Michigan PSC Adopts Nonbypassable Capacity Rates Applicable to Retail Suppliers

The Michigan PSC has approved Indiana Michigan Power Company's cost of service based proposal for the creation of a state compensation mechanism to establish the charge applied to alternative retail electric suppliers for capacity provided under the I&M (AEP) Fixed Resource Requirement (FRR), subject a $244,000 reduction in nonbypassable capacity power supply charges and corresponding increase in bypassable non-capacity power supply charges as proposed by Staff.

The adopted state compensation mechanism essentially splits the current I&M power supply charge, which is totally bypassable, into a nonbypassable capacity component and a bypassable non-capacity supply component.

Depending on rate class, and type of charge (volumetric versus demand), generally some 60% to 80% of formerly bypassable supply costs have been made part of the nonbypassable capacity charge (although some rate classes had lower amounts made nonbypassable).

Link to nonbypassable capacity rates and bypassable supply rates adopted by the PSC, starting on page 35

The Commission did find that the capacity rate established in its order shall be reevaluated when I&M files its next general rate case

"The Commission finds that in providing the SCM [state compensation mechanism] as a preferable alternative to the PJM auction clearing price, the FERC intended FRR entities to be compensated based on state ratemaking principles, rather than federal wholesale rates," the PSC said.

"[B]ecause there is no prohibition in the RAA [PJM Reliability Assurance Agreement] against using fully embedded costs, the Commission finds that in setting a SCM, it is appropriate to use fully embedded costs, which align with Michigan ratemaking principles," the PSC said.

"The intervenors proposed setting the capacity rate using the PJM RPM auction clearing price. The Commission agrees with I&M that using the PJM RPM auction clearing price would be inappropriate in light of the fact that I&M is a FRR entity. As discussed by I&M, neither the company's capacity, nor load, was included in the PJM RPM auction price. Therefore, because the RPM auction clearing price does not include I&M's load and capacity, it would be inappropriate to set the company's capacity rate at the RPM pricing rate. In addition, I&M has made long-term investments in its capacity. The RPM auction prices only reflect a short-term price for capacity," the PSC said.

"Competition is one of several goals outlined in the statute, but it does not take precedence over the other Michigan-specific ratemaking principles," the PSC continued.

"In addition, the Commission notes that adoption of I&M's proposed SCM will not end competition in I&M's Michigan service territory. The fact that AESs [alternative electric suppliers] cannot provide energy service to choice customers at a lesser price than I&M does not mean competition does not exist. And, in any event, choice customer enrollments in I&M's Michigan service territory went from zero to the full 10% after the company filed its application with the FERC to establish a cost-based capacity rate," the PSC said.

The PSC also refused to adjust the nonbypassable capacity charge to reflect the margin received by I&M from selling energy formerly used to serve default service customers but which can be sold into the market when such customers switch to competitive supply.

"In reviewing the record, the Commission notes that I&M made the persuasive distinction that OAD [open access distribution] customers are paying for capacity service, not capacity in the literal sense. OAD customers are not paying for depreciation or other operating expenses, and they are not entitled to any ownership interest, legal or equitable, in the property used to provide service. Therefore, the Commission finds that because OAD customers are paying for service, they do not have a legal or equitable claim to more of the OSS [off-system sales] margins," the PSC said.

Commissioner Greg White issued a concurring opinion in which he stated: "I support the majority's decision to adopt Indiana Michigan Power Company's (I&M) cost of service based proposal for the creation of a state compensation mechanism for alternative electric supplier capacity in its Michigan service territory. However, in I&M's next general rate case filing, I would prefer that the company provide alternatives to a cost of service based proposal, including, but not limited to, a market based proposal."

Case No. U-17032