MPSC Case No.: Respondent: Requestor: Answer

MPSC Case No.: U-16892-R Respondent: K. Krishnamurthy Requestor: MEC-1 Question No.: MEC/DE-1.7 Page: 1 of 1 Question: Refer to Exhibit A-3. Explain why total system fuel costs (in $/MMBtu)

were 6.6% higher than planned while total system fossil fuel costs increased 1.2% and nuclear fuel costs decreased 5.2%.

Answer: Please refer to Exhibit A-3 in my Direct Testimony in this Case and the

Table below.

As shown in the Table below for 2012 i) The Actual Total System - Fossil fuel cost was ₵276.7/MMBtu,

which was 1.2% above the PSCR PLAN Total System - Fossil fuel cost of ₵273.5/MMBtu.

ii) The Actual Nuclear fuel cost was ₵59.7/MMBtu, which was 5.2% below the PSCR PLAN Nuclear fuel cost of ₵63.0/MMBtu.

iii) The Actual Total System - Fossil fuel consumption (353,873,543 MBTU) was down 1.5% from the PSCR PLAN Total System - Fossil fuel consumption (359,153,837 MBTU) while the Actual Nuclear fuel consumption (55,728,746 MBTU) was down 36.8% from the PSCR PLAN Nuclear fuel consumption (88,220,000 MBTU).

iv) The Actual consumption of the significantly lower cost Nuclear fuel was 36.8% lower than PSCR PLAN and comprised a significantly lower percentage (13.6%) of the Actual Total System fuel consumption than the Nuclear fuel percentage (19.7%) of the PSCR PLAN Total System fuel consumption.

v) As a result of the significantly lower Nuclear fuel consumption, the actual Total System fuel cost of ₵247.2/MMBtu was 6.6% higher than the PSCR PLAN Total System fuel cost of ₵232.0/MMBtu.

Line (a) (b) (c) (d) (e) (f) (g) (h)

No.

1

2 PERCENTAGE DIFFERENCE

3 FUEL TYPE COST, $ MBTU ₵/MMBtu COST, $ MBTU ₵/MMBtu ACTUAL PLAN (₵/MMBtu)4

5 TOTAL SYSTEM - FOSSIL $979,275,906 353,873,543 276.7 $982,303,741 359,153,837 273.5 1.2%

6

7 NUCLEAR $33,284,081 55,728,746 59.7 $55,591,470 88,220,000 63.0 -5.2%

8

9 TOTAL SYSTEM $1,012,559,986 409,602,289 247.2 $1,037,895,211 447,373,837 232.0 6.6%

2012

ACTUAL PSCR PLAN

Direct Testimony of G. E. Sansoucy on Behalf of MEC MPSC Case No. U-16892-R - October 17, 2013 Exhibit: MEC-36 - MEC/DE-1.7 Page 1 of 1

MPSC Docket U-17319, June 10, 2014 Exhibit MEC-70; Source: U-16434-R, U-16892-R, and U-17097 Page 242 of 873

MPSC Case No.: U-16892-R Respondent: R. E. Palmer/Legal Requestor: MEC- 3 Question No.: MEC/DE-3.39e (1) Page: 1 of 1 Question: Refer to Mr. Palmer’s direct testimony at page REP-5 and to discovery

response MEC/DE-1.20. e. For each of the units listed in MEC/DE-1.20, provide the planned and

actual capacity factor for each year from 2008 to 2012. Answer: DTE Electric objects for the reason that the information requested is not

relevant or reasonably calculated to lead to the discovery of admissible evidence in this proceeding. The requested information is for years 2008 to present, which are outside the time frame for this proceeding with the exception of year 2012 which only addressed the reasonableness and prudence of DTE Electric’s power supply costs and expenses for the 2012 PSCR Reconciliation which is the proper subject time frame of this PSCR proceeding under Act 304 pursuant to MCL 460.6j(12). Subject to such objection, and without waiver thereof, DTE Electric would answer as follows:

2012 PSCR Plan 2012 ActualWinter NDC Capacity Factor Capacity Factor

Belle River 1 (DE) 517 72% 71%Belle River 2 (DE) 517 57% 63%Fermi 2 1139 86% 51%Greenwood 785 3% 9%Harbor Beach 103 9% 8%Monroe 1 770 67% 60%Monroe 2 795 47% 51%Monroe 3 783 72% 70%Monroe 4 762 57% 48%River Rouge 2 260 57% 37%River Rouge 3 280 60% 57%St Clair 1 158 50% 45%St Clair 2 162 48% 42%St Clair 3 168 46% 40%St Clair 4 158 49% 48%St Clair 6 320 40% 33%St Clair 7 450 55% 51%Trenton 7 110 47% 63%Trenton 8 100 6% 3%Trenton 9 520 48% 62%

Capacity Factors are based on winter NDC as shown

Direct Testimony of G. E. Sansoucy on Behalf of MEC MPSC Case No. U-16892-R - October 17, 2013 Exhibit: MEC-37 - MEC/DE-3.39e Page 1 of 1


MPSC Case No.: U-16892-R Respondent: R. E. Palmer/Legal Requestor: MEC-1 Question No.: MEC/DE-1.20 Page: 1 of 1 Question: Refer to the direct testimony of Robert Palmer at REP-5, lines 11-19.

Provide the Company’s projected and actual loading factor, for each of its base load coal units, from 2008-2012.

Answer: DTE Electric objects for the reason that a subset of the information

requested is for the years 2008-2011, which are outside the timeframe for this proceeding, and is not relevant to the reasonableness and prudence of DTE Electric’s power supply costs and expenses for the 2012 PSCR Reconciliation, which is the proper subject timeframe of this PSCR plan proceeding under Act 304 pursuant to MCL 460.6j(3) and (4), nor is it reasonably calculated to lead to the discovery of admissible evidence. Subject to such objection, and without waiver thereof, DTE Electric would answer as follows:

2008 Loading Factor

2009 Loading Factor

2010 Loading Factor

2011 Loading Factor

2012 Loading Factor

Plan Actual Plan Actual Plan Actual Plan Actual Plan Actual

Belle River 1 95% 91% 95% 94% 96% 90% 90% 89% 84% 83% Belle River 2 93% 95% 94% 92% 88% 92% 89% 92% 84% 89% Monroe 1 90% 87% 83% 88% 88% 87% 72% 80% 79% 67% Monroe 2 82% 80% 81% 84% 88% 85% 75% 72% 57% 65% Monroe 3 88% 85% 84% 84% 89% 87% 70% 86% 81% 77% Monroe 4 90% 85% 89% 87% 89% 88% 76% 75% 82% 65% River Rouge 2 89% 80% 78% 79% 75% 90% 77% 61% 72% 48% River Rouge 3 75% 80% 68% 78% 79% 80% 77% 68% 68% 64% St Clair 1 66% 69% 68% 61% 62% 64% 61% 56% 57% 53% St Clair 2 64% 67% 65% 59% 60% 63% 59% 55% 55% 51% St Clair 3 62% 69% 63% 56% 57% 55% 56% 53% 52% 51% St Clair 4 66% 65% 70% 62% 65% 63% 63% 53% 59% 58% St Clair 6 73% 73% 78% 75% 78% 72% 72% 66% 61% 63% St Clair 7 79% 81% 76% 77% 73% 75% 74% 73% 66% 67% Trenton HS 64% 73% 71% 73% 62% 65% 48% 49% 34% 49% Trenton 9 76% 76% 78% 75% 73% 82% 64% 71% 58% 70%

Direct Testimony of G. E. Sansoucy on Behalf of MEC MPSC Case No. U-16892-R - October 17, 2013 Exhibit: MEC-38 - MEC/DE-1.20 Page 1 of 1


MPSC Case No.: U-16892-R Respondent: A.P.Wojtowicz/R.E. Palmer/ Legal Requestor: MEC-1 Question No.: MEC/DE-1.6b Page: 1 of 2 Question: Refer to the direct testimony of Karthik Krishnamurthy at KK-7.

b. Identify and describe, for each month of 2012, how higher-than-forecast coal costs affected the dispatch price, dispatch rate, generation, and overall power supply cost (in $/kWh) of each of the Company’s coal-fired power plants.

Answer: DTE Electric objects for the reasons that the request is unduly

burdensome and overly broad. Subject to such objection, and without waiver thereof, DTE Electric would answer as follows:

The dispatch of the Company’s coal units is performed by MISO and is the

result of a combination of interrelating factors. The dispatch price of our coal units can vary depending on the coal blend that is being burned and the associated emission allowance expense. The price would be based off of the replacement fuel cost (of the blend to be burned) and would only be dispatched by MISO if it was economic to do so or if required for system reliability. Each coal blend changes the capacity limit of each unit differently, so the maximum output from any unit can vary. This means the actual generation from coal-fired power plants will change depending on the MISO dispatch and the blend of coal burned. The MISO dispatch rate of the Company’s coal-fired power plants depends on many factors including the wholesale energy market price, the availability of other market participants’ generation, the amount of load, and the various blends of coal. The overall power supply costs were minimized through the economic dispatch of our coal-fired power plants by MISO.

The contribution of higher coal costs on dispatch rate, generation, and overall power supply costs cannot be determined, but only estimated by performing a detailed hourly analysis of the plan and actual data and evaluating and speculating about numerous operating assumptions. Even a detailed hourly post-analysis would be extremely complicated and only result in an estimate because of multiple interacting variables that are not mutually exclusive and consideration in differing sequences could result in different conclusions. The data that would have to be considered would include, at a minimum; load, wholesale energy market prices, generation and assumptions about what generation would have been

Direct Testimony of G. E. Sansoucy on Behalf of MEC MPSC Case No. U-16892-R - October 17, 2013 Exhibit: MEC-39 - MEC/DE-1.6b Page 1 of 2


MPSC Case No.: U-16892-R Respondent: A.P.Wojtowicz/R.E. Palmer/ Legal Requestor: MEC-1 Question No.: MEC/DE-1.6b Page: 2 of 2

under different conditions (i.e., different market prices which can result in different power plant operations and different output capabilities).



MPSC Case No.: U-16892-R Respondent: R. E. Palmer Requestor: MEC-1 Question No.: MEC/DE-1.21b Page: 1 of 1 Question: Refer to Exhibit A-13. b. Explain why actual plant generation was higher than projected at

Greenwood. Answer: During the summer of 2012 the weather was hotter than the weather

normalized projections and that resulted in higher than forecasted loads in the MISO footprint. The price of natural gas delivered to Greenwood was also lower than forecasted. The combination of those events and others within MISO resulted in the increased Greenwood generation.



MPSC Case No.: U-16892-R Respondent: K. Krishnamurthy Requestor: ST-1 Question No.: ST/DE-1.20 Page: 1 of 1 Question: Does DTE Electric have firm capacity and firm supply for Greenwood? If

so, please indicate the volumes for each. Answer: DTE Electric does not have firm capacity and firm supply for natural gas

for the Greenwood generating station.

Direct Testimony of G. E. Sansoucy on Behalf of MEC MPSC Case No. U-16892-R - October 17, 2013 Exhibit: MEC-41 - ST/DE-1.20 Page 1 of 1


DTE Electric Capacity and Generation Analysis

PSCR Plan Year 2012

A B C D E F G H I J K L M N O P Q R S

NDC2012 Net Heat Rate

Planned Outages

Unplanned Outages

2012 Actual On-Line Hours

Total Potential Hours Plan POF

Actual POF

Plan ROF

Actual ROF

Total Planned Outage Factor

Total Actual Outage Factor Availability

2012 Net Generation

Unadjusted Capacity Factor

Adjusted Capacity Factor*

Net Generation based on 80% capacity factor

Net Generation @ 80% CF less Actual

Net Generation**(MW) (Btu/kWh) (Hours) (Hours) (Hours) (Hours) (%) (%) (%) (%) (%) (%) (%) (MWh) (%) (%) (MWh) (MWh)

MCAAA/DE-3.92 Exh. A-14

MEC/DE-3.44

MEC/DE-2.36a Exh. A-14 (Col. D+E+F)

MEC/DE-2.36b

MEC/DE-2.36b

MEC/DE-2.36b

MEC/DE-2.36b

Col. H + Col. J (Col. I + K)

(100% - Col. M) Exh. A-14

(Col. O ÷ (Col. B X Col. G)

(Col. O ÷ (Col. B X Col. F)

(80% X (Col. B X Col. F)) Col. R - Col. O

BRVPP - 1 517 10,235 726 498 7557 8,781 7% 8.3% 8% 6.1% 15.0% 14.4% 85.6% 3,234,146 71.24% 82.78% 3,125,575 BRVPP - 2 517 10,112 2,048 486 6248 8,782 23% 23.4% 9% 5.9% 32.0% 29.3% 70.7% 2,843,761 62.63% 88.04% 2,584,173 MONPP - 1 770 10,454 629 389 7767 8,785 5% 7.2% 9% 4.8% 14.0% 12.0% 88.0% 4,017,056 59.38% 67.17% 4,784,472 767,416 MONPP - 2 795 10,170 913 926 6944 8,783 8% 10.4% 10% 11.4% 18.0% 21.8% 78.2% 3,563,477 51.03% 64.55% 4,416,384 852,907 MONPP - 3 783 9,819 708 8076 8,784 2% 0.1% 10% 9.3% 12.0% 9.4% 90.6% 4,779,578 69.49% 75.58% 5,058,806 279,228 MONPP - 4 762 10,461 2,113 209 6462 8,784 24% 24.2% 7% 2.6% 31.0% 26.8% 73.2% 3,175,316 47.44% 64.49% 3,939,235 763,919 RRGPP - 2 260 10,827 1,722 251 6314 8,287 14% 19.9% 7% 3.2% 21.0% 23.1% 76.9% 852,689 39.57% 51.94% 1,313,312 460,623 RRGPP - 3 280 10,521 177 724 7479 8,380 4% 2.0% 7% 9.7% 11.0% 11.7% 88.3% 1,400,059 59.67% 66.86% 1,675,296 275,237 STCPP - 1 158 11,675 439 157 8187 8,783 3% 5.1% 9% 10.0% 12.0% 15.1% 84.9% 622,647 44.87% 48.13% 1,034,837 412,190 STCPP - 2 162 11,620 864 361 7559 8,784 3% 10.0% 9% 6.3% 12.0% 16.3% 83.7% 600,721 42.21% 49.06% 979,646 378,925 STCPP - 3 168 11,774 1,546 362 6754 8,662 3% 17.5% 8% 5.4% 11.0% 22.9% 77.1% 582,424 40.02% 51.33% 907,738 325,314 STCPP - 4 158 11,559 830 673 7217 8,720 9% 9.6% 12% 8.3% 21.0% 17.9% 82.1% 664,427 48.23% 58.27% 912,229 247,802 STCPP - 6 320 10,973 2,485 999 5303 8,787 22% 28.5% 13% 18.6% 35.0% 47.1% 52.9% 934,541 33.24% 55.07% 1,357,568 423,027 STCPP - 7 450 10,663 757 877 7099 8,733 4% 9.0% 10% 14.9% 14.0% 23.9% 76.1% 2,023,831 51.50% 63.35% 2,555,640 531,809 TCHPP - 9 520 9,674 477 346 7961 8,784 2% 6.7% 16% 4.9% 18.0% 11.6% 88.4% 2,818,892 61.71% 68.09% 3,311,776 492,884 TOTALS 32,113,565 37,956,687 6,211,281

* Adjusted for Actual Outages** Belle River ran at a capacity factor over 80%, as such, no additional generation is estimated.

Direct Testimony of G. E. Sansoucy on Behalf of MEC MPSC Case No. U-16892-R - October 17, 2013 Exhibit: MEC-42 - DTE Electric Capacity and Generation Analysis Page 1 of 1


DTE Electric Fly Ash Analysis

PSCR Plan Year 2012

A B C D E F GNon-REF REF

Fly Ash Produced per Coal Ton - Non

REF Coal

Fly Ash Produced per Coal Ton -

REF Coal

Additional Fly Ash Produced per Coal Ton from REF Coal

REF Coal Consumed in 2012

Additional Fly Ash Produced

Additional Cost of Fly Ash Disposal @ $8.90/ton

(Ton) (Ton) (Ton) (Ton) (Ton) ($)MEC/DE-3-52c MEC/DE-3-52d Col. C - Col. B KK-10, ln 18-20 Col. D X Col E Col. F X $8.90

St. Clair 0.035 0.038 0.003 1,769,118 5,307 47,235 Belle River 0.035 0.038 0.003 1,735,213 5,206 46,330 Monroe 0.048 0.051 0.003 7,438,570 22,316 198,610 TOTALS 10,942,901 32,829 292,175

Direct Testimony of G. E. Sansoucy on Behalf of MEC MPSC Case No. U-16892-R - October 17, 2013 Exhibit: MEC-43 - DTE Electric Fly Ash Analysis Page 1 of 1


MPSC Case No.: U-17097 Respondent: K. Krishnamurthy/Legal Requestor: MEC-1 Question No.: MEC/DE-1.23a Page: 1 of 1 Question: Please state whether the Company or any of its witnesses has any more

information, on any of the following topics related to REF, than was provided in discovery responses and cross-examination in Case U-16892, and discovery and testimony (direct and rebuttal) in Case U-16434-R. For any affirmative answer, describe in detail the new information and produce any documents referenced, reviewed, or relied upon for the answer.

a. Identities of the third party tax credit investors.

Answer: Detroit Edison objects for the reason that the information requested is not

relevant to the reasonableness and prudence of power supply costs and expenses that are the proper subject of PSCR proceedings under Act 304, nor is it reasonably calculated to lead to the discovery of admissible evidence. Subject to such objection, and without waiver thereof, Detroit Edison would answer as follows:

No.

MPSC Case No. U-17097 - March 7, 2013 Exhibit MEC-33; Source: MEC-DE-1.23a-g (Krishnamurthy, Dau), U-17097 Page 1 of 7


MPSC Case No.: U-17097 Respondent: K. Krishnamurthy/Legal Requestor: MEC-1 Question No.: MEC/DE-1.23b Page: 1 of 1 Question: Please state whether the Company or any of its witnesses has any more


b. Purchase price of the interests in the Fuel Companies sold to the third

party tax credit investors. Answer: Detroit Edison objects for the reason that the information requested is not


No.



MPSC Case No.: U-17097 Respondent: K. Krishnamurthy/Legal Requestor: MEC-1 Question No.: MEC/DE-1.23c Page: 1 of 1 Question: Please state whether the Company or any of its witnesses has any more


c. Projected or actual revenues accruing to DTE Energy Company and/or

any subsidiaries from the REF program, including but not limited to tax credit revenues and membership interest sale proceeds.



No.



MPSC Case No.: U-17097 Respondent: J. C. Dau Requestor: MEC-1 Question No.: MEC/DE-1.23d Page: 1 of 1 Question: Please state whether the Company or any of its witnesses has any more


d. Status of the testing at Belle River.

Answer: The current plan is to continue testing Unit 1 in 2013. The testing is

planned around the Unit 1 outage that is currently scheduled for March 8, 2013 through May 23, 2013. The first test period is to begin January 1 to the start of the outage and the second test period is to begin after the outage for a minimum of 90 days. Any outcome as to a decision and or further testing on Unit 1 and/or 2 will be based on the test results.

No documents were relied upon to support the discovery response.



MPSC Case No.: U-17097

Respondent: K. Krishnamurthy

Requestor: MEC-1

Question No.: MEC/DE-1.23e

Page: 1 of 1 Question: Please state whether the Company or any of its witnesses has any more


e. Revision of any agreements with any of the Fuel Companies related to

the REF program. Answer: To the extent that REF testing is continuing at BRPP, the Acceptance

Period Inventory Purchase Agreement is extended under the same Terms & Conditions to accommodate the sale of additional Coal Inventory.



MPSC Case No.: U-17097 Respondent: K. Krishnamurthy/Legal Requestor: MEC-1 Question No.: MEC/DE-1.23f Page: 1 of 1 Question: Please state whether the Company or any of its witnesses has any more


f. Sale of any interests in any of the Fuel Companies.



No.



MPSC Case No.: U-17097

Respondent: K. L. O’Neill

Requestor: MEC-1

Question No.: MEC/DE-1.23g

Page: 1 of 1

Question: Please state whether the Company or any of its witnesses has any more


g. Disclosures to the Commission of any coal inventory sales to the Fuel

Companies. Answer: The Company submitted The Detroit Edison Company’s Affiliate

Transactions Compliance Report for the year 2011 as required by the order issued by the Michigan Public Service Commission dated January 21, 2003 in Case No. U-13502 which can be found at the following url:

http://efile.mpsc.state.mi.us/efile/docs/13502/0041.pdf



9

1 STATE OF MICHIGAN

2 BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

3 In the matter of the application of

The Detroit Edison Company for Case No. U-16434-R

4 reconciliation of its power supply

cost recovery plan for the 12-month Volume No. 2

5 period ending December 31, 2011.

_____________________________________/

6

CROSS-EXAMINATION

7

Proceedings held in the above-entitled matter

8

before Mark D. Eyster, J.D., Administrative Law Judge

9

with Michigan Administrative Hearing System, at the

10

Michigan Public Service Commission, Constitution Hall,

11

525 West Allegan, Nisbet Room, Lansing, Michigan, on

12

Tuesday, January 8, 2013, at 9:03 a.m.

13

APPEARANCES:

14

DAVID MAQUERA, J.D.

15 JON P. CHRISTINIDIS, J.D.

DTE Energy

16 One Energy Plaza, #688WCB

Detroit, Michigan 48226

17

On behalf of The Detroit Edison Company

18

DON L. KESKEY, J.D.

19 Public Law Resource Center, PLLC

139 West Lake Lansing Road, Suite 210

20 East Lansing, Michigan 48823

21 On behalf of Michigan Community Action

Agency Association

22

23

24

25 (Continued)

Metro Court Reporters, Inc. 248.426.9530

MPSC Case No. U-17097 - March 7, 2013 Exhibit MEC-34; Source: Examination of G. Lapplander (Jan. 8, 2013 direct and cross), U-16434-R Page 1 of 190


10

1 APPEARANCES Continued:

2 CHRISTOPHER BZDOK, J.D.

EMERSON HILTON, J.D.

3 Olson, Bzdok & Howard PC

420 East Front Street

4 Traverse City, Michigan 49686

5 On behalf of Michigan Environmental Council

6 DONALD E. ERICKSON,

Assistant Attorney General

7 Special Litigation Division

525 West Ottawa, 6th Floor

8 Lansing, Michigan 48909

9 On behalf of Attorney General Bill Schuette

10 ANNE M. UITVLUGT,


11 6545 Mercantile Way, Suite 15

Lansing, Michigan 48911

12

On behalf of Michigan Public Service

13 Commission Staff

14 - - -

15

16

17

18

19

20

21

22

23 REPORTED BY: Lori Anne Penn (CSR-1315)

24

25




11

1 I N D E X

2 WITNESS: PAGE

3 John C. Dau

4 Testimony Bound In 19

5 Jeffrey A. Jewell


7 Kelly A. Holmes


9 Michael W. Shields


11 James D. Good

12 Direct Examination by Mr. Maquera 83

Cross-Examination by Mr. Keskey 95

13 Cross-Examination by Mr. Bzdok 101

Cross-Examination by Mr. Erickson 103

14

Kevin L. O'Neill

15

Direct Examination by Mr. Maquera 107

16 Cross-Examination by Mr. Keskey 129

17 Gary E. Lapplander

18 Direct Examination by Mr. Maquera 136

Cross-Examination by Mr. Keskey 182

19

20

21

22

23

24

25




MPSC Case No. U-16434-R

January 8, 2013 - Transcript 2

Testimony of Gary E. Lapplander

Other testimony atpp. 12 through 135

removed as unrelated



136

1 JUDGE EYSTER: Briefly. We're off the

2 record.

3 (At10:01 a.m., there was a two-minute recess.)

4 JUDGE EYSTER: Back on the record.

5 MR. MAQUERA: Yes, your Honor. The

6 Company has no redirect for this witness.

7 JUDGE EYSTER: All right. Thank you.

8 You're excused.

9 (The witness was excused.)

10 - - -

11 MR. KESKEY: Your Honor, can we go off

12 the record a minute?

13 JUDGE EYSTER: Sure. We're off the

14 record.

15 (At 10:04 a.m., there was a 38-minute recess.)

16 (Documents marked for identification by the Court

17 Reporter as Exhibit Nos. MCA-12 through MCA-26.)

18 JUDGE EYSTER: We're back on the record.

19 G A R Y E. L A P P L A N D E R

20 was called as a witness on behalf of The Detroit Edison

21 Company and, having been duly sworn to testify the truth,

22 was examined and testified as follows:

23 DIRECT EXAMINATION

24 BY MR. MAQUERA:

25 Q Mr. Lapplander, would you please state your full name and




137

1 business address for the record?

2 A Gary E. Lapplander, One Energy Plaza, Detroit, Michigan

3 48226.

4 Q Mr. Lapplander, did you file or cause to be filed with

5 the Commission a document entitled the Qualifications and

6 Direct Testimony of Gary E. Lapplander, consisting of a

7 cover sheet and 21 pages of questions and answers?

8 A Yes.

9 Q Do you have any changes you wish to make to your direct

10 testimony?

11 A No.

12 Q Is that then the direct testimony that you are adopting

13 today?

14 A Yes.

15 Q And are you sponsoring any exhibits associated with your

16 direct testimony in this case?

17 A Yes.

18 Q For purposes of identification, would that be exhibit, or

19 include Exhibit A-10, consisting of 10 pages; Exhibit

20 A-11, consisting of two pages; and Exhibit A-24,

21 consisting of nine pages?

22 A Yes.

23 Q Were these exhibits prepared by you or for you or at your

24 direction?

25 A Yes.




138

1 Q Do you have any changes to make to any of those three

2 direct exhibits?

3 A No.

4 Q Mr. Lapplander, did you also cause to be filed with the

5 Commission a document entitled the Rebuttal Testimony of

6 Gary E. Lapplander, consisting of a cover sheet and 19

7 pages of questions and answers?

8 A Yes.

9 Q Do you have any changes you wish to make to your rebuttal

10 testimony?

11 A No.

12 Q Is that then the rebuttal testimony that you are adopting

13 today?

14 A Yes.

15 Q Did you sponsor any exhibits associated with your

16 rebuttal testimony in this case?

17 A Yes.

18 Q For purposes of identification, would those exhibits

19 include and be designated as Exhibit A-25, which consists

20 of one page; Exhibit A-26, which consists of one page,

21 Exhibit A-27, consisting of 82 pages; Exhibit A-28,

22 consisting of 61 pages; Exhibit A-29, consisting of one

23 page; Exhibit A-30, consisting of 806 pages; Exhibit

24 A-31, consisting of two pages; Exhibit A-32, consisting

25 of two pages; Exhibit A-33, consisting of one page; and




139

1 Exhibit A-34, consisting of two pages?

2 A Yes.

3 Q Were these exhibits prepared by you or for you or at your

4 direction?

5 A Yes.

6 Q Do you have any changes you wish to make to any of those

7 ten rebuttal exhibits?

8 A No.

9 MR. MAQUERA: Your Honor, Detroit Edison

10 moves to bind into the record the Direct Testimony and

11 Rebuttal Testimony of Gary E. Lapplander, and moves for

12 admission at the end of cross-examination of Exhibits

13 A-10, A-11 and A-24, and A-25, A-26, A-27, A-28, A-29,

14 A-30, A-31, A-32, A-33 and A-34, and tenders

15 Mr. Lapplander for cross-examination.

16 JUDGE EYSTER: O.K. Are there any

17 objections to the testimony being bound into the record?

18 MR. BZDOK: Judge, we have no objection

19 to the testimony. We anticipate some voir dire questions

20 relative to Exhibit A-30. I understand you're holding a

21 ruling on the admission of the exhibits until the end,

22 but I just wanted to put that there as a heads up.

23 JUDGE EYSTER: All right. Hearing no

24 objection, the testimony is bound into the record.

25 (Testimony bound in.)




STATE OF MICHIGAN

BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

In the matter of the Application of ) THE DETROIT EDISON COMPANY for ) Reconciliation of its Power Supply ) Case No. U-16434-R Cost Recovery Plan for the 12-month Period ) Ending December 31, 2011 )

QUALIFICATIONS

AND

DIRECT TESTIMONY

OF

GARY E. LAPPLANDER



THE DETROIT EDISON COMPANY QUALIFICATIONS OF GARY E. LAPPLANDER

Line No.

GEL - 1

Q. Would you please state your name and business address? 1

A. My name is Gary E. Lapplander. I am the Director - Fuel Supply for The Detroit 2

Edison Company (Detroit Edison or the Company). My business address is One 3

Energy Plaza, Detroit, Michigan 48226. I am testifying on behalf of Detroit 4

Edison. 5

6

Q. Would you please summarize your educational background? 7

A. I received a Bachelor of Science Degree in Mechanical Engineering in 1975 from 8

Western Michigan University (WMU). In 1978, I also received from WMU a 9

Bachelor of Science Degree in Automotive Engineering Technology. In 1982, I 10

received a Masters Degree in Business Administration from Wayne State 11

University, with a major in Finance. I have completed many Company-sponsored 12

courses and have attended numerous seminars to further my development with 13

Detroit Edison. 14

15

Q. Would you please describe your professional experience? 16

A. I began working for Detroit Edison in 1975, and for the period 1975 through 1981, I 17

held various positions within the Special Projects Group of the Mechanical 18

Engineering Division of the Generation Engineering Department. My primary 19

responsibilities focused on engineering economic analysis, thermodynamic analysis 20

of power plant cycles, cost/benefit analysis of new capital additions and various 21

regulatory matters. While I was a member of the Special Projects Group, I cross-22

trained with Strategic Planning, the Greenwood Project Management Organization 23

and the Greenwood Production Organization. 24

25



G. E. LAPPLANDER Line U-16434-R No.

GEL- 2

In 1982, I joined the Planning and Development Division of the Fuel Supply 1

Department as a Fuel Resources Engineer. 2

3

In 1985, I undertook a one-year management training assignment as the Assistant 4

Maintenance Engineer at the Company’s River Rouge Power Plant. Upon my 5

return to Fuel Supply in 1986, I was promoted to Senior Fuel Resources Engineer 6

and had responsibility for the preparation of short and long-term fuel plans. A fuel 7

plan considers all aspects of the fuel supply function including fuel consumption, 8

fuel requirements, etc. Fuel plans form the basis for the development of fuel 9

expense and fuel requirement forecasts. In addition, I assisted in, or was 10

responsible for, the initial negotiations for long-term procurement of fuels and 11

related transportation. Also, I was involved with the development of fuel 12

specifications for individual electric power plants operated by the Company. 13

14

In 1991, I was appointed to the position of Director - Planning & Contracts, Fuel 15

Supply. My responsibilities included planning, development and procurement of 16

fossil fuels to meet the Company’s electric generating needs. In addition, I was 17

responsible for the negotiation and administration of the Company’s long-term 18

fossil fuel and related transportation contracts. 19

20

In 1994, I was appointed Director - Power Supply Initiatives/Business Planning. 21

My responsibilities included development and implementation of a management 22

and control system for Power Supply, assessment of utility deregulation and its 23

impact on the electric generating business and the introduction of risk management 24

in Power Supply. 25




GEL- 3

In 1997, I was promoted to Director - Fuel Supply (the title for this position 1

changed from Manager in 2002 in conjunction with the reversal of the naming 2

convention that took place with the merger with Michigan Consolidated Gas 3

Company) the position I currently hold. 4

5

Q. What are your specific responsibilities as Director - Fuel Supply? 6

A. As Director I am responsible for fossil fuel supply and transportation requirements 7

for Detroit Edison’s fossil fueled electric generating assets, as well as the 8

Company’s coal transshipment facility, Midwest Energy Resources Company 9

(MERC). 10

11

Q. Are you a registered professional engineer? 12

A. Yes. I became registered as a professional engineer with the State of Michigan in 13

1980 by examination. 14

15

Q. Are you a member of any professional societies or organizations? 16

A. Yes. I am a member of the American Society of Mechanical Engineers. 17

18

Q. Have you testified or been involved in any hearings before the MPSC while 19

employed with Detroit Edison? 20

A. Yes. I have supplied direct testimony and/or testified in the Steam Heating Fuel 21

Cost Recovery Case No. U-7906, the 1984 and 1986 Power Supply Cost Recovery 22

Reconciliation Case Nos. U-7775-R and U-8291-R, respectively, the 1987, 1988 23

and 2012 Power Supply Cost Recovery Plan Case Nos. U-8578, U-8880 and U-24

16892, respectively, and Main Electric Rate Case Nos. U-8789, U-10102, U-13808, 25




GEL- 4

U-15244 and U-14838. Also, I presented Supplemental and Rebuttal testimony in 1

Case Nos. U-7775-R, U-8020-R and U-16047-R. Furthermore, I assisted in the 2

development of testimony and/or provided support for Company witnesses in other 3

Main Electric Rate and Power Supply Cost Recovery cases. 4



THE DETROIT EDISON COMPANY DIRECT TESTIMONY OF GARY E. LAPPLANDER

Line No.

GEL - 5

Q. Mr. Lapplander, what is the purpose of your testimony in this case? 1

A. The purpose of my testimony is to support both the use of Reduced Emission Fuel 2

(REF or the Project) at various Detroit Edison Power Plants and the computation of 3

the REF Adder and to discuss why the REF business structure complies with the 4

Code of Conduct. 5

6

Q. Are you sponsoring any exhibits? 7

A. Yes. I am sponsoring the following exhibits 8

Exhibit Description 9

A-10 Overview of Reduced Emissions Fuel (REF) Projects 10

A-11 Refined Coal Adder Inputs Calculation Worksheet 11

A-24 REF Transaction: MPSC Code of Conduct 12

13

Q. Please describe Exhibit A-10 Overview of REF Project? 14

A. Exhibit A-10 is a presentation developed in 2012 that provides an overview of the 15

REF Project at the St. Clair (SCPP), Belle River (BRPP) and Monroe (MPP) Power 16

Plants which will assist the parties in understanding the business structure of the 17

REF Project. 18

19

Q. Please explain Exhibit A-24 REF Transactions: Code of Conduct? 20

A. Exhibit A-24 is a presentation explaining the REF projects’ compliance with the 21

MPSC Code of Conduct. 22

23

Q. At which Detroit Edison Plants was REF consumed in 2011? 24

A. In 2011 REF was consumed at St. Clair Units 1-4 & 6, Monroe Units 1-4 and was 25




GEL- 6

being tested at the Belle River Units 1 & 2. 1

2

Q. When did the REF facilities begin operation at Detroit Edison plants? 3

A. The Belle River Fuels Company (BRFC) and St. Clair Fuels Company (SCFC), 4

subsidiaries of DTE Energy Services, placed in service their respective facilities in 5

December 2009. The Monroe Fuels Company (MFC), also a subsidiary of DTE 6

Energy Services, placed their facility in service in November 2011. The facility at 7

Belle River has two production lines, the facility at St. Clair has three production 8

lines and the facility at the Monroe Power Plant (MPP) has two production lines. 9

DTE Energy Resources, Inc, the parent company of the Fuels Companies, has an 10

exclusive license to use Chem-Mod, the unique and proprietary chemical additive 11

technology, at all DTE Energy sites. 12

13

Q. Did BRFC, SCFC or the MFC sell an interest in any of their production lines 14

at the BRPP, SCPP or MPP? 15

A. Yes. In January 2011 a membership interest was sold in the SCFC, the owner of 16

one of the REF production lines at the SCPP. This arrangement allows the SCFC to 17

begin generating tax credits through the production of Refined Coal sold to Detroit 18

Edison. In November 2011, a membership interest was sold in the MFC, the owner 19

of one of the REF production lines at the Monroe Power Plant. This arrangement 20

similarly allows the MFC to begin generating tax credits through the sale of 21

Refined Coal sold to Detroit Edison. 22

23

Q. What is the status of REF consumption at the Belle River, Monroe and St. 24

Clair Power Plants? 25




GEL- 7

A. REF is being consumed at the St. Clair Power Plant Units 1 through 4, and 6, with a 1

targeted annual REF consumption of approximately 1.8 million tons. REF is 2

continuing to be tested at the BRPP, although the BRFC equipment is considered 3

“in-service” for purposes of qualification for Section 45 production tax credits. The 4

Monroe Power Plant began consuming REF on November 28, 2011. 5

6

Q. How much REF did the Belle River, St. Clair and Monroe Power Plants 7

consume during 2011? 8

A. The Belle River Plant consumed 4,401,402 tons of coal in 2011 and approximately 9

628,662 tons or 14.3% was REF. The St. Clair Plant consumed approximately 10

1,568,222 tons of REF or 44.6% of its total consumption of 3,519,979 tons of coal. 11

The Monroe Plant consumed 8,504,819 tons of coal in 2011 and approximately 12

712,102 tons or 8.4% was REF. 13

14

Q. What is the price charged to Detroit Edison to purchase REF from the Fuels 15

Companies? 16

A. In 2011, the price charged to Detroit Edison to purchase treated coal, REF, from the 17

Fuels Companies was as follows: 18

At Belle River plant, the price was the same as the cost for coal sold by Detroit 19

Edison to the BRFC. i.e. without the Refined Coal Adder (RCA). At St Clair plant, 20

the price was the same as the cost for coal sold by Detroit Edison to SCFC plus 21

RCA. The RCA is offset by the value of reduced emissions. At the Monroe plant, 22

the price is the same as the costs for coal sold by Detroit Edison to MFC. 23

Additionally, there is a Coal Fee Rate paid to Detroit Edison by MFC for each ton 24

of REF consumed. 25




GEL- 8

Q. What were the amounts for Refined Coal Adder at Belle River and St. Clair? 1

A. In 2011, the SO2 portion of, the Refined Coal Adder (RCA) was as follows: 2

Belle River Power Plant: $0 3

St. Clair Power Plant: $544 4

5

The annual cost of the RCA has no impact on the PSCR costs for the above plants 6

since the value of the RCA is offset by the value of reduced SO2 emissions. 7

8

Q. What was the amount for the Coal Fee Rate at the Monroe Power Plant? 9

A. The total Coal Fee Rate amount received by Detroit Edison from MFC at the 10

Monroe Power Plant in 2011 was $738,806, of which $275,940 was credited to 11

O&M and $462,866 was credited to coal inventory. As described later in my 12

testimony, Detroit Edison retains the value of reduced SO2 emissions, realizes the 13

savings of reduced mercury compliance and coal inventory carrying costs. 14

15

Q. What was the reason for crediting a portion of the Coal Fee Rate at the 16

Monroe Power Plant to O&M Expense? 17

A. The Monroe Power Plant determined that to realize the benefits of REF, certain 18

incremental O&M expenditures would need to be incurred related to REF 19

consumption at Monroe. The credit to O&M of a portion of the Coal Fee Rate 20

provides for reimbursement of the incremental O&M expense incurred at the 21

Monroe Power Plant related to the REF consumption. 22

23




GEL- 9

Q. How is Detroit Edison’s sale of coal to its affiliates, BRFC, SCFC and the MFC 1

(collectively, the Fuels Companies), consistent with both the letter and the 2

intent of the Code of Conduct? 3

A. Shipments of coal for consumption at the BRPP and SCPP will be sold at Detroit 4

Edison’s MERC transshipment facility. All rail shipments of coal for consumption 5

at MPP will be sold FOB mine and all vessel delivered western coal for 6

consumption at MPP will be sold FOB vessel at Detroit Edison’s MERC facility. 7

Notwithstanding these sales, the coal always remains under the supervision and 8

control of Detroit Edison and MERC (no Fuels Company employees are involved in 9

any process other than operation of the Fuels Companies’ separate equipment and 10

facilities) and Detroit Edison’s and MERC’s books and records are maintained 11

separately from the Fuels Companies. Most importantly, Section III.C of the Code 12

of Conduct, as approved in the Commission’s October 29, 2001 Order on Rehearing 13

in Case No. U-12134, provides for sales to affiliates at the higher of fully allocated 14

cost or market price. With respect to fully allocated cost, the price at which Detroit 15

Edison is selling the coal is equal to Detroit Edison’s fully allocated cost, or book 16

cost. The Fuels Companies will simply use the coal to produce REF and sell the 17

REF back to Detroit Edison for consumption at the BRPP, SCPP and MPP and any 18

adjustments to the sale price to reflect any higher market pricing would only serve 19

to increase the resale price to Detroit Edison. Since the asymmetrical pricing 20

provision of the Code of Conduct is intended to prevent Detroit Edison from 21

subsidizing its unregulated affiliates, it is clear that this transaction is consistent 22

with that intent and effectuates the proper outcome. 23

24

In addition, Exhibit A-24 describes how the REF projects’ comply with all aspects 25




GEL- 10

of the MPSC Code of Conduct including providing structural separation, avoiding 1

preferential treatment and avoiding subsidized pricing. 2

3

Q. Why didn’t Detroit Edison construct the REF processing facilities? 4

A. At the time the arrangements between Detroit Edison and SCFC and BRFC were 5

consummated, there were a number of reasons why Detroit Edison’s affiliates, 6

rather than Detroit Edison itself, or an independent third party, designed, 7

constructed, owned and operated the REF processing facilities. First and foremost 8

was the fact that the arrangements provided Detroit Edison a risk free option to help 9

it meet the mercury emission reduction requirements contained in Michigan Rule 10

1503 beginning in 2015. Detroit Edison was not required to make any capital 11

investment to support the REF processing facilities and therefore did not assume 12

any risk that the REF project would not be successful. Detroit Edison also 13

reasonably determined that the tax risks and commitment to an unproven 14

technology at its generating facilities were not appropriate for a regulated utility. 15

16

Q. Why did Detroit Edison select its affiliate for this proposal? 17

A. DTE Energy Services (DTEES), the parent company of both BRFC and SCFC, has 18

experience designing, constructing, and operating the production equipment and 19

was willing to take on the associated risk. At the time the REF facilities were 20

constructed at the Belle River and St. Clair Power Plants, the existing legislation 21

required the facilities to achieve commercial operation (i.e. be in service) by 22

January 1, 2010 and Detroit Edison had only a limited time to pursue alternative 23

processes or suppliers. Further, Detroit Edison was not aware of any other supplier 24

that was willing to make this type of investment at the time the REF project needed 25




GEL- 11

to move forward given the existing legislation. 1

2

In addition, at the time that Detroit Edison entered into discussions with DTEES to 3

supply REF for Belle River Power Plant, DTE Energy Resources, parent of 4

DTEES, was one of only three known licensees for the provision of the proprietary 5

technology and held an exclusive license to use the unique and proprietary chemical 6

additive technology, Chem-Mod, at Detroit Edison sites. 7

8

Q. What are some of the other reasons that Detroit Edison moved forward with 9

this REF project with DTEES? 10

A. It seemed reasonable since DTEES had already reached a similar agreement with 11

the Michigan Public Power Agency (MPPA), a partial owner of the Belle River 12

Power Plant. The MPPA is an unaffiliated entity that negotiated at arms-length 13

with DTEES. The MPPA had no particular incentive to reach an agreement with 14

DTEES as opposed to reaching an agreement with any other unrelated third party. 15

As such, the agreement reached with the MPPA was rightfully considered to 16

represent the market for a business deal of this nature. 17

18

In addition, the DTEES proposal provided the following: 19

(a) Reduction in Detroit Edison’s working capital expense by not carrying coal 20

inventory; 21

(b) Reduction in NOX emission allowance expense; and; 22

(c) PSCR customers will never pay more than the value of the environmental 23

benefits received. 24

25




GEL- 12

Q. Why did Detroit Edison move forward with the Monroe REF project with 1

DTEES? 2

A. DTEES, the parent of the MFC, offered an attractive proposal for siting a REF 3

facility at Monroe. The agreement between Detroit Edison and the MFC provides 4

for a Coal Fee Rate payable to Detroit Edison for each ton of REF purchased. In 5

my opinion, this Coal Fee Rate is economically favorable to Detroit Edison and its 6

customers and is at a level which approximates market. The agreement with MFC 7

further provides for the retention of all environmental benefits by Detroit Edison 8

and a reduction in working capital as a result of the MFC owning a portion of the 9

Monroe Power Plant coal inventory. In addition, as previously stated, DTE Energy 10

Resources, Inc., holds an exclusive license to use the unique and proprietary 11

chemical additive technology, Chem-Mod, at Detroit Edison sites. 12

13

Q. Can you provide details as to how REF has been implemented at the Belle 14

River and St. Clair Power Plants? 15

A. Yes. A number of activities have occurred including the sale of a portion of Detroit 16

Edison’s coal inventory to the BRFC and SCFC at the end of 2009, coal handling 17

and consulting activities have been provided by Detroit Edison to the Fuels 18

Companies and the REF has been produced and sold by the Fuels Companies to 19

Detroit Edison for consumption. In addition, arrangements have been made for 20

environmental indemnity protection and payment for other Detroit Edison services 21

by the Fuels Companies. 22

23

Q. When did Detroit Edison sell a portion of its coal inventory to the Fuels 24

Companies? 25




GEL- 13

A. Detroit Edison initially sold 1.7 million ton of its coal inventory at the BRPP and 1

SCPP in December 2009 for $38.6 million, its book cost of inventory. The BRFC 2

purchased one million tons and the SCFC purchased 700,000 tons. Because all of 3

the coal will ultimately be resold to Detroit Edison as either REF or untreated coal 4

(resold coal), I believe it is appropriate to make this transaction at book cost. 5

Detroit Edison customers will benefit from reduced costs associated with not 6

carrying the relevant fuel inventory on its books. At the end of the 10-year REF 7

consumption period, any remaining coal inventory will be sold back to Detroit 8

Edison at the Fuels Companies’ book cost. Notwithstanding these sales, the coal 9

always remains under the supervision and control of Detroit Edison and MERC (no 10

Fuels Company employees are involved in any process other than operation of the 11

Fuels Companies’ separate equipment and facilities) and Detroit Edison’s and 12

MERC’s books and records are maintained separately from the Fuel Companies’ 13

books and records. 14

15

Q. How do Detroit Edison’s customers benefit from the sale of coal inventory to 16

the Fuels Companies? 17

A. In Detroit Edison's rate case, Case No. U-16472, the 12-month ending historical 18

period was the 12-month period ending December 2009. To project the working 19

capital component of rate base for the forecast period, the starting point was the 20

December 31, 2009 balance sheet values, which reflected the reduction in inventory 21

from the sale to the Fuels Companies. Therefore, the resulting rate base also 22

reflects the coal sale to the Fuels Companies that occurred in December of 2009. 23

Customers are experiencing lower base rates of approximately $4 million due to 24

this sale of Detroit Edison’s coal inventory to the Fuel Companies. 25




GEL- 14

Q. Have there been additional sales of Detroit Edison coal inventory subsequent 1

to the initial sale of 1.7 million tons in December 2009? 2

A. Yes. Detroit Edison has periodically sold coal inventory from the coal yard to 3

BRFC at book cost for continued testing at BRPP. In addition, Detroit Edison sold 4

the SCFC 714,000 tons of inventory at a book cost of $19.6 million in January 5

2011, the date the SCFC sold an interest in their facility. The sale of coal inventory 6

at Monroe is discussed later in this testimony. 7

8

Q. How are the coal handling and consulting activities provided? 9

A. These activities are provided under the Coal Handling and Consulting Agreements 10

between Detroit Edison and the Fuels Companies. 11

12

Q. What are some of Detroit Edison’s duties or obligations under the Coal 13

Handling and Consulting Agreements for the BRPP and SCPP? 14

A. The Coal Handling and Consulting Agreements provide that Detroit Edison will, in 15

exchange for a fee, perform all functions related to the delivery of coal to the BRPP 16

and SCPP. These functions, which Detroit Edison has always performed, cover all 17

fuel procurement, fuel processing and fuel handling activities including 18

consumption forecasting, specification of coal quality, coal purchasing, coal 19

transportation, coal shipment scheduling, receiving and unloading of coal, coal 20

sampling and analysis, coal stockpile management and maintenance, etc. The Fuels 21

companies utilize their own employees for management and operation of their own 22

facilities. The operating employees of Detroit Edison are completely separate from 23

the operating employees of the Fuels Companies. 24

25




GEL- 15

Q. Are the costs related to the functions performed by Detroit Edison under the 1

Coal Handling and Consulting Agreement included in the PSCR expenses? 2

A. No. There is no fuel handling expense whatsoever included in PSCR expense, 3

either fuel handling related to Detroit Edison or its affiliates. Coal handling and 4

consulting services are provided by Detroit Edison at cost to the Fuel Companies to 5

support the processing and delivery of REF to the Belle River & St. Clair Power 6

Plants. The rationale for providing these services at cost is that these services are 7

only supporting the provision of REF feedstock coal to the Belle River and St. Clair 8

Power Plants and these same costs eventually flow back to Detroit Edison. In other 9

words, the costs of these services are a zero-sum proposition with costs charged to 10

the Fuels Companies ultimately flowing back to Detroit Edison as REF is 11

purchased. 12

13

Q. Can you describe the details of BRFC’s and SCFC’s sale of REF to Detroit 14

Edison? 15

A. Yes. After the coal is processed and treated by the Fuels Companies, the REF will 16

be sold and delivered to BRPP and the SCPP for “just in time” consumption. The 17

REF sale transaction will be priced out at the fully allocated cost at which Detroit 18

Edison sold the coal to the Fuels Companies plus an REF adder (the REF adder is 19

waived for Belle River during REF testing). The REF adder will consist of several 20

components: (1) an adjustment amount related to fly ash disposal costs designed to 21

keep Detroit Edison whole for any incremental fly ash disposal costs (beginning in 22

January 2011); (2) an adjustment amount related to fly ash revenue, if applicable 23

(beginning in 2015); (3) an adjustment amount based upon and no greater than 24

Detroit Edison’s reduction in actual SO2 emission allowance expense (beginning in 25




GEL- 16

January 2011); and (4) an adjustment amount based upon Detroit Edison’s 1

reduction in actual mercury compliance expense (beginning in 2015). The latter 2

two adjustments combined are capped at the Fuel Companies’ revenue requirement. 3

4

Q. Can you explain how the REF Adder is calculated for SCPP? 5

A. The SCFC has been invoicing Detroit Edison under the Refined Coal Supply 6

Agreement for REF at the fully allocated cost at which Detroit Edison sold the coal 7

to SCFC plus a Refined Coal Adder since January 2011. This Adder is equal to or 8

lower than Detroit Edison’s Environmental Benefit. To help explain how the Adder 9

is determined I have included, for illustrative purpose, as Exhibit A-11 the 10

September 2011 Refined Coal Adder Inputs Calculation Worksheet. Lines 6-8 on 11

Exhibit A-11, page 1 of 2 show the SO2 benefit of $20.38 and Fly ash benefit of 12

($4,308.33) for September 2011 with line 9 showing the Refined Coal Adder for 13

September 2011 of $(4,287.95). The REF Adder is negative in this instance due to 14

increased fly ash disposal cost. The SO2 portion of the Refined Coal Adder is offset 15

by a reduction in SO2 emission expense. All of the other months, in 2011, were 16

calculated in an identical manner. 17

18

Q. Does the St. Clair Refined Coal Supply Agreement provide for the 19

Environmental Benefit to be capped at an amount equal to the Project 20

Revenue Requirement? 21

A. Yes. The Refined Coal Supply Agreement provides that the Environmental Benefit 22

be capped at an amount equal to the Project Revenue Requirement. For illustrative 23

purpose, refer to Exhibit A-11, lines 10-14 on page 1 of 2, which represents the 24

estimated annualized Environmental Benefit. This estimated value of $(52,173) 25




GEL- 17

(again this is negative due to increased fly ash disposal cost) is only used to 1

compare with SCFC’s Revenue Requirement to determine the Refined Coal Adder 2

as shown on lines 2-5. Line 2 is the estimated annual Environmental Benefit while 3

line 3 is the Revenue Requirement for the Project of $11,112,482. Line 5 compares 4

the Environmental Benefit with the Revenue Requirement to determine if the 5

Environmental Benefit should be capped at an amount equal to the Revenue 6

Requirement. Clearly the Environmental Benefit is lower and the Revenue 7

Requirement has no impact on the calculation of the Refined Coal Adder for 2011. 8

9

Q. What is the value of the Refined Coal Adder SO2 emission benefit for REF 10

consumed at SCPP for 2011? 11

A. The value of the Refined Coal Adder SO2 emission benefit for REF consumed at 12

SCPP for 2011 was $544. This value is the product of the allowance consumption 13

reduction and or allowances not consumed due to REF of 2,174 allowances and the 14

value of $0.25 per allowance. The allowance value of $0.25 per allowance is the 15

actual revenue price realized by the sale of the allowances not consumed as 16

discussed by Company Witness Ms. Wojtowicz. There is no impact on PSCR costs 17

for SCPP since the value of the Refined Coal Adder SO2 benefit is offset by the 18

value of reduced SO2 emissions. As described later in my testimony, Detroit 19

Edison retains the value of reduced emissions for the Monroe REF project. 20

21

Q. Can you summarize the details of the other arrangements? 22

A. Yes. An arrangement has been made for environmental indemnity protection 23

included in the Environmental Indemnity Agreement. Detroit Edison has also 24

entered into a License and Services Agreement where Detroit Edison has agreed to 25




GEL- 18

provide, for a fee, among other things, potable water, sanitary sewer and storm 1

water disposal to the Fuels Companies in order to make certain that Detroit Edison 2

is not subsidizing the Fuels Companies. 3

4

Q. Can you describe the REF arrangement at the Monroe Power Plant? 5

A. Yes. A number of activities have occurred including the sale of a portion of Detroit 6

Edison’s coal inventory to the MFC, coal handling and consulting activities have 7

been provided by Detroit Edison to the MFC, and the REF has been produced and 8

sold by the MFC to Detroit Edison for consumption. Unlike the arrangement 9

Detroit Edison has with the BRFC and SCFC where the price of REF is the fully 10

allocated cost at which Detroit Edison sold the coal to the Fuels Companies plus a 11

Refined Coal Adder, Detroit Edison has negotiated a Coal Fee Rate, payable to 12

Detroit Edison, based on the amount of REF consumed at the Monroe Power Plant. 13

The MFC will sell Detroit Edison refined coal at the fully allocated cost at which 14

Detroit Edison sold the coal to the MFC and MFC will pay a Coal Fee Rate to 15

Detroit Edison for all tons of REF coal purchased by Detroit Edison. Detroit 16

Edison’s PSCR customers will not only receive the benefit of the Coal Fee Rate but 17

also the benefits of reduced working capital from not carrying a portion of the coal 18

inventory, the benefit of reduced SO2 emissions and the benefit of reduced cost of 19

mercury compliance. 20

21

Q. Why is the REF arrangement at the Monroe Power Plant different than the 22

arrangements at the St. Clair and Belle River Power Plants? 23

A. The refined coal production tax credit was enacted by Congress to encourage 24

investment in emissions control technologies prior to the time such technologies 25




GEL- 19

would otherwise be required by law. During 2011, subsequent to the time the 1

arrangements with BRFC and SCFC were negotiated, the IRS issued guidance that 2

certain rules under the Internal Revenue Code should not be applied to transactions 3

that generate targeted tax incentives in a manner inconsistent with the 4

Congressional intent for creating those incentives. My understanding is that this 5

guidance provided that reduced emissions fuel projects no longer had to generate a 6

2-3% internal rate of return to earn the production tax credits. It was this 7

requirement that had prevented the Coal Fee Rate structure from being offered on 8

the arrangements at the St. Clair and Belle River Power Plants. Without this 9

requirement, Detroit Edison was able to negotiate for the Coal Fee Rate structure 10

for REF consumed at the Monroe Power Plant. 11

12

Q. Can you summarize the details of the Refined Coal Supply from the MFC? 13

A. Yes. The MFC will supply REF to Detroit Edison on a “just in time” delivery 14

basis. The MFC’s REF facilities have been constructed on the plant site and are 15

integrated into the Company’s coal delivery process. The cost of the REF will be 16

based upon the fully allocated cost at which Detroit Edison sold the coal to the 17

MFC. 18

19

Q. Can you summarize the Coal Inventory Purchase by the MFC? 20

A. Yes. At closing in November 2011, Detroit Edison sold 250,000 tons of its coal 21

inventories at the plant to the MFC at book cost plus another 48,000 tons of coal-in-22

transit also at book cost for a total of $15.6 million. Subsequently, MFC will take 23

ownership of all coal destined for the Monroe Power Plant, in transit, as it enters the 24

rail car for rail delivered coal and FOB vessel for water born deliveries from 25




GEL- 20

MERC. Notwithstanding these sales, the coal always remains under the supervision 1

and control of Detroit Edison and MERC (no Fuels Company employees are 2

involved in any process other than operation of the Fuels Companies’ separate 3

equipment and facilities) and Detroit Edison’s and MERC’s books and records are 4

maintained separately from MFC’s books and records. MFC will purchase the coal 5

at the same price Detroit Edison pays its coal suppliers and will reimburse Detroit 6

Edison for all transportation costs. Detroit Edison customers will ultimately benefit 7

from reduced costs associated with not carrying the relevant fuel inventory on its 8

books when base rates are reset. At the end of the 10-year REF consumption 9

period, the remaining coal inventory will be resold to Detroit Edison at the MFC’s 10

book cost. 11

12

Q. Can you summarize the details of the other arrangements? 13

A. Yes. The coal handling and consulting services will be provided by Detroit Edison 14

to the MFC to support the processing and delivery of REF to the Monroe Power 15

Plant. These functions, which Detroit Edison has always performed, cover all fuel 16

procurement, fuel processing and fuel handling activities including consumption 17

forecasting, specification of coal quality, coal purchasing, coal transportation, coal 18

shipment scheduling, receiving and unloading of coal, coal sampling and analysis, 19

coal stockpile management and maintenance, etc. As stated previously, the MFC 20

will pay a Coal Fee Rate for these coal handling and consulting services. 21

22

In addition, an arrangement has been made for environmental indemnity protection 23

included in the Environmental Indemnity Agreement. Detroit Edison has also 24

entered into a License and Services Agreement where Detroit Edison has agreed to 25




GEL- 21

provide for a fee, among other things, potable water, sanitary sewer and storm water 1

disposal to the MFC in order to make certain that Detroit Edison is not subsidizing 2

the MFC. 3

4

Q. Are the REF business arrangements at St. Clair and Belle River Power Plants 5

reasonable and prudent? 6

A. Yes. The REF business arrangements allow Detroit Edison customers to receive 7

cost reductions through their base rates. The REF adder will never exceed the 8

environmental benefit realized by the customer. Detroit Edison’s customers benefit 9

without assuming any technology, tax or capital risk. 10

11

Q. Is the REF business arrangement at the Monroe Power Plant reasonable and 12

prudent? 13

A. Yes. The REF business arrangement allows Detroit Edison customers to receive 14

cost reductions through their base rates while PSCR customers realize lower cost 15

through the Coal Fee Rate paid by the MFC to Detroit Edison and the value of 16

reduced SO2 and reduced mercury compliance costs. Detroit Edison’s customers 17

benefit without assuming any technology, tax or capital risk. 18

19

Q. Does this complete your direct testimony? 20

A. Yes, it does. 21



STATE OF MICHIGAN

BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

In the matter of the Application of ) THE DETROIT EDISON COMPANY ) For Reconciliation of its Power ) Case No. U-16434-R Supply Cost Recovery Plan for the ) 12 month- Period Ending ) December 31, 2011 )

REBUTTAL TESTIMONY

OF

GARY E. LAPPLANDER



THE DETROIT EDISON COMPANY REBUTTAL TESTIMONY OF GARY E. LAPPLANDER

Line No.

GEL Rebuttal - 1

Q. Are you the same Gary E. Lapplander who previously offered testimony in this 1

proceeding? 2

A. Yes, I am. 3

4

Q. Mr. Lapplander, what is the purpose of your testimony in this case? 5

A. The purpose of my testimony is to rebut the testimonies of Witness Mr. Crandall on 6

behalf of the Michigan Community Action Agency Association (MCAAA), 7

Witness Mr. McGarry, Sr. on behalf of the Attorney General Bill Schuette (AG) 8

and Witness Mr. Sansoucy on behalf of the Michigan Environmental Council and 9

the Natural Resources Defense Council (MEC), which pertain to Reduced 10

Emissions Fuel (REF). 11

12

Q. Are you sponsoring any rebuttal exhibits? 13

A. Yes. I am sponsoring the following exhibits: 14

Exhibit Description 15

A-25 U-16892 Discovery Question/Response MCAAA/DE 1.52 16

A-26 U-16892 Discovery Question/Response MCAAA/DE 1.25d 17

A-27 U-16892 Discovery Question/Attachment MCAAA/DE 1.30 18

A-28 U-16434-R Discovery Question/Attachment MCAAA/DE 31j 19

A-29 U-16434-R Discovery Question/Attachment MCAAA/DE 45a 20

A-30 Detroit Edison REF Project Agreements 21

A-31 U-16892 Discovery Question/Response MCAAA/DE 1.56 22

A-32 U-16892 Discovery Question/Response MCAAA/DE 1.63a 23

A-33 U-16892 Discovery Question/Response MCAAA/DE 1.81c 24

A-34 U-16434-R Discovery Question/Response MCAAA/DE 52 25




GEL Rebuttal - 2

Q. Were these exhibits prepared or obtained by you or under your direction? 1

A. Yes, they were. 2

3

Q. How would you characterize the above Witnesses testimonies? 4

A. In my opinion, there are underlying common claims to Witness Crandall’s and 5

Witness Sansoucy’s testimonies. Their arguments related to REF include i) 6

production tax credits, ii) the Code of Conduct, iii) the nature of arms-length 7

negotiations, and iv) the nature of Act 304 costs/working capital benefit. 8

9

Q. What is your opinion of the above Witnesses testimonies? 10

A. Each witness mischaracterizes the REF program, and includes inaccurate assertions 11

related to refined coal production tax credits, the code of conduct, working capital 12

benefits, and Detroit Edison’s arms-length negotiation with the Fuels Companies. 13

14

Production Tax Credits 15

Q. What is your interpretation of Witness Crandall’s argument related to the 16

production tax credits? 17

A. Please note that Witness Crandall, in his Direct Testimony, refers to the production 18

tax credits as clean coal tax credits. His Direct Testimony is replete with 19

unjustified assertions that the production tax credit should be granted to Detroit 20

Edison PSCR customers. 21

22

Q. What is your interpretation of Witness Sansoucy’s argument related to the 23

production tax credits? 24

A. Witness Sansoucy states that Detroit Edison “…in these negotiations, made no 25




GEL Rebuttal - 3

attempt… to structure the use of REF in a manner that provides benefits to Detroit 1

Edison customers that are proportional to the benefits flowing to the Fuels 2

Companies and DTE”. He questions, without basis, the arms-length nature of the 3

negotiation between Detroit Edison and the Fuels Companies. 4

5

Q. Do you agree with their assertions and recommendations? 6

A. No. 7

8

Q. What is the nature of your disagreement on the production tax credit grant to 9

Detroit Edison’s PSCR customers? 10

A. Detroit Edison did not and could not have availed itself of the Production Tax 11

Credit because Detroit Edison cannot produce and sell REF to itself and qualify for 12

IRS Section 45 tax credits. Therefore, granting tax credit proceeds to Detroit 13

Edison’s PSCR customers is without any reasoned basis. 14

15

Q. Have you explained Detroit Edison’s position related to the production tax 16

credits? 17

A. Yes. I have explained in my Direct Testimony in this Case, Exhibit A-10, page 2 of 18

10, that the “Refined coal must be sold to an unrelated person to qualify for the tax 19

credit”. 20

21

Additionally, Detroit Edison previously explained that “The Fuel Companies were 22

created to comply with Internal Revenue Code §45(e)(8) – [cited below] -- which 23

requires an entity unrelated to the purchaser of REF to produce and sell REF to the 24

purchaser. If the production and sale of REF was undertaken by Detroit Edison 25




GEL Rebuttal - 4

itself, no tax credits would be allowed. See Exhibit A-25. The requirement to sell 1

REF to an unrelated person set forth in Internal Revenue Code § 45(e)(8)A)(ii)(I) 2

would not be satisfied. 3

4 Internal Revenue Code § 45 Electricity produced from certain renewable 5 resources, etc. 6

(e) Definitions and special rules. 7

For purposes of this section — 8

(8) Refined coal production facilities. 9

(A) Determination of credit amount. In the case of a producer of 10 refined coal, the credit determined under this section (without 11 regard to this paragraph ) for any taxable year shall be increased by 12 an amount equal to $4.375 per ton of qualified refined coal— 13

(i) produced by the taxpayer at a refined coal production 14 facility during the 10-year period beginning on the date the 15 facility was originally placed in service, and 16

(ii) sold by the taxpayer— 17

(I) to an unrelated person, and 18

(II) during such 10-year period and such taxable year.” 19

20

Finally, the Company has repeatedly explained that “Detroit Edison does not 21

qualify for the production tax credits… Only the Fuels Companies qualify for 22

production tax credits.” See Exhibit A-26. 23

24

Q. What are the positions of other utilities that are utilizing or contemplating 25

REF application, related to the production tax credit? 26

A. Please see page 32 of Exhibit A-27 which is an attachment that was included in 27

Detroit Edison’s discovery response to question MCAAA/DE-1.30 in Case No. U-28




GEL Rebuttal - 5

16892. Page 32 of Exhibit A-27 references the Direct Testimony of Mr. Robert K. 1

Neff on behalf of Ameren Missouri, and in his testimony he states, “Section 45 of 2

the Internal Revenue Tax Code provides for federal income tax credits for the 3

production and sale of refined coal from a qualified facility. These credits are 4

available to the third party owners of the refined coal facility. Ameren Missouri 5

will receive a payment from this third party owner for providing property and 6

handling of the coal through the lease and a fee for coal handling and licensing. 7

Ameren Missouri will not receive any tax credits directly from these agreements.” 8

ii) on page 11 of Exhibit A-28 which is an attachment that was included in Detroit 9

Edison’s discovery response to question MCAAA/DE-31j. Page 11, titled 10

“Simplified Clean Coal Plant Development Steps” of Exhibit A-28 which provides 11

a step-wise detail of the REF process by Arthur J. Gallagher & Co. (AJG). Step 3 12

on this slide states that “We sell majority portion of the plant to an investment 13

partner(s)…”. The “plant” referenced herein is their equivalent of the REF Facility 14

and the “investment partner(s)” are other than the Host Utility. Therefore, it 15

appears to me that, as is the case for Detroit Edison, the “Host Utility” does not 16

receive any tax credit and iii) on page 67 of Exhibit A-27 that references the Direct 17

Testimony of Mr. Brian P. Davey on behalf of Duke Energy Indiana, Inc. he states 18

that “…CERT will qualify for the tax credits; in exchange Duke Energy Indiana 19

will have the opportunity to become familiar with and learn about a potential 20

environmental compliance option without incurring any capital expenses…”. 21

Furthermore, on page 44 of this same attachment, Mr. Steven Meehan testifies that 22

“…CERT will use the tax credit to cover all CERT expenses including: cost of 23

capital, consumables, staffing, franchise fee, lease payment and other O&M 24

expenses…” and Mr. Meehan further states on page 46 that “…the risk of 25




GEL Rebuttal - 6

qualifying for the tax credit is strictly borne by CERT…” 1

2

Q. What do you deduce from the above about the position of other utilities related 3

to the production tax credit? 4

A. I have reviewed the above public documents from the above mentioned companies 5

related to REF projects, and it appears to me that like Detroit Edison, these utilities 6

did not receive any production tax credits 7

8

Q. What are your thoughts regarding the ownership structure of the REF Facility 9

at the other utilities? 10

A. The ownership structures appear to be substantially similar to those of DTE 11

Energy’s Fuels Companies. i) Please see page 22 of Exhibit A-27 that references 12

the Direct Testimony of Mr. Mark C. Birk on behalf of Ameren Missouri when he 13

states in regards to CERT’s affiliate BP, the REF provider, that “All equipment and 14

infrastructure will be funded, installed, owned and operated by BP.” ii) Please also 15

see page 45 of Exhibit A-27 that references the Direct Testimony of Mr. Steven 16

Meehan on behalf of Duke Energy Indiana, Inc. where he states “CERT will also 17

pay Duke Energy Indiana a rental fee for the lease spaces…”. iii) In addition, on 18

page 12 of Exhibit A-28 related to the flow chart “Operations After Selling Portion 19

of Plant”, it is implied in this flow chart that the ownership and the daily operations 20

of the 17 deployed REF Facilities is an entity which is not the Host Utility. 21

Specifically, AJG and the financial partners have elected Taggart Global and not 22

the “Host Utility” to be the REF Facility’s a.k.a. Clean Coal Plant’s Plant Manager 23

for the daily operations. 24

25




GEL Rebuttal - 7

Q. What is your opinion based on all of the above discussions related to other 1

utilities? 2

A. Other utilities utilizing REF also do not own nor operate the REF facility and do not 3

get the production tax credits. 4

5

Q. Can you summarize your position related to the production tax credit? 6

A. The eligibility qualifications of the production tax credit and specifically the 7

requirement to sell REF to an unrelated person set forth in the Internal Revenue 8

Code would not be satisfied if Detroit Edison were to own the REF Facility and 9

Detroit Edison could not have availed itself of the tax credits. See Exhibit A-25. 10

Therefore, there is no reasoned basis to impute tax credit revenues to Detroit Edison 11

PSCR customers. 12

13

Additionally, I have explained in my Direct testimony on pages GEL-10, GEL-11, 14

GEL-18 and GEL-19 i) the tax risk and commitment to an unproven technology, 15

such as REF, at Detroit Edison’s generating facilities were not appropriate for a 16

regulated utility ii) DTE Energy Resources held an exclusive license to use the 17

unique and proprietary chemical additive technology, Chem-Mod, at Detroit Edison 18

sites and iii) the reason for the difference in REF arrangement at Monroe Power 19

Plant versus Belle River and St. Clair Power Plant is because of IRS interpretations 20

requiring different contractual structures at different points in the deployment of 21

REF projects at Detroit Edison power plants. As noted elsewhere in this testimony, 22

other utilities that are utilizing REF do not own the REF facility nor do they get the 23

tax credits. While Witness Crandall may not have the benefit of the Company’s 24

repeated explanations of REF, his client MCAAA surely has, so it is perplexing, in 25




GEL Rebuttal - 8

this case, that Witness Crandall would assert, without any substantive support, that 1

“…REF transactions divert significant tax credit revenues from use and 2

transformation of the DECo 304 purchased coal….to unregulated affiliates of 3

DTE…” (page 4, lines 3-5). 4

5

Similarly, Witness Crandall’s computation, that the “..tax credit received for the 6

REF coal burned by DECO in 2011 was $18,413,000” (page 9, line 18) and his 7

testimony on the topic all assume Detroit Edison owns the REF Facility and 8

receives 100% of the tax credit which is in conflict with the Section 45 tax credit 9

provision that requires the taxpayer and/or owner to be unrelated to the consumer of 10

the Refined Coal. This line of argument should be totally rejected once and for all. 11

12

In my opinion, Witness Crandall’s statements concerning tax credit revenues and 13

computations, is misleading, erroneous and without basis. 14

15

Act 304 Costs, Working Capital and Other Benefits 16

Q. Do you agree with MCAAA Witness Crandall’s assertion that “...the REF 17

project does not comport with the requirements contained in Act 304…”? 18

A. No. Detroit Edison is not eligible for the production tax credits and therefore 19

cannot apply the tax credits to “…minimize the cost of fuel to the utility and 20

ultimately the Act 304 customers” as suggested by Witness Crandall on page 7, 21

lines 15-16 of his Direct testimony. In my Direct Testimony in this case, page 22

GEL-8, lines 1-14, I explain the positive impact to Detroit Edison’s Act 304 costs 23

that accrue to its PSCR customers and that the annual cost of the Refined Coal 24

Adder (RCA) has no impact on the PSCR costs for the BRFC and SCFC plants 25




GEL Rebuttal - 9

since the value of the RCA is offset by the value of reduced SO2 emissions. Also, 1

the Coal Fee Rate amount credited to coal inventory at Monroe Power Plant was 2

$462,866, which lowers Detroit Edison’s PSCR costs, in addition to retaining the 3

value of the reduced SO2 emissions, and future savings related to reduced mercury 4

emissions compliance costs. Furthermore, in my Direct Testimony, in this case, 5

page GEL-13, lines 16-25, I explain how Detroit Edison’s customers benefit from 6

the sale of coal inventory to the Fuels Companies. 7

8

Q. Do you agree with Witness Sansoucy’s allegations that the 2009 working 9

capital component of rate base did not include a reduction in fuel inventory? 10

A. No, I do not agree. As I have previously testified in my rebuttal to MCAAA 11

Witness Peloquin in Case No. U-16047-R, page 16 (2 T292-293): “Mr. Peloquin is 12

technically correct that there was no specific reference in Case No. U-16472 to the 13

reduction of Detroit Edison’s working capital for the coal transferred to the REF 14

projects. However, there was a sale of coal inventory that occurred in December 15

2009. The month-over-month change in fuel inventory from November 2009 to 16

December 2009 was a $63.4 million reduction. Included in the $63.4 million 17

reduction was the sale of 1.7 million tons of coal for $38.6 million to the Belle 18

River and St. Clair Fuels Companies. In Detroit Edison’s rate case, Case No. U-19

16472, the 12-month ending historical period was the 12-months ending December 20

2009. To project the working capital component of rate base for the forecast 21

period, the starting point was the December 31, 2009 balance sheet values. The 22

resulting rate base therefore reflects the coal sale to the Fuels Companies in 23

December 2009. Thus, Mr. Peloquin is incorrect in his assertion that Detroit Edison 24

customers are being charged for all Detroit Edison fuel inventory, including any 25




GEL Rebuttal - 10

transfers to REF projects. Customers are experiencing lower base rates due to the 1

sale of coal inventory in December 2009.” This testimony was true, accurate, and 2

remains so now. 3

4

Q. Can you explain the 2011 working capital benefit to the Detroit Edison 5

customers on an equivalent $/ton basis? 6

A. For Belle River: 7

Present annual base rate benefits for Detroit Edison customers are the value of 8

Detroit Edison coal inventory sold to the Fuels Company of $22.72 million. In 9

2011, REF sold by the Fuels Company to Detroit Edison was 628,662 tons. Please 10

refer to Exhibit A-29. Applying the same Rate of Return and Revenue Multiplier, a 11

$3.89 per ton value to the ratepayers is calculated as follows: 12

Rate Base (millions): $22.72M 13

Rate of Return (source Exhibit A-29): 6.586% 14

Income Required (millions): $22.72M x 0.06586 = $1.496M 15

Revenue Multiplier (source Exhibit A-29): 1.6355 16

Revenue Requirement (millions): $1.496M x 1.6355 = $2.447M 17

2011 REF Tonnage Sold by Fuels Company: 628,662 tons 18

Effective rate ($/per ton): $2.447M ÷ 628,662 = $3.89 19

20

For St. Clair: 21

Present annual base rate benefits for Detroit Edison customers are the value of 22

Detroit Edison coal inventory sold to the Fuels Company of $15.9 million. In 2011, 23

REF sold by the Fuels Company to Detroit Edison was 1,568,222 tons. Please refer 24

to Exhibit A-29. Applying the same Rate of Return and Revenue Multiplier, a 25




GEL Rebuttal - 11

$1.09 per ton value to the ratepayers is calculated as follows: 1

Rate Base (millions): $15.90M 2

Rate of Return (source Exhibit A-29): 6.586% 3

Income Required (millions): $15.9M x 0.06586 = $1.0472M 4

Revenue Multiplier (source Exhibit A-29): 1.0472M x 1.6355 = $1.713M 5

2011 REF Tonnage Sold by Fuels Company: 1,568,222 tons 6

Effective rate ($/per ton): $1.713M ÷ 1,568,222 = $1.09 7

8

Q. What do you infer from the above working capital benefit computation? 9

A. In 2011, in addition to the Coal Fee Rate at Monroe of $1.0375 per ton, Detroit 10

Edison customers experienced an equivalent value of $3.89 per ton and $1.09 per 11

ton at Belle River and St. Clair respectively. 12

13

Code of Conduct 14

Q. What is Witness Crandall’s position related to sale and purchase of coal 15

inventories? 16

A. Witness Crandall’s position is that Detroit Edison should be found in violation of 17

the Code of Conduct and that Detroit Edison should be directed to use the higher of 18

the market price or fully allocated costs when selling coal to its affiliates. 19

20

Q. What is the basis for Witness Crandall’s position? 21

A. Witness Crandall argues, incorrectly, that absent this recommended treatment, an 22

affiliate could profit from off-system coal sales that do not inure to the benefit of 23

Detroit Edison customers. Witness Crandall also provides a couple of 24

computational examples. 25




GEL Rebuttal - 12

Q. Do you agree with Witness Crandall’s position? 1

A. No. Witness Crandall’s assertion in this regard is erroneous. In my Direct 2

Testimony, page GEL-9, lines 1-25 and page GEL-10, lines 1-2, I provide an 3

explanation as to how “…adjustments to the sale price to reflect any higher market 4

pricing would only serve to increase the resale price to Detroit Edison.” To avoid 5

increasing the resale price to Detroit Edison and in keeping with the intent of the 6

asymmetrical pricing provision of the Code of Conduct i.e. to prevent Detroit 7

Edison from subsidizing its unregulated affiliates, the offsetting nature of the sale to 8

the Fuels Company and resale to Detroit Edison provides for a mechanism that is 9

consistent with the intent of the Code of Conduct and effectuates a proper outcome. 10

11

Q. Has BRFC sold REF processed coal to MPPA as suggested by MCAAA 12

Witness Crandall? 13

A. No. Detroit Edison purchases all refined coal from the BRFC and resells a portion 14

to MPPA. MPPA never buys refined coal from the BRFC. 15

16

Q. Do you agree with Witness Crandall that “The Fuels Companies could have 17

made sales of Refined Coal in 2011”? 18

A. No. Witness Crandall makes his argument based, in part, upon a perceived 19

imbalance in the tons of Refined Coal sold to Detroit Edison compared to the tons 20

of Feedstock Coal sold to the Fuels Company. He misses the point that not all 21

Feedstock Coal gets refined and that the resale to Detroit Edison consists of a 22

Resold (unrefined) component as well. Specifically, feedstock coal minus refined 23

coal minus resold coal is always equal to the change in inventory. 24

25




GEL Rebuttal - 13

Q. Have the Fuels Companies sold any refined coal to a third party? 1

A. No. 2

3

Q. Who purchases all of the refined coal produced by the Fuels Companies at 4

Belle River, St. Clair and Monroe? 5

A. Detroit Edison. 6

7

Q. What is your opinion with regard to Witness Crandall’s speculation that “The 8

Fuels Companies may be planning to make REF coal sales to unrelated third 9

parties”? 10

A. Nothing could be further from the truth. Witness Crandall has totally misconstrued 11

the 8-K filing statement upon which he bases his conclusion. The REF Facilities 12

reported in the 8-K filing consist of a total of nine (9) REF Facilities, of which two 13

(2) are located at utilities other than Detroit Edison, four (4) are in the process of 14

being relocated and managed separately at utilities other than Detroit Edison and 15

three (3) units are located at Detroit Edison power plants, one of which is being 16

used for testing REF at Belle River. These non-Detroit Edison facilities will not 17

utilize Detroit Edison procured Feedstock Coal. Detroit Edison’s REF Project 18

agreements clearly limit the Fuel Company’s ability to resell REF to third parties 19

(See Exhibit A-30, BRFC Refined Coal Supply Agreement (RCSA) dated 20

December 4, 2009, Section 5.2, BRFC Amendment dated March 1, 2010, Item 5, 21

SCFC RCSA dated December 18, 2009, Section 5.2 and MFC RCSA dated August 22

21, 2011, Section 5.3). As outlined in the aforementioned Exhibit A-30, they would 23

need Detroit Edison’s consent to sell REF coal to third parties. For Detroit Edison 24

to provide consent to sell REF coal to a third party by the Fuels Company, Detroit 25




GEL Rebuttal - 14

Edison would require that the original sale of Feedstock coal meet the asymmetrical 1

pricing guideline included in the Code of Conduct and any discussions of a profit 2

motive is simply meritless. 3

4

Arms-Length Transaction 5

Q. Does MCAAA Witness Crandall allege a lack of an arms-length transaction for 6

the REF Projects? 7

A. Yes, at page 7 of his testimony. 8

9

Q. Do you agree with MCAAA’s allegations asserting a lack of an arms-length 10

transaction for the REF Project? 11

A. No. In fact, Detroit Edison negotiated at arms-length with its affiliate and I have 12

repeatedly testified that this was the case. I have explained in my Direct Testimony 13

in this Case the reasons as to why Detroit Edison did not construct the REF 14

processing facilities and the reasons why Detroit Edison selected its affiliate for this 15

proposal. Additionally, I have also provided responses to Discovery Requests in 16

this Case and in cross-examination in Case No. U-16892 that the witnesses should 17

reference to compare Detroit Edison’s benefits in comparison to other utilities. 18

Those reasons were all but ignored by Witness Crandall and Witness Sansoucy. 19

20

Q. Did Detroit Edison customers derive any benefits from the REF transaction 21

with the Fuels Companies during 2011? 22

A. Yes. 23

24

Q. How do the benefits to Detroit Edison’s customers compare with other similar 25




GEL Rebuttal - 15

REF projects at other utilities? 1

A. Detroit Edison’s negotiated benefits were equivalent, if not better than, similar REF 2

projects elsewhere. 3

This point is proven in Exhibits A-27, A-28 and A-31, which is summarized below. 4

Duke Energy Indiana: 5

Pages 30 and 31 of Exhibit A-27 illustrate Duke Energy Indiana’s estimated net 6

benefit associated with refined coal supplier CERT. The net benefit stated was 7

approximately $5.0 million and the coal consumption was approximately 12.0 8

million tons. This computes to approximately $0.42 per net ton net benefit that 9

would be credited to the Duke Energy Indiana’s retail customer via their equivalent 10

PSCR methodology. 11

12

Arthur J. Gallagher & Co: 13

Exhibit A-28 is a presentation from Arthur J. Gallagher & Co. (AJG) detailing their 14

refined coal process, (referenced as “Clean Coal Production Process”). Pages 19 15

and 20 of Exhibit A-28 provide an illustration of the components of the $6.40 16

estimated tax credit subsidy. AJG estimates that in 2012 the average Material and 17

Operating Costs for their 17 deployed projects was $2.27/ton. On page 20, AJG 18

estimates that the average discount to the Host Utility for their 17 deployed projects 19

after-tax is $0.45/ton. This would imply, at a 40% tax rate, a discount to the Utility 20

of $0.75/ton pre-tax discount. 21

22

Arthur J. Gallagher & Co: 23

Exhibit A-31 reflects an unsolicited offer received from AJ Gallagher Coal, Inc. 24

who received permission from DTE Energy, Inc. to submit the offer for REF at 25




GEL Rebuttal - 16

River Rouge Plant. The offer was for Detroit Edison to receive a net $0.50 per ton 1

for each ton of refined coal produced and sold to Detroit Edison. This $0.50 per ton 2

is based on $0.25 per ton Site License payment and a $0.25 per ton of discount to 3

the purchase price for the refined coal. 4

5

Q. How do the benefits to Detroit Edison’s customers compare with the REF 6

values to utilities described above? 7

A. In comparison, Detroit Edison’s Monroe Power Plant receives from the Fuels 8

Company a discount (Coal Fee Rate) of $1.0375 per ton for the first seven million 9

tons received annually and $1.50 per ton for each ton received above the seven 10

million ton level. From review of public documents I described above, I conclude 11

that Detroit Edison negotiated a favorable discount with the Fuels Companies, 12

compared to the other utilities mentioned above with their refined coal suppliers. In 13

addition, Detroit Edison customers receive working capital benefits through base 14

rates now and these benefits will increase as Detroit Edison base rates are set in the 15

future. In 2011, the benefit per ton of REF to Detroit Edison ratepayers related to 16

Detroit Edison sale of coal inventory to the Fuels Companies at SCPP was $1.09 17

per ton and at BRPP it was $3.89 per ton. 18

19

Q. What conclusion do you draw from your discussion above? 20

A. Based on the analysis presented above, a reasonable person would conclude that 21

Detroit Edison has negotiated at arms-length with the Fuels Companies. It is also 22

clear that within the constraints of the tax regulations, and the other reasonable 23

considerations I have previously described, Detroit Edison has ensured that the REF 24

projects minimize customers’ rates. Absent the REF projects, PSCR and total rates 25




GEL Rebuttal - 17

would be higher. 1

2

Other Miscellaneous Issues 3

Q. Can you clarify MEC Witness Sansoucy’s Direct Testimony page 15, lines 10-4

11 when he states that “Mr. Lapplander later tried to revise his number 5

upward during cross examination”? 6

A. Yes. I did revise the REF Benefit for Detroit Edison’s customers to $160 - $165 7

million (Case No. U-16892 (2 T176). As I stated in my cross examination, I 8

identified that the total customer benefit is $140 million which included a $20 9

million reduction to account for the possibility of adverse operational impacts at 10

Monroe. I then indicated that during the first six months of operation, there was no 11

impact whatsoever on plant performance and that the $20M reduction should be 12

added to the $140 million benefit. Therefore, the total benefit to the customer 13

should be $160 million. 14

15

Q. Do you agree with AG Witness McGarry’s statement, “I conclude that the 16

Commission should disallow the Company from including REF project costs in 17

this case…” (page MJM-9, lines 15-16)? 18

A. No, I do not agree because there are no net REF Project costs charged to Detroit 19

Edison PSCR customers in this Case. Please see Exhibit A-32 in which the 20

Company states in pertinent part that “...At SCPP...the REF adder on each ton of 21

REF coal purchased is equivalent to and entirely offset by reduced emissions 22

allowance costs. There is no increase in PSCR costs…” Similarly, the Company 23

states for St. Clair “the REF Adder is equal to reduced emissions costs from the use 24

of REF, resulting in no net increase in PSCR costs…” See Exhibit A-33. 25




GEL Rebuttal - 18

1

Finally, in 2011, the REF Adder was $544. See Exhibit A-34. In this case, Witness 2

Wojtowicz explains the offset to the REF Adder is a $544 reduction in emission 3

allowance expense in her Direct Testimony at page APW-13, lines 14-25, and page 4

APW-14, lines 1-5. 5

6

Q. What is your opinion of AG Witness McGarry’s statement that “The company 7

has not provided information regarding to what extent the REF Adder will 8

actually reduce SO2 and NOx emissions”? 9

A. As explained in my Direct Testimony on page GEL-11, lines 19-24, page GEL-18, 10

lines 16-20 and Exhibit A-10 page 3 of 10, the consumption of REF causes a 11

reduction in SO2 and NOx emissions and mercury compliance costs beginning in 12

2015. The REF Coal Adder is a computation that partly determines Detroit 13

Edison’s Environmental benefits, which includes Detroit Edison’s SO2 Benefit. 14

Please see Exhibit A-34 for the computation of the Refined Coal Adder. 15

16

Q. What is your opinion of MCAAA Witness Crandall’s statement that “DECo 17

has not revealed the transportation (capital) costs, and unloading and handling 18

expenses incurred after receipt of the fuel, that it is incurring through its 19

arrangements and transactions with the affiliated fuel companies…”? 20

A. As stated in my Direct Testimony in this Case, page GEL-15 lines 1-12, “There is 21

no fuel handling expense whatsoever included in PSCR expense…”. Fuel handling 22

costs with and without REF are the same, are not part of the PSCR, and hence 23

Witness Crandall’s statement above is without basis should be ignored. 24

25




GEL Rebuttal - 19

Q. What conclusions do you draw from your commentary above? 1

A. Based on the analysis presented above, Detroit Edison has negotiated a reasonable 2

and prudent arrangement for REF at its facilities and all of the recommendations, 3

criticisms and disallowances proposed by Witnesses McGarry, Crandall and 4

Sansoucy should be rejected. 5

6

Q. Does this complete your rebuttal testimony? 7

A. Yes, it does. 8



182

1 JUDGE EYSTER: Cross? Mr. Keskey.

2 CROSS-EXAMINATION

3 BY MR. KESKEY:

4 Q Good morning, Mr. Lapplander.

5 A Good morning.

6 Q Let me turn first to the Exhibit MCAAA-12 which has been

7 identified, and that incorporates several discovery

8 responses by yourself as indicated on the front cover of

9 that exhibit. And if we take a look at the first

10 response, which ends with Question No. DE-11 and has an

11 attachment chart, could you explain what that chart

12 demonstrates?

13 A It's an organizational chart basically depicting the org

14 structure of the various REF facilities.

15 Q And this shows the corporate structure comprising the

16 various fuel companies and then also, as you go up the

17 chart, the affiliates of DTE that own or control or

18 supervise those fuel companies; is that right?

19 A That is correct.

20 Q Pardon?


22 Q Now, first of all, if we were to go top down, first of

23 all, DTE Energy Company is at the top; is that right?

24 A Correct.

25 Q And that is the holding company that owns all the, all of




183

1 the affiliates, including Detroit Edison and the fuel

2 companies; is that right?

3 A Correct.

4 Q And then you have Detroit Edison off to the side. And

5 then the next one down, you have DTE Energy Resources,

6 LLC; do you see that?

7 A Yes.

8 Q And then below that you have DTE Energy Services, Inc.;

9 do you see that?

10 A Yes.

11 Q And below that you have DTE REF Holdings, LLC?

12 A Correct.

13 Q And then you have the holding companies -- I mean the

14 fuel companies?

15 A Correct.

16 Q Now, are any of these subsidiaries that are on this tree

17 new affiliates since the fuel companies were established?

18 A I don't believe so.

19 Q Well, let me ask you specifically about DTE REF Holdings,

20 LLC; has that always been in existence?

21 A Well, when you say always been in existence, I mean none

22 of these have always been in existence, but when we

23 originally, when the Energy Services or DTE REF Holdings

24 originally constructed the Belle River Fuels Company

25 facility, it appears that subsequent to that they have,




184

1 if you want to call reclassified one of those production

2 lines from the Belle River Fuels Company to the Belle

3 River REF No. 2, LLC. So if that's what you mean by

4 subsequent to the creation of the fuels company, then

5 yes, these are the one, two, three, four of the boxes at

6 the bottom were created, to my knowledge, subsequent to

7 the creation of the various fuels companies.

8 Q Well, I guess to shorten this, do you know when each of

9 the affiliates that are immediately under DTE Energy

10 Company were formed, and I'm specifically -- let's first

11 say DTE Energy Resources?

12 A I do not.

13 Q How about DTE Energy Service below that?

14 A I do not.

15 Q And below that, DTE REF Holdings?

16 A I do not.

17 Q O.K. Do you know whether those affiliates were in

18 existence before the REF affiliates that are listed at

19 the bottom of the chart?

20 A DTE Energy Resources was in existence, and I believe DTE

21 Energy Services was also in existence.

22 Q And so DTE REF Holdings is a rather new affiliate, is it?

23 A I do not know when that was created.

24 Q Was it created after the creation of the fuel companies?

25 A I do not know.




185

1 Q O.K. Now, with respect to the fuel companies, would it

2 be correct that in approximately 2009, that the fuel

3 companies altogether had about five different sets of REF

4 facilities, I suppose we could call them machines?

5 A That's correct.

6 Q And is it correct that presently there are nine, or are

7 there more?

8 A There are five, as you referred to, that were in service

9 in 2009 at Belle River and St. Clair, there were two that

10 were placed in service in 2011 at Monroe, and as shown in

11 your proposed Exhibit MCAAA-20, on page 14 of that, it's

12 maybe three pages in, but page 14 it shows their REF

13 Emission Fuel, and it shows the location of Michigan,

14 Oklahoma and Illinois, so I'm presuming that there were

15 two other facilities built, one in Oklahoma, one in

16 Illinois, so that would be the total of nine.

17 Q So the DTE affiliates are operating REF facilities in now

18 three states instead of just Michigan; is that right?

19 A That's my understanding, yes.

20 Q And in fact, their various SEC filings would indicate

21 that DTE Energy and its affiliates are actively marketing

22 the REF process and program as a new market for DTE

23 Energy?

24 A I believe that's a fair characterization.

25 Q In other words, you would seek to add additional REF




186

1 facilities if you can obtain contracts with other

2 utilities or other companies that might want those

3 services?

4 A That is not true.

5 Q I mean I'm talking about DTE Energy?

6 A That's not true.

7 Q Why is that?

8 A IRS tax law said that -- in 2009, the IRS tax law said

9 these machines had to be in service, producing refined

10 coal at the end of 2009; that was subsequently extended

11 to the end of 2011. So it is my understanding that those

12 entities who have refined coal facilities that have been

13 defined as placed in service by the end of '011, that

14 caps the total number of REF facilities that then can be

15 used to produce refined coal. So DTE Energy can't, to my

16 knowledge, unless the IRS extends this again, and I have

17 no knowledge of that, they can't go and place a new

18 facility at another utility because the period has

19 expired for qualifying additional REF machine.

20 Q And now --

21 JUDGE EYSTER: Just a moment.

22 Mr. Lapplander, are you a tax attorney?

23 A I am not.

24 JUDGE EYSTER: Who's advising you on

25 this?




187

1 A Well, I talked to Brian Wheeler, one of our tax counsels.

2 JUDGE EYSTER: Who does he work for?

3 A He's a DTE Energy employee.

4 JUDGE EYSTER: DTE Energy. O.K.

5 A I think he reports up through Bruce Peterson, who's the

6 general counsel.

7 JUDGE EYSTER: So that's the person that

8 you've sought advice from with regards to the tax laws

9 and the implications that run from that with regards to

10 credits and --

11 A A lot of my knowledge has come through discussions with

12 him, yes.

13 JUDGE EYSTER: O.K.

14 A But as it relates to in-service dates, that's just

15 general knowledge in reading some of the tax code myself

16 and just general knowledge I pick up along the way.

17 Q (By Mr. Keskey): Well, as far as your general knowledge,

18 and not asking you for a legal opinion, is it your

19 understanding that the number of REF facilities or

20 machines are capped for DTE Energy and its affiliates at

21 eleven presently, or can they put in additional machines

22 at existing sites, you know, where they're, in the three

23 states that they're in?

24 A Currently it's capped at nine, which would be two at

25 Belle River, three at St. Clair for five, two at Monroe




188

1 for seven, and then they have one facility in Oklahoma

2 and one in, what did I say, Illinois, so that would be

3 nine machines. And I think the 10K and different

4 documents refer to nine machines. So I believe it's

5 capped at nine.

6 JUDGE EYSTER: Excuse me. Just so we're

7 clear, when you guys are saying machines, you're talking

8 about the entire production line? Is that what you mean

9 by machine?

10 A My understanding is that, for example, at Belle River,

11 there are two, we call them pug mills, they're like a

12 cement mixer, we put coal in, they have the Mersorb and

13 S-Sorb, which are the two proprietary chemicals for the

14 Chem-Mod process, and it mixes the three together, and

15 then we then put it on a conveyer, deliver it to the

16 plant. That pug mill and maybe some of the surrounding

17 machinery is defined as, if you will, a qualified

18 facility for tax purposes. So there's two of those pug

19 mills at Belle River, so there's two production lines, if

20 you will, that are qualified under the IRS.

21 JUDGE EYSTER: So is there something that

22 those two pug mills share? Because I guess I had

23 envisioned this being two separate units. Mix pug mill I

24 guess what you're calling it, and some conveyer belts

25 basically. Is there something else?




189

1 A Well, there's a common facility.

2 JUDGE EYSTER: Which is?

3 A Well, it's a structure just say that houses or encloses

4 the pug mills.


6 A You've got conveyors basically coming in, conveyors

7 leaving this housing, if you will, the building, there's

8 two pug mills inside. There's also, say, a silo that

9 would store the CKD, which is cement kiln dust, and then

10 there's probably some, for Mersorb, it's a liquid, some

11 tanks and various piping and what have you, so that would

12 be the entire, if you will, facility that's on a

13 footprint of approximately three acres at our power

14 plant. But within the building itself at Belle River,

15 there are two pug mills where you'd say there's two REF

16 production lines per se that are individually qualified

17 under the IRS tax code.

18 JUDGE EYSTER: O.K. So then the rest of

19 the equipment is shared between the two mills?

20 A Correct.

21 JUDGE EYSTER: But that mill is what

22 defines production line --

23 A That's my understanding.

24 JUDGE EYSTER: -- for tax purposes?

25 A That's my understanding, correct.




190

1 JUDGE EYSTER: O.K. Mr. Keskey.

2 Q (By Mr. Keskey): Mr. Lapplander, let me turn your

3 attention to your Exhibit A-10, page 4.

4 JUDGE EYSTER: Well, just a moment.

5 Before we leave this exhibit, what years did the -- when

6 were the facilities built at Belle River?

7 A They were built during 2009 and were placed in service in

8 December --

9 JUDGE EYSTER: And that's --

10 A -- 2009.

11 JUDGE EYSTER: And that's two production

12 lines?

13 A Correct.

14 JUDGE EYSTER: And when was the contract

15 signed for the production of REF?

16 A The, for example, in Exhibit A-30, the Refined Coal

17 Supply Agreement was executed on December 4, 2009; but I

18 would add that for Belle River, the Site License and

19 Service Agreement was executed or effective August 24,

20 2009, which is on or about the date construction started.

21 So the Site License and Service Agreement basically

22 allows them permission to be on our property.

23 JUDGE EYSTER: Is that one of your

24 exhibits, the Site License and whatever that contract you

25 just referred to was?




191

1 A Yes. It's the Site License and Service Agreement for

2 Belle River begins on page 117 of 806.

3 JUDGE EYSTER: And that ends at?

4 A Most of these reference the expiration date of the

5 Refined Coal Supply Agreement, so in this case, it's

6 probably ten years after the December '09.

7 JUDGE EYSTER: No, no, sorry. That

8 agreement ends on what page?

9 A I'm sorry?

10 JUDGE EYSTER: Is that page 151 --

11 A For?

12 JUDGE EYSTER: -- of 806?

13 A You mean the Site License and Service Agreement?

14 JUDGE EYSTER: The License and Services

15 Agreement, yes.

16 A Starts on page 117.

17 JUDGE EYSTER: And ends at what page?

18 A Oh, I'm sorry.

19 JUDGE EYSTER: There's a signature page

20 of some sort at page 150 and 151.

21 A Then there's multiple exhibits to that.

22 JUDGE EYSTER: O.K. Can you tell me what

23 the signature page is at 150-151?

24 A Signature page is 151, correct.

25 JUDGE EYSTER: Who signed that?




192

1 A Steve Kermis, who's president of Detroit Edison, David

2 Walters, who is a representative of the MPPA, and David

3 Ruud, who's president of Belle River Fuels Company.

4 JUDGE EYSTER: When was that signed, do

5 you know?

6 A I'm not sure.

7 JUDGE EYSTER: This is your exhibit,

8 right?

9 A Correct.

10 JUDGE EYSTER: Do you know if there's any

11 dates on it? I don't see any dates.

12 A I don't. I'm not sure of the exact date that it was

13 executed.

14 JUDGE EYSTER: It says reviewed by legal.

15 Do you know who that is? There's some initials there?

16 A I believe that's Frank Stellingworth.

17 JUDGE EYSTER: Do you know that, or are

18 you just taking a guess?

19 A Frank Stellingworth was the legal counsel who reviewed

20 these documents.

21 JUDGE EYSTER: And how do you know that?

22 A Because we worked -- I worked hand-in-hand with Frank

23 when we were going through this process.

24 JUDGE EYSTER: O.K. And you did not sign

25 these documents?




193

1 A I did not sign these documents.

2 JUDGE EYSTER: Do the fuels companies pay

3 rent?

4 A Yes.

5 JUDGE EYSTER: What's included in that?

6 A As part of the Site License and Service Agreement, when

7 we first executed the agreement, the, according to our

8 real estate and rights-of-way folks, a market rate for

9 leasing property, and their footprint is approximately

10 three acres, the lease rate was $5,000 an acre, and

11 therefore they're paying as part of the Site License and

12 Service Fee on an annual basis $15,000 a year to lease

13 our property. Also part of --

14 JUDGE EYSTER: Where is that included in

15 the contract?

16 A I believe there is a, somewhere in here there is probably

17 a redacted -- it's on page 134. It's not. On page 134,

18 Section 9.2(a), $60,000 paid in equal monthly

19 installments.

20 JUDGE EYSTER: O.K. Page 134.

21 A Section 9.2(a), fourth line down.

22 JUDGE EYSTER: O.K. So that is for -- so

23 there's the $60,000 annual charge. And then are there

24 utilities and services separate from that?

25 A The electric service is separately metered.




194


2 A But included in the 60, we've got potable water, we've

3 got service water, sewage, fire fighting water, and the

4 disposal of storm water and wash-down, those services

5 we've estimated at approximately $30,000. We have the

6 lease of three acres at $5,000, which is 15, the total of

7 that is $45,000, and then we increased it by --

8 JUDGE EYSTER: Wait, wait, wait. How do

9 you get to a total of 45?

10 A Well, potable water we have as an estimate of $5,000;

11 service water, $5,000; sewage, 5,000; fire fighting

12 water, 2,500; disposal of storm water and wash-down,

13 12,500. Those sum up to $30,000.

14 JUDGE EYSTER: O.K. So if you have

15 $30,000 for water.

16 A 15,000 for the three acres of lease at a market rate of

17 5,000 per acre, that's 15,000. The sum of those two is

18 45,000. And then we increased that by 33 percent, or

19 15,000, in an attempt to eliminate any hint of

20 subsidization of the affiliate, and reflecting that we're

21 estimating what these costs are, and we set the Site

22 License and Service Fee at $60,000 a year.

23 JUDGE EYSTER: O.K. And the electric is

24 metered separately?

25 A Yes.




195

1 JUDGE EYSTER: Any property tax

2 consequences that you have?

3 A I'm sorry?

4 JUDGE EYSTER: Property tax.

5 A Well, I'll explain. In MEC Exhibit 12 in this case,

6 U-16434-R, that is the St. Clair Fuel Company revenue

7 requirement forecast for 2012, and in there it shows as a

8 line item utilities of $300,000. So the fuel company is

9 estimating their utility costs, which are all metered

10 separate, for 300,000. There's a line item in here for

11 site license and property tax, and it's 164,000. So

12 you've got roughly 60 -- the Site License and Service

13 Agreement escalates each year, so you've got a little

14 over 60,000 Site License Service Agreement, so the

15 property taxes they pay are probably in the $100-102,000

16 a year range.

17 JUDGE EYSTER: That's the fuels company

18 is paying, paying the property tax?

19 A Correct.

20 JUDGE EYSTER: Do you know which of the

21 production lines it's DTE Energy's intent to move?

22 A I believe on your, the org chart we were looking at, the

23 Belle River REF No. 2, there's the potential for that

24 one, and I'll get back to that. But St. Clair REF No. 1

25 and the St. Clair REF No. 3 I believe they plan on




196

1 moving, and then the Monroe REF No. 1 they plan on

2 relocating.

3 When Belle River REF was -- when Belle

4 River Fuels Company was originally constructed, they had

5 anticipated needing both of those machines to meet the

6 REF requirements at Belle River, and I think they've

7 subsequently learned through testing that they only need

8 one, so I believe they may be looking to relocate one of

9 those machines at Belle River.

10 JUDGE EYSTER: Who's in charge of -- or

11 who did the calculations with regards to the value of

12 services provided under the License and Services

13 Agreement?

14 A Tom Kenning, who I believe was the operations engineer at

15 Belle River at the time.

16 JUDGE EYSTER: Who did he work for?

17 A I believe at the time he worked for John Dau.

18 JUDGE EYSTER: What company?

19 A Pardon me?

20 JUDGE EYSTER: What company?

21 A John Dau was plant manager at Belle River, who was

22 employed by Detroit Edison.

23 JUDGE EYSTER: And do you know who

24 advised him with regards to the value of the property in

25 terms of just the rent that was, the three acres?




197

1 A I don't know who he contacted.

2 JUDGE EYSTER: O.K. So that was -- so

3 for this, for Belle River, this is $15,000 a year, which

4 is the charge for occupying the land?

5 A Correct.

6 JUDGE EYSTER: Do you personally know,

7 have any experience with evaluating the price of

8 commercial property rent? I mean I don't either. I have

9 some experience with residential property, and I can tell

10 you that's kind of about a four-bedroom house in Lansing

11 right there, if you're close to Michigan State.

12 A I'm not familiar with anything in that area, but I've got

13 a relative who lives up near Houghton Lake, and I know

14 that you can buy property up there for, you know,

15 probably in the 3, 5, $6,000 an acre range, and that was

16 a few years ago when he was buying some property adjacent

17 to his.

18 JUDGE EYSTER: O.K. But that's really

19 not terribly relevant to --

20 A Other that than that, no, I've got no knowledge of the

21 market value of property. And given that this is under a

22 lease --

23 JUDGE EYSTER: Excuse me?

24 A This is under a lease arrangement, they didn't buy it, so

25 I don't know.




198

1 JUDGE EYSTER: When were the St. Clair

2 facilities built?

3 A Approximately the same timeframe. I believe --

4 JUDGE EYSTER: That contract's included

5 in here also; is that right?

6 A Correct. On, I think beginning on page 352, the Refined

7 Coal Supply Agreement was effective December 18, 2009.

8 JUDGE EYSTER: And you said you didn't

9 know when the construction began? What was your answer?

10 A Construction at St. Clair began, the effective date of

11 the Site License and Service Agreement for St. Clair was

12 September 22, 2009, so I would -- I'm guessing that

13 construction started on or about that date.

14 JUDGE EYSTER: And do you know when

15 Monroe was built?

16 A Monroe Site License and Service Agreement was effective

17 June 13, 2011. Those contracts were executed on August

18 21 of '011.

19 JUDGE EYSTER: O.K. You're answering a

20 different question, or you're giving answer to -- do you

21 know when the facilities were constructed?

22 A Monroe started in and about June 13, 2011.

23 JUDGE EYSTER: And then the contracts

24 were dated when?

25 A August 21, 2011.




199

1 JUDGE EYSTER: That's for the -- what

2 page is that?

3 A 596.

4 JUDGE EYSTER: Do you know when that

5 agreement was signed by the parties?

6 A I don't know the exact date, no.

7 JUDGE EYSTER: O.K. So the basis for

8 your answer in terms of when construction began is based

9 on the dates that are found in these contracts, correct?

10 Is that --

11 A They're based on that and information that we verified

12 with our affiliate in Ann Arbor as to when the

13 construction actually began, and the construction

14 actually began in and around the date of the Site License

15 and Service Agreement at all three facilities.

16 JUDGE EYSTER: Does Detroit Edison

17 receive any -- is there any change in the agreements or

18 any compensation made to Detroit Edison when these fuels

19 companies move their production facilities someplace

20 else?

21 A No.

22 JUDGE EYSTER: So the contracts that are

23 here stay the same?

24 A Correct.

25 JUDGE EYSTER: O.K. Do you know where




200

1 these facilities are being relocated to?

2 A I do not.

3 JUDGE EYSTER: Have you ever been

4 contacted by anybody with regards to the movement of

5 them, relocation?

6 A No.

7 JUDGE EYSTER: Mr. Keskey.

8 MR. KESKEY: Thank you, your Honor.

9 Q (By Mr. Keskey): Along a similar or same line of

10 questioning, if you'll turn to your Exhibit A-10, page 4,

11 could you read in the couple of lines there on the bottom

12 bullet in the right-hand corner of page 4?

13 JUDGE EYSTER: Just a moment. Where are

14 we, Mr. Keskey?

15 MR. KESKEY: Exhibit A-10, page 4.

16 JUDGE EYSTER: A-10. O.K.

17 A "Demonstrated production capacity exceeds power plant

18 feed system needs. One facility sufficient at each DTE

19 power plant."

20 Q (By Mr. Keskey): So you have REF facilities at three

21 plants, right?

22 A Correct.

23 Q And so three of these REF units or machines would be

24 adequate for Detroit Edison's plants?

25 A Correct.




201

1 Q So you've got four extra machines at Detroit Edison

2 plants presently which have been undergoing various

3 stages of testing or construction or operation; is that

4 right?

5 A I believe one of the facilities at St. Clair has already

6 been moved, so but as a general sense, yes.

7 Q And where was that one moved to?

8 A I don't know.

9 Q Is that one of those that was moved to either Oklahoma or

10 to Illinois?

11 A To my knowledge, the facilities built in Oklahoma and

12 Illinois were those qualified in 2011 and were built from

13 scratch by our affiliate at those utilities in Oklahoma

14 and Illinois.

15 Q Would it be correct that Edison under its, under the cap

16 that you were referring to of nine units could still move

17 four units somewhere else and still qualify for tax

18 credits?

19 A Correct.

20 Q So you're actively seeking other locations in which to

21 move those units, are you not?

22 A Somebody within DTE Energy is, yes.

23 Q And it would be correct that Detroit Edison and its coal

24 plants has been the research base from which the REF

25 facilities are being developed or are being tested for




202

1 purposes of a broader market than Detroit Edison?

2 A I wouldn't agree with that.

3 JUDGE EYSTER: What is the testing that

4 goes on when these facilities are constructed, because

5 not all plants are currently under testing, correct?

6 A The Belle River power plant is under testing --

7 JUDGE EYSTER: Belle River, O.K.

8 A -- to determine if the REF coal is an acceptable fuel in

9 the combustion of the boiler.

10 JUDGE EYSTER: O.K. Now, how does that

11 work? How does the testing process work?

12 A Well, that's -- I'd like to defer to John Dau on that,

13 but he's not here. I'm not that familiar with how the

14 testing or what they're testing for.

15 JUDGE EYSTER: Who's testing?

16 A The Detroit Edison employees at the Belle River power

17 plant.

18 JUDGE EYSTER: O.K. So they're in --

19 they run this coal through, they do some determinations

20 as to how it --

21 A How it's combusting in the boiler.

22 JUDGE EYSTER: And then they give that

23 information back to the fuels companies?

24 A No.

25 JUDGE EYSTER: O.K. Then how do the




203

1 fuels companies adjust their mix, I guess?

2 A The fuel companies test the fuel blends or the individual

3 fuel at a particular plant at EERC, that test combustor

4 in North Dakota, with a certain mixture of Mersorb and

5 S-Sorb, and then if they demonstrate emission reduction,

6 then it's a qualified, it gets qualified. So that's not

7 really what's being tested per se at the power plant.

8 What we're testing at Belle River is the REF fuel that,

9 the fuel company producing an acceptable fuel for the

10 plant to burn long term without any impact on plant

11 operations.

12 JUDGE EYSTER: O.K. And if it is, what

13 happens?

14 A If it is, if there's an impact on plant operations?

15 JUDGE EYSTER: No, if it's acceptable.

16 A If it's acceptable, then more than likely we'll, the fuel

17 company will go look for a tax partner and they'll sell a

18 membership interest in the facility and we will start

19 generating tax credits at the Belle River Fuels Company.

20 JUDGE EYSTER: What if it's not

21 acceptable?

22 A If it's not acceptable, then all the agreements terminate

23 and we're basically done.

24 JUDGE EYSTER: O.K. So now what's going

25 on during the testing process?




204

1 A The power plant is determining whether the REF fuel long

2 term will be an acceptable fuel. They have not made that

3 determination yet.

4 JUDGE EYSTER: O.K. I guess I'm a little

5 confused. But I mean I guess when I envision a testing

6 process, I envision you've got a product, the REF, the

7 fuel, the coal itself that's being produced and you've

8 got people that are burning it and you're doing all sorts

9 of tests in terms of probably, I don't know, Btus

10 produced and emissions and whatever it is you're testing,

11 I don't actually know, I'm not sure that's been

12 indicated, but then there would be some feedback to the

13 people that are producing the coal, sort of, for

14 instance, of finding out, well, we're having this effect,

15 can you do something, can you modify the amounts of

16 sorbents that you put in, not sorbents, but the S-Sorb

17 and the M-Sorb, whatever it is, the chemicals that are

18 mixed in the coal. To me, when I envision this notion of

19 testing, that's how this occurs, there's this interchange

20 of information that goes back and forth so that you can

21 try to modify the system to get it to work. It sounds to

22 me like you're telling me that doesn't happen.

23 A Most of the testing at Belle River -- it does in part.

24 Let me explain. Most of the testing at Belle River is

25 just the combustion within the boiler. I think John Dau




205

1 explained in one of the discoveries that the fuel company

2 pays for a product from Fuel Tech that we're injecting in

3 the boiler to help the operation, so that was something

4 that changed here probably within the last year of the

5 testing, so that's new and we're looking at that.

6 JUDGE EYSTER: That's a separate product

7 that's being purchased to inject into the combustion

8 chamber to make this fuel, the REF combust better I

9 guess? I don't know what you would say.

10 A More efficient operation, correct.

11 JUDGE EYSTER: To make a more efficient

12 operation.

13 A Correct. Now, what the affiliate has recently done --

14 let me go back. When we first qualified the various fuel

15 blends at Belle River and St. Clair, the --

16 JUDGE EYSTER: Qualified meaning?

17 A Qualified those in the test combustor in the University

18 of North Dakota. The IRS --

19 JUDGE EYSTER: That was something Detroit

20 Edison did?

21 A No.

22 JUDGE EYSTER: That was something that --

23 when you say -- because you say we a lot, and I have no

24 idea who you're talking about, because it seems like

25 oftentimes you're talking about entities that are not




206

1 Detroit Edison, are not your employer.

2 A The fuels company, Belle River or St. Clair Fuels

3 Company, we gave them samples of the coal that would be

4 used at Belle River/St. Clair, and this was back probably

5 late, probably in 2009. The IRS accepts test combustor

6 results that demonstrate emission reductions to qualify

7 for the refined coal tax credits. So in 2009 there was a

8 Mersorb and S-Sorb, which is the CKD, or cement kiln

9 dust, added and they came up with a certain application

10 rate that demonstrated emission reductions that would

11 allow these application rates with this type of coal to

12 qualify for tax credits. At that time, the cement kiln

13 dust had an application rate of .55 percent, or .005, but

14 anyway .55. The fuels companies have subsequently tested

15 an application rate of CKD of .33 percent, which is less

16 cement kiln dust, and occasionally the cement kiln dust

17 can slag and fallow the boiler, and that's what this Fuel

18 Tech additive does, prevents, helps prevent. So there is

19 some feedback on the operation of the plant, and the fuel

20 companies are changing the mixture or the application

21 rates of the cement kiln dust, CKD, and Mersorb, and they

22 have qualified, met the emission reductions to qualify

23 the blend, the coal types at Belle River/St. Clair, with

24 an application rate of .33 CKD.

25 JUDGE EYSTER: Who certified that?




207

1 A The testing at EERC, by EERC at North Dakota lab, their

2 test combustor.

3 JUDGE EYSTER: So EERC certified --

4 here's the thing. I'm having a hard time envisioning the

5 fuels companies actually being out there at EERC given

6 what I've heard.

7 A They are not.

8 JUDGE EYSTER: So they weren't doing the

9 testing?

10 A EERC is the Energy and Environmental Research Center

11 located at the University of North Dakota. They have a

12 test combustor that apparently is recognized as being one

13 of the better, and when you want to qualify a coal and/or

14 demonstrate that when I mix these chemicals with coal,

15 they do a tightly controlled test with and without the

16 REF chemicals and then measure the emission reductions,

17 and if they measure the reductions required to meet the

18 IRS tax code, then we define that as it's a qualified

19 mixture of chemicals with a particular type of fuel.

20 JUDGE EYSTER: Who was actually -- well,

21 do you know who did the testing with the Mersorb and is

22 it S-Sorb? I forget what you guys call it.

23 A Correct.

24 JUDGE EYSTER: Those are the two

25 chemicals that DTE Energy Services has the rights to sell




208

1 to Detroit Edison, right; is that correct?

2 A Those are the two chemicals that, the Chem-Mod process

3 that is licensed by the fuels company from Chem-Mod, LLC.

4 JUDGE EYSTER: Which is two people -- no,

5 three people? Do you know who Chem-Mod is?

6 A I don't know. But all I do know is that in my Exhibit

7 A-28, which is the A. J. Gallagher investor presentation,

8 they indicate in here that A. J. Gallagher is a

9 42-percent owner of Chem-Mod. Other than that, I don't

10 know if it's a scientist who said if I mix these two

11 chemicals together, I could get emission reductions, I'm

12 not sure who that is.

13 JUDGE EYSTER: O.K. So I'm kind of

14 curious, do you know why any -- well, I found it

15 interesting, there's an interesting, as I understand it,

16 Michigan connection with Chem-Mod; Spencer Abraham is

17 apparently an advisor to them. Do you know if he's been

18 involved with Detroit Edison in terms of their decisions

19 to purchase from that company?

20 A I do not, no.

21 JUDGE EYSTER: O.K. So the fuels

22 companies themselves were not out with EERC, is that it,

23 in North Dakota?

24 A I believe there may have been a representative from the

25 fuels company or Energy Services or Energy Resources out




209

1 there during the test.

2 JUDGE EYSTER: What about Detroit Edison?

3 A I don't know.

4 JUDGE EYSTER: So do you know what

5 Detroit Edison's involvement was in the certification of

6 this fuel?

7 A Other than providing them a representative sample of the

8 coal that we burn at a power plant, I'm unaware of

9 whether we were involved in any of the testing or

10 monitoring of that in North Dakota.

11 JUDGE EYSTER: And I hate to keep digging

12 into this so deep, because it's really not my case to

13 present, but, and also some of this is coming --

14 obviously we had a plan case that just came through

15 recently -- so I had the impression from the plan case,

16 and that based on some testimony that was presented, that

17 Detroit Edison was in fact very involved with testing of

18 all sorts of fuels over the course of a decade. Now, it

19 may have been a loose usage of company names -- you know,

20 I mean I have to deal with the record that I get

21 presented, so we have testimony sometimes that isn't

22 crossed and then someone says Detroit Edison and who

23 knows what they're talking about sometimes. O.K. You

24 know, but anyways, that's what I have to deal with. So

25 you don't know of anybody from Detroit Edison -- I mean




210

1 do you know of anybody, can you name a person that was

2 involved in the research for the fuel that is being

3 burned at Detroit Edison that was actually part of the

4 research?

5 A No.


7 A I believe we said in a discovery response that we

8 purchased the license from Chem-Mod in 2008, so that

9 Energy Services or somebody out in our Ann Arbor

10 affiliate, so in '08 they purchased a license from

11 Chem-Mod that allowed them to do whatever they're going

12 to do with it. But I mean we've tested a lot of

13 different fuels over the years --

14 JUDGE EYSTER: Who is we?

15 A Detroit Edison has tested a lot of fuels over the years.


17 A O.K. We continue to test, and these are different types

18 of coal, high-sulfur eastern coal, low-sulfur western

19 coal, so Detroit Edison has tested a lot of different

20 coals.

21 JUDGE EYSTER: And when you mean testing,

22 what are you talking about? Or when you say testing,

23 what does that mean?

24 A For example, we --

25 JUDGE EYSTER: O.K. We is?




211

1 A Detroit Edison.

2 JUDGE EYSTER: And Detroit Edison is the

3 party that's here for this case, O.K., just to make

4 clear, right? When we say Detroit Edison, just so

5 everybody is on the same, using the same language,

6 Detroit Edison is the applicant. And so if we're going

7 to talk about any other entities, let's make sure we

8 don't call them Detroit Edison. And I don't think

9 anybody's been doing that today, but I'm not sure that's

10 the case all the time, so sometimes the record may not be

11 as accurate as it should be. And when you say we, I have

12 no idea what you're talking about, because I think you're

13 using we in a very general sense in terms of any one of

14 the Detroit Energy, whatever your parent company is

15 called, entities. I get the sense that's the way you use

16 the term we. And is that accurate? We is not always the

17 Company you work for, the applicants?

18 A There may be an instance where that's not the case.

19 JUDGE EYSTER: O.K. So in the future,

20 let's --

21 A I will do my best.

22 JUDGE EYSTER: -- please don't say we.

23 When you're saying -- you need to identify the company

24 you're referring to.

25 A So Detroit Edison is in the process of testing a




212

1 Pittsburgh seam high-sulfur coal at our Monroe power

2 plant. The blend of coal that the Monroe plant has used

3 over the years is a combination of Wyoming 8,800 Btu per

4 pound Wyoming coal and 25-percent we call it a mid-sulfur

5 eastern coal, which is typically sourced out of Kentucky

6 and West Virginia. Because we have scrubbers at Monroe

7 on Units 3 and 4, we have the opportunity to burn a

8 little higher sulfur coal and still meet our emission

9 requirements because of the scrubbers.

10 JUDGE EYSTER: And the high-sulfur coal

11 is cheaper I assume?

12 A That is correct. Certain markets, certain times during

13 the year in certain markets, yes, it can be cheaper than

14 the mid-sulfur coal that we're burning. There's certain

15 characteristics in the high-sulfur coal that potentially

16 can cause problems. But we would, Detroit Edison would

17 run tests at various blends of high-sulfur coal, monitor

18 the impact on plant performance, and then the plant would

19 ultimately decide if it's an acceptable fuel for fuel

20 supply to procure for them. That's an example of some

21 testing that the Detroit Edison Company has done. I

22 believe some of the other testing is included in Bill

23 Rogers' testimony that talks about various testing of

24 powdered activated carbon in the past and that sort of

25 thing.




213

1 JUDGE EYSTER: And then what type of --

2 so what testing of the REF, the actual coal itself, has

3 Detroit Edison done, and how much of it was done prior to

4 the contracts?

5 A There was some testing of the REF at St. Clair prior to

6 signing the contracts; I believe there was also testing

7 done at Belle River and at Monroe prior to signing the

8 contracts. I believe they put some temporary

9 installations in where they could apply the various

10 chemicals.

11 JUDGE EYSTER: Who is they?

12 A At that time it would have been I believe Energy

13 Resources put some temporary facilities in where they

14 could apply the CKD and the Mersorb on the coal entering

15 the power plant so that we could have a, Detroit Edison

16 could have an effective test as to what impact it may

17 have on our plant.

18 JUDGE EYSTER: So this would have been a

19 facility constructed by Detroit Energy, DTE Energy

20 Services?

21 A Correct.

22 JUDGE EYSTER: Is that -- what was your

23 answer?

24 A Correct.

25 JUDGE EYSTER: And so the research would




214

1 have been conducted with DTE Energy Services employees

2 and Detroit Edison employees.

3 A I would not classify that as research. The fuel mixtures

4 that have been qualified was performed at EERC by Energy

5 Services. All we were trying to do is replicate those,

6 the additives, in the amount that they plan on using, and

7 then --

8 JUDGE EYSTER: O.K. We is again?

9 A Energy Services was putting the application rate on the

10 coal conveyer so that Detroit Edison could determine if

11 the combustion of this coal in its boilers would cause

12 any problems. So we weren't -- I don't -- we may just be

13 having semantics, but I wouldn't call that research. I

14 said the research would be, in my nomenclature, the

15 development of the Chem-Mod process itself. The Detroit

16 Edison Company was running some combustion tests in its

17 boiler seeing if our ash handling system could handle it,

18 the precipitators could collect whatever, and that's what

19 we were testing at our power plants.

20 JUDGE EYSTER: And what type of

21 arrangements did you have, contractual arrangements at

22 that time between Detroit Edison and DTE Energy Services?

23 A I'm unaware at this time whether there were any contract

24 arrangements during the time that testing was being done.





215


2 Q (By Mr. Keskey): Now, the fact that you have four of

3 these machines at your three plants means that they're

4 not being operated at all; is that what that means?

5 A I believe in a discovery request that we said that that's

6 probably a fair statement, except for Monroe where the

7 second line at Monroe is occasionally used as a backup

8 for the other.

9 Q And if another utility or entity contacts DTE or any of

10 its affiliates and wants to utilize one of your machines,

11 would the Company be open to relocating it to such a new

12 entity or some other entity?

13 A I believe that's the case, yes.

14 Q Now, of the units that you've had at the Detroit Edison

15 plants, how many have been moved?

16 A I believe one of the units at St. Clair has been moved.

17 Q And you don't know where that unit was moved?

18 A I do not know.

19 Q Now, the fact that this is referred to as a machine or a

20 unit, it must be a self-contained kind of facility that

21 is capable of being moved; is that right?

22 A As I've explained a little earlier, my understanding of

23 what's qualified is the various pug mills that do the

24 mixing of the chemicals and the coal, so at Monroe there

25 are two of these huge pug mills, and there obviously is a




216

1 building or a structure and various conveyors. To my

2 knowledge, what was relocated at St. Clair was one of

3 those pug mills.

4 Q So it is something that can be dismantled and actually

5 physically moved with transportation to another location

6 other than a Detroit Edison plant?


8 Q Now, to the degree that the symbiotic relationship -- let

9 me just call it that, I'm not trying to be, put words in

10 your mouth -- but the testing, the construction,

11 operation, property management, all of the interfaces

12 between Detroit Edison and these fuel companies, isn't

13 that entire relationship of the fuel companies with

14 Edison providing the fuel companies or their parent

15 affiliates with the expertise and the resources to then

16 move a unit and obtain another customer from another

17 utility?

18 A I'm not sure I completely understand your question, but

19 to my knowledge, the Detroit Edison Company employees at

20 the St. Clair power plant in no way helped facilitate the

21 movement of that one pug mill that was moved to another

22 utility.

23 Q I'm not talking about just the movement, I'm talking

24 about the development of a market, the development of

25 expertise, the development of the ability to say to




217

1 another non-Edison entity that we have some units, we no

2 longer run them, we can move it to your place, and

3 thereby you expand, and when I mean you, I mean DTE and

4 its affiliates, expand the market in the REF market;

5 isn't that logical?

6 A I have not contacted or been contacted by any other

7 utility regarding REF. How our affiliate, if at all,

8 uses the experience at Detroit Edison to market this,

9 these machines, I have no idea.

10 JUDGE EYSTER: Do you know of any other

11 Detroit Edison employees that have been contacted?

12 A I don't know of any.

13 Q (By Mr. Keskey): O.K. Now, let me refer to the next

14 page of Exhibit A-12, or MCAAA-12, which ends with the

15 Question No. DE-37(24).

16 JUDGE EYSTER: Sorry, Mr. Keskey, where

17 are we again?

18 MR. KESKEY: On Exhibit MCAAA-12, and it

19 is the discovery response that ends with Question No.

20 DE-37(24), and I apologize if your copy might have two

21 copies of the same answer.

22 Q (By Mr. Keskey): Do you see that response?

23 JUDGE EYSTER: Wait a minute. I haven't

24 found it yet. Approximately what page in this exhibit is

25 that? 37(24) you said?




218

1 MR. KESKEY: It's about, after the cover

2 page, it's right after the chart, it's the third page in.

3 JUDGE EYSTER: Got it.

4 MR. ERICKSON: Mr. Keskey, the fourth

5 page in appears to be a duplicate; is that what you're

6 saying?

7 MR. KESKEY: Yes, yes. So you can rip

8 out the extra page, it doesn't change the exhibit if you

9 do.

10 Q (By Mr. Keskey): Do you see that response?

11 A I do.

12 Q O.K. So let's look at this a little bit. First of all,

13 each of these REF facilities that are operated by the

14 fuel companies, they're entirely within the boundaries of

15 the Detroit Edison coal plants, are they not?

16 A Correct.

17 Q And this answer seems to indicate that the fuel companies

18 are able to run the REF process with very, very limited

19 staff, as you present here; is that right?

20 A Correct.

21 Q And of course, if they're not operating and if they're

22 idle, do they have any employees at all?

23 A I guess that would depend whether the plant is idle for a

24 day, for a week or a year. I would assume that depending

25 on the duration, there may be adjustments in staffing




219

1 levels.

2 Q Well, I think you've indicated that primarily you've got

3 three units, three plants that are sufficient to serve

4 those plants. So with respect to the extra capacity in

5 the other four units, you certainly would reduce or not

6 invest staff time in operating those units, would you, in

7 terms of employees?

8 MR. ERICKSON: Are we talking about

9 Detroit Edison employees or the REF --

10 MR. KESKEY: I'm talking about the fuel

11 companies.

12 Q (By Mr. Keskey): If you know.

13 A I would say that the staffing levels that are shown in

14 response to this discovery would be for, for example, at

15 St. Clair for the operation of the, of one of the units

16 that is owned by the St. Clair Fuels Company.

17 Q And so on a per-site basis of this estimate, this

18 indication in your response of the employees at the fuel

19 companies would apply to the Monroe units, the St. Clair

20 units and the Belle River units?

21 A That's what this response indicates, yes.

22 Q Now, do you know how many employees there are that

23 Detroit Edison has at Belle River and at St. Clair and at

24 Monroe --

25 A I do not.




220

1 Q -- approximately?

2 A I don't know.

3 Q Well, it is 50, is it 500, do you have a range?

4 A More than 50, but I don't know that number.

5 Q Do you know how many employees Detroit Edison has in its

6 electric division or in the electric utility?

7 A I believe Detroit Edison has something less than 5,000

8 employees.

9 Q Do you have an approximate number?

10 A Between 4 and 5,000 employees.

11 Q O.K. Now, it's correct, is it not, that there are no

12 fuel company employees that work outside of the

13 boundaries of the individual plants, coal plants at

14 Detroit Edison?

15 A That's my general understanding.

16 Q So there are no employees engaged in buying coal,

17 transporting it by rail or vessel, overseeing the

18 management of the coal supply chain, and getting the coal

19 right to the plant site; is that right?

20 A There is no fuel company employee involved in that.

21 Q So then the fuel companies are buying the coal from

22 Detroit Edison at the plant site, are they not?

23 A There's been multiple discovery that have explained this,

24 I think it's in my testimony as well. But the coal for

25 the St. Clair power plant is sold in the coal yard at




221

1 MERC, our dock, Midwest Energy Resources. The Detroit

2 Edison Company owned the dock, Midwest Energy Resources

3 Company. It is sold to the Belle River Fuels Company, it

4 is then transported from there in Detroit Edison-

5 contracted vessels and delivered to the Belle River/St.

6 Clair facility, at which point the Belle River Fuels

7 Company sells it to the St. Clair Fuels Company, so in

8 that instance, title transfers at Detroit Edison's MERC

9 facility. Belle River, we've been on occasion selling

10 the Belle River Fuels Company coal from our coal yard for

11 their testing. For the Monroe power plant, we sell,

12 Detroit Edison Company sells coal to the Monroe Fuels

13 Company FOB rail car, and then the, it is transported

14 under Detroit Edison contracts with the railroads to the

15 Monroe power plant.

16 JUDGE EYSTER: Can you clarify something

17 for me. You just outlined a number of transactions, and

18 is there somebody from the fuels company that's actually

19 engaged in these transactions, or is this just a record

20 keeping that's taking place at some other affiliate of

21 DTE Energy?

22 A The fuel company is basically involved in the accounting

23 at the end of the month.

24 JUDGE EYSTER: Who is? Do you know the

25 person from the fuel company that, fuels company that




222

1 actually does that? I mean is there someone that's doing

2 it, or is it somebody that works for a different company?

3 I mean because -- excuse me -- because I mean, you know,

4 I guess part of the reason I ask is we're going over this

5 discovery question, you've got a site manager and office

6 assistant at the Monroe plant. Well, not you, excuse me,

7 the fuels company does, and then labor's provided by Duke

8 & Duke Services, who I have no idea who that is. Is that

9 a -- do you know who Duke & Duke Services is?

10 A Duke & Duke is a contractor for services like a

11 millwright or an electrician or something like that. So

12 it's a labor contractor.

13 JUDGE EYSTER: It's a labor service, it's

14 a --

15 A Correct.

16 JUDGE EYSTER: They provide employees?

17 A Correct.

18 JUDGE EYSTER: O.K. So anybody -- do you

19 know if there's anybody on this discovery answer that

20 actually does those transactions?

21 A To my knowledge, they do not do that. But to clarify,

22 Chris Berkermer is one individual that my team works with

23 on the accounting side of this; I do not know if he's an

24 employee of DTE REF Holdings, which is the first, if you

25 will, corporate structure above all the fuel companies.




223

1 My guess is that he probably is employed by that entity,

2 and that the actual fuel companies themselves have very

3 few employees.

4 JUDGE EYSTER: But you don't know who

5 he's actually employed by?

6 A I don't know at this point in time.

7 JUDGE EYSTER: O.K. But at the end of

8 the month, when you go through your accounting, that's

9 the person you deal with?

10 A He is one of the individuals that my team works with,

11 yes.

12 JUDGE EYSTER: And that's sort of on a

13 monthly basis?

14 A Yes, on the accounting side when we close at the end of

15 the month and we have invoices and purchase orders that

16 go back where we're buying fuel, they're selling fuel and

17 that sort of thing.



20 Q (By Mr. Keskey): Mr. Lapplander, when the coal

21 physically arrives at these various plants, is it Detroit

22 Edison employees that are involved in unloading the coal?

23 A Yes.

24 Q And doesn't the coal have to be sorted according to

25 whether it's high sulfur, low sulfur, mid sulfur or the




224

1 type of coal?

2 A If the coal is being delivered to the Monroe power plant,

3 there is what is termed an overhead tripper gallery, and

4 the plant operators would just position the unloading

5 chute over the pile to reflect the fact of the coal type

6 of the, that's in the train or the vessel that's being

7 offloaded.

8 Q O.K. Now, is it true with all three of the Edison plants

9 that it's Edison employees that supervise and handle the

10 unloading of the coal and the placement of the coal in

11 inventory?


13 Q And then where in the chain does the fuel company take

14 physical possession of the coal, and where --

15 A When it enters the -- I'm assuming it's when it enters

16 the building structure that houses the pug mill.

17 Q And is that true for all three locations, all three

18 plants?

19 A To my knowledge.

20 Q And are those REF facilities connected by conveyors to

21 the boiler system of the plant, or some other way?

22 A Yes, those, the REF facilities are connected via conveyer

23 belt to the bulkers where we load coal that then feeds

24 the coal mills that then is pulverized and fed into the

25 boiler.




225

1 Q Now, you indicated that the fuel companies take title of

2 the coal earlier than the plant site, is that right, in

3 the chain of, supply chain?

4 A For St. Clair and Monroe. But during the testing phase

5 at Belle River, the Belle River Fuel Company periodically

6 buys coal from Detroit Edison in the coal yard for

7 testing purposes.

8 Q So for Belle River, the fuel company does not take title

9 to any coal except at the plant site itself?

10 A That is correct, for Belle River. But as I indicated

11 earlier, the Belle River Fuel Company buys coal FOB MERC

12 for the St. Clair Fuels Company.

13 Q Well, I'm trying to find out whether or not the fuel

14 companies are acquiring title to the coal before it

15 arrives at the plant sites for all coal tonnage or if

16 there is some coal tonnage that is not subject to the

17 fuel companies acquiring title prior to arrival at the

18 plant site?

19 A For the St. Clair power plant, the St. Clair Fuels

20 Company, our contract with them specifies that coal, we

21 will target 1.8 million tons and the REF will be consumed

22 on Units 1, 2, 3, 4 and 6. We determine what percentage

23 those five units at St. Clair's consumption is of the

24 total, and that's the approximate percent of coal that

25 the Belle River Fuels Company will own at MERC for St.




226

1 Clair Units 1 through 4 and 6, and that is subsequently

2 transported down and sold to the St. Clair Fuels Company

3 where they store it at our facility at St. Clair. That

4 might be 50-60 percent of the total coal that's consumed

5 at the plant, because St. Clair Unit 7, the biggest unit,

6 is not part of that equation. So all of the coal that

7 comes down from MERC for St. Clair is not owned or it is

8 not titled to the fuels company. And as I indicated at

9 Belle River, they periodically buy coal from us in the

10 coal yard. I don't know at this time, they may end up

11 basically buying all of the needs and taking title at

12 some point for Belle River, I don't have that information

13 at my hands, and I would believe it's probably fair to

14 say that most, if not all, of the coal going to Monroe

15 while it's in route, it's titled to the fuels company.

16 Q Now, if I could refer you -- and I'm not asking you for a

17 legal opinion here -- but Section 13 of 6j(13) of the

18 statute, Act 304, says in part, 6j(13) says in part, it's

19 actually Section 6j(13) and part of sub (d) of Act 304,

20 it says: In its order in the power supply cost

21 reconciliation, the Commission shall disallow unloading

22 and handling expenses incurred after receipt of fuel by

23 the utility. Have you looked at that section?

24 A I have not.

25 Q Are you suggesting in any way that the transfer of title




227

1 as a piece of paper is a substitute as to what the real

2 transaction is when you consider the physical

3 transportation and acquiring of coal and the entire

4 supply chain of coal from the mine all the way down to

5 the plant site?

6 MR. MAQUERA: Objection. It's a compound

7 question, your Honor.

8 JUDGE EYSTER: Could you repeat the

9 question, Mr. Keskey?

10 MR. KESKEY: I'll try a different way.

11 Q (By Mr. Keskey): Do you know why the fuel companies have

12 acquired title to at least a portion of the coal at

13 locations such as the MERC dock instead of acquiring

14 title at the plant site where they physically interact

15 with the coal for the first time?

16 A I believe the fuels companies want to demonstrate

17 ownership of the coal that will ultimately be refined and

18 sold to the host utility, and they want to demonstrate

19 that ownership for as long during the supply chain as

20 possible.

21 Q Now, when the fuel companies --

22 JUDGE EYSTER: Just one moment. Where

23 did you gain that understanding?

24 A While negotiating these contracts with Jerry Endler, who

25 was the counsel for Energy Services in Ann Arbor.




228

1 JUDGE EYSTER: Do you know what the

2 reason for them, the fuels companies wanting to show

3 ownership of the coal -- I can't remember exactly how you

4 phrased that -- but do you know what the reason for that

5 was?

6 A I don't know.


8 Q (By Mr. Keskey): Now, we have testimony in the case, I

9 think a lot of it's yours, that the arrangement

10 essentially is that Edison sells the coal to the fuel

11 companies with the agreement to buy it back at the same

12 cost. I know there's a, there's some adders and there's

13 some things in there, but basically the majority of the

14 transaction involves sale of the coal at a price and the

15 buyback from Edison, by Edison from the fuel companies at

16 the same price. Is that about right?

17 A That's true.

18 Q And that's a binding commitment in the sense that when

19 Edison sells the coal to the fuel companies, that they

20 automatically agree to buy it all back?

21 A That's true, and that's really by necessity because that

22 coal is on Detroit Edison property.

23 Q I mean Edison doesn't have any choice to change its mind

24 and say, well, we don't need the coal anymore because we

25 have too much coal or our plants aren't operating as much




229

1 as they were before?

2 A Detroit Edison is the exclusive coal consultant for these

3 projects, and we have full and total control over all

4 procurement and managing of deliveries as we always have

5 for our power plants, and we like to manage our

6 facilities such where we don't think that will ever

7 happen, and it's not a concern to us.

8 Q And what's the timeframe between the time that Edison

9 sells the coal to the fuel companies and then buys it

10 back from the fuel companies?

11 A That's hard to say. For example, when Detroit Edison

12 sells some of its coal at the MERC facility, it could sit

13 there for a period of time, a week, a month, three

14 months; when it ultimately gets delivered to St. Clair,

15 there's an inventory at St. Clair that any deliveries

16 would be added to; and to pick a time as to when it's

17 sold to when it's actually purchased and consumed, it

18 could be days, it could be weeks, it could be three or

19 four or five months potentially.

20 Q Now, when Edison buys the coal back from the fuel

21 companies, does Edison undertake any comparison at that

22 time with the spot market prices of coal or any other

23 alternative sources of coal in determining whether it

24 would buy it back or not?

25 A We do not. It's at our power plant, and as Mr. Peloquin




230

1 had indicated in the prior reconciliation case, he

2 believes that Detroit Edison buys coal under market, so I

3 believe that the coal that we're buying back is market or

4 below. I won't argue with Mr. Peloquin as to the, you

5 know, skill that we have in our company in fuel supply

6 and buying coal.

7 Q Well, markets change, several months in some cases

8 between the sale of the coal and the purchase back of the

9 coal. When Edison is undertaking the function of buying

10 the coal back, do they compare it to any other prices or

11 any other sources of coal or any other qualities of coal

12 that they might be able to get a better deal than from

13 the fuel companies?

14 A We do not do that process, no.

15 JUDGE EYSTER: Before I forget, the

16 handling/procurement services that are provided through

17 to the fuels company is by Detroit Edison, correct?


19 JUDGE EYSTER: And what contract covers

20 the compensation for those?

21 A Coal Handling and Consulting Agreement.

22 JUDGE EYSTER: O.K. And those are,

23 correct me if I'm wrong, provided at cost to the fuels

24 companies and then paid for at cost; is that correct?





231

1 JUDGE EYSTER: And there's -- are you

2 involved with that transaction?

3 A There's some people that work in my group that do --

4 within our SAP accounting system, those transactions take

5 place each month and they net to zero.

6 JUDGE EYSTER: So you have some accounts

7 that are set up that end up having lots of zeros in them

8 at the end of the month?


10 JUDGE EYSTER: Who's in charge of

11 determining what the value of that service is?

12 A That was determined by the, I believe the manager of the

13 coal handling facility at St. Clair and some similar

14 individual at Belle River at the time we did the deal.

15 JUDGE EYSTER: O.K. And I want to make

16 sure that I understand your testimony, because I may not

17 be maybe in this case. Your claim is not that these

18 arrangements technically comply with the Code of Conduct,

19 but that they meet the spirit of the Code of Conduct,

20 correct?

21 A I would say -- as it relates to the coal handling and

22 consulting services or all aspects of these transactions?

23 JUDGE EYSTER: Well, you can start with

24 the coal handling services, I guess, and then you can

25 branch out to the other aspects if you'd like.




232

1 A Well, I would, as it relates to the asymmetrical pricing,

2 selling at cost and being charged back at cost versus the

3 market, because we need, the Detroit Edison Company must

4 sell at the higher of cost to market to an affiliate. I

5 don't know, and I don't think it can be determined what

6 the market rate for coal handling at the St. Clair and

7 Belle River power plants is, we've not conducted that

8 study. I don't know how to do it. So I've -- I think

9 I've testified in prior cases that I make the assumption

10 that the market price and the cost are the same. If that

11 can be agreed upon, then I think technically in regards

12 to asymmetrical pricing, we're in compliance with the

13 Code of Conduct.

14 JUDGE EYSTER: O.K. If you were to

15 provide those same services to a company that was not a

16 fuels company, say a competitor, would you provide those

17 services to them at cost?

18 A If the -- if as part of the negotiations in the contract

19 structure -- let me back up. Given --

20 JUDGE EYSTER: O.K. You know -- O.K.

21 Let's put it -- let me change the question, because that

22 probably was not the best wording. If you were to market

23 that service, would you market it at cost, or would you

24 assume that you're going to make a profit off it and

25 attempt to make a profit and market it with a profit




233

1 built in?

2 A Well --

3 JUDGE EYSTER: You know what, I mean I'm

4 asking -- that's maybe not such a fair question really

5 for me to be asking. I, you know, I can make my own

6 decisions about market and costs. So I'm starting to get

7 a little farther in the questioning than I like to be.

8 It's 12:30 just about. I'm assuming

9 people would probably like to take a break for lunch. So

10 it doesn't sound like we'll be done with this witness any

11 time soon, we should probably take a break. Everybody

12 back at 1:30, does that work?

13 MR. MAQUERA: Thank you, your Honor.

14 JUDGE EYSTER: All right. We're off the

15 record.

16 (At 12:31 p.m., the hearing recessed for lunch.)

17 - - -

18

19

20

21

22

23

24

25




234

1 Lansing, Michigan

2 Tuesday, January 7, 2013

3 At 1:38 p.m.

4 - - -

5 (The hearing resumed following the luncheon recess.)

6 JUDGE EYSTER: O.K. We're back on the

7 record. Just I just want to make a comment. The last

8 question I asked of this witness, if it wasn't apparent,

9 I think it -- well, I felt a little uncomfortable asking

10 it, it seemed a little loaded I guess, and I hope I'm not

11 giving the appearance that I'm taking one side or the

12 other in this case. Obviously I wrote a PFD recently

13 that touched on a lot of what's been discussed today. I

14 try as best I can to be the guy that calls the balls and

15 strikes and interprets the rules of the game, and I deal

16 with the evidentiary record that I get, and I think what

17 was probably clear from the last PFD on the plan case was

18 that, at least in my mind, there were a lot of questions

19 that I had that were unanswered based on the record that

20 was presented, so some of the questions I'm asking are an

21 attempt on my part just to clarify some stuff. And so I

22 don't want to be giving the impression, and that's kind

23 of why I backed off on the last question I asked, is that

24 then siding with one particular viewpoint over another.

25 So anyways, that being said, I believe




235

1 it's Mr. Keskey that's continuing with cross.



4 resumed the stand, and having been previously

5 sworn, testified further as follows:

6 CROSS-EXAMINATION (Continuing)

7 BY MR. KESKEY:

8 Q Good afternoon, Mr. Lapplander.

9 A Good afternoon.

10 Q Let me try to briefly go through some supply chain

11 questions with you. Is it correct that the fuel

12 companies take title to some of the coal at FOB mine?

13 A Correct.

14 Q And do you know what portion of the coal?

15 A Probably eight, eight and a half million tons a year.

16 Q And what percentage of Edison's total coal purchases

17 would that represent?

18 A Probably a little less than 50 percent.

19 Q And then does the supply -- excuse me. Do the fuel

20 companies then pay for all the transportation costs for

21 their portion of the coal from the mine to the plant

22 where it's going?

23 A That's true.

24 Q And that would include both rail and vessel if the vessel

25 is also used; would that be true?




236

1 A That's true.

2 Q And do they also pay for some of the management costs

3 related to negotiating for the coal or contracting with

4 the mines for the coal or any of the administration of,

5 you know, to obtain the coal?

6 A Those would be covered in their Coal Handling and

7 Consulting Agreement.

8 Q And then there's a portion of the coal that you purchase

9 not at the mine but at the MERC facility; is that right?

10 I'm talking about the fuel companies.

11 A A portion of it is purchased there, yes.

12 Q And approximately what percentage of the total Edison

13 coal requirements would that represent?

14 A Might be in the range of two and a half to three million

15 tons.

16 Q And that would be what percentage of the overall Edison

17 purchases?

18 A Less than 20 percent.

19 Q And then is that -- does the fuel companies also purchase

20 coal at the dock facilities in Chicago?

21 A No.

22 Q Now, when the coal arrives at each plant site, do the

23 fuel companies pay for the unloading of the coal?

24 A That's included in the Coal Handling and Consulting

25 Agreement.




237

1 Q And how about the management of the inventory of the coal

2 at the plant site?

3 A That's also covered in the Coal Handling and Consulting

4 Agreement.

5 Q And are Edison and the fuel companies paying a

6 proportionate share, an equal share of all the expenses

7 based on the total coal that each owns?

8 A Well, for the Belle River/St. Clair agreement, the Coal

9 Handling and Consulting, I believe there was a discovery

10 request where there was some $8 or $9 million paid to St.

11 Clair, and 2-3 million paid for Belle River, but then

12 those are added to the invoice price of coal, so the net

13 effect is zero, there is no money that changes hands.

14 Q Well, I guess I'm asking, you know, in terms of cash flow

15 or capital requirements and overhead and reflection of

16 all indirect costs as well, whether or not the fuel

17 companies are paying a full proportionate share of the

18 costs on per-ton basis to get the coal from the mine to

19 the plant and also the contract for the coal?

20 A Like I said, we estimated I think -- I guess I don't know

21 the specific answer to your question. But as I

22 indicated, if it's 9 million or 10 million, then it's

23 added to the price of coal, and within our accounting

24 system, there's no cash that changes hands at the end of

25 the month.




238

1 Q So Edison is paying all the cash, and then you will make

2 an accounting adjustment later when the coal is

3 repurchased?

4 A Well, Detroit Edison is doing exactly the same thing they

5 did prior to the REF, we're not incurring any additional

6 costs associated with REF, so the way the Belle River/St.

7 Clair is structured, there's a fee that's paid and then

8 it's added to the price or the invoice, and so we pay

9 them, they pay us, and the net is zero each month.

10 Q But as far as cash outlay and covering all the costs and

11 having all the personnel and the expertise, et cetera,

12 Edison, just like before the fuel companies were created,

13 pays all the bills and then later on there's an

14 accounting entry to zero out the costs; is that what

15 you're saying?

16 A On coal handling and consulting fee. Now, for the actual

17 coal purchases, for example, there's two or three of our

18 major western coal suppliers, we get deliveries during

19 the month, they give us an invoice within one or two days

20 after the month, and then there is either 10 to, 10, 15

21 or 20 days is the payment terms. So for western coal

22 delivered to Monroe by rail, the affiliate will pay us

23 within three or four business days at the end of the

24 month, and at least for three or four of our major

25 western suppliers, we don't pay them until the 15th or




239

1 the 20th of the month. So in that situation, the

2 affiliate pays us before we actually pay our supplier.

3 Q O.K. So you're saying Detroit Edison pays all the bills

4 first, and then you actually get cash from the fuel

5 companies in reimbursement of those payments?

6 A Correct.

7 Q Within the --

8 A But like I said, in some instances they pay us before we

9 pay our suppliers.

10 Q O.K. Now, so then finally, when the coal is sold, resold

11 back to Edison, Edison is reimbursed for all of its

12 costs, is it?

13 A For all of its -- if the cost of coal is the same

14 weighted average inventory cost that we sold it to the

15 fuels company.

16 Q So in that process, then, Edison would be getting

17 reimbursed for unloading and handling expenses at the

18 plant sites, would they not?

19 A That's the accounting that's done at the end of the month

20 where we charge them for unloading and coal handling

21 consulting and they add it to the, if you will, to the

22 invoice, and within the SAP accounting system, those

23 transactions offset themselves and there's no cash that

24 changes hands.

25 Q Are the unloading and the handling expenses separately




240

1 billed or segregated out in the bills?

2 A I don't -- I'm sure it is, but I don't recall seeing a

3 bill. It is not part of the fuel cost that's invoiced,

4 it is separate, but because it's the way SAP handles

5 that, I'm not quite sure at this time.

6 Q Is Edison including in this Act 304 case for 2011 all of

7 the costs that it paid to the fuel companies for the coal

8 that it -- excuse me. Let me restate it.

9 Has Detroit Edison backed out of its Act

10 304 figures the costs for unloading and handling expenses

11 at the plants?

12 A There are no unloading or handling expenses in the fuel

13 costs of Detroit Edison that's included in 2011 PSCR

14 costs.

15 Q And where would they be included?

16 A They would be handled as an O&M cost in a main electric

17 rate case.

18 Q So are you saying that the fuel companies' bills to

19 Detroit Edison for coal do not include costs for

20 unloading and handling expenses?

21 A No. I'm saying that most likely the invoice we get with

22 them has multiple items, one of which is the price of

23 coal that we're buying for the month, and the other would

24 be the coal handling and consulting. We segregate those

25 out and handle them differently as it relates to O&M




241

1 expenses and fuel costs.

2 Q Is that based on your direct knowledge, or are you basing

3 that on some discussion with someone else?

4 A I indicated that I have not seen those invoices, but I

5 can assure you there are absolutely no coal handling and

6 consulting O&M-related costs included in fuel expense in

7 2011.

8 Q Now, with respect to the various agreements that you have

9 included in Exhibit A-30, you have not also included any

10 of the agreements that may exist relative to the REF

11 facilities that are located in Illinois or in Oklahoma;

12 is that right?


14 Q And the REF facilities located at those locations are

15 facilities that the DTE fuel companies or affiliates are

16 operating for independent third-party entities, are they

17 not?


19 Q So there's no ability to compare your contracts here with

20 the third-party independents in contrast to your

21 contracts with your own affiliates; is that right?

22 A I've never seen those and don't have access to them, so

23 I've not made that comparison.

24 Q And in negotiating these contracts that are shown in

25 A-30, you did not compare them or consider them to




242

1 contracts that were entered into with independent third

2 parties?

3 A Well, in 2009 I didn't know of any other REF facility

4 that was in operation, and in '011, no, with the Monroe

5 type structure and the coal fee rate, I did not compare

6 that. I mean subsequent I think to that, to those

7 agreements being signed and as included in my rebuttal

8 testimony and the exhibits, you can see that CERT, who is

9 one of the licensees who that deal with, I believe it's

10 Duke, and I imputed a 42-cent a ton benefit per their

11 testimony. And in A. J. Gallagher, they got their

12 investor presentation that's included as one of my

13 exhibits, A. J. Gallagher's got 29 of these facilities,

14 and there's 17 they define as being deployed, 12 they are

15 trying to find a host utility to site; and in there, they

16 have on average for their 17 deployed units a 75-cent a

17 ton fee or a discount offered to the host utility. The

18 Monroe power plant, we got a dollar, I think the average

19 for 2011 was like $1.06, because we get $1.375 for the

20 first 7 million tons, and $1.50 a ton coal fee rate over

21 7 million. I believe in '11 we had 7,450,000 tons. So,

22 you know, the data as included in my rebuttal testimony

23 would indicate we got a better deal than what the market

24 has offered others.

25 Q Now, the payment at Monroe, the coal fee that you, that




243

1 Edison gets paid, it is not a hundred-percent credited to

2 PSCR rates, is it?

3 A That's true.

4 Q And what portion is not?

5 A There's a total of 2.7 million I believe that is credited

6 to O&M, and the balance is credited to the PSCR.

7 Q And so how much is credited to the PSCR?

8 A I don't have that number in front of me.

9 JUDGE EYSTER: Mr. Lapplander, can you

10 turn to page 8 of your direct testimony. Do you have

11 that?

12 A 462,886 was credited to coal inventory in 2011.

13 JUDGE EYSTER: So for 2011, the total

14 coal fee rate paid to Detroit Edison was this 738,806

15 figure?

16 A Correct. That is correct.

17 JUDGE EYSTER: I think you just earlier

18 gave some testimony about that number being considerably

19 larger. Maybe I misunderstood you. Weren't you just

20 telling Mr. Keskey in one of your, in an answer that how

21 much was paid?

22 A Well, I'm -- yeah. Let me -- the numbers that -- the

23 2.76 million, that would be for a full-year operation,

24 and that's what was in 2012. But yes, I'm sorry to

25 confuse this. But for 2011, the coal fee rate was only




244

1 in effect for about six weeks of operation, but that's

2 the actual coal fee rate paid was $1.0375.

3 JUDGE EYSTER: O.K. And then are you in

4 charge of determining the allocation between O&M and coal

5 inventory?

6 A I am not.

7 JUDGE EYSTER: Do you know who is?

8 A That determination was made by the Monroe power plant.

9 Prior to entering into this agreement, they felt that

10 they would -- they identified the potential of the $2.7

11 million incremental O&M costs for consuming REF.

12 JUDGE EYSTER: Who is they?

13 A I believe at the time it was Brian Rice, who was the

14 plant manager.

15 JUDGE EYSTER: Do you know how those

16 numbers and those allocations were determined?

17 A I do not know really.

18 JUDGE EYSTER: And the 462,866 that's

19 part of this case, that's a cost of coal?

20 A Correct.


22 Q (By Mr. Keskey): Now, the portion that's not credited to

23 PSCR rates is then offset to Detroit Edison's operation

24 and maintenance expenses for purposes of base rates; is

25 that right?




245

1 A That's true.

2 Q Now, with respect to the other sites of the fuel

3 companies, you are not paying a similar coal fee, are

4 you?

5 A We are not being paid a similar coal fee rate, no.

6 Q And --

7 A Detroit Edison is not getting paid a similar coal fee.

8 Q O.K. And at those sites, would not Edison be incurring

9 some operation and maintenance expense just like they are

10 at Monroe?

11 A There have -- the only operating and maintenance expenses

12 that I'm aware of at St. Clair are spelled out in some

13 discovery requests that John Dau provided and that we've

14 been reimbursed for at St. Clair.

15 Q And what about Belle River?

16 A To my knowledge, there has -- I'm unaware of any prior

17 to -- what is it -- prior to 2012, I was unaware of any

18 incremental O&M expenses, but in 2012, the plant

19 negotiated an arrangement with Belle River Fuels Company

20 to get reimbursed for 25 cents a ton for what they

21 perceived as some incremental O&M expenses during their

22 test year.

23 Q So was that a renegotiation of one of their contracts?

24 A I would say it's just a letter agreement that they

25 executed and that it wasn't renegotiation of any existing




246

1 agreement.

2 Q Is there any bar that you know of or anything that would

3 prevent you from renegotiating your arrangements with the

4 fuel companies to provide for a coal fee or an increase

5 in coal fee on a going-forward basis?

6 A Well, if you look at MEC-12, page 2 of 2, in this case,

7 that's the revenue requirement for the St. Clair Fuels

8 Company.

9 JUDGE EYSTER: Where are you?

10 A This is MEC-12.

11 MR. BZDOK: Do you want a copy, Judge?

12 JUDGE EYSTER: Yes, please.

13 (Document provided to Judge Eyster.)

14 A This shows the revenue requirement calculation for the

15 St. Clair power plant, and this revenue requirement is

16 constructed to represent if Detroit Edison was the owner

17 of the REF facility at St. Clair, in there today, in SNF

18 for 2012 is coal inventory of $33 million, the working

19 capital benefit of that is 3.6 million. So if we were

20 to -- which if there was a tax partner and to try and

21 restructure this, you know, I'm not sure that's even

22 possible, but if you restructure that similar to Monroe

23 where there's only a fraction of the inventory owned,

24 that number goes, becomes much, much smaller, and if

25 you're consuming 1.8 million tons a year and you got a




247

1 coal fee rate of a dollar or a dollar two or three like

2 Monroe, you'll get a $1.8 million revenue stream, but you

3 got a $3.6 million revenue requirement benefit if you

4 have $33 million off your books. So it depends on the

5 situation. Up at Belle River/St. Clair where they own

6 all of the inventory for use in the particular units,

7 there's a pretty large working capital benefit for the

8 customer. So in this situation where we want to say,

9 well, let's just restructure this, if you do, you'd

10 probably end up having the customer pay higher rates.

11 Q (By Mr. Keskey): That's only if Edison were to make that

12 subtraction in working capital in the base rate case

13 and/or if they have a base rate case going forward; isn't

14 that true?

15 A Yes, when base rates are reset, that's when this would

16 take place.

17 Q Now, in your testimony, it's clear that Edison is not

18 obtaining any sharing or any portion of the tax credit or

19 tax credit monetization that is received by the fuel

20 companies and then by affiliates of DTE or of the third

21 parties that buy the benefits; isn't that right?

22 A That's correct.

23 Q So Edison has not negotiated any kind of offset to the

24 cost of coal for those tax credit benefits; isn't that

25 right?




248

1 A Well, I would say that the value that is in the

2 agreements today that we just talked about is the value,

3 is the value we extracted during our negotiations. All

4 these machines have a pretax loss, and the only way

5 they're profitable is through the tax credits. So, you

6 know, for example, at Monroe, we get what I believe is a

7 market rate for the coal fee. I mean if one could imply

8 that if we were to do deal with A. J. Gallagher, their

9 average discount on the 17 deployed units is 75 cents, so

10 if we did a deal with them, then one could imply that we

11 would be even worse off than if we have a deal with our

12 affiliate.

13 A. J. Gallagher on all their machines,

14 they buy the fuel as it enters the REF facility, they

15 don't want to own any inventory. If you look at the CERT

16 machines in Duke and Ameren, they talk about the CERT

17 only wanting to own two days' worth of inventory on site.

18 So you get an A. J. Gallagher and CERT, who A. J.

19 Gallagher, like I said, has got 29 machines and CERT's

20 got 15, they don't want to own any inventory, or a very

21 small amount. Our affiliate, on the other hand, they

22 take a different approach, and that iners to the benefit

23 of the customer.

24 Q Now, were you part of the negotiations on behalf of

25 Detroit Edison with the affiliate of DTE when the REF




249

1 projects were conceived and when the fuel supply

2 companies were created?

3 A Yes.

4 Q And did you negotiate on behalf of Detroit Edison?

5 A I did.

6 Q And who were you negotiating with?

7 A Primarily Katie Panczak and Jerry Endler.

8 Q Who were they representing?

9 A At the time, I believe DTE Energy Services.

10 Q And all of the subsidiaries, of course, are owned and

11 controlled by DTE Energy, right?

12 A Correct.

13 Q And DTE Energy and Detroit Edison have all of the same

14 boards of directors and executives, or virtually all the

15 same executives?

16 A There are some that are the same, yes. I don't recall

17 specifically.

18 Q The vast majority?

19 A Pardon?

20 Q Vast majority of directors and the executives of DTE

21 Energy --

22 A I believe we've talked about that last case, so I would

23 say that probably substantially they're the same.

24 Q And DTE Energy files a consolidated tax return, does it

25 not?




250

1 A I don't know.

2 Q Well, it is ultimately a consolidated holding company

3 where DTE is the owner, controller and the boss of the

4 whole operation; isn't that right?

5 A I'd say as a general rule, yes.

6 Q So when you were negotiating these contracts, you were

7 aware that you were subject or were part of the authority

8 of the ultimate holding company executives and directors

9 and supervisors, were you not?

10 A We were -- the fuel supply organization of Detroit Edison

11 were working on this arrangement, and during one of the

12 staff meetings that I -- and I report to Steve Kermis,

13 who's president of Detroit Edison, I raised a concern

14 that we needed a single point of contact between Detroit

15 Edison and the affiliate for negotiating all these deals,

16 and Steve Kermis, the president, said that I thought you

17 were doing that. So at that point in time, I got

18 appointed project manager, and I negotiated what I

19 thought was the best deal on behalf of Detroit Edison and

20 its customers.

21 JUDGE EYSTER: Where were the

22 negotiations at that point, what stage were they in?

23 A We were probably in the early contract construction

24 stage, constructing the contracts that make up the

25 Exhibit A-30.




251

1 JUDGE EYSTER: And O.K. Can you tell me

2 approximately when that would have been?

3 A I'm guessing maybe in the first or second quarter of

4 2009, maybe the second quarter of 2009.

5 JUDGE EYSTER: So these negotiations were

6 taking place by whom up until that time?

7 A I was -- my group was primarily responsible for those,

8 but I didn't believe there was clear authority that I was

9 in charge of the project, and during that staff meeting,

10 that's what I was given.

11 JUDGE EYSTER: So who -- what prompted

12 the negotiations to begin?

13 A Well, our affiliate, Detroit Edison's affiliate, Energy

14 Services, as I indicated earlier, had bought the license

15 from Chem-Mod in 2008, they were looking to site some

16 facilities; I think they finally got Energy Services'

17 authority from the board of directors sometime during

18 2009, probably, I don't know, I'm not sure when, and then

19 they -- we did some testing to see if it worked, as I

20 indicated earlier, and then we started negotiations on

21 the contracts, and they started construction of the

22 facilities.

23 JUDGE EYSTER: And what was your -- what

24 was your interest in requiring -- or acquiring the REF,

25 why were you interested in acquiring it, or were you?




252

1 A You mean utilizing it in our plant?

2 JUDGE EYSTER: Yes. Was this your idea,

3 or was this somebody else's?

4 A It was the idea of the affiliate, and like I say in my

5 testimony, that, you know, it looked to reduce the cost

6 to the customer through working capital benefit, and I

7 say in my testimony that it gave us a free option to look

8 at the impact that this would have on helping to control

9 mercury reductions, or the cost of complying with mercury

10 reductions; there are some NOx and SO2 benefits

11 associated with this technology.

12 JUDGE EYSTER: What are you going to do

13 at the end of this ten-year contract?

14 A I believe it's a Site License and Service Agreement. At

15 the end of ten years, to the extent that any of these

16 facilities exist on our site, we have the unilateral

17 option to buy any or all of the facility, and if we

18 choose not to, then at their, at the fuel companies'

19 expense, they will remove all of the facilities that they

20 built.

21 JUDGE EYSTER: I think you indicated

22 earlier that you were given tax advice by an employee of

23 DTE Energy, correct?

24 A Correct.

25 JUDGE EYSTER: And apparently based on




253

1 that advice, you're testifying that pursuant to Internal

2 Revenue Code, in order to qualify for the tax credit, the

3 REF can not be sold to an affiliated company; is that

4 right?

5 A That's correct.

6 JUDGE EYSTER: O.K. And DTE Energy, or

7 maybe DTE Energy Services, retains an interest in these

8 fuels companies; is that correct?

9 A They have -- once they monetize them, they retain a

10 one-percent ownership interest.

11 JUDGE EYSTER: Was there any inquiry made

12 on your part with regards to why Detroit Edison couldn't

13 have itself structured an arrangement similar to that

14 that would allow the tax credits to flow to Detroit

15 Edison rather than -- I don't know who they go to, but I

16 don't know if you do either.

17 A I do not.

18 JUDGE EYSTER: Did that -- was there an

19 inquiry made with regards to --

20 A Yes. And my tax counsel said that it is probable that

21 the sale of an unrelated person requirement would not be

22 satisfied if Detroit Edison was on both sides of the

23 transaction, if we were the owner and the buyer of the

24 REF. So he uses the word probable because, as he

25 indicates, every tax lawyer has got a different opinion




254

1 as to whether this will work or not.

2 JUDGE EYSTER: And that person would have

3 been who?

4 A Brian Wheeler.

5 JUDGE EYSTER: This is the same person

6 you mentioned earlier?

7 A Correct.

8 JUDGE EYSTER: Did you seek advice from

9 anybody else? I mean it would appear, with what little I

10 know, that this person might have a conflict of interest

11 in terms of advising you and asserting for DTE Energy.

12 A I didn't seek advice from anybody else other than him.

13 But can I clarify something?

14 JUDGE EYSTER: Sure.

15 A If you again go back to MEC-12, the St. Clair revenue

16 requirement. So if Detroit Edison owned this, we would

17 say we'd have 12.3 million of plant in service, we'd have

18 similar costs and expenses that the affiliate, that the

19 St. Clair Fuel Company is portraying here, so Detroit

20 Edison's revenue requirement if we own this facility

21 would be $10,174,000 as shown on the bottom called total

22 revenue requirement. Part of my rebuttal --

23 JUDGE EYSTER: O.K. Wait, wait, wait. I

24 was looking at the wrong page, sorry. O.K.

25 A O.K. So at the bottom, if Detroit Edison owned this, our




255

1 revenue requirement would be 10.1 million. Part of my,

2 or almost all of my rebuttal testimony around tax

3 credits, where we would not be eligible for those, is in

4 response to Witness Crandall of MCAAA, who calculates an

5 $18 million, and then reduces it to some $11 million, if

6 you will, credit to the PSCR, because we should get some

7 portion of the tax credit. In that calculation, he

8 adjusts the $6.00 tax credit by $2.00 for O&M, but then

9 he's using $4.00 a ton, which implies that Detroit Edison

10 owns the facility a hundred percent, gets a hundred

11 percent of the tax credits. That is totally inconsistent

12 with Section 45 tax credits where you have to sell to an

13 unrelated third party.

14 If you take the revenue requirement at

15 St. Clair, if Detroit Edison owned it, it would be 10

16 million, 10.1 as shown on MEC-12. We're targeting 1.8

17 million tons of REF each year. I use $6.40 a ton tax

18 credit, just to give you an idea, I think it was $6.47,

19 but I use $6.40; at 1.8 million tons the total tax credit

20 available is $11 1/2 million. We have a revenue

21 requirement of 10 million. But if arguably Detroit

22 Edison could do this themselves and monetize this, I made

23 the assumption that we'd have $2.00 of O&M, we'd have

24 $4.40 left of the $6.40 total credit, we'd split that

25 with a tax investor, so Detroit Edison would get $4.40 a




256

1 ton of the $6.40 tax credit. So if you take $4.20 a ton

2 times the 1.8 million tons of REF, you get 7.56 million.

3 So if Detroit Edison did this project themselves, we

4 would put it in rate base, we'd have a revenue

5 requirement of 10 million and contribution from the tax

6 credits of 7.5 million, so it would be a loser.

7 JUDGE EYSTER: That's -- let me just make

8 sure I understand that. That's with Detroit Edison

9 owning the equipment that is owned by the fuels companies

10 currently?

11 A Correct.

12 JUDGE EYSTER: And get a return on that

13 equipment just as it would in any other capital

14 investment, correct?

15 A Correct. The calculation here, about four, five lines

16 down, the 6.586, that's the after-tax rate of return

17 authorized in the last rate case for Detroit Edison, and

18 the revenue multiplier 1.636 was also included in the

19 last year's main electric rate case.

20 JUDGE EYSTER: Now, the fuels companies

21 don't have the same accounting practices as Detroit

22 Edison; is that correct?

23 A That's true.

24 JUDGE EYSTER: They're not calculating a

25 return on this capital investment the way you would be




257

1 permitted to; is that correct?

2 A I would think that their cost of capital would be

3 different than ours. I don't know what it is, but I

4 think it would be different than ours.


6 MR. KESKEY: Yes, your Honor. I think we

7 want to go through a few figures here in terms of what

8 was just stated, but prior to that, I'd like to hand out

9 a copy of Section 45 of the tax code. I'm not sure it's

10 necessary to make it an exhibit, unless you want to, your

11 Honor.

12 JUDGE EYSTER: Well, why are you handing

13 it out?

14 MR. KESKEY: So I can have the witness

15 read one paragraph of it, and so I can ask him some

16 questions.

17 (Document distributed.)

18 Q (By Mr. Keskey): Now, you've indicated at several places

19 in your testimony that under Section 45, that the utility

20 couldn't make arrangements to take advantage of this tax

21 credit itself and it had to make arrangements with an

22 unrelated party; is that right?

23 A Like I had just indicated in my rebuttal testimony, that

24 that testimony was rebutting Witness Crandall's assertion

25 that implied in his calculation is that the Detroit




258

1 Edison Company owns the facility and gets a hundred

2 percent of the tax credit, and that's where I said, you

3 know, it itself does not qualify, we do not qualify for

4 the tax credit under that set of assumptions.

5 Q Well, that's not the question I'm asking you right now.

6 I'm asking you, if you look at the definitions under

7 subpart (e), which is more than halfway through the

8 handout, sub (4) it says Related Persons. Do you see

9 that paragraph?

10 A No. Where is that?

11 Q It's about four or five pages ahead of the back of the

12 last page.

13 A You say four or five from the back?

14 Q Yes.

15 MR. ERICKSON: It's the tenth page of

16 this document, is that where we're at?

17 MR. KESKEY: Yes, it's (4), Related

18 Persons.

19 Q (By Mr. Keskey): You in your testimony have referred to

20 (8) Refined Coal Production Facilities, or at least you

21 had quoted one of these sections, I believe you quoted

22 (8) Refined Coal Production Facilities, in your

23 testimony, you quoted part of that section, including the

24 reference to an unrelated person; isn't that correct,

25 that you quoted subsection (8), or part of it, in your




259

1 testimony?


3 Q O.K. And you were discussing the requirement of an

4 unrelated person; do you recall that?

5 A Yes.

6 Q On the page before that, you see (4) Related Persons, and

7 this is under the subsection that deals with (e)

8 definitions and special rules under the prior page. You

9 know, as you understand it, and I know I'm not asking for

10 a legal opinion, but when you are making a point about

11 the requirement of an unrelated person, would the

12 definition of, in (4), Related Persons, be applicable to

13 how you would define that requirement?

14 A I'm not sure I understand what this is saying.

15 Q Well, you quoted subsection (e)(8), or a part of it,

16 which included reference to a requirement of being, of

17 selling to an unrelated person. In the same subsection,

18 there's, on the prior page, (4) Related Persons. Could

19 you read that small paragraph into the record?

20 A "Persons shall be treated as related to each other if

21 such persons would be treated as a single employer under

22 the regulations prescribed under section 52(b). In the

23 case of a corporation which is a member of an affiliated

24 group of corporations filing a consolidated return, such

25 corporation shall be treated as selling electricity to an




260

1 unrelated person if such electricity is sold to such a

2 person by another member of such group."

3 Q Now, would that, that separate paragraph you just quoted

4 be the authorization by which the affiliates, DTE Energy

5 or the holding company, or for that matter, the fuel

6 companies, were able to claim the tax credit?

7 A It may well be, but I don't know.

8 Q Well, if Detroit Edison had formed its own subsidiary to

9 undertake these transactions under the umbrella of

10 Detroit Edison as the utility, wouldn't it be a

11 subsidiary just in the same sense as DTE Services or the

12 holding company or the fuel companies?

13 MR. MAQUERA: Objection. Asked and

14 answered.

15 MR. KESKEY: I don't believe I've asked

16 the question until now.

17 JUDGE EYSTER: Well, I'm not sure it was

18 asked and answered; I think I asked him similar

19 questions. But I'm not really sure that any answer that

20 would be given would be terribly helpful unless,

21 Mr. Keskey, you can lay some sort of foundation for it.

22 Like you really haven't established much of a foundation

23 for this document and from what he's reading from, you

24 haven't established that he actually has the credentials

25 to interpret it. I think he's indicated he's not a tax




261

1 attorney, but the advice that he was given with regards

2 to who was eligible for tax credits came from a gentleman

3 whose name I don't remember, but that he worked for

4 Detroit, DTE Energy, and that he hasn't sought advice

5 from anybody else. So I'm not sure where --

6 MR. KESKEY: Well, I'm testing the

7 credibility of his statements in his testimony about

8 Edison could not be the host for this transaction, it had

9 to be an unrelated person, and he quotes from part of

10 this very same subsection, except he omits the definition

11 of what an unrelated person is. Now, I agree he's not a

12 tax attorney, he's not qualified for making a lot of the

13 statements he does in his testimony, but in fact he's

14 making the statements, and I think I should have the

15 right in cross-examination to test that and the scope of

16 his knowledge and whether he considered this definition

17 in relation to his citation of the very same subsection,

18 albeit a different subparagraph of the same subsection,

19 which goes right to the heart of the definition that's

20 under (4) Related Persons.

21 JUDGE EYSTER: All right. Objection is

22 overruled.

23 MR. KESKEY: Could you repeat the

24 question, please?

25 (The record was read aloud as follows:




262

1 "Q Well, if Detroit Edison had formed its own

2 subsidiary to undertake these transactions

3 under the umbrella of Detroit Edison as the

4 utility, wouldn't it be a subsidiary just in

5 the same sense as DTE Services or the holding

6 company or the fuel companies?")

7 A As I indicated before, my tax counsel, he phrased it this

8 way; he said, it is probable the sale of an unrelated

9 person requirement would not be satisfied if Detroit

10 Edison was on both sides of the transaction. So I think

11 by using that word probable, one could probably have that

12 kind of structure, but in his opinion, you got a big risk

13 of whether the IRS would approve the tax credit.

14 Q (By Mr. Keskey): Well, in the same sense --

15 A I mean that's all I can offer at this time.

16 Q Well, O.K. Just --

17 JUDGE EYSTER: Mr. Bzdok.

18 MR. BZDOK: It appears to me that in

19 delivering that answer to Mr. Keskey, the witness is

20 reading from handwritten notes which are in front of him

21 in his binder, and I would like leave to examine those

22 handwritten notes if in fact they were what he was

23 referring to in his answer.

24 JUDGE EYSTER: Mr. Lapplander, I didn't

25 see what you were doing, but are you referring to notes




263

1 that you have before you?

2 A This is what I was reading from.


4 A Happy to take a look at it if you'd like.

5 JUDGE EYSTER: If you could provide that

6 to counsel. Yeah, it is -- if you're providing

7 testimony, you need to testify from your own

8 recollections initially. If there's some documents that

9 you're going to rely upon -- well, you shouldn't being

10 relying upon documents to give your testimony. Generally

11 if there's a document that's going to be used to refresh

12 your recollection, it would be better brought to the

13 attention of counsel you might wish to use it, or if it's

14 some contemporaneous note, I suppose it could be admitted

15 into evidence.

16 Mr. Bzdok, did you want to take a look at

17 that?

18 MR. BZDOK: I guess I would just request

19 is that if his lawyers haven't seen it, maybe when we're

20 on a break, his lawyers can look at it first and

21 determine if there's an objection. It looks like there's

22 several pages of notes there, and I'd like to see those,

23 but I don't want to get into the middle of the flow. I

24 just noticed him reading from the notes when he gave that

25 answer.




264

1 JUDGE EYSTER: Well, what are those notes

2 that you're using?

3 A Well, when I go through some of the discovery, my

4 testimony, what I think I'm going to be talking about

5 here, I might write what I considered like a storyline of

6 how I might respond to a particular line of questioning.

7 So I just for the sake of, you know, speeding up things,

8 like here I say, you know, I go on to say, it's probable

9 that tax counsel from a third-party investor would

10 recommend that their client not enter into a transaction

11 where DECo is on both sides. And it says, if you can't

12 find a tax partner, you can't get the tax credits. And

13 then I go on to say, well, this is according to my

14 rebuttal testimony where I state that utilities utilizing

15 REF also do not own nor operate the REF facilities and do

16 not get the production tax credits. So I just say

17 rebuttal testimony, page 7, so that if I get that

18 storyline, I'm not fiddling through and I can perhaps

19 speed up the cross-examination. That's just by way of

20 example.

21 JUDGE EYSTER: O.K. Please don't refer

22 to your notes, then, during the course of cross-

23 examination.

24 Q (By Mr. Keskey): Mr. Lapplander, did you ask your tax

25 counsel -- not I guess technically your tax counsel --




265

1 but the gentleman that you referred to as to whether

2 Detroit Edison could set up separate fuel company

3 subsidiaries to undertake these transactions and still

4 obtain the tax credit benefits that are provided under

5 Section 45?

6 A The discussion I had with him, he indicated that it was

7 probable that we would not pass IRS audit, as I

8 indicated, and that's to the extent of our discussion.

9 Q I'm not talking about Detroit Edison itself, I'm talking

10 about if Detroit Edison were to formulate its own

11 separate subsidiary, much in the same way that DTE

12 Services is, did you ask specifically whether Detroit

13 Edison, as a utility, could capture those tax credit

14 benefits by creating in a similar fashion a subsidiary?

15 A I did not.

16 Q Did you undertake any requests to the Public Service

17 Commission or file any kind of accounting application or

18 request for approval to get some guidance there?

19 A I did not.

20 Q Did Detroit Edison?

21 A I'm not aware if they did or not.

22 Q Did Detroit Edison put out a competitive bid or RFP to

23 the industry as to who might be interested in providing

24 the REF project services?

25 A We did not go out for competitive bids, no.




266

1 Q Did Detroit Edison put out any kind of request for legal

2 advice to anybody else outside of the Company as to

3 Section 45 and what the options were for Detroit Edison

4 itself to benefit from those tax credits or one of its

5 subsidiaries?

6 A I'm unaware of that taking place. But as I say in my

7 testimony, at the time we did this, there were only three

8 licensees to Chem-Mod that we are aware of, and today I'm

9 only aware of three, so DTE Energy had an exclusive

10 license to market this technology to the Detroit Edison

11 Company, so I don't think the responses would have been

12 very good if we went out for bids because I don't believe

13 anybody else could respond to the RFP.

14 Q So if DTE Services had the license for the Chem-Mod

15 process, then it had incentive right from the beginning

16 to impose that REF program on Edison, wouldn't that --

17 A They had every incentive to try to make the REF, if you

18 will, business at Detroit Edison successful, yes. They

19 didn't impose anything on them.

20 Q Did you make any inquiries of any tax attorney at Detroit

21 Edison separate from DTE or DTE Services relative to all

22 the ramifications under Section 45 and the various

23 options?

24 A To my knowledge, Detroit Edison doesn't have any tax

25 attorneys, so no, I did not.




267

1 Q Would Detroit Edison have the capability of having access

2 to some tax attorneys?

3 A Detroit Edison has access to tax attorneys at the holding

4 company level.

5 Q Only, Detroit Edison --

6 A I would see no reason why to go hire outside tax counsel

7 rather than in-house.

8 Q And in-house refers to DTE Energy and not Detroit Edison?

9 A Correct.

10 JUDGE EYSTER: Do you know how they came

11 to be that the license, the Chem-Mod license came to be

12 owned by Detroit -- DTE Energy Services?

13 A I do not. I just know that we responded to a discovery

14 request that said on or about, and I forget the month in

15 2008, they acquired that license.

16 JUDGE EYSTER: Is that a discovery

17 response that you gave?

18 A Yes.

19 JUDGE EYSTER: How did you learn that?

20 A I believe somebody on my staff actually called I believe

21 it was Katie Panczak and asked, through the discovery was

22 asked I think the date that the affiliate acquired the

23 license, so we called Katie and she gave us the date.

24 JUDGE EYSTER: And you don't know who was

25 responsible for taking that action or acquiring the




268

1 license?

2 A I don't. I don't.

3 JUDGE EYSTER: And I take it you don't

4 know who that was approved by, then?

5 A I don't.



8 Q (By Mr. Keskey): Mr. Lapplander, even though DTE

9 Services set this up so that they could realize or

10 monetize the tax credit benefits, do you know of any

11 reason why that subsidiary of DTE Energy could not have

12 credited Detroit Edison as a utility for the value of

13 those tax benefits?

14 A We negotiated a deal with the fuel companies, and

15 particularly up at Belle River/St. Clair, given the

16 economic substance doctrine that was in place, which it

17 will, obligates the project company to demonstrate a net

18 positive net income or an internal rate of return that's

19 positive, I believe that the structure we have there,

20 there could not be any more value attracted by Detroit

21 Edison or they never would have built those facilities

22 because it could not demonstrate a positive net income

23 for the project company absent the tax credit.

24 Q I'm asking you specifically about DTE subsidiaries which

25 are shown on your chart which is in Exhibit MCAAA-12, as




269

1 to why those subsidiary companies that are over and above

2 or supervising the various fuel companies, why they could

3 not have provided the tax credit benefits to Detroit

4 Edison, or at least a significant share of such benefits,

5 do you know of any prohibition to them undertaking that?

6 A I don't know of any prohibition.

7 Q And who appointed the various -- let me ask you it this

8 way. Do each of the fuel companies have a president?

9 A I don't know.

10 Q Do each of the fuel companies have someone who is manager

11 in charge?

12 A To my knowledge, Katie Panczak is, I believe her title is

13 vice president, and she might be in charge of all of the

14 fuel companies, so I don't believe there's an individual

15 "in charge" or at that level for each individual fuel

16 company.

17 Q And Ms. Panczak, where does she work?

18 A Well, her offices are out in Ann Arbor, it's one of the

19 deregulated subsidiaries.

20 Q Is she with DTE Energy or one of these affiliates that

21 you show in your discovery response?

22 A I believe she's an employee of DTE REF Holdings, but I am

23 not sure of that.

24 JUDGE EYSTER: Mr. Lapplander, is there a

25 reason that Detroit Edison isn't taking the position that




270

1 those tax credits should be considered a cost of fuel and

2 credited in this PSCR case?

3 A Well, we negotiated a deal with our affiliates and we're

4 extracting some value out of those, and it's not part of

5 the arrangement that we have with our affiliate. And as

6 I indicated there, at least for St. Clair, and it's

7 similar to Belle River and Monroe, if you run the

8 numbers, if we were to own those facilities, we would

9 either loss money or just break even, and in Monroe's

10 case, we'd make just a little bit.

11 JUDGE EYSTER: Well, I'm not as

12 interested in that scenario of owning them, I'm going to

13 assume that Section 45 wouldn't allow you to own them and

14 get the tax credits. So I think I wrote in the PFD, I

15 had some questions about why similar arrangements

16 couldn't have been made, and I think that that was

17 something that the record didn't, at least as best as I

18 could figure out, didn't address. But it's -- I mean

19 there's some suggestion here that -- the agreements that

20 you have with these fuel companies doesn't address how

21 those tax credits are going to be, those profits will be

22 allocated or who gets them or how they're going to be

23 accounted for?


25 JUDGE EYSTER: O.K. So it's -- why would




271

1 it not be in the interest of Detroit Edison then to, on

2 behalf of its customers, to try and convince the

3 Commission that those tax credits should be credited to

4 customers?

5 A Well, Detroit Edison doesn't have the license from

6 Chem-Mod, Detroit Edison didn't spend the -- St. Clair

7 Fuels Company spent $19 million building the facility in

8 2009, Belle River spent 13 million building their

9 facilities, I don't know what Monroe spent, but it's

10 probably somewhere in between, so you got 40 plus million

11 in capital that the affiliate spent. We didn't spend any

12 capital, we didn't take any risk that this would work.

13 The affiliate at Belle River, we're still testing, so

14 they've been spending money and not earning anything for

15 a couple, three years now.

16 JUDGE EYSTER: Are they not getting the

17 tax credit at Belle River?

18 A To my knowledge, they have not sold a membership interest

19 and --

20 JUDGE EYSTER: Because I think in your

21 testimony you've indicated, or maybe it's not in this

22 case, but they are considered on line for tax purposes,

23 right?

24 A Correct. They had that, the Belle River Fuel Company had

25 those machines up and running and producing refined coal




272

1 in December of '09, and at that time, a refined coal

2 facility had to be producing coal by the end of the year

3 in 2009, so they're placed in service from an IRS tax

4 credit standpoint.

5 JUDGE EYSTER: O.K. But you don't know

6 if they're receiving tax credits?

7 A I do not. I know they have not sold a membership

8 interest in that, in the Belle River machines like they

9 did at St. Clair and at Monroe.

10 JUDGE EYSTER: And how do you know that?

11 A Because we would have known that in our contract

12 administration process that they in fact have a tax

13 partner, they would have monetized it, and the contracts

14 would then require the Belle River Fuels Company to own a

15 hundred percent of the coal inventory for the Belle River

16 power plant. That has not taken place, so there hasn't

17 been a monetization of those machines.

18 JUDGE EYSTER: O.K. I guess I'm still

19 not -- I don't think you answered my question. I think

20 you may have been explaining why Detroit Edison doesn't

21 own the facilities. But in order to look at DTE Energy,

22 if one were to look at DTE Energy, the credits lower the

23 cost of coal, correct?

24 A The tax credits create a revenue stream that offset the

25 pretax loss of running these machines, that then the fuel




273

1 company can offer us, like at Monroe, the coal fee rate.

2 A. J. Gallagher has got a page in their testimony, or

3 their report, investor presentation, and it says these

4 machines operate at a pretax loss, and the tax credits

5 then pick up that loss and there's something left over.

6 So we don't get credits directly from this, but there's

7 value --

8 JUDGE EYSTER: Who is we?

9 A Detroit Edison does not get tax credits directly from

10 these projects, tax credits create value for the fuels

11 company, and they, and if you will, through our

12 contracts, by them owning our inventory at Belle

13 River/St. Clair, reduce our working capital for the

14 benefit of the customer, and at Monroe, they own a

15 smaller portion of the inventory and then they pay us the

16 coal fee rate.

17 JUDGE EYSTER: O.K. So correct me if I'm

18 wrong then: The reason that you don't feel it's in the

19 interest of Detroit Edison to try and claim the revenue

20 that's generated by these tax credits as a PSCR cost is

21 that it's not in the contracts you signed?

22 A That's true.

23 JUDGE EYSTER: Is there any other reason?

24 A As I just explained, there's value that's being created

25 through these projects, and we're getting the value in a




274

1 different form.

2 JUDGE EYSTER: That's included in the

3 contracts, right?

4 A Correct.

5 JUDGE EYSTER: Mr. Keskey. Well, we'll

6 take a short break. We're off the record.

7 (At 2:59 p.m., there was a 15-minute recess.)

8 JUDGE EYSTER: Back on the record.

9 Mr. Keskey.


11 Q (By Mr. Keskey): Mr. Lapplander, before the break you

12 were discussing what you were claiming would be certain

13 losses or risks that the affiliate was undertaking by

14 undertaking this REF transaction. And let me ask you

15 first, would you think that DTE Energy or its affiliates

16 would be interested in undertaking transactions that

17 would carry a loss?

18 A No.

19 Q And when you refer to losses or such matters, you don't

20 mention any amount of the benefits received from the tax

21 credits or the monetization of the tax credits, do you?

22 A I do not.

23 Q And in fact, despite extensive discovery in this and past

24 cases, you and your company have not revealed what the

25 benefits are that were realized by the fuel companies or




275

1 the other affiliates of DTE from the tax credits or from

2 monetizing the tax credits, have you?

3 A We've not provided that.

4 Q And is it also correct that your company and you have

5 taken the position that the books and the records of the

6 fuel companies are separate from Edison and that you

7 would not supply those?

8 A I believe that's the position of our legal department,

9 and that's why they had the legal objection.

10 Q Are you aware of whether or not the Staff of the

11 Commission has undertaken any audit of the books and

12 records of the fuel companies or of the other affiliates

13 of DTE that are involved in these transactions?

14 A I do not know.

15 Q Do you know of -- do you know of such an audit?

16 A I do not know.

17 MR. KESKEY: Your Honor -- before I ask

18 you that, I have another question.

19 Q (By Mr. Keskey): Now, have you had a chance to review

20 the various exhibits that we handed out this morning and

21 that have been identified as MCAAA-12 through 26?

22 A I have.

23 Q And with respect to those exhibits, do you believe the

24 responses provided in the discovery and the information

25 provided in the portions of the SEC reports are accurate,




276

1 to the best of your knowledge?

2 A As it relates to my discovery responses, yes. I believe

3 the 10Ks are correct because I review those on a routine

4 basis. The other -- I think some of the 8Ks that are

5 some presentations or other things, I'm assuming those

6 are accurate; I have never reviewed those, but I could

7 assume that they're, perhaps they're correct, but as I

8 said, I have reviewed some of that.

9 MR. KESKEY: Your Honor, I would like to

10 move for the admission of Exhibits MCAAA-12 through 26,

11 and I may be mistaken, but I believe the Company doesn't

12 have a -- does not have an objection to that.

13 JUDGE EYSTER: Are there any objections?

14 MR. MAQUERA: No objection.

15 JUDGE EYSTER: MCA-12 through MCA, what

16 was that, 26; is that correct?

17 MR. KESKEY: Right.

18 JUDGE EYSTER: Are admitted into

19 evidence.

20 Any more cross, Mr. Keskey?

21 MR. KESKEY: Yes, your Honor.

22 Q (By Mr. Keskey): Let me turn to page 13 of your rebuttal

23 testimony, and if you look at line 8 through 11 of, not

24 through 11, but your first sentence of 11, could you read

25 that question and that one sentence answer?




277

1 A Did you ask me to read the question?

2 Q Yes. Just for the contexts of the record, could you read

3 that question again and the one-sentence answer?

4 A "What is your opinion with regard to Witness Crandall's

5 speculation that 'The Fuels Companies may be planning to

6 sell REF coal sales to unrelated third parties?"

7 JUDGE EYSTER: Where are you reading

8 from?

9 MR. KESKEY: Page 13, the question on

10 line 8 to 10.

11 Q (By Mr. Keskey): I believe you misquoted one word of

12 that. I don't think you asked in that question "sell"

13 REF wholesale, I think you said "make".

14 A You want me to read the question again?

15 Q If you could read the question again, and just that first

16 sentence of that answer.

17 A "What is your opinion with regard to Witness Crandall's

18 speculation that 'The Fuels Companies may be planning to

19 make REF coal sales to unrelated third parties?" The

20 first part of answer is, "Nothing could be further from

21 the truth."

22 Q O.K. Now let me refer you to your Exhibit A-30, the

23 Refined Coal Supply Agreement, et cetera, and if you'd

24 look at page 12 and 13 of that, it's a very short

25 paragraph. It's Section 5.2, if you could read that




278

1 section, including the title, it's page 16 of 806 of your

2 Exhibit A-30.

3 A "Section 5.2. Sale to Third Parties.

4 "Any Refined Coal produced at the Facility and not

5 purchased by Buyer, for any reason, may be sold by Seller

6 to third parties or otherwise disposed of subject to

7 compliance with applicable existing permits, Coal

8 Purchase Contracts and coal transportation agreements.

9 This Section 5.2 is not intended and shall not be

10 construed to limit any remedies available to Seller

11 hereunder or under applicable Law."

12 Q So that section would indicate that the fuel companies or

13 some other entity of DTE Energy retains the right to sell

14 REF to other parties besides Detroit Edison; is that

15 right?

16 A That's what the Refined Coal Supply Agreement says. I

17 believe in my rebuttal testimony someplace it says that

18 they need our consent to sell to a third party. In

19 addition, the REF facilities are constructed such that

20 the coal the REF produced can only go to, in this case,

21 the Belle River power plant. They'd have to physically

22 reconstruct the whole facility to create some REF, put it

23 on the ground, and then if they, what this provision

24 would then allow is they could load it in a truck and

25 sell it, however, we need to give our consent, and since




279

1 under the Coal Handling and Consulting Agreement we have

2 the exclusive right to buy coal, we never buy any more

3 coal than is needed at our power plant.

4 Q Belle River, can the fuel companies sell REF coal

5 directly to MPPA?

6 A No.

7 Q Do they need your consent to do that, or I mean Detroit

8 Edison's consent?

9 A All of the coal produced -- all of the coal, all of the

10 REF produced at Belle River is sold to Detroit Edison.

11 Detroit Edison has a Participation Agreement with MPPA,

12 and Detroit Edison has sold coal to MPPA under that

13 Participation Agreement since the plant has been, since

14 the plant was built back in 1984, and we will continue to

15 operate under the Participation Agreement going forward.

16 JUDGE EYSTER: Mr. Lapplander, did you

17 testify in this case that -- and I believe you did --

18 that one of the reasons that Detroit Edison, one of the

19 reasons you indicate that you, I guess as evidence that

20 you negotiated at arm's length was that the MPPA had

21 reached agreement with the fuels companies for the

22 provision of REF?

23 A Correct.

24 JUDGE EYSTER: How is -- I guess I need

25 you to, if you could, to explain that a little bit,




280

1 because I'm somewhat confused by the arrangements that

2 the fuels companies have with MPPA and how it is that

3 this became -- I mean it sounds like you're saying this

4 became a model for the agreement that you made, and yet

5 it sounds like the arrangements, for instance, in your

6 rebuttal, it suggests that you actually sell the refined

7 coal to the MPPA. So sorry about that rather long and

8 complex question, but can you just explain the

9 relationship between the MPPA and the fuels companies as

10 you understand it? And Detroit Edison I guess, because

11 it sounds like the three of you are all intertwined

12 with --

13 A MPPA through the Participation Agreement owns

14 approximately 18.6 percent of the Belle River power

15 plant, and I believe when we were looking at the Belle

16 River Site License and Service Agreement, a signatory to

17 that agreement was MPPA, because MPPA in fact owns 18.61

18 percent of the property, the facility, et cetera,

19 et cetera. One of the things that we had to do included

20 in a memo of understanding that modifies I believe the

21 Participation Agreement, I'm not sure, was to include the

22 refined coal adder calculation in an agreement with MPPA

23 whereby adjusting, I believe, the method of calculating

24 the price of coal that MPPA would pay Detroit Edison. I

25 believe, while I haven't seen it, I believe there was a




281

1 similar type agreement wherein the Belle River Fuels

2 Company maybe buy a portion or all or a portion of their

3 inventory like they would ours if we actually get a tax

4 partner and close on this transaction, so there's

5 agreements of that nature between MPPA and the fuels

6 company.

7 JUDGE EYSTER: What was the agreement

8 that MPPA had prior to the agreement that you made?

9 A There was a Participation Agreement entered into between

10 Detroit Edison and MPPA I believe back in the early '80s.

11 JUDGE EYSTER: O.K. Maybe I

12 misunderstand the testimony that you've given. I had the

13 impression that as part of the justification you've given

14 for entering into the contract with the fuels companies

15 was that the MPPA had already negotiated a contract upon

16 which the one you entered into was based?


18 JUDGE EYSTER: Well, what do you mean,

19 that's your understanding? What was your participation

20 in this?

21 A I don't know the exact date that the fuel companies

22 executed their deal with MPPA, but I do know that the

23 refined coal adder is identical to the one that Detroit

24 Edison has in our Refined Coal Supply Agreement, because

25 I saw that in a memo of understanding between Detroit




282

1 Edison and MPPA that my boss executed.

2 JUDGE EYSTER: What's the price you

3 charge MPPA for refined coal?

4 A Today, since the, there is no refined coal adder, because

5 we've waived that in the Refined Coal Supply Agreement

6 while we're testing, the price that we sell coal to

7 MPPA -- the price Detroit Edison sells coal to MPPA is,

8 follows the pricing provisions of the Participation

9 Agreement as amended by some arbitration ruling that we

10 had 10 or 15 years ago. But to my knowledge, the price

11 that MPPA pays for coal is slightly higher than our

12 average cost of inventory, and therefore, there's a

13 slight benefit to the customer as a result of that sale.

14 JUDGE EYSTER: How much do they pay for

15 the reduced emissions fuel?

16 A Currently it's the same as their normal coal price

17 because there's no refined coal adder, so it would be the

18 same as normal coal.

19 JUDGE EYSTER: So MPPA receives reduced

20 emissions fuel at no cost?

21 A No. They receive reduced emission fuel priced at the

22 coal price specified in the Participation Agreement.

23 JUDGE EYSTER: They receive it at the

24 same price that they would pay for coal?

25 A Correct.




283

1 JUDGE EYSTER: So the refined portion of

2 it does not cost them anything?

3 A Correct. The process of refining the coal doesn't add

4 any additional cost to their price that they pay today.

5 JUDGE EYSTER: O.K. And I'm still not

6 clear. So then this Participation Agreement that you've

7 had since the '80s, plus some changes to it over the

8 course of the years, what you're referring to in your

9 testimony when you say MPPA had an agreement with the

10 coal -- fuels companies, and that based on that, you've

11 entered into these agreements. Maybe I'm just

12 misunderstanding your testimony.

13 A Well, I wouldn't characterize it that way. I would

14 characterize it that the fuel companies were negotiating,

15 if you will, simultaneously with Detroit Edison and MPPA,

16 and independent of each other, that being Detroit Edison

17 and MPPA, MPPA came to an agreement that has a similar

18 structure that we have, and therefore, you know, I think

19 I say in my testimony there's no reason for MPPA to enter

20 into this transaction unless they feel it's, you know,

21 what the market offers per se, and so we would then claim

22 as that process went, we could then argue that it was an

23 arm's length transaction since ours was similar to what

24 MPPA entered into.

25 JUDGE EYSTER: Do you recall where that




284

1 appears in your testimony?

2 MR. BZDOK: Page 11 of his direct.


4 MR. BZDOK: Page 11 of his direct.

5 JUDGE EYSTER: O.K. Mr. Lapplander, page

6 11, line 9: "What are some of the other reasons that

7 Detroit Edison moved forward with this REF project with

8 DTEES?" Answer: "It seemed reasonable since DTEES had

9 already reached a similar agreement with the Michigan

10 Public Power Agency...". Am I missing something? That

11 doesn't sound like this is already in place, this is why

12 we did it. Is that not -- I mean are you changing your

13 testimony?

14 A No.

15 JUDGE EYSTER: O.K. So I guess I did not

16 hear you testify the same as what you have written here,

17 at least I didn't interpret it. What I interpret this

18 is, what are some other reasons that you moved forward

19 with this; "It seemed reasonable since DTEES had already

20 reached a similar agreement with the Michigan Public

21 Power Agency...", and I think that that's, as best I can

22 recall, that's been your testimony, that's what you say

23 here, and seems as though there was similar testimony in

24 a previous case --

25 A That's true.




285

1 JUDGE EYSTER: -- which is this is kind

2 of an area of this whole issue that I didn't understand.

3 And what you're telling me now is that there were

4 negotiations going on with the MPPA at the same time?

5 A There were. But I believe the MPPA and the Belle River

6 Fuel Company's deals were executed prior to ours. And

7 the point of this paragraph is just the last sentence

8 that says, "As such, the agreement reached with the MPPA

9 was rightfully considered to represent the market for a

10 business deal of this nature." Because MPPA is obviously

11 not an affiliate of the fuels company, they didn't have

12 to enter into this arrangement, but they did, and we were

13 just bringing that to light.

14 JUDGE EYSTER: Do you know when they made

15 their agreement?

16 A I do not know the date of that.

17 JUDGE EYSTER: Do you know -- it doesn't

18 sound that the terms of their agreement are the same as

19 the terms that you have with the fuels companies; is that

20 correct?

21 A The only thing that I'm aware of is the refined coal

22 adder exhibit in the memo of understanding that we signed

23 with MPPA is identical to the refined coal supply exhibit

24 included in our refined, in Detroit Edison's Refined Coal

25 Supply Agreement for Belle River.




286

1 JUDGE EYSTER: O.K. And so that --

2 excuse me. What was the first document you referred to?

3 A The memo of understanding between Detroit Edison and

4 MPPA.

5 JUDGE EYSTER: And is this the -- when

6 was that signed?

7 A I don't have that date with me.

8 JUDGE EYSTER: Can you give me in the --

9 is it signed after you signed your Refined Coal Supply

10 Agreement with Belle River Fuels Company?

11 A I don't -- I don't have that date, so I don't know.

12 JUDGE EYSTER: O.K. The memo of

13 understanding is an agreement between you and MPPA that

14 they're being assessed an adder?

15 A Correct, in part.

16 JUDGE EYSTER: So that would have to have

17 been signed after your agreement, right, being the

18 Refined Coal Supply Agreement with Belle River Fuels

19 Company?

20 A I don't have that date, so I don't know.

21 JUDGE EYSTER: Well, how could -- I mean

22 did you sign that agreement with the MPPA before you

23 signed your agreement with Belle River Fuels Company?

24 Did you sign those agreements --

25 A I did not.




287

1 JUDGE EYSTER: -- that agreement? Did

2 you negotiate it?

3 A MPPA could have made the deal with the Belle River Fuels

4 Company which required the MOU prior to us signing our

5 contracts. I mean that's possible.

6 JUDGE EYSTER: Really, quite honestly, I

7 mean I get the impression that the Belle -- that the

8 MPPA's agreement had very little to do with your decision

9 to enter into the Detroit, or your agreement with the

10 Belle River Fuels Company?

11 A That's an absolutely true statement.


13 A The only point I'm trying to make here is that it

14 represents -- because MPPA is totally unaffiliated with

15 the fuel company, they reached a similar agreement, which

16 we had no part of, to what we have, so one might conclude

17 that it was a business deal that represented the market

18 at the time. That's the only point that I'm trying to

19 make here.

20 JUDGE EYSTER: O.K. Would it be

21 reasonable for somebody to conclude that somebody from

22 DTE Energy Services said, here's the deal we made with

23 Detroit Edison and would you guys like to participate

24 since you're a 18-percent owner in the same plant?

25 A I'm sorry?




288

1 JUDGE EYSTER: O.K. You're indicating

2 that one might make a certain conclusion, and I guess the

3 question is, would it be reasonable for someone to make

4 the conclusion that MPPA went along with it because that

5 was the agreement they were told that you made?

6 A I don't know why they would do that, but I wasn't party

7 to those negotiations, so I don't know what was

8 discussed.

9 JUDGE EYSTER: O.K. All right.

10 Mr. Keskey.


12 Q (By Mr. Keskey): Mr. Lapplander, you've made some

13 statements today about some losses or rate of return that

14 the fuel companies would earn. I would like to get some

15 clarification, and for that purpose, I would like to

16 identify for the record an Exhibit MCAAA-27.

17 (Document marked for identification by the Court

18 Reporter as Exhibit MCA-27.)

19 JUDGE EYSTER: 27?

20 MR. KESKEY: MCAAA-27.

21 Q (By Mr. Keskey): And the reference on the front cover

22 page and in the document indicates that this was also

23 Exhibit A-24 from Case U-16047-R. Now, if I can refer

24 you to -- well, first of all, do you recognize,

25 Mr. Lapplander, this as being your exhibit in this case?




289

1 A I recall seeing this, and if you say it was an exhibit, I

2 trust that it was.

3 Q Now, let me refer you to page 7 of 8 of that exhibit.

4 And you're mentioning there some of the things you were

5 mentioning today, and you have a bullet there that

6 indicates that DTEES has -- let me try again. "DTEES

7 invested $37 million without clear guidance from the

8 IRS", and you mentioned some points in there. Do you see

9 that?

10 A Yes.

11 Q And that was, that refers to the period before January 1,

12 2010; is that right?

13 A Correct.

14 Q And is it correct that this was an estimate of the costs

15 to construct five units to be placed in service in 2009?

16 A I believe the 37 was an estimate at some point in time

17 when this was put together, and as I indicated, the St.

18 Clair Fuel Company capital was roughly $19 million and

19 the Belle River Fuel Company capital investment was

20 approximately 13, for a total of 32 million.

21 Q Well, O.K. So the number is 32 million and not 37

22 million?

23 A That's the actual cost, correct.

24 Q So this exhibit here was only an estimate and it actually

25 cost less; isn't that right?




290

1 A Correct.

2 Q And was that for five units?

3 A The numbers that I quoted were for five units, correct.

4 Q Which is five units would be approximately $6 million per

5 unit or a little bit more than that; would that be right?

6 A No, that's not the proper way of doing that.

7 Q Well, you can't just sort of take an average of your

8 actual investment and divide it by the number of units?

9 A No.

10 Q Why is that?

11 A Again, looking at Belle River, you have a building and

12 all the associated conveyors and you have two pug mills.

13 So, for example, the pug mills, and I don't know what

14 they cost, but let's just say they cost a million dollars

15 a piece, and the building structure, the chemicals, the

16 silo for the CKD, the tank and associated equipment for

17 Mersorb, you know, all of that stuff is pretty much a

18 cost whether you've got one or two units. So it wouldn't

19 be appropriate to just say I spent 30 some odd million, I

20 divide it by five, and that's the cost for each one.

21 Q Well, did you do any kind of a specific study or breakout

22 that would indicate what the cost per unit would be or

23 how you would allocate those costs since you have two

24 units at a location?

25 A There was an analysis done for St. Clair to determine, as




291

1 shown on MEC-12, where plant, net plant in service for

2 the St. Clair Fuel Company is 12 million 312, the

3 original construction cost was slightly over $19 million.

4 There was an adjustment made to take the capital cost

5 associated with the two production lines at St. Clair

6 that are not owned by the St. Clair Fuels Company, so

7 that the revenue requirement calculation would only

8 reflect the, if you will, capital in service for Detroit

9 Edison, the REF production line serving Detroit Edison.

10 Q Well, let me refer you to your Exhibit A-11 in this case,

11 page 2.

12 JUDGE EYSTER: Where are we now?


14 Q (By Mr. Keskey): And under that exhibit, starting on

15 line 20 and thereafter, under the heading SCFC's revenue

16 requirement, on line 26 you have a net plant figure of

17 $13,980,944.

18 A Correct.

19 Q And the St. Clair Fuel Company has two units; is that

20 right?

21 A Originally had three.

22 Q And is this, is this figure based on three units or is it

23 based on two units?

24 A This figure, to my understanding, is based on one unit

25 that the St. Clair Fuel Company owns and has used to




292

1 provide REF to Detroit Edison at St. Clair.

2 Q So how do you rationalize the fact that you estimated the

3 St. Clair Fuels Company's cost of installing REF

4 facilities at $19,281,000 approximately for three units

5 when in fact your Exhibit A-10, page 4, which we

6 discussed earlier, includes the admission that you'll

7 only need one unit per plant, and yet you show the 13.980

8 million here in your line 26 of your Exhibit A-11? There

9 seems to be something that's out of proportion here. Are

10 you including -- first of all, are you including the cost

11 of the unit that you do not need?

12 A No. I said we took the original construction cost for

13 three units was a little over $19 million, we've adjusted

14 the -- for a calculation of the revenue requirement,

15 we've adjusted that total capital expenditure to reflect

16 that only one of the units. So whatever the cost of two

17 other units, just those pug mills, that's been deducted

18 from net plant for purposes of calculating the revenue

19 requirement as shown on my Exhibit A-11, page 2 of 2.

20 Q So are you suggesting that you have included in this

21 13.980 million figure on line 26, Exhibit A-11, not only

22 the cost of one pug unit, but all of the conveyer belts,

23 the buildings, all the apparatus, the entire location,

24 for that one unit, even though it was originally set up

25 for three units?




293

1 MR. ERICKSON: I believe Mr. Keskey might

2 have misstated the number as 13,809 million, I think it's

3 13,980 million.

4 MR. KESKEY: That's correct.

5 A All of the ancillary facilities, like conveyer belts and

6 what have you, are all sized for the coal required for

7 the St. Clair power plant. The three production lines at

8 St. Clair are three full-size production lines, only one

9 would ever need to be operated at one time. So the

10 ancillary service, ancillary structures, if you will, are

11 only sized for the one facility, which can provide the

12 requirements of REF for the St. Clair power plant.

13 Q (By Mr. Keskey): O.K. And so why would you proceed to

14 locate or construct three units there if you only need

15 one?

16 A Well, the fuel companies made that decision, I didn't.

17 Q Well, in terms of, you know, the accuracy here of your

18 assumed revenue requirement for St. Clair Fuel Company,

19 it appears that you once had three units there, and now

20 you're down to two since one was moved, and you only

21 subtracted from this figure for two of the units only a

22 minor portion or a moderate portion of that total

23 investment of 19 plus million.

24 A Well, let's just assume that the conveyer belts cost $5

25 million, let's assume that the CKD tank and Mersorb tank




294

1 cost a million dollars. Whether you've got three

2 facilities or one facility, the conveyors cost the same

3 amount of money, 5 million bucks, the tanks, whether it's

4 one facility or three production lines, cost the same

5 amount of money, because it's all sized for the

6 requirements of the St. Clair power plant, and each one

7 of those facilities could serve that same purpose, but

8 you can't have them all running at the same time, there's

9 no need. So the whole system is designed for the

10 operation of one of the production lines that is owned by

11 the St. Clair Fuels Company. So the adjustment to the

12 original capital investment is just for the second and

13 third production line at St. Clair.

14 Q Were those second and third units ever connected to the

15 conveyer belt and to the other apparatus?

16 A Yes.

17 Q And --

18 JUDGE EYSTER: Mr. Bzdok, did you have

19 something you wanted to --

20 MR. BZDOK: Mr. Keskey was continuing, I

21 was going to ask if I could shut those blinds, the sun's

22 down to a point where it's hard to see.

23 JUDGE EYSTER: Yeah, I'll get it. These

24 right here?

25 MR. BZDOK: Yeah. Thank you.




295

1 JUDGE EYSTER: Go ahead, Mr. Keskey.

2 Does that do it?

3 MR. BZDOK: Yes. Thank you.

4 JUDGE EYSTER: Mr. Lapplander, if I

5 understand your testimony, then, the two second -- I

6 forgot what you call them.

7 A Pug mills.

8 JUDGE EYSTER: What are they called?

9 A Pug mills.

10 JUDGE EYSTER: Pug mills weren't

11 necessary?

12 A No.

13 JUDGE EYSTER: O.K. So those were placed

14 in operation at your plant so they could be transferred

15 somewhere else?

16 A Correct.

17 JUDGE EYSTER: So they qualified for tax

18 credits?

19 A Correct.

20 JUDGE EYSTER: And then taken off site to

21 go earn money at a different location?

22 A One of them has been moved to my knowledge, the other one

23 is still there sitting idle.

24 JUDGE EYSTER: Do you know how much money

25 those are generating at the new location?




296

1 A Well, my understanding is they moved one, but reading the

2 10Ks and Qs, they don't -- I don't believe that that's in

3 operation yet. But they're, just by way of example, in

4 MEC/NDRC official exhibit in the 2012 plan case, there

5 was a business update, February 7, 2012, there they

6 talked about an REF facility in service at a midwest

7 utility, in service in '011, and they're expecting four

8 to five million tons a year REF, that was one of the

9 facilities that was constructed from scratch at a

10 third-party facility; and then there's another one,

11 midwest utility that was again constructed from scratch

12 and expected to produce one to two million tons of REF;

13 and then the balance of these, they're saying they're

14 just searching for a new location. My understanding is

15 one of them has been removed, but to my knowledge, it has

16 not been put into production yet.

17 JUDGE EYSTER: Does Detroit Edison

18 receive any of the revenue stream that's being presumably

19 generated by this production line that was once attached

20 to your facility?

21 A No.

22 JUDGE EYSTER: So correct me if I'm

23 wrong: Is it your understanding, then, that if that

24 hadn't been placed unnecessarily, there's apparently no

25 reason that Detroit Edison needed it, but if it hadn't




297

1 been placed at the Detroit Edison plant, it wouldn't be

2 available now to go generate money someplace else?

3 A Well, generally speaking, yes. Because the tax credit

4 in-service date was extended from December of '09 to

5 December 2011, there was -- there's the potential that

6 the affiliate could have sited other units similarly and

7 got them qualified. But generally correct. Generally

8 correct.

9 JUDGE EYSTER: Were any of these sited

10 prior to 2011?

11 A These were, the machines at Belle River/St. Clair were

12 sited in '09.

13 JUDGE EYSTER: Relocated. Sorry.

14 A Relocated in '011?

15 JUDGE EYSTER: Prior to.

16 A No.

17 JUDGE EYSTER: The time for them to be in

18 service was extended to 2011?

19 A And that's what allowed the Belle River machines to be

20 placed in service, correct.

21 JUDGE EYSTER: The lines that are located

22 at St. Clair, one was just relocated this last year,

23 right?

24 A To my knowledge, one has been removed from the site and

25 is in the process of being relocated, yes. To my -- I




298

1 don't know, but to my knowledge, but reading the 10Ks, I

2 don't believe that, the one that's relocated, I don't

3 believe it's in operation yet. So the construction

4 period might be three months, four months, five months,

5 so.

6 JUDGE EYSTER: Do you know who owns the

7 relocated production line?

8 A I think if we look at that org chart that we were looking

9 before, it's St. Clair REF No. 1 or No. 3, whichever one

10 was moved, I'm not sure.

11 JUDGE EYSTER: What contractual

12 arrangements do you have with that company?

13 A Other than the arrangement that we have with the Site

14 License and Service Agreement, which was originally

15 intended to cover the entire facility at St. Clair and at

16 Belle River, we have no contractual arrangement with that

17 fuel company.

18 JUDGE EYSTER: Mr. Keskey. Well, you

19 know what, before we go, I did have one question on that.

20 Back to page 7 of 8. Well, let's see, what is it?

21 Proposed Exhibit MCAAA-27, page 7 of 8. I haven't looked

22 through the rest of it, but I just kind of noticed some

23 statement that I was interested in following up on. It

24 says at the bottom of that, "Detroit Edison determined

25 that the tax risks and involvement with an unproven




299

1 technology are not appropriate for a regulated utility."

2 Were you involved with those determinations?

3 A I wasn't involved in the tax risk discussion, but the

4 involvement of an unproven technology, yes.

5 JUDGE EYSTER: O.K. And what did you do

6 to make that determination, then?

7 A This was a technology that had the claim of significant

8 mercury reductions as a result of burning REF, some of

9 the literature indicated that the Chem-Mod technology

10 could get to 90-percent mercury reductions. We had some

11 skepticism about that. The REF test, the testing that

12 was conducted by the fuel companies at EERC demonstrated

13 mercury reductions in excess of 40 percent, but not to

14 where, not up to 90 percent, which would allow for

15 mercury compliance just using this technology. Unproven

16 also has to do with whether or not it's an acceptable

17 fuel to be consumed in our power plants as exemplified by

18 the continued testing at Belle River, and the, you know,

19 we do not know enough today whether or not we're going to

20 accept that as a viable fuel for the plant. So that's

21 how --

22 JUDGE EYSTER: For Belle River?

23 A For Belle River.

24 JUDGE EYSTER: So the determination that

25 you made was based on a claim of 90 percent and the




300

1 testing that showed 40 percent?

2 A When I say an unproven technology, there were claims that

3 this technology would have significant mercury

4 reductions. We weren't convinced in the operation of

5 this, utilization of this, the Detroit Edison Company was

6 not convinced that the utilization of this technology

7 would prove out per the advertised mercury reductions.

8 To qualify for production tax credits, you only have to

9 demonstrate 20-percent NOx reductions and 40-percent

10 mercury or 40-percent SO2. So for tax credit

11 qualification, EERC, if they demonstrate through their

12 testing a 40-percent reduction in mercury emissions and

13 20-percent NOx, and they did, then it's sufficient to

14 qualify for the tax credits. Detroit Edison --

15 JUDGE EYSTER: I'm not sure you're

16 answering the question I'm asking. You have a statement

17 that says you determined involvement with an unproven

18 technology, I'll change that to was, was not appropriate

19 for a regulated utility, and I guess what I'm asking is,

20 Detroit Edison determined that, and I'm trying to figure

21 out how you determined that. Are you talking about --

22 you're telling me things that have happened since that

23 point, that, for instance, Belle River isn't working out

24 maybe, but that wouldn't have been something you

25 considered at the time, right?




301

1 A But that's -- but that is something I would put in the

2 bucket as unproven until we utilize it.

3 JUDGE EYSTER: You didn't have that

4 information at the time you made this determination,

5 though, correct?

6 A I did not know whether, at the time we entered into these

7 deals, whether or not this could be burned long term at

8 the Belle River power plant. That was a risk borne by

9 the affiliate.

10 JUDGE EYSTER: O.K. Did you have -- O.K.

11 A We've done -- we did some short-term testing, and

12 apparently somebody decided that, well, let's go with

13 what we got. But in Belle River's instance, we've not

14 proven that we can burn this fuel long term, so that's --

15 JUDGE EYSTER: O.K. But that fact, while

16 interesting to know, wasn't known at the time you made

17 this determination, correct?

18 A That's true.

19 JUDGE EYSTER: O.K. Because that's --

20 what I'm asking you is what you did to make this

21 determination. You made a determination at some point,

22 I'm not sure, I don't believe -- well, sometime in 2009 I

23 guess. So I'm trying to figure out what you did in 2009.

24 I mean you're making a claim here, I'm trying to figure

25 out what it means, and you're giving me examples of




302

1 things that happened since this determination had been

2 made, which isn't very helpful. You've got two claims

3 there; determine the tax risks were not appropriate for a

4 regulated utility, and involvement with an unproven

5 technology is not appropriate for a regulated utility. I

6 believe you talked about the tax risk before, you got

7 advice from an attorney's name who I don't recall who

8 works for DTE Energy who said, in my opinion, you won't

9 be able to get the tax credits. Correct?

10 A Yes. His exact words is that it was probable that we

11 wouldn't pass the unrelated --


13 A -- portion of the tax credits.

14 JUDGE EYSTER: So is that the risk that

15 you determined, was that the way in which you determined

16 that the tax risks were not appropriate for a regulated

17 utility?

18 A Correct, correct.

19 JUDGE EYSTER: O.K. So what did you do

20 to determine that involvement with an unproven technology

21 was not appropriate for a regulated utility?

22 A Well --

23 JUDGE EYSTER: At that time --

24 A Well --

25 JUDGE EYSTER: -- not since then.




303

1 A I'm not sure I know how to explain it any other way than

2 what I did. When I say unproven, that's just like if we

3 were to, if Detroit Edison were to do some testing of

4 coal like we discussed with high sulfur at Monroe, we

5 would test it for some period of time to see the

6 long-term implications as to whether it's a viable fuel.

7 So when -- we could test it for a day or two and say,

8 O.K., we think it might work, but at that point it's

9 still unproven as to whether it's an acceptable fuel.

10 O.K. So there was some short-term testing done at Belle

11 River with REF, but the long-term implications of whether

12 or not it is an acceptable fuel in this '09 timeframe, it

13 was unproven as to whether it was acceptable. So that

14 the technology of Chem-Mod in creating REF, we were

15 unsure at that time if that's something that would prove

16 successful in the long term. I'm sorry, Judge, but I

17 don't know how to --

18 JUDGE EYSTER: I think that's a better

19 explanation.

20 A I don't know how to --

21 JUDGE EYSTER: I was just -- I was trying

22 to get it narrowed down to in 2009, but you just said

23 during that timeframe what you were doing. That's better

24 than telling me what's happening in 2013.

25 Mr. Keskey.




304

1 Q (By Mr. Keskey): Mr. Lapplander, when a decision is made

2 in 2009 to go forward with this program, the tax risk was

3 not there if you could meet the deadline of January 1;

4 isn't that right? If could you meet the criteria of the

5 statute for getting the tax credits, that was not a risk,

6 you simply follow the guidelines in the IRS; would that

7 be correct?

8 A Well, in part, yes. But the second bullet on that page,

9 where it says, "... invested $37 million without clear

10 guidance from the IRS", there must have been some

11 guidance that the affiliate was seeking, and they were

12 spending money, I'm assuming the guidance would give them

13 some indication as to whether whatever they were doing

14 would in fact qualify, and they didn't get that until

15 after they started the project. So there's some, let's

16 say there's some tax risk from the affiliate's standpoint

17 prior to the end of -- or prior to, up to the time where

18 they actually did get some guidance.

19 Q Well, the point is that at the time that they decided to

20 cement this deal by January 1, 2010, they had made a

21 decision that the tax risk was minimal and the tax credit

22 benefits were substantial; isn't that the essential

23 balancing analysis that was done?

24 A Well, they may have thought, the fuels company thought

25 that. To my knowledge, there's been no audit completed




305

1 on any of these transactions, so I believe the jury's

2 still out as to whether they are in fact ultimately going

3 to be tax-risk associated.

4 Q There is no audit that's been undertaken so far, is

5 there?

6 A To my knowledge, they have not passed an audit at either

7 of those facilities.

8 Q They haven't been asked to be subject to an audit, have

9 they?

10 A I'm not sure you'd ask to be subject to an audit.

11 Q Well, has the IRS sent a notice of audit to any of the

12 affiliates of DTE or any of the fuel companies?

13 A I'm not aware of that, no.

14 Q Now, if in fact the tax code itself had passed a

15 provision providing for this refined emission fuel

16 technology and setting forth guidelines and deadlines for

17 it, there must have been some rather proven technology

18 existing in the field for the REF project; wouldn't that

19 be reasonable to assume, then?

20 A Well, prior to undertaking this whole endeavor, I would,

21 one could assume that there was some testing done at the

22 EERC test combustor in North Dakota that actually

23 demonstrated the mercury and SO2 or NOx reductions

24 required to qualify for the tax credits.

25 Q And even in 2008, DTEES had entered into the license




306

1 agreement with Chem-Mod, right?


3 Q And they had a technology at that time; is that right?


5 Q Are you aware of any study that Detroit Edison undertook

6 to evaluate the risks involved compared to the benefits

7 given up? Let me break that question down into two. Did

8 you or anybody else at Edison undertake a study as to

9 what the risks were that would be involved with respect

10 to both the tax angle and also the technology angle? I'm

11 talking about Detroit Edison as a utility, not DTE.

12 A Not to my knowledge.

13 Q I mean to your knowledge, are you aware of any study that

14 Detroit Edison as a utility undertook to determine the

15 potential economic benefits that it would be missing out

16 on from the tax credits or tax credit revenues if it did

17 not undertake a mechanism to capture that for the utility

18 compared to allowing the affiliate of DTE to undertake

19 those opportunities?

20 A I did not perform those studies. But as I indicated,

21 when you look at MEC-12, the revenue requirement for St.

22 Clair is what, $10-11 million, and the example we went

23 through before, if we owned that and we monetized that

24 facility, and assuming when we monetize it out of the

25 $6.40 tax credit, 2.20 would go to a tax investor, $4.40




307

1 would be left with Detroit Edison, that times 1.8 million

2 tons REF is $7 1/2 million of tax credits and a cost to

3 the customer of $10 million. So for Detroit Edison to

4 own the St. Clair facility, monetize it similar to what

5 our affiliate did, the customer would be worse off

6 because you'd have to compare it against the benefit that

7 they're getting today under the existing agreement. So

8 they're getting a working capital benefit today of about

9 a little less than $2 million, and when we reset base

10 rates in 2015, if that's the date, that will go to 3.6,

11 3.8 million, and if we owned it, monetized it, then we'd

12 ask customers to pay us 10 million revenue requirement

13 and we'd only get 7 1/2 million tax credit.

14 Q Well, Mr. Lapplander, first of all, as you stated before,

15 the Company has not provided any information as to the

16 tax credit benefit value or the monetization value of

17 those tax credits for the ten-year program that is

18 provided for under the statute, so we don't know what the

19 economic value is of those benefits. Now, looking at the

20 other side of your equation, let's get back to your

21 assumed representative sample from the St. Clair Fuels

22 Company which is shown on your Exhibit A-11, and that

23 figure of 13.980.9 [sic] million -- let me refer to

24 you --

25 JUDGE EYSTER: Just a moment, Mr. Keskey.




308

1 Before we move on, I just wanted to follow up with some

2 questions you were asking.

3 Do you know -- I was under the impression

4 that the tax credits are being granted to the fuels

5 companies, well, St. Clair and Monroe; is that correct?

6 A To my knowledge, the companies involved in those are

7 claiming the tax credits, but to my knowledge, they

8 haven't passed IRS audit and are subject to refund if

9 they fail the audit.

10 JUDGE EYSTER: Do you know if they've

11 requested -- and I'm going to assume these still exist

12 and I don't know the exact name of it -- but it seems

13 like back whenever it was I was in law school, that you

14 could ask for some sort of an advisory opinion from the

15 IRS with regards to whether or not something would

16 qualify for a tax credit or deduction, whatever it may

17 be. And you may not know if this is --

18 A There have been some private letter rulings from the IRS.


20 A And I think in the exhibit, the proposed exhibit that

21 Mr. Keskey gave me, on page 7 of 8 --

22 JUDGE EYSTER: O.K. That's 27, that's

23 proposed Exhibit 27?


25 JUDGE EYSTER: O.K. We're back to page 7




309

1 of 8. All right.

2 A The second bullet, "DTEES invested $37 Million without

3 clear guidance from the IRS." I believe they got some

4 form of guidance late in the year, I don't know what the

5 form of that guidance was. But I think what may be an

6 issue at audit is the ownership structure that took place

7 after they monetized the machines.

8 JUDGE EYSTER: O.K. So you don't know

9 that; is that speculation on your part?

10 A I don't know.



13 Q (By Mr. Keskey): Getting back to your representative

14 example of the revenue requirement for St. Clair Fuel

15 Company, you've got a figure on line 26 of $13,980,944.

16 On Exhibit A-1, page 2, you were talking about the cost

17 of a unit and then the cost of connecting to the plant.

18 Let me refer you to your own Exhibit A-28 in this case,

19 page 11 of 61.

20 A I'm sorry, page what?

21 Q Page 11.

22 JUDGE EYSTER: What exhibit are we on?


24 JUDGE EYSTER: Page 11 of 61?

25 MR. KESKEY: Yes.




310

1 Q (By Mr. Keskey): Now, if you look at that exhibit, this

2 is part of your exhibit that is provided as part of a

3 presentation by the Arthur J. Gallagher Company, is it

4 not?

5 A Correct.

6 Q And they're the owners of Chem-Mod, are they not?

7 A I believe they own 42 percent of Chem-Mod.

8 Q And that's, Chem-Mod is the one again who DTEES

9 contracted with?

10 A Yes. They are paying an annual fee for the license to

11 utilize the Chem-Mod technology.

12 Q Now, if we look at this page here, if we take a look

13 first at what their presentation is, what their estimate

14 is as a, perhaps a leader in the industry in the REF

15 process, under step one, do you see that they have a

16 block there that says, plant cost, $1 million?

17 A Correct.

18 Q And then step two, they talk about the incremental pretax

19 capital cost to connect the unit to the host plant, and

20 they indicate a connection cost of 4 million; is that

21 right?


23 Q So would that indicate that the estimated cost to install

24 one of these REF units would be about 5 million?

25 A For the process and how A. J. Gallagher hooks this up to




311

1 the host utility, that is correct.

2 MR. KESKEY: Your Honor, I'd like to

3 identify another exhibit which we propose as Exhibit

4 MCAAA-28?

5 JUDGE EYSTER: What do you want to do

6 with proposed Exhibit MCAAA-27?

7 MR. KESKEY: I thought I would move to

8 admit that with this one at the appropriate time. I'm

9 willing to move it now, but I just thought it might be

10 relevant to the same area that we're in right now.

11 JUDGE EYSTER: O.K. You can wait if you

12 want. I just want to make sure we didn't forget about

13 it.

14 MR. MAQUERA: Your Honor, while

15 Mr. Keskey is handing out the proposed exhibit, we have a

16 couple of additional witnesses, and I'm wondering is, in

17 case they have any arrangements they need to meet, how

18 much longer we plan on going today?

19 JUDGE EYSTER: Well, let's go off the

20 record and discuss that. We're off the record.

21 - - -

22 (At 4:30 p.m., there was a six-minute pause in the

23 proceedings.)






312


2 record.

3 Mr. Lapplander, I have a question for

4 you. Did you read my PFD from the plan case?

5 A I did.

6 JUDGE EYSTER: O.K. Do you recall a

7 section of that in which I expressed some confusion as to

8 the way in which the fly ash benefit worked, how it, what

9 was accounted for?

10 A Yes.

11 JUDGE EYSTER: Can you explain that to

12 me, the way it was accounted for? Because if I recall

13 correctly, there was an exhibit and some testimony that

14 appeared to conflict, or maybe it was a statement in a

15 discovery response, I don't recall, but it was not

16 entirely clear -- well, it wasn't entirely clear I guess

17 when and how the fly ash was accounted for, and I can't

18 remember what the issue was. But can you try to clarify

19 that for me?

20 A Yes.

21 JUDGE EYSTER: Thank you.

22 A It was, at the time we did this deal, at the time Detroit

23 Edison did this deal, there was an expectation on the

24 part of the fuels company that the use of REF would meet

25 our mercury compliance standard. If that were the case




313

1 and we did not have to use powdered activated carbon, as

2 Bill Rogers is testifying to in this case and others,

3 then the sale of fly ash in 2015 when the mercury rule is

4 in place, there was the potential to continue to sell fly

5 ash. My understanding is if you follow the fly ash with

6 carbon, it's not a saleable product. So that's where the

7 term fly ash benefit comes from. But we can not meet

8 mercury compliance with just REF, we will use some form

9 of powdered activated carbon, so more than likely we

10 won't have any fly ash sales beginning in 2015, so there

11 won't be this benefit. But prior to that, as shown on

12 Exhibit A-11, page 1 of 2, the fly ash benefit can be

13 negative, which is the cost of additional fly ash

14 disposal cost. So the affiliate is basically paying us,

15 as part of this refined coal adder, our disposal cost to

16 ash, and that portion of the refined coal adder is

17 negative and is handled in the O&M portion of the books

18 of the Company.

19 JUDGE EYSTER: O.K. You know what,

20 you'll be here tomorrow, why don't I just save it for

21 tomorrow and look at that PFD, because there was a

22 specific question I had, because I understand that part.

23 There was something else that I was not sure about, and

24 we'll get to that tomorrow.

25 A O.K.




314

1 JUDGE EYSTER: Mr. Keskey, I think we

2 were still with you.


4 Q (By Mr. Keskey): Mr. Lapplander, I distributed a report

5 that's Exhibit MCAAA Exhibit 28, and again, this is using

6 also an attachment page which is one of your responses to

7 discovery regarding the cost of the Belle River Fuels and

8 St. Clair Fuels Company installation of REF facilities.

9 And again, just as another benchmarking guide here,

10 looking at the number of units placed in each of those

11 locations, do you see that on an average basis, that the

12 average cost of the REF plants per unit ranges in here

13 between approximately 6.4 to 6.85 million per unit?

14 A I see that, yes, your math is correct.

15 Q O.K. And certainly your discovery responses is accurate,

16 is it not?

17 A Correct.

18 Q Now, taking that figure and also the figure from Exhibit

19 A-28, page 11, the Gallagher estimated or presented cost

20 of these plant units as connected with the coal plant,

21 your figure of 13,980,944 on line 26 as the net plant

22 cost for the St. Clair Fuels Company unit as shown on

23 A-11, page 2, simply appears to be way overstated

24 compared to those other benchmarks?

25 A Well, I may direct you to my Exhibit A-27, page 21 of 82,




315

1 which is Mark C. Birk testimony, and I don't recall if

2 he's Duke or Ameren, but on line --

3 MR. ERICKSON: What was that page

4 reference, Mr. Lapplander?

5 A 21 of 82.

6 MR. ERICKSON: Thank you.

7 A This is Ameren. On page 4, it states: Ameren Missouri

8 reviewed proposals from both BP, which is CERT, one of

9 the Chem-Mod licensees, and another Chem-Mod licensee,

10 and made a determination that BP was a better fit at Rush

11 Island, primarily due to their system being less

12 intrusive on the existing plant coal handling equipment

13 and because there was not sufficient time available to

14 install the more complex alternative system. So this

15 leads me to believe that an A. J. Gallagher or a CERT or

16 a DTE Energy have their own design, some may be more

17 conservative than others, so it probably is not

18 appropriate to compare the capital cost of one of these

19 to another.

20 Q (By Mr. Keskey): Well, I'm not -- first of all, what you

21 are surveying in the few pages of some of the cases

22 around the country for other utilities may have totally

23 different circumstances from your situation; wouldn't you

24 agree with that?

25 A That's entirely possible, yes.




316

1 Q So I mean it's of minimal, if any, value in terms of

2 taking snippets of some other, someone else's testimony

3 in another state under a different statute with a

4 different utility, a different circumstances, and try to

5 support your situation, is it not?

6 A I disagree with that.

7 Q Well, O.K. But I'm looking at it from Detroit Edison's

8 standpoint and from your own study here where you keep

9 indicating a revenue requirement and keep indicating that

10 there will be an uneconomic loss for Edison who have

11 undertaken these projects themselves or through its own

12 subsidiary or it's own arrangements, and you've got here

13 a, what you believe is a representative sample with a net

14 plant cost that is apparently more than double of the

15 average per unit cost of your own units, and is even more

16 excessive than that when you look at the Gallagher study;

17 it's a Gallagher company who's very experienced in this

18 field, is it not?

19 A That's true.

20 Q So doesn't that bring into question the reasonableness of

21 your estimate of a $13.98 million net plant cost for what

22 is only one unit that's needed at that site?

23 A Well, the purpose of Exhibit A-11 is to determine whether

24 the refined coal adder is equal to the lesser of the

25 project revenue requirement or the environmental benefit.




317

1 In 2011, the environmental benefit was $544, the revenue

2 requirement was some 11 million. That's the only purpose

3 of putting any net plant number in this exhibit.

4 My firm belief, given what we know today,

5 the environmental benefit will never exceed the revenue

6 requirement associated with this project, so the net

7 plant in service as shown on Exhibit A-11, page 2 of 2,

8 will never come into play in setting the value of the

9 refined coal adder.

10 Q Oh, so what you're really saying is Exhibit A-11 has

11 nothing to do with analyzing the cost to Edison or an

12 affiliate of Edison of undertaking the REF units itself

13 as compared to the tax credit revenue benefits, that's

14 not the purpose of this exhibit and it doesn't support

15 that premise, you haven't done that study; isn't that

16 right?

17 A Subject to looking at my notes, if you look at MEC-12

18 that we've been talking about, and I just assumed in this

19 spreadsheet, which I'd be happy to provide individuals if

20 they'd like it --

21 MR. BZDOK: Yes.

22 A -- that if you read the, it's in one of your exhibits,

23 Exhibit MCAAA-20, on page 13 of this exhibit, which is

24 the third page in, the fourth line from the bottom:

25 Although both sales included a modest up-front payment to




318

1 the tax -- from the tax investor..., so when they

2 monetize these machines, there was a modest payment made

3 by the tax investor; I don't know what it is, but for

4 purposes of a little analysis that I did, is I assumed

5 the tax partner, if Detroit Edison monetized this,

6 Detroit Edison would receive a $10 million contribution

7 in aid of construction or a payment from our tax

8 investor, and I just defined that as being a modest

9 payment. I don't know what it would be, but for my

10 purposes, that's what I did.

11 So I reduced the rate base as shown in

12 MEC-12 from 51.9 million to 41.9 million. The revenue

13 requirement associated, that's 4 1/2 million down from

14 5.598 million, I assumed the expenses would be the same,

15 so the total revenue requirement is 9.8 million, 9.098

16 million. The same assumption that Detroit Edison, if

17 they owned this and they monetized this, they would get

18 $4.20 of the $6.40 tax credit. $4.20 times 1.8 million

19 is still 7.56 million of the tax credit, and the revenue

20 requirement would be 9.09 million, so that the Detroit

21 Edison and customers would be worse off by 1.5 million,

22 and they would also lose the working capital benefit

23 that's in base rates today of 1.7 million, and that will

24 get increased to over 3.6 million when we reset base

25 rates in 2015, because the value of the inventory today




319

1 is higher than we originally made the sale in December of

2 '09 when that December of '09 was used as the last year

3 of the historical test year, the historical year in our

4 last rate case, that working capital balance was then

5 carried forward to the projected test year. So the

6 current benefit of working capital reduction today at St.

7 Clair is 1.7 million; if we owned this, we'd own the

8 fuel, we would lose that, and as I indicated, we'd also

9 be worse off by 1.5 million.

10 MR. BZDOK: Point of order, Judge.

11 JUDGE EYSTER: Yes.

12 MR. BZDOK: Can the parties get a copy of

13 this spreadsheet note that the witness has been referring

14 to so we can study it tonight prior to our adjourning?

15 JUDGE EYSTER: Yeah, I'm sorry, I thought

16 he was reading from an exhibit and I was going to clarify

17 that. I thought you said you were --

18 A No. I said subject to reading from my notes again, which

19 you said -- I was just trying to clarify that I --

20 Mr. Keskey said that I hadn't done any analysis; I had,

21 it's just part of my notes, and I was just reading from

22 it.

23 JUDGE EYSTER: I thought you were pulling

24 out an exhibit and referring to an exhibit.

25 A I'm sorry.




320

1 MR. BZDOK: All I want, Judge, is to be

2 able to get a copy of that document and take it home,

3 well, not home, but home away from home tonight and look

4 at it so that we understand it coming back in tomorrow

5 morning.

6 MR. KESKEY: And your Honor, we'd like a

7 copy of that as well.

8 JUDGE EYSTER: All right. Can you

9 provide copies of that to everybody, please?

10 MR. CHRISTINIDIS: Not unless we have a

11 copy machine.

12 JUDGE EYSTER: I'll have to make copies I

13 guess.


15 JUDGE EYSTER: All right. If anybody

16 leaves after 5:00, you have to leave your visitor's badge

17 at her desk, the security guard's desk on the way out.

18 Let's try to wrap up.

19 MR. MAQUERA: I thought.

20 (At 4:53 p.m., a brief discussion was held off the

21 record.)

22 JUDGE EYSTER: O.K. Were you done

23 answering that question?

24 A Yes.

25 JUDGE EYSTER: Mr. Keskey, anything with




321

1 that question?

2 MR. KESKEY: I would like to look at the

3 worksheet, and we're dealing with some apples and oranges

4 here that we --

5 JUDGE EYSTER: I would agree with that, I

6 think you're right.

7 MR. KESKEY: And so we don't have a whole

8 lot left, but if you wanted to break here, we can finish

9 up pretty fast tomorrow morning, and I know that Chris

10 has got his, and I don't think all of us have very much

11 for the next two.

12 JUDGE EYSTER: O.K. Let's just wrap it

13 up then for today. So unless there's something else

14 somebody wants to put on the record, we'll go off the

15 record. Anything else for today? 9:00 o'clock tomorrow

16 morning. O.K. That's it for today.

17 (At 4:55 p.m., the hearing adjourned to January 8,

18 2013, at 9:00 a.m.)

19 - - -

20

21

22

23

24

25




323

1 STATE OF MICHIGAN

2 BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

3 In the matter of the application of

The Detroit Edison Company for Case No. U-16434-R

4 reconciliation of its power supply

cost recovery plan for the 12-month Volume No. 3

5 period ending December 31, 2011.

_____________________________________/

6

CROSS-EXAMINATION

7

Proceedings held in the above-entitled matter

8

before Mark D. Eyster, J.D., Administrative Law Judge

9

with Michigan Administrative Hearing System, at the

10

Michigan Public Service Commission, Constitution Hall,

11

525 West Allegan, Nisbet Room, Lansing, Michigan, on

12

Wednesday, January 9, 2013, at 9:09 a.m.

13

APPEARANCES:

14

DAVID MAQUERA, J.D.

15 JON P. CHRISTINIDIS, J.D.

DTE Energy

16 One Energy Plaza, #688WCB

Detroit, Michigan 48226

17

On behalf of The Detroit Edison Company

18

DON L. KESKEY, J.D.

19 Public Law Resource Center, PLLC

139 West Lake Lansing Road, Suite 210

20 East Lansing, Michigan 48823

21 On behalf of Michigan Community Action

Agency Association

22

23

24

25 (Continued)


MPSC Case No. U-17097 - March 7, 2013 Exhibit MEC-35; Source: Examination of G. Lapplander (Jan. 9, 2013 cross), U-16434-R Page 1 of 238 pages


324

1 APPEARANCES Continued:

2 CHRISTOPHER BZDOK, J.D.

EMERSON HILTON, J.D.

3 Olson, Bzdok & Howard PC

420 East Front Street

4 Traverse City, Michigan 49686

5 On behalf of Michigan Environmental Council

6 DONALD E. ERICKSON,


7 Special Litigation Division

525 West Ottawa, 6th Floor


9 On behalf of Attorney General Bill Schuette

10 ANNE M. UITVLUGT,

ROBERT W. BEACH,

11 Assistant Attorneys General

6545 Mercantile Way, Suite 15


13 On behalf of Michigan Public Service

Commission Staff

14 - - -

15

16

17

18

19

20

21

22

23 REPORTED BY: Lori Anne Penn (CSR-1315)

24

25




325

1 I N D E X

2 WITNESS: PAGE

3 Gary E. Lapplander

4 Cross-Examination by Mr. Keskey (Continuing) 329

Cross-Examination by Mr. Bzdok 405

5 Cross-Examination by Mr. Erickson 478

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25




326

1 E X H I B I T S

2 NUMBER DESCRIPTION MRKD OFRD RECD

3 A-10 Overview of Reduced Emissions -- -- 559

Fuel (REF) Projects

4

A-11 Refined Coal Adder Inputs -- -- 559

5 Calculation Worksheet

6 A-24 REF Transaction: MPSC Code of -- -- 559

Conduct

7

A-25 Discovery Response MCAAA/DE-1.52 -- -- 559

8

A-26 Discovery Response MCAAA/DE-1.25d -- -- 559

9

A-27 Discovery Response MCAAA/DE-1.30 -- -- 559

10

A-28 Discovery Response MCAAA/DE-1.31j -- -- 559

11

A-29 Discovery Response MCAAA/DE-1.45a -- -- 559

12

A-30 Detroit Edison REF Project -- -- 559

13 Agreements

14 A-31 Discovery Response MCAAA/DE-1.56 -- -- 559

15 A-32 Discovery Response MCAAA/DE-1.63a -- -- 559

16 A-33 Discovery Response MCAAA/DE-1.81c -- -- 559

17 A-34 Discovery Response MCAAA/DE-52 -- -- 559

18 MCA-27 Lapplander's A-24 from Case No. -- 405 405

U-16047-R

19

MCA-28 Cost of 2009 REF Plants and -- 405 405

20 Discovery Response MEC/DE-1.23f

21 MCA-29 Materials and Operating Costs 339 405 405

$ Per Ton of Coal on an After-Tax

22 Basis Assuming 40% Tax Rate

23 MEC-25 Discovery Response MEC/DE-2a-c 453 -- --

24 MEC-30 Exhibit A Facility Land 411 411 411

25




327

1 E X H I B I T S

2 NUMBER DESCRIPTION MRKD OFRD RECD

3 MEC-31 Exhibit B Belle River Site and 411 411 411

St. Clair Site

4

MEC-32 Belle River Revenue Requirement 436 436 442

5

MEC-33 Monroe Revenue Requirement 436 436 442

6

AG-1 St. Clair Revenue Requirement 328 328 329

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25




328

1 Lansing, Michigan

2 Wednesday, January 9, 2013

3 At 9:09 a.m.

4 - - -

5 (Hearing resumed following adjournment of January 8,

6 2013.)


8 Reporter as Exhibit No. AG-1.)


10 record in U 16434-R.

11 And Mr. Erickson, I believe you, prior to

12 going on the record, indicated you had a proposed

13 exhibit. Would you like to address that?

14 MR. ERICKSON: Yes, your Honor. Thank

15 you. Your Honor, yesterday at several points

16 Mr. Lapplander referred to a workpaper that he was using

17 to calculate some information he provided in his

18 testimony. He, just as we closed the record, he did

19 provide everybody a copy of that. I have taken the

20 opportunity to scan the document he provided, add a

21 footer for a label for the exhibit, and I would propose

22 to offer that document as AG-1 in this case. And I have

23 provided copy to the court reporter, Mr. Lapplander and

24 everyone else.





329

1 O.K. Hearing none, the exhibit is admitted as AG-1.

2 I think we left off with Mr. Keskey

3 continuing his cross-examination; is that right?


5 JUDGE EYSTER: All right. Mr. Keskey.

6 - - -


8 resumed the stand, and having been previously sworn,

9 testified further as follows:

10 CROSS-EXAMINATION (Continuing)

11 BY MR. KESKEY:

12 Q Good morning, Mr. Lapplander.

13 A Good morning.

14 Q Let's start off with a couple of questions regarding what

15 has now been identified as AG-1. This in fact is the

16 workpaper that you referred to late yesterday and which

17 was provided to the parties; is that right?

18 A Correct.

19 Q And again, what was the purpose of this workpaper?

20 A It was something I put together on Sunday in just

21 thinking about what the economics of the REF facility at

22 St. Clair under a set assumptions if Detroit Edison was

23 the actual owner of the facility, and then at the bottom

24 there, in if fact we had monetized this to see what in

25 fact economics would play out to be.




330

1 Q O.K. Now, if we take a look at your top line, net plant

2 in service of 12,312,936, as we discussed yesterday,

3 according to other benchmarks utilizing the Gallagher

4 presentation of a plant unit cost for an REF facility,

5 including the unit plus the connection to the plant, was

6 $5 million, and utilizing another benchmark of the

7 average cost of your five units and the cost thereof for

8 the 2009 REF plants shown on Exhibit MCAAA-28 in a range

9 of roughly 6.5 to 6.8 million, that would suggest that

10 your net plant in service for one unit of in excess of

11 12.3 million is much larger than some of those other

12 benchmarks; is that right?

13 A Well, I would agree with your benchmark on A. J.

14 Gallagher, but I would not agree to your benchmark when

15 you determine what the "average cost" is by just taking

16 plants in service for Belle River/St. Clair and dividing

17 it by the number of units.

18 Q O.K. So if you used the $5 million from the Gallagher

19 presentation as compared to your 12.3 million for net

20 plant in service, if you had used the Gallagher figure of

21 5 million, your revenue requirement in rate base would be

22 considerably lower, would it not?

23 A It would be, and that's, that is basically exemplified in

24 the calculation where I assumed a modest up-front payment

25 by a tax partner where I reduced plant in service by 10




331

1 million, so when you look at the bottom set of

2 calculations, that assumes basically a net plant in

3 service of only $2,312,936.

4 JUDGE EYSTER: Mr. Lapplander, where did

5 the 12,312,936 figure come from?

6 A That's from MEC-12, page 2 of 2, the exhibit that was

7 referenced quite a bit last year, and in there it says

8 the St. Clair Fuel Company revenue requirement 2012

9 forecast, the net plant in service was the 12,312,936.

10 JUDGE EYSTER: O.K. That's an answer

11 that was provided by you?

12 A Yes, it was, discovery requests.

13 JUDGE EYSTER: All right. So where did

14 the figure come from that was included in your discovery

15 response?

16 A My Exhibit A-11, page 2 of 2.

17 JUDGE EYSTER: That's in this case?

18 A Correct.

19 JUDGE EYSTER: So O.K. Continue.

20 A On page 2 of 2, line 26, and again, this is for an

21 example of how the refined coal adder is calculated, and

22 this is for September 2011, and the net plant in service

23 that we use in '011 was 13,980,994. 2012, we get this

24 net plant in service estimate from our affiliate, and

25 then these series of calculations on MEC-12 would then be




332

1 replicated on a similar exhibit, similar workpaper as

2 A-11, but for 2012, for A-11 is 2011 calculations.

3 JUDGE EYSTER: O.K. So the 12 million --

4 O.K. Who's the source for the figure?

5 A I would say that individual would be Chris Berkemer, who

6 works for, I believe, DTE REF Holdings.

7 JUDGE EYSTER: O.K. So that's not a

8 figure that you generated?

9 A I did not generate that, no.



12 Q (By Mr. Keskey): Now, when you mentioned making an

13 adjustment at the bottom of your sheet for a 10 million

14 payment, and your workpaper labels that payment as

15 follows, "Tax Partner Modest Upfront Payment Assume $10

16 million", that payment has no relationship to the amount

17 of investment that you would have in net plant in service

18 for the unit, would it; and by that I mean is, the tax

19 partner payment where the tax partner doesn't care how

20 much you paid for the unit, what he cares about is his

21 revenue stream of value of his tax credit benefits; isn't

22 that right?

23 A I would assume that if the Detroit Edison Company spent

24 only $5 million to build this facility, that the modest

25 up-front payment would be somewhat related to the cost




333

1 that Detroit Edison has in the project up to the point

2 that we get a partner in that project. So I would assume

3 that the "modest payment" by a tax partner would, yes,

4 have some relationship to the amount of cost that Detroit

5 Edison would have spent up to that time.

6 Q Well, isn't a tax partner looking at how much he would

7 pay up front for the value of the benefits he's going to

8 receive from the tax credits, not as to what you as

9 Edison invested in the unit?

10 A No, I disagree.

11 Q And why is that?

12 A Well, Mr. Crandall made a calculation where he estimated

13 the tax credits to be some $500 million, and then

14 adjusted it for a tax partner, and somehow was

15 speculating that DTE, our affiliate, got a couple,

16 $300-400 million payment up front, but your Exhibit

17 MCAAA-20 says in our 10K that we received a modest

18 up-front payment.

19 Q I don't see --

20 A Modest up-front payment and these hundreds of millions of

21 dollars to me are inconsistent, so the payment that our

22 affiliate received, I believe, has nothing to do with,

23 you know, the future value of the tax credits.

24 Q Well, that's not my question; I don't see the relevancy

25 of that answer.




334

1 Let me ask it this way: If in fact the

2 cost of a unit which would be the net plant in service on

3 AG-1 were 5 million instead of your 12.3 million plus,

4 and if you assumed that the tax partner up-front payment

5 would still be 10 million, then that adds to the

6 imbalance that's trying, that you try to present here on

7 this exhibit, does it not?

8 A If that's what -- yeah, under that set of assumptions. I

9 would reduce net plant in service from 12.3 to 5 million,

10 that's a $7 million reduction, you run through that math,

11 and that would be equivalent to about a million dollars,

12 and so the revenue requirement would be 9 million instead

13 of the 10.17, but the tax credits still are only 7.5

14 million.

15 Q Well, we'll get to that next. But, you know, what is

16 the -- what is the basis for your assumption of a $10

17 million tax partner modest up-front payment, is that just

18 a guess, or is that based on some kind of sophisticated

19 model of some sort?

20 A It was just an estimate that I would reflect in here so

21 that it would be an attempt to be equivalent to what the

22 affiliate did.

23 Q O.K. Now, let's take a look at your, the Detroit Edison

24 assumed tax credit of $7,560,000 that you show at the

25 second line from the bottom of the calculations. Now,




335

1 first of all, that's an after-tax figure, is it not?

2 A Correct.

3 Q Now, if you were to multiply that by the tax factor, the

4 pretax amount which was equivalent to that 7.56 million

5 would be 12.5 million, would it not?

6 A No.

7 Q How would you calculate the pretax figure?

8 A There is no pretax figure. Tax credits are one-to-one on

9 revenue.

10 Q Who told you that?

11 A My accounting group.

12 Q Are you familiar with how ratemaking is done at the MPSC?

13 A I am.

14 Q O.K. In order to get -- well, let's look at it this way.

15 That 7.56 million affects income to the Company to the

16 degree that, as a tax credit, that 7.56 million is a

17 one-for-one reduction to the actual tax bill, is it not?

18 A Correct, which is a one-for-one reduction in revenue.

19 Q But in order to get 7.56 million in income under MPSC

20 ratemaking, you have to multiply it by the tax factor of

21 1.667 for the Detroit Edison, do you not?

22 A No, I disagree. The, if you will, the revenue multiplier

23 of 1.6355, that is on an income deficiency to recognize

24 income tax effects of the deficiency, it's -- so it is

25 below, or right above the income tax, if you will. O.K.




336

1 So I mean if you have income of 10 and expenses of 5, you

2 got an operating income of 5, you pay taxes, and then you

3 have your net income. If your taxes go up or down, your

4 expenses don't change and your, if you want the same net

5 income, the revenue changes by the same amount as the

6 taxes.

7 Q Well, let's go through this scenario. If you have

8 revenue of 12.5 million and if you assume a tax rate of

9 40 percent, which is 5 million, your net income is 7.5

10 million, right?

11 A Would you say that again?

12 Q If we assume a revenue of 12.5 million for Detroit Edison

13 at a tax rate of 40 percent, which is 5 million, your net

14 income would be the net of the two, which is 7.5 million?

15 A Correct. And my point is is if I got, in the 5 million

16 tax, if I got a credit of a million, then to get the same

17 bottom line, I'd have one million less revenue, so I'd

18 have 11.5 million; 4 million in tax, and I'd have the

19 same 7 1/2 million remaining, so the tax is a

20 one-for-one, the tax credits.

21 Q Let's get back to your Exhibit AG-1. If you get a tax

22 credit of 7.56 million, that increases Detroit Edison's

23 income by 7.56 million, does it not?

24 A It would increase our income, correct.

25 Q By that amount, 7.56 million?




337

1 A Yes. But the point here is then when we're in a rate

2 case, we would reduce our revenue by 7.5 million and we'd

3 end up with the same net income.

4 Q Well, in order to get to 7.56 million of net income on a

5 ratemaking basis, you have to assume a revenue of 7.56

6 million times the tax factor for Detroit Edison, which I

7 suggest is 1.667, but you had a different, slightly

8 different tax factor.


10 answered, and that's not even a question.


12 MR. KESKEY: It is a question; I'm

13 following up with the other questions.

14 MR. MAQUERA: It's still been asked and

15 answered.

16 MR. KESKEY: It hasn't been asked and

17 answered because the witness is either erroneous or being

18 evasive.

19 MR. MAQUERA: Now you're being

20 argumentative.

21 MR. KESKEY: Exactly, because I am

22 arguing.

23 MR. MAQUERA: That's the point.

24 JUDGE EYSTER: Well, that sounded more

25 like a statement than a question to me, so I'll sustain




338

1 on that grounds.

2 Q (By Mr. Keskey): For purposes of this case, did you

3 review the Detroit Edison rate order in U-16472?

4 A Yes.

5 Q Did you look at the manner in which the Commission in

6 that rate order determined the amount of revenues that

7 had to be assumed in order to provide for the income

8 deficiency the Commission found in that rate order?

9 A Yes.

10 Q And in order to determine the revenue to be derived from

11 rates, did the Commission apply a tax factor multiplier

12 to the income deficiency?

13 A It did. But that's on -- if you've got an income

14 required and then you have adjusted net operating income,

15 which is after tax, to get your income deficiency, and

16 then there's a revenue multiplier.

17 Q Well, the net -- the adjustments to net operating income

18 are dealing with enumerable issues that's not related to

19 my question; is that right?

20 A Could you repeat your question?

21 Q Looking at the MPSC order in U-16472 for Detroit Edison

22 at page 92, when it came up with the income deficiency of

23 $106,959,000, and then it multiplied that by a revenue

24 multiplier of 1.6355 to come up with a revenue deficiency

25 of $174,931,000, that in fact is what the Commission




339

1 granted Edison in a rate increase, is it not, correct?

2 A Correct.

3 Q So in order to, for ratemaking purposes, deal with an

4 income deficiency of, let's say, hypothetically of $1.00,

5 that would equate to a revenue rate impact of $1.00 times

6 the tax factor of 1.6355 to get to a higher figure for

7 the revenue deficiency; isn't that correct?

8 A That's correct. But the tax, the revenue multiplier

9 1.6355 is to reflect the fact that there's taxes. That's

10 the line item where this tax credit is, if will you, is

11 kind of handled in this calculation. It's not above or

12 below.

13 Q Have you ever testified as to calculating a revenue

14 deficiency in a rate case?

15 A I have not.

16 MR. KESKEY: Your Honor, we'd like to

17 identify an exhibit as Exhibit MCAAA-29, another exhibit

18 which I'd like to hand out at this time.



21 MR. ERICKSON: Your Honor, could we go

22 off the record?

23 JUDGE EYSTER: We can go off the record.

24 We're off the record.

25 (At 9:35 a.m., there was a nine-minute pause in the




340

1 proceedings.)


3 Mr. Keskey.

4 MR. KESKEY: Your Honor, in the

5 off-the-record discussion, we're clarifying for

6 identification purposes that our Exhibit MCAAA-29

7 consists of a cover page, which is not numbered, followed

8 by page 1 of 2 of Exhibit MCAAA-29, and then the

9 attachment has been designated on the copy to be filed on

10 the website as page 2 of Exhibit MCAAA-29, which is a

11 page from Exhibit A-28, page 20 of 61, and that would

12 comprise the entirety of that Exhibit MCAAA-29.

13 Q (By Mr. Keskey): Now, Mr. Lapplander, have you had a

14 chance to take a look at Exhibit MCAAA-29?

15 A I have.

16 Q And if you would also look at page 15 of your rebuttal

17 where you discuss the various projects of the Gallagher

18 Company, page 15 of your rebuttal testimony, lines 18 to

19 21. And then if you look at Exhibit MCAAA-29, this

20 exhibit is simply to demonstrate the before-tax and

21 after-tax calculations and not as a basis to necessarily

22 disagree with your rebuttal testimony. Well, first of

23 all, if you look at page 2 of Exhibit MCAAA-29, do you

24 recognize that as page 20 of 61 of your Exhibit A-28?

25 A Yes.




341

1 Q And if you look at the information on that page, does

2 that show a breakout of the materials and operating costs

3 presented by the Gallagher Company on an after-tax basis

4 assuming a 40-percent tax rate with the various elements

5 of costs relative to an REF unit?

6 A Correct.

7 Q And if you look at the 45-cent piece of that pie chart,

8 what does that represent?

9 A Well, it's titled Utility (Rent or Discount on Coal).

10 Q Now, is that the amount that the Gallagher Company offers

11 to the participants on REF units that it participates in?

12 A My understanding, or I'd interpret that as the host

13 utility for an REF machine for the average 17 deployed

14 units for A. J. Gallagher is 75 cents a ton.

15 Q That 75 cents is on a pretax basis, is it?

16 A Correct.

17 Q And if it's an average, that would suggest that some of

18 the plant units would be above that figure and some would

19 be below that figure; is that right?

20 A That's possible.

21 Q And are you aware of specifically the highest figure that

22 Gallagher Company pays host utilities for the use of its

23 units in coming up with that average of 75 cents pretax?

24 A No.

25 Q Well, there has to be, out of the 17 projects, it would




342

1 have to be approximately conceptually at least half or

2 thereabouts of units that Gallagher pays the utility or

3 discounts the utility in excess of the 45-cent average or

4 the 75-cent pretax; would that be conceptually correct?

5 A No.

6 Q Well, in order to come up with -- well, let me ask you it

7 this way: How did the Gallagher Company come up with the

8 average?

9 A I have no idea.

10 Q So you don't know at all what the range of discounts were

11 that they provided to the host utilities for their

12 various units?

13 A I do not know.

14 Q Now, with respect to the other piece of that pie chart on

15 page 2 of Exhibit MCAAA-29, you see that figure for the

16 30 cents for the license fee to Chem-Mod?

17 A Yes.

18 Q And that is what the fuel companies are paying Chem-Mod;

19 is that right?

20 A That's what A. -- I believe this represents what A. J.

21 Gallagher's costs to license the Chem-Mod technologies.

22 Q Is it the fuel companies undertaking their REF units

23 under a Chem-Mod license?

24 A The fuel companies located at Detroit Edison, yes.

25 Q So the, as licensees of Chem-Mod, the fuel companies are




343

1 paying the 30-cent after-tax license fee to Chem-Mod, are

2 they not?

3 A Well, this shows what A. J. Gallagher is paying. I don't

4 know if what the fuel companies are paying Chem-Mod is

5 the same number. They are paying Chem-Mod a fee to

6 license the technology, I just don't know on an

7 equivalent dollar per ton basis which, whether it's this

8 30 cents.

9 JUDGE EYSTER: Do you even know if the

10 fuels companies themselves are paying that fee?

11 A They are, yes.

12 JUDGE EYSTER: It's the fuels companies

13 rather than DTE Energy Services?

14 A Ken Johnston offered an exhibit in the 2010 I think

15 reconciliation case, and he had in there I believe the

16 estimated royalty is somewhere in the $700-800,000 range

17 as part of the, their expenses included in the revenue

18 requirement calculation.

19 JUDGE EYSTER: I don't know who that

20 person is and I don't know who their expenses are.

21 A Going to MEC-12, there's a line item that says Cost of

22 Goods Sold (Mer-Sorb, S-Sorb & Royalty), so that is the

23 royalty that the fuel company has to pay Chem-Mod for the

24 right to use the Chem-Mod technology.

25 Q (By Mr. Keskey): Well, let me refer you to your Exhibit




344

1 A-28, pages 18 through 22.

2 JUDGE EYSTER: Hang on a second,

3 Mr. Keskey. I just want to make sure, because I -- who

4 holds the license to use Chem-Mod technologies, do you

5 know?

6 A I believe DTE Energy Resources.

7 JUDGE EYSTER: DTE Energy Resources.

8 A Which is on the org chart ladder one organization above

9 DTE REF Holdings.


11 A So somewhere in those two companies, they hold the

12 license for the Chem-Mod technology.

13 JUDGE EYSTER: O.K. So do you personally

14 know who pays that fee to Chem-Mod? I mean I don't even

15 know if this has any relevance. It would seem just

16 logically that the person who owns the license would pay

17 the fee, but maybe it doesn't matter. Does that make

18 sense?

19 A I'm not sure the exact entity that pays that.

20 JUDGE EYSTER: O.K. Mr. Keskey. That

21 probably has very little relevance, but sometimes there's

22 -- some of the difficulty that I've found when dealing

23 with this is that people make statements so and so's

24 paying something, well, they really aren't, it's somebody

25 else, or they don't really know who pays it. It becomes




345

1 a very cloudy picture of what's going on and becomes very

2 difficult to decipher the evidence and actually make

3 factual conclusions, and it becomes quite frustrating at

4 times. So it's -- to me, that seemed like something, a

5 statement that may not have been based in knowledge on

6 your part. I was trying to clear that up.

7 And I guess I'll put this out for the

8 record. Detroit Edison has the burden in this case, and

9 probably most cases, without making a ruling on anything,

10 and the cloudier the picture is, the more difficult it is

11 to find that you've carried your burden. And it's -- you

12 know, and I picked on a point there that probably has

13 very little relevance, but, you know, this case and the

14 plan case I think can be characterized by an attempt to,

15 you know, peel back the layers on an onion, and I'm not

16 really hearing much from the players that can tell you

17 what the next layer is, and it's, it's a lot of work with

18 not a lot of results. But I, you know, that's your guys,

19 you present the case, you present it the way you want, I

20 have to deal with it, but I'm not sure if any of that

21 frustration showed in the last PFD I wrote, I try to keep

22 that kind of stuff out of there, but it's not, it's not

23 helpful for me. But I'm just one piece of this,

24 ultimately the Commission makes their decisions, and I

25 guess that's what you base your presentation on, so.




346

1 Sorry for digressing into that.

2 Mr. Keskey.


4 Q (By Mr. Keskey): Mr. Lapplander, do you know what the

5 amount of the license fee that is paid to Chem-Mod?

6 A Like I said, I saw an estimate that Ken Johnston had that

7 was in the 700 or 800 or $900,000 range. Beyond that, I

8 don't know the specific dollar amount that the, say the

9 St. Clair Fuel Company pays for producing REF, what the

10 Belle River Fuel Company pays for producing REF, or

11 Monroe Fuels Company for producing REF.

12 Q And do you show that 700 to 900,000 figure anywhere in

13 your case exhibits or work papers?

14 A Well, that would be in the, as I mentioned, MEC-12, where

15 that one line item cost, where the one line item that

16 said Mersorb, S-Sorb & Royalty, it would be included in

17 that number, to my knowledge.

18 Q Do you know if that fee is paid as a license to use those

19 chemicals, or do you know if there's any additional

20 license fees to utilize the REF process at each of the

21 fuel companies on a per-ton basis?

22 A It's my assumption that there is a Chem-Mod license fee

23 for each of the three fuel companies at each of the three

24 plants.

25 Q On a per-ton basis?




347

1 A I don't know if it's on a per-ton basis.

2 Q Then why do you assume that?

3 A Well, there's -- there's a, as I said, on MEC-12 there's

4 a line item there that says Royalty. I'm just making the

5 assumption that there's, if we had a similar, if Belle

6 River had a tax partner and we were operating under the

7 Refined Coal Supply Agreement, that a similar set of

8 numbers like MEC-12 for St. Clair would exist for Belle

9 River and there would be a line item for Mersorb, S-Sorb,

10 & Royalty.

11 Q Well, looking back at your, looking back at page 2 of

12 Exhibit MCAAA-29, which is page 20 of 61 of your Exhibit

13 A-28, and if you take a look also at pages 18 through 22

14 of your Exhibit A-28, does that indicate that there is a

15 royalty license fee of $30 per ton on a pretax basis --

16 30 cents per ton -- excuse me -- on an after-tax basis?

17 A That's what that shows, correct, for the 17 deployed

18 units of A. J. Gallagher.

19 Q O.K. Take a look at page 18 of 61 of your Exhibit A-28.

20 JUDGE EYSTER: Page 16.

21 MR. KESKEY: Page 18 of 61.

22 Q (By Mr. Keskey): Now, if you look at that page, and you

23 notice that on the right arrow chart it refers to page

24 19. Would that refer to the licensees of the Chem-Mod

25 process? And when it refers to the Gallagher




348

1 presentation of page, at page 19, that page of

2 Gallagher's presentation is actually your page 22 of 61

3 of A-28.

4 A O.K. I've got that now. I'm sorry. What was your

5 question?

6 Q Well, does this show that the Gallagher royalty payment

7 requirement is, for licensees, 50 cents on a pretax basis

8 and 30 cents on an after-tax basis?

9 A That's what it shows.

10 Q Now, if you look at Exhibit A-29 -- or Exhibit MCAAA,

11 Exhibit MCAAA-29, page 1, this demonstrates the pretax

12 and post-tax figures for the license fee to Chem-Mod and

13 the utility rent or discount on the coal. Now, do you

14 know whether or not the fuel companies or if the

15 unregulated subsidiaries such as the holding companies or

16 DTEES pays that after-tax amount of 30 cents per ton and

17 the -- well, let me just ask that first.


19 answered. This witness has been asked repeatedly about

20 this 30-cent figure, the witness has answered repeatedly

21 that this is what Gallagher pays.

22 JUDGE EYSTER: Mr. Keskey, any response?

23 MR. KESKEY: The license fee of 30 cents

24 after tax and 50 cents pretax, according to the Exhibit

25 A-28, is what Gallagher charges its licensees, and the




349

1 testimony I believe indicates that these projects are run

2 under a Chem-Mod license, so I'm trying to get clarity on

3 whether this is paid or not paid.

4 JUDGE EYSTER: Well, let me see if I can

5 shed some light on that. Mr. Lapplander, do you know how

6 much -- this is the royalty fee you're concerned about?

7 MR. KESKEY: Yes.

8 JUDGE EYSTER: Do you know how much

9 whatever Detroit Edison affiliate is that actually pays

10 the royalty fee pays?

11 A I do not, no.

12 JUDGE EYSTER: O.K. He doesn't know.

13 MR. KESKEY: I think your question

14 involved Detroit Edison, and I'm -- I think we've, if I'm

15 mistaken, I thought your question referred to Detroit

16 Edison, and I think the license fee relates to the

17 unregulated affiliates.

18 JUDGE EYSTER: O.K. Just to make sure

19 we're clear, whatever unlicensed Detroit Edison affiliate

20 that pays the royalty fee, do you know what that amount

21 is?

22 A No.

23 JUDGE EYSTER: He doesn't know.

24 MR. KESKEY: That's fine.

25 A Mr. Keskey, if I might add, what's a little confusing, if




350

1 you go to my Exhibit A-28, page 17, in the green bar down

2 there, Chem-Mod, LLC, it shows their 42-percent

3 ownership, so A. J. Gallagher has a 42-percent ownership

4 of Chem-Mod, LLC, so it's a little confusing as to the

5 potential royalties could be higher and they're only

6 showing their 42 percent, I do not know, so that's why

7 there's some confusion as to if that's the full royalty

8 that may be, you know, they would be charging those who,

9 like the Belle River Fuels Company, or if it's just their

10 42-percent interest in that royalty stream.

11 Q (By Mr. Keskey): Well, your testimony talks about a

12 royalty or license payment to the entity known as

13 Chem-Mod, it doesn't try to suggest that there's some

14 relevance to the ownership of Chem-Mod, does it?

15 A No.

16 JUDGE EYSTER: Mr. Lapplander, what is

17 Exhibit A-28?

18 A On page 4 of 61, the cover sheet, A. J. Gallagher, it's a

19 presentation, I would call it an investor -- it says

20 Clean Energy Investment Conference Call, so I believe it

21 was a conference call with investors in A. J. Gallagher

22 as a company.

23 JUDGE EYSTER: Was this some filing with

24 the SEC, do you know? Where did it come from?

25 A We just -- an individual on my staff found this by




351

1 Googling A. J. Gallagher, and knew that they were one of

2 the licensees, and we're continually just trying to find

3 information in this regard.

4 JUDGE EYSTER: So this is just a document

5 that somebody found on the internet?

6 A I'd have to check with the individual, whether they got

7 this off the internet or whether they in fact got this

8 off their web page of A. J. Gallagher on some filing that

9 they make similar to some of MCAAA's exhibits that we

10 talked about yesterday.

11 JUDGE EYSTER: So do you know the purpose

12 for this exhibit, like this document, do you know why it

13 was produced?

14 A It sheds light on what others in the REF community, the

15 Chem-Mod technology, what they are offering other

16 utilities.

17 JUDGE EYSTER: O.K. That's the reason

18 you included it as an exhibit, correct?

19 A Correct.

20 JUDGE EYSTER: Do you know that the -- do

21 you know who produced this document?

22 A Jim Good. Who produced it?

23 JUDGE EYSTER: Yeah.

24 A You mean like the individual as A. J. Gallagher?





352

1 A I believe it's presented by Douglas K. Howell, their CFO,

2 which is shown on page 4 of 61.

3 JUDGE EYSTER: O.K. You had nothing to

4 do with the production of the document, right?

5 A I did not put this -- no.

6 JUDGE EYSTER: None of your staff did?

7 A (Nodding negatively.)

8 JUDGE EYSTER: You can't vouch for any of

9 the numbers, the accuracy of anything in this document?

10 A No.


12 MR. MAQUERA: Judge, for clarification, I

13 believe on the upper left-hand corner of every page in

14 this document there's a reference to attachment

15 MCAAA/DE-31j.


17 MR. MAQUERA: And this document was

18 originally produced in response to a discovery request

19 served on the Company by MCAAA.

20 JUDGE EYSTER: What are the first three

21 pages, looks like you have some article that was attached

22 to it?

23 A I believe MCAAA/DE-31j was a discovery request asking for

24 information that Detroit Edison had in regards to

25 Chem-Mod, and we generated these two documents because we




353

1 had these in our possession.

2 JUDGE EYSTER: O.K. And so then again,

3 what was the purpose, then, that you included this as an

4 exhibit?

5 A I used this in support of some of the conclusions I drew

6 in my rebuttal testimony about whether or not the coal

7 fee rate at Monroe was actually a market-based rate. I

8 drew some conclusions looking through this investor

9 presentation that the 17 deployed units of A. J.

10 Gallagher, none of those are owned by the host utility.

11 And I believe those are the two primary conclusions that

12 I've relied on, in part, on this investor presentation.



15 Q (By Mr. Keskey): Now, looking at Exhibit MCAAA-29, page

16 1, and also page 2, as we indicated before, the Gallagher

17 Company pays 75 cents per ton on average on a pretax

18 basis to its REF host utilities. How much does the St.

19 Clair Fuels Company pay to Detroit Edison?

20 A The value that we get at St. Clair is the carrying cost

21 of inventory. As I mentioned, the A. J. Gallagher, they

22 offered us a term sheet for River Rouge, and during those

23 discussions, they indicate that they, their model is they

24 buy the fuel from the host utility as it enters the

25 refined coal facility, so they do not own any inventory.




354

1 So if you look at Detroit Edison up at St. Clair, I

2 believe we got about a $1.7 million working capital

3 benefit included in base rates today, and if we get our

4 targeted 1.8 million tons of REF, you get just slightly

5 less than a dollar a ton equivalent value to the customer

6 compared to what A. J. Gallagher offers as the discounted

7 average 75 cents.

8 JUDGE EYSTER: When did you solicit a

9 proposal from Gallagher?

10 A They, A. J. Gallagher seeked permission from our

11 affiliate, who has an exclusive license, to offer

12 Chem-Mod at Detroit Edison plants. They asked, A. J.

13 Gallagher asked Energy Services for permission to offer

14 the siting of an REF facility at our River Rouge power

15 plant.

16 JUDGE EYSTER: When? So again, let me

17 just make sure that I understand your answer. You never

18 requested Gallagher to present a proposal with regards to

19 providing services, Detroit Edison?

20 A Detroit Edison did not do that.

21 JUDGE EYSTER: Detroit Edison did not.

22 Now, so you've never -- did they contact you, Detroit

23 Edison?

24 A They did not contact me.

25 JUDGE EYSTER: So you've never negotiated




355

1 with Gallagher over the terms of a contract?

2 A Individuals in my group met on a few occasions out at the

3 River Rouge power plant.

4 JUDGE EYSTER: Your group being?

5 A The fuels supply organization for Detroit Edison.


7 A And Exhibit A-31 is the term sheet that A. J. Gallagher

8 offered at the start of the process of determining

9 whether we wanted to site a facility there or not.

10 JUDGE EYSTER: When did that take place?

11 A The term sheet is dated September, 2010, so I'm assuming

12 it was in that timeframe.

13 JUDGE EYSTER: So this is after -- this

14 was at Belle River?

15 A This is at the River Rouge power plant.

16 JUDGE EYSTER: River Rouge. There's no

17 facility sited there right now?

18 A There is none, no.

19 JUDGE EYSTER: What prompted those

20 discussions? I guess I'm a little confused. I thought I

21 asked you if you solicited a bid from them, you said no.

22 A Who?

23 JUDGE EYSTER: You being Detroit Edison.

24 A We did not solicit a bid from A. J. Gallagher. They --





356

1 A They requested through Energy Services the right to sit

2 down and talk to us or offer us a proposal at River

3 Rouge.


5 A And they initiated that process, Detroit Edison did not.

6 JUDGE EYSTER: All right. And some of

7 the employees that work under you personally sat in on a

8 meeting?

9 A Yes.

10 JUDGE EYSTER: That involved

11 representatives from Energy Services and Gallagher?

12 A No. A. J. Gallagher and individuals at the River Rouge

13 power plant. Energy Services was not involved in that

14 transaction or those discussions, to my knowledge.

15 JUDGE EYSTER: O.K. So in 2010,

16 employees that work for you personally met with

17 representatives from A. J. Gallagher at the River Rouge

18 plant to discuss the possibility of them providing

19 refined coal at that plant?

20 A Correct.

21 JUDGE EYSTER: And you have an exhibit

22 someplace in here that I didn't find, what was that

23 number again?

24 A Exhibit A-31.

25 JUDGE EYSTER: I don't know where that




357

1 is. That's a proposed exhibit in this case?

2 A Yes.

3 MR. BZDOK: Judge, it's a, in the

4 prefiling in the rebuttal, I believe that

5 Mr. Lapplander's exhibits are slightly out of order

6 because of the large volume of A-30, or maybe that's just

7 how they were printed out in my stack. But A-31 in my

8 stacks follows A -- it comes before A-30. I think what

9 happened was 30 was filed separately in three batches.

10 So I have it following A --

11 JUDGE EYSTER: Well, I thought I had all

12 those exhibits. Let's go off the record for a moment.

13 (At 10:21 a.m., there was a 20-minute recess.)


15 Mr. Lapplander, I think we left off with me searching

16 around for Exhibit A-31, and I was able to find it. And

17 this proposed exhibit is a two-page exhibit; is that

18 correct?

19 A Correct.

20 JUDGE EYSTER: And can you tell me where

21 you acquired this particular exhibit?

22 A From one of the individuals who reports to me.

23 JUDGE EYSTER: Who's that?

24 A Harthan Krishnamurphy (sp).

25 JUDGE EYSTER: And that individual




358

1 acquired it where, from whom?

2 A I would assume that it was offered, I don't know exactly,

3 but I would assume it would be offered at the meeting

4 that they had at the Monroe power plant, or at -- I'm

5 sorry -- the River Rouge power plant.

6 JUDGE EYSTER: And can you tell me what

7 your understanding of what this document is?

8 A It's their offer to site a refined coal facility at River

9 Rouge, provide us a 25-cent a ton lease payment, and the

10 25-cent a ton discount for refined coal.

11 JUDGE EYSTER: Do you know if this was

12 the result of any negotiations?

13 A To my knowledge, this was the term sheet they submitted

14 to us which started the negotiations between Detroit

15 Edison and A. J. Gallagher.

16 JUDGE EYSTER: Did any negotiations ensue

17 from the presentation of this document?

18 A There were some, yes.

19 JUDGE EYSTER: Were you involved with

20 those?

21 A I was not.

22 JUDGE EYSTER: So it's your

23 understanding, then, that this was just the initial offer

24 of, including a few terms for the sitement of an REF

25 facility, reduced emissions fuel facility?




359

1 A Correct.



4 Q (By Mr. Keskey): Now, back to your Exhibit A-28 and our

5 Exhibit A-29, we note that the Gallagher Company pays 75

6 cents per ton on average to its REF hosts. Again, I

7 would like a direct answer to the question about how much

8 the St. Clair Fuels Company is paid, or rather pays to

9 Detroit Edison on a similar basis.

10 A There is no discount or coal fee rate like the Monroe

11 power plant for the St. Clair Fuel Company arrangement

12 with the Detroit Edison Company.

13 Q So the, other than Monroe, the Detroit Edison is not paid

14 the 75 cents per ton discount that Gallagher pays to its

15 other hosts; is that right?

16 A For St. Clair, that is the case.

17 Q And for Belle River?

18 A Belle River, the contract structure, we're not operating

19 under because they're still testing, but it has a similar

20 structure that the St. Clair Fuels Company has.

21 Q So Belle River is not getting a payment, discount payment

22 from Gallagher?

23 A Gallagher doesn't own these facilities, so no, we don't

24 get any payment from Gallagher.

25 Q You are still getting the tax credit for the Belle River




360

1 units because that they're in place and being tested; is

2 that right?

3 A To my knowledge, there is no monetization of the Belle

4 River machines, so I don't believe tax credits are

5 currently being generated.

6 Q I'm not talking about generated by Detroit Edison, I'm

7 talking about the DTE affiliates, do they qualify for the

8 tax credits since they were put in place?

9 A To my knowledge, the Belle River Fuels Company would have

10 to sell a majority interest in that facility in order to

11 qualify for the unrelated, the unrelated person criteria

12 in Section 45, and to my knowledge, that has not taken

13 place, and there are no tax credits being generated, to

14 my knowledge, at Belle River.

15 Q But the units qualify for the tax credit if and when

16 those other steps are undertaken; is that right?


18 Q In other words, the DTE affiliates have not missed any

19 deadlines so far for qualifying at some point for the tax

20 credits or the monetization of those tax credits at Belle

21 River?

22 A Those -- the machines at Belle River were placed in

23 service by the deadline at the time, December 31, 2009,

24 so they are classified as in service from Section 45 tax

25 credit perspective.




361

1 Q O.K. Now, again --

2 JUDGE EYSTER: Wait a second.

3 Mr. Lapplander, I thought you had testified earlier you

4 did not know whether or not the Belle River Fuels Company

5 was receiving a tax credit. Have you looked at their tax

6 documents?

7 A No. Well, I think I testified, similar to St. Clair and

8 similar to Monroe, that those, there's a -- the St. Clair

9 Fuels Company, at the time they monetized the facility,

10 St. Clair Fuels owned a hundred percent and they sold a

11 99-percent interest to a tax partner. The Monroe Fuels

12 Company has likewise sold a 99-percent interest to a tax

13 partner, and that's what I define as monetization. To my

14 knowledge, that has not taken place at Belle River. We

15 have -- we are still testing the REF at Belle River.

16 JUDGE EYSTER: O.K. But that -- is there

17 anything in the law that says they would have to do that

18 in order to receive the tax credit?

19 A Yes.

20 JUDGE EYSTER: And that would be?

21 A That's the unrelated, one of the criteria of Section 45

22 is to sell to an unrelated person, and if our, the Belle

23 River Fuels Company, which is our affiliate, is a

24 hundred-percent owner of that, they can't sell it to

25 Detroit Edison.




362

1 JUDGE EYSTER: O.K. And that's based --

2 O.K. I understand that that's the interpretation that's

3 been made of Section 45, that's the advice you've been

4 given by tax attorneys, correct?

5 A Correct.

6 JUDGE EYSTER: But do you personally have

7 any knowledge as to whether or not the Belle River Fuels

8 Company is claiming the credit? I mean it's --

9 A I would -- let me try it this way. We have a series of

10 contracts executed with the Belle River Fuels Company --

11 JUDGE EYSTER: Right.

12 A -- and I believe in there, when there is a closing or a

13 monetization, the Belle River Fuels Company will buy a

14 hundred percent of the inventory requirements for the

15 Belle River power plant. That has not taken place. When

16 we had a -- when the St. Clair Fuels Company sold an

17 interest in their facility, there was a series of

18 amendments to the contracts that their tax partner

19 wanted. When the Monroe Fuels Company sold a membership

20 interest in that facility, there was also a series of

21 amendments that the tax partner wanted. None of that has

22 taken place at Belle River, so I am reasonably confident

23 that there has been, there's been no monetization or a

24 tax partner for Belle River, and to my knowledge, the tax

25 credits, they're not generating tax credits today.




363

1 JUDGE EYSTER: O.K. So monetizing and

2 finding a tax partner is one way in which the fuels

3 companies have decided that they can qualify for the tax

4 credits?

5 A That's correct.

6 JUDGE EYSTER: And that's been the

7 pattern that's been, that played out at Monroe and St.

8 Clair?

9 A Correct.

10 JUDGE EYSTER: O.K. So your testimony

11 that they're not collecting or haven't qualified for tax

12 credits is based on the fact that they have not followed

13 the same pattern as the other two companies?

14 A Correct.

15 JUDGE EYSTER: But that doesn't eliminate

16 the possibility that they've taken some different course

17 of action that they believe would have qualified for them

18 for tax credits and they've claimed them?

19 A I'm assuming that's a possibility. I'm unaware of that

20 taking place.

21 JUDGE EYSTER: Would they normally tell

22 you if they're getting tax credits?

23 A Probably not.


25 Q (By Mr. Keskey): Am I correct in understanding from your




364

1 recent answer that it's your understanding that to

2 qualify for the Section 45 tax credits, that there must

3 be a sale of the tax credits to a third party or

4 monetization of the tax credits to a third party or a

5 sale of part of the ownership of the fuel companies to a

6 third party?

7 A My understanding, there has to be a sale in the interest

8 of the fuel company.

9 Q So if the fuel companies were or had been organized as

10 subsidiaries of Detroit Edison as a utility, those

11 subsidiaries could have sold ownership in the fuel

12 companies to third parties, could they have not?

13 A As we discussed yesterday, if we were -- if the Detroit

14 Edison Company was to do that, my tax counsel, Brian

15 Wheeler, indicated that it was probable that we wouldn't

16 meet the unrelated person requirement of the tax code.

17 Q Well, what's the conceptual difference between a separate

18 affiliate or subsidiary of DTE Energy as contrasted to a

19 similar subsidiary or affiliate separately organized

20 under Detroit Edison as a utility for purposes of

21 qualifying for Section 45 and the requirement itself,

22 ownership of the fuels companies to third parties?

23 A All I can offer is what I've said.

24 Q When you obtained this response from tax counsel about

25 the probability, was it -- was that comparison




365

1 specifically discussed in terms of the option of A,

2 organizing the fuel companies as subsidiaries or

3 affiliates of the unregulated DTE Energy, or B,

4 organizing the fuel companies as affiliates under the

5 regulated utility Detroit Edison?

6 A The question I posed to tax counsel was if Detroit Edison

7 owned these facilities, what was the tax risk associated

8 with that, and that's what had I indicated is that we

9 said there's, it's probable that we wouldn't meet that

10 requirement.

11 Q So you did not specifically ask your tax counsel as to

12 the outcome on Section 45 if a separate corporate

13 subsidiary or affiliate of Detroit Edison were the fuel

14 companies instead of Detroit Edison itself?

15 MR. MAQUERA: Objection. This question

16 has been asked and answered.

17 JUDGE EYSTER: I think it's been asked,

18 I'm not sure it was answered. So overruled.

19 MR. KESKEY: I don't believe it has, your

20 Honor, because the distinction is he keeps referring to

21 Detroit Edison itself.

22 JUDGE EYSTER: I agree with you. It's

23 overruled.

24 A My question to tax counsel was Detroit Edison.

25 Q (By Mr. Keskey): And not with respect to any affiliate




366

1 or subsidiary of Detroit Edison; is that right?

2 A That's correct.

3 Q Now, let's assume the scenario where Detroit Edison had

4 organized the separate subsidiary corporation as a fuel

5 company and sold 99 percent or, let's say, a majority

6 percent to independent third parties, wouldn't that

7 qualify for Section 45 tax treatment just as the

8 affiliates for the unregulated DTE?

9 MR. MAQUERA: Objection. Asks for a

10 legal opinion.


12 MR. KESKEY: Well, I do recognize that

13 he's offered considerable testimony as if he were a

14 lawyer, and I don't accept that. On the other hand, with

15 all the discussion we've had, I am asking for his

16 non-lawyer understanding from his discussions and

17 negotiations within the Company.

18 MR. MAQUERA: And just to clarify, the

19 witness has testified repeatedly that he relied on

20 counsel, or tax counsel from Brian Wheeler, he wasn't

21 offering legal opinions with respect to Section 45 based

22 on his own legal analysis. Your question is posing or

23 requesting him to make a legal analysis.

24 MR. KESKEY: I am asking him from his

25 knowledge of all of his discussions with Mr. Wheeler and




367

1 of his negotiations, whether he's aware in his own

2 information of any distinction that there might be

3 relative to the two scenarios; one, where the separate

4 affiliate is organized under the unregulated holding

5 company apparatus and sold to third parties in part or

6 whole or substantially, or B, where the same separate

7 utility is organized under the regulated utility with a

8 similar sale to third parties.

9 JUDGE EYSTER: All right. Mr. Keskey, I

10 don't believe you've laid a sufficient foundation to

11 establish that this witness is qualified to make, to

12 answer that question. So the objection is sustained.

13 Q (By Mr. Keskey): Well, is it -- am I correct that your

14 answer is that the idea or suggestion or possibility of

15 Detroit Edison organizing the fuel companies as separate

16 subsidiaries under Detroit Edison and undertaking similar

17 sales of part ownership in those companies to third

18 parties never came up?

19 A That's true.

20 Q Now, with respect to the St. Clair Fuels Company,

21 according to your testimony, the St. Clair Fuel Companies

22 do charge Detroit Edison Company for the decreased

23 emission cost; is that right?

24 A The value of reduced emissions, which in 2011 was $544,

25 is part of the refined coal adder, and yes, it is an




368

1 increased cost to coal, but there is a corresponding

2 reduction in emission costs, so the net impact on the

3 PSCR is zero.

4 Q But the St. Clair Fuels Company would charge Detroit

5 Edison and does charge Detroit Edison for the decreased

6 emission costs?

7 A Correct.

8 Q O.K. Now, with respect to the Gallagher Company, how

9 much does Gallagher Company charge its REF host for

10 decreased emissions costs?

11 A To my knowledge, nothing.

12 Q Now, when we look at emission costs going forward,

13 there's much testimony in this case about the concern of

14 planning for 2015 and possible increased costs for

15 mercury emissions; is that your understanding?

16 A Correct.

17 Q And so what planning has been undertaken with respect to

18 a concern or the possibility that there will be in 2015

19 substantial increases in emission costs?

20 A There will be some costs associated with controlling

21 emissions in 2015 when the Mercury and Air Toxic Rule

22 becomes effective.

23 Q And do you have an estimate as to how much that increased

24 cost will be for St. Clair?

25 A I don't have that.




369

1 JUDGE EYSTER: What kind of costs are you

2 talking about?

3 MR. KESKEY: Mercury emissions costs.

4 JUDGE EYSTER: I know, but there's lots

5 of costs. Are you talking about capital expenditures,

6 are you talking about increased fuel costs?

7 MR. KESKEY: We're talking -- well, the

8 foundational questions that I just asked were related to

9 the emissions costs that the St. Clair Fuel Company would

10 be charging Detroit Edison which they would capture in

11 increased charges.

12 JUDGE EYSTER: Increased charges from the

13 St. Clair Fuels Companies?

14 MR. KESKEY: To Detroit Edison.

15 JUDGE EYSTER: To Detroit Edison. Is

16 that your understanding of the question?

17 A I understand it.

18 JUDGE EYSTER: Was that your

19 understanding when you gave your last answer?

20 A I don't have those. There were estimates for those --

21 JUDGE EYSTER: Wait, wait. O.K. You

22 understand the question that's been asked; can you give

23 an answer again, then, please?

24 A I don't know the exact amount of those emissions, the

25 cost increases associated with mercury in particular in




370

1 2015.

2 Q (By Mr. Keskey): O.K. Now --

3 JUDGE EYSTER: So wait. Just so I'm

4 clear, make sure I understand. We're talking about an

5 increase in the adder based on savings at the power

6 plant; is that correct?

7 A Correct.

8 JUDGE EYSTER: So those will be -- and

9 those are -- I thought one of your power plants you were

10 expecting to be able to sell off emissions allowances and

11 actually turn a profit; is that right?

12 A Not that I'm aware of.

13 JUDGE EYSTER: O.K. That was not -- I

14 think that was related to rules that the courts have

15 overturned; is that right? You've got some projections

16 in your plan case that you were going to turn profit by

17 selling some allowances --


19 JUDGE EYSTER: -- based on rules that are

20 not in effect --

21 A Right.

22 JUDGE EYSTER: -- and have been --

23 A The courts vacated the CSAPR, the Cross-State Air

24 Pollution Rule, and we were forecasting in the '12 plan

25 case that SO2 allowances would have pretty substantial




371

1 value, and that's all collapsed, and the Care allowances

2 now for SO2 are approximately worthless.


4 Q (By Mr. Keskey): Under your proposal for REF, the fuel

5 companies would charge Detroit Edison for all costs of

6 emissions of mercury and the other emissions up to a cap;

7 is that right?

8 A The refined coal adder is structured that to the extent

9 we identify reduced SO2 emissions and reduced costs to

10 comply with mercury emissions, those identified costs

11 would then be part of, the cost avoidance associated with

12 REF would then become part of the refined coal adder.

13 Q And so that adder is charged by the fuel companies to

14 Detroit Edison?

15 A Yes, it is.

16 Q Now, if the emissions costs escalate from today's $544 to

17 some multimillion dollar or other higher figure in 2015,

18 then the charges under the adder from the fuel companies

19 to Detroit Edison will similarly increase, will they not?

20 A Under your scenario, yes. But I just might add that we

21 went out for a sale of the SO2 allowances that were, that

22 we -- the reduced allowances in 2012 in the marketplace

23 was zero, so in the case for 2012, the refined coal adder

24 will be zero. I would expect it to be zero in '14, and

25 then there will be some value associated with the mercury




372

1 compliance cost reduction associated with REF, which will

2 become part of the adder in 2015.

3 Q Well, to the degree that you charge, the fuel companies

4 charge Detroit Edison under the adder for emissions costs

5 and future increases each year as the emission costs

6 change or decreases, if in fact it turns out that those

7 emission costs escalate substantially and the fuel

8 companies charge that to Detroit Edison, that's providing

9 additional cash flow for working capital and other

10 purposes, is it not?

11 A It would provide additional cash flow to the St. Clair

12 Fuels Company, correct.

13 JUDGE EYSTER: It's the cost savings that

14 would be charged under the adder, the emission control

15 that's the savings?

16 A Correct.

17 JUDGE EYSTER: Now, and what category of

18 expenses does that include?

19 A SO2 and mercury compliance costs.

20 JUDGE EYSTER: Across the board,

21 everything, not just emission allowances; capital costs?

22 A No. Well, there's a provision in there for the, as part

23 of the adder, the mercury capital, if you will, avoidance

24 amortization, O.K., that was part of the refined coal

25 adder originally based on the assumption that the use of




373

1 REF in and of itself would allow for qualification or the

2 reduction of 90-percent mercury at the plant, and that if

3 in fact using REF would avoid Detroit Edison spending

4 capital for mercury controls, we would amortize that

5 savings as part of the adder. We will be installing

6 powdered activated carbon systems at St. Clair, so there

7 is no avoided mercury capital amortization that will be

8 part of the refined coal adder. But as it relates to

9 mercury and SO2, it would be just the value of SO2

10 allowances, and then we would look at the savings

11 associated with the type of powdered activated carbon

12 that we use and the amount of that, which Bill Rogers can

13 speak to.

14 JUDGE EYSTER: For the mercury?

15 A Correct.


17 Q (By Mr. Keskey): O.K. Let me ask some questions, then,

18 about the Monroe power plant and the coal fee rate and in

19 terms specifically related to working capital and

20 operation and maintenance expense. As indicated before,

21 on page 8 of your direct testimony you provide

22 calculation at line 10 to 12 regarding the coal fee rate

23 amount received by Detroit Edison from Monroe Fuel

24 Company in 2011 as being $738,806, of which $275,940 was

25 credited to an O&M, and $462,866 was credited to coal




374

1 inventory. Now, do you know when that, when those

2 credits were booked or reflected in 2011?

3 A I believe a portion of it was booked at month end

4 November and majority of it was booked at month end

5 December.

6 Q And the Commission's most recent base rate order for

7 Detroit Edison in U-16472 was issued on October 20, 2011;

8 is that right?

9 A I'll take your word for that.

10 Q So the credits that you refer here regarding those

11 credits were not reflected in the rate case; is that

12 right?

13 A That's true.

14 Q Now, if Detroit Edison does not have a rate case for a

15 few more years, then that credit would not be realized;

16 is that right, the O&M credit?

17 A The purpose -- the power plant, the Monroe power plant

18 identified some incremental O&M costs, and that's

19 reflected in the total of about $2.7 million. So if in

20 fact those incremental O&M costs materialize during the

21 year, this in fact just offsets the increased cost that

22 the plant will incur.

23 Q But as far as customer rates, there's no credit to

24 customer rates if there's no rate case; is that right?

25 A That's true, sir. But all I'm saying is if there's an




375

1 increase in O&M expense and there's a payment to cover

2 that, there wouldn't be any credit to the customers in

3 base rates in that instance.

4 Q Well, you have no exhibit in this case that identifies

5 and discusses and analyzes the increased O&M costs

6 related to the REF units at Monroe, do you?

7 A I don't. That would have been something John Dau could

8 have answered.

9 Q Now, specifically, you indicate a portion was credited to

10 O&M and a portion was credited to coal inventory. Are

11 either of those two credits related directly to PSCR

12 costs?

13 A The credit to coal inventory?

14 Q Yes.

15 A The credit to coal inventory is directly related to PSCR

16 costs.

17 Q It's not fuel burned, is it?

18 A Inventory is not fuel burned.

19 Q So exactly how is the credit -- well, how is the credit

20 that you refer to up to the coal inventory, how

21 specifically does that reduce or offset PSCR costs in

22 2011?

23 A To the extent that this credit rolled through the normal

24 weighted average inventory cost calculation each month,

25 and the weighted average inventory cost is the dollar per




376

1 ton that you use to create the expense each month, so

2 when you credit inventory, you will be lowering the

3 weighted average inventory cost of coal, which ultimately

4 rolls through to a lower fuel expense.

5 Q So is that $462,866 figure for credit to coal inventory

6 the amount that was credited for the last two months of

7 2011, or is that an annualized figure?

8 A It is the credit that was earned based on the amount of

9 REF produced and sold to Detroit Edison since the Monroe

10 Fuels Company started operation.

11 Q And so that, does that 462,000 reflect an actual credit

12 in the 2011 PSCR?

13 A I believe the credit to inventory would not have

14 completely rolled through and the entire $462,866 would

15 have, not have shown up as reduced PSCR expense in 2011.

16 Q And would it be correct that there's only two months of

17 impact in 2011?

18 A A little less than two months, yes.

19 Q And what is the amount, what portion of that 462,000 is

20 credited to 2011 PSCR costs?

21 A I don't know that answer.

22 Q Be pretty minor portion of that amount, would it not?

23 A It would be a relatively small amount, yes.

24 Q And would an approximate amount of less than two months

25 over an annualized figure of twelve months be a ratio




377

1 that could be utilized to determine roughly what the

2 actual credit to 2011 PSCR was?

3 A No.

4 Q Now, with respect to the 275,000 that was credited to O&M

5 expense, there was no request of the Commission for

6 authority to handle it that way or to obtain permission,

7 was there?

8 A To my knowledge, there wasn't.

9 Q And none of that figure credited to O&M would reduce the

10 PSCR costs from 2011; is that right?


12 JUDGE EYSTER: Mr. Lapplander, is the

13 actual figure -- well, you've got the 462,886, which is

14 credited to coal inventory?

15 A Yes.

16 JUDGE EYSTER: And only a portion of that

17 is for the 2011 PSCR case?

18 A Yes. The way we calculate fuel expense on a monthly

19 basis is we use the weighted average inventory cost.

20 JUDGE EYSTER: O.K. Is that figure in

21 this case someplace in an exhibit?

22 A What figure?

23 JUDGE EYSTER: The portion of that

24 $462,000 that's considered a cost in the 2011.

25 A The portion of that that would actually be part of the




378

1 fuel expense reduction in 2011, to my knowledge, is not

2 part of this case. There is no specific line item that

3 would designate that amount.

4 JUDGE EYSTER: Is that supposed to be

5 included in this case?

6 A Well, we've credited the inventory by that amount. We

7 did not, to my knowledge, perform an analysis of what our

8 fuel expense would have been absent this credit and then

9 what it is with the credit and then come up and say that

10 only, say, $100,000 of that credit actually rolled

11 through inventory -- or rolled through inventory and hit

12 expense in November and December. I believe the

13 accounting rules from the Public Service Commission say

14 that we credit inventory or debit inventory, and that we

15 don't run the straight through expense.


17 Q (By Mr. Keskey): Now, would it be correct that DTE

18 Energy generated REF tax credits in 2009?

19 A I don't know. There may have been some tax credits

20 generated by the Belle River Fuel Company selling

21 ultimately at an MPPA, an unrelated person, they might be

22 able to earn some tax credits associated with the MPPA's

23 ownership portion of the plant.

24 Q Do you know if there were any tax partners realized in

25 2009?




379

1 A To my knowledge, no.

2 Q Do you know whether DTE could still use the 2009 REF tax

3 credits to reduce DTE's income taxes with or without a

4 tax partner?

5 A I don't know.

6 Q Do you know if DTE Energy generated REF tax credits in

7 2010?

8 A I don't know specifically if they did.

9 Q Do you know if there were tax partners with respect to

10 the fuel companies in 2010?

11 A To my knowledge, there were none.

12 Q Do you know whether DTE could still utilize the REF tax

13 credit to reduce its taxes in 2010?

14 A I don't know.

15 Q With respect to 2011, do you know whether DTE Energy

16 generated tax credits in 2011?

17 A I believe their one-percent ownership interest in the St.

18 Clair Fuels Company and the Monroe Fuels Company,

19 ultimately DTE Energy may have been able to avail itself

20 of one percent of the tax credits.

21 Q How about Belle River?

22 A I'm unaware of whether there's tax credits being

23 generated at Belle River.

24 Q And with respect to the sale of the ownership in the fuel

25 companies to realize tax credit benefits, the




380

1 monetization of those amounts would accrue to DTE Energy

2 ultimately, would they not?

3 A I believe so.

4 Q Do you know what the amount of that is?

5 A No.

6 Q For any of the three years?

7 A No.

8 Q In your testimony, you've been indicating that DTE Energy

9 or its affiliates can not monetize the tax credits

10 without a third-party tax partner, but you have not

11 indicated whether or not DTE Energy or its affiliates can

12 nevertheless utilize the tax credits as an offset or a

13 deferral of its own tax liability on a consolidated

14 basis; is that right?

15 A Could you restate that?

16 MR. KESKEY: Could you read back the

17 question, please.


19 "Q In your testimony, you've been indicating that

20 DTE Energy or its affiliates can not monetize

21 the tax credits without a third-party tax

22 partner, but you have not indicated whether or

23 not DTE Energy or its affiliates can

24 nevertheless utilize the tax credits as an

25 offset or a deferral of its own tax liability




381

1 on a consolidated basis; is that right?")

2 A Well, I think I indicated that the St. Clair and Monroe

3 Fuels Company only own one percent -- or DTE Energy only

4 owns one percent of those, so we get one percent of the

5 tax credit. I presume they get one percent if somebody

6 else owns 99 percent of the facility. So to the extent

7 there's some tax credits that the affiliate gets, I would

8 guess that would roll up through the consolidated

9 statement of DTE Energy.

10 Q (By Mr. Keskey): Well, on one hand, for the tax credits

11 that have been monetized, that revenue has already been

12 generated by DTE Energy or its affiliates, right, or is

13 being --

14 A I'm not sure I understand when you say that revenue.

15 Q Well, there's two parts of the pie; there's a part that's

16 been, the ownership of fuel companies have been sold and

17 therefore monetized, and then there is a remaining

18 ownership that's not been sold yet which has tax credits

19 associated with it, right?

20 A The one-percent interest at St. Clair and Belle River, is

21 that what you're referring to?

22 Q Whatever the tax percentages are, do you know what the

23 remaining ownership is of DTE Energy or its affiliates in

24 each of the fuel companies?

25 A To my knowledge, DTE Energy has a one-percent ownership




382

1 interest in the St. Clair Fuels Company and a one-percent

2 ownership interest in the Monroe Fuels Company, and it's

3 my understanding that DTE Energy has a hundred-percent

4 interest in the Belle River Fuels Company.

5 Q O.K. Now, to the degree that DTE Energy or its

6 affiliates own, still own portions of each of the fuel

7 companies, do you know whether to that degree they

8 receive the tax credit associated with that ownership?

9 A I don't directly know that, no.

10 Q And with respect to the portions of the ownership that

11 they have sold, then that generated revenues or

12 monetization for DTE Energy or its affiliates; is that

13 right?

14 A I don't know, other than what's in the 10Q or K that you

15 have as exhibits that says there was a modest up-front

16 payment when they monetized the Belle River -- or St.

17 Clair Fuels Company and the Monroe Fuels Company.

18 Q Sort of an installment payment by a, for the sale of some

19 of those ownerships, is that what your answer meant?

20 A I don't know. All I read is in the 10K I believe, and it

21 said there was a modest up-front payment.

22 Q O.K. Now, I'm trying to work through some cleanup

23 questions here. You've indicated that Detroit Edison had

24 nine REF units for three plants, and you've testified

25 that there's only one REF unit needed for each plant; in




383

1 other words, one REF unit at a plant is adequate to

2 handle the REF needs at each of those plants?

3 A Your question was Detroit Edison had nine plants; Detroit

4 Edison doesn't have any plants. There are seven

5 production lines located at Detroit Edison plants, and

6 there are two located, one I think in Oklahoma and one in

7 Illinois.

8 Q So the DTE affiliates developed or placed REF units at

9 Detroit Edison plants by the deadline of 2000 -- January

10 1, 2010, and how many units were there?

11 A Five.

12 Q And then was there a second deadline, was there an

13 extension?

14 A Yes. December 31, 2011.

15 Q And then the DTE affiliates then placed additional REF

16 units at Detroit Edison plants before that deadline?

17 A Correct.

18 Q And how many units?

19 A Two.

20 JUDGE EYSTER: And where were those?

21 A The Monroe power plant.

22 Q (By Mr. Keskey): Well, didn't you at one time have as

23 many as nine?

24 A No.

25 Q Were the other two that are located elsewhere, were they




384

1 moved to those locations or were they developed at those

2 locations?

3 A They were developed at those locations.

4 Q O.K. And you're saying that basically your engineers or

5 Detroit Edison or Gallagher, your exhibits indicate your

6 company knew they only needed one REF unit for each

7 plant, which would be a total of three; is that right?

8 A As I testified yesterday, when we originally -- when

9 Detroit Edison was working with the Belle River, Energy

10 Services at the time, the two pug mills at Belle River,

11 it was assumed that both would be required to fulfill the

12 requirements of the Belle River power plant. Subsequent

13 to testing of those facilities, they had determined that

14 only one would be required, and therefore, there's a

15 potential that they could relocate one of the production

16 lines at Belle River.

17 Q How many units did you place in your plants by the

18 deadline of January 1, 2010? I'm talking about actual

19 placed in service.

20 MR. MAQUERA: Could counsel clarify what

21 he means by you?

22 MR. KESKEY: I'm talking about Detroit

23 Edison.

24 A Detroit Edison didn't place any of the units in service.

25 Q (By Mr. Keskey): How about DTE Energy and its




385

1 affiliates?

2 A They placed two units at Belle River and three units at

3 St. Clair by the end of 2009, so there were five units

4 qualified at the end of 2009. There were an additional

5 two units that were qualified at Monroe by the end of

6 2011.

7 Q And in order to meet the requirements of the tax credits

8 for each of these units, did they also have to be

9 actually at some point before the deadline physically

10 connected to the Edison plants?

11 A They, each of those production lines had to run and

12 produce refined coal, yes.

13 Q But you obviously couldn't run all of those units at the

14 same time, you'd have to do some kind of a cycling

15 approach, right?

16 A I would assume that's the case, but I was not involved in

17 the actual operation of those production lines.

18 Q So you knew in 2009 that you only needed one unit for --

19 O.K. Let me rephrase the question. By early 2010, it

20 was known that only one unit each was needed for Belle

21 River and St. Clair?

22 A That's true for St. Clair. I don't know the date as to

23 when the determination was made that only one production

24 line was required at Belle River.

25 Q So you already had some surplus units at the plants; why




386

1 did you order two additional plants before the second

2 deadline?

3 A I didn't do that.

4 Q Do you know why DTE or its affiliates, knowing that there

5 were surplus units at the plants, that they ordered

6 additional units?

7 A I wasn't involved in that decision.

8 Q Now, would it be correct that the two additional new

9 units that were ordered from Monroe in 2010 had to be

10 actually in service and operating in order to get the tax

11 credit?

12 A I don't believe there were any units ordered in 2010.

13 Q Well, when were they ordered?

14 A I believe construction for the two units at Monroe began

15 sometime in the summer of 2011.

16 Q So DTE and its affiliates knew that it had surplus units,

17 even at Monroe alone, when it placed those units in

18 service at Monroe?

19 MR. MAQUERA: Your Honor, this question

20 has been asked and answered since yesterday.


22 MR. KESKEY: That's basically my last

23 question on this area.

24 JUDGE EYSTER: All right. Why don't you

25 just go ahead and answer it.




387

1 A I would say that's fair.

2 Q (By Mr. Keskey): Now, looking at the worksheet that was

3 identified this morning as AG-1, and looking at the top

4 of that exhibit, sort of on the right, far right of the

5 top, you have a figure for coal inventory of $33,653,000.

6 If in fact Detroit Edison continued to own the coal and

7 the units, because the units received the coal just in

8 time, just when it was going into the pug units, then

9 under that scenario you would have a reduction in that

10 figure of that 33.6 million from the 51.9 million that

11 you show as rate base, and then if you go with the rest

12 of the calculation, the 6.59 percent, you would end up

13 with an income requirement of 1.206 million times a tax

14 factor, and that would add up, on the revenue requirement

15 rate base of 1.973 million instead of 5.598 million.

16 That's just a mathematical comparison. Does that

17 sound --

18 A You lost me right when you started this just in time into

19 the pug mill sort of thing.

20 Q Well, O.K. If you look at your Exhibit AG-1, your

21 worksheet, and if you were to consider a different

22 scenario in which the fuel companies did not buy the

23 coal, Edison owned the coal and the coal inventories,

24 that 33.65 million shown on your worksheet, AG-1, would

25 change the income requirement according to the rest of




388

1 the calculations on that page, would they not?

2 A The revenue requirement associated with the fuel company

3 owning this, but if you want to take that off of the fuel

4 company books and puts it on Detroit Edison books, the

5 customer would then be paying the 33,653,000. So there

6 would be no, you know -- the value at St. Clair is the

7 working capital benefit, and you just can't, you just

8 can't say I'm going to take it away; that cost exists, so

9 if you want to take it out of here or somehow to have an

10 alternate look at what this might be, you have to put

11 that somewhere, because that inventory is still there.

12 So the, if you want to take it out of the fuel company,

13 it you'd have to put it on in the rate base or part of

14 the working capital component in the rate base.

15 Q Well, let's --

16 JUDGE EYSTER: Wait. Question. Did the

17 fuels companies use the same accounting practices as

18 Detroit Edison?

19 A No.

20 JUDGE EYSTER: O.K. So these numbers

21 have nothing to do with the way St. Clair Fuels Company

22 might account?

23 A That's true. This was set up to reflect what the revenue

24 requirement would be if Detroit Edison owned this.

25 JUDGE EYSTER: O.K. I guess I do want to




389

1 follow up with something. The revenue requirement figure

2 that is used as the cap, however, is calculated using

3 accounting practices as if Detroit Edison owned the

4 Company, right?

5 A Correct.


7 Q (By Mr. Keskey): Mr. Lapplander, I'm just trying to

8 simply, you know, illustrate that if the fuel company,

9 St. Clair, did not own the coal inventory of 33.6 million

10 and you back that out, the revenue requirement would

11 reduce accordingly with your calculations that occur on

12 the top of page? That's basically all I'm asking.

13 A Yes, if you reduce any part of those numbers, you would

14 reduce the working -- the revenue requirement.

15 Q And that correspondingly would reduce the cap that you

16 can charge on emissions, right?

17 A It would reduce the cap -- the refined coal adder is the

18 lesser of the project revenue requirement or the value of

19 reduced emissions. So if you reduce the revenue

20 requirement, you would be reducing the cap on the REF

21 adder. But as I testified to earlier, I don't believe

22 the REF, the revenue requirement portion of the REF

23 calculation will ever come into play, because the value

24 of reduced emissions, in my opinion, will always be less

25 than the revenue requirement of a project, and the REF




390

1 adder will then be associated with the value of these

2 numbers.

3 JUDGE EYSTER: What -- excuse me. Is

4 there somewhere in these contracts something that defines

5 how the revenue requirement is to be calculated?

6 A Yes. It's in an exhibit in the Refined Coal Supply

7 Agreement.


9 Q (By Mr. Keskey): Now, there must have been a reason why

10 you included the cap as operating with the twin elements

11 of the revenue requirement or the reduction in emissions.

12 If in fact the cap becomes in a future year governed by

13 the revenue requirement element, to the degree that there

14 would be a reduction in that cap caused by the fuel

15 companies not owning the coal inventory, that would

16 reduce the charges under the cap, would it not?

17 A In your example, that would be true.

18 Q Now, there's been testimony that the fuel companies take

19 title to only a portion of the coal that's in the supply

20 chain and not 100 percent of the coal that comes from the

21 mines or from MERC. Is there -- what's the reason why

22 the coal, the fuel companies are not taking title to 100

23 percent of the coal?

24 A The fuel companies are taking 100 percent of the coal

25 requirements for St. Clair 1, 2, 3, 4 and 6 per the




391

1 contract, and the fuel company's taking 100-percent title

2 of coal going to the Monroe power plant under the

3 contract for the Monroe Fuels Company.

4 Q Are the fuel companies taking title to only the portion

5 of the coal that's subject to being processed under the

6 REF process?

7 A They're taking the title -- 100 percent of the coal

8 consumed at Monroe and at St. Clair 1, 2, 3, 4 and 6 are

9 not REF, but they are taking title to all of the coal

10 going to Monroe and they're taking title to their

11 percentage share of all of the St. Clair 1 through 4 and

12 6 requirement.

13 JUDGE EYSTER: Wait. Let me -- I'm still

14 not sure I understand. So they take title to all of the

15 coal that is shipped to Monroe?

16 A Let me clarify.

17 JUDGE EYSTER: Wait, just answer my

18 question. All of the coal that goes to Monroe?

19 A Correct.

20 JUDGE EYSTER: Whether they make REF out

21 of it or not?

22 A Correct.

23 JUDGE EYSTER: O.K. And then for St.

24 Clair, they're only taking title to the coal that they

25 produce REF, that they use to produce REF?




392

1 A They're taking --

2 JUDGE EYSTER: Is that correct or not?

3 A No.

4 JUDGE EYSTER: O.K. Can you explain

5 that, then?

6 A We're only producing coal, REF per the contract on a

7 regular basis on St. Clair's 1, 2, 3, 4 and 6. St. Clair

8 7 burns almost no REF at all. So the coal requirements

9 for St. Clair 1, 2, 3, 4 and 6, the fuel company takes

10 title to that at our, at Detroit Edison's Midwest Energy

11 Resource Company, our dock up in Duluth, Minnesota.

12 JUDGE EYSTER: So they're taking title to

13 all of St. Clair 1, 2, 3, 4 and 6?

14 A Correct.

15 JUDGE EYSTER: All right. And then

16 you've got 7?

17 A They do not -- that's Detroit Edison-owned coal

18 throughout the supply chain.

19 JUDGE EYSTER: Is there an 8 there?

20 A No.

21 JUDGE EYSTER: Does that cover all of

22 them?

23 A At Belle River.

24 JUDGE EYSTER: 1, 2, 3, 4 --

25 A St. Clair 5 has been retired, so that's all of the -- St.




393

1 Clair 1 through 4, 6 and 7 comprises the entire plant.

2 JUDGE EYSTER: O.K. And then Belle

3 River, they're only taking title to what they use?

4 A Periodically we sell them inventory in the coal yard at

5 the power plant --


7 A -- Detroit Edison does periodically for their testing.


9 Q (By Mr. Keskey): And at Monroe, as you indicated, you're

10 taking 100-percent title, the fuel companies are?

11 A Correct.

12 Q All right. The fuel companies are taking title to 100

13 percent of the fuel requirements in Monroe at MERC or at

14 the mines or both?

15 A If the fuel is going to be delivered all rail, they take

16 title FOB rail car at the coal mine; if the coal is going

17 to be delivered by vessel, they take title FOB vessel.

18 Q Is that true with respect to all of the plant locations,

19 the rail versus vessel distinction?

20 A There is no rail-delivered western coal to Belle

21 River/St. Clair. As I indicated, the Belle River Fuel

22 Company buys the proportionate share of St. Clair

23 requirements at MERC, so they own coal at MERC so that

24 they have their proportionate share of inventory what

25 I'll call through the supply chain from MERC to the




394

1 plant.

2 Q O.K. Now, as far as the actual coal inventory at Monroe,

3 not necessarily coal that's in transit, does the fuel

4 companies own 100-percent of the fuel inventory at

5 Monroe?

6 A No.

7 Q What portion is owned by Detroit Edison and what portion

8 is owned by the fuel company?

9 JUDGE EYSTER: What document are you

10 referring to?

11 A I have some notes that indicate what the inventory that

12 the Monroe Fuels Company owned by fuel type in December

13 of 2000 -- year end 2011.

14 JUDGE EYSTER: And those are just notes

15 that you produced yourself, that's some sort of a

16 document you have?

17 A They're notes I produced myself from a document that in

18 part is generated by my staff.

19 JUDGE EYSTER: Does anybody have any

20 concerns with the witness referring to his notes for his

21 answer?

22 MR. BZDOK: We would simply like to take

23 a look at them at the break, the lunch break.

24 JUDGE EYSTER: O.K. You can provide

25 those at break, which we'll be taking soon; is that




395

1 correct?

2 A That would be fine.

3 JUDGE EYSTER: All right. Thank you.

4 A Taking a snapshot at year end 2011, the Monroe Fuels

5 Company owned 115,760 tons of western coal in the coal

6 yard, they had 46,147 tons of low-sulfur western coal in

7 transit, they owned 130,826 tons of mid-sulfur coal on

8 the coal pile, and they owned 27,852 tons of mid-sulfur

9 coal in transit for a total of 320,585 tons.

10 Q (By Mr. Keskey): And the portion of that Detroit

11 Edison-owned inventory for those categories are what?

12 A I don't have that information with me.

13 Q Do you know what the total inventory is at the Monroe

14 Fuels -- at the Monroe plant for both types of coal?

15 A I don't have that information with me.

16 Q Now --

17 JUDGE EYSTER: Just I want to -- just to

18 make sure I understand, the inventory is that coal is

19 sitting on site, correct; is that what you consider

20 inventory?

21 A The numbers that I read included coal sitting on the

22 site, and as part of our inventory that we book each

23 month is coal that is in transit. So if we have two or

24 three trains of western coal that are sitting in Chicago,

25 we count that.




396

1 JUDGE EYSTER: O.K. So inventory

2 includes coal in transit and on site?

3 A Correct.

4 JUDGE EYSTER: O.K. And so the figures

5 you gave, you just broke out the ownership? This is all

6 owned by the Monroe Fuels Company, right --

7 A Correct.

8 JUDGE EYSTER: -- those figures you just

9 gave, and you broke it into in transit and on site?

10 A Correct.

11 JUDGE EYSTER: And that's all inventory.

12 And there's some inventory for Monroe that Detroit Edison

13 owns?

14 A Correct.

15 JUDGE EYSTER: Where is that?

16 A That's on Detroit Edison's books, I just don't have that

17 document with me. It probably is around a million tons

18 of coal.

19 JUDGE EYSTER: How is that still on your

20 books if Monroe is taking title to the entire amount of

21 coal that's burned at the Monroe power plant?

22 A At the time this -- at the time the Monroe Fuels Company

23 contracts were executed, I think in my testimony it was

24 agreed that the fuel company, Monroe Fuel Company would

25 buy 250,000 tons of coal in the coal yard per the




397

1 contract and all coal in transit. So when we closed,

2 they paid us some amount of money to take ownership of a

3 small portion of coal at the Monroe power plant and the

4 coal in transit. During a month, Detroit Edison may

5 have, under our Coal Consulting Agreement, we buy all the

6 coal, we deliver it, so we may, Detroit Edison will

7 deliver, for example, 600,000 tons of coal to Monroe. If

8 during the month the Monroe power plant consumes 600,000

9 tons of coal, there would be no change in the Monroe Fuel

10 Company's inventory.

11 JUDGE EYSTER: What about your inventory?

12 You're saying Detroit Edison has an inventory of a

13 million tons of coal?

14 A Correct.

15 JUDGE EYSTER: Is that just because

16 that's coal that was sitting there when you originally

17 signed the contract with Monroe Fuels Company?

18 A Correct.

19 JUDGE EYSTER: And they only -- so you

20 had 1.2 million tons, and then they took care of 200

21 million [sic] and left you a million --

22 A Correct.

23 JUDGE EYSTER: -- that hasn't been used?

24 A Correct.





398

1 Q (By Mr. Keskey): Now, the Monroe Fuel Company does not

2 process all of the coal under the REF process that's

3 burned at Monroe; is that right?

4 A Since the Monroe Fuel Company started refining coal, that

5 is correct, a hundred percent of the coal consumed at

6 Monroe has not been REF.

7 Q So is that true with St. Clair, also?

8 A That is true.

9 Q And do you know what portion of the coal at St. Clair and

10 Monroe was processed under the REF process for

11 consumption at each of those plants in 2011?

12 MR. ERICKSON: Objection, your Honor. I

13 believe it's been asked and answered. Mr. Lapplander has

14 indicated that the coal that goes to the specified Units

15 1, 2, 3, 4 and 6 is processed, none of the coal for Unit

16 7 is processed, and I think that if we try to figure out

17 what -- since none of the coal for 7 is processed,

18 figuring out how much coal is going to St. Clair won't

19 advance this record, and I believe Mr. Lapplander's

20 adequately answered the question.


22 MR. KESKEY: I think Mr. Erickson is

23 misunderstanding my question. We were talking about

24 inventories before, but now we're talking about the

25 portion of the REF -- the portion of the coal that -- how




399

1 much coal is being processed at each of these plants. In

2 other words --

3 JUDGE EYSTER: O.K. The objection is

4 overruled. I don't --

5 MR. BZDOK: Judge, it's in his direct at

6 page 7.

7 JUDGE EYSTER: Is it?

8 MR. BZDOK: Yes. So it has been asked

9 and answered.

10 Q (By Mr. Keskey): Now, building on what you've indicated

11 on page 7 of your direct testimony where you've split

12 that out -- and I'm sorry, I had it circled here and I

13 missed that -- there's no requirement as to how much or

14 what proportion the fuel companies must process under the

15 REF process; is that right?

16 A I don't believe there's any minimum guarantee or

17 something like that in the agreements.

18 Q Who makes the decision of how much to process under the

19 REF process, is that made at, that decision made by the

20 fuel companies or is it made by Detroit Edison?

21 A I believe it's a combination of the two.

22 Q Is Detroit Edison obligated to, when it buys back the

23 coal from the fuel companies, to buy it back at the same

24 price regardless whether it has been processed under the

25 REF process or whether it has not been processed?




400

1 A Yes. And I would say, just qualify that, except for the

2 refined coal adder at St. Clair.

3 Q But the ability to get the tax credits by DTE and its

4 affiliates, or in this case the Monroe Fuel Company, is

5 not dependent on what percentage or any kind of a minimal

6 level of coal that is processed under REF; is that right?


8 Q So if the Monroe Fuel Company decided to only process one

9 percent of the coal as REF coal, the tax benefits would

10 be -- the tax credits would be realized, but Detroit

11 Edison would not receive the reduced emissions that would

12 be contemplated under such a process?

13 A Well, in your scenario, the fuel company would get one

14 percent of the tax credits, because the credits are based

15 on the tons of REF produced, and then Detroit Edison

16 would only get the coal fee rate applied to one percent

17 of the coal.

18 MR. KESKEY: O.K. We have only a few

19 more questions, your Honor, and I would like to see if I

20 can highlight those very quickly.

21 Q (By Mr. Keskey): You've provided some references to

22 other utilities and what they are doing with the REF

23 program. And on your Exhibit A-27, page 3, you reference

24 a 42-cent per ton calculation for Duke of Indiana.

25 A I'm sorry, what exhibit was that?




401

1 Q Exhibit A-27, page 31.

2 A Page 31.

3 Q And it's also referred to in your rebuttal testimony.

4 Your rebuttal testimony, page 15, line 9 to 11, and if

5 you look at also page 30 of your Exhibit A-27. Do you

6 see on page, both page 30 and 31 of your Exhibit A-27 you

7 discuss a $5 million annual savings related to that

8 utility; do you see that?

9 A Yes, I do.

10 Q And what is the source of the 2010 actual tonnage that

11 relates to that?

12 A I believe the source of that is the EIA 9/23 report, the

13 Energy Information and Administration, where utilities

14 are required to provide, among other things, this type of

15 information.

16 Q Is the data that appears on your page 31 of A-27 supplied

17 by that source, or is it supplied by Mr. Blackwell, who

18 was the referenced testimony on your page 30?

19 A This information was provided to me by an individual who

20 works for me in my group.

21 Q So you don't know whether Mr. Blackwell was calculating

22 the 5 million based on that data, do you?

23 A Mr. Blackwell states that, based on an assumed coal

24 consumption similar to that experienced in 2010, and

25 proposed accounting regulatory treatment, et cetera,




402

1 et cetera, an annual benefit of $5 million.

2 Q Do you know how many tons of coal being processed he has

3 calculated that figure from?

4 A He said it was based on a coal consumed similar to that

5 experienced in 2010, which shown on 31 is the actual coal

6 consumption at the Cayuga and Gibson plants, and that's

7 what I assumed he was referring to.

8 Q Well, there could be considerable differences between the

9 coal that's processed at that utility under the REF

10 process compared to what is processed, for example, at

11 Monroe or any of the other plants of Detroit Edison; is

12 that right?

13 A There could be differences in the amount of coal that's

14 produced from an REF facility depending on what plant the

15 facility is located at.

16 Q So you don't know what percentage of the coal is

17 processed at this other utility?

18 A Well, based on the testimony of Mr. Blackwell, he just

19 says that based on the assumed coal -- if the coal

20 consumption is similar to that which they experienced in

21 2010 at their plants, they'd realize a value of $5

22 million. It doesn't say how much REF is consumed, it

23 just says, if their coal consumption was similar, that's

24 what it would be. And I just made an assumption. Yeah,

25 it -- is the REF a hundred percent at Cayuga and Gibson




403

1 assumed in here, I don't know.

2 Q And you don't know whether that has any similarity to the

3 Monroe plant or any of your other plants?

4 A I don't know that, no.

5 JUDGE EYSTER: What was the purpose of

6 all this testimony that's been filed in this exhibit?

7 A It's to demonstrate in part that Ameren and Duke do not

8 own the REF facilities located at their plants, they do

9 not get any of the production tax credits, and the

10 economics that they realize, I'm using to help

11 demonstrate that the deals Detroit Edison has with the

12 fuel companies represent an arm's length transaction.

13 JUDGE EYSTER: And where did you get this

14 testimony from?

15 A I went to the -- I went to the Public Service Commission

16 website for I guess it's Missouri and wherever Duke is

17 and got it off that.

18 JUDGE EYSTER: Do you know if it was

19 admitted into -- I don't know what their procedures are

20 there -- admitted into evidence, bound into the record;

21 do you know if it was ever part of a record?

22 A I don't know.


24 MR. KESKEY: We have no other questions.

25 JUDGE EYSTER: That's it? O.K. We're




404

1 going to take a break for lunch. We're off the record.

2 (At 12:13 p.m., the hearing recessed for lunch.)

3 - - -

4

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17

18

19

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25




405

1 Lansing, Michigan

2 Wednesday, January 9, 2013

3 At 1:15 p.m.

4 - - -

5 (The hearing resumed following the luncheon recess.)


7 Mr. Keskey.

8 MR. KESKEY: Yes, your Honor. I would

9 like to move the admission of the three exhibits which

10 were identified but have not yet been admitted, and

11 that's Exhibit MC AAA-27, 28 and 29.


13 Hearing none, the exhibits are admitted. Mr. Bzdok.

14 MR. BZDOK: Thank you, Judge.

15 - - -


17 resumed the stand, and having been previously sworn,

18 testified further as follows:

19 CROSS-EXAMINATION

20 BY MR. BZDOK:


22 A Good afternoon.

23 Q I have some questions for you on a number of subjects.

24 The first is the agreements which you attached as A-30,

25 to Exhibit A-30 to your rebuttal testimony. I think you




406

1 have a separate binder for those; if you could pull those

2 out, please. As I understand it, generally speaking,

3 this 806 pages of agreements is all of the agreements

4 related to the REF projects currently existing at Detroit

5 Edison's Belle River, St. Clair and Monroe power plants,

6 correct?

7 A That is correct. Except for, as I was going through this

8 the other day, I believe the entire Site License and

9 Service Agreement -- there's one agreement from one of

10 the plants that isn't complete in here. I can't find it,

11 so I'd say yes.

12 JUDGE EYSTER: Go ahead. O.K. You

13 indicated there's an agreement in here that's not

14 complete?

15 A Reviewing this over the weekend, I thought there was one.

16 I'll go through every one of these again, and I'll see

17 why I thought I had that.

18 MR. BZDOK: Judge and Mr. Lapplander, my

19 anticipation is to breeze, not page-by-page, but

20 agreement-by-agreement through these, and perhaps if

21 Mr. Lapplander during the course of that process

22 determines which is the one he believes is incomplete, he

23 could so indicate at that time if he can't find it right

24 now.

25 JUDGE EYSTER: O.K. Proceed.




407

1 Q (By Mr. Bzdok): O.K. Are we clear on what I was

2 suggesting?

3 A Yes.

4 Q O.K. So beginning page 1 of the exhibit, we have a

5 Refined Coal Supply Agreement between Belle River Fuel

6 Company and Detroit Edison Company, and that appears to

7 me to go to page 72, where on page 73 there's an

8 amendment to that agreement that begins; is that

9 consistent with your understanding?

10 A Yes.

11 Q O.K. And then there's an amendment to that Refined Coal

12 Supply Agreement between the same parties that runs from

13 page 72 of your exhibit to page 84 of your exhibit,

14 correct?

15 A Correct.

16 Q And then there is a Coal Inventory Purchase Agreement

17 between Belle River Fuels Company and Detroit Edison that

18 runs from pages 85 to 116 of your exhibit, correct?

19 A Correct.

20 Q And then the License and Site Services Agreement between

21 Belle River Fuels Company, Detroit Edison and also the

22 Michigan Public Power Agency begins on page 117 of your

23 exhibit and runs to page, through page 162, where an

24 amendment to that agreement begins on 163; is that

25 correct?




408

1 A Correct.

2 Q I have a couple questions for you on this agreement, and

3 they really focus on the definition of the facility land.

4 And generally speaking, without asking you to make legal

5 interpretations, because I think this is a fairly

6 straight-forward factual issue, the facility, the License

7 Agreement refers to the facility land in a few different

8 places, and when it refers to the facility land, I'm

9 looking, for example, at Article II, Section 2.1(a),

10 which is page 127 of your exhibit. You see there

11 Facility License, and then there's about four lines down

12 that references an Exhibit A, the Facility Land?

13 A Correct.

14 Q And I see that a number of places. And then I go to

15 Exhibit A, which is page 152, and there is a, what looks

16 like a survey style of map that was produced by perhaps a

17 CAD or a civil engineering firm. Do you see that?

18 A I do.

19 Q My question for you -- I have a couple questions about

20 this map. The first one is, there's a little hash mark

21 shading on the right-hand side that says facility land

22 for the refined coal facility, and my question is, I

23 can't figure out from this sketch where the actual

24 facility land is on this survey sketch. Can you

25 illuminate that for me? That's the same look I had on my




409

1 face over the weekend.

2 A I believe the actual location is the darker shaded box in

3 the middle bottom of the sketch.

4 MR. BZDOK: May I approach the witness,

5 Judge?


7 Q (By Mr. Bzdok): Just for the record, I'm approaching him

8 with my copy of that page 152 and also a highlighter.

9 Just for the record, and I'll probably admit this in some

10 fashion, can you just highlight for me where it is you're

11 speaking of when you're talking about the dark box; can

12 you just outline that for me in the highlight?

13 A To the best of my knowledge, I would believe it's located

14 right there.

15 Q O.K. And I'm interpreting your answer as being based in

16 part on your knowledge of the site perhaps even more so

17 than you're able, your ability to decipher where the

18 hashings are on this sketch; is that correct?

19 A Yes. I have seen some pictures of where that facility is

20 located, and translating my limited knowledge of the

21 physical location to this somewhat less than good picture

22 of their site, I would, my best recollection is it's

23 where I indicated.

24 Q O.K. And then I think I'm understanding -- I'm looking

25 at Exhibit B now, which is the very next page, which is




410

1 like an aerial photograph of the Belle River and St.

2 Clair sites. I guess I'm going to do the same thing.

3 MR. BZDOK: Do you want me to ask you

4 each time I approach the witness, Judge?

5 JUDGE EYSTER: That's not necessary.

6 Q (By Mr. Bzdok): O.K. I'm going to hand you my copy of

7 page 153 of your Exhibit A-30, and again, the same

8 highlighter, and ask you, can you show me where on the

9 aerial map that little box you drew in is? I'm trying to

10 understand where on the Belle River power plant property

11 the facility land is in the aerial map.

12 A Looking at Exhibit A, and to the best of my recollection,

13 I believe it's right --

14 JUDGE EYSTER: Is that Exhibit B or

15 Exhibit A that you're looking at?

16 A Exhibit B.

17 Q (By Mr. Bzdok): He's looking at A and then transposing

18 it on to B; is that correct?

19 A Yeah. I'm under the impression that this designation

20 here would represent this coal pile on the picture, and

21 if in fact that's the case, then that, the facility would

22 be somewhere around here (indicating).

23 MR. BZDOK: O.K. I'm going to mark my

24 copies that the witness has marked up as Exhibits MEC

25 Proposed 30; Proposed 30 is Exhibit A. I'm only




411

1 admitting them separately, and I don't have copies to

2 share obviously because the witness, you know, has just

3 marked them, but I think that so the record is clear,

4 I'll probably, you know, I'll be looking to prefile

5 and -- or not prefile -- post-file and include those in

6 the record in color as, proposed MEC-30 as Exhibit A and

7 MEC-31 as Exhibit B.

8 MR. ERICKSON: That would correspond to

9 pages 153 and 152 respectively in Exhibit A-30?

10 MR. BZDOK: 152 and 153; MEC-30 is page

11 152, MEC-31 is page 153.


13 MR. BZDOK: And I'll just, when we file

14 them, we'll file them in color so that the highlighting

15 shows up. Do you want to see these before I continue on?

16 JUDGE EYSTER: Mr. Bzdok, before you

17 leave these exhibits, I have some questions I want to

18 ask.

19 MR. BZDOK: O.K. I'll leave them up

20 there with you for the moment, then. I'm going to move

21 for their admission right now.


23 Hearing none, Exhibit MEC-30 and 31 are admitted into

24 evidence.





412

1 Reporter as Exhibit Nos. MEC-30 and MEC-31.)

2 Q (By Mr. Bzdok): The squares you highlighted on the two

3 maps or sketches, Mr. Lapplander, those are the

4 three-acre sites you were referring to in your testimony

5 yesterday?

6 A I would say yes.

7 Q O.K. You've also testified in prefiled testimony and

8 also in cross that the coal is owned, title in these fuel

9 companies is in the fuel companies from some point,

10 whether it's at the mine mouth and the railroad, you

11 know, all railroad delivery case or at MERC in the vessel

12 case, up until some point just prior to burning by

13 Detroit Edison, correct?

14 A Correct.

15 Q Is that coal stored on the facility land or is it stored

16 in the coal piles elsewhere on the site that's owned by

17 Detroit Edison?

18 A In the coal pile owned by Detroit Edison.

19 Q Is there any rental or fee or payment in the agreements

20 that reflects that the fuel company-owned coal is being

21 stored on the Detroit Edison property outside of the

22 facility land in the agreements?

23 A There is no rental fee in any of the agreements for that.

24 Q Detroit Edison provides the fuel company with storage

25 gratis, correct?




413

1 A Well, I would say that you could say that in the

2 provisions of providing the coal handling and consulting

3 services as outlined in that agreement, that we receive

4 all the coal and handle all the coal, so the fees paid

5 there one might say would include the use of that land.

6 Q Are you saying that that's reflected in the agreements,

7 or are you saying one could infer from the situation that

8 that might be the case?

9 A There is no specific fee for the land that the coal is

10 sitting on specified in any agreement.

11 Q Without pulling out maps and highlighting them, is that

12 also the case on the St. Clair facility, the situation

13 we've just described?

14 A Correct.

15 Q And is it also the case on the Monroe facility under

16 these agreements as the situation we've just described?

17 A Correct.

18 Q The Site Licensing Agreement goes on to page --

19 MR. BZDOK: Sorry, Judge. You said you

20 might have questions about those maps before I continue

21 to a different topic?

22 JUDGE EYSTER: Yeah. Mr. Lapplander, do

23 you have Exhibit -- well, page 152 in front of you?

24 A Yes.

25 JUDGE EYSTER: And as you're looking at




414

1 the page in the upper left corner, do you see that

2 circle?

3 A Yes.

4 JUDGE EYSTER: And below that, do you see

5 the markings that appear to be circles?

6 A I'm sorry, do I see the marking of?

7 JUDGE EYSTER: That appear to be circles.

8 A I believe so.

9 JUDGE EYSTER: Do you know what that

10 indicates?

11 A I do not.

12 JUDGE EYSTER: All right. Mr. Bzdok.

13 MR. BZDOK: Thank you.

14 Q (By Mr. Bzdok): Before we digress into the maps, I

15 believe we were looking at the License Service Agreement,

16 and the maps were exhibits to that, and that takes us to

17 page 163 where there's an amendment to the Belle River

18 License and Service Agreement again between Belle River

19 Fuel Company, Detroit Edison and MPPA, correct?

20 A Correct.

21 Q There is -- and that agreement continues to page 1 --

22 through page 167, and at 168 begins the Environmental

23 Indemnity Agreement between Belle River and Detroit

24 Edison Company, correct?

25 A Correct.




415

1 Q Do you know why MPPA is not a party to this agreement?

2 A The Environmental Indemnity Agreement?

3 Q Yes. Since they own a portion of the property.

4 A I do not know.

5 Q And that Environmental Agreement continues through page

6 192, and at page 193 begins the Coal Handling and

7 Consulting Agreement between Belle River Fuel Company and

8 Detroit Edison Company, correct?

9 A Correct.

10 Q And that was the agreement you referenced in our

11 discussion of coal handling and consulting services a

12 moment ago, correct?

13 A Correct.

14 Q And that continues through page 232, and at page 233

15 begins the Acceptance Period Coal Inventory Purchase

16 Agreement between Belle River and Detroit Edison,

17 correct?

18 A Correct.

19 Q And then that agreement continues through page 351 of

20 your exhibit, and at page 352 begins a Refined Coal

21 Supply Agreement between the St. Clair Fuels Company and


23 A Correct.

24 Q And that agreement continues through page 413, and at

25 page 414 begins a series of amendments to that agreement,




416

1 correct, to that Refined Coal Services Agreement, or

2 Refined Coal --

3 A Correct.

4 Q O.K. Can you -- there are three amendments, correct?

5 A Correct.

6 Q Can you, without asking you for a legal opinion and

7 without asking you to, you know, read me the agreements,

8 can you describe for me generally speaking -- well, first

9 of all, were you involved in the negotiation of each of

10 these three amendments?

11 A I was involved in -- yes, I would say I was involved in

12 the negotiation of the commercial terms as it relates to

13 this, and obviously the lawyers did most of the

14 wordsmithing.

15 Q I've heard it described as just scriveners in those

16 situations, but I suppose that your characterization is

17 more charitable. Can you describe for me generally what

18 the purpose of those three amendments were, whether you

19 want to take them one at a time or whether they had all

20 had a common purposes? I'm just trying to understand

21 generally why those amendments were entered into.

22 A I'm sorry, but where -- where does amendment one start?

23 Q Sure. I have the original agreement going through page

24 413, and then I have a document starting on 414 that it's

25 just called Amendment to St. Clair Refined Coal Supply




417

1 Agreement, and then at page 435 I have an Amendment No. 2

2 to St. Clair Refined Coal Supply Agreement, and then at

3 page 443 I have Amendment No. 3.

4 A Well, it looks like in amendment, the first amendment on

5 page 414, there was a revision to Section 5.9 regarding

6 invoice and payment.

7 Q I guess -- let me put my cards on the table. I'm not

8 looking to argue with you about any of these amendments,

9 and I understand that there's new language in certain

10 sections, I'm just wondering just generally what was your

11 understanding of what was the occasion for needing to

12 amend these various provision? Do you see what I'm

13 saying?

14 A I do.

15 Q I can go through the agreements and say, well, there was

16 Section 9.2 here and then there's a new Section 9.2 and

17 it says it supersedes. I'm just looking from your memory

18 of the negotiations and the discussion, do you remember

19 why was it that these changes were made?

20 A Well, the first amendment is March '10, March 1, 2010, a

21 couple months, couple, three months after the facility

22 was placed in service, so I'm perhaps -- and I don't

23 specifically recall -- that this might have been some

24 cleanup, if you will, to the original agreements, we

25 decided we'd do something just a little different. The




418

1 Amendment No. 2 is dated January 7, 2011, and I would

2 expect that that revision amendment was in part what the

3 tax partner wanted to see in these agreements, because I

4 think we monetized that facility in January 2011.

5 Q Do you recall any specifics of that conversation; we need

6 to change this agreement because the tax partner wants

7 this, that or that? When you say the changes in

8 Amendment 2 were driven by concerns or desires of the tax

9 partner, can you describe for me generally what those

10 were?

11 A I don't know, I wasn't involved with the tax partner.

12 Q But you were involved, you said, in the negotiation of

13 the amendment, so it was in that context that I'm asking

14 you what you remember.

15 A There were -- some of what was changed in this amendment,

16 it was asked to be changed by the tax partner. Why the

17 tax partner asked for those, I don't know.

18 Q O.K. How about Amendment 3?

19 A This looks like a, perhaps a further clarification of how

20 the coal pile survey would be conducted at the power

21 plant.

22 Q And why did that need to be clarified or changed?

23 A I don't recall.

24 Q O.K. Amendment 3 appears to me to end on page 445, and

25 then on page 446 there's a Coal Inventory Purchase




419

1 Agreement between the St. Clair Fuels Company and Detroit

2 Edison that runs through page 474, correct?

3 A I believe it runs through 471.

4 Q Thank you. Yes. And then on page 472 begins an

5 Acceptance Period Coal Inventory Purchase Agreement

6 between the St. Clair Fuels Company and Detroit Edison,

7 correct?

8 A Correct.

9 Q And that runs through page 493, and at 494 begins the

10 License and Service Agreement for St. Clair Fuels Company

11 and Detroit Edison, correct?

12 A Correct.

13 Q And then that agreement runs through page 543 of your

14 exhibit, and at page 544 there is an amendment to the St.

15 Clair Environmental Indemnity Agreement, followed by

16 another document saying Amendment to St. Clair

17 Environmental Indemnity Agreement, followed by an

18 Amendment No. 2 to the St. Clair Environmental Indemnity

19 Agreement, correct?

20 A Correct.

21 Q We may have put our finger on it, but is it possible that

22 what's missing is the original St. Clair Environmental

23 Indemnity Agreement, because I could not find it in these

24 documents?

25 A That's the one, yes.




420

1 Q Was that simply a ministerial mixup that that was not

2 included in these documents, or was there some reason why

3 it was not included that's substantive in nature?

4 A It was probably just an administrative misstep, because I

5 believe we provided, we anticipated to provide all of the

6 documents in a, I believe a discovery request in the

7 prior case, and I believe administratively we just copied

8 that file, so it's just an oversight.

9 Q O.K. Is that agreement identical, substantively

10 identical to the Environmental Indemnity Agreement at

11 Belle River?

12 A It is.

13 Q The various amendments to the Environmental Indemnity

14 Agreements for St. Clair go through page 551, and at 552

15 begins the Coal Handling and Consulting Agreement between

16 the St. Clair Fuels Company and the Detroit Edison

17 Company, correct?

18 A Correct.

19 Q And that agreement runs through page 594 of your exhibit,

20 correct?

21 A Correct.

22 Q And then at page 595 there's a document that's simply

23 called Agreement, and it has some whereases and now,

24 therefores, and then it has a paragraph 1 that says: In

25 addition to amounts paid to DECo by SCFC under the Coal




421

1 Handling Agreement, commencing in January 2011 and

2 continuing for the term of this Agreement, DTE Energy

3 Services shall pay to DECo a redacted amount per month to

4 reimburse DECo for the incremental cost incurred in

5 connection with supplying 1,800,000 tons of coal per

6 calendar year to this Facility. Did I read that

7 accurately?

8 A You did.

9 Q O.K. First, what is the purpose of this agreement?

10 A The coal handling -- the employees at St. Clair

11 determined that the incremental cost to them for handling

12 the coal for this facility were approximately $10,000 a

13 month, so there was a separate agreement, as shown here,

14 to reimburse the plant for that incremental coal handling

15 expense.

16 Q O.K. And pause in case your counsel wants to object, but

17 is the redacted number the 10,000 per month?

18 A That's been provided in discovery, yes.

19 Q O.K. Commencing at page 596 is a Refined Coal Supply

20 Agreement between the Monroe Fuels Company and the

21 Detroit Edison Company that then runs through page 646 of

22 your Exhibit A-30, correct?

23 A Correct.

24 Q I have a question for you related to page 19 of this

25 agreement, which is at page 618 of your exhibit. So turn




422

1 to that page, if you would. Again, allow a pause between

2 my question and your answer on these questions, if you

3 would. Do you know what the subject of Section 9.4, the

4 redacted section, what the subject of that section is

5 generally speaking? I'll note that the title was

6 redacted in the table of contents as well.

7 A That, I'm not quite sure, but I think it may apply to a

8 structure, the original structure of the Monroe

9 agreements where a fee was paid for coal handling and

10 consulting services, and then it was, this is entitled

11 Coal Fee Reimbursement, was then added back to the

12 invoice price of coal so the two at month end closing

13 would net to zero since we're not performing any

14 additional services, so that may be what's being

15 discussed here.

16 Q Do you know why that would be confidential?

17 A It may have to do with -- well, that's a good question.

18 I'm not sure.


20 exhibits, where it begins on page 647 a Pre-Closing Coal

21 Inventory Purchase Agreement between the Monroe Fuels

22 Company and Detroit Edison, correct?

23 A Correct.

24 Q And that agreement runs through page 669 of your exhibit,

25 and at 670 begins a License and Service Agreement between




423

1 Monroe Fuels Company and Detroit Edison, correct?

2 A Correct.


4 exhibit, where it begins at page 720 the Environmental

5 Indemnity Agreement for Monroe Fuels Company and Detroit

6 Edison, correct?

7 A Correct.

8 Q And that item continues through page 742, and at 743

9 there's an amendment to that indemnity agreement,

10 correct?

11 A Correct.

12 Q And then starting at page 745 is the Coal Handling and

13 Consulting Agreement between Monroe Fuels Company and


15 A Correct.

16 Q And that runs through page 781, and at page 782 begins

17 the Coal Feedstock Purchase Agreement between Monroe

18 Fuels Company and Detroit Edison, which is the last

19 document in your exhibit, correct?

20 A Correct.

21 Q O.K. I count a total of something over 28 different

22 agreements in this exhibit; does that sound neighborhood

23 ballpark to you?

24 A I would agree with you.

25 Q This citation to these exhibits in your rebuttal




424

1 testimony was in the context of rebutting some testimony

2 from Witness Geoffrey Crandall for MCAAA; do you recall

3 that?

4 A Yes.

5 Q And specifically, you were arguing that, or you were

6 asserting that 3 of these 28 or more agreements provide

7 for certain limitations on the ability of the fuels

8 companies to sell refined coal to parties other than


10 A Correct.

11 Q And you've cited those, those were each of the, whether

12 as amended or original, they were the Refined Coal Supply

13 Agreements for the three plants, correct?

14 A I believe that was the case, yes.

15 Q And those are the only agreements cited in your rebuttal

16 testimony out of the 28 or more from this Exhibit A-30,

17 correct?

18 A I believe that's a fair statement, yes.

19 MR. BZDOK: O.K. I'm going to move to

20 another topic, unless your Honor has questions you want

21 to ask about those agreements?

22 JUDGE EYSTER: No.

23 Q (By Mr. Bzdok): Mr. Lapplander, my next question for you

24 concerns your direct testimony at page 11, if you want to

25 locate that. Are you there, sir?




425

1 A Yes.

2 Q In that section you make a statement that, on that page

3 starting line 11, you make a statement that: Detroit

4 Edison was not required to make any capital investment to

5 support the REF processing facilities and therefore did

6 not assume any risk that the REF project would not be

7 successful. Correct?

8 A I'm sorry, what -- is that page 11 of my direct, did you

9 say?

10 Q I thought it was page 11, starting line 11.

11 JUDGE EYSTER: I don't think so.

12 A My page 11, line 11, is: It seemed reasonable since DTE

13 Energy had already reached a similar agreement with MPPA.

14 Q Sir, I apologize, it's possible that I mismarked that as

15 your rebuttal, so let me just check real quick, O.K. No,

16 I don't see it there either, so I must have had a typo in

17 my notes, but we can get at this in a different

18 direction.

19 You had some discussion with Mr. Keskey

20 on cross-examination about differences in the, about

21 different numbers in that Exhibit A-28 of yours, the

22 Arthur Gallagher presentation, relative to the cost to

23 construct and connect an REF facility and the costs that

24 were being used for the construction cost number of $19

25 million at St. Clair and Belle River, 13 million --




426

1 sorry -- $19 million at St. Clair, 13 million at Belle

2 River for units, and then the net plant in service in

3 Exhibit MEC-12. Do you recall that discussion generally?

4 A Yes.

5 Q O.K. Just so the record is clear, I was trying to ask

6 you about page 10, line 11, of your direct earlier, the

7 line that I had, about the capital risk. Do you see

8 that?

9 A Yes.

10 Q I don't think that's -- that's what I was trying to find,

11 and I apologize.

12 In the discussion with Mr. Keskey about

13 the Arthur Gallagher number of $1 million pretax to

14 construct an REF plant and $4 million after tax to

15 connect the -- sorry -- $4 million pretax to connect the

16 plant, $2.4 million after tax, the ALJ asked you a couple

17 of questions and you said that someone name Chris

18 Berkemer at DTE REF Holdings was the source of the net

19 plant number in your St. Clair revenue requirement at

20 page -- or Exhibit MEC-12. Do you recall that?

21 A Yes.

22 Q Was Mr. Berkemer also the source of the construction cost

23 number?

24 A I believe I got that from Katie Panczak.

25 Q And she's also at DTE REF Holdings?




427

1 A Correct.

2 Q Did Mr. Berkemer work for her?

3 A I believe so.

4 Q Do you have any knowledge of what is in the DTE REF

5 plants that's not in the Arthur Gallagher plants that

6 might be driving the discrepancy in costs?

7 A I believe that it is entirely possible that A. J.

8 Gallagher, their REF facility consists of spraying

9 Mersorb on coal as it's on a conveyer belt and applying

10 the S-Sorb or CKD on the conveyor belt, where the fuels

11 companies for Detroit Edison have the pug mill where they

12 actually mix the chemicals together with the coal, I

13 believe that could represent a difference in the capital

14 cost. It's just a different process.

15 Q What is the source of your belief as to the different

16 method or different type of equipment being constructed

17 and connected by Arthur Gallagher as opposed to DTE?

18 A There was a reference that I made yesterday, I believe it

19 was in Ameren's testimony, where they selected CERT

20 because it was a less intrusive process on their coal

21 handling systems than an alternative REF supplier that

22 apparently they were considering, too, and given the

23 timeframe to install, they went with CERT, and that

24 implies to me that the process is more simple and

25 obviously takes less time to install.




428

1 Q And just so the record is clear, CERT is a different

2 company than Arthur Gallagher, right?

3 A Correct.

4 Q What you're saying is that, in essence -- and I don't

5 mean this word pejoratively -- but you're speculating

6 that if CERT's using a process that is less intrusive,

7 lower capital cost, perhaps that's what Arthur Gallagher

8 is doing, correct?

9 A That's a potential explanation for why there's the

10 capital cost difference.

11 Q So you actually have no knowledge of what the difference

12 in the capital cost is being driven by, this is perhaps

13 your best guess about what it might be?

14 A That is true.

15 Q O.K. Do you know why -- let's just sort of posit, let's

16 work within that framework, shall we say, of the

17 hypothetical or the speculative. Do you know why DTE

18 would have chosen the more capital-intensive type of

19 facility to undertake this activity at Detroit Edison

20 plants in comparison to what was going on in CERT and

21 what might have been going on with the Arthur Gallagher

22 facilities?

23 A I believe it might have something to do with the, being

24 very conservative as it relates to qualifying for the tax

25 credits, so the fuel companies want this pug mill where




429

1 they get thorough mixing versus perhaps a much less

2 sophisticated application with the other suppliers. As I

3 indicated from a risk standpoint, our affiliates, the

4 fuel companies want to own the coal long during the

5 supply chain so they can demonstrate ownership of the

6 coal, where A. J. Gallagher buys the coal as it enters

7 the refined coal facility, so their ownership is almost

8 nonexistent, and in the Duke and Ameren testimony, they

9 indicate CERT wants a two-day supply of coal on the

10 ground. So I think the fuel companies are trying to be

11 as conservative in how they construct their operations

12 and the, and in particular, the ownership of the coal.

13 Q So the more capital-intensive facility is being driven by

14 a risk management or risk avoidance strategy by the fuel

15 companies?

16 A That's what I would speculate. I don't know for a fact

17 why they picked that technology, but given what I know,

18 that's my speculation as to why they went that way.

19 Q Certainly based on your testimony over the last couple of

20 days here, as to capital risk, if Detroit Edison had been

21 looking at doing this, putting aside some of these other

22 issues that we'll get to, if Detroit Edison had been

23 looking at doing this itself, there could have been an

24 option available with a much lower capital risk, correct?

25 A There is a potential for that.




430

1 Q And that also using that other option would have lowered

2 significantly -- strike that question.

3 I want to ask you about Exhibit AG-1,

4 which was the notes that you had disclosed yesterday near

5 the end of the day and which Mr. Erickson has marked as

6 proposed Exhibit AG-1. Do you have a copy of that in

7 front of you?

8 A Yes.

9 MR. BZDOK: Don, have you moved to admit

10 this yet?

11 MR. ERICKSON: Yes, it was admitted.

12 Q (By Mr. Bzdok): A couple questions. Did you do a

13 similar worksheet like this for -- well, let me back up.

14 We've already established that this is --

15 tell me in a sentence or two what this is in your words

16 rather than me trying to put words in your mouth.

17 A Well, the top portion of this is basically copied from

18 MEC-12, which we've been discussing, which is the

19 estimated revenue requirement or the revenue requirement

20 forecast for 2012 for the St. Clair Fuels Company. The

21 bottom portion of this was something that I put together

22 assuming that -- I was curious as to what the economics

23 would look like if in fact Detroit Edison built this

24 facility under the same conditions that the fuel company

25 built the facility and then we monetized this facility,




431

1 and what would the value be to Detroit Edison.

2 Q And that was -- and the value -- so this was a $10

3 million up-front contribution from the tax partner that

4 was put toward construction costs of the facility,

5 correct?

6 A That was the assumption at the bottom, correct.

7 Q And then a revenue through the monetization to Detroit

8 Edison of $4.20 per ton of REF that was refined and

9 burned at the facility, correct?

10 A Yes.

11 Q And essentially the comparison you were making was that

12 there would be a revenue requirement in the area of $9

13 million for the facility with that tax partner

14 contribution, correct?

15 A Correct.

16 Q And you were comparing that to a revenue to Detroit

17 Edison of $4.20 per ton over 1.8 million tons yielding a

18 revenue of $7.5 million, correct?

19 A Yes, tax credit revenue. Revenue and tax credit are

20 synonymous there, yes.

21 Q O.K. Sure. And that was the basis for your testimony

22 that under this hypothetical, there would be a net loss

23 to Detroit Edison customers at the St. Clair facility of

24 $1 1/2 million, correct?

25 A Well, that loss is shown there, but you have to compare




432

1 it against the agreement we have today, and today we have

2 a savings of base rates, for the 700,000 tons that are in

3 base rates today that's owned by the St. Clair Fuels

4 Company, there's a working capital benefit to the

5 customer of 1.7 million. So that would -- we would

6 forego that, so you'd have to add those two, so it would

7 be about 3.2 million, and then when we reset base rates

8 in our next rate case, that 33 million is equivalent to

9 about a 3.6 million impact on revenue requirement for the

10 customers. So if we owned this, we would lose that as

11 well.

12 Q Everything you just told me is additional information

13 that's not on this exhibit, correct?

14 A No. Right in the middle of the page it says savings in

15 base rates from the sale of .7 million tons is $1.7

16 million.

17 Q O.K.

18 A It's $15.9 million times the conversion to get it to a

19 revenue requirement.

20 Q Yep.

21 A So it's all on here.

22 Q O.K. The question I was asking you was, you had

23 mentioned a few times in your cross, I think it was

24 earlier today or maybe it was yesterday, about $1 1/2

25 million loss to the Edison customer, and that was based




433

1 on this calculation; do you recall that?

2 A Not specifically, but that matches this number, so.

3 Q O.K. Did you do a sheet like this for, to evaluate what

4 these numbers would look like at Monroe?

5 A Yes.

6 Q Do you have that with you?

7 A Yes.

8 Q Can I see it? Same question about Belle River.

9 A Yes.

10 Q Can I see that one as well?

11 (Documents provided to Mr. Bzdok.)

12 MR. BZDOK: I think just to save time and

13 to streamline things, if you don't object to my writing

14 on these in pencil, I'm just going to mark these as

15 proposed Exhibits MEC-32 and 33, and we'll admit them,

16 then we can argue about what they mean later, rather than

17 trying to digest this information and ask you a bunch of

18 followup questions. Does anybody object to that?

19 MR. ERICKSON: 32 is going to be the

20 Monroe or Belle River, which one?

21 MR. BZDOK: How about 32 would be -- do

22 you mind if I write on these?

23 A No.

24 MR. BZDOK: 32 will be Belle River, and

25 33 will be Monroe.




434

1 MR. ERICKSON: You're not moving for

2 their admission at this time, because I'll need to see

3 them before I --

4 MR. BZDOK: Right now I guess I was

5 asking if he objected to me writing on them as a first

6 step. I don't know how you want to do this, Judge,

7 because this is probably the only copy, and I imagine

8 people will want to see it before we move to admit them,

9 but I certainly do want to admit them.

10 JUDGE EYSTER: Well, if it's your

11 intention to move for their admittance into evidence,

12 then you should pass them around for everybody to look at

13 them.

14 MR. BZDOK: O.K.

15 JUDGE EYSTER: We can go off the record

16 for a minute, unless you want to continue. Do you want

17 to continue with your cross, Mr. Bzdok, or do you want to

18 wait?

19 MR. BZDOK: Certainly I can do that, and

20 then we'll just come back to that.

21 Q (By Mr. Bzdok): One of the things that I noted on the

22 Monroe sheet that you had there was, or a number that

23 jumped out at me was that there was a net positive

24 revenue to Detroit Edison customers in the example where

25 Detroit Edison had owned and monetized the REF project at




435

1 Monroe, correct?

2 A Correct. But you have to compare that against the

3 benefit that the Monroe Fuels Company's providing to

4 Detroit Edison and compare that with that net benefit of

5 900,000.

6 Q I understand that that's an argument that you're making,

7 and you're -- it would be better if you answer the

8 question I ask you instead of answering and then saying,

9 oh, and another thing, just generally speaking this will

10 maybe go a little smoother and, you know, I'll ask you

11 the question that I want to know to get the fact that I

12 want, and then if others want to get other facts, they

13 can ask you additional question, if that's all right.

14 A Fine.

15 MR. ERICKSON: Your Honor, at this time,

16 should we have the court reporter get a copy of this

17 document and mark it as a proposed exhibit and maybe

18 circulate copies to everybody even though we're not going

19 to address admissibility at this time?

20 MR. BZDOK: That's fine with me, also.

21 JUDGE EYSTER: Whatever you guys would

22 like to do it, I don't care.

23 MR. BZDOK: Perhaps it would be best,

24 then, to just take a five, and if we can make copies

25 here, we'll make copies.




436

1 JUDGE EYSTER: Somebody had access to

2 copy machine the other day, I don't know who did that.

3 MR. ERICKSON: I can go across the street

4 and make copies.

5 JUDGE EYSTER: All right. Let's take

6 five. Off the record.



9 Reporter as Exhibit Nos. MEC-32 and MEC-33.)

10 - - -

11 JUDGE EYSTER: All right. We're back on

12 the record. I do want to follow up with something real

13 quick. Are you still crossing on these exhibits?

14 MR. BZDOK: The ones we just marked?

15 JUDGE EYSTER: The proposed?

16 MR. BZDOK: Yes.

17 JUDGE EYSTER: Why don't you go ahead.

18 MR. BZDOK: O.K.

19 Q (By Mr. Bzdok): Mr. Lapplander, just a couple of

20 questions on these --

21 MR. BZDOK: Well, I'm going to move right

22 now to admit them, 32 and 33. Everybody's got a copy.


24 MR. ERICKSON: I would like to have an

25 opportunity to cross-examine on 33, because I think




437

1 there's a difference in the way that Monroe number is

2 run, and so I'm not sure whether this is -- they all seem

3 to be modeled on the same St. Clair/Belle River revenue

4 requirements model, which has an adder as a replacement

5 for enabling the REF to collect these dollars, but I

6 don't think that's going to work with Monroe, so I'd like

7 to have some questions first. I probably won't have

8 objections once I get questions, but I'd like to see,

9 have the opportunity to ask some questions about MEC-33.

10 I have no objections to MEC-32.

11 JUDGE EYSTER: 32 is admitted.

12 MR. KESKEY: Your Honor.

13 JUDGE EYSTER: Excuse me.

14 MR. KESKEY: With respect to both

15 exhibits, we don't have an objection in terms of the

16 limited purposes of trying to demonstrate what the

17 witness workpaper is, but we don't agree that the figures

18 that the witness may use on those workpapers or proposed

19 exhibits are valid or reasonable. So I understand

20 that -- I guess my understanding is that the exhibit is

21 being offered to, for demonstration purposes and to use

22 in cross-examination and not as confirmation of the

23 validity of the numbers that the witness, the Company

24 witness has included in these exhibits.

25 JUDGE EYSTER: What's the purpose for the




438

1 exhibit, or both?

2 MR. BZDOK: The purpose for the exhibit

3 is to compare the scenario he described with St. Clair to

4 the scenarios that he has evaluated relative to Monroe

5 and Belle River. By producing -- by moving to admit his

6 work product into the record, I am doing so because I

7 believe it's relevant because it's his work product and

8 it has bearing on the issues we've been discussing in

9 this case. That does not constitute an endorsement by me

10 of his figures or of his method, simply that I believe it

11 has relevance and I want to ask him a few other questions

12 about it.

13 JUDGE EYSTER: O.K. So where are we

14 then; is there an objection, Mr. Keskey?

15 MR. KESKEY: Well, I do not object to the

16 admission of the exhibits for the limited purposes

17 described by Mr. Bzdok. I would object to any suggestion

18 or use of the exhibits by the Company or any other party

19 to suggest that these are the evidentiary figures that

20 the parties accept or as evidence of the actual figures

21 or the methods.

22 JUDGE EYSTER: So you're objecting --

23 your concern is that it's being admitted for the

24 truthfulness of the matters asserted?

25 MR. KESKEY: My concern is that we




439

1 protect ourselves against the exhibit figures and method

2 used in these exhibits to be used as evidence to confirm

3 the witness's position on what they show rather than the

4 other parties. In other words, I don't object to the

5 exhibits being used as an adjunct to the cross-

6 examination and to demonstrate differences or challenging

7 perhaps the differences, and I understand that's the

8 limited purpose that Mr. Bzdok is requesting admission.

9 MR. MAQUERA: Your Honor.


11 MR. MAQUERA: If the Company may, I

12 suspect there's a lot more numbers that MCAAA's counsel

13 doesn't agree with. Counsel and all the parties are free

14 to make arguments with or against or for these numbers, I

15 don't think the admissibility should be limited, just

16 they should just be entered, let the parties do with them

17 as they may; ultimately it's going to be up to the trier

18 of fact to make a determination as to how these numbers

19 should be treated.

20 JUDGE EYSTER: O.K. Mr. Erickson, where

21 are you?

22 MR. ERICKSON: Mr. Maquera's comments

23 suggest to me an objectionable motive behind the

24 admission of these exhibits. If they're being admitted

25 to prove the truth for the purposes of the facts asserted




440

1 therein, they are documents that we didn't have a chance

2 to submit discovery on and that we didn't have a chance

3 to completely verify. The distinction between MEC-32 and

4 33 and AG-1 is that Exhibit AG-1 was an analysis of an

5 underlying set of exhibits and, therefore, it was an

6 extension or an explanation or a clarification of what

7 was already in the record. This is not, none of these

8 numbers are in the record, and this is not to clarify

9 them, and that's why I think that we have to move slowly

10 on admitting these documents to prove the validity of the

11 numbers in them. I am willing to agree to admission of

12 MEC-32 and MEC-33 for the limited purpose, your Honor, of

13 comparing how the analysis works with different numbers;

14 although, I'm not sure why we need to have a comparison,

15 we know that different numbers should get different

16 results.

17 But at any rate, I would be willing to

18 admit it for that limited purpose, but I wouldn't like

19 you to admit it for the purpose of showing that these

20 numbers are -- for the purpose of supporting these

21 numbers or presenting these numbers in this case to

22 justify the Monroe and the Belle River REF projects.


24 MR. BZDOK: Judge, I think my client's

25 opposition to approval of the REF project is pretty well




441

1 known and briefed by this point, so we're not putting

2 these in the record in order, in some bizarre attempt to

3 support the utility's case. Frankly, the analysis of St.

4 Clair that Mr. Erickson referred to that was part of the

5 record and that was AG-1 is really the workpaper for, my

6 view of that was that's probably -- the demonstration

7 here that this would be a bad deal or purports to show

8 this would be a bad deal for Detroit Edison to own the

9 St. Clair facility, in my view, was probably the worst

10 case scenario of the three, and so I wanted to know,

11 well, have you looked at analyses for the other two

12 facilities, because I think the economics of the other

13 two facilities under Detroit Edison ownership are more

14 positive than St. Clair, and St. Clair's the worst case

15 scenario, and that's the one that's been put forward by

16 the Company into the record. So I wanted the record to

17 reflect that there are economically, even using this

18 witness's assumptions and method, there are economically

19 more beneficial numbers at the other two plants.

20 JUDGE EYSTER: O.K. Mr. Erickson, you're

21 not objecting any longer? Ms. Uitvlugt, do you have

22 something --

23 MR. ERICKSON: Your Honor, I think --

24 MS. UITVLUGT: Yes, your Honor.

25 JUDGE EYSTER: O.K. It's your turn.




442

1 MS. UITVLUGT: Just very, very, very

2 briefly, Staff is not taking a position on whether or not

3 these exhibits should be admitted; but it was just stated

4 that it was O.K. to admit AG-1 because part of the

5 underlying information of AG-1 was MEC-12, or half of it,

6 which was provided in discovery. In looking at MEC-12

7 and comparing it to these two other documents, the same

8 information is on MEC-12, with the exception of the coal

9 inventory numbers, which I'm, and I'm assuming this, are

10 going to be different for Monroe and Belle River, and I

11 would assume are in other places in the record, and that

12 was partial to the AG's objection to why they should not

13 be admitted. That's all.

14 JUDGE EYSTER: Oh, boy. O.K., I'm just

15 going to go out on a limb without opening up my Rules of

16 Evidence. Mr. Keskey, it sounds like you're concerned

17 about this being used as evidence that these matters,

18 with regards to the truthfulness of the matters that have

19 been asserted. Clearly this is an out-of-court statement

20 that was made; I don't believe that's the purpose for

21 which it's being admitted into evidence. It appears to

22 be an admission by the witness, it's admissible,

23 Mr. Bzdok can do with it as he pleases. So both exhibits

24 are admitted.





443

1 Q (By Mr. Bzdok): Mr. Lapplander, looking at Exhibit

2 MEC-33, this is the Monroe exhibit. This does have a

3 positive revenue to Detroit Edison under the hypothetical

4 scenario that you have constructed here where Detroit

5 Edison owns the plant with a contribution and a

6 monetization with the tax partner, correct?

7 A Correct.

8 Q This also assumes a net plant in service of the

9 $12,312,936, correct?

10 A That is the same number, yes, that the St. Clair one is.

11 For purposes of this, I just assumed they were the same.

12 Q Do you know what time period, over what time period

13 Mr. Berkemer was depreciating these facilities to get the

14 net plant of 12.3 million in 2011?

15 A I don't know.

16 Q For Monroe, you've done a total tax credits at 7.5

17 million tons of REF, correct?

18 A Correct.

19 Q Your projections for the tonnage of REF at Monroe are

20 actually going to increase over time to somewhere in the

21 neighborhood of 8.2 million tons, correct?

22 A I don't know if we are. If we did 7 million and 400 and

23 some odd thousand tons in 2012, so I just used for this

24 purpose, rounded the actual REF tonnage in 2012 to up to

25 7.5 million tons.




444

1 Q Do you have a copy of your, of Exhibit MEC-19?

2 A I do not. I don't believe I do.

3 Q I only ask you because you had MEC-12 earlier.

4 (Document provided to the witness.)

5 Q This is MEC-19 in this case, it was prefiled with

6 Mr. Sansoucy's testimony and exhibits. That's a

7 discovery response from you in Case 16892, correct?

8 A Yes.

9 Q What's that?

10 A Correct.

11 Q O.K. I'm looking at page 2 of 4, you've got a table here

12 for the Monroe REF project, and you've got a line 7,

13 total refined coal consumption in tons. Do you see that?

14 A Are you talking page 1 of 3?

15 Q Page 2 of -- you know what, it's, on the new stamping,

16 it's page 2 of 4, on the stamping below, it's page 1 of

17 3.

18 A Oh, I see. I'm sorry.

19 Q Sure. I was just using this to refresh your memory as to

20 my earlier question about the tonnage of projected REF

21 coal to be consumed at Monroe was going to rise from the

22 7.5 million you used to generate the revenue in Exhibit

23 MEC-33 up to roughly 8.2 million tons a few years from

24 now, according to your projection; is that correct?





445

1 Q Which would then increase the revenues in your worksheet

2 here, correct?

3 A The coal fee rate would go up, yes.

4 Q No, I'm talking about the revenues under the hypothetical

5 scenario where Detroit Edison had owned the REF facility

6 with the tax partner.

7 A The amount of tax credits that would be calculated in

8 that 31.5 million number?

9 Q Yes, that 31 3.5 million number would increase, correct?

10 A Correct.

11 Q The net plant in all of these examples will decrease over

12 time, correct?

13 A That -- more than likely, I don't expect -- I'm sure

14 there's capital improvements that they'll make over time,

15 but that's probably a fair statement that depreciation

16 will cause net plant to decrease over time.

17 Q And the multiplier of the $4.20 per ton, that will also

18 increase over time, correct?

19 A Correct.

20 Q On the Belle River sheet, MEC-32, total tax credits at 3

21 million tons of REF, that's also not the maximum tonnage

22 you're projecting Belle River will ramp up to for REF,

23 correct?

24 A In the 2013 PSCR plan case, we're assuming 75 percent of

25 the coal burned at Belle River will be REF, and when you




446

1 take MPPA's portion of the burn out, it's approximately 3

2 million tons.

3 Q And then in future years, I'm inferring that it's going

4 to ramp up further from there; is that correct?

5 A No.

6 Q In your rebuttal testimony in the last case, in 16892, at

7 Volume 2 of the transcript, page -- give me a moment. I

8 just moved my arrow incorrectly and I lost the page up

9 here.

10 MR. CHRISTINIDIS: Does counsel intend to

11 show the witness the transcript?

12 MR. BZDOK: Yes, I do. Yes, I do.

13 Q (By Mr. Bzdok): I was just trying to locate the page

14 number. Page 91.

15 (Document on computer shown to the witness.)

16 Q I'm looking at rebuttal testimony from you in which you

17 did a third of a thumbnail calculation of benefits for

18 REF coal, and you were looking at a total tonnage for

19 each of the various years and timeframes, and the tonnage

20 starts at 10.8 million tons through 2015, rises to 14.3

21 million tons for 2016 through 2019, and then comes down

22 to 8.192 million tons for years 2020 and 2021. I

23 understand, I just answered my own question. O.K. 2020

24 and 2021 will be Monroe only, correct?

25 A Correct.




447

1 Q So as far as you know, Belle River is going to max out

2 around 3 million tons?

3 A Correct.

4 Q O.K. It's reasonable to expect based on some of these

5 assumptions, that at least as to some of these exhibits,

6 the revenues, the overall revenues to, net revenue

7 numbers to Detroit Edison are going to get more positive

8 than they are currently on these sheets, correct?

9 A That's a possibility.

10 Q You testified in some of your cross-exam earlier about

11 tax risk, and also in some of your rebuttal testimony,

12 and you had a discussion with the judge about IRS private

13 letter rulings. Do you recall that?

14 A I recall that.

15 Q O.K. On Exhibit A-28 at page 34, that's the A. J.

16 Gallagher presentation.

17 A I'm sorry, what page of that?

18 Q Page 34 of your exhibit. There's an indication on that

19 page of the presentation under the heading Management's

20 Observations Regarding Possible Mitigation Alternatives,

21 there's a bullet that says: Based on our communications

22 with the IRS, we believe our operations satisfy IRC

23 Section 45 and qualify for tax credits. And then there's

24 a bullet: We have received 3 Private Letter Rulings

25 (PLRs) covering 8 plants. In another bullet: We are in




448

1 the process of applying for 2 additional PLRs covering 5

2 plants. Did I read that section of your exhibit

3 accurately?

4 A You did.

5 Q I guess my question is, do you know why DTE at any of the

6 affiliate levels or Detroit Edison did not yet seek

7 private letter rulings on any of these projects?

8 A I don't know if they have.

9 Q You had testified yesterday in response to the judge's

10 questions where you brought up the private letter ruling

11 that you thought that some guidance was being sought this

12 fall or something like that. That's really where my,

13 more my question was aimed.

14 A There was I believe in one of the exhibits of MCAAA

15 entered into today, there was a reference to spending up

16 to $37 million prior to guidance from the IRS, and that

17 was in 2009.

18 Q I guess what I'm saying is, couldn't a lot of that risk

19 have been mitigated by seeking the private letter rulings

20 back at that time?

21 A I don't know.

22 Q Couldn't the question of Detroit Edison creating the fuel

23 company affiliates and handling it under the Detroit

24 Edison umbrella have been resolved by seeking the private

25 letter rulings at that time?




449

1 MR. MAQUERA: Objection. Foundation.


3 MR. BZDOK: You know, the point's well

4 taken, however, the witness has been testifying both in

5 prefiled and also in cross about we did this because this

6 was our assessment of the tax situation, so I'm asking

7 him a question about that very testimony, and if he

8 didn't have -- if he doesn't have the foundation to

9 answer my question, he didn't have the foundation to

10 offer all that other testimony about we did this because

11 this was our evaluation of the tax situation.

12 MR. MAQUERA: Well, just for

13 clarification, in numerous cross-examination questions

14 throughout yesterday and today, I think it's apparent

15 that the witness has testified that his testimony

16 regarding Section 45 was based on counsel received from

17 Mr. Wheeler. And if I further recall, it was the judge

18 who brought up private letter rulings and not the

19 witness. So the basis for my objection on foundation is

20 there's no foundation established that the witness can

21 testify to, or as to what a private letter ruling is,

22 what's its effect is, how it is sought, the process

23 involved.

24 MR. BZDOK: May I respond?





450

1 MR. BZDOK: My recall, my recollection of

2 what happened yesterday was that you brought up the

3 general subject without naming them, you said there was

4 something you remembered from law school, Mr. Lapplander

5 then offered, oh, you mean a private letter ruling, and

6 then you had a colloquy about them. So clearly the

7 witness has some foundation for understanding what those

8 are, how they are dealt with, and I think he can answer

9 this question in the spirit that he's, you know, offered

10 all this other testimony about why they did what they

11 did.

12 JUDGE EYSTER: I'm going to permit the

13 question. The witnesses has discussed quite a bit about

14 risk without really defining it very well, and I think

15 that's kind of the general gist of the questioning. So

16 overruled.

17 Q (By Mr. Bzdok): Do you recall the question?

18 A No.

19 Q As best I can remember it, the question was, couldn't

20 have -- couldn't seeking an IRS private letter ruling or

21 rulings been a way of resolving the question about

22 whether Detroit Edison could operate this project itself

23 using fuel company affiliates of Detroit Edison that it

24 created for that purpose, wouldn't that have been a route

25 available to Detroit Edison in figuring that question out




451

1 at that time?

2 A I don't know if private letter rulings would address the

3 ownership interest in the related Section 45 requirement

4 of dealing with unrelated people.

5 Q O.K.

6 A I don't know.

7 Q I want to ask you just a couple of followup questions

8 about MPPA. There was discussion yesterday about MPPA

9 and an REF agreement with MPPA that was occurring before

10 or simultaneous with some of these other REF project

11 agreements. Do you recall that discussion?

12 A Yes.

13 Q Do you know where the REF coal that's sold to MPPA is

14 burned?

15 A In the Belle River power plant.

16 Q I just want to make sure I understand this clearly. Does

17 MPPA own a portion of the coal -- let's put aside the REF

18 for a minute. Does MPPA own a portion of the coal that

19 is burned in the Belle River power plant, or does MPPA

20 own an interest in a portion of the electricity generated

21 from that coal in the Belle River power plant?

22 A The MPPA owns a portion of the coal in inventory at the

23 Belle River/St. Clair complex, and Detroit Edison sells

24 MPPA coal on a monthly basis for its pro rata share of

25 the generation from the power plant on a monthly basis.




452

1 JUDGE EYSTER: And just so I understand

2 it, MPPA also owns, they own 18 point some odd percent,

3 whatever it is --


5 JUDGE EYSTER: -- of the power plant?

6 A Correct.

7 JUDGE EYSTER: The entire site?

8 A The entire, yes.

9 JUDGE EYSTER: And they own the same

10 percentage of the coal?

11 A The Participation Agreement I believe specified that they

12 own 250,000 tons, but I believe for various reasons

13 what's on the books today is closer to 300,000 tons is

14 their ownership of the coal at that facility.

15 JUDGE EYSTER: The inventory that's at

16 the facility?

17 A Correct.

18 MR. MAQUERA: Your Honor, could you

19 clarify what you meant by site, because the St. Clair and

20 Belle River plants are right next to each other.

21 JUDGE EYSTER: Well, I was envisioning in

22 my mind the fence that surrounds the Belle River plant,

23 but I'm guessing there is no fence that surrounds it.

24 Whatever is considered Belle River. And I had not

25 considered the fact that there's two power plants




453

1 essentially at the same location. Did you answer the

2 question that I gave you, based on what I just indicated

3 to Mr. Maquera?

4 A The Belle River and St. Clair power plants are adjacent

5 to each other, and there is one common coal-handling

6 system that is used to feed both power plants.

7 JUDGE EYSTER: O.K. Mr. Bzdok.


9 Q (By Mr. Bzdok): I'm going to switch topics slightly now

10 and hand you a copy of proposed Exhibit MEC-25, which is

11 the source of that is the Discovery Response MEC/DE-21a-c

12 in this case.


14 Reporter as Exhibit No. MEC-25.)

15 - - -

16 Q (By Mr. Bzdok): Which has also been distributed to the

17 parties. Specifically, this is a discovery request and

18 an objection from the Company related to a DTE Energy

19 Business and Financial Update, October 9 and 10, 2012.

20 The actual answer to this discovery request was an

21 objection by legal. It was not signed by you, so I guess

22 my first question is, were you aware of this request and

23 consulted on the answer?

24 A No.

25 Q You didn't instruct anybody to object to providing




454

1 answers about Unit 1 and Unit 2?

2 A No.

3 Q Have you ever seen the Business and Financial Update that

4 was attached to it?

5 A I can't say that I have.

6 Q O.K. Turn to page 4, and I'm just going to ask you

7 whether you have any knowledge of information described

8 in the contents. And the reason I'm asking you this

9 question is that there were some, there was a question

10 and answer, or a couple of questions and answers

11 yesterday with the judge about Belle River REF No. 2,

12 St. Clair REF No. 1 and No. 3, and Monroe REF No. 1 Fuel

13 Companies. Do you recall that discussion?

14 A Yes.

15 Q What I'm trying to ascertain is whether you have any

16 knowledge about what's referred to in the investor

17 presentations as Units 1, 2, 3 and 4, how those correlate

18 to Belle River REF No. 2, St. Clair REF No. 1 and 3, and

19 Monroe REF No. 1?

20 A I do not.

21 Q You don't have any knowledge of whether any of the list I

22 gave you, the Belle River REF No. 2, St. Clair REF No. 1

23 and 3, Monroe REF No. 1, you don't have any knowledge as

24 to whether one of those units there's an agreement that's

25 executed and a relocation was expected in the fourth




455

1 quarter of 2012?

2 A I don't.

3 Q And you have no knowledge about another of those units

4 that an agreement was executed and a relocation being

5 under way?

6 A I do not.

7 MR. BZDOK: As to the, I'm not going to

8 move for admission of the exhibit based on the witness's

9 answers.

10 Q (By Mr. Bzdok): But I am going to ask you some more

11 questions of Belle River REF No. 2, St. Clair REF No. 1

12 and 3, and Monroe REF No. 1. Those are all units that

13 DTE and affiliates are looking to relocate to other host

14 utilities, correct?


16 Q And they are all units that were placed into service, as

17 that was required, in time for it to meet the IRS

18 deadline, correct?

19 A Correct.

20 Q And if they hadn't been placed into service, they would

21 not be eligible for relocation and generating tax credits

22 at a new site, correct?


24 Q Do you have any estimate of the value to DTE and

25 affiliates of being, of having had the opportunity to put




456

1 these facilities into service at Detroit Edison sites in

2 time to meet the IRS deadline and then essentially hold

3 them there in an incubation state until another host

4 utility can be found?

5 A Are you asking do I know what the value to the fuel

6 company for allowing that?

7 Q Yeah, what the value of that business opportunity is.

8 A I don't know.

9 Q Is it reasonable to expect that if DTE had approached

10 Consumers or Indiana Michigan Power and said, we would

11 like to put REF facilities in service at your site and

12 then hold them there for an indefinite period of years

13 until we can find somewhere else to relocate them, that

14 an unaffiliated utility would have said, well, that

15 sounds like something that's valuable, something we're

16 going to charge you for creating and maintaining that

17 business opportunity for you, does that seem reasonable

18 to you?

19 A That's hard to say. I mean we have a Site License and

20 Service Agreement, and within the footprint of the three

21 acres they have their facility, and it may have one or

22 two or three, two or three production lines, there's no

23 cost to Detroit Edison if there's two or three production

24 lines within their footprint. Is there a value; I, you

25 know, I guess one might say there is, but I don't know




457

1 what that is.

2 Q Certainly without that opportunity, all of the future

3 potential revenues from those facilities, once they're

4 relocated, would be foregone, correct?

5 A That would be true.

6 Q And that's a lot of money, I mean we're talking about

7 hundreds of millions of dollars ultimately, right?

8 A I haven't ran that number.

9 Q You indicated in some of your discussion yesterday that

10 there was testing that was, had occurred and was ongoing

11 at some of these plants relative, at the Detroit Edison

12 plants relative to REF and whether it can be, you know,

13 used long term at those plants; do you recall that

14 testimony?

15 A Yes.

16 Q And that testing was done by Detroit Edison, correct?

17 A Correct.

18 Q Do you have any sense of what results or criteria Detroit

19 Edison was using to determine whether the use of REF was

20 acceptable or unacceptable long term?

21 A That was not my decision, that was handled in the plant,

22 so no, I don't know what criteria they were using.

23 Q Do you have any knowledge whatsoever of what general

24 types of things they were looking for, is this going to

25 cause X or Y, I mean any knowledge whatsoever?




458

1 A I would defer to John Dau, who was the witness who would

2 have talked about that.

3 Q O.K. There was an REF facility relocated from St. Clair,

4 correct?

5 A My knowledge, one of those machines has been relocated.

6 Q Was the successful outcome of testing at the St. Clair

7 plant of REF showing that the use of REF was compatible

8 with a working full-scale coal plant, did that have any

9 usefulness in making the sale of the REF unit to the new

10 utility?

11 A I would doubt it. If you're going to relocate to another

12 utility, more than likely they would do testing like we

13 did. You know, I can say that A. J. Gallagher's got 17

14 deployed units, CERT's got 15 units they're trying to

15 find a home for, A. J. Gallagher has 12 units that they

16 don't have a host utility for, so there's a lot of

17 activity in the market trying to set a lot of machines

18 that don't have a host utility. So, you know, having

19 demonstrated the use of REF at St. Clair, as I've

20 mentioned with the testing going on at Belle River --

21 MR. BZDOK: Mr. Peloquin, can you please,

22 it's hard for me to hear the witness with the talking in

23 my other ear.

24 A For example, with the testing going on at Belle River,

25 the use of REF at each plant has got its own specific




459

1 issues to deal with, so having demonstrated the use of

2 REF at one plant wouldn't necessarily be a sales pitch,

3 if you will, for the use at another.

4 Q (By Mr. Bzdok): Do you still have that copy of MEC-19,

5 that was the three tables of the utilities? Is that

6 still up there?

7 A Yes.

8 Q Take a look at that again. These tables include, among

9 other things, your computation of the working capital

10 benefit that you believe is flowing to Detroit Edison

11 customers at the various plants, correct?

12 A That's included in here, yes.

13 Q In your direct testimony on page 13, you make a statement

14 that you've made before: "Customers are experiencing

15 lower base rates of approximately $4 million due to this

16 sale of Detroit Edison's coal inventory to the Fuel

17 Companies." Do you recall making that statement?

18 A Correct.

19 Q My question for you is, in looking at these tables and

20 your computation of the working capital benefit, I can

21 not put together that $4 million from these three tables.

22 Can you explain to me how these tables generate that $4

23 million number in your testimony?

24 A The $4 million was the amount of coal under the

25 Acceptance Period Coal Inventory Purchase Agreement for




460

1 Belle River and St. Clair. These represent the working

2 capital benefit once there's a tax partner and we're

3 operating under the Refined Coal Supply Agreement and the

4 Coal Inventory Purchase Agreement. So there's different

5 agreements that will govern the 1.7 million-ton sale.

6 That was an initial sale so that they could run coal

7 through their REF facilities.

8 Q To put them in service?

9 A Correct.

10 Q So these are hypothetical working capital benefit numbers

11 that may be seen at some point in the future when all

12 those agreements are executed and base rates are reset;

13 is that fair?

14 A Yes. If you look at page 2 of 3, or 3 of 4, I don't know

15 which number, but it's the St. Clair, what's -- we show

16 there if base rates were reset, say, for 2013, there

17 would be a $32 million working capital benefit. What's

18 in base rates today is 15.9 million for St. Clair, which

19 is shown on AG-1.

20 Q Run those numbers by me one more time.

21 A If you go to AG-1, about three-quarters of the way down

22 it says savings in base rates of 700,000 tons, or .7

23 million tons, that's the St. Clair portion, and that's

24 got a value of 15.9 million. So there's a working

25 capital benefit in base rates today as a result of the




461

1 700,000-ton sale in December of '09 of 1.7 million. But

2 if you go to, say, a 2013 on the St. Clair REF project in

3 the paper you just gave me, if we were to reset base

4 rates in '13 with this, we'd expect a $32 million

5 reduction in working capital.

6 Q So the benefit numbers in the three tables that are part

7 of 19, you agree, are higher amounts of working capital

8 benefit than are occurring at present?


10 Q And it's my general understanding that it's not expected

11 that base rates will be reset until at least 2015. Did

12 you -- am I incorrect about that?

13 A That's a fair statement.

14 Q O.K. And at that point, the St. Clair project will be,

15 will only have -- six of its ten years will have expired,

16 correct?

17 A Correct.

18 Q And at the other ones -- and at Belle River, six of its

19 ten years will have expired, correct?

20 A Correct.

21 Q And at Monroe, what, four of its ten years will have

22 expired?

23 A Correct.

24 Q So based on what we know right now, the working capital

25 benefits that you've projected are actually not going to




462

1 accrue for the majority of the REF project years,

2 correct?

3 A Some -- yes, some of the value that's shown in those

4 spreadsheets will occur.

5 Q Do you have a copy of Exhibit MEC-22?

6 A No.

7 Q O.K.

8 MR. ERICKSON: What was that exhibit

9 number?

10 MR. BZDOK: 22.

11 (Document provided to the witness.)

12 Q (By Mr. Bzdok): I'm going to hand you a copy of Exhibit

13 MEC-22, which was prefiled with Mr. Sansoucy's testimony

14 in this case; it consists of a page of Theresa Uzenski's

15 testimony in Case U-16472, and then a couple of exhibits:

16 Exhibit A-2 (Revised), Schedule B4, Witness T. M.

17 Uzenski; Exhibit A-9 (Revised), Schedule B4, Witness

18 Horgan; and Exhibit A-9, Schedule B5, Witness Uzenski,

19 all from that case. Do you recall reviewing

20 Mr. Sansoucy's testimony relative to fuel inventory and

21 working capital in the last rate case?

22 A In the last --

23 Q In this case, Mr. Sansoucy submitted testimony which you

24 rebutted relative to the working capital and fuel

25 inventory from the last rate case. Do you recall that?




463

1 A Yes.

2 Q O.K. And Mr. Sansoucy in his testimony indicated that he

3 felt that there was not evidence that the sale of fuel

4 inventory in December of 2011 for the REF project was

5 actually taken out of the working capital component of

6 rate base, and you offered rebuttal to that point; do you

7 recall that?

8 A Yes.

9 Q And that's the $38.6 million worth of coal that you

10 assert was sold out of inventory to the affiliates at

11 that point, correct?

12 A Correct.

13 Q I guess my question is maybe this, and it's a little bit

14 argumentative, so I apologize, but at the bottom of this

15 page of Ms. Uzenski's testimony, she indicates that, for

16 simplicity purposes, a number of categories, including

17 fuel inventory, are all being held in at historic levels.

18 Do you see that?

19 A I see that.

20 Q If a pair of first of their kind sales of $38.6 million

21 worth of coal out of inventory had just occurred at the

22 end of the historical period, resulting in a reduction in

23 the working capital component of, or the fuel component

24 of the working capital, why would she not have mentioned

25 that and simply said, it was being, fuel inventory was




464

1 being held at historic levels?

2 A I don't know if Theresa Uzenski knew that that sale took

3 place. If you -- well, I'll let it -- I can explain

4 further.

5 Q Either she was wrong here or you're wrong in your

6 rebuttal, right?

7 A I have a document here that is not part of this, but it

8 was one of Theresa Uzenski's work papers, that might shed

9 a little light on why she may not have -- I don't know

10 why she said what she did, but it will better demonstrate

11 that I'm not lying on the witness stand.

12 Q I'm not calling you a liar, and I've not said anything

13 like that whatsoever, but what I'm trying to understand

14 is whether your testimony and her testimony are

15 inconsistent with each other. So please don't -- you

16 know, we can have arguments, but I've never in any way

17 impugned your character or your honesty, sir.

18 Why don't you show me the workpaper.

19 (Document provided to Mr. Bzdok.)

20 MR. BZDOK: Can we go off the record?

21 JUDGE EYSTER: We're off the record.



24 record. Mr. Bzdok.





465

1 Q (By Mr. Bzdok): Mr. Lapplander, the judge asked you some

2 questions yesterday, or perhaps it was this morning,

3 about the purpose of your Exhibits A-27 and A-28. Do you

4 recall that?

5 A Yes.

6 Q As I understood it, the purpose of those exhibits, or

7 maybe their primary purpose was you were attempting to

8 compare the benefits to the utility in the examples

9 provided by A-27 and A-28 to the benefits provided to

10 Detroit Edison in the Monroe, Belle River and St. Clair

11 REF agreement, correct?

12 A That was in part my reason for including it.

13 Q In making the comparison of the benefit at Duke, there

14 was some questions and answers before lunch today that

15 you were not sure whether the Duke REF coal consumption

16 was the full 12 million tons identified in your exhibit

17 from 2010, correct?

18 A I think I testified that I don't know if the full amount

19 of, if a hundred percent of the reference that was made

20 there would impact the REF.

21 Q In fact, page 31 of your Exhibit A-27, that table with

22 some handwritten calculations on it, that is not an

23 exhibit -- this page of your exhibit is not from the

24 testimony in the Duke case, correct?

25 A Correct.




466

1 Q This is a document that you generated and then hand wrote

2 the calculations on, correct?

3 A Correct.

4 Q O.K. It's separate from that Duke record, right?

5 A Correct.

6 Q O.K. Just so that I understand, then, what you've done

7 in making your comparisons of the per-ton benefit between

8 the Duke case and the Detroit Edison plants is you have

9 compared the benefit divided by the total coal consumed

10 in the Duke case to the benefit divided by the REF coal

11 consumed in the three Detroit Edison cases, correct?

12 A Correct.

13 Q There's a certain potential apples and oranges there,

14 you'll concede, correct?

15 A I just, as I said before, the -- what page is that of

16 that exhibit?

17 Q That is page 31 of A-27.

18 A All I was relying on was Blackwell's statement on page 30

19 of that same exhibit where it says: Based on the assumed

20 coal consumption experienced in 2010, they expect a $5

21 million benefit. That's all I was relying on.

22 Q I don't want to prolong the point, so I won't.

23 The working capital benefit to Detroit

24 Edison in the REF transactions is -- well, let me say it

25 this way: The coal has to be transferred at some point




467

1 to the fuel company in order for the fuel company to sell

2 it back to Detroit Edison or the tax credits won't be

3 generated, correct?

4 A Correct.

5 Q And you testified yesterday, and I think this morning,

6 also, that the fuel company was the one who wanted to

7 hold the coal for as long in the supply chain as possible

8 in order to best ensure its eligibility to generate the

9 tax credits, correct?

10 A That's one of the reasons they wanted that. Detroit

11 Edison wanted that as well.

12 Q The working capital benefit, then, is a necessary result

13 of structuring these agreements the way the fuel

14 companies wanted to structure them, correct?

15 A Correct.

16 Q It's not something the fuel companies were giving or

17 granting to Detroit Edison in consideration of anything,

18 correct?

19 A I would disagree with that.

20 Q Well, they had to sell the coal -- they had to own the

21 coal in order to sell it back to Edison, right?

22 A That is true.

23 Q And they wanted to own the coal for as long as possible

24 in the supply chain, right?

25 A That is true.




468

1 Q So they didn't concede anything to Detroit Edison that

2 resulted in that working capital benefit, right?

3 A Well, for example, there's 250,000 tons of inventory they

4 own at Monroe, and we have, as discussed earlier, maybe 1

5 million, or 1.2 million total at the site. At St. Clair,

6 they own a hundred percent of the coal requirement. So

7 depending on the site, it's not a necessity that they own

8 the entire supply chain. They do not own all of the coal

9 at the Monroe power plant, they only own a portion; they

10 don't own all of the coal at Belle River, they only own a

11 small portion because they're testing. But, you know,

12 they could -- it could have been that they own only a

13 portion of the coal, like the Monroe structure, at St.

14 Clair, but that's the value that Detroit Edison gets out

15 of the contract structure up at Belle River/St. Clair is

16 the working capital benefit.

17 Q You testified I think earlier that there is, that these

18 transactions are handled in Ann Arbor by essentially

19 netting out the various amounts at the end of the

20 process, right?

21 A For the coal handling and consulting services payment,

22 yes.

23 Q O.K. What about for the transfer of coal to the fuel

24 company and then the resale of the coal by the fuel

25 company to Detroit Edison, is that a netting transaction,




469

1 or is, for example, if the fuel company is taking title

2 to $10 million worth of coal, are they writing a check or

3 making a money transfer for $10 million and then Edison's

4 writing a check or a wire transfer for 10 million on the

5 other end?

6 A For Belle River, and the Belle River Fuel Company

7 occasionally purchases coal from us in the coal yard,

8 they will write us a check for that or wire transfer,

9 however we do that. For St. Clair, the Belle River Fuel

10 Company buys coal at our MERC dock, at Detroit Edison's

11 MERC dock, and they will pay us, and they own that

12 inventory, and that eventually rolls through and they

13 billed that, the Belle River Fuel Company will sell to

14 the St. Clair Fuel Company at St. Clair and St. Clair

15 Fuel Company has inventory. At Monroe, at the end of the

16 month there is a netting of the invoice we provide them

17 to buy the coal that got delivered, and they invoice us

18 in essence simultaneously on the purchase of REF that was

19 produced and consumed during that month.

20 Q So Monroe doesn't have to raise the cash to buy the

21 inventory, it's a netting at the end?

22 A They had approximately $18 million worth of inventory

23 that they had to buy at the time of closing, they

24 purchased 250,000 tons and they owned the coal in

25 transit; but then on an ongoing basis, there obviously




470

1 could be a mismatch; we could deliver 900,000 tons in a

2 month that they would have to pay for, and if they only,

3 if the plant only consumed 600,000, then there's that

4 300,000-ton difference, and the cash flow would come to

5 Detroit Edison for the discrepancy. There would only be

6 no cash-flow difference if the two happened to be

7 identical in dollar amount.

8 Q So is it fair to say that the fuel companies don't have

9 to raise the amount of capital, an amount of capital

10 equal to the full value of the coal inventory that

11 they're providing, with which they're providing Detroit

12 Edison with the working capital benefit?

13 A I don't believe that's true.

14 Q I guess my question was geared at some of this netting.

15 A The Monroe power plant -- the Monroe Fuels Company owns

16 roughly $18 million worth of inventory, they will own

17 that for the ten-year period. The netting is the actual

18 deliveries and the consumption for each month.

19 Q Right.

20 A But they still have that working capital on their books,

21 their 18 million for the coal they own. The St. Clair

22 Fuels Company, in combination of MERC and at the plant,

23 owns approximately 700-750,000 tons of coal every month.

24 Q You've testified in a number of places that on the St.

25 Clair and Belle River agreements, Detroit Edison




471

1 reimburses the fuel company for emission-related savings

2 up to a cap, correct?

3 A Correct.

4 Q And is that true at Monroe as well?

5 A No.

6 Q O.K. In your Exhibit A-27, in the description of the

7 Duke project, did you note that that's a different

8 arrangement that Duke, where emission savings is an

9 additional benefit to the Duke customer?

10 A That's true, similar to Monroe.

11 Q Exhibit A-31, which was that term sheet provided by

12 Arthur Gallagher Company to Detroit Edison for the sale,

13 that exhibit, or that term sheet provides for a sale of

14 coal by Detroit Edison to Arthur Gallagher and then a

15 repurchase of coal by Detroit Edison from Arthur

16 Gallagher, correct?

17 A It would be a, yes, a sale of coal by Edison, they would

18 refine it and we'd buy, purchase refined coal from A. J.

19 Gallagher.

20 Q But it's a sale to them and then a buy back from them,

21 much like a sale and a buy-back in the three existing REF

22 projects for Detroit Edison, right?

23 A Except that in the A. J. Gallagher proposal, their

24 proposal included buying coal on a realtime basis as it

25 entered their facility, so they would own, they would




472

1 never own any coal.

2 Q I didn't see that in the term sheet, what you just

3 described.

4 A That was a result --

5 Q Can you show me in the terms sheet where that is?

6 A That specifically is not in the term sheet. That was

7 discussed at various meetings that some of my staff had

8 with A. J. Gallagher, and one of the reasons that I was

9 told, one of the concerns we had is whether or not from

10 an accounting perspective, since the sale and purchase of

11 coal was almost simultaneous, whether in fact that would

12 be considered a sale. So I think our technical

13 accounting group had a concern whether this was a viable

14 project.

15 Q So you're describing conversations that occurred at a

16 meeting that you did not attend, correct?

17 A That is true.

18 Q And statements made by representatives of A. J. Gallagher

19 whose identity you do not know, correct?


21 Q Was there a counteroffer made by Detroit Edison to A. J.

22 Gallagher's term sheet?

23 A My understanding is that we went back to them with a

24 dollar a ton discount instead of the 50 cents that they

25 have there, and then the negotiations didn't move




473

1 forward.

2 Q In your research on other utility operations involving

3 refined coal, did you or your staff look at Great River

4 Energy?

5 A I did not, no.

6 Q To your knowledge, did any of them?

7 A I don't know.

8 Q Did you or your staff look into any proposals where the

9 utility owned the REF facility and the tax credit

10 investors leased the facility from the utility?

11 A I don't know of any of those.

12 Q Your Exhibit A-28 has a press release and then an A. J.

13 Gallagher presentation, correct?

14 A Correct.

15 Q In the press release at page 2, there's a mention of the

16 Corette plant in Montana. Are you familiar with that?

17 A No.

18 Q Well, it's your exhibit; did you see it mentioned in

19 there or not?

20 A I see it right now.

21 Q You didn't notice that before you sponsored the exhibit?

22 A I probably read this once, but now my recollection is,

23 yeah, I see that Corette power plant in Montana.

24 Q So we're both looking at page 2 of 61, one, two, three,

25 four, five, fifth full paragraph: Results from the




474

1 limited testing we have done with the Chem-Mod process at

2 our Corette power plant in Montana were promising. We're

3 working with Chem-Mod on plans for more extensive testing

4 at a PPL generating facility, said Paul T. Champagne,

5 President of PPL Energy. Correct?

6 A Yep.

7 Q Are you aware that the Corette plant he's referring to

8 has been announced for mothballing due to MATS

9 compliance?

10 A I'm not aware of that.

11 Q The Gallagher exhibit, the presentation at page 36 refers

12 to the tax credit phasing out above a certain price for

13 coal -- well, phasing down at a price and then phasing

14 out. Do you recall seeing that in your exhibit?

15 A Yes.

16 Q Are there contingencies in the agreements in A-30 to

17 address the issue of the phase down or phase out of the

18 tax credits due to the price of coal?


20 Q Did the testing of REF coal at the Detroit Edison plants

21 indicate that the use of REF would increase the

22 particulate load from the plants, do you know?

23 A I don't know.

24 Q To your knowledge, has Detroit Edison evaluated the cost

25 of MATS compliance using REF without the tax credits?




475

1 A I believe Mr. Rogers could address that. I think that's

2 part of the 2012-13 PSCR plan filing.

3 Q If the Company's MATS compliance strategy is based on the

4 use of REF coal, at the point where the tax credits

5 expire, 2019 -- let me back up.

6 You indicated in some earlier testimony,

7 I don't remember if it was in response to the judge's

8 questions or Mr. Keskey's, that at the end of the tax

9 credit terms for these projects, Detroit Edison will have

10 the option to either buy the facilities from the fuel

11 companies or the fuel companies will have a requirement

12 to remove the facilities, correct?

13 A Correct.

14 Q What will happen to the fuel companies, will they be

15 dissolved?

16 A I don't know.

17 Q If the Company's using REF coal as a crucial component of

18 its MATS compliance strategy, and Belle River and St.

19 Clair expire in 2019 and then Monroe expires in 2021,

20 Detroit Edison realistically has to buy those facilities

21 and continue operating the REF project without the tax

22 credits, does it not?

23 A No.

24 Q Why not? Haven't you painted yourself into a corner at

25 that point?




476

1 A For example, at the Monroe power plant, at the end of the

2 REF facility's project life, we'll have four scrubbers

3 and four SCRs operating, and as Bill Rogers testifies,

4 the SCR -- if a combination of scrubber and SCR doesn't

5 consistently remove 90-percent mercury from the flue gas,

6 and one element of the REF, the Mersorb, is a calcium

7 bromide, which when applied to the coal further oxidizes

8 the elemental mercury in the flue gas and then is easily

9 collected in the scrubber, if the REF facility -- and I

10 think I said we have the right to buy any or all, any

11 part of or all of the REF facility when the contract

12 expires, we may choose to just keep the calcium bromide

13 tank and just put, if you will, a simple spray bar in

14 over a coal conveyor and spray the calcium bromide on the

15 coal, and that would serve the exact same purpose as the

16 entire REF facility as it relates to controlling mercury

17 emissions at the Monroe power plant. So no, we're not

18 backing ourselves into a corner. And the same thing up

19 at Belle River and St. Clair; when we use REF at those

20 two, when Detroit Edison uses REF at those two plants, we

21 will still have to, the Detroit Edison Company will have

22 to use powdered activated carbon, as explained by Bill

23 Rogers. The REF usage allows us to use a cheaper

24 powdered activated carbon and less of it. We could

25 continue to use a cheaper powdered activated carbon and




477

1 less of it if the REF facilities weren't there, and as I

2 just explained at Monroe, we installed a calcium bromide

3 spray application system on our coal. So no, we are not

4 backed into a corner with those facilities when their

5 useful, when the life of the project expires.

6 Q You've indicated in your testimony at several points that

7 testing at Belle River is continuing, correct?

8 A That is true.

9 Q How -- when did testing at Belle River start?

10 A I think there was some testing on and off in 2010.

11 Q How long is it expected to continue?

12 A I think we provided a response to that in a discovery

13 response, but to my recollection, the power plant staff

14 wants to run a series of two tests after their periodic

15 outage in the spring on Unit 1. So I believe that after

16 the periodic outage, they'll run two probably 120-day

17 tests and they'll make a decision, the power plant will

18 make a decision sometime towards the end of this year.

19 Q A decision go, no go?

20 A Correct.

21 MR. BZDOK: Thank you. That concludes my

22 questions for you.

23 JUDGE EYSTER: Who's next? Mr. Erickson.

24 MR. ERICKSON: Thank you, your Honor.

25 - - -




478

1 CROSS-EXAMINATION

2 BY MR. ERICKSON:


4 A Good afternoon.

5 Q Let me start with your organization chart on the, what is

6 the third page of Exhibit MCAAA-12. Do you have that?

7 A Yes.

8 Q Now, as I understand it, all of the boxes below the DTE

9 Energy Company are subsidiaries of DTE Energy Company; am

10 I correct?


12 Q Detroit Edison is also a subsidiary of DTE Energy

13 Company; am I correct?

14 A Correct.

15 Q Now, if Detroit Edison sells fuel to each one of the

16 affiliates at the bottom tier and buys back fuel from

17 those at the bottom tier, will any of the resulting costs

18 being shifted between Detroit Edison and the other

19 affiliates require anything from the middle three

20 affiliates in this chart?


22 Q Now, just a little while ago, as I understood it, I heard

23 you tell Mr. Bzdok that when the fuel is -- when the coal

24 is sold by Detroit Edison to a refined fuel affiliate,

25 there will be a cash transfer from the affiliate to




479

1 Detroit Edison?

2 A Correct.

3 Q And it's my understanding, of course, that that cash

4 transfer to Detroit Edison will be based upon the amount

5 of cash that Detroit Edison paid for all of the various

6 costs to buy the fuel from the, at the mine from the

7 supplier and all of the costs that the Detroit Edison

8 paid to transfer the fuel to the point of sale; am I

9 correct?

10 A Correct.

11 Q Now, is Detroit Edison, DTE Energy, and all of the

12 affiliates, are they accrual accounting based companies?

13 A I believe -- I believe the ones on this org chart are,

14 but I think the Energy Trading Group is on mark-to-market

15 accounting, but everybody here I believe is on accrual

16 accounting.

17 Q O.K. Now, accrual accounting means that you recognize

18 the economic reality of a transaction from a financial

19 point of view and you recognize revenue debits when the

20 right to those debits accrue and when, and you recognize

21 expense credits when those, the liability for those

22 credits accrue; am I right?

23 A I'm not an accountant, but if that's what it is, I'll

24 take your word for it.

25 Q O.K. Well, let's put it this way: Would you agree that




480

1 if you look from the top down from DTE Energy Company, if

2 Detroit Edison accrues a cost for fuel or fuel

3 transportation or fuel handling, all other things being

4 equal, that cost will increase expenses for DTE Energy on

5 a consolidated financial statement basis?

6 A I think so, yes.

7 Q Now, to the extent that DTE -- Detroit Edison incurs a

8 cost for fuel or fuel handling or administrative services

9 or what have you, those costs will be owed to third

10 parties that aren't part of the affiliated organization;

11 am I correct?

12 A I'm confused when you say costs. I think you said costs

13 owed to a third party.

14 Q Sure. You agree to pay $10 a ton for coal --

15 A Oh, O.K.

16 Q -- to a mine supplier, you pay, agree to pay MERC some

17 handling costs, you agree to pay a boat company or

18 railroad company for costs --

19 A Correct, correct.

20 Q -- then you're going to -- that's going to be a liability

21 of Detroit Edison that's owed to an independent third

22 party; am I right?

23 A Correct.

24 Q And since it's an independent third party, even if you

25 accrue a liability related to expense, you're ultimately




481

1 going to have to reduce cash and eliminate the liability

2 by making an actual payment to the third party; am I

3 right?

4 A Correct.

5 Q Now, let's assume that you sell the fuel to one of the

6 REF affiliates. You're going to -- at that point,

7 Detroit Edison would recognize a receivable and they

8 would reduce their liability in an equal amount; am I

9 right?

10 A I believe so.

11 Q And at the same time that that happens, the REF must

12 recognize an expense and a liability?

13 A I would assume so, yes.

14 Q Now, since Detroit Edison and the affiliate are in the

15 same chain for accounting, consolidated accounting

16 purposes, the original amounts accrued by Detroit Edison

17 on Detroit Edison's books will be offset by the

18 receivable that it gets from the affiliate and then the

19 affiliate will have an increase in its liabilities, so

20 that what happens is is you just move the amount of money

21 from Detroit Edison to the affiliate, but in the chain

22 going all the way up to DTE Energy, there's a single

23 amount because you have a debit and a credit on Detroit

24 Edison's books and you have a credit on the affiliate's

25 books, right?




482

1 A I believe that's true.

2 Q So why would Detroit Edison and the affiliates and

3 Detroit -- and DTE Energy move cash from the affiliate to

4 Detroit Edison in this rather than just simply handling

5 it as an accounting transaction where the liability is

6 removed from Detroit Edison's books and the expense is

7 removed from Detroit Edison's books and the expense is

8 now on the affiliate's books?

9 A I'm not -- I'm not familiar with how our treasury group

10 handles the cash flow for the Belle River and St. Clair

11 transactions, but I know the way the Monroe structure is,

12 that there is a separate bank that DTE Energy deals with

13 for the payment for the cash flows that take place for

14 the Monroe Fuels Company.

15 Q O.K. Now, if there is a cash-flow transaction between

16 Detroit Edison and an affiliate refined fuel company,

17 then I take it when Detroit Edison repurchases the fuel,

18 Detroit Edison is going to send cash back to the

19 affiliate; is that an accurate assumption?

20 A For the Monroe Fuel Company transaction, yes. I'm not

21 sure how the cash flows take place for the Belle

22 River/St. Clair projects.

23 Q So Detroit Edison is going to pay cash for the services

24 it purchases from third parties, it's going to receive

25 cash from the affiliate, and then it's going to pay cash




483

1 back to the affiliate, so that it will have paid cash

2 twice and had receipt of cash once, so the net impact for

3 Detroit Edison is going to be we're back at square one,

4 same cost; am I right?

5 A It would be the same cost, yes.

6 Q Now, is this true for -- does that change in any way for

7 costs that are incurred after the point that title to the

8 coal transfers?

9 A No.

10 Q So at the point the title transfers, then any costs that

11 are incurred are going to be incurred, as I understand

12 it, because Detroit Edison is performing administration

13 and all of the other physical functions of coal handling,

14 where the fuels company is going to have to pay cash to

15 Detroit Edison for the out-of-pocket costs that Detroit

16 Edison incurs; am I right?

17 A Well, the way the coal handling and consulting services

18 are structured, they do pay the fee for those services,

19 but then it's added to the invoice when they sell it

20 back, and there's an intercompany transaction within SAP

21 that nets those two to zero.

22 Q O.K. If you buy, let's say, 100,000 tons of coal,

23 deliver title to the 100,000 tons of coal in Montana to

24 the REF and the REF pays -- then Detroit Edison incurs

25 costs to move it from Montana to Belle River or St.




484

1 Clair?

2 A O.K.

3 Q At that -- when those costs are incurred, the affiliates'

4 going to have to pay cash to Detroit Edison to reimburse

5 it for those costs from Montana to Belle River or St.

6 Clair; am I right?

7 A I would say that, yeah, I would say that's true.

8 Q O.K. And then when Detroit Edison buys it back from the

9 affiliate, Detroit Edison will pay the affiliate cash; am

10 I right?

11 A I believe that's the case, yes.

12 Q So once again, the expenses Detroit Edison incurs will be

13 booked twice, once when they pay for them, offset by a

14 cash from the affiliate, reinstated by cash paid to the

15 affiliate; am I right?

16 A Correct. Ending up in the same price as if the REF

17 facility didn't, the transaction hadn't --

18 Q So from --

19 (Multiple speakers.)

20 A The same price as if the REF transaction had not taken

21 place.

22 Q O.K. So that means that the working capital in terms of

23 cash is, for Detroit Edison is going to be the same at

24 the point where it incurs the expenses until it receives

25 reimbursement, and then it will be the same again once




485

1 Detroit Edison buys the fuel back, right?

2 A The working capital benefit will be the same up until the

3 point they buy the coal, and then since we, Detroit

4 Edison buys the coal back and we immediately consume it,

5 after the purchase there's really no working capital

6 change because it's almost an instantaneous.

7 Q The -- but Detroit Edison has to have the working capital

8 in the first place to buy the coal, and they have to have

9 the working capital to pay back the REF; am I right?

10 A If they have to -- yeah, they have to have cash in the

11 bank to pay for the REF, which is approximately

12 equivalent to the cash that they paid for us when they

13 bought all the fuel.

14 Q O.K. In your analysis in your Exhibit A-11, let me just

15 use that -- and basically speaking, you've provided us

16 with several exhibits that do an analysis. The analysis

17 on page 26 Exhibit A-11 for SCFC's revenue requirements,

18 as I understand it, the line 27 is the working capital

19 element; am I right?

20 A I would say in this calculation, the -- well, that's

21 non-coal working capital, line 27. Line 28 is inventory.

22 Q O.K.

23 A So it's -- and then arguably it's the net plant, but

24 that's plant in service, and then for working capital, it

25 would be the non-coal as well as the coal.




486

1 Q Now, the coal inventory of $31 million, that's the amount

2 that Detroit Edison paid, was reimbursed by the

3 affiliate, and then it's the amount that Detroit Edison

4 would pay back to the affiliate upon repurchase of the

5 title to the coal?

6 A Correct.

7 Q Now, it's my understanding that the 31.5 million on line

8 28 of the page 2 of Exhibit A-11 is currently included in

9 working capital or some other component of Detroit

10 Edison's rate base for purposes of the rates that were

11 set in 16472; is that your understanding?

12 A A portion of this 31 million was included, which is

13 ownership by the fuel company, a portion of that was

14 included in the rate case that you mentioned, and as a

15 result, there was a lower working capital number used to

16 set base rates.

17 Q In other words, you're saying even though the working

18 capital necessary for that coal inventory is $31.5

19 million, that in the rate case, Detroit Edison did not

20 include all of the $31.5 million?

21 A That's correct. And the reason was, back in 2009 when we

22 sold the coal, the inventory cost was like $22-23 a ton

23 when we sold the coal; today, with the new western

24 transportation agreement that we have, the average unit

25 cost of coal is higher, so for the same amount of volume,




487

1 the dollar value of the working capital would be higher.

2 Q So there's just a timing change. In the base rates set

3 in U-16472, you were looking at a $22,000 [sic] working

4 capital requirement, now this particular exhibit uses a

5 $31.5 million working capital requirement?

6 A Correct.

7 Q So that means that the savings at the current time since

8 2009 would be 31.5 million minus the 22 million; am I

9 right, from a ratepayer's perspective?

10 A This is for St. Clair. What's included in the rate case

11 for St. Clair is 15.9 million, and it's roughly 22

12 million for Belle River, so we would be looking at the

13 15.9 million versus this 31.5 million that you

14 referenced.

15 Q So the savings to ratepayers since St. Clair Fuel Company

16 took title and ownership of the fuel would be the

17 difference between the 15 million and the 31.5 million?

18 A Correct.

19 Q Now, as I understand it, however, in the meantime, once

20 the St. Clair Fuels Company took title to the coal, it

21 would have paid Detroit Edison $31.5 million?

22 A Yes.

23 Q So Detroit Edison would be recovering $15 million in

24 current base rates plus $31 million from St. Clair Fuel

25 Company while St. Clair Fuel Company held title to the




488

1 fuel; am I right?

2 A I don't believe it would be appropriate to add the two.

3 The 15.9 million at that point in time represented

4 700,000 tons that they purchased, that the fuel company

5 purchased for St. Clair. That's -- we typically have

6 around, Detroit Edison typically has around 720-730,000

7 tons of coal that's owned by the St. Clair Fuels Company,

8 so it's approximately the same volume, but it's priced at

9 the 30 -- 31 million today, and so you wouldn't add it

10 because then you'd have 1.4 million tons, you would I

11 think just look at the difference of the value of the

12 inventory at two different points in time.

13 Q If Detroit Edison's base rates are currently recovering

14 15 million, and St. Clair Fuel Company pays Detroit

15 Edison 31.5 million, then the revenue, the sum of the

16 revenues from those two sources is 15 million plus 31

17 million; do you agree?

18 A Well, the sum of those two is as you indicate, but there

19 is an ongoing monthly sale of coal to the St. Clair Fuels

20 Company, so, you know, each month the St. Clair power

21 plant consumes some of the St. Clair Fuels' inventory,

22 they buy some St. Clair Fuel Company, you know, takes

23 title up at MERC of some portion, and then, you know, so

24 it's an inventory, you know, cycle that goes on.

25 Q That cycle is at the beginning of the month you have a




489

1 certain amount of inventory, you add to that deliveries,

2 and you subtract from that consumption?

3 A Correct.

4 Q And so that what you're saying is the rolling average

5 working capital for coal inventory will swing up and down

6 depending upon the cycles of deliveries and consumption;

7 am I right?


9 Q But the $15 million that's in base rates, that's a

10 constant source of revenue, and if we assume no changes

11 in the $31.5 million because deliveries in consumption

12 match and the price is the same, then 15 million plus 31

13 million would be the total revenues Detroit Edison would

14 be recovering in combination from its ratepayers and St.

15 Clair Fuels Company; am I right?

16 Let me try to make it a little clearer.

17 Let's make an assumption that Detroit Edison currently is

18 recovering from its ratepayers for coal inventory for St.

19 Clair Fuels Company-owned coal. Let us also assume that

20 Detroit Edison has been paid for the St. Clair Fuels

21 Company coal at a cost of $31.5 million. The $31.5

22 million payment plus the $15 million payment would

23 represent the total revenue related to that coal at that

24 given point in time; am I right?

25 A At, yeah, at that point in time.




490

1 Q O.K. Now, as I understand your analysis -- let's go back

2 in time. This whole process was generated because of

3 Section 45 in the Internal Revenue Code, which provides

4 tax credits for certain forms of activities that will

5 reduce SO2 and mercury fuel emissions, as well as NOx

6 fuel emissions; is that an accurate understanding?

7 A Correct.

8 Q And at the time that was, the Internal Revenue Code was

9 amended to provide for those tax credits, the value of

10 those tax credits is based upon the tonnage of fuel

11 burned or based upon the amount of reduced SO2, NOx and

12 mercury emissions, which is it?

13 A Based on the amount that, the tonnage amount of REF.

14 Q O.K. So without regard to how much the REF -- how much

15 less NOx, SO2 or mercury the REF emits, the tax credit

16 will be based upon the amount of tons burned; is that an

17 accurate understanding?

18 A Correct. Given the -- you'd have to -- the fuel

19 companies had to take a representative coal sample from

20 our plant and then demonstrate in the test lab in North

21 Dakota that these conditions actually do, they actually

22 can reduce the mercury, the NOx and/or SO2 as you've

23 discussed, so that has to be demonstrated, and to my

24 knowledge, the IRS accepts the test results in a test

25 combustor environment, so then that fuel with the mixture




491

1 of additives is now qualified.

2 Q O.K. But the value of the tax credits is not dependent

3 upon the quantity of NOx, SO2 or mercury emissions?

4 A That's correct.

5 Q Now, on the other hand, as I understand it, for St. Clair

6 and Belle River, what happens is the, the fuel adder will

7 depend upon the quantity of NOx, SO2 and mercury

8 reductions; am I correct?

9 A You're correct, except it does not include the reductions

10 for NOx.

11 Q O.K. And then to determine how much the coal adder is

12 going to be -- in order to determine or price out the

13 fuel adder, you would have to take and set a price for

14 each emission reduction that is achieved and multiply the

15 emission reductions for SO2 and the emission reductions

16 for mercury times the cost for alternative methods of

17 reducing those emissions to calculate the coal fuel

18 adder; am I right?

19 A When you use the phrase alternative methods, let me just

20 clarify. With SO2, there's a process in the agreement

21 where we determine the amount of reduction in SO2 as a

22 result of consuming REF, and then what we have done is

23 gone out in the market and attempted to sell those

24 allowances to determine what the market value is; and in

25 2011, the value of the allowance was 25 cents a ton, and




492

1 that resulted in the REF adder, which was only the value

2 of SO2 reductions of $544.

3 Now, in 2015, when mercury emissions are,

4 there are the mercury MATS, Mercury and Air Toxic

5 Standards, we will have to determine whether, as

6 Mr. Rogers has testified to in previous cases, if our

7 compliance plan without REF is to use brominated powdered

8 activated carbon, but when we use REF we can use standard

9 activated carbon, and if it's determined that the

10 difference in that is a half a million dollars, then

11 that, we'd have to demonstrate that, and then that would

12 become the mercury component of the REF adder beginning

13 in 2015.

14 Q If cross-state pollution regulations are reinstated in

15 some form, then the value of the SO2 emissions would

16 increase over what you've estimated for 2012; am I right?

17 A There is that chance, yes.

18 Q And so over the ten-year period of these contracts in

19 Exhibit A-30, the chances are that the fuel adder could

20 become significantly higher than it is for purposes your

21 2012 estimates; am I right?

22 A There is that possibility.

23 Q And if that happens, then the St. Clair Fuels and the

24 Belle River Fuels Companies will receive much more money

25 from Detroit Edison from the fuel adder?




493

1 A Correct.

2 Q Now, as I understand it, the money that the fuels

3 companies receive from the fuel adder are capped by a

4 cost component. Could you point to me in Exhibit A-30

5 where the provisions for calculating the fuel adder are

6 found for Belle River and St. Clair? Just page

7 reference.

8 A For Belle River, it starts on page 43 of 806.

9 Q O.K. And for St. Clair, what page is that found on?

10 A 420.

11 Q Now, as I understand it from your testimony, those pages,

12 the calculation identified in those pages is based

13 upon -- or is independent from the calculation of the

14 cap, and therefore, the coal adder could be substantially

15 less than, equal to or substantially greater than the

16 cap, at least in theory; am I right?

17 A Correct.

18 Q Now, for 2012, you've testified that Detroit Edison

19 estimates the coal adder will be really a very, very

20 small portion of the cap?

21 A It will be zero for 2012.

22 Q And we don't know over the ten-year process of when these

23 agreements are in place, what the relative total for the

24 fuel adder will be compared with the cap; am I right?





494

1 Q Now, is the cap a fixed cap, or does it get recalculated

2 annually?

3 A It gets recalculated annually.

4 Q O.K. Now, would you agree that since we don't know what

5 the fuel adder will be from year to year, that the higher

6 the calculation for the cap is, the less likely that the

7 fuel adder value would exceed the cap?

8 A I agree.

9 Q And in fact, given the current disparity between the fuel

10 adder expense and the cap, it's very unlikely that,

11 during the ten-year period of these contracts, that there

12 would be emissions cost benefits to PSCR customers that

13 would exceed the cap?

14 A That's true.

15 Q Now, since what we're talking about is figuring out how

16 to price to Detroit Edison the costs for emissions

17 benefits, have you performed any calculation of the

18 alternative costs of simply not doing any REF either

19 through an affiliate or through Detroit Edison, but, for

20 example, reducing coal consumption?

21 A I have not done that analysis.

22 Q Do you know if Detroit Edison has attempted to perform

23 such an analysis?

24 A I don't know.

25 Q Could Detroit Edison satisfy fuel emissions requirements




495

1 by reducing the total consumption of coal?

2 A Bill Rogers could probably speak to this more than I, but

3 I believe the Mercury and Air Toxic Rule is a

4 unit-by-unit mercury reduction target of 90 percent, so

5 it's not a, not like the SO2, some of the SO2 programs

6 where a Detroit Edison may have 200,000 allowances

7 allocated by the EPA, where you could in fact reduce the

8 amount of SO2 and comply with regulations by reducing

9 coal consumption, but for mercury, I don't think that's

10 the case.

11 Q O.K. Let's focus on SO2, then. If Detroit Edison

12 reduced its consumption of coal and generated more

13 electricity using natural gas resources or even fuel oil

14 resources, that would be another way of attaining the

15 emissions reduction targets; am I correct?

16 A I believe that would be one way that you could do it.

17 Q And we don't know whether that would cost more than, cost

18 the same as, or cost less than the proposed REF

19 agreements that the Company has submitted in this case;

20 am I right?

21 A Well, I know that for 2011 and 2012, since the value of

22 the REF adder is $500 and zero, that I don't believe

23 there's a, burning natural gas or oil, at least in those

24 two years, would have resulted in a, in more benefit to

25 the customer than what we paid for the REF adder.




496

1 Q But that's based on only knowing one side of the economic

2 comparison; am I correct?

3 A What -- your alternative was burning oil or natural gas?

4 Q In my hypothetical, yes.

5 A In your hypothetical, oil is probably five, five times or

6 ten times more expensive than coal.

7 Q How about natural gas?

8 A Well, natural gas today is probably, we probably get

9 delivered to our plants, I think the NYMEX is around 330

10 a million Btu, and there's a basis difference to

11 recognize transportation, probably a little less than

12 370, 380 a million Btu, which would be --

13 Q How much per million Btus is Detroit Edison paying for

14 the coal before refinement and after refinement?

15 A I believe up at Belle River/St. Clair, our cents per

16 million Btu there is probably in the 230 to 240 per

17 million MMBtu.

18 Q How does the heat rate of a natural gas facility compare

19 with the heat rate of those facilities?

20 A I would just -- depending on what facility, our Greenwood

21 power plant burns natural gas, its heat rate is probably

22 around 10,000-11,000 Btus per kilowatt hour, but a new

23 combined-cycle plant would have a heat rate down in the

24 7,000 Btu per kilowatt hour rate.

25 Q What would the heat rate of Belle River and St. Clair be?




497

1 A Belle River probably runs about 10,000 Btus per kilowatt

2 hour, St. Clair is probably slightly higher than that.

3 Q You mentioned earlier scrubbers and SCR; I get the

4 impression that those were two different concepts for

5 addressing SO2 emission reductions. Could you clarify

6 that for me?

7 A Scrubbers are used for reducing SO2 emissions, and

8 selective catalytic reductions, or SCRs, are used for NOx

9 reductions. And the combination of those two, there's a

10 co-benefit of somewhere in the 85 percent range of

11 mercury reduction as a co-benefit when you have a

12 scrubber and an SCR in service.

13 Q Now, you mentioned earlier in your testimony that you

14 had, when you were devising and negotiating these

15 agreements that are included in Exhibit A-30, that there

16 was an assumption that the REF technology would be able

17 to reduce 90 percent of the mercury, and that

18 subsequently there was something like 40 percent. Could

19 you clarify that for me?

20 A The fuel companies up at Belle River/St. Clair, when they

21 were putting their business plan together, from what I

22 understand, they, at that point in time, the fuel

23 companies had to demonstrate a positive net income for

24 the project absent the tax credits, and their business

25 plan assumed that the use of REF would achieve mercury




498

1 compliance at Belle River and St. Clair. Their business

2 plan included Detroit Edison paying the revenue

3 requirement of the project in 2015 and beyond. The

4 reality is we can not achieve compliance with the mercury

5 limit utilizing REF, and as a result, the REF adder will

6 be significantly less than the they originally imputed in

7 their business plan.

8 Q Does that mean that if we look at the revenue requirement

9 such as you calculated in Exhibit A-11 for 2011 or in

10 MEC-12 for 2012, the revenue requirements you calculated

11 in that exhibit and the revenue requirements that are

12 identified in what has been admitted as Exhibits MEC-32

13 and 33 will not be recovered by the REF facilities

14 because the, fully recovered by the REF facilities

15 because the adder is not going to be as much as

16 anticipated when the business plan was developed?

17 A Correct.

18 Q So that means that the REF affiliates will actually lose

19 money on the project based upon more current information?

20 A They will have a lot of -- the fuel company will

21 experience -- because of what you said, I would

22 anticipate the fuel company could experience a loss prior

23 to the recognition of the tax credit.

24 Q Recognition of what?

25 A The tax credits.




499

1 Q Oh, uh-huh. O.K. Now, they have to have -- do they have

2 to have a positive income before or after the tax credit?

3 A Prior to the tax credits.

4 Q O.K. So then that would mean that given more current

5 assumptions, they, the REF affiliates may not qualify for

6 a tax credit; am I correct?

7 A There's that possibility. To my knowledge, there hasn't

8 been an audit of those projects yet by the IRS.

9 Q Now, if they don't qualify for a tax credit, they'll be

10 in a net loss position providing REF services to Detroit

11 Edison; am I correct?

12 A That's my understanding, yes.

13 Q Now, those REF affiliates, are they capitalized with

14 assets that exceed the costs that they, the revenue

15 requirements they were going to incur in order to provide

16 the services to Detroit Edison at St. Clair and Belle

17 River?

18 A I'm not sure when you say are the projects capitalized.

19 Q In other words, the companies. In other words, if I look

20 at Belle River Fuels Company, LLC, Belle River Fuels

21 Company No. 2, LLC, and so forth across the chart, in

22 Exhibit MCAAA-12, do they have enough capital assets to

23 be able to absorb the losses such as may occur as a

24 result of what we've discussed in the past few minutes?

25 A I don't know.




500

1 Q Now, the contracts are with those, the bottom tier

2 companies; am I correct?

3 A The contracts are with the box entitled Belle River Fuel

4 Company, St. Clair Fuel Company and the Monroe Fuel

5 Company.

6 Q The other boxes are just affiliates that own the lines

7 that are, have been found to be unnecessary; am I

8 correct?

9 A Correct.

10 Q Did the agreements with Detroit Edison of those three

11 fuel, of the St. Clair and Belle River Fuels Company

12 enable them to make the decision to build two pug mill

13 facilities in their REF treatment facilities?

14 A The agreements we have in place didn't restrict them to

15 the number that they could build within their facility.

16 Q Let me look at your chart in Exhibit A-10, page 4. Do

17 you have that?

18 A Yes.

19 Q It appears to me that I would call this a schematic

20 diagram of the physical facilities that are sort of

21 pictured on the subsequent pages. Would that be an

22 accurate characterization?

23 A Correct.

24 Q Now, the diagram on page 4 of Exhibit A-10, if I look at

25 the Belle River and St. Clair pictures on page 5 of that




501

1 exhibit, as I understand it, the schematic is duplicated

2 twice in the facility to, facilities to which the Belle

3 River arrow points and are duplicated three times in the

4 facilities identified by the St. Clair power plant arrow;

5 am I correct?

6 A Correct.

7 Q Now, one of the three has already been removed?

8 A Correct.

9 Q And it looks like two of the Belle River facilities and

10 two of the remaining St. Clair plants can be removed?

11 A Well, there's only two production lines at Belle River,

12 so perhaps one.

13 Q O.K. Now, as I understand it, if I look at -- there was

14 another exhibit that you, that was included in the case

15 with some pictures of facilities. As I understand it,

16 though, if I look at this diagram on page 4 of Exhibit

17 A-10, that diagram, essentially everything shown in that

18 schematic has been constructed twice?

19 A Correct.

20 Q Now, earlier you said that there are common facilities

21 that wouldn't be duplicated, but as I understand it, if

22 we look within the confines of the schematic, all of

23 those things being duplicated twice include what you

24 referred to as common facilities. Could you clarify that

25 for me?




502

1 A Well, for example, you see the powder S-Sorb storage

2 tank?

3 Q Yes.

4 A You would need that storage tank at St. Clair if you had

5 one facility, one production line, two production lines

6 or three production lines. Each of those production

7 lines, only one's required, and the, I'll call it

8 ancillary services structures, the Mersorb tank, the

9 S-Sorb tank, it's sized for one production line.

10 Q O.K. Then I guess maybe I led you into a misleading

11 answer. The facilities in the schematic diagram on page

12 4 of Exhibit A-10 are not all duplicated, because there

13 was three production lines at St. Clair and two

14 production lines at Belle River is what I'm hearing you

15 say now?

16 A Well, yeah, I'm getting a little confused, because I

17 thought that you were referring to that there's a --

18 there is an REF production facility for St. Clair, there

19 is an REF production facility for Belle River in two

20 separate places, as indicated by the arrows on page 5 of

21 this exhibit, but then there is not, if you will, three

22 separate storage tanks for S-Sorb for the three

23 production lines, there's only one storage tank for

24 S-Sorb at St. Clair. I'm sorry.

25 Q The enclosure facility is a common facility that wasn't




503

1 sized larger for some reason because you had two or three

2 production lines; am I right?

3 A The facility at St. Clair might have been sized slightly

4 bigger because there were three lines versus one.

5 Q Now, looking -- and I want to be sure to give you time to

6 do it. Look at the schematic on page 4. Thus far it

7 appears to me that the only thing that wasn't duplicated

8 when you had two production lines at Belle River and

9 three production lines at St. Clair was the powder S-Sorb

10 tank. Am I accurate in my conclusion?

11 A I would just say that you got the Mersorb tank as well as

12 the S-Sorb tank, and to the extent that there is conveyor

13 belts that feed this facility and then any conveyor belt

14 modifications to take coal from the pug mill to our power

15 plant, I would say those are common facilities as well.

16 Q O.K. Looking at this schematic, since the schematic only

17 shows one pug mill and one liquid Mersorb path and one

18 S-Sorb path, would there be one or two paths at Belle

19 River?

20 A Two paths.

21 Q O.K. But would there be three paths at St. Clair?

22 A Yes. You'd have a conveyor belt as shown in the upper

23 left coming down, and I believe they have what we term

24 flop gates, so a flop gate at Belle River; if it's in one

25 way, one direction, the coal would go to one pug mill, if




504

1 the flop gate's in another direction, it would go to the

2 second pug mill, but then both pug mills would use a

3 common, the common S-Sorb storage tank and the common

4 liquid Mersorb storage tank, and you got a PC controller

5 and different things that there's only one set of a lot

6 of that equipment.

7 Q O.K. In this schematic, you have path lines. Are those

8 path lines something that identifies a physical facility

9 that is used, is needed to move from one of the icons in

10 the schematic to another, or are they just paths to

11 indicate that, one way or another, something would have

12 to get from the S-Sorb day bin into the processing point

13 called the PLC processor?

14 A I'm sorry, could you say that again?

15 Q There's a line from the S-Sorb day bin to the PLC

16 processor, and it's my understanding that -- well, I

17 don't know, I'm trying to find out. Does that represent

18 a physical facility, or does that just simply indicate

19 that the materials have to go from the S-Sorb day bin

20 into the PLC processor?

21 A It's just to represent the fact that that material will

22 flow that direction.

23 Q Would it -- I think it's becoming clearer to me, but I

24 want to be sure. If I look at the surge bin, the

25 vibrating feeder, the PLC processor, the liquid Mersorb




505

1 tank, the binder spray nozzles, the power S-Sorb storage

2 tank and the two conveyors, those are actually physical

3 facilities?

4 A Correct.

5 Q And those physical facilities, with the exception of the

6 pug mill, were designed and do serve both of the

7 production lines?

8 A Correct.

9 Q O.K. So really all we're -- all we would take out of the

10 process if we're eliminating a production line would be

11 what?

12 A To my knowledge, it's the pug mill.

13 Q O.K. Now, I want to ask you some questions about the

14 Belle River contracts and the MPPA. As I understand it,

15 the MPPA's interests in Belle River are governed by the

16 Participation Agreement between Detroit Edison and MPPA

17 that were executed back in the 1980s; am I right?

18 A Correct.

19 Q And it's my understanding that MPPA has no role in

20 determining what fuel will be acquired for the Belle

21 River plant or any of the methods by which fuel is

22 transported to the Belle River plant, that Detroit Edison

23 makes those determinations and simply charges an

24 18.61-percent cost of those materials and facilities to

25 MPPA; am I correct?




506

1 A That's generally correct, yes.

2 Q So under the Participation Agreement, MPPA really could

3 not go out and buy coal at a separate place, deliver it

4 to the REF affiliate, and buy back the coal from the REF

5 affiliate independent of what Detroit Edison decided; am

6 I correct?


8 Q So actually, although there is apparently an independent

9 agreement between MPPA and the Belle River REF

10 subsidiary, that agreement depends upon approval of

11 Detroit Edison under the, so that they can do it under

12 the Participation Agreement; am I right?

13 A There was an amendment, a memo of understanding, an

14 amendment to the Participation Agreement where MPPA

15 agreed to the refined coal adder calculation.

16 Q Since under the Participation Agreement Detroit Edison

17 had sole control over delivering fuel to the Belle River

18 plant, MPPA really didn't have any choice in that matter,

19 did they?

20 A The Participation Agreement got amended via an

21 arbitration ruling sometime I believe in the '90s, and

22 that arbitration ruling spells out in detail how you

23 calculate the cost of coal under the MPPA agreement, and

24 that does not include the REF adder calculation. So we

25 needed MPPA's approval, which we got through this memo of




507

1 understanding, where they had previously agreed with the

2 Belle River Fuels Company, I'm assuming in some -- well,

3 it's not a Refined Coal Agreement, but it's just the

4 exhibit that we were referring to in the Refined Coal

5 Supply Agreement that shows how to calculate the refined

6 coal adder, that was pretty much replicated in the memo

7 of understanding modifying the Participation Agreement.

8 Q So what you needed from MPPA is an agreement that they

9 would pay the REF adder for Belle River in addition to

10 the other fuel costs that they're obligated to pay under

11 the Participation Agreement; am I right?

12 A Yes, they had agreed with the Belle River Fuels Company

13 to do that, consistent with the way we agreed with the

14 fuel company in parallel, and then we had and execute an

15 agreement between Detroit Edison and MPPA.

16 Q Now, MPPA is not an independent host utility like Detroit

17 Edison where Detroit Edison controls all of the decisions

18 with regard to fuel burned at the Belle River plant; am I

19 right?

20 A That's true.

21 JUDGE EYSTER: What was the last

22 question?

23 MR. ERICKSON: Could we have the question

24 and answer read back.





508

1 "Q Now, MPPA is not an independent host utility

2 like Detroit Edison where Detroit Edison

3 controls all of the decisions with regard to

4 fuel burned at the Belle River plant; am I

5 right?

6 "A That's true.")

7 Q (By Mr. Erickson): Now, as I understand it, the life of

8 these REF agreements are limited to ten years because

9 that's the life of the tax credits; am I correct?

10 A Correct.

11 Q Now, if all, as an alternative to the REF, whether

12 Detroit Edison's or an affiliate owned it or whether

13 DTE's affiliate owned it, one alternative Detroit Edison

14 would have had would be to either reduce consumption for,

15 to meet SO2 requirements, or they could, Detroit Edison

16 could simply install scrubbers and SCRs and achieve the

17 same emissions reductions; am I right?

18 A That could be one option.

19 Q Now, if those options were used, those options would have

20 a life at least roughly equivalent to the life of the

21 existing Belle River facilities; am I correct?

22 A I believe that's correct, yes.

23 Q So if, let us assume that the capital investment in

24 scrubbers were three times the capital investment you

25 used in calculating the revenue requirements in Exhibit




509

1 A-11, page 2, and let's assume that the life of the Belle

2 River plant is three times the operating term of the

3 exhibits in Exhibit A-30, then the cost of the Belle --

4 of the scrubber/SCR alternative would be, on an annual

5 basis, approximately the same; would you agree?

6 A If the depreciation rates and everything falls out, I

7 would suggest that at least at Monroe, the scrubber and

8 SCR projects for four units that are over billions,

9 they're in the billions of dollar range, so if we were to

10 install a scrubber at Belle River, it would be in the

11 hundreds, in my view, hundreds of millions of dollars and

12 not three times or 30 million as I think you're

13 suggesting.

14 Q As I understand it, Detroit Edison is going to have to

15 invest that hundreds of millions of dollars anyway

16 because of its need to meet mercury requirements; am I

17 correct?

18 A No.

19 Q I thought I heard you say at Monroe you were going to

20 have to put in scrubbers and SCR facilities?

21 A There's -- the scrubbers and SCRs, I thought you were

22 referring to Belle River.

23 Q Oh, I'm sorry.

24 A We were talking about Belle River.

25 Q Maybe I misstated myself.




510

1 A We are installing scrubbers and SCRs, there are three

2 SCRs in operation today, two scrubbers, two additional

3 scrubbers are under construction and one SCR, so in a

4 matter of a year or so, we'll have four SCRs and four

5 scrubbers in operation at the Monroe power plant.

6 Q As I understand your testimony, between now and the time

7 those scrubbers and SCRs go in, the projected value of

8 SO2 emission allowances is going to be very small; am I

9 correct?

10 A The near-term projection of SO2 allowances is very small.

11 Q Now, will you agree that if Detroit Edison solves the

12 emissions reduction problems by use of SCRs and by the

13 use of scrubbers and by the use of alternative mercury

14 reduction technology, that the money that Detroit Edison

15 would spend for those alternatives would flow to third,

16 independent third parties and not to affiliates of DTE?

17 A Correct.

18 Q Now, you referred to Coal Handling Agreements where

19 you're going, Detroit Edison is going to get reimbursed.

20 Those Coal Handling Agreements -- you may have covered

21 this with Mr. Bzdok, but I don't recall. Where are the

22 Coal Handling Agreements for the three contracts in

23 Exhibit A-30, could you give me a page reference to each

24 of them?

25 A Belle River Coal Handing and Consulting Agreement starts




511

1 on page 193. The Coal Handling and Consulting Agreement

2 for the St. Clair Fuel Company begins on 552. The Coal

3 Handling and Consulting Agreement for the Monroe Fuel

4 Company begins on page 745.

5 Q Thank you. Now, with regard to those Coal Handling

6 Agreements, it's my understanding that those Coal

7 Handling Agreements oblige Detroit Edison to provide all

8 of the services that it's currently providing, and it

9 requires the REF to reimburse Detroit Edison for those

10 costs; am I right?

11 A We get -- Detroit Edison gets reimbursed for those costs,

12 and then those costs are then added by the fuel company

13 on their invoice, and the net is zero. So there's -- no

14 money changes hands.

15 Q Now, that, you mentioned that, and there was a discussion

16 between you and Mr. Bzdok about one of the aspects of

17 Exhibit, the redacted portions of Exhibit A-30, that as I

18 listened to your testimony, I wasn't clear on. Let me

19 see, go back to my reference.

20 JUDGE EYSTER: We're going to take a

21 break right now. It's five after 5:00. We're off the

22 record.

23 (At 5:05 p.m., there was a ten-minute recess.)

24 JUDGE EYSTER: O.K. Back on the record.

25 Q (By Mr. Erickson): Mr. Lapplander, before we took the




512

1 break, I was looking for and I've now found the redaction

2 that I wanted to ask some questions about it in Exhibit

3 A-30, pages 618 and 619. Do you have those pages?

4 A Yes.

5 Q Looking at what wasn't redacted in the paragraph before

6 where there was a discussion of Coal Handling and

7 Consulting Agreements, and based upon your responses to

8 Mr. Bzdok, I got the impression that the redacted

9 material called for Detroit Edison to reimburse the REF

10 at Monroe for fees that the Monroe REF paid for Coal

11 Handling and Consulting Agreement, in addition to the

12 price that the Company would pay for coal expense, and

13 I'm wondering if I've drawn an accurate conclusion, that

14 there's something that has to be paid, that there is no

15 100-percent wash. Can you clarify that for me?

16 A No, I believe what this, looking at 9.4, I guess I'm not

17 quite sure there, but 9.3, it says: Buyer shall

18 reimburse Seller for the Coal Fee as and when paid under

19 the Coal Handling and Consulting Agreement. So this is

20 the, this is the Refined Coal Supply Agreement that we're

21 looking at right here, so I believe what you have is,

22 under the Coal Handling and Consulting Agreement, we will

23 charge the fuels company for handling and consulting, and

24 then in the Refined Coal Supply Agreement, they add that

25 to the bill and we pay it for a net zero sum.




513

1 Q O.K. So when we go to the fuel, the Coal Handling

2 Agreement beginning on page 745 of Exhibit A-30, Section

3 9.3 says that the payments made by the fuels company to

4 Detroit Edison under the Coal Handling and Consulting

5 Agreement will be paid back in the same amount?

6 A That -- yes.

7 Q And the same is true for the costs paid by the fuels

8 companies under the Coal Handling and Consulting

9 Agreement for Belle River and St. Clair; am I right?

10 A Correct.

11 Q Now, you discussed at one point an allocation of coal

12 handling costs between fuel expense and O&M expense, and

13 if I remember, it was something like 80/20 or something

14 like that. I don't recall what that purpose or point of

15 that allocation was. Could you clarify that for me?

16 A I don't recall 80/20, I don't recall.

17 Q I don't -- I'm not sure about the 80/20, but it was

18 something about some of the costs that are being

19 reimbursed to Detroit Edison under the Coal Handling and

20 Consulting Agreement relate to O&M expense and some

21 relate to fuel expense.

22 A Well, that more than likely is under the Refined Coal

23 Supply Agreement where they pay us a coal fee rate at

24 Monroe, and we take part of that, Detroit Edison takes

25 part of that coal fee rate and credits an O&M account at




514

1 Monroe, and part of it goes to a reduction in PSCR

2 expense.

3 Q O.K. So the full discount rate for the Monroe REF does

4 not go to reduce the PSCR expense?


6 Q Would it be true that some of the expenses that are

7 reimbursed to Detroit Edison under the Coal Handling and

8 Consulting Agreement would be booked as O&M expense

9 instead of booked cost of fuel burned?

10 A All of it would be.

11 Q O.K. If Detroit Edison reimburses the REF for all of the

12 payments made to Detroit Edison under the Coal Handling

13 and Consulting Agreement, would that reimbursement be

14 included in the repurchase cost of the refined fuel?

15 A No.

16 Q How would that be handled?

17 A Up at Belle River/St. Clair, there's just some kind of I

18 believe intercompany transaction that takes place within

19 our SAP system where there's debits and credits on both

20 sides, because the net effect is that there's net zero

21 exchange cash. We charge them ten, they add it to the

22 invoice, the invoice has different components, part of

23 which is the price of fuel, there's a cost of ten, so we

24 just net the two, and it's the coal handling and

25 consulting costs end up as no cash exchanged at the end




515

1 of the month.

2 Q But the question isn't even if there's no cash exchanged,

3 my question is, is there an expense booked by the Detroit

4 Edison regarding the reimbursement for the coal handling

5 and consulting fee?

6 A There is a book, they do book the reimbursement to

7 offset -- we invoice them, and I believe there's a

8 receivable on our side, and then they pay us, which

9 cancels the receivable.

10 Q Then you buy the coal back and you --

11 A That's for the coal handling and consulting.

12 Q O.K. What I'm thinking about, at the time you buy the

13 coal back, do you reimburse the REF for the money they

14 paid to you for coal handling and consulting?

15 A Yes, that's part of the entire invoicing process at the

16 end of the month.

17 Q So in general terms, the reimbursement at the time of

18 repurchase by Detroit Edison would have two components,

19 it would have the fuel cost components and it would have

20 the coal handling and consulting components?

21 A And -- that is correct. And up at St. Clair, you have

22 the refined coal adder, which also has the incremental

23 increased ash disposal cost, which is treated as a

24 separate line item, which when they reimburse us for

25 that, it gets credited to the plant's O&M for the




516

1 increased ash handling. So yes, there's different

2 components to the invoice; part of it is fuel and part of

3 it is handled as various O&M accounts.

4 Q O.K. So let's say that the fuel costs, including

5 transportation, for a month were $500,000 in total for

6 all of the coal that's at Monroe, Belle River and St.

7 Clair, and let's assume that the Coal Handling and

8 Consulting Agreement had an additional cost of, let's

9 say, $50,000. So Detroit Edison would have received for

10 that month 500,000 plus 50,000 when the title was

11 transferred to the REF; am I right? When or after, not

12 necessarily absolutely simultaneously, I'm not thinking

13 of that.

14 A I believe that's the case, but then simultaneously in

15 that month, there's a reversal of the 50,000 that you

16 just mentioned.

17 Q And is that reversal of the 50,000 treated as a booked

18 cost of fuel burned?

19 A No.

20 Q In that reversal of 50,000, is that a reversal based upon

21 a prior month's fees that were paid by the fuels company

22 as opposed to the current month's fees?

23 A My understanding is that they're all on a current month

24 basis.

25 Q So you never really do receive any cash-flow advantage




517

1 for, from the reimbursement of the coal handling fees

2 because they charge them -- they pay you them and then

3 you reimburse them for those right away?

4 A That is true.

5 Q So that means that immediately -- that in fact there is

6 no coal handling cost savings as a result of the REF

7 agreements in Exhibit A-30; am I right?

8 A That's correct.

9 Q Why do they pay you for the coal handling fees and then

10 you give them back the money immediately, what's the

11 point?

12 A I believe the intent, the intent of doing that was to

13 show that we're in compliance with the Code of Conduct

14 and we're not providing our affiliate a service for free,

15 but the net effect is Detroit Edison does not incur any

16 additional costs for handling this coal, we would have

17 handled it all any way, so it's just a mechanism that we

18 put in the agreement that we would charge them, they add

19 it to the invoice, and it nets to zero.

20 Q Now, the Coal Handling and Consulting Agreement involves

21 costs that Detroit Edison incurs that confer a benefit on

22 the REF because without those services, the REF wouldn't

23 get the coal at Belle River to run through their

24 facility, would they?

25 A That's true. But as I said, we're not --




518

1 Q But they don't give you any net payment or partial

2 payments toward a prorated cost, share of those costs

3 that were necessary to get the fuel to them after they

4 took title; am I right?

5 A As it relates to coal handling at the facility, you are

6 correct.

7 Q O.K. Are there any other components of money that

8 Detroit Edison must pay the fuel REF's affiliates when

9 they buy back title to their coal, the processed coal,

10 other than coal handling money previously and booked fuel

11 costs?

12 A As I indicated at St. Clair, the refined coal adder, that

13 would be the only other component.

14 Q And the refined coal adder would be treated as a booked

15 cost of fuel burned in addition to the washed out

16 purchase price of the fuel before the title transfer?

17 A The environmental benefit portion of the REF adder, that

18 is correct.

19 Q And from the perspective of DTE Corporation and its REF

20 affiliates, that refined fuel adder goes toward recovery

21 of some of the REF's operating and capital costs; am I

22 correct?

23 A I would assume that if the REF adder is an additional

24 revenue stream, that yeah, it would go to do as you

25 suggest.




519

1 Q Would you agree that what Detroit Edison did prior to the

2 execution of these agreements in Exhibit A-30 was to

3 investigate the feasibility of burning coal that had been

4 refined without reducing the -- I'm sorry -- without

5 increasing the costs for generating the electricity?

6 JUDGE EYSTER: Could you repeat that

7 question?

8 MR. ERICKSON: Let me rephrase it, your

9 Honor.

10 Q (By Mr. Erickson): As I understand it, the process for

11 reimburse -- for selling title and buying back title is

12 dependent upon whether or not the refined fuel will burn

13 effectively in the respective plants; am I correct? If

14 it won't, it's a no go?

15 A Yeah, I believe I understand your question. If -- there

16 are some times where, pick a power plant, St. Clair,

17 where for whatever reason, they don't refine the coal and

18 the coal that the St. Clair Fuel Company owns, they'll

19 sell it to us as resold coal, so we have refined coal and

20 resold coal; resold coal is just coal taken from the pile

21 and it bypasses the facility.

22 Q And there would be no adder to that?

23 A There is no adder to that.

24 Q O.K. Please continue. I don't think --

25 A No, that's all I had to say.




520

1 JUDGE EYSTER: Just a question. At Belle

2 River, what are you guys testing for?

3 A We're testing to determine if the use of REF coal, the

4 combustion of that in the boilers will work and won't

5 impact plant performance on a long-term basis.

6 JUDGE EYSTER: And you did the same

7 testing at St. Clair?

8 A We have, Detroit Edison -- the consumption of REF at St.

9 Clair pretty much from the start worked very well, and

10 therefore, the Belle River Fuel Company was able to look

11 for a tax partner and they monetized that facility in

12 January 2011.

13 JUDGE EYSTER: St. Clair Fuels Company?

14 A Correct.

15 JUDGE EYSTER: So the -- what's the main

16 concern with the fuel as it affects operations?

17 A I believe it has to do with the slagging and fallowing in

18 the boiler, and they have, at the fuel company's expense,

19 installed a system to inject a Fuel Tech additive in the

20 boiler to see if that could mitigate any potential

21 problems from burning REF, and that's been reasonably

22 successful. Again, all at the fuel company's expense.

23 JUDGE EYSTER: Reasonably successful

24 where?

25 A On Belle River Unit 1 where the testing is going on.




521

1 JUDGE EYSTER: Have you looked at the

2 results for St. Clair, the results of your testing?

3 A I have not, no.

4 JUDGE EYSTER: Are -- because you couched

5 your answer earlier with a sort of, I think it was more

6 or less, and I don't know if it was, what you were

7 referring to. I mean what's the impact on that plant of

8 burning REF?

9 A What the plant, as we -- as I think we discussed sometime

10 I believe it was today, the plant wants to, after it has

11 its periodic outage in the spring of this year on Unit 1,

12 it wants to run another couple tests, and they'll decide

13 by the end of the year whether this is going to be

14 successful.

15 JUDGE EYSTER: No, I'm asking you about

16 St. Clair.

17 A I'm sorry?

18 JUDGE EYSTER: St. Clair.

19 A I would characterize the use of REF at St. Clair as it is

20 an acceptable fuel and we're beyond the testing; it's

21 acceptable and we're just consuming it on an ongoing

22 basis.

23 JUDGE EYSTER: What does acceptable mean?

24 A It doesn't -- it doesn't adversely affect the plant

25 performance, it doesn't --




522

1 JUDGE EYSTER: O.K. And how do you know

2 that it's acceptable? I think you just said you haven't

3 seen the reports with regards to it.

4 A I rely on -- the power plant staff made the decision that

5 this was an acceptable fuel, which then allowed the

6 affiliate to monetize.

7 JUDGE EYSTER: Do you know what their

8 standards are for acceptability?

9 A I don't know what the power plant personnel, why or how

10 they decided that.

11 JUDGE EYSTER: Do you know if it's no

12 impact or just marginal impact or a percentage of some

13 sort that they used to discern whether it's acceptable?

14 A I don't know that, your Honor.

15 JUDGE EYSTER: O.K. Is there a -- is the

16 St. Clair plant compensated at all by the fuels company

17 for less sufficient operation of the plant in terms of

18 burning of the fuel?

19 A We responded in a discovery, I think John Dau responded

20 that the St. Clair Fuel Company has reimbursed the St.

21 Clair power plant for I believe it was three furnace

22 cleanings in 2011.

23 JUDGE EYSTER: Is that pursuant to the

24 contract that you have?

25 A Yes.




523

1 JUDGE EYSTER: O.K. So other than three

2 furnace cleanings, that's it?

3 A Correct.

4 JUDGE EYSTER: Do you know if REF affects

5 the Btus that the coal produces?

6 A I don't believe there's -- that there may be some very,

7 very minor. The application rates of the Mersorb and

8 S-Sorb are in the, like Mersorb is like .002 percent and

9 S-Sorb is .5 or .055 --

10 JUDGE EYSTER: So you're answer is you

11 don't know, but there may be some small effect?

12 A The additive rate is so small that the impact on the Btus

13 is probably hard to measure.

14 JUDGE EYSTER: O.K. Mr. Erickson.


16 Q (By Mr. Erickson): I thought I heard you talk a moment

17 ago in response to the judge that Detroit Edison

18 reimbursed the St. Clair facility for costs of some kind

19 after or -- after testing or something like that. Did I

20 mishear you or --

21 A The St. Clair Fuel Company paid Detroit Edison some costs

22 that they incurred for a couple furnace cleanings during

23 2011.

24 Q O.K. And that would be outside of the costs

25 reimbursements under the Coal Handling and Consulting




524

1 Agreement; am I correct?


3 Q And that Detroit Edison wouldn't subsequently when it

4 retook title to coal include in the price of the

5 repurchased coal; am I correct?

6 A You're correct.

7 Q O.K. Now, would it be true that the REF could not

8 perform that test, that Detroit Edison personnel had to

9 perform the test because the REF personnel are not

10 qualified to burn and operate coal in the, in either

11 Belle River or St. Clair?

12 A That's true.

13 Q So that testing had to take place before Detroit Edison

14 could accept the coal under the REF Supply Agreement, and

15 until Detroit Edison could accept coal under the REF

16 Supply Agreement, the REF couldn't qualify for tax

17 credits because it wouldn't be in service?

18 A That's fair.

19 Q So it was Detroit Edison's position and is Detroit

20 Edison's position still at Belle River that Detroit

21 Edison has to perform services to be sure that it can

22 efficiently and effectively operate its plant without

23 degradation in such things as heat rate or fallowing and

24 slagging of boiler tubes and things like that; is that a

25 fair understanding?




525

1 A Detroit Edison is continuing to test, so we're not

2 incurring any additional expenses, we don't -- I mean in

3 terms of personnel or whatever, we have the same number

4 of people, and it's just, you know, it's -- I think I'm

5 agreeing with what you're saying.

6 Q O.K. The benefit flowing to the REF is Detroit Edison's

7 activities that Detroit Edison is paying for is enabling

8 them to qualify for tax credits, which they couldn't

9 qualify for if Detroit Edison didn't perform those

10 activities; am I right?

11 A Detroit Edison is performing the testing by operating the

12 Belle River power plant. They're not incurring any

13 additional costs associated with operating the plant,

14 there's no additional personnel per se, but yet if you

15 want to characterize it that the Detroit Edison

16 Company -- we're trying to, we are performing a test so

17 that, in Detroit Edison's opinion, it's an acceptable

18 fuel to use.

19 Q And that has an additional benefit for the REF that it

20 will qualify for tax credits that it wouldn't qualify for

21 if Detroit Edison didn't perform those activities at no

22 incremental cost?

23 A That's true. And if in fact it is successful per the

24 agreement, the Belle River Fuels Company will be

25 purchasing the entire inventory at Belle River, which is




526

1 in the $50 to $60 million range, and the customer would

2 receive a working capital benefit when we reset base

3 rates to the tune of 5 to 6 million a year. So we have

4 every interest in trying to make this successful as well

5 so we can reduce the rates for our customers.

6 Q Detroit Edison's activities enabled the REFs to also

7 qualify as being in service a second and a third

8 production line facility at Belle River and St. Clair

9 respectively; am I right?

10 A That's true.

11 Q And the REF now will have the opportunity to move those

12 additional units elsewhere and obtain marginal tax credit

13 revenue at other locations because the qualification took

14 place in the time limits of 2009 and 2011; am I right?

15 A Correct.

16 JUDGE EYSTER: Can I just -- I just want

17 to make sure I understand, that the qualification for

18 these production lines was a combination of them being

19 certified in North Dakota or Wyoming or wherever, that

20 process, and the capital investment having been made and

21 functioning at your plant?

22 A Correct.

23 JUDGE EYSTER: So it wasn't -- and in

24 fact, for Belle River, they qual -- well, I think your

25 testimony is that -- well, I'm not sure what your




527

1 testimony is. Let's assume everything fell into place in

2 terms of tax, the tax issue, but the tax credit doesn't

3 hinge on further testing of the fuel in terms of the IRS

4 saying that qualifies? Do you understand what I'm

5 saying?

6 A The two production lines at Belle River are qualified and

7 deemed in service, but they're not, to my knowledge,

8 producing tax credits because the Belle River Fuel

9 Company has not monetized that investment.

10 JUDGE EYSTER: We've been through that a

11 number of times. I just wanted to make clear that beyond

12 the monetizing issue, the process is considered adequate

13 by testing that's done out in, by EER --

14 A EERC.

15 JUDGE EYSTER: -- EERC in their fancy

16 little testing center there, and the fact that they have

17 then transferred that technology to a functioning

18 operating system at a plant someplace by a certain date?

19 A Correct.

20 JUDGE EYSTER: So they don't have to show

21 it worked on this plant?

22 A Correct.

23 JUDGE EYSTER: O.K. Mr. Erickson.

24 Q (By Mr. Erickson): The purpose of testing is to be sure

25 that it will work long term at all three power plants,




528

1 right?

2 A Correct.

3 Q Now, back in the 1980s when Belle River was being built

4 and placed in service and when St. Clair was being

5 modified to burn Decker coal, the problem there was

6 slagging and fallowing of boilers due to high sodium in

7 the Decker coal. Essentially you have the same

8 high-sodium western coal as the sole source of supply for

9 Belle River and St. Clair; am I correct?

10 A Yes.

11 Q Why is it necessary --

12 JUDGE EYSTER: Sodium? Sodium or sulfur?

13 Sodium?

14 MR. ERICKSON: It was high sodium, as I

15 understand it.

16 Q (By Mr. Erickson): Am I right, Mr. --

17 A You're correct.


19 Q (By Mr. Erickson): Since the coal was, since the Belle

20 River plant was designed to burn Decker coal or

21 high-sodium western coal with low sulfur content, why

22 would, why is Detroit Edison concerned about the

23 possibility that the operation of Decker -- or I'm

24 sorry -- the operation of Belle River will not work with

25 the same coal plus the additives?




529

1 A All I can say in that regard, Mr. Erickson, is that the

2 power plant was in charge of this, has made that

3 decision. I'm not involved in that process, so I'm not

4 sure I could answer that question.

5 Q Apparently, then, because they're doing, they did testing

6 at St. Clair and Monroe and are continuing testing at

7 Belle River, there's a concern that the additives could

8 affect the burning of the coal consumed at those plants;

9 am I right?

10 A I think that's a fair statement as to why we're --

11 (At 5:48 p.m., brief interruption as the building

12 lights shut down.)


14 "Q Apparently, then, because they're doing, they

15 did testing at St. Clair and Monroe and are

16 continuing testing at Belle River, there's a

17 concern that the additives could affect the

18 burning of the coal consumed at those plants;

19 am I right?

20 "A I think that's a fair statement as to why

21 we're --")


23 record. We were off the record just for a few moments to

24 turn the lights back on. And they will go off in another

25 hour, by the way, so it would be nice if we were out of




530

1 here by then.

2 Q (By Mr. Erickson): Mr. Lapplander, to you have anything

3 to add to the answer that the court reporter read back?

4 A Yes. I would just like to add that we are no longer

5 testing at Monroe, that that fuel burns perfectly well

6 there, it burns fine at St. Clair, and we're continuing

7 our testing at Belle River, and we should have that

8 concluded by the end of this year and a decision will be

9 made to proceed with the REF project.

10 Q Now, at one point in your testimony you said that, you

11 stated someplace in an exhibit or in testimony that

12 Detroit Edison determined ownership and operation of the

13 REF by itself or a subsidiary would not be an acceptable

14 risk for the utility, but as I understand it, from some

15 of the other information you provided, the REFs went

16 ahead and decided to spend up to $37 million to go

17 forward with this technology even though Detroit Edison

18 was not yet committed to buying the REF fuel; am I

19 correct?


21 Q So the tax credits must have provided a sufficient

22 incentive to DTEES or its subsidiaries to take that risk

23 that Detroit Edison said it wouldn't, decided it wouldn't

24 take?

25 A That's a fair assumption.




531

1 Q Now, if Detroit Edison wouldn't accept the risk and if

2 Detroit Edison didn't get a third party, independent

3 third party or an affiliate of DTE to accept the risk,

4 then the alternative would have been to come up with

5 alternative technologies to reduce emissions; am I right?

6 A Correct.

7 Q And would there have been less risk in those alternative

8 technologies than there were in the REF technology?

9 A Well, Detroit Edison was assuming no risk in the REF

10 technologies, and I believe if you were to ask that to

11 Bill Rogers, he would say that, for an example, the use

12 of powdered activated carbon for mercury controls, it's

13 pretty well defined that it will work, so I don't think

14 we'd classify that as a risky alternative.

15 Q What was the technological risk that led Detroit Edison

16 to conclude for a regulated utility that would recover

17 its reasonably and prudently incurred cost of service to

18 avoid that risk?

19 A I'm sorry, could you --

20 MR. ERICKSON: Could I have the question

21 read back.


23 "Q What was the technological risk that led

24 Detroit Edison to conclude for a regulated

25 utility that would recover its reasonably and




532

1 prudently incurred cost of service to avoid

2 that risk?")

3 A I'm sorry, Mr. Erickson, I don't understand what you're

4 asking for.

5 Q (By Mr. Erickson): Well, as I understand it, DTE Energy

6 through its affiliates has decided to take the risk,

7 Detroit Edison decided it shouldn't take the risk, and as

8 I understand it, the technology, whether Detroit Edison

9 implemented it or an affiliate implemented it, it didn't

10 have any different risks, so what I was trying to find

11 out is what was it in the nature of the technology risks

12 that Detroit Edison was unwilling to undertake that the

13 affiliates were perfectly willing to undertake?

14 A I think one of the technology risks is what we discussed

15 where the actual mercury reductions that have been

16 demonstrated through the use of REF are far less than

17 what is required for the Mercury and Air Toxic Rule

18 limits, so that technology, where it has been portrayed

19 as the potential of meeting the Mercury and Air Toxic

20 limit in fact does not.

21 Q But that information wasn't available to Detroit Edison

22 at the time it decided not to go down the path of

23 building the facility that it is now receiving services

24 from the REF; am I right?

25 A I think maybe you could ask Bill Rogers that, because he




533

1 would be able to respond to that.

2 Q O.K. Let me go through, I think I'm just about, if not

3 have completed my questions here.

4 Do you believe that the availability of

5 tax credit revenues to DTE and its unregulated REF

6 affiliates was the incentive that made them agree to take

7 the risk that Detroit Edison decided not to take?

8 A Did you say the potential revenue from those or the

9 potential benefit?

10 Q Right. You testified earlier that the tax credits and

11 revenues are roughly equal.

12 A Right, I would say that's true.

13 Q Now, therefore, the pivotal thing in deciding Detroit

14 Edison's decision not to do it was Detroit Edison's

15 conclusion based upon representation from counsel for DTE

16 that Detroit Edison couldn't take advantage of the tax

17 credits; am I correct?

18 A I believe that I said my tax counsel said that it was

19 probable that the Detroit Edison wouldn't have passed the

20 unrelated persons test, if you will, in Section 45.

21 Q Was that advice pivotal in Detroit Edison's decision not

22 to go ahead and develop the REF facility on its plant

23 sites by itself?

24 A Well, as I say in my testimony, the Energy Services had

25 the exclusive license for REF, and Detroit Edison really




534

1 couldn't build this because we didn't have the license to

2 do it.

3 Q So DTE Energy Services got a license which precluded

4 Detroit Edison from doing it even if they would have

5 gotten the tax credits; am I right?

6 A That's probably a fair statement. We weren't a licensee

7 of Chem-Mod, we never pursued that.

8 Q But before you pursued negotiations --

9 JUDGE EYSTER: Excuse me. Just a moment,

10 Mr. Erickson. A couple questions. The tax advice you

11 got, when did you receive that; was that after the fuels

12 companies had come to you or was that before the fuels

13 companies?

14 A I'd say it's after the fuels companies came to us.

15 JUDGE EYSTER: O.K. And then do you know

16 who holds the license to use Chem-Mod?

17 A It's either DTE Energy Services or DTE Energy REF

18 Holdings.

19 JUDGE EYSTER: O.K. So it's not the

20 fuels companies?

21 A To my knowledge, it's not.

22 JUDGE EYSTER: And the fuels companies

23 are the ones that actually apply it?

24 A Correct.

25 JUDGE EYSTER: So why wouldn't Detroit




535

1 Edison have been able to do the same thing as the fuels

2 companies, in terms of not owning the license but still

3 being able to use the product, what's the difference?

4 A You're asking if the affiliate has the license, why

5 didn't they allow the Detroit Edison Company to build the

6 facilities? I think it's --

7 JUDGE EYSTER: I think, and maybe I

8 misunderstood your answer, but I thought you were

9 indicating you couldn't do it because you didn't hold the

10 license, and I guess that's -- I'm trying to understand

11 why Detroit Edison would be limited because they don't

12 hold the license, but the fuels companies aren't?

13 Because you've indicated you don't believe that the fuels

14 companies have the license either, yet they're the ones

15 providing the service. So what's the difference?

16 A But the -- I believe the fuel companies are all

17 subsidiaries, deregulated subsidiaries of a subsidiary, a

18 deregulated sub that holds the license. So a deregulated

19 subsidiary that holds the license is allowing

20 subsidiaries of the entity that holds the license to use

21 the technology. We're not part of that stream or that

22 organizational chart.

23 JUDGE EYSTER: Did you ever inquire into

24 whether or not that technology or that -- excuse me --

25 the Chem-Mod products would be available for you to use




536

1 if you wanted to?

2 A I have not, no.

3 JUDGE EYSTER: Mr. Erickson.

4 MR. ERICKSON: Thank you, your Honor.

5 Q (By Mr. Erickson): Let me try to end here,

6 Mr. Lapplander, with this. You performed some analysis

7 of what you have concluded would be savings that have

8 been avoided by having the REF take on capital

9 obligations and assume operating expenses, those

10 calculations are found in Exhibit MEC-12 and your Exhibit

11 A-11, they are supplemented by the workpaper in Exhibit

12 AG-1, and you have presented in Exhibits MEC-32 and 33

13 similar analyses. It's my understanding that all those

14 analyses were designed to comply with the formula for --

15 that was adopted in the exhibits, the contracts in

16 Exhibit A-30 that were executed well before those

17 analyses were performed this 2011-2012; am I correct?

18 A Yes.

19 Q So does that -- is it true that those analyses and those

20 exhibits relative to revenue requirements were designed

21 to comply with the mathematical calculations imposed in

22 the contract agreements?

23 A Correct.

24 MR. ERICKSON: I have nothing further,

25 your Honor.




537

1 JUDGE EYSTER: Redirect?

2 MR. MAQUERA: Can we recess, your Honor?

3 JUDGE EYSTER: Sure.

4 MR. MAQUERA: Thanks. Off the record.

5 (At 6:04 p.m., there was a three-minute recess.)


7 Redirect?

8 MR. MAQUERA: No redirect, your Honor.

9 JUDGE EYSTER: All right.

10 Mr. Lapplander, you're free. Thanks for your testimony.

11 A Thank you, your Honor.

12 JUDGE EYSTER: That's not a very

13 comfortable looking place you've been sitting for the

14 last day.

15 MR. MAQUERA: Two.

16 (The witness was excused.)

17 - - -

18 MR. ERICKSON: Do we have some exhibits

19 that haven't been admitted? I think the Company's

20 exhibits haven't been, and some of Don's might not.

21 JUDGE EYSTER: The Company's -- well,

22 Mr. Lapplander's exhibits have not been, are still

23 floating out there. Does anybody else have any -- I'm

24 not sure. You know, I've got some MCA --

25 (Multiple-speaker discussion regarding exhibits.)




538

1 MR. ERICKSON: He did through 26, but I

2 didn't think he got 27, 28 and 29.

3 JUDGE EYSTER: Are there any objections

4 to admitting Exhibits A-10, 11, 24, A-25, 26, 27, 28, 29,

5 30, 31, 32, 33 and 34 into evidence?

6 MR. BZDOK: Yes.


8 MR. BZDOK: Object to A-30, Judge, on the

9 following grounds: Number one, it's incomplete because

10 of the lack of the Environmental Indemnity Agreement for

11 St. Clair. I think that's easily fixable. Number two,

12 because there's a redacted Section 9.4 in the agreement

13 as discussed, and there's no explanation for the

14 redaction. Number three is, as the witness indicated,

15 the exhibit was really the only -- the only documents --

16 this whole package was dumped in the record in the

17 rebuttal testimony, the only documents that related to

18 the rebuttal testimony were the Refined Coal Supply

19 Agreements, which were offered for the purpose of

20 rebutting Mr. Crandall on the issue of the right of the

21 fuel companies to buy coal from others, or to sell coal

22 to others, the rest of it was really just a record dump.

23 I make that last objection mindful of the fact that the

24 PFD you wrote in 16892, one of the issues that you had

25 was that the agreements themselves were not in the




539

1 record. I'm also mindful of the fact that your Honor, as

2 well as some of us, have asked some additional questions

3 about some of these other exhibits. But I do think it

4 should have been part of the direct, not part of the

5 rebuttal, and I understand there's some countervailing

6 considerations that go in both directions on that. As I

7 indicated when Mr. Lapplander's exhibits were first moved

8 for exhibit, I was going to voir dire on A-30 and I've

9 done that, and that's the reasons for my objections.

10 JUDGE EYSTER: Mr. Maquera.

11 MR. KESKEY: May I input on that?


13 MR. KESKEY: On balance, your Honor, we

14 think that Exhibit A-30 should be admitted, and the

15 reason for it is, while it may not be complete, in this

16 progression of cases that we've had now, I think this is

17 the fourth case of the REF issues, hopefully each case

18 sheds more light, more understanding through a process in

19 which it's been very hard in discovery to get

20 information. I would suggest that we're better off with

21 more information than less. And if something is

22 incomplete like one attachment, the remedy isn't striking

23 all of the agreements, the remedy should be the

24 requirement by your Honor to require the production of

25 the attachment, or at least set it for a motion that




540

1 people can respond to that situation.

2 The same is true with the redaction. In

3 other words, we don't agree the redactions are proper,

4 but, you know, having some of the agreement in there

5 maybe is better than having none of it, and perhaps

6 there's a remedy to have the redacted page produced or

7 some process for considering a motion on that, or maybe

8 we can get it in the next case, because this is a

9 progression of trying to get more and more information.

10 And the final point perhaps with respect

11 to the fact that this was produced in the rebuttal phase

12 to a witness presented by MCAAA, it's better for the

13 utility to be required to place into the record their

14 agreements in a complete record than for parties to have

15 to try to carry the burden from having the utility

16 ultimately file a complete case, and we think that the

17 agreements help the record by providing documents that

18 the parties can brief for determining how and what are

19 all the facts and the arrangements as much as possible,

20 realizing we're not at perfection yet, we don't have all

21 the information.

22 So I think there's, balancing the

23 interests, I think that there's, it's more important to

24 have the agreements in the record than having them out of

25 the record.




541

1 JUDGE EYSTER: Mr. Maquera.

2 MR. MAQUERA: With all due respect to my

3 fellow counsels, I take issue with some comments made

4 here today. The impression is that we haven't been

5 providing information or that we haven't been forthcoming

6 with information for the past several proceedings; we

7 have. These documents have been provided in discovery in

8 the past couple of cases, and in fact, I do recall that

9 MEC took issue in a past proceeding in either briefs or

10 exceptions or perhaps both that we hadn't provided the

11 actual contracts. Your Honor's PFD, as you fully well

12 recall, left the impression that the contracts were

13 desired; that PFD came out I believe during our rebuttal

14 phase.

15 Let me move on to some more relevant

16 considerations. Your Honor issued a scheduling order at

17 the beginning of this case, many months ago, and in that

18 scheduling order, a time for motions to strike prefiled

19 testimony and exhibits was clearly laid out by your

20 Honor. Nobody filed any motions to strike Exhibit A-30.

21 I think your Honor's scheduling orders are to be, should

22 be held enforceable.

23 Let's talk about contract relevance.

24 JUDGE EYSTER: Here's a question for you.

25 Can you supply the missing contract?




542

1 MR. MAQUERA: And I was going to get to

2 that point, too, your Honor.

3 JUDGE EYSTER: Can you supply the

4 redacted portions?

5 MR. MAQUERA: So those redacted portions

6 were not redacted by the Company, they were redacted by

7 the counterparties, because I believe they're subject to

8 some confidentiality provisions. So at this time, your

9 Honor, no, I can not represent that the Company is able

10 to provide the redacted portions without talking to the

11 counterparties. There have been --

12 JUDGE EYSTER: Well, I mean we can -- we

13 do have confidentiality agreements that are signed

14 between the parties in cases, contested cases, procedure

15 for providing that information on a confidential basis.

16 Is there a reason why --

17 MR. MAQUERA: In a public body

18 proceeding, your Honor?

19 JUDGE EYSTER: Yes. Is there any reason

20 they can't be done in this case?

21 MR. MAQUERA: What would procedure be?

22 What does your Honor believe that procedure to be?

23 JUDGE EYSTER: Parties sign

24 confidentiality agreements, the document in question is

25 filed as a confidential version, which there is one




543

1 provided to me. I have not seen the workings on the

2 other side of the bench, so I just -- but I'm assuming

3 the parties exchange the documents in a redacted -- or

4 unredacted form, I have not seen them. There's an entry

5 in the e-file that is blank, confidential version of it,

6 there's nothing there.

7 MR. MAQUERA: My understanding, your

8 Honor, is that that still doesn't escape the provisions

9 of the Freedom of Information Act, the process you just

10 outlined.

11 JUDGE EYSTER: O.K. So you're telling me

12 that the Commission doesn't get to look at your

13 contracts; is that what you're saying, is that in a

14 contested case hearing, the Commission doesn't get to

15 examine them, I don't get to look at them --

16 MS. UITVLUGT: Your Honor.

17 JUDGE EYSTER: -- that you can withhold

18 that evidence on the basis of some agreement you --

19 MR. MAQUERA: I don't think I said that,

20 your Honor. What I'm saying is that it doesn't escape

21 the provisions of the Freedom of Information Act.

22 JUDGE EYSTER: O.K. So what are you

23 trying to say then? Is there some other means by

24 which --

25 MR. MAQUERA: I believe what I said, your




544

1 Honor, is that we didn't redact those portions of the

2 contracts at issue, the counterparties did.

3 JUDGE EYSTER: These are exhibits that

4 you've provided?

5 MR. MAQUERA: Which --

6 JUDGE EYSTER: Correct?

7 MR. MAQUERA: Yes, which MEC is trying to

8 strike now belatedly.


10 MR. MAQUERA: Which MEC is trying to

11 prohibit from being entered into evidence, yes.

12 JUDGE EYSTER: You've got a redacted

13 portion of it, it's redacted, I mean somebody marked it

14 off; to me, it doesn't matter.

15 MR. MAQUERA: It wasn't the Company.

16 JUDGE EYSTER: I don't know that it

17 really matters who did it. That's -- it's here in that

18 form, it's your exhibit. And if I'm -- I'm not sure what

19 your comment about FOIA was meant to suggest, but I took

20 that as you didn't believe that the confidentiality

21 procedures that are commonly used here were sufficient

22 for you to agree to use them because they could be

23 FOIAed?

24 MR. MAQUERA: That's my understanding,

25 your Honor.




545

1 JUDGE EYSTER: Ms. Uitvlugt.

2 MS. UITVLUGT: Your Honor, if I may, with

3 respect to the FOIA issue on confidentiality agreements,

4 it is standard practice, and I believe in protective

5 orders issued by ALJs before the Commission, there's

6 language in there that includes that the Staff or whoever

7 will not provide the confidential agreement without first

8 contacting the party that deems the said information to

9 be confidential. The public provision is provided, and

10 in this instance or in my example, the Staff does not

11 give the confidential information, we advise that there

12 was confidential information, the Company is contacted in

13 order to allow the Company to fight whatever party is

14 requesting the information that that person deemed to be

15 confidential. That, at least that has been my working

16 understanding with this issue.

17 MR. ERICKSON: Your Honor, with regard to

18 confidentiality, I think you've got it right. The

19 redacted material was not identified as being anything

20 other than redacted material, there was no evidence in

21 Mr. Lapplander's accompanying rebuttal testimony that

22 indicated that there was a significant confidentiality in

23 the document. Not only that, there was no evidence that

24 showed, clearly showed how Detroit Edison would be harmed

25 by the disclosure of the information, and the fact that




546

1 somebody else doesn't want it to be disclosed isn't the

2 ultimate test of it. And I think that at least, at least

3 the redacted material should be accompanied by some kind

4 of a verbal motion at this time which explains why the

5 information should be held confidential, and if you're

6 convinced that the confidentiality should be, a

7 protective order can be requested and those of us who

8 want to agree to a protective order to see the redacted

9 material ought to be able to see it. We don't really

10 know what, if any, impact that clause has on it.

11 Mr. Lapplander couldn't even understand it and really

12 give us the subject matter of the document, of that

13 redacted material, and the Company has provided nothing

14 that indicates the subject matter of the material is

15 truly confidential, and furthermore, that there would be

16 a clear harm to the Company if it was disclosed.

17 And so I guess my feeling is is either we

18 should, we should require that they disclose the redacted

19 material without a confidentiality agreement, or they

20 should, at most, be entitled to disclose the information

21 as part of a, under a protective order if people will

22 sign a nondisclosure agreement.

23 MR. MAQUERA: Your Honor, I haven't been

24 able to address the relevance of the contracts in the

25 question.




547

1 MR. BZDOK: I stipulate that they're

2 relevant. I agree that they're relevant.

3 MR. CHRISTINIDIS: No, you didn't.

4 MR. BZDOK: Yeah, I did.

5 MR. CHRISTINIDIS: You objected, you said

6 they were relevant for a limited purpose.

7 MR. BZDOK: Oh, right, yes.

8 JUDGE EYSTER: What's the issue with

9 regards to relevance?

10 MR. MAQUERA: Apparently there is none.

11 Opposing counsel is agreeing that they are relevant.

12 MR. BZDOK: What I indicated was that

13 they, when I asked the witness about which of these

14 documents, which of these 28 documents were actually

15 germane to his rebuttal testimony, he agreed that only

16 the 3 Refined Coal Supply Agreements as amended were

17 germane to his rebuttal testimony.

18 MR. MAQUERA: And then the record

19 supports that there was extensive cross-examination for

20 about the past, oh, I don't know, about 16 business hours

21 that deal with the contracts in one form or another,

22 including cross-examination by your Honor.

23 MR. BZDOK: And I agreed that's a

24 countervailing consideration, and I so stated.

25 MR. MAQUERA: I mean, your Honor, we're




548

1 not at the discovery phase of the case. You know, the

2 time to have addressed redacted portions would have been

3 through a timely filed motion to compel, and that hasn't

4 been done. We're at the cross-examination stage of the

5 case now, your Honor.

6 MR. BZDOK: The reason, as I understand

7 it, that rulings on motions to admit exhibits are

8 deferred until after cross-examination is to allow for

9 questions to be asked about those exhibits that may bear

10 on their ultimate admissibility. I asked the witness if

11 he knew why Section 9.4 was redacted, he said he didn't

12 know why it was redacted. So that -- I mean that bears

13 on -- and it's his exhibit, he was sponsoring it, he said

14 he didn't know why it was redacted.

15 JUDGE EYSTER: What's the rule on

16 documents, partial documents that have been moved for

17 admission requiring that the entire -- what rule is it?

18 MR. BZDOK: The rule of completeness

19 indicates that.

20 JUDGE EYSTER: Which rule, do you know

21 the rule number?

22 MR. BZDOK: Not off the top of my head.

23 JUDGE EYSTER: I'm looking for it.

24 MR. ERICKSON: MRE 104 I believe is the

25 rule of completeness in the Rules of Evidence. I believe




549

1 MCR 2.302 has provisions for protective orders, which can

2 include redaction based upon a showing of a serious harm,

3 clear and serious harm, and a showing of confidentiality.

4 Let's assume for the sake of argument

5 this is confidential. There is absolutely no reason it's

6 been offered, including the testimony of Mr. Lapplander,

7 who said he didn't know why. I think that in the absence

8 of a showing of clear and serious harm to Detroit Edison

9 from disclosure, they should be required to provide that

10 as part of the exhibit, and we should take the exhibit.

11 MR. MAQUERA: Well, Judge, it's been a

12 few years since I engaged in civil practice in the

13 courts, but my understanding is that proper procedure

14 requires some sort of a motion to quash that would

15 provide an opportunity to a counter-party that is not a

16 party to a proceeding to assert their rights, such as

17 confidentiality provisions. What Mr. Erickson is

18 suggesting is having a ruling on the motion without --

19 JUDGE EYSTER: Who's going to file a

20 motion to quash?

21 MR. MAQUERA: -- without interested

22 parties involved who can weigh in on the matter.

23 MR. KESKEY: Your Honor.


25 MR. KESKEY: Since this, these contracts




550

1 were reportedly submitted as rebuttal to my witness, I

2 mean you'd have -- I think you have all but two pages

3 which are unredacted, which is a good step forward in

4 trying to understand this. With respect to the two pages

5 that are redacted, I mean a motion quash is not something

6 that we would have filed because it's like a double

7 negative, it's like you're going to move to quash

8 something that's redacted.

9 I think there is a cure, and that's

10 simply admit the exhibits as is and schedule the filing

11 of a motion or some kind of a cross-motion that the

12 redacted parts be produced, or if Edison wants to file a

13 motion for protective order, that they make that showing,

14 and then the responses are filed and the two pages are

15 submitted under seal if you rule in favor of

16 confidentiality under regular procedure at the Commission

17 that's used many, many times would then be utilized.

18 JUDGE EYSTER: Anything else?

19 MR. MAQUERA: Your Honor, just other

20 than, you know, the contracts were being offered to show

21 that, you know, the transactions involved were arm's

22 length deals. I mean out of 806 pages, which may very,

23 the page count may very well go up with the addition of a

24 particular missing agreement --

25 JUDGE EYSTER: Which is the missing




551

1 agreement, I forgot?

2 MR. MAQUERA: I forgot, too, your Honor.

3 It was identified by the witness.

4 MR. BZDOK: Environmental Indemnity

5 Agreement for I believe St. Clair.

6 MS. UITVLUGT: That's what I have written

7 down.

8 MR. MAQUERA: So I don't know how long

9 that would be, but for the sake of argument, let's say

10 it's another 10 pages, so out of 816 pages, there's a

11 missing paragraph that was redacted by a counter-party.

12 I'm just really puzzled why there would be an objection

13 to entry of this offer of evidence, especially by a party

14 that has taken the Company to task for not entering these

15 exhibits or these contracts into evidence.

16 JUDGE EYSTER: Well, I think he stated

17 the reasons for, it's not --

18 MR. MAQUERA: I think that's judicial

19 estoppel. It's the same parties, it's the same issue,

20 and now he's taking an adverse position to what he took

21 formerly with respect to entry of this evidence. This is

22 evidence that has been provided to the same parties for

23 the past couple of proceedings.

24 MR. BZDOK: Let me --

25 JUDGE EYSTER: You know what, here's the




552

1 thing: You guys may do discovery and have documents or

2 not have documents, I don't know, it's, I don't see it,

3 so --

4 MR. MAQUERA: Which is one of the many

5 reasons why --

6 JUDGE EYSTER: -- and so when I have to

7 write a PFD, and essentially all the arrangements are

8 contractual based and I get testimony from witnesses that

9 are trying to describe what's in contracts without

10 presenting a contract, that's why I put in the PFD, no

11 contracts have been presented. But I mean what you do in

12 discovery, that's not for me -- I mean I don't, I don't

13 necessarily know that. So that's -- there's two

14 different issues there, I guess, and I'm not sure what --

15 it's great if this was provided in discovery, I don't

16 know what was provided in discovery, it wasn't presented

17 to me.

18 MR. MAQUERA: Because we followed your

19 discovery order and --

20 JUDGE EYSTER: What's that?

21 MR. MAQUERA: I mean the parties complied

22 with your order with respect to discover to not supply

23 you with the actual responses with the exhibits.

24 JUDGE EYSTER: Right, I wouldn't normally

25 see discovery responses, yeah.




553

1 MR. BZDOK: My concern on the provision

2 of this --

3 JUDGE EYSTER: Hang on a second. Which

4 one again was the one that's missing? That's for --

5 that's the St. Clair --

6 MR. BZDOK: Let me grab my computer. St.

7 Clair Environmental Indemnity --

8 MS. UITVLUGT: Your Honor, by my notes,

9 it's that.

10 JUDGE EYSTER: Mr. Maquera, you've

11 indicated that can be provided?

12 MR. MAQUERA: Yes, I see no reason -- I'm

13 not aware of a reason why since it's a duplicate

14 essentially of another document that is a part of Exhibit

15 A-30.

16 JUDGE EYSTER: O.K. And so the redacted

17 portions we have are what, page 595 --

18 MR. BZDOK: Judge, the only reason --

19 MR. ERICKSON: 618 and 19, I think.

20 JUDGE EYSTER: And then 618 and 19.

21 MR. BZDOK: 595, the witness filled in

22 the redacted number in cross, so that's not an issue, I

23 have not raised that as an issue.

24 JUDGE EYSTER: O.K. So we're not talking

25 about page 595?




554

1 MR. BZDOK: Correct.

2 JUDGE EYSTER: So we're -- the motion,

3 your motion was to strike the entire exhibit?

4 MR. BZDOK: No. I was opposing the

5 motion to admit A-30.

6 JUDGE EYSTER: Yes. Your objection --

7 MR. BZDOK: You asked if there was any

8 objection to admitting --

9 (Multiple speakers.)

10 JUDGE EYSTER: Your objection was to the

11 entire exhibit, right? Or is it to lesser portions of

12 it?

13 MR. BZDOK: My concern about admitting

14 all of this stuff in a single record dump at the rebuttal

15 phase is that I'm going to get a brief that's going to

16 say, clause iv(4) that's never been discussed by any

17 witness in this case is suddenly going to become an issue

18 in the briefing post hearing, that's why I was concerned

19 about this being admitted at the rebuttal phase without

20 ever being part of the Company's direct case. If that

21 doesn't happen -- you know, if that happens, I can make a

22 motion to, you know, to, I suppose at that time, and that

23 resolves that concern. That's my concern about that

24 issue is that something's going to come out of left

25 field, because this is going to be in evidence really




555

1 without explanation by the sponsoring witness of, you

2 know, why which agreement is being put in for what,

3 though we had some of that on cross here today.

4 The remedy on the motion to -- the remedy

5 on the completeness objection has already been stated,

6 they'll put that agreement in; the remedy on the redacted

7 section, if they can not obtain permission to provide

8 that unredacted I think is simply to not admit that

9 particular agreement as part of this exhibit.

10 JUDGE EYSTER: O.K. And that's, that's

11 the way I'm going to rule. The objection is sustained in

12 part I guess.

13 MR. BZDOK: Thank you.

14 JUDGE EYSTER: To the extent that if

15 you're not able to provide the complete agreement that

16 has, that includes page 618 and 619, the redacted

17 portion, then that part of the exhibit is not admitted.

18 Well, that part of the exhibit is not admitted into

19 evidence.

20 MR. MAQUERA: The rest of the agreement

21 is, is that my understanding?

22 JUDGE EYSTER: The agreement that that,

23 that those two redacted pages are a portion of is not

24 admitted, and I couldn't tell you right offhand which

25 pages of this that is. The rest of it's admitted. If




556

1 you'd like to have it in -- if you'd like to have it

2 in --

3 MR. MAQUERA: Can I take a look at that

4 document, your Honor, to see if I can make an offer of

5 proof?

6 MR. BZDOK: That's the Refined Coal

7 Supply Agreement for Monroe, starts at page 596, runs to

8 page 669 of the exhibit. No, sorry. It runs to page,

9 through page 646 of the exhibit.

10 JUDGE EYSTER: If you can provide the

11 redacted portions of it, it's in. Right now you can't.

12 My preference would be that it's admitted into evidence,

13 but with a chunk of it missing for no reason, it stays

14 out.

15 MR. MAQUERA: For the reasons stated,

16 it's redacted by a counter-party.


18 MR. MAQUERA: May I make an offer of

19 proof as to what that particular document, what it

20 substantially showed, your Honor?

21 JUDGE EYSTER: Who's going to do that?

22 Do you have a witness to call? What are you going to do?

23 I guess I'm just confused as to what your plan is, what

24 you want to do here.

25 MR. MAQUERA: For purposes of preserving




557

1 at appeal.

2 JUDGE EYSTER: I am not sure what you

3 want to do, how you want to proceed.

4 MR. ERICKSON: On a lighter note, your

5 Honor, have we admitted Exhibits MCAAA-27, 28 and 29, and

6 MEC-25?

7 MR. KESKEY: My exhibits were --

8 JUDGE EYSTER: We're off the record.

9 (At 6:39 p.m., a brief discussion was held off the

10 record.)


12 Mr. Maquera.


14 Just with respect to the Company's offer of proof in

15 regard to the document titled Refined Coal Supply

16 Agreement By and Between Monroe Fuels Company, LLC, and

17 the Detroit Edison Company, your Honor, this is a

18 document that is in regard to transactions between

19 Detroit Edison Company and the Monroe Fuels Company for

20 the sale of refined coal. And I just wanted to place on

21 the record an offer of proof that that is what the

22 agreement, substantially what it showed. And it begins

23 on I believe page 596 and runs through --

24 MR. BZDOK: 646.

25 MR. MAQUERA: Thank you. 646 of Exhibit




558

1 A-30. And then in addition, just I would like to make an

2 objection with respect to a motion to strike not having

3 been timely filed with respect to this particular

4 exhibit.

5 JUDGE EYSTER: O.K. Let me just --

6 usually, and I don't know that, how specific it's

7 phrased, but I have generally the motions to strike, I

8 have considered those to be motions to strike the

9 testimony, oftentimes it includes the Company exhibits if

10 that testimony is stricken. And the reason that as of

11 late I have gone to not admitting the exhibits until

12 after cross has been conducted is for, I think Mr. Bzdok

13 indicates, that the reason he believed that was the

14 procedure was to allow for cross-examination, delaying a

15 decision on that until cross-examination be conducted and

16 the witnesses have been crossed with regards to those

17 exhibits so that if there's any objections to be made to

18 them, those objections can be made. That was something

19 I think that was done long before I was here, and in

20 fact, for many years I didn't follow that procedure, I

21 tended to admit the evidence -- or excuse me -- admit the

22 exhibits before cross had been conducted, and I can

23 remember how many attorneys sat there, and it wasn't that

24 many, but back when I started there was a few attorneys

25 that looked at me and said, well, basically what are you




559

1 doing, and over the course of the last probably year or

2 so, it became evident to me why that procedure was the

3 way it was. So I don't know that it's that unusual to

4 wait to rule on the exhibits until after cross has been

5 conducted, and the reason for that is to allow the cross

6 of the witnesses and to determine whether or not there's

7 an objection to be made with regards to an exhibit.

8 So my preference is that that exhibit, if

9 it can be made available, be made available. So that's,

10 if you can do that, that would be great.

11 Is there a -- there's no other objections

12 to the remainder of the exhibits; is that correct?

13 MR. BZDOK: Correct.

14 JUDGE EYSTER: So those are all admitted

15 into evidence.

16 Is there anything else we need to address

17 before we leave? O.K. That's it for this evening,

18 everybody. I'll see you at 9:00. Thanks.

19 (At 6:45 p.m., the hearing adjourned to January 10,

20 2013, at 9:00 a.m.)

21 - - -

22

23

24

25




560

1

2 C E R T I F I C A T E

3

4 I, Lori Anne Penn (CSR-1315), do hereby

5 certify that I reported in stenotype the proceedings had

6 in the above-entitled matter, that being Case No.

7 U-16434-R, before Mark D. Eyster, J.D., Administrative

8 Law Judge with Michigan Administrative Hearing System, at

9 the Michigan Public Service Commission, Constitution

10 Hall, 525 West Ottawa, Lansing, Michigan, on Wednesday,

11 January 9, 2013; and do further certify that the

12 foregoing transcript constitutes a true and correct

13 transcript of my stenotype notes.

14

15

16

17 ______________________________________

18 Lori Anne Penn, CSR-1315

19 33231 Grand River Avenue

20 Farmington, Michigan 48336

21

22

23 Dated: January 17, 2013

24

25




MPSC Case No.: U-16434-R Respondent: G. E. Lapplander Requestor: AG-1 Question No.: AG/DE-19 Page: 1 of 1 Question: Witness Lapplander states, “Detroit Edison was not aware of any other

supplier that was willing to make this type of investment at the time the REF project needed to move forward given the existing legislation” (GEL-10:25 - GEL-11:1). Prior to executing an agreement with the affiliate to administer the REF program, please identify and explain all Detroit Edison’s contacts with other third parties to provide REF or similar services and describe the specific outcomes of those contacts, including relevant dates.

Answer: DTE Energy Resources, Inc. has an exclusive license to offer the

technology used by the Fuels Companies i.e. the REF process to the Detroit Edison plants. Attachment AGDE-19 (see attached) is an unsolicited offer received from AJ Gallagher Coal, Inc., who received permission from DTE Energy Resources, Inc. to submit the offer for REF at River Rouge Power Plant. This unsolicited offer, for REF at the River Rouge Power Plant, was received in September, 2010 and no agreement was reached to locate a facility at the River Rouge Power Plant. There are no non-affiliate companies that provide REF services or functions for Detroit Edison at Detroit Edison power plants.

MPSC Case No. U-17097 - March 7, 2013 Exhibit MEC-37; Source: AG/DE-19, U-16434-R Page 1 of 3






REFINED COAL SUPPLY AGREEMENT

by and between

BELLE RIVER FUELS COMPANY, LLC

and

THE DETROIT EDISON COMPANY

December 4, 2009

Case No.: U-16434-R Exhibit: A-30 Witness: G. E. Lapplander Page: 1 of 806

MPSC Case No. U-17097 - March 7, 2013 Exhibit MEC-38; Source: Exhibit A-30, U-16434-R Page 1 of 72


TABLE OF CONTENTS

Page

ARTICLE I DEFINITIONS .1Section 1.1. Definitions 1Section 1.2. Construction of Certain Terms and Phrases 8

ARTICLE II REPRESENTATIONS AND WARRANTIES 9Section 2.1. Representations and Warranties of Buyer 9Section 2.2. Representations and Warranties of Seller 10

ARTICLE III TERM 10Section 3.1. Term 10

ARTICLE IV AUTHORIZED REPRESENTATIVES 11Section 4.1. Authorized Representatives ii

ARTICLE V PRODUCTION AND SALE OF REFINED COAL IISection 5.1. Production and Sale 11Section 5.2. Sales to Third Parties 12Section 5.3. Annual Forecasts; Adjustments 13Section 5.4. Purchase by Buyer at Termination 13Section 5.5. Consistent Reporting 13

ARTICLE VI PURCHASE AND SALES OF SELLER COAL 13Section 6.1. Coal Purchase Contracts 13Section 6.2. Available Seller Coal 14Section 6.3. Purchase by Buyer at Termination 14

ARTICLE VII DELIVERIES; WEIGHTS; TITLE AND RISK OF LOSS 15Section 7.1. Deliveries 15Section 7.2. Weights 15Section 7.3. Feedstock Inventory Store Reconciliation 16Section 7.4. Measurement Methodology 17Section 7.5. Title and Risk of Loss 17

ARTICLE VIII REFINED COAL AND RESOLD COAL SPECIFICATIONS 17Section 8.1. Coal Specifications 17Section 8.2. Refined Coal Production Specifications and Use 18Section 8.3. Chemical Additives 18Section 8.4. Presumption Regarding Conforming Coal and Refined Coal 19Section 8.5. Warranty Disclaimer 19

ARTICLE IX PRICE; BILLiNG AND PAYMENT 20Section 9.1. Refined Coal Price 20Section 9.2. Resold Coal Price 20Section 9.3. Coal Consultant Fee Reimbursement 20




Section 9.4. O&M and Capital Cost Reimbument . 20Section 9.5. Invoicing and Payment 21Section 9.6. Business Days 23Section 9.7. Audit 23Section 9.8. Taxes and Other Liabilities 23

ARTICLE X FORCE MAJEURE 23Section 10.1. Force Maj cure 23

ARTICLE XI EARLY TERMINATION 24Section 11.1. Early Termination 24Section 11.2. Post-Termination Obligations; Survival 25

ARTICLE XII EVENTS OF DEFAULT AND REMEDIES 25Section 12.1. Event of Default 25Section 12.2. Remedies 26Section 12.3. Limitations of Seller Liability 27

ARTICLE XIII DISPUTE RESOLUTION 27Section 13.1. Dispute Resolution 27

ARTICLE XIV MISCELLANEOUS 28Section 14.1. Terms and Conditions of Sale 28Section 14.2. Confidentiality 28Section 14.3. Required Disclosure 29Section 14.4. Compliance with Laws and Governmental Approvals 29Section 14.5. Entire Agreement; Successors and Assigns 30Section 14.6. Notices 30Section 14.7. Assignment 31Section 14.8. Waiver; Invalidity 31Section 14.9. Limitations of LiabiLity and Exclusive Remedies 31Section 14.10. Headings 32Section 14.11. Counterparts 32Section 14.12. Applicable Law 32Section 14.13. Amendment 32Section 14.14. No Third Party Beneficiary 33

11




EXHIBITS

EXHIBIT A Belle River SiteEXHIBIT B Delivery PointsEXHIBIT C Calculation of Detroit Edison BenefitsEXHIBIT D Calculation of MPPA BenefitsEXHIBIT E Operating Protocols

SCHEDULES

SCHEDULE 1.1(a) Buyer KnowledgeSCHEDULE 1.1(b) Seller KnowledgeSCHEDULE 2.1 Required Consents and Approvals

111




REFINED COAL SUPPLY AGREEMENT

THIS REFINED COAL SUPPLY AGREEMENT (this “Agreement”), is made andentered into as of December 4, 2009, (the “Effective Date”), by and between BELLE RIVERFUELS COMPANY, LLC, a Delaware limited liability company (“Seller”), and THE DETROITEDISON COMPANY, a Michigan corporation (“Buyer”) (Seller and Buyer each a “Party,” andcollectively, the “Parties”).

RECITALS:

WHEREAS, Seller desires to provide refined coal produced at the Facility for use inBuyer’s Belle River Power Plant; and

WHEREAS, Buyer desires to purchase all of the feedstock requirements for the BelleRiver Power Plant in the form of Refined Coal output of the Facility, and otherwise in the formof Resold Coal, as provided herein.

NOW, THEREFORE, in consideration of the mutual covenants, set forth in thisAgreement, and for other good and valuable consideration, the receipt and sufficiency of whichare hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows:

ARTICLE IDEFINITIONS

Section 1.1. Definitions.

The following terms, when used in this Agreement, have the following meanings:

“Acceptance Period Coal Inventory Purchase Aweement” means the Acceptance PeriodCoal Inventory Purchase Agreement, to be entered into on or about the Commercial OperationsDate, by and between Detroit Edison and BR Fuels.

“Affiliate” of a specified Person means any Person that directly or indirectly through oneor more intermediaries controls, is controlled by, or is under common control with, suchspecified Person. As used in this definition of Affiliate, the term “control” of a specified Personincluding, with correlative meanings, the terms, “controlled by” and “under common controlwith,” means (a) the ownership, directly or indirectly, of 50 percent or more of the equity interestin a Person or (b) the power to direct or cause the direction of the management and policies of aPerson, whether through ownership of voting securities, by contract or otherwise; provided,however, that notwithstanding the foregoing, for purposes of this Agreement, members of BRFuels will be deemed to be an Affiliate of Seller, but, in no event will either Party be deemed tobe an Affiliate of the other Party.

“Agreement” has the meaning given to such term in the introductory paragraph hereof.

“Authorized Representative” means the individual or individuals designated as such byeach Party pursuant to Section 4.1.




“Available Seller Coal” shall mean an amount of Conforming Coal that is in theFeedstock Inventory Store or in transit (or has been identified for delivery under a Coal PurchaseContract but is not yet in transit), in either case, as to which Seller has determined that is notneeded as Feedstock.

“Back-Up Coal Purchase Contract” has the meaning given to such term in Section 6.1(b).

“Belle River Power Plant” means the two fossil fuel-fired steam eLectric generating unitsknown as Belle River Unit No. I and Belle River Unit No. 2, each with a nominal rating of 650megawatts, together with related facilities, located at the Belle River Site.

“Belie River Site” means that certain property located in St. Clair County, Michigan, onwhich the Belle River Power Plant is located, more particularly described on Exhibit A.

“BR Fuels” means Belle River Fuels Company, LLC, a Delaware limited liabilitycompany.

“Business Day” means any day other than Saturday, Sunday and any day that is a legalholiday or a day on which banking institutions in Michigan are authorized by law orgovernmental action to close.

“Buyer” has the meaning given such term in the introductory paragraph hereof

“Buyer Annual Forecast” has the meaning given to such term in Section 5.3.

“Coal Consultant” has the meaning given to such term in the Coal Handling andConsulting Agreement.

4’Coal Handling and Consulting Agreement” means the Coal Handling and ConsultingAgreement, to be entered into on or about the Commercial Operations Date, by and betweenDetroit Edison and BR Fuels.

“Coal Consultant Fee” means the Coal Fee and the Coal Consultant Reimbursable Costsas defined in the Coal Handling and Consulting Agreement.

“Coal Inventory Price” means, for any given period, the per Ton amount derived bydividing (i) the sum of(A) the book value of the Seller Coal inventory at the beginning of theperiod (less the “Inventory Coal Purchase Price,” as defined in the MPPA Coal InventoryPurchase Agreement), plus (B) the total quality adjusted cost of all Seller Coal purchased duringsuch period (reflecting all quality and other allowances, adjustments and assessments under theapplicable Coal Purchase Contract, all related Third Party Impositions that are imposed on Sellerin this Agreement and transportation costs, and all other charges and costs relating to such periodand charged to Seller Coal inventory in accordance with Seller’s customary inventory accountingprocedures consistently applied), by (ii) the sum of (A) the volume in Tons of Seller Coalinventory on hand at the beginning of the period, plus (B) the volume in Tons of Se! [er Coalinventory purchased during such period.

2




“Coal inventory Purchase Agreement” means the Coal inventory Purchase Agreement, tobe entered into on or about the Commercial Operations Date, by and between Detroit Edison andBR Fuels.

“Coal Purchase Contract” has the meaning given to such term in Section 6.1(a).

“Coal Specifications” means coal type, other specifications and price parameters for thecoal that Seller is to use as Feedstock in the production of Refined Coal for sale to Buyerhereunder and that Seller is to sell to Buyer and to other parties to the extent so directed byBuyer as Resold Coal hereunder, as provided in Section 8.1.

“Code” means the Internal Revenue Code of 1986, as amended.

“Collective Coal Inventory Purchase Agreements” means, collectively, the DetroitEdison Coal inventory Purchase Agreements and the MPPA Coal Inventory PurchaseAgreement.

“Commercial Qperations Date” has the meaning given to such term in the LicenseAgreement.

“Conforming Coal” means Seller Coal that meets the Coal Specifications in effect at thetime that the Coal Purchase Contract relating to such Seller Coal was entered into, and shallinclude, without limitation, Seller Coal presumed to be Conforming Coal pursuant to Section 8.4hereof and/or pursuant to the Collective Coal Inventory Purchase Agreements.

“Contract” means any agreement, lease, license, evidence of indebtedness, indenture, orother contract (including any design, construction, equipment or other warranty or guaranteeunder any of the foregoing).

“Contract Year” means each calendar year during the Term of this Agreement, wovidedthat: (a) the initial Contract Year shall commence on the Commercial Operations Date and shallend on December 31 of that year; and (b) the final Contract Year shall end on the date oftermination or expiration of this Agreement and shall commence on the immediately precedingJanuary 1.

“Delivery Point for Feedstocjc” means the point at transfer gate no. 03zm05 3 on feedconveyor CV 23 and at transfer gate no. 03zm054 on feed conveyor CV 24, designated as“Delivery Point for Feedstock” on Exhibi hereto.

“Delivery Point for Resold Coal” means: (a) for Resold Coal that is in transit or that hasbeen identified for delivery under a Coal Purchase Contract but is not yet in transit, the Point ofOrigin; and (b) for all other Resold Coal, the point at transfer gate no. 03zm053 on feedconveyor CV 23 and at transfer gate no. 03zm054 on feed conveyor CV 24, designated as“Delivery Point for Resold Coal” on Exhibit B hereto.

“Delivery Point for Refined Coal” means the point at which Refined Coal is dischargedfrom the product conveyor extending from the discharge point of the Facility onto product

3




conveyors CV 19 and CV 20, designated as “Delivery Point for Refined Coal” on Exhibit Bhereto.

“Detroit Edison” means The Detroit Edison Company, a Michigan corporation.

“Detroit Edison Benefits” means the amount equal to the sum of(i) the Detroit EdisonFlyAsh Benefit, plus (ii) the Detroit Edison Mercury Benefit, plus (iii) the Detroit Edison SO2Benefit.

“Detroit Edison Coal Inventory Purchase Agreements” means (i) the Acceptance PeriodCoal Inventory Purchase Agreement, and (ii) the Coal Inventory Purchase Agreement.

“Detroit Edison Fly Ash Benefit” means the change in sales revenues and/or disposalexpenses for the fly ash produced at the Belle River Power Plant while using Refined Coal as afuel calculated in accordance with the formulas set forth in Exhibit C.

“Detroit Edison Mercury Benefit” means the benefits achieved as a result of reducedmercury emissions from the Belle River Power Plant while using Refined Coal as a fuelcalculated in accordance with the formulas set forth in Exhibit C.

“Detroit Edison PA2 Expense Increase” means the increase in Detroit Edison’s cost ofpurchasing power under PA2 power purchase agreements or any power purchase agreemententered into under the Public Utility Regulatory Policies Act of 1978, if any, that is due toDetroit Edison paying the Detroit Edison Refined Coal Adder calculated in accordance with theformulas set forth in Exhibit C.

“Detroit Edison Refined Coal Adder” means the amount calculated as set forth in ExhibitC.

“Detroit Edison Revenue Requirement” means Detroit Edison’s share of BR Fuels’annual revenue requirements calculated in accordance with the formula set forth in Exhibit C.

“Detroit Edison SO2 Benefit” means the benefits achieved as a result of reduced SO2emissions from the Belle River Power Plant while using Refined Coal as a fuel calculated inaccordance with the formulas set forth in Exhibit C.

“Effective Date” has the meaning given to such term in the introductory paragraphhereof

“Environmental Indemnity Agreement” means that certain Environmental IndemnityAgreement, dated as of August 24, 2009, by and between Detroit Edison and BR Fuels.

“Event of Default” has the meaning given to such term in Section 12.1.

“Event of Force Majeure” means any event beyond the reasonable control of the Partyaffected, including, without limitation, any act of God, strike, work stoppage or other labordisturbance, shortage of supplies, parts, materials, rail cars, barges or other freight transportvehicles customarily used, breakdowns or damage to or destruction of the Facility, the Belle

4




River Power Plant, the St. Clair Power Plant or any part thereof or to plants or other facilities(including a forced outage or an extension of a scheduled outage of the Facility, the Belle RiverPower Plant, the St. Clair Power Plant or such plants, equipment or facilities to make repairs toavoid breakdowns thereof or damage thereto), act of public enemy, act of terrorism, war,blockade, riot, public unrest, lightning, fire, violent storm, flood, frozen river, canal, channel orlake, unforeseeable geological condition, drought, unusually severe weather conditions,explosion, government order or restraint, or other cause or event, whether of a similar ordissimilar nature, which, in the case of any of the foregoing: (a) could not have been reasonablyanticipated by the affected Party, and (b) cannot be reasonably avoided or circumvented by theaffected Party.

“Excess Amount” has the meaning given to such term in Section 7.3.

“Facility” means the refined coal production facility, comprised of one or moreproduction lines, to be constructed and owned by BR Fuels to be located at the Belle River Site.

“Feedstock” means coal utilized as feedstock by the Facility for the production ofRefined Coal.

“Feedstock Inventory Store” means the Seller Coal deposited and present in the areasidentified as “Coal Yard” and on all interconnecting conveyors shown in Exhibit B hereto (priorto crossing either the Delivery Point for Resold Coal or the Delivery Point for Feedstock, each asidentified on Exhibit B hereto).

“Follow-up Period” means the period commencing at the expiration of the InitialAcceptance Period and ending at the later of(i) the expiration of 60 days or such other period asagreed upon by the Parties, or (ii) such time as the reasonable determination is made by Buyer,after prompt review and analysis of the operating data and information relating to the use ofRefined Coal during the Initial Acceptance Period, that use of Refined Coal at the Belle RiverPower Plant will not likely result in a Reduction Event.

“Governmental Approvals” means any authorization, consent, concession, license,certificate, permit, waiver, privilege or approval from, or filing with, or notice to, anyGovernmental Body.

“Governmental Body” means the federal government of the United States, any state ofthe United States or political subdivision thereof, and any entity exercising executive, legislative,judicial, regulatory or administrative functions of or pertaining to government and any othergovernmental entity, instrumentality, agency, authority or commission.

“Increased Expenses” has the meaning given to such term in Section 9.4.

“Initial Accentance Period” means the period commencing on the CommercialOperations Date and ending at the later of (i) the expiration of 75 days following the CommercialOperations Date, or (ii) the last of 60 consecutive days during which the Facility is in operationwith at least 90 percent availability (or such lesser percentage determined by reducing 90 percentas necessary to reflect any reduction in the production and supply of Refined Coal as directed by

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Buyer (except by reason of a Reduction Event)), as such availability is measured on a calendarweek basis.

“Initial Term” has the meaning given to such term in Section 3.1.

“Knowledge” means, as to Buyer, the actual knowledge, after due inquiry, of thosepersons identified on Schedule 1.1(a) and, as to Seller, the actual knowledge, after due inquiry,of those persons identified on Schedule 1 Jj).

“Late Payment Rate” means a rate of interest per annum equal to the lesser of: (a) as toeach applicable day, the most recent published prime rate, as reported in The Wall Street Journal(Eastern Edition) under “Money Rates” or, if such rate does not so appear, in such othernationally recognized publication as Seller may, from time to time, specify to Buyer; or (b) themaximum rate of interest permitted by applicable Law.

“Law” means any law (including common law), statute, act, decree, ordinance, rule,directive (to the extent having the force of law), order, treaty, code or regulation (including anyof the foregoing relating to health and safety matters) or any interpretation of any of theforegoing, as enacted, issued or promulgated by any Governmental Body, including allamendments, modifications, extensions, replacements or re-enactments thereof.

“License Agreement” means that certain License and Services Agreement, dated as ofAugust 24, 2009, by and among BR Fuels, Detroit Edison and MPPA.

“Mer-Sorb” is a chemical additive identified in the patents listed in the Amended andRestated License Agreement, dated January 23, 2009, between Chem-Mod LLC and DTEEnergy Resources, Inc.

“MPPA” means Michigan Public Power Agency, a public body politic and corporateorganized pursuant to Act 448, Public Acts of Michigan 1976.

“MPPA Benefits” means the amount equal to the sum of(i) the MPPA FlyAsh Benefit,plus (ii) the MPPA Mercury Benefit, plus (iii) the MPPA SO2 Benefit.

“MPPA Coal Inventory Purchase Agreement” means the Coal Inventory PurchaseAgreement, to be entered into on or about the Commercial Operations Date, by and between BRFuels and MPPA.

“MPPA Fly Ash Benefit” means the change in sales revenues andlor disposal expensesfor the fly ash produced at the Belle River Power Plant while using Refined Coal as a fuelcalculated in accordance with the formulas set forth in Exhibit D.

“MPPA Mercury Benefit” means the benefits achieved as a result of reduced mercuryemissions from the Belle River Power Plant while using Refined Coal as a fUel calculated inaccordance with the formulas set forth in Exhibit D.

“MPPA Refined Coal Adder” means the lesser of the MPPA Benefits or the MPPARevenue Requirement.

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“MPPA Revenue Requirement” means MPPA’s share of BR Fuels’ annual revenuerequirements calculated in accordance with the formula set forth in Exhibit D.

“MPPA SO2 Benefit” means the benefits achieved as a result of reduced SO2 emissionsfrom the Belle River Power Plant while using Refined Coal as a fuel calculated in accordancewith the formulas set forth in Exhibit D.

“NJW means the National Institute of Standards and Technology.

“Operating Protocols” means those certain operating protocols and procedures set forthas Exhibit E.

“Party” and “Parties” have the meanings given to such terms in the introductoryparagraph hereof.

“Person” means any corporation, limited liability company, any form of partnership, anyjoint venture, trust, estate, Governmental Body, or other legal or commercial entity or any naturalperson.

“Point of Origin” means the location where the Seller Coal is loaded into a railcar (orother form of transport), FOB, for transport to Seller at the Belle River Site or to any other sitedesignated by Buyer.

“Project Documents” means: (a) this Agreement, (b) the Coal Handling and ConsultingAgreement, (c) the License Agreement, (d) the Detroit Edison Coal Inventory PurchaseAgreements, (e) the MPPA Coal Inventory Purchase Agreement, (1) the EnvironmentalIndemnity Agreement, (g) the Memorandum of Understanding with respect to the ParticipationAgreement, to be entered into on or about the Commercial Operations Date, by and betweenMPPA and Detroit Edison, (Ii) the St. Clair Supply Agreement and (i) the other documents,agreements, certificates and instruments executed or entered into by and between (i) BR Fuelsand MPPA and Detroit Edison, (ii) BR Fuels and Detroit Edison, and (iii) BR FueLs and MPPAin connection with the transactions contemplated thereby; provided that, in the case of clause(iii), Detroit Edison has received notice of and approved any such documents, agreements,certificates and instruments, such approval not to be unreasonably withheld.

“Reduction Event” has the meaning given to such term in Section 5.1(b).

“Refined Coal” means the refined coal product produced by Seller for sale to Buyerpursuant to this Agreement.

“Refined Coal Price” means the per Ton amount equal to the sum of (1) the CoalInventory Price, plus (ii) the Detroit Edison Refined Coal Adder, plus (iii) the MPPA RefinedCoal Adder.

“Renewal Term” has the meaning given to such term in Section 3.1.

“Resold Coal” means Available Seller Coal sold hereunder to Buyer or to third parties asdirected by Buyer.

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“Resold Coal Price” has the meaning given to such term in Section 9.2.

“S-Sorb Ill” is a chemical additive identified in the patents listed in the Amended andRestated License Agreement, dated January 23, 2009, between Chem-Mod LLC and DTEEnergy Resources, Inc.

“Section 45 Tax Credits” means the credits against federal income tax available underSection 45 of the Code or any successor provision.

“Seller” has the meaning given to such term in the introductory paragraph hereof

“Seller Coal” means coal purchased by Seller pursuant to a Coal Purchase Contract.

“Shortfall Amount” has the meaning given to such term in Section 7.3.

“St. Clair Fuels” means St. Clair Fuels Company, LLC, a Delaware limited liabilitycompany.

“St. Clair Power Plant” means the fossil fuel-fired steam electric generating facilitylocated at the St. Clair Site.

“St. Clair Site” means that certain property located in St. Clair County, Michigan adjacentto the Belle River Site, on which the fossil fuel-fired steam electric generating facility known asthe St. Clair Power Plant is owned and operated by Detroit Edison.

“St. Clair Supply Agreement” means the St. Clair Supply Agreement, to be entered intoon or about the Commercial Operations Date, by and between St. Clair Fuels and BR Fuels.

“Term” means, collectively, the Initial Term and any Renewal Term.

“Third Party Impositions” has the meaning given to such term in Section 9.7.

“Ton” means two thousand (2,000) pounds avoirdupois weight.

“Unloaded Weight” means the weight of the Seller Coal as documented by the supplierunder the applicable Coal Purchase Contract.

Section 1.2. Construction of Certain Terms and Phrases.

Unless the context of this Agreement otherwise requires: (a) words ofeither genderinclude the other gender; (b) words using the singular or plural also include the plural orsingular, respectively; (c) the terms “hereof;” “herein,” “hereby,” “hereto” and similar wordsrefer to this entire Agreement and not any particular Article, Section, Clause, Exhibit, Appendixor Schedule or any other subdivision of this Agreement; (d) references to “Article,” “Section,”“Clause,” “Exhibit,” “Appendix” or “Schedule” are to the Articles, Sections, Clauses, Exhibits,Appendices and Schedules, respectively, of this Agreement; (e) the words “include” or“including” shall be deemed to be followed by “without limitation” or “but not limited to”whether or not they are followed by such phrases or words of like import; and (0 references to

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“this Agreement” or any other agreement or document shall be construed as a reference to suchagreement or document, including any Exhibits, Appendices, Attachments and Schedulesthereto, as amended, modified or supplemented and in effect from time to time and shall includea reference to any document that amends, modifies or supplements it, or is entered into, made orgiven pursuant to or in accordance with its terms. Whenever this Agreement refers to a numberof days, such number shall refer to calendar days unless Business Days are specified. Allaccounting terms used herein and not expressly defined herein shall have the meanings given tothem under generally accepted accounting principles as promulgated by the FinancialAccounting Standards Board and as in effect on the Effective Date.

ARTICLE IIREPRESENTATIONS AND WARRANTIES

Section 2.1. çpesentations and Warranties of Buyer.

Buyer hereby represents and warrants as of the date hereof as follows:

(a) except as set forth in Schedule 2.1, Buyer’s execution and delivery of, andperformance under, this Agreement have been duly authorized and do not violate or conflict withany charter, bylaw, Law, Contract, permit or obligation applying to Buyer, the Belle River PowerPlant or the Belle River Site, other than such violations or conflicts that would not reasonably beexpected to have a material adverse effect on Buyer’s ability to perform its obligations under thisAgreement;

(b) except as set forth in Schedule 2.1, this Agreement constitutes a legal,valid and binding contractual obligation of Buyer, enforceable against Buyer in accordance withits terms, except as such enforceability may be limited by applicable bankruptcy, insolvency,reorganization and similar laws affecting the enforcement of creditors’ rights generally;

(c) except as set forth in Schedule 2.1, no permit from, notice to, or consent,approval, authorization or order of any court or other Governmental Body or third party notalready given or obtained is required with respect to Buyer in connection with its execution anddelivery of, and performance under, this Agreement, including, without limitation, Buyer’spurchase, transportation, handling and use of Refined Coal and coal as fUel at the Belle RiverPower Plant;

(d) Buyer is validly existing and in good standing under the laws of the Stateof Michigan and is authorized to do business in each jurisdiction necessary for it to perform itsobligations under this Agreement, and Buyer has the right, power and authority, to enter into thisAgreement and to perform its obligations hereunder; and

(e) there is no pending or, to Buyer’s Knowledge, threatened action, suit,investigation, arbitration or other proceeding against Buyer that, if adversely determined, wouldreasonably be expected to have a material adverse effect on the ability of Buyer to perform itsobligations under this Agreement.

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Section 2.2. Representations and Warranties of Seller.

Seller hereby represents and warrants as of the date hereof as follows:

(a) Seller’s execution and delivery of; and performance under, this Agreementhave been duly authorized and do not violate or conflict with any charter, bylaw, Law, Contract,permit or obligation applying to Seller, other than such violations and conflicts that would notreasonably be expected to have a material adverse effect on Seller’s ability to perform itsobligations under this Agreement;

(b) this Agreement constitutes a legal, valid and binding obligation of Seller,enforceable against Seller in accordance with its terms, except as such enforceability may belimited by applicable bankruptcy, insolvency, reorganization and similar laws affecting theenforcement of creditors’ rights generally;

(c) no permit from, notice to, or consent, approval, authorization or order ofany court or other Governmental Body or third party not already given or obtained is requiredwith respect to Seller in connection with its execution and delivery of, and performance under,this Agreement, other than any such permit, notice, consent, approval authorization or orderrequired for the construction and operation of the Facility;

(d) Seller is validly existing and in good standing under the laws of the Stateof Delaware and is authorized to do business in each jurisdiction necessary for it to perform itsobligations under this Agreement, and Seller has the right, power and authority to enter into thisAgreement and perform its obligations hereunder; and

(e) there is no pending or, to Seller’s Knowledge, threatened action, suit,investigation, arbitration or other proceeding against Seller, that, if adversely determined, wouldreasonably be expected to have a material adverse effect on the ability of Seller to perform itsobligations under this Agreement.

ARTICLE IIITERM

Section 3.1. Term.

Subject to Section 11.1, the term of this Agreement will commence on the Effective Dateand will end on the tenth anniversary of the Commercial Operations Date (the “Initial Term”).This Agreement shall automatically renew for one additional five-year period thereafter (the“Renewal Term”), unless one Party provides to the other Party, at least 90 days prior to theexpiration of the Initial Term, written notice of its election that this Agreement not be renewedbeyond the Initial Term.

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ARTICLE IVAUTHORIZED REPRESENTATIVES

Section 4.1. Authorized Representatives.

The initial Authorized Representative of Seller is Katherine A. Panczak. The initialAuthorized Representative of Buyer is Patrick J. Temple. Each Party shall be entitled to relyupon any instructions or information given or provided by the Authorized Representative of theother Party (or any one designated individual if more than one individual is designated as suchother Party’s Authorized Representative), but no Authorized Representative shall have authorityunder this Section 4.1 to modify or amend this Agreement. Each Party shall have the right torevoke any appointment of any individual or individuals who had been appointed to act as itsAuthorized Representative with such revocation being effective upon receipt by the other Partyof the notice provided for in the following sentence. Each Party shall give to the other Partywritten notice of any such revocation of appointment and of the appointment of a new individualor individuals to act as its Authorized Representative.

ARTICLE VPRODUCTION AND SALE OF REFINED COAL

Section 5.1. Production and Sale.

(a) During each Contract Year, in accordance with the terms of, and except asotherwise provided in, this Agreement, (i) Buyer shall procure and purchase from Seller all of itsrequirements for coal and coal-based fuel at the Belle River Power Plant (other than any coalpurchased by Buyer under a Back-Up Coal Purchase Contract in accordance withSection 6.1(ç)), and (ii) Seller shall use commercially reasonable efforts, in accordance with theOperating Protocols, to produce and sell to Buyer Refined Coal in amounts necessary to satisfyBuyer’s requirements for coal and coal-based fuel at the Belle River Power Plant, and (iii) to theextent that such requirements are not fully satisfied by such Refined Coal as described in clause(ii), including without limitation, during a suspension event under the provisions of SectionsS.l(e’3, 8.2(c and 4, Seller shall sell to Buyer (and Buyer shall purchase) Available Seller Coal,in amounts necessary to satisfy such requirements, as Resold Coal.

(b) Buyer’s purchase of Refined Coal pursuant to this Section 5.1 shall bereduced to the extent necessary (i) to prevent damage (other than normal wear and tear thatwould be caused by the exclusive use of coal (other than Refined Coal) as fuel at the Belle RiverPower Plant) to the boilers, pollution control equipment or other operating components thatcomprise the Belle River Power Plant that would be caused by the use of Refined Coal as a fuelat the Belle River Power Plant, or (ii) to prevent material impairment to or a material adverseeffect on the operation and maintenance of the boilers, pollution control equipment or otheroperating components that comprise the BelIe River Power Plant or (iii) to prevent the violationof any permit or Governmental Approval (any of the foregoing circumstances described inclauses (i), (ii) and (iii) being referred to as a “Reduction Event”) and, to the extent that Buyer’srequirements are not fully satisfied by Refined Coal, Seller shall sell to Buyer (and Buyer shallpurchase) Available Seller Coal, in amounts necessary to satisfj such requirements, as ResoldCoal. The determination of a Reduction Event shall be made by Buyer in its good faith

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discretion. Buyer shall notify Seller promptly when Buyer determines that a Reduction Eventhas occurred. The Reduction Event will terminate when the circumstances bringing rise to theReduction Event are resolved or mitigated as agreed by Buyer and Seller in accordance withSection 5.1(d). The reduction of Buyer’s purchase of Refined Coal due to a Reduction Eventshall be of no greater scope and no longer duration than that which is necessary by reason of theReduction Event.

(c) During the Follow-up Period, unless and until otherwise agreed by theParties, each Party’s obligations under Section 5Jj) will be suspended to provide the Partiestime to review and analyze operating data and other information relating to the use by Buyer ofRefined Coal as fuel at the Belle River Power Plant during the Initial Acceptance Period. Duringthe Follow-up Period, Buyer shall have the right, but not the obligation, to purchase AvailableSeller Coal as Resold Coal from Seller as set forth in Section 5.1(a).

(d) During any Reduction Event, as soon as it is reasonably available, Buyerwill provide Seller with all information regarding the cause of the Reduction Event and otheroperating data and other information relating to the use of Refined Coal, and Buyer and Sellerwill cooperate, discuss and negotiate in good faith to develop and agree upon any priceadjustments or other remedial actions to avoid or limit the circumstances leading to theReduction Event and otherwise to improve, optimize and maximize the use of Refined Coal as afuel at the Belle River Power Plant on a going-forward basis. Examples ofpossible remedialactions include, without limitation, capital improvements to the Facility or the Belle River PowerPlant, resetting chemical additive levels as provided in Section 8.3(a), and resetting Buyer’srequirements for Refined Coal at a quantity less than 100 percent of its coal-based fuelrequirements for the Belle River Power Plant. Notwithstanding the foregoing, neither Party shallbe required hereunder to agree to any remedial action that would require it to incur additionalcosts or expenditures. In addition, Seller need not agree to any remedial action (and mayterminate any remedial action agreed to) that Seller believes in its sole discretion, could impair orjeopardize the ability of the Refined Coal to qualify for Section 45 Tax Credits.

(e) At any time that Seller fails to satisfy Buyer’s requirements for coal orcoal-based fuel at the Belle River Plant as required by Section 5.1(a), and Seller fails to deliverResold Coal in accordance with Section 5.1(a), then, upon notice by telephone to Seller, BuyershalT have the right to cause transfer gates on the product conveyors extending from the CoalYard to be switched such that Available Seller Coal bypasses the Facility and is delivereddirectly to the Delivery Point for Resold Coal for sale to and purchase by Buyer as Resold Coaland to maintain such transfer gate positions until such time as Seller provides to Buyerreasonably adequate assurances of Seller’s ability to perform in accordance with Section 5.1(a).

(f) Notwithstanding the foregoing, nothing contained in this Article V willprevent Buyer from discontinuing or reducing operation of one or both of the generating units atthe Belle River Power Plant prior to the end of the Term.

Section 5.2. Sales to Third Parties.

Any Refined Coal produced at the Facility and not purchased by Buyer, for any reason,may be sold by Seller to third parties or otherwise disposed of subject to compliance with

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applicable existing permits, Coal Purchase Contracts and coal transportation agreements. ThisSection 5.2 is not intended and shall not be construed to limit any remedies available to Sellerhereunder or under applicable Law.

Section 5.3. Annual Forecasts: Adjustments.

For each Contract Year during the Term, Buyer shall provide Seller with a good faithprojection (the “Buyer Annual Forecast”) of the aggregate quantity of Refined Coal and ResoldCoal it expects to require during each month of such Contract Year pursuant to the terms of thisAgreement. The Buyer Annual Forecast for the initial Contract Year shall be provided no laterthan the 30th day following the Commercial Operations Date. Each succeeding Buyer AnnualForecast shall be delivered no later than October 1 preceding the start of such Contract Year.Buyer shall update such forecast on a monthly basis to reflect any change in Buyer’s projections.Buyer shall provide any such amendment to Seller no less than 15 Business Days before the firstBusiness Day of each such month. The Buyer Annual Forecast is to be used solely forinformational purposes.

Section 5.4. Purchase by Buyer at Termination.

On the last thy of the Term, to the extent it has not already done so, Buyer shallpurchase, and Seller shall sell to Buyer, all Refined Coal on hand.

Section 5.5. Consistent Renorting.

Notwithstanding the means of sourcing fuel for the Belle River Power Plant prior to theCommercial Operations Date, Buyer covenants and agrees that it will not, and it will cause itsAffiliates not to, make or give any filing, return, ruling request, representation, allegation, noticeor report with or to any Governmental Body or court that contains, or otherwise presents inaccounting or financial records, reports or statements, or tax or information returns,characterizations of the transactions (or elements thereof) contemplated by the various ProjectDocuments that are inconsistent with the terms of such Project Documents, such as (by way ofexample and not limitation) any characterization that Feedstock purchased by Seller underapplicable Coal Purchase Contracts was purchased by Buyer or any other Person, or that RefinedCoal sold to Buyer hereunder was something other than Refined Coal.

ARTICLE VIPURCHASE AND SALES OF SELLER COAL

Section 6.1. Coal Purchase Contracts.

(a) It is contemplated that Seller, directly or through an Affiliate, will enterinto one or more contracts with third-party coal suppliers to purchase coal conforming to theCoal Specifications for use as Feedstock and for sale to Buyer, or others designated by Buyer, asprovided herein (each, a “Coal Purchase Contract”).

(b) It is fUrther contemplated that included among the Coal PurchaseContracts wilL be purchase contracts that Buyer has in place with coal suppliers on the

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Commercial Operations Date and that are to be assigned in whole or in part to Seller pursuant tothe Coal Inventory Purchase Agreement.

(c) For each Coal Purchase Contract entered into by Seller, Buyer may, butshall not be obligated to, enter into and maintain a back-up Contract to purchase coal from thesame third-party coal supplier on terms substantially similar to the terms contained in thecorresponding Coal Purchase Contract, including, without limitation, the quantity of coal to bepurchased thereunder, except that Buyer’s obligation to purchase a quantity of coal thereundershall be reduced by the quantity of coal purchased by Seller under the corresponding CoalPurchase Contract (each, a “Back-Up Coal Purchase Contract”).

(d) Notwithstanding anything to the contrary herein but subject to theprovisions of Sections 5.1(e), 8.2Cc) and j, Buyer’s sole remedies for Seller’s failure toproduce and sell Refined Coal hereunder shall be to: (i) purchase Resold Coal pursuant toSection 5.1 and to purchase coal under the Back-Up Coal Purchase Contracts; and (ii) terminatethis Agreement in accordance with Section Il .1 (1’).

Section 6.2. Available Seller Coal.

(a) At any point in time, to the extent that Seller has Available Seller Coal,Buyer may request to purchase, and upon such request Seller will sell to Buyer, or to others tothe extent so directed by Buyer, all (or such portion requested by Buyer) of such Available SellerCoal as Resold Coal at the applicable Resold Coal Price and otherwise as provided herein;provided, however, that, as to any Available Seller Coal that is to be sold to others or shipped foruse at a location or facility other than the Belle River Power Plant or St. Clair Power Plant,Seller’s obligation to sell such Available Seller Coal shall be subject to receiving Buyer’sundertaking to replace or cause to be replaced by arranging for one or more Coal PurchaseContracts for Conforming Coal, and providing for delivery in such a manner that Seller’sFeedstock requirements for production of Refined Coal, and its Refined Coal productionschedule, will not be impaired.

(b) At any point in time, to the extent that Seller has Available Seller Coal,Seller may request that Buyer purchase all or a portion of such Available Seller Coal, and uponsuch request, Buyer will purchase and Seller will sell to Buyer, or to others to the extent sodirected by Buyer, such Available Seller Coal (or the applicable portion thereof) as Resold Coalat the applicable Resold Coal Price and otherwise as provided herein, it being agreed, for theavoidance of doubt, that Seller’s exercise of such right shall not cause to arise an obligation byBuyer to replace Conforming Coal under Section 6.2(a),

Section 6.3. Purchase by Buyer at Termination.

At the end of the Term, Buyer shall purchase, and Seller shall sell to Buyer, allConforming Coal on hand or under contract as Resold Coal. To the extent that there is any CoalPurchase Contract in place at the end of the Term which, by its terms, obligates Seller topurchase Conforming Coal for a period extending beyond the end of the Term, each Party agreesthat Seller will assign such Coal Purchase Contract to Buyer and Buyer will assume Seller’srights and obligations thereunder. To the extent any such Coal Purchase Contract is not able to

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be so assigned, following the end of the Term, Seller shall sell and Buyer shall purchaseConforming Coal as Resold Coal in accordance with the terms and conditions hereof until theapplicable Coal Purchase Contract expires or otherwise terminates.

ARTICLE VIIDELIVERIES; WEIGHTS; TITLE AND RISK OF LOSS

Section 7.1. Deliveries.

(a) Refined Coal deliveries will be made at the Delivery Point for RefinedCoal based on Buyer’s requirements for use of Refined Coal as fuel in the Belle River PowerPlant.

(b) Deliveries of Available Seller Coal will be made at the applicableDelivery Point for Resold Coal as specified herein, and, assuming timely performance by thirdparties under the Coal Purchase Contracts and by the Coal Consultant under the Coal Handlingand Consulting Agreement and except as may be otherwise agreed by the Parties, such deliverieswill be made based on Buyer’s, or others’ to the extent so directed by Buyer) requirements foruse of Available Seller Coal as fuel.

Section 7.2. Weights.

(a) The weight of Refined Coal sold to Buyer hereunder during any applicableperiod will be established by weights of Feedstock measured by Buyer’s belt scales located onproduct conveyors CV 23 and CV 24, plus an agreed upon allowance for the chemical additiveused in the Refined Coal production process.

(b) The weight of Resold Coal sold to Buyer hereunder during any applicableperiod will be established by weights of Resold Coal measured by Buyer’s belt scales located onproduct conveyors CV 23 and CV 24.

(c) Buyer shall maintain and preserve, during the Term and for at least sixmonths after any termination of this Agreement, records of all weights taken under thisSection 7.2 and shall maintain the scales as provided below:

(i) At least once each calendar year, the accuracy of the scales shall bemaintained, tested and, if necessary, adjusted, in accordance with the guidelines outlined by theNIST Handbook #44, or other procedures which shall be mutually acceptable to Seller and Buyerarid in accordance with applicable Law. If any such test shows the scales to be in error, Buyershall cause them to be adjusted to within the tolerance specifications as designated by the scalemanufacturer;

(ii) Buyer shall give prompt notice by telephone (and confirm suchnotice in writing or by email or facsimile) to Seller the results of any testing and adjustment ofthe scales, and otherwise if and when the scales are discovered to be in error beyond thetolerance specifications as designated by the scale manufacturer;

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(iii) Seller shalL have the right, but not the duty, to have a representativepresent at any and all times to observe the determination of weights hereunder. In addition to thetesting described in Section 7.2(cXi), if Seller should at any time question the accuracy of thescales, Seller shall so advise Buyer and confirm the same in writing, and Buyer shall promptlyarrange testing of the scales. If such test shows the scales to be in error, Buyer shall cause themto be adjusted to within the tolerance specifications as designated by the scale manufacturer. Ifsuch test prompted by Seller pursuant to this Section 7.2(cYiii) shows the scale to be within theapplicable tolerance specifications, then Seller shall pay all costs of such test. Otherwise, Buyershall pay all costs of maintaining, testing and adjusting the scales hereunder.

(d) During any period when the scales are inoperable, determination of thequantities of Refined Coal and Resold Coal delivered hereunder shall be determined by aprocedure to be established at such time by agreement of Seller and Buyer and in accordancewith applicable Law.

Section 7.3. Feedstock Inventory Store Reconciliation.

(a) On a quarterly basis, the Coal Consultant shall cause to be performed aphysical inventory survey of the Feedstock Inventory Store. Promptly thereafter, a reconciliationof the Feedstock Inventory Store will be made, and the actual weight of Resold Coal sold fromthe Feedstock Inventory Store, and of Feedstock from the Feedstock Inventory Store used toproduce Refined Coal, during such quarter will be determined, based on: (i) the FeedstockInventory Store as measured on such date; (ii) the Feedstock Inventory Store as measured at theend of the prior quarter; (iii) the record of the Unloaded Weight of Seller Coal unloaded at theBelle River Site during the quarter; (iv) the record of the weight of Resold Coal moved from theFeedstock Inventory Store, as determined pursuant to Section 7.2(b), during the quarter; and(v) the record of the weight of Feedstock used to produce Refined Coal sold to Buyer, asdetermined pursuant to Section 7.2(a), during the quarter. To the extent that the sum of: (i) theFeedstock Inventory Store as measured at the end of the prior quarter; and (ii) the UnloadedWeight of Seller Coal unloaded at the Belle River Site during the quarter, exceeds the sum of:(x) the Feedstoek Inventory Store on the measurement date; (y) the weight ofResold Coalmoved from the Feedstock Inventory Store, as determined pursuant to Section 7.2(b), during thequarter; and (z) the weight of Feedstock used to produce Refined Coal sold to Buyer, asdetermined pursuant to Section 7.2(a), during the quarter, the difference (the “Excess Amount”)shall be attributable to Resold Coal sold to Buyer and Feedstock used to produce Refined Coalsold to Buyer, in the same proportions as reflected in clauses (y) and (z) above, and the sum ofsuch Excess Amount and the weights described in clauses (y) and (z) above will constitute theactual weight of Resold Coal sold, and Feedstock used, from the Feedstock Inventory Storeduring such quarter. Seller will invoice Buyer for such Excess Amount using the Coal InventoryPrice and the Resold Coal Price, as applicable, on the date the Excess Amount is recorded bySeller as a reduction of Feedstock Inventory Store, and Buyer will make payment, for suchExcess Amount in accordance with Article IX. To the extent that the sum of: (i) the FeedstockInventory Store as measured at the end of the prior quarter; and (ii) the Unloaded Weight ofSeller Coal unloaded at the Belle River Site during the quarter, is less than the sum of: (x) theFeedstock Inventory Store on the measurement date; (y) the weight of Resold Coal moved fromthe Feedstock Inventory Store, as determined pursuant to Section 7.2(1,], during the quarter; and(z) the weight of Feedstock used to produce Refined Coal sold to Buyer, as determined pursuant

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to Section 7.2(a), during the quarter, the deficiency (the “Shortfall Amount”) shall be attributableto Resold Coal purchased by Buyer and Feedstock used to produce Refined Coal sold to Buyer,in the same proportions as reflected in clauses (y) and (z) above, and, in such case, Seller willcredit Buyer for such Shortfall Amount in accordance with Article IX using the Coal InventoryPrice and the Resold Price, as applicable, on the date the Shortfall Amount is recorded by Selleras an increase in Feedstock Inventory Store. For purposes ofthis Section 7.3, in the case of thefirst quarter (or partial quarter, as the case may be) following the closing date under the CoalInventory Purchase Agreement, all references herein to “the Feedstock Inventory Store asmeasured at the end of the prior quarter” shalL mean the aggregate tonnage purchased under theCollective Coal inventory Purchase Agreements. The costs of taking such physical inventoriesshall be borne by Buyer.

(b) In addition to the reconciliation of the Feedstock inventory Store, the CoalConsultant shall cause to be performed a physical survey of Seller’s inventory located at theSuperior Midwest Energy Terminal annually. The survey shall be performed during eitherOctober or November of each Contract Year. Buyer shall provide Seller with the results of thephysical survey on or about December 15 of each year during Term. Seller will adjust itsinventory using the results of the survey before December 31 of the Contract Year.

Section 7.4. Measurement Methodology.

Notwithstanding Sections 7.2 and fl, Buyer shall have the right to increase thefrequency of scale testing to a quarterly basis. If Buyer elects to increase scale testing to aquarterly basis, Seller shall direct the Coal Consultant to adjust the frequency of the FeedstockInventory Store reconciliation to an annual basis.

Section 7.5. Title and Risk of Loss.

(a) Title and risk of loss, damage or destruction with respect to the RefinedCoal sold hereunder will pass to Buyer at the Delivery Point for Refined Coal,

(b) Title and risk of loss, damage or destruction with respect to the ResoldCoal sold hereunder will pass to Buyer at the applicable Delivery Point for Resold Coal.

ARTICLE VIIIREFINED COAL AND RESOLD COAL SPECIFiCATIONS

Section 8.1. Coal Specifications.

Buyer will specify to Seller the initial Coal Specifications upon request by Seller, andwill subsequently, from time to time during the Term as requested by Seller, confirm the CoalSpecifications then in effect. During the Term, Buyer may change the Coal Specifications fromtime to time. Notification of any such change shall be made in writing to Seller and to the CoalConsultant.

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Section 8.2. Refined Coal Production Specifications and Use.

(a) Refined Coal produced and sold to Buyer hereunder shall be producedfrom Feedstock that-was purchased pursuant to a Coal Purchase Contract and was ConformingCoal at the time delivered to the Belle River Site.

(b) Seller hereby covenants and warrants that Refined Coal produced and soldto Buyer hereunder shall be produced in accordance with the Operating Protocols.

(c) During any time that Seller is delivering Refined Coal without complyingwith the Operating Protocols:

(i) Buyer shall have the right to suspend immediately all deliveries ofRefined Coal by giving notice of the suspension to Seller. Such suspension shall remain in effectuntil such time as Seller provides to Buyer reasonably adequate assurances of Seller’s ability andintention to comply with the Operating Protocols in accordance with this Section 8.2. Afterreceipt of such notice, Seller shall commence appropriate action and use its best efforts to correctthe deficiency; and

(ii) Buyer shall have the right upon notice by telephone to Seller, tocause transfer gates on the product conveyors extending from the Coal Yard to be switched suchthat Available Seller Coal bypasses the Facility and is delivered directly to the Delivery Point forResold Coal for sale to and purchase by Buyer as Resold Coal and to maintain such transfer gatepositions until such time as Seller provides to Buyer reasonably adequate assurances of Seller’sability to perform in accordance with the Operating Protocols.

(d) Buyer hereby covenants that it will use all Refined Coal purchasedhereunder solely for use as ftzel in the Belle River Power Plant.

(e) Each Monday, Buyer shall provide to Seller the inputs or estimates of theinputs required for calculating the Detroit Edison Benefits and the MPPA Benefits for theprevious week (beginning on the previous Monday and ending on Sunday), as set forth onExhibit C or Exhibit D.

Section 8.3. Chemical Additives.

(a) Upon Buyer’s request and Seller’s approval, Seller will increase the levelof chemical additives used in the production of Refined Coal beyond that called for in theOperating Protocols (subject to the physical constraints of the Facility), and, in such event, Buyershall reimburse Seller for any additional costs and expenses incurred by Seller for andattributable to the use of the additional chemical additive. Notwithstanding the foregoing, ifafter such an increase, there occurs a Reduction Event, Seller shall have the right to reduce levelsof chemical additives back to levels called for in the Operating Protocols.

(b) Upon Buyer’s request, Seller shall for a period of up to seven days oftesting, supply additional Mer-Sorb, at its own expense, and increase the application rate forMer-Sorb to the level that the Parties mutually agree is likely reduce the mercury emissions fromthe Belle River Power Plant to the maximum level ofmercury emissions reductions that can be

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reasonably achieved by the application of additional Mer-Sorb to the Conforming Coal (allsubject to the physical constraints of the Facility); provided, however, that all costs and expenses(other than the cost of such additional Mer-Sorb) related to such testing shall be borne by Buyer.

(c) During any time during the Term that the Facility is not operating, Buyershall have the right to purchase from Seller, as Seller’s delivered cost, such chemical additivesfor use at the Belle River Power Plant; provided that Buyer shall be responsible for any capitalrelating to the handling, storage and use of such chemical additives so purchased, including withlimitation, any capital costs associated with or required for Buyer’s use of such chemicaladditives.

Section 8.4. Presumption Regarding Conforming Coal and Refined Coal.

BUYER AGREES THAT ANY RESOLD COAL OR FEEDSTOCK WILL BECONCLUSIVELY PRESUMED TO HAVE BEEN CONFORMING COAL IF SUCHCOAL WAS PURCHASED BY SELLER PURSUANT TO THE COLLECTIVE COALINVENTORY PURCHASE AGREEMENTS OR: (A) WAS PURCHASED BY SELLERPURSUANT TO A COAL PURCHASE CONTRACT THAT WAS ASSIGNED TOSELLER BY BUYER OR THAT WAS CERTIFIED BY THE COAL CONSULTANT ASPROVIDED IN THE COAL HANDLING AND CONSULTING AGREEMENT, AND (B)WAS NOT RECOMMENDED FOR REJECTION IN ACCORDANCE WITH THEAPPLICABLE COAL PURCHASE CONTRACT BY THE COAL CONSULTANTPURSUANT TO THE COAL HANDLING AND CONSULTING AGREEMENT, ANDWAS PREPARED, BLENDED AND DELiVERED TO THE APPLICABLE DELIVERYPOINT BY THE COAL CONSULTANT PURSUANT TO THE COAL HANDLING ANDCONSULTING AGREEMENT. ACCORDINGLY, BUYER WAIVES ANY RIGHT ITMIGHT HAVE TO REJECT OR TO REVOKE ACCEPTANCE OF, OR TO CLAIMDAMAGES OR ANY OTHER RELIEF WITH RESPECT TO ANY SUCH RESOLDCOAL OR ANY REFINED COAL PRODUCED FROM SUCH FEEDSTOCK BYREASON THAT SUCH RESOLD COAL OR FEEDSTOCK WAS NOT CONFORMINGCOAL.

Section 8.5. Warranty Disclaimer.

(a) EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE VIII,ALL RESOLD COAL AND REFINED COAL SOLD PURSUANT TO THISAGREEMENT IS SOLD “AS IS” AT THE APPLICABLE DELIVERY POINTPROVIDED HEREIN.

(b) EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE VIII,SELLER HEREBY DISCLAIMS ALL WARRANTIES (OTHER THAN THEWARRANTY OF TITLE) WHETHER EXPRESS OR IMPLIED, INCLUDING,WITHOUT LIMITATION, IMPLIED WARRANTIES OF MERCHANTABILITY ANDFITNESS FOR A PARTICULAR PURPOSE AND ALL WARRANTIES REGARDINGTHE COMPATIBILITY OF ANY REFINED COAL WITH ANY BUYER EQUIPMENT.

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ARTICLE IXPRICE; BILLING AND PAYMENT

Section 9.1. Refined Coal Price.

For each Ton of Refined Coal produced and sold by Seller and purchased by Buyerhereunder during a Contract Year, Buyer shall pay to Seller the Refined Coal Price applicable tosuch Ton of Refined Coal.

Section 9.2. Resold Coal Price.

Buyer shall pay (or cause to be paid) to Seller for each Ton of Resold Coal purchased andsold hereunder the Resold Coal Price. The “Resold Coal Price” for Resold Coal purchased at asite other than the Belle River Site shall be the same quality adjusted price per Ton incurred or tobe incurred directly by Seller under any applicable Coal Purchase Contract, plus any applicabletransportation charges or other rail and transloading costs incurred by Seller. The “Resold CoalPrice” for Resold Coal sold from the Feedstock Inventory Store shall be the Coal Inventory Priceapplicable to such Ton of Resold Coal.

Section 9.3. Coal Consultant Fee Reimbursement.

Buyer shall reimburse Seller for the Coal Fee as and when paid under the Coal Handlingand Consulting Agreement.

Section 9.4. O&M and CaDital Cost Reimbursement.

(a) Seller shall reimburse Buyer for increased operation and maintenanceexpenses incurred and that Buyer demonstrates are related to Buyer’s use of Refined Coal (andnot increased levels of chemical additives pursuant to Section 8.3) as a fuel in the Belle RiverPower Plant that would not have been incurred from use of coal (other than Refined Coal), butonly to the extent such costs are not included in the calculation of Detroit Edison Benefits(“Increased Expenses”). Buyer shall give Seller prompt notice upon the occurrence of anyIncreased Expenses. If the Increased Expense is ongoing, either Party shall have the right tosuspend delivery of Refined Coal hereunder unless and until the Parties agree upon a resolutionof such Increased Expense; provided, however, that Buyer shall have the right to suspenddelivery of Refined Coal hereunder only to the extent that Buyer is not reimbursed for suchIncreased Expense. If Seller disputes an Increased Expense, Seller shall have the right towithhold reimbursement for such Increased Expense until such dispute has been resolved.

(b) Seller shall reimburse Buyer for any capital investments that Buyerdemonstrates are required of Buyer as a result of Buyer’s use of Refined Coal (and not increasedlevels of chemical additives pursuant to Section 8.3) as fuel in the Belle River Power Plant, tothe extent agreed to and approved by Seller, Either Party shall have the right to suspend deliveryof Refined Coal hereunder unless and until the Parties agree upon such capital investment andreimbursement or upon other resolution of such matter.

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(c) Notwithstanding the foregoing, Seller shall not be required to reimburseBuyer for any costs, expenses or capital investment that Buyer cannot demonstrate are amountsthat Buyer would not have incurred but for Buyer’s use of Refined Coal.

Section 9.5. Invoicing and Payment.

(a) Buyer shall pay Seller by electronic transfer (recipient’s account perSeller’s advice) in United States fUnds for all Refined Coal produced and sold by Seller andpurchased by Buyer hereunder. Seller shall submit to Buyer an invoice for the Refined Coaldelivered to Buyer hereunder during each week. Such invoice will be submitted within twoBusiness Days after the end of the applicable week and will include the weight of Refined Coaldelivered, an estimate of the Refined Coal Price applicable to such Refined Coal, the amount ofany applicable true-up adjustment and pertinent wire transfer instructions. Buyer shall makepayment within four days after receipt of each Seller invoice. From time to time, Seller, withassistance of the Coal Consultant, shall determine (i) the actual Refined Coal Price, (ii) the actualprice of the Detroit Edison Refined Coal Adder, and (iii) the actual price of the MPPA RefinedCoal Adder, in each case, applicable to the Refined Coal produced and sold during the mostrecent period following any prior true-up adjustment and any resulting true-up adjustment will bereflected (as an addition or reduction, as the case may be) on the weekly invoice next submittedby Seller hereunder.

(b) Buyer shall pay Seller by electronic transfer (recipient’s account perSeller’s advice) in United States funds for all Resold Coal from the Feedstock Inventory Storepurchased and sold hereunder. Seller shall submit to Buyer an invoice for the Resold Coal fromthe Feedstock Inventory Store delivered to Buyer hereunder during each week. Such invoicewill be submitted within two Business Days after the end of the applicable week and will includethe weight of such Resold Coal delivered, an estimate of the Resold Coal Price applicable tosuch Resold Coal, the amount of any applicable true-up adjustment and pertinent wire transferinstructions. Buyer shall make payment within four days after receipt of each Seller invoice.From time to time, Seller, with assistance of the Coal Consultant, shall determine the actualResold Coal Price applicable to the Resold Coal from the Feedstock Inventory Store delivered toBuyer hereunder during the most recent period following any prior true-up adjustment and anyresulting true-up adjustment will be teflected (as an addition or reduction, as the case may be) onthe weekly invoice next submitted by Seller hereunder. Following each inventory reconciliation(and determination of the actual Unloaded Weight of Resold Coal sold from the FeedstockInventory Store during such period) as to which it is determined that there is an Excess Amountor a Shortfall Amount as provided in Section 7.3, the amount of such Excess Amount or ShortfallAmount will be reflected (as an addition or reduction, as the case may be) on the weekly invoicenext submitted by Seller hereunder.

(c) Buyer shall pay Seller by electronic transfer (recipient’s account perSeller’s advice) in United States fimds for all Resold Coal purchased and sold hereunder otherthan from the Feedstock Inventory Store. Seller shall submit to Buyer an invoice for the ResoldCoal other than from the Feedstock inventory Store delivered to Buyer hereunder during eachweek. Such invoice will be submitted within two Business Days after the end of the applicableweek and will include the weight of such Resold Coal delivered, the Resold Coal Price

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applicable to such Resold Coal and pertinent wire transfer instructions. Buyer shall makepayment within four days after receipt of each Seller invoice.

(d) Buyer shall pay Seller by electronic transfer (recipient’s account perSeller’s advice) in United States finds for the reimbursement required under Section 9.3. Sellershall submit to Buyer an invoice for the Coal Fee during each week. Such invoice will besubmitted within two Business Days after the end of the applicable week and will includepertinent wire transfer instructions. Buyer shall make payment within four days after receipt ofeach Seller invoice.

(e) The Parties agree that each Party may, in computing the amount requiredto be paid by such Party upon termination of this Agreement, reduce the required amount of suchpayment by offsetting against such amount the aggregate amount due and owing (and not subjectto a good faith dispute) to such Party and all Affiliates of such Party by such other Partyhereunder and under the other Project Documents.

(1) in case any portion of an invoice submitted pursuant to this Section 9.5 isin bona tide dispute, the undisputed amount shall be payable when due. Any Party disputing anyportion of an invoice shall provide the other Party with notice describing the nature of the disputeas soon as reasonably possible.

(g) invoices shall be mailed, emailed or sent by facsimile to the Persons listedbelow, or such other Person or address as may be specified by Buyer:

The Detroit Edison CompanyOne Energy Plaza634 General OfficesDetroit, Michigan 48226Attention: John R. KlosEmail: klosjdteenergy.com

With a copy to:

The Detroit Edison CompanyOne Energy Plaza634 General OfficesDetroit, Michigan 48226Attention: John A. WagnerEmail: wagnerjdteenergy.com

(h) All amounts owed by a Party to the other Party under this Agreementmore than five Business Days beyond the date on which such amount is due and payable shallbear interest at the Late Payment Rate.

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Section 9.6. Business Days.

All payments to be made under this Agreement shall be made on a Business Day. If theday specified for payment is not a Business Day, such payment shall be made on the nextsucceeding day which is a Business Day.

Section 9.7. Audit.

Notwithstanding the payment of any amount pursuant to this Article IX, each Party shallremain entitled to conduct an audit and review of all costs and expenses subject toreimbursement by such Party hereunder, including, but not limited to, costs incurred and takeninto account in the calculation of the Detroit Edison Benefits, together with any supportingdocumentation, for a period of three years from and after the close of the calendar year in whichsuch costs were incurred, excluding those books and records related to costs based upon thestandard allowances and rates. If, pursuant to such audit and review, it is determined that anyamount previously paid by such Party did not constitute a due and payable item of costs, suchParty may submit a claim to the other Party indicating the amount and reason the cost is believednot to be reimbursable. If the Parties agree on such matter, the Party obligated to pay will remitthe amount within 30 calendar days. If there is not agreement on any item of cost, the Partieswill then meet and attempt to agree on the disposition of the item of cost. If the Parties are notable to resolve issues raised by such an audit and review, any disputed items will be resolved inaccordance with the provisions of Article XIII.

Section 9.8. Taxes and Other Liabilities.

(a) Seller shall be solely responsible for all assessments, fees, costs, expensesand taxes imposed by any Governmental Body or other third parties (“Third Party Impositions”)relating to Seller Coal that arise prior to any transfer of title to the Seller Coal hereunder, eitheras Resold Coal or after its conversion into Refined Coal, as provided herein; provided, however,that such Third Party Impositions shall, for purposes of this Agreement, be included in thedefinition and calculation of the Coal Inventory Price. Buyer shall be solely responsible for allThird Party Impositions relating to the Resold Coal or Refined Coal imposed at or after thetransfer of title to Buyer (other than franchise or income taxes which are related to the sale of theSeller Coal and are the responsibility of Seller), including, but not limited to, sales or use tax ifapplicable.

(b) Upon Buyer’s purchase of Refined Coal from Seller, Buyer shall provideSeller with a sales tax exemption certificate with the “industrial processing” exemption boxselected.

ARTICLE XFORCE MAJEURE

Section 10.1. Force Mai eure.

(a) Except as otherwise provided in this Section 10.1, a Party shall be excusedfrom performance under this Agreement, and shall not be considered to be in default hereunderfor failure to perform obligations under this Agreement, to the extent that such Party is unable to,

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or otherwise fails to, perform due to an Event of Force Majeure or the failure of the other Partyor any of its Affiliates to perform it obligations under any of the Project Documents. No Partyshall be relieved of any obligation for the payment of money as a result of an Event of ForceMajeure or relieved of any other obligations under this Agreement as a result of an Event ofForce Majeure solely because of increased costs or other adverse economic consequences thatmay result from performance by such Party.

(b) If a Party’s ability to perform its obligations under this Agreement isaffected by an Event of Force Majeure, such Party shall: (i) promptly notify the other Party inwriting of such event and its cause; and (ii) promptly supply such other available informationabout the Event of Force Majeure and its cause as may be reasonably requested by the otherParty.

(c) The suspension of performance by a Party due to an Event of ForceMajeure hereunder shall be of no greater scope and no longer duration than that which isnecessary by reason of the Event of Force Majeure. The affected Party shall use commerciallyreasonable efforts to promptly mitigate or remedy its inability to perform. However, no Partyshall be required hereunder to accede to the demands of labor or settle any strike or labor dispute.An Event of Force Majeure shall not excuse compliance with any Law or environmental permitsunless so provided under the applicable Law or permit.

ARTICLE XIEARLY TERMINATION

Section 11.1. Early Termination.

This Agreement shall terminate on a date prior to the date referred to in Section 3.1 underthe following circumstances:

(a) Upon mutual agreement of Buyer and Seller, which termination shall beeffective on the date agreed to by Buyer and Seller;

(b) If the Term (as defined in the License Agreement) under the LicenseAgreement expires or is terminated, which termination of this Agreement shall be effective as ofthe expiration or termination of the Term under the License Agreement;

(c) Upon the date specified in a termination notice sent by a non-breachingParty, so long as such date follows the expiration of any applicable notice and/or cure period, inaccordance with Article XII hereof;

(d) Upon the date specified in a notice of termination from Seller to Buyer, solong as such date follows the expiration of 30 days’ notice, if a change in Law or circumstancesthat results in a material increase in costs and expenses or a material reduction in revenue orbenefits in respect of Section 45 Tax Credits; Drovided that to the extent Seller terminates inaccordance with this Section 11.1(d), Seller shall not be required to produce and sell RefinedCoal pursuant to Section 5.1 from the date of the notice of termination until the effective date ofsuch termination;

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(e) Upon the date specified in a notice of termination by one Party to the otherParty, so long as such date follows the expiration of 30 days’ notice, if the other Party’sobligation to perform hereunder is excused due to an Event of Force Majeure and,notwithstanding the provisions of Section 10.1, the suspension of such other Party’s performancedue to the Event of Force Majeure has continued for at least six consecutive months;

(1) Upon the date specified in a notice of termination by Buyer to Seller, solong as such date follows the expiration of 30 days’ notice, if after the Follow-up Period, Sellerfails to produce Refined Coal for at least three consecutive months and such failure to produce isnot attributable in whole or part to Buyer;

(g) Upon the date specified in a notice of termination by one Party to the otherParty, so long as such date follows the expiration of 30 days’ notice, if after the Follow-upPeriod, deliveries of Refined Coal are suspended for at least three consecutive months;

(h) Upon the date specified in a notice of termination from Buyer to Seller, solong as such date follows the expiration of 30 days’ notice, if an order issued by the MichiganPublic Service Commission, or a change in Law, related to Buyer’s use of Refined Coal as a fuelin the Belle River Power Plant, this Agreement or any of the transactions contemplated by theProject Documents results in an increase in costs and expenses or a reduction in revenue toBuyer; or

(i) Upon the date specified in a notice of termination from Buyer to Seller, solong as such date follows the expiration of 30 days’ notice, if operation of one or both of thegenerating units at the Belle River Power Plant is discontinued.

Section 11.2. Post-Termination ObliRations; Survival.

(a) Any termination of this Agreement, irrespective of the reason therefor,shall not release either Party of any obligations incurred prior to the effective date of suchtermination nor, subject to Article XII hereof, waive any rights or remedies with respect to abreach of this Agreement giving rise to such termination.

(b) Any termination of this Agreement, irrespective of the reason therefor,shall not release either Party of any applicable rights and obligations pursuant to Section 5.4,Section 5.5, Section 6.3, Section 7.2(b), Section 11.2, Article XII, Article XIII or Article XIV.

ARTICLE XIIEVENTS OF DEFAULT AND REMEDIES

Section 12.1. Event of Default.

An “Event of DefauLt” shall mean the occurrence of any one or more of the followingevents:

(a) A breach by Buyer of its payment obligations under Article IX hereof,which breach is not cured within ten days from the date written notice thereof is given to Buyerby Seller;

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(b) Any representation or warranty made by either Party in this Agreementshall at any time prove to be false or misleading in any material respect as ofthe date hereof,unless: (i) the fact, circumstance or condition that is the subject of such representation orwarranty is made true within 30 days after such Party becomes aware that it was false ormisleading (or within such longer period of time, not to exceed 90 days, as is necessary for suchParty with the exercise of diligence to cure such failure, if such failure is susceptible to beingmade true but cannot be cured with the exercise of diligence within such 30-thy period, and ifsuch Party commences within such 30-thy period and thereafter diligently and in good faithprosecutes the curing of such failure); and (ii) such cure removes any adverse effect on the otherParty of such fact, circumstance or condition being otherwise than as first represented; or unlesssuch fact, circumstance or condition being other than as first represented does not materiallyadversely affect the other Party, as the case may be;

(c) The failure by Buyer to purchase its requirements for coal, refined coaland coal-based feedstock as required in Section 5.1, which breach is not cured within ten daysfrom the date written notice thereof Is given to Buyer by Seller;

(d) A breach of a material provision hereof (other than a breach described inthe other subsections ofthis Section U).) by either Party, which breach is not cured within:(1) 60 days from the date written notice thereof is given to the breaching Party by the other Party;or (ii) if such breach caimot reasonably be cured within such 60 days, and the breaching Partyhas commenced and is diligently pursuing cure, within 90 days of the date written notice isgiven; or

(e) If either Party shall: (i) become insolvent or generally unable to pay itsdebts as they become due; (ii) apply for, consent to, or acquiesce in, the appointment of a trustee,receiver, sequestrator or other custodian for it or any of its property, or make a generalassignment for the benefit of its creditors; (iii) in the absence of any such application, consent oracquiescence, permit or suffer to exist the appointment of a trustee, receiver, sequestrator orother custodian for it or a substantial portion of its property, and such trustee, receiver,sequestrator or other custodian shall not be discharged within 60 days; (iv) permit or suffer toexist the commencement of any bankruptcy, reorganization, debt arrangement or other case orproceeding under any bankruptcy or insolvency law, or any dissolution, winding up orliquidation proceeding, in respect of it, and, if any such case or proceeding shall be consented toor acquiesced in by it or shall result in the entry ofan order for relief or shall remain for 60 daysundismissed; or (v) take any formal action authorizing, or in furtherance of, any of the foregoing.

Section 12.2. Remedies.

(a) Upon the occurrence of an Event of Default described in Section 12.1(c),Seller shall have the right, exercisable within 90 days following the occurrence of the Event ofDefault, by giving written notice to Buyer to such effect, to terminate this Agreement within 30days after the date of such notice.

(b) Upon the occurrence of the Event of Default described in Section 12.1(a),Section 12.1(k) or Section 12.1(d), the non-breaching Party shall have the right to terminate thisAgreement (so long as such Event of Default remains uncured) by giving written notice to the

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breaching Party to such effect, which notice shall specify a date of termination that is not lessthan 90 days after written notice of the breach and not more than 120 days after written notice ofthe breach.

(c) Upon the occurrence of an Event of Default described in Section 12.1(e),the non-breaching Party shall have the right to terminate this Agreement immediately by givingwritten notice to the breaching Party to such effect.

(d) Notwithstanding any other provision of this Agreement to the contrary, theremedies contained in this Article XII shall not be applicable to any matter governed by theEnvironmental Law or pertaining to Hazardous Materials, as those terms are defined in theEnvironmental Indemnity Agreement, and the Parties acknowledge and agree that anyindemnification or other remedies as to such environmental matters are governed solely andexclusively by the Environmental Indemnity Agreement.

(e) Except as otherwise provided herein, in addition to the remedies specifiedin this Article XII, each Party shall have all rights and remedies as are available to it at law or inequity.

Section 12.3. Limitations of Seller Liability.

Notwithstanding anything to the contrary in this Agreement, the total aggregate liabilityof Seller for the payment of money to Buyer in any Contract Year under this Agreement,including without limitation, Seller’s breach or alleged breach of this Agreement but excludingSeller’s reimbursement obligations under Section 9.4, shall in no event exceed the aggregateamount paid by Buyer pursuant to Sections 9.1 and after deducting the Coal Inventory Priceassociated therewith and Resold Coal Price for Resold Coal purchased at a site other than theBelle River Site.

ARTICLE XIIIDISPUTE RESOLUTION

Section 13.1. Dispute Resolution.

(a) The Parties hereto agree: (i) to attempt to resolve all disputes arisinghereunder promptly, equitably and in a good faith manner; and (ii) to provide each other withreasonable access during normal business hours to any and all non-privileged records,information and data pertaining to any such dispute.

(b) Other than a claim for equitable relief; which may be brought directly toany court of competent jurisdiction, any claim or dispute arising out of any of the provisions ofthis Agreement or the breach thereof which the Parties are unable to resolve pursuant to Section13.1(a), shall be settled by arbitration to be conducted in Lansing, Michigan in accordance withthe American Arbitration Association Commercial Arbitration Rules. The arbitration shall beheld before a panel of three arbitrators. Each Party shall appoint an arbitrator within 30 days ofthe filing of the notice of intent to arbitrate. The arbitrators appointed by the Parties shallattempt to agree on the selection of the third arbitrator who will serve as chairman of thearbitration panel within 30 days from their appointment. If they cannot agree on an arbitrator

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then either Party may move to have the arbitrator appointed by the American ArbitrationAssociation. Time shall be ofthe essence in the nomination of the arbitrators. If a Party fails toappoint an arbitrator within such 30 day period, that Party shall waive its right to appoint anarbitrator and the arbitration shall proceed with the appointed arbitrator. The arbitration awardby the arbitrator shall be final and binding and, unless the arbitrator expressly determines them tobe appropriate, shall not include costs or attorney’s fees, A judgment to enforce the arbitrationaward may be entered in any court of appropriate jurisdiction. Each Party shall bear the cost ofits appointed arbitrator and the Parties shall share equally the cost of the third arbitrator and theAmerican Arbitration Association. Upon the date of an arbitration award, if it is determined thatan amount is due from one Party to the other, then such amount will be paid to the Party towhom it is due within 15 days from the final settlement, or written determination of thearbitrator, as the case may be.

(c) During resolution of any dispute under this Article XIII, the Parties shallcontinue to perform all of their respective obligations under this Agreement without interruptionor slow down, except to the extent a Party is prevented from performing due to the nature of thedispute, until such dispute is resolved.

(d) The Parties agree that they may be joined as an additional party to anarbitration involving BR Fuels, MPPA or Detroit Edison under any of the other ProjectDocuments; provided, that the Party joined as an additional party to the arbitration is a properrespondent in the arbitration. Ifmore than one arbitration is begun under the Agreement or theProject Documents and any Person contends that two or more arbitrations involve substantiallythe same issues and should be heard in one proceeding, then the arbitration(s) that have beencommenced shall be dismissed and a new arbitration proceeding involving all of the parties shallbe commenced and a new arbitration panel shall be selected.

ARTICLE XIVMISCELLANEOUS

Section 14.1. Terms and Conditions of Sale.

The terms and conditions of sale applicable to each sale of Refined Coal under thisAgreement will be those stated in this Agreement, unless the Parties otherwise agree in writing.The terms and conditions of sale applicable to each sale of Resold Coal under this Agreementwill be those stated in this Agreement, unless the Parties otherwise agree in writing; providedthat any inconsistencies between the terms and conditions of this Agreement and any purchaseorder shall be resolved in favor of the terms and conditions set forth in this Agreement.

Section 14.2. Confidentiality.

Each Party shall hold, and shall use its best efforts to cause its Affiliates, agents, advisors(including counsel and consultants), any lender, potential lender, investor or potential investor tohold, in strict confidence from any other Person (other than any such Affiliate, agent or advisoror any lender, potential lender, investor or potential investor as permitted hereby) all documentsand information concerning the other Party or any of its Affiliates furnished to it, or its Affiliates,

28




agents or advisors (including counsel and consultants) which are marked confidential or canreasonably be interpreted to contain confidential information, whether before or after theEffective Date, by or on behalf of the other Party in connection with this Agreement or thetransactions contemplated hereby, and neither Party nor their Affiliates or any agent, advisor,lender, potential lender, investor or potential investor shall disclose any such information unless,subject to Section 14.3, required to disclose any such information by judicial or administrativeprocess (including in connection with obtaining from Governmental Bodies the necessaryapprovals of this Agreement and the transactions contemplated hereby) or by other requirementsof Law. Each Party may disclose such documents or information to its agents and advisors andany lender or potential lender or any investor or potential investor, provided that prior to receiptof any such information any such agent, advisor, lender, potential lenders, investor or potentialinvestor shall have executed a confidentiality agreement with such Party that incorporates therestrictions and exceptions set forth in this Section 14.2, and may disclose such documents orinformation in an action or proceeding brought by either Party in pursuit of its rights or in theexercise of its remedies hereunder. Notwithstanding the foregoing, this Section 14.2 shall notapply to such documents or information that were (i) previously known by the Party receivingsuch documents or information without breach of any confidentiality requirement or obligation,(ii) in the public domain (either prior to or after the ffirnishing of such documents or informationhereunder) through operation of Law, or by no fault of such receiving Party, or (iii) lateracquired by such receiving Party from another source if such receiving Party is not aware thatsuch source is under an obligation to the other Party to keep such documents and informationconfidential.

Section 14.3. Required Disclosure.

Any Party reasonably determining in good faith that it is required by Law or in the courseof tax audits or administrative orjudicial proceedings to disclose information that is otherwiserequired to be maintained in confidence pursuant to Section 14.2 may make disclosurenotwithstanding the provisions of Section 14.2; provided, however, that the Party making thedisclosure shall, to the extent possible, give prior notice to the other Party of the requirement andthe terms thereof and shall cooperate to the maximum extent practicable to minimize thedisclosure of the information to allow such Party at its cost and expense to obtain proprietary orconfidential treatment of such information by the third party to whom the information isdisclosed and, to the extent such remedies are available, to seek protective orders limiting thedissemination and use of the information. This Agreement does not alter the rights of eitherParty to object to the Law or proceedings requiring the disclosure.

Section 14.4. Compliance with Laws and Governmental Approvals.

In connection with the performance of this Agreement, each Party agrees to comply in allmaterial respects with all Laws, and each Party hereto agrees that it or its agent will usecommercially reasonable efforts to acquire and maintain, in a timely manner, all GovernmentalApprovals required by Law or Governmental Bodies to perform its obligations under thisAgreement.

29




Section 14.5. Entire Aneementz Successors and Assign.

This Agreement, together with the other Project Documents, constitutes the entireagreement and understanding between the Parties with respect to the subject matter herein andtherein and the transactions contemplated hereby and thereby, and any and all previousunderstandings, proposals, negotiations, agreements, commitments and representations, whetheroral or written, are merged herein and are superseded hereby. This Agreement shall be bindingupon and inure to the benefit of the Parties and their respective successors and permitted assigns.

Section 14.6. Notices.

Except as otherwise set forth in this Agreement, all notices, requests and othercommunications hereunder must be in writing and shall be delivered personally (by handdelivery or by overnight courier) or by facsimile transmission (with receipt of transmissionconfirmation) or mailed (certified mail postage prepaid, return receipt requested) to the Parties atthe following addresses or facsimile numbers and shall be effective upon receipt (when sent bypersonal delivery or certified mail) and upon receipt of transmission confirmation (when sent byfacsimile):

If to Buyer, to: The Detroit Edison CompanyOne Energy Plaza634 General OfficesDetroit, Michigan 48226Attention: Manager, Business Development andAdministration - Fuel SupplyFacsimile: (313) 235-6992

With a copy to: The Detroit Edison CompanyOne Energy Plaza641 General OfficesDetroit, Michigan 48226Attention: Director - Fuel SupplyFacsimile: (313) 235-6992

If to Seller, to: Belle River Fuels Company, LLC414 South Main StreetSuite 600AnnArbor,MI 48104Attention: General CounselFacsimile: (734) 302-8245

30




With a copy to: Belle River Fuels Company, LLC414 South Main StreetSuite 600Ann Arbor, MI 48104Attention: Katherine A. PanczakFacsimile: (734) 302-5335

provided, however, that either Party from time to time may change its address, facsimile numberor other information for the purposes of notices to such Party by giving notice specifying suchchange to the other Party.

Section 14.7. Assignment.

Neither this Agreement, nor any of the rights and obligations hereunder, may be assigned,transferred or delegated by either Party without the express prior written consent of the otherParty, which consent shall not be unreasonably withheld or delayed, except that either Party mayassign this Agreement to art Affiliate thereof without the prior written consent of the other Party;provided that any assignment to an Affiliate shall not release the assignor from any obligationsunder this Agreement unless otherwise expressly consented to by the other Party. For purposesof this Section 14.7, any change in control or majority ownership of Seller which causes Sellerno longer to be an Affiliate of DTE Energy Company (determined without regard to the provisoin the definition of “Affiliate” contained herein) shall be deemed an assignment.

Section 14.8. Waiver: Invalidity.

Any term or condition of this Agreement may be waived at any time by the Party that isentitled to the benefit thereof, but no such waiver shall be effective unless set forth in a writteninstrument duly executed by such waiving Party. The failure or delay ofeither Party to requireperformance by the other Party of any provision of this Agreement shall not affect its right torequire performance of such provision unless and until such performance has been waived bysuch Party in writing in accordance with the terms hereof. No waiver by either Party of any termor condition of this Agreement, in any one or more instances, shall be deemed to be or construedas a waiver of the same or any other term or condition of this Agreement on any future occasion.All remedies, either under this Agreement or by Law or otherwise afforded, shall be cumulativeand not alternative. The invalidity or unenforceability of any provision of this Agreement shallbe determined only by a court of competent jurisdiction. The Parties hereby agree to use goodfaith efforts to negotiate an equitable adjustment to any provisions of this Agreement determinedto be invalid or unenforceable with a view toward effecting the purposes of this Agreement, andthe validity or enforceability of the remaining provisions of this Agreement shall not be affectedthereby.

Section 14.9. Limitations of Liability and Exclusive Remedies.

(a) NEITHER PARTY NOR ITS AFFILIATES SHALL BE LIABLEUNDER THIS AGREEMENT TO THE OTHER PARTY OR ITS AFFILIATES FORCONSEQUENTIAL OR INDIRECT LOSS OR DAMAGE, INCLUDING, WITHOUT

31




LIMITATION, LOSS OF PROFIT, LOSS OF TAX BENEFIT OR CREDITS, LOSS OFGOODWILL OR ANY OTHER SPECIAL, PUNITIVE OR INCIDENTAL DAMAGESRESULTING FROM ANY VIOLATION OF OR DEFAULT UNDER TillSAGREEMENT.

(b) THE PROVISIONS OF THIS SECTION 14.9 SHALL APPLY TOALL CLAIMS BASED ON OR ARISING UNDER THIS AGREEMENT, WHETHER INCONTRACT, EQUITY, TORT OR OTHERWISE, REGARDLESS OF FAULT, GROSSOR OTHER NEGLIGENCE (IN WHOLE OR IN PART), STRICT LIABILITY,BREACH OF CONTRACT OR BREACH OF WARRANTY AND SHALL EXTEND TOTHE MEMBERS, MANAGERS, TRUSTEES, DIRECTORS, OFFICERS ANDEMPLOYEES, AGENTS AND RELATED PERSONS OR AFFILIATES OF EACHPARTY, AND THEIR RESPECTIVE MEMBERS, MANAGERS, DIRECTORS,TRUSTEES, OFFICERS, EMPLOYEES AND AGENTS.

Section 14.10. Headings.

The headings contained in this Agreement are solely for the convenience of the Partiesand shall not be used or relied upon in any manner in the construction or interpretation of thisAgreement.

Section 14.11. Counterparts.

The Parties may execute this Agreement in counterparts, which shall, in the aggregate,when signed by both Parties constitute one and the same instrument, and, thereafter, eachcounterpart shall be deemed an original instrument as against any Party who has signed it.

Section 14.12. Applicable Law.

This Agreement, including the interpretation, construction, validity and enforceabilityhereof, and the transactions contemplated herein, and all disputes between the Parties under orrelated to this Agreement or the facts and circumstances leading to its execution or performance,whether in contract, tort or otherwise will be governed by the laws of the State of Michiganwithout regard to the conflict of laws rules thereof. IN ADDITION, EACH PARTY,KNOWINGLY AND INTENTIONALLY, IRREVOCABLY AND UNCONDITIONALLY,WAIVES TRIAL BY JURY TN AND AS TO ANY LEGAL ACTION OR PROCEEDINGRELATING TO THIS AGREEMENT AND FOR ANY CLAIM, COUNTERCLAIM, CROSSCLAIM OR THIRD PARTY CLAIM THEREIN.

Section 14,13. Amendment.

No modification or amendment of any provisions of this Agreement shall be valid unlessit is in writing and signed by both Parties.

32




Section 14.14. No Third Party Beneficiary.

The terms and provisions of this Agreement are intended solely for the benefit of eachParty and their respective successors or permitted assigns, and it is not the intention of the Partiesto confer third-party beneficiary rights upon any other Person.

[Remainder ofpage intentionally left blank]

33




IN WETNESS WHEREOF, the Parties have executed this Refined Coal SupplyAgreement by their authorized representatives as of the date first above written.

BELLE RIVER FUELS COMPANY, LLC

-I

By:7?ZA 7)—ANameTjô RLMTitle: e€s ,nr

THE DETROIT EDISON COMPANY

Title: OY*&

34




EXHIBIT A

BELLE RIVER SITE

A-i




EXHIBIT B

DELIVERY POINTS

See attached on the next page.

B-i




c1

III




EXHIBITC

CALCULATION OF DETROIT EDISON BENEFITS

See attached.

13-I




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