EXHIBIT 10.4
MPSC FINANCING ORDER (INCLUDING THE OPINION AND ORDER
ISSUED ON OCTOBER 24, 2000 AND THE ORDER GRANTING REHEARING
ISSUED ON JANUARY 4, 2001 BY THE MPSC WITH RESPECT TO CONSUMERS)
STATE OF MICHIGAN
BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION
* * * * *
In the matter of the application of CONSUMERS ENERGY COMPANY for a
financing order approving the securitization of Case No. U-12505 certain
regulatory assets and other qualified costs.
At the October 24, 2000 meeting of the Michigan Public Service
Commission in Lansing, Michigan.
PRESENT: Hon. John G. Strand, Chairman
Hon. David A. Svanda, Commissioner
Hon. Robert B. Nelson, Commissioner
OPINION AND ORDER
I.
BACKGROUND
In order for Michigan's customers to begin receiving the benefits
of a competitive electric generation market, the Commission issued an order
on June 5, 1997 in Case No. U-11290 setting forth the framework for
implementing retail open access (ROA) in this state. Among other things,
that order accomplished the following: First, it established a schedule for
phasing-in customers' eligibility for ROA service such that all customers
would have the option of choosing their respective power suppliers by the
start of 2002. Second, it identified five categories of stranded costs
that, if prudently incurred, could be recovered by the utilities, namely:
(1) capital costs of nuclear power plants, (2) regulatory assets, (3)
capacity costs in excess of market value that arise from power purchase
agreements, (4) employee retraining costs, and (5) costs related to the
implementation of restructuring. Third, it commenced development of a
mechanism to true-up (on an annual basis) the amounts collected through
transition and implementation surcharges paid by customers electing to use
ROA, on the one hand, and each utility's actual stranded costs, on the
other. Fourth, it established December 31, 2007 as the last day for
recovering stranded costs. During the subsequent three years, the
Commission issued several additional orders--in Case No. U-11290 as well as
in other dockets--regarding the implementation of ROA.
On June 5, 2000, the Customer Choice and Electricity Reliability
Act, 2000 PA 141 (Act 141) and 2000 PA 142 (Act 142), which amended 1939 PA
3, MCL 460.1 et seq.; MSA 22.13(1) et seq., took effect. In addition to
codifying the Commission's prior orders regarding ROA--See, Section 10a(5)
of Act 141--this new law required Consumers Energy Company (Consumers) and
The Detroit Edison Company (Detroit Edison) to reduce by 5% the rates in
effect for their residential rate classes as of May 1, 2000, imposed
various rate freezes and caps for these and other rate classes, and allowed
certain utilities(1) the option of reducing their costs through the use of
securitization.(2)
II.
HISTORY OF PROCEEDINGS
On July 5, 2000, Consumers filed an application, with supporting
testimony and exhibits, seeking a financing order authorizing the issuance
of securitization bonds covering approximately $472,549,000 in after-tax
qualified costs. The application further requested authority to (1) create
one or more special purpose entities (SPEs) to which it could transfer
securitized property for the purpose of minimizing bankruptcy risks and
maximizing the ratings on its securitization bonds, (2) implement
securitization charges--and related tax charges--to be collected from its
customers, as well as a mechanism for undertaking periodic true-ups of
those charges, (3) proceed, at its sole discretion, with the sale of the
securitization bonds authorized in this case, and (4) employ appropriate
methodologies to account for these transactions and to eventually refund or
retire any or all of its securitization bonds.
Pursuant to due notice, a prehearing conference was held on July
17, 2000 before Administrative Law Judge George Schankler (ALJ). In the
course of the prehearing conference, the ALJ granted intervenor status to
Attorney General Jennifer M. Granholm (Attorney General); the Association
of Businesses Advocating Tariff Equity (ABATE); Energy Michigan; the
Michigan Environmental Council and the Public Interest Research Group in
Michigan (collectively, MEC); Unicom Energy, Inc. (Unicom); The Dow Corning
Corporation and Hemlock Semiconductor Corporation (collectively, Dow); the
Michigan Community Action Agency Association (MCAAA); the Michigan Chamber
of Commerce (Chamber of Commerce); Midland Cogeneration Venture Limited
Partnership; the Michigan Electric and Gas Association; PG&E Corporation
and the Midwest Independent Power Suppliers Coordination Group; and the
Commission Staff (Staff).(3)
The ALJ further established a schedule for this case that, as
mandated by Section 10i(6) of Act 142, would result in the completion of
all proceedings and the issuance of the Commission's order within 90 days
after the filing of the application. However, because Consumers
subsequently amended its supporting testimony and exhibits, the parties
stipulated that the 90-day period should commence on July 26, 2000 (the
date that Consumers filed its revised testimony and exhibits). The ALJ
accepted the parties' stipulation and established an amended schedule
calling for a Commission order by October 24, 2000.
Evidentiary hearings were conducted on August 14, as well as
September 5, 6, 7, 8, and 13, 2000. The record consists of 924 pages of
transcript and 55 exhibits, 46 of which were received into evidence.
Consumers, the Attorney General, ABATE, Energy Michigan, MEC,
Unicom, MCAAA, the Staff, and Dow filed briefs on September 29, 2000. Reply
briefs were filed by Consumers, the Attorney General, ABATE, Energy
Michigan, MEC, Unicom, MCAAA, the Staff, and the Chamber of Commerce on
September 29, 2000. On October 3, 2000, the Staff filed a motion to strike
the Chamber of Commerce's reply brief. The Commission agreed to read the
record, thus dispensing with the need for a proposal for decision,
exceptions, and replies to exceptions.
III.
OVERVIEW OF CONSUMERS' PROPOSAL
Robert H. Hoffman, a Vice President in the Securitized Products
Group of Morgan Stanley & Co., Incorporated, described the securitization
process and provided an overview of Consumers' proposal. As stated by Mr.
Hoffman, securitization involves the "delinking of the credit quality of
the issued bonds from that of the utility in order to achieve higher credit
ratings and lower financing costs." 3 Tr. 169. In order to accomplish this,
he continued, Consumers proposes to sell the securitization property and
other collateral to a bankruptcy remote SPE in what constitutes a "true
sale" for bankruptcy purposes. Id. This "true sale" sale is designed to
insulate the collateral from the credit risk of the utility.(4) The SPE
will then issue bonds backed by the underlying collateral to various
investors.(5) According to Mr. Hoffman, an indenture trustee (trustee) will
also be appointed to (1) act as a representative on behalf of the
investors, (2) remit payments to these bondholders, and (3) ensure that
their rights are protected in accordance with the terms of the financing
documents. In addition to the bankruptcy remote status of the SPE, he
continued, "credit enhancements, such as capital contributions,
overcollateralization, and a true-up mechanism," will be used to obtain the
desired "AAA" rating for the securitization bonds. 3 Tr. 170.
Mr. Hoffman went on to state that "the securitization property
that is sold to the [SPE] is the right to impose, collect, and receive from
Consumers' wires customers amounts necessary to pay principal and interest
on the securitization bonds, as well as other amounts," including the
ability to receive adjusted amounts of securitization charges through the
periodic use of a true-up mechanism.(6) 3 Tr. 170-71. According to Mr.
Hoffman, the phrase "other amounts" refers to certain "qualified costs
related to the issuance of securitization bonds that will be payable from
the securitization charge collections over the life of the financing
transaction." Id., at 171. These include credit enhancement expenses,
servicing fees, trustee fees, legal fees, administrative fees, rating
agency fees, independent manager fees, and other operating expenses
incurred by the SPE. With regard to Consumers' proposal, these anticipated
fees and expenses (with the exception of credit enhancement expenses) are
set forth on Exhibit CE-18.
When put into effect, Consumers' proposal is designed to establish
non-bypassable securitization charges expressed in cents per kilowatt-hour
(kWh). These securitization charges, which are to be applied and billed to
all (or nearly all) customers taking service over Consumers' system, will
be stated as a separate charge on the bill and each customer's otherwise
applicable rate will be reduced by an equal amount. Thus, the utility
notes, the imposition of the securitization charge will neither increase
nor decrease the total amount of the bill. Consumers further proposes a
system of periodic true-ups intended to ensure that the dedicated revenue
stream from the securitization charge is adequate to pay, in a timely
manner, the principal and interest on the securitization bonds, as well as
all related costs. At least initially, Consumers will act as the servicer
for the SPE. In that capacity, the utility will bill and collect the
securitization charge, perform the periodic true-ups and calculate any
necessary adjustment to that charge, and undertake related activities.
Mr. Hoffman went on to stress that any order approving Consumers'
proposal must contain certain elements. First, he asserted that it should
specifically "reserve to Consumers the sole discretion as to whether and
when to issue securitization bonds." 3 Tr. 197. According to Mr. Hoffman,
this discretion is critical to the utility's achieving the lowest financing
cost possible because receptive market conditions do not always exist.
Likewise, he continued, Consumers should be allowed to seek Commission
authority to refinance outstanding securitization bonds if interest rates
fall sufficiently to allow for the creation of additional savings. Second,
the "finality and irrevocability of the financing order should be affirmed
subject to Act 142 with regard to true-ups," thus assuring bondholders that
their rights and benefits will be upheld. 3 Tr. 201. Third and finally, he
stated that the financing order should reaffirm the state's pledge--as set
forth in Section 10n(2) of Act 142--that it will neither take nor permit
any action that would impair the value of the securitization property
authorized in that order nor, except as permitted by Section 10k(3) of that
act, reduce, alter, or impair the securitization charges.
IV.
DISCUSSION
Act 141 sets forth the general authority and duties of the
Commission with regard to helping convert Michigan's electric industry from
one that is based on intensive regulation to one that relies, in many
aspects, on competition. The range of activities covered by Act 141 runs
from the general (i.e., issuing orders, making reports, holding contested
case proceedings, and protecting ratepayers from unfair business practices)
to the specific (i.e., addressing utilities' requests for stranded cost
recovery, approving annual true-up adjustments for each utility's
transition charge,(7) imposing temporary rate freezes and caps, and
establishing an immediate 5% rate reduction for all residential customers
in Consumers' and Detroit Edison's service territories). In contrast, Act
142 deals with a narrower set of issues. Specifically, it is limited to
establishing the legal framework by which the Commission may authorize the
issuance of securitization bonds.
This raises six significant issues to be resolved by the
Commission. First, it must determine what (if any) amount of Consumers'
proposed qualified costs should be deemed recoverable through
securitization. Second, it must decide whether the utility's proposal
satisfies the statutory requirements of Act 142. Third, it must rule on the
reasonableness of Consumers' proposals regarding the use to which all
securitization-related savings will be put. Fourth, it must decide whether
the various amortization, accounting, and ratemaking approvals requested by
the utility to effectuate the proposed securitization of its qualified
costs are reasonable and should be approved. Fifth, it needs to determine
whether the utility's proposed securitization and tax charges (namely, the
fees Consumers seeks to impose on customers to fund repayment of the
securitization bonds and any related tax liability, respectively) are
reasonable both in amount and form. Sixth, it must rule on whether the
utility's proposed securitization charge true-up mechanism is reasonable
and should be approved.
These issues will be addressed seriatim.
Qualified Costs
Key to the issuance of a financing order like that requested by
Consumers is the Commission's determination of the amount of qualified
costs to be recovered. Qualified costs are defined in Section 10h(g) of Act
142 as follows:
"Qualified costs" means an electric utility's regulatory assets as
determined by the commission, adjusted by the applicable portion of related
investment tax credits, plus any costs that the commission determines that
the electric utility would be unlikely to collect in a competitive market,
including, but not limited to, retail open access implementation costs and
the costs of a commission approved restructuring, buyout or buy-down of a
power purchase contract, together with the costs of issuing, supporting,
and servicing securitization bonds and any costs of retiring and refunding
the electric utility's existing debt and equity securities in connection
with the issuance of securitization bonds. Qualified costs include taxes
related to the recovery of securitization charges.
MCL 460.10h(g); MSA 22.13(10h)(g).
According to Dennis DaPra, Consumers' Vice President and
Controller, the qualified costs that the utility seeks to securitize fall
into two classes. The first (with a remaining book value of approximately
$714,499,000) consists of six regulatory assets, the largest of which
relates to Consumers' Palisades Nuclear Generating Plant (Palisades), and
one regulatory liability. The second (totaling $12,500,000) reflects the
estimated initial cost of preparing, underwriting, registering, and issuing
the securitization bonds, along with the estimated cost of retiring and
refunding Consumers' existing debt and equity securities. As shown on
Exhibit CE-7, these costs can be broken down as follows:
Palisades Capital Costs (Net of Depreciation Reserve) $405,455,000
Income Taxes Due From Customers 198,477,000
Post-Retirement Benefits Other Than Pensions 84,168,000
Decontamination and Decommissioning Reserve 15,543,000
Ludington Pumped Storage Plant Settlement 7,716,000
Unamortized Loss on Reacquired Debt 5,180,000
Clean Air Act Sulfur Dioxide Allowances (2,041,000)
SUBTOTAL $714,499,000
------------
Initial Securitization Issuance Costs (estimated) 8,500,000
Debt and Equity Retirement Costs (estimated) 4,000,000
TOTAL $726,999,000
------------
Mr. DaPra went on to state that because the resulting amount
reflects the "total remaining book value" of the regulatory assets and
liabilities that Consumers seeks to recover through securitization, the
utility "is proposing to reduce this amount by the tax effect, i.e., 35%,
and to securitize the remainder, $472,549,237." 2 Tr. 71.
In addition to the initial securitization issuance costs and the
debt and equity retirement costs included in that $472,549,237, Consumers
notes that other qualified costs will be incurred throughout the life of
the securitization bonds. These ongoing costs include an annual servicing
fee of up to 0.25% of the principal amount of all outstanding
securitization bonds if Consumers serves as the servicer or up to 1.5% of
that amount if some other entity is designated to be the servicer. They
also include, among other things, the payment of all operating expenses
incurred by the SPE and contributions to the overcollateralization
subaccount. The utility estimates that although these ongoing expenses will
total approximately $1.7 million per year at the onset of securitization,
the annual total will decline each year as ratepayers pay down the
principal amount owed on the securitization bonds. See, Exhibit CE-8,
column (h). Consumers seeks to recover these qualified costs through its
securitization charge, but not as a part of the amount to be securitized.
Specifically, it proposes that "the actual amount of ongoing costs . . . be
recovered through the securitization charge by means of operation of the
true-up mechanism for which Consumers is seeking approval in the financing
order." Consumers' initial brief, p. 15.
Gerald F. Geml, Supervisor of the Auditing Section within the
Commission's Electric Division, testified that he "performed a review of
the books and records of the company to verify the amounts the company
requested for securitization." 4 Tr. 565. Mr. Geml further indicated that
he reviewed prior orders issued by the Federal Energy Regulatory Commission
and this Commission to ensure that the ratemaking treatment underlying
Consumers' proposed level of qualified cost securitization was reasonable
and consistent with those orders. Based on his review, the Staff supports
the amount of qualified costs for which Consumers seeks securitization,
with one adjustment. Specifically, the Staff notes that Consumers' gross
figure of $726,999,000 did not recognize the effect of $6,088,000 in
investment tax credits related to Palisades. See, Exhibit S-41. Thus,
consistent with the definition of qualified costs set forth in Section
10h(g) of Act 142 (which specifies that a utility's regulatory assets must
be "adjusted by the applicable portion of related investment tax credits"),
the Staff recommended reducing the utility's gross figure for qualified
costs to $720,910,000 and its after-tax figure to $468,592,000. Id., lines
12 and 14.
Consumers, as specifically expressed in footnote 2 on page 11 of
its initial brief, agrees that the Staff's recommended adjustment is proper
and now requests Commission approval to securitize qualified costs in the
amount of $468,592,000.
The only parties opposing that request, ABATE and the Attorney
General, contend that none of the $405,455,000 in booked capital costs from
Palisades can be included in the computation of qualified costs. These
parties offer two primary reasons in support of that contention. First,
they assert that Palisades has yet to be designated as a regulatory asset,
either directly or indirectly, by Commission order. Second, ABATE claims,
"absent from this proceeding is any request by Consumers that Palisades be
converted to a regulatory asset by the Commission, or that the Commission
make any such determination." ABATE's reply brief, p. 11. Thus, these two
parties contend, all costs relating to Palisades must be excluded from the
Commission's determination regarding the amount of qualified costs to be
securitized in this case.
In addressing this issue, the Commission notes that the second
argument offered by these parties--to the effect that Consumers has yet to
request that Palisades be deemed a regulatory asset--is incorrect.
Notwithstanding ABATE's claims to the contrary, Consumers has specifically
asked that the Commission "take any and all necessary regulatory steps to
confirm that Palisades is a regulatory asset [in] accordance with the
orders in Case No. U-11290 et al." Consumers' reply brief, p. 32. Moreover,
because nothing in Act 142 precludes contemporaneously ruling on (1)
whether something is a regulatory asset and (2) whether, and to what
extent, that regulatory asset should be included in the determination of
qualified costs, the Commission finds unpersuasive the first argument
offered by ABATE and the Attorney General.
Thus, the salient issue is whether Consumers' investment in
Palisades constitutes a regulatory asset. The Commission concludes that it
does. This conclusion is based on the following two factors.
First, the Commission has consistently expressed its commitment to
allowing recovery of nuclear capital costs as part of its ROA program. This
began with the June 5, 1997 order in Case No. U-11290, which specifically
listed "capital costs of nuclear plants" as one of the five categories of
recoverable stranded costs (June 5, 1997 order, pp. 7 and 12), and
continued throughout the issuance of subsequent restructuring orders. The
rationale for that treatment was, and continues to be, that because
Michigan's electric utilities "made significant investments in order to
meet their obligations" to serve customers residing in this state, they
should be given a reasonable opportunity to recover that investment. Id.,
at 11.
Second, when faced with a nearly identical situation involving
Detroit Edison's Fermi 2 Nuclear Generating Plant (Fermi), the Commission
granted that utility's request to remove Fermi from plant in service and to
book it as a regulatory asset. See, the Commission's December 28, 1998
order in Case No. U-11726, pp. 17-22. In that case, as here, (1) a
significant portion of the utility's Commission-approved investment in the
plant remained on the books, (2) there was insufficient time to recover
that investment before all of the utility's customers would become eligible
for ROA, and (3) the plant in question, being a nuclear plant, was an
unlikely candidate for sale to another entity at or near its existing net
book value.
The Commission therefore finds that its repeated commitment to the
full recovery of nuclear capital costs that were expended to serve Michigan
residents, when coupled with the similarities between Fermi and Palisades
(at least from a cost recovery standpoint), justify granting Consumers'
request to specifically deem Palisades a regulatory asset. However, the
Commission likewise finds that two of the conditions imposed on Detroit
Edison in Case No. U-11726 should be applied to Consumers in this case.
Specifically, should Consumers elect to sell Palisades, any profit
arising from the plant's treatment as a regulatory asset designated for
securitization must be passed on to the utility's customers. As noted by
Brian L. Ballinger, a senior economist in the Commission's Licensing and
Enforcement Division, doing otherwise would place customers at risk of
paying twice for the capital costs of the plant (once through the
non-bypassable securitization charge and again through any power purchase
contract necessitated by the plant's sale). See, 4 Tr. 584. Thus, if
Consumers sells Palisades for more than its book value following the
plant's treatment as a regulatory asset, or if the utility itself is
purchased, Consumers (or its successor utility) shall immediately initiate
a proceeding designed to compute and promptly return to the utility's
ratepayers all economic benefit arising from Palisades' treatment as a
regulatory asset. Similarly, if Consumers (or any successor utility) seeks
to abandon Palisades subsequent to its being treated as a regulatory asset,
the utility must first initiate a contested case proceeding to evaluate the
effect of the proposed abandonment on its customers.
In addition to her arguments regarding Palisades, the Attorney
General objects to the proposal to include, as part of the utility's $1.7
million per year in ongoing costs, the potential 0.25% fee that would be
paid to Consumers if it operates as the servicer for the bonds.(8)
According to the Attorney General's witness, William A. Peloquin, that fee
should not be considered a qualified cost of securitization. Rather, Mr.
Peloquin contends that it "represents Consumers' cost for billing,
collecting, and remitting ratepayer funds" to the SPE and that the
utility's tariffs already recover these costs in the form of "customer
accounts expense." 5 Tr. 743. Mr. Peloquin further notes that, because it
will be hired by Consumers, the SPE will lack adequate incentive to
challenge the amount of that servicing fee throughout the respective lives
of the securitization bonds.
The Commission finds that the Attorney General's objection to the
collection of these ongoing securitization expenses should be rejected.
Although it is true that Consumers' existing tariffs provide for the
recovery of customer accounts expenses (i.e., those related to metering,
billing, and payment collection), the onset of securitization will impose
additional duties on the utility if it also operates as the servicer for
the bonds. Specifically, Consumers will be required to separate from all of
its customers' payments, and forward to the SPE, the amounts received from
each customer that pertain to the repayment of the securitization bonds. It
is only logical that the performance of those additional duties will give
rise to increased costs, a fact that appears to have been recognized by the
Legislature in its decision to specifically include "the costs of . . .
servicing securitization bonds" within the definition of qualified costs.
Section 10h(g) of Act 142. Moreover, testimony provided by Mr. Hoffman
indicates that (1) the amount of the annual servicing fee proposed by the
utility is consistent with customary commercial levels, and (2) rating
agencies will be unwilling to rate Consumers' securitization bonds unless
they can be convinced that the servicer will be compensated at such a
commercially acceptable level. See, 3 Tr. 209-10. Therefore, the Commission
concludes that Consumers' proposal regarding recovery of all ongoing costs
of securitization is reasonable and should be approved.
Due to the findings expressed above, Palisades' capital costs (net
of the plant's depreciation reserve and all related income tax credits) can
properly be included in the computation of qualified costs. The Commission
therefore concludes that the total after-tax amount to be securitized in
this proceeding is $468,592,000.(9) The Commission further concludes that
it should approve Consumers' request to recover through its securitization
charge (but not as a part of the amount to be securitized) the ongoing
expenses of securitization, including the maximum 0.25% servicing fee paid
to Consumers or the maximum 1.5% fee paid to a third-party servicer.
Satisfaction of Statutory Criteria
Act 142 establishes several criteria that must be satisfied before
the Commission is required to grant a utility's request for authority to
issue securitization bonds. These criteria are set forth in Sections 10i(1)
and 10i(2) of Act 142, which read as follows:
(1) Upon the application of an electric utility, if the commission finds
that the net present value of the revenues to be collected under the
financing order is less than the amount that would be recovered over the
remaining life of the qualified costs using conventional financing methods
and that the financing order is consistent the standards in subsection (2),
the commission shall issue a financing order to allow the utility to
recover qualified costs.
(2) In a financing order, the commission shall ensure all of the following:
(a) That the proceeds of the securitization bonds are used
solely for the purposes of the refinancing or retirement
of debt or equity.
(b) That securitization provides tangible and quantifiable
benefits to customers of the electric utility.
(c) That the expected structuring and expected pricing of the
securitization bonds will result in the lowest
securitization charges consistent with market conditions
and the terms of the financing order.
(d) That the amount securitized does not exceed the net
present value of the revenue requirement over the life of
the proposed securitization bonds associated with the
qualified costs sought to be securitized.
MCL 460.10i(1) and (2); MCL 22.13(10i)(1) and (2).
Consumers' witnesses offered substantial testimony and exhibits
describing the manner in which they believed that the utility's
securitization proposal satisfied these criteria. For the sake of
consistency, these criteria will be referred to as "statutory tests," as
they are in the parties' briefs and reply briefs.
a. Section 10i(1)
Francis A. Ernst, Jr., Consumers' Executive Director of Rates and
Electric SBU Planning, described how the utility's proposal satisfies the
statutory test set forth in Section 10i(1) of Act 142. Mr. Ernst began by
examining the regulatory assets and liabilities that will be removed from
rates due to securitization, and then computed the net present value of the
annual revenue requirement that would be necessary for their rate recovery
pursuant to conventional financing methods. As reflected on pages 1 and 2
of Exhibit CE-6, this produced a figure of $619,746,000. He then computed
the net present value of the "revenue requirement associated with the
securitized bond payments" that ratepayers would make if securitization was
undertaken pursuant to a financing order along the lines proposed by the
utility. 3 Tr. 257. This resulted in a figure of $538,587,000. Exhibit
CE-6, p. 1. Consumers therefore asserts that because Mr. Ernst's analysis
shows that the present value of the revenues to be collected under the
financing order is less than the net present value of those that would be
recovered under conventional financing, its proposal satisfies the
statutory test set forth in Section 10i(1) of Act 142.
The Staff concurs in Consumers' assessment. According to the
Staff, one of its witnesses, Mr. Ballinger, performed a similar analysis
(set forth on Exhibit S-42) and reached the same conclusion as Mr. Ernst.
Namely, Mr. Ballinger found that the net present value of the revenue
requirement arising under Consumers' securitization proposal would be
significantly less than that arising from conventional financing over the
remaining lives of the qualified costs. See, 4 Tr. 586-89.
The only party to challenge this assessment is the Attorney
General, who argues that both Consumers and the Staff were wrong to use
analyses based on revenue requirements. According to the second of her two
witnesses, Charles W. King, the more appropriate analysis would be to
compare the actual cash flows that Consumers would collect under a
financing order with those that would be recovered under conventional
financing. See, 5 Tr. 671. Because Consumers' plan fails the Section 10i(1)
test if actual cash flows are used, she asserts, the utility's request for
securitization should be rejected.
The Commission does not find the Attorney General's assertion
persuasive. As noted by Consumers, and conceded by Mr. King (5 Tr. 706), a
utility's cash flows can fluctuate greatly from one period to another. This
is due, among other things, to weather-related changes in sales, the
movement of customers from one rate class to another, and the migration of
customers into or out of the utility's service territory. In contrast, a
utility's revenue requirements are relatively stable from one period to the
next. The Commission therefore finds the analyses relied upon by Consumers'
and the Staff are superior to the analysis developed by Mr. King and relied
upon by the Attorney General. Because the former analyses show the net
present value of the revenue requirement resulting from securitization to
be significantly less than that arising from conventional financing, the
Commission concludes that the statutory test set forth in Section 10i(1) is
satisfied.
b. Sections 10i(2)(a) and 10i(2)(c)
As noted above, Section 10i(2)(a) of Act 142 requires that the
proceeds derived from the sale of Consumers' securitization bonds be used
solely for the purposes of refinancing or retiring the utility's existing
debt or equity. Moreover, Section 10i(2)(c) requires that the
securitization bonds be structured and priced in a manner that will result
in the lowest securitization charges possible. Consumers asserts that,
based on information provided by two of its witnesses, both of these
statutory tests should be deemed satisfied.
Consumers cites testimony offered by John J. Murphy, the utility's
Director of Corporate Finance, as showing that appropriate use will be made
of all securitization bond proceeds, as demanded by Section 10i(2)(a).
According to Mr. Murphy, the utility will utilize those proceeds "solely to
pay down Company debt and equity." 2 Tr. 113. He went on to state that, in
deciding precisely when and in what proportion to refinance Consumers'
current debt and equity, the utility will consider, among other factors:
[T]he amount of equity to retire while keeping sufficient equity
in its capital structure to maintain or improve its credit quality
and credit ratings. It will also need to consider the cost of each
of its debt securities outstanding at the time that it receives
the proceeds from the sale of the securitization property . . .,
the mandatory cost of retiring each of those existing securities,
market conditions which might impact tender offer opportunities
for existing securities, and near-term new capital requirements,
including environmental capital expenditure requirements.
Id. Mr. Murphy concluded by stating that Consumers would, within
12 months following -- its receipt of proceeds from the sale of its
securitization bonds, file a report specifying the principal amount of
those bonds, the initial securitization issuance costs, all debt and equity
retirement costs incurred, and the respective amounts of debt and equity
that were retired. See, 2 Tr. 114.
With regard to satisfying the requirements of Section 10i(2)(c),
Consumers relies on a detailed description of the securitization bond
marketing plan provided by Mr. Hoffman. Specifically, Mr. Hoffman indicated
that, among other things, the following steps would be used to minimize
Consumers' securitization charges: (1) All securitization bonds will be
rated by at least two nationally-recognized rating agencies. (2) No legal
maturity of any series or class of securitization bonds will exceed 15
years from the date of issuance, and all tranches(10) will have expected
maturities of less than 15 years. (3) Several tranches of bonds will be
developed to present offerings across a wide spectrum of potential demand.
(4) An extensive investor education program will be provided by the utility
and the bonds' underwriters. (5) A minimum of two experienced underwriters
will be used to market the bonds, each having wide experience in the
marketing of asset-backed securities and specific experience in the
marketing of stranded cost securitization bonds. (6) The underwriters,
exercising professional judgement based on the number of orders received
and with Consumers' express concurrence, may adjust the bond prices and
coupon rates as necessary to ensure maximum distribution of the bonds at
the lowest possible bond yields. (7) The underwriters must offer to
purchase the bonds for their own portfolios at specified prices and coupon
rates in the event that one or more tranches of Consumers' securitization
bonds generates insufficient investor orders. See, 2 Tr. 186-88.
The Staff agrees with Consumers' assessment that the utility's
proposal, as explained by Messrs. Murphy and Hoffman, satisfies the
requirements of Sections 10i(2)(a) and 10i(2)(c). However, to ensure that
Consumers adheres to all prudent and efficient practices concerning the
actual issuance of securitization bonds and the use of those bonds'
proceeds to reduce the utility's overall capital costs, Staff witness
Ballinger recommended requiring Consumers to implement a more stringent
reporting schedule than the one proposed by Mr. Murphy. Specifically, Mr.
Ballinger testified that Consumers should file its initial report regarding
the utility's use of its securitization bond proceeds "within 30 days of
the bonds' issuance . . . [and] each quarter thereafter demonstrating that
the proceeds have been used for the intended purposes." 4 Tr. 592. In
addition to Mr. Ballinger's recommendation, the Staff requests (1) that all
reports regarding the use of the bond proceeds should detail the use that
Consumers' parent company, CMS Energy Company (CMS), makes of those
proceeds, (2) that Consumers be required to file a report immediately
following any refinancing of its securitization bonds due to a decline in
interest rates, and (3) that the Commission initiate a hearing in those
situations to determine the appropriate use of all cost savings arising
from such refinancing.
For its part, Unicom asserts that Consumers' securitization
proposal generally satisfies all of the statutory tests set forth in Act
142. Nevertheless, Unicom raises one issue with regard to Section
10i(2)(c). Noting that Consumers seeks a "securitization charge recovery
period lasting fourteen years, rather than the fifteen years allowed by
statute," (Exhibit I-24, p. 1) it suggests that the Commission require the
utility to collect its securitization charges over 15 years.
In contrast to Consumers, the Staff, and Unicom, the Attorney
General contends that Section 10i(2)(a) has not been satisfied. This is
based on the Attorney General's belief that securitization bond proceeds
could be used to repurchase Consumers' equity that is held by CMS, instead
of equity held by public investors. As a result, she continues, those
proceeds might be used to "finance unregulated ventures for potential
anti-competitive purposes" by funneling them to "unregulated entities
through the subterfuge of the utility's holding company structure."
Attorney General's initial brief, pp. 16-17.
Notwithstanding the Attorney General's assertions to the contrary,
the Commission finds that Consumers' securitization proposal satisfies
Sections 10i(2)(a) and 10i(2)(c) of Act 142. Through the testimony provided
by Mr. Murphy, Consumers specifically and unequivocally states that all of
the proceeds from the sale of the securitization bonds will be used to
refund or retire Consumers' existing debt and equity, thus reducing the
utility's capital costs. That is sufficient to meet the requirements
imposed by Section 10i(2)(a).(11) Similarly, the detailed marketing plan
developed by the utility and described by Mr. Hoffman shows that Consumers
plans to take all reasonable steps to achieve the lowest possible
securitization charges to repay the bonds. Thus, the utility's proposal
satisfies Section 10i(2)(c).
Nevertheless, the Commission agrees with the Staff that certain
changes should be made to Consumers' proposal as it relates to these
issues. First, the utility should revise its reporting schedule in the
manner recommended by Mr. Ballinger. Thus, Consumers must file its first
report regarding its use of securitization bond proceeds within 30 days of
the bonds' initial issuance (or any portion of their issuance), and
quarterly from that date until all bond proceeds have been disbursed.
Second, the reports should be structured to also include information
detailing CMS's use of those proceeds. Third, in the event that a decline
in interest rates leads Consumers to refinance any of its securitization
bonds, the utility should file--within 7 days of that refinancing--a report
notifying the Commission of that fact. Following completion of the
refinancing and receipt of the report, the Commission will initiate a
hearing to determine the appropriate use of all cost savings arising from
that refinancing. Fourth, to ensure continued adherence to the requirements
set forth in Section 10i(2)(c) of Act 142, Consumers should file--again,
within 7 days--a report (1) notifying the Commission of any reduction in
applicable interest rates or other charges in the bond market that might
make refinancing economically advantageous, and (2) advising the Commission
of what, if any, steps the utility intends to take in light of that
reduction or change.
Finally, the Commission finds that it should decline Unicom's
proposal to make the utility extend its securitization charge recovery
period from its proposed 14 years to 15 years. As noted by the Staff, the
statutory language relied upon by Unicom is permissive. Thus, rather than
mandating that recovery be spread over 15 years, Act 142 merely authorizes
a utility to request repayment over any period not to exceed 15 years.
c. Section 10i(2)(b)
Section 10i(2)(b) demands that Consumers' securitization proposal
be shown to provide tangible and quantifiable benefits to the utility's
customers. In satisfaction of this requirement, Consumers cites Exhibit
CE-5, a chart developed by Mr. Ernst to show the effect of securitizing
approximately $470 million in after-tax qualified costs (as Consumers
proposes to do in this case). According to that exhibit, the utility would
use proceeds derived from the sale of its securitization bonds to retire
over $135 million of its most expensive short-term debt and approximately
$325 million of its common equity. The chart goes on to indicate that those
reductions will serve to reduce Consumers' weighted average cost of capital
from its current level of 10.96% to a post-securitization level of 10.48%.
Exhibit CE-5, lines 13 and 30.
According to Mr. Ernst, that reduction of 0.48% in the utility's
weighted cost of capital "demonstrates that the Company's issuance of the
securitization bonds meets the test described in ss.10i(2)(b)." 3 Tr. 256.
Specifically, he continued, the utility's "cost of capital will be
decreased and, under traditional . . . ratemaking principles, will be
flowed through to electric customers in the form of reduced electric rates,
all other things being equal." Id. Based on this evidence, Consumers
asserts, the Commission should find this statutory test to be satisfied.
The Staff agrees with that assertion and joins Consumers in
requesting that the Commission find that Section 10i(2)(b) has been
satisfied. According to the Staff's witness on this issue, Mr. Ballinger,
"satisfaction of this criteria is achieved as the Company's capital cost
rate declines." 4 Tr. 593. He went on to testify that, "to the degree that
this permits a rate reduction, there would indeed appear to be a tangible
benefit." Id.
In contrast, the Attorney General and ABATE contend, among other
things, that the benefits claimed as a result of securitization are
speculative and, as a result, can be deemed neither tangible nor
quantifiable. These parties further contend that, even assuming the
existence of tangible benefits due to securitization, those benefits cannot
be passed on to Consumers' customers because (according to Act 141) the
utility's rates are frozen until 2004.
The Commission disagrees with the Attorney General and ABATE, and
finds adequate support in the record for concluding that the statutory test
set forth in Section 10i(2)(b) is satisfied. The stated goal of
securitization, and one that several witnesses--including Mr. Hoffman--view
as eminently achievable in this case, is to issue bonds with a AAA rating
and a correspondingly low interest rate. As reflected on numerous exhibits,
the expected interest rate for the utility's securitization bonds (which
Consumers predicts to be 7.73%) will be significantly lower than the
utility's authorized rate of return on common equity (which presently
stands at 12.25%). Due to this significant differential, it is clear that
by using even a portion of its securitization bond proceeds to retire
common equity, Consumers' proposal will produce quantifiable and tangible
benefits.
Moreover, a full reading of Act 141 indicates that,
notwithstanding the imposition of the temporary rate freeze referred to by
the Attorney General and ABATE, benefits derived from securitization can be
immediately passed on to Consumers' ratepayers. Specifically, although
Section 10d(1) purports to freeze Consumers' retail rates at their May 1,
2000 level until the close of 2003, that provision concludes by stating
"unless otherwise reduced by the commission under subsection (4)." MCL
460.10d(1); MSA 22.13(10d)(1). The "subsection (4)" referred to above
states, in pertinent part, that:
(4) If the commission authorizes an electric utility to use
securitization financing under section 10i, any savings resulting from
securitization shall be used to reduce retail electric rates from those
authorized or in effect as of May 1, 2000 as required under subsection (1).
MCL 460.10d(4); MSA 22.13(10d)(4). Thus, because today's order
grants Consumers' request to securitize up to $468,592,000 in after-tax
qualified costs and directs the utility to use its securitization cost
savings to implement additional rate reductions (beyond the 5% residential
rate cut imposed by the June 5, 2000 order in Case No. U-12464),(12) the
Commission concludes that the requirements of Section 10i(2)(b) have been
satisfied.
d. Section 10i(2)(d)
As noted above, the last of these statutory tests requires the
Commission to find that the amount securitized does not exceed the net
present value of the revenue requirement for those qualified costs over the
life of the securitization bonds. Based on computations performed by Mr.
Ernst, Consumers concludes that it met this test. As set forth on Exhibit
CE-6, Mr. Ernst computed the net present value of the 14-year revenue
requirements to be $639.5 million when discounted at 7.73%, and $577.4
million when discounted at 10.34%. Because both of these net present value
figures exceed the utility's proposed after-tax securitization bond issue
of $472.5 million, Mr. Ernst stated that the statutory test spelled out in
Section 10(2)(d) of Act 142 has been satisfied. See, 2 Tr. 257.
The Staff agrees with Consumers' conclusion. However, its analysis
differs slightly from that performed by the utility. Specifically, Staff
witness Ballinger stated that neither of the discount rates used by Mr.
Ernst was entirely appropriate for purposes of this statutory test.
Instead, he suggested using a discount rate of 10.63%, which results in a
net present value figure of $549.4 million. Exhibit S-43. Nevertheless,
because this figure is still well in excess of the proposed $472.5 million
bond issue, the Staff asserts that the requirements of Section 10i(2)(d)
have been satisfied.
The Attorney General challenges the overall assessment reached by
both Consumers and the Staff, and contends that the utility's proposal
fails to pass this statutory test. The Attorney General begins by asserting
(as did the Staff) that the appropriate discount rate for use in this test
is the utility's composite cost of capital, rather than either of the
reduced discount rates relied on by Mr. Ernst. More importantly, she argues
that Consumers' calculation "grossly understates the amount actually being
securitized." Attorney General's initial brief, p. 23. According to one of
her witnesses, Mr. Peloquin, this is because the utility incorrectly
reduced the gross amount of its qualified costs ($727 million) by $254.5
million in deferred income taxes when establishing the amount of its
proposed $472.5 million bond issue. The Attorney General claims that once
this mistake is corrected, thus restoring the amount to be securitized to
its original level of $727 million, none of the net present value figures
developed by Consumers or the Staff exceeds that level and the requirements
of Section 10i(2)(d) cannot be met.
The Commission finds that the Attorney General's challenge, at
least as it pertains to the $254.5 million adjustment to the gross amount
of Consumers' qualified costs, is not well taken. As pointed out in the
section of this order dealing with the computation of Consumers' qualified
costs, supra, the difference between the $727 million gross amount of those
costs and the $472.5 million face value of the proposed securitization
bonds corresponds solely to the income tax effect arising from Consumers'
future collection of securitization charges. It has nothing to do with
deferred income taxes currently on Consumers' books. This is confirmed by
the fact that the computation of the $727 million gross amount of the
utility's proposed qualified costs specifically accounts for $198.5 million
in deferred income taxes. Thus, both the utility and the Staff were correct
to compare their respective net present value figures to the $472.5 million
after-tax figure. Moreover, because each of those net present value figures
greatly exceeds $472.5 million, the Commission concludes that Section
10i(2)(d) has also been satisfied.
Based on the findings set forth above, Consumers' proposal has met
each of the criteria established by Section 10i(1) and 10i(2) of Act 142.
The Commission therefore concludes that the utility's request for authority
to issue securitization bonds should be granted.
Proposed Use of Securitization Cost Savings
The next issue to be addressed is the utility's proposed use of
its estimated cost savings from securitization. Consumers' position on this
issue was described by Mr. Ernst and set forth on Exhibit CE-7.
According to Mr. Ernst, the issuance of securitization bonds along
the lines of the utility's proposal would result in an annual cost savings
of approximately $58.7 million. See, 3 Tr. 259. He arrived at this figure
by subtracting the total annualized revenue requirement associated with the
qualified costs that will be securitized pursuant to this order ($75.8
million) from the annual levelized revenue requirements that would have
arisen from those qualified costs in the absence of securitization ($134.5
million). Id. Mr. Ernst went on to note that, as reflected on Line D of
Exhibit CE-7, approximately $49.8 million of that $58.7 million annual cost
savings will go toward offsetting the 5% residential rate reduction
required by Section 10d(1) of Act 141 and implemented pursuant to the
Commission's June 5, 2000 order in Case No. U-12464.
None of the parties dispute the reasonableness of Consumers'
estimated annual cost savings.(13) Likewise, none of them object to the
utility's plan to use a significant portion of those savings to underwrite
Consumers' previously initiated residential rate cut. Nevertheless,
significant disagreement exists regarding what use should be made of the
remaining $8.9 million per year of securitization-related savings.
For example, Consumers proposes applying the remaining annual
savings to "the reduction of the other qualified costs shown on lines F-1
through F-5" of Exhibit CE-7. Id. These costs include, among other things,
approximately $32.9 million in "revenue lost due to the difference in the
timing" between the implementation of the 5% residential rate cut (which
took effect on June 5, 2000) and the issuance of securitization bonds
(which Consumers assumes will occur on approximately January 1, 2001).
Consumers' initial brief, p. 75. The utility cites Section 10d of Act 141
in support of its proposal to recover that lost revenue. According to
Consumers, that section clearly indicates that all revenue reductions
resulting from the 5% residential rate cut must be recovered through
securitization. This is only logical, the utility asserts, because Act 142
makes implementation of the 5% residential rate reduction contingent upon
securitization. Moreover, Consumers notes that the total dollar value of
the year 2000 revenue reduction and the other components of what it refers
to as "Section F Qualified Costs" vastly exceeds the remaining $8.9 million
in estimated securitization-related savings. Consumers' initial brief, p.
73. The utility therefore requests that the Commission give it "reasonable
discretion in applying what may be a limited amount of excess
securitization savings" to those costs. Id.
In contrast, the MEC and MCAAA contend that the Commission is
statutorily obligated to use the estimated $8.9 million in annual excess
savings to provide the funding necessary to establish and operate the
low-income and energy efficiency fund (LI/EE fund) described in Section
10d(6) of Act 141. According to these parties, "a common sense
interpretation" of Act 141 requires that all excess savings above the 5%
residential rate reduction mandated in Section 10d(1) must go, "as a matter
of priority," to the LI/EE fund. MEC's initial brief, p. 4. They therefore
propose that the Commission specifically order Consumers to file an
application to establish such a fund.
Several parties object to these proposals. For example, Unicom,
ABATE, and the Staff each contend that Consumers' proposal conflicts with
both the wording and the intent of Act 141. According to Unicom, there is
nothing in the statute "that would justify the Commission in leaving the
application of such amounts to Consumers' 'reasonable discretion'."
Unicom's reply brief, p. 3. Rather, Unicom continues, the application of
excess securitization savings is a matter governed in very specific terms
under Sections 10d(5) and 10d(6) of Act 141. As for ABATE, it points out
that Consumers' request is illogical. According to ABATE, any use of
securitization-related savings to fund the 5% residential rate cut can
occur (if at all) only after the securitization bonds have been sold. This
is because, ABATE continues, "there is no benefit to customers until such
time as the bonds have been issued and the savings generated." ABATE's
reply brief, p. 16. The Staff agrees with ABATE, noting that Consumers'
proposal would require "the retroactive allocation of prospective savings,
which the Commission cannot legally effectuate." Staff's reply brief, p.
10.
Likewise, Consumers objects to the proposal offered by the MEC and
MCAAA. According to the utility, that proposal is based on the premise that
Act 141 mandates the assignment to the LI/EE fund of all securitization
savings beyond those used to achieve the 5% residential rate reduction.
That premise, Consumers contends, directly conflicts with the clear
language found in Section 10d of Act 141. The utility therefore argues that
the proposal developed by the MEC and MCAAA must be rejected.
As can be seen from these arguments, the resolution of this issue
depends on the wording of Section 10d. This section states, in pertinent
part:
(1) Unless otherwise reduced by the commission under subsection
(4), the commission shall establish the residential rates for each utility
with 1,000,000 or more retail customers in this state as of May 1, 2000
that will result in a 5% rate reduction from the rates that were authorized
or in effect on May 1, 2000.
* * *
(4) If the commission authorizes an electric utility to use
securitization financing under section 10i, any savings resulting from
securitization shall be used to reduce retail electric rates from those
authorized or in effect as of May 1, 2000 as required under subsection (1).
(5) Except for savings assigned to the low-income and energy
efficiency fund pursuant to subsection (6), securitization savings greater
than those used to achieve the 5% rate reduction under subsection (1) shall
be allocated by the com ission to further rate reductions or to reduce the
level of any charges authorized by the commission to recover an electric
utility's stranded costs.
* * *
(6) If securitization savings exceed the amount needed to achieve
a 5% rate reduction for all customers, then, for a period of 6 years, 100%
of the excess savings, up to 2% of the electric utility's commercial and
industrial revenues, shall be allocated to the low-income and energy
efficiency fund . . ..
MCL 460.10d; MSA 22.13(10d).
Based on its reading of this statutory language, the Commission
finds that it must reject Consumers' proposal regarding the use of excess
securitization savings, as well as the proposal submitted by the MEC and
MCAAA.
Notwithstanding Consumers' assertions to the contrary, Act 142 did
not make implementation of the 5% residential rate reduction contingent on
the utility's issuance of securitization bonds. Rather, as can be derived
from the Legislature's use of the word "shall" in Section 10d(1), each
Michigan electric utility having over 1 million customers--namely,
Consumers and Detroit Edison--was mandatorily required to reduce by 5% the
residential rates that were authorized or in effect as of May 1, 2000. In
contrast, all decisions regarding when (or even whether) to undertake
securitization were left to the discretion of each utility's management.
Thus, the so-called "timing difference" for which Consumers seeks
compensation never actually arose.
Similarly, the MEC and MCAAA are mistaken in their belief that Act
142 requires a mandatory contribution to the LI/EE fund at this time. By
its own terms, the mandatory contribution provision set forth in Section
10d(6) does not take effect until "securitization savings exceed the amount
needed to achieve a 5% rate reduction for all customers," rather than just
those customers taking service on the utility's residential rates. MCL
460.10d(6); MSA 22.13 (10d)(6). [Emphasis added.] Thus, because several
classes of customers on this utility's system have not received rate cuts
of at least 5%, the MEC and MCAAA cannot yet lay claim to the excess
savings produced by Consumers' proposed securitization.
Having rejected these proposals as being inconsistent with Section
10d of Act 142, the Commission must now decide how the $8.9 million in
excess securitization savings can best be used. It finds that the key to
this determination resides in the second clause of Section 10d(5), which
states that securitization savings in excess of those used to achieve the
5% residential rate reduction "shall be allocated by the commission to
further rate reductions or to reduce the level of any charges authorized by
the commission to recover an electric utility's stranded costs." MCL
460.10d(5); MSA 22.13(10d)(5).
Based on that language, the Commission concludes that the most
appropriate use for Consumers' excess securitization savings is to (1)
apply 50% of the estimated excess--approximately $4.5 million--to a
reduction in the distribution charge of each non-residential customer on
Consumers' electric system, and (2) designate the remaining 50% for use in
reducing the transition charge developed in the context of Consumers'
stranded cost recovery true-up proceedings and charged to the utility's ROA
customers. Unlike the mandatory 5% residential rate cut, which had
immediate effect, implementation of the rate reductions arising from excess
securitization savings should be held in abeyance pending Consumers'
initial receipt of securitization bond proceeds and shall commence
contemporaneously with the initiation of the utility's securitization and
tax charges.
Proposed Amortization, Accounting, and Ratemaking Approvals
According to its lead witness, Mr. DaPra, Consumers' request for a
financing order specifically seeks authorization to establish an
amortization schedule "on the same basis as the recovery of the principal
amounts of the securitized qualified costs." 2 Tr. 69. In addition, the
utility claims that it seeks two sets of proposed accounting and ratemaking
authorizations, each covering a separate aspect of securitization.
The first set of these authorizations, described on pages 11 and
12 of Mr. DaPra's direct testimony (2 Tr. 76-77) and illustrated on Exhibit
CE-2, concerns the authority necessary to record on Consumers' books all
financial transactions necessary to undertake securitization, including
those between the utility and the proposed SPE. This authority would
permit, among other things, all accounting entries needed to record (1) the
securitized qualified costs on Consumers' books, (2) the issuance of the
securitization bonds, (3) the use of the securitization bond proceeds to
retire existing debt and equity, (4) the receipt of revenues arising from
Consumers' proposed securitization charge and securitization-related tax
charge, (5) the payment of principal, interest, and expenses relating to
the bonds, and (6) the amortization of securitized qualified costs.
According to Mr. DaPra, "the amount securitized will be recorded as a
financing of the SPE for financial reporting purposes and, because the SPE
will be consolidated with [Consumers] for financial reporting purposes,"
the amounts financed will also appear as a financing in the utility's
consolidated financial statements. 2 Tr. 77.
The second set of authorizations concerns Consumers' request for
"ratemaking and accounting approval" from the Commission regarding the
utility's "ability to seek future recovery of . . . other qualified costs
as set forth at Section F, lines 3, 4, and 5 of Exhibit CE-7." 2 Tr. 82.
Specifically, Mr. DaPra notes that the costs appearing on lines F-1 and F-2
of that exhibit (and which pertain to ROA implementation costs and related
customer education costs) are already being deferred in accordance with
prior Commission orders. Thus, Consumers is now requesting the "same
deferral treatment and the establishment of a regulatory asset for
accounting purposes" for the costs set forth on lines F-3, F-4, and F-5 of
that exhibit. Id.
The only substantive dispute concerning this issue involves
Consumers' request to treat the figure on line F-4 of Exhibit CE-7 (the
year 2000 revenue reduction arising from Act 141's mandatory 5% residential
rate cut) as a regulatory asset. The Staff, ABATE, and the Attorney General
oppose that treatment on the grounds that (1) a rate reduction cannot, by
definition, constitute a regulatory asset, and (2) granting the utility's
request would mean that Acts 141 and 142 were "a sham" under which the
Legislature intended "to give ratepayers a guaranteed 5% rate reduction
with one hand, and then take it away with the other." Attorney General's
initial brief, p. 13. These three parties therefore argue that the
Commission should reject Consumers' proposed treatment of that revenue
reduction.
The Commission agrees with the Staff, ABATE, and the Attorney
General, and finds that it must reject Consumers' proposal as it relates to
the figure set forth on line F-4 of Exhibit CE-7.
According to testimony offered by one of the utility's own
witnesses, Mr. DaPra, a regulatory asset is created when the Commission
issues a ruling making it "probable that a regulated utility's incurred
cost will be recovered through future revenue." 2 Tr. 70-71 [Emphasis
added].
Unlike an investment in an abandoned or economically uncompetitive
generating plant, a rate cut does not constitute an incurred cost. Thus,
the 5% residential rate reduction mandated by Section 10d(1) of Act 141
falls outside the definition of a regulatory asset. Moreover, granting
Consumers the authority to treat this amount as either a regulatory asset
or a qualified cost could result in its recovery, albeit over time, from
utility customers. This would have the illogical effect of requiring
ratepayers to pay for their own rate cut.
The Commission therefore concludes that although Consumers' other
requests for amortization, accounting, and ratemaking authority are
reasonable and should be approved, no such approval should be given with
regard to the amount listed on line F-4 of Exhibit CE-7.
Before moving on, one other issue (more procedural than
substantive) must be addressed. Specifically, Energy Michigan argues that
the amortization, accounting, and ratemaking approvals included in the
Commission's financing order should not be given immediate effect. Instead,
Energy Michigan contends, the effect of these approvals--as well as any
other authorizations granted in this order--should be tolled pending
Consumers' express acceptance of all conditions and limitations that this
order places on the utility.
In addition, and as previously noted in this order, the 5%
residential rate reduction was not contingent on the issuance of
securitization bonds and, thus, securitization cannot be applied
retroactively to fund that rate reduction. Consumers' proposal to
retroactively create a regulatory asset is just a variant of its "timing
difference" argument that the Commission has rejected.
The Commission finds Energy Michigan's argument persuasive. If
Consumers elects not to pursue securitization due to its failure to prevail
on some issue addressed in this order, the basis for granting the utility's
myriad requests for amortization, accounting, and ratemaking authority
disappears. The Commission thus concludes that its grant of all such
authority shall not become effective until Consumers submits a written
acceptance of the Commission's financing order. Upon the filing of that
acceptance with the Commission, the financing order and the securitization
charges approved in the order, shall be considered irrevocable as directed
under Section 10i(4) of Act 142--except as provided under Section 10k(3) of
that act.
Securitization and Tax Charges
Due to its earlier finding that Consumers' request for authority
to issue securitization bonds should be granted, the Commission must now
rule on how costs relating to those bonds shall be recovered.
Consumers proposes to recover those costs by imposing a uniform
per kWh securitization charge, as well as a uniform per kWh tax charge,(14)
on each customer's energy usage. The utility gives three reasons in support
of this approach. First, it notes that this is consistent with the
Commission's decision--set forth in numerous orders in Case No. U-11290 et
al.--to collect ROA transition charges through the application of a uniform
energy surcharge. Second, it points out that structuring its securitization
and tax charges in this manner makes them "easier to track for true-up
purposes and promotes cross-collateralization among rate classes, which
makes the bonds more marketable." Consumers' initial brief, p. 18, quoting
3 Tr. 264. Third, the utility contends that this avoids creating complex
administration and implementation issues with regard to its billing
systems.
The utility goes on to note that its proposed securitization and
tax charges will only be assessed to a customer during billing months in
which the customer actually takes delivery of electricity over some portion
of Consumers' system. For example, the utility continues, customers that
have contracted for auxiliary or stand-by service will only be required to
pay securitization and tax charges during periods in which they take
deliveries of electricity on the applicable rate schedules. Nevertheless,
for bundled sales customers and ROA customers alike (each of whom requires
use of Consumers' transmission and distribution systems on a regular
basis), the only way to "avoid paying the securitization charge and the tax
charge would be to physically disconnect itself" from Consumers'
facilities. Id. For this reason, Consumers points out, these charges are
non-bypassable for any electric customers that remain connected to the
utility's system.
Although the actual per kWh charges will change over time
depending on the principal balance of the outstanding bonds and the
composite interest rate at which they are being held, among other things,
Consumers computed the maximum securitization and tax charge rates that it
seeks to impose beginning with the first billing cycle after securitization
bonds are sold by the SPE. According to Mr. Ernst, these maximum rates, for
which Consumers seeks Commission approval in this order, are $0.00205 per
kWh for the securitization charge and $0.00025 per kWh for the tax charge.
Because the computation of these charges (which is shown on Exhibit CE-8)
was based on an assumed aggregate bond yield of 10.34%, and because the
average expected yield for the various tranches of Consumers'
securitization bonds is only 7.73%, the actual rates charged to Consumers'
customers are expected to be significantly below the ceiling rates for
which the utility now seeks approval.
In recognition of this fact, Consumers proposes adding a new rule
to its electric tariff, designated as Rule B-18. This proposed tariff
language, which is set forth on Exhibit CE-10, "describes the process
[that] the Company will use to initially implement and adjust periodically
the securitization charges and the tax charges during the term of the
securitization bonds." 3 Tr. 269. Consumers goes on to state that once the
initial securitization charge is computed (following issuance of the first
tranche or tranches of bonds), the amount of that charge (1) will be
deducted from the respective energy charge shown on each of its current
rate sheets, and (2) a line will be added to each of the affected rate
sheets listing the per kWh securitization charge. Thus, even though the
securitization charge will be collected through a separate line item on
each customer's bill, "the revised rate sheets will reflect a total kWh
energy charge to customers equal to those in effect today." 3 Tr. 271. As
for the tax charge, the utility proposes to simply recover it through the
amounts billed and collected under the energy charge shown on each existing
rate sheet.
As for customers taking ROA service, the proposed payment
structure is slightly more complex because certain rules governing ROA will
change on January 1, 2002. Prior to that date, the transition charge owed
to Consumers is the price offered in a successful bid and is to be
submitted to the utility by the ROA customer's retail energy provider. In
contrast, the post-2001 transition charge will be a uniform rate
established by Commission order and will be paid directly by the customer
to the utility. For ROA service received before January 1, 2002, Consumers
proposes to bill the retail energy suppliers for the full amount of the bid
price and separate each payment into three parts following its receipt: (1)
the securitization charge, which will be forwarded to the trustee for the
bondholders; (2) the tax charge, which will be retained by the utility; and
(3) the transition charge, which will be applied against the utility's
stranded costs. In cases where the sum of the securitization and tax
charges exceeds the bid price paid by the retail energy provider, a
"negative transition charge will be reflected in the stranded cost
computation." Id. As for ROA service received after the start of 2002,
Consumers proposes to send each bill directly to the customer, setting
forth the securitization charge on a line separate from the combined tax
and transition charge.
Consumers' proposals concerning the computation and collection of
its securitization and tax charges have given rise to several areas of
dispute.
a. Uniform per kWh charges
ABATE, Unicom, and Energy Michigan object to the utility's
proposal to recover its securitization-related costs through the use of
uniform per kWh charges. According to these parties, applying per kWh
charges would be disadvantageous to high load factor customers. As a
result, they contend that Consumers' proposal will result in an
overallocation of securitization-related costs to industrial customers and
an underallocation to residential customers. They go on to assert that the
Commission has consistently allocated costs like those to be recovered by
the securitization charge through the application of a 12 coincident peak,
75% demand/25% energy allocation factor. Because no such allocation was
performed by any of the parties to this case, ABATE, Unicom, and Energy
Michigan recommend that the Commission reject the utility's proposal to use
uniform per kWh charges and, instead, order Consumers to develop new rates
based on the 12 coincident peak, 75% demand/25% energy methodology.
Consumers, joined by the Attorney General and the Staff, oppose
that recommendation for several reasons. First, they point out that because
no such cost allocation has been performed--much less offered into
evidence--with regard to these securitization costs, mandating the use of
the 12 coincident peak method would significantly delay the start of
securitization. Second, noting that it would require the utility to develop
different securitization and tax charges for each customer class, use of
that allocation methodology would make all future securitization and tax
charge reconciliations unnecessarily complex and time-consuming. Third,
claiming that "the primary beneficiaries of base load plants [like
Palisades] are high energy use customers," they contend that the
demand-based allocation sought by ABATE, Unicom, and Energy Michigan would
assign far too little of the qualified costs to those customers. Staff's
reply brief, p. 5. For these and other reasons, Consumers, the Attorney
General, and the Staff support the use of uniform per kWh charges.(15)
The Commission agrees and finds that Consumers' proposal should be
adopted in this regard. A similar situation arose in Case No. U-11290,
where the Commission had to determine the best method for recovering
stranded costs. Due, in large part, to the fact that it would help expedite
the true-up of all transition and implementation charges imposed on ROA
customers, the Commission authorized the use of a uniform per kWh charge.
Because Section 10k(3) requires that securitization charges "be reviewed
and adjusted by the Commission at least annually," ease of administration
likewise weighs heavily in favor of applying per kWh charges in the present
case. Moreover, as discussed by both Mr. Ernst and Mr. Hoffman, the
utility's proposal promotes the concept of full cross-collateralization
between and among customers regardless of rate class. See, 2 Tr. 196-97 and
264-65. As noted by those witnesses, this cross-collateralization makes all
customers jointly and severally responsible for payment of the principal,
interest, and all related costs of securitization. Thus, as pointed out by
Mr. Hoffman, the use of per kWh charges "will be favorably received by the
rating agencies" and help ensure the highest possible rating for Consumers'
securitization bonds. 2 Tr. 197.
Moreover, notwithstanding some parties' claims to the contrary,
use of uniform per kWh securitization and tax charges will not change
existing cost allocations among customer classes. This is because a
corresponding reduction in each customer's distribution or transition
charge will be made, thus assuring that no customer pays more as a result
of securitization. This is in contrast to the demand-based allocation
methodology proposed by ABATE, Unicom, and Energy Michigan, which (because
Palisades is a base load plant whose principal beneficiaries are high
energy use customers) would likely result in a reallocation of cost
responsibility in violation of Section 10d(5) of Act 141.
For these reasons, the Commission concludes that the utility's
proposal to recover its securitization-related costs through the use of
uniform per kWh securitization and tax charges should be approved.
b. Post-2001 treatment of ROA customers
Energy Michigan raises a concern regarding whether ROA customers
will be treated fairly under Consumers' proposal after the close of 2001.
Specifically, it notes that although the utility plans to reduce the
tariffed rate paid by each bundled sales customer by the sum of the
securitization and tax charges, and despite the fact that it likewise plans
to reduce the bid-based transition charge applied to ROA customers on or
before December 31, 2001, it appears that no similar reduction will be made
to ROA customers' bills after the start of 2002. According to Energy
Michigan, this would have an inequitable (and, it claims, intentionally
anticompetitive) effect on ROA. Specifically, Energy Michigan continues, it
would deprive those ROA customers of something that is being offered to
similarly-situated sales customers, namely the right to offset their other
rates by the amount paid in securitization and tax charges.
In response, Consumers contends that there is no hidden agenda
behind its proposed recovery of securitization and tax charges.
Specifically, the utility asserts that it "is not trying to double count
these stranded costs and recover the same categories of stranded costs once
through securitization charges and once through transition charges" imposed
on ROA customers. Consumers' reply brief, p. 24. Rather, Consumers
contends, its failure to state that all securitization and tax charges paid
by ROA customers after the start of 2002 will be used as an offset to the
transition charges appearing on their bills is based on the utility's
assumption that the transition charge computed by the Commission for use on
and after January 1, 2002 "will take into account the assets that have been
securitized and not include them in the development of that transition
charge." Id., p. 25. The Staff agrees with Consumers, relying on the same
assumption.
Although it is true that the transition charge applied to ROA
customers after December 31, 2001 could be structured to recognize the
reduction in Consumers' stranded costs due to securitization, the
importance of this issue (from a competitive standpoint) justifies taking
immediate action rather than adopting a "wait-and-see" approach. The
Commission therefore finds that its approval of Consumers' application
should be conditioned upon the utility's express agreement that, for all
bills rendered after the close of 2001, the utility will reflect on bundled
sales and ROA customers' bills alike an offset equal to the sum of each
customer's securitization and tax charges payable for that same billing
period.
c. Proposed equalization of the residential rate reduction
Energy Michigan contends that despite providing welcome relief,
the 5% residential rate cut mandated by Section 10d(1) of Act 141 unfairly
benefits bundled sales customers. Specifically, it states that although the
5% reduction in bundled residential rates produces a net reduction of
0.375(cent) per kWh, it only reduces the rates charged to ROA residential
customers by 0.22(cent) per kWh. According to Energy Michigan, the 5%
reduction in ROA residential rates yields less savings because it applies
only to transmission and distribution costs and not to generation-related
expenses. Energy Michigan therefore recommends, among other things,
ordering Consumers to subtract "the equivalent of the 0.375(cent) per kWh
bundled sales reductions in dollars per kWh (and not as a percentage) from
ROA bid transition charges." Energy Michigan's initial brief, p. 10. Unless
this occurs, Energy Michigan continues, residential customers will have an
incentive to remain on Consumers' bundled rates instead of switching to
ROA.
Consumers opposes Energy Michigan's proposal for several reasons.
Principal among these is the fact that any residential ROA customer
"already had the lowest residential rate for the type of distribution
service it received from Consumers prior to the passage of Act 141."
Consumers' reply brief, p. 20. After the passage of Act 141, Consumers
continues, that already low rate was reduced further. Moreover, the utility
notes that although the Legislature could have enacted a residential rate
cut on a dollars per kWh basis if it so desired, it chose instead to enact
equal percentage rate reductions. Thus, claiming that it would effectively
overturn the Legislature's decision, Consumers questions the legality of
any Commission order granting Energy Michigan's request.
The Commission finds Energy Michigan's arguments on this issue
persuasive. Act 141 requires a 5% reduction in residential rates from those
authorized or in effect on May 1, 2000. For a bundled sales customer, this
reduced rates by approximately 0.375(cent) per kWh effective June 5, 2000.
There were no ROA residential customers on that date, nor are there any
today. In the future, if the equalization adjustment proposed by Energy
Michigan is not made, then residential customers switching to ROA will
receive a lower rate reduction than those that do not. The Commission finds
that this outcome would be inconsistent with the legislative intent that
all residential customers receive a 5% rate reduction.
Moreover, even if Act 141 did not require the equalization
adjustment, there are significant policy reasons that call for its
adoption. As previously noted, Section 10d(5) of Act 141 requires that
securitization proceeds in excess of those needed to fund the 5%
residential rate reduction "shall be allocated by the commission to further
rate reductions or to reduce the level of any charges authorized by the
commission to recover an electric utility's stranded costs." MCL
460.10d(5); MSA 22.13 (10d)(5). Thus, even if Act 141 did not require the
equalization adjustment, the Commission would be authorized to implement
it. The record clearly indicates that, without the equalization adjustment,
residential customers who switch to an alternative supplier will be
unfairly disadvantaged. This is inconsistent with the policy of promoting a
competitive market. Thus, the Commission finds that Energy Michigan's
proposed equalization adjustment should be adopted for policy reasons as
well as because it is required by Act 141.
d. Implementation of direct billing
Consumers' proposal provides that, prior to January 1, 2002, the
utility would collect its securitization and tax charges from each ROA
customer's retail energy provider and rely on the provider to pass those
charges on to the customer. However, starting January 1, 2002, Consumers
would begin billing ROA customers directly. According to Energy Michigan,
initiating one billing system and promptly replacing it with another will
lead to needless confusion, create billing problems for those providers,
and increase implementation costs. It therefore recommends that Consumers
simply rely on direct billing from the start.
Consumers opposes this recommendation. According to the utility,
the Commission's orders in Case No. U-11290 placed responsibility on the
retail service provider for paying the winning bid price for ROA service,
and the desire to shift this responsibility to the ROA customers is an
insufficient basis for making the recommended change.
The Commission disagrees with the utility and finds that Energy
Michigan's request should be granted. Consumers anticipates that, if
everything goes as planned, the SPE will begin issuing its securitization
bonds at the start of 2001. Thus, the period during which the utility plans
to bill retail energy providers, instead of the underlying ROA customers,
would last for no more than 12 months. The Commission therefore concludes
that, to avoid the needless confusion that could result from changing the
billing system after such a short time, Energy Michigan's recommendation to
implement direct billing from the outset should be adopted.
e. Billing for securitization and tax charges
As noted above, Consumers proposes to set out the securitization
charge as a separate line item on its customers' bills, while collecting
the tax charge as part of the bundled energy charge. Energy Michigan's
witness, Richard A. Polich, recommends including all securitization costs
(including taxes) in a single, unified charge. Claiming that this should
make things easier from an accounting, billing, and reconciliation
standpoint, Energy Michigan asks the Commission to adopt Mr. Polich's
recommendation.
Consumers disagrees with that recommendation. According to the
utility, the reason for collecting the securitization charge separately is
that those funds need to be passed on to the SPE. This is not the case with
the funds collected by the tax charge. The utility concludes by stating
that if the Commission is concerned about accounting, billing, and true-up
issues, the better solution would be "for the securitization charge and the
tax charge to remain separate charges as proposed by the company and for
each of the two charges to be stated as separate line items on all customer
bills, including customers taking ROA service." Consumers' reply brief, p.
18.
The Commission finds that good reason exists for keeping the
securitization charge separate from the tax charge. Specifically,
collecting the securitization charge separately will, according to
testimony provided by Mr. Hoffman, make it easier to determine precisely
what portion of Consumers' revenue stream corresponds to the payments that
the utility must make to the SPE (or, more precisely, the trustee). See, 3
Tr. 213. Moreover, because both the securitization charge and the tax
charge will be the subject of periodic true-ups, the Commission finds that
stating them each as separate line items on customers' bills (instead of
rolling the tax charge into the energy charge, as Consumers initially
recommended) will likely prove beneficial. The Commission therefore rejects
Energy Michigan's request to consolidate these two charges and adopts the
revised billing structure discussed in Consumers' reply brief.
f. Range of securitization and tax charge liability
Dow asserts that the Commission should specifically include within
this order the following statement:
Nothing in this order authorizes [Consumers] or any other entity
to impose any securitization charge, securitization tax charge, or any
other similar charge on self-service power or on a person engaged in
affiliate wheeling.
Dow's initial brief, p. 1. Dow bases its assertion on certain
provisions set forth in Act 141. Dow cites Section 10a(6), which states
that "this act does not prohibit or limit the right of a person to obtain
self-service power, and it does not impose a transition, implementation,
exit fee, or any other similar charge on self-service power." MCL
460.10a(6); MSA 22.13(10a)(6). Similarly, it cites Section 10a(7), which
states that "this act does not prohibit or limit the right of a person to
engage in affiliate wheeling and does not impose a transition,
implementation, exit fee, or any other similar charge on a person engaged
in affiliate wheeling." MCL 460.10a(7); MSA 22.13(10a)(7).
Consumers agrees with Dow that the securitization and tax charges
approved in this order fall within the "any other similar charge" clause
set forth in both Sections 10a(6) and 10a(7) of Act 141. However, the
utility goes on to assert that "this does not automatically mean" that
every customer who claims to have obtained self-service power or engaged in
affiliate wheeling is "entitled to an exemption from the securitization
charge and related tax charge proposed in this proceeding." Consumers'
reply brief, p. 45. According to Consumers, there are other provisions
within Act 141 that may come into play for a specific customer. The utility
therefore contends that the language proposed by Dow is overly broad and
that the following statement should be used in its place:
For purposes of this financing order, securitization charges and
the related tax charges are a "similar charge" as that term is used in
Subsections 10a(6) and 10a(7) of Act 141.
Id. at 47. None of the other parties to this case addressed this
issue. --
Due to the lack of dispute among the parties, and in light of its
reading of Act 141, the Commission finds that Dow's proposed language (as
amended by Consumers) should be approved and included in the findings of
this order.
Periodic True-ups
According to Mr. Ernst, two factors necessitate the periodic
adjustment of securitization and tax charges. First, he noted that because
these charges are applied prospectively to bills rendered during the next
period, the revenues collected are unlikely to ever exactly match the cash
required by the SPE or the trustee for the purpose of making the scheduled
principal and interest payments on the bonds and reimbursing the SPE's
ongoing operating costs. Thus, he continued, "the next period's charges
must reflect not only the cost attributable to the upcoming period, but
also any over- or under-collections from the previous period." 3 Tr. 268.
Second, he stated that even absent any over- or under-collections from the
prior period, these charges must be adjusted to reflect changes in such
things as forecasted sales, expenses, and customer payment patterns for the
upcoming period. Mr. Ernst concluded by pointing out that because
establishing an expedited true-up procedure to make these adjustments
increases the certainty that the securitization bonds will be paid-off in a
timely manner, it will "greatly enhance the receipt of a AAA rating" for
those bonds. Id.
Consumers therefore developed a proposed system for conducting a
securitization and tax charge true-up at least once a year (except that
starting 12 months prior to the last expected maturity date of the
securitization bonds, true-ups would be undertaken at least quarterly). The
utility's proposed system was designed to allow Consumers to analyze the
past period's actual revenues and expenses, maintain the appropriate amount
in the overcollateralization subaccount, roll over any over- or
underrecovery to the upcoming period, compute new levels for its
securitization and tax charges, and automatically begin implementing those
charges at their revised levels. Consumers went on to provide a
hypothetical example, set forth on Exhibit CE-9, of how its system would
operate.
The utility's proposal was strongly supported by the Staff.
However, it was challenged, in part, by Energy Michigan and the Attorney
General. For example, Energy Michigan argued that the periodic true-ups
should not occur more than once annually (at least until 12 months prior to
the bonds' last expected maturity date). Any more frequent occurrence, it
contended, would merely serve to confuse customers. As for the Attorney
General, she recommended that each true-up be exposed to rigorous
examination by all interested parties (likely in the form of a contested
case proceeding) and that all overrecoveries be returned--with interest--to
Consumers' ratepayers instead of being rolled over to the next period.
Finally, Energy Michigan and the Attorney General argued that the utility
must be precluded from implementing revised securitization and tax charges
without first receiving Commission approval of those new charges.
The record clearly shows that not only are periodic securitization
and tax charge true-ups necessary, but (to provide the certainty needed to
obtain a AAA bond rating) they need to be undertaken in a way that allows
for their swift and certain resolution. For this reason, the Commission
finds that Consumers' proposal should be approved, but with two relatively
minor changes. First, based on recent indications by the utility that
annual true-ups would be sufficient until one year prior to the bonds'
final maturity date (See, Consumers' initial brief, p. 9), the utility
should be limited to undertaking no more than one routine true-up per year
until the final year that securitization is in place. Moreover, during that
final year, true-ups shall be limited to no more than one per quarter.
Second, Consumers should initiate each routine true-up by filing an
application that (1) explains the basis for its proposed revision of the
securitization and tax charges, (2) shows the computation of its revised
charges, and (3) seeks Commission approval--on an expedited basis--of those
new charges before they can be implemented. All proceedings must be
completed and a final Commission order regarding the utility's request for
a routine true-up must be issued within 45 days after Consumers files its
application.(16)
Miscellaneous Issues
In addition to those discussed above, six additional issues have
been raised by the parties. Three of these issues address evidentiary and
procedural questions, while the remainder involve various substantive
concerns.
First, ABATE argues that the ALJ erroneously struck a majority of
the rebuttal testimony offered by one of its witnesses, Nicholas Phillips,
Jr., on the grounds that it constituted improper rebuttal. ABATE notes that
one of the Staff witnesses, Mr. Ballinger, testified that the Staff
supports Consumers' proposal to impose its securitization charge on a per
kWh basis. According to ABATE, Mr. Phillips' stricken testimony "rebuts
both whether a per kWh charge satisfies the requirements of Acts 141 and
142 and whether it is an appropriate policy position for the Staff to take
in this case." ABATE's initial brief, p. 12. Claiming that these issues
could not have been addressed in its direct testimony because the Staff had
not, at that time, taken a position on the utility's proposal, ABATE
asserts that the stricken testimony constitutes proper rebuttal and should
be considered by the Commission in deciding this case.
The Commission finds that ABATE's assertion should be rejected.
Nowhere in the stricken testimony does Mr. Phillips truly address how it is
that the Staff's policy is faulty. Instead, as noted by the ALJ in
rejecting that testimony, the actual target of Mr. Phillip's rebuttal is
Consumers' position regarding the use of a per kWh securitization charge.
Because he had adequate opportunity to address the utility's proposal in
the context of his direct testimony (which Mr. Phillips did to a great
extent, as shown on 6 Tr. 840-46), his rebuttal testimony on this issue
represents nothing more than an attempted second bite of the apple. Thus,
the Commission concludes, the ALJ's decision to strike that rebuttal
testimony was fully justified.
Second, ABATE claims that the ALJ erred in excluding testimony
offered by Mr. Phillips and Dr. Richard D. Tabors regarding the market
value of Consumers' generating plants and other issues relating to the
computation of net stranded costs. Although agreeing that stranded cost
issues are generally covered by Act 141, ABATE claims that the fact that
Acts 141 and 142 were "tie-barred" by the Legislature supports their
consideration in the context of the present Act 142 application case. ABATE
goes on to assert that regardless of the treatment given to that proposed
testimony, the nexus between the two acts justifies addressing--in this
financing order--the effect of stranded benefits and excess earnings on the
computation of Consumers' stranded costs.
Again, the Commission disagrees with ABATE and finds that the
ALJ's various rulings on this issue should be upheld. None of the stricken
testimony concerns matters to be addressed pursuant to Act 142, such as the
book value of the regulatory assets that Consumers seeks to securitize, the
statutory tests to be satisfied before securitization can be authorized,
the mechanics to be used in implementing Consumers' securitization
proposal, or the appropriate use of either the proceeds produced by the
sale of securitization bonds or the cost savings arising from replacing
current debt and equity with those lower-cost bonds. Moreover, the issue
that the stricken testimony does address, namely Consumers' net stranded
cost recovery, lies exclusively within the realm of proceedings to be
conducted under Sections 10a(1), 10a(9), and 10a(10) of Act 141. Thus,
ABATE's claims concerning net stranded costs (and the effect of excess
earnings on their computation) should be addressed in one of those
proceedings,(17) rather than in this Act 142 case.
Third, as noted earlier, the Staff filed a motion on October 3,
2000 seeking to strike portions of the Chamber of Commerce's reply brief.
According to the Staff, the comments that it seeks to strike constitute an
improper attempt by the Chamber of Commerce to circumvent the hearing
process and present substantive evidence on brief.
The Commission agrees with the Staff's characterization of those
comments as factual assertions, rather than argument. As a result, the
Chamber of Commerce should have presented them through the testimony of
someone with first-hand knowledge and made that person or persons available
for cross-examination by the other parties. Because this did not occur, the
comments constitute extra-record evidence and should be stricken. The
Commission therefore grants the motion to strike portions of pages 1 and 2
of the Chamber of Commerce's reply brief as indicated on Attachment 1 to
the Staff's motion.
Fourth, Energy Michigan notes that through December 31, 2001, open
bids will be used to allocate capacity among customers seeking to
participate in Consumers' existing ROA program. It further notes that the
first four rounds of bidding have been completed (the fifth will occur on
November 20, 2000) and that each winning bidder has been required to
provide a bid deposit to be retained by the utility. Energy Michigan argues
that the Commission should cancel the bid requirements for the winning
residential ROA bidders in the first four rounds and offer to refund those
deposits. According to Energy Michigan, this action is necessary because
those that successfully bid for residential capacity in rounds 1 through 4
could not have anticipated that bundled rates for that service would be
reduced by 5%, pursuant to Section 10d(1) of Act 141, and that therefore
"competition in the residential class would be made less economic." Energy
Michigan's initial brief, p. 12.
The Commission disagrees and finds that this request should not be
adopted. As noted by Consumers, the terms applicable to the winning
residential ROA bids were established at a time when the parties "were on
notice that the terms were under consideration." Consumers' reply brief, p.
41. It can further be assumed that the bids submitted in those first four
rounds contain rates and terms that the successful bidders found
acceptable; otherwise, their bids would not have been voluntarily
submitted. Because requiring Consumers to refund the bid deposits under
these circumstances would be inequitable, the Commission concludes that
this proposal must be rejected.
Fifth, MEC sponsored testimony on a set of "guiding principles"
that it felt should be used when setting spending priorities for the money
accumulated in the LI/EE fund. It thus requested that the Commission take
time in this order to establish the appropriate standards and guidelines to
be followed during the future operation of the fund.
As noted in this order's earlier discussion regarding the use of
securitization cost savings, no funding is currently available to establish
and operate the LI/EE fund. The Commission thus finds that, at the current
time, it would be premature to establish the directional guidelines and
standards for the use of this fund.
Sixth, based on testimony offered by Mr. Peloquin, the Attorney
General raises two final concerns regarding the transfer of securitization
charge revenues from Consumers (acting as the servicer) to the trustee. Mr.
Peloquin reported that the utility proposes to make that transfer "to the
trustee at some unspecified time interval" following Consumers' receipt of
those payments from the customers. 5 Tr. 740. Based on that testimony, the
Attorney General asserted that the utility's proposal was unreasonably
vague and should be replaced by the requirement that securitization
revenues "be forwarded to the trustee no later than 45 calendar days after
the billing date of the customer's bill." Attorney General's initial brief,
p. 26. According to her, this would remove some uncertainty and thus
increase the likelihood that the securitization bonds would receive a AAA
rating. Mr. Peloquin went on to indicate that although Consumers witness
DaPra proposed sending securitization funds to the trustee "net of
uncollectibles," approving that proposal would provide the utility with "a
double recovery of bad debt expense from the ratepayer." 5 Tr. 741. The
Attorney General therefore asserted that the Commission should reject that
portion of the utility's proposal and specifically bar Consumers from
retaining any portion of the securitization revenues as an offset to bad
debt expense.
The Commission finds that both of those assertions are incorrect
and that the changes requested by the Attorney General should be rejected.
As Consumers witness Hoffman stated with regard to the transfer of funds
from Consumers to the trustee:
[T]he rating agencies ultimately control the timetable by which
the servicer will be required to remit collections to the trustee.
This is not a decision left to the discretion of the servicer,
whether that servicer is Consumers or a replacement servicer. In
fact, the servicer of the securitization bonds will remit
securitization charge collections to the trustee based upon a
rating agency timetable for remittance consistent with achieving
the highest possible credit ratings for the transaction. . . .
Since Consumers' customers are required to pay within 18-22 days
of the billing date and the vast majority of customers pay on
time, that average remittance period should be expected to be much
shorter than Mr. Peloquin's proposed 45-day period . . . and will,
therefore, be better for securitization bondholders and more
acceptable to rating agencies.
3 Tr. 204-205. This testimony indicates that a somewhat vague
timetable like that set forth in the utility's proposal will make the
proposed structure more attractive to the bond market than would an
arbitrary, albeit more specific, timetable. Thus, the Attorney General's
request to implement a 45-day payment requirement is denied.
Similarly, the Attorney General's opposition to Consumers'
proposal to forward all securitization revenues to the trustee "net of
uncollectibles" is based on an incorrect interpretation of Mr. DaPra's
statement regarding those revenues. As pointed out by Mr. DaPra:
[The Attorney General's witness] gives a different meaning to the
phrase "net of uncollectibles," as used in my testimony, than was
intended. Consumers will remit 100% of all securitization revenue
collected to the trustee (there will be no subtraction from the
amounts collected for uncollectibles). By definition, therefore,
the amount collected is "net of uncollectibles."
2 Tr. 88. The fact that this dispute arose from a simple
misunderstanding of the phrase "net of uncollectibles" was confirmed by Mr.
Hoffman. See, 3 Tr. 206-207. The Commission therefore finds that the
Attorney General's second request should also be rejected and that the
utility's proposal should be approved instead.
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
seq.; and the Commission's Rules of Practice and
Procedure, as amended, 1992 AACS, R 460.17101 et seq.
b. Consumers is an electric utility as defined by Section
10h(c) of Act 142 and it had 1,000,000 or more retail
customers in this state as of May 1, 2000.
c. As agreed to by the parties, Consumers' complete, revised
application was filed on July 26, 2000, thus requiring
issuance of this financing order by October 24, 2000,
pursuant to Section 10i(1) of Act 142.
d. Consumers' unrecovered investment in Palisades
constitutes a regulatory asset and, therefore, the
plant's capital costs (net of the plant's depreciation
reserve and all related income tax credits) constitute
qualified costs, as defined in Section 10h(g) of Act 142.
e. Consumers' generation-related regulatory assets (net of
certain regulatory liabilities), for which recovery was
sought in the application, constitute qualified costs
that may be recovered through a securitization charge,
together with a related tax charge, assessed against all
of Consumers' bundled sales and ROA customers through
Commission-approved rate schedules.
f. Consumers should be allowed to establish one or more
SPEs, capitalize and direct the administration of each
such SPE, and sell (directly or indirectly) to each SPE
some or all of the securitization property discussed in
this order. Each SPE will be an assignee as defined in
Section 10h(a) of Act 142 once an interest in
securitization property is transferred to the SPE.
g. Consumers' and any SPE's up-front other qualified costs
identified in this financing order, including Consumers'
costs of retiring existing debt and equity securities and
the Commission's costs of financial and legal services to
assist in the issuance of this financing order, are all
qualified costs pursuant to Section 10h(g) of Act 142 and
are therefore recoverable by Consumers through
securitization.
h. The holders (otherwise known as the purchasers) of the
securitization bonds and their respective trustees will
each be a financing party as defined in Section 10h(e) of
Act 142.
i. The SPE may issue securitization bonds in accordance with
this financing order and may pledge all of its interest
in the securitization property and related assets to
secure those bonds.
j. The securitization transaction approved in this financing
order satisfies the requirements of Section 10i(2)(a) of
Act 142 because the proceeds of the securitization bonds
shall be used solely for the purposes of the refinancing
or the retirement of debt or equity.
k. The securitization transaction approved in this financing
order satisfies the requirements of Section 10i(2)(b) of
Act 142 because it provides tangible and quantifiable
benefits to customers of the electric utility.
l. The SPE's issuance of securitization bonds in compliance
with this financing order will satisfy the requirements
of Section 10i(2)(c) of Act 142 because the expected
structuring and pricing of the securitization bonds will
result in the lowest securitization charges consistent
with market conditions and the terms of this order.
m. The amount of qualified costs approved for securitization
in this financing order does not exceed the net present
value of the revenue requirement over the life of the
securitization bonds associated with the qualified costs
sought to be securitized, as required by Section10i(2)(d)
of Act 142.
n. The securitization transaction approved in this financing
order satisfies the requirements of Section 10i(1) of Act
142 because the net present value of the revenues to be
collected under this order will be less than the amount
that would be recovered over the remaining life of the
qualified costs using conventional financing methods.
o. This financing order adequately details the amount of
qualified costs to be recovered ($468,592,000 after
taxes) and the period over which Consumers will be
permitted to recover non-bypassable securitization
charges (not more than 15 years), as required by Section
10i(3) of Act 142.
p. The tax charge does not constitute securitization
property within the meaning of Section 10j of Act 142.
q. As provided in Section 10i(4) of Act 142, the
securitization charges authorized by this financing order
are irrevocable and not subject to reduction, impairment,
or adjustment by further action of the Commission, except
by use of the true-up procedures approved in this order.
r. The methodology set forth in Rule B-18 and approved in
this financing order to implement the initial
securitization and tax charges, and the methodology set
forth in Rule B-18 and approved (with modifications) in
this order to implement adjustments to the securitization
and tax charges through use of an expedited true-up
mechanism, each satisfy the requirements of Section
10k(3) of Act 142.
s. Consumers should be allowed to establish securitization
property, including a non-bypassable securitization
charge, from which the utility's securitization bonds are
to be paid.
t. Consistent with Section 10j(1) of Act 142, the
securitization property established by Consumers should
be deemed to include without limitation (1) the right to
collect, impose, and receive securitization charges in an
amount necessary to allow for the full recovery of all
qualified costs, (2) the right to obtain periodic
adjustments of securitization charges, and (3) all
revenue, collections, payments, money, and proceeds
arising out of those rights.
u. Consistent with Section 10j(2) of Act 142, all
securitization property arising as a result of this
financing order should be deemed to constitute a present
property right even though the imposition and collection
of securitization charges depends on further acts by
Consumersor others.
v. Consistent with Section 10m(2) of Act 142, any lien and
security interest created in the securitization property
(through the execution and delivery of a security
agreement with a financing party) should be deemed to
attach automatically from the time that value is received
forthe bonds and, further, should be deemed a
continuously perfected lien and security interest in the
securitization property.
w. The priority of any lien and security interest in the
securitization property arising from this financing order
should not be considered impaired by any later
modification of this order or by the commingling of the
funds arising from securitization charges with any other
funds, consistent with Section 10m(4) of Act 142.
x. Any SPE created by Consumers pursuant to the authority
granted in this financing order should be authorized to
enter into hedge arrangements when issuing securitization
bonds having a variable rate of interest.
y. Consistent with Section 10i(2)(a) of Act 142, all
securitization bond proceeds arising from the authority
granted in this financing order shall be used solely for
the purpose of retiring or refinancing debt or equity.
z. Except as otherwise provided for in this order, the
general structure of the securitization transactions, the
expected terms of the securitization bonds, and the use
of the securitization bond proceeds, as proposed by
Consumers, are reasonable and should be approved.
aa. If and when Consumers transfers the securitization
property to the SPE, including the right to impose,
collect, and receive the securitization charges, the
servicer will be authorized to recover the securitization
charges only for the benefit of the SPE in accordance
with the servicing agreement.
bb. If and when Consumers transfers the securitization
property to the SPE under an agreement that expressly
states that the transfer is a sale or other absolute
transfer in accordance with the "true sale" provisions of
Section 10l(1) of Act 142, that transfer will constitute
a "true sale" and not a secured transaction or other
financing arrangement, and title (both legal and
equitable) to the securitization property will
immediately pass to the SPE. As provided by Section
10l(2) of Act 142, this "true sale" shall apply
regardless of whether the purchaser has any recourse
against the seller, or any other term of the parties'
agreement, including the seller's retention of an
indirect equity interest in the securitization property
by reason of its equity interest in the SPE, the fact
that Consumers acts as the collector of securitization
charges relating to the securitization property, or the
treatment of the transfer as a financing for tax,
financial reporting, or other purposes.
cc. As provided in Section 10m(5) of Act 142, if the servicer
defaults on its obligation to remit revenues arising with
respect to the securitization property, on application by
or on behalf of the financing parties, the Commission or
a court of appropriate jurisdiction shall order the
sequestration and payment to those parties of revenues
arising with respect to the securitization property.
dd. Pursuant to Section 10n(2) of Act 142, the State of
Michigan pledges, for the benefit and protection of all
financing parties and Consumers, that it will not take or
permit any action that would impair the value of the
securitization property, reduce or alter, except as
allowed under Section 10k(3) of Act 142, or impair the
securitization charges to be imposed, collected, and
remitted to the financing parties, until the principal,
interest, and premium, as well as any other charges
incurred and contracts to be performed in connection with
the securitization bonds, have been paid and performed in
full. The SPE, when issuing securitization bonds, is
authorized, pursuant to Section 10n(2) of Act 142 and
this financing order, to include this pledge in any
documentation relating to the securitization bonds.
ee. The financing order, as well as Consumers' written
acceptance of all conditions and limitations imposed by
the order, will remain in effect and unabated
notwithstanding the bankruptcy or insolvency of
Consumers, its successors, or its assignees, as required
by Section 10k(1) of Act 142.
ff. Consumers retains sole discretion regarding whether or
when to assign, sell, or otherwise transfer the
securitization property or other rights and interests
created by this financing order, or any interest therein,
or to cause the issuance of any securitization bonds
authorized by this order.
gg. Because adequate savings will arise from the
securitization authorized in this financing order to
cover the 5% rate reduction required under Section 10d(1)
of Act 141, the order likewise satisfies the requirements
of Section 10d(4) of Act 141.
hh. Any securitization bonds issued pursuant to the authority
granted in this financing order are not a debt or
obligation of the state and are not a charge on its full
faith and credit or taxing power.
ii. As required by Section 10m(8) of Act 142, any subsequent
changes in this financing order or in the customer's
securitization charges do not affect the validity,
perfection, or priority of the security interest in the
securitization property.
jj. As required by Section 10j(2) of Act 142, the financing
order shall remain in effect and all securitization
property shall continue to exist until the securitization
bonds authorized for issuance by this order, as well as
all expenses related to those bonds, have been paid in
full.
kk. The securitization charges authorized in this order shall
be billed, collected, and delivered to the trustee by
Consumers, as the initial servicer, or any successor
servicer pursuant to a servicing agreement. Any payment
of the securitization charge by a customer to the SPE, or
to the servicer on behalf of the SPE, will discharge the
customer's obligations regarding that charge to the
extent of that payment, notwithstanding any objection or
direction to the contrary by Consumers.
ll. As required by Section 10k(2), the imposition and
collection of the securitization charges authorized in
this financing order are non-bypassable charges.
mm. Consumers should file a report, within 30 days following
the receipt of any proceeds from the sale of its
securitization bonds and quarterly thereafter until all
bond proceeds have been disbursed, specifying (1) the
gross amount of proceeds arising from the sale of those
bonds, (2) any amounts expended for payment of initial
other qualified costs relating to that sale, (3) the
amount of proceeds remaining after payment of those
costs, and (4) the precise type and amount of debt or
equity, originally held by Consumers or CMS, that was
retired through use of those proceeds.
nn. In the event that a decline in interest rates or other
change in market conditions leads Consumers to refinance
any of its securitization bonds, Consumers should file,
within 7 days, a report disclosing the details of that
refinancing.
oo. Consumers should continually monitor the bond market and
notify the Commission, within 7 days, of (1) any
reduction in applicable bond rates or other change in
market conditions that might make refinancing its
securitization bonds economically advantageous, and (2)
what steps, if any, Consumers intends to take as a result
of that reduction or change.
pp. All amortization, accounting, and ratemaking approvals,
as well as all other authorizations, provided for in this
financing order should be tolled pending Consumers'
express written acceptance of all conditions and
limitations that the order places on the utility.
qq. This financing order is final and is not subject to
rehearing by this Commission, except as provided in
Section 10i(7) of Act 142, and is not subject to review
or appeal, except as expressly provided in Section 10i(8)
of Act 142.
THEREFORE, IT IS ORDERED that:
A. With the modifications provided for in this order, the general
structure of the securitization transactions, the expected terms
of the securitization bonds, and the use of the securitization
bonds' proceeds, as proposed by Consumers Energy Company, is
approved, and Consumers Energy Company is authorized to proceed,
at its sole discretion, with the sale of securitization bonds as
set forth in this order.
B. Consumers Energy Company is authorized to treat its unrecovered
investment in the Palisades Nuclear Generating Plant as a regulatory
asset.
C. Consumers Energy Company is authorized to proceed with
securitization for up to $468,592,000 of its regulatory assets
(net of certain regulatory liabilities) and other qualified costs,
as detailed in this order.
D. Consumers Energy Company, or any successor servicer, shall impose
and collect from customers, in the manner provided by this
financing order, securitization charges and tax charges in amounts
sufficient to provide for the full and timely recovery of the
amount securitized, the ongoing other qualified costs of the
Special Purpose Entity, and federal, state, and local taxes
related to the securitization charge.
E. Consumers Energy Company shall include, as part of its electric
tariffs and before any securitization bonds are issued, new
language like that found in its proposed Rule B-18, as modified by
this order. Consumers Energy Company shall also file, no less than
seven days prior to the initial imposition and billing of its
securitization and tax charges, revised tariff sheets reflecting
all other changes required by this order, including those
necessary to implement reductions in base rates, the transition
charge, and non-residential customers' distribution charge.
F. Consumers Energy Company, and any successor servicer, is
authorized to bill to its customers, following the sale of
securitization bonds, an initial securitization charge of not more
than $0.00205 per kilowatt-hour and an initial tax charge of not
more than $0.00025 per kilowatt-hour. The procedure described in
the testimony and exhibits of Francis A. Ernst, Jr., shall be used
to determine the precise securitization charge and tax charge to
be billed initially by Consumers Energy Company. Following that
determination, the initial securitization charge and the initial
tax charge shall be placed on customers' bills beginning with the
first billing cycle after the sale of the securitization bonds and
shall be subject to subsequent true-ups in the manner directed in
this order. Corresponding reductions shall be made to customers'
distribution or transition charges contemporaneously with the
billing of all securitization and tax charges.
G. The securitization and tax charges related to Consumers Energy
Company's securitization bonds shall be billed to each customer
for recovery over a period of not greater than 15 years after the
beginning of the first complete billing cycle during which the
securitization and tax charges were initially placed on any
customer's bill. However, Consumers Energy Company may continue to
collect any billed but uncollected securitization charges or tax
charges after the close of this 15-year period. Amounts of the
securitization and tax charges remaining unpaid after the close of
this 15-year period may be recovered through use of collection
activities, including the use of the judicial process.
H. Routine true-ups of the securitization charges and the tax charges
shall be conducted periodically, in accordance with the 45-day
schedule and the methodology approved in this order.
I. Consumers Energy Company is authorized to create one or more
special purpose entities to which it may transfer securitized
property. In turn, each special purpose entity is authorized to
issue securitization bonds in the manner specified in this
financing order. All securitization bonds shall be binding in
accordance with their terms, regardless of whether this order is
later vacated, modified, or otherwise held to be invalid, in whole
or in part. Each special purpose entity shall be funded with
sufficient capital to carry out its intended functions and to
obtain the desired ratings for the securitization bonds that it
issues.
J. Consumers Energy Company is authorized to initiate and complete
the refinancing of its securitization bonds when justified by
financial market conditions.
K. All securitization property and other collateral shall be pledged
by the special purpose entity to the indenture trustee for the
benefit of the holders of the securitization bonds and the other
parties specified in the indenture.
L. Consumers Energy Company is authorized to enter into a servicing
agreement with each special purpose entity that it creates and to
perform the servicing duties contemplated by this financing order
in return for an annual servicing fee not to exceed 0.25% of the
principal amount of all outstanding securitization bonds. If some
other entity is selected to serve in place of Consumers Energy
Company, that replacement servicer shall perform the servicing
duties in return for an annual fee not to exceed 1.5% of the
bonds' outstanding principal amount. The servicer shall remit all
collections of the securitization charges to the indenture trustee
for the special purpose entity's account, in accordance with the
terms of the servicing agreement.
M. Upon the issuance of securitization bonds, the special purpose
entity shall pay the proceeds from the sale of the securitization
bonds (after payment of the special purpose entity's up-front
other qualified costs) to Consumers Energy Company as the purchase
price of the securitization property. The proceeds from the sale
of the securitization property (after payment or reimbursement of
all up-front other qualified costs) shall be applied to retire
Consumers Energy Company's existing debt or equity.
N. Consumers Energy Company has the continuing, irrevocable right to
cause the issuance of securitization bonds in one or more series
(in accordance with the terms of this financing order) for a
period of two years following the later of the date upon which
this order becomes final and no longer appealable or, if appealed,
is no longer subject to further judicial review.
O. Immediately upon its receipt, Consumers Energy Company shall
deliver to the Commission a copy of each private letter or other
ruling issued by the Internal Revenue Service with respect to the
proposed securitization transaction, the securitization bonds, or
any other related matter. Similarly, Consumers Energy Company
shall provide the Commission with a copy of each registration
statement, prospectus, or any other closing documents filed with
the Securities and Exchange Commission as part of its
securitization transaction immediately following the filing of the
original document.
P. This financing order, together with the securitization charges
authorized by the order, shall be binding upon Consumers Energy
Company and any of its successors or affiliates that provide
distribution service directly to customers in Consumers Energy
Company's service area as of the initial date of issuance of the
securitization bonds, as well as any other entity that provides
distribution services to customers within that service area. This
order is also binding upon any servicer or other entity
responsible for billing and collecting securitization charges on
behalf of the owners of securitization property, and upon any
successor to the Commission.
Q. Subject to compliance with the requirements of this financing
order, Consumers Energy Company and each special purpose entity
that it creates shall be afforded flexibility in establishing the
terms and conditions of the securitization bonds, including the
final structure of the special purpose entity as either a business
trust or limited liability company, repayment schedules, term,
payment dates, collateral, credit enhancement, interest rates
swaps, other hedging arrangements, required debt service,
reserves, interest rates, indices, other reasonable and necessary
financing costs, and the ability of Consumers Energy Company, at
its option, to issue one or more series of securitization bonds.
Notwithstanding the fact that Consumers Energy Company and each of
its special purpose entities are authorized to use interest rate
swaps and other hedging arrangements to obtain the best rates
possible for the securitization bonds, the resulting
securitization charge shall be converted to, and billed as, a
fixed charge subject to true-up in the manner approved by this
order.
R. All regulatory approvals within the jurisdiction of the Commission
that are necessary for the securitization of the qualified costs
identified in this financing order, and all related transactions,
are granted.
S. Consistent with the terms of this financing order, Consumers
Energy Company shall first use the cost savings arising from
securitization to cover the 5% residential rate reduction
initiated pursuant to the Commission's June 5, 2000 order in Case
No. U-12464. The remaining cost savings shall then be applied, in
equal proportion, to reduce by up to 5% the distribution charge of
each non-residential customer on Consumers Energy Company's
electric system and the transition charge imposed (or to be
imposed) on its retail open access customers. If the overall cost
savings exceed the amount needed to achieve a 5% rate reduction
for all customers, the excess savings shall be designated for use
in funding the low-income and energy efficiency fund. Unlike the
mandatory 5% residential rate reduction, which had immediate
effect, implementation of the rate reductions arising from the
remaining securitization savings shall be held in abeyance pending
Consumers Energy Company's initial receipt of securitization bond
proceeds.
T. Consumers Energy Company shall file a report, within 30 days
following the receipt of all or any portion of the proceeds from
the sale of its securitization bonds and quarterly thereafter
until all bond proceeds have been disbursed, specifying (1) the
gross amount of proceeds arising from the sale of those bonds, (2)
any amounts expended for payment of initial other qualified costs
relating to that sale, (3) the amount of proceeds remaining after
payment of those costs, and (4) the precise type and amount of
debt or equity, originally held by Consumers Energy Company or its
parent company, CMS Energy Company, retired through use of those
proceeds. The initial report filed following each receipt of
securitization bond proceeds shall include a copy of the closing
documents (generally referred to as the "closing transcript")
arising from the sale of those bonds.
U. In the event that a decline in interest rates or other change in
market conditions leads Consumers Energy Company to refinance any
of its securitization bonds, Consumers Energy Company shall file,
within 7 days, a report disclosing the details of that
refinancing.
V. Consumers Energy Company shall continually monitor the bond market
and notify the Commission, within 7 days, of (1) any reduction in
applicable bond rates or other change in market conditions that
might make refinancing its securitization bonds economically
advantageous, and (2) what steps, if any, Consumers Energy Company
intends to take as a result of that reduction or change.
W. All amortization, accounting, and ratemaking approvals, as well as
all other authorizations, provided for in this financing order
shall be tolled pending Consumers Energy Company's express written
acceptance of all conditions and limitations that the order places
on the utility.
X. Following Consumers Energy Company's express written acceptance of
all conditions and limitations established by this financing
order, the order--and each of its terms--shall be irrevocable.
Consumers Energy Company's acceptance likewise shall be
irrevocable and, therefore, shall survive bankruptcy or any other
change in the utility's legal or economic structure.
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
/s/ John G. Strand
Chairman
( S E A L )
/s/ David A. Svanda
Commissioner
/s/ Robert B. Nelson
Commissioner, concurring in part, and dissenting in part.
By its action of October 24, 2000.
/s/ Dorothy Wideman
Its Executive Secretary
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
Commissioner, concurring in part, and
dissenting in part.
By its action of October 24, 2000.
Its Executive Secretary
In the matter of the application of)
CONSUMERS ENERGY COMPANY for a financing order approving the securitization
of)Case No. U-12505 certain regulatory assets and other qualified costs.
Suggested Minute:
"Adopt and issue order dated October 24, 2000 authorizing Consumers Energy
Company to securitize up to $468,592,000 of its after-tax qualified costs,
to create one or more special purpose entities for use in issuing its
securitization bonds, to implement and collect securitization and tax
charges, to apply appropriate accounting and amortization methodologies,
and to use the cost savings arising from securitization to reduce the rates
charged to its bundled sales and retail open access customers, among
others, as set forth in the order."
STATE OF MICHIGAN
BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION
* * * * *
In the matter of the application of CONSUMERS ENERGY COMPANY for a
financing order approving the securitization of)Case No. U-12505 certain
regulatory assets and other qualified costs.
OPINION OF COMMISSIONER ROBERT B. NELSON
CONCURRING IN PART AND DISSENTING IN PART
(Submitted on October 24, 2000 concerning order issued on same date.)
I join my colleagues today on virtually all aspects of today's
order in this proceeding, including (1) the rejection of Consumers Energy
Company's (Consumers) request to retroactively securitize a portion of the
residential rate reduction ordered by the Legislature (2) the
implementation of a base rate reduction for retail customers to offset
securitization and tax charges, and (3) equalization of the 5% rate
reduction for retail access customers. However, I do not need to reach
these conclusions because I cannot agree with the majority when they find
(1) that the Palisades nuclear plant constitutes a regulatory asset, (2)
that the net present value of revenues to be collected under this order is
less than revenues that would be collected using conventional financing
methods, and (3) that there are tangible and quantifiable benefits to
securitization for Consumers' customers. Accordingly, I would find that
Consumers has not met the requirements of the new law, and a financing
order approving the issuance of securitization bonds should not be issued.
Section 10i(1) of 2000 PA 142 (Act 142) requires the Commission to
issue a financing order to allow a utility to recover "qualified costs" if
the Commission finds that the net present value of the revenues to be
collected under the financing order is less than the amount that would be
recovered over the remaining life of the qualified costs using conventional
financing and if the order is consistent with other standards enunciated in
Act 142. The first inquiry of the Commission with regard to any request for
a financing order is whether the request involves "qualified costs."
"Qualified costs", under Section 10h(g) of Act 142, are defined as an
electric utility's "regulatory assets" as determined by the Commission and
any costs that the Commission "determines that the electric utility would
be unlikely to collect in a competitive market . . ." Neither Act 142, nor
its companion, 2000 PA 141 (Act 141), defines regulatory asset. However,
since Act 142 refers to regulatory assets "as determined" by the
Commission, prior Commission orders are relevant. In particular, the
Commission's orders in Case No. U-11290, cited by some of the parties in
this proceeding, should be examined.
COMMISSION RESTRUCTURING ORDERS REGARDING REGULATORY ASSETS
Case No. U-11290 was the primary docket for the Commission's
electric restructuring program and hence clearly falls within the purview
of Section 10a(5) of Act 141, which affirms that all Commission orders
issued before the effective date of Act 141 that allowed customers to
choose an alternative electric supplier and authorized recovery of net
stranded costs are enforceable. The Commission took great pains to
indicate, in its January 14, 1998 order, that:
The Commission wishes to emphasize that these stranded cost
calculations are heavily dependent upon the assumptions used. For example,
if only half of the customers choose open access, then Consumers' stranded
costs will be reduced to approximately $880 million and Detroit Edison's
stranded costs to approximately $1,242 million. If the market price of
power were to change by more than 0.5(cent)/kWh from the assumed level of
2.9(cent)/kWh, then the estimated stranded costs would change by more than
$750 million. These facts suggest that caution should be exercised in the
use of the stranded cost estimates.
Case No. U-11290, Order dated January 14, 1998, p. 15.
In a subsequent order dated February 11, 1998, the Commission
again noted, in response to a request for clarification by Consumers:
As the Commission indicated in the January 14 order, the stranded
cost information contained therein provides initial estimates that
are heavily dependent upon uncertain assumptions. The Commission
noted that even modest changes in these assumptions could easily
change the stranded cost estimates by $750 million to $1 billion
or more. In light of this uncertainty, it would be fruitless to
attempt to "fine-tune" the estimate in the manner that Consumers
proposes. Such minor details are more appropriate for
consideration in the true-up proceeding."
Case No. U-11290, Order dated February 11, 1998, p. 7.
The January 14 and February 11 orders, in estimating the amount of
stranded costs that might be included in a transition charge to be applied
to retail access customers in 2002, based on early 1998 assumptions,
included five so-called "buckets" or categories of stranded costs. These
buckets remained distinct and separate throughout the numerous
restructuring orders issued by the Commission, before and after 1998. One
such bucket was labeled "Nuclear Plant" and another bucket was labeled
Regulatory Assets." The January 14 order estimated that Consumers' "Nuclear
Plant" bucket included $231 million in stranded costs and its "Regulatory
Assets" bucket included $68 million in stranded costs.
Regulatory assets had been defined previously in Case No. U-11290,
in an order issued on June 5, 1997:
First, regulatory assets consist of unrecovered costs of demand
side management programs, plant abandonment costs, unfunded
pension and health benefit liabilities, deferred tax liabilities,
and other similar costs. These costs have been approved by the
Commission and collection of these costs [has] been deferred to
future time frames.
Case No. U-11290, Order issued June 5, 1997, p. 7.
With regard to the "Nuclear Plant" bucket, the Commission stated:
Second, [stranded] costs include the capital costs of certain
existing power supply facilities. Included in this category are
the capital costs (net book) of nuclear facilities.. . . Given the
need to ensure adequate financial resources for nuclear plants,
the entire net capital cost of the facilities should be included
as stranded costs because it is unlikely that the market value of
the energy produced will be able to offset the operating and
maintenance costs for some time to come, let alone make a
contribution towards capital recovery. As a general rule, it is
not necessary to recognize capital costs of hydroelectric, coal,
oil, or gas power production facilities that are owned by the
utility because they should be at market value by the end of the
transition period, provided that the combination of the
performance based regulation and the utility's stranded cost
mitigation efforts produces the necessary capital recovery.
Case No. U-11290, Order dated June 5, 1997 p. 7.
In each of the orders in Case No. U-11290, from June 5, 1997 on,
the Commission maintained the distinction between Nuclear Plant and
Regulatory Assets. In fact, even one of Consumers' own exhibits in this
case preserves this distinction. (Exhibit CE-7). The exhibit indicates that
the "Revenue Requirements" for the Palisades Net capital costs are
$405,455,000. This is the amount that Consumers seeks to securitize in this
case, based on what it projects the balance in the Palisades account will
be on December 31, 2000. Not only does classifying the net book capital
costs of Palisades contravene all previous Commission restructuring orders,
but the amount sought to be securitized vastly exceeds the amount of net
stranded costs the Commission estimated to be attributable to Palisades in
1998. Accordingly, prior Commission restructuring orders provide no support
for classifying Palisades as a regulatory asset.
Consumers has argued that the January 14, 1998 order, by its
terms, created the underlying regulatory asset for Palisades. This ignores
the fact that regulatory assets, however they are created, require changes
in accounting that must be approved by the Commission. As the Attorney
General points out, Consumers has never requested the accounting changes
necessarily associated with obtaining a regulatory asset. In fact, despite
Consumers' assertion that it is merely a matter of fulfilling the proper
"bureaucratic process" to obtain regulatory asset designation, the
application in this case did not even seek such treatment. It merely
assumes that the net book capital costs of Palisades should be deemed a
regulatory asset. Although the majority points to Consumers' request for
regulatory asset treatment for Palisades in its reply brief, this did not
provide any notice to parties that may dispute the appropriateness of such
treatment. Consumers has made no claim that it is no longer required to
comply with the Uniform System of Accounts as applied by the Commission or
the FERC. As will be seen in examining other precedent, the Commission has
consistently required approval of the necessary accounting changes before
"determining" regulatory assets. The reasons for requiring these approvals
were not, in my view, entirely bureaucratic.
OTHER COMMISSION PRECEDENT REGARDING REGULATORY ASSETS
Detroit Edison sought accounting authority in Case No. U-11726 in
association with its intention to classify the net book capital costs of
its Fermi II nuclear plant as a regulatory asset and accelerate the
amortization of the plant. The Commission conducted a contested case to
determine whether Detroit Edison could make these accounting changes and
concluded, after a thorough review, that it could. As the Attorney General
points out, as a result of the record established in that case, the
Commission ordered Detroit Edison to comply with six enumerated conditions
in connection with the approved accounting authority. Moreover, the record
contained a review of the projected market value of Fermi II in 2008, the
end of the transition period.
As ABATE points out, there is no record in this proceeding that
would allow us to evaluate the projected market value of Palisades in 2008
or to impose on Consumers the conditions that were imposed on Detroit
Edison. Indeed, one of the conditions imposed on Detroit Edison was an
earnings sharing mechanism, something that the Commission would have
difficulty implementing today in the context of frozen rates. Two of the
other conditions deal with ratepayer protection in the event of a sale or
abandonment of the plant. Although the Commission is today attempting to
impose conditions on Consumers in the event of a sale or abandonment of
Palisades, the record in this proceeding did not address such
contingencies, as the record in Case No. U-11726 did, and such conditions
may not be supported on appeal. The majority's conclusion that the
Commission's order in Case No. U-11726 established a precedent for all net
book nuclear plant costs ignores the considered review conducted with
regard to Detroit Edison's application. Moreover, the similarities cited by
the majority between the Fermi II plant and Palisades are not as compelling
as they suggest. The remaining lives of the plants are considerably
different and Palisades may have a significant market value. If Palisades
is sold before the end of the rate freeze, there will be no way to
immediately pass any benefits on to ratepayers. At the end of the rate
freeze, the Commission's ability to do so may be compromised by whatever
regulatory structure emerges.(18)
In Case No. U-10083, the Commission conducted a contested case
hearing (required by the Uniform System of Accounts) to determine whether
regulated electric and gas utilities would be granted general authorization
to use specified accounts for temporary book/tax-timing differences and to
use deferred tax accounting pursuant to SFAS 109. In granting the requested
authorizations, the Commission indicated that affected utilities were
"assured of continued recovery of regulatory assets.. . . " Order dated
February 8, 1993, in Case No. U-10083. Consumers has correctly listed the
balance in its SFAS 109 account as a regulatory asset.
In Case Nos. U-10040 and U-10040-A, the Commission required
Michigan utilities to begin accounting for post-retirement benefits (other
than pensions) and to employ SFAS 106. In this order, the Commission found
that a utility should be allowed to recover "its reasonable and prudent
SFAS 106 costs through rates.. . . " Pursuant to this authority, Consumers
has correctly listed the balance in its OPEB account (as it relates to
generation) in this proceeding as a regulatory asset, which was defined in
the proceeding as one for which "the regulator has given reasonable
assurance that the incurred cost will be recovered in future rates." (19)
Order dated December 8, 1992 in Cases Nos. U-10040 and U-10040-A, p.7.
In each of the cases cited above, the Commission had the benefit
of a full record to conclude that regulatory assets should be established.
We have no such record with regard to Palisades and these cases are not
appropriate precedent.
OTHER REQUIREMENTS FOR SECURITIZATION
Even if it is not a regulatory asset, Palisades could still be a
"qualified cost" and eligible for securitization if Consumers had made an
effort to establish that the net book capital costs of the plant were costs
that it would unlikely "collect in a competitive market." Consumers chose
not to make the effort. The lack of effort may be due to the fact that
Palisades' current market value is such that it would be competitive in
today's volatile market. Without any record on this issue, the test of
Section 10h(g) cannot be satisfied.(20) Consumers seems to be arguing that
it is the Attorney General's responsibility to prove why the Palisades net
book nuclear plant cost is not a qualified cost. In fact, it is Consumers'
responsibility to prove that it is. This the company has failed to do.
Having concluded that Consumers has not demonstrated that
Palisades is a regulatory asset and hence not a qualified cost under PA
142, I would deduct the $405 million from Consumers' list of qualified
costs (Exhibit CE-7) and find that only $322 million of the $727 million
sought to be securitized should be considered qualified costs. After taking
into account income tax effects, only $209 million will be securitized.
However, $209 million is not a sufficient amount to finance the residential
rate reduction ($49,783,000 annually). Under the terms of Section 10d(4) of
PA 141, a rate reduction funded pursuant to that subsection shall not be
less than the 5% rate reduction under subsection (1). Since the removal of
Palisades net book capital costs from Consumers' qualified costs does not
allow for the financing of a 5% residential rate reduction, none of the
reduction can be financed through securitization and securitization is not
permitted.
I read the last clause in Section 10d(4), which provides that the
Commission cannot preclude the issuance of an amount of securitization
bonds sufficient to fund the 5% rate reduction to mean that if the
Commission concludes that securitization should be permitted, it must
securitize at least that amount. Section 10d of Act 141 is only operative,
by its terms, if "the commission authorizes an electric utility to use
securitization financing under section 10i." It is also questionable that
the benefits of securitization will be forthcoming if only $209 million in
securitization bonds were to be issued. If Consumers is correct that the
last clause in subsection 10d(4) requires us to authorize securitization,
regardless of the amount of qualified costs involved, absurd results would
follow. A utility could seek to securitize only a 20 year old transformer
with a market value of less than .1% of the amount needed to fund the rate
reduction and, on that basis, require ratepayers to be obligated to pay a
securitization charge for 14 years. The courts have consistently held that
legislation should be construed to avoid absurd interpretations. See Salas
v Clements, 399 Mich 103, 109 (1976). If Consumers subsequently
demonstrates that it has sufficient qualified costs to finance,
prospectively, the 5% residential rate reduction, this Commission will be
precluded from allowing it to securitize an amount less than that.(21)
There are those who would argue that the Legislature clearly
intended to allow Consumers to avail itself of securitization. The
Legislature could have indicated that all net stranded costs would be
subject to securitization, as the Texas legislature did. They did not. The
Legislature could have said that all nuclear capital costs would be subject
to securitization. They did not. The Legislature could have provided that
all of the five buckets that the Commission established in Case No. U-11290
would be subject to securitization. They did not. The Legislature clearly
delineated the terms by which securitization is available. Consumers did
not meet them. We are not allowed to rewrite legislation and must accept
the clear and unambiguous meaning of the words in the statute. See In re
MCI Telecommunications Complaint, 460 Mich 396, 414 (1999).
NET PRESENT VALUE OF REVENUES WITH AND WITHOUT SECURITIZATION
Consumers has predicated its compliance with Section 10i(1) of Act 142 on a
comparison of the "revenue requirements" that would be collected under this
financing order with the revenue requirements that would be recovered under
conventional financing methods. As the Attorney General points out, such a
comparison does not square with the statutory language, which requires an
examination of the "revenues to be collected" under a financing order with
the revenues that would be recovered using conventional methods. The
Attorney General has correctly noted that, for at least three years (five
years for residential customers), the revenues collected under the
financing order will be exactly the same as the revenues collected under
conventional methods because of the rate freeze imposed by Section 10(d) of
Act 141. The Attorney General's witness King concluded that, after the rate
freeze, the revenues collected under the financing order would exceed the
revenues that would be collected under conventional financing by more than
$96 million (Exhibit I-46). Accordingly, Consumers would not satisfy the
requirements of Section 10i(1) and securitization would not be permitted.
The only responses given by Consumers to this analysis are (1) that the
rate reduction is contingent on securitization, which, as the majority
properly finds, is not a valid interpretation of the statute and (2) that
"revenue requirements" should be used to determine compliance with the Act.
In its reply brief, Consumers argues, in this connection, that no one
"could ever predict" what the "revenues to be collected" under the statute
would be and the Attorney General's reliance on "cash flows" as opposed to
"revenue requirements" is misplaced. I disagree.
The new statute, by requiring an examination of revenues "to be collected"
inherently calls for a "prediction" of future revenues. I believe the
Attorney General's analysis, which utilizes "cash flows," is more
consistent with the intent of the Legislature than an analysis based on
revenue requirements. By ignoring the effects of the rate freeze mandated
by the Legislature and examining "revenue requirements", Consumers and the
majority have attempted to contrive a new test for securitization. The
statutory test has not been met.
BENEFITS TO RATEPAYERS
Perhaps the most critical test in Act 142 is found in Section 10i(2)(b),
which requires that in any financing order, the Commission must ensure that
there will be "tangible and quantifiable benefits" to customers from
securitization. Given the previous discussion and in view of the evidence
presented in this proceeding, I do not believe the Commission can ensure
such benefits.
For residential ratepayers who choose to continue to buy generation service
from Consumers, the lack of such benefits is painfully evident. For five
years, the rates for these customers will be frozen and whether the assets
listed in Consumers' application are securitized or not, they will be
unaffected. This is because the securitization charge will be offset by a
base rate reduction to ensure that rates remain frozen. If conventional
financing is used, years six and seven would be the only possible years
that these customers could, pursuant to the terms of Commission orders in
Case No. U-11290, be required to pay in excess of the frozen rate levels
toward the recovery of stranded assets. The Attorney General has estimated
that residential customers would pay approximately an additional $74
million toward such recovery in 2006 and 2007 (Exhibit I-49). In contrast,
under Consumers' securitization proposal, these same residential ratepayers
would pay securitization charges for a 14 year period that on a net present
value basis amounts to considerably more than they would pay under Case No.
U-11290 (Exhibit I-46).(22)
Although not as striking, small commercial customers would also pay well in
excess for recovery of securitized assets than they would for recovery of
the same assets under conventional financing. As ABATE notes, there is no
assurance that any of the benefits from securitization will inure to
ratepayers because after the rate freeze, CMS Energy may have disposed of
any such benefits for its own purposes. Based on the fact that the majority
of Consumers' customers would not benefit from securitization (and would in
fact be harmed considerably), I am unable to conclude that Consumers has
met the statutory test necessary for approval of its application. This does
not mean that Consumers may not have stranded costs and indeed that the
assets it seeks to securitize in this application may provide the basis for
the recovery of stranded costs. However, those costs should be recovered in
the manner prescribed by the Commission in Case No. U-11290 and be subject
to a true-up proceeding every year. The new statutes make it clear that in
looking at stranded costs, this Commission must focus on "net" stranded
costs, only those stranded costs that remain after stranded benefits are
subtracted from stranded assets. (See Sections 10a(1, 5, 9, and 10) of Act
141). The Commission today has commenced a generic proceeding to deal with
the statutory mandate to develop a method for determining net stranded
costs. I fully support the commencement of that proceeding and believe it
will provide us with the basis to determine whether Consumers has
sufficient net stranded costs to warrant recovery from ratepayers through
securitization or other means. Although Act 142 does allow for
securitization of certain qualified costs prior to a determination of a
given utility's net stranded costs, the flaws in Consumers' application are
such that its approval at this time, with the associated commitment by
customers to pay well over $1 billion for 14 years, would be ill-advised
and unlawful.
MICHIGAN PUBLIC SERVICE COMMISSION
Robert B. Nelson, Commissioner
1. As noted in Section 10h(c) of Act 142, the only entities eligible
for securitization are those falling within the definition of
"electric utility" in Section 2(d) of the Electric Transmission
Line Certification Act, 1995 PA 30, MCL 460.562(d); MSA
22.150(2)(d). Both Consumers and Detroit Edison satisfy that
definition.
2. Securitization is the process by which a utility--following the
issuance of a financing order by the Commission--replaces
relatively high-cost debt and equity with lower-cost debt in the
form of securitization bonds.
3. Although Windpower, L.L.C., filed a late petition to intervene on
July 24, 2000, no hearing was requested or scheduled, and
Windpower took no further action with regard to its petition.
4. Pursuant to Section 10l(2) of Act 142, this designation as a "true
sale" applies regardless of whether the purchaser has any recourse
against the seller, or any other term of the parties' sales
agreement, including the seller's retention of an equity interest
in the securitization property, the fact that Consumers may act as
the collector of securitization charges, or the treatment of the
transfer as a financing for tax, financial reporting, or other
purposes.
5. As stated in Section 10n(1) of Act 142, these bonds are not a debt
or obligation of the state, and do not constitute a charge on its
full faith and credit or taxing power.
6. As stated in Section 10j(2) of Act 142, securitization property
shall constitute a present property right even though the
imposition and collection of securitization charges depends on
further acts of the electric utility or others that have not yet
occurred. Moreover, pursuant to Sections 10m(2) and 10m(4) of that
act, the lien and security interest created by this financing
order and held by the SPE shall attach automatically once value is
received for the bonds, shall constitute a continuously perfected
lien and security interest, and shall not be impaired by any later
modification of the order or by the commingling of funds arising
from securitization charges with other funds. Moreover, as stated
in Section 10n(2) of the act, the State of Michigan pledges not to
take or permit any action that would impair the value of the
securitization property or that would reduce or alter--except as
allowed in the context of a true-up procedure undertaken pursuant
to Section 10k(3) of the act--or otherwise impair the revenue
stream produced by any securitization charges approved in this
order. Finally, as set forth in Section 10m(8), any changes in
either the order or the securitization charges do not affect the
validity, perfection, or priority of the security interest.
7. In the context of this order, "transition charge" refers to the
fee or fees imposed by a utility to recover stranded costs arising
from ROA, other than those that are recovered through
securitization. Securitization charges are designed to recover
qualified costs, which may include some stranded costs. Although
there is significant overlap between "stranded costs" and
"qualified costs," the terms are not synonymous. 8. Interestingly,
neither the Attorney General nor any other party challenges the
legitimacy of the proposed 1.5% fee that would be paid if some
entity other than Consumers is the servicer.
9. Unicom notes that Consumers has additional items that the utility
could have included within the quantifiable costs for which it
currently seeks securitization. Unicom expresses concern that the
utility may, at some future date, attempt to recover these other
costs "in a manner that would provide Consumers with a competitive
advantage" over other energy providers. Unicom's initial brief, p.
4. Notwithstanding Unicom's apparent belief to the contrary, this
issue is not ripe for Commission action.
10. "Tranches" refers to individual classes of bonds having different
maturity dates and average lives.
11. Although the Attorney General raises a legitimate concern, and
despite the Commission's concurrence that CMS should be encouraged
to use the securitization bond proceeds to repurchase
publicly-held equity, the issue of whether Consumers' parent might
ultimately use securitization of the utility's qualified costs to
gain an unfair competitive advantage is better left to another
case.
12. See, infra, the Commission's discussion regarding the "Proposed
Use of Securitization Costs Savings."
13. The Commission recognizes that the estimates discussed in Mr.
Ernst's testimony and set forth on Exhibit CE-7 do not reflect the
Palisades investment tax credit adjustment that was proposed by
Mr. Ballinger and adopted earlier in this order. However, because
that adjustment will have only minimal effect on the estimated
figures being discussed in this section and more precise figures
will be calculated once securitization has actually occurred, Mr.
Ernst's estimated figures are sufficiently accurate to warrant
their use in this context.
14. As previously indicated in this order, the tax charge is designed
to recover all tax liability arising from Consumers' assessment
and collection of its securitization charge. The need for a tax
charge was explained by Mr. Ernst, as follows:
In order for the Company to make each $1 in annual principal
payments to the trustee for the bondholders, the Company needs to
collect $1.5747 in revenues from customers for the principal
component of the annual payment. In other words, the Company has
to pay [federal income tax] and [Michigan Single Business Tax] on
the revenues it receives to repay principal due to the fact that
the principal does not have a tax deduction associated with it. If
the Company did not charge the $1.5747, it would not collect
enough revenue to pay taxes and to pay the entire amount of its
debt obligations.
3 Tr. 262.
15. Dow joins with these parties and supports the use of per kWh
charges, at least as they apply to the provision of stand-by
power.
16. As mentioned in Consumers' proposal, a dramatic and unforeseen
change in circumstance could result in a request for a non-routine
true-up. Because it would necessitate a complex contested case
proceeding, resolution of that request would not be subject to the
45-day deadline.
17. In the course of its argument, ABATE asserted that "should the
Commission determine not to examine net stranded costs (and
stranded benefits) here, it must take action to assure that they
are examined promptly." ABATE's initial brief, p. 15. This has
been accomplished by the issuance of today's order in Case No.
U-12639 initiating a contested case proceeding, pursuant to
Section 10a(10) of Act 141, to establish procedures for
determining net stranded costs.
18. It is significant, in my view, that regulatory assets, under
Section 10h(g) must be those assets previously determined by the
Commission, whereas the Commission can determine other qualified
costs in the context of this case. The majority is therefore
attempting to support a regulatory asset determination that should
have been established for Palisades in a previous case.
19. The Commission's order relied on SFAS 71, which Consumers
apparently now asserts is no longer applicable to its electric
utility assets, in light of Case No. U-11290. If Consumers is no
longer adhering to SFAS 71, the Commission may not be in a
position to approve regulatory assets. If so, the only available
way for Consumers to justify classifying Palisades as a "qualified
cost" under PA 142 is to prove that the costs of Palisades could
not be collected in a competitive market. As noted elsewhere in
this opinion, the record is devoid of any attempt to offer such
proof. The FERC defines "regulatory asset" as one resulting from
the "rate action" of a regulatory agency for which it is probable
that the asset would be included in a different period than
traditional ratemaking. Case No. U-11290's treatment of stranded
costs was not a specific rate action since it dealt with costs
that could only be recovered from retail access customers and did
not affect, for ratemaking purposes, other customers.
20. The absence of a record on this issue is significant in view of
the recent sales of generation units throughout the country,
detailed by the Attorney General, and the fact that the
Commission's 1998 "estimate" of stranded costs was based on
uncertain assumptions.
21. Consumers has relied on Section 10cc of Act 141 in support of its
position. This provision, which could void the 5% rate reduction
if a court invalidates any part of Act 141, is not triggered by a
Commission finding that a utility has failed to meet the
requirements of Act 142.
22. The majority asserts that "benefits derived from securitization
can be immediately passed on to Consumers' ratepayers." (Order, p.
24.) However, none of the securitization savings beyond the 5%
rate reduction required by law are being passed on to captive
(bundled) residential ratepayers. (Order, p. 32.) Moreover, some
of the benefits of realigning Consumers' debt and equity may be
accomplished without securitization.
STATE OF MICHIGAN
BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION
* * * * *
In the matter of the application of )
CONSUMERS ENERGY COMPANY for a )
financing order approving the securitization of ) Case No. U-12505
certain regulatory assets and other qualified costs. )
)
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At the January 4, 2001 meeting of the Michigan Public Service
Commission in Lansing, Michigan.
PRESENT: Hon. John G. Strand, Chairman
Hon. David A. Svanda, Commissioner
Hon. Robert B. Nelson, Commissioner
OPINION AND ORDER
On October 24, 2000, the Commission issued its order in this case
(referred to as the financing order) authorizing Consumers Energy Company
(Consumers) to securitize up to $468,592,000 of its after-tax qualified
costs, pursuant to certain terms and conditions. Among other things, that
order, issued pursuant to the Customer Choice and Electricity Reliability
Act, 2000 PA 141 (Act 141) and 2000 PA 142 (Act 142), allowed the utility
to (1) create one or more special purpose entities for use in issuing its
securitization bonds, (2) apply appropriate accounting and amortization
methodologies, (3) implement and collect securitization and tax charges,
and (4) use the cost savings from securitization to reduce the rates
charged to its bundled sales and retail open access customers. Furthermore,
it required Consumers to file its "express written acceptance of all
conditions and limitations that the order places on the utility." Financing
order, p. 68.
On November 9, 2000, Consumers submitted a written acceptance in
which the utility stated that it "fully accepts the terms and conditions"
of the financing order "based upon certain interpretations and
understandings" set forth in that acceptance. Specifically, the utility's
acceptance letter listed, as paragraphs A through D, four areas where
Consumers seeks confirmation that it has correctly interpreted the
financing order. Consistent with that letter, Consumers filed a petition
seeking rehearing or clarification of those four issues. On November 30,
2000, Attorney General Jennifer M. Granholm (Attorney General), the
Association of Businesses Advocating Tariff Equity (ABATE), Energy
Michigan, and the Michigan Chamber of Commerce filed responses to
Consumers' petition.(1)
Rule 403 of the Commission's Rules of Practice and Procedure, 1992
AACS, R 460.17403, provides that a petition for rehearing may be based on
claims of error, newly discovered evidence, facts or circumstances arising
after the hearing, or unintended consequences resulting from compliance
with the order. A petition for rehearing is not merely another opportunity
for a party to argue a position or to express disagreement with the
Commission's decision. Unless a party can show the decision to be incorrect
or improper because of errors, newly discovered evidence, or unintended
consequences of the decision, the Commission will not grant a rehearing.
--------
(1) In addition to addressing the requests set forth in Consumers'
petition, some of these responses effectively seek rehearing of other
issues discussed in the financing order. However, MCL 460.l0i(7); MSA
22.13(l0i)(7), which was adopted as part of Act 142, specifically precludes
any party other than "the applicant for securitization"--Consumers, in this
case--from requesting rehearing of a financing order. The Commission is
therefore prohibited from addressing any issues beyond the four raised in
Consumers' petition, and has thus disregarded all discussions set forth in
the responses that concern other issues. The Commission is further
prohibited from addressing the issue of the constitutionality of Section
l0i(7) of Act 142, an issue raised by the Attorney General and ABATE. See,
Universal Am-Can Limited v Attorney General, 197 Mich App 34, 37-38; 494
NW2d 787 (1992).
Periodic True-ups
The financing order issued in this case, as well as that provided
for The Detroit Edison Company (Detroit Edison) by the Commission's
November 2, 2000 order in Case No. U-12478, established a system for
periodically adjusting securitization and tax charges. In each instance,
the Commission approved a true-up methodology that differed slightly from
the respective utility's initial proposal. The changes adopted in both
cases were designed to alleviate various parties' concerns regarding the
frequency, scope, and potential complexity of future true-up proceedings.
In paragraph A of its acceptance letter, Consumers expresses its
belief that the Commission intended the true-up mechanisms approved for
itself and Detroit Edison to be the same. Nevertheless, Consumers notes,
the language used by the Commission differs from one case to the other. The
utility therefore contends that, assuming the Commission wanted these two
utilities to use identical true-up methodologies, language like that found
on pages 37 and 38 of Detroit Edison's order should be substituted for that
found on page 49 of the financing order issued in Consumers' case.
The Commission agrees with this contention. It was, as Consumers
correctly assumes, the Commission's intention to establish identical
true-up procedures for use by both of these utilities. The Commission
therefore finds that it should resolve any and all potential confusion on
this issue by adopting the language proposed on pages 1 and 2 of Consumers'
acceptance letter, albeit with one small correction. Specifically, the
revised language to be included as part of Consumers' financing order
should reflect that, as discussed in the financing order, some other entity
may ultimately succeed Consumers as the servicer of its securitization
bonds. Thus, the language set forth on page 49 of the financing order,
lines 5 through 16, as well as in footnote 16, should be revised to read as
follows:
For this reason, the Commission finds that Consumers' proposal for
a true-up mechanism should be approved, but with two relatively
minor changes. First, the servicer (whether Consumers or a
successor servicer) should be limited to undertaking no more than
one routine true-up per year until 12 months prior to the last
expected maturity date of the securitization bonds. Moreover,
during the period from the beginning of those 12 months prior to
the last expected maturity date, routine true-ups shall be limited
to no more than one per quarter. Second, the servicer of the
securitization bonds should initiate each routine true-up pursuant
to Section l0k(3) of Act 142 by filing a request for adjustment
that (1) explains how its proposed revision of the securitization
and tax charges will ensure the expected recovery of amounts
sufficient to timely provide all payments of debt service and
other required amounts and charges in connection with the
securitization bonds, (2) shows the computation of the proposed
adjustments to the securitization charge and the tax charge
currently in place, and (3) seeks Commission review and
approval--on an expedited basis--of the arithmetic computations
contained in the proposed adjustments before they can be
implemented. All reviews conducted by the Commission of the
computations shall be consistent with the requirements of Section
l0k(3) of Act 142 for a true-up mechanism. This review must be
completed regarding the servicer's request for adjustments to the
securitization charge and the tax charge pursuant to a routine
true-up within 45 days after the servicer files its request for
adjustment.16 The determination of the Commission in response to a
request for adjustment shall be provided by the Commission to the
servicer within the aforementioned 45-day period. The adjustments
by the Commission will be to the securitization charge and the tax
charge in effect prior to the filing of the request for adjustment
and those charges shall remain in place until the adjustments have
become effective and are being billed to customers.
-------------------------
16 As mentioned in Consumers' proposal, a dramatic and
unforeseen change in circumstances could result in a request for a
non-routine true-up. The Commission is approving Consumers'
request for the availability of a non-routine true-up process to a
servicer of securitization bonds. Because it, unlike a routine
true-up, would have a scope that goes beyond verification of
arithmetic computations and would necessitate a complex contested
case proceeding, resolution of a request by a servicer for a
non-routine adjustment to the securitization charge and the tax
charge would not be subject to the 45- day deadline.
The Mandatory 5% Residential Rate Cut
Section l0d of Act 141 required Consumers and Detroit Edison to
reduce by 5% the rates in effect for their residential rate classes as of
May 1, 2000. It also provided those utilities an opportunity to use at
least a portion of any savings arising from securitization to offset that
5% residential rate reduction. However, noting that a significant amount of
time would likely elapse between the implementation of that rate cut
(during the summer of 2000) and the issuance of Consumers' securitization
bonds (which the utility estimated would not occur before the start of
2001), Consumers requested authority to treat as a regulatory asset the
entire year 2000 revenue reduction arising from that 5% residential rate
cut. In the financing order, the Commission rejected Consumers' request on
the grounds that, among other things, "securitization cannot be applied
retroactively to fund that rate reduction." Financing order, p. 35.
In paragraph B of its acceptance letter, Consumers states that it
understands the Commission's ruling disallowing the retroactive application
of securitization to mean that although the revenue reduction occurring
prior to the October 24, 2000 issuance of the financing order cannot be
recovered, the same is not true with regard to any portion of the revenues
lost between that date and the actual issuance of Consumers' securitization
bonds. In support of this interpretation, Consumers cites statements in
Detroit Edison's financing order to the effect that "the Legislature did
not intend that the cost of the residential rate reduction prior to [a]
financing order be securitized" and that Commission rejection was required
for any utility's "proposal to treat the rate reduction as a regulatory
asset prior to the issuance of [a financing] order." Consumers' acceptance
letter, p. 2; citing the Commission's November 2, 2000 order in Case No.
U-12478, pp. 13 and 27. Consumers therefore requests that the Commission
specifically confirm its understanding regarding its ability to recover,
through the operation of the utility's securitization program, all revenues
lost on and after October 24, 2000, and to concurrently authorize treatment
of those lost revenues as a regulatory asset.
The Commission finds that it should grant Consumers' request, in
part. It is the Commission's intention that Consumers have an opportunity
to recover from its securitization savings the full cost of the residential
rate reduction beginning with the date that the financing order was issued
(namely, October 24, 2000). To rule otherwise, and thus forever preclude
recovery for rate reductions provided prior to the actual issuance of the
utility's securitization bonds, would merely give the other parties to this
case an incentive to delay--through unwarranted appeals and other
means--the initiation of Consumers' securitization program. Any such delays
would conflict with the Legislature's intent that securitization be
implemented in whatever reasonable manner provides the maximum cost
savings. The Commission therefore confirms Consumers' understanding that
the utility is authorized to recover, through its securitization program,
all reductions in its revenues beginning October 24, 2000. Nevertheless,
the Commission finds no compelling reason at this time to formally declare
those lost revenues a regulatory asset. As ABATE notes, making a
declaration of regulatory asset at this time would imply a "full funding"
of the rate reduction, contrary to the terms of the financing order.
Offsets for All Securitization and Tax Charges
Consumers notes that, on page 42 of the financing order, the
Commission required the utility to reflect an offset on the bills of its
bundled sales and retail open access (ROA) customers alike equal to the sum
of each customer's securitization and tax charges for the billing period in
question. The utility further notes that the reason given for imposing that
requirement, namely to ensure that Consumers' bundled sales rates or ROA
transition charges do not include costs that are duplicative of those
recovered through the issuance of securitization bonds, is valid.
Nevertheless, in paragraph C of its acceptance letter, Consumers
seeks to clarify whether that requirement should continue indefinitely or
whether (as the utility believes) the offset is intended to remain in
effect only until certain actions are taken by the Commission to remove
those potentially duplicative costs from the base rates paid by bundled
sales customers and from the transition charge paid by ROA customers.
Consumers therefore seeks confirmation that, for bundled sales customers,
the offset would be in effect only from the date of issuance of the
securitization bonds to the conclusion of a rate case that "removes from
bundled sales rates the revenue requirement associated with the assets
approved for securitization." Acceptance letter, p. 3. As for its ROA
customers, Consumers wants to confirm that the offset would be discontinued
immediately following either the Commission's issuance of a decision in
Case No. U-12639 establishing the methodology for computing the utility's
transition charge or the completion of any proceeding establishing a
revised transition charge for use beginning January 1, 2002, whichever
occurs first.
The Commission finds that Consumers' request for clarification
should be granted with regard to the term of the securitization and tax
charge offset. In issuing the financing order, the Commission assumed (as
it still does) that the offset for ROA customers would become unnecessary
beginning January 1, 2002. This assumption is based on the Commission's
belief that, before that date, an order will be issued in Case No. U-12639
from which a transition charge can be derived that recognizes the effect of
securitization on Consumers' total stranded costs. However, in the event
that no such transition charge is in place for Consumers by January 1,
2002, the Commission will impose a temporary transition charge equal to the
sum of the then- effective securitization and tax charges. The offset would
continue to be applied to this charge to ensure equality between bundled
sales and ROA customers until such time as a revised transition charge is
adopted. This will ensure the collection of all revenue necessary to pay
the securitization bond holders and should, in turn, enhance the
marketability of the bonds.
Creation of Lien and Security Interest
Section l0m(l) of Act 142 establishes the requirements for
creating a valid and enforceable lien and security interest in a utility's
securitization property. Specifically, this section states that they "may
be created only by a financing order and the execution and delivery of a
security agreement with a financing party in connection with the issuance
of securitization bonds." MCL 460.l0m(l); MSA 22.13(l0m)(1). According to
paragraph D of its acceptance letter, Consumers interprets ordering
paragraph R on page 67 of the financing order to mean that the Commission
has taken all of its necessary steps with regard to approving the utility's
request for securitization and that, as a result, Consumers now only needs
to execute and deliver the applicable security agreement. The utility seeks
confirmation that its interpretation is accurate.
The Commission finds Consumers' interpretation to be correct.
Ordering paragraph R states that "[a]ll regulatory approvals within the
jurisdiction of the Commission that are necessary for the securitization of
the qualified costs identified in this financing order, and all related
transactions, are granted." Financing order, p. 67. The Commission's use of
such broad language was intended to advise all interested parties (and,
particularly, the financial markets) that, following Consumers' submission
of an unconditional acceptance letter, the utility will be deemed to have
satisfied all state-imposed prerequisites to the execution of a security
agreement. Thus, pursuant to Act 142, a valid and enforceable lien and
security interest in the securitization property will be created following
the execution and delivery of the applicable security agreement.
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 seq.; and the Commission's Rules of Practice and Procedure,
as amended, 1992 AACS, R 460.17101 et seq.
b. Consumers' petition for rehearing or clarification should be
granted in part and denied in part, as discussed in this order.
THEREFORE, IT IS ORDERED that:
A. Consumers Energy Company's November 9, 2000 petition for
rehearing or clarification is granted in part and denied in part, as
discussed in this order.
B. If Consumers Energy Company desires to undertake
securitization, it shall file, within 7 days following issuance of this
order, a document expressing its unconditional acceptance of all conditions
and limitations imposed on the utility by this order and the October 24,
2000 financing order.
C. All amortization, accounting, and ratemaking approvals, as well
as all other authorizations, provided for in the Commission's October 24,
2000 financing order and clarified in this order shall be tolled pending
Consumers Energy Company's unconditional acceptance of all conditions and
limitations that those orders place on the utility.
D. Following Consumers Energy Company's unconditional acceptance
of all conditions and limitations established by the Commission's October
24, 2000 financing order and clarified in this order, these orders--and
each of their terms--shall be irrevocable. Consumers Energy Company's
acceptance likewise shall be irrevocable and, therefore, shall survive
bankruptcy or any other changes in the utility's legal structure.
E. This order and its anticipated unconditional acceptance by
Consumers Energy Company shall be incorporated by reference into the
Commission's October 24, 2000 financing order, shall be deemed to relate
back to the date of issuance of that financing order, and shall be treated
as being in full force and effect as of that date.
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
/s/ John G. Strand
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Chairman
( S E A L )
/s/ David A. Svanda
----------------------------------------
Commissioner
/s/ Robert B. Nelson
----------------------------------------
Commissioner, concurring in a separate
opinion.
By its action of January 4, 2001.
/s/ Dorothy Wideman
--------------------------------
Its Executive Secretary
In the matter of the application of )
CONSUMERS ENERGY COMPANY for a )
financing order approving the securitization of ) Case No. U-12505
certain regulatory assets and other qualified costs. )
)
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Suggested Minute:
----------------
"Adopt and issue order dated January 4, 2001 granting in
part and denying in part the petition for rehearing or
clarification filed by Consumers Energy Company, as set
forth in the order."
STATE OF MICHIGAN
BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION
* * * * *
In the matter of the application of )
CONSUMERS ENERGY COMPANY for a )
financing order approving the securitization of ) Case No. U-12505
certain regulatory assets and other qualified costs. )
)
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CONCURRING OPINION OF COMMISSIONER ROBERT B. NELSON
---------------------------------------------------
(Submitted on January 4, 2001 concerning order issued on same date.)
I issued a separate opinion on October 24, 2000 when the majority
approved a financing order in this case. I concluded at that time that a
financing order should not be issued because Consumers Energy Company
(Consumers) had not met the requirements of 2000 PA 142. I stand by that
opinion today. However, I am compelled to review the motion for rehearing
on its merits, taking the financing order as I find it. In this context, I
concur with the majority's decision to continue the offsetting adjustment
detailed on page 42 of the October 24 order on the bills of retail access
customers after 2001. I believe that, in the absence of the establishment
of a revised transition charge, continuation of this adjustment beyond 2001
is critical in the Commission's efforts to foster a competitive retail
market.
I also concur with my colleagues in concluding that the October 24
order did not create a regulatory asset, a creation that may depend on a
timely issuance of securitization bonds in accordance with the overall
intent of Act 142 to expedite the securitization process.
MICHIGAN PUBLIC SERVICE COMMISSION
/s/ Robert B. Nelson
---------------------------------------
Robert B. Nelson, Commissioner