opinion and order i. history of proceedingspresent: hon. john g. strand, chairman hon. john c. shea,...

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 request of )CONSUMERS ENERGY COMPANY ) for approval of a retail open access ) Case No. U-11451tariff. )) )

)In the matter of the request of )THE DETROIT EDISON COMPANY ) Case No. U-11452for approval of a direct access tariff. ) )

At the October 29, 1997 meeting of the Michigan Public Service Commission in Lansing, Michigan.

PRESENT: Hon. John G. Strand, ChairmanHon. John C. Shea, CommissionerHon. David A. Svanda, Commissioner

OPINION AND ORDER

I.

HISTORY OF PROCEEDINGS

On January 8, 1996, Governor John Engler forwarded to the Commission recommendations from the

Michigan Jobs Commission entitled “A Framework for Electric and Gas Utility Reform.” That document

advocated various changes to the electric industry in Michigan. In July and August of 1996, the Commission

held public hearings across the state to provide the public with an opportunity to express views on electric

industry restructuring. The Commission received testimony from 95 witnesses in those hearings and also

received numerous written comments from the public.

1Although both this order and the tariff sheets pertaining to Consumers Energy Company (whichare attached to the order as Exhibit A) speak in terms of “open access,” the tariff sheets concerning TheDetroit Edison Company (and attached as Exhibit B) use the phrase “direct access.”

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On December 19, 1996, the Commission Staff (Staff) filed a report (Staff Report) outlining a conceptual

framework for electric industry restructuring. The Staff Report proposed implementing a system in which

customers would be given the opportunity to select the power supplier of their choice, commonly referred to

as open access.1 In January 1997, the Commission held public hearings on the Staff Report in Detroit, Grand

Rapids, and Lansing. The Commission received testimony from 78 witnesses and also received written

comments from 86 members of the public.

Based on the testimony and comments, the Commission determined that additional information would be

useful in order to evaluate the Staff Report. On February 5, 1997, the Commission directed Consumers

Energy Company (Consumers) and The Detroit Edison Company (Detroit Edison) to make informational

filings by March 7, 1997 regarding nine specific issues relating to electric restructuring. Other electric

utilities in Michigan were also allowed to make informational filings if they wished to do so. The Commis-

sion conducted public hearings in Detroit, Grand Rapids, Mount Pleasant, and Lansing in March and April of

1997. A total of 38 witnesses testified regarding the informational filings. In addition, the Commission

received written comments from 50 members of the public.

Based on the information presented at those hearings, the Commission issued an order on June 5, 1997 in

Case No. U-11290 (the June 5 order) setting forth the framework for implementing open access in Michigan.

Among other things, the June 5 order did the following. First, it concluded that approximately 2½% of each

Michigan electric utility’s retail load should become eligible for open access each year from 1997 through

2001, beginning with 225 megawatts (MW) for Detroit Edison, 150 MW for Consumers, and equivalent

amounts for other utilities. Second, it held that the phase-in schedule should be applied equally to all

2Specifically, the Commission found that those customers should submit a sealed bid specifying theamount they would be willing to pay the utility as a transition charge through December 31, 2001, afterwhich time all customers will begin paying the same cost-based transition charge. The Commission wenton state that if there is a tie for the final portion of a block of capacity, “a lottery will be held among those inthe tie.” June 5 order, p. 32.

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customer classes. Third, it directed that in 2002, all remaining customers would be given the option of

choosing their power suppliers. Fourth, it stated that a bidding process should be used to allocate the

available open access capacity among interested customers.2 Fifth, it concluded that small customers (e.g.,

those having individual loads of less than 1 MW) should have an opportunity to participate through use of an

aggregator, with a set-aside in the amount of 6 MW on Detroit Edison’s system and 4 MW on Consumers’

system included in each year’s open access block.

Sixth, the June 5 order stated that the reciprocity requirements adopted in Cases Nos.

U-10685, U-10754, and U-10787--which required reciprocity from all utilities that wished to supply power

directly or through an affiliate, but did not require reciprocity for unaffiliated marketers or brokers--should be

applied to open access providers during the phase-in period through December 31, 2001. However, the June

5 order continued, once open access is made available for use by all ratepayers on January 1, 2002, reciprocity

would be required from all suppliers. Seventh, it adopted the Staff Report’s conclusion that, if prudently

incurred, five categories of stranded costs should be recovered by the utilities in return for providing open

access, namely (1) capital costs of nuclear plants, (2) regulatory assets, (3) contract capacity costs arising

from power purchase agreements, (4) employee retraining costs, and (5) costs related to the implementation

of restructuring.

Eighth, the June 5 order indicated that although prior Commission decisions might provide an adequate

basis for finding that nuclear capital costs, regulatory assets, and above-market power purchase agreement

payments were prudently incurred and thus recoverable under some sort of transition charge, all costs of

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implementing open access service (including retraining employees, installing demand meters, revising billing

and accounting procedures, etc.) must be audited and verified prior to their recovery. Ninth, it concluded that

some mechanism should be developed to annually true up the amounts collected through transition and

implementation surcharges, on the one hand, and each utility’s actual stranded costs, on the other. Tenth, it

rejected as premature the Staff Report’s suggestion to authorize securitization as a means of refinancing

potentially stranded costs. Eleventh, it held that each utility should offer some reasonable form of standby

service in conjunction with its open access service.

The June 5 order concluded by directing Consumers and Detroit Edison to file, on or before June 19,

1997, all tariffs necessary to implement open access service in a manner consistent with that order. It went on

to suggest that proceedings undertaken to review those tariffs would provide a logical place for the utilities to

present, and for the parties to address, standby rate structures designed for use by open access customers.

Finally, the June 5 order (1) established July 7, 1997 as the last day for filing objections to the tariffs filed by

Consumers and Detroit Edison, (2) designated November 1, 1997 as the initial day for submitting bids for the

first block of open access service, (3) set New Year’s Day as the starting date for the respective phase-in

blocks for 1998, 1999, 2000, and 2001, and (4) declared December 31, 2007 as the last day for the collection

of stranded costs arising from open access.

Pursuant to that schedule, Consumers and Detroit Edison filed their proposed tariffs (in Cases Nos. U-

11451 and U-11452, respectively) on June 19, 1997. Several objections to those tariffs were filed and, on

July 23, 1997, a prehearing conference was held before Administrative Law Judge Robert E. Hollenshead

(ALJ). In the course of the prehearing conference, the ALJ approved a request to hear these cases on a

combined record and granted numerous parties’ requests for leave to intervene. As a result, the following

parties participated in the proceedings: Consumers; Detroit Edison; the Staff; Attorney General Frank J.

Kelley (Attorney General); the Association of Businesses Advocating Tariff Equity (ABATE); Energy

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Michigan; the Michigan Public Power Agency, the Michigan South Central Power Agency, and the City of

Detroit and its Public Lighting Department (collectively, the MPPA); Shell Western E&P Inc.; The Dow

Chemical Company and DowElanco (collectively, Dow); MidCon Gas Services Corp. and mc2, Inc.;

Wisconsin Public Service Corporation; the Residential Ratepayer Consortium; the Midland Cogeneration

Venture Limited Partnership; Indiana Michigan Power Company (I&M); the Michigan Community Action

Agency Association; the Michigan Independent Power Producers Association; Competitive Utility Tariffs,

Inc.; and First Power, L.L.C.

Evidentiary hearings were conducted on September 8 through 12, 1997. The record consists of 1,679

pages of transcript and 49 exhibits, 48 of which were admitted into evidence. Briefs and reply briefs were

filed on September 24 and 30, 1997, respectively. Because the Commission agreed to read the record, the

ALJ did not prepare a proposal for decision.

II.

ANALYSIS OF THE JUNE 19, 1997 FILINGS

Numerous objections were posed in response to the June 19, 1997 filings by Consumers and Detroit

Edison. Many of the objections were based on differences between what the intervenors concluded the

Commission’s June 5, 1997 order required and what the two utilities chose to submit. Still others were based

on intervenors’ beliefs that various definitions, restrictions, and conditions included in those filings would

either make open access unworkable or render the utilities’ proposals wholly unattractive to potential

customers. Some went so far as to assert that, if approved in their entirety, these proposals would generate

such a large windfall for Consumers and Detroit Edison that those utilities could begin buying their existing

competitors. This, they asserted, could lead to less competition, higher rates, and reduced quality of service.

3Although the Commission reviewed and considered all of the myriad changes proposed by theparties, those not specifically mentioned in this order or reflected in the attachments are rejected.

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A majority of the intervenors therefore recommended either making numerous, significant changes to the

proposals submitted by the utilities or rejecting the proposals in their entirety.

The Commission notes that, in some ways, the proposals submitted by Consumers and Detroit Edison

conflict with the June 5, 1997 order. It further recognizes that a few of the definitions and restrictions set

forth in those filings could unnecessarily hinder the creation of competition with regard to electric generation.

Nevertheless, it finds that these problems can be resolved. Moreover, the Commission concludes that making

these changes should leave each utility with a mechanism capable of producing the type of reasoned and

measured transition to an open market that was envisioned by both the Jobs Commission’s recommendations

and the June 5 order.

The Commission recognizes that reaching this conclusion has the effect of rejecting a majority of the

changes sought by the intervenors. Nevertheless, it is convinced that the result is not unreasonable. The

responsibility for implementing and managing the open access systems authorized by this order will fall on

the utilities. It is therefore fitting that during the initial attempts to open the electric generation market,

Consumers and Detroit Edison should be allowed to make use of systems that, to the greatest extent possible,

were designed by the respective utilities.

Thus, the Commission finds that the proposals submitted by Consumers and Detroit Edison on June 19,

1997 should be adopted with the changes discussed below.3

Detroit Edison’s Proposed Customer Delivery Contracts

As noted by Energy Michigan, ABATE, and the Attorney General, the most striking conflict between the

June 5 order and Detroit Edison’s June 19, 1997 filing was the fact that, rather than submitting revised

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proposed tariff sheets conforming with the decisions reached in that order, the utility filed two form Customer

Delivery Contracts (CDCs). According to Detroit Edison, its proposed contract structure offers increased

flexibility and is therefore superior to the imposition of a tariff. This is particularly true in this instance, the

utility contends, because all of the nuances and special requirements necessary to unbundle the electric

industry are not, and cannot be, known at this time. Detroit Edison thus argues that its CDCs should be

approved for use instead of an open access tariff.

The Commission disagrees with the utility and finds that an open access tariff should be approved instead

of Detroit Edison’s proposed CDCs. Reliance on the utility’s contract format could potentially require the

renegotiation of hundreds of thousands of contracts every time the Commission or the Federal Energy

Regulatory Commission (FERC) makes even the most routine change in the regulatory structure relating to

open access. Moreover, and as correctly noted by the intervenors, using the CDCs instead of an open access

tariff increases the chance for unjust discrimination. However, a review of the CDCs indicates that they can

easily be converted from contracts to a tariff. Nearly all that is required is to (1) remove the cover sheet from

each of the proposed contracts, (2) replace references to “the Contract” with references to either “the Tariff”

or “the Distribution Contract,” as appropriate, and (3) eliminate the last three sentences of Section 3, all of

Section 20.3, and all of Section 21. The Commission therefore concludes that Detroit Edison’s proposal to

use CDCs should be rejected and that those contracts should be converted to an open access tariff consistent

with that attached as Exhibit B to this order.

Reciprocity and the Definition of “Eligible Power Supplier”

As noted in prior Commission orders, the resolution of issues regarding reciprocity requires a careful

balancing of the interests of the utilities and their customers. For example, utilities have a reasonable

expectation that if they open their existing markets to competition, they will have corresponding competitive

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opportunities outside of their markets. Conversely, ratepayers have a reasonable expectation that, through

open access, they will be able to tap a diverse, vibrant market of potential power suppliers. As pointed out in

the June 5 order, this problem is further complicated by the fact that (at least in the short-term) marketers and

brokers that are not affiliates of electric distribution utilities have no existing markets from which they can

provide reciprocity.

The Commission addressed this issue as part of its November 14, 1996 order in Cases Nos. U-10685, U-

10754, and U-10787, where it established reciprocity requirements for participation in Consumers’ Rate DA.

In that instance, the Commission required reciprocity from all utilities that wished to supply power directly or

through an affiliate, but did not require reciprocity for unaffiliated marketers or brokers. In addition,

municipal utilities and power agencies were allowed to provide primary power supply or back-up service, but

were required to offer reciprocity for the same type of service provided under Rate DA and for the same

amount of capacity.

In the June 5 order, the Commission concluded that the reciprocity conditions imposed in Cases Nos.

U-10685, U-10754, and U-10787 should be applied to open access providers during the phase-in period

running through December 31, 2001. According to the Commission:

This approach is practical and provides a reasonable balancing of the conflicting interests ofutilities and customers. Unaffiliated marketers and brokers will be able to provide customerswith reasonable access to a competitive market, while Michigan utilities will be assured thatout-of-state utilities will not be able to invade their markets without providing a reciprocalopportunity to Michigan utilities.

June 5 order, p. 38. The order went on to state that once open access is fully implemented in this state on

January 1, 2002, “the Commission will require reciprocity from all suppliers (including marketers and

brokers) seeking new or additional direct access customers in Michigan.” Id., p. 39.

Energy Michigan and the MPPA contend, among other things, that language included in the utilities’

filings conflicts with the June 5 order’s directive concerning reciprocity. Specifically, they claim that (1)

4The MPPA expressed concern with one other aspect of Consumers’ proposed tariff. Specifically,it noted that in addition to requiring “Eligible Power Suppliers” to provide “comparable” service tocustomers located in their own service territories, Rule F1.3 of Consumers’ tariff defines “comparable”service as one which “specifies rates, terms, and conditions that are equivalent to those offered by theCompany, and that have been approved by all applicable regulatory authorities for use in Retail OpenAccess Service transactions.” The MPPA requested striking that language on the grounds that it could beviewed as requiring municipal utilities and power agencies to submit to rate regulation by this Commission. Because the Commission does not subscribe to that reading of the proposed language, today’s order will notaddress the MPPA’s proposed deletion.

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Consumers’ proposed definition of an “Eligible Power Supplier” omits brokers and marketers, thus

precluding their participation as a source of power for open access customers, (2) Detroit Edison’s suggested

definition of that same phrase states that no one can be considered an “Eligible Power Supplier” unless and

until it agrees to full reciprocity with the utility, and (3) neither of these utilities’ filings mention that,

according to the June 5 order, unaffiliated brokers and marketers should be allowed to participate in the

utilities’ open access programs without providing reciprocity until after December 31, 2001. The intervenors

therefore contend that unless revised to comport with directives set forth in the June 5 order, the utilities’ June

19, 1997 filings will improperly expand the scope of reciprocity and reduce the range of potential power

suppliers.4

Detroit Edison and Consumers defend the language included in their filings on the grounds that it is

consistent with the Staff Report. They go on to contend that any narrower application of reciprocity (whether

occurring during or after the phase-in period) will serve only to increase the stranded costs associated with

restructuring the electric industry. As such, the utilities assert that the Commission should approve without

revision the language contained in their respective June 19, 1997 filings.

The utilities’ assertions are not well taken. As noted previously, the June 5 order adopted a framework

for utility restructuring that differs in several ways from the Staff Report. One of those differences involves

the application of reciprocity to open access. Because the language proposed by Consumers and Detroit

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Edison would either exclude all brokers and marketers from the definition of “Eligible Power Suppliers” or

impose reciprocity upon unaffiliated brokers and marketers during the phase-in period, it conflicts with the

directives of the June 5 order. The Commission therefore finds that the language found in Rule F1.1(i) and

Section 5.1 of the June 19, 1997 filings submitted by Consumers and Detroit Edison, respectively, should be

replaced with the following:

“Eligible Power Supplier” means an entity that meets the following criteria:

(i) generates, brokers, markets, or otherwise procures electricity to be supplied atthe point of receipt and with whom a customer or aggregator has contracted for thepurchase of power,

(ii) satisfies all applicable franchise and statutory requirements of Michigan law,and

(iii) satisfies all applicable reciprocity requirements set forth in this tariff.

Likewise, the Commission concludes that the following language should be included in each of these utilities’

open access tariffs:

Reciprocity:

A reasonable level of reciprocity between the Company and the prospective EligiblePower Supplier and its affiliates must be established.

Through December 31, 2001, in-state and out-of-state utilities and utility affiliatesmust consent to open an identical amount of retail customer load to competition by theCompany. Further, the consent of out-of-state utilities and utility affiliates to thisreciprocity requirement must be expressed as a provision of an enforceable contract. Amunicipal utility or a municipal power agency is required to provide reciprocity onlyfor the type of service it provides and in an identical amount.

On and after January 1, 2002:

A. No Michigan-based electric utility shall be permitted to utilize the Company’ssystem to make retail sales unless the utility wishing to make the sale pro-vides comparable Retail Open Access Service to retail customers locatedwithin its service territory.

5Although Detroit Edison’s CDCs refer to this component as a “transition charge,” the types ofcosts that the utility seeks to recover through its use--namely, employee retraining costs and other annualexpenses arising directly from the implementation of open access service--are collected through a devicethat is more commonly referred to as an “implementa-tion charge.”

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B. No generation supplier that provides retail distribution services, or that has anaffiliate that provides retail distribution services, shall be permitted to utilize theCompany’s system to make retail sales unless the supplier or its affiliate providescomparable Retail Open Access Service. If the transaction involves an intermedi-ary (such as a marketer or broker), the reciprocity obligation may be satisfied byeither the regional transmission/distribution affiliate of the intermediary or by theowner of the generation source or its regional transmission/distribution affiliate.

C. “Comparable” Retail Open Access Service is one which (i) provides for RetailOpen Access Service in an amount of retail customer load equivalent to thatprovided by the Company, and (ii) specifies rates, terms, and conditions that areequivalent to those offered by the Company, and that have been approved by allapplicable regulatory authorities for use in Retail Open Access Service transac-tions.

Finally, the Commission finds that Consumers’ proposed Rule F3(G)(3) should be modified to likewise

reflect the fact some eligible power suppliers (e.g., unaffiliated brokers and marketers providing power to

open access customers prior to January 1, 2002) will be exempt from reciprocity.

Satisfaction of Preconditions

As noted by ABATE’s witness, James T. Selecky, the utilities’ June 19, 1997 filings each contain

language that, if approved, would impose numerous preconditions on the implementa-tion of open access

service. For example, Section 17 of Detroit Edison’s proposed CDCs states that open access service will only

be offered if, by December 31, 1997, the Governor signs legislation and the Commission issues orders (on

which “all appeal periods have expired without an appeal being taken” and which are “acceptable to the

Company in its sole discretion”) author-izing the utility to (1) undertake rate reduction bond securitization, (2)

impose an implementa-tion cost surcharge,5 (3) implement a performance-based ratemaking mechanism, (4)

freeze the rates for all customer classes at current levels, except for implementation of performance-based rate

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escalations, and (5) terminate or suspend its power supply cost recovery (PSCR) clause. Exhibits A-10, p. 13,

and A-11, pp. 13-14. Similarly, Consumers’ proposed Rule F11 states that the open access tariff will not

become effective until “all state regulatory approvals requested by Consumers Energy in its June 19, 1997

filing in Case No. U-11290 [including those providing for securitization, implementation cost recovery,

performance-based regulation, and suspension of its PSCR clause] have been granted” and “electric utility

restructuring legislation consistent with this tariff is enacted,” among other things. Exhibit A-18,

p.10.

In addition to requesting approval of several conditions that directly conflict with prior Commission

rulings, Mr. Selecky asserts, the utilities’ demand for these various forms of relief “is simply a delaying

tactic.” 7 Tr. 1102. Moreover, ABATE contends, the utilities’ requests are internally inconsistent. For

example, it argues, concurrently requesting the passage of securitization legislation and the freezing of rates at

their current levels would foreclose the intended result of securitization--an overall rate reduction. Further-

more, ABATE points out that the implementation charges for which the utilities seek advance Commission

approval are based on “mere speculation” regarding the size of actual implementation costs that may be

incurred in the future. ABATE’s initial brief, p. 7. It therefore requests that all mention of these precondi-

tions be removed from any tariffs approved in these proceedings.

The Commission concludes that ABATE’s request should be granted. This conclusion is supported by

the fact that two of the most important preconditions included in the utilities’ filings conflict with specific

rulings contained in the June 5 order. For example, the Commission previously held that although implemen-

tation costs may be recovered from open access customers at some point in the future, they must be audited,

verified, and examined for prudence “prior to including them in rates.” June 5 order, p. 14. At present, none

of those requirements have been met. Similarly, the Commission concluded that “it would be premature for

the Commission to make a decision regarding securitization” until enabling legislation is enacted, questions

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regarding tax treatment are answered, and it is shown that securitization will reduce these utilities’ rates on a

net present value basis over the life of the securitized assets. Id., p. 16. As noted by the intervenors, the

Legislature has yet to approve any bills relating to securitization.

Therefore, all mention of the utilities’ proposed preconditions should be stricken from their open access

tariffs. This includes language found in Consumers’ tariff concerning its requested 0.13¢ per kilowatt-hour

(kWh) implementation surcharge, as well as that found in Detroit Edison’s filing concerning its desired 0.43¢

per kWh implementation charge, 0.90¢ per kWh securitization charge, and 1.41¢ per kWh pre-securitization

charge.

Allocation, Bidding, and Transition Costs

As noted in footnote 2, supra, the June 5 order held that a bidding process should be implemented to

allocate available open access capacity among interested customers while, at the same time, providing a

means for recovering stranded costs resulting from utility restructuring. According to that order, Consumers

and Detroit Edison were to include as part of their June 19, 1997 filings tariff language that (1) allows

customers to submit bids for open access service specifying the respective amounts that they are willing to

pay as a transition charge through December 31, 2001, (2) allocates available open access capacity to those

submitting the highest bids, (3) establishes a lottery for use in breaking any ties for the final portion of a block

of capacity, (4) creates a set-aside for aggregators in order to ensure that at least 4 MW of the annual load

offered for bid by Consumers, as well as 6 MW of that offered by Detroit Edison, is made available for

customers having maximum loads under 1 MW, and (5) indicates that beginning January 1, 2002, all open

access customers will begin paying the same cost-based transition charge. The June 5 order also indicated

that the bids could be either above or below a stated transition charge. However, it did not define when and in

what manner the stated charge would be developed. Instead, it indicated only that the transition charge

6The amount set aside for each customer class (32.66% for residential, 21.33% for secondary, and46% for primary) corresponds with these groups’ relative contributions to Consumers’ overall demand.

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revenues collected through the bids would be included in whatever true-up process is established in Case No.

U-11454.

Consumers expressed support for the use of a bidding process and, in Section F2 of its proposed tariff,

set forth its proposed bidding procedure. Moreover, to ensure that all customer classes have an opportunity to

participate in open access, Consumers set aside a specific amount of capacity for customers taking residential,

secondary, and primary service6 and developed a separate rate schedule for each class. Included in Consum-

ers’ three rate schedules was a 1.31¢ per kWh transition charge. In contrast, Detroit Edison’s proposed CDCs

included no mention of the bidding process beyond indicating that the utility’s open access customers would

all pay a “Bid Participation Charge as per bid documents.” Exhibits A-10, p. 2, and A-11, p. 2.

The utilities’ proposals regarding the allocation of open access capacity and the recovery of stranded

costs through use of a transition charge engendered heated debate among the parties. For example, several

intervenors, led by Energy Michigan and the MPPA, assert that no stranded cost will arise during the 5-year

phase-in period. Because projected load growth for both Consumers and Detroit Edison will exceed the

annual 2½% expansion of open access through December 31, 2001, they contend that none of the utilities’

generating plant investment or power purchase costs will be stranded, and that no transition charge should be

imposed. Still others, such as I&M and the Attorney General, allege the existence of serious flaws regarding

the respective methodologies and figures used by the utilities to estimate their stranded costs. Foremost

among the problems cited by these intervenors is the utilities’ failure to net their below market generating

assets against their most expensive plants. As for load allocation, at least one party argued that because it

could lead to price uncertainty and foster customer confusion, the bidding process mandated in the June 5

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order should be replaced with a lottery system. In doing so, it was asserted, the Commission should simply

implement a flat transition charge of 0.45¢ per kWh for Consumers and 0.83¢ per kWh for Detroit Edison.

The record reveals much dispute, but surprisingly little detailed testimony, regarding the estimated level

of the utilities’ stranded costs and the size of the transition charges necessary for their recovery. This appears

to have resulted from substantial uncertainty regarding (1) how much load Consumers and Detroit Edison will

lose to open access, (2) which facilities and costs will ultimately be stranded, (3) how successful the utilities

will be in mitigating their potential harm, and (4) the degree, if any, to which netting should be required. It

can reasonably be expected that as the 5-year phase-in progresses, these uncertainties will begin to dissipate.

The Commission therefore finds that it should defer to future true-up proceedings any designation of a

specific transition charge. It further concludes that, in the interim, the use of a bidding process to recover

transition costs and to allocate open access load represents the best alternative. Moreover, the Commission

finds no reason to depart from findings expressed in the June 5 order regarding the need for a single, cost-

based transition charge effective January 1, 2002.

However, in order to ensure that open access customers contribute something toward the recovery of any

stranded costs that may arise from their departure, and in response to concerns regarding the potential for

customer confusion, the Commission finds that the bidding systems implemented by Consumers and Detroit

Edison should meet four additional requirements. First, they should specify that, unless otherwise provided

by Commission order, each bid must meet or exceed a mandatory minimum level of 0.5¢ per kWh. Second,

they should include language indicating that if the total load requested by a group of bidders is less than the

load initially allocated for use by members of that rate class, the excess capacity should immediately be

assigned to the highest unsuccessful bidders seeking open access service under any other qualifying rate

schedule. Third, they should provide that if a successful bidder fails to satisfy the conditions precedent to the

initiation of open access service (regarding any part of the successfully obtained bid) within 60 days after

7Notwithstanding this provision, the Commission expressly reserves the right to disallow anysuccessful bid shown to have been submitted primarily to achieve an anti-competitive purpose.

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selection, the bidder’s right to receive open access service for that portion of its load shall immediately pass to

the highest unsuccessful bidder. Fourth, they should specifically state that although affiliates of the utility are

free to participate in the bidding process,7 any open access load obtained through the affiliate’s successful bid

will not count toward the utility’s total maximum demand of open access load.

In light of these findings, certain changes must be made to Consumers’ proposed open access tariff.

Specifically, Rule F2 should be revised to (1) reflect that through December 31, 2001, the transition charge

paid by an open access customer will be whatever rate appears in its successful bid; (2) indicate that, unless

otherwise provided by Commission order, each customer’s bid must meet or exceed a mandatory minimum

level of 0.5¢ per kWh, (3) specify that beginning January 1, 2002, all customers will pay a uniform transition

charge established by the Commission; and (4) include language necessary to satisfy the three requirements

discussed in the preceding paragraph. In addition, the 1.31¢ per kWh transition charge set forth in each of

Consumers’ open access rate schedules should be replaced by language stating that the charge is “to be

determined by bid through December 31, 2001, and thereafter by Public Service Commission order.”

Similarly, several revisions must be made to Detroit Edison’s proposal. For example, (1) all mention of a

“Bid Participation Charge” should be removed from Sections 2.1 and 2.2 of the converted CDCs and replaced

with a statement that the transition charge will be determined by bid through December 31, 2001, and

thereafter established by Commission order; (2) the definition of transition charge set forth in Section 4.6

should be revised to indicate that it is designed to recover stranded costs arising from the Company’s

implementation of open access; (3) Section 4.8, which originally defined the utility’s “Bid Participation

Charge,” should be deleted; and (4) language consistent with Rule F2 of Consumers’ open access tariff should

be inserted in Detroit Edison’s proposal, including the four additions discussed above.

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Implementation Schedule

As noted earlier, the June 5 order directed Consumers and Detroit Edison to open 150 MW and 225 MW

of load, respectively, to open access service each year from 1997 through 2001. Notwithstanding those

directives, the proposed rate schedules submitted by Consumers indicate that no open access service would be

offered in 1997. Thus, rather than opening a total of 750 MW of load to competition before 2002,

as would have occurred under the schedule established by the June 5 order, Consumers proposes

opening only 600 MW. Energy Michigan and others oppose the utility’s proposal, asserting that

Consumers offered no adequate justification for reducing the size of the Commission’s required phase-in.

The Commission agrees with these intervenors and finds that the entire 750 MW of Consumers’ open

access load should be made available to customers by the close of the phase-in period. In establishing the

framework for competition set forth in the June 5 order, the Commission specifically set out a schedule that,

“assuming there is sufficient interest from customers, . . . would mean that approximately 12½% of each

utility’s load would be involved in the program in 2001.” June 5 order, p. 6. To reach that 12½% target,

Consumers must provide 750 MW of open access service prior to 2002.

As noted by several parties, the June 3 order set forth a schedule indicating that bidding for Consumers’

and Detroit Edison’s initial blocks of open access service would commence on November 1, 1997.

Nevertheless, an order issued today in Case No. U-11290 has suspended that round of bidding. The

Commission therefore finds that in order to adhere to the June 5 order’s directive to open 12½% of these

utilities’ load to open access service by the end of the phase-in period, each utility’s block of load initially

designated for bidding during 1997 should be added to its 2½% block scheduled to be opened during 1998.

Thus, Consumers’ tariff should be revised to state that 300 MW will made available for open access service

during 1998, an additional 150 MW will be added each year through 2001, and the entire system will be

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opened to competition in 2002. Similarly, Detroit Edison’s tariff should indicate that 450 MW of open access

service will be subjected to bidding in 1998, 225 MW will be added annually through 2001, and full

competition will begin in 2002.

Nuclear Decommissioning, Site Security, and Fuel Storage Costs

Detroit Edison’s proposal included a request to impose a 0.14¢ per kWh “Nuclear Decommissioning and

Nuclear Site Security Charge.” Exhibits A-10 and A-11, pp. 2-3. According to Charles F. Loeher, Detroit

Edison’s Director of Revenue Requirements, this consists of three components: (1) the 0.0748¢ per kWh

nuclear decommissioning surcharge approved for the utility in Case No. U-10102, (2) a 0.0468¢ per kWh

charge to recover the annual expense, currently included in base rates, of site security for its nuclear facilities,

and

(3) a 0.0116¢ per kWh fee designed to collect costs that Detroit Edison predicts it will incur between 2020

and 2040 for designing, constructing, and decommissioning a dry cask storage system for spent nuclear fuel.

7 Tr. 1176-1178.

Energy Michigan, the Attorney General, and others oppose collecting the last two components of this

proposed charge. According to Energy Michigan, the June 5 order authorizes recovery through open access

rates of neither the site security nor the dry cask fuel storage costs requested by Detroit Edison. Furthermore,

because the utility will not begin incurring them for another 22 years, if ever, Energy Michigan contends that

the proposed fuel storage costs are “totally speculative.”

The Commission agrees with the intervenors that the tariffs approved in this order should not provide for

the recovery of Detroit Edison’s projected site security and dry cask fuel storage costs. As pointed out by

Energy Michigan, neither type of expense falls within the five classes of potential stranded costs that the Staff

Report and the June 5 order designated for recovery through open access service rates. Furthermore, because

8In its brief, Consumers requested that any approval of its load profiling system be accompanied bya Commission order imposing a similar system on all other Michigan-based utilities. The Commissionrejects that request as being beyond the scope of these proceedings.

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they include numerous assumptions regarding the operating levels of the Fermi 2 generating plant over the

next several decades, U.S. Department of Energy activities regarding the development of off-site storage, and

Nuclear Regulatory Commission approval of the utility’s as-of-yet undeveloped storage plan, Detroit

Edison’s future spent fuel storage costs are too speculative to be included for recovery through the open

access tariffs approved in this order.

The Commission therefore concludes that the “Nuclear Decommissioning and Nuclear Site Security

Charge” set forth in Sections 2.1 and 2.2 of Detroit Edison’s proposed CDCs should be deleted in its entirety.

This conclusion is based on the fact that, by retaining as part of the utility’s rate structure the phrase

“Surcharges and Credits as approved by the MPSC (See Schedule B4.9),” the existing 0.0748¢ per kWh

nuclear decommissioning surcharge will be recovered from Detroit Edison’s open access customers.

Potential Conflicts with FERC Tariffs

Consumers proposed using a load profiling system to establish the demand requirements for its smallest

customers (e.g., those with a maximum demand of less than 20 kilowatts). Accord-ing to the utility, this

would eliminate the requirement, at least until 2002, that each open access customer install a demand meter

costing $500 to $1,000 prior to taking service. 4 Tr. 125-127. Because it would eliminate a potential

roadblock to the use of open access by residential and small commercial customers on Consumers’ system,

the utility’s request to initiate its proposed load profiling system should be approved.8

Nevertheless, two potential problems exist with regard to the adoption of the utility’s proposal. First,

Consumers plans to use its load profiling system to produce transmission and distribution rates stated in terms

of kWh of usage rather than kilowatts (kW) of demand. The utility concedes that billing open access

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customers on the basis of energy usage rather than demand will create a conflict between any rates approved

in these proceedings and those on file with the FERC as part of Consumers’ open access transmission tariff.

Consumers goes on to note that this conflict would have to be resolved through a waiver from the FERC

before the open access tariff included in its June 19, 1997 filing can be implemented, and contends that

Commission assistance will be needed in obtaining that waiver. Second, although not specifically mentioned

in the utility’s proposed open access tariff, several of the rates included in its June 19, 1997 filing assume

approval of the state/federal jurisdictional split proposed by Consumers in Case No. U-11283.

The Commission finds that Consumers’ proposal regarding the use of energy-based open access rates

should be rejected. Approving the per kWh transmission and distribution rates sought by Consumers,

assisting the utility in efforts to obtain a FERC waiver, and suspending application of various rates pending

resolution of a state/federal jurisdictional split would, at best, delay significantly the implementation of open

access service in Consumers’ territory.

The better approach, and the one adopted by the Commission in this order, is to make the following

changes. First, Consumers should replace its per kWh transmission and distribution rates with the following

language:

The charges for use of the Company’s transmission and distribution system shall be inaccordance with the Company’s FERC Open Access Tariff, subject to any jurisdictional splitestablished by the Public Service Commission and concurred in by the FERC.

Second, Consumers should delete the proposed language regarding the per kWh rates for its “Reactive Supply

and Voltage Control from Generation Sources Service Charge” and its “Regulation and Frequency Response

Service Charge,” and insert the following for each:

The charge for this service should coincide with that set forth for similar service under theCompany’s FERC Open Access Tariff.

9Although the energy balancing service described in Section 6 of Detroit Edison’s proposed CDCsis not a mandatory service, that fact is not clearly indicated by the utility’s proposed language. Thus,Section 6 should be revised to better indicate that this service is optional.

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Making these revisions will help ensure that Consumers’ customers can begin making use of open access

pursuant to the schedule discussed earlier in this order.

One additional concern raised by several intervenors involved Consumers’ “Energy Imbalance Service

Charge.” It was noted that although each of the utility’s three rate schedules included a imbalance charge

covering both transmission and distribution service, the deviation band included in Consumers’ proposal

differed from that contained in its FERC Open Access Tariff. Specifically, it failed to include the 2 MW

minimum deadband. Thus, to avoid conflicting with Consumers’ FERC tariff, the Commission finds that the

language contained in the utility’s June 19, 1997 filing should be revised to include an identical minimum

energy imbalance deadband.

Unlike those found in Consumers’ proposal, Detroit Edison’s transmission and distribution rates, as well

as those proposed for use with regard to its mandatory ancillary services, were stated on a per kW basis.

Moreover, its “Energy Balancing Service”9 appears to apply only to the need for balancing on its distribution

system. Thus, the only problem raised by its suggested rates was that, like those found in Consumers’ tariff,

Detroit Edison’s figures assume that its recommended jurisdictional split will ultimately be approved by the

Commission and the FERC. The Commission therefore finds that the following language should be inserted

directly under the heading “Monthly Base Rates” in Section 2 of both proposed CDCs:

The following rates are based on the Company’s proposal to define its federally-regulatedtransmission system (as distinguished from its state-regulated distribution system) as the partof its electric system that is rated for use at 120 kV or more. Any different jurisdictionalsplit established by the MPSC and concurred in by the FERC may therefore require revisionof these monthly base rates.

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Standby Service

In its June 5 order, the Commission concluded that because Consumers and Detroit Edison claim to have

no available transfer capability during four months of the year, “it is clear that standby is a critical and

necessary component” of open access service. June 5 order, p. 30. It was therefore suggested that the utilities

present, and the intervenors examine, reasonable standby rate structures designed specifically for use by open

access customers.

In response to the Commission’s suggestion, Consumers submitted a standby tariff with a capacity

charge of $2.95 per kW per month and an energy charge equal to the greater of 5¢ per kWh or the utility’s top

incremental cost of power plus 1¢ per kWh. Likewise, Detroit Edison proposed an optional standby service

(referred to in its proposed CDCs as “Back-up Service”) having a reservation charge of $2 per kW per month

and an energy charge equal to the utility’s incremental service charge plus 1¢ per kWh.

Dow contends that Consumers’ proposal would result in “grossly excessive” standby rates. Specifically,

it asserts that compared to the utility’s current monthly capacity charge of 33¢ per kW for standby service

provided under Rate D-7, Consumers’ proposed capacity charge of $2.95 per kW represents an unjustifiable

795% increase. Dow’s brief, pp. 3-4. Likewise, ABATE asserts that both utilities are proposing energy

charges for standby service that, according to Mr. Selecky, could be “punitive for no reason.” 7 Tr. 1079.

This assertion is based on the fact that they would apply even in cases where a customer’s use of standby

service results from transmission constraints or similar problems on the utility’s system, rather than from any

lack of supply caused by the customer or its eligible power supplier. ABATE therefore asserts that except

when the customer or its eligible power supplier is at fault, the customer should pay the lesser of its cost of

energy or the utility’s top incremental cost.

Overall, the Commission finds the testimony supplied in support of and in opposition to the utilities’

standby service proposals lacking both in breadth and depth of coverage. As specifically noted in the June 5

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order, this issue is critically important to the successful operation of open access. The Commission therefore

concludes that it should reopen the record in Cases Nos. U-11451 and U-11452 for the purpose of taking

additional testimony regarding the rates, terms, and conditions of standby service to be offered in conjunction

with the open access service provided by Consumers and Detroit Edison. However, to avoid delaying the first

round of bidding for open access, the Commission further concludes that the utilities’ standby service

proposals should be approved with one change. Specifically, to avoid the unfair result discussed by Mr.

Selecky, the standby energy charge in each utility’s proposal should include language indicating that if the

need for standby service arises from something other than the fault of the customer or its eligible power

supplier, the energy charge shall be the lesser of the customer’s cost of energy or the utility’s top incremental

cost.

III.

MISCELLANEOUS PROCEDURAL ISSUES

In the course of these proceedings, several parties submitted requests for rulings on procedural issues.

Three remain to be addressed in this order.

ABATE’s Application for Leave to Appeal

On August 15, 1997, the ALJ denied a motion by ABATE to strike all testimony offered in these cases

pertaining to securitization, stranded cost recovery, Consumers’ proposed open access tariffs, and employee

restructuring costs. On August 27, 1997, ABATE filed an application for leave to appeal the ALJ’s ruling.

According to ABATE, the Commission lacks jurisdiction to consider securitization, stranded costs, and

employee retraining expenses. It further asserts that employee retraining costs are so speculative that their

approval in these cases would be wholly unjustified. Finally, ABATE argues that Consumers’ proposed open

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access tariffs conflict with the utility’s FERC tariffs, and thus have no validity. ABATE therefore requests

that the Commission reverse the ALJ’s August 15, 1997 ruling and strike all testimony referenced in its initial

motion.

The Commission finds that ABATE’s request should be denied. According to the June 5 order, the goal

of this proceeding is to review and, if appropriate, approve tariffs necessary to provide ratepayers the option

of taking open access service. As noted by the Commission’s April 11, 1994 and June 19, 1995 orders in

Cases Nos. U-10143 and U-10176 [concerning implementation of retail wheeling experiments for consumers

and Detroit Edison], the Transmission of Electricity Act, 1909 PA 106, as amended, MCL 460.551 et seq.;

MSA 22.151 et seq.; the Public Service Commission Act, 1939 PA 3, as amended, MCL 460.1 et seq.;

MSA 22.13(1) et seq.; and the Railroad Act, 1909 PA 300, as amended, MCL 462.2 et seq.; MSA 22.21 et

seq.; grant the Commission jurisdiction to approve implementation of retail access programs like those

proposed by Consumers and Detroit Edison. Moreover, because each of these programs constitutes an

optional service, ABATE’s members can continue to take service on their current rate schedules, if they so

desire. Finally, because today’s order rejects the utilities’ requests to begin recovering employee retraining

costs and revises their proposed rates to avoid conflicts with previously-filed FERC open access tariffs, it is

unnecessary to address ABATE’s last two arguments.

The Attorney General’s Motion to Extend the Briefing Schedule

On September 12, 1997, the Attorney General offered an oral motion to extend the dead-lines for filing

briefs and reply briefs in these cases to October 10 and 24, 1997, respectively. The ALJ denied the motion,

and on September 16, 1997 the Attorney General filed a motion directly with the Commission requesting the

same relief as his September 12, 1997 motion.

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The July 14, 1997 order established September 30, 1997 as the final date for receiving reply briefs in

Cases Nos. U-11451 and U-11452. Therefore, the Attorney General’s September 12 and September 16, 1997

motions represent untimely requests for rehearing of that order and are rejected for that reason. In addition,

they also appear to represent a collateral attack on the September 3, 1997 ruling of Ingham County Circuit

Judge Michael G. Harrison in Docket No. 97-86744-AS, which held, in pertinent part, that the schedule

established for these proceedings allowed adequate time for the parties to present their cases. Moreover,

because the record reflects that the Attorney General successfully filed briefs and reply briefs in each case

within the time established by that schedule, his motion is moot. Thus, the Commission finds that the

Attorney General’s motion should be denied.

Detroit Edison’s Motion to Strike

On October 14, 1997, Detroit Edison filed a motion to strike Section IIA(2) of ABATE’s reply brief. In

support of its request, the utility points out that all arguments contained in that section (relating to ABATE’s

claim that the recovery of stranded costs by a utility violates the Commerce Clause of both the U.S. and

Michigan Constitutions) were raised for the first time in the intervenor’s reply brief. Because this precluded

the other parties from responding to ABATE’s claim, Detroit Edison argues, that part of the reply brief must

be stricken. The Commission agrees and finds that Section IIA(2) of ABATE’s September 30, 1997 reply

brief should be stricken.

The Commission FINDS that:

a. Jurisdiction is pursuant to 1909 PA 106, as amended, MCL 460.551 et seq.; MSA 22.151 et seq.;

1919 PA 419, as amended, MCL 460.51 et seq.; MSA 22.1 et seq.; 1939 PA 3, as amended, MCL 460.1

et seq.; MSA 22.13(1) et seq.; 1969 PA 306, as amended, MCL 24.201 et seq.; MSA 3.560(101) et

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seq.;et seq.; 1909 PA 300, as amended, MCL 462.2 et seq.; MSA 22.21 et seq.; and the Commission's Rules

of Practice and Procedure, as amended, 1992 AACS, R 460.17101

b. The open access service proposals submitted by Consumers and Detroit Edison in Cases Nos. U-

11451 and U-11452, respectively, are reasonable and should be approved as amended by this order.

c. Consumers and Detroit Edison should implement open access service pursuant to the tariff sheets

attached as Exhibits A and B to this order, respectively.

d. The record should be reopened to take additional testimony and exhibits regarding the rates, terms,

and conditions for standby service to be provided by Consumers and Detroit Edison in conjunction with open

access service.

e. ABATE’s application for leave to appeal and the Attorney General’s motion to extend the briefing

schedule should be denied.

f. Detroit Edison’s motion to strike should be granted.

THEREFORE, IT IS ORDERED that:

A. Consumers Energy Company shall provide Retail Open Access Service pursuant to the discussion in

this order and the rates, terms, and conditions contained in the tariff sheets attached as Exhibit A.

B. The Detroit Edison Company shall provide Direct Access Service pursuant to the discussion in this

order and the rates, terms, and conditions contained in the tariff sheets attached as Exhibit B.

C. The tariffs authorized for Consumers Energy Company in Case No. U-11451 and The Detroit Edison

Company in Case No. U-11452 shall take effect November 1, 1997.

D. Consumers Energy Company and The Detroit Edison Company shall file with the Commission,

within 14 days of the date of this order, tariff sheets in conformity with this order.

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E. A prehearing conference shall be held regarding the reopened proceedings in Cases Nos. U-11451

and U-11452 on November 13, 1997 at 9:00 a.m. at the Commission’s offices at 6545 Mercantile Way,

Lansing, Michigan.

F. The application for leave to appeal filed on August 27, 1997 by the Association of Businesses

Advocating Tariff Equity is denied.

G. The September 16, 1997 motion to extend the briefing schedule filed by Attorney General Frank J.

Kelley is denied.

H. The October 14, 1997 motion to strike filed by The Detroit Edison Company is granted.

The Commission reserves jurisdiction and may issue further orders as necessary.

Any party 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; MSA 22.45.

MICHIGAN PUBLIC SERVICE COMMISSION

John G. Strand Chairman

( S E A L )

John C. Shea Commissioner, dissenting in a separate opinion.

David A. Svanda Commissioner

By its action of October 29, 1997.

Dorothy Wideman Executive Secretary

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Its Executive Secretary

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G. The September 16, 1997 motion to extend the briefing schedule filed by Attorney General Frank J.

Kelley is denied.

H. The October 14, 1997 motion to strike filed by The Detroit Edison Company is granted.

The Commission reserves jurisdiction and may issue further orders as necessary.

Any party 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; MSA 22.45.

MICHIGAN PUBLIC SERVICE COMMISSION

Chairman

Commissioner, dissenting in a separate opinion.

Commissioner

By its action of October 29, 1997.

Its Executive Secretary

In the matter of the request of )CONSUMERS ENERGY COMPANY ) for approval of a retail open access ) Case No. U-11451tariff. )) )

)In the matter of the request of )THE DETROIT EDISON COMPANY ) Case No. U-11452for approval of a direct access tariff. ) )

Suggested Minute:

“Adopt and issue order dated October 29, 1997 approving, with modifications, aretail open access tariff for Consumers Energy Company and a direct access tarifffor The Detroit Edison Company, as set forth in the order.”

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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 request of

)CONSUMER ENERGY COMPANY

)for approval of a retail open access

)Case No. U-11451

tariff.)

)

)In the matter of the request of

)THE DETROIT EDISON COMPANY

) Case No. U-11452for approval of a direct access tariff.

)

)

DISSENTING OPINION OF COMMISSIONER JOHN C. SHEA

(Submitted on October 29, 1997 concerning order issued on same date.)

With its series of orders today in dockets Nos. U-11290, U-11451, U-11452, U-11453, U-

11454, U-11456 and U-11449, the majority completes its wholesale transformation of the

December 19, 1996 MPSC Staff Report on Electricity Restructuring (“MPSC Staff Report”) and

the March 7, 1997 filings by Consumers Energy Company (“Consumers”) and The Detroit Edison

Company (“Edison”). Earlier this year, the Commission requested “informational filings” from

Consumers and Edison concerning ways to implement the MPSC Staff Report. See, February 5,

1997 order in Case No. U-11290 at 2-3, 5. In today’s orders, those informational filings have

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mutated into a mandatory direct access service program upon terms and conditions far different

from the plan proposed in the MPSC Staff Report or set forth in the utilities’ filings. See, Docket

Nos. U-11451, U-11452, supra, at 29-30.

As I have stated previously, see, June 5, 1997 Dissenting Opinion in MPSC Case No. U-

11290, the most important analysis concerning the matters addressed by today’s orders should

have been the extent of the Commission’s authority to issue these orders. Regrettably, today’s

orders shed little light on the power of the Commission to mandate sweeping changes in the way

electricity has been delivered to customers in this state for almost a century. More importantly,

today’s orders fail to articulate why it is in the public interest to do so.

Without a clear statement as to the power of the Commission and an articulation of the benefit

of these orders to the public interest, I cannot agree to today’s orders. I therefore dissent.

John C. Shea, Commissioner

opinion and order i. history of proceedingspresent: hon. john g. strand, chairman hon. john c. shea,...

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