Regulatory Matters

12 Months Ended

Dec. 31, 2015

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 allocation among 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	2015			2014
Regulatory assets
Current
Energy optimization plan incentive1	2016		$	16		$	17
Securitized costs – electric utility restructuring legislation2	2015			-			61
Major maintenance2	2015			-			8
Other	2015			-			3
Total current regulatory assets			$	16		$	89
Non-current
Postretirement benefits3	various		$	1,096		$	1,195
Securitized costs – electric generating units to be retired2	2029			348			370
ARO4	various			151			139
MGP sites4	various			146			147
Unamortized debt costs4	various			61			66
Gas storage inventory adjustments4	various			18			21
Energy optimization plan incentive1	2017			18			17
Other	various			2			1
Total non‑current regulatory assets			$	1,840		$	1,956
Total regulatory assets			$	1,856		$	2,045
Regulatory liabilities
Current
Income taxes, net	2016		$	64		$	64
Securitized costs – electric utility restructuring legislation	2016			14			-
Other	2016			4			3
Total current regulatory liabilities			$	82		$	67
Non-current
Cost of removal	various		$	1,745		$	1,673
Renewable energy plan	2028			109			131
ARO	various			73			83
Income taxes, net	various			64			103
Renewable energy grant	2043			60			63
Energy optimization plan	various			26			32
Other	various			11			10
Total non‑current regulatory liabilities			$	2,088		$	2,095
Total regulatory liabilities			$	2,170		$	2,162

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.

These regulatory assets 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.

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

Energy Optimization Plan Incentive: In May 2015, Consumers filed its annual report and reconciliation for its energy optimization plan, requesting approval of its energy optimization plan costs for 2014. In September 2015, the MPSC approved a settlement agreement authorizing Consumers to collect $17 million from customers during 2016 as an incentive payment for exceeding statutory targets under both its gas and electric energy optimization plans during 2014.

Consumers also exceeded its statutory savings targets in 2015, 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 2016.

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 amortized this regulatory asset over the life of the related Securitization bonds, which were paid in full in October 2015. During 2015, Consumers overcollected surcharges related to this Securitization and, as a result, recorded a regulatory liability. Consumers filed a reconciliation with the MPSC in January 2016, requesting to refund this amount to customers in 2016.

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 that ended in May 2015.

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 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 by 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 July 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 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 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 2015, Consumers returned $64 million of income tax benefits to customers.

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 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.

Energy Optimization Plan: At December 31, 2015 and 2014, 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 December 2014, Consumers filed an application with the MPSC seeking an annual rate increase of $163 million, based on a 10.7 percent authorized return on equity. 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 planned retirement of seven coal-fueled electric generating units, the annual rate increase will be reduced by $39 million to $126 million.

In June 2015, Consumers self-implemented an annual rate increase of $110 million, subject to refund with interest. Consumers does not expect that a significant refund of self-implemented rates will be required.

Electric Rate Design: In June 2015, the MPSC issued an order on Consumers’ proposal for a new electric rate design, authorizing a reallocation of annual costs among customer classes. This new allocation will better ensure that rates reflect the cost of service for each customer class and will have the effect of making rates for energy-intensive industrial customers more competitive, while keeping residential bills below the national average. In December 2015, the new rate design went into effect.

Depreciation Rate Case: In June 2014, Consumers filed a depreciation case related to its electric and common utility property. In this case, Consumers requested an increase in depreciation expense, and its recovery of that expense, of $28 million annually. In May 2015, the MPSC approved a settlement agreement authorizing an increase in Consumers’ depreciation expense, and its recovery of that expense, of $6 million annually based on December 31, 2013 balances. In December 2015, the new depreciation rates went into effect.

Consumers Gas Utility

Gas Rate Case: In July 2014, Consumers filed an application with the MPSC seeking an annual rate increase of $88 million. The filing requested authority to recover new investments that will allow Consumers to improve system reliability, comply with regulations, and enhance technology.

In January 2015, the MPSC approved a settlement agreement authorizing a $45 million annual rate increase, based on a 10.3 percent authorized return on equity. This was Consumers’ first gas base rate increase since 2012.

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	2015			2014
Assets
Accrued gas revenue		$	-		$	27
Liabilities
Accrued rate refunds			26			6

PSCR Plans and Reconciliations: In May 2015, the MPSC issued an order in Consumers’ 2013 PSCR plan, authorizing the 2013 PSCR factor that Consumers self-implemented beginning in January 2013. Consumers filed its 2013 PSCR reconciliation in March 2014, 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. In March 2015, Consumers filed its 2014 PSCR reconciliation, requesting full recovery of $2.1 billion of power costs and authorization to roll into its 2015 PSCR plan the overrecovery of $6 million.

Consumers submitted its 2015 PSCR plan to the MPSC in September 2014 and, in accordance with its proposed plan, self-implemented the 2015 PSCR factor beginning in January 2015. Consumers had an $8 million PSCR overrecovery at December 31, 2015.

GCR Plans and Reconciliations: In July 2014, the MPSC issued an order in Consumers’ 2013-2014 GCR plan, 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.

In June 2015, the MPSC issued an order in Consumers’ 2014-2015 GCR plan, authorizing the 2014-2015 GCR factor that Consumers self-implemented beginning in April 2014. Consumers filed its 2014-2015 GCR reconciliation in June 2015, requesting full recovery of $0.8 billion of gas costs and authorization to roll into its 2015-2016 GCR plan the overrecovery of $9 million.

Consumers submitted its 2015-2016 GCR plan to the MPSC in December 2014 and, in accordance with its proposed plan, self-implemented the 2015-2016 GCR charge beginning in April 2015. Consumers had an $18 million GCR overrecovery recorded at December 31, 2015.

Consumers Energy Company [Member]

Regulatory Matters