A conflict has erupted in Michigan between Attorney General Frank J. Kelley and the Michigan Public Service Commission (PSC) over two recent PSC orders involving Consumers Energy and Michigan Consolidated Gas. The attorney general said the orders, which involved “radical” rate changes at Consumers and a reduction in depreciation costs at MichCon, will deprive Michigan ratepayers of millions of dollars and “simply continue the trend of recent orders [that] shows that the [PSC] lacks any real interest in protecting utility customers.”

Kelley filed appeals with the Michigan Court of Appeals challenging the two orders. “I hope that this will stop soon, but I will make every effort to protect the customers of Michigan from the unfair results of such errors,” he said. The most disturbing aspect of the PSC’s actions, Kelley said, is how hastily the PSC approved the Consumers application (in 10 days). “No program which so radically changes the manner in which rates are set should be approved so quickly and without hearings,” he said. It is illegal for the PSC to approve a rate increase without hearings. The PSC said there will be no rate increase for Consumers’ customers; the Consumers order actually freezes rates. Consumers spokesman Dan Bishop said the commission “apparently saw it as a very solid proposal.

“Legally the commission is only required to conduct a hearing if you’re talking about a possible rate increase and that was not the case here. Nobody’s gas bill will go up because of this program,” said Bishop. “In fact, their gas bills will be lower (frozen) due to the rate of inflation. And if you want to test the market to find lower cost supplies, you are free to do that.”

But Kelley noted the order removes a collection of revenue refunding mechanisms, taking millions out of the hands of ratepayers. It also sets Consumers gas costs at a rate that is much higher than current Michigan citygate prices and prices for long-term supply contracts.

On condition of anonymity, a source inside the PSC told NGI last week the attorney general may be touching the surface of a deeper problem inside the commission. “Let me just say that I have rarely seen a case, such as the Consumers’ case, processed with such speed. And there are issues which the attorney general touches on that may bear some further examination. As far as I know, there was no ‘blue slip’ for this [Consumers] case. The case was never scheduled for hearing. No one was asked to review it at the staff level. There was no case coordinator assigned, which [would have been] normal procedure. It went right to the commissioners and right through the commission. So we never really saw it officially. And the fact is, a major part of it has nothing to do with expanded transportation; it’s really a rate case.”

The Consumers order was styled primarily as an experimental pilot program that will allow 300,000 residential, commercial and industrial customers all across its territory to choose alternative suppliers on a first-come first-served basis starting April 1 and continuing throughout the year. Consumers’ previous customer pilot was capped at 40,000 customers. The order allows alternative suppliers to use their own upstream transportation capacity, sets transportation standards of conduct and establishes a complaint procedure for marketers and brokers.

But the order goes much deeper than that. It includes a freeze on gas rates for all Consumers’ customers for three years. It eliminates the rate review process and suspends Consumers gas cost readjustment mechanism (setting gas purchase levels at the current GCR level of $2.84/Mcf) for the three-year term. Where it increases rates, according to Kelley, is in its elimination of a “90-10” revenue sharing mechanism that requires 90% of Consumers’ profits above the 11.6% authorized threshold be returned to customers. According to the attorney general, the “90-10” split allowed returns to ratepayers of $15 million in 1995 and $11 million in 1996. Michael Kidd, the PSC’s gas division director, said returns to ratepayers from the split were closer to $500,000 in 1996.

The attorney general also claims customers will lose about $5 million per year in gas cost refunds because the order suspends the GCR. The changes to the gas cost readjustment mechanism are “particularly offensive,” Kelley noted, because of the recent drop in gas prices. “While the PSC’s order permits the company to charge ratepayers $2.83/Mcf of gas during the three-year freeze, I understand that Consumers has locked in numerous long-term fixed price gas contracts at prices lower than the $2.83 price. This allows Consumers to charge ratepayers significantly more than the cost of gas purchased which violates Michigan law.” Current Michigan citygate prices are averaging about $2.17, and Kidd admitted to NGI if the commission had assigned the case to PSC staff the staff might have taken a closer look at gas purchase costs.

Kidd also conceded the new revenue sharing mechanism could have been crafted a little better. The 90-10 mechanism was replaced by one allowing Consumers to keep all profits up to a 13.5% return on common equity. (It should be noted each percentage point for Consumers represents about $5.5 million.) Starting in April, Consumers also can keep 50% of the profits between a 13.5% and 17.5% return on equity and 25% of the profits between a 17.5% and 25% return. The utility’s decreasing share of its profits past 17.5% could create a disincentive for Consumers to make more than that level of return, Kidd said.

According to NGI’s source, other Michigan utilities, such as SEMCO, have filed similar performance-based rate making proposals that went through an extensive hearing process and came out substantially different and less favorable to the utility than the Consumers’ case. He attributes this apparent favoritism to election year politics.

“If you can find someone who can talk to you about politics in Michigan, who the governor’s informal energy advisor is and what energy company that person owns, you might have a clearer picture of the politics involved.

“Part of it you must understand is [the attorney general] is a Democrat and the governor is a Republican and we have an election coming up, so some of it is related to that. That’s politics. They are supposed to say that.

“But usually utilities don’t get 10-day turn around on anything. The best I’ve been able to do is six weeks in and out for an uncontested settlement.”

Consumers’ Bishop said the utility is confident the court will find the MPSC acted properly in authorizing the experiment. “If you choose to stay with us your rates are frozen over the next three years.. If you want to choose to test the market and buy lower cost supplies elsewhere you’re free to do that. Overall this is a good thing for customers. We’re the state’s lowest cost supplier. And based upon what I’ve seen, we’re about the seventh lowest cost utility in the country.”

MichCon Cuts Depreciation Costs

The attorney general’s second appeal involves a PSC order permitting the Michigan Consolidated Gas Company to reduce its depreciation costs by $16 million per year, while at the same time refusing to compel the company to pass the $16 million savings on to its customers.

“The PSC is required to set rates that are just and reasonable. It is not just, and it is certainly not reasonable, to allow MichCon to significantly reduce its depreciation expense and fail to pass the savings on to its customers,” said Kelley. “The effect of the PSC’s action is to annually deprive MichCon’s customers of $16 million of rate relief for the foreseeable future.

“What makes the PSC’s action so galling is that in the past, when they ordered MichCon’s depreciation costs increased, the PSC allowed the company to delay implementing the cost increases until the company could include the higher charges in its customers’ bills. But when I filed to have the rates immediately reflect the reduced depreciation costs, it was denied. This is a terrible double-standard…,” he said.

The Attorney General has not made a decision to investigate the public service commission, but “certainly that is something he is aware that he could do,” said Assistant Attorney General Peter Lark.

Rocco Canonica

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