One Energy Plaza Tel: (517) Jackson, MI Fax: (517) *Washington Office: 1730 Rhode Island Ave. N.W. Tel: (202)

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1 A CMS Energy Company April 21, 2009 Ms. Mary Jo Kunkle Executive Secretary Michigan Public Service Commission 6545 Mercantile Way P.O. Box Lansing, MI General Offices: One Energy Plaza Tel: (517) Jackson, MI Fax: (517) *Washington Office: 1730 Rhode Island Ave. N.W. Tel: (202) Suite 1007 Washington, DC Fax: (202) Writer s Direct Dial Number: (517) Writer s Address: jcshea@cmsenergy.com LEGAL DEPARTMENT JAMES E BRUNNER Senior Vice President and General Counsel JON R ROBINSON Vice President and Deputy General Counsel Utility Law and Regulation Shelley J Ruckman Kimberly C Wilson Michael G Wilson Assistant General Counsel David E Barth H Richard Chambers John P Dickey Deborah Ann Kile M Bryan Little Kathrine M Lorenz Eric V Luoma Raymond E McQuillan Rhonda M Morris Deborah A Moss* Mirče Michael Nestor Robert M Neustifter Laura M Pintar Vincent P Provenzano Susan L Rasmussen John C Shea Scott J Sinkwitts P Leni Staley Charlotte A Walls Attorney Re: MPSC Case No. U R In the Matter of the Application of Consumers Energy Company for the Reconciliation of Power Supply Cost Recovery (PSCR) Costs and Revenues for the Calendar Year 2007 and for Other Relief Relating to Pension and OPEB Costs Dear Ms. Kunkle: Enclosed please find the Reply Brief of Consumers Energy Company. This is a paperless filing and is therefore being filed only in a PDF format. I have also enclosed a Proof of Service showing electronic and hard copy service upon the parties. Very truly yours, John C. Shea cc: Hon. James N. Rigas, ALJ Parties per Attachment1 to Proof of Service fl

2 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for the Reconciliation of Power Supply Cost ) Case No. U R Recovery (PSCR) Costs and Revenues ) for the Calendar Year 2007 and for other relief ) relating to pension and OPEB costs ) ) REPLY BRIEF OF CONSUMERS ENERGY COMPANY I. Reply to Staff. At 2-3 of the MPSC Staff s initial brief, Staff sets forth four proposed adjustments to the case presented by Consumers Energy Company ( Consumers Energy or the Company ). In its rebuttal testimony, Consumers Energy has accepted all but one of the Staff s proposed adjustments, i.e., quoted paragraphs 1, 3-4. The Company s acceptance is set forth on Exhibit A-41 (SH-10) and more fully described in the rebuttal testimony of Company witness Hunley, 2 TR Staff s first adjustment was to Total Calendar PSCR Sales. Staff used 36,837,833 MWH. The Company agreed to this adjustment. See, Exhibit A-41 (SH-10) line 4, column (n) (stated in kwh). The Company also accepted the second adjustment proposed by Staff. See, Exhibit A-41 (SH-10), line 21, column (n) which is $775,709 less than the amount originally set forth on Exhibit A-8 Rev (SH-1). This is the total of the two adjustments proposed by Staff and set forth in quoted paragraphs 3 and 4, $140,874 and $634,835 at 3 of Staff s initial brief. 1

3 The final two adjustments proposed by Staff were for the Company to abandon its request for recovery of discounts offered to certain customers and not fully recovered by the Company. The Company addressed these discounts at length in its initial brief. See, initial brief of Consumers Energy Company at 3-7. The Company continues to believe that it is entitled to fully recover the discounts provided to certain customers under the TPR tariff and the Rate E-1 tariff including the portions not yet provided for. Much of what Staff argues in its initial brief concerning these discounts analyzes whether or not the recovery previously provided by the Commission did not overlook the the so-called "PSCR factor discount, Staff initial brief at 5 (quoting the Commission s April 22, 2008 order in MPSC Case No. U R at 5). However, no party disputes that the Company is experiencing lost revenue as a result of the annual PSCR factor discounts provided to TPR and Rate E-1 customers. Nor does Staff address the contention of Company witness Miller (with respect to the TPR discount) that the Commission found that the discount provided... a cushion against rate shock for special contract customers while not depriving Consumers of revenues that it needs. [emphasis added]. See, December 22, 2005 order in MPSC Case No. U at TR 108 [testimony of Company witness Miller]. As Mr. Miller testified, the TPR discount was instituted to provide a benefit to other customers: Q. Does the Rate TPR discount benefit other customers? A. Yes. By offering the discount the Company was able to retain the special contract load, while increasing their contribution towards fixed costs. Indeed, the spreading of fixed costs over more units benefits all customers served by Consumers Energy. Thus, it would be unfair to require the Company s shareholders to suffer from an under recovery because of the Rate TPR discounts. 2 TR

4 This benefit to other customers does not extend to Consumers Energy. The presence or absence of the TPR discount does not affect the Company s ability to recover its prudently-incurred costs. If, in the absence of the TPR (or Rate E-1) discounts, customers left the Company s system, then prudently-incurred fixed costs would still be recovered. The fact that the Company volunteered to try to help other (non-tpr) customers by retaining load over which to spread fixed costs can not be interpreted as an agreement by the Company to have its revenues reduced. If the Company had known that future recovery of revenues lost as a result of this voluntary discount would be denied, the Company would not have proposed this discount. Similarly, with respect to the Rate E-1 discount, that discount was voluntarily agreed to by the Company with the intention of reducing rates in special circumstances to retain load and to provide an incentive for some customers to increase economic development in Michigan. No more needs to be said about the dire economic situation in this state. However, like the TPR discount, whether or not the load receiving the Rate E-1 discount has been retained, the Company would still have been entitled to recover its prudently-incurred costs. Thus, the benefit of the Rate E-1 discount (as well as the TPR discount) did not accrue to Consumers Energy Company but rather to its customers. If the Company s belief that the Company would suffer no loss of revenue as a result of this voluntary discount is in error, then the Company will be unable to continue to offer the Rate E-1 discount program that guarantees Company losses and will decline to offer any future voluntary discounts. The Rate E-1 tariff treats similarly-situated customers differently albeit for good reason but if the consequence of this special tariff is to unfairly reduce the Company revenues, contrary to the reasonable Company s expectations formed before volunteering these discounts, then the Company alone is suffering a negative economic consequence. This was not what the Company agreed to. 3

5 Company witness Rasmussen provided the Company s position with respect to the economic discounts provided to customers as well as the Company s expectations with respect to these voluntary discounts: Q. What is the consequence of the Commission adopting Mr. Droz s position to disallow the recovery of the 2007 PSCR factor portion of the Rate E-1 and TPR discounts? A. By disallowing the recovery of these discounts the Commission would be penalizing Consumer Energy and its shareholders for having discounted tariffs that were approved by the MPSC for the purpose of attracting and retaining significant business investments in the State of Michigan. The Company supported the Rate E-1 and TPR tariffs based upon its understanding that the Company and its shareholders would not be financially harmed from the application of those discounts. The Company would obviously not have sought approval of either of these tariffs from the Commission if the Company believed that its shareholders would be asked to bear the financial burden of those discounts. If the Commission disallows the recovery of the $3.4 million in PSCR factor discounts in this case, then that is exactly what would happen. This financial burden is not insignificant: For 2007 the impact of the discount is quantified at $1.61 million. This impact is expected to grow significantly and could exceed $25 million per year by To the extent the discounts are not recovered from other customers, the Company would owe a fiduciary duty to its shareholders to terminate the Rate E-1 and TPR discounts. 2 TR In summary, the voluntary actions of the Company (approved by the Commission) of providing discounts to retain load benefits other customers, not the Company. It is inequitable that the customers who benefit are being permitted to avoid the cost of the benefit. II. Reply to the Attorney General. The Attorney General addresses two issues in his initial brief. The first issue pertains to the Rate E-1 and TPR discounts. The Company relies on its reply to MPSC Staff, supra, in answer to the Attorney General s arguments. 4

6 The Attorney General s second issue pertains to the crane accident that occurred during the outage at the Campbell 3 unit and which resulted in a seven-day extension of that outage. The Attorney General argues that any replacement power costs resulting from the seven-day outage extension caused by the crane collapse should be borne by Consumers Energy and not by customers. The Attorney General also asserts that any insurance proceeds covering the loss of power should, in the event that the Commission authorizes recovery of the replacement power costs, be dedicated to the replacement power costs. The only record testimony even suggesting any possible unreasonableness or imprudence by Consumers Energy is set forth in the testimony of Attorney General witness Walter. And even Mr. Walter s testimony is, at best, equivocal. At 2 TR 166, Mr. Walter testifies that Consumers evidently developed no checklists or procedures of its own to ensure that the contract provisions were being adequately observed. However, Mr. Walter admits that the contractor, APComPower did develop crane safety procedures. Id. [emphasis added]. Mr. Walter never indicates exactly how many sets of safety procedures he would deem adequate. After all, the Company could institute safety procedures to overlay those of APComPower, and another entity could be hired to create additional safety procedures to overlay those of the Company. This process could be never-ending, but it would never address the fundamental cause of this accident: unforeseen high winds. The Attorney General asserts that [a] utility cannot shift the burden of costs resulting from imprudent action merely because those actions were made by an independent contractor. Attorney General s initial brief at 7. However, the Attorney General is assuming imprudence here based on absolutely no evidence. Later, the Attorney General asserts that APComPower's actions... were negligence. Attorney General s initial brief at 8. However, even assuming for the sake of argument that this dubious conclusion is true, APComPower s negligence cannot be imputed to Consumers 5

7 Energy merely on the Attorney General s say-so. The fact remains that Consumers Energy and APComPower employed and adhered to extensive crane safety procedures. These procedures can be found at Exhibit AG-10 (seventeen pages). The Attorney General also contends that Consumers Energy has somehow mishandled the replacement power insurance proceeds received on account of the crane accident. However, as described by Company witness Kehoe, Consumers Energy is handling the insurance proceeds in this case exactly in the same manner in which the Company has handled such issues previously: Consumers Energy has followed and continues to follow the longstanding Commission practice of returning the proceeds from insurance to its customers in cases where the Commission has authorized replacement power recovery in PSCR cases and keeping those insurance proceeds where the Commission disallows replacement power costs. See, e.g., MPSC Case No. U R. Any insurance proceeds recovered will be used by the Company to offset replacement power costs, and therefore benefit customers. For example, the Company has reduced its 2008 power supply costs by $2.3 million representing the receipt of insurance proceeds relating to the Campbell 3 replacement power costs. Mr. Walters appears to be attempting to create controversy in this case where none exists. 2 TR III. Reply to MEC/PIRGIM. MEC/PIRGIM raises no new or different issues in its initial brief, but merely repeats the arguments of the MPSC Staff and the Attorney General. Therefore, Consumers Energy has no reason to repeat its responsive arguments but rather relies upon those argument previously stated as though fully set forth herein. IV. Conclusion and Relief Requested Based on the evidence introduced into the record in this proceeding together with the arguments set forth herein, Consumers Energy respectfully requests that the Commission issue 6

8 an order granting the relief requested in the Company s initial brief filed in this proceeding and grant such other and further relief as may be lawful and appropriate. Respectfully submitted, CONSUMERS ENERGY COMPANY April 21, 2009 By John C. Shea One Energy Plaza Jackson, Michigan Attorney for Consumers Energy Company Tel: (517)

9 S T A T E O F M I C H I G A N BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the application of ) CONSUMERS ENERGY COMPANY ) for the Reconciliation of Power Supply Cost ) Case No. U R Recovery (PSCR) Costs and Revenues ) for the Calendar Year 2007 and for other relief ) relating to pension and OPEB costs ) ) STATE OF MICHIGAN ) ) SS COUNTY OF JACKSON ) PROOF OF SERVICE Judy A. Jones, being first duly sworn, deposes and says that she is employed in the Legal Department of Consumers Energy Company; that on April 21, 2009 she served an electronic copy of the Reply Brief of Consumers Energy Company upon the persons listed in Attachment 1 hereto, at the addresses listed therein. She further states that she also served a hard copy of the same document to the addresses listed in Attachment 1 by depositing the same in the United States mail in the City of Jackson, Michigan, with first-class postage thereon fully paid. Judy A. Jones Subscribed and sworn to before me this 21 st day of April, Sharon K. Davis, Notary Public State of Michigan, County of Jackson My Commission Expires: 07/28/10 Acting in the County of Jackson

10 ATTACHMENT 1 TO CASE NO. U R Administrative Law Judge (ALJ) Honorable James N. Rigas Administrative Law Judge 6545 Mercantile Way, Suite 14 P.O. Box Lansing, MI (517) FAX (517) [SD #20] jnrigas@michigan.gov Counsel for the Michigan Public Service Commission Staff Patricia S. Barone, Esq. Assistant Attorney General 6545 Mercantile Way, Suite 15 Lansing, MI baronep@michigan.gov Counsel for Attorney General Michael A. Cox Donald E. Erickson, Esq. Assistant Attorney General 525 W. Ottawa Street 7th Floor Williams Building P.O. Box Lansing, MI ericksond@michigan.gov Consultants for Attorney General Michael A. Cox Bruce R. Walter Ellen Blumenthal GDS Associates, Inc. 919 Congress Avenue, Suite 800 Austin, TX Bruce.Walter@gdsassociates.com Ellen.Blumenthal@gdsassociates.com Counsel for Midland Cogeneration Venture Limited Partnership ( MCV ) Peter D. Cronk, Esq. Plunkett & Cooney, P.C. City Center Office Building 325 E. Grand River Ave., Suite 250 East Lansing, MI pcronk@plunkettcooney.com Gary B. Pasek, Esq. Vice President, General Counsel and Secretary Midland Cogeneration Venture, LP 100 Progress Place Midland, MI gbpasek@midcogen.com Counsel for Michigan Environmental Council ( MEC ) and the Public Interest Research Group in Michigan ( PIRGIM ) Don L. Keskey, Esq. Clark Hill PLC 212 E. Grand River Avenue Lansing, MI dkeskey@clarkhill.com Counsel for Michigan Power Limited Partnership, Ada Cogeneration Limited Partnership and Cadillac Renewable Energy, LLC David E. S. Marvin, Esq. Fraser, Trebilcock, Davis & Dunlap, P.C. 124 West Allegan Street, Ste Lansing, MI dmarvin@fraserlawfirm.com

11 Counsel for the Association of Businesses Advocating Tariff Equity ( ABATE ) Robert A. W. Strong, Esq. Clark Hill PLC 151 S. Old Woodward Ave., Suite 200 Birmingham, MI rstrong@clarkhill.com Leland R. Rosier, Esq. Clark Hill PLC 212 E. Grand River Ave. Lansing, MI lrrosier@clarkhill.com