CONSUMERS ENERGY COMPANY

Transcription

1 Before the Public Service Commission of the State of Michigan Case No. U- CONSUMERS ENERGY COMPNY Direct Testimony of Nicholas Phillips, Jr. On Behalf of BTE February 00 Project

2 CONSUMERS ENERGY COMPNY Before the Public Service Commission of the State of Michigan Case No. U- Direct Testimony of Nicholas Phillips, Jr. INTRODUCTION PLESE STTE YOUR NME ND BUSINESS DDRESS. Nicholas Phillips, Jr.; Fern Ridge Parkway, Suite 0; St. Louis, MO WHT IS YOUR OCCUPTION ND BY WHOM RE YOU EMPLOYED? I am a consultant in the field of public utility regulation and a principal with the firm of Brubaker & ssociates, Inc., energy, economic and regulatory consultants. Our firm and its predecessor firms have been in this field since and have participated in more than,000 proceedings in forty states and in various provinces in Canada. We have experience with more than 0 utilities, including many electric utilities, gas pipelines and local distribution companies (LDCs). I have testified in many electric and gas rate proceedings on virtually all aspects of ratemaking. More details are provided in ppendix of this testimony. BRUBKER & SSOCITES, INC.

3 Page ON WHOSE BEHLF RE YOU TESTIFYING IN THIS PROCEEDING? I am testifying on behalf of the ssociation of Businesses dvocating Tariff Equity (BTE), a group of businesses including many of Michigan's largest employers and energy users. HVE YOU PRESENTED TESTIMONY IN PRIOR CONSUMERS ENERGY COMPNY (CONSUMERS OR COMPNY) PROCEEDINGS BEFORE THE MICHIGN PUBLIC SERVICE COMMISSION (COMMISSION OR MPSC)? Yes. I have been involved in many prior Consumers proceedings before this Commission. 0 WHT IS THE SUBJECT MTTER OF YOUR DIRECT TESTIMONY? The subject matter of my testimony is directed toward Consumers Proposed Tariffs for the Rate D and Retail Open ccess Service Programs (D and RO, respectively). Background Information 0 WERE THE CURRENT TRIFFS SSOCITED WITH THE RTE D ND RO PROGRMS DEVELOPED PRIOR TO THE PSSGE OF THE CUSTOMER CHOICE ND ELECTRIC RELIBILITY CT 000 P? Yes. The Michigan Customer Choice and Electric Reliability ct was signed on June, 000 with an effective date of June, 000. It is important to be aware of the stated purposes and objectives of P. Section 0 of P states the purposes of the recently passed legislation as: (a) To ensure that all retail customers in this state of electric power have a choice of electric suppliers. BRUBKER & SSOCITES, INC.

4 Page (b) To allow and encourage the Michigan public service commission to foster competition in this state in the provision of electric supply and maintain regulation of electric supply for customers who continue to choose supply from incumbent electric utilities. (c) To encourage the development and construction of merchant plants which will diversify the ownership of electric generation in this state. 0 (d) (e) To ensure that all persons in this state are afforded safe, reliable electric power at a reasonable rate. To improve the opportunities for economic development in this state and to promote financially healthy and competitive utilities in this state. It is clear that it is intended that all retail customers in Michigan have a choice of electric power suppliers and that the construction of merchant generating plants in Michigan should be encouraged. It is also clear that customer choice and the construction of merchant plants will not occur without the development of a robust competitive market and electric rates, terms and conditions that are consistent with the stated purposes of the law. 0 WHT DID THE CUSTOMER CHOICE ND ELECTRIC RELIBILITY CT 000 P STTE WITH RESPECT TO ELECTRIC RTES? 0 Section 0b. of P stated the following: () The commission shall establish rates, terms, and conditions of electric service that promote and enhance the development of new generation, transmission, and distribution technologies. () No later than year from the effective date of the amendatory act that added this section, each electric utility shall file an application with the commission to unbundle its existing commercial and industrial rate schedules and separately identify and charge for their discrete services. No earlier than year from the effective date of the amendatory act that added this section, the commission may order the electric utility to file an application to unbundle existing residential rate schedules. The commission may allow the unbundled rates to be expressed on residential billings in terms of percentages in order to BRUBKER & SSOCITES, INC.

5 Page 0 0 simplify residential billing. The commission shall allow recovery by electric utilities of all just and reasonable costs incurred by electric utilities to implement and administer the provisions of this subsection. () The orders issued under this act shall include, but are not limited to, the providing of reliable and lower cost competitive rates for all customers in this state. () n electric utility is obligated, with commission oversight, to provide standby generation service for open access load on a best efforts basis until December, 00 or the date established under section 0d(), whichever is later. The pricing for the electric generation standby service is equal to the retail market price of comparable standby service allowed under subsection (). n electric utility is not required to interrupt firm off-system sales or firm service customers to provide standby generation service. Until the date established under section 0d(), standby generation service shall continue to be provided to nonopen access customers under regulated tariffs. () The methodology for identifying the retail market price for electric generation service to be applied under this section shall be determined by the commission based upon market indices commonly relied upon in the electric generation industry, adjusted as appropriate to reflect retail market prices in the relevant market. Therefore, Consumers will be required to file unbundled rate schedules by June, 00. The resulting rates must, among other things, provide for lower cost competitive rates for all customers in Michigan. On that basis, it is clear that this case will not produce the final RO tariff, but is intended to address some problems as identified by the MPSC Staff. It is extremely important that any RO tariff that results from this proceeding not hinder customer choice in any manner. Rate D 0 WHT DOES CONSUMERS PROPOSE WITH RESPECT TO RTE D? Consumers believes that Rate D should be terminated and all Rate D customers be given the opportunity to participate in the RO program as soon as possible. Consumers points out that the MPSC Order in Case No. U- extended Rate D BRUBKER & SSOCITES, INC.

6 Page 0 service until an order is issued in this proceeding. s I understand Consumers proposal, Rate D customers that want to continue to receive service from an alternative electric supplier would have to participate in the Company s Electric Customer Choice (ECC) program by completing all the necessary ECC program requirements. The mandate to participate in the ECC program would occur when a Commission order is issued in this proceeding. Effective January, 00, all retail customers have the opportunity to choose their electric supplier consistent with 000 P. Consumers indicates that there is no need to maintain two separate choice programs and that customer confusion could result between the two separate programs. 0 DO YOU GREE? I do not entirely agree. The recent MPSC Order in Case No. U- extended Rate D service until an order is issued in this proceeding. The current schedule in this proceeding indicates that a proposal for a decision should be issued on June, 00. Therefore, a Commission order might be issued in the fall of 00. It is expected that Consumers will file its application with the Commission to unbundle rate schedules by June, 00 as required by 000 P. That filing will most probably result in additional rate changes to RO rates, which will be effective January, 00. In my opinion, the Rate D program should be allowed to continue through the end of 00 and those customers should either be allowed to return to full service or participate in customer choice, which is available for all retail electric customers of Consumers on January, 00. This transition would be less burdensome and less confusing to customers than requiring Rate D customers to participate in the ECC program for a very short time period prior to January, 00. BRUBKER & SSOCITES, INC.

7 Page Return to Full Service Rates WHT DOES CONSUMERS PROPOSE WITH RESPECT TO NOTICE REUIREMENTS FOR N RO CUSTOMER TO RETURN TO FULL SERVICE RTES? 0 Consumers proposed tariff requires a customer who has elected to take service from an alternative electric supplier to provide notice of its intention to take service from Consumers nine months prior to being eligible to return to full service rates. (This requirement is waived for customers that have been slammed by a retailer.) Consumers proposes that during the period between the date the returning customer resumes taking full service and the date the customer is eligible to return to full service, the customer pay what is termed a market-based rate that is the greater of the full service rate or a price based on market conditions experienced by the Company. DO YOU GREE WITH CONSUMERS PROPOSL? No, I do not. Requiring a nine-month period for a customer to be eligible to return to full service rates is extremely onerous and could seriously stifle the entire customer choice program in Michigan. 0 TO YOUR KNOWLEDGE, DOES THE DETROIT EDISON COMPNY (DETROIT EDISON) REUIRE NINE-MONTH NOTICE PERIOD FOR N RO CUSTOMER TO RETURN TO FULL SERVICE? To my knowledge, Detroit Edison does not have this requirement. It is my understanding that Detroit Edison has two options a -month service commitment option and a short-term service option. Under Option Month Service BRUBKER & SSOCITES, INC.

8 Page 0 Commitment, a customer may return to Detroit Edison for full service for a minimum of months. Under Option Short-Term Service, the customer chooses not to commit to Detroit Edison for full service for a minimum of months, but may take short-term service for a maximum of three months. Under Option, a customer is charged under the full-term service tariff for which the customer qualifies, and under Option, the customer purchases power at market price plus charges for transmission and losses. The concept appears to be that a customer can return to full service with a -month service commitment, or a customer can return to shortterm service and pay market prices. These two options conceptually give customers less onerous and more realistic options to choose from and are steps in the right direction for the transition to customer choice. I am not aware of any request by Consumers for a moratorium on providing full service to new customers. Certainly, in any instance in which a supplier serving an RO customer has defaulted, the RO customer should be allowed to return to full service (Option or Option ) upon notification. To meet the purposes and objectives of P, the Commission should encourage participation in retail access by removing any constraints that would inhibit such participation. 0 WHT DO YOU PROPOSE FOR CONSUMERS WITH RESPECT TO CUSTOMERS WHO DISCONTINUE RETIL CCESS SERVICE ND RETURN TO CONSUMERS FOR FULL SERVICE? I recommend that the Detroit Edison concept be followed. customer that wishes to return to full service under a -month service commitment should be allowed to take service under any tariff rate for which the customer qualifies. customer should not be obligated to sign any contractual arrangement for a period of longer than BRUBKER & SSOCITES, INC.

9 Page months, or be burdened with any ratchet provisions that extend longer than the - month period. For customers that choose not to commit to Consumers for full service for a -month period, a short-term service option should be available, which is based on the purchase of energy at market price plus charges for delivery service. 0 0 DO YOU HVE NY OTHER COMMENTS REGRDING WHT HS BEEN TERMED OPTION THT WOULD REUIRE CUSTOMER TO COMMIT TO FULL SERVICE FOR MINIMUM OF MONTHS? I recommend that a customer that wishes to discontinue the RO program and return to full service for a minimum of one year be allowed that option. customer on the RO program in this transition phase is required to pay Consumers any surcharges found appropriate by the Commission, including securitization surcharges and transition cost surcharges. customer that is subject to those types of surcharges should certainly be entitled to use the generating facilities that presumably have costs that are above the market and are the genesis of the surcharges. I would also like to suggest that Consumers full service rates be reviewed, either in this case or in the upcoming unbundling case, to ensure that no contract provisions or ratchet provisions would prevent or economically penalize a customer from going to retail access service. fter a customer takes service from Consumers for a minimum period of months, any ratchet or contract provisions should be waived if that customer elects to leave Consumers full service tariff and choose retail access service. The imposition of a ratchet provision on billing demand could result in a customer going to RO paying twice for the same service. BRUBKER & SSOCITES, INC.

10 Page 0 PLESE COMMENT ON THE CONCEPT OF OPTION SHORT-TERM SERVICE. Customers that do not wish to commit to taking full service from Consumers for one year would be charged market power prices under this option. The customer should not pay the greater of full service or a market price option, but simply a market price option. P indicates that the methodology for identifying the retail market price of electric generation service shall be determined by the Commission based on market indices commonly relied upon in an electric generation industry, adjusted as appropriate to reflect retail market prices in the relevant market, as previously indicated in this testimony. Therefore, the Commission should determine the appropriate mechanism for establishing retail market prices for electric generation service in Michigan. I do not necessarily agree that the four component methodology set forth by Mr. Ronk will be in conformance with the methodology established by the Commission. Consumers highest hourly incremental cost of generation is not the same as a price established by market indices. Standby Service 0 HVE YOU REVIEWED CONSUMERS PROPOSL FOR THE PRICING OF RETIL OPEN CCESS STNDBY SERVICE? Yes. For retail open access standby service, Consumers proposes to charge the supplier the greatest of the Company s highest hourly incremental cost of any generation or purchases of power plus 0%, plus applicable transmission charges, or the highest hourly market sales price plus 0%, plus applicable transmission charges. BRUBKER & SSOCITES, INC.

11 Page 0 0 DO YOU HVE NY COMMENTS ON CONSUMERS RETIL OPEN CCESS STNDBY SERVICE? Yes. The requirement for standby service under the Customer Choice and Electric Reliability ct 000 P states certain provisions and methodologies for standby service. It is my understanding that the retail market price for electric generation service shall be determined by the Commission utilizing the appropriate market indices adjusted as appropriate to reflect retail market prices in the relative market. I do not believe it is appropriate to have each utility define a methodology to determine market prices, and I do not believe it is appropriate or justified to charge an extra 0% to that market price as established by the Commission. The definition and methodology concerning the establishment of appropriate market prices in Michigan require guidance from the Commission. Profile Management Service Charge DO YOU HVE COMMENTS CONCERNING CONSUMERS PROFILE MNGEMENT SERVICE CHRGE? 0 Consumers tariff contains a charge of $0.00 (. mills) per kwh for all kwh for customers that do not have a time-of-use meter. I recommend that this and any associated issues or charges be fully examined in Consumers unbundling filing. Charges to customers with smaller loads that do not have time-of-use metering should be minimized so that the retail customer choice program is not hampered and that the maximum number of customers is afforded the opportunity to participate in the RO program. BRUBKER & SSOCITES, INC.

12 Page DOES THIS CONCLUDE YOUR TESTIMONY T THIS TIME? Yes, it does. BRUBKER & SSOCITES, INC.

13 ppendix ualifications of Nicholas Phillips, Jr. PLESE STTE YOUR NME ND BUSINESS DDRESS. Nicholas Phillips, Jr. My business mailing address is P. O. Box 000, Fern Ridge Parkway, Suite 0, St. Louis, Missouri PLESE STTE YOUR OCCUPTION. I am a consultant in the field of public utility regulation and am a principal in the firm of Brubaker & ssociates, Inc., energy, economic and regulatory consultants. 0 0 PLESE STTE YOUR EDUCTIONL BCKGROUND ND PROFESSIONL EMPLOYMENT EXPERIENCE. I graduated from Lawrence Institute of Technology in with a Bachelor of Science Degree in Electrical Engineering. I received a Master's of Business dministration Degree from Wayne State University in. Since that time I have taken many Masters and Ph.D. level courses in the field of Economics at Wayne State University and the University of Missouri. I was employed by The Detroit Edison Company in June of in its Professional Development Program. My initial assignments were in the engineering and operations divisions where my responsibilities included the overhead and underground design, construction, operation and specifications for transmission and distribution equipment; budgeting and cost control for operations and capital expenditures; equipment performance under field and laboratory conditions; and BRUBKER & SSOCITES, INC.

14 ppendix Nicholas Phillips, Jr. Page 0 0 emergency service restoration. I also worked in various districts, planning system expansion and construction based on increased and changing loads. Since, I have been engaged in the preparation of studies involving revenue requirements based on the cost to serve electric, steam, water and other portions of utility operations. Other responsibilities have included power plant studies; profitability of various segments of utility operations; administration and recovery of fuel and purchased power costs; sale of utility plant; rate investigations; depreciation accrual rates; economic investigations; the determination of rate base, operating income, rate of return; contract analysis; rate design and revenue requirements in general. I have held various positions including Supervisor of Cost of Service, Supervisor of Economic studies and Depreciation, ssistant Director of Load Research, and was designated as Manager of various rate cases before the Michigan Public Service Commission and the Federal Energy Regulatory Commission. I was acting as Director of Revenue Requirements when I left Detroit Edison to accept a position at Drazen- Brubaker & ssociates, Inc., in May of. The firm of Drazen-Brubaker & ssociates, Inc. was incorporated in and has assumed the utility rate and economic consulting activities of Drazen ssociates, Inc., active since. In pril, the firm of Brubaker & ssociates, was formed. It includes most of the former DB principals and staff. Our firm has prepared many studies involving original cost and annual depreciation accrual rates relating to electric, steam, gas and water properties, as well as cost of service studies in connection with rate cases and negotiation of contracts for substantial quantities of gas and electricity for industrial use. In these cases, it was necessary to analyze property records, depreciation accrual rates and BRUBKER & SSOCITES, INC.

15 ppendix Nicholas Phillips, Jr. Page reserves, rate base determinations, operating revenues, operating expenses, cost of capital and all other elements relating to cost of service. In general, we are engaged in valuation and depreciation studies, rate work, feasibility, economic and cost of service studies and the design of rates for utility services. In addition to our main office in St. Louis, the firm also has branch offices in Kerrville, Texas; Plano, Texas; Denver, Colorado; and Chicago, Illinois. 0 WHT DDITIONL EDUCTIONL, PROFESSIONL EXPERIENCE ND FFILITIONS HVE YOU HD? I have completed various courses and attended many seminars concerned with rate design, load research, capital recovery, depreciation, and financial evaluation. I have served as an instructor of mathematics of finance at the Detroit College of Business located in Dearborn, Michigan. I have also lectured on rate and revenue requirement topics. 0 HVE YOU PREVIOUSLY PPERED BEFORE REGULTORY COMMISSION? Yes. I have appeared before the New Jersey Board of Public Utilities, the Public Service Commissions of Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Missouri, Montana, New York, North Carolina, Ohio, Pennsylvania, South Carolina, South Dakota, West Virginia and Wisconsin, the Lansing Board of Water and Light, and the Council of the City of New Orleans in numerous proceedings concerning cost of service, rate base, unit costs, pro forma operating income, appropriate class rates of return, adjustments to the income statement, revenue requirements, rate design, integrated resource planning, power plant operations, fuel BRUBKER & SSOCITES, INC.

16 ppendix Nicholas Phillips, Jr. Page cost recovery, regulatory issues, rate-making issues, environmental compliance, avoided costs, cogeneration, cost recovery, economic dispatch, rate of return, demand-side management, regulatory accounting and various other items. BRUBKER & SSOCITES, INC.