STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION ***** In the matter of the application of DTE ELECTRIC COMPANY for authority to implement a power supply cost recovery plan in its rate schedules for 2014 metered jurisdictional sales of electricity. ) ) ) ) ) ) Case No. U-17319 At the May 14, 2015 meeting of the Michigan Public Service Commission in Lansing, Michigan. PRESENT: Hon. John D. Quackenbush, Chairman Hon. Greg R. White, Commissioner Hon. Sally A. Talberg, Commissioner ORDER History of Proceedings On September 30, 2013, DTE Electric Company (DTE Electric) filed an application, with supporting testimony and exhibits, pursuant to 1982 PA 304 (Act 304), MCL 460.6j et seq., seeking authority to implement a power supply cost recovery (PSCR) plan in its rate schedules for 2014 metered jurisdictional sales of electricity, and requesting review of its five-year forecast. DTE Electric sought a 2014 levelized monthly PSCR billing factor of 1.08 mills per kilowatt-hour (kWh) based on 2014 PSCR costs of $1.429 billion. DTE Electric also requested a Commission determination on whether it was likely to permit recovery of certain chemicals used to control mercury and sulfur dioxide emissions and sought Commission approval to procure capacity resources pursuant to MCL 460.6j(13)(b). A prehearing conference was held on November 21, 2013, before Administrative Law Judge Sharon L. Feldman (ALJ). The ALJ granted intervenor status to the Michigan Department of the Attorney General (Attorney General), the Association of Businesses Advocating Tariff Equity (ABATE), the Michigan Environmental Council and Sierra Club (MEC/SC), and the Great Lakes Renewable Energy Association (GLREA). At a second prehearing conference held on December 13, 2013, the ALJ granted permissive intervention to the Institute for Energy Innovation (IEI). 1 The Commission Staff (Staff) also participated in the proceedings. Evidentiary hearings were held on August 12 and 13, 2014. Thereafter, the parties submitted initial and reply briefs. The ALJ issued her Proposal for Decision (PFD) on February 27, 2015. On March 25, 2015, the Attorney General, MEC/SC, GLREA, and IEI filed exceptions to the PFD, and on April 13, 2015, DTE Electric filed replies to exceptions. The record in this proceeding consists of 995 pages of transcript and 135 exhibits. Discussion The ALJ provided a detailed review of the record and positions of the parties on pages 3-42 of the PFD, which will not be repeated here. The ALJ identified several issues to be addressed, including: (1) DTE Electric’s proposed capacity purchases; (2) PROMOD modeling issues; (3) DTE Electric’s proposed sorbent costs; (4) DTE Electric’s coal forecast; (5) recommendations from IEI and GLREA concerning the five-year forecast; (6) costs and other concerns associated with the reduced emissions fuel (REF) project; and (7) spent nuclear fuel (SNF) fees. There were no exceptions to the ALJ’s recommendations concerning the REF project, IEI’s proposals In an order issued on March 6, 2014, the Commission affirmed the ALJ’s grant of permissive intervention to IEI. 1 Page 2 U-17319 concerning load forecasting and voltage control, and SNF fees. With respect to these issues, the Commission adopts the PFD. The remaining contested issues are addressed seriatum. Proposed Capacity Purchases DTE Electric requested that, pursuant to MCL 460.6j(13)(b), the Commission approve purchasing methods to obtain capacity necessary to meet future Midcontinent Independent System Operator, Inc. (MISO) resource adequacy requirements. DTE Electric proposed that the Commission preapprove these purchases provided that the company uses one of three least-cost procurement methods it described. The Attorney General disputed the lawfulness of DTE Electric’s proposal, arguing that under Section 6j(13)(b), the Commission may only approve or disapprove an actual contract and not specific procedures that may result in a contract. The ALJ found that the Commission resolved this issue in the June 19 and September 11, 2014 orders in Case No. U-17496. In those orders, addressing a similar request by Consumers Energy Company (Consumers), the Commission denied the company’s request for approval of auction procedures, finding that Consumers could hold a capacity auction without Commission approval. Further, the Commission determined that Consumers could request approval of any actual long-term contracts resulting from an auction either in a PSCR reconciliation or in a separate case. However, because this is a PSCR plan case, where the Commission is charged with evaluating the reasonableness and prudence of the decisions underlying the company’s plan, the ALJ recommended that the Commission generally approve DTE Electric’s proposed procedures to acquire capacity to meet MISO’s requirements under Section 6j(6), and take up in the future any contracts that might be entered into under Section 6j(13)(b). The Attorney General filed an exception in which he argued that construing Sections 6j(6) and 6j(13) in pari materia requires the Commission to disallow any capacity charges that are incurred Page 3 U-17319 before Commission approval of an agreement, notwithstanding previous Commission orders that, he contends, misinterpreted the sections at issue. The Attorney General asserts: Within the overall context of Subsections (6) and (13) of MCL 460.6j, the word ‘prior’ refers to disallowing capacity charge costs incurred by a utility under a power purchase agreement (‘PPA’) unless the Commission has previously approved recovery. And although it may be true that the Commission can approve capacity charges after a PPA is executed and before a utility incurs any such capacity charges, MCL 460.6j(13)(b) says costs must be disallowed in a reconciliation order when the underlying capacity charges were not approved before the utility incurred the costs. Thus, the word ‘prior’ in subsection 6j(13)(b) provides the clear textual basis in the statute for inferring that costs incurred before the Commission reviews and approves capacity charges in a PPA shall be disallowed. In sum, the Commission should rule that approval of capacity charges before DTE Electric Company incurs them and seeks recovery is required by MCL 460.6j(13)(b) even though it may not be necessary to approve them for purposes of this case because DTE Electric seeks no recovery in this case. Attorney General’s exceptions, pp. 3-4. In response, DTE Electric expresses support for the ALJ’s findings and conclusions on this issue, however, according to the company, the Attorney General now takes the position that any capacity charges must be disallowed in a reconciliation if charges were not approved in the associated plan proceeding. DTE Electric maintains that the ALJ’s recommendation “properly gives legal and practical effect to the PSCR plan and reconciliation provisions of 1982 PA 304, MCL 460.6j et seq[,]” and that the Commission should reject the Attorney General’s attempt to create limitations to capacity purchases that the Legislature never intended. DTE Electric’s replies to exceptions, pp. 5-6. DTE Electric adds that there is a more fundamental reason to reject the Attorney General’s exception. The company points out that the plain language of MCL 460.6j(13)(b) applies only to “capacity charges associated with power purchased for periods in excess of 6 months unless the utility has obtained the prior approval of the commission.” DTE Electric’s replies to exceptions, Page 4 U-17319 p. 3 (emphasis supplied). DTE Electric argues that because it plans to purchase capacity without associated power, Section 6j(13)(b) does not apply, and the Attorney General’s exception is moot. The Commission finds the PFD well-reasoned and adopts the ALJ’s findings and conclusions on this issue. As discussed in the PFD, the Commission has addressed the concerns associated with the approval of purchasing procedures in the June 19 and September 11, 2014 orders in Case No. U-17496, and it concurs with the ALJ that there is no reason to revisit the matter here. Further, the Commission observes that although DTE Electric’s argument concerning the applicability of Section 6j(13)(b) to the purchase of capacity only appears to have some merit, the Commission nevertheless finds that the argument, presented late in this proceeding, should be addressed more fully in a future case if this issue is presented. PROMOD Modeling Issues DTE Electric forecasted its generation using a production cost simulation program, PROMOD IV, which is widely used in the electric industry. According to DTE Electric, PROMOD simulates economic dispatch of generation units based on multiple inputs including fuel cost and consumption, emissions, environmental regulations, market-based electric prices, and maintenance schedules. MEC/SC raised concerns about the inputs and projections from DTE Electric’s modeling. First, MEC/SC questioned the results showing the uneconomic operation of Trenton Channel 7 and 8 coal units for the plan year and unit 7 for much of the five-year forecast. Next, MEC/SC raised concerns about the designation of all coal units as must-run, contending that this was not the most economical option for ratepayers. Finally, MEC/SC presented its own PROMOD analysis using corrected costs for sorbents that demonstrated significant periods of uneconomic operation for several of DTE Electric’s coal units. MEC/SC therefore requested that: (1) the Commission Page 5 U-17319 issue a Section 7 warning that DTE Electric would be unlikely to recover costs associated with continued operation of Trenton Channel 7 after April 2016, unless DTE Electric makes a clear commitment to retire the unit by that time; (2) that the Commission issue a Section 7 warning that DTE Electric would be unlikely to recover excess costs during the months when the company bids its coal units as must-run and they operate at a loss; and (3) that DTE Electric would be unlikely to recover the costs of certain sorbents and pollution control equipment based on the company’s erroneous cost information and modeling. Among other findings, some of which were uncontested, the ALJ found persuasive DTE Electric’s rebuttal explaining that the cost difference between the company’s must-run scenario, compared to MEC/SC’s more specific analysis, was de minimus. She further found that DTE Electric demonstrated that the modeling it uses for PSCR planning purposes differs from the way the company actually bids its units into the MISO market, thus addressing MEC/SC’s fundamental concern about the company’s PROMOD modeling. The ALJ found that no warning was necessary and that any issues concerning the company’s modeling and actual bidding could be addressed in the reconciliation proceeding. MEC/SC takes exception, arguing that the PFD should have better recognized the value of accurate forecasting, an issue that is central to a PSCR plan case. As such, MEC/SC maintained that a Section 7 warning is appropriate. MEC/SC quoted the Commission’s December 4, 2014 order in Case No. U17097, in which the Commission acknowledged the challenges of forecasting as well as the need for the company to improve its forecasting methods in order to mitigate the risks to both the company and ratepayers as energy and capacity markets become more constrained. MEC/SC points out that PSCR plan cases are the only proceedings where a utility is required to explain its projections and allow for scrutiny by the Commission and other parties. Page 6 U-17319 MEC/SC contends that “the PROMOD results are the underlying basis of the company’s filing and, therefore, should reflect how DTE actually expects to operate its system.” MEC/SC’s exceptions, p. 3. MEC/SC further observed that accurate modeling is essential to assuring that the company is taking all steps to minimize the cost of fuel, as required under the act, using the company’s practice of entering into multi-year contracts for coal as an example. According to MEC/SC, “[o]nly through accurate forecasting can it be ensured that the amounts of coal being contracted for are reasonable.” Id. at 4. In response, DTE Electric repeats arguments from its brief and reply brief, namely that the PROMOD modeling used in this proceeding is the same that the company has historically used in PSCR and rate cases. According to DTE Electric, MEC/SC has failed to establish that the company’s method does not achieve a reasonable level of precision, given that day-to-day conditions may differ significantly from the projection. DTE Electric emphasizes testimony, and the ALJ’s finding, that the company’s actual bidding of units necessarily differs from its projection. DTE Electric reiterates that the company performs biweekly economic forecasts, on the basis of which commitment status of individual units is established. The Commission agrees with DTE Electric that for PSCR planning purposes the company’s modeling with respect to unit dispatch is reasonable. As DTE Electric points out, the company files its plan case three months before the beginning of the plan year using the best information it has available at the time of the filing. During the course of the plan year, the must-run status of many units is changed depending on actual conditions in the days or weeks ahead. The Commission also recognizes MEC/SC’s concern that inaccurate modeling could cause the company to operate obsolete units that should be retired, however, in this proceeding PROMOD is not being used for that purpose. Indeed, decisions about plant investments or retirements require Page 7 U-17319 different inputs and a much different type of modeling than the limited analysis here, the primary purpose of which is to develop a reasonable PSCR factor. The Commission therefore adopts the ALJ’s analysis and conclusions on this issue. Costs of Sorbents DTE Electric projected the costs of sorbents to be used in conjunction with control systems to decrease emissions of various air toxics and particulate matter as required under federal environmental regulations. See, Exhibit A-2. DTE Electric requested that the Commission indicate whether it is unlikely to permit recovery of these costs as reasonable and prudent costs of fuel burned, beginning in the 2016 plan year. The Attorney General objected to DTE Electric’s request on grounds that although Section 6j(7) (Section 7) allows the Commission to indicate items in the five-year forecast, which, on the basis of present evidence, it may not approve recovery, the statute does not permit the Commission to make an a priori assessment of the reasonableness and prudence of future costs. MEC/SC recommended that the Commission issue a Section 7 warning that the proposed costs may be disallowed on grounds that the company’s estimates concerning the costs of the sorbents have varied substantially from case to case and from recent estimates provided to the Michigan Department of Environmental Quality. MEC/SC further argued that burning REF coal may require larger amounts of sorbent and that the use of these materials may not be economically justified. In rebuttal, DTE Electric argued that its estimates were based on the best information from its vendors at the time the case was filed. DTE Electric added that its economic analysis of the use of sorbents and implementation of other pollution controls was a means of screening to determine the relative value of building new generation compared to retrofitting existing plants with pollution controls. Page 8 U-17319 The ALJ found MEC/SC’s position on sorbent cost variability persuasive, observing that DTE Electric presented conflicting estimates concerning the amount of sorbent that might be required and that the more recent estimates provided by MEC/SC indicate that DTE Electric has likely significantly understated the variable costs of pollution control measures. The ALJ determined that, consistent with previous Commission orders, sorbent costs are the type of cost that may be recovered as part of PSCR, however, issues concerning capital investments for related pollution control equipment should be deferred to rate case proceedings. MEC/SC takes exception to the ALJ’s finding on this issue. Recognizing that the recommendation in the PFD is consistent with the Commission’s order in Case No. U-17097, MEC/SC nevertheless maintains: [T]hat decision does not distinguish between two distinct elements of MEC/SC’s claims regarding [dry sorbent injection] DSI and [activated carbon injection] ACI: (1) that DTE has not demonstrated that its decision to retrofit several aging coal units with DSI and ACI is reasonable and prudent given that there are likely lower cost resource options, and (2) that DTE’s PROMOD modeling does not incorporate a reasonable projection of the variable operating cost of the planned DSI and ACI usage on certain of the Company’s coal units. MEC/SC’s exceptions, p. 5. MEC/SC continues by noting that a reasonable projection of the variable costs associated with pollution control equipment is essential in a PSCR proceeding, regardless of whether or not the investments in retrofits for pollution control are deemed unreasonable in a rate case. In response, DTE Electric contends that MEC/SC’s exception on this issue is improper because it questions the Commission’s December 4, 2012 order in Case No. U-17097 (December 4 order). According to DTE Electric, the proper way to have claimed an error in the December 4 order would have been by a petition for rehearing or clarification of the order, not by attempting to relitigate the issue in this proceeding. DTE Electric further points out that the Commission has Page 9 U-17319 repeatedly determined that issues concerning capital costs and plant retirement are appropriately addressed in a rate case, and not in a limited PSCR proceeding, and that sorbent costs are the type of cost that can be recovered under the PSCR. The Commission reiterates that the plan and forecast provisions of Act 304 refer to “existing sources of electric generation.” MCL 460.6j(3); MCL 460.6j(4). As such, the inclusion of sorbents in a plan and forecast is appropriate. However, the Commission acknowledges that the costs for sorbents and associated capital investments are included in DTE Electric’s pending rate case, Case No. U-17767, and it is preferable to examine both the operations and maintenance costs and capital costs for DSI and ACI in that proceeding. Adjustments can be made in future PSCR proceedings based on the Commission’s determinations in the rate case. Coal Forecast MEC/SC contended that DTE Electric seriously underestimated the cost of coal in its five-year forecast, pointing to the fact that the coal prices projected in this case were substantially reduced from those in the forecast presented in the company’s previous PSCR plan proceeding. MEC/SC added that the changed forecast deviates substantially from other industry forecasts and was presented with no explanation. MEC/SC raised concerns that DTE Electric is making decisions on the dispatch of its coal units, and on the feasibility of installing pollution control equipment on these units, using a forecast that the MEC/SC contended lacked credibility. The ALJ found that MEC/SC primarily had issues with the coal prices projected for the 20152018 forecast period, and not the 2014 plan year, and that MEC/SC was also concerned that DTE Electric was using a flawed forecast to decide whether to retire or retrofit aging coal units. The ALJ noted that the Commission has previously determined that a PSCR plan proceeding is not the appropriate venue for evaluating capital expenditures and plant retirement. Issues concerning Page 10 U-17319 capital costs or plant investment decisions should be addressed in a rate case where the company will be expected to fully justify its plans. MEC/SC takes exception arguing that the Commission should find that DTE Electric’s coal forecast is relevant to this PSCR plan proceeding and urging the Commission to issue a Section 7 warning to protect customers in the event the company’s forecast is too low. In reply, DTE Electric argues that MEC/SC’s exception is without merit. Contrary to MEC/SC’s claim, DTE Electric asserts that it provided ample explanation for its coal cost projections for both the plan year and five-year forecast. According to DTE Electric, the company plans to increase purchases of lower-cost western coal while decreasing purchases of more expensive eastern coal. DTE Electric also points to the much lower costs of contract and spot coal for 2015, compared to 2014, along with lower transportation costs. The Commission finds that MEC/SC’s exception should be rejected. While DTE Electric’s coal forecast in this case may have differed significantly from its previous PSCR forecast, the Commission finds that DTE Electric’s projected coal costs were developed using the same methods it has used in the past. The Commission further finds that the company provided sufficient explanation for why these costs are projected to decrease, including changes in coal blend, lower transportation costs, and reduced demand due to the expected closure of older coal units. Institute for Energy Innovation and Great Lakes Renewable Energy Association Proposals The IEI asserted that DTE Electric’s five-year forecast fails to take into account cost-effective energy efficiency opportunities that could serve to minimize the cost of fuel as required under Section 6j(6) of Act 304. IEI also cited various sections of 2008 PA 295 (Act 295) that require the Commission to promote energy efficiency and that allow for additional expenditures for prudent Page 11 U-17319 energy efficiency investments. Accordingly, IEI argued that DTE Electric should be directed, on a prospective basis, to include all cost-effective energy efficiency measures in its five-year forecast. DTE Electric opposed IEI’s proposal on grounds that it exceeds the Commission’s authority under Act 304. DTE Electric pointed to Section 6j(4) that only requires the five-year forecast (not “plan” as IEI described it) to contain power supply requirements of its customers and its future sources and costs of supply, in light of its existing sources of electrical generation and sources of electrical generation under construction. Further, DTE Electric claimed that IEI’s proposal creates a conflict between Act 304 and Act 295. GLREA similarly made recommendations concerning DTE Electric’s five-year forecast. In sum, GLREA asserted that the Commission should require the company, in future plan cases, to align its five-year forecast with the results and recommendations of a solar collaborative ordered on December 19, 2013, in Case No. U-17302. GLREA recommended that the Commission direct the company to continue to evaluate the benefits of solar energy and incorporate additional solar resources as justified by its analyses. DTE Electric opposed GLREA’s recommendations as beyond the scope of a PSCR plan proceeding, reiterating that Act 304 requires a plan and forecast based on existing, and not aspirational, generation. As with the recommendations supported by IEI, the company posited that GLREA was also setting up a conflict between Act 304 and Act 295. Concerning the issue raised by IEI, the ALJ found that the Commission “has clearly indicated that it does not want to review generalized arguments regarding energy efficiency and conservation opportunities in PSCR plan cases,” observing that the Court of Appeals has affirmed that the Commission, in its discretion, may consider energy efficiency in PSCR plan proceedings, but it is not required to do so. PFD, p. 86. The ALJ continued, quoting the March 6, 2014 order in Page 12 U-17319 this case wherein the Commission stressed that the scope of the PSCR plan and forecast is limited by statute and prior Commission holdings. The ALJ therefore declined to recommend that the Commission order DTE Electric to provide the additional analyses concerning energy efficiency requested by IEI. With respect to GLREA’s recommendations, the ALJ found that, to the extent that DTE Electric incorporates its renewable portfolio into its PSCR forecast, it should be expected to do so, and there is no evidence that the company’s forecast does not correspond to DTE Electric’s most recently approved renewable energy plan. Concerning GLREA’s recommendation that the fiveyear forecast include analysis of the benefits associated with expanded solar energy, the ALJ determined that this issue should be presented in a renewable energy plan case, in accordance with past Commission determinations. IEI takes exception to the ALJ’s recommendation arguing that the ALJ relied too much on prior Commission orders and that the Commission is in a position to reconsider the incorporation of expanded energy efficiency in PSCR plan cases, which it again argues is the most appropriate forum for these issues. GLREA also takes exception to the ALJ’s recommendation concerning the inclusion of solar energy in the PSCR plan and forecast. According to GLREA, the fact that DTE Electric’s PSCR five-year forecast is consistent with the company’s most recent renewable energy plan does not make the forecast per se reasonable and prudent. GLREA further posits that even if the forecast is limited to existing generation, the forecast misstates the power supply requirements of DTE Electric’s customers because it fails to account for the expansion of customer and communityowned solar generation. GLREA argues that DTE Electric’s five-year forecast showing stable or declining solar generation is contradicted by independent analyses showing growth in customer- Page 13 U-17319 owned solar. GLREA adds that the proposed forecast is inconsistent with Governor Rick Snyder’s recent pronouncements on Michigan’s energy future, which will involve a significant expansion of renewable generation resources. In reply, DTE Electric asserts that GLREA’s exceptions do not challenge any specific findings or conclusions in the PFD. According to DTE Electric, GLREA does not cite any law or evidence to support its objections to the PFD and, as such, GLREA’s exceptions do not comport with Mich Admin Code, R 792.10435. DTE Electric points out that GLREA’s first exception (that inclusion in the PSCR plan and forecast of the level of renewable energy in the company’s most recent REP is per se reasonable) is to a finding that the ALJ did not make. Likewise, DTE Electric contends that GLREA’s second exception (that “flawed and incomplete” forecasts may be approved simply because issues concerning renewable energy may be addressed in REP or rate case proceedings) was not a finding in the PFD. The Commission finds the PFD well-reasoned, and it adopts the findings and conclusions on these issues. As an initial matter, the Commission observes that the energy landscape and the utility regulatory paradigm are undergoing rapid transformations, many of which have arisen after this case was filed. There is no question that recent changes, including constrained capacity markets, possible changes to Act 295 and other energy laws, and new federal environmental regulations suggest a need to look more holistically at energy supply and demand projections and diverse options to meet electricity needs in a cost-effective manner in the future. The Commission acknowledges that the fragmented nature of current regulatory proceedings that deal with fuel and capital investment decisions is challenging and may not lead to the best long-term solutions for utility customers. That said, the direction that Michigan will take in addressing its energy future is uncertain, thus, the Commission is reluctant to make significant changes to the requirements for Page 14 U-17319 PSCR plans and forecasts. Nevertheless, the issues that IEI and GLREA raise here, appropriately addressed by the ALJ for the purposes of this proceeding, have some merit and may be revisited in future proceedings. THEREFORE, IT IS ORDERED that: A. DTE Electric Company’s application for a power supply cost recovery plan for 2014 metered jurisdictional electric sales is approved. B. DTE Electric Company’s five-year forecast is accepted as set forth in the order. C. DTE Electric Company is authorized to implement a 2014 maximum monthly power supply cost recovery factor of 1.08 mills per kilowatt-hour. The Commission reserves jurisdiction and may issue further orders as necessary. Page 15 U-17319 Any person desiring to appeal this order must do so in the appropriate court within 30 days after 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 mpscedockets@michigan.gov and to the Michigan Department of the Attorney General - Public Service Division at pungp1@michigan.gov. 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 West Saginaw Hwy, Lansing, MI 48917. MICHIGAN PUBLIC SERVICE COMMISSION ________________________________________ John D. Quackenbush, Chairman ________________________________________ Greg R. White, Commissioner ________________________________________ Sally A. Talberg, Commissioner By its action of May 14, 2015. ________________________________ Sally Wallace, Acting Executive Secretary Page 16 U-17319