STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION **************************

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1 01 N. WASHINGTON SQUARE SUITE 810 LANSING, MICHIGAN 89 TELEPHONE 1 / 8- FAX 1 / ERIC J. SCHNEIDEWIND ejschneidewind@varnumlaw.com October, 00 Ms. Mary Jo Kunkle Michigan Public Service Commission Mercantile Way P.O. Box 01 Lansing, MI 8909 Re: Case No. U-1808-R/U-1 Dear Ms. Kunkle: Attached for electronic filing is Rebuttal Testimony of Richard A. Polich on Behalf of Energy Michigan, Inc. Also attached is the Proof of Service indicating service on counsel. Thank you for your assistance in this matter. Very truly yours, VARNUM, RIDDERING, SCHMIDT & HOWLETTLLP EJS/mrr Eric J. Schneidewind cc: ALJ parties GRAND RAPIDS LANSING KALAMAZOO GRAND HAVEN MILWAUKEE

2 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION ************************** In the matter of the application of ) THE DETROIT EDISON COMPANY ) Reconciliation of its Power Supply ) Case No. U-1 Cost Recovery Plan for the 1-month Period ) Ending December 1, 00 ) In the matter of the application of ) THE DETROIT EDISON COMPANY ) To Implement the Commission s Final ) Case No. U-1808-R Order in Case No. U-1808 Concerning, ) Inter Alia, 00 Net Stranded Costs and the ) Provisions of Section 10a(1) and (1) ) REBUTTAL TESTIMONY OF RICHARD A. POLICH ON BEHALF OF ENERGY MICHIGAN October, 00

3 R. A. Polich Rebuttal Case No. U-1808R/1 Rebuttal Testimony of Richard A Polich On Behalf of Energy Michigan Q. Please state your name and business address. A. My name is Richard A. Polich. My business address is PO Box, Ann Arbor, Michigan Q. By whom are you employed and what is your present position? A. I am currently working as an independent consultant in a firm called Energy Options & Solutions. Q. Are you the same Richard A Polich who previously testified in this proceeding? A. Yes, I am. PURPOSE OF REBUTTAL TESTIMONY Q. What is the purpose of your rebuttal testimony? A. I will be addressing certain portions of Michigan Public Service Commission ( Commission ) Staff s witness William G. Aldrich. First, I will address Mr. Aldrich s calculation of stranded costs. Second, I will be addressing the allocation of rd party wholesale sales profit proposed by Mr. Aldrich. Q. Are you sponsoring any Exhibits? A. Yes, I am sponsoring the following Exhibits: 1 18 Exhibit EM- (RAP-) Exhibit EM- (RAP-) Staff Method of Stranded Cost Calculation Choice Sales Impact on 00 PSCR Factor 19 0 Q. Were these exhibits prepared by you or under your direction? A. Yes, they were.

4 R. A. Polich Rebuttal Case No. U-1808R/ STAFF STRANDED COST ANALYSIS PROBLEMS Q. What was the basis of figures used in Mr. Aldrich s Jan1- Feb 0 Stranded Cost calculations? A. Mr. Aldrich relied upon figures supplied by Detroit Edison for all of the calculations shown on Exhibit S-. Q. Should the calculations provided by Mr. Aldrich in Exhibit S- be adjusted? A. Yes. Because Mr. Aldrich based his calculations on figures supplied by Detroit Edison in their exhibits, the errors in their exhibit translate over to Mr. Aldrich s Exhibit S-. The first problem is that the Production Fixed costs were based upon year end 00. Detroit Edison should not be allowed to earn a return on investment it did not make. This would be the case if stranded cost calculations are based upon year end 00. As was explained in my testimony, it is appropriate to use the end of year 00 plant balances because the pre-1808 period only includes the first two months of 00. The second item to be adjusted is the Pre-Interim PFC Revenues. Again amount used by Mr. Aldrich is based upon figures contained in Detroit Edison s exhibits and workpapers. There were several errors in Detroit Edison s development of the figures as explained in my Testimony, Pages 9-. In summary, Detroit Edison used the wrong PSCR figures in calculation of the Non Restricted Revenue excl PSCR Costs and the Production Related Revenue Allocator. The correct calculation, shown in my Exhibit EM- (RAP-), page 1, results in a Pre-Interim PFC Revenue of $. million. The third item is the omission of the SMC and LCC Discounts. Since the Stranded Cost Calculation shown on Exhibit S- is prior to the final order, the SMC and LCC discounts are to be added to reduce the stranded costs as was done in all previous

5 R. A. Polich Rebuttal Case No. U-1808R/ stranded cost calculations. Based upon Detroit Edison figures, the SMC & LCC Discounts for the Pre Interim Period was $. million. Q. How do these adjustments effect Mr. Aldrich s calculation in Exhibit S-? A. Exhibit EM- (RAP-) provides a side by side comparison of Mr. Aldrich s calculations to the Stranded Cost calculation with the proper adjustments. Once the proper adjustments are made to Exhibit S-, there is actually a stranded benefit of over $ million for the interim Pre-Interim Order Period. Q. What issues do you have with the stranded cost calculation for the Interim Rate period, as shown in Mr. Aldrich s Exhibit S-, Page? A. First, Mr. Aldrich has again relied upon the figures contained in Detroit Edison s stranded costs calculation, which contain several critical errors as outlined in my original testimony in this case. Second, Mr. Aldrich did not calculate a stranded cost based upon a comparison of actual PFC related revenues to PFC Costs (PFC Revenue Requirement). Mr. Aldrich s calculation of stranded costs, shown in Exhibit S-, page, lines -, simply allocates the difference between the PFC Related portion of the final order revenue deficiency and the interim order revenue deficiency to stranded costs. No where in his calculation does Mr. Aldrich look at the revenues Detroit Edison actually received during the interim period. In simple terms, Mr. Aldrich s calculation of $1. million of stranded cost for the Interim Period has nothing to do with stranded costs during the period of the interim order. All Mr. Aldrich s calculation does is to assign a portion of revenue that is not included in the rates paid by bundled service customer and in which Detroit Edison is not allowed to recover, to Choice Customers. This is an allocation of revenues that Detroit Edison is not even entitled too. This stranded cost calculation should simply be ignored because it is not a calculation of stranded costs.

6 R. A. Polich Rebuttal Case No. U-1808R/ Q. What would be the total stranded costs for the Pre Interim & Post Interim Order? A. The stranded cost calculation shown in Exhibit EM-, page 1 line 1 should be used for the Interim Order Period. Column d of Exhibit shows the final Adjustments to Mr. Aldrich s Exhibit S-. The result is a stranded Benefit of over 1 million, not including the revenues from rd party wholesale sales. ALLOCATION OF RD PARTY WHOLESALE SALES NET REVENUES Q. Do you agree with the Staff s allocation of rd party wholesale net revenues? A. No. First, not all of Detroit Edison bundled customers sales were subject to the PSCR clause during 00. Residential customers and other commercial customers less than 1 kw were still operating under caped and fixed rates during that period. The Staff s allocation of rd party wholesale profits to these customers is totally inappropriate and is not consistent with previous Commission decisions on stranded costs and the allocation of these revenues. Over 1% of Detroit Edison sales were to customers with capped rates and not subjected to the PSCR clause during 00. In prior periods in which rates were frozen, the Commission was not allowed to order collection of PSCR under-recovery due to the language in PA-. This condition still exists for the calendar year of 00 for those customers with capped rates. The Commission should exclude those customers with capped rates from the calculation of PSCR reconciliation refunds or credits. Second, the rd party wholesale sales are the result of power freed up by open access. If the Commission feels it is necessary to charge stranded costs to Choice Customers because their decisions, it must also be willing to assign profits resulting from their decisions to Choice customers. The Commission should credit the rd party wholesale net revenues in the manner presented in Exhibit EM-1, to Choice customers in the stranded cost calculations.

7 R. A. Polich Rebuttal Case No. U-1808R/ Q. What should be the minimum level of rd party wholesale sales revenue to be credited to the stranded cost calculation? A. Exhibit A-0 (KLO-), line includes a footnote that states: by.10 which is the percentage of residential & Small Commercial Sales to Total Electric Sales This indicates that 1.0% of Detroit Edison sales were associated with capped rates. The Commission should as a minimum, allocate 1.0% of the rd party wholesale profits to offset stranded costs. This would credit a minimum of $. million of rd party wholesale profits to offset stranded costs. Q. What are the resulting stranded costs for the Pre-Interim Order and Interim Order Periods? A. The modification of the Staff s stranded cost calculations results in over $1 million of stranded benefits. These stranded benefits should be allocated to open access and used to offset securitization and nuclear decommissioning surcharges. In addition, the Commission should include a refund of the $ million in stranded costs surcharges paid by Choice customers as a result of the Commission s order in the 00 and 00 Stranded Cost cases and the $8 million in 00 Stranded costs included in Case U This would be consistent with the Commission s practice of refunding full service customers for over collection of PSCR costs. Q. Do you agree with Mr. Aldrich s position that the current level of stranded cost surcharges should continue? Q. No. First, the corrected calculation of stranded costs shows Detroit Edison has incurred stranded benefits. Thus, the Commission should not only eliminate the current stranded cost surcharge but should set it to a negative $0.008/kWh. Second, the stranded

8 R. A. Polich Rebuttal Case No. U-1808R/ costs charges and other recent Commission decisions have resulted in a significant amount of Detroit Edison load returning to bundled service. If this trend continues, Bundled customers will see increases in their PSCR factor as shown in Exhibit EM- (RAP-). This exhibit is a reproduction of a Detroit Edison exhibit In Case U-10, Detroit Edison s 00 Projected PSCR Case. The Exhibit shows that if Choice sales are eliminated, the PSCR factor will increase from.99 mills/kwh to 10.0 mills/kwh. This would be a 10% increase in the PSCR factor. This also demonstrates there is a benefit to bundled service customers for Choice Customers to remain in the program. This occurs because Detroit Edison does not have sufficient base load generation resources to serve its entire native load and must rely upon power purchases to provide electricity for any increase in sales. The Staff s recommendation to continue to charge Choice Customers a Stranded Cost charge of 1 to mills/kwh will ensure that Choice Customers return to bundled service and that the PSCR will increase, causing all customers to incur higher electric bills in 00. Q. Does this conclude your testimony? A. Yes.

9 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION ************************** In the matter of the application of ) THE DETROIT EDISON COMPANY ) Reconciliation of its Power Supply ) Case No. U-1 Cost Recovery Plan for the 1-month Period ) Ending December 1, 00 ) In the matter of the application of ) THE DETROIT EDISON COMPANY ) To Implement the Commission s Final ) Case No. U-1808-R Order in Case No. U-1808 Concerning, ) Inter Alia, 00 Net Stranded Costs and the ) Provisions of Section 10a(1) and (1) ) EXHIBITS OF RICHARD A. POLICH ON BEHALF OF ENERGY MICHIGAN October 00

10 ENERGY MICHIGAN Detroit Edison 00 PSCR Reconciliation & Stranded Cost Case 00 Stranded Cost/(Benefit) Calculation STAFF METHOD OF STRANDED COST CALCULATION Case No: U-1808-R/U-1 Exhibit No. EM- (RAP-) Page No: 1 of 1 Witness: R.A. Polich Date: 9-Oct-0 Line No. ADJUSTED AMOUNT (000) SOURCE Description AMOUNT (000) SOURCE a b c d e Calculation of Pre-Interim Order Stranded Costs (000) Source 1 Total Production Fixed Costs $,0 Exh. A- $, Exh EM- Production Fixed Costs: Jan. 1 - Feb. 0 $,088 Line 1 * 1/ $,8 Line 1 * 1/ Less: Clean Air Act Deferred Return of and on $8, WP-WGA-1 $8, WP-WGA-1 Less: Pre-Interim PFC Revenues $, Exh. A- $,8 Exh EM- Less: Stranded Costs Recovered per Case No. U-1808 $8,08 Exh. A- $8,08 Exh. A- Less: River Rouge Gain Offset $9 Exh A-1 *1/ $9 Exh A-1 *1/ 8 PFC Revenue Shortfall/(Surplus) $,9 ($0,) 9 Less: SMC & LCC Discounts: $0 $,8 Det Ed WP-RSS-, ln 10 PFC Net Stranded Costs: Jan 1- Feb 0 $,9 ($,10) 1 Calculation of Post-Interim Order Stranded Costs 1 Stranded Cost During the Interim Increase Period $1,1 Exhibit S-, p $9,10 Exhibit Em-, pg 1, ln 1 1 Stranded Cost During the Final Increase Period $0 $0 1 Total Post-Feb. 0 Stranded Cost $1,1 $9,10 1 Total 00 PFC Net Stranded Cost $18, Ln 10 plus ln 1 ($1,810) Ln 10 plus ln 1 rd Party Wholesale Net Revenues ($10,88) ($1,8)

11 Case No: U-1808-R/U-1 Exhibit No. EM- (RAP-) Page No: 1 of 1 Witness: R.A. Polich Date: 9-Oct-0

12 STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION In the matter of the Application of ) The Detroit Edison Company to ) Implement the Commission's final ) Order in Case U-1808 concerning, ) Inter alia, 00 net stranded costs ) Case No. U-1808-R/U-1 And the provisions of Section ) 10a(1) and (1) ) ) PROOF OF SERVICE Monica Robinson, duly sworn, deposes and says that on this th day of October, 00 she served a copy of Rebuttal Testimony of Richard Polich on Behalf of Energy Michigan, Inc. with copies upon the individuals listed on the attached service list by at their last known addresses. Monica Robinson Subscribed and sworn to before me this th day October of 00. Eric J. Schneidewind, Notary Public Eaton County, Michigan Acting in Ingham County, Michigan My Commission Expires: April, 00

13 Service List Case U-1808-R/U-1 Hon. Daniel Nickerson, Jr. Administrative Law Judge Michigan Public Service Commission Michael L. Kurtz Boehm, Kurtz & Lowry Steven Hughey Patricia Barone Assistant Attorneys General-PSC David Shaltz Shaltz & Royal, P.C John Dempsey Jennifer Frye Dickinson Wright PLLC Bruce Maters Jon Christinidis Detroit Edison Company Donald Erickson Michael Moody Assistant Attorneys General Robert Strong Clark Hill, PLC Gus Calebrese Clark Hill, PLC