Regulatory Matters

12 Months Ended

Dec. 31, 2016

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 negatively affect 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 recovery from customers, 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	2016			2015
Regulatory assets
Current
Energy optimization plan incentive1	2017		$	17		$	16
Total current regulatory assets			$	17		$	16
Non-current
Postretirement benefits2	various		$	1,373		$	1,096
Securitized costs3	2029			323			348
ARO4	various			166			151
MGP sites4	various			139			146
Unamortized loss on reacquired debt4	various			54			61
Energy optimization plan incentive1	2018			18			18
Gas storage inventory adjustments4	various			14			18
Other	various			4			2
Total non-current regulatory assets			$	2,091		$	1,840
Total regulatory assets			$	2,108		$	1,856
Regulatory liabilities
Current
Income taxes, net	2017		$	64		$	64
Reserve for customer refunds	2017			31			18
Total current regulatory liabilities			$	95		$	82
Non-current
Cost of removal	various		$	1,809		$	1,745
Renewable energy plan	2028			83			109
ARO	various			62			73
Renewable energy grant	2043			58			60
Energy optimization plan	various			11			26
Income taxes, net	various			7			64
Other	various			11			11
Total non-current regulatory liabilities			$	2,041		$	2,088
Total regulatory liabilities			$	2,136		$	2,170

These regulatory assets have arisen from an alternative revenue program 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.

The MPSC has authorized a specific return on this regulatory asset.

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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

Energy Optimization Plan Incentive: In September 2016, the MPSC approved a settlement agreement authorizing Consumers to collect $18 million during 2017 as an incentive for exceeding its statutory savings targets in 2015 and for achieving certain other goals. Consumers recognized incentive revenue under this program of $18 million in 2015.

Consumers also exceeded its statutory savings targets in 2016, and achieved certain other goals, and will request the MPSC’s approval to collect $18 million, the maximum performance incentive, in the energy optimization reconciliation to be filed in 2017. Consumers recognized incentive revenue under this program of $18 million in 2016.

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: In 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 retired in April 2016 and three smaller natural gas-fueled electric generating units that Consumers retired 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 a subsidiary in 2014. For additional details regarding the securitization bonds, see Note 5, Financings and Capitalization.

ARO: The recovery of the underlying asset investments and related removal and monitoring 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.

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.

Unamortized Loss on Reacquired Debt: Under regulatory accounting, any unamortized discount, premium, or expense related to debt redeemed with the proceeds of new debt is 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 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 2016, Consumers returned $64 million of income tax benefits to customers.

Reserve for Customer Refunds: Consumers had recorded reserves for customer refunds of $31 million at December 31, 2016 and $18 million at December 31, 2015. At December 31, 2016, the majority of the balance related to self-implemented electric and gas rates. At December 31, 2015, the amount recorded included a $14 million regulatory liability related to the overcollection during 2015 of surcharges related to securitization bonds that Consumers issued in 2001 and retired in 2015. Consumers refunded this amount to customers in 2016.

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.

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 Michigan’s renewable portfolio standard 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.

Energy Optimization Plan: At December 31, 2016 and 2015, 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

2014 Electric Rate Case: In December 2014, Consumers filed an application with the MPSC seeking an annual rate increase of $163 million, and in June 2015, Consumers self-implemented an annual rate increase of $110 million, subject to refund with interest. The MPSC issued an order in November 2015, authorizing an annual rate increase of $165 million, based on a 10.3 percent authorized rate of return on equity. In April 2016, upon the retirement of seven coal-fueled electric generating units, the annual rate increase was reduced to $126 million.

In February 2016, Consumers filed a reconciliation of total revenues collected during self-implementation to those that would have been collected under final rates. In June 2016, the MPSC approved a settlement agreement that resulted in a $1 million refund to customers.

2016 Electric Rate Case: In March 2016, Consumers filed an application with the MPSC seeking an annual rate increase of $225 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 increase in revenue:



In Millions
Components of the rate increase
Investment in rate base	$	161
Operating and maintenance costs		21
Gross margin		17
Cost of capital		15
Working capital		11
Total	$	225

The filing also seeks approval of an investment recovery mechanism that would provide for additional annual rate increases of $38 million beginning in 2017, $92 million beginning in 2018, and $92 million beginning in 2019 for incremental investments that Consumers plans to make in those years, subject to reconciliation.

In September 2016, Consumers self‑implemented an annual rate increase of $170 million, subject to refund with interest. In October 2016, Consumers reduced its requested annual rate increase to $208 million. Consumers had a recorded reserve for customer refunds at December 31, 2016 that it believes is adequate.

Consumers Gas Utility

Gas Rate Case: In July 2015, Consumers filed an application with the MPSC seeking an annual rate increase of $85 million, based on a 10.7 percent authorized return on equity. In January 2016, Consumers self-implemented an annual rate increase of $60 million, subject to refund with interest. In April 2016, the MPSC approved a settlement agreement authorizing a $40 million annual rate increase.

In July 2016, Consumers filed a reconciliation of total revenues collected during self-implementation to those that would have been collected under final rates. In November 2016, the MPSC approved a settlement agreement that resulted in a $10 million refund to customers, which Consumers had recorded as a reserve for customer refunds at December 31, 2016.

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; overrecoveries represent previously collected revenues that will be refunded to customers.

Presented in the following table are the liabilities for PSCR and GCR overrecoveries reflected on Consumers’ consolidated balance sheets:



In Millions
December 31	2016			2015
Liabilities
PSCR overrecoveries		$	8		$	8
GCR overrecoveries			13			18
Accrued rate refunds		$	21		$	26

PSCR Plans and Reconciliations: In May 2016, the MPSC issued an order in Consumers’ 2013 PSCR reconciliation, approving full recovery of $1.9 billion of power costs and authorizing Consumers to reflect in its 2014 PSCR plan the overrecovery of $9 million.

In May 2016, the MPSC issued an order in Consumers’ 2014 PSCR plan, authorizing the 2014 PSCR factor that Consumers self-implemented beginning in January 2014 and then revised in July 2014 following severe winter weather during the three months ended March 31, 2014. In July 2016, the MPSC issued an order in Consumers’ 2014 PSCR reconciliation, approving full recovery of $2.1 billion of power costs and authorizing Consumers to reflect in its 2015 PSCR plan the overrecovery of $5 million.

In June 2016, the MPSC issued an order in Consumers’ 2015 PSCR plan, authorizing the 2015 PSCR factor that Consumers self-implemented beginning in January 2015. In March 2016, Consumers filed its 2015 PSCR reconciliation, requesting full recovery of $1.9 billion of power costs and authorization to reflect in its 2016 PSCR plan the overrecovery of $6 million.

In October 2016, the MPSC approved Consumers’ 2016 PSCR plan, with the exception of the recovery of litigation costs related to a complaint that Consumers filed against a rail transportation company, and adjusted the 2016 PSCR factor that Consumers self-implemented in January 2016. In its order, the MPSC indicated that the litigation costs could be included for consideration in a general rate case. In connection with this disallowance, Consumers recognized a charge of $6 million related to litigation costs incurred during 2015 and 2016.

GCR Plans and Reconciliations: In July 2016, the MPSC issued an order in Consumers’ 2013-2014 GCR reconciliation, approving full recovery of $0.9 billion of gas costs and authorizing Consumers to reflect in its 2014-2015 GCR plan the underrecovery of $84 million.

In September 2016, the MPSC issued an order in Consumers 2014-2015 GCR reconciliation, approving full recovery of $0.8 billion of gas costs and authorizing Consumers to reflect in its 2015-2016 GCR plan the overrecovery of $9 million.

In May 2016, the MPSC issued an order in Consumers’ 2015-2016 GCR plan, revising the 2015-2016 GCR factor that Consumers self-implemented beginning in April 2015. Consumers filed its 2015-2016 GCR reconciliation in June 2016, requesting full recovery of $0.5 billion of gas costs and authorization to reflect in its 2016-2017 GCR plan the overrecovery of $2 million.

In November 2016, the MPSC issued an order in Consumers’ 2016-2017 GCR plan, authorizing the 2016-2017 GCR factor that Consumers self-implemented beginning in April 2016.

Consumers Energy Company [Member]

Regulatory Matters