-9

authored several years ago for the National Association of Regulatory Utility Commissioners 10

(NARUC) and the Michigan Public Service Commission staff.4 Put simply, DTE’s proposal to 11

revert back to just a first year savings metric, if adopted, would represent a significant step 12

backwards for the Commission, the Company and its customers. 13

Q: Has DTE attempted to address the concern that basing shareholder incentives solely on 14

first year savings creates a perverse incentive to increase focus on savings that are 15

relatively inexpensive per first year MCf saved but not very cost-competitive from a 16

longer-term perspective? 17

A: Yes. Mr. Boladian notes that the Company’s proposed performance metrics are not based 18

solely on first year savings because the magnitude of any financial incentive earned by the 19

company can be constrained by the cost-effectiveness of its programs. He also notes that the 20

4 Exhibit NRD-2, Optimal Energy and Energy Futures Group, “Final Report: Alternative Michigan Energy Savings Goals to Promote Longer Term Savings and Address Small Utility Challenges”, prepared for the Michigan Public Service Commission, September 13, 2013. (http://www.dleg.state.mi.us/mpsc/electric/workgroups/progdesign/final_phase1_report.pdf).


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http://www.dleg.state.mi.us/mpsc/electric/workgroups/progdesign/final_phase1_report.pdf

11

cost-effectiveness test assigns value to the full life of the savings of the measures installed and 1

therefore “demonstrates the value provided to customers based on lifetime savings.”5 2

Q: Does that address your concern? 3

A: No. It is true that the magnitude of the Company’s maximum shareholder incentive can 4

theoretically be constrained by the cost-effectiveness of its programs. For example, at the 5

highest level of performance the statute states that the maximum shareholder incentive will be 6

equal to the lesser of (A) 20% of the utility’s efficiency program spending; and (B) 30% of the 7

economic net benefits those programs provide. However, the reality is that the magnitude of the 8

shareholder incentive is likely to only be constrained by the first of those two possibilities: the 9

amount of program spending. Put another way, cost-effectiveness is a constraint in name only. 10

Q: Why is that? 11

A: I estimate that DTE’s program portfolio will provide approximately $29 million per year in 12

UCT net benefits.6 Thus, the economic net benefits cap is on the order of $8.7 million. In 13

contrast, with a total budget of $26.4 million, the 20% spending cap is about $5.3 million. Put 14

another way, the portfolio cost-effectiveness would need to decline by more nearly 40% for the 15

net benefits cap to be more constraining on the maximum shareholder incentive than the 16

spending cap. That magnitude of reduction could not result from even very large shifts in 17

emphasis away from longer-lived measures and towards shorter-lived savings. As a result, the 18

5 Exhibit NRD-3, Discovery Response NRDC-1.8a. 6 Computed by multiplying residential sector, low income sector, commercial and industrial sector, pilot and education program budgets as shown in DTE Exhibit A-4 by their respective UCT benefit-cost ratios as shown in DTE Exhibit A-7. EM&V and administrative costs also included in the calculation.


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fact that lifetime savings are captured in cost-effectiveness analysis will have no bearing on the 1

potential perverse incentive that basing performance incentives on first year savings creates. 2

Q: Would it be easy to translate DTE’s proposed first year savings metrics to lifetime 3

savings metrics for 2018-20212019? 4

A: Yes. Lifetime savings estimates can be easily extracted from the data and analyses that DTE 5

has provided in this case.7 Based on those data and analyses, I have computed the lifetime 6

savings that the Company would need to achieve to reach the minimum levels of savings 7

required to earn a shareholder incentive (i.e., equivalent to 1.00% electric0.75% gas first year 8

savings) as well as the lifetime savings that the Company would need to earn the maximum 9

shareholder incentive. Those values are presented in rows (f) and (h) in Table 1 below. 10

7 See Exhibit NRD-4, Discovery Response NRDC-1.4 with Attachment U-18268-NRDC-1.4 DTE Gas Lifetime Mcf.xlsx. Note that the lifetime savings values in this document were off by a factor of ten (i.e., expressed in Mcf when they were really in ccf) for all programs other than emerging measures, pilots, and education. The need for such adjustments is confirmed by a review of the “Results Summary” tabs in the C&I, Low Income and Residential files provided in response to NRDC-1. Note also that the lifetime savings values suggested by this analysis are considerably lower than the 13.81 years suggested in DTE Exhibit A-4. I use have used average measure life implied by the values in the DTE discovery responses because they are provided in a more detailed manner. If they are incorrect and the average life reported in DTE Exhibit A-4 is accurate, the 13.81 years value from Exhibit A-4 can be easily substituted into my Table 1 to update the implied lifetime savings goals.


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Table 1: Lifetime Savings Equivalents for Shareholder Incentives 1

2

Q: Why has DTE proposed reverting back to a first year savings metric? 3

A: The Company has not offered a detailed explanation for this proposed change. It simply 4

states that its proposal is consistent with the language of the new law, PA 342.8 5

Q: Would the language of the new law prohibit adoption of lifetime savings metric? 6

A: I am not an attorney, so I cannot offer a legal opinion. However, my general understanding 7

is that both the old law (PA 295) and the new law (PA 342) establish minimum savings 8

requirements in terms of first year savings. Other than the fact that PA 342 establishes three 9

different incentive amounts for three different levels of savings, the language in both statutes 10

regarding shareholder incentives is very similar. Under PA 295, the Commission approved 11

performance incentive mechanisms for DTE in which first year savings requirements were 12

translated into lifetime savings performance metrics for the purpose of determining the value of 13

8 Direct Testimony of J.R. Boladian, pp. 26-28 and Exhibit A-8.

2018 2019 Source

a 1st Year Savings (Mcf) 1,714,331 1,699,235 Exh A-4b Avg Measure Life (Years) 10.19 10.22 (c) / (a)c Lifetime Savings (Mcf) 17,469,467 17,361,932 (b) * (a)d 1st Year Savings % of Sales 1.00% 1.00% [ (a) / (e) ] / 100

e 1st Year Savings (Mcf) 1,285,748 1,274,426 Exh A-4f Lifetime Savings (Mcf) 13,102,098 13,021,447 (e) * (b)

g 1st Year Savings (Mcf) 1,714,331 1,699,235 (e) * 1.333h Lifetime Savings (Mcf) 17,469,463 17,361,929 (g) * (b)

DTE Plan

Savings at 0.75% of Sales

Savings at 1.00% of Sales


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shareholder incentives.9 It is not clear to me why the Commission would not have the same 1

discretion under the new law 2

Q: Are there other aspects of the PA 342’s language regarding shareholder incentives that 3

also require Commission interpretation in this case? 4

A: Yes. As I just noted, the new law, PA 342, describes three tiers of shareholder incentive: 5

1. 15% of spending for achieving 0.750% to 0.875% electric gas savings;6

2. 17.5% of spending for achieving 0.875% to 1.000% electric gas savings; and7

3. 20% for achieving greater than 1.000% electric gas savings.8

DTE appears to be asking that the Commission make the incentives associated with those tiers a 9

“step function” rather than a linear sliding scale.10 I suggest that a linear sliding scale would be 10

more appropriate as it would eliminate a perverse incentive. For example, rather than making a 11

utility indifferent between achieving 0.90% and 0.99% electricity gas savings, as would be the 12

case if a three-tiered incentive structure without a sliding scale were adopted, a sliding scale 13

would give a utility an incentive to continuing improving its performance at every level of 14

electric gas savings up to 1.00%. 15

Q: Given the two major concerns you have raised in this section of your testimony – (1) the 16

significant advantage of making lifetime savings, rather than 1st year savings, the primary 17

performance metric, and (2) the value of having a portion of shareholder incentives tied to 18

9 For example, see U-17763 DTE Exhibit A-8, p. 2 of 2 (proposing base energy savings performance metric of “Lifetime MWH of energy savings for exceeding yearly reduction of sales by 1.00%”) and the June 3, 2015 Commission Order approving the plan as modified through by a settlement agreement. 10 Though the Company did state that it “may consider” the sliding scale approach I propose. Exhibit NRD-5, Discovery Response NRDC-1.8ci.


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other, secondary performance objectives – how would you recommend structuring DTE’s 1

total shareholder incentive? 2

A: I would recommend 80% of the shareholder incentive weight (i.e., a maximum incentive 3

equal to 16% of efficiency program spending) be tied to performance relative to total portfolio 4

lifetime savings. I would further recommend an additional 15% weight (i.e., a maximum 5

incentive equal to 3% of program spending) be assigned to the number of low income housing 6

units receiving comprehensive retrofits and an additional 10% weight (i.e., a maximum incentive 7

equal to 2% of program spending) be assigned to the portion of business lifetime energy savings 8

produced by small businesses. 9

Note that the sum of my proposed weights is equal to 105%. By definition, the Company should 10

not be permitted to earn more than 100% of a maximum portfolio incentive of 20% of program 11

spending. Having the sum of the maximums that can be earned for each individual metric 12

exceed 100% simply means that the Company would not have to achieve the maximum level of 13

performance on every single metric in order to earn the maximum portfolio incentive. This 14

provides some risk mitigation for the Company, allowing achievement of the maximum 15

rewardable performance in some metrics to offset somewhat less than maximum performance on 16

others. This is conceptually the same as the structure that was in place in recent years. 17

As in the past, for each metric there should be a “threshold level” of performance at which the 18

Company would begin to earn an incentive, a specific amount that the Company would earn for 19

attaining that threshold (“threshold incentive”) and a “maximum level” of performance at which 20

the maximum incentive would be earned. The incentive earned at any point between the 21


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“threshold level” and the “maximum level” would be linearly interpolated between the 1

“threshold incentive” and the “maximum incentive”. 2

Q: What might that look like? 3

A: Table 2 shows what this might look like for the 2018 gas efficiency portfolio. 4

Table 2: Conceptual Lay-Out of 2018 Gas Performance Incentive Structure 5

Q: In Table 2 you provide not only the metrics and suggested weights, but also specific 6

performance levels for each metric. What is the basis for those performance levels? 7

A: The specific performance levels in these tables were developed as follows: 8

• Lifetime Savings: These are based on the Company’s own estimates of lifetime savings9

from its plan, adjusted down to the statutory 1st year performance targets (i.e., 1.00% to10

1.50% of electric salesi.e., 0.75% to 1.00% of gas sales) as shown in Table 1 of my11

testimony above. I understand that NRDC witness Mellinger is suggesting in his12

testimony that DTE has overstated the lifetime savings of standard LED light bulbs. A13


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modest downward adjustment to the lifetime electric savings targets in Table 2 would be 1

appropriate if the Commission agrees with his recommendations. 2

• Low Income Housing Units Receiving Whole Building Retrofit: The maximum target3

is roughly equal to 1% of the number of low income households in DTE’s gas service4

territory.11 In my experience, that it is a reasonably aggressive target.5

• Portion of business savings from small businesses: The maximum incentive would be6

earned if the portion of business savings acquired from small businesses was equal to the7

portion of business energy sales made to small businesses. That would be true equity.8

However, understanding it is harder to reach and treat small businesses, the threshold9

level proposed is one-half of that. Depending on the portion of savings DTE is currently10

acquiring from small business customers, it may be appropriate to start with targets a11

little lower for 2018 and ramp up to these levels.12

Q: Would the Company be able to earn the maximum incentives for each of these metrics 13

under its Plan as filed? 14

A: The Company would be able to achieve the maximum incentive level for the lifetime savings 15

metric, with its plan as filed, because that metric is pegged to the Company’s own forecast 16

performance in its plan. However, the metrics regarding low income comprehensive retrofits 17

11 There were more than 3.2 million residential gas customers in Michigan in 2016(https://www.eia.gov/dnav/ng/ng_cons_num_dcu_SMI_a.htm). DTE Gas accounted for approximately 36% of residential gas sales in the state in 2016. (https://www.eia.gov/cfapps/ngqs/ngqs.cfm?f_report=RP1&CFID=3671337&CFTOKEN=adecb824a353d3ce-2B0A52F6-237D-DA68-24A4616E47171EC2). Statewide, approximately 27% of households are at or below 200% of the federal poverty guideline (http://www.kff.org/other/state-indicator/population-up-to-200-fpl/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D). If that percentage applied to DTE’s gas territory, it would mean that a little more than 300,000 of its residential customers were low income. Needless to say, that estimate could be adjusted if better data regarding DTE’s low income population were available.


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https://www.eia.gov/cfapps/ngqs/ngqs.cfm?f_report=RP1&CFID=3671337&CFTOKEN=adecb824a353d3ce-2B0A52F6-237D-DA68-24A4616E47171EC2

https://www.eia.gov/cfapps/ngqs/ngqs.cfm?f_report=RP1&CFID=3671337&CFTOKEN=adecb824a353d3ce-2B0A52F6-237D-DA68-24A4616E47171EC2

http://www.kff.org/other/state-indicator/population-up-to-200-fpl/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D

http://www.kff.org/other/state-indicator/population-up-to-200-fpl/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D

18

and small business savings may not be achievable without some modification to the Company’s 1

plan – including the addition of some budget for programs targeting such customers. 2

Q: Have you estimated how much additional budget would be required? 3

A: No, I have not. 4

Q: What would you suggest that the Commission do in the absence of an estimate of the 5

level of additional budget required to achieve the metrics you have proposed? 6

A: I am advised by counsel that in DTE’s (then Michigan Consolidated Gas Company’s) first 7

Energy Optimization Plan Case (U-15890), the Commission found the Company’s incentive 8

proposal was not appropriately reflected in the surcharges proposed in that case, and directed the 9

Company to file redesigned surcharges and tariff sheets “reflecting the exclusion of the financial 10

inventive mechanism portion of the proposed surcharges.”12 In this case, I would suggest that the 11

Commission similarly instruct the Company to consult with interested parties and develop a 12

modified incentive proposal necessary to meet these proposed targets, or alternative targets for 13

the same metrics if the Company can present compelling evidence that it is not possible or 14

reasonable to reach the specific targets I have proposed. As part of the order directing the 15

development of the modified proposal, the Company could be instructed to provide information 16

regarding trade-offs (i.e., how much more or less it would cost to lower or increase each target 17

by 10% or 20%) so that the Commission and other parties can then fully judge the 18

reasonableness of the targets. 19

Q: Table 2 represents a proposal for 2018. What about 2019? 20

12 Case No. U-15890, June 3, 2010, Commission Order, pp. 15–16.


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19

A: My suggested structure – i.e., the performance metrics, their weights and the portion that can 1

be earned at the threshold and maximum levels – would be the same for both years. As shown in 2

Table 1, my suggested lifetime savings target for 2019 is a little lower than for 2018, based on 3

DTE’s estimates of baseline sales. I would recommend that the performance metrics for low 4

income retrofits and small business savings remain the same. 5

Q: Your proposals omit any reference to first year savings. Are you suggesting that the 6

level of first year savings should have no role in the structure of the Company’s 7

performance incentive mechanism? 8

A: No, I would not characterize my proposal that way. First, I am suggesting that the lifetime 9

savings metric be pegged to the level of first year savings discussed in the statute, multiplied by a 10

reasonable and achievable average measure life. 11

That said, if there are concerns about either the legality or the policy merits of not having a 12

specific first year savings metric, the Commission could adopt both a first year savings metric 13

and the lifetime savings and other metrics I have proposed. In that situation, I would recommend 14

that performance relative to the first year savings metric establish the maximum incentive the 15

Company would be eligible to earn in any given year, but would not – by itself – earn the 16

Company anything. The portion of that maximum incentive that would be earned would then be 17

dictated by performance relative both lifetime savings and the other metrics discussed above. 18

That is my understanding of the performance incentive structure adopted for DTE’s modified 19

2017 plan.1320

13 Case No. U-17763, September 15, 2017, Commission Order Approving Settlement Agreement.


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Q: Can you give a couple of examples of how the first year savings performance and the 1

other metrics you have proposed would interact under that scenario? 2

A: Yes. If the Company achieved a 0.876% first year savings level (setting its maximum 3

incentive at 17.5% of spending), but did not reach the minimum performance level for lifetime 4

savings or any other metric, it would not earn any incentive. Alternatively, if it achieved a 5

0.876% first year savings level and reached the maximum performance level on the lifetime 6

savings and all other metrics, it would still only be able to earn 17.5% of spending. 7


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IV. Education and Pilot Program Savings Assumptions 1

Q: What is the Company assuming with regard to savings from its Education and Pilot 2

programs? 3

A: The Company is assuming that its Education and Pilot programs are producing savings at the 4

same rate – per dollar spent – as the rest of its program portfolio.14 That appears to be the case 5

for both first year and lifetime savings. Importantly, that is not just a planning assumption that 6

will be adjusted after actual results from the programs are experienced and tallied. Rather, the 7

Company has in the past, and appears to be planning in the future, to count savings calculated 8

this way towards achievement of their statutory savings goals and the performance metrics 9

governing their earning of shareholder incentives. 10

Q: What is the basis for DTE’s assumptions? 11

A: This has been previously approved for the Michigan utilities since their efficiency programs 12

were started back in 2009. That common practice has been based on a temporary order issued by 13

the Commission December 2008 in Case U-15800.15 14

Q: Do you consider those assumptions to be a reasonably accurate representation of the 15

savings the Company’s pilot and education programs are actually producing? 16

A: No. Such assumptions are likely to significantly overstate the actual savings the pilot and 17

education programs are producing. 18

Q: Why is that? 19

14 Exhibit NRD-6, Discovery Response NRDC-1.9a 15 Id.


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A: In the case of pilot programs, there are two main reasons. 1

1. Much of the money is spent on market studies, evaluations and/or other activities2

that do not directly lead to the installation of efficiency measures. For example,3

in 2016 DTE spent $107,678 “studying whether or not sufficient electric and gas4

savings exist as a result of raising energy code performance rates to justify a5

utility sponsored codes support program.”16 All told, about 60% of DTE’s gas6

pilot program spending in 2016 was on studies and/or evaluations that did not7

involve any implementation of efficiency measures.178

2. Pilot programs that are designed to promote installation of new efficiency9

technology or test new methods to promote installation of well-established10

technologies should be expected to generate fewer savings per dollar – at least on11

average – than the rest of the efficiency program portfolio because of the up-front12

costs associated with setting up new program approaches.13

In the case of portfolio-wide education program, to the extent that it is actually producing any 14

savings – and I am unaware of any evaluation DTE has had performed to document any such 15

effects – it is likely that at least a portion of any such impacts are already captured in the results 16

of its other programs. 17

16 Exhibit NRD-7, Discovery Response NRDC-1.10 with Attachment U-18268-NRDC-1.10 Pilot List-Gas.xlsx. 17 Id.


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Q: Are you suggesting that DTE’s proposed spending on pilot and general education 1

programs is inappropriate or not a good use of funds? 2

A: No. When it is possible to fund general education and pilot programs as part of a substantial 3

and diverse portfolio of efficiency programs, I strongly support them. I am particularly 4

supportive of pilot programs that assess new technology and/or new program approaches to 5

promoting efficient technology. However, the principal purpose of pilot programs, other 6

research and development spending, and general education programs is not to generate their own 7

near-term savings. Rather, it is to raise general awareness and support other programs (in the 8

case of education efforts) and to develop a foundation for capturing savings in the future (in the 9

case of pilots). Thus, it is unreasonable to assume these programs are providing a substantial 10

level of near-term savings, let alone savings at the rate per dollar of spending as the rest of the 11

Company’s program portfolio. 12

Q: What savings do you suggest DTE should be able to claim from pilot and general 13

education programs? 14

A: I suggest that any savings claims for such programs should be held to the same evaluation 15

standard as savings claims for other programs. I consider that both common practice and 16

industry best practice. For example, it is the approach taken to spending of similar funds in the 17

neighboring state of Illinois. I would suggest that it is also consistent with the Commission’s 18

own emphasis on the growing importance of accurately estimating savings as recently articulated 19

in its order in U-18260 et al.: 20

“…it is essential that actual energy savings from EWR programs are rigorously and 21 accurately determined and continuously verified. In addition, because EWR will be a 22 critical part of utility IRPs and because energy savings continue to be a metric used under 23


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Act 342 for rewarding electric and gas utilities for engaging in EWR, accurate 1 assessments of energy savings help ensure ratepayer dollars are spent prudently.”18 2

Q: Didn’t the Commission’s order in U-18260 et al. suggest that the utilities continue to 3

assume pilot and education programs generate the same savings per dollar as the rest of 4

the program portfolios? 5

A: I am not a lawyer, so I cannot offer a legal opinion. However, it is not clear to me that it 6

does. The order does reinforce the U-15800 temporary order’s support for spending up to 5% of 7

an efficiency program portfolio budget on pilots and 3% on general education programs. In the 8

Order the Commission also “observes that the template contained in Attachment E to the 9

Temporary Order has worked well as a framework for plan filings” and recommends that utilities 10

continue to use it.19 However, it makes no direct reference to other parts of Attachment E to the 11

U-15800 Temporary Order, including the part of Attachment E that suggested utilities assume12

pilot and education programs generate the same savings per dollar spent as in the rest of their 13

program portfolios. 14

That said, if the Commission believes such direction has been implied, I would at least 15

encourage that it commit to reconsidering this issue as part of the utilities’ Energy Waste 16

Reduction biennial plans which will be filed in 2019 (governing their 2020 and 2021 program 17

years). 18

Q: Does that conclude your testimony? 19

A: Yes. 20

18 U-18260 et al., March 28, 2017, Commission Order, p. 10. 19 Id. at pp. 7–8.


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STATE OF MICHIGAN

BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

In the matter, on the Commission’s own motion, regarding the regulatory reviews, revisions, determinations, and/or approvals necessary for DTE GAS COMPANY to fully comply with Public Act 295 of 2008, as amended by Public Act 342 of 2016

U-18268 ALJ Lauren G. Van Steel

______________________________________________________________________

PROOF OF SERVICE On the date below, an electronic copy of the CORRECTED Direct Testimony of Chris Neme on behalf of the Natural Resources Defense Council was served on the following:

Name/Party E-mail Address

Administrative Law Judge Lauren G. Van Steel

[email protected]

Counsel for DTE Electric Co. Michael J. Solo Andrea E. Hayden

[email protected] [email protected] [email protected]

Counsel for MPSC Staff Bryan A. Brandenburg Amit T. Singh

[email protected] [email protected]

Counsel for ABATE Sean Gallagher Stephen Campbell Michael J. Pattwell

[email protected] [email protected] [email protected]

The statements above are true to the best of my knowledge, information and belief.

OLSON, BZDOK & HOWARD, P.C. Counsel for NRDC Date: December 7, 2017 By: _______________________________ Marcia Randazzo, Legal Assistant Kimberly Flynn, Legal Assistant Karla Gerds, Legal Assistant 420 E. Front St. Traverse City, MI 49686 Phone: 231/946-0044 Email: [email protected] and

[email protected] [email protected]












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