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

BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

* * * * *

In the matter of the application of ) AQUILA NETWORKS-MGU, f/k/a MICHIGAN ) GAS UTILITIES, for a reconciliation of its gas ) Case No. U-11192-R cost recovery revenues and expenses for the ) 12-month period ended December 31, 1997. ) )

) In the matter of the application of ) AQUILA NETWORKS-MGU, f/k/a MICHIGAN ) GAS UTILITIES, for a reconciliation of its gas ) Case No. U-11542-R cost recovery revenues and expenses for the ) 12-month period ended December 31, 1998. ) )

) In the matter of the application of ) AQUILA NETWORKS-MGU, f/k/a MICHIGAN ) GAS UTILITIES, for a reconciliation of its gas ) Case No. U-11802-R cost recovery revenues and expenses for the ) 12-month period ended December 31, 1999. ) ) At the November 7, 2002 meeting of the Michigan Public Service Commission in Lansing,

Michigan.

PRESENT: Hon. Laura Chappelle, Chairman

Hon. David A. Svanda, Commissioner Hon. Robert B. Nelson, Commissioner

ORDER APPROVING SETTLEMENT AGREEMENT

On February 27, 1998, Aquila Networks-MGU, f/k/a Michigan Gas Utilities, (Aquila) filed an

application in Case No. U-11192-R seeking a reconciliation of its gas cost recovery (GCR)

revenues and expenses for the 12-month period ended December 31, 1997. A prehearing

Page 2 U-11192-R et al.

conference took place on April 4, 1998, and an evidentiary hearing was conducted on October 10,

1998.

The parties to Case No. U-11192-R ultimately submitted a settlement agreement in which they

agreed, among other things, that Aquila experienced a net GCR underrecovery of $9,191,133

during the 1997 plan year and that this underrecovery should be rolled into Aquila’s 1998 GCR

plan. On January 6, 1999, the Commission issued an order approving the settlement agreement

(the January 6 order).

On May 4, 1999, the Commission Staff (Staff) filed a petition, pursuant to MCL 462.24,

seeking rescission of the January 6 order. According to the Staff, it had become aware that infor-

mation relied upon in developing the settlement agreement in Case No. U-11192-R was incorrect

and may have resulted in Aquila’s 1997 GCR underrecovery being overstated by approximately

$7.1 million. As a result, the Staff asserted, the record in that case should be reopened and the cost

of gas assigned to the utility’s GCR customers should be revised. On May 17 and June 4, 1999,

respectively, Aquila filed a response to the petition and the Staff filed a reply to that response.

Finally, on June 28, 1999, Aquila submitted a reply to the Staff’s response.

On July 28, 1999, the Commission issued an order finding that, before considering the merits

of the Staff’s petition to rescind, this matter should be:

“[R]emanded to an administrative law judge (ALJ) for further proceedings, which will give the parties an opportunity not only to present evidence in support of their positions on the Staff’s petition, but also to develop a record that will allow the Commission to address any disputed substantive issues necessary to bring [Aquila’s] 1997 GCR reconciliation proceeding to a conclusion if the Commis-sion concludes that the prior order should be rescinded.”

July 28, 1999 order in Case No. U-11192-R, pp. 5-6. The Commission therefore scheduled a

prehearing conference in this matter for September 14, 1999.

Page 3 U-11192-R et al.

In the course of the September 14, 1999 prehearing conference, the ALJ, Daniel E. Nickerson,

Jr., granted the Staff’s motion to consolidate Case No. U-11192-R with Aquila’s 1998 GCR

reconciliation proceeding, which had been docketed as Case No. U-11542-R.1 According to the

application filed in Case No. U-11542-R, Aquila claimed that it overrecovered its 1998 GCR costs

by $194,491. However, the application noted, this figure was based on Aquila’s assumption that

the Commission would neither rescind the January 6 order nor revise the cost of gas assigned to

the utility’s GCR customers, as had been requested by the Staff.

On February 29, 2000, Aquila filed an application in Case No. U-11802-R seeking a reconcili-

ation of its 1999 GCR revenues and expenses. As with the utility’s 1998 reconciliation request,

Aquila’s claim that its 1999 GCR costs were underrecovered by $4,908,915 was based on the

assumption that all issues in the 1997 and 1998 GCR cases would be resolved in its favor. Due to

its close connection to those proceedings, Case No. U-11802-R was ultimately consolidated with

Cases Nos. U-11192-R and U-11542-R.

Following numerous hearings on procedural issues, a second evidentiary hearing was

conducted on May 24, 2001 (this one involving all three dockets). Based on a stipulation of the

parties, testimony from 13 witnesses was bound into the record without cross-examination.

Aquila, the Staff, Attorney General Jennifer M. Granholm, and the Residential Ratepayer

Consortium participated in the consolidated proceedings.

1Although Aquila’s application in Case No. U-11542-R was filed on February 26, 1999 and a

prehearing conference had been conducted on April 6, 1999, evidentiary hearings in that case had not yet commenced when it was consolidated with Case No. U-11192-R.

Page 4 U-11192-R et al.

Subsequently, the parties submitted a settlement agreement resolving all issues in these three

consolidated cases.2 Concurrently, the parties submitted a settlement agreement resolving the

issues in Aquila’s pending GCR reconciliation proceeding concerning the 2000 calendar year,

which is docketed as Case No. U-12122-R.3

According to the settlement agreement filed in these consolidated cases and attached to this

order as Exhibit A, the parties agree to implement the Commission’s September 30, 1997 and

April 12, 1999 orders in Case No. U-10982-R (concerning Aquila’s 1996 GCR reconciliation), and

to settle their disputes in consolidated Cases No. U-11192-R, U-11542-R, and U-11802-R in

accordance with the following terms and conditions.

First, Aquila agrees to make a line item adjustment in the amount of $796,627 (inclusive of

interest through the date of the adjustment) to its booked cost of gas sold as of January 1, 2001.

This line item adjustment is separate and distinct from the settlement amount for the 1997, 1998,

and 1999 GCR reconciliation cases described below. A line item adjustment of $656,166, which

was previously reflected in Case No. U-12617-R (Aquila’s 2001 GCR reconciliation), will be

replaced by the $796,627 discussed above.

Second, the parties agree to settle all issues in the three consolidated cases (covering Aquila’s

1997, 1998, and 1999 GCR reconciliation proceedings) including, but not limited to, issues raised

in an anonymous letter regarding the business practices and conduct of Aquila or other related

business units, which was mailed to the Commission during September 2000. The parties agree to

2Although not specifically addressed by the parties, approval of the settlement agreement

submitted in these consolidated cases would also render moot all issues concerning the Staff’s petition to rescind the January 6 order.

3Today’s order in Case No. U-12122-R approves that settlement agreement.

Page 5 U-11192-R et al.

settle those issues by making a $4,150,000 reduction to Aquila’s booked cost of gas sold as of

January 1, 2000, and by reducing Aquila’s cost of gas sold as of January 1, 2001 by $43,445 (to

reflect the effect of interest). According to the settlement agreement, these two reductions

represent net adjustments for the 1997, 1998, and 1999 GCR reconciliations without specific

reference or attribution to particular issues in the consolidated cases.

Third, Aquila agrees that it will release its excess interstate natural gas pipeline capacity

through the use of the appropriate interstate pipeline companies’ electronic bulletin boards.

Fourth, the parties acknowledge the approval of the settlement agreement and the existence of

other Commission orders in Case No. U-11648 (Aquila’s code of conduct case), in which Aquila

agreed that (1) one of its affiliates, Energy One Ventures, has been or will be sold to a non-

affiliated company, and (2) Aquila, as well as all of its subsidiaries and affiliates, will not provide

non-regulated industrial and commercial natural gas sales and agency services to transportation

customers within Aquila’s Michigan service territory, at least until the Commission specifically

grants authority to provide those services.

Fifth, Aquila agrees that it will not enter into put/call transactions without first receiving

express approval of the Commission to participate in those transactions.

Sixth and finally, the document states that Aquila’s entry into the settlement agreement

constitutes neither an admission nor an agreement by Aquila that any of its actions were

unreasonable or imprudent.

The Commission FINDS that:

a. Jurisdiction is pursuant to 1909 PA 300, as amended, MCL 462.2 et seq.; 1919 PA 419, as

amended, MCL 460.51 et seq.; 1939 PA 3, as amended, MCL 460.1 et seq.; 1982 PA 304, as

Page 6 U-11192-R et al.

amended, MCL 460.6h et seq.; 1969 PA 306, as amended, MCL 24.201 et seq.; and the

Commission's Rules of Practice and Procedure, as amended, 1992 AACS, R 460.17101 et seq.

b. The settlement agreement, attached as Exhibit A, is reasonable and in the public interest,

and should be approved.

THEREFORE, IT IS ORDERED that:

A. The settlement agreement, attached as Exhibit A to this order, is approved.

B. Aquila Networks-MGU, f/k/a Michigan Gas Utilities, shall make all of the adjustments to

its booked cost of gas sold set forth in the settlement agreement and discussed earlier in this order,

including the net $4,193,445 reduction specified by the parties.

C. Aquila Networks-MGU, f/k/a Michigan Gas Utilities, shall also (1) release all of its excess

interstate natural gas pipeline capacity through use of the appropriate interstate pipeline

companies’ electronic bulletin boards, (2) abide by the terms of the settlement agreement

approved, as well as the orders issued, in Case No. U-11648, and (3) refrain from entering into

put/call transactions absent its receipt of prior approval by the Commission.

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

Page 7 U-11192-R et al.

Any party desiring to appeal this order must do so in the appropriate court within 30 days after

issuance and notice of this order, pursuant to MCL 462.26.

MICHIGAN PUBLIC SERVICE COMMISSION

/s/ Laura Chappelle

Chairman ( S E A L)

/s/ David A. Svanda Commissioner

/s/ Robert B. Nelson Commissioner By its action of November 7, 2002. /s/ Dorothy Wideman Its Executive Secretary

Page 8 U-11192-R et al.

Any party desiring to appeal this order must do so in the appropriate court within 30 days after

issuance and notice of this order, pursuant to MCL 462.26.

MICHIGAN PUBLIC SERVICE COMMISSION

_________________________________________

Chairman

_________________________________________ Commissioner

_________________________________________ Commissioner By its action of November 7, 2002. ______________________________ Its Executive Secretary

EXHIBIT A

STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

In the matter of the application of MIGHIGAN GAS UTILITIES for a Gas Cost Recovery Reconciliation CaseNo.U-11192-R Proceeding for the 1Zmonth period ended December 31,1997

In the matter of the application of MICHIGAN GAS UTILITIES for a Gas Cost Recovery Reconciliation Proceeding for the 12-month period ended December 31, 1998

Case No. U-l 1542-R

In the matter of the application,of MICHIGAN GAS UTILITIES for a Gas Cost Recovery Reconciliation Proceeding for the 1%month period ended’December 31,1999

Case No. U- 11802-R

SETTLEMENT AGREEMENT

Pursuant to MCL 24.278 and Rule 333 of the Rules of Practice and Procedure before the

Michigan Public Service Commission (MPSC or Commission), Aquila, Inc. dib/a Aquila

Networks-MGU (formerly know as “Utilicorp United, Inc.” d/b/a Michigan Gas Utilities or

MGU), the MPSC’s Staff (Staff), Attorney General Jennifer M. Granholm (Attorney General),

and the Residential Ratepayer Consortium (RRC) agree as follows:

1. Aquila Networks-MGU has several Gas Cost Recovery reconciliation (GCR

Reconciliation) cases pending before the MPSC, including but not limited to the captioned cases.

2. Aquila Networks-MGU, the Staff, the Attorney General, and R& are parties in

one or more of these cases, which have been consolidated for decision. The parties have

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submitted testimony and exhibits in these cases, have submitted motions or responses, and have

filed briefs and reply briefs. A Proposal for Decision in these consolidated cases is pending but

has not yet been issued.

3. The MPSC previously ordered an adjustment in MPSC Case No. U-10982-R for

the calendar year of 1996. That previously ordered adjustment totaIs approximately $796,627

inclusive of interest through January 1,200l.

4. Based upon the evidence and briefs submitted by the parties, the Staff, the

Attorney General, and RRC have been supporting in aggregate a net GCR over recovery for the

years 1997, 1998, and 1999 that totals approximately $14,173,896, inclusive of interest through

December 1999 plus a disallowance of S219,815 proposed by RRC.

5. On the other h~and, Aquila Networks-MGU has supported a net under recovery of

$4,908,915 for its 1997-1999 GCR reconciliation cases prior to the 1996 GCR reconciliation

adjustment approved by the Commission and hasdisputed the adjustments or disallowances

proposed for 1997 through 1999 by the other parties.

6. The total difference between Aquila Networks-MGU’s net under recovery and

adjustments for 1996,1997, 1998, and 1999 either approved by the MPSC or proposed by the

other parties is approximately $19,302,626 inclusive of interest through January 1,200l.

7. Aquila Networks-MGU, the Staff, the Attorney General, and RRC further agree to

implement the MPSC’s order in Case No. U-10982-R and settle their disputes in the captioned

cases according to the following terms and condition:

A. 1996 GCR Refund.

Aquila Networks-MGU agrees that it has made or will make a lirzitem

adjustment in the sum of $796,627, inclusive of interest through that date, to its

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booked costs of g& sold as of January 1,200l. This line item adjustment is

separate and distinct from the settlement amount for the 1997-1999 GCR

reconciliation case described below. A line item adjustment of $656,166

previously reflected in Case No. U-12617-R will be replaced~by the $796,627 as

noted above.

By. 1997-1999 Gas Cost Recovery Reconciliation Cases.

1. The parties agree to settle all issues in the captioned cases for the

1997, 1998, and 1999 GCR reconciliation cases, including but not limited to, any

and all issues raised in an anonymous letter regarding business practices and

conduct ofAquila Networks-MGU or other business units, which was mailed to

the MPSC and/or any other state regulatory commission on or around September

2000. The parties agree that to settle those issues by an adjustment of $4,15O,OOO

booked as a reduction to the booked cost of gas sold on January 1,2000, and by

an interest reduction adjustment of S43,445 booked as a reduction to the booked

cost of gas sold on January 1,200l. These reductions represent net adjustments

for 1997, 1998, and 1999 GCR reconciliations without specific reference or

attribution to particular issues in the captioned cases.

ii. Aquila Networks-MGU agrees that it will release excess interstate

natural gas capacity via the appropriate interstate pipeline’s electronic bulletin

board.

111. The parties acknowledge the Approved Settlement and

Commission Orders in Case No. U-l 1648, wherein a) Aquila Networks-MGU

agreed that Energy One Ventures has been or will be sold to a non-affiliate, and b)

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Aquila Networks-?vIGU, its subsidiaries, and/or affiliates agreed further that it will

not conduct competitive, non-regulated industrial and commercial natural gas

sales and agency services to Aquila Networks-MGU transportation customers

within the Michigan territory of Aquila Networks-MGU prior to receipt of prior

approval of the Commission to conduct any such future activity.

iv. Aquila Networks-MGU agrees that it will enter into no put/call

transactions without express prior approval of those types of transaction by the

MPSC.

V. By entering into this settlement, Aquila Networks-MGIJ does not

admit or agree that any of its actions were unreasonable or imprudent

8. This Settlement Agreement has been made for-the sole and express purpose of

reaching compromise among the positions of the signatory parties without prejudice to their

rights to take new and/or different positions in other proceedings. All offers of settlement and

discussions relating to this Settlement Agreement shall be considered privileged as provided in

MRE 408. If the Commission approves this Settlement Agreement without modification, neither

the parties to this Settlement Agreement nor the Commission shall make any reference to or use

of the Settlement Agreement or the Order approving its as a reason, authority, rationale or

example for taking any action or position or making any subsequent decision in any other cases

or proceeding; provided however, such reference or use may be made to enforce the Settlement

Agreement and Order.

9. Except as noted in Paragraph 7B i through v above, the parties understand and

agree that no specific finding of fact, conclusion of law, or other precedent is or will be

established by this Settlement Agreement. If the MPSC approves this Settlement Agreement

4

without modification, the’parties agree to support this Settlement Agreement before the MPSC or

elsewhere, but this agreement to support shall not require any party to appear or intervene in any

proceeding in which that party is not otherwise involved.

10. This Settlement Agreement is intended for final disposition of all issues

established or to be raised in the captioned cases. The Staff certifies that this Settlement

Agreement is reasonable, will promote the public interest, will aid the expeditious conclusion of

these cases, and will minimize the time and expense that~the Commission and the parties would

otherwise be required to devote to these cases. The parties will tile this Settlement Agreement in

each of the captioned proceedings along with other documents needed to finalize these cases.

11. This Settlement Agreement is not severable. Each provision of the Settlement

Agreement is dependent upon all other provisions of the Settlement Agreement. Failure to

comply with any provision of the Settlement Agreement constitutes failure to comply with the

entire Settlement Agreement. If the Commission rejects or modifies this Settlement Agreement

or any provision of the Settlement Agreement, the Settlement Agreement shall be withdrawn and

shall not constitute any part of the record of this proceeding or be used for any other purpose.

12. Each part agrees not to appeal or otherwise contest any Commission order

accepting and approving this Settlement Agreement without modification.

Aquila, Inc. di/a Aquila Networks-MGU

Michigan Public Service Commission Staff

By: Albert Ernst Dykema Gossett PLLC 800 Michigan National Tower Lansing, MI 48933

William W. Derengoski Assistant Attorney-General - Public Service Division 6545 Mercantile Way, Suite 15 Lansing, MI 48911

Residential Ratepayer Consortium Attorney General Jennifer M. Granholm

By: Dvd?a g. &&&W Donald E. Erickson Assistant Attorney General Special Litigation Division 525 W. Ottawa St., Sixth Floor P.O. Box 30212 Lansing, MI 48909

Shaltz & Royal, P.C. 3303 W. Saginaw Street, Suite Cl Lansing, MI 48917

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STATE OF MICHIGAN BEFORE THE MICHIGAN PUBLIC SERVICE COMMISSION

In the matter of the application of MIGHIGAN GAS ~;~.9,.1 ,fl-;i::~ _’

UTILITIES for a Gas Cost Recovery Reconciliation Case No. U-l 119&R Proceeding for the 12-month period ended December

OCT 3.7 no2 i

In the matter of the application of MICHIGAN GAS UTILITIES for a Gas Cost Recovery Reconciliation Proceeding for the 12-month period ended December Case No. U-l 1542-R 31,1998

In the matter of the application of MICHIGAN GAS UTILITIES for a Gas Cost Recovery Reconciliation Proceeding for the 12-month period ended December 31,1999

Case No. U-l 1802-R

ADDENDUM TO SETTLEMENT AGREEMENT

Pursuant to MCL 24.278 and Rule 333 of the Rules of Practice and Procedure before the

Michigan Public Service Commission (MPSC or Commission), Aquila, Inc. d/b/a Aquila

Networks-MGU (formerly know as “Utilicotp United, Inc.” d/b/a Michigan Gas Utilities or

MGU), the MPSC’s Staff (Staff), Attorney General Jennifer M. Granholm (Attorney General),

and the Residential Ratepayer Consortium (RRC), in addition to the terms set forth in the

parties’ signed Settlement Agreement, agree as follows:

1. So long as the Commission approves the settlement without modification, Section

81 of the Administrative Procedures Act of 1969 is waived by the signatories.

1

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Aquila, Inc. d/b/a Aquila Networks-MGU

By: f&5uw Albert Ernst Dykema Gossett PLLC 800 Michigan National Tower Lansing, MI 48933

Residential Ratepayer Consortium

Shahz &Royal, PC. 3303 W. Saginaw Street, Suite Cl Lansing, MI 489 17

Michigan Public Service Commission Staff

By&& ‘A&. &+&.,, William W. Derengoski Assistant Attorney General Public Service Division 6545 Mercantile Way, Suite 15 Lansing, MI 48911

Attorney General Jennifer M. Granholm

By: tmQ&z. icLic%w t Donald E. Erickson Assistant Attorney General Special Litigation Division 525 W. Ottawa St., Sixth Floor P.O. Box 30212 Lansing, MI 48909

LAN01\100142.1 IDKMMA

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