Regulatory Matters

12 Months Ended

Dec. 31, 2014

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

Consumers is subject to the actions of the MPSC and FERC and therefore 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	2014			2013
Regulatory assets
Current
Securitized costs – electric utility restructuring legislation1	2015		$	61		$	-
Energy optimization plan incentive2	2015			17			17
Major maintenance1	2015			8			-
Cancelled coal-fueled plant costs1	2015			2			5
Gas revenue decoupling mechanism2	2014			-			17
Other1	2015			1			1
Total current regulatory assets			$	89		$	40
Non-current
Postretirement benefits3	various		$	1,195		$	634
Securitized costs – electric generating units to be retired1	2029			370			362
MGP sites4	various			147			148
ARO4	various			139			129
Unamortized debt costs4	various			66			74
Gas storage inventory adjustments4	various			21			23
Energy optimization plan incentive2	2016			17			18
Securitized costs – electric utility restructuring legislation1	2015			-			129
Major maintenance1	2015			-			10
Other1	various			1			3
Total non-current regulatory assets			$	1,956		$	1,530
Total regulatory assets			$	2,045		$	1,570
Regulatory liabilities
Current
Income taxes, net	2015		$	64		$	64
Renewable energy grant	2015			2			2
Other	2015			1			1
Total current regulatory liabilities			$	67		$	67
Non-current
Cost of removal	various		$	1,673		$	1,599
Renewable energy plan	2028			131			159
Income taxes, net	various			103			157
ARO	various			83			93
Renewable energy grant	2043			63			65
Energy optimization plan	various			32			31
Postretirement benefits	various			-			98
Other	various			10			13
Total non-current regulatory liabilities			$	2,095		$	2,215
Total regulatory liabilities			$	2,162		$	2,282

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.

These 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.

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

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

Regulatory Assets

Securitized Costs – Electric Utility Restructuring Legislation: In 2000, the MPSC authorized Consumers to securitize certain qualified costs incurred as a result of electric utility restructuring legislation. Consumers is amortizing this regulatory asset over the life of the related Securitization bonds.

Energy Optimization Plan Incentive: In May 2014, Consumers filed its annual report and reconciliation for its energy optimization plan, requesting approval of its energy optimization plan costs for 2013. In November 2014, the MPSC approved a settlement agreement authorizing Consumers to collect $18 million from customers during 2015 as an incentive payment for exceeding statutory targets under both its gas and electric energy optimization plans during 2013.

During 2014, Consumers achieved 135 percent of its electric savings target and 129 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 2015.

Major Maintenance: In its 2012 order in Consumers’ electric rate case, the MPSC allowed Consumers to defer major maintenance costs associated with its electric generating units in excess of the costs approved in the rate order and to recover those excess costs from customers, subject to MPSC approval. In November 2014, the MPSC approved a settlement agreement authorizing Consumers to recover $10 million of such excess costs over a six-month period beginning December 2014.

Cancelled Coal-Fueled Plant Costs: In its 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 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. In April 2014, the Michigan Court of Appeals affirmed the MPSC’s conclusion, which can no longer be appealed and is closed.

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. In 2013, the MPSC approved Consumers’ final reconciliation of the gas revenue decoupling mechanism and Consumers collected $17 million during 2014.

Postretirement Benefits: As part of the ratemaking process, the MPSC allows Consumers to recover the costs of postretirement benefits. Accordingly, Consumers defers the net impact of actuarial losses and gains as well as prior service costs and credits associated with postretirement benefits as a regulatory asset or liability. The asset or liability will decrease as the deferred items are amortized and recognized as components of net periodic benefit cost. For details about the amortization periods, see Note 12, Retirement Benefits.

Securitized Costs – Electric Generating Units to be Retired: In December 2013, the MPSC issued a Securitization financing order authorizing Consumers to issue Securitization bonds in order to finance the recovery of the remaining book value of seven smaller coal-fueled electric generating units that Consumers plans to retire in April 2016 and three smaller natural gas-fueled electric generating units that it plans to retire in June 2015. Upon receipt of the MPSC’s order, Consumers removed the book value of the ten units from plant, property, and equipment and recorded this amount as a regulatory asset. Consumers is amortizing the regulatory asset over the life of the related Securitization bonds, which it issued through its subsidiary Consumers 2014 Securitization Funding in July 2014. For additional details regarding the Securitization bonds, see Note 5, Financings and Capitalization.

MGP Sites: Consumers is incurring 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 is 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. The recovery period approximates the useful life of the assets to be removed.

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.

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.

In September 2013, the MPSC issued an order authorizing Consumers to accelerate the flow-through to electric and gas customers of certain income tax benefits associated primarily with the cost of removal of plant placed in service before 1993. The order authorized Consumers to implement a regulatory treatment beginning January 2014 that will return $209 million of income tax benefits over five years to electric customers and $260 million of income tax benefits over 12 years to gas customers. During 2014, Consumers returned $64 million of income tax benefits to customers.

Renewable Energy Grant: In 2013, Consumers received a $69 million renewable energy grant for Lake Winds® Energy Park, which began operations 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.

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. The refund period of this regulatory liability approximates the useful life of the assets to be removed.

Renewable Energy Plan: Consumers has collected surcharges to fund its renewable energy plan. Amounts not yet spent under the plan are recorded as a regulatory liability, which 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, 2014 and 2013, 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.

Power Supply Cost Recovery and Gas Cost Recovery

The PSCR and GCR ratemaking 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 charges monthly in order to minimize the underrecovery or overrecovery amount in the annual reconciliations.

Underrecoveries represent probable future revenues that will be recovered from customers and are included in accrued gas revenue on Consumers’ consolidated balance sheets. Overrecoveries represent previously collected revenues that will be refunded to customers and are included in accrued rate refunds on Consumers’ consolidated balance sheets. Presented in the following table are the assets and liabilities for PSCR and GCR underrecoveries and overrecoveries reflected on Consumers’ consolidated balance sheets:



In Millions
December 31	2014			2013
Accrued gas revenue		$	27		$	-
Accrued rate refunds			6			12

PSCR Plans and Reconciliations: In May 2014, the MPSC issued an order in Consumers’ 2012 PSCR reconciliation, approving full recovery of $1.9 billion of power costs and authorizing Consumers to roll into its 2013 PSCR plan the underrecovery of $18 million.

Consumers submitted its 2013 PSCR plan to the MPSC in September 2012, and in accordance with its proposed plan, self-implemented the 2013 PSCR factor beginning in January 2013. In March 2014, Consumers filed its 2013 PSCR reconciliation, requesting full recovery of $1.9 billion of power costs and authorization to roll into its 2014 PSCR plan the overrecovery of $10 million.

Consumers submitted its 2014 PSCR plan to the MPSC in September 2013, and in accordance with its proposed plan, self-implemented the 2014 PSCR factor beginning in January 2014. Consumers’ power supply costs for 2014 were significantly higher than those projected in its 2014 PSCR plan due to severe winter weather during the three months ended March 31, 2014, as extreme cold weather and heavy snowfall inhibited the delivery and use of coal at Consumers’ coal-fueled generating units. Additionally, increases in natural gas prices raised the cost of electricity purchased from the MISO energy market as well as the cost of power generated at Consumers’ natural gas-fueled generating units. Consumers filed an amendment to its 2014 PSCR plan in March 2014, requesting approval to increase the 2014 PSCR factor. Consumers self-implemented the revised factor in July 2014. Consumers had a $6 million PSCR overrecovery at December 31, 2014.

GCR Plans and Reconciliations: In September 2014, the MPSC issued an order in Consumers’ 2012-2013 GCR reconciliation, approving full recovery of $0.9 billion in gas costs and authorizing Consumers to roll into its 2013-2014 GCR plan the underrecovery of $22 million.

The MPSC approved Consumers’ 2013-2014 GCR plan in July 2014, authorizing the 2013-2014 GCR factor that Consumers self-implemented beginning in April 2013. Due to the impact on natural gas prices of extended periods of colder-than-normal winter weather in Michigan and throughout the United States during the three months ended March 31, 2014, Consumers’ natural gas fuel costs for this period were significantly higher than those projected in its 2013-2014 GCR plan. As a result, Consumers calculated an $84 million underrecovery for the 2013-2014 GCR plan year. In the reconciliation it filed in June 2014, Consumers requested full recovery of $0.9 billion of gas costs and authorization to roll into its 2014-2015 GCR plan the underrecovery of $84 million.

Consumers submitted its 2014-2015 GCR plan in December 2013, and in accordance with its proposed plan, self-implemented the 2014-2015 GCR factor beginning in April 2014. Due to the significant underrecovery Consumers experienced during the 2013-2014 GCR plan year, Consumers filed an amendment to its 2014-2015 GCR plan in February 2014, requesting approval to increase the 2014-2015 GCR factor to be charged to customers. In May 2014, the MPSC issued an order authorizing Consumers to charge the increased factor to customers until the MPSC issues a final order in Consumers’ 2014-2015 GCR plan. Consumers had a $27 million GCR underrecovery recorded at December 31, 2014.

Consumers Energy Company [Member]

Regulatory Matters