Stateofmichigan Before the Michigan Public Service

S T A T E O F M I C H I G A N

BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

* * * * *

In the matter of the application of ) CONSUMERS ENERGY COMPANY for approval ) of a power purchase agreement and for other relief ) Case No. U-14992 in connection with the sale of the Palisades Nuclear ) Power Plant and other assets. ) )

At the March 27, 2007 meeting of the Michigan Public Service Commission in Lansing,

Michigan.

PRESENT: Hon. J. Peter Lark, Chairman Hon. Laura Chappelle, Commissioner Hon. Monica Martinez, Commissioner

ORDER GRANTING REGULATORY APPROVALS AND PROVIDING FOR THE DISTRIBUTION OF PROCEEDS TO ALL CUSTOMERS

HISTORY OF PROCEEDINGS

On August 18, 2006, Consumers Energy Company (Consumers) filed an application, together with the testimony and exhibits of five witnesses, seeking certain regulatory determinations in connection with the proposed sale of Consumers’ Palisades Nuclear Power Plant (Palisades) to

Entergy Nuclear Palisades, LLC (ENP), a subsidiary of Entergy Corporation (Entergy). The determinations sought by Consumers included: (1) approval of a power purchase agreement (PPA) between Consumers and ENP pursuant to MCL 460.6j(13)(b) and other applicable law; (2) approval of the manner in which Consumers’ rates should be adjusted to remove the costs associated with the ownership of Palisades and to incorporate the costs of the PPA; (3) confirma- tion that the requirements of the October 24, 2000 order in Case No. U-12505, which authorized the securitization of Consumers’ pre-2001 investment in Palisades, have been satisfied;

(4) approval of the proposed transfer of the funds in the Commission-jurisdictional decommissioning trust funds; (5) approval of Consumers’ proposal to use $100 million of the sale and decommissioning proceeds to reduce the proposed PPA PSCR costs in 2007-2009 and a determination on how to use of the remaining proceeds; (6) approval to terminate the current decommissioning surcharge when the PPA begins; (7) waiver of the requirement to file a March 2007 decommissioning report for Palisades as required by Case No. U-14150; (8) issuance of a certificate of public convenience and necessity pursuant to 1929 PA 69 to supply station power to

Palisades; (9) a finding that Palisades is an “eligible facility” to facilitate an exempt wholesale generator (EWG) determination by the Federal Energy Regulatory Commission (FERC); and

(10) approval of Consumers’ request to net sale transaction costs and Big Rock expenses against sale proceeds from Palisades.

Pursuant to due notice, a prehearing conference was conducted on September 20, 2006 by

Administrative Law Judge Barbara A. Stump (ALJ), at which time the following intervenors were granted the right to intervene: the Association of Businesses Advocating Tariff Equity (ABATE),

Attorney General Michael A. Cox (Attorney General), Energy Michigan, the Michigan Environ- mental Council and the Public Interest Research Group in Michigan (collectively, MEC/PIRGIM), and Van Buren County, Covert Public Schools, Covert Township, Lake Michigan College,

Van Buren District Library, Van Buren Intermediate School District, and South Haven

Community Hospital (collectively, the Local Units). The Commission Staff (Staff) also

Page 2 U-14992 participated in the proceedings. Finally, at the prehearing conference the parties agreed to a schedule for the proceedings.

On December 20, 2006, the Staff and intervenors filed their testimony and exhibits. On

January 8, 2007, Consumers and ABATE filed rebuttal testimony.

On January 9, 2007, Consumers filed a motion to strike the entirety of the testimony and exhibits of Local Units’ witnesses Al Hawkins, David L. Tate, Edward K. Vander Vries,

Dr. Stephanie Burrage, Dale Richard Gribler, Lt. Alain E. Svilpe, Terrell R. Oetzel, and a portion of the testimony of George E. Sansoucy (p. 22, line 8 through p. 27, line 10). Consumers argued that the testimony filed on behalf of the Local Units fell into one of the following categories:

(1) complaints about the level of property taxes that Consumers has paid in connection with its ownership and operation of Palisades; (2) descriptions of the demographics of the area surrounding Palisades; (3) descriptions of various types of equipment, programs, facilities, and personnel that the Local Units desire; (4) descriptions of various issues related to emergency management and preparedness; and (5) an estimate of the potential lost property taxes to the Local

Units during the period July 2051 through October 2092 under a stated set of assumptions.

Consumers contended that none of these matters are relevant to the issues pending before the

Commission in this case. Moreover, Consumers argued that property tax issues are not within the

Commission’s jurisdiction, nor are issues of how to fund local emergency preparedness needs.

In opposition, the Local Units argued that they are the power plant’s host communities and are therefore compelled to share the risks associated with operation of the plant. The Local Units claimed that only the Commission can decide whether their concerns are relevant, and that the scope of the proceeding encompasses the risks associated with nuclear power generation generally, such as emergency preparedness.

Page 3 U-14992 On January 16, 2007, the ALJ struck the testimony of Terrell Oetzel on grounds that his testimony was speculative because it involved estimates regarding property tax revenue reductions and economic losses that might be experienced by the Local Units during a period that does not start until 2052. The ALJ allowed the balance of the Local Units’ testimony to remain to allow the

Commission to decide what weight, if any, it should have.

On January 11, 2007, MEC/PIRGIM and the Local Units filed a motion to postpone and consolidate this proceeding with other proceedings and for a “proceeds trust remedy.”1 The ALJ found the motion to be untimely and refused to consider its merits.

From January 16-19 and 22-25, 2007, the ALJ presided over cross-examination of all witnesses. Thereafter, on January 25, 2007, the ALJ closed the record and transmitted the matter to the Commission, which had agreed to read the record.

On February 1, 2007, pursuant to Rule 401 of the Commission’s Rules of Practice and

Procedure, 1999 AC, R 460.17401, the Attorney General filed a petition seeking to reopen the evidentiary record. Attached to the petition was the public version of written testimony of John J.

Reed that had been filed before the Public Service Commission of Wisconsin (PSCW) in Docket

No. 6630-EI-113 by Wisconsin Electric Power Company (WEPCo). Mr. Reed’s PSCW Docket

No. 6630-EI-113 testimony supported approval of an asset sale agreement and a power purchase agreement for the sale by WEPCo of the Point Beach Nuclear Plant (Point Beach). Mr. Reed, who is the Chairman and Chief Executive Officer of Concentric Energy Advisors, Inc., and CE Capital

Advisors, Inc. (collectively, CEA), had previously testified in this proceeding on behalf of

Consumers to support the reasonableness and prudence of Consumers’ proposed asset sale agreement (ASA) and proposed power purchase agreement (PPA).

1 The disposition of this motion is addressed in Section V. 2., infra. Page 4 U-14992 The Attorney General argued that Mr. Reed’s testimony in PSCW Docket No. 6630-EI-113

“is relevant to and casts doubt upon the reasonableness and prudence of the proposed Palisades sale and power purchase agreement” and “justifies reopening the captioned case for additional discovery and testimony.” Attorney General’s petition, p. 2.

On February 1, 2007, the Commission’s Executive Secretary sent an electronic communication to all parties to this proceeding informing them that responses to the Attorney General’s petition should be filed by 4:00 p.m. Monday, February 5, 2007. Consumers, the Staff, and

MEC/PIRGIM filed timely responses to the Attorney General’s petition. Consumers and the Staff opposed the Attorney General’s petition. MEC/PIRGIM supported it.

In an order issued on February 6, 2007, the Commission found that the Attorney General’s petition to reopen the record should be granted. In so doing, the Commission made allowances for the filing of additional testimony, a period of discovery, additional cross-examination, and oral argument.

On February 7, 2007, MEC/PIRGIM filed a motion to compel and a motion to reopen, or alternatively, to include another issue in the reopened proceeding. MEC/PIRGIM claimed that the record was incomplete with regard to the issue of the proportion of the cost for the storage of spent nuclear fuel (SNF) and the investment in the design and construction of the interim spent fuel storage installations (ISFSIs) at Consumers’ now decommissioned Big Rock Point Nuclear Plant

(Big Rock) and at Palisades that could be attributed to the default by the United States Department of Energy (DOE) of the obligations set forth in the 1983 standard SNF disposal contract between the DOE and Consumers.2

2The disposition of this motion is addressed in Section V. 4., infra. Page 5 U-14992 On February 9 and 20, 2007, Consumers, ABATE, Attorney General, MEC/PIRGIM, Energy

Michigan, the Local Units, and the Staff filed briefs and reply briefs, respectively.

On February 21, 2007, Consumers filed the supplemental testimony of Mr. Reed as required by the Commission’s February 6, 2007 order.

On February 26, 2007, MEC/PIRGIM filed a motion for immediate consideration of its

February 7, 2007 motion and a notice of hearing.

On February 27, 2007, Consumers filed a response to MEC/PIRGIM’s February 7, 2007 motion.3

On March 7, 2007, the ALJ conducted the additional evidentiary hearing provided for in the

Commission’s February 6, 2007 order. Mr. Reed testified and was cross-examined by the Staff, the Local Units, MEC/PIRGIM, and the Attorney General. In addition, the Attorney General submitted six exhibits and the Local Units submitted one exhibit, all of which were received into evidence. Thereafter, Consumers, the Staff, the Local Units, MEC/PIRGIM, and the Attorney

General presented oral arguments.4 The ALJ then closed the record and re-submitted the matter to the Commission for its consideration. A Proposal for Decision was not prepared by the ALJ because the Commission indicated its intention to read the record to expedite resolution of the proceeding. The entire record consists of 11 volumes of transcript containing 1,926 pages and nearly 100 exhibits that were admitted into evidence.

3On February 28, 2007, MEC/PIRGIM filed an additional “reply” pleading pertaining to its February 7, 2007 motion. Because the Commission’s rules do not provide for the filing of such a pleading, MEC/PIRGIM’s reply has been ignored.

4Energy Michigan and ABATE did not attend the March 7, 2007 hearing. Page 6 U-14992 II.

CONSUMERS’ APPLICATION AND TESTIMONY

Description of Palisades

Stephen T. Wawro, Consumers’ Director of Nuclear Assets, provided an overview of

Palisades. He described Palisades as a single-unit, two-loop pressurized water reactor with an average net capacity of 798 megawatts (MW). Palisades is located on a 469 acre site on the Lake

Michigan shoreline about five miles south of South Haven, Michigan. Consumers currently owns

100% of Palisades. The plant commenced commercial operation in 1971. Pursuant to a 2001 agreement, Consumers turned over the day-to-day operations of Palisades to Nuclear Management

Company (NMC), a company formed by a group of nuclear plant owners to operate their plants.

At the time that this application was filed, the Palisades’ operating license was scheduled to expire in 2011. In March 2005, Consumers filed an application with the Nuclear Regulatory Commission

(NRC) to renew Palisades’ operating license. On January 17, 2007, the NRC extended Palisades’ operating license for an additional 20 years.

Mr. Wawro provided data regarding the plant’s past operations and its average capacity factors over the years of its operation. He also developed major inputs and assumptions underlying Consumers’ cost of continued ownership (CCO), including the forecasted capacity factor, the timing and duration of future outages, expected capital expenditures, depreciation amounts, and operation and maintenance (O&M) expenses. Further, Mr. Wawro described anticipated capital expenditures, totaling $569 million, necessary to replace the reactor vessel head and the steam generators, to undertake the combined pressurizer/Alloy 600 equipment repairs and replacements, and to complete other life extension projects.

Page 7 U-14992 Description of the Big Rock ISFSI

The Big Rock ISFSI consists of a concrete pad that houses eight dry storage casks containing

SNF from Big Rock located in a secure, fenced, and monitored area on a portion of the property of the former nuclear plant.5 After the shutdown of Big Rock in 1997, Consumers removed the SNF bundles from the plant and placed them in the ISFSI. The ISFSI will remain on the current site until the SNF is transferred off-site to a DOE facility or some other licensed storage facility.

Consumers’ Rationale for Selling Palisades and the Big Rock ISFSI

David W. Joos, Chief Executive Officer and a member of the Board of Directors of both

Consumers and its parent, CMS Energy Corporation (CMS), presented testimony regarding

Consumers’ reasons for selling Palisades and the Big Rock ISFSI.

With regard to the Palisades’ sale, Mr. Joos explained that the future of NMC is uncertain. He stated that, at the time Consumers joined NMC, it was the fifth owner to place operating responsibility of a nuclear plant with NMC. Subsequently, two of the five NMC participating utilities sold their plants and left NMC. By late 2005, the three remaining owners were unwilling to make long term commitments to NMC. According to Mr. Joos, NMC’s continued existence is in question.

Based on an analysis of the effect of Consumers resuming direct operation of Palisades, the utility determined that the most prudent course of action was to explore the possibility of selling the plant.

Mr. Joos also indicated that there are significant capital expenditures that will be required at

Palisades over and above the $20 million average annual amounts. He stated that replacement of the reactor vessel head and the steam generator are believed necessary to extend the life of the

5Other highly radioactive materials from the plant known as other “Greater Than Class C Waste” are also stored in these containers. Page 8 U-14992 plant and that during the next 10 years the total of such non-routine capital expenditures could exceed $589 million.

Mr. Joos also cited the current strong market for nuclear generating assets, the ability to retain access to Palisades’ power products on a long-term basis at reasonable prices, and the ability of

Consumers to free up and gain access to the excess decommissioning funds as further support for

Consumers’ decision to sell the plant at this time.

Finally, Mr. Joos opined that Consumers was interested in avoiding the risks associated with the continued ownership of a nuclear plant. He stated that there are significant risks associated with each extended outage at a nuclear plant, which can be very costly due to continuation of the plant’s fixed costs and significant replacement power costs. According to Mr. Joos, substitution of the performance-based PPA structure will mitigate those risks. In addition, he stated that there is considerable risk associated with the decommissioning of nuclear units, including the risk of the investment performance of the decommissioning trust funds, the difficulty in accurately projecting the cost of decommissioning the plant, and the risk associated with carrying out decommissioning activities. The prospect of being able to transfer these risks to a new owner, while retaining the right to the output of the plant for a substantial term, also supported Consumers’ decision to sell

Palisades.

With regard to the Big Rock ISFSI, Mr. Joos testified that the Big Rock ISFSI was offered on an optional basis to bidders due to Consumers’ desire to minimize the future costs and risks associated with the ownership of nuclear assets. He stated that because Consumers had made the decision to sell Palisades and because the decommissioning of Big Rock was well underway,

Consumers believed that the time was right to explore the possibility of transferring ownership of the Big Rock ISFSI, which is Consumers’ only other nuclear power-related asset. Mr. Joos also

Page 9 U-14992 cited Consumers’ ability to eliminate the technical staffing capability necessary to support the Big

Rock ISFSI as justification for the sale. Finally, Mr. Joos explained that transfer of the Big Rock

ISFSI to the new owner of Palisades would avoid difficulties associated with separating the rights

(between Palisades and Big Rock) that Consumers has under the 1983 SNF disposal contract with the DOE.

The Sale/Auction/Negotiation Process

In December 2005, Consumers announced that Palisades would be offered for sale in a competitive auction process. Consumers concluded that conducting an open and competitive auction in which all prospective bidders had an equal opportunity to participate would ensure that the maximum value for the plant was realized. Consumers retained CEA as the auction manager.

Mr. Reed acted as the Responsible Officer for the CEA auction team.

According to Mr. Reed, the auction process was conducted in six major phases, each designed and executed to achieve Consumers’ auction objectives. As described by Mr. Reed, the major phases of the auction process included: (a) auction preparation, (b) the early interest phase, (c) a period of marketing and due diligence, (d) the bid phase, (e) bid evaluation, and (f) the negotiation and agreement phase. These activities stretched over a period of seven months and culminated in agreement on the terms of the ASA and PPA between Consumers and ENP on July 11, 2006.

Mr. Reed opined that the auction process was very successful because it: (1) secured a purchase price for the facility that was at least equivalent to the book value of the assets being sold plus the costs of the transactions; (2) secured a 15-year PPA for all of the output of the facility at prices that were less than Consumers’ CCO; (3) transferred the operating risk to the plant’s new owner; (4) transferred all of the decommissioning responsibilities for the plant to the new owner while allowing the utility to retain a significant portion of the accumulated decommissioning funds

Page 10 U-14992 for the benefit of its customers; (5) achieved terms of sale for labor, environmental, and other issues that were within industry norms; and (6) achieved a disposition of the Big Rock ISFSI on terms that yielded cost and risk levels that were no higher than those associated with Consumers’ continuing to own that facility. According to Mr. Reed, Consumers’ objectives were aggressive both individually and in the aggregate. He testified that the proposed transaction with ENP, taken as a whole, represents one of the most favorable nuclear plant sales to date, with approximately

$582 million in net benefits created for Consumers and its customers.

Descriptions of Entergy and ENP

Entergy owns and operates power plants with approximately 30,000 MW of total electric generating capacity, and is the nation’s second largest nuclear plant operator. Entergy delivers electricity to 2.7 million utility customers in Louisiana, Texas, Mississippi, and Arkansas. It has annual revenues of approximately $10 billion and has approximately 14,000 employees. Entergy owns ten nuclear plants and operates another. Palisades would be the third pressurized water reactor in the Entergy fleet.

ENP is an indirect, wholly-owned subsidiary of Entergy, a registered public utility holding company under The Public Utility Holding Company Act (PUHCA). ENP and its parent corporation are not affiliated with Consumers or its parent, CMS. While ENP will operate independently of its parent corporation, it should be noted that Entergy provided certain parent guarantees, including a guarantee that ENP and Entergy will pursue the necessary NRC license transfer and will provide financial guarantees for operations and decommissioning costs as required by NRC regulations.

Page 11 U-14992 Description of the Asset Sale Agreement

On July 11, 2006, Consumers and ENP entered into the ASA. The basic terms of the ASA address the purchase price, the PPA, SNF disposal, and provisions regarding decommissioning trust funds to be transferred to ENP. These provisions are discussed in detail in the following sections. i. Purchase Price

At closing, ENP has agreed to pay Consumers $380 million for Palisades, plus or minus any adjustments pursuant to the terms of the ASA. The purchase price exceeds the book value of

Palisades by about $66 million. Consumers has agreed to pay ENP $30 million in exchange for

ENP taking title to the Big Rock ISFSI. In return for this payment, ENP assumes the annual O&M expense for the site, the cost of transferring the SNF offsite, and the ultimate decommissioning of the Big Rock ISFSI.

ii. Power Purchase Agreement

Consumers and ENP executed a PPA for the output from Palisades for a 15-year term.

William E. Garrity, Consumers’ Senior Vice President for Electric and Gas Supply, described the

PPA and offered an assessment of its benefits to Consumers’ ratepayers. According to

Mr. Garrity, the PPA has a 15-year term and will enable Consumers to supply its customers with capacity, energy, and associated generation services at a lower cost and with less risk than customers would experience under Consumers’ continued ownership of Palisades. The PPA charges are the highest during the summer on-peak hours. The annual pricing varies from approximately $43.50 per megawatt-hour (MWh) in 2006 to $63.00 per MWh in 2023. The pricing increases annually over this period. He insisted that the PPA provides power at a cost that is $199 million lower on a net present value (NPV) basis than Consumers’ CCO. Mr. Garrity maintained

Page 12 U-14992 that the PPA will provide price stability and will establish future power costs that are anticipated to be well within the range of Consumers’ market price projections and below the utility’s median market price projection.

Mr. Garrity explained that the PPA: (1) ensures that Consumers’ customers will continue to have access to all power products from Palisades on a long-term, reliable basis; (2) reduces nuclear ownership and operating risks to the maximum extent possible; (3) provides long term price certainty and stability; and (4) maintains or reduces power supply costs for customers, as compared to Consumers’ CCO.

While the initial term of the PPA is 15 years, it should be noted that Consumers and ENP reached an agreement wherein ENP granted Consumers a right of first negotiation to enter into a subsequent PPA. See, Exhibit A-13. This arguably places Consumers in a favorable position to secure power from Palisades beyond 2022. 6 Tr 1035.

Mr. Garrity also testified that the PPA has performance-based pricing, which means that customers only pay for capacity and energy actually delivered to them. In addition, the PPA preserves for Consumers the potential future value from plant attributes not currently traded or valued, and also preserves access to all financial transmission rights (FTRs) associated with the products currently being purchased.

iii. SNF Disposal Arrangements

The ASA provides that ENP will assume title to and responsibility for management, storage, removal, transportation, and disposal of all SNF associated with Palisades and the Big Rock ISFSI.

Consumers will also assign to ENP its rights, title, and interest in the 1983 standard SNF disposal contract with the DOE, with certain exceptions. The exceptions provide that Consumers retains its right to pursue its damages claims against the DOE for the DOE’s failure to perform under the

Page 13 U-14992 1983 standard SNF disposal contract and maintain Consumers’ liability to pay the DOE for the pre-1983 SNF disposal costs.

iv. Decommissioning Funds Provisions

Consumers has a “Qualified Nuclear Decommissioning Fund” (the qualified fund) pursuant to

Section 468A of the Internal Revenue Code, which was expected to contain $366 million as of

March 1, 2007. Consumers also has a “Non-Qualified Nuclear Decommissioning Trust Fund” (the non-qualified fund), which is expected to contain approximately $200 million at that time.6 In sum, there is estimated to be approximately $566 million in the qualified and non-qualified decommissioning trust funds.

Disposition of the funds in the non-qualified fund is simple. At closing, all of the funds in the non-qualified fund will be retained by Consumers.

The disposition of the funds in the qualified fund is more complicated. Pursuant to formulas adopted by the NRC, the qualified fund must contain a minimum of $201 million after the 20-year license extension. ENP and Consumers have agreed to a qualified decommission fund target amount of $250 million as of the date of closing. Under the terms of the ASA, Consumers will convey $250 million in qualified decommissioning funds to ENP at closing, leaving $116 million of funds in the qualified fund for Commission to use for the benefit of its customers. However, absent a favorable Internal Revenue Service (IRS) ruling or a change in the tax code, Consumers cannot access the $116 million without significant punitive tax consequences. Consumers has

6Consumers’ non-qualified fund contains monies received both from its Commission- jurisdictional sales and from its FERC-jurisdictional sales. Exhibit A-12 identifies the amount of monies received from its FERC-jurisdictional sales to be $10.987 million. Page 14 U-14992 applied for an IRS ruling.7 Mr. Reed estimated that it could take 12-15 months for the IRS to respond to this request. 4 Tr 421.

If the IRS tax ruling is not obtained prior to closing, all of the funds in the qualified trust will transfer to ENP, but Consumers will retain the right to recover $116 million (plus earnings less taxes). If Consumers receives a favorable tax ruling prior to closing, only the $250 million decommissioning target amount will be transferred to ENP at closing. These terms recognize

ENP’s conclusion that it needs only $250 million in the qualified fund now for the future decommissioning of the plant, and Consumers’ conclusion that, under current tax regulations, there could be a significant tax penalty associated with the withdrawal of the excess amount from the qualified trust. Finally, if tax considerations prevent Consumers from recovering these funds earlier, the ASA provides that the $116 million (plus accrued earnings and less taxes) will be returned after the plant has been decommissioned, which could be as early as 2052 or as late as

2092.

v. Decommissioning Obligations

At closing, ENP becomes solely responsible for decommissioning Palisades and the Big Rock

ISFSI sufficient for termination of the NRC license; and ultimately restoring both sites in

7Consumers requested the IRS to provide a ruling on this issue on September 13, 2006. Absent a favorable IRS ruling the taxes of the $116 million excess qualified funds would exceed $116 million. 5 Tr 844.

Page 15 U-14992 accordance with NRC regulations and the decommissioning provisions of the ASA.8 In the case of

Palisades, Consumers retained the litigation rights against the DOE for pre-closing damages associated with the DOE’s breach of the 1983 SNF disposal contract. In the case of the Big Rock

ISFSI, Consumers retained these litigation rights with respect to pre-closing damages, and the $30 million paid by Consumers pursuant to the ASA. Consumers acknowledged that, to the extent that customers have previously paid for any of the costs that are ultimately recovered from DOE,

Consumers will use such amounts for the benefit of customers. However, Consumers candidly admitted that it is impossible to predict when, if ever, those damages will be recovered from the

DOE, or what amounts may be recovered. Finally, Consumers also retained the pre-1983 DOE liability under the 1983 SNF disposal contract.

vi. Miscellaneous Issues and Contingencies

a. ENP has agreed to assume Consumers’ obligations under the collective bargaining agreement (CBA) covering the union workers at Palisades. The term of the CBA extends through May

8Article 1.1-Definitions of the ASA defines “Decommission” to mean “with respect to each Site, to completely retire and remove the Facilities on that Site from service and to restore the Site, as well as any planning and administrative activities incidental thereto, including: (i) the dismantlement and removal of the Facilities on such Site and any reduction or removal of radioactivity at such Site to a level that permits termination of the applicable NRC License and unrestricted use of the Site; (ii) all other activities necessary for the retirement, dismantlement, decontamination and/or storage of the Facilities at such Site to comply with all applicable Nuclear Laws and Environmental Laws, including the applicable requirements of the Atomic Energy Act and the NRC’s rules, regulations, orders and pronouncements thereunder; and (iii) once the applicable Site is no longer utilized (A) in the case of Palisades, either for power generation of any kind or for any storage of Spent Nuclear Fuel or other Nuclear Material, and (B) in the case of the Big Rock ISFSI, for storage of Spent Nuclear Fuel or other Greater Than Class C Waste, the removal of structures, buried piping, rebar, below grade foundations, paved areas and rubble, and restoration of such Site to an appropriately graded, stabilized and vegetated condition. The Parties understand and agree that SAFSTOR is a permissible interim status for Palisades, provided that Decommissioning is completed in accordance with the applicable NRC regulations.” Page 16 U-14992 2010. With respect to non-union employees, ENP has agreed to offer continued employment to the existing Palisades and Big Rock ISFSI workforces at comparable wages for 18 months, and has committed to provide similar health care and other benefits to this workforce for a period extending 36 months after closing.

b. ENP has accepted Consumers’ pension and other post-employment benefit (OPEB) obligations for the Palisades’ employees. The estimated pension liability associated with the transferred employees is between $39 million to $55.1 million (depending upon the methodology used to calculate those liabilities), and the transferred OPEB responsibility is another $10.1 million.

Consumers must transfer pension assets equal to $18.2 million and OPEB assets equal to

$6.1 million. The avoided costs represent savings to Consumers’ customers of $25-$40 million.

c. The sale is contingent upon (i) Commission approval of the PPA, (ii) Commission approval of the manner in which Consumers’ rates will be adjusted to reflect the sale of Palisades and to incorporate the costs incurred pursuant to the PPA, (iii) a Commission order affirming that the requirements imposed by the October 24, 2000 order in Case No. U-12505, Consumers’ initial securitization proceeding that approved securitization of Consumers’ pre-2001 investment in

Palisades, have been satisfied, (iv) Commission approval of the proposed transfer and disposition of the funds in the Commission jurisdictional decommissioning trust funds, and (v) Commission issuance of a certificate of convenience and necessity pursuant to Act 69 that will allow

Consumers to supply station power to Palisades, if ENP elects that option.

d. The terms of the ASA recognize the importance of ENP assuming operational control of

Palisades sufficiently in advance of the planned 2007 refueling outage so that ENP has time to prepare for that outage. The ASA also provides that, for each day the closing is delayed after

Page 17 U-14992 March 1, 2007, the purchase price is reduced by amounts that start at $79,306 per day and increase to $133,412 per day.

Ratemaking Issues

Michael A. Torrey, Director of Revenue Requirements, Cost Analysis, and Planning in

Consumers’ Rates and Business Support Department, described Consumers’ proposed rate treatment associated with the sale of Palisades to ENP. His testimony covered: (1) the cash purchase price; (2) the ability of Consumers to provide benefits to customers through the use of the net sale proceeds; (3) the opportunity to access decommissioning funds for customer benefit; and (4) post- closing rate adjustments to base rates and the company’s power supply cost recovery (PSCR) factor. In this regard, Mr. Torrey differentiated between rate changes that needed immediate attention as opposed to those that should await the conclusion of Consumers’ next general rate case proceeding.9 Mr. Torrey discussed several inputs he provided to the CCO model sponsored by

Mr. Reed. He also provided details regarding rate treatment that are consistent with the

October 24, 2000 securitization financing order issued by the Commission in Case No. U-12505.

Finally, Mr. Torrey supported Consumers’ request that the Commission grant a certificate of public convenience and necessity pursuant to 1929 PA 69 (Act 69); MCL 460.501 et seq., to allow

ENP to meet Palisades’ station power requirements with retail purchases from Consumers.

Consumers’ Proposed Use of the Proceeds

Consumers estimates that the total gross proceeds from the sale immediately available are between $255 million and $371 million, including the $66 million by which the $380 million

9In Paragraph 17 of its application, Consumers stated that it “is willing to commit to filing such a general electric rate case within 90 days of a final order in this proceeding, so that these benefits to customers can be distributed in a timely manner.” Page 18 U-14992 purchase price to be paid by ENP exceeds the expected book value of Palisades of $314 million at

March 1, 2007, $189 million in jurisdictional non-qualified funds, and between $0 and

$116 million in qualified trust funds.

Consumers desires to use $30 million of the $66 million to offset the ASA/PPA transaction costs (including costs associated with termination of Consumers’ NMC interests). This would leave $35 million as the remaining purchase price proceeds. At this point, Consumers stresses that it is obligated to pay ENP another $30 million to assume ownership of the Big Rock ISFSI.

Consumers states that the remaining $5 million in purchase price proceeds and the approximately

$200-$316 million freed up from the decommissioning trusts will be available to benefit customers.

Consumers suggests that it would be appropriate to use some significant portion of the proceeds to reduce PSCR costs during the initial years of the PPA. Although the PPA pricing provides a $199 million present value benefit to customers over its 15-year term relative to the

CCO, Consumers acknowledges that the pricing in the initial years of the PPA will result in a rate increase relative to the costs of Palisades currently included in Consumers’ rates. For this reason,

Consumers proposes to minimize that rate effect by using $100 million of the proceeds to offset

PPA costs during the first three years of the PPA.

With respect to the remaining proceeds, Consumers suggests that the final determination of the possible uses should be deferred until a future case. Further, Consumers suggests that some of the potential uses of the remainder of the proceeds could include: (1) the remaining decommissioning and site restoration costs of approximately $55 million incurred at the Big Rock site in excess of what has been paid into the decommissioning fund by customers; (2) the costs incurred thus far to construct and operate the Big Rock ISFSI of approximately $55 million; (3) stranded

Page 19 U-14992 cost of $63.2 million associated with Consumers’ 2002-2003 stranded cost cases; and (4) the unrecovered $15.8 million of enhanced security costs incurred at Palisades and Big Rock that were approved in Case No. U-14126.

III.

TESTIMONY AND POSITIONS OF THE OTHER PARTIES The Staff

Ronald J. Ancona, a Departmental Specialist with the Commission’s Regulated Energy

Division, testified regarding the Staff’s review of the PPA. Specifically, Mr. Ancona testified that the PPA would assure a reliable source of power at a reasonable cost. 6 Tr 1029. Mr. Ancona noted that the Staff agreed with Consumers’ claim that selling Palisades would eliminate the costs and risks associated with ownership of a nuclear generating facility. According to Mr. Ancona, a multi-plant nuclear operator would be more likely to be able to operate the plant at a higher performance level for a longer period of time than Consumers. 6 Tr 1029-1030. In addition, Mr.

Ancona asserted that if the plant’s license is renewed, Consumers will be well positioned to secure

Palisades power beyond expiration of the PPA in 2021.

Mr. Ancona provided an estimate of average rates and NPV of the revenue stream from 2007-

2021 under the PPA compared to various scenarios involving the CCO using different escalation factors and estimating additional costs associated with replacement of the plant steam generators.

See, Exhibit S-1. According to Exhibit S-1, under the PPA, the average rate per MWh is $50.72 with an NPV of the revenue stream of $2,339,917,131 compared to Consumers’ estimate under the

CCO scenario of $58.51 per MWh with an NPV of the revenue stream of $2,536,020,301. Mr.

Ancona observed:

Page 20 U-14992 [T]he PPA NPV is less than the CCO NPV with steam generator replacement regardless of how often fixed costs are increased in rates. The PPA NPV is less than or close to each scenario that excluded steam generator replacement costs. . . . [T]he PPA NPV is equivalent to 2006 fixed costs being escalated at an annual rate of 5.01%. 6 Tr 1032.

Mr. Ancona admitted that the values derived under the PPA and different CCO scenarios were based on the same assumed output and did not take into account that the plant operation by ENP might result in increased output. 6 Tr 1083-1085.

Regarding the Staff’s overall view of the PPA, Mr. Ancona testified that having customers pay only for energy produced by Palisades is a benefit for customers because currently customers must pay fixed costs for Palisades even if the plant is in an outage. Mr. Ancona further noted that the

PPA rates are adjusted for on and off-peak as well as on a monthly basis; thus, the PPA rates closely track the seasonality of the power market. As such, if Consumers needs to purchase replacement power due to an outage at Palisades, the potential effect on energy costs should be minimized. 6 Tr 1033-1034. Mr. Ancona also observed that the PPA creates an incentive for ENP to prioritize operation of Palisades during the summer months; it provides a penalty for output less than 95% during July and August; and the PPA requires that ENP provide replacement power during a summer scheduled outage. 6 Tr 1034.

According to Mr. Ancona, the Staff did not review the apportionment of nuclear decommissioning costs, noting that the apportionment would be reviewed in Consumers’ next electric rate case. 6 Tr 1045. In addition, the Staff did not extensively review the financial capability of NMC to continue to operate the Palisades plant, nor did it independently review the long-term viability of NMC. 6 Tr 1055-1066. Mr. Ancona also stated that NMC has made improvements in

Palisades’ performance after assuming operational control over the plant in 2001. 6 Tr 1058-1059.

Page 21 U-14992 Susan Crimmins Devon, Director of the Commission’s Regulated Energy Division, testified regarding the various regulatory approvals that Consumers sought from the Commission.

Ms. Devon recommended that the Commission approve the PPA under MCL 460.6j(13)(b)10 because the Staff found that it was reasonable and prudent for Consumers to acquire power through the long-term PPA. Ms. Devon noted that through the sale of Palisades, Consumers would reduce its nuclear ownership and operating risks while the PPA will provide price certainty and stability for Consumers and its customers.

With regard to Commission approval to remove the costs associated with the ownership of

Palisades from base rates and incorporate the costs under the PPA, Ms. Devon testified that the

Staff agreed with Consumers that it will be necessary to make adjustments upon the closing of the sale to assure that customers are paying appropriate rates. Ms. Devon noted that the Commis- sion’s October 24, 2000 order in Case No. U-12505 required that the ratemaking consequences of the sale of the Palisades plant be examined and determined before the sale. Ms. Devon testified that the Staff reviewed Consumers’ documentation and verified the reasonableness of the company’s figures. Ms. Devon indicated that the Staff agreed with Consumers’ proposal to remove the costs of ownership of the Palisades plant in two steps. First, the company will credit the PPA with the revenue requirement currently reflected in base rates for the operation of

Palisades. This crediting mechanism will remain in place until Consumers’ next electric rate case when all costs associated with the ownership of Palisades will be removed from base rates.

Ms. Devon further testified that the Staff agreed that Consumers’ calculated sale related revenue requirement should be adjusted for sales growth and timing of the closing and that prorated

10MCL 460.6j(13)(b) provides that the Commission shall, “[d]isallow any capacity charges associated with power purchased for periods in excess of 6 months unless the utility has obtained the prior approval of the commission.” Page 22 U-14992 amounts should be based on sales rather than number of months. The Staff also agreed with

Consumers’ proposed adjustments to its pension equalization mechanism and OPEB mechanism to reflect the removal of these costs from Consumers’ rates.

Ms. Devon testified that while the ASA transaction has many characteristics of a sale, for accounting purposes, it is not a sale and cannot be recorded as a sale on Consumers’ general purpose financial statements. Ms. Devon observed that Consumers’ internal accountants likewise determined that under Generally Accepted Accounting Principles (GAAP), the transaction could not be recorded as a sale. 6 Tr 1137. Specifically, it was determined under GAAP pronouncement

Emerging Issue Task Force (EITF) No. 01-8, Determining Whether an Arrangement Contains a

Lease, and Statement of Financial Accounting Standards (SFAS) No. 98, Accounting for Leases,

Sales-Leaseback Transactions Involving Real Estate, that the transaction was not a sale.11

According to EITF No. 01-8, the PPA is a lease because Consumers controls physical access to the facility by precluding ENP from selling energy to other parties and because Consumers will take substantially all of the output from the plant during the term of the PPA. Similarly, Ms. Devon testified that SFAS No. 98 explicitly prohibits sale recognition of the transaction because of

Consumers’ continuing involvement with the plant.

Ms. Devon stated that the Staff concurred with Consumers’ conclusion that the Palisades transaction would be recorded as a refinancing on the company’s GAAP financial statements and that Palisades and its debt will remain on Consumers’ balance sheet.

Ms. Devon explained that Consumers described the proposed transaction as a sale in its application to the Commission because it is planning to record the transaction as a sale for both the

FERC and for Commission accounting purposes. However, Ms. Devon testified that the Staff was

11Consumers also reviewed SFAS No. 66 Accounting for Sales of Real Estate and determined that this standard was not definitive enough to prohibit recognition of a sale. Page 23 U-14992 concerned about “such a drastic departure from GAAP accounting,” which may cause problems over the term of the PPA. Ms. Devon noted that the Commission has intervened in Consumers’ application before the FERC and has informed the agency about Consumers’ proposed regulatory accounting and the Commission’s concerns about the divergence from GAAP. Thus, according to

Ms. Devon, the Staff recommends that the Commission defer determination of the accounting issue until the FERC has made a decision on Consumers’ application. 6 Tr 1140-1141.

Ms. Devon testified that the Staff had reviewed the Palisades’ sale, including the auction and bidding process, the actual bids, the final negotiated bid, and the financial and economic effects on

Consumers and its customers. Ms. Devon observed that Consumers had hired CEA to provide a study of the company’s alternatives for Palisades. According to Ms. Devon, CEA recommended that Consumers sell Palisades to take advantage of a strong market for nuclear power plants, with the expectation of securing a PPA that was beneficial to Consumers’ customers and a reduction in risks associated with owning a nuclear power plant. Ms. Devon noted that, based on its review of seven recent nuclear plant sales, the Staff agreed with Mr. Reed, that the “Palisades Transaction has a total value that puts it in the top 10% of the industry’s past transactions.” 6 Tr 1142.

Ms. Devon testified that the Staff reviewed the bids of all the parties and that it was clear that the bid accepted by Consumers was the highest offered. The Staff also compared the bid evaluation model with the CCO estimate and concluded that the final bid negotiated with ENP provides financial and economic benefits to Consumers and its customers. 6 Tr 1142. Ms. Devon also testified that the Staff had reviewed various investment securities research reports and found that investment firms believe that the sale of Palisades is strategically sound and that the financial implications of the sale would be that free cash flow to Consumers would increase by the proceeds of the sale. 6 Tr 1144-1145. Ms. Devon noted that, according to the investment securities

Page 24 U-14992 research, income gains or losses associated with the sale are expected to be minimal because any sale proceeds in excess of book value must be returned to customers. Furthermore, Ms. Devon observed that because the transaction with ENP does not qualify as a sale under GAAP, approximately $110 million will remain on Consumers’ books as a financing obligation. Thus, two major rating agencies view the PPA as a financing obligation that must be considered in their bond rating analysis of Consumers. Nevertheless, because of the reduced operating risk to Consumers,

Ms. Devon testified that the rating agencies would view the transaction as a non-credit event and

Consumers’ bond ratings are would not expected to change as a result of the transaction.

Ms. Devon testified that if Consumers applied all of the proceeds from the sale to debt reduction, there might be some effect on the utility’s weighted average cost of capital. Any changes to the capital structure as a result of the transaction will be addressed in an electric rate case. With regard to concerns about future carbon taxes, Ms Devon testified that under the PPA, Consumers is entitled to 100% of future power attributes, carbon credits, and renewable energy credits for the first 10 years of the agreement and a 50/50 share for the remaining 5 years of the agreement.

Ms. Devon testified that pursuant to the Commission’s October 24, 2000 order in Case

No. U-12505, the difference between book value ($314 million) and gross sale price

($380 million) should be returned to Consumers’ customers immediately by reducing the first year’s PPA costs. Ms. Devon noted that the Commission could consider returning a pro rata share of the proceeds to choice customers.

Ms. Devon testified that the Staff recommended that the transactions costs not be used to reduce the proceeds from the sale, but that these costs should be considered in a future electric rate. According to Ms. Devon, the recovery of transaction costs should be subject to a finding that the costs were reasonably and prudently incurred, after an appropriate audit. Further, the Staff

Page 25 U-14992 recommended that recovery of the $30 million for the Big Rock ISFSI from ratepayers be deferred until any recovery from the DOE is determined.

Ms. Devon testified that the Staff recommended that the Commission approve the transfer of

Commission-jurisdictional decommissioning trust funds to ENP. Ms. Devon observed that

Consumers’ decommissioning obligations will be assumed by ENP and that Palisades and the Big

Rock ISFSI will be decommissioned in accordance with NRC regulations. Ms. Devon testified that because the NRC license for Palisades has been extended to 2031, the decommissioning trusts

(for both qualified and non-qualified funds) will be overfunded. According to Ms. Devon, the

ASA requires $250 million in decommissioning funds to be conveyed to ENP at the closing, however, the balance of funds in the two trusts is currently $566 million. Ms. Devon noted that because of certain IRS regulations, Consumers expects to transfer 100% of its qualified trust funds, or $366 million, to ENP at closing. The difference between the $250 million required in the agreement and the $366 million transferred will be returned, with earnings and interest, to

Consumers if the IRS issues a favorable ruling. Ms. Devon testified that it was not known whether

Consumers would be successful in its request for a ruling from the IRS or how long until a ruling is issued. 6 Tr 1149.

Ms. Devon testified that the non-qualified fund will be available at closing and can be returned to ratepayers in accordance with the Commission’s order. Ms. Devon testified that the Staff does not agree with Consumers’ proposal to use $100 million of the sale and decommissioning proceeds to reduce the PPA costs for 2007-2009. Ms. Devon recommended that an appropriate use of the excess decommissioning funds should be determined in Consumers’ next rate case.

Ms. Devon testified that the Staff recommended that the decommissioning surcharge reflected in Consumers’ rate base be discontinued after the closing of the sale. Likewise, she recommended

Page 26 U-14992 that the decommissioning report that Consumers is required to file by March 31, 2007 be suspended until December 31, 2007. See, September 20, 2005 order in Case No. U-14150. If decommissioning responsibilities are transferred to ENP by that time, then Consumers would not need to file a report.

Ms. Devon testified that the Staff recommended approval of Consumers’ request for a certificate of public convenience and necessity to supply station power to Palisades under Act 69.

Ms. Devon noted that although the plant is located in the service territory of Indiana Michigan

Power Company (I&M), Consumers has always supplied power to the plant and requests that it continue to do so on tariff terms. I&M has not intervened in this case. Therefore, the Staff recommended that the Commission grant Consumers an Act 69 certificate after the company obtains the necessary franchise agreement from Covert Township.

Regarding Consumers’ request for a Commission determination that Palisades is an eligible facility, Ms. Devon explained that a condition of the ASA was a determination by the FERC that

ENP is an EWG. Consumers requested the eligible facility determination from the Commission to facilitate ENP in obtaining EWG status from the FERC. Ms. Devon testified that for Palisades to be an eligible facility, the Commission must find that the determination 1) will benefit Consumers’ customers; 2) is in the public interest; and 3) does not in violate Michigan law. Ms. Devon testified that if the Commission approves the PPA, then it has found the proposed transaction to be of benefit to ratepayers, in the public interest, and not in violation of Michigan law. Therefore,

Ms. Devon recommended that if the Commission approves the PPA that it also determine that

Palisades is an eligible facility.

Finally, Ms. Devon testified that the Staff supported Consumers’ request to expedite this proceeding; however, the Staff opposed Consumers’ request for recovery of penalties from customers

Page 27 U-14992 if the sale does not close by March 1, 2007. Ms. Devon stated that Consumers filed its case on

August 18, 2006 and requested an order from the Commission by February 28, 2007. She further testified that Consumers was well aware that their request was highly optimistic for a major contested case. Ms. Devon therefore recommended that Consumers’ shareholders bear the burden of any penalties.

ABATE

James T. Selecky, a consultant in the field of public utility regulation and a Managing

Principal in the firm of Brubaker & Associates, Inc., stated that based on all of the evidence, it was his view that Consumers acted reasonably in deciding to sell Palisades. Mr. Selecky pointed to lower risk and the fact that the PPA was less costly than Consumers’ CCO as factors supporting the sale and approval of the PPA. 8 Tr 1375-1376.

Mr. Selecky contended that all net proceeds from the sale should be allocated to customers in this proceeding. He also asserted that the net proceeds from the transaction should not flow through the PSCR as Consumers has proposed. Instead, the first $100 million in proceeds from the transaction should be refunded to both bundled and retail open access (ROA) customers on an equal mills per kilowatt-hour (kWh) basis over a period of one year with any unrefunded amounts credited plus interest at a rate equal to Consumers’ short-term borrowing rate. The second $100 million should be refunded in the same manner in the second year, plus interest at a rate equal to

Consumers’ overall rate of return. Any remaining funds should be refunded in like fashion in the third year. ABATE argued that this is just and reasonable because ROA customers pay securitization and decommissioning charges at the same rate that retail customers do.

ABATE claimed in its brief that Consumers should bear the responsibility for sale transaction costs and that rather than offsetting the $30 million payment to ENP for taking responsibility for

Page 28 U-14992 the Big Rock ISFSI, Consumers should make $22 million immediately available to customers as suggested by MEC/PIRGIM. See, Exhibit MEC-38. ABATE noted that this provides an incentive to Consumers to pursue its claims against the DOE. ABATE further disagreed with Consumers’ suggestion that some of the sale proceeds be used to offset a shortfall in the amount of money available to decommission Big Rock. ABATE noted that it concurred with MEC/PIRGIM’s analysis of this issue, which showed that the Commission approved a decommissioning surcharge for Big Rock that was supposed to end on December 31, 2000. However, because of the application of the rate freeze provisions in 2000 PA 141 (Act 141); MCL 460.10 et seq; Consumers continued to collect the surcharge from 2001 through 2003. If Consumers had deposited the funds, an additional $100 million would be available for decommissioning Big Rock. Thus,

ABATE argued that Consumers should be responsible for any decommissioning shortfall.

MEC/PIRGIM

MEC/PIRGIM recommended that the Commission deny Consumers’ application due to

Consumers’ failure to demonstrate that the proposed transaction is prudent and in the public interest. According to MEC/PIRGIM, the PPA will provide Consumers and its ratepayers with access to capacity and energy for only 15 years, even though Palisades has been granted a license to operate by the NRC until 2031. Consumers could have, if it continued ownership of the plant, shared in the benefits of nuclear power after the 15-year period, such as lower operating costs or receipt of future emission credits from the federal government.

However, MEC/PIRGIM argued that if the Commission does grant Consumers’ application and approves the proposed transaction, the Commission should condition any approvals upon the protection of ratepayer funds and interests.

Page 29 U-14992 Evidentiary support for MEC/PIRGIM’s positions is contained in the testimony and exhibits of independent consultants William A. Peloquin and Ronald C. Callen, both of whom are experts in utility regulation and have appeared as witnesses in many prior Commission proceedings, and

Geoffrey C. Crandall, a principal and the Vice President of MSB Energy Associates, Inc.

Mr. Peloquin addressed the issues of the transfer of decommissioning funds to ENP, the Big

Rock decommissioning funds shortfall, the transfer of the Big Rock ISFSI to ENP, the funding of the pre-1983 SNF disposal costs, and several issues related to decommissioning costs at Big Rock.

Mr. Callen focused his testimony on the pre-1983 SNF disposal fee owed by Consumers to the

DOE. However, he also supported the positions taken by Mr. Peloquin in opposition to

Consumers’ proposed use of $85 million of proceeds for the company’s Big Rock ISFSI expenses.

Mr. Crandall testified concerning Consumers’ failure to consider the importance of keeping

Palisades in its inventory of generating facilities as a hedge against higher cost electricity from natural gas and coal fired generating plants, the unreasonableness of Consumers’ estimates for future electricity prices, the possibility that ENP may require Consumers to renegotiate the PPA and the ASA at a later date, the use of the proceeds, and the adequacy of the decommissioning funds.

Based on the testimony of Mr. Peloquin, MEC/PIRGIM asserted that the Commission should order Consumers to immediately deposit into the Big Rock decommissioning fund the monies collected from ratepayers during the rate freeze of 2001-2003 imposed by Act 141. MEC/PIRGIM argued that, at the time Act 141 was passed, Consumers was collecting decommissioning funds for

Big Rock pursuant to the Commission’s original orders in Case No. U-6150. Like ABATE,

MEC/PIRGIM noted that Consumers continued to collect these funds during the rate freeze from

2001-2003 and, instead of depositing them within the decommissioning fund, booked the funds

Page 30 U-14992 under its general revenues. MEC/PIRGIM projected that these funds, plus interest, now amount to

$140 million.

With $140 million funded by ratepayers for the purpose of the Big Rock decommissioning fund during the 2001-2003 period, MEC/PIRGIM contended that Consumers cannot seriously claim that the Big Rock fund is “underfunded” by $55 million. Mr. Peloquin recommended that the Commission reject Consumers’ request to collect any of the $85 million Big Rock ISFSI expenses from the proceeds or from the decommissioning trust funds. Mr. Peloquin testified that the $30 million prospective ISFSI costs for Big Rock are the result of the SNF disposal contract breach by the DOE and therefore, the DOE should be held responsible for it, not the ratepayers.

MEC/PIRGIM asserted that Consumers should not be authorized to recover costs associated with the Palisades ISFSI for the same reason; the DOE is the responsible party. According to

MEC/PIRGIM, if Consumers were to recover these costs from ratepayers, this would undermine

Consumers’ incentive and standing to continue to pursue its DOE lawsuit. Likewise,

MEC/PIRGIM argued that even Consumers has admitted that the ISFSI is not a used or useful asset and should not be made recoverable from ratepayers.

Additionally, MEC/PIRGIM urged the Commission to retain considerable control over the qualified and non-qualified decommissioning trust funds. Mr. Peloquin testified that the

Commission should authorize a maximum12 transfer of $250 million from the qualified decommissioning trust fund to ENP. The remaining $116 million within the qualified trust fund should, according to Mr. Peloquin, be combined with the $200 million in the non-qualified decommissioning trust fund so that the Commission would have control over the funds to authorize withdrawals to fund pre-approved refunds and reimbursements. MEC/PIRGIM claimed

12MEC/PIRGIM supported a transfer of only $201 million, the minimum recognized by the NRC. Page 31 U-14992 that if ENP were to gain control of the funds unchecked the company would reduce the trust funds and send the monies to its parent company or affiliates.

Mr. Callen testified that the Commission should also require Consumers to deposit all the SNF disposal fees collected from ratepayers for pre-April 1983 nuclear generation in an external interest-bearing trust fund. This trust fund, MEC/PIRGIM argued, should be regulated by the

Commission. MEC/PIRGIM estimated these funds total $153.3 million by March 1, 2007. Initial

Brief, p. 27, fn. 7. Mr. Callen opined that the Commission should take jurisdiction over the funds due to the uncertainty of the DOE disposal program as well as the great uncertainty with regard to the integrity of the funds themselves. Specifically, Mr. Callen testified that he was concerned about the organization of ENP, a limited liability corporation, because this provides “even further reason to assure these funds are assuredly available and secure in the event of federal failure.” 9

Tr 1593.

MEC/PIRGIM opposed Consumers’ request to collect $30 million in ASA/PPA transaction costs. MEC/PIRGIM vehemently disagreed with this approach and argued that ratepayers should not have to pay for a transaction that benefits Consumers by reducing its risk with regard to SNF and decommissioning issues, but that does not reduce the risk to ratepayers. MEC/PIRGIM asserted that because Consumers selected an auction firm charging $5.5 million for its services,

Consumers should pay these exorbitant fees.

MEC/PIRGIM also claimed that Consumers is in the process of selling off land at Big Rock to the Michigan Department of Natural Resources for approximately $20 million even though the net book value of the land is only $107,583. Arguing that ratepayers have paid for the purchase of this land and have funded the taxes and expenses of upkeep on the land since it was purchased,

MEC/PIRGIM insisted that Consumers’ ratepayers, not its shareholders, are entitled to any gain on

Page 32 U-14992 the sale of this investment. In the alternative, MEC/PIRGIM advocated that any land sale gains be deposited into a separate, interest-bearing account within the jurisdiction of the Commission.

If the Commission refunds any excess decommissioning funds, MEC/PIRGIM advocated refunding the monies in accordance with the manner in which they were collected. In this same vein, MEC/PIRGIM asserted that the Commission should require Consumers to refund to ratepayers the difference between the purchase price and the net book value of Palisades.

MEC/PIRGIM recommended that the Commission not allow Consumers to use decommissioning funds to offset the cost of the PPA in its first three years because, MEC/PIRGIM argued, this approach does nothing more than mask the true costs of the PPA. MEC/PIRGIM did, however, support the Staff’s proposal to refund the difference between the sale price of Palisades and its net book value within the first PSCR year. Furthermore, MEC/PIRGIM did not advocate requiring ratepayers to pay for the penalty provision that Consumers voluntarily put into the ASA.

Moreover, MEC/PIRGIM argued that the Commission should not be influenced by this provision and should not rush to judgment on any of the issues it has before it.

With regard to Consumers’ request for a certificate of public convenience and necessity,

MEC/PIRGIM stated that there is no emergency requiring immediate relief and thus the Commis- sion does not need to waive the statutory procedural requirements involved. Likewise, designation of Palisades as an eligible facility pursuant to Consumers’ request does not need to be rushed. In fact, MEC/PIRGIM advocated that the Commission wait to make such a determination until after the appropriate ratemaking decisions have been reached. Furthermore, MEC/PIRGIM asserted that there has been no evidence to support Consumers’ proposition that the amount the company assigns to Palisades’ net book value is a prudent investment. MEC/PIRGIM recommended that

Page 33 U-14992 the Commission deny Consumers’ request to suspend the decommissioning report requirement due

March 31, 2007.

In conclusion, if the Commission does approve Consumers’ application, MEC/PIRGIM supported the Staff’s proposal to refund to ratepayers the $66 million proceeds from the transaction immediately and condition the approval of the transaction as described above.

Energy Michigan

Energy Michigan presented the testimony of Richard A. Polich, an independent consultant employed by Energy Options & Solutions. Neither Energy Michigan nor its witness took a position on whether the Commission should approve the PPA. Rather, Energy Michigan’s only interest in this proceeding was in how the proceeds of the sale and the excess decommissioning funds should be used.

According to Mr. Polich, Consumers’ proposed uses for the net proceeds of the sale are unfair to ROA customers because Consumers has proposed to allocate all of the net proceeds to bundled customers by using the sale proceeds and excess decommissioning funds to offset the PPA for three years. He argued that subsequent to the onset of securitization surcharges, Consumers’ ROA customers have been “required to pay the Securitization Bond and Tax Surcharges even though they do not receive any benefit.” 10 Tr 1651. Mr. Polich also noted that ROA customers were required to pay Consumers’ nuclear decommissioning surcharges., but under Consumers’ proposal these customers will not share in the return of these funds. Energy Michigan argued that if all transaction proceeds were used as a credit to retail and ROA customers, the credit amount would be almost sufficient to offset the cost of the plant in rate base and pay most of the remaining securitization obligations.

Page 34 U-14992 At pages 1654 to 1660 of the transcript, Mr. Polich proffered a “Sinking Fund” method for refunding the net proceeds from the sale of Palisades to all of Consumers’ customers. The

“Sinking Fund” method would have lasted until the retirement of the securitization bonds on

October 15, 2015. The other details of this proposal need not be discussed because Energy

Michigan withdrew the proposal in its February 9, 2007 brief.

Instead, Energy Michigan advocated an alternative proposal wherein retail and ROA customers would be given a rate base credit and a sale and decommissioning trust credit. Under this proposal, retail customers would receive a credit through a reduction in the PPA to offset

Palisades’ capital costs. ROA customers would receive a similar credit to reflect their contributions to securitization and decommissioning costs. After Consumers’ next rate case, Palisades will be removed from Consumers’ rate base and retail customers will pay reduced rates as a result.

ROA customers will continue to receive this credit until 2015.

The nuclear decommissioning trust credit component would involve the creation of a sinking fund into which the gain on the sale transaction ($35 million) and excess decommissioning trust funds (from $159 million to $267 million according to Energy Michigan) would be deposited.

Interest would be paid at 9.17%--Consumers’ overall capital structure return. As in Energy

Michigan’s original proposal, the funds would be paid out equally to retail and ROA customers over the next 8.5 years or until the retirement of Consumers’ securitization bond. Energy

Michigan also noted that ROA customers are paying .12 ¢ per kWh in stranded costs and .1721 ¢ per kWh for securitization, “despite the fact that these ROA customers derive no benefit whatsoever from these payments.” Nevertheless, Energy Michigan asserted that it recognized that stranded cost charges may be reduced or eliminated. Energy Michigan therefore proposed a cap

Page 35 U-14992 on the credit to ROA customers equal to the securitization bond and tax charge, if the stranded cost charges are eliminated.

The Local Units

The Local Units argued that a portion of the proceeds from the sale should be returned to the

Local Units for two reasons. First, the Local Units asserted that they agreed to an unfair (and allegedly illegal) deal in 1999 under which the plant site was assigned an artificially low value, allowing for reduced (and thereafter flat) taxes for Consumers. During the negotiations the Local

Units were asked by Consumers not to use, and did not use, counsel. The Local Units argued that the effect of the 1993 agreement has been a reduced level of services to schoolchildren, libraries, hospitals, and all persons potentially affected by an emergency in Covert Township.

Second, the Local Units argued that they are due a portion of the sale price because Van Buren

County is expected to undertake special duties in order to meet emergency preparedness and homeland security requirements imposed on the county by the presence of the plant, for which the county lacks the funding.13 Testimony from the Local Units focused on the lack of proper emergency services in the township and county, including items such as no existing wireless emergency communications system and an inadequate number of buses available to evacuate all students and staff from the Covert Public Schools.

13The Local Units state that they “cannot afford to provide essential emergency preparedness services, personnel or equipment, required by having the Palisades Nuclear Power Plant in their community.” Local Units’ Initial Brief, pp. 7, 19. The majority of the testimony provided by the Local Units is intended to demonstrate that they are unable to meet the fundamental requirements of emergency preparedness. Such testimony could provide the basis for an action by the NRC (or a request by any person that an action be instituted) to revoke, suspend, or terminate the plant’s operating license. See, 10 CFR 2.202, 2.206. The Local Units complain that they have never received financial help from Consumers for the expenses associated with emergency preparedness. Page 36 U-14992 Al Hawkins, the retired Superintendent of Covert Public Schools (CPS), testified regarding an agreement that was entered into in 1999 between Covert Township, the local taxing units, and

Consumers to reduce the plant’s value and keep taxes level. Mr. Hawkins stated that Consumers claimed that the Palisades plant would have to close down if the taxing units did not agree to its demands. Mr. Hawkins indicated that the CPS signed the agreement in the belief that it had no other option even though the tax agreement reduced the funds available to the schools and caused a forced reduction in the ability of the schools to meet emergency needs, particularly in the areas of transportation, and safety training and equipment.

David L. Tate, Director of the Van Buren District Library, testified that the meeting with

Consumers on the tax reduction issue was conducted at Consumers’ request without legal counsel present. As a result of the agreement the library district received less revenue, which was reduced in 2000 and remained flat through 2003.

Edward K. VanderVries, Acting Director of Equalization for Van Buren County and Director of Planning and Land Management, testified that the 1999 tax agreement was illegal because there is no provision in state law for a property tax assessment to be made by a predetermined agreement. He testified that if either the Equalization Director or the State Tax Commission had been made aware of the terms of the 1999 agreement, the State of Michigan would have assumed jurisdiction over Covert Township’s assessment roll and would have established the plant assessment at 50% of the true cash value, as required by the Michigan Constitution. He testified that Proposal A prohibited any increase in the taxable value of the plant from the value agreed to in the 1999 agreement in excess of the rate of inflation, and that, as a result of the 1999 agreement, the annual lost revenue to the taxing units was $11,714,051.07. He testified that Covert Township had retained Mr. Oetzel in 1992 to value the plant. Mr. Oetzel appraised the plant at $413,250,000

Page 37 U-14992 as of December 1992. Using this value, Mr. VanderVries found that the taxing units experienced a revenue loss of approximately $69 million, which he claimed had severely affected emergency management funding. He also testified that the plant sits on 5,000 feet of Lake Michigan shoreline, and that the shoreline property alone is worth about $76 million. He testified that there is currently not enough funding available to allow Van Buren County to carry out its Emergency

Operations Plan (EOP).

Stephanie Burrage, Superintendent of CPS, testified that the majority of students in CPS have family incomes below the poverty level, and CPS was listed in the 2000 Census as the poorest school district in Michigan in terms of family income. CPS’s student population is 44% African

American, 39% Hispanic, and 17% Caucasian. She testified that CPS requires additional funding for second language learners and special education requirements, and CPS has a budget shortfall.

She testified that the 1999 tax agreement cut funding to the schools. She further testified that CPS is in the Emergency Planning Zone (EPZ), and that CPS has an evacuation plan in the event of a nuclear incident at Palisades, but does not have sufficient funding to carry out the plan. Specifi- cally, CPS has too few buses to evacuate all students and staff, and is in need of six additional buses ($330,000) and a larger bus garage ($350,000). She testified that CPS is in need of safety training, and communications equipment, as there are not enough cell phones or walkie-talkies available to coordinate an evacuation.

Dale R. Gribler, Sheriff of Van Buren County and Emergency Program Manager for the county, testified that the presence of the plant brings the possibility of terrorist attack and nuclear accident to the county, and the county’s lack of emergency equipment and personnel will contribute to any disaster. He testified that the 1999 tax agreement had a severe negative effect on the Sheriff’s budget. He testified that the county does not have sufficient funds to carry out its

Page 38 U-14992 EOP. He testified that when the Homeland Security nationwide alert level is elevated to orange, his office must maintain a buffer zone of security around Palisades by manning the perimeter 24 hours a day, but the county does not receive funding for this. He testified that he employs 12 police officers, and that his office is 10 officers short of what would be required in comparable counties that do not have the added burden of a nuclear plant to protect. He further testified that his emergency equipment is inadequate, and that he is in need of equipment and training in the areas of general emergency operations, communications, public works, law enforcement, medical care, transportation/evacuation, damage assessment, cyber security, fire security, radiological and chemical response, and training for school personnel. He testified that his emergency communications equipment is currently landline only, and there is no wireless communication available, and insufficient staffing for the Emergency Operations Center.

Lt. Alain E. Svilpe, Director of the Van Buren County Office of Domestic Preparedness, testified that Van Buren County is evaluated by the Federal Emergency Management Agency

(FEMA) during its regular emergency exercise with the plant, and that the county must perform well for the plant to keep its operating license. His office trains 250-450 first responders

(including many volunteers). He is the only full-time person assigned to this division, and his position is partially funded by a Homeland Security grant. His office has never received any cash assistance from Consumers. He testified that his office currently does not have enough funding to carry out the EOP. In the event of a nuclear incident, 37,500 people would need to be evacuated.

He testified that his office is in need of equipment and training in the areas of general emergency operations, communications, public works, law enforcement, medical care, transportation/evacuation, damage assessment, and fire and marine services. He testified that his operation currently uses the state’s 800 MHz radio system, and is in need of a reserve 9-1-1 system and the necessary

Page 39 U-14992 telephone lines and a wireless system. The cost of the total required communications enhance- ment is $10 to $13 million. He testified that CPS and the South Haven Community Hospital lie within the 10 mile EPZ and would have to be evacuated in the event of a nuclear incident. He testified that he does not have sufficient personnel or equipment, and current personnel are not properly trained to carry out this requirement. He is also in need of a decontamination trailer, and other decontamination equipment, as well as an enhanced geographic information system. He testified that CPS does not have enough buses to evacuate its students and staff to a point outside the EPZ.

George E. Sansoucy, P.E., a consultant to government and municipal entities regarding nuclear utility property matters, expressed concerned that all monies in the decommissioning funds will not be transferred to ENP. He testified that, in his experience, the decommissioning funds remain intact with the party assuming responsibility. He testified that the portion of the fund going to ENP, $250 million, is insufficient to allow ENP to carry out the decommissioning responsibilities assumed by it under the terms of the ASA. Mr. Sansoucy was also troubled that the decommissioning timeframe had been extended. He stated that Consumers’ decommissioning plan discusses two potential scenarios: DECON allows for decommissioning by 2051, SAFSTOR extends this time to 2091.14 He testified that the ASA provides that SNF stored at the Big Rock plant may be transferred to Palisades for storage, thus making the longer scenario more likely. He testified that in its 2004 decommissioning study, Consumers committed to the restoration of the

14DECON is “a method of decommissioning in which the equipment, structures, and portions of a facility and site containing radioactive contaminants are removed and safely buried in a low- level radioactive waste landfill or decontaminated to a level that permits the property to be released for unrestricted use shortly after cessation of operations.” http://www.nrc.gov/reading- rm/basic-ref/glossary/decon.html. SAFSTOR is “a method of decommissioning in which the nuclear facility is placed and maintained in such condition that the nuclear facility can be safely stored and subsequently decontaminated to levels that permit release for unrestricted use.” http://www.nrc.gov/reading-rm/basic-ref/glossary/safstor.html. Page 40 U-14992 plant site to greenfield status by the end of 2048. Even though Consumers’ application and

Mr. Joos’ testimony mention ENP’s commitment to assume Consumers’ promise to restore the plant site to greenfield status, Mr. Sansoucy is worried that only Consumers has the ability to enforce the terms of the ASA and that Consumers could simply opt to walk away from all responsibility in this regard.

Based on Mr. Sansoucy’s testimony, the Local Units argued that the Commission should require Consumers to restore Palisades to greenfield status by 2052. The Local Units contend that the Commission has jurisdiction to require the transfer of an additional $157 million of the trust fund monies to ENP for decommissioning, and to undertake enforcement of the decommissioning and greenfield obligations contained in the ASA. The Local Units are concerned that if ENP has only $250 million available for decommissioning activities, ENP’s only viable option will be to close the plant in 2032, placing it into SAFSTOR mode for 60 years until 2092 when its restoration to DECON status will occur. Absent the inclusion of $157 million of additional decommissioning funding, the Local Units insist that ENP is too risky and is in an untenable financial position in comparison to other transfers of nuclear plants.

The Local Units urged the Commission to place conditions on the sale as follows: (1) require

Consumers to “refund” $11,700,000 in tax revenues to the Local Units that were lost as a result of the illegal 1999 agreement; (2) require a $0.0002 per kWh surcharge be added to the PPA, to be used for reimbursement to the Local Units for ongoing emergency preparedness; (3) add

$157,103,000 to the decommissioning trust fund, in order to ensure that there are sufficient funds to decommission the site to greenfield status by 2052; (4) retain continuing jurisdiction over the decommissioning trust funds and continue to require the annual minimum contributions; and

(5) obtain written commitments from Entergy for all obligations assumed by ENP, including

Page 41 U-14992 returning the site to greenfield status by 2052 and guaranteeing sufficient funds to address an ongoing unplanned outage or other financial drain on ENP.

Finally, the Local Units pointed out that Mr. Reed’s testimony has been paid for by

Consumers, and that the amount of the fee paid to CEA is contingent upon the outcome of these proceedings. The Local Units argue that this is in clear violation of public policy and they urge the Commission to give little weight to Mr. Reed’s testimony, and, as an extension, the recommendations of the Staff that arise from information supplied by Mr. Reed.

Attorney General

The Attorney General presented the testimony of two witnesses, J. Richard Hornby and David

A. Schlissel, both of whom are energy industry and regulatory consultants employed by Synapse

Energy Economics, Inc. Mr. Hornby testified regarding the evolution of the key terms of the

ENP/Consumers transactions between the evaluation of the initial bids and Consumers’ selection of the winning bid. He believed that Consumers had a conflict of interest in the design of its auction process, and in particular in its final negotiations with the bidders in response to their initial bids. According to Mr. Hornby, Consumers’ “objective of recovering the book value of the plant for its shareholders conflicted with the objective of maximizing the value of the other components of the transaction for its ratepayers.” 8 Tr 1398. He testified that Consumers picked the wrong starting point to begin negotiations with Entergy. He also stated that acceptance of

Entergy’s final bid, which was based on negotiations commencing from Entergy’s initial bid

No. 1, resulted in ratepayers being worse off by $87.7 million as compared to Entergy’s initial bid

No. 3.

Mr. Schlissel addressed the merits of the proposed PPA relative to Consumers’ CCO.

Mr. Schlissel testified that, in his opinion, Consumers has overstated the value of the PPA to

Page 42 U-14992 ratepayers by inflating the CCO, and, in particular, by assuming that the company would replace the steam generators in 2016 at a time when, according to Consumers’ own forecasts, the market cost of power will be cheaper than the cost to generate it at Palisades. Mr. Schlissel testified that it appeared that Consumers used higher operating and capital costs in the CCO figures than were used in NMC’s 2007-2011 business plan, and that the “smoothed” CCO costs front-end loaded the

PPA. 8 Tr 1430-1431. According to Mr. Schlissel’s analysis, the CCO costs are lower than the

PPA costs in the early years of the operation of the PPA, until 2016 when the ratepayers break even, and thereafter the PPA costs are lower than the CCO. Mr. Schlissel testified that this means that ENP could decide that it had earned enough from its investment during the early years of the

PPA, would not replace the steam generators, and would discontinue operation of the plant as soon as 2016. 8 Tr 1435, 1440.

Mr. Schlissel further testified that, because Entergy is a fleet owner, it should be able to decommission the plant at a lower cost than Consumers; that the level of decommissioning funds being transferred “might be more than adequate;” and the “Palisades funds might already be overfunded.” 8 Tr 1444, 1445. However, Mr. Schlissel opined that should it become necessary to pierce the corporate veil of ENP, such efforts may prove unavailing. 8 Tr 1454.

In his brief, the Attorney General argued that Consumers structured the sale of the plant to benefit shareholders at the expense of ratepayers and that the sale will take significant parts of the plant’s operations out of the jurisdiction of the Commission to the detriment of ratepayers.

The Attorney General argued that ENP is actually buying the revenue stream associated with the PPA, but the Commission has very little information about what expenses ENP will incur in order to “earn that revenue stream,” or what projected profits will result for ENP. The Attorney

General argued that this makes it impossible for the Commission to compare Consumers’

Page 43 U-14992 projected CCO against ENP’s projected expenses. The Attorney General argued that the Commis- sion has no evidence upon which to decide whether ENP can or will pay for the financial or economic consequences of any negative future events, because ENP is a limited liability shell.

The Attorney General pointed to Articles VI and X of the PPA, which allow ENP to provide a

12-month notice of termination if ENP determines that continued operation of the plant is no longer feasible or prudent. The Attorney General contended that the PPA is “front-end loaded” in the sense that ENP will recover most of the PPA revenues in the first nine years of the contract, but the projected savings for ratepayers will not begin until the final six years. The Attorney

General asserted that under the PPA termination provisions, ENP could decide to forgo the

$357 million cost of replacing the steam generators in favor of simply delaying and issuing a notice of termination in 2014, forcing ratepayers into a much higher price seven years from now.

With respect to the decommissioning trust fund, the Attorney General argued that since no nuclear power plant has been decommissioned after a 60-year operating life, no one knows what the actual cost of decommissioning Palisades will be. The Attorney General contended that the financial assumptions being made as part of the deal are projected over too long a time period to be reliable, and that all parties are banking upon the newly-extended life of the plant to result in earnings growth. The Attorney General further contended that neither Consumers nor ratepayers have any assurance of capacity, energy, or prices from 2022 to 2030.

The Attorney General contended that by shifting costs from base rates to the PSCR factor, risk is being shifted from shareholders to ratepayers. The Attorney General posited that if Consumers receives the regulatory assurances that it is requesting, the Commission will have agreed in advance to the reasonableness and prudence of the PPA prices and delivery terms that will be passing through the PSCR process, which will leave ratepayers without any future protection. The

Page 44 U-14992 Attorney General further contended that this Commission does not have the authority to bind future Commissions by approving PPA prices that extend to 15 years.

The Attorney General calculated that the actual balance of net proceeds from the sale is $195 million, but that amount is exceeded by Consumers’ proposed uses for the proceeds, which include a PPA buy-down, Big Rock decommissioning and ISFSI site restoration expenses, security costs, and stranded costs. The Attorney General posited that these expenses will total $230 million. The

Attorney General argued that the ASA creates a minimum fixed cost of $30 million related to the

Big Rock ISFSI.

The Attorney General pointed out that Consumers will, pursuant to GAAP requirements, be accounting for this transaction as a refinancing. However, Consumers is asking the Commission to treat the transaction as a sale, to remove associated costs from rate base treatment, and to handle the PPA costs through the PSCR process. The Attorney General argues that this does not fit the definition of booked costs of fuel as required for PSCR treatment. See, MCL 460.6j. The

Attorney General urged the Commission to disallow the creation of a second set of regulatory accounting books, and to treat the transaction as a financing transaction, not a sale and purchased power buyback.

IV.

DISCUSSION OF THE ISSUES

Asset Sale Agreement

The ASA between ENP and Consumers, received into evidence as Exhibit A-8, is of interest to the Commission and the other participants to this proceeding and must be reviewed and analyzed for a complete understanding of the entire transaction. However, it is neither anticipated

Page 45 U-14992 nor required that the Commission will formally approve or reject the ASA. Consumers did not ask for Commission approval of the ASA in its application, its witnesses did not suggest that such an approval is necessary, and no request for approval of the ASA appears in Consumers’ brief or reply brief. While this circumstance may seem incongruous, there are reasons for the lack of a request for approval of the ASA. The Commission shares jurisdiction over aspects of the sale of

Palisades with the NRC and the FERC. For example, the NRC is solely responsible for the determination whether the license to operate Palisades should be transferred to ENP and for approval of conforming administrative license amendments for the transfer. The FERC must give its approval pursuant to various sections of the Federal Power Act (FPA) for the sale of facilities, the acceptance of the interconnection agreement, and the grant of authority to ENP to sell electric capacity, energy, and ancillary services at wholesale. ASA, Schedule 5.3(b). The Commission’s primary responsibility is in the area of retail ratemaking.

The Commission observes that the Staff and ABATE support Consumers’ proposed sale of

Palisades as reasonable and in the public interest. Energy Michigan has remained neutral on the issue, choosing instead to focus on the distribution of proceeds in the event that the

ENP/Consumers deal is consummated. The terms of the ASA have been criticized by the Attorney

General, MEC/PIRGIM, and the Local Units. The Attorney General maintains that the ASA has such significant shortcomings that the Commission should not supply ENP and Consumers with the necessary regulatory approvals on the matters that are within its jurisdiction to rule on. In this regard, the Attorney General appears steadfast that the ASA cannot be salvaged under any circumstances. On the other hand, MEC/PIRGIM and the Local Units suggest that the Com- mission’s regulatory authority could be invoked to appropriately condition the ENP/Consumers

Page 46 U-14992 transaction in a manner that would reform the deal into one that would be sufficiently beneficial to the public as to merit the Commission’s imprimatur.

After considering all of the testimony, exhibits, arguments, and pleadings of the parties, the

Commission is persuaded that Consumers, the Staff, and ABATE correctly assert that the sale will provide significant benefits to Consumers and its ratepayers. The sale will also reduce or eliminate the risks associated with the continued ownership of a nuclear generating plant by a utility that is uncertain whether it should remain an owner of any nuclear facility. In analyzing this issue, the Commission notes that in its June 12, 1992 order in Case Nos. U-9507 and U-9794, the

Commission rejected Consumers’ earlier attempt to dispose of Palisades. The Commission does not suggest that a comparison of the earlier and current cases is outcome determinative; only that the two cases illustrate that the circumstances surrounding the sale of nuclear plants have dramatically changed during the past 15 years.

Much has occurred subsequent to Consumers’ first attempt to sell Palisades. Most noteworthy are the newly emerging structure of the nuclear-fueled electric generation industry, and the likeli- hood that under new management Palisades, which does not produce greenhouse gases or otherwise contribute to global warming, will be able to remain in service for a longer period of time.

Mr. Reed’s testimony is unrebutted and compelling on the recent consolidation of the nuclear fueled electric generation industry. He testified that of the 103 nuclear plants in the United States,

72 are now owned by 10 fleet operators. Beginning in 1998, sales and mergers have resulted in 30 nuclear plants being acquired. Regulatory commissions from 15 different states have approved such acquisitions. According to Mr. Reed, prices paid to acquire nuclear power plants have increased by 800% during the past 5 years.

Page 47 U-14992 Not only has there been an industry trend towards consolidation of nuclear plants under the fleet ownership model, this trend has resulted in significant improvements in plant performances.

According to Mr. Reed, nuclear plant capacity factors, which were below 60% in the 1980s, improved to 91% during the period of 2000 to 2005.

Consumers candidly admits that it did not enjoy a great deal of success in running Palisades in an optimal manner in past years. Mr. Wawro testified that from 1973 to 2005, Palisades’ average capacity factor was only 56.4% as compared to the industry average of 68.3%. While Palisades has improved its average capacity factor over the past 10 and 5 year periods, it must be remembered that Consumers turned over the day-to-day operations to NMC in 2001 and that

Palisades has consistently performed at higher levels since that time. 6 Tr 1029. Indeed,

Mr. Wawro testified that for the years 2003, 2004, and 2005, Palisades had a capacity factor of

87.33%, which is the highest level ever attained at Palisades. 4 Tr 546. Additionally, with NMC’s continuing viability at issue, Mr. Joos stated that Consumers “did not believe that resuming direct management and operations of Palisades was a practical or realistic choice.” 3 Tr 109. In light of these circumstances, and in the absence of any contrary facts, it is no surprise that Staff witness

Ancona concluded that “it is more likely Palisades would be in operation throughout the 15 year

PPA period if a more experienced nuclear oriented entity is operating it rather than Consumers.”

6 Tr 1029-1030.

The apparent advantages of fleet ownership over the continued ownership as the utility’s sole nuclear unit is only one factor to be considered. The Commission also notes that the transaction will result in the avoidance by Consumers and its ratepayers of the risks associated with

Consumers’ premature closure of the plant, the NMC’s possible demise and a return to Palisades’ management by Consumers, future capital costs at Palisades, outages at Palisades, ISFSI-related

Page 48 U-14992 costs at Palisades and Big Rock, Palisades’ decommissioning-related costs, NRC regulatory changes, and costs arising as a result of incidents at other nuclear plants. The PPA is projected to reduce costs by $199 million on a present value basis ($702 million on a nominal basis) over the next 15 years. The sale will also free up over $250 million in funds for immediate use on behalf of

Consumers’ ratepayers and another $116 million (plus earnings less taxes) that will be available in the future.

The Commission rejects the Attorney General’s contention that contractual assignment of various liabilities to ENP in the ASA will not enable ratepayers to avoid risks that might arise out of continued operation of Palisades. ENP has assumed significant responsibilities, including operation of the plant, the obligation to fund and perform all required decommissioning tasks, and the obligation to store and dispose of SNF at Palisades and Big Rock. Further, ratepayers will no longer pay for the plant’s fixed costs in their base rates during an outage because all of the plant’s fixed and variable costs will be collectable only while the plant is delivering power to Consumers.

The Attorney General also maintains that “the Commission should reject the proposals in this case as it did with regard to an analogous Palisades’ proposal addressed in its June 12, 1992

Opinion and Order rejecting a proposed asset sale and PPA with the Palisades Generating

Company (PCG) in Case Nos. U-9507 and U-9794.” Attorney General’s brief, p. 9. The

Commission disagrees. The order in Case Nos. U-9507 and U-9794 amply demonstrates that the

1992 proposed sale and the current proposal to sell Palisades are not analogous. The 1992 transaction called for: (1) a sale price approximating the plant’s book value; (2) Consumers to retain a

44.4% ownership interest in the plant; (3) Consumers would continue to operate the plant; and

(4) Consumers would remain liable for decommissioning costs despite transferring the accumulated decommissioning funds held in its trusts to the new owner. In the present case: (1) the sale

Page 49 U-14992 price is $66 million above book value; (2) Consumers retains no ownership interest;

(3) Consumers retains no obligation to operate the plant; and (4) Consumers has no decommissioning liability and gets to keep all $200 million of its non-qualified decommissioning fund and $116 million of its $366 million qualified decommissioning fund.

The contentions that Consumers and Entergy manipulated their post-bid negotiations to the detriment of ratepayers and that Consumers selected the wrong bid15 from which to begin those negotiations are rejected. The testimony of Mr. Reed and Mr. Garrity indicates that a large portion of the value associated with the bid believed by the Attorney General to be superior came from the

PPA pricing in the last five years of the term of the PPA. Consumers pointed out that this circumstance was rejected because it presented a risk to the continued operation of the plant. To address this concern, Consumers negotiated a transaction that moved more PPA value to the earlier years of the PPA, providing more compensatory pricing in the later years of the PPA, and requiring ENP to invest $105 million more up front in the purchase price, which provides more incentive for ENP to continue to operate the plant to recover the larger purchase price.

The Commission also rejects the Attorney General’s argument that Consumers’ calculations of its CCO were purposely manipulated between October 2005 and May 2006 to benefit its shareholders. Consumers responded to this contention by quoting the following passage of Mr. Reed’s rebuttal testimony, which the Commission finds to provide a persuasive explanation of this issue:

Let me begin by responding to the accusation that Consumers purposely inflated the CCO. The only evidence that Mr. Schlissel has cited to support this accusation is that the CCO pricing was increased in March, 2006 (over the October, 2005 values) and in May, 2006 (over the March, 2006 values). Mr. Schlissel is generally correct in these observations although what he purports to be our “raw” CCO as of October, 2005 is in fact the smoothed CCO from that date.

15Consumers encouraged bidders to submit multiple bids. Entergy submitted seven bids. Page 50 U-14992 Consumers has provided substantial documentation through the discovery process in this case as to why these changes were made, specifically what the changes were, and the source materials for the underlying cost revisions. Notably, Mr. Schlissel has chosen to not comment on, or even acknowledge the existence of, all of this supporting documentation. He simply concludes that because the CCO went up, it must be because of some nefarious scheme by Consumers.

As Consumers has documented in the discovery process, the CCO estimates were originally based on expense and capital projections supplied by the NMC, and on a five-year average capacity factor for Palisades. NMC does not prepare long-term budgets or forecasts for Palisades because it has never been asked to do this and saw no need for such a forecast. In preparing the October 2005 CCO values, Consumers decided to take the short-term projections from the NMC budget and trend the costs from that base. As we have since recognized, that technique may work reasonably well for operating expenses, but it does not work well for capital expenditures and fuel costs. Capital expenditures at a nuclear plant are driven by NRC regulations, the need to replace major components, and the life extension process for plants with an extended operating license. These costs cannot be accurately predicted from short-term budgeting trends.

The revisions that Consumers has made to the CCO primarily reflect higher levels of capital expenditures for known component replacement programs and NRC initiatives that were not included in the original “trended” CCO. These include steam generator replacement, alloy 600 remediation and replacement (including the pressurizer), delayed vessel head replacement, life extension capital spending (assuming an extended license is granted), compliance with new NRC regulations regarding the containment sump strainers, and a general increase in capital spending projected by the NMC. In addition to capital projects, O&M costs were increased to reflect higher fees imposed by the NRC, higher labor costs to comply with new NRC regulations regarding limits on overtime, higher security and fire protection costs stemming from new NRC rules, and significantly higher nuclear fuel costs, based on a new NMC forecast. Uranium prices have nearly tripled in the past few years. The revisions to the Palisades CCO are individually and collectively reasonable and fully supported by Consumers’ documentation of its cost projections. It is also appropriate to note that the bidders in the Palisades auction continued to tell us, right up to the delivery of final bids, that our CCO estimates were too low, and too optimistic on how long the capital improvements could be put off.

3 Tr 339-340.

With regard to MEC/PIRGIM’s and the Local Units’ arguments that pertain to the overall transaction, the Commission finds them to be without merit. Many of these arguments mirror

Page 51 U-14992 those of the Attorney General. Others are intertwined with pleas for the imposition of various pre- conditions and will be more fully discussed in other portions of this order.

Finally, the Commission finds that the testimony, exhibits, and arguments presented by the parties at the March 7, 2007 reopened proceeding do not suggest that the ASA is unreasonable.

The March 7, 2007 hearing was scheduled in response to the Attorney General’s contention that newly discovered evidence, in the form of Mr. Reed’s public testimony in the PSCW case dealing with the sale of Point Beach, was relevant to this case. Despite a full day of testimony and argument, the only salient point garnered from that proceeding is the fact that the differences between Palisades and Point Beach are so significant that there is no reason to conclude that the

Palisades sale is unreasonable based on a comparison of the details of both sales.

Accordingly, the Commission turns to the list of sale-related issues over which the parties urge the Commission to assert its jurisdiction.

MEC/PIRGIM’s Pre-conditions for Approval of the PPA

MEC/PIRGIM argues that, if the Commission does grant Consumers’ application and approves the proposed transaction, the Commission should condition any approvals upon the protection of ratepayer funds and interests. Specifically, MEC/PIRGIM recommends several “pre- conditions” regarding the transfer and use of transaction proceeds that should be required for

Commission approval of the transaction.

First, MEC/PIRGIM asserts that the Commission should order Consumers to immediately deposit into the Big Rock decommissioning fund the monies, estimated at $140 million, which were collected from ratepayers during the rate freeze of 2001-2003 under Act 141.

Page 52 U-14992 The Commission finds that this issue is not properly raised in this proceeding and should be addressed by the parties in Consumers’ next rate case or in the reconciliation proceeding for the

Big Rock decommissioning fund.

Second, MEC/PIRGIM recommends that the Commission authorize a maximum transfer of

$250 million from the qualified fund to ENP. MEC/PIRGIM claims that if ENP were to gain control of all the qualified trust funds, the company could send the excess funds to its parent company, Entergy, or to affiliates. Moreover, MEC/PIRGIM urges the Commission to order the parties to reform the ASA to provide that the $250 million transfer to ENP must await the favorable IRS ruling. MEC/PIRGIM also suggests that if the $250 million is transferred to ENP, then the Commission should require Consumers to place the remaining $116 million of the qualified fund into Consumers’ non-qualified fund where it should remain until the Commission authorizes its use to fund pre-approved refunds and reimbursements.

The Commission finds that the ASA addresses this concern adequately and that

MEC/PIRGIM’s recommendation should be rejected. Under the ASA, Consumers will transfer the full $366 million in the qualified fund to ENP if, as is likely, there is no private letter ruling from the IRS before the transaction closes. If a favorable tax ruling is received after closing, the agreement provides for the return of the $116 million (plus associated earnings and less income taxes) from the qualified trust. If the IRS does not issue a favorable ruling, excess funds plus earnings and interest will be refunded when Palisades is decommissioned.16

16According to Mr. Reed, “[I]f the PLR [private letter ruling] is not received, Consumers may continue to pursue a PLR or may pursue a change in the law to enable the company to withdraw those funds. At such time as the funds can be withdrawn, Consumers gets all of them plus its share of earnings. If this doesn’t occur until 2092 as the Attorney General suggests could happen, assuming 7% per year earnings, Consumers’ portion of the qualified trust funds would be $36.5 billion.” 11 Tr 1742. Page 53 U-14992 Third, MEC/PIRGIM recommends that the $116 million within the qualified trust fund be combined with the $200 million in the non-qualified decommissioning trust fund and deposited into a Commission-regulated fund. The Commission could then authorize withdrawals for approved refunds and reimbursements.

The Commission finds that sequestration of either the $116 million from the qualified fund or the $200 million from the non-qualified fund into an independent fund is unnecessary. The

Commission retains ratemaking authority over Consumers and all of the sale proceeds received by

Consumers will be within the Commission’s reach without regard to whether the funds are held by

Consumers or are held in an independent fund.

Fourth, MEC/PIRGIM recommends that as a pre-condition of any approval, all of the SNF disposal fees collected from ratepayers for pre-April 7, 1983 nuclear generation should be placed in an external trust regulated by the Commission. MEC/PIRGIM claims that the current balance on these funds is approximately $148 million, including interest, and that the funds are currently controlled internally by Consumers. MEC/PIRGIM argues that the funds should be deposited in a

Commission-regulated trust to “overcome the great uncertainty that exists with respect to the integrity, safety, and availability of these funds.”

The Commission finds that while the ASA provides that Consumers retains the liability for payment of the pre-1983 disposal fees, this issue is nevertheless outside the scope of this proceeding.

Fifth, MEC/PIRGIM argues that the Commission should assure that all SNF and ISFSI costs at the Big Rock site are assigned to Consumers’ damage suit against the DOE.

According to MEC/PIRGIM, Consumers is requesting to use $30 million of the transaction proceeds to pay ENP to assume responsibility for the Big Rock ISFSI and is proposing to use an

Page 54 U-14992 additional $55 million of the proceeds for past ISFSI costs. MEC/PIRGIM argues that neither the historic nor prospective costs of Big Rock ISFSI should be recovered from ratepayers or from excess decommissioning trust funds. Instead, MEC/PIRGIM asserts that these costs should be recovered in Consumers’ lawsuit against DOE.

The Commission agrees that these sums are not immediately recoverable from the sale proceeds and that Consumers’ requests should be deferred until the company’s next rate case.

Finally, MEC/PIRGIM argues that the Commission should ensure as a pre-condition of its approval of this transaction that all gain on the value of land at the Big Rock site should be assigned to ratepayers and not shareholders. MEC/PIRGIM notes that, based on a report in The

Chicago Tribune, Consumers recently offered the land at Big Rock to the Michigan Department of

Natural Resources (DNR) at a purported price of $19.3 million. MEC/PIRGIM notes that the book value of the land is approximately $108,000 and that Consumers ratepayers fully funded the purchase of the property. Therefore, according to MEC/PIRGIM, ratepayers are entitled to any gain on the sale of the land.

The Commission finds that the issue of the amount or assignment of the proceeds resulting from a sale of the land at the Big Rock site is not ripe for determination because the land has not yet been sold. However, the Commission finds that Consumers should be directed to report any future sale or other disposition of the land at the Big Rock site.

Approval of the PPA.

Before addressing Consumers’ request for approval of its PPA with ENP, it is important to understand the exact nature of the request.

Page 55 U-14992 In paragraph 12 of its application Consumers asks the Commission to approve the PPA pursuant to MCL 460.6j(13)(b), which provides in pertinent part17:

In its order in a power supply cost reconciliation, the commission shall:

* * * * * Disallow any capacity charges associated with power purchased for periods in excess of 6 months unless the utility has obtained the prior approval of the commission.18

Moreover, Consumers’ application states that the PPA has no regulatory out clause and that: “The

Company is unwilling to proceed with this transaction without first receiving assurance from the

Commission that the costs to be incurred by the Company during the full term of the PPA will be fully recoverable in its rates.” Consumers’ application, p. 8.

In its initial brief, Consumers reiterates its desire that the Commission approve the PPA for purposes of Section 6j(13)(b), but then adds “and other applicable law” without specific reference to the statutory or case law relied on. The Commission was only informed that Consumers would discuss the issue at greater length in its reply brief.

In its reply brief, the greater discussion promised by Consumers appears as follows:

The Attorney General argues that the Commission should not (p. 7) and indeed, cannot lawfully (p. 20) grant Consumers Energy the long-term approval of the PPA that the Company is seeking. As noted in the Company’s initial brief, there is no justification for the Attorney General’s position. As a matter of fact, the evidence presented in this case demonstrates that the PPA contains reasonable terms, including pricing that results in savings to customers of $199 million relative to the cost of Consumers Energy’s continued ownership of the plant. As a matter of law, the Commission has previously approved long-term power purchase agreements that it deemed reasonable. See e.g., Order in Case No. U-10939 dated October 25,

17The balance of MCL 460.6j(13)(b) was added by 1987 PA 81 and applies only to purchased power agreements between a utility and a qualifying facility under the Public Utilities Regulatory Policies Act of 1978, PL 95-617.

18Disapproval of capacity charges for PSCR reconciliation purposes is not tantamount to disallowance of the charges for all ratemaking purposes. A reasonably and prudently incurred expense may be recovered by the utility in its general rates. Page 56 U-14992 1995, affirmed by the Court of Appeals, 220 Mich App 561; 560 NW2d 348 (1997); Case No. U-13162, dated December 20, 2001. In the U-10939 case, the Commission approved a six year power purchase agreement Detroit Edison had entered into with Ontario Hydro. As the Commission concluded in that case, there is no reason to infer a limit on the Commission’s ability to grant “pre-approval” of a power purchase agreement pursuant to MCL 460.6j and other applicable law. The law is clear that the review of the prudence of utility decisions must be made in light of the circumstances that existed at the time the decision was made. See e.g., ABATE v PSC, 208 Mich App 248, 267; 527 NW2d 533 (1994); Attorney General v PSC, 161 Mich App 506, 517; 411 NW2d 469 (1987). The PPA at issue in this case is a long-term, 15 year contract. Parties do not have the legal choice of entering into a 15 year contract and, in midterm, unilaterally deciding that they would like to stop performance under the contract. The business decision about whether the contract represents a reasonable business arrangement for the full 15 years must be made at the beginning of the contractual relationship. Similarly, the question before the Commission in this proceeding is whether the PPA represents a reasonable power supply arrangement for customers for the entire term of the PPA. The Company is not willing to proceed with the transaction unless the Commission agrees that the PPA represents a reasonable and prudent power supply arrangement for its entire term. A Commission decision that, for example, only years 1, 5, 8, and 13 are reasonable, or a decision that was limited to a finding that only the first year of the PPA’s term is reasonable would be, from Consumers Energy’s perspective, a denial of the relief sought. It should be emphasized that, contrary to the Attorney General’s characterization of the Company’s request, this position does not seek to shift all risks to customers, or to eliminate Commission review of decisions that are made during the course of the term of the PPA. There are plainly more risks and more price uncertainty associated with the continued ownership of Palisades than with the proposed sale. Risks associated with new and unforeseen capital expenditures, risks associated with unforeseen and extended outages, risks associated with new NRC regulations that increase operating costs, risks associated with increases in fuel prices, and other O&M costs are transferred to Entergy by the proposed sale. Even if the worst case happened, and Palisades had to be shut down the day after closing, customers are clearly benefited by having received the purchase price, by having transferred the decommissioning liability, and by having the released decommissioning funds.

Finally, contrary to the Attorney General’s assertions, Consumers Energy is not seeking to avoid all subsequent Commission review of decisions made concerning the administration of the PPA. Mr. Reed explained:

“My understanding is that anything that relates to the conduct under the PPA would be something that’s reviewable in the annual PSCR filings. So the company’s conduct with regard to enforcement of the PPA and anything that was essentially discretionary in their conduct that related to costs, that actually caused costs to be higher or lower, is something that I understand can be reviewed in those PSCR reconciliations.” 4 TR 535.

Page 57 U-14992

Thus, the PPA approval sought by the Company in this proceeding would, if granted, mean that the Company would not later be subject to a disallowance based upon some objection to the provisions of the PPA. The Company would continue to have to demonstrate in the annual PSCR proceedings that it properly administered the PPA. This is no different from the situation that exists with respect to other utility investments or contracts, and is fully consistent with Michigan law.

Consumers’ reply brief, pp. 4-6 (footnote omitted).

After considering Consumers’ request for approval of the PPA, it is evident that Consumers is actually seeking two distinct types of approvals. The first form of approval is limited to the purposes of MCL 460.6j(13)(b). The second form of approval is of a broader scope and is described by Consumers as an “assurance from the Commission that the costs to be incurred by the

Company during the full term of the PPA will be fully recoverable in its rates.” Application, p. 8.

Turning first to the MCL 460.6j(13)(b) approval, it is important to understand why the provision exists, which will require a discussion of the regulatory underpinnings of 1982 PA 304

(Act 304), which added MCL 460.6j(13)(b).

One of the purposes of Act 304 was to eliminate use of automatic adjustment clauses. Such clauses allowed a utility to directly pass through its expenses for fuel costs. They came into use in

Michigan in the 1940s. However, until passage of 1972 PA 300 (Act 300), which removed a legislative prohibition against the incorporation of fuel cost adjustment clauses in rates for domestic service, fuel cost adjustment clauses were only applicable to billings of commercial and industrial customers. Indeed, it wasn’t until the Commission decided Case No. U-4262 on

August 13, 1973 that a fuel cost adjustment clause applicable to residential customers was incorporated in Consumers’ rate schedules. Prior to April 12, 1976, the adjustment clauses contained in Consumers’ rate schedules were limited to passing through the utility’s fuel costs to its customers. However, in its April 12, 1976 order in Case No. U-4840, the Commission approved

Page 58 U-14992 Consumers’ request to incorporate a purchased power adjustment clause in recognition of the fact that, like the fuel costs for self-generation, it had become sufficiently important to the well-being of the utility that a mechanism to allow the utility to pass through its purchased power expenses to its customers should also be incorporated into its rate schedules. However, while the Commission authorized Consumers to incorporate a purchased power adjustment clause into its rate schedules, the Commission specifically restricted the utility’s use of its purchased power adjustment clause as follows:

Capacity charges associated with long-term purchased power contracts from power pooling-type utilities should be excluded from consideration in the calculation of the purchased and net interchange power clause. Such charges are defined as those associated with power purchases under contracts with a term of six months or more. This provision has been included so as not to encourage Applicant through a potential economical incentive to rely on purchased power as a long-term source of supply.

Order, Case No. U-4840, p. 76.

Subsequent to this total ban on the pass-through of capacity charges associated with long-term purchase power agreements adopted in its April 12, 1976 order in Case No. U-4840, the Commis- sion was presented with a request by Consumers for authority to include the capacity charges associated with a particular long-term purchase power agreement. The Commission’s May 2,

1980 order in Case No. U-6042 specifically granted Consumers authority to include charges associated with the company’s purchase of planned excess capacity from the Campbell Unit No. 3 generating facility in the calculation of the company’s purchased and net interchange power adjustment charges. Therefore, at the time that Act 304 was passed, it was well established that capacity charges associated with long-term contracts were to be excluded from the operation of an automatic adjustment clause absent an order specifically approving the inclusion of such charges by the Commission and it may be concluded that the Legislature’s passage of Section 6j(13)(b) of

Page 59 U-14992 Act 304 was intended to preserve the public policy crafted by the Commission in Case

Nos. U-4840 and U-6042.

The Commission finds no reason in the record to withhold approval of the PPA for purposes of MCL 460.6j(13)(b). To begin with, the parties did not focus much attention on the

MCL 460.6j(13)(b) approval. For the most part, the parties argued over whether the costs to be paid pursuant to the PPA and passed onto ratepayers would be more or less than the CCO. That is a wholly different issue. MCL 460.6j(13)(b) was born over 30 years ago out of concern that utilities should not be overly encouraged to rely on purchased power as a long-term source of supply. Order, Case No. U-4840. The utility industry has radically changed in the past 30 years and the emphasis on self-generation versus purchased power is no longer as important. In addition, if the Commission were to deny recovery of the capacity charges through the PSCR factor, the capacity charges could be sought and recovered through the utility’s base rates. If contained in the company’s base rates, ratepayers would be required to compensate Consumers for the plant’s capacity payments even when the plant is not operating, despite the fact that Consumers is not obligated under the PPA to pay ENP unless the plant is actually producing power. The

Commission finds that this mismatch is not in the public interest. Therefore, the Commission grants the MCL 460.6j(13)(b) approval sought by Consumers.

Turning to the second form of approval of the PPA requested by Consumers, the Commission observes that much of the analysis of the reasonableness and prudence of the PPA depends on projections and estimates of future costs. In this regard, the Commission has determined that significantly more weight should be afforded to the projections and estimates supported by the witnesses for Consumers, the Staff, and ABATE, who represent the diverse interests of the utility, the public, and a group of large industrial customers. All three of these parties agree on the

Page 60 U-14992 reasonableness and prudence of the PPA and these three parties rarely agree on anything controversial. In particular, great weight should be afforded to the testimony of Mr. Ancona and

Ms. Devon. Both of these highly experienced employees have participated in numerous Act 304 cases and are particularly qualified to render unbiased expert opinions on the reasonableness and prudence of long-term contracts between utilities and their suppliers.

As non-ratepayers, the Local Units’ standing to contest the PPA is dubious at best. Most of their issues ask for remedies that are beyond this Commission’s jurisdiction to consider. Further, the Commission finds that it should steer clear of the temptation to acquiesce in the Local Units’ requested remedies because that course would require substantial ratepayer subsidization of the taxpayer obligations of non-ratepayers. Because the motivations underlying the Local Units’ interests in approval or rejection of the PPA are significantly different from the considerations that must be weighed by the Commission, the Commission concludes that Local Unit’s arguments should be afforded little weight.

While MEC/PIRGIM and the Attorney General urge the rejection of the PPA, the Commission finds that their arguments are not persuasive. The assertion that ENP and Entergy’s corporate structure makes the benefits afforded by the ASA and PPA illusory is not well taken. Claims by the Attorney General, MEC/PIRGIM, and the Local Units that ENP and Entergy are likely to shut down Palisades prematurely, leaving Consumers, its ratepayers, and the state of Michigan to suffer the consequences of the abandonment of a nuclear plant are sheer speculation. It is unrebutted that

Entergy is dedicated to ownership and operation of a fleet of nuclear-fueled electric generating plants. That ENP and Entergy are serious about their obligations in this regard is demonstrated by their commitment of $380 million to acquire Palisades. In addition, the notion that ENP and

Entergy will prematurely attempt to walk away from their ongoing legal and financial commit-

Page 61 U-14992 ments is unlikely given that the PPA is expected to provide ENP and Entergy a 15-year revenue stream in the nominal amount of over $4.5 billion.

The Commission is not dissuaded by the presence of a typical force majeure provision and a termination provision in the PPA. While there are circumstances that might require ENP and

Entergy to shut down Palisades, these circumstances also would be just as likely to bring about the closure of the plant if it were to remain in Consumers’ ownership.

The Commission also rejects the Attorney General’s argument that ENP might buy replacement power in the open market when PPA prices exceed market prices and resell the purchased power to Consumers without operating the plant. Consumers states that this sort of arbitrage is not permitted by the PPA. The Commission agrees. Sections 2.1 and 2.4 of the PPA indicate that the

PPA obligates ENP to sell all capacity “that Seller has available from the Facility for the duration of the Term” and that ENP’s right to supply replacement capacity and energy is only “during a

Derate with a duration of more than one (1) day.”

Supposition that ENP and Entergy might run the plant until 2016 to collect revenues under the

PPA and then threaten its closure in order to force Consumers into renegotiating the PPA to obtain more favorable terms is equally speculative. While it is true that the PPA does contain an early termination provision, that provision does not contemplate that ENP may simply threaten to close the plant. Rather, the ability to cease performance under the PPA requires that ENP and Entergy first provide 12 months notice and then must prematurely and permanently retire the plant, which would leave ENP and Entergy with a very expensive non-revenue producing asset in the event that they were bluffing and Consumers chose to call their bluff. Section 10.2 of the PPA, which was admitted as Exhibit A-1, specifies that ENP and Entergy may only invoke the termination

Page 62 U-14992 provision if “operation of the Facility has become materially and economically adverse such that continued operation of the Facility is no longer feasible, prudent and/or sustainable.”

Concern that the PPA is unreasonable because its term expires in 2022 rather than at the new expiration date for the plant’s operating license (2031) is without merit. The ability to predict market prices with any degree of certainty for the period 2022 to 2031 is questionable. The only attempt to do so in this record is Mr. Garrity’s projection that market prices would be below

Consumers’ CCO prices during the post-PPA period, which, if it comes to fruition, would seemingly be beneficial to ratepayers. In any event, Entergy and Consumers have entered into a right of first negotiation that obligates the new owner to enter into exclusive negotiations with

Consumers at the end of the PPA.

Further, the Commission finds that MEC/PIRGIM and the Attorney General have failed to offer any credible analysis supporting their arguments that the risk of ENP’s default under the PPA due to plant economics is greater than the risk of premature shutdown of Palisades if Consumers retained ownership. Indeed, the reverse seems more likely. As previously noted, both Mr. Reed and Mr. Ancona expressed their concerns on this issue and opined that ENP would be more likely to be able to successfully operate the plant than Consumers.

Given these findings and in light of the facts and circumstances at the time that Consumers and ENP executed the PPA, the Commission finds that the PPA is reasonable and in the public interest. However, as conceded by Consumers, granting this second form of regulatory approval will not shield the utility from continuing Commission scrutiny, which is a major concern expressed by both MEC/PIRGIM and the Attorney General. While Consumers correctly notes that the law is clear that the review of the reasonableness and prudence of a utility’s long-term purchased power arrangements must be resolved in light of the circumstances at the time that the

Page 63 U-14992 contract was executed, the fact remains that the Commission is required by Act 304 to conduct both an annual PSCR plan proceeding and an annual PSCR reconciliation proceeding.

MCL 460.6j(3) requires Consumers to file an annual PSCR plan describing “all major contracts and power supply arrangements entered into by the utility for providing power supply during the specified 12-month period.” In evaluating a utility’s annual PSCR plan, MCL 460.6j(6) requires the Commission to “consider the cost and availability of the electrical generation available to the utility; the cost of short-term firm purchases available to the utility; the availability of interruptible service; the ability of the utility to reduce or to eliminate any firm sales to out-of-state customers if the utility is not a multi-state utility whose firm sales are subject to other regulatory authority; whether the utility has taken all appropriate actions to minimize the cost of fuel; and other relevant factors.”

One of the court decisions cited by Consumers to the Commission as support for Consumers’ request for approval of the PPA sheds some light on the scope of the Commission’s PSCR review process with regard to approvals of PPAs for the purposes of MCL 460.6j(13)(b):

“The Legislature gave the PSC discretion in dealing with requests for approval, with the understanding that any party could dispute the reasonableness and prudence of the purchase at least in a power supply cost recovery case and perhaps in a gerneal rate case.”

Attorney General v Public Service Comm, 220 Mich App 561, 566; 560 NW2d 348 (1996).

Finally, because the Commission has a strong interest in monitoring the adequacy of the decommissioning funding, and may find it necessary to participate in federal agency actions affecting Palisades or the ISFSI, approval of the PPA is conditioned upon Consumers obtaining

ENP’s commitment to provide the Commission with copies of all information submitted to either

FERC or the NRC by ENP or Entergy during the course of the plant’s time in service and the decommissioning period. This reporting obligation shall apply to information regarding

Page 64 U-14992 (1) decommissioning of the Palisades plant, (2) the SNF stored at the Big Rock ISFSI, (3) the decommissioning funds held by ENP for those two sites, and (4) changes in ownership of either of those sites; including, but not limited to, information required by Title 10 of the Code of Federal

Regulations, part 20, subpart E, and parts 50.75, 50.82, 51.53, and 51.95. All regulatory approvals granted in this order are expressly conditioned on receipt of letters from duly authorized officers of both Consumers and ENP agreeing to this requirement. The letters shall be delivered to the

Commission’s Executive Secretary as well as electronically filed in the Commission’s docket for this proceeding as soon as possible following issuance of this order.

Ratemaking Adjustments

Consumers requested that the fixed costs of Palisades, e. g., those costs associated with the ownership of the plant, be removed from its base rates with approval of the transaction.19

Palisades’ sale-related revenue requirement currently included in Consumers’ base rates is

$163.7 million. Big Rock’s sale-related revenue requirement currently included in base rates is

$15,000.20 Id. Under Consumers’ proposal, at its next electric general rate case, all of the sale- related costs of Big Rock and Palisades would be removed from rates such that only the PPA costs would be recovered through the PSCR process. Prior to completion of Consumers’ next electric general rate case, Consumers also proposes that ratepayers’ bills only reflect the difference between the PPA costs and the costs currently in rates.

19In making this request, Consumers presumes that a portion of the proceeds from the sale will be used for recovery of the $314 million book value as of March 1, 2007 of the assets being sold to ENP. Id., fn 12, 3 Tr 217. Energy Michigan agreed with the proposal of using $314 million from the transaction proceeds to remove Palisades’ costs from the rate base used to calculate retail rates. Energy Michigan’s reply brief, p. 4.

20Both figures would need to be adjusted for sales growth, sale-related lease revenues, and the timing of the closing. Page 65 U-14992 The Staff has examined Consumers’ proposal and recommended that the Commission approve the rate adjustment whereby Consumers will credit the PPA with an amount equal to the revenue requirement currently in base rates, adjusted for sales growth, sale-related lease revenues, and the timing of the sale close. This credit would stay in place until the completion of Consumers’ next electric general rate case when all costs associated with ownership of both plants would be removed from rate base.

ABATE agrees that rates should be adjusted to reflect the commencement of payments under the PPA for Palisades and supports making adjustments for costs removed from rates as a result of the transaction.

The Commission approves the removal of the Palisades and Big Rock costs from the company’s base rates via the mechanism described by Mr. Torrey at 5 Tr 830 to 836, with the clarification suggested by Ms. Devon at 6 Tr 1136 that the adjustment that is necessary to reflect the difference between the $163,718,000 revenue requirement derived from the sales used to design rates and revenue produced by the company’s actual sales be prorated at the date that the

PPA is included in the PSCR based on sales rather than the number of months. The Commission further finds that removing Palisades and Big Rock from base rates while allowing Consumers to collect costs associated with the PPA is in the public interest. Consumer’s proposal accomplishes the task of removing assets that it will no longer own from base rates and allows for the recovery of its PPA costs. The Commission finds that Consumers’ use of $314 million of sale proceeds to recover the book value of Palisades is reasonable.

Page 66 U-14992 The requirements of the October 24, 2000 order in Case No. U-12505

The Commission’s October 24, 2000 order in Case No. U-12505 authorized Consumers to securitize the Palisades investment, net of depreciation, estimated as of December 31, 2000. The order further stated:

[S]hould Consumers elect to sell Palisades, any profit arising from the plant’s treatment as a regulatory asset designated for securitization must be passed on to the utility’s customers. As noted by Brian L. Ballinger, a senior economist in the Commission’s Licensing and Enforcement Division, doing otherwise would place customers at risk of paying twice for the capital costs of the plant (once through the non-bypassable securitization charge and again through any power purchase contract necessitated by the plant’s sale). . . . Thus, if Consumers sells Palisades for more than its book value following the plant’s treatment as a regulatory asset, or if the utility itself is purchased, Consumers (or its successor utility) shall immediately initiate a proceeding designed to compute and promptly return to the utility’s ratepayers all economic benefit arising from Palisades’ treatment as a regulatory asset.

October 24, 2000 order in Case No. U-12505, p. 14.

Consumers asserted that it does not intend to retain any profit from the sale of the plant at above book value. Consumers proposed that the difference between book value and sale price, less transaction costs, should be used to benefit customers in a manner determined by the

Commission. As such, Consumers argued that the Commission should find that Consumers has complied with the requirements of the order in Case No. U-12505.

The Staff generally agreed that Consumers’ proposal to return any profit above book value to ratepayers comports with the requirements in Case No. U-12505. The Attorney General argues that Case No. U-12505 requires a “substantive review of the reasonableness and prudence of proposed money allocations.” MEC/PIRGIM argues that a determination of whether the conditions under Case No. U-12505 have been met should await the Commission’s decision on all ratemaking issues involved.

Page 67 U-14992 The Commission finds that with the disposition of sale proceeds and excess decommissioning funds provided for by this order, the requirements of the October 24, 2000 order in Case

No. U-12505 have been met.

Approval of the transfer of the funds in the MPSC-jurisdictional decommissioning trust fund

ENP and Consumers have agreed that at closing Consumers’ qualified fund will have approximately $366 million. One of the major provisions in the ASA calls for Consumers to transfer

$250 million to ENP from the utility’s qualified fund at closing. As previously discussed, to effectuate this transfer, it is necessary for Consumers to receive a favorable IRS ruling prior to the date of closing, or to transfer the entire fund while retaining a right to recover $116 million (plus earnings less taxes) at a later date.

The Attorney General objected based on Mr. Schissel’s claim that the $200-$316 million released from the qualified decommissioning trust fund could be released even without the sale of

Palisades. The Attorney General contends that it is the extension of the license, not the sale of the plant, which creates the “excess” funds. According to the Attorney General, the Commission need not approve the sale to free up excess funding, if any. Instead, the Attorney General asserts that the Commission could review the adequacy of the existing decommissioning trust, and order

Consumers to refund any excess funds from the qualified fund and terminate future decommissioning surcharges.

Mr. Reed rebutted the Attorney General’s position as follows:

Q. What is your response to Mr. Schlissel’s views that the return of decommissioning funds may be possible even without a sale?

A. Mr. Schlissel acknowledges that extracting funds from the decommissioning trusts has never been accomplished other than through a sale. He also acknowledges that without a sale such an action is only a possibility. His conclusion that license extension and deferring decommissioning have created

Page 68 U-14992 the decommissioning trust surplus, however, misses the most important factor that permits the freeing up of decommissioning funds. This factor is the commitment, such as that made by Entergy Nuclear Palisades, to take on the decommissioning obligation for a fixed price. Entergy has agreed that, in exchange for the receipt of the Decommissioning Target amount of $250 million (as adjusted based upon the closing date), it will take on all decommissioning responsibility and liability. Consumers then has no further decommissioning responsibility, which makes all of the NQF and a portion of the QF surplus to Consumers’ financial obligations. Without this commitment, which establishes a definitive dollar value for the decommissioning liability, there is no means of defining how much of the decommissioning funds is, in fact, surplus. Under Mr. Schlissel’s theory, every nuclear plant in the U.S. that has received a license extension is sitting on many millions of dollars of surplus funds that could be withdrawn and used for other purposes. Yet, no one has ever done this, and, as he admitted, no one has ever tried. Without some party being willing to step up and guarantee that it will cover any unfunded decommissioning costs, I doubt anyone will ever try this, because they know how the NRC would respond to such a request.

3 Tr 330.

The Commission is persuaded by Mr. Reed’s explanation that the excess decommissioning funds simply cannot be removed, as suggested by Mr. Schlissel, after the extension of a nuclear license. As Mr. Reed explained, it has never occurred, and no one has even attempted to do it. In any event, the Commission is not reviewing what could have been done, but what Consumers is proposing to do, which is to use all of the excess decommissioning funds to benefit its ratepayers.

In their initial brief, the Local Units characterized the proposed sale as the “largest raid” on a public decommissioning trust fund in the history of the United States. The Local Units argued that, unless ENP is committed to using SAFSTOR (and assuming a 3% real growth rate on the funds), the sale will leave ENP with inadequate funds to properly decommission the site. The

Local Units urged the Commission to place conditions regarding the decommissioning funds on the proposed sale: (1) add $157 million to the decommissioning trust fund to ensure that there are sufficient funds to decommission the site by 2052; (2) retain continuing jurisdiction over the decommissioning trust funds and continue to require annual minimum contributions to the trust;

Page 69 U-14992 and (3) obtain written commitments from Entergy for all obligations assumed by ENP, including returning the site to “greenfield” status by 2052 and guaranteeing sufficient funds to address an ongoing unplanned outage or other financial drain on ENP.

The Local Units (as well as the Attorney General and MEC/PIRGM) contend that the Com- mission has the authority21 to provide this relief and to undertake enforcement of the decommissioning and “greenfield” obligations contained in the ASA, which are, as currently written, only enforceable by Consumers.

In response, Consumers argues that transferring additional and unnecessary decommissioning trust funds to ENP is contrary to the interests of Consumers’ customers. Moreover, Consumers notes that the ASA clearly provides that ENP has the legal obligation to restore the site “to an appropriately graded, stabilized, and vegetated condition.” Furthermore, Consumers states that

NRC regulations require that license transferees demonstrate that they possess, or have reasonable assurance of obtaining, funds to cover the costs of operation and decommissioning. Consumers further notes that the Local Units are well aware that the NRC has jurisdiction over this matter, as demonstrated by the Local Units’ submission of extensive comments to the NRC in the proceeding regarding the proposed license transfer.

Consumers and the Staff further observe that the Local Units fail to cite any authority that would permit the Commission to retain jurisdiction over, or impose any conditions on, the decommissioning trust funds. Consumers also asserts that while the Commission has historically had

21The Local Units’ legal argument that the Commission may retain jurisdiction over, and impose conditions upon, the decommissioning funds is severely undermined by the fact that the Local Units’ initial brief quotes from, and relies on, alleged rulings of the U.S. Supreme Court on this issue, when in fact the quotes are from the brief of a petitioner (Maine Public Utilities Commission) seeking certiorari from that court, and are not rulings (or even observations) ever made by the U.S. Supreme Court. Local Units’ Initial Brief, pp. 40-41, quoting from 1991 WL 11176609 at *5, *18. Page 70 U-14992 authority over the funds collected by Consumers for decommissioning of Palisades, ENP will not be engaged in the retail sale of electricity and therefore the Commission will not have ratemaking authority over ENP.

The Commission agrees with Consumers and the Staff regarding the transfer of decommissioning trust funds to ENP. The Commission lacks authority to continue oversight over the decommissioning trust funds after the transaction is completed. The Commission has jurisdiction over public utilities, not merchant plants. See, MCL 460.6, 460.54, 460.562(e), 460.10g(d).

Moreover, the Commission’s ratemaking authority in the area of collection and management of decommissioning funds only applies to the plant licensee. 10 CFR 50.75(a). Upon completion of the sale and transfer of the license, Consumers (the entity over which the Commission has jurisdiction) will no longer be the licensee.

The parties who argue so vociferously in favor of continued Commission oversight of these funds (despite the lack of any legal authority) fail to recognize the comprehensive and substantial regulatory oversight of the decommissioning of Palisades that will be provided by the NRC and

FERC. NRC regulations set a minimum for decommissioning funding. 10 CFR 50.75(c). The minimum amount required under that regulation is $201 million as of March 1, 2007; the ASA provides for the transfer of $49 million in excess of that minimum to ENP for decommissioning.

ENP will be required to submit regular reports on its decommissioning funds, as well as decommissioning plans, to the NRC. Id. Upon receipt of a license termination plan or a decommissioning plan the NRC is required to notify and solicit comments from local and State governments, and to hold hearings at specified stages of the closure process. 10 CFR 20.1405. Thus, while there is no authority for the Commission to retain jurisdiction over the decommissioning funds of a

Page 71 U-14992 merchant plant, the Commission (as well as the Local Units, if they so choose) will be involved in the decommissioning process to ensure the health and safety of the citizens of Michigan.

Accordingly, the Commission approves Consumers’ proposal for the transfer of the decommissioning funds to ENP.22

Certificate of Public Convenience and Necessity

In its application, Consumers requested that the Commission grant the company a certificate of public convenience and necessity pursuant to Act 69 to provide station power to Palisades after the transaction with ENP is completed. Consumers noted that although Palisades is in I&M’s service territory,23 it has historically served Palisades’ station power requirements. Moreover,

Consumers argued that although ENP will have various options available to obtain station power, the parties have agreed that Consumers should continue to supply station power to the plant.

The Staff recommended that the Commission grant Consumers’ request for an Act 69 certificate provided that Consumers submits a consent or franchise from Covert Township, as required by MCL 460.503. The Commission therefore grants conditional approval of a certificate of convenience and necessity, provided that Consumers confirms that it has received the requisite franchise from the township.

7. Determination that Palisades qualifies as an “eligible facility” under Section 32(a) of PUHCA

Consumers requested that the Commission determine that Palisades is an “eligible facility” as defined under Section 32 of PUHCA of 2005 to facilitate ENP in obtaining EWG status from the

22 Nothing in the discussion of this issue pertains to the matter of the distribution of proceeds, which is discussed later in this order.

23 I&M is not contesting Consumers’ request to serve Palisades. See Attachment 1, Consumers’ initial brief. Page 72 U-14992 FERC.24 In order for a generating facility that was included in a utility’s rate base to constitute an eligible facility for purposes of allowing its owner to be an EWG, the Commission is required to make a specific determination that allowing the generating facility to be an eligible facility:

(1) will benefit consumers, (2) will be in the public interest, and (3) does not violate state law.25

The Staff and ABATE concur with Consumers’ request and recommend that the Commission find that Palisades is an eligible facility. However, the Attorney General argues that the Commis- sion should defer its final decision on this matter because, according to the Attorney General, the record is insufficient to assess the effect of Consumers’ request on ratepayers. MEC/PIRGIM also recommends that the Commission defer making a decision on this issue, arguing that the elements of the determination “can best be made after the important ratemaking decisions are made involving not only [Consumers’] rates, PSCR rates, decommissioning funds, but also important proceeds issues raised by the parties to this case.” MEC/PIRGIM’s reply brief, p. 42.

The Commission finds no reason to delay examination of Palisades’ qualification as an eligible facility. Moreover, the ASA requires both a determination from the Commission that

Palisades is an eligible facility and a grant of EWG status to ENP by the FERC before the transaction is ready to be closed. See, Schedule 5.3(b) of ASA.

As an initial matter, the Commission observes that the proposed sale of a relatively low-cost baseload generating facility raises significant public interest issues that require careful examina-

24The Commission notes that PUHCA of 1935, as amended, 15 USC 79z-5a, was repealed by enactment of the Energy Policy Act of 2005 (EPAct of 2005) Pub. L. No. 109-58, 119 Stst. 594 (2005), and these provisions are now located at 42 USC 16451 et seq. Pursuant to 42 USC 16451(6), EWG has the same meaning as in PUHCA of 1935.

2518 C.F.R. § 366.7(b). There are two mechanisms for requesting status as an EWG through FERC. The first is self-certification for new generation facilities and does not involve the action of state commissions. The second mechanism necessitates a relevant state commission making the above-referenced, three-prong determination before FERC will issue a declaratory order granting EWG status. Page 73 U-14992 tion by the Commission. In putting together the proposed transaction, Consumers’ objectives were to: (1) secure a deal that provided clear economic benefits to ratepayers and the company;

(2) secure power at a reasonable price via a long-term PPA; (3) sell to an experienced operator that was committed to long-term, safe, and reliable operation of the plant; and (4) shed the risk associated with nuclear plant ownership, operation, and decommissioning. The Commission agrees with the Staff and Consumers that these objectives were met. Specifically, the ASA provides for a sale price that is substantially higher than Palisades’ book value, with sale proceeds to be refunded to ratepayers. The 15 year PPA, included as part of the transaction, will likely provide significant savings compared to the cost of power if Consumers continues to own the plant, and the PPA will provide certainty and price stability for the company and ratepayers. Furthermore, Consumers and

Entergy agreed that Consumers will have a right of first negotiation when the initial PPA expires.

Finally, Consumers will shed the risk associated with nuclear plant ownership and operation by transferring responsibility for plant operation and decommissioning to ENP.

Based on the record, the Commission is satisfied that the transaction is in the best interest of

Consumers and its ratepayers. The Commission therefore finds that determining Palisades to be an eligible facility will benefit ratepayers, is in the public interest, and does not violate state law.

Termination of the Decommissioning Surcharge and Consumers’ Obligation to File Decommissioning Reports

Consumers currently collects separately stated decommissioning surcharges for the decommissioning of Palisades. The company proposes that these surcharges be terminated concurrently with the commencement of recovery of costs incurred pursuant to the PPA. In addition, pursuant to the Commission’s September 20, 2005 order in Case No. U-14150, Consumers is required to

Page 74 U-14992 file a new decommissioning report by March 31, 2007. The company urges the Commission to postpone this requirement until December 31, 2007, or dispense with it if the transaction closes.

The Staff supports Consumers’ proposal to end the surcharge and argues that the new decommissioning report is no longer necessary. The Commission agrees with the Staff. Assuming that the transfer of the plant to ENP is completed after issuance of this order, Consumers will no longer have any obligation (or ability) to continue the decommissioning surcharge or plan for the decommissioning of the plant. See, 10 CFR 50.75. Under these circumstances, the decommissioning report will not be required from Consumers – ENP will then have the obligation to file necessary decommissioning reports with the NRC. These reports will be subject to the Commission’s above- stated requirement that approval of the PPA is conditioned upon Consumers’ receipt of ENP’s commitment to transmit copies of all such reports to the Commission. The Commission further finds that Consumers should discontinue collection of the decommissioning surcharge upon commencement of its receipt of costs through operation of the PPA.

Approve Elimination of the Nuclear Expense Tracking Mechanism

In the December 22, 2005 order in Case No. U-14347, the Commission adopted Consumers’ proposed nuclear O&M expenses of $117,986,000. The Commission directed Consumers to institute an annual tracking mechanism to be applied to $2,015,000 of that amount, in order to determine whether actual expenses met the inflation-adjusted 2003 expense level, and to allow for refunds to customers if they did not. Consumers argues that the tracking mechanism becomes obsolete when the Palisades transaction closes, and the refund obligation is eliminated as well. It appears that no party replied to this proposal in the briefing, although the Staff was generally in agreement with Consumers’ other suggested miscellaneous adjustments to rates associated with removal of the plant from rate base.

Page 75 U-14992 The Commission agrees with Consumers’ proposal to eliminate tracking of nuclear O&M expenses for refund purposes, since such expenses will no longer be incurred after the sale of the plant. The tracking mechanism should remain in place until commencement of the operation of the PPA.

Adjustment of Pension and OPEB Expenses

In the December 22, 2005 order in Case No. U-14347, the Commission approved pension and

OPEB equalization mechanisms. Generally, the equalization mechanisms work by tracking these expenses. If actual pension or OPEB expenses are greater than the expense amount set in rates, this difference is recognized as a regulatory asset for future recovery; if actual expenses are less, the company recognizes a regulatory liability for distribution to customers. Reconciliations occur in conjunction with the annual PSCR reconciliations.

Consumers and the Staff argue that once the proposed sale transaction closes and the Palisades and Big Rock costs are removed from rates, the pension and OPEB equalization mechanisms must be adjusted so that, during reconciliation, the amount against which actual expenses are measured is adjusted downward by an amount equal to the Palisades and Big Rock pension and OPEB costs that have been removed from rates. The Commission agrees. If the amount recovered in base rates is reduced, that reduced amount should be the amount against which actual expenses are compared in reconciliation cases that take place after the commencement of operation of the PPA.

Distribution of the Proceeds.

Consumers seeks to immediately recover all of the Palisades sale transaction costs at closing from the proceeds of the sale above the plant’s book value. Consumers estimates these costs to be

$30 million.

Page 76 U-14992 The Staff disagreed that sale transaction costs should be deducted from the approximately $66 million proceeds on the sale. The Staff recommended that the Commission defer consideration of the transaction costs until Consumers’ next rate case. According to the Staff, at that time it will be possible to determine the total cost of the transaction and the Staff will have the opportunity to fully audit the transaction expenses and assess their reasonableness.

In response, Consumers noted that the transaction would not have been possible without incurring these costs and that the costs proposed for this transaction are substantially lower than those incurred by other utilities who sold nuclear plants. Consumers further argued that in other generation asset sales, transaction costs have been recovered by the seller as a deduction against the proceeds of the transaction.

The Attorney General argues that Case No. U-12505 requires a “substantive review of the reasonableness and prudence of proposed money allocations.” As such, the Attorney General urges the Commission to review all of the proposed fund allocations. Furthermore, the Attorney

General argues that refunds related to the decommissioning funds should not be identified as sale proceeds because these funds should be used for decommissioning and should not be returned to ratepayers.

MEC/PIRGIM also argues that all transaction costs should be assigned to shareholders rather than ratepayers. According to MEC/PIRGIM, a large portion of the $30 million transaction cost relates to Consumers’ loss of equity in NMC as a result of the sale. MEC/PIRGIM claims that the shedding of the risks and costs associated with nuclear plant ownership is a corporate strategy with no demonstrated benefit to ratepayers. Therefore, MEC/PIRGIM concludes that shareholders should bear the costs of Consumers’ business decision to sell the plant.

Page 77 U-14992 The Commission agrees with the Staff and MEC/PIRGIM that sale transaction costs should not be deducted from sale proceeds. Rather, the reasonableness and allocation of these costs should be reviewed in Consumers’ next rate case. As the Staff points out, at that time the costs will be known and the Staff will have an opportunity to review the costs for reasonableness and prudence.

Consumers also asks for an immediate determination that amounts deducted from the sale price due to the delay in closing provision in the ASA should not be treated as a penalty that falls on its shareholders. Consumers noted that there were several closing day adjustments to the purchase price including adjustments to inventory levels and capital expenditures that result from differences in what was assumed in the ASA. Consumers further stated that there was an additional adjustment of $79,306 per day for each day after March 1, 2007 that the closing is delayed.

Consumers argues that this is not a “penalty” per se but results from the fact that the plant is an asset with a relatively fixed life and, as such, the value of the asset declines daily. According to

Consumers, it is in ENP’s best interest to take ownership of the plant as soon as possible and any costs for a delay should accrue to the seller. Consumers points to the fact that it entered extensive negotiations with Entergy to change the closing date from January 1 to March 1, 2007 without any increase in closing date adjustment amounts or decrease in purchase price. Consumers claims that these negotiations resulted in approximately $7 million in benefits for customers. Consumers further observes that the closing date adjustment proposed in this proceeding is much less than those proposed in similar proceedings in other jurisdictions. Thus, according to Consumers, the adjustment proposed here is reasonable. Consumers proposes to deduct any adjustment for delay in closing from the proceeds from the sale.

Page 78 U-14992 The Staff argues that Consumers should have filed the case sooner if they wanted a decision by February 28, 2007—as Consumers requested in its application—and maintains that Consumers’ shareholders should pay any costs associated with a delayed closing. The Staff noted that it supported every effort to expedite this proceeding and agreed to the extra step of dispensing with a proposal for decision to provide a timely order.

MEC/PIRGIM concurs that the penalty provisions should not be recognized by the Commis- sion and the possibility of a cost for closing after March 1, 2007 should not influence the

Commission’s decision or compel the Commission to make a hasty decision.

The Commission agrees with the Staff and MEC/PIRGIM that it is not reasonable to expect ratepayers to bear the cost of the delayed closing. As the Staff pointed out, Consumers was extremely optimistic in requesting an order in such a complex proceeding within the time frame proposed in its application. The Commission therefore finds that while other closing adjustments listed by Consumers are reasonable, any penalty associated with closing after March 1, 2007 should be borne by the company and not the ratepayers.

The Local Units first argue that a portion of the proceeds from the sale of the Palisades plant –

$11.7 million – should be returned to the Local Units because the Local Units agreed to an unfair

(and allegedly illegal) deal in 1999 under which the plant site was assigned an artificially low value, allowing for reduced (and thereafter flat) taxes for Consumers. The Local Units argue that

$11.7 million represents the amount that the Local Units have lost in the interim as a result of this deal that the Local Units say they should not have agreed to.

The Local Units fail to cite any case, statute, regulation, rule, or tariff that supports this argument. As the Local Units surely know, the Commission has no jurisdiction whatsoever in tax

Page 79 U-14992 matters. The Local Units have selected the wrong forum in which to bring their claim that they entered into an unlawful agreement with Consumers regarding the tax treatment of the plant site.

Second, the Local Units argue that they are due a portion of the sale price – $11.7 million – because Van Buren County is required to undertake special duties in order to meet emergency preparedness and homeland security requirements imposed on the county by the presence of the plant, for which the county lacks the funding. In conjunction with this request, the Local Units ask the Commission to require that a $0.0002 per kWh surcharge be added to the PPA, to be used for reimbursement of funds to the Local Units for ongoing emergency preparedness expenses. Areas of need that the Local Units propose to address with these funds include essential emergency preparedness services (such as bus transportation), personnel (such as additional emergency planners), and equipment (such as wireless communications equipment).

The Staff argues that the Local Units are seeking funding from ratepayers for resources that are unrelated to the provision of utility service, since the requested emergency preparedness services, personnel, and equipment would be used for general emergency events. Moreover, the

Staff points out that since the Local Units are not in Consumers’ service territory, they are seeking funding from ratepayers who do not live in their communities, and the Local Units arguably have no “stake” in this proceeding. The Staff points out that the requested emergency resources are of general benefit to the local inhabitants, but do not provide any benefit to ratepayers.

The Commission is charged with setting just and reasonable electric utility rates. MCL 460.6,

460.557. As with the tax claim, the Local Units fail to cite any legal authority for the notion that the Commission may divert funds from the sale of an electric generation plant to a local government, or may institute a per-kWh charge for funneling funds to a local government. That is because there is none. While the Commission is aware that emergency preparedness services can

Page 80 U-14992 strain the budgets of governmental units, small and large, the Local Units have failed to demonstrate that this proceeding for review of a power purchase agreement is the appropriate forum for seeking additional funds. Moreover, the Commission is not persuaded that it has authority to carry out any of the Local Units’ requests for emergency preparedness funding.26 Such requests for additional funding for local government uses are more properly directed to the Legislature.

Consumers proposed to use $30 million from excess decommissioning funds and sale proceeds to pay ENP for its acceptance of all operating, maintenance, and decommissioning responsibility for the Big Rock ISFSI. Consumers argued that because Big Rock is a non-revenue producing facility, no entity would assume responsibility without compensation. Consumers pointed to unrebutted testimony that the proposed payment to ENP is less than the company’s estimated cost to maintain and decommission the site itself.

MEC/PIRGIM and ABATE argue that the $30 million payment for the Big Rock ISFSI should not be taken out of proceeds nor should it be recovered from ratepayers. According to

MEC/PIRGIM, this cost should be recovered from Consumers’ litigation with the DOE over the

DOE’s failure to accept SNF from Big Rock. Alternatively, MEC/PIRGIM assert that Consumers should pay this cost out of the funds that it collected for Big Rock decommissioning from 2001-

2003, which it failed to deposit into the decommissioning trust fund.

The Staff also recommended that Consumers’ proposed $30 million payment to ENP for the

Big Rock ISFSI not be charged to ratepayers until Consumers’ suit against the DOE is decided and any damages are received. The Staff further observed that the $30 million payment to ENP

26Even assuming that the Commission had such authority, the only type of proceeding in which such a request could be considered would be a general rate case. The Local Units have never intervened in a Consumers’ rate case. Page 81 U-14992 represents a negotiated amount calculated to recover current and future costs of SNF storage and therefore does not represent a current cost of service for the utility.

In response to MEC/PIRGIM, Consumers argued that the issue regarding funds that the company allegedly should have deposited into the Big Rock decommissioning trust is not appropriately raised in this proceeding and should be raised when Consumers files its decommissioning reconciliation for Big Rock. In response to the Staff and MEC/PIRGIM’s recommendation that the $30 million payment be deferred pending the outcome of the litigation against the DOE,

Consumers argues that the payment for the Big Rock ISFSI was prudently planned as part of an overall transaction that demonstrates significant benefits for ratepayers. Consumers concludes that it should not be penalized by being required to finance this payment to ENP pending the outcome of litigation that may take years to complete.

The Commission finds that its decision on this issue should be deferred until Consumers’ next rate case. In that proceeding, the Commission requests that the parties more fully address the arguments raised here as well as the effect of the United States Federal Court of Claims’ decision in Consumers Energy Co v United States, 65 Fed Cl 364 (2005), on the Commission’s determination. Consumers can also provide the Commission with an update on the status of the litigation against DOE. For the purposes of this case, the sale proceeds will not be offset by any payment for the Big Rock ISFSI.

As previously noted, the non-qualified decommissioning fund has a Commission jurisdictional component and a FERC jurisdictional component. The Commission jurisdictional fund balance is expected to be $189 million and the FERC fund balance is expected to be $11 million on March 1,

2007. 5 Tr 840. Consumers stated that it expects the FERC to approve the release of the approximately $11 million of FERC-jurisdictional funds, which were collected from Consumers’

Page 82 U-14992 wholesale customers. However, Consumers stated that it did not expect that the FERC would direct the funds to be refunded to its two remaining wholesale customers. Mr. Torrey testified that under the contracts that Consumers has with wholesale customers, the customers are not specifically paying for decommissioning. Consumers initially claimed that it intended to use these funds to offset prior company contributions to Big Rock decommissioning activities. In its brief, however, Consumers indicated that it anticipates disposing of these funds in a manner authorized by the FERC.27

The proceeds of the sale transaction amount to the $66 million difference between the sale price and the plant’s book value. In addition, the transaction immediately frees up $189 million from the non-qualified fund that are subject to Commission jurisdiction, which means that there are $255 million available for use by Consumers’ ratepayers immediately and another

$116 million (plus earnings less taxes) whenever Consumers may reclaim that amount from ENP.

ABATE and Energy Michigan urge the Commission to make an immediate determination regarding the use of the funds instead of making only a partial refund at this time and deferring any further decisions to a general rate case, as proposed by both Consumers and the Staff. The

Commission agrees that an immediate determination is appropriate.

The Commission has studied the proposals by the parties for use of these funds. The Commis- sion finds that ABATE’s approach has the most merit. ABATE recommended that the distribution of the net proceeds occur as an equal mills per kWh negative surcharge on the bills of all customers, not as credit flowed through Consumers’ PSCR clause. According to ABATE, the

27In an order issued on February 21, 2007 in Docket Nos. EC06-155-000, ER06-1410-000, and ER06-1411-000, the FERC authorized Consumers to use the $11 million of non-qualified decommissioning funds attributable to FERC-jurisdictional rates to cover shortfalls in the decommissioning of Big Rock, subject to the outcome of the NRC licensing proceeding. Consumers Energy Co & Entergy Nuclear Palisades, LLC, et. al.,118 FERC ¶ 61,143 (Feb. 21, 2007.) Page 83 U-14992 equal mills per kWh negative surcharge approach will benefit not only Consumers’ PSCR customers, but also the company’s ROA customers. Because the PPA charges will be collected on a mills per kWh basis, ABATE maintains that it would be fair to distribute the proceeds on that basis. Further, because securitization charges are collected on a uniform mills per kWh basis,

ABATE maintains that the refund should flow back to Consumers’ customers in the same manner.

The Commission agrees.

The Commission directs that Consumers use 2006 calendar year actual data to determine the appropriate equal mills per kWh negative surcharge factor to apply to customers’ bills for the remaining months of 2007 and all of 2008.28 The 2006 calendar year actual data needs to be filed by March 30, 2007 as part of the company’s 2006 PSCR reconciliation proceeding. Interest shall be added to the unrefunded balance of the refund amount commencing at closing and continuing through the midpoint of December 2008. The rate of interest shall be Consumers’ short-term borrowing rate.29

Within two weeks of closing, Consumers shall file a report in this docket describing the amount of the proceeds and the calculation of the equal mills per kWh negative surcharge factor.

Any interested person may file comments regarding the accuracy of the calculation within seven days of the filing of Consumers’ report. Absent further order from the Commission, Consumers shall implement the negative surcharge approved by this order at the beginning of the first billing

28The Commission estimates that the refund period will last for approximately 18 months.

29The Commission approves Consumers’ and the Staff’s recommended interest rate instead of the higher rate proffered by ABATE and Energy Michigan (Consumers’ overall rate of return of 9.17%). Consumers’ short-term borrowing rate is an economically neutral rate that is appropriate where the utility is returning proceeds on a short-term basis pursuant to a schedule determined by the Commission. Page 84 U-14992 cycle that is more than 30 days following the filing of the report regarding the calculation of the equal mills per kWh negative surcharge factor.

MISCELLANEOUS ISSUES

1. Oral Argument Request

The Local Units asked for the opportunity to present oral argument to the Commission pursuant to R 460.17339(1). That request is denied. Oral argument pursuant to R 460.17339(1) is entirely discretionary and nothing in the Local Units’ testimony, exhibits, and briefs suggests that allowing counsel for the Local Units to make an oral presentation to the Commission would be of any benefit to the Commission.

2. MEC/PIRGIM and Local Units Motion

On January 11, 2007, MEC/PIRGIM and the Local Units (Joint Movants) filed a motion to postpone and to consolidate this proceeding and for a “proceeds trust remedy.” The motion sought to postpone the evidentiary hearings set to begin on January 16, 2007, to consolidate this matter with at least seven other matters, and to establish a Commission-regulated external interest trust in which to hold all proceeds “upon closing and pending decision by the Commission of a unified decision, or contemporaneous decisions, in all cases dealing with all proceeds and related issues.”

Motion, p. 2. Joint Movants requested that this proceeding be postponed in order to have it consolidated with: (1) the general rate case that Consumers has not yet filed; (2) a Big Rock nuclear decommissioning fund reconciliation that Consumers has not yet filed; (3) a proceeding to determine whether Consumers should be granted a certificate of convenience and necessity under

Page 85 U-14992 Act 69 that Consumers has not yet filed;30 (4) a reopened Case No. U-14150, the completed case governing the Palisades nuclear decommissioning fund; (5) a reopened Case No. U-12505, the completed securitization case; (6) Case No. U-15001, Consumers’ pending PSCR plan case; and

(7) “other cases which raise issues inherent or integral” to this case. Motion, p. 3.

On January 12, 2007, the Staff and Consumers filed responses opposing the Joint Movants’ motion.

At the commencement of the hearing on January 16, 2007, the ALJ refused to entertain the motion. Relying on Rule 335 of the Commission’s Rules of Practice and Procedure, the ALJ found the motion to be “improper and extremely untimely.” 3 Tr 95. The ALJ noted that she was sent the motion by e-mail on Thursday, January 11th, at 5:16 p.m. She received it the following morning, a Friday. The following Monday, January 15th, was a state and federal holiday, and the evidentiary hearings were to commence on Tuesday, the 16th. The ALJ found that the motion grossly failed to comply with both the service and hearing notice requirements of Rule 335, and she rejected the motion.

In its initial brief, MEC/PIRGIM complained that the motion has not been addressed on the merits by either the ALJ or the Commission.

The Commission agrees with the ALJ. Rule 335(2) requires that motions are to be served on all parties no less than nine days before the hearing if served by mail, and not less than seven days before the hearing if personally served. Rule 335(3) requires that the responses to motions are due not less than five days before the hearing if served by mail, and not less than three days before the hearing if personally served. Rule 335(4) requires that motions be noticed for hearing at a time designated by the Commission or the ALJ. Joint Movants’ motion failed to comply with any of

30This issue is dealt with conditionally in this order, as certain required documents have not yet been filed by Consumers. Page 86 U-14992 these fundamental motion practice provisions, and therefore was fatally procedurally defective.

Assuming receipt of the motion by Friday morning (when the ALJ received the motion) the parties had less than one business day to respond. The motion further purported to set a hearing date and time that had been chosen by the Joint Movants without any consultation with the ALJ. 3 Tr 96-

97. The ALJ’s decision not to entertain the motion was the correct one.

In addition, the Commission finds that the motion lacks merit. By the Joint Movants’ own admission, three of the seven cases that the Joint Movants request to have consolidated have not yet been filed. Two of the seven cases are dealt with in this order, where the Commission makes findings regarding the effects of this proceeding on the outstanding orders in Case Nos. U-14150 and U-12505. In the one remaining case – Consumers’ pending PSCR plan case – an order issued on December 21, 2006 in Case No. U-15001, and temporary PSCR factors are currently in place.

Joint Movants fail to offer any compelling reason, or legal authority for, why the PSCR plan case must be consolidated with this proceeding considering the approval of a PPA. The Commission is well able to address any effects on the PSCR plan in that proceeding. Finally, the seventh category of cases with which the Joint Movants request consolidation is simply too vague to merit a response.

The motion presents the same positions and concerns regarding Consumers’ application that the Joint Movants have presented in their initial and reply briefs. The Joint Movants argue that the schedule of this proceeding will not allow the Commission sufficient time to address the intervenors’ concerns. This argument is belied by this order, in which the Commission comprehen- sively addresses all of the arguments made by the intervenors. The Commission notes that Joint

Movants stipulated to the schedule in this case on September 20, 2006. 1 Tr 9-14. Joint Movants have had the opportunity to conduct discovery, prepare and file direct and rebuttal testimony,

Page 87 U-14992 participate in several days’ worth of cross-examination, and extensively brief their arguments. By their motion Joint Movants seek an indefinite postponement of a proceeding in which all parties are aware that each day after March 1, 2007 costs Consumers as much as $133,000, and never less than $79,000. The Commission may set its own schedule with reference to issuing orders; however, the Commission is required to “secure a just, economical, and expeditious determination of the issues presented.” Rule 103(2). The Commission would certainly be lax in this duty if it granted an open-ended motion essentially meant to bring before the Commission the same issues that the Joint Movants have amply argued in their briefs, and are addressed by the Commission herein.

3. The Attorney General’s Objection to the Reopened Proceeding

On February 1, 2007, pursuant to Rule 401 of the Commission’s Rules of Practice and

Procedure, 1999 AC, R 460.17401, the Attorney General filed a petition seeking to reopen the evidentiary record. Attached to the petition was the public version of written testimony of

Consumers’ witness Reed that had been filed before the PSCW in Docket No. 6630-EI-113 by

WEPCo. Mr. Reed’s PSCW Docket No. 6630-EI-113 testimony supported approval of an ASA and a PPA for the sale by WEPCo of Point Beach.

The Attorney General argued that Mr. Reed’s testimony in PSCW Docket No. 6630-EI-113

“is relevant to and casts doubt upon the reasonableness and prudence of the proposed Palisades sale and power purchase agreement” in this proceeding, and that Mr. Reed’s Wisconsin testimony

“justifies reopening the captioned case for additional discovery and testimony.” Attorney

General’s petition, p. 2.

On February 6, 2007, the Commission granted the Attorney General’s petition to reopen this proceeding. In doing so, the Commission acted with extreme haste. Because the purpose of the

Page 88 U-14992 Attorney General’s petition was limited to calling into question the opinion testimony rendered by

Mr. Reed in this case, the Commission granted the Attorney General an opportunity to demonstrate that Mr. Reed provided different opinion testimony in another proceeding and to argue that his Wisconsin testimony should have some bearing on the outcome of this proceeding. To that end, the Commission allowed the Attorney General additional time to submit interrogatories to

Consumers, and ordered that cross-examination of Mr. Reed would take place on March 7, 2007.

The Commission allowed for no rebuttal, and directed the parties not to go beyond the stated purpose of demonstrating that Mr. Reed provided different opinion testimony in another proceeding that has bearing on the outcome of this proceeding. The Commission otherwise directed the parties to maintain the original schedule.

On March 7, 2007, Mr. Reed was cross-examined regarding his Wisconsin testimony, and all parties were allowed time for oral argument on the issue of the weight, if any, that the alleged differences between the public version of Mr. Reed’s Wisconsin testimony and his testimony in this proceeding should have on the decisions that the Commission must make in this proceeding.

At that hearing, the Attorney General stated that he was not, by his appearance, waiving any objections to the Commission’s February 6 order on his motion. The Attorney General expressed the opinion that the Commission’s order denied him the right to oral and written argument, the right to present evidence, and the right to rebuttal, and violated the Commission’s Rules of

Practice and Procedure, 1999 AC, R 460.17325(3) (Rule 325(3)), and the Michigan Administrative

Procedures Act, MCL 24.272(3).

The Commission has previously recognized that the urgency with which some of the matters that come before the Commission must be decided occasionally will obligate the Commission to

Page 89 U-14992 craft proceedings that curtail the full panoply of rights routinely observed in most other proceedings. In its January 29, 2004 order in Case No. U-13989, the Commission stated:

As previously noted, the urgency underlying the need to complete this proceeding in an expeditious manner caused ABATE to raise several due process concerns. The Commission finds that these concerns are not well taken. The Commission rejects ABATE’s contention that its due process rights were violated by any aspect of this proceeding. To be sure, the schedule was abbreviated and lacked the full panoply of procedural activities normally available to litigants before the Commission. However, the precarious financial condition of the State of Michigan and the Public Universities is well established and uncontested. More- over, some of the benefits anticipated by the State of Michigan and the Public Universities would be denied if the schedule were to have been lengthened as proposed by ABATE. After the application was filed, the Commission immediately recognized that only through a schedule that provided for an abbreviated evidentiary hearing could this matter be processed in a manner that would strike a balance between the needs of Consumers, the State of Michigan, the Public Universities, and potential intervenors. Moreover, ABATE’s contention that it was deprived of the right to participate in this proceeding in a meaningful manner rings hollow in light of the ability of the Staff and Energy Michigan to develop testimony and present witnesses at the hearing. Therefore, the Commission does not agree that the procedures followed in this case amounted to a denial of due process.

Order, Case No. U-13989, pp. 12-13.

The urgency with which this case had to be processed is evidenced by a number of factors, including, but not limited to, the need to refuel the plant, the desire of the new owner to acquire as much expertise in the operation of the plant prior to its refueling, and the $79,306 per day price reduction/penalty provision in the ASA. The schedule suggested by the Attorney General for the reopened proceedings would have easily dragged the proceeding out for another three to four months. At $79,306 per day, even a three month delay would have incurred $7.2 million in price reduction/penalty charges.

As the Attorney General is well aware, the Commission has endeavored to avoid undue delay in this proceeding and to adhere to the original schedule. Nothing in the Attorney General’s petition to reopen called into question the testimony of any other witness in this proceeding or credibly suggested the need for rebuttal witnesses. The Attorney General made no offer of proof Page 90 U-14992 reflecting the need for additional or rebuttal evidence, and offered no suggestion of what that evidence, or who those witnesses, would be. The Attorney General made no request for a special record. The Attorney General had the better part of a day to cross-examine Mr. Reed, made no indication at the close of the cross-examination that he needed more time, and made a lengthy oral argument at the conclusion of that hearing. Finally, the Attorney General failed to exercise his right to request rehearing of the Commission’s ruling on his motion. See, Rule 403. For these reasons, the Commission finds the Attorney General’s objections to the procedures imposed on the reopened proceeding to be without merit.

4. MEC/PIRGIM’s Attempt to Reopen the Record

On February 7, 2007, MEC/PIRGIM filed a motion to compel and motion to reopen. In its motion, MEC/PIRGIM argued that this proceeding needed to be reopened in order to take evidence on the issue of what portion of “the $315 million of net book plant investment” in

Palisades relates to the post-securitization investment in storage of SNF and ISFSI costs.

MEC/PIRGIM argues that this issue is critical to this proceeding because ratepayers should not be asked to advance to Consumers any amounts that Consumers should rightfully be seeking instead from the DOE as damages in a proceeding to enforce the contract to handle and provide permanent storage of SNF. MEC/PIRGM indicates in its motion that it has sought discovery from

Consumers on this issue and is dissatisfied with the answers it has received.

In response, Consumers indicated that it has answered MEC/PIRGIM’s discovery requests, and that Exhibit MEC-38 shows Consumers’ best estimates of the amounts of the costs and investments that MEC/PIRGIM is seeking.

At a hearing on March 7, 2007, the ALJ received oral argument on MEC/PIRGIM’s motion.

At the conclusion of oral argument, the ALJ denied the motion. Relying upon the language of the

Page 91 U-14992 Commission’s February 6 order, which narrowly limited the scope of the reopened proceeding to the issue of the relevance of Mr. Reed’s Wisconsin testimony to this case, the ALJ found that

MEC/PIRGIM’s motion was outside the scope of the reopened proceeding.

The Commission is persuaded that the ALJ properly denied MEC/PIRGIM’s February 6, 2007 motion. The issues of whether and how much the DOE may eventually owe Consumers for its breach of the 1983 SNF disposal contract for the Palisades ISFSI expenses are far from being resolved and their final determination is not necessary for the Commission to rule on this application. Consumers’ ratepayers have not been harmed by the Commission’s decision to move forward. Their rights to seek recovery of any amounts eventually recovered by Consumers from the DOE are protected. However, the Commission finds that Consumers should be required to report to the Commission on the outcome of litigation with the DOE regarding the Palisades ISFSI issue within 30 days of the issuance of any final determination by a court.

5. “Greenfield” Obligation

With respect to the Local Units’ concerns over the “greenfield” obligation, the Commission notes that term appears nowhere in either the ASA or the NRC’s regulations governing the decommissioning and clean-up of a former nuclear plant site. A dictionary definition of “greenfield” is an undeveloped property. Thus, the term lacks relevance in this proceeding despite the explicit use of that term in Consumers’ testimony.

The NRC is the final authority regarding the decommissioning and clean-up of a former nuclear plant site. Several opportunities are provided for public involvement during the decommissioning process. Before the commencement of the actual decommissioning activities, ENP will be required to file a written certification of permanent cessation of operation to the NRC. The

NRC will hold a meeting in the vicinity of the plant to discuss the decommissioning process and to

Page 92 U-14992 invite public comments and questions. NRC approval and issuance of a license amendment is required for changes to the plant license and decommissioning activities that could adversely affect the public. The license amendment process provides an opportunity for a public hearing.

Additionally, a license termination plan must be approved by license amendment, thus providing another hearing opportunity for affected members of the public.

Within two years after submitting the certification of permanent closure, ENP must submit a post-shutdown decommissioning activities report (PSDAR) to the NRC. This report will be available to the public and triggers another opportunity for public comments and a public meeting in the vicinity of the plant for the NRC to consider ENP’s intentions.

Ninety days after the NRC receives the PSDAR, and generally 30 days after the public meeting, ENP will be able to commence certain major decommissioning activities without specific

NRC approval. However, any activity that involves release of the site for possible unrestricted use, consumes too much of the remaining decommissioning funds, or causes any significant environmental impact not previously reviewed cannot be undertaken absent another license amendment request and another opportunity for a public hearing.

Finally, ENP will be required to submit a License Termination Plan (LTP) within two years of the expected license termination. The plan must address site characterization, identification of remaining site dismantlement activities, plans for site remediation, detailed plans for final radiation surveys for release of the site, method for demonstrating compliance with the radiological criteria for license termination, updated site-specific estimates of remaining decommissioning costs, and a supplement to the environmental report that describes any new information or significant environmental changes associated with the owner's proposed termination activities. For a plan proposing release of the site for restricted use, it must describe the site’s end use,

Page 93 U-14992 documentation on public consultation, institutional controls, and financial assurance needed to comply with the requirements for license termination for restricted release. The LTP requires approval by NRC of a license amendment. Before approval can be given, an opportunity for hearing is published and a public meeting is held near the plant site.

ENP will be required, at the time of decommissioning, to comply with the NRC’s standard for release of the site for unrestricted use of no more than 25 millirem (mrem) per year above background.31 10 CFR 20.1402. In the ASA, ENP commits, in addition, to restoration of the site to an “appropriately graded, stabilized and vegetated condition.” Arts. 1.1(50), 2.3(h). Thus, the

ASA provides for both decommissioning funding and site restoration obligations that exceed the current NRC requirements.

The Commission has conditioned its approval of the PPA on the commitment by ENP to provide the Commission with copies of all information submitted to either FERC or the NRC by

ENP or Entergy during the course of the plant’s time in service and the decommissioning period.

This will facilitate the Commission’s ability to intervene in these proceedings to monitor them and to ensure that the decommissioning of Palisades is accomplished in a manner consistent with the public interest.

6. The testimony of Mr. Reed

In their initial brief, the Local Units claimed that, “The fact that a principal source of Staff's knowledge came from experts with a financial interest in the outcome casts serious doubt upon the foundation for the recommendations of Staff in this case.” Local Units initial brief, p. 43. The

31Background radiation exposure is approximately 360 mrem/year. See, http://www.nrc.gov/about-nrc/radiation/sources.html (visited March 16, 2007). The NRC’s standard is based upon a dose-based radiation protection approach and requires residual radioactivity to be reduced to levels that are as low as reasonably achievable (ALARA). 10 CFR 20.1402. Page 94 U-14992 Local Units argued that the Staff relied extensively on “the assistance and advice” provided by

CEA, which has a significant financial stake in the outcome of the proceedings.32 The Local Units further observed that the amount Consumers will pay in its contract with CEA is in part contingent upon closing the sale of Palisades. The Local Units continued, arguing that “Michigan has long held contingent fee contracts for the testimony of a witness (lay or expert) to be against public policy and unenforceable.” Sherman v Burton, 165 Mich 293; 130 NW 667 (1911).

The Staff objected strongly to what it characterized as ad hominem attacks by the Local Units and argued that contrary to the Local Units’ claims, the Staff had in fact relied on its own expertise in reviewing all testimony, exhibits, and discovery questions and responses.

Consumers responded that the Local Units mischaracterized the contract between CEA and

Consumers. Consumers claimed that the contract between the company and CEA was not a

“contingent fee” contract but was drafted to provide a substantial incentive to CEA to obtain the greatest possible value for the asset. Consumers explained that the contract provided for a monthly retainer fee, a “success fee” that was tied to the total transaction value, and a cap on total compensation paid under the contract.

The Commission finds this issue raised by the Local Units to be entirely without merit. While the Staff closely examined the evidence submitted by CEA, it also conducted its own extensive investigation and analysis of the proposed transaction. Furthermore, the Commission finds that

Sherman, supra, is inapposite. Sherman involved a contract for expert medical testimony with the fee contingent upon the sum of damages awarded. Our Supreme Court held that this payment arrangement could suborn perjury and as such, found that the contract violated public policy.

32The Attorney General likewise alluded to CEA’s financial stake in the proposed transaction. See, 8 Tr 1400. Page 95 U-14992 Here, there is no indication that the problem identified in the Sherman case is present in this proceeding.

The Commission FINDS that:

a. Jurisdiction is pursuant to 1909 PA 106, as amended, MCL 460.551 et seq.; 1919 PA 419, as amended, MCL 460.51 et seq.;1929 PA 69, as amended, MCL 460.501 et seq.; 1939 PA 3, as amended, MCL 460.1 et seq.; 1982 PA 304, as amended, MCL 460.6h et seq.; 1969 PA 306, as amended, MCL 24.201 et seq.; the Energy Policy Act of 2005, Pub. L. No. 109-58, 42 USC 16451 et seq., and the Commission’s Rules of Practice and Procedure, as amended, 1999 AC,

R 460.17101 et seq.

b. The PPA between Consumers and ENP should be approved, under the terms and conditions described in the order.

c. Consumers’ proposals to credit its PSCR factor with the revenue requirement for Palisades and the Big Rock ISFSI after the closing of the transaction and to completely remove Palisades from rate base in its next rate case are reasonable and should be approved, as modified by this order to incorporate the clarification suggested by the Staff.

d. Consumers’ transaction costs for the sale of Palisades to ENP should not be deducted from sale proceeds and should be reviewed in Consumers’ next rate case.

e. The requirements of the Commission’s October 24, 2000 order in Case No. U-12505 will have been met by the disposition of the proceeds as set forth in this order.

f. Consumers’ proposal to transfer the qualified decommissioning trust funds to ENP is reasonable and should be approved. Consumers should be directed report its recovery of the $116 million (plus earnings less taxes) in qualified decommissioning trust funds from ENP to the

Commission within 30 days of receipt of the funds.

Page 96 U-14992 g. Consumers’ request for an Act 69 certificate of convenience and necessity should be approved, provided Consumers submits to the Commission a franchise from Covert Township prior to providing service.

h. Determining Palisades to be an eligible facility will benefit customers, is in the public interest, and will not violate Michigan law.

i. Upon the close of the transaction, Consumers should cease collecting decommissioning surcharges for Palisades.

j. The requirement in the Commission’s September 20, 2005 order in Case No. U-14150 that

Consumers submit a decommissioning report by March 31, 2007 is suspended until December 31,

2007. If the proposed transaction is completed, no additional decommissioning reports from

Consumers should be required.

k. The tracking mechanism for nuclear O&M expenses authorized in the December 22, 2005 order in Case No. U-14347 should be eliminated at the close of the transaction.

l. The pension and OPEB tracking mechanisms authorized in the December 22, 2005 order in

Case No. U-14347 should be adjusted to reflect the removal of Palisades from Consumers’ rate base.

m. Any penalties for delayed closing should not be deducted from sale proceeds; penalties associated with closing after March 1, 2007 should be borne by Consumers and not by ratepayers.

n. The Local Units’ request for proceeds from the sale and other economic relief should be denied because the relief requested is beyond the Commission’s jurisdiction.

o. Consumers’ request to apply $30 million in transaction proceeds to its payment to ENP to assume responsibility for the Big Rock ISFSI should be deferred until the company’s next rate case.

Page 97 U-14992 p. The Local Units’ request for oral argument before the Commission should be denied.

q. The motion to postpone and consolidate this proceeding filed by the Local Units and

MEC/PIRGIM should be denied.

r. Consumers should use 2006 calendar year actual sales data to determine the appropriate equal mills per kilowatt-hour negative surcharge factor to apply to customers’ bills for the remaining months of 2007 and all of 2008 as set forth in the order. Within two weeks of closing,

Consumers should file a report in this docket describing the amount of the proceeds and the calculation of the equal mills per kilowatt-hour negative surcharge factor. Any interested person may file comments regarding the accuracy of the calculation within seven days of Consumers’ filing. Absent further order of the Commission, Consumers should implement the negative surcharge in accordance with the methodology approved by this order at the beginning of the first billing cycle that is more than 30 days following the filing of the report regarding the calculation of the equal mills per kilowatt-hour negative surcharge factor.

s. Consumers should be required to report to the Commission on the outcome of litigation with the DOE regarding the Palisades’ ISFSI issue within 30 days of the issuance of any final determination by a court.

t. Consumers should be required to report to the Commission regarding any future sale or other disposition of the land at the Big Rock site.

u. Consumers should be directed to account for the sale of Palisades in accordance with standards acceptable to the FERC.

v. All regulatory approvals granted in this order should be expressly conditioned on receipt of letters from duly authorized officers of both Consumers and ENP agreeing to the requirement that

ENP commit to provide the Commission with copies of all information submitted to either the

Page 98 U-14992 FERC or the NRC by ENP or Entergy during the course of the plant’s time in service and the decommissioning period. This reporting obligation applies to information regarding (1) decommissioning of the Palisades plant, (2) the SNF stored at the Big Rock ISFSI, (3) the decommissioning funds held by ENP for those two sites, and (4) changes in ownership of either of those sites; including, but not limited to, information required by Title 10 of the Code of Federal

Regulations, part 20, subpart E, and parts 50.75, 50.82, 51.53, and 51.95. The letters shall be delivered to the Commission’s Executive Secretary as well as being electronically filed in the

Commission’s docket for this proceeding as soon as possible following issuance of this order.

THEREFORE, IT IS ORDERED that:

A. The power purchase agreement between Consumers Energy Company and Entergy

Nuclear Palisades, LLC, is approved subject to the terms and conditions set forth in the order.

B. Consumers Energy Company’s proposals to credit its power supply cost recovery factor with the revenue requirement for the Palisades Nuclear Power Plant and the Big Rock interim spent fuel storage installation as an offset to costs incurred under the power purchase agreement after the closing of the transaction and to completely remove the Palisades Nuclear Power Plant from rate base in its next rate case are approved, as modified by this order to incorporate the clarification suggested by the Commission Staff.

C. Consumers Energy Company’s request to deduct $30 million in transaction costs associated with the sale of the Palisades Nuclear Power Plant to Entergy Nuclear Palisades, LLC, is denied.

D. The requirements of the Commission’s October 24, 2000 order in Case No. U-12505 have been met by the disposition of the proceeds as set forth in this order.

Page 99 U-14992 E. Consumers Energy Company’s proposal to transfer the qualified decommissioning trust funds to Entergy Nuclear Palisades, LLC, in the manner set forth in its application is approved.

Consumers Energy Company shall report its recovery of the $116 million (plus earnings less taxes) in qualified decommissioning trust funds from Entergy Nuclear Palisades, LLC, to the

Commission within 30 days of receipt of the funds.

F. Consumers Energy Company’s request for a certificate of public convenience and necessity pursuant to 1929 PA 69; MCL 460.501 et seq. to provide station power to Entergy

Nuclear Palisades, LLC, is approved, provided Consumers Energy Company submits to the

Commission a consent or franchise from Covert Township as required by MCL 460.503 prior to providing service.

G. The Palisades Nuclear Power Plant is an “eligible facility” pursuant to Section 32 of the

Public Utility Holding Company Act of 2005.

H. Upon the close of the transaction, Consumers Energy Company shall cease collecting decommissioning surcharges for the Palisades Nuclear Power Plant.

I. The requirement in the September 20, 2005 order in Case No. U-14150 that Consumers

Energy Company submit a decommissioning report by March 31, 2007 is suspended until

December 31, 2007. If the proposed transaction is completed, no additional decommissioning reports from Consumers Energy Company shall be required.

J. The tracking mechanism for nuclear operations and maintenance expenses authorized in the

December 22, 2005 order in Case No. U-14347 shall be eliminated at the close of the transaction.

K. The pension and other post employment benefits tracking mechanisms authorized in the

December 22, 2005 order in Case No. U-14347 shall be adjusted to reflect the removal of the

Palisades Nuclear Power Plant assets from Consumers Energy Company’s rate base.

Page 100 U-14992 L. Consumers Energy Company shall bear the cost of any penalties for delayed closing after

March 1, 2007.

M. The requests made by Van Buren County, Covert Public Schools, Covert Township, Lake

Michigan College, Van Buren District Library, Van Buren Intermediate School District, and South

Haven Community Hospital for proceeds from the sale and other economic relief are denied because their requests are beyond the jurisdiction of the Commission.

N. Consumers Energy Company’s request to apply $30 million in transaction proceeds to its payment to Entergy Nuclear Palisades, LLC, to assume responsibility for the Big Rock interim spent fuel storage installation is deferred until the company’s next rate case.

O. The request made by Van Buren County, Covert Public Schools, Covert Township, Lake

Michigan College, Van Buren District Library, Van Buren Intermediate School District, and South

Haven Community Hospital for oral argument before the Commission is denied.

P. The motion to postpone and consolidate this proceeding filed by Van Buren County,

Covert Public Schools, Covert Township, Lake Michigan College, Van Buren District Library,

Van Buren Intermediate School District, and South Haven Community Hospital Local Units and the Michigan Environmental Council and the Public Interest Research Group in Michigan is denied.

Q. Consumers Energy Company shall use 2006 calendar year actual sales data to determine the appropriate equal mills per kilowatt-hour negative surcharge factor to apply to customers’ bills for the remaining months of 2007 and all of 2008 as set forth in the order. Within two weeks of closing, Consumers Energy Company shall file a report in this docket describing the amount of the proceeds and the calculation of the equal mills per kilowatt-hour negative surcharge factor. Any interested person shall file comments regarding the accuracy of the calculation within seven days

Page 101 U-14992 of Consumers Energy Company’s filing. Absent further order of the Commission, Consumers

Energy Company shall implement the negative surcharge in accordance with the methodology approved by this order at the beginning of the first billing cycle that is more than 30 days following the filing of the report regarding the calculation of the equal mills per kilowatt-hour negative surcharge factor.

R. Consumers Energy Company shall report to the Commission on the outcome of litigation with the United States Department of Energy regarding the Palisades Nuclear Power Plant interim spent fuel storage installation issue within 30 days of the issuance of any final determination by a court.

S. Consumers Energy Company shall report to the Commission regarding any future sale or other disposition of the land at the site of its former Big Rock Point Nuclear Plant.

T. Consumers Energy Company shall account for the sale of the Palisades Nuclear Power

Plant in accordance with standards acceptable to the Federal Energy Regulatory Commission.

U. All regulatory approvals granted in this order are expressly conditioned on receipt of letters from duly authorized officers of both Consumers Energy Company and Entergy Nuclear

Palisades, LLC, agreeing to the requirement that Entergy Nuclear Palisades, LLC, commit to provide the Commission with copies of all information submitted to either the Federal Energy

Regulatory Commission or the Nuclear Regulatory Commission by Entergy Nuclear Palisades,

LLC, or Entergy Corporation during the course of the plant’s time in service and the decommissioning period. This reporting obligation applies to information regarding (1) decommissioning of the Palisades Nuclear Power Plant, (2) the spent nuclear fuel stored at the Big Rock Point interim spent fuel storage installations, (3) the decommissioning funds held by Entergy Nuclear Palisades,

LLC, for those two sites, and (4) changes in ownership of either of those sites; including, but not

Page 102 U-14992 limited to, information required by Title 10 of the Code of Federal Regulations, part 20, subpart E, and parts 50.75, 50.82, 51.53, and 51.95. The letters shall be delivered to the Commission’s

Executive Secretary as well as being electronically filed in the Commission’s docket for this proceeding as soon as possible following issuance of this order.

The Commission reserves jurisdiction and may issue further orders as necessary.

Any party desiring to appeal this order must do so in the appropriate court within 30 days after issuance and notice of this order, pursuant to MCL 462.26.

MICHIGAN PUBLIC SERVICE COMMISSION

/s/ J. Peter Lark Chairman

( S E A L)

/s/ Laura Chappelle Commissioner

/s/ Monica Martinez Commissioner

By its action of March 27, 2007.

/s/ Mary Jo Kunkle Its Executive Secretary

Page 103 U-14992 limited to, information required by Title 10 of the Code of Federal Regulations, part 20, subpart E, and parts 50.75, 50.82, 51.53, and 51.95. The letters shall be delivered to the Commission’s

Executive Secretary as well as being electronically filed in the Commission’s docket for this proceeding as soon as possible following issuance of this order.

The Commission reserves jurisdiction and may issue further orders as necessary.

Any party desiring to appeal this order must do so in the appropriate court within 30 days after issuance and notice of this order, pursuant to MCL 462.26.

MICHIGAN PUBLIC SERVICE COMMISSION

______Chairman

______Commissioner

By its action of March 27, 2007.

______Its Executive Secretary

Page 104 U-14992