DEAR Detroit Edison and MichCon retirees working to presenre our hard earned benefits

An Alliance of DTE Energy Retirees 2 t.1 ZOOb

Commissioner J. Peter Lark Commissioner Laura Chappelle Commissioner Monica Martinez Michigan Public Service Commission 6545 Mercantile Way Lansing, Michigan 48909

Re: Letter and Comments regarding Detroit Edison's Report in Response to the Commission's Investigation of A&G Expenditures, Case No. U-14666.

Dear Commissioners:

DEAR DEAR (Detroit Edison Alliance of Retirees) consists of retirees of both Detroit Edison and MichCon. DEAR was formed in 2000 with the objective of assuring that retirement benefits earned by the employees of DTE, primarily pension and health care benefits, are properly funded, maintained, and paid by DTE.

DEAR is also a member of the National Retiree Legislative Network ("NRLN), a non-partisan coalition of retiree associations devoted to protecting pension plans and retirement health care benefits. The president of DEAR, Robert Foresta, is on the board of the NRLN, which has two million members nation wide and a staff that is based in Washington, D.C.

Reasons DEAR is Providing Comments On February 1,2006, Detroit Edison filed a report with the Commission in response to the Commission's investigation of A&G expenditures, entitled "The Detroit Edison Company's Administrative and General Expense Analysis" ("DE's Analysis").

Members of DEAR have experience in many of the issues that underlie A&G expenditures. It is DEAR'S considered concern that while Detroit Edison has explained away much of the difference in A&G expenses between it and Consumers Energy, Detroit Edison leaves the analysis short by suggesting that the bulk of the remaining difference is caused by high retirement benefits cost.

As this Commission knows, for many years retirement health care has been externally funded under the Commission's authority by monies collected from ratepayers, and monies so collected are intended to fund the benefits that retirees have earned from long service with Detroit Edison.

DEAR Board of Directors Bob Cabble + Bob Foresta + Mike Gavin + Charlotte "Charlie" Mahoney + J i Piana + Bob Pierce John Sangregorio + Kathy Sulliian + Bob Tompkins + Frank Torre + Cheryl VanWit + Alex Zakem

"By Retirees for Retirees"

DEAR is offering the Commission comments on DE's Analysis for the following reasons:

(I) To provide an accurate assessment and comparison of the retirement health care situation,

(2) To provide a more complete perspective from which to assess potential future actions by Detroit Edison regarding changes to or reductions of retirement benefits, and

(3) To prevent the "raiding" of the retirement health care fund by Detroit Edison in an attempt to convert funding requirements into additional profits.

DEAR's Perspective Historically, benefits to utility employees have been weighted lighter on the front end and heavier on the back end, to achieve the purpose of retaining specialized expertise over the long term. The Commission, in its wisdom, directed that such back-end benefits - particularly retirement health care - be externally funded rather than paid out of current cash, because internal funding would create "too great a temptation for utility management, a corporate raider, or aparent corporation to avail itselfof abundant cash." [Order in Case No. U-10040, December 8, 1992, page 17, emphasis added]

External funding, contributions to funds in anticipation of expenditures, and back-end loading of benefits make Detroit Edison's situation quite unlike that of auto manufacturers and other corporations recently in the news. However, in its DE Analysis Detroit Edison appears to be leaping on the bandwagon of public sentiment regarding high retirement health care costs.

DEAR's purpose is not to seek "more" for retirees, but rather to maintain the level of benefits earned by retirees. DEAR believes that these benefits are in fact deferred compensation, compensation already paid for by ratepayers.

DEAR hopes that the Commission will take the attached comments in the spirit in which they are offered - a good faith attempt to set the record straight and to assist the Commission and its Staff in the A&G investigation.

Attachment

cc: Michael E. Champley, Detroit Edison Thomas A. Hughes, Detroit Edison

Contact: Robert Foresta 13 120 Orange St. Southgate, MI 48 195-1 61 6 734-285-1242 dearalliance@,comcast.net

~ o b & Foresta President

DEAR'S Comments on DE's Analysis of A&G Expenditures

(Page numbers refer to DE's Analysis unless otherwise noted)

I. DE's Analysis Failed to Make an Obvious Adjustment That Accounts for Much of the Difference in Pension and OPEB Expenses: Adjusting for the Difference in Number of Employees

DE's Claims

In DE's Analysis [page 31, Detroit Edison identifies three factors that should be considered in a

proper side-by-side comparison of Detroit Edison to Consumers Energy:

1. Accounting differences 2. Differences in scale

a. Size of customer base b. Generation mix

3. Geographic based cost differences.

These factors are certainly valid. For "differences in scale," Detroit Edison considers only

number of customers and generation mix - not number of employees or number of retirees (a

point which will be addressed later in these comments). After adjusting for the three factors,

Detroit Edison concludes [page 41:

On this basis of comparison, it is apparent that the single largest differentiator in A&G expense between Edison and Consumers large enough to warrant detailed analysis is Employee Pensions and Benefits expense. Indeed, a deeper analysis highlights that the vast majority of this difference can be traced to pension and other post employment benefit (OPEB) expense . . . .

The sources of the differences in the level of pension and OPEB expense are varied and dependent on the underlying specific accounting and actuarial practices. The underlying benefit plan design, employee demographics, actuarial assumptions, funding and investment returns on assets heavily influence both of these expenses.

Detroit Edison goes on to identifl four "primary drivers" of differences in OPEB expenses

between Detroit Edison and Consumers Energy (page 4): interest cost, loss recognition, plan

design, and transition obligation. Later in DE's Analysis, Detroit Edison purports to examine

differences in OPEB expenses "in detail" [pages 20-291.

DEARys Review

So, what is wrong with how Detroit Edison sets up the examination of pension and OPEB

expenses? Two errors: (1) Detroit Edison's definition of "differences in scale" does not include

the one main factor that must be considered in comparison of absolute benefit dollars - namely,

number of people receiving such benefits; and (2), although DE's Analysis shows the difference

between Detroit Edison and Consumers Energy in number of employees [table on page 101, it

fails to use such an obvious normalizing factor to adjust for differences in a meaningful way.

Detroit Edison defines OPEB expenses as relating to "medical, prescription drug and life

insurance benefits for qualified retired employees," meaning "providing current active employees

with benefit programs used after their retirementy' [page 201. How many employees? The answer

is in the table in DE's Analysis on page 10. Therefore, the meaningful way to compare the

pension and OPEB expenses of Detroit Edison to Consumers Energy is to compare on a per

person basis. The following table shows the comparison that Detroit Edison could have and

should have made, but did not. Adjusted Employee Benefits and Pensions of $l38M equals

$2 12M times the ratio of employees (5 1 39 / 790 1).

Edison Detroit Consum After Adj Edison E n e m mff Empl Adi Lff

Employee Benefits and Pensions ($M) $212 $58 $154 $138 $80

Average Number of Employees 7,901 5,139

Thus, the purported difference between Detroit Edison and Consumers Energy of $1 54M shrinks

to $80M after correctly accounting for the difference in number of employees. This remaining

2

$80M difference would be further subject to Detroit Edison's application of distinguishing factor

#3 - geographical based cost differences - and other differentiating factors.

Taking the $80M difference unexplained by the simple adjustment for number of employees as a

starting point, one can apply reasonably some of the additional adjustments explained in DE's

Analysis:

Adiustment Factor $M

Starting difference $80

Geographical based costs - 10 Net financing of pension - 30 Net financing of OPEB - 6 Transition obligation + 10 Savings plan - - 13

Net Difference $3 1

Diff in Employee Pensions and Benefits after adjusting for number of employees

7% of $138M, derived from p. 18 due to DE larger population of retirees, p.22 2nd table on p. 26 2"d table on p.26 CE suspends savings plan, table p. 28

Remaining unexplained difference

In the table on page 3 of DE's Analysis, Detroit Edison summarizes the difference between it and /

Consumers Energy after making normalizing adjustments to A&G expenses. It concludes that

total A&G expense difference (after normalization) is $1 17M, of which $75M is due to Employee

Benefits and Pensions: "Almost 213 of the difference in A&G expense is attributed to Employee

Pensions and Benefits representing $75 million of the total difference" [page 191. However, by

including a simple adjustment to normalize for number of employees, DEAR'S review as

explained above has shown that only $.?IM of the difference between Detroit Edison and

Consumers Energy is due to unexplained differences in Employee Benefits and Pensions.

Further, to the extent that the OPEB fund is currently under-funded by Detroit Edison, the amount

offsetting costs due to "expected return on assets" [see pages 25 and 261 is less than it would be

otherwise. Therefore a fully funded OPEB fund would reduce the difference to much less than

$3 1M.

Conclusion

While $3 1M is no small sum, it does not support Detroit Edison's conclusion that "the bulk of the

unadiusted difference f$117M1 is due to pension and OPEB expense." Therefore, if Detroit

Edison has concluded that its Employee Benefits and Pensions are extraordinarily high, compared

to other companies, and if such a conclusion is not accurate, then any actions Detroit Edison takes

to reduce pension and retirement health care benefits will not be fact based and may well be bad

decisions - (a) bad for retirees in that their earned benefits would be lost and (b) bad for Detroit

Edison in that it would not realize the anticipated expense reductions from such cuts.

The Rhetoric in DE's Analysis of High Retirement Health Care Costs is Contradicted by Evidence Submitted by DE in Case No. U-14428 (post employment benefits equalization)

DE's Analysis

In the DE analysis, Detroit Edison puts much emphasis on what it has determined to be the high

cost of pensions and OPEB, compared to Consumers, calling these two areas "the single largest

differentiator in A&G expense between Edison and Consumers" [page 41 and stating that "the

bulk of the unadjusted difference [in A&G] is due to pension and OPEB expense" [page 51. The

DE analysis also speaks to the level of heqlth care expenses, specifically "recent health care cost

experience much higher than assumed in prior periods" [page 271, stating "Edison's higher health

care cost experience has resulted in its actuarial losses being larger than Consumers' " [page 271.

DEAR'S Review

In Case No. U-14428, in Exhibit AG-1, Detroit Edison was asked, "Please identify the annual

OPEB expenses recorded on DECo's books each year for the last ten years." Detroit Edison

responded with the following information shown in columns (a) and (b) of the following table:

1995 1996 1997 1998 1999 2000

MCN Merger 200 1 2002 2003 2004

(b) Net

Postretirement Cost

$ million No. of Yo

Change

DEAR has added columns (c) through (e) to show what the costs have been per employee. The

trend of these costs shows a significant decline fiom 1995 to 2000. Clearly these data, whether

viewed on an absolute or a cost-per-employee basis, cannot support Detroit Edison's claims

regarding health care cost escalation. Obviously, there are other factors affecting the level of

OPEB expenses that are more significant than only the claimed escalation in health care costs.

So, the open question is: Is Detroit Edison's attribution of differences in OPEB expenses to

escalation in "recent health care cost" a valid attribution, or is there another reason for such

differences?

In the same Exhibit AG-1, Detroit Edison provided its assumption on the rate of escalation of

health care costs that it uses in projecting OPEB expenses. There are separate rates for recipients

age 65 and below and those over age 65. Detroit Edison states that its assumed health care trend

is as follows:

Year - 2005 2006 2007 2008 2009 20 10 & later

Health Care Trend Rate Pre-66 Post-65

Conclusion

These escalation rates are quite modest, and do not appear to be excessive or alarming. They

certainly do not give reason for Detroit Edison to claim publicly that escalation in health care

costs are or will be any part of its financial or competitive problems.

Further, Exhibit AG-1 shows that during the 2005 to 2010 and later time frame, Detroit Edison

expects the return on its OPEB fund to be 9.00%. With 9% assumed growth of fund and less than

9% assumed health care trend rate, Detroit Edison's continued rhetoric of impending doom

regarding retirement health care is a mystery to DEAR. To the contrary, with such a robust

growth prediction of 9% and less than 9% escalation in health care costs, would it not be

beneficial to Detroit Edison to more fully fund the health care fund?

HI. Continuing Cuts in Health Care Benefits Results in Figuratively "Raiding" the Retirement Health Care Fund for Corporate Profits

Dangers of Internal Funding

Many years ago, the Commission had the foresight to require external funding for retirement

health care. In its order on December 8, 1992, in Case No. U-10040 the Commission stated:

"In the Commission's view, to charge ratepayers for SFAS 106 [retirement health care] costs without the utility's commitment to externally fund those costs would not be just or reasonable." [December 8, 1992, Order, page 1 71

The Commission warned that internal funding -mere accumulation of cash without a

requirement to externally fund the costs of retirement health care - would create "too great a

temptation for utility management, a corporate raider, or a parent corporation to avail itseIfof

abundant cash." [December 8,1992, Order, page 17, emphasis added]

Certainly, any reader of the Wall Street Journal has seen many reports during recent years

concerning how corporations are attempting to, and succeeding at, converting money intended to

cover future pensions and health care into current income.

The Commission's order in 1992, its continued oversight, and its findings in Detroit Edison's

recent rate case U-13808 have gone a long way in protecting the money in the pension and health

care funds that is intended to pay for benefits for retirees. There are still, however, ways that

Detroit Edison can convert pension and health care funds into short-term profits.

Loopholes

The first method of dipping into the cookie jar of external funds, which has been used by Detroit

Edison and which the Commission caught and addressed in its interim order on February 20,

2004, in Case No. U-13808, is the simple failure to contribute to the funds. Noting that Detroit

Edison made no contributions to the pension fund in 1998, 1999, and 2000 because the plan was

fully funded, the Commission required that it would authorize the collection of pension expenses

in rates, "but only on the condition that Detroit Edison agrees that it will make minimum annual

prorated contributions equal to that amount during the period these rates are in effect" [February

20,2004, Order, page SO].

Obviously, if Detroit Edison is collecting money from customers to cover pension expenses, but

not contributing the money to the pension fund, then that money is serving to increase Detroit

Edison's profits.

A similar occurrence of zero contribution to the OPEB trust fund, not yet addressed by the

Commission, is evidenced in the record in Case No. U-14428. Data provided by Detroit Edison

in Exhibit AG-1 shows the following:

Year - 1995 1996 1997 1998 1999 2000 200 1 2002 2003 2004

Contribution to OPEB Trust

$ million

If Detroit Edison is concerned about its ability to cover retirement health care costs, why did it

not contribute to the fund in 2003? Was Detroit Edison's decision to not contribute related to

considerations of meeting earnings targets?

The second method of converting external funds into short-term profits is to reduce health care

benefits to retirees and increase retiree premiums. For example, suppose Detroit Edison increases

health care deductibles for retirees such that Detroit Edison retiree health care expenses fall by $1

million in a year, say 2007. Since such a reduction is assumed to continue indefinitely, the

funding requirement would be reduced by the present value of $1 million annually over many

years - by $12M over 20 years (using Detroit Edison's discount rate of 6%, shown in Exhibit

AG-I). Thus, a $1 million reduction in benefits is highly leveraged into a $12 million reduction

in required funding. Then, because funding requirements are $12 million less, Detroit Edison can

contribute $12 million less into the fund in 2007, and still claim that retirement health care is fully

funded. The $12 million not contributed to the fund goes toward profits for the year 2007.

It is the leverage ofpresent value of funding requirements that provides a huge incentive for a

company - even one that has a mandatory external fund - to reduce health care benefits. That is

how DEAR believes the funding requirement is converted - or "raided" -to increase profits.

The example of a one year reduction of benefits in 2007 converts to a leveraged one-time

reduction of funding requirements in 2007. In the next year, if the corporation wants to use the

same conversion ploy, it must reduce benefits again. Therefore, one symptom of "raiding" of the

health care fund would be continual, yearly reductions in health care benefits and/or increases in

premiums, not commensurate with actual increases in health care costs. Retirees certainly have

experienced annual reductions in health care benefits and increases in premiums. On the basis of

data that Detroit Edison has shared with DEAR, these cost shifts to retirees appear unwarranted.

Conclusion

DEAR has attempted to get the factual basis for reduction of health care benefits to retirees and to

get sufficient information upon which to verify that the increases in the share of health care costs

that retirees pay have been done in accordance with prescribed rules, but has not been able to do

so. DEAR sees the incentive that Detroit Edison has to "raid" the health care fund - to "avail

itselfof abundant cash," as the Commission has phrased it - but looks to the Commission to

provide the remedies needed to prevent the destruction of retiree benefits.

IV. DEAR Proposes Remedies to Assist in the Enforcement of Proper Use of Retirement Health Care Funds

Impetus for Remedies

DEAR's comments in Sections I, 11, and TI1 above illustrate that the information conveyed in

DE's Analysis explaining A&G expenses is not always consistent with information that Detroit

Edison has conveyed in other forums. In addition, Detroit Edison has been directed by the

Commission in various orders to adequately fund the external fund for OPEB. The intent of

external funding is that the money in the funds is to be used to pay benefits that retirees have

earned for long-time service to Detroit Edison, particularly for retirement health care. From

DEAR's perspective there is an open question as to whether or not Detroit Edison's actions in

reducing retiree health care benefits and increasing premiums have been ways to convert some of

the value of the external fund into profits - to "avail itselfof abundant cash."

Proposed Remedies

Accordingly, DEAR proposes three remedies to assist in the enforcement of proper use of

retirement benefit funds:

1. Audit of retiree cost-sharing charges for health care. Many retirees have seen increases in health care premiums that do not appear to be commensurate with the known rules for cost sharing. Detroit Edison has not been forthcoming with information on exactly how increases in premiums have been calculated. Excessive increases in premiums would serve to reduce externalfinding requirements, and thus eflectively "raid" the externalfind, as explained in Section In.

Accordingly, DEAR proposes an audit task force headed by the Commission Staff with representatives of DEAR and of Detroit Edison.

2. Audit of changes in retiree health care benefits. Retiree health care benefits have continued to be reduced annually. This is a symptom consistent with converting external funds into corporate profits, as explained in Section III. Such reduction of benefits do not appear consistent with the relatively modest increase in health care rates that Detroit Edison has used to determine the required level of health care funding. It is also unknown whether or not increases in coverage of retirement health

care for active employees, and subsequent funding, is being covered by reductions in benefits to retirees.

Accordingly, DEAR proposes an audit of health care funding and benefit changes to ascertain that the externaljknd for retirement health care benefits is being used as the Commission anticipated. The same task force proposed in (1) above could take on this task as well.

3. Removal of loophole to "raid" the retirement health care external funds. DEAR's perspective is that as long as there is the ability to convert external funds to short- term profits by tactics such as not contributing to the funds, reducing benefits, and increasing premiums, the leverage of present value will provide a large incentive for Detroit Edison to continue to cut retiree benefits. Such a loophole must be closed to (a) protect the earned benefits of retirees and (b) protect customers by making sure that monies collected in rates are used for their intended purposes.

Accordingly, DEAR proposes for the Commission's consideration the following:

(a) To the extent that Detroit Edison does not contribute thejkll amount of money included in rates for pension and OPEB to the respective funds, that Detroit Edison's allowed return in the next rate case (or other appropriate proceeding) be reduced by a commensurate amount;

(b) To the extent that Detroit Edison reduces retirement health care beneJits for retirees or increases cost sharing for retirees above proper levels, that Detroit Edison's allowed return in the next rate case (or other appropriate proceeding) is reduced by the present value of the effect on the external retirement health care fund.

V. Summary

DE's Analysis of A&G expenses raises questions of consistency and of proper use of OPEB

funds. DEAR's comments above provide some insight into underlying issues. DEAR has

proposed remedies to clarify underlying issues and to close loopholes that provide the incentive

for Detroit Edison to convert external pension and OPEB funds to corporate profits.

DEARS ability to access Detroit Edison data and to analyze it does not rise anywhere near the

level of the Commission's ability. For these reasons we respectfully request and encourage the

Commission to examine the issues we have raised.