REGULATORY MATTERS

Regulation

DTE Electric and DTE Gas are subject to the regulatory jurisdiction of the MPSC, which issues orders pertaining to rates, recovery of certain costs, including the costs of generating facilities and regulatory assets, conditions of service, accounting, and operating-related matters. DTE Electric is also regulated by the FERC with respect to financing authorization and wholesale electric activities. Regulation results in differences in the application of generally accepted accounting principles between regulated and non-regulated businesses.

The Registrants are unable to predict the outcome of the unresolved regulatory matters discussed herein. Resolution of these matters is dependent upon future MPSC orders and appeals, which may materially impact the Consolidated Financial Statements of the Registrants.

Regulatory Assets and Liabilities

DTE Electric and DTE Gas are required to record Regulatory assets and liabilities for certain transactions that would have been treated as revenue or expense in non-regulated businesses. Continued applicability of regulatory accounting treatment requires that rates be designed to recover specific costs of providing regulated services and be charged to and collected from customers. Future regulatory changes or changes in the competitive environment could result in the discontinuance of this accounting treatment for Regulatory assets and liabilities for some or all of the Registrants' businesses and may require the write-off of the portion of any Regulatory asset or liability that was no longer probable of recovery through regulated rates. Management believes that currently available facts support the continued use of Regulatory assets and liabilities and that all Regulatory assets and liabilities are recoverable or refundable in the current regulatory environment.

The following are balances and a brief description of the Registrants' Regulatory assets and liabilities at December 31:



	DTE Energy						DTE Electric
	2015			2014			2015			2014
Assets	(In millions)
Recoverable pension and other postretirement costs:
Pension	$	2,112		$	2,284		$	1,592		$	1,743
Other postretirement costs	256			234			198			191
Asset retirement obligation	565			448			565			448
Recoverable Michigan income taxes	248			267			203			220
Removal costs asset	118			15			118			15
Unamortized loss on reacquired debt	63			67			41			44
Other recoverable income taxes	61			66			61			66
Deferred environmental costs	54			59			—			—
Transitional Reconciliation Mechanism	43			14			43			14
Cost to achieve Performance Excellence Process	33			54			28			46
Accrued PSCR/GCR revenue	12			61			—			34
Recoverable income taxes related to Securitized regulatory assets	—			19			—			19
Other	159			139			137			119
	3,724			3,727			2,986			2,959
Less amount included in Current Assets	(32		)	(76		)	(17		)	(46		)
	$	3,692		$	3,651		$	2,969		$	2,913
Securitized regulatory assets	$	—		$	34		$	—		$	34



	DTE Energy						DTE Electric
	2015			2014			2015			2014
Liabilities	(In millions)
Removal costs liability	$	291		$	308		$	—		$	—
Renewable energy	197			227			197			227
Negative pension offset	46			67			—			—
Accrued PSCR/GCR refund	37			—			15			—
Refundable income taxes	23			33			—			—
Energy optimization	10			24			—			14
Fermi 2 refueling outage	4			16			4			16
Securitization over recovery	—			71			—			71
Refundable revenue decoupling/deferred gain	—			63			—			63
Other	2			11			2			4
	$	610		$	820		$	218		$	395
Less amount included in Current Liabilities	(41		)	(153		)	(19		)	(150		)
	$	569		$	667		$	199		$	245

As noted below, certain Regulatory assets for which costs have been incurred have been included (or are expected to be included, for costs incurred subsequent to the most recently approved rate case) in DTE Electric's or DTE Gas' rate base, thereby providing a return on invested costs (except as noted). Certain other regulatory assets are not included in rate base but accrue recoverable carrying charges until surcharges to collect the assets are billed. Certain Regulatory assets do not result from cash expenditures and therefore do not represent investments included in rate base or have offsetting liabilities that reduce rate base.

ASSETS

•

Recoverable pension and other postretirement costs — Accounting rules for pension and other postretirement benefit costs require, among other things, the recognition in Other comprehensive income of the actuarial gains or losses and the prior service costs that arise during the period but that are not immediately recognized as components of net periodic benefit costs. DTE Electric and DTE Gas record the impact of actuarial gains or losses and prior service costs as a Regulatory asset since the traditional rate setting process allows for the recovery of pension and other postretirement costs. The asset will reverse as the deferred items are amortized and recognized as components of net periodic benefit costs. (a)


•	Asset retirement obligation — This obligation is for Fermi 2 decommissioning costs. The asset captures the timing differences between expense recognition and current recovery in rates and will reverse over the remaining life of the related plant. (a)

•

Recoverable Michigan income taxes — In July 2007, the MBT was enacted by the State of Michigan. State deferred tax liabilities were established for DTE Energy’s utilities and offsetting Regulatory assets were recorded as the impacts of the deferred tax liabilities will be reflected in rates as the related taxable temporary differences reverse and flow through current income tax expense. In May 2011, the MBT was repealed and the MCIT was enacted. The Regulatory asset was remeasured to reflect the impact of the MCIT tax rate. (a)


•	Removal costs asset — Receivable for the recovery of asset removal expenditures in excess of amounts collected from customers.


•	Unamortized loss on reacquired debt — The unamortized discount, premium, and expense related to debt redeemed with a refinancing are deferred, amortized, and recovered over the life of the replacement issue.


•	Other recoverable income taxes — Income taxes receivable from DTE Electric’s customers representing the difference in property-related deferred income taxes and amounts previously reflected in DTE Electric’s rates. This asset will reverse over the remaining life of the related plant. (a)


•	Deferred environmental costs — The MPSC approved the deferral of investigation and remediation costs associated with DTE Gas' former MGP sites. Amortization of deferred costs is over a ten-year period beginning in the year after costs were incurred, with recovery (net of any insurance proceeds) through base rate filings. (a)


•	Transitional Reconciliation Mechanism (TRM) — The MPSC approved the recovery of the deferred net incremental revenue requirement associated with the transition of PLD customers to DTE Electric's distribution system, effective July 1, 2014. Annual reconciliations will be filed and surcharges will be implemented to recover approved amounts.


•	Cost to achieve Performance Excellence Process (PEP) — The MPSC authorized the deferral of costs to implement the PEP. These costs consist of employee severance, project management, and consultant support. These costs are amortized over a ten-year period beginning with the year subsequent to the year the costs were deferred.


•	Accrued PSCR/GCR revenue — Receivable for the temporary under-recovery of and carrying costs on fuel and purchased power costs incurred by DTE Electric which are recoverable through the PSCR mechanism and temporary under-recovery of and carrying costs on gas costs incurred by DTE Gas which are recoverable through the GCR mechanism.


•	Recoverable income taxes related to Securitized regulatory assets — Receivable for the recovery of income taxes to be paid on the non-bypassable securitization bond surcharge. A non-bypassable securitization tax surcharge, which ended in December 2014, was in place to recover the income tax over a 14-year period. (a)

•

Securitized regulatory assets — The net book balance of the Fermi 2 nuclear plant was written off in 1998 and an equivalent regulatory asset was established. In 2001, the Fermi 2 regulatory asset and certain other regulatory assets were securitized pursuant to PA 142 and an MPSC order. A non-bypassable securitization bond surcharge, which ended in December 2014, was in place to recover the Securitized regulatory asset over a 14-year period.

________________________________________________

(a)Regulatory assets not earning a return or accruing carrying charges.

LIABILITIES


•	Removal costs liability — The amount collected from customers for the funding of future asset removal activities.


•	Renewable energy — Amounts collected in rates in excess of renewable energy expenditures.


•	Negative pension offset — DTE Gas' negative pension costs are not included as a reduction to its authorized rates; therefore, DTE Gas is accruing a Regulatory liability to eliminate the impact on earnings of the negative pension expense accrued. This Regulatory liability will reverse to the extent DTE Gas' pension expense is positive in future years.


•	Accrued PSCR/GCR refund — Liability for the temporary over-recovery of and a return on power supply costs and transmission costs incurred by DTE Electric which are recoverable through the PSCR mechanism and temporary over-recovery of and a return on gas costs incurred by DTE Gas which are recoverable through the GCR mechanism.


•	Refundable income taxes — Income taxes refundable to DTE Gas' customers representing the difference in property-related deferred income taxes payable and amounts recognized pursuant to MPSC authorization.


•	Energy optimization (EO) — Amounts collected in rates in excess of energy optimization expenditures.


•	Fermi 2 refueling outage — Accrued liability for refueling outage at Fermi 2 pursuant to MPSC authorization.


•	Securitization over recovery — Over recovery of securitization bond expenses.

•

Refundable revenue decoupling/deferred gain — Amounts were originally accrued as refundable to DTE Electric customers for the change in revenue resulting from the difference between actual average sales per customer compared to the base level of average sales per customer established by the MPSC. In 2012, the MCOA issued a decision reversing the MPSC's decision to authorize a RDM for DTE Electric. The revenue decoupling liability was reversed and, after receiving an order from the MPSC to defer the resulting gain for future amortization, DTE Electric created a regulatory liability representing its obligation to refund the gain. The deferred gain was amortized into earnings in 2014 and 2015.

2014 Electric Rate Case Filing

DTE Electric filed a rate case with the MPSC on December 19, 2014 requesting an increase in base rates of $370 million based on a projected twelve-month period ending June 30, 2016. The requested increase in base rates was due primarily to an increase in net plant resulting from infrastructure investments, plant acquisitions, environmental compliance, and reliability improvement projects. The rate filing also included projected changes in sales, working capital, operation and maintenance expenses, return on equity, and capital structure. On July 1, 2015, DTE Electric realized an annual revenue increase of $230 million consisting of $190 million of self-implemented base rate increase related to the December 19, 2014 rate request and $40 million associated with the required elimination of a credit surcharge. On December 11, 2015, the MPSC issued an order approving an annual revenue increase of $238 million for service rendered on or after December 17, 2015. The rate order also provided for a reduction of the return on equity from 10.5% to 10.3% on a capital structure of 50% debt and 50% equity. On December 22, 2015, DTE Electric petitioned the MPSC for a rehearing and clarification of several issues related to the December 11, 2015 MPSC rate order. The three main issues addressed in the rehearing request were related to the recovery of the cost of the operating license for Fermi 3, the capitalization of the cost of tree trimming, and costs related to certain land and a building located near DTE Electric's Detroit headquarters. On January 19, 2016, the MPSC issued an order authorizing DTE Electric to begin amortization of the cost of the Fermi 3 operating license over a 20-year period without a return on the unamortized balance. The MPSC denied the capitalization of the tree trimming costs and the cost related to the land and building. DTE Electric recorded a disallowance of $10 million related to tree trim costs in the fourth quarter of 2015 which was previously capitalized as of September 30, 2015. The land and building have economic value independent of recovery through rates and therefore no impairment charge was recorded for these assets. The MPSC order also stated that any changes to the revenue deficiency will be addressed in a final rehearing order in this case.

2016 Electric Rate Case Filing

DTE Electric filed a rate case with the MPSC on February 1, 2016 requesting an increase in base rates of $344 million based on a projected twelve-month period ending July 31, 2017. The requested increase in base rates is due primarily to an increase in net plant resulting from infrastructure investments, environmental compliance, and reliability improvement projects. The rate filing also includes projected changes in sales, operation and maintenance expenses, and working capital. The rate filing also requests an increase in return on equity from 10.3% to 10.5% on a capital structure of 50% equity and 50% debt. DTE Electric anticipates self-implementing a rate increase in August 2016 with an MPSC order expected by February 2017.

PSCR Proceedings

The PSCR process is designed to allow DTE Electric to recover all of its power supply costs if incurred under reasonable and prudent policies and practices. DTE Electric's power supply costs include fuel and related transportation costs, purchased and net interchange power costs, nitrogen oxide and sulfur dioxide emission allowances costs, urea costs, transmission costs, and MISO costs. The MPSC reviews these costs, policies, and practices for prudence in annual plan and reconciliation filings.

2012 PSCR Year — In March 2013, DTE Electric filed its 2012 PSCR reconciliation that included purchased power costs related to the manual shutdown of the Fermi 2 nuclear power plant in June 2012 caused by the failure of one of the plant's two non-safety related feed-water pumps. The plant was restarted on July 30, 2012, which restored production to approximately 68% of full capacity. In September 2013, the repair to the plant was completed and production was returned to full capacity. DTE Electric was able to purchase sufficient power from MISO to continue to provide uninterrupted service to customers. On June 30, 2015, the MPSC issued an order that disallowed approximately $19 million of Fermi 2 related purchased power costs. DTE Electric recorded the impact of this disallowance in the second quarter of 2015.

Customer Settlement

In July 2014, an industrial customer of DTE Electric filed a complaint with the MPSC alleging they had been overcharged for the period of February 2008 through March 2014, and sought payment from DTE Electric of $22 million, plus interest. In July 2015, the MPSC issued an order that found the customer is entitled to a refund in the amount of $20 million, plus interest calculated at 7% per annum. In July 2015, DTE Electric issued a customer refund of $25 million, inclusive of interest. Approximately $16 million of the refund obligation is expected to be recovered through the PSCR and other regulatory mechanisms. DTE Electric does not expect this order to have a material impact to its Consolidated Statements of Operations.

2015 DTE Gas Rate Case Filing

DTE Gas filed a rate case with the MPSC on December 18, 2015 requesting an increase in base rates of $183 million based on a projected twelve-month period ending October 31, 2017. The requested increase in base rates is due primarily to an increase in net plant of $800 million, inclusive of IRM capital investments being recovered through approved IRM surcharge filings. The rate filing also includes projected changes in sales, operation and maintenance expenses, and working capital. The rate filing also requests an increase in return on equity from 10.5% to 10.75% on a capital structure of 52% equity and 48% debt. DTE Gas anticipates self-implementing a rate increase in November 2016 with an MPSC order expected by December 2016. Concurrent with the MPSC order in this rate case, the existing IRM surcharge will be terminated. However, in this rate case filing, DTE Gas requested to implement a new IRM surcharge to become effective in January 2017.

DTE Gas IRM

In November 2014, DTE Gas filed an application with the MPSC for approval of an increased IRM surcharge to recover an additional $47 million of annual capital expenditures in 2016 and 2017 for its gas main renewal program. In November 2015, the MPSC issued an order authorizing an expansion of its gas main renewal program and an increase in the IRM surcharge of $16 million for 2016 and $31 million for 2017. The 2017 increase is subject to a reduction to the 2016 level if the 2016 target is not met. The IRM surcharge authorized by the order in this filing will become effective in July 2016 and will be terminated upon the implementation of base rates requested in the December 18, 2015 rate case filing.