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An Overview of the MPSC

Energy Regulatory Partnership ProgramAbuja, Nigeria

July 14-18, 2008

Orjiakor N. Isiogu, ChairmanMichigan Public Service Commission

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United States of America

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MPSC Mission Statement

• Grow Michigan's economy and enhance the quality of life of its communities by assuring safe and reliable energy, telecommunications, and transportation services at reasonable prices.

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MPSC Goals• Establish fair and reasonable rates for regulated services and adopt

and administer fair terms and conditions of service for all customers. • Assure adequate and reliable supplies of regulated services to all

Michigan customers, and the safe and efficient production, distribution, and use of the State’s energy, telecommunications, and transportation services.

• Assure the security of the State’s critical infrastructure by promoting homeland security.

• Promote the State’s economic growth and enhance the quality of life of its communities through adoption of new technologies like broadband telecommunications and efficient renewable energy resources.

• Provide customers with the opportunity to choose alternative electric, natural gas, telecommunications, and transportation providers.

• Provide regulatory oversight in a prudent and efficient manner while implementing legislative and constitutional requirements.

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MICHIGAN PUBLIC SERVICE COMMISSION

Orjiakor N. Isiogu

Chairman

Steven A. Transeth

Commissioner

Monica Martinez

Commissioner

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Historical Reasons for Utility Regulation in the USA

• Traced to British Common Law under the reign of King James as espoused by Lord Chief Justice Matthew Hale, [c. 1670. ]

• In Munn v Illinois, 94 US 113 (1876), a case dealing with grain elevators, the US Supreme Court stated:– “…we find that when private property is ‘affected with a public

interest, it ceases to be juris privati only.’ Property does become clothed with a public interest when used in a manner to make it of public consequence, and affect the community at large. When, therefore, one devotes his property to a use in which the public has an interest, he, in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good.”

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Beginning of Regulation in Michigan

• 1873 - Michigan Legislature established the Michigan Railroad Commission, with a single Commissioner, to regulate railroad rates and conditions of service.

• 1909 - Legislature expanded the Commission to a three-member body, to regulate rail and electric rates and conditions of service.

• 1911 - Michigan Railroad Commission’s authority was extended to include telephone service in 1911.

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History of Regulation – The Early Years

• 1919 - Michigan Railroad Commission was abolished and replaced by the Michigan Public Utilities Commission, comprised of five members, each serving four year terms.

• Public Act 419 of 1919 gave the MPUC authority to regulate steam and natural gas, expanding to – water carriers (ferry services) in 1921,– natural gas pipelines through Public Act 9 of 1929, – petroleum pipelines through Public Act 16 of 1929,

and – motor carriers through Public Act 254 of 1933.

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History of Regulation – The Middle Years

• 1939 - Michigan Public Utilities Commission was abolished and the Michigan Public Service Commission MPSC was established, a five member panel with each member serving a five-year term.

• 1947 - Legislature reduced the body to a three member panel, with members serving staggered six-year terms.

• 1951 - Legislature passed Public Act 275, which required that not more than two Commissioners may represent a single political party.

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History of Regulation – The Middle Years Continued

• 1957 - MPSC first established Gas Safety Standards, prescribing safety requirements for pipeline facilities used to transport natural gas.

• 1967 - Water utilities came under MPSC jurisdiction through Public Act 19 of 1967. Commission jurisdiction over these utilities was repealed by Public Act 246 of 1995.

• 1968 - MPSC assumed duties over administration and enforcement of the size, weight, and load of motor carriers from the Department of State Highways.

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History of Regulation – The Middle Years Continued

• 1969 - Legislature passed Public Act 165, providing for enforcement and penalties of gas safety standards. Periodic revisions and updates over the past forty years have kept Michigan's code current with federal and state legislative requirements and safety standards.

• 1982 - Executive Order 1982-1 transferred the Motor Carrier Enforcement Division to the Department of State Police.

• 1986 - Governor James J. Blanchard merged the Energy Administration of the Michigan Department of Commerce with the MPSC, through Executive Order 1986-17, with the intent to strengthen the regulatory and non-regulatory energy planning, policy and program capabilities for Michigan.

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History of Regulation – The 1990’s

• 1991 - Michigan Legislature passed the Michigan Telecommunications Act (MTA), in an effort to improve opportunities for economic development and promote customer choice.

• 1996 - Commission implemented a new organizational structure, initiated as a result of recommendations by Governor John Engler, designed to streamline operations and improve the competitiveness of Michigan's utility industries. – 6 divisions consolidated into 3: electric, natural gas, and

communications.– Energy program functions transferred from MPSC to the

Department of Consumer and Industry Services, formerly the Department of Commerce. The Department created a State Energy Office to administer these programs.

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History of Regulation – The 1990’s

• Late 90’s - Commission continued its support for greater customer choice in the electric, natural gas and telecommunications industries and increased reliance on market forces to support that choice. – Natural gas customer choice pilot programs were

approved for the four largest natural gas companies in Michigan, Michigan Gas Utilities, Consumers Energy Company, Michigan Consolidated Gas Company, and SEMCO Energy Gas Company

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Recent Regulation in Michigan

• 2000 - Michigan's Customer Choice and Electricity Reliability Act (2000 PA 141) took effect in June. – Directed the MPSC to issue orders that gave all customers of

Michigan's investor-owned utilities the ability to choose an alternative electric supplier, starting in January 2002.

– Defined a new type of entity, called "alternative electric supplier" ("AES"), and gave the MPSC authority to license them.

• Michigan's electric industry has been restructured so that the generation and supply of electricity is open to competitive suppliers.

• The electric transmission and distribution businesses remain under a regulated monopoly utility structure.

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Political Reason for the Current Utility Regulatory Structure

• Every State in the USA has an independent regulatory commission to set utility rates.– Need for expertise– Balancing of interests of shareholders and ratepayers– High level of accountability– Shields elected officials from having to make unpopular decisions– Grounded in constitutional law and economic theory – Generally well proven (100+ years, “mature”)– Encourages long-term infrastructure investment – Reasonable and institutionally valid – Provides a high degree of stability – Produces relatively coherent and consistent results – Provides reasonable, if imperfect, performance incentives (RB/ROR

is a form of incentive regulation)

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Current Structure of the MPSC

• The MPSC is an independent state agency located in Michigan’s Department of Labor and Economic Growth.

• Most authority comes from statutes passed by the Michigan Legislature.

• Some authority in the area of telecommunications regulation comes from federal law.

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MPSC FUNDING MECHANISM 1972 PA 299

 • Subsequent to December 1972, Utilities

have been assessed all costs for their regulation by the MPSC.

• There is a minimum $50.00 per utility assessment.

• There are alternative assessment provisions.

• There is a mechanism for a utility to challenge its annual assessment.

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MPSC Organizational Chart

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• Provides the Commission with legal, technical, and research expertise

• Executive Secretary Section performs other administrative duties, including:– Maintaining the security of all official records– Providing appropriate access to records– Distributing all official Commission documents– Coordinating court reporting functions– Responding to Freedom of Information Act (FOIA)

requests, 1976 PA 442, MCL 15.231 et seq.

Regulatory Affairs Division Robert W. Kehres, Director

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• Provides technical and administrative support to the Commission in the areas of motor carrier regulation, low-income energy assistance and efficiency grants, energy emergency preparedness, critical infrastructure protection, and energy data and analysis

• Comprised of four sections: Motor Carrier Credentials & Customer Service, Motor Carrier Safety & Compliance, Energy Grants, and Energy Data & Security

Motor Carrier, Energy Grants & Information Division

Michael Fielek, Director

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• Provides technical assistance and recommendations on electric and natural gas services and issues necessary to ensure that regulated electric and natural gas services are provided in a safe, reliable, and efficient manner to enhance Michigan’s competitive economic environment

• Monitors federal and regional electric and natural gas issues and recommends policy proposals at the federal and regional levels

• Comprised of three sections: Gas Operations, Electric Operations, and Energy Markets

Operations & Wholesale Markets Division Paul Proudfoot, Director

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• Responsible for all regulatory oversight of the Commission-regulated energy utilities in the state, including recommendations of appropriate utility rates

• Administers the Commission’s gas cost recovery (GCR) and power supply cost recovery (PSCR) programs, Uniform System of Accounts, Annual Reports, and Utility Tariff books

• Oversight of Michigan’s electric and natural gas customer choice programs, including administering the Commission’s code of conduct, designing choice rates and tariff rules, and the licensing of alternative electric and gas suppliers

• Comprised of four sections: Accounting & Auditing, Electric & Gas (Act 304) Supply and Sales Forecasting, Financial Analysis & Customer Choice, and Rates & Tariffs

Regulated Energy Division Dr. Nicholas Nwabueze, Director

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• Responsible for the development, implementation, and enforcement of utility quality of service rules, orders, and policies relating to the Commission’s customer information and support functions– Handle formal and informal complaints,

coordinate MPSC’s annual Consumer Forums• Comprised of two sections: Customer Support

and Service Quality

Service Quality Division Dr. Michel Hiser, Director

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• Provides the Commission with technical assistance and policy recommendations on telecommunications issues impacting Michigan and its citizens

• Regulation of basic local telephone service, Emergency 9-1-1 service, telephone service for the speech and hearing impaired and all other state regulatory requirements as defined by the Michigan Telecommunications Act of 1996 (1991 PA 179), and the federal Telecommunications Act of 1996

• Administers the Michigan Children’s Protection Registry Act (2004 PA 241) and the Uniform Video Services Local Franchise Act (2006 PA 480)

• Comprised of three sections: Licensing & Competitive Issues, Operations & Tariffs, and Rates & Financial Analysis

Telecommunications Division Robin P. Ancona, Director

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Introduction to Electric Utility Regulation by the MPSC

Energy Regulatory Partnership ProgramAbuja, Nigeria

July 14-18, 2008

Orjiakor N. Isiogu, ChairmanMichigan Public Service Commission

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Authority to Regulate

• Act 3 of 1939 (MCL 460.6) vested with the PSC the power and jurisdiction to:– Regulate all public utilities in the state except a

municipally-owned utility, the owner of a renewable resource power production facility, and except as otherwise restricted by law

– Regulate all rates, fares, fees, charges, services, rules, conditions of service, and all other matters pertaining to the formation, operation, or direction of public utilities.

– Hear and pass upon all matters pertaining to, necessary, or incident to the regulation of public utilities.

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Major Substantive Laws Giving the Commission Its Jurisdiction

• Railroad Act (1909)• Transmission of Electricity Act (1909)• Public Utilities Commission Act (1919)• Carriers by Water Act [a/k/a Ferry Boats] (1921)• Certificates of Convenience and Necessity Act (1929)• Public Service Commission Act (1939)• Protection of Underground Facilities (1974)• Michigan Telecommunications Act (1991)• Electric Transmission Line Certification Act (1995)• Customer Choice and Reliability Act (2000)• Video Franchising Act (2006)

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Major Procedural Laws governing the Commission

• Administrative Procedures Act (1969)

• Open Meetings Act (1976)

• Freedom of Information Act (1976)

• Costs of Regulating Utilities Act (1972)

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How the MPSC Regulates

• Informal Contacts• Formal Investigations• Show Cause Proceedings• Uncontested Cases• Contested Cases• Adoption of Administrative Rules• Adoption of Guidelines• Declaratory Rulings

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Examples of Informal Contacts

• Educational meetings with industry experts– Need to bring the Commission and its Staff up

to date on new developments (ex: the proposed sale of a nuclear facility)

– Need to provide the Commission with background information before commencing a contested case proceeding

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Examples of Formal Investigations

• Two formal investigations this year:– To discover how a series of thunderstorms

affected two major utilities’ distribution systems (June 19, 2008)

– To look into the marketing and customer service policies and practices of Universal Gas & Electric, an alternative gas supplier (February 26, 2008)

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Examples of Show Cause Proceedings

• Two recent show cause proceedings:– Requiring the state’s largest electric utility

(Detroit Edison) to demonstrate why its rates should not be reduced due to certain recent developments. (March 23, 2006)

– Requiring a utility to explain why it should not be found to have violated the Commission’s Winter Protection Plan rules against shutting off elderly customers during cold weather.

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Example of Uncontested Case

• Pursuant to MCL 460.6a, if a utility’s request of the Commission does not result in an increase in customer rates, charges, or its cost of service, ex parte approval is appropriate.– In its March 11, 2008 order in Case No. U-

15482, the Commission approved an application by Wisconsin Public Service Corporation that requested recognition and approval of depreciation rates for a new power plant.

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Contested Cases

• Contested cases are governed by the– Commission’s Rules of Practice and

Procedure – Michigan Administrative Procedures Act

• Examples of Contested Cases– Consumers Energy Company’s Electric Rate Case

(Case No. U-15245, order issued June 10, 2008)– The Detroit Edison Company’s pending Electric Rate

Case (Case No. U-15244)

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Rulemakings

• The Commission must have either expressed or implied authority in a statute to do rulemaking.

• The rulemaking procedures that must be followed are set forth in the Michigan Administrative Procedures Act.

• The Commission must provide notice to the public.• The Commission must conduct at least one public

hearing.• The public may file comments.• The final rules must be submitted to SOAHR for legal

approval, to LSB for stylistic approval, and to a Joint Committee of the Legislature for its consideration.

• See the Michigan Administrative Procedures Act

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Procedures for Guidelines

• Guideline procedures that must be followed are set forth in the Michigan Administrative Procedures Act.

• Commission must provide notice of the proposed guideline to the joint legislative committee, SOAHR, and each person who requested the agency in writing or electronically for advance notice of the proposed action.

• The Commission must allow for comments to be filed regarding the proposed guidelines.

• Guidelines are rarely used by the Commission. • Example: Guideline for the timely processing of cases –

Case No. U-9832, order dated August 29, 1991

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Declaratory Rulings

• Generally not issued very often• Only binding on the Commission and the party

requesting the Declaratory Ruling• Declaratory Rulings are also governed by the

Commission’s Rules of Practice and Procedure and by the Michigan Administrative Procedures Act.

• Example: PATCH Energy – Order issued September 25, 1991 in Case No. U-

9461 – Issue was whether a gas submetering device would

subject a landlord to regulation as a public utility.

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Organizational Structure

• Michigan Public Service Commission – MPSC Commissioners– MPSC Technical Staff

• Represents the public in contested cases• Advises the Commissioners on technical issues

• Michigan Department of Attorney General – Public Service Division– Represents the Staff in proceedings before the Commission and

the Commission in Appellate Courts

• State Office of Administrative Hearings and Rules (SOAHR)– Provides the Commission with independent administrative law

judges to hear disputed cases.– Supervises the adoption of all administrative rules and

guidelines.

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Duties of the Commissioners

• Economic Regulation of Public Utility Services, including

– Electric Utilities– Natural Gas Utilities– Telecommunications– Motor Carriers– Ferry Boats– Gas Pipeline Construction– Video Services– Emergency Telephone Services– Proration of Production from Natural Gas Fields– Protect MI Child – Transmission Line Siting

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Working Relationships

• Open Meetings Act Exemption allows Commissioners to discuss contested cases in private conferences. MCL 24.263(7)(f)

• Prohibition against ex parte communications with parties to contested cases contained in the Administrative Procedures Act was waived in cases where the Staff’s technical expertise is needed. MCL 24.282

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Standards for Commission Determinations

• The Commission speaks only through its orders.

• Orders in contested cases must be supported by record evidence.

• Orders must be in writing and available to the public.

• Orders must contain sufficient findings of fact and conclusions of law as to permit review by an appellate court.

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Future Directions

• Self-regulation of Rural electric cooperatives

• Renewable portfolio standards

• Energy efficiency programs

• More Commission autonomy

• Faster rate case processing

• Certificate of need for new generation plants

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Additional Topics

Energy Regulatory Partnership ProgramAbuja, Nigeria

July 14-18, 2008

Robert W. Kehres, DirectorMichigan Public Service Commission

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Ethical Issues -- Gifts

• The State of Michigan, the Department of Labor and Economic Growth (DLEG) and the MPSC all have prohibitions on Commissioners and employees of the Commission and immediate family members accepting any form of gift or benefit from an entity that is regulated by the state or from a vendor.

• The lone exception is an incidental meal associated with a plant tour that is necessary to avoid a disruption of the event.

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Ethical issues – Profiting from Insider Information

• A Commissioner or an employee of the Commission cannot disclose or otherwise use information garnered in the course of his or her employment that is not known to the public to obtain a benefit.

– Example: I cannot advise my sister to buy or sell the stock of a company regulated by the Commission.

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Ethical Issues – Conflicts of Interest

• A Commission employee and immediate family members cannot own any interest (i.e. stock) in any company regulated by the Commission.

• DLEG requires an annual disclosure by each employee of his or her interests in investments over which the employee has control.

• But, an employee may invest in a mutual fund because the employee has no control over the mutual fund’s investment decisions.

• An employee cannot be involved in any case if an immediate family member has an interest in the outcome.

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Confidentiality Issues

• Michigan Law protects certain confidential information and also requires complete disclosure of certain information.– Open Meetings Act (Act 267 of 1976) - outlines provisions for

making meeting of public bodies open to the public (public notice, publishing of minutes)

– Freedom of Information Act (Act 442 of 1976) – allows the public to request information from a public body

• A public body is not required to create a document that does not otherwise already exist.

• Many items are exempt from disclosure, including, trade secrets or confidential information, communications that are advisory, non-factual, and preliminary, and personal information

– Specific Regulatory Acts

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Processing & Flow of Information Into the Commission

• The MPSC has a Case Management Section supervised by the Commission’s Executive Secretary.

• All official documents are received by the Executive Secretary and managed by the Case Processing Section.

• The MPSC has authority to require utilities to file reports.• While the Commission still accepts paper filings from

residential customers who file customer complaints against utilities, the vast majority of all other filings are being done electronically via e-mail.

• All of the MPSC’s e-file dockets are available 24 hours a day, 7 days a week on the Commission’s website.

• http://www.michigan.gov/mpsc

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MPSC Website

• MPSC’s website has all of the Commission’s orders that have been issued subsequent to 1960. – Cases dating from 1996 to present are listed by industry

(telecommunications, electric, gas) according to their date of issuance.

– Cases issued between 1960 and 1996 can be located through use of several search functions.

• E-filing Dockets - contains all pleadings, transcripts, exhibits, motions, briefs, case decisions, etc., related to the case and is accessible from any computer with internet access

• If the website fails, the MPSC can still retrieve the information from a backup server or from previously backed up data disks. There is also an emergency filing protocol in the event of sever failure for E-dockets.

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Information & Data Flows Between Utilities and the Commission

• Formally, Utilities are required to submit reports to the MPSC such as:– Annual Reports (Report detailing the yearly financial activities of each

utility).– 45-Day Reports (detail fuel and purchased power data from 45 days

following the end of the preceding month).– Power Supply Cost Recovery plans and reconciliations.– Summer Reliability assessments.

• Informally, Utilities provide the MPSC:– Audit requests spawning from contested cases.– Customer and system interruption data.– Monthly fuel inventory levels– Other data and pertinent information as deemed necessary by the

MPSC staff.• The MPSC staff tries to keep open lines of communication between

themselves and the utilities in order to better serve the customers of Michigan by allowing the free flow of information between the staff and utilities. Good communication is the key to good regulation.

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Relationship with State and Federal Agencies

• The MPSC shares jurisdiction and regulatory responsibilities with the following state and federal agencies:– Federal Energy Regulatory Commission – Federal Communications Commission– US Department of Transportation (motor carrier &

pipeline safety)– Michigan Department of Natural Resources– Michigan Department of State Police– Others (EPA, Air Quality, DEQ, NRC)

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Federal Energy Regulatory Commission

• FERC determinations may preempt MPSC decisions in certain areas. – The FERC has jurisdiction over wholesale

power markets and interstate power transactions.

– Any time power reaches the grid, the authority of the FERC comes into play.

– The MPSC’s authority extends to retail markets in Michigan.

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State & Federal Agencies

• Decisions by State and Federal Agencies may influence MPSC rate decisions by requiring a utility to incur costs.

• Example:– A Nuclear Regulatory Commission decision

may require a utility with a nuclear plant to spend millions of dollars on a safety-related upgrade, which would need to be reflected in the utility’s retail rates.

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Local Governments

• Cities, townships, and villages sometimes try to require utilities to pay franchise fees or absorb the cost of construction expenses.– City of Taylor Case– Hartland Twsp Case– Port Huron franchise renewal

• Payment of fee• Refusal to serve

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Regulatory Considerations:Michigan/Wisconsin issues

• Michigan has two Peninsulas• The Upper Peninsula is sparsely populated and

some parts border Wisconsin and are served by electric utilities from Wisconsin, which are subject to regulation by the Wisconsin Public Service Commission.

• So, to avoid different regulatory schemes, the MPSC often defers to Wisconsin’s approaches to regulation, which is cost efficient for all.

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Regulatory Considerations:Midwest Independent Transmission

System Operator (MISO)• Non-profit, member-based organization

committed to being the leader in electricity markets

• Provides customers with valued service, reliable, cost effective systems and operations, dependable and transparent prices, open access to markets, and planning for long-term efficiency.

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Midwest ISO Reliability Area

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Midwest ISO• Midwest ISO manages one of the world’s largest energy

markets using security-constrained economic dispatch of generation.

• Market operations include a Day-Ahead Market, a Real-Time Market, and a Financial Transmission Rights (FTR) Market. These markets are operated and settled separately.

• $2.6 billion settled/month on average (Day-ahead, cleared w virtuals, 2007)

• 1,768 pricing nodes• Five-minute dispatch• Offers locked in 30 minutes prior to the scheduling hour• Spot market prices calculated every five minutes• <15-minute ramp rate at 1,000 MW• 280 Market Participants

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Midwest ISO – Scope of Operations

• Generation Capacity– 127,000 MW (market)– 156,000 MW (reliability)

• Peak Load (set July 31st, 2006)– 109,157 MW (market)– 129,647 MW (reliability )

• 93,600 miles of transmission– 500kV, 345kV, 230kV, 161kV, 138kV, 120kV, 115kV, 69kV

• 15 states and one Canadian province• 920,000 square miles• Control Centers in Carmel, IN and St. Paul, MN• 631.2 TW hours annual billing (2006 transmission

service)

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See our Web site at:

www.michigan.gov/mpsc