Regulatory Matters (Consumers Energy Company [Member])

9 Months Ended

Sep. 30, 2011

Consumers Energy Company [Member]

4: REGULATORY MATTERS

Rate matters are critical to Consumers. Depending upon the specific issues, the outcomes of rate cases and proceedings could have a material adverse effect on CMS Energy's and Consumers' liquidity, financial condition, and results of operations. Consumers cannot predict the outcome of these proceedings.

Consumers' Electric Utility

Electric Rate Cases: The MPSC, in its 2010 electric rate case order, authorized Consumers to increase its rates by $146 million annually, $4 million less than the rate increase self-implemented by Consumers in July 2010. In June 2011, the MPSC approved a settlement agreement, finding that no refund of self-implemented rates to customers is required.

In June 2011, Consumers filed an application with the MPSC seeking an annual rate increase of $195 million, based on a 10.7 percent authorized return on equity. The filing requested authority to recover new investment in system reliability, environmental compliance, and technology enhancements. Presented in the following table are the components of the requested rate increase:


	In Millions
Components of the rate increase

Investment in rate base	$	81
Depreciation and property taxes		70
Impact of sales declines		50
Impact of reduced funding for customer assistance programs¹		13
Reduced operating and maintenance costs		(17	)
Cost of capital		(2	)

Total	$	195

¹ Consumers projects electric uncollectible expense to increase by $13 million in 2012 due to an anticipated reduction in federal funding for customer assistance programs. Due to the uncertainty surrounding federal funding for such programs and the resulting impact on uncollectible expense, Consumers also requested that the MPSC approve an uncollectible expense true-up mechanism.

Power Supply Cost Recovery: The PSCR process is designed to allow Consumers to recover all of its power supply costs if incurred under reasonable and prudent policies and practices. The MPSC reviews these costs, policies, and practices in annual plan and reconciliation proceedings. Consumers adjusts its PSCR billing factor monthly in order to minimize the overrecovery or underrecovery amount in the annual PSCR reconciliation.

PSCR Plan: In September 2010, Consumers submitted its 2011 PSCR plan to the MPSC. In accordance with its proposed plan, Consumers self-implemented the 2011 PSCR charge beginning in January 2011.

In October 2011, the administrative law judge recommended that the MPSC approve Consumers' 2011 PSCR Plan, with minor exceptions.

In September 2011, Consumers submitted its 2012 PSCR plan to the MPSC. In accordance with its proposed plan, Consumers expects to self-implement the 2012 PSCR charge beginning in January 2012.

PSCR Reconciliation: Presented in the following table is the PSCR reconciliation filing pending with the MPSC:

In June 2011, the MPSC issued an order approving Consumers' 2009 PSCR reconciliation, as modified by the order, and authorized Consumers to include an underrecovery of $31 million in its 2010 PSCR reconciliation.

Electric Revenue Decoupling Mechanism: The MPSC's 2009 electric rate case order authorized Consumers to implement an electric revenue decoupling mechanism, subject to certain conditions. This decoupling mechanism, which was extended through November 2011 in the 2010 electric rate case order, allows Consumers to adjust future electric rates to compensate for changes in sales volumes resulting from the difference between the level of average sales per customer adopted in the order and actual average sales per customer. Various parties have filed appeals concerning the electric decoupling mechanism.

In March 2011, Consumers filed its first reconciliation of the electric revenue decoupling mechanism with the MPSC, requesting recovery of $27 million from customers for the period December 2009 through November 2010. The MPSC Staff and intervenors are opposing this recovery.

At September 30, 2011, Consumers had a $55 million non-current regulatory asset recorded for electric decoupling, which included the $27 million balance referred to above.

Uncollectible Expense Tracking Mechanism: In March 2011, Consumers filed its reconciliation of the uncollectible expense tracking mechanism with the MPSC, requesting recovery of $3 million from customers for November 2009 through November 2010, the entire period of the tracker. The uncollectible expense tracking mechanism, authorized by the MPSC in its 2009 electric rate order, allowed future rates to be adjusted to collect or refund 80 percent of the difference between the level of electric uncollectible expense included in rates and actual uncollectible expense. During 2009, various parties filed appeals concerning the uncollectible expense tracking mechanism. In its 2010 electric rate order, the MPSC terminated the uncollectible expense tracking mechanism as of November 2010.

Electric Operation and Maintenance Expenditures Show-Cause Order: In 2005, the MPSC ordered Consumers to spend certain amounts on future tree-trimming and line-clearing activities, as well as on the operation and maintenance of Consumers' fossil-fueled power plants. In 2009, the MPSC issued a show-cause order alleging that, in 2007, Consumers spent $14 million less on forestry and fossil-fueled plant operation and maintenance activity than the amount ordered by the MPSC and that Consumers had not refunded this amount to customers. Consumers' response indicated that the total amount it spent on forestry and fossil-fueled plant operation and maintenance activity for the years 2006 through 2009 exceeded the total amounts included in rates for these activities. In June 2011, the MPSC found that Consumers violated the 2005 order, but that customers were not affected significantly by the violation. The MPSC levied a $65,200 penalty on Consumers, but concluded that no refund was required.

Big Rock Decommissioning: The MPSC and FERC regulate the recovery of Consumers' costs to decommission Big Rock. Subsequent to 2000, Consumers stopped funding a Big Rock trust fund because the collection period for an MPSC-authorized decommissioning surcharge expired. The level of funds provided by the trust fell short of the amount needed to complete decommissioning and Consumers provided $44 million of corporate contributions for decommissioning costs.

In an order issued in February 2010, the MPSC concluded that certain revenues collected during a statutory rate freeze from 2001 through 2003 should have been deposited in a decommissioning trust fund. The MPSC agreed that Consumers was entitled to recover $44 million of decommissioning costs, but concluded that Consumers had collected this amount previously through the rates in effect during the rate freeze. In April 2010, the MPSC ordered Consumers to refund $85 million of revenue collected in excess of decommissioning costs plus interest. Consumers completed this refund in January 2011. Consumers filed an appeal with the Michigan Court of Appeals in March 2010 to dispute the MPSC's conclusion that the collections received during the rate freeze should be subject to refund.

Consumers paid $30 million to Entergy to assume ownership and responsibility for the Big Rock ISFSI. Consumers also incurred $55 million at Big Rock for nuclear fuel storage costs as a result of the DOE's failure to accept spent nuclear fuel. Consumers has an $85 million regulatory asset recorded on its consolidated balance sheets for these costs. Consumers had filed a complaint against the DOE in 2002 for its failure to accept spent nuclear fuel, and in July 2011, Consumers entered into an agreement with the DOE to settle its claims for $120 million. In September 2011, Consumers filed an application with the MPSC requesting authority to utilize $85 million of the DOE settlement amount as recovery of its regulatory asset, and to refund to customers $23 million previously collected through rates for spent nuclear fuel costs. If the MPSC concludes that Consumers may retain any portion of the remaining $12 million of the DOE settlement amount, Consumers will recognize that amount in earnings. For further information, see Note 3, Contingencies and Commitments, "Consumers' Electric Utility Contingencies — Nuclear Matters."

Renewable Energy Plan: In 2010, Consumers filed with the MPSC its first annual report and reconciliation for its renewable energy plan, requesting approval of Consumers' reconciliation of renewable energy plan costs for 2009. In June 2011, the administrative law judge issued a proposal for decision, recommending that the MPSC issue an order finding that Consumers met its 2009 renewable portfolio standards and that actual 2009 renewable energy expenses and revenues fell within MPSC-authorized levels. The administrative law judge also recommended, however, that the MPSC exclude from recovery through the renewable surcharge $3 million of capital expenditures, along with related carrying costs, that Consumers incurred prior to enactment of the 2008 Energy Law.

Consumers filed its second annual report and reconciliation with the MPSC in June 2011, requesting approval of its reconciliation of renewable energy plan costs for 2010.

In May 2011, the MPSC issued an order approving Consumers' amended renewable energy plan, with slight modifications. The amended plan reduces the renewable energy surcharge that will be billed to customers by an annual amount of $54 million. The reduction is a result of lower-than-anticipated costs to comply with the renewable energy requirements prescribed by the 2008 Energy Law.

In October 2011, Consumers filed an application for the biennial review and approval of its renewable energy plan. The plan further reduces the renewable energy surcharge that will be billed to customers by an annual amount of $3 million.

Energy Optimization Plan: In May 2011, the MPSC issued an order approving Consumers' reconciliation of energy optimization plan costs for 2009. The MPSC also authorized Consumers to collect $6 million from customers as an incentive payment for exceeding savings targets under both its gas and electric energy optimization plans during 2009. Consumers will collect the incentive over 12 months beginning June 2011.

In April 2011, Consumers filed with the MPSC its second annual report and reconciliation for its energy optimization plan, requesting approval of Consumers' reconciliation of energy optimization plan costs for 2010.

Consumers also requested approval to collect $8 million from customers as an incentive payment for exceeding savings targets under both its gas and electric energy optimization plans during 2010.

As one of the conditions to the continuation of the electric and gas decoupling mechanisms, Consumers must exceed the statutory savings targets for 2012 through 2015 specified in the 2008 Energy Law. In August 2011, Consumers filed an amended energy optimization plan with the MPSC, requesting approval of the additional spending necessary to exceed these savings targets.

Electric Depreciation: In June 2011, the MPSC approved a settlement agreement in Consumers' February 2010 electric depreciation case, authorizing a $19 million increase in annual depreciation expense. The new depreciation rates will go into effect with a final order in Consumers' next electric rate case.

In February 2010, Consumers filed an electric depreciation case for Ludington, the pumped-storage plant jointly owned by Consumers and Detroit Edison. This case, filed jointly with Detroit Edison, requests an increase in annual depreciation expense. Consumers' share of this increase is $9 million annually. In October 2011, a settlement agreement among all parties was submitted to the MPSC for approval.

Consumers' Gas Utility

Gas Rate Case: In August 2010, Consumers filed an application with the MPSC seeking an annual rate increase of $55 million based on an 11 percent authorized return on equity. The filing requested recovery for investments made to enhance safety, system reliability, and operational efficiencies that improve service to customers.

Consumers filed testimony and exhibits with the MPSC in January 2011, supporting a self-implemented annual gas rate increase of $48 million, subject to refund with interest. In February, Consumers filed a letter with the MPSC reducing the proposed self-implemented increase to $29 million. The MPSC then issued an order delaying Consumers' self-implementation in order to give other parties to the proceeding an opportunity to respond to Consumers' revised self-implementation filing.

In May 2011, the MPSC approved a partial settlement agreement authorizing Consumers to increase its rates by $31 million annually, based on a 10.5 percent authorized return on equity. Matters not addressed in the settlement agreement included the decoupling mechanism, the Smart Grid program, and contributions to the low-income and energy efficiency fund. Presented in the following table are the components of the rate increase authorized by the MPSC and the rate increase originally requested by Consumers:


In Millions
				Increase Originally
	Increase Authorized			Requested by
Components of the rate increase	by the MPSC			Consumers		Difference

Investment in rate base	$	29		$	30	$	(1	)
Impact of sales declines		15			4		11
Operating and maintenance costs		2			16		(14	)
Cost of capital		(15	)		5		(20	)

Total	$	31		$	55	$	(24	)

In August 2011, the MPSC authorized the continuation of the decoupling mechanism and the collection of low-income and energy efficiency funds, but denied recovery of costs associated with the Smart Grid program related to Consumers' gas utility. Consumers filed a petition for rehearing in this case, stating that disallowance of Smart Grid costs was contrary to the settlement agreement approved in May 2011. In its petition, Consumers recognized the MPSC's concerns regarding the Smart Grid program related to the gas utility and stated that it would remove all costs associated with the gas Smart Grid program from its next general rate case application. In October 2011, the MPSC granted Consumers' petition for rehearing, allowing Consumers to recover costs that the gas utility has incurred associated with the Smart Grid program.

In September 2011, Consumers filed an application with the MPSC seeking an annual rate increase of $49 million based on a 10.7 percent authorized return on equity. The filing requested recovery for investments made to enhance safety, system reliability, and operational efficiencies that improve service to customers. Presented in the following table are the components of the requested rate increase:


In Millions
Components of the rate increase

Investment in rate base	$	22
Impact of reduced funding for customer assistance programs¹		19
Cost of capital		10
Impact of sales declines		2
Reduced operating and maintenance costs		(4	)

Total	$	49

¹ Consumers projects gas uncollectible expense to increase by $19 million in 2012 due to an anticipated reduction in federal and state funding for customer assistance programs. Due to the uncertainty surrounding federal and state funding for such programs and the resulting impact on uncollectible expense, Consumers also requested that the MPSC approve an uncollectible expense true-up mechanism.

Gas Cost Recovery: The GCR process is designed to allow Consumers to recover all of its purchased natural gas costs if incurred under reasonable and prudent policies and practices. The MPSC reviews these costs, policies, and practices in annual plan and reconciliation proceedings. Consumers adjusts its GCR billing factor monthly in order to minimize the overrecovery or underrecovery amount in the annual GCR reconciliation.

GCR Plan: In December 2010, Consumers submitted its 2011-2012 GCR plan to the MPSC. In accordance with its proposed plan, Consumers self-implemented the 2011-2012 GCR charge beginning in April 2011. In September 2011, the administrative law judge recommended that the MPSC approve Consumers' 2011-2012 GCR plan, with certain adjustments to its fixed-price purchase guidelines.

GCR Reconciliations: Presented in the following table are the GCR reconciliation filings pending with the MPSC:

Gas Revenue Decoupling Mechanism: The MPSC's 2009 gas rate case order authorized Consumers to implement a gas revenue decoupling mechanism, subject to certain conditions. This decoupling mechanism, which was extended in the 2010 gas rate case order, allows Consumers to adjust future gas rates to compensate for changes in sales volumes resulting from the difference between the level of average sales per customer adopted in the order and actual average weather-adjusted sales per customer. In September 2011, Consumers filed its first reconciliation of the gas revenue decoupling mechanism with the MPSC, requesting recovery of $16 million from customers for the period June 2010 through May 2011. At September 30, 2011, Consumers had a $16 million non-current regulatory asset recorded for gas decoupling.

Date Filed

Net Underrecovery

PSCR Cost of Power Sold

March 2011

$15 million

$1.7 billion