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									Founded in 1852                                                                                                    MICHIGAN: Ann Arbor
by Sidney Davy Miller                                                                                             Detroit  Grand Rapids
                                                                                                                   Kalamazoo  Lansing
                                                                                                                          Saginaw  Troy
                                                                                                                        FLORIDA: Tampa
                                                                                                                       ILLINOIS: Chicago
                                                                                                                   NEW YORK: New York
SHERRI A. WELLMAN                     Miller, Canfield, Paddock and Stone, P.L.C.
TEL (517) 483-4954                                                                                                       OHIO: Cincinnati
                                            One Michigan Avenue, Suite 900
FAX (517) 374-6304
                                               Lansing, Michigan 48933                                     CANADA:    Toronto  Windsor
E-MAIL wellmans@millercanfield.com
                                                  TEL (517) 487-2070                                                    CHINA: Shanghai
                                                  FAX (517) 374-6304                                                  MEXICO: Monterrey
                                                www.millercanfield.com                                                  POLAND: Gdynia
                                                                                                                      Warsaw  Wrocław


                                                   June 15, 2011

         Ms. Mary Jo Kunkle
         Executive Secretary
         Michigan Public Service Commission
         6545 Mercantile Way
         P.O. Box 30221
         Lansing, MI 48909

                  Re:       SEMCO Energy Gas Company
                            2009-10 GCR Reconciliation
                            MPSC Case No. U-15702-R

         Dear Ms. Kunkle:

                Enclosed for electronic filing is the Reply Brief of SEMCO Energy Gas Company
         and a Proof of Service.

                                                Very truly yours,

                                                Miller, Canfield, Paddock and Stone, P.L.C.
                                                             Sherri A.              Digitally signed by: Sherri A. Wellman
                                                                                    DN: CN = Sherri A. Wellman C = US O = Miller
                                                                                    Canfield
                                                             Wellman                Date: 2011.06.15 10:44:54 -05'00'
                                                By:
                                                       Sherri A. Wellman
         Enclosures

         cc:      Tom Connelly

         SAW/tmb


         19,159,066.1\129584-00052
                                STATE OF MICHIGAN
               BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION
                                              ****
In the matter of the application of         )
SEMCO ENERGY GAS COMPANY                    )      Case No. U-15702-R
for reconciliation of the gas cost recovery )
plan for the 12-month period ending         )
March 31, 2010 for its M.P.S.C. Division. )
                                            )
                                                              PROOF OF SERVICE
STATE OF MICHIGAN                              )
                                               )ss
COUNTY OF INGHAM                               )
       Theresa M. Briseno, being first duly sworn, deposes and says that on June 15, 2011, she
caused to be served a copy of the Reply Brief of SEMCO Energy Gas Company on the persons
below via electronic mail and U.S. Mail as follows:
Michael Moody                                                                       Michael J. Orris
Assistant Attorney General                                                          Moe Freedman
Environment, Natural Resources & Agriculture Div.                                   Assistant Attorney General
525 W. Ottawa Street                                                                Michigan Public Service Commission
Lansing, MI 48933                                                                   6545 Mercantile Way, Suite 15
moodym2@michigan.gov                                                                Lansing MI 48911-5976
                                                                                    orrism@michigan.gov
                                                                                    Freedmanm1@michigan.gov

Sebastian Coppola                                                                   David L. Shaltz
President                                                                           Chalgian & Tripp Law Offices PLLC
Corporate Analytics, Inc.                                                           1019 Trowbridge Road
1359 Springwood Lane                                                                East Lansing MI 48823
Rochester Hills, MI 48309                                                           dshaltz@sbcglobal.net
sebcoppola@corplytics.com

Frank Hollewa                                                                       ALJ Mark E. Cummins
EPEC                                                                                Administrative Law Judge
6182 Grovedale Court                                                                Michigan Public Service Commission
Alexandria VA 22310                                                                 6545 Mercantile Way, Suite 14
fjhepec@starpower.net                                                               Lansing MI 48911
                                                                                    cumminsm1@michigan.gov
                                                                                                            Digitally signed by: Theresa M. Briseno
                                                                                            Theres          DN: CN = Theresa M. Briseno C = US O = Miller
                                                                                            a M.            Canfield
                                                                                                            Date: 2011.06.15 10:45:08 -05'00'
                                                                                            Briseno
                                                                                    Theresa M. Briseno
Subscribed and sworn before me
on this 15th day of June, 2011.
                            Digitally signed by: Jeri L. Clevenger
        Jeri L.             DN: CN = Jeri L. Clevenger C = US O = Miller Canfield
        Cleven              Date: 2011.06.15 10:45:27 -05'00'
        ger
Jeri L. Clevenger
State of Michigan, County of Ingham, Acting in Ingham
My Commission Expires: October 8, 2015
19,159,076.1\129584-00052
                               STATE OF MICHIGAN

              BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

                                                  ****

In the matter of the application of           )
SEMCO ENERGY GAS COMPANY                      )          Case No. U-15702-R
for reconciliation of the gas cost recovery   )
plan for the 12-month period ending           )
March 31, 2010 for its M.P.S.C. Division.     )
                                              )




                  REPLY BRIEF OF SEMCO ENERGY GAS COMPANY




June 15, 2011
                                                TABLE OF CONTENTS

                                                                                                                                      Page


I.     INTRODUCTION ............................................................................................................. 1
II.    REPLY............................................................................................................................... 2
       A.         Response to Staff ................................................................................................... 2
       B.         Response to AG ..................................................................................................... 3
                  1.         The AG’s recital of the scope of review to be applied in a GCR
                             reconciliation is neither correct, nor relevant to the contested issues
                             in this case.................................................................................................. 3
                  2.         The AG has failed to make a case for disallowing any of the fixed
                             price gas purchases from booked cost of gas............................................. 6
                  3.         The AG has failed to make a case for a disallowance associated
                             with SEMCO Gas’s management of gas storage during the 2009-
                             2010 GCR Period..................................................................................... 14
                  4.         The AG’s recommendations regarding pipeline capacity are
                             without support, unnecessary and should be rejected.............................. 17
III.   RELIEF ............................................................................................................................ 18




                                                                   -i-
                                STATE OF MICHIGAN

              BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

                                                  ****

In the matter of the application of           )
SEMCO ENERGY GAS COMPANY                      )           Case No. U-15702-R
for reconciliation of the gas cost recovery   )
plan for the 12-month period ending           )
March 31, 2010 for its M.P.S.C. Division.     )
                                              )



                  REPLY BRIEF OF SEMCO ENERGY GAS COMPANY



I.     INTRODUCTION

       Case No. U-15702-R involves the reconciliation of Gas Cost Recovery (“GCR”) costs

and revenues for the 12-month period of April 1, 2009 through March 31, 2010 (“2009-2010

GCR Period”).     On June 1, 2011, SEMCO Energy Gas Company (“SEMCO Gas” or the

“Company”), the Attorney General (“AG”) and the Michigan Public Service Commission Staff

(“Staff”) filed initial briefs in this matter. The Residential Ratepayer Consortium (“RRC”) did

not file an initial brief.1 Reply briefs are scheduled to be filed June 15, 2011.

       For the reasons set forth in the testimony and exhibits filed by SEMCO Gas, and as

discussed in the Company’s Initial Brief, SEMCO Gas requests that the Commission approve the

reconciliation of its 2009-2010 GCR costs and revenues in accordance with the Company’s

proposals and authorize SEMCO Gas to refund the over-recovery of $268,866 to its customers

using the approved roll-in methodology.



1
  The absence of an initial brief from the RRC is not unexpected, as the RRC’s witness, Frank
Hollewa, did not recommend any disallowances in connection with the 2009-2010 GCR Period.


                                                   1
        To the extent issues raised by the Staff and the AG in their initial briefs are not discussed

in the reply, SEMCO Gas relies on its Initial Brief and the testimony and exhibits sponsored by

its witnesses in this case.


II.     REPLY

        A.      Response to Staff.

        Pursuant to Section 6h of Act 304, this is a reconciliation of the booked costs of gas

incurred and revenues received by SEMCO Gas during the 2009-2010 GCR Period.                      In

accordance with Act 304, a utility is to be reimbursed for its booked cost of gas provided the

utility’s actions were reasonable and prudent.

        At pages 10 and 11 of its initial brief, Staff advises that SEMCO Gas over-recovered

$268,866, inclusive of interest, for the 2009-2010 GCR Period. Continuing in brief, the Staff

states that it “is not making any recommendations to the Commission regarding the

reasonableness or prudence of SEMCO’s actions during its 2009-2010 GCR Plan Year.” In

regard to this statement, it is notable that Staff is not making any recommended disallowances,

and that it is recommending the recovery of the over-recovered amount of $268,866 which is

consistent with the Company’s proposed reconciliation. As such, SEMCO Gas submits that no

reply to Staff is necessary.2




2
  The Company takes note of Staff’s position expressed in paragraph II, on page 11, of its initial
brief and does not believe a response is necessary as Staff’s recommendation relates to the
future.


                                                  2
       B.      Response to AG.

               1.      The AG’s recital of the scope of review to be applied in a GCR
                       reconciliation is neither correct, nor relevant to the contested issues in
                       this case.

       At pages 2-6 of his initial brief, the AG fails to correctly identify the appropriate standard

of review to be applied in a GCR reconciliation proceeding. The AG’s suggestion that the scope

of this reconciliation is open to addressing all “actual purchasing activities, regardless of whether

or not modifications were made to the purchasing strategy proposed in the plan case” (p 5, AG’s

brief, relying on the September 28, 2010 Order in Case No. U-16146), is neither envisioned nor

allowed by Act 304.

       Act 304 provides for the review of a utility’s gas costs in two separate proceedings. First,

the prudence of the utility’s Plan is reviewed by the Commission in a proceeding known as a

“gas supply and cost review”. Second, the utility’s actual booked cost of gas and revenues

incurred during the plan period are reviewed in a GCR reconciliation proceeding. There is no

provision in Act 304 which provides for the Commission to defer its review of the Plan until the

reconciliation. Specifically, Section 6h(5), MCL 460.6h provides:

       “If a utility files a gas cost recovery plan and a 5-year forecast as provided in
       subsections (3) and (4), the commission shall conduct a proceeding, to be known
       as a gas supply and cost review. For the purpose of evaluating the reasonableness
       and prudence of the plan, and establishing the gas cost recovery factors to
       implement a gas cost recovery clause incorporated in the rates or rate schedule of
       the gas utility.” (Emphasis added.)


       As envisioned by the Legislature, the gas supply and cost review serves as the forum for

an advance evaluation of the reasonableness and prudence of the gas utility’s Plan so that

adjustments may be made to the Plan if necessary. This legislative intent is expressed in Section

6h(6) of Act 304:



                                                 3
       “In its final order in a gas supply and cost review, the commission shall evaluate
       the reasonableness and prudence of the decisions underlying the gas cost
       recovery plan filed by the gas utility…and shall approve, disapprove, or amend
       the gas cost recovery plan accordingly.” (Emphasis added.)


       The statutory obligation to review the Plan in a gas supply and cost review proceeding is

mandatory, and any issue that could have been adequately considered in the Plan cannot be

reserved for reconciliation:

       At the gas cost reconciliation the commission shall reconcile the revenues
       recorded pursuant to the gas cost recovery factor…with the amounts actually
       expensed and included in the cost of gas sold by the gas utility. The commission
       shall consider any issue regarding the reasonableness and prudence of expenses
       for which customers were charged if the issue could not have been considered
       adequately at a previously conducted gas supply and cost review.” (Emphasis
       added.) MCL 460.6h(12) (Emphasis added.)


       All of these Act 304 provisions make it clear that taking a “wait and see” approach to the

Plan or advocating an open-ended review during reconciliation is neither envisioned nor

permissible. Furthermore, if such approach was adopted, it would effectively nullify the purpose

of the Plan.

       As for the AG’s reliance on the Commission’s September 28, 2010 Order in In re

Michigan Consolidated Gas Co., U-16146, as support, it is misplaced. It is clear that the

Commission’s decision in the September 28, 2010 Order is limited to Michigan Consolidated

Gas Company (“Mich Con”) and does not have the broad applicability that the AG suggests3:

       The Commission agrees that, in light of the very unpredictable gas market that
       Mich Con is currently experiencing, the implementation of the VCA purchasing
       method is reasonable and prudent. As Mich Con points out, the company’s
       current fixed price purchasing guidelines rely on price dependent triggers that are
       based on historical price analysis or technical analysis without regard to market
       fundamentals. The VCA method allows continual market participation over an

3
 Nor could the Commission’s September 28, 2010 Order have the broad applicability that the
AG suggests as it would be directly inconsistent with the statutory mandate of Section 6h(12) of
Act 304, MCL 460.6h(12) as cited above.


                                               4
        extended period of time and is consistent with the philosophy that “beating the
        market” is impossible over the long term. As Mich Con observes, only 3.1% of
        its gas supply will be subject to any temporary price spike in a given month. If
        the price increase results in a long-term upward price shifts, then the purchases
        made during the initial price increase will be favorable compared to the new
        higher prices. On the other hand, if prices fall, then the company can take
        advantage of downward price movements with purchases made in periods where
        prices are declining. Nevertheless, the Commission agrees with the Staff that
        during the reconciliation part of this case, Mich Con will bear the burden of
        justifying and supporting its actual purchasing activities, regardless of whether or
        not modifications were made to the purchasing strategy proposed in the plan case.
        (Emphasis added.) (pp 21-22)


        Finally, the Commission’s Order in Case No. U-11225-R is distinguishable from the case

at hand. It is clear from reading pages 2-5 of the AG’s brief, that Consumer Energy Company in

Case No. U-11225-R deviated from its approved plan. SEMCO Gas submits that it adhered to its

approved plan. As addressed, in its Initial Brief, the Company followed its plan in connection (i)

with managing its storage inventory, (ii) making its September 29, 2008 FPP pursuant to the

Milestone Default Method, (iii) making its December 12, 2008 FPP, (iv) purchasing an annual

quantity of 8,984,558 Dth as consistent with the FPP Guidelines for the 2009-2010 Period

established in Case No. U-15452, and (v) acquiring the level of contracted pipeline

transportation capacity. Alternatively, even if it were to be determined that SEMCO Gas acted

contrary to its plan, the Company has provided substantial justification for its actions to support a

finding that the Company acted reasonably and prudently.

        In sum, the Commission should find that the AG’s suggestion regarding the scope of

review to be applied in this GCR reconciliation is neither correct, nor relevant to the contested

issues in this case.




                                                 5
              2.      The AG has failed to make a case for disallowing any of the fixed
                      price gas purchases from booked cost of gas.

       At pages 5-9 of his initial brief, the AG takes up Mr. Coppola’s direct testimony

regarding fixed price purchases, and at page 12 requests a disallowance of $1,462,102 “related to

imprudent purchases of fixed gas supply”. Conspicuously absent from the AG’s “argument”,

however, is any attempt to address the Company’s rebuttal case; in fact, the AG has outright

ignored the Company’s rebuttal to Mr. Coppola’s direct testimony. With the AG having failed to

“argue” his positions in light of opposing testimony, it makes it difficult for the Company to

reply, other than to highlight the evidence which refuted the testimony given by Mr. Coppola.

SEMCO Gas submits that the AG has failed to meet his burden of persuasion.

       At page 6 of his initial brief, the AG claims that SEMCO Gas “deviated from the

approved guidelines and its deviation was unreasonable” and recommends a disallowance of

$168,441. In support of this claim, the AG merely recites verbatim the direct testimony of

Mr. Coppola regarding the September 29, 2008 purchase made pursuant to the FPP Milestone

Method. As discussed in the Company’s Initial Brief (pp 13-17), Ms. Spencer effectively

showed Mr. Coppola’s assertions to be inaccurate.

       As Ms. Spencer addressed in her rebuttal testimony, Mr. Coppola neither understood nor

correctly applied the FPP Guidelines’ 1st Tier Milestone Default Method, and that the Company

made the September 29, 2008 purchase in accordance with its approved plan and the FPP

Guidelines. Specifically, Ms. Spencer identified each of Mr. Coppola’s errors.

       Q.     The AG has recommended a disallowance of $168,441 relating to the
              purchase of FPP on September 29, 2008, due to the Milestone purchase
              requirement. Referring to page 8, lines 16-17 of Mr. Coppola’s pre-filed
              direct testimony, he states that his “review of the Guideline under the
              Milestone Method, would indicate that these purchases were not necessary
              as of September 29, 2008.” Does the Company agree?




                                               6
A.   No. The purchase to which Mr. Coppola refers is reflected on Exhibit A-6
     (TLS-1), line 10, and was made in accordance with the Milestone method
     contained in the FPP Guidelines as approved in Case No. U-15452,
     presented in this testimony as Exhibit A-21 (TLS-8). The FPP Guideline
     contains the Milestone Method and was relied upon by the Company in
     the determination of whether the purchase was to be made on September
     29, 2008. The Milestone purchase was reasonable and prudent and
     Mr. Coppola’s recommended disallowance should be rejected.

Q.   Referring to the direct testimony of Mr. Coppola, page 9, lines 1 – 3, he
     states that “…the Company had already purchased 3,000,457 Dth at fixed
     prices; of which 1,250,190 Dth was for the November through March
     winter period”. Please discuss.

A.   Mr. Coppola has overstated the annual quantity relevant to the Tier 1
     Milestone purchase in question.         The quantity of 3,000,457 Dth
     Mr. Coppola referenced includes 1,181,370 Dth of Tier 2 purchases which
     is not relevant in the evaluation of the Tier 1 purchases made under the
     Tier 1 Milestone requirements. The annual purchase made under Tier 1 at
     the time the Milestone purchase was made was 1,819,370 Dth, not
     3,000,457 Dth. As a result, Mr. Coppola’s statement that “1,250,190 Dth
     was for the November through March winter period” is inaccurate. The
     actual winter portion of the annual purchase made under Tier 1 was
     752,584 Dth.

Q.   Mr. Coppola asserts that the Milestone purchase made on September 29,
     2008 was “not necessary” due to the level of winter supply included in the
     Tier 1 annual purchase acquired prior to the Milestone date. Does the
     Company agree?

A.   No. Mr. Coppola has failed to differentiate between the annual purchase
     layer and the winter purchase layers of Tier 1. Referring to Exhibit A-21
     (TLS-8), page 5 under “% of Requirement”, the purchase layers are
     clearly identified as 5% annual, and 3% winter. In following those
     guidelines and the Milestone Method requirements, the Company
     purchased 1/3 of its Tier 1 winter layer requirement on September 29,
     2008. While Mr. Coppola , on page 9, lines 1-3, states that a portion of
     the annual layer included winter supply, the winter supply referenced was
     part of the Tier 1 annual purchase, based on the specific purchase
     parameters shown on Exhibit A-21 (TLS-8), page 2. The Tier 1 winter
     layer purchase requirement, 3%, is not considered part of the Tier 1 annual
     layer requirements for purposes of pricing, or implementation of the
     Milestone Method.

Q.   What are the purchase indicators which may necessitate a FPP under the
     Milestone Method?



                                      7
       A.     Exhibit A-22 (TLS-9) is a flow chart which lays out the Tier 1 purchase
              indicators and dates for Milestone purchases if necessary. In addition, the
              requirements are defined in the FPP Guidelines, Exhibit A-21 (TLS-8),
              page 3.

              Exhibit A-22 (TLS-9) consists of two sections, the Quartile Methodology
              and the Milestone Methodology. As reflected on the flow chart, if
              purchases are not made as a result of reaching quartile indicators, the
              process moves into the Milestone parameters.

       Q.     When was the Milestone quantity for the Tier 1 winter layer purchased?

       A.     The Milestone Method has a Tier 1 target date for purchasing each layer
              of Tier 1. That date, as reflected on Exhibit A-22 (TLS-9), and the FPP
              Guidelines, Exhibit A-21 (TLS-8), was September 20, 2008. As of
              September 20, the 3% winter layer had not been acquired under the
              quartile method. Therefore, the Company was required to purchase 1/3 of
              the Tier 1 winter quantity during the last 5 trading days in September, and
              completed the purchase on September 29, 2008.

       Q.     Why didn’t the Company purchase any of the Tier 1 annual supply layer
              under the Milestone Method?

       A.     In accordance with the FPP Guidelines, the annual layer requirement of
              5% was purchased on September 2, 2008, upon reaching a second quartile
              purchase indicator. It was not necessary, therefore, to invoke the
              Milestone Method for the annual layer, only for the winter layer which
              and not been acquired by September 20, 2008. (2 Tr 87-89)

       As is clear from Ms. Spencer’s testimony, the Company did not “deviate” from the

approved FPP Guidelines.

       Finally, the alleged unreasonable cost to customers of $168,441, as identified by the AG

at page 6 of his brief, is based on hindsight. AG reached this disallowance amount by using

pricing that was achieved almost a month after the Company had made its September 29, 2008

Milestone Default Method purchase. It was Mr. Coppola’s testimony that a purchase on October

24, 2008, triggered under the second quartile purchase price signal, would have secured supply at

“prices [that] had dropped $1.15 per Dth”. Of course, as Ms. Spencer testified, it is only by




                                               8
relying on hindsight can one know that the second quartile was reached on October 24, 2008.

(2 Tr 90, L 5-19)

       At page 7 of his initial brief, the AG claims that based on the information available to

SEMCO Gas at the time it made the December 12, 2008 FPP the purchase was unreasonable and

imprudent, and recommends a disallowance of $1,209,046. In support of this claim, again the

AG merely recites verbatim the direct testimony of Mr. Coppola making absolutely no attempt to

address Ms. Spencer’s rebuttal testimony.      As discussed in the Company’s Initial Brief,

Ms. Spencer clearly identified what was known and reasonably foreseeable by the Company at

the time it decided make the December 12, 2008 FPP.

       Ms. Spencer identified in her rebuttal testimony the information that was reasonably

available to the Company at the time it made its December 12, 2008 FPP, and confirmed that this

information as then known to the Company supported its purchase decision as reasonable and

prudent.

       Q.      On page 11, lines 13-15 of his pre-filed direct testimony, Mr. Coppola
               states that a purchase of 734,313 Dth was “neither reasonable nor prudent”
               and recommends a disallowance of $1,209,046. Does the Company agree
               that the purchase of winter FPP supply on December 12, 2008 was
               imprudent and therefore worthy of a disallowance?

       A.      No. The winter fixed price purchase made by the Company on December
               12, 2008 was reasonable and prudent. The NYMEX winter strip rose from
               November to December 2008, as seen on Exhibit A-23 (TLS-10). The
               FPP Guidelines contain a purchase indicator of $.30 under a previously
               secured NYMEX price, which was reached around December 4, 2008 and
               the Company made the required Tier 3 winter purchases, and
               approximately 16.5% of the Tier 4 winter purchase. On December 12,
               2008, the winter strip showed the opportunity to secure another portion of
               the Tier 4 winter supply, approximately 34.5%, at a NYMEX price that
               was not only approximately $.30 under the December 4th Tier 4 winter
               purchase, but also approximately $.60 under the second quartile indicator,
               bringing the total Tier 4 winter purchase to 50%, as allowed in the
               Guidelines, and reflected on lines 24 and 26 of Exhibit A-6 (TLS-1).




                                               9
       Q.     Ms. Spencer, at the time the winter purchase was made on December 12,
              2008, what did the Company know regarding future prices?

       A.     Exhibit A-23 (TLS-10) is a graph of the 2009-10 winter NYMEX strip,
              the pricing period which is applicable to the purchase made on December
              12th. The graph depicts the activity of the NYMEX winter strip up to
              December 12th, the information known by the Company at the time. The
              Company felt it was prudent to layer in another winter purchase with the
              decline in the market which allowed for a purchase to be made $.60 under
              the second quartile indicator. The purchase left approximately 2.2 Bcf of
              winter supply available for purchase after the first of the year which, as it
              turned out, experienced a significant decline in prices which the Company
              was able to capture with its FPP acquisitions in April of 2009.

              The second quartile was identified as a reasonable price signal during the
              course of the collaborative effort to develop FPP Guidelines over the last
              several years. Certainly a purchase of supply at a price $.60 under the
              second quartile cannot be determined to be imprudent because NYMEX
              prices began to fall steadily, with the February contract settling at a 24
              month low on January 29, 2009, a month and a half after the decision was
              made. The December 12, 2008 FPP purchase made by the Company was
              reasonable and prudent, thus no disallowance is warranted. (2 Tr 90-92)

       Ms. Spencer also effectively demonstrated that Mr. Coppola’s analysis utterly failed to

support his conclusion that spot market prices at the time of the December 12 FPP “were in a

free-fall”, and that his claim that the market was $1.46 below the December 12 FPP price, was

equally flawed from which no reasonable comparison could be made.

       Q.     Mr. Coppola, on page 10, line 9 – 13 of his pre-filed direct testimony,
              states that the fixed price purchase made by the Company on December
              12, 2008, was “premature and ill-conceived” and made at a time when
              “spot market gas prices were in a free-fall and $1.46 below the December
              12 transaction price.” Please discuss.

       A.     Mr. Coppola’s referenced statement is misleading. He states that “spot
              market gas prices were in a free-fall…” which was not the case on
              December 12, 2008 when the Company purchased the FPP with which
              Mr. Coppola takes issue. To support his statement, he presents a graph,
              shown on page 11 of his direct testimony, which represents the activity of
              the “Average Actual Index Prices”. As reflected on Mr. Coppola’s graph,
              a significant decline in market prices, which would indicate a “free-fall” in
              index market prices, did not come about until the end of January, when the
              NYMEX began to settle at 2 year lows in late February and 6 year lows in
              early March. In fact, Mr. Coppola’s graph shows an increase in prices


                                               10
              through November to December 2008. Mr. Coppola has provided a graph
              that seems to reflect his reliance on hindsight information for determining
              the reasonableness and prudency of the Company’s purchases.

       Q.     Please discuss Mr. Coppola’s assertion that the market was “$1.46 below
              the December 12 transaction price” as stated on page 10, line 12-13 of his
              pre-filed direct testimony.

       A.     Mr. Coppola’s statement on page 10, line 12-15 regarding spot prices
              being “$1.46 below the December 12 transaction price”, is based upon a
              flawed comparison. The prices compared by Mr. Coppola are for supply
              purchased for November 2008 monthly spot supply, $5.70, versus a 5
              month future winter period, purchased on December 12th. To compare
              the monthly spot price of November 2008 supply to the price of the 2009-
              2010 winter price paid on December 12th and to imply that the price paid
              by the Company was $1.46 too high is inappropriate. Mr. Coppola has
              actually highlighted the difference in a spot price for a single month,
              versus the price of 5 month supply a year into the future.

              In addition, the supply purchased by the Company on December 12, was
              at a specific receipt point, ANR Southeast. The “average actual field
              index price” of all “gas supply basins accessed by the Company” in
              November of 2008 is not proper for comparison to a purchase at a specific
              receipt point for a future period. In the case of the December 12 purchase,
              the price paid was $7.1625/Dth on ANR Southeast, while the ANR
              Southeast November 2008 monthly index was $6.50 – a difference of
              $.6625. If one were using Mr. Coppola’s methodology of selecting a
              monthly index price versus the 2009-10 winter NYMEX on December
              12th, it would have been more appropriate to use the December 2008
              monthly index for ANR SE of $6.89, which would result in a difference of
              $.27. (2 TR 92-93)

       Finally, the amount of the AG’s proposed disallowance lacks merit. In calculating his

recommended disallowance the AG “used the NYMEX average strip price” and “adjusted this

NYMEX price for the basis differential for purchases in April 2009 delivered to the ANR

Southeast pipeline to arrive at an estimated fixed price of $5.516.” As Ms. Spencer explained,

the AG’s adjustment was improper as Mr. Coppola used a basis differential for spot supply to

flow in the month of April 2009; whereas, the December 12 FPP was for fixed price supply to

flow in the months of November 2009 – March 2010. On this point Ms. Spencer testified:




                                              11
              To calculate his recommended disallowance, Mr. Coppola, on page 11,
              lines 7 – 11, states he used “the NYMEX average strip price of $5.551 on
              April 2, 2009…” and “adjusted this NYMEX price for the basis
              differential for purchases in April 2009 delivered to the ANR Southeast
              pipeline to arrive at an estimated fixed price of $5.516.” A basis
              differential obtained for monthly spot supply for flow in the month of
              April 2009 specifically, is not the basis differential one is likely to have
              available when contracting for November 2009-March 2010 winter supply
              purchased in April 2009.


       Q.     What was the ANR Southeast basis differential had the December 12
              purchase been made on April 2, 2009?

       A.     The Company did not purchase ANR Southeast supply for the 2009-10
              winter period in April 2009, therefore, the actual basis differential that
              may have been attained by the Company is not known. Basis differentials
              can vary dramatically. To highlight this fact, one can compare the basis
              differential attained by the Company for spot supply for October 2008 on
              Northern Natural Gas (NNG), the Demarc receipt point, versus the basis
              available for the FPP purchase at the same supply location on October 24,
              2008. The October 2008 monthly spot supply basis was ($3.055),
              compared to the basis differential available for the FPP purchase made on
              October 24, 2008, for the flow period of November 2009-March 2010, of
              ($.675) a difference of $2.38. This example serves as a cautionary tale
              when using an apples to oranges comparison to calculate disallowance
              recommendations. (2 TR 94-95)


       At page 9 of his initial brief, the AG asserts that based on the information available to

SEMCO Gas the Company was unreasonable to purchase an annual quantity of 8,984,558 Dth to

satisfy its FPP requirements, and recommends a disallowance of $84,615. In support of this

assertion, once again the AG merely recites verbatim the direct testimony of Mr. Coppola. In

fact, the AG goes so far to claim that SEMCO Gas “failed to explain” its actions. If the AG had

in fact looked at Ms. Spencer’s rebuttal testimony he would have received a full explanation of

why the Company acted to purchase an annual quantity of 8,984,558 Dth.

       On that point, Ms. Spencer explained that in securing the annual quantity of 8,984,558

Dth, the Company was following “the approved 2009-10 FPP quantities, 9,033,703 Dth,



                                              12
delivered reflected in the FPP Guidelines, Exhibit A-21 (TLS-8), p 5, approved in Case No.

U-15452.” (2 Tr 95, L 20-23) And although the Company in its plan filed in Case No. U-15702,

proposed a revised sales forecast, it knew that the FPP Guidelines established in Case No.

U-15452 remained in effect until changed by Commission order. The uniqueness of these

circumstances must be recognized; with the establishment of the fixed price purchase guidelines,

parties to GCR proceedings sought to fix supply outside of the 12-month plan periods at issue,

requiring the utilities to make fixed price supply purchases for future GCR periods. The FPP

Guidelines approved by Commission order in Case No U-15452 were specific as to amounts to

be secured by SEMCO Gas for 2009-2010 and beyond. It was this directive that was known to

the Company when it secured it last fixed price purchase in April 2009, more than 5 months

before the Commission’s September 29, 2009 Order approving revised Guidelines for the 2009-

2010 GCR Period.

       Not only did SEMCO Gas explain that its actions were intended to follow the then

approved Guidelines, the Company also demonstrated, that the amount of the AG’s disallowance

is result-oriented; designed to achieve the greatest disallowance. Mr. Coppola stated that he

calculated the AG’s proposed disallowance of $84,615 by assuming that instead of securing

281,113 Dth in fixed supply, the Company would have purchased that amount in the spot market.

Mr. Coppola then chose the FPP supply package with the highest price, $5.345/Dth and swapped

it out for a spot price of $5.044/Dth. As explained by Ms. Spencer in her rebuttal testimony,

Mr. Coppola’s methodology was inappropriate:

       Q.     Mr. Coppola has recommended a disallowance of $84,615 based on the
              difference between the April FPP package purchased from Nexen, and the
              average spot price of supply in the months of November – March 2009. Is
              the calculation correct?

       A.     The Company does not agree that a disallowance is warranted on variance
              of .7% over planned quantities. If one were to calculate one, however, the


                                              13
              gas cost used by Mr. Coppola is not correct. Rather than using a weighted
              average cost of the three FPP made in April 2009, Mr. Coppola selected
              the supply package with the highest price. Referring to Exhibit AG-4,
              lines 12 and 13, Mr. Coppola has used the supply package from Nexen at a
              price of $5.345/Dth. One cannot assume that the Nexen supply is the
              package that would have been purchased at a lesser quantity had the
              Company reduced its April purchases. It is, therefore, inappropriate to use
              this package alone in the calculation.

              Mr. Coppola should have used the weighted average cost of the fixed price
              purchases made in April 2009. Those purchases consisted of three
              packages, reflected on Exhibit A-6 (TLS-1), lines 18, 20 and 22, at a
              weighted average cost of $5.1628/Dth. The average cost of spot supply in
              November – March 2009 was $5.044, $.1188/Dth less than the rate used
              by the AG. Applied to the variance in actual annual FPP versus 25% of
              annual purchases quantities filed in Case No. U-15702, 254,458 Dth, the
              difference in cost would be $20,230, $54,385 less than the disallowance
              recommended by the AG. (2 TR 97)

              3.     The AG has failed to make a case for a disallowance associated with
                     SEMCO Gas’s management of gas storage during the 2009-2010 GCR
                     Period.

       At pages 9-10 of his initial brief, the AG takes up Mr. Coppola’s direct testimony

regarding the gas storage management, claiming that based on Mr. Coppola’s “review and

experience” SEMCO Gas’s management of its gas supply and storage withdrawal during the

2009-2010 GCR Period was neither reasonable nor prudent.             This claim is belied by

Mr. Coppola’s testimony given during cross-examination, as well as Ms. Spencer’s rebuttal

testimony which the AG completely ignores in his brief.

       It was made clear during cross-examination that Mr. Coppola has no experience in

managing gas storage (2 Tr 200-201). It is only Ms. Spencer, with extensive experience in

managing gas storage, who testified that the Company took significant action, based on what was

known and reasonably foreseeable, to manage its gas storage inventory, and described the flaws

in Mr. Coppola’s review as follows:




                                              14
Q.   What adjustments were made by the Company to manage higher than
     planned storage inventory levels during the November 2009-March 2010
     winter period?

A.   The Company reduced its purchases by approximately 968,000 Dth for the
     December 2009 – March 2010 winter period in an effort to reduce higher
     than planned storage inventory. These adjustments were made to manage
     inventory variances in the months of November 2009 – February 2010. In
     fact, during the purchase and storage planning process for March, the
     Company estimated that at the end of February, the storage variance from
     plan would be 262,267 Dth, and the Company adjusted storage
     withdrawals and purchases accordingly. Had the weather and GCC
     activity occurred exactly as planned, the inventory variance would have
     been eliminated at the end of February. The weather through the
     remainder of February, however, was warmer than normal, resulting in an
     actual inventory variance at the end of February of 582,876 Dth, which the
     Company had no way of knowing at the time it made its adjustments for
     the month of February. (2 Tr 82-83)

Q.   What has Mr. Coppola concluded was the impact of GCC and weather on
     the storage inventory variance for 2009-10?

A.   Mr. Coppola has calculated an impact on storage inventory of
     approximately 739,000 Dth, attributable to the combined sales impact of
     weather in February and March (692,363 Dth), and GCC impact on March
     alone (46,082 Dth). Mr. Coppola has seemingly ignored the GCC impact
     for February, approximately 181,400 Dth, in his discussion on page 14,
     lines 16-21, of his direct testimony. He acknowledges the combined
     impact of weather on February and March, but minimizes the GCC impact
     on sales by noting only the adverse effect in March 2010, thus
     understating the impact of February and March activity.

Q.   Please continue.

A.   The annual inventory variance of 1,325,105 Dth was impacted by more
     than just February and March weather, and the GCC participation in
     March. Referring to Exhibit A-20 (TLS-7), column G, line 3, the total
     impact of weather and GCC for the winter period totaled approximately
     1,547,000 Dth. The Company, by making adjustments of approximately
     968,000 Dth to purchases and storage withdrawals for December – March,
     mitigated the impact, a fact which Mr. Coppola appears to disregard.

     Another factor to include in a review of storage activity is the higher than
     planned inventory levels at the end of November, 882,662 Dth. It is
     important to note that at the time the Company made its purchase and
     storage withdrawal decisions for the month of December, the projected
     end of November inventory variance was approximately 730,000 Dth. As


                                     15
               discussed previously in my testimony, the Company must base its
               purchase and storage decisions for the next month without the benefit of
               the actual month end inventory level of the prior month, but rather an
               estimate. The Company, as seen on Exhibit A-20 (TLS-7), line 5, made
               adjustments to it December purchases which, in conjunction with slightly
               colder than normal weather, ultimately served to offset the majority of the
               GCC sales impact, and worked to reduce the end of November inventory
               variance by 385,163 Dth.        The remaining inventory variance of
               approximately 498,000 Dth was present throughout the remaining winter
               months. As seen on Exhibit A-20 (TLS-7), the purchase and storage
               adjustments made by the Company ultimately served to offset weather and
               GCC impact, rather than serving to reduce the inventory variance.

       Q.      Referring to Mr. Coppola’s pre-filed direct testimony, page 14, lines 20-
               21, he discusses the storage inventory variance stating that there is
               approximately 601,426 Dth, of the total inventory variance of 1,325,105
               Dth, left unexplained. Please discuss.

       A.      Mr. Coppola has provided a simplistic analysis of a complex issue. In
               discussing the Company’s “management of its gas supply”, the AG:

               1) fails to consider the full impact of GCC participation and weather;

               2) disregards the approximately 968,000 Dth, of purchase and storage
                  adjustments made by the Company, 745,000 Dth of which were for
                  the January-March period, stating that they were not “significant
                  steps”;

               3) seemingly does not recognize the lingering effects of falling behind
                  on storage withdrawals in November, with no opportunity to fully
                  make up the variance due to the impact of weather and GCC;

               4) ignores the monthly purchase and storage planning process, which is
                  necessarily based on estimated storage variances, affected by
                  unknown factors and;

               5) has chosen to ignore the fact that the variance remained steady during
                  the winter, from approximately 500,000 Dth in December to less than
                  600,000 Dth in January and February , as a result of the actions taken
                  by the Company to manage the inventory with the weather and GCC
                  participation an unknown variable each month. (2 Tr 83-86)

       Finally, not only did Mr. Coppola’s review fail to meet the mark, as Ms. Spencer pointed

out, the basis for the amount of the AG’s disallowance is equally flawed.

       Q.      Please discuss the gas cost rate used by the AG in the disallowance
               calculation.


                                               16
       A.     Mr. Coppola has selected January and February as the months for which
              the additional 505,400 Dth adjustment to purchases should have been
              made, rather than choosing to spread the 505,400 Dth out over the four
              month period during which the Company decreased its purchases, and as
              discussed in the 2009-10 GCR plan for managing warmer than normal
              weather. Therefore, Mr. Coppola should have used an average of prices
              for the December-March period in calculating any type of disallowance.
              (2 Tr 86, L 19-25)

       In sum, the AG failed to make a case for disallowance for SEMCO Gas’s management of

gas storage during the 2009-2010 GCR Period.

              4.      The AG’s recommendations regarding pipeline capacity are without
                      support, unnecessary and should be rejected.

       At pages 10 through 12 of his initial brief the AG requests the Commission to direct the

Company to (i) increase utilization of pipeline capacity by either more aggressive temporary

release or permanent release, (ii) comply with additional filing requirements regarding pipeline

capacity, and (iii) aggressively pursue before FERC crediting pipeline fees during interruptions.

As support for these recommendations, the AG relies on Mr. Coppola’s testimony while

conspicuously disregarding the Company’s rebuttal case on this issue.

       As addressed both in Mr. Fitzgerald’s testimony and in SEMCO Gas’s Initial brief (pp

23-25), the Company maximized its use of capacity for the 2009-2010 GCR Period. As for the

future, Mr. Fitzgerald testified that the BP Asset Management Agreement (“AMA”), as

restructured, provides for the release of 100% of available capacity (2 Tr 147) , and the AG’s

witness, Mr. Coppola deemed the restructured AMA to be “an appropriate move by the

Company to better manage and optimize its pipeline capacity and gas supply.” (2 TR 182, L 5-6)

       Also, Mr. Fitzgerald responded to Mr. Coppola’s claim that “the Company is not

providing sufficient information in its GCR reconciliation filing to allow adequate upfront

review of pipeline capacity utilization,” proved it to be untrue. The AG was clearly able to seek

the information that he needed on pipeline capacity through discovery and the Company


                                               17
reasonably complied with the AG’s requests. (2 Tr 147, L 10-17) In fact, Mr. Coppola admitted

same when he stated “[I]n response to discovery by the AG, the Company provided information

on the utilization of contracted interstate pipeline capacity.” (2 Tr 177, L 11-12) The

Commission should not burden the Company with increased direct case filing requirements,

when the information sought by the AG can be clearly obtained, if necessary, through discovery.

         As regarding AG’s concern for pipeline deliverability interruptions and any possible

related costs (p 11, AG’s brief), the AG’s witness, Mr. Coppola, commended the Company for

intervening in a FERC proceeding to require pipelines to revise their tariffs to provide credits to

shippers during periods of service interruptions. (2 Tr 181)

         In sum, there is no need to adopt the AG‘s recommendations regarding pipeline capacity.


III.     RELIEF

         The record evidence in this proceeding as addressed in SEMCO Gas’s testimony,

exhibits, and briefs overwhelmingly supports approval of SEMCO Gas’s 2009-2010 GCR

reconciliation case, and the positions taken by, claims and arguments presented by the AG are

without merit and should be rejected.

                                 Respectfully submitted,

                                 SEMCO ENERGY GAS COMPANY
                                             Sherri A.           Digitally signed by: Sherri A. Wellman
                                                                 DN: CN = Sherri A. Wellman C = US O = Miller Canfield
                                                                 Date: 2011.06.15 10:45:52 -05'00'

Dated: June 15, 2011             By:         Wellman
                                       Its Attorney
                                       Sherri A. Wellman (P38989)
                                       MILLER, CANFIELD, PADDOCK AND STONE, P.L.C.
                                       One Michigan Avenue, Suite 900
                                       Lansing, MI 48933
                                       (517) 487-2070
                            Attorney for SEMCO ENERGY GAS COMPANY

19,138,393.1\129584-00052




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