Regulatory Matters

12 Months Ended

Dec. 31, 2012

3:REGULATORY MATTERS

Regulatory matters are critical to Consumers. The Michigan Attorney General, ABATE, the MPSC Staff, and certain other parties typically participate in MPSC proceedings concerning Consumers, such as Consumers’ rate cases and PSCR and GCR processes. These parties often challenge various aspects of those proceedings, including the prudence of Consumers’ policies and practices, and seek cost disallowances and other relief. The parties also have appealed significant MPSC orders. Depending upon the specific issues, the outcomes of rate cases and proceedings, including judicial proceedings challenging MPSC orders or other actions, 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.

There are multiple appeals pending that involve various issues concerning cost allocation among customers, the allocation of refunds among customer groups, the adequacy of the record evidence supporting the recovery of Smart Energy investments, and other matters. Consumers is unable to predict the outcome of these appeals.

Regulatory Assets and Liabilities

Because Consumers is subject to the actions of the MPSC and FERC, Consumers prepares its consolidated financial statements in accordance with the provisions of regulatory accounting. A utility must apply regulatory accounting when its rates are designed to recover specific costs of providing regulated services. Under regulatory accounting, Consumers records regulatory assets or liabilities for certain transactions that would have been treated as expense or revenue by non-regulated businesses.

Presented in the following table are the regulatory assets and liabilities on Consumers’ consolidated balance sheets:



In Millions
December 31	End of Recovery or Refund Period	2012			2011
Regulatory assets
Current
Gas revenue decoupling mechanism	2013		$	16		$	-
Energy optimization plan incentive	2013			15			-
Cancelled coal-fueled plant costs¹	2013			4			-
Other¹	2012			-			1
Total current regulatory assets			$	35		$	1
Non-current
Postretirement benefits²	various		$	1,700		$	1,665
Securitized costs³	2016			192			252
MGP sites³	various			152			156
ARO⁴	various			123			114
Unamortized debt costs³	various			55			44
Gas revenue decoupling mechanism	2014			17			21
Energy optimization plan incentive	2014			17			26
Gas storage inventory adjustments³	various			15			14
Cancelled coal-fueled plant costs¹	2015			7			-
Major maintenance¹	various			5			-
Big Rock nuclear decommissioning³	2012			-			85
Electric revenue decoupling mechanism	n/a			-			59
Stranded costs¹	2012			-			23
Other¹	various			4			7
Total non-current regulatory assets			$	2,287		$	2,466
Total regulatory assets			$	2,322		$	2,467
Regulatory liabilities
Current
DOE settlement	2013		$	23		$	120
Other	2013			2			5
Total current regulatory liabilities			$	25		$	125
Non-current
Cost of removal	various		$	1,441		$	1,364
Income taxes, net	various			336			181
Renewable energy plan	2028			175			161
ARO	various			103			113
Energy optimization plan	2014			34			45
Other	various			12			11
Total non-current regulatory liabilities			$	2,101		$	1,875
Total regulatory liabilities			$	2,126		$	2,000

¹ These regulatory assets either are included in rate base (or are expected to be included, for costs incurred subsequent to the most recently approved rate case), thereby providing a return on expenditures, or provide a specific return on investment authorized by the MPSC.

² This regulatory asset is offset partially by liabilities. The net amount is included in rate base, thereby providing a return.

³ These regulatory assets represent expenditures for which the MPSC has provided, or Consumers expects, recovery without a return on investment.

⁴ Consumers records a regulatory asset and a regulatory liability for timing differences between the recognition of AROs for financial reporting purposes and the recovery of these costs from customers. Although the regulatory asset for AROs does not provide a return on investment, the underlying asset retirement costs are capitalized as part of the carrying amount of the related asset and included in rate base, thereby providing a return.

Regulatory Assets

Gas Revenue Decoupling Mechanism: The MPSC’s 2009 gas rate case order authorized Consumers to implement a gas revenue decoupling mechanism. This mechanism, which was extended through April 2012 in the 2010 gas rate case order, allowed Consumers to adjust future gas rates to the degree that actual average weather-adjusted sales per customer differed from the rate order. This mechanism was not affected by a separate Michigan Court of Appeals decision on electric revenue decoupling.

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. In December 2012, the MPSC approved Consumers’ reconciliation for the full amount of its request and authorized recovery over three months beginning in February 2013. In January 2013, ABATE filed an appeal with the Michigan Court of Appeals to dispute the MPSC’s order in this case that Consumers is eligible to recover the portion of this amount allocated to transport customers.

Consumers filed its final reconciliation of the gas revenue decoupling mechanism in August 2012, requesting recovery of $17 million from customers for the period June 2011 through April 2012.

Energy Optimization Plan Incentive: The MPSC has authorized Consumers to collect $15 million as an incentive payment for exceeding savings targets under both its gas and electric optimization plans during 2011. The incentive will be collected over seven months beginning in June 2013.

During 2012, Consumers achieved 123 percent of its electric savings target and 132 percent of its gas savings target. For achieving these savings levels, Consumers will request the MPSC’s approval to collect $17 million, the maximum incentive, in the energy optimization reconciliation to be filed in May 2013.

Cancelled Coal-Fueled Plant Costs: In its June 2012 order in Consumers’ electric rate case, the MPSC authorized recovery of $14 million of development costs associated with Consumers’ proposed 830-MW coal-fueled plant. The MPSC authorized Consumers to recover these costs over a three-year period. In September 2012, a party in Consumers’ electric rate case filed an appeal with the Michigan Court of Appeals to dispute the MPSC’s conclusion that authorized Consumers to recover these costs.

Postretirement Benefits: As part of the ratemaking process, the MPSC allows Consumers to defer the impact of actuarial gains and losses and prior service costs associated with postretirement benefits as a regulatory asset and to recover these costs from customers. The asset will decrease as the deferred items are amortized and recognized as components of net periodic benefit cost.

Securitized Costs: In 2000, the MPSC authorized recovery of securitization and tax charges related to Consumers’ Securitization bonds over a period of up to 15 years.

MGP Sites: Consumers expects to incur environmental remediation and other response activity costs at 23 former MGP facilities. The MPSC allows Consumers to recover from its natural gas customers over a ten-year period the costs incurred to remediate the MGP sites.

ARO: The recovery of the underlying asset investments and related removal costs of recorded AROs are approved by the MPSC in depreciation rate cases. Consumers records a regulatory asset and a regulatory liability for timing differences between the recognition of AROs for financial reporting purposes and the recovery of these costs from customers.

Unamortized Debt Costs: Under regulatory accounting, any unamortized debt costs related to debt redeemed with the proceeds of new debt are capitalized and amortized over the life of the new debt.

Gas Storage Inventory Adjustments: Consumers incurs inventory expenses related to the loss of gas from its natural gas storage fields. The MPSC allows Consumers to recover these costs from its natural gas customers over a five-year period.

Major Maintenance: In its June 2012 order in Consumers’ electric rate case, the MPSC allowed Consumers to defer major maintenance costs associated with certain plants in excess of the costs approved in the rate order and recover these excess costs from customers, subject to MPSC approval.

Big Rock Nuclear Decommissioning and DOE Settlement: Consumers had recorded an $85 million regulatory asset for $30 million it paid to Entergy to assume ownership responsibility for the Big Rock ISFSI and for $55 million of nuclear fuel storage costs it incurred as a result of the DOE’s failure to accept nuclear fuel. Consumers filed a complaint against the DOE in 2002 for this failure.

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 settlement amount as recovery of its regulatory asset, and to refund to customers $23 million previously collected through rates for spent nuclear fuel costs. In December 2012, the MPSC approved this treatment. Consumers will refund $23 million to customers over a six-month period beginning in January 2013. Consumers recognized the remaining $12 million of the settlement as a reduction of maintenance and other operating expenses.

Electric Revenue Decoupling Mechanism: The MPSC’s 2009 electric rate case order authorized Consumers to implement an electric revenue decoupling mechanism. This decoupling mechanism allowed Consumers to adjust future electric rates to the degree that actual average sales per customer differed from the rate order. At December 31, 2011, Consumers had recorded a $59 million regulatory asset related to this mechanism.

In April 2012, the Michigan Court of Appeals ruled in an appeal filed by ABATE that disputed the MPSC’s decision to authorize an electric revenue decoupling mechanism for DTE Electric. The Court concluded that the MPSC lacks statutory authority to approve or direct the use of a revenue decoupling mechanism for electric providers. As a result, Consumers determined that it no longer met the accounting criteria for recognition of a regulatory asset under an alternative revenue program, and wrote off its $59 million electric revenue decoupling mechanism regulatory asset at March 31, 2012.

In November 2012, the Michigan Court of Appeals ruled in an appeal of the MPSC’s 2010 order in Consumers’ electric rate case; this appeal had been filed by the Attorney General and ABATE. In light of the Court’s previous ruling that the MPSC does not have authority to authorize electric decoupling, the Court reversed the portion of the 2010 order related to Consumers’ electric revenue decoupling mechanism, substantiating Consumers’ decision to write off its associated regulatory asset in March 2012. In addition, the Court remanded this portion of the electric rate case to the MPSC for further proceedings.

Stranded Costs: These costs represent fixed generation costs that were incurred in 2002 and 2003 to serve customers who elected to receive electricity from alternative energy suppliers. In 2004, the MPSC approved the recovery of stranded costs from these customers. Consumers completed its recovery of the stranded cost surcharge in December 2012.

Regulatory Liabilities

Cost of Removal: These amounts have been collected from customers to fund future asset removal activities. This regulatory liability is reduced as costs of removal are incurred.

Income Taxes, Net: These costs represent the difference between deferred income taxes recognized for financial reporting purposes and amounts previously reflected in Consumers’ rates. This net balance will decrease over the remaining life of the related temporary differences and flow through current income tax benefit.

In December 2012, Consumers assigned $792 million of assets in the VEBA trust to pay future prescription drug costs. This preserved the tax benefits lost upon enactment of the Health Care Acts. As a result, Consumers remeasured its deferred income taxes and recognized an offsetting $151 million increase in regulatory liabilities.

Renewable Energy Plan: At December 31, 2012 and 2011, surcharges collected from customers to fund Consumers’ renewable energy plan exceeded Consumers’ spending. This regulatory liability is amortized as costs are incurred to operate and depreciate Consumers’ wind farms and as Consumers purchases RECs under renewable energy purchase agreements.

Energy Optimization Plan: At December 31, 2012 and 2011, surcharges collected from customers to fund Consumers’ energy optimization plan exceeded Consumers’ spending. The associated regulatory liability is amortized as costs are incurred under Consumers’ energy optimization plan.

Other Rate Matters

Consumers’ Electric Utility

Electric Rate Case: In June 2012, the MPSC authorized an annual rate increase of $118 million, based on a 10.3 percent authorized return on equity. Consumers filed an application in September 2012 to reconcile the total revenues collected during self-implementation to those that would have been collected under final rates. This reconciliation requests that the MPSC find that no refund is required.

The annual rate increase authorized by the MPSC included a $20 million increase in annual depreciation expense resulting from the new depreciation rates that the MPSC approved in June 2011 in Consumers’ electric depreciation case. These new depreciation rates went into effect with the June 2012 electric rate case order.

Consumers’ Gas Utility

Gas Rate Case: 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, in order to recover investments made to enhance safety, system reliability, and operational efficiencies that improve service to customers. Consumers self-implemented an annual rate increase of $23 million in March 2012, subject to refund with interest.

In June 2012, the MPSC authorized an annual rate increase of $16 million, based on a 10.3 percent authorized return on equity. In January 2013, the MPSC approved Consumers’ reconciliation of the total revenues collected during self-implementation to those that would have been collected under final rates. As a result of the reconciliation, which found that a refund was required, Consumers had a $2 million regulatory liability recorded at December 31, 2012. Consumers will refund this amount to customers in March 2013.

Power Supply Cost Recovery and Gas Cost Recovery

The PSCR and GCR processes are designed to allow Consumers to recover all of its power supply and 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 PSCR and GCR billing factors monthly in order to minimize the overrecovery or underrecovery amount in the annual reconciliations.

PSCR Plans: In July 2012, the MPSC approved Consumers’ 2011 PSCR plan, authorizing the 2011 PSCR charge that Consumers self-implemented beginning in January 2011.

Consumers submitted its 2012 PSCR plan to the MPSC in September 2011, and in accordance with its proposed plan, self-implemented the 2012 PSCR charge beginning in January 2012. In February 2012, Consumers filed a revised 2012 PSCR plan, which significantly reduced costs.

PSCR Reconciliations: Presented in the following table are details about the PSCR reconciliation filing pending with the MPSC:



PSCR Year	Date Filed	Net Overrecovery (In Millions)			PSCR Cost of Power Sold (In Billions)
2011	March 2012		$	8		$	1.8

In December 2012, the MPSC issued an order in Consumers’ 2010 PSCR reconciliation, approving full recovery of $1.7 billion of power costs and authorizing Consumers to roll into its 2011 PSCR plan the underrecovery of $11 million.

GCR Plans: In March 2012, the MPSC approved Consumers’ 2011-2012 GCR plan, authorizing the 2011-2012 GCR charge that Consumers self-implemented beginning in April 2011.

Consumers submitted its 2012-2013 GCR plan to the MPSC in December 2011, and in accordance with its proposed plan, self-implemented the 2012-2013 GCR charge beginning in April 2012.

GCR Reconciliations: Presented in the following table are details about the GCR reconciliation filing pending with the MPSC:



GCR Year	Date Filed	Net Overrecovery (In Millions)			GCR Cost of Gas Sold (In Billions)
2011-2012	June 2012		$	2		$	0.9

In March 2012, the MPSC issued an order in Consumers’ 2009-2010 GCR reconciliation, approving full recovery of $1.3 billion in gas costs and authorizing Consumers to roll into its 2010-2011 GCR plan the overrecovery of $1 million.

In September 2012, the MPSC issued an order in Consumers’ 2010-2011 GCR reconciliation, approving full recovery of $1.2 billion in gas costs and authorizing Consumers to roll into its 2011-2012 GCR plan an overrecovery of $6 million.

Consumers’ PSCR and GCR mechanisms also represent probable future revenues that will be recovered from customers or previously collected revenues that will be refunded to customers through the ratemaking process. Underrecoveries are included in accrued power supply and overrecoveries are included in accrued rate refunds on Consumers’ consolidated balance sheets.

Consumers reflected the following assets and liabilities for PSCR and GCR underrecoveries and overrecoveries on its consolidated balance sheets:



In Millions
December 31	2012			2011
Accrued power supply revenue		$	32		$	-
Accrued rate refunds			6			30

Consumers Energy Company [Member]

Regulatory Matters