Transcript Processing Rate Cases

Processing Rate Cases
Energy Regulatory Partnership Program
Abuja, Nigeria
July 14-18, 2008
Presented by Robert W. Kehres
Why is there Regulation?
• Certain privately-owned activities are
“affected with a public interest.”
• Electric service is necessary for a
reasonable quality of life.
• An unregulated electric market is
imperfect.
Indicia of a Perfect Market
• Supply and demand set market price.
• The perfect marketplace has:
– Many buyers
– Many sellers
– No entry barriers
– A fully fungible product
Reality of the Electricity
Marketplace
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Many buyers
Fungible product
Extremely high entry barriers
Insurmountable economies of scale for
generation capacity and energy costs
• It is not practical to duplicate transmission
or distribution systems
Goal of Regulation
• Reliable and abundant service at
reasonable prices
• To serve as a marketplace substitute for
competition
– By limiting a utility’s ability to recover only just
and reasonable rates, regulation encourages
the maximization of satisfaction in the face of
scarcity
– Incentive to profit through the wise use of
scarce resources and avoidance of waste
Social Compact
• Obligation to serve all customers’ needs
• Just and reasonable rates
• Abundant, safe, and reliable service
• Right to recover all reasonable and
prudently incurred costs
• Opportunity to earn a reasonable rate of
return on its capital investments
Ratemaking Principles
• The Commission is not bound to the use
of any single formula or combination of
formulae in determining rates.
• The ratemaking function involves the
making of pragmatic adjustments.
• Although rates must be just and
reasonable, it is the result reached, not the
method employed, which is controlling.
More Ratemaking Principles
• The fact that the method employed to
reach a result may contain infirmities is not
important so long as the total effect of the
rate order cannot be said to be unjust and
unreasonable.
• The ratemaking process, i.e., the fixing of
"just and reasonable" rates, involves a
balancing of the investor and the
consumer interests.
Even More Ratemaking Principles
• Rate regulation need not ensure that the utility will
produce net revenues.
• However, the Commission must realize that the investor
interest has a legitimate concern with the financial
integrity of the company whose rates are being
regulated.
• From the investor or company point of view, it is
important that there be enough revenue not only for
operating expenses, but also for the capital costs of the
business.
• By that standard, the return to the equity owner should
be commensurate with returns on investments in other
enterprises having corresponding risks.
• That return, moreover, should be sufficient to assure
confidence in the financial integrity of the enterprise, so
as to maintain its credit and to attract capital.
Legal Basis For Ratemaking
• US Constitution, Amendment V., states:
–“…nor shall private property be
taken for public use, without just
compensation.”
Preliminary Considerations
• A Regulatory Agency should not be
surprised by the filing of a rate case.
• A Regulatory Agency should avoid
unnecessary delays (i.e. “Regulatory
Lag”).
• A Regulatory Agency should attempt to
conserve its scarce resources.
How to accomplish these goals?
• Rate Case Filing Requirements
MPSC’s Initial Solution
• Case No. U-4252, issued January 2, 1973
adopted “Emergency Rules”
• The emergency was passage of a requirement
that rate cases be resolved in 9 months.
• The possibility existed that many rate case
applications would be filed in the very near
future.
• See,
http://www.cis.state.mi.us/mpsc/orders/archive/p
dfs/U-4252_01-02-1973.PDF
What did Case No. U-4252 do?
• Standardized the filing requirements for all
utility rate cases through adoption of 10
requirements.
• This made it easier for the Commission
Staff to process cases because they
become familiar with the format.
The ten Case No. U-4252
requirements were:
• The filing of an original and 12 copies of the
application.
• The filing of 12 copies of all testimony and
exhibits.
• The filing of 2 copies of all work papers.
• The test year upon which the testimony and
exhibits were based had to be fully available for
audit at the time of filing.
• Rate Base, revenues, and expenses must be
separated between jurisdictional and nonjurisdictional operations.
Case No. U-4252 continued:
• Jurisdictional operations had to be further
separated in accordance with commission policy.
• All data had to state bases for normalization and
adjustments of rate base, revenues, and
expenses and appropriate supporting data.
• The proposed rates had to be submitted in rate
schedules (tariff sheets) in accord with
Commission rules and regulations.
Case No. U-4252 continued:
• All testimony and exhibits had to be
submitted in such form and detail as
necessary for the Commission to analyze
and verify its propriety, validity, and effect.
• Customer’s billing data had to be
submitted in sufficient detail as to enable
calculation of the proposed rates and
charges of customers by rate schedules.
Case No. U-4252 “completeness”
requirement.
• The application is deemed filed only when
it fully complies with all of the above
requirements.
• If insufficient information was filed, the
application languishes until the deficiency
is corrected.
The MPSC’s current standard –
Case No. U-4771
• This order adopted standard filing
requirements for electric utilities with
annual revenues of $50 million or more.
• See,
http://www.cis.state.mi.us/mpsc/orders/arc
hive/pdfs/U-4771_05-10-1976.PDF
Electric Rate Regulation in
Michigan
• Periodically, the MPSC examines an electric
utility’s costs and revenues in a rate case
proceeding. Usually, the utility is asking for
higher rates to cover increases in its costs.
• Annually, the MPSC conducts power supply
cost recovery (PSCR) plan and reconciliation
proceedings, which focus only on fuel and
purchased power costs and transportation
charges.
Step 1 -- The Rate Case
Application
• Case No. U-15245 - filed by Consumers
Energy Company (Consumers) on March
30, 2007 with the Commission’s Executive
Secretary. The application was 22 pages.
• http://efile.mpsc.cis.state.mi.us/efile/docs/15245/0001.pdf
• The pre-filed testimony was 330 pages
from 15 witnesses.
• http://efile.mpsc.cis.state.mi.us/efile/docs/15245/0002.pdf
• The 85 pre-filed exhibits were 494 pages.
• http://efile.mpsc.cis.state.mi.us/efile/docs/15245/0003.pdf
What did Consumers want?
• $143.5 million rate increase above the retail
electric base rates established in the company’s
last rate case.
• Consumers proposed that its rates be based on
2006 financial information, updated to reflect
known and measurable changes, to arrive at a
projected level of costs and revenues for the
2008 test year.
• A 11.25% return on equity (ROE), which
represents a 10 basis point increase above its
then existing ROE of 11.15%.
Proof of Service
• On March 30, 2007, Consumers Energy
Company also submitted proof that it had
sent copies of its rate case filing to all
parties in its previous recent rate case,
and its 2006 and 2007 recent PSCR
cases.
Step 2 – Docketing of the
Application
• Immediately upon filing, an application is
assigned a Docket Number and entered into the
Commission’s electronic filing system.
• The Executive Secretary notifies the State Office
of Administrative Hearings and Rules, who
assigns an independent Administrative Law
Judge (ALJ). The assigned ALJ informs the
Executive Secretary of the date for the initial
hearing.
• The Executive Secretary also notifies the
MPSC’s Regulated Energy Division (RED), who
assigns a case coordinator.
Step 3 – Review of Notice of
Hearing
• The company files a proposed Notice of Hearing
(NOH) with its application.
• The Executive Secretary reviews the proposed
NOH, makes changes, and fills in:
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The amount of the proposed increase
The date for the initial hearing
The name of the ALJ
Advice on how to intervene as a party, including the
deadline for filing petitions to intervene by parties
– Advice on how to comment informally (Rule 207)
Step 4 – Publishing the Notice of
Hearing
• Within 2 weeks of the application’s filing, the Executive
Secretary directs the company to:
– Mail a copy of the enclosed notice of hearing to all
cities, incorporated villages, townships and counties
in its electric service area, and to intervenors in other
cases.
– Publish the notice of hearing in daily newspapers of
general circulation in its electric service area.
– Serve upon each person who has petitioned to
intervene a copy of the written direct testimony of its
proposed witnesses and the proposed exhibits as
filed with the Commission.
– Provide timely proof of the completion of these
activities.
Step 5 -- Discovery
• Discovery is a well-established part of American Legal
Jurisprudence.
• Parties may send written interrogatories to any other
party.
• Discovery goes on throughout the proceeding.
• Normally, receiving party must respond (or object) within
14 days.
• Objections are ruled on by the ALJ.
• In Case No. U-15245, discovery commenced May 10,
2007.
• Staff has right to audit company’s books.
Standard for Discovery
• Discovery questions may seek information
that is admissible evidence, or that may
lead to admissible evidence.
Step 6 – Interventions by Parties
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Attorney General Michael A. Cox (Attorney General)
The Kroger Company (Kroger).
The Association of Businesses Advocating Tariff Equity (ABATE).
The Michigan Retailers Association (MI Retailers).
Michigan Environmental Council & Public Interest Research
Group in Michigan (MEC/PIRGIM).
The Midland Cogeneration Limited Partnership (MCV).
AARP Michigan (AARP).
Dow Corning and Hemlock Semiconductor Corporations
(Dow/Hemlock).
Energy Michigan.
the National Energy Marketers Association (NEMA).
Constellation New Energy (CNE).
Phil Forner.
The Commission Staff (Staff) also participated in the
proceedings.
[One “delayed” intervenor, MML, took case as it was.]
Step 7 -- Informal Comments
• Rule 207 of the MPSC’s Rules of Practice
and Procedure allow anyone to appear at
a hearing or to submit written comments.
– These comments are placed in the record, but
are not record evidence.
– Those making Rule 207 comments are not
sworn as witnesses and cannot be crossexamined.
– Such comments may be received at any time.
Step 8 – Objections to
Interventions
• Consumers objected to almost every
petition to intervene
– The primary objection was that the
intervenors did dot state their interest in the
proceedings
– This was an effort by the utility to nail down
the intervenors to specific issues and
positions – possibly to simplify the proceeding
Intervention Standards
• Controlled by Rule 201 of MPSC’s Rules of Practice and
Procedure and Case Law:
– Intervenor must have an interest in the proceeding that is clearly
pleaded in the petition to intervene.
– Any other party may object.
– MPSC applies the “Two-Prong Test” from Association of Data
Processing Service Organizations, Inc. v Camp, 397 US 150; 90
S Ct 827; 250 LEd 184 (1970) to determine standing.
– That test requires a proposed party to show (1) that it will suffer
an “injury in fact” and (2) that the interest allegedly damaged are
within the “zone of interests” to be protected or regulated by the
statute or constitutional guarantee in question.
– MPSC has discretion to permit anyone to intervene if the
Commission is persuaded that the intervenor will add something.
– Generally, the two-prong test excludes competitors.
Step 9 – Initial Prehearing
Conference
• The first prehearing conference was May 10,
2007. The ALJ granted the petitions to intervene
submitted by the Attorney General, Kroger,
ABATE, and MI Retailers.
• ALJ also set a schedule for the remainer of the
prodeedings.
• The other intervenors were given a chance to
supplement their petitions to intervene.
• Consumers again filed objections to the
interventions.
Step 10 – Second Prehearing
Conference
• At the second prehearing conference on
May 31, 2007, the ALJ granted the
petitions to MEC/PIRGIM, the MCV, AARP,
Dow/Hemlock, Energy Michigan, NEMA,
CNE, and Phil Forner.
Step 11 – Joint Motion regarding
Expert Witness
• In June 2007, the former Chairman of the MPSC took
another job and he convinced several key Commission
RED staffers to switch jobs with him.
• Given the loss of veteran employees and the complex
nature of their expertise, the Commission Staff and
Consumers requested approval of a proposal to have
Consumers pay for two expert witnesses to be used to
present portions of the Staff’s case. One consultant was
needed to make an assessment of Consumers’
environmental compliance programs and the other was
needed to make an assessment of issues concerning
Consumers’ load study and class cost of service study.
Step 12 – Responses to the joint
motion regarding expert witnesses
• CNE filed a response in support of the
joint motion.
• Energy Michigan also supported the joint
motion, but argued that the Staff had to
maintain its independence from
Consumers.
• Attorney General filed comments opposing
the joint motion.
Step 13 – Commission Order
• On June 26, 2007, the MPSC issued an order granting the joint
motion authorizing the Staff to retain, at Consumers’ expense, the
services of independent consultants to assess Consumers’
environmental compliance programs and load study and class cost
of service study.
• In order to avoid any appearance of impropriety, the Commission
directed that the Staff shall provide Consumers with a list of qualified
consulting firms for Consumers to inform these firms of the bidding
process. While Consumers was responsible for drafting the legal
contracts with the Staff-selected vendors and for payments under
the contracts, the Staff was to have control over the nomination,
selection, supervision, conclusions, reports, and possible expert
testimony of the consultants.
• Consumers’ sole involvement in the Staff’s retention of consultants
was limited to the administration of the solicitation of bids from the
Staff-selected vendors, the contracting of services, and the payment
of the consulting fees.
• http://efile.mpsc.cis.state.mi.us/efile/docs/15245/0088.pdf
Step 14 – [Bombshell]
The Utility Amends its Application
• On July 3, 2007, Consumers filed an
amended application.
– 672 pages of an amended application, a
Motion for Partial and Immediate Relief, and
the testimony and exhibits of seven
witnesses.
– The utility also proposes to revise the
schedule of the proceeding.
Now What Does Consumers want?
• Partial and immediate (P & I) rate relief of $77 million.
• An immediate final determination on a request for rate relief
associated with Consumers’ proposed acquisition of a 946
megawatt (MW) gas-fired generating plant located in Zeeland,
Michigan for $84 million.
• Authorization to remove $169 million of costs from its rates
and the contemporaneous elimination of the power supply cost
recovery (PSCR) crediting mechanism valued at $167 million.
• Authorization to utilize $127 million of Palisades proceeds to
offset both its proposed P & I rate increase of $77 million and
the $84 million rate increase associated with the purchase of
the Zeeland Generating Station until issuance of a final order
or exhaustion of the $127 million, whichever comes first.
Step 15 – A New Notice of Hearing
• Because the new rate filing increased the
amount sought by Consumers and
included a request for P&I rate relief, a
new notice of hearing had to be issued by
the Executive Secretary and published by
the company.
Step 16 – Motion to strike July 3 filing
for costs and attorney fees by ABATE
• According to ABATE, because Consumers
updated its case, ABATE should be
entitled to recover its costs of litigating the
new aspects of the case, which ABATE
contends could have been included in the
company’s original filing. In the
alternative, ABATE asked the ALJ to strike
the new filing.
Step 17 – Attorney General’s petition
for review in the Circuit Court of the
June 26 order
• Normally, court challenges of the MPSC’s
orders go to the Michigan Court of
Appeals.
• But, the Court of Appeals will not entertain
any appeal of the MPSC’s interlocutory
rulings.
• So, the Attorney General tried to bring the
matter before the Circuit Court.
Step 18 -- Motion Hearing
• On July 26, 2007, the ALJ decided to allow
Consumers to revise the schedule, but
denied the requests by ABATE to strike
the company’s July 3 filing and for costs
and attorney fees.
Step 19 – Appeal of the ALJ’s July
26 ruling by the Attorney General
• The Commission has provided for parties who
are dissatisfied with the ALJ’s ruling to have an
opportunity to file an interlocutory appeal to the
Commission.
• The Commission need not address such
appeals if it appears that the ALJ’s decision was
correct.
• If the Commission disagrees with the ALJ, the
Commission issues an order granting the
appeal.
• Here, the Commission waited until issuing its
order on P & I relief to address this appeal.
Step 20 – Assorted Motions
• Attorney General’s motion to amend schedule.
• MML’s motion to intervene.
• Motions to compel discovery. Many of these
were withdrawn.
• Motion for a protective order limiting discovery.
• At a September 24, 2007 motion hearing one
motion to compel was granted in part, and the
motion to limit discovery was rejected.
Step 21 – Filing of Staff Report and Staff
and Intervenor Testimony and Exhibits
• The submission of a Staff Report is
required before the Commission may
consider a motion for P & I rate relief
• Intervenors get the opportunity for a full
evidentiary hearing, including the right to
submit there own testimony and exhibits
on the issue of interim relief.
Step 22 -- Protective order
• On October 3, 2007, the ALJ issued an
order finding that Exhibit AG-22 should
remain confidential.
Step 23 – Evidentiary Hearing on
the request for P & I Rate Relief
• Evidentiary hearings on Consumers’ requested
P & I rate relief were held on October 3 and 4,
2007.
• Eleven witnesses testified and 112 exhibits were
received into evidence.
• On October 26, 2007, Consumers, the Staff, the
Attorney General, the MCV, ABATE, and
Dow/Hemlock filed briefs.
• On November 9, 2007, Consumers, the Staff,
the Attorney General, the MCV, and ABATE filed
reply briefs.
Admissible Evidence
• Must be relevant to the subject matter.
• Admissibility of evidence is determined by
the same standard applicable to civil trials
heard by a judge.
• Agency may admit and give probative
effect to evidence of a type commonly
relied upon by reasonably prudent men in
the conduct of their affairs.
Step 24 -- Decision on Interim Relief
• No Proposal for Decision by ALJ.
• On December 18, 2007, the Commission approved:
– An electric rate increase of $69.5 million related to Consumers’
pending purchase of the Zeeland Generating Station, a 946
megawatt gas-fired generating plant. The increase was 17
percent below what the utility requested. The average
residential Consumers electric customer saw an increase of
$1.09 per month.
– However, the Commission denied the utility's request for partial
and immediate rate relief in the net additional amount of $77
million, noting that the utility is not currently experiencing a
revenue deficiency.
Step 25 – Filing of Staff and Intervenor
“direct” testimony on final rate relief
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The Staff -- 19 witnesses.
ABATE -- 2 witnesses.
Kroger -- 1 witness.
MML – 3 witnesses.
Attorney General – 3 witnesses.
Energy Michigan – 1 witness.
CNE – 1 witness.
NEMA – 1 witness.
Dow/Hemlock – 1 witness.
ABATE – 1 witness.
MEC/Pirgim – 4 witnesses.
Mr. Forner – 1 witness.
Step 26 – Filing of Staff and Intervenor
“rebuttal” testimony on final rate relief
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Consumers – 11 witnesses.
Staff – 1 witness.
Dow/Hemlock – 1 witness.
CNE – 1 witness.
Attorney General – 1 witness.
Hearing on Final Rate Relief
• Step 26 – Motions to Strike Testimony.
• Step 27 – Six days of hearings before the ALJ. Crossexamination of all witnesses. Introduction of 338
exhibits.
• Step 28 – Briefs.
• Step 29 – Reply Briefs.
• Step 30 – ALJ’s Proposal for Decision
Step 30 – Proposal for Decision
• Hearing Judge’s recommendations on all
rate case issues
– Test Year
– Rate Base
– Cost rates and overall rate of return
– Capital Structure
– Net operating income
• Annual expenses
• Annual revenues
• Revenue deficiency or sufficiency
Step 30 -- continued
• Judge’s rate design recommendations
– Assignment of costs to rate classes
– Rate re-alignment
– Creation of new rates
– Elimination of existing rates
The final decision
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Step 32 – Exceptions
Step 33 – Replies to Exceptions
Step 34 – Drafting the final order
Step 35 – Issuance of the Final Order
Step 36 – Rehearing
Step 37 -- Appeal