Latest Rate Increase for Consumers Energy Targets Pipeline Integrity

In what seems to have become an annual rite of passage, the Michigan Public Service Commission has authorized a significant upward adjustment in a natural gas local distribution company's (LDC's) revenue requirement, although not by nearly as much as requested by the utility, Consumers Energy Company. Whereas the commission approved an increase of a little more than $29.2 million, the LDC had asked for more than $90.48 million. By comparison, the LDC's 2016 rate case had resulted in a $40 million rate increase, out of an application for $85 million in rate relief. The company had petitioned for a similar increase of $88 million in its 2015 rate proceeding, which produced an approved increase of $45 million. Interestingly, while the commission had maintained Consumers Energy's rate of return on common equity (ROE) at 10.3% in both the 2015 and 2016 rate cases, it found in the instant docket that it was now time to lower the company's ROE. It therefore adopted a slightly reduced ROE of 10.1% for the LDC for the rate-effective period.

In submitting its application, Consumers Energy had listed a need for ongoing infrastructure improvements and replacements as a primary driver behind its request for higher rates. More particularly, the company claimed that its network of pipelines was aging and deteriorating, with significant upgrades necessary if it was to be able to continue to assure public safety and system reliability. To that end, the LDC argued for a budget of $41.8 million for its pipeline integrity program through 2019.

While not disputing the need for the pipeline integrity program, commission staff did challenge the company's proposed spending levels. According to commission staff, the LDC in the past has had a tendency to overstate its capital needs and has not always expended all the monies allocated for various projects. Indeed, commission staff said, the five-year average of the company's actual capital expenditures between 2011 and 2015 would warrant a pipeline integrity project budget of only about $23.2 million.

However, after Consumers Energy tendered more information and documentation on its projects and their associated costs, commission staff admitted that the LDC's outlays had been increasing in recent years. Upon looking at the average for just the three-year period of 2013 to 2015, instead of the longer five-year time frame, commission staff conceded that a somewhat higher pipeline integrity budget of $27.5 million would be justified. And, commission staff said, that amount did not include close to $10 million the company had spent on specific "remediation dig" activities, the need for which had arisen after a pipeline rupture incident in 2015.

The commission echoed its staff's concerns about the often considerable variance between the company's estimated and actual expenditures with respect to its pipeline integrity program. Nevertheless, in light of the importance of the initiative and the updated data provided by the LDC, the commission ruled that the company should be afforded an annual capital budget of slightly less than $29.6 million through 2019.

The commission explained that Consumers Energy had successfully shown that the costs of its pipeline integrity efforts were rising in conjunction with the discovery of additional pipeline segments that had been compromised. The commission therefore determined that in projecting a realistic capital improvement budget for the LDC, it was appropriate to take into account the most recent three-year average of costs (2014- 2016), which encompassed the remediation dig work following the pipeline breach.

The commission joined its staff and an administrative law judge (ALJ) in finding that the pipeline integrity program costs should be recouped via an infrastructure recovery mechanism (IRM). Observing that IRMs had been approved for other LDCs in the state, the commission stated that the substantial costs involved in replacing and upgrading older pipeline systems justified collection of such costs through a rider rather than in base rate charges.

In Consumers Energy's case, the commission noted that, besides the pipeline integrity projects, the IRM would pertain to several specific distribution and transmission (D&T) system programs. They include both D&T-related enhanced infrastructure replacement projects and an endeavor aimed at analyzing asset relocation needs for mains and services.

However, again concurring with its staff and the ALJ, the commission held that the costs of the company's initial transmission enhancement deliverability (TED-I) program should not be recovered in the IRM surcharge. In expounding on its decision thereto, the commission pointed out that in contrast to most of the LDC's infrastructure projects, which have been undertaken in response to inspections and studies that identified pipeline segments most urgently in need of repair and replacement, the TED-I proposal is more proactive in nature than reactive. Moreover, the commission disclosed that the company had provided no information on the scope of any actual TED-I work to be done during the upcoming threeyear rate-effective period.

As to cost-of-capital issues, the commission deemed patently unreasonable the company's recommended ROE of 10.6%. Citing both national and Michigan-specific statistics, the commission commented on the downward trend in utility ROEs. It also remarked on the steady growth and improvement in the state's economy.

The commission thus described as inappropriate the company's attempt to secure a higher ROE than in its last rate dockets. It was critical of the range of reasonableness put forth by the LDC, which relied on the company's last approved ROE as the bottom value of that range. The commission said that the entire range was excessive and unsupported by any of the substantiated ROE cost models.

According to the commission, some of those cost analyses clearly indicated that a ROE below 10% could be viewed as just and reasonable. In the end, however, the commission selected a 10.1% ROE, declaring that value to be in line with current economic circumstances and financial markets.

The commission concluded that a 10.1% ROE would be adequate for compensating the company for the level of risk it faces while simultaneously protecting the "financial soundness" of its business operations and affording it a "strong ability" to attract capital at reasonable rates. Re Consumers Energy Co., Case No. U-18124, July 31, 2017 (Mich.P.S.C.).