Regulatory Matters

12 Months Ended

Dec. 31, 2013

2: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	2013			2012
Regulatory assets
Current
Energy optimization plan incentive1	2014		$	17		$	15
Gas revenue decoupling mechanism1	2014			17			16
Cancelled coal-fueled plant costs2	2014			5			4
Other2	2014			1			-
Total current regulatory assets			$	40		$	35
Non-current
Postretirement benefits3	various		$	634		$	1,700
Costs of electric generating units to be retired and securitized2	2029			362			-
MGP sites4	various			148			152
Other securitized costs2	2016			129			192
ARO4	various			129			123
Unamortized debt costs4	various			74			55
Gas storage inventory adjustments4	various			23			15
Energy optimization plan incentive1	2015			18			17
Major maintenance2	various			10			5
Cancelled coal-fueled plant costs2	2015			2			7
Gas revenue decoupling mechanism1	2014			-			17
Other2	various			1			4
Total non-current regulatory assets			$	1,530		$	2,287
Total regulatory assets			$	1,570		$	2,322
Regulatory liabilities
Current
Income taxes, net	2014		$	64		$	-
Renewable energy grant	2014			2			-
DOE settlement	2013			-			23
Other	2014			1			2
Total current regulatory liabilities			$	67		$	25
Non-current
Cost of removal	various		$	1,599		$	1,441
Renewable energy plan	2028			159			175
Income taxes, net	various			157			336
Postretirement benefits	various			98			-
ARO	various			93			103
Renewable energy grant	2043			65			-
Energy optimization plan	2015			31			34
Other	various			13			12
Total non-current regulatory liabilities			$	2,215		$	2,101
Total regulatory liabilities			$	2,282		$	2,126

1These regulatory assets have arisen from alternative revenue programs and are not associated with incurred costs or capital investments. Therefore, the MPSC has provided for recovery without a return.

2These 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.

3This regulatory asset is offset partially by liabilities. The net amount is included in rate base, thereby providing a return.

4These regulatory assets represent incurred costs for which the MPSC has provided, or Consumers expects, recovery without a return on investment.

Regulatory Assets

Energy Optimization Plan Incentive: In May 2013, Consumers filed its fourth annual report and reconciliation for its energy optimization plan, requesting approval of its energy optimization plan costs for 2012. In November 2013, the MPSC approved a settlement agreement authorizing Consumers to collect $17 million from customers during 2014 as an incentive payment for exceeding statutory targets under both its gas and electric energy optimization plans during 2012.

During 2013, Consumers achieved 140 percent of its electric savings target and 122 percent of its gas savings target. For achieving these savings levels, Consumers will request the MPSC’s approval to collect $18 million, the maximum incentive, in the energy optimization reconciliation to be filed in 2014.

Gas Revenue Decoupling Mechanism: The MPSC’s 2009 order in Consumers’ gas rate case authorized Consumers to implement a gas revenue decoupling mechanism. This mechanism, which the MPSC extended through April 2012 in its 2010 order in Consumers’ gas rate case, 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 August 2012, Consumers filed its final reconciliation of the gas revenue decoupling mechanism, requesting recovery of $17 million from customers for the period June 2011 through April 2012. In December 2013, the MPSC approved Consumers’ reconciliation for the full amount of its request and authorized recovery over four months beginning in January 2014.

Cancelled Coal-Fueled Plant Costs: In its June 2012 order in Consumers’ electric rate case, the MPSC authorized recovery over a three-year period of $14 million of development costs associated with Consumers’ cancelled 830‑MW coal-fueled plant. 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 losses and prior service costs associated with postretirement benefits as a regulatory asset and to recover these costs from customers. Conversely, Consumers defers the impact of actuarial gains as a regulatory liability and refunds these amounts to customers. The asset and liability will decrease as the deferred items are amortized and recognized as components of net periodic benefit cost.

Costs of Electric Generating Units to be Retired and Securitized: In December 2013, the MPSC issued a Securitization financing order that authorizes Consumers to proceed, at its sole discretion, with the sale of up to $389 million in Securitization bonds through a newly formed subsidiary. Under Michigan law, electric utilities are permitted to use highly rated, low-cost Securitization bonds to finance the recovery of qualified costs. The qualified costs that Consumers intends to securitize are principally the remaining book value of seven smaller coal-fueled electric generating units and three smaller gas-fueled electric generating units that Consumers plans to retire in 2016 if the Securitization transaction is successful.

Upon receipt of the Securitization financing order from the MPSC, Consumers removed the book value of the ten units from plant, property, and equipment and recorded this amount as a regulatory asset. Consumers will amortize the regulatory asset in accordance with current depreciation rates while the assets remain in rate base. Upon issuance of the Securitization bonds, Consumers will remove the book value of the units from rate base and amortize the regulatory asset over the life of the related Securitization bonds.

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.

Other Securitized Costs: In 2000, the MPSC authorized Consumers to securitize certain qualified costs incurred as a result of electric utility restructuring legislation. This regulatory asset is amortized over the life of the related Securitization bonds.

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.

Regulatory Liabilities

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.

Renewable Energy Grant: In January 2013, Consumers received a $69 million renewable energy grant for Lake Winds® Energy Park, which began operations in November 2012. The grant was received from the U.S. Department of Treasury under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009.

As reflected in Consumers’ 2011 biennial renewable energy plan, which the MPSC approved in 2012, this grant reduces Consumers’ cost of complying with the renewable portfolio standards prescribed by the 2008 Energy Law and, accordingly, reduces the overall renewable energy surcharge to be collected from customers. The regulatory liability recorded for the grant will be amortized over the life of Lake Winds® Energy Park.

DOE Settlement: In 2011, Consumers entered into an agreement with the DOE to settle, for $120 million, a complaint filed by Consumers against the DOE in 2002 for nuclear storage costs incurred as a result of the DOE’s failure to accept spent nuclear fuel. In December 2012, the MPSC approved Consumers’ proposed treatment of this settlement amount, including a refund to customers of $23 million for spent nuclear fuel costs previously collected through rates. Consumers refunded this amount to customers during 2013. In March 2013, a party filed an appeal with the Michigan Court of Appeals to dispute the MPSC’s December 2012 order.

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.

Renewable Energy Plan: At December 31, 2013 and 2012, surcharges collected from customers to fund Consumers’ renewable energy plan exceeded Consumers’ spending. This regulatory liability is amortized as incremental costs are incurred to operate and depreciate Consumers’ wind parks and to purchase RECs under renewable energy purchase agreements. Incremental costs represent costs incurred in excess of amounts recovered through the PSCR process.

Energy Optimization Plan: At December 31, 2013 and 2012, 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.

Consumers’ Electric Utility

Electric Rate Case: In September 2012, Consumers filed an application with the MPSC seeking an annual rate increase of $148 million, based on a 10.5 percent authorized return on equity. In January 2013, Consumers supplemented its electric rate case application to reflect certain changes, which reduced its requested annual rate increase to $145 million. In March 2013, Consumers self-implemented an annual rate increase of $110 million out of its requested $145 million, subject to refund with interest. The MPSC approved a partial settlement agreement in May 2013, authorizing an annual rate increase of $89 million, based on a 10.3 percent authorized rate of return on equity. In June 2013, in connection with this electric rate case, the MPSC approved Consumers’ application for authority to continue the advanced metering infrastructure program and implement a non‑transmitting meter provision.

Consumers filed an application in July 2013 requesting that the MPSC find that the total revenues collected during self-implementation did not exceed those that would have been collected under final rates. In February 2014, the MPSC approved Consumers’ application, finding that no refund was required.

Electric Revenue Decoupling Mechanism: The MPSC’s 2009 order in Consumers’ electric rate case 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. The MPSC extended the electric revenue decoupling mechanism for a second year in its 2010 order in Consumers’ electric rate case.

In April 2012, the Michigan Court of Appeals ruled that the MPSC lacks statutory authority to approve or direct the use of a revenue decoupling mechanism for electric providers. Subsequently, in November 2012, the Michigan Court of Appeals ruled in an appeal of the MPSC’s 2010 order in Consumers’ electric rate case. The Court reversed the portion of the 2010 order related to Consumers’ electric revenue decoupling mechanism and remanded the case to the MPSC for further proceedings related to the revenue decoupling mechanism. In 2013, the MPSC issued an order reversing its prior approval of Consumers’ authority to implement a revenue decoupling mechanism.

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 January 2014, the MPSC approved Consumers’ 2012 PSCR plan, authorizing the 2012 PSCR charge that Consumers self-implemented beginning in January 2012.

Consumers submitted its 2013 PSCR plan to the MPSC in September 2012, and in accordance with its proposed plan, self-implemented the 2013 PSCR charge beginning in January 2013.

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



PSCR Year	Date Filed	Net Underrecovery (In Millions)			PSCR Cost of Power Sold (In Billions)
2012	March 2013		$	18		$	1.9

In May 2013, the MPSC issued an order in Consumers’ 2011 PSCR reconciliation, approving full recovery of $1.8 billion of power costs and authorizing Consumers to roll into its 2012 PSCR plan the overrecovery of $8 million.

GCR Plans: In February 2013, the MPSC approved Consumers’ 2012-2013 GCR plan, authorizing the 2012-2013 GCR charge that Consumers self-implemented beginning in April 2012.

Consumers submitted its 2013-2014 GCR plan to the MPSC in December 2012, and in accordance with its proposed plan, self-implemented the 2013-2014 GCR charge beginning in April 2013.

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



GCR Year	Date Filed	Net Underrecovery (In Millions)			GCR Cost of Gas Sold (In Billions)
2012-2013	June 2013		$	22		$	0.9

In May 2013, the MPSC issued an order in Consumers’ 2011-2012 GCR reconciliation, approving full recovery of $0.9 billion in gas costs and authorizing Consumers to roll into its 2012-2013 GCR plan the overrecovery of $2 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	2013			2012
Accrued power supply revenue		$	-		$	32
Accrued rate refunds			12			6

Consumers Energy Company [Member]

Regulatory Matters