Consumers Energy gets rate okay for ‘Classic 7’ retirements, Jackson plant buy

The Michigan Public Service Commission on Nov. 19 approved a December 2014 rate application from Consumers Energy that includes ratemaking treatment for the April 2016 retirement of the “Classic 7” coal units and the buy of a 540-MW, gas-fired plant to partially make up for that loss of capacity.

Consumers Energy filed this application seeking authority to increase rates charged to its 1.8 million retail electric customers for the generation and distribution of electricity, and for other regulatory approvals. The rate increase sought in this proceeding is based on the company’s projections for relevant items of investment, expenses, and revenues for a test year covering the 12-month period from June 1, 2015, to May 31, 2016.

Consumers averred that, without rate relief, the utility will experience a jurisdictional electric revenue shortfall of $166 million on an annual basis during the test year. The utility also stressed that the $166 million shortfall does not include the additional $35 million revenue deficiency associated with its purchase of a 540-MW combined cycle natural gas generating facility located in Jackson, Michigan (Jackson Plant), or the revenue sufficiency related to the reduction of $38 million of operation and maintenance (O&M) costs associated with Consumers’ expected retirement of seven small coal-fired generation units.

Netting the revenue impacts of the $166 million test year deficiency, the $35 million revenue requirement associated with the Jackson Plant acquisition, and the annual O&M savings of $38 million associated with closure of the Classic 7, brings the annual test year revenue deficiency to $163 million.

Consumers explained that the acquisition of the 540-MW Jackson Plant would only partially offset the 956 MW capacity reduction associated with closure of the Classic 7 units. The Classic 7 units are Cobb Units 4 and 5, Weadock Units 7 and 8, and Whiting Units 1, 2, and 3. The April 2016 retirements are timed on the end of one-year compliance deadline extensions under the federal Mercury and Air Toxics Standards.

Consumers proposed in its application that the rate increase be implemented in a “three step” manner:

  • At the conclusion of the proceeding, Consumers’ base rates would be increased by $201 million.
  • Simultaneous with the implementation of the $201 million rate increase, Consumers would be authorized to immediately apply a credit to customers’ bills to reduce Consumers’ recovery by $35 million (the revenue requirement associated with the 540 MW Jackson Plant) that would remain in effect until the Jackson Plant purchase closes and the plant becomes fully operational, at which point the credit would be terminated.
  • Upon retirement of the Classic 7 plants in April 2016, Consumers’ rates would be adjusted downward by $38 million to reflect the decrease in O&M associated with the operation of those plants.

Said the Nov. 19 PSC approval: “Based on this order’s findings adopting a 2015-2016 test year, a jurisdictional rate base of $9,160,088,000, an authorized rate of return on common equity of 10.3%, and an authorized overall rate of return of 6.18%, Consumers Energy Company is authorized to implement rates that increase its annual electric revenues by $130,127,000 on a jurisdictional basis over the rates approved in Case No. U-17087 on and after December 1, 2015. After the closing of the sale of the Jackson Power Plant, Consumers Energy Company is authorized to implement rates that increase its annual electric revenues by $164,812,000 on a jurisdictional basis. On and after April 15, 2016, Consumers Energy Company is authorized to implement rates that increase its annual electric revenues by $126,356,000 on a jurisdictional basis. Implementation of these rates will be in three steps, as provided in Ordering Paragraphs B, C, and D.

“On and after December 1, 2015, Consumers Energy Company is authorized to implement increased rates on a service rendered basis for the distribution and sale of electric energy to its retail customers to produce revenues as summarized in Attachment A and shown in Attachment B. The rates set forth in Attachment B include credits associated with the timing of the closing of Consumers Energy Company’s acquisition of the 540 megawatt Jackson Power Plant. Those credits will remain in effect until the Jackson Power Plant purchase closes. On that date, the credits will be terminated and the rates set forth in Attachment B will remain in effect.”

Said the Oct. 29 Form 10-Q quarterly statement of Consumers Energy parent CMS Energy (NYSE: CMS): “In 2013, Consumers signed an agreement to purchase a 540-MW natural gas-fueled electric generating plant located in Jackson, Michigan for $155 million from AlphaGen Power LLC and DPC Juniper, LLC, affiliates of JPMorgan Chase & Co. As provided for in the agreement, the purchase is subject to FERC, MPSC, and other approvals. Consumers received approval from FERC for the purchase in September 2014. Consumers expects to close the purchase in late 2015 or early 2016.

“In January 2014, as a result of this planned purchase, Consumers announced plans to defer the development of its proposed 700-MW natural gas-fueled electric generating plant at its Thetford complex in Genesee County, Michigan, which Consumers estimated would have cost $700 million. The [Michigan Department of Environmental Quality] granted an extension of the project’s air permit in January 2015. The permit will be void if Consumers does not start construction or obtain a further extension before July 2016.

“Despite the planned retirement of seven smaller coal-fueled electric generating units in 2016, with the purchase of the natural gas-fueled electric generating plant, upgrades at Ludington [pumped storage hydro], energy efficiency programs, and demand management programs, Consumers expects its existing resources to be adequate to meet the capacity requirements of its full-service customers for 2016 through 2020. As demand forecasts become more certain, Consumers may take additional actions to cover any remaining capacity requirements, including participation in the annual MISO planning resource auction.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.