in Re Application of Indiana Michigan Power Co Cert of Necessity , 307 Mich. App. 272 ( 2014 )

STATE OF MICHIGAN
COURT OF APPEALS
___________________________________________
In re Application of Indiana Michigan Power
Company for a Certificate of Necessity
ASSOCIATION OF BUSINESSES FOR PUBLICATION
ADVOCATING TARIFF EQUITY, October 21, 2014
9:10 a.m.
Appellant,
V No. 314829
MPSC
MICHIGAN PUBLIC SERVICE COMMISSION, LC No. 00-017026
Appellee,
and
INDIANA MICHIGAN POWER COMPANY,
Petitioner-Appellee,
and
MICHIGAN ENVIRONMENTAL COUNCIL,
Appellee.
In re Application of Indiana Michigan Power
Company for a Certificate of Necessity
ATTORNEY GENERAL,
Appellant,
v No. 314979
MPSC
MICHIGAN PUBLIC SERVICE COMMISSION, LC No. 00-017026
-1-
Appellee,
and
INDIANA MICHIGAN POWER COMPANY,
Petitioner-Appellee,
and
MICHIGAN ENVIRONMENTAL COUNCIL,
Appellee.
Before: FITZGERALD, P.J., and GLEICHER and RONAYNE KRAUSE, JJ.
Per Curiam.
The Michigan Public Service Commission (“PSC”) issued an order approving a
certificate of necessity (“CON”) for a life cycle management (“LCM”) project, comprised of 117
subprojects, at the Donald C. Cook Nuclear Power Plant owned by Indiana Michigan Power
Company (“Indiana Michigan”). The PSC preapproved recovery of a CON amount of $773.6
million for projected project costs, as well as a 10% management reserve of $77,361,100, for a
total of $850,972,100. In these consolidated appeals,1 appellant Association of Businesses
Advocating Tariff Equity (“ABATE”) and appellant Attorney General appeal as of right. We
affirm in part and reverse in part.
This appeal requires construction of MCL 460.6s. Subsection (1) of this statute provides
that an electric utility can seek a CON for “a significant investment in an existing electric
generation facility,” and that a “significant investment” may include “a group of investments
reasonably planned to be made over a multiple year period not to exceed 6 years for a singular
purpose such as increasing the capacity of an existing electric generation plant.” Subsection (4)
requires that the PSC specify the costs approved if it approves a CON. Subsection (9) provides
that the PSC must include in rates all reasonable and prudent costs for which the CON has been
granted when the facility is considered “used and useful.”
Appellants maintain that Indiana Michigan’s LCM project does not qualify for a CON
under the statute. Alternatively, they argue that the PSC erred in approving a management
reserve for the LCM project. ABATE argues that eight subprojects that required an incremental
1
See In Re Application of Indiana Michigan Power Co for a Certificate of Necessity,
unpublished order of the Court of Appeals, entered March 7, 2013 (Docket Nos. 314829,
314979).
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expenditure for a potential future uprate should not have been approved, and the Attorney
General argues that greater specification of costs allowed and disallowed was necessary.
The PSC did not err in construing the statute so as to determine that the LCM Project is a
significant investment comprised of a group of investments being made for a singular purpose.
Moreover, the PSC did not err in approving the eight subprojects. However, we conclude that
the management reserve was not supported by substantial evidence on the whole record. We
decline to address the specification of costs issue because it was not properly preserved.
I. FACTS
In 1975 and 1978, the D.C. Cook Nuclear Power Plant placed its two nuclear reactors in
service. The Nuclear Regulatory Commission (“NRC”) had issued 40-year operating licenses
for each reactor in 1974 and 1977, consistent with their expected 40-year life spans. In 2005, the
NRC granted Indiana Michigan 20-year license renewals for the units, allowing them to operate
until 2034 and 2037. Indiana Michigan indicated that the extension to 60 years would require
“that the plant’s systems, structures, and components be inspected, maintained, refurbished, and
replaced on a managed basis.” In fact, the NRC exacted a commitment to manage the aging of
passive, long-lived components as a condition of continued operations. Indiana Michigan
confirmed that continued investment was required to maintain highly reliable operations.
Specifically, Indiana Michigan claimed that to take advantage of the license renewals, it
had to undertake a multiyear project involving LCM investment in the equipment, systems and
facilities of the plant. It explained that life cycle management is “a process for the timely
detection and mitigation of aging effects in [systems, structures and components] that are
important to plant safety, reliability and economics,” and for this project included “non-recurring
capital replacements required to operate for an extended license period.”
Indiana Michigan sought a CON for its LCM Project, which was originally projected to
cost $1.169 billion. The LCM Project included 117 subprojects that were to be implemented
between the second half of 2011 through 2018. The subprojects involved replacing various
components. The cost of each subproject was separately calculated, and included a risk reserve.
Indiana Michigan also proposed a management reserve, incorporated in the $1.169 billion, to
cover unknown contingencies for the project as a whole. It acknowledged that a power uprate of
capacity was feasible (meaning power output could be increased), and that “a very small
investment in the upsizing of certain equipment to accommodate a potential future uprate” was
also included in the LCM Project, as it would be less costly to upsize now.
Paul Chodak III, the president and chief operating officer of Indiana Michigan, testified
that the
investments are reasonable and necessary at the Cook Plant to allow it to comply
with its NRC licenses, operate safely and reliably, and continue to provide low-
cost energy to [Indiana Michigan’s] customers. If the LCM Project is not
performed, the availability of the generation of the Cook Plant would deteriorate,
which would adversely impact the cost of generation available to [Indiana
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Michigan’s] customers. The LCM Project is the most reasonable and prudent
means of meeting our customers’ needs through the end of this license period.
Michael Carlson, the Vice President of Site Support Services at the Cook Plant, added that
without capital to support the LCM Project, the reactors would have to be shut down before their
extended license lifetimes due to equipment degradation.
ABATE and the Attorney General argued that the LCM Project was akin to capital
expenditures for maintenance that would simply allow for continued operations. They
maintained that the project did not qualify as a “significant investment in an existing electric
generation facility” because it was not a “group of investments” made “for a singular purpose
such as increasing the capacity of an existing electric generation plant.” Regarding this point,
the PSC concluded that the requirement that a project be for a “singular purpose” did not require
that the project increase capacity, and that “an LCM project, for the singular purpose of assuring
that safe and reliable power can continue to be produced from a nuclear generation facility until
the end of its extended license, comports with the requirements of Section 6s(1) and thus is
eligible for a CON.” Further, it concluded that the costs should cover the six-year period of 2013
through 2018 (rather than the second half of 2011 though 2018 as had been requested), and that
the costs for this abbreviated period would total $773,611,000.
Appellants also argued that a management reserve should be disallowed. The PSC
agreed that Indiana Michigan had not carried its burden of proving that a proposed management
reserve of $220 million, in addition to the risk reserve included in the CON amount, was
reasonable. However, acknowledging that “knowledge of the future is not achievable given the
complexity of the LCM project and the tasks and resources required to achieve it,” the PSC
found “it appropriate to include a management reserve of 10% of the base cost of the project,”
which amounted to $77,361,100.
Finally ABATE argued that, to the extent eight subprojects involved upsizing some
equipment to accommodate a potential future uprate, they should be disallowed. The PSC held
that the cost of replacing a turbine nearing the end of its life with significant signs of wear should
be allowed. With respect to the seven other projects, the PSC held that they should be permitted
even though there were incremental costs associated with future uprates for which a current need
could not be established.
II. STANDARD OF REVIEW
In In re Application of Consumers Energy Co for Rate Increase, 291 Mich App 106, 109-
110; 804 NW2d 574 (2010), this Court described the scope of our review as follows:
The standard of review for PSC orders is narrow and well defined.
Pursuant to MCL 462.25, all rates, fares, charges, classification and joint rates,
regulations, practices, and services prescribed by the PSC are presumed, prima
facie, to be lawful and reasonable. See also Michigan Consolidated Gas Co v Pub
Serv Comm, 389 Mich 624, 635-636; 209 NW2d 210 (1973). A party aggrieved
by an order of the PSC has the burden of proving by clear and convincing
evidence that the order is unlawful or unreasonable. MCL 462.26(8). To
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establish that a PSC order is unlawful, the appellant must show that the PSC
failed to follow a statutory requirement or abused its discretion in the exercise of
its judgment. In re MCI Telecom Complaint, 460 Mich 396, 427; 596 NW2d 164
(1999). A reviewing court gives due deference to the PSC’s administrative
expertise, and should not substitute its judgment for that of the PSC. Attorney
General v Pub Serv Comm No 2, 237 Mich App 82, 88; 602 NW2d 225 (1999).
A final order of the PSC must be authorized by law and be supported by
competent, material, and substantial evidence on the whole record. Const 1963,
art 6, § 28; In re Application of Consumers Energy Co, 279 Mich App 180, 188;
756 NW2d 253 (2008). Whether the PSC exceeded the scope of its authority is a
question of law that is reviewed de novo. In re Complaint of Pelland Against
Ameritech Mich, 254 Mich App 675, 682; 658 NW2d 849 (2003).
The operation of the competent, material and substantial evidence test was explained in
In re Application of Detroit Edison Co, 483 Mich 993, 993; 764 NW2d 272 (2009):
Judicial review of administrative agency decisions must “not invade the province
of exclusive administrative fact-finding by displacing an agency’s choice between
two reasonably differing views.” MERC v Detroit Symphony Orchestra, 393
Mich 116, 124; 223 NW2d 283 (1974); see also In re Payne, 444 Mich 679, 692-
693; 514 NW2d 121 (1994) (“When reviewing the decision of an administrative
agency for substantial evidence, a court should accept the agency’s findings of
fact if they are supported by that quantum of evidence. A court will not set aside
findings merely because alternative findings also could have been supported by
substantial evidence on the record.”).
We reject ABATE’s suggestion that the substantial evidence test does not apply on
grounds that approval of the CON involved ratemaking. In Detroit Edison Co v Pub Serv Comm,
264 Mich App 462, 472; 691 NW2d 61 (2004), this Court held:
[D]etermining the interest rate to be awarded as part of a utility’s full recovery of
[retail open access] implementation costs [under MCL 460.10a] is highly akin to
ratemaking in that it does not involve determining a factual matter but involves
instead an effort to provide a fair return that is neither too high nor too low in a
context in which no one interest rate can reasonably be characterized as the only
fair rate.
MCL 460.10a provides: “The commission shall issue orders establishing the rates, terms, and
conditions of service that allow all retail customers of an electric utility or provider to choose an
alternative electric supplier.” In contrast, MCL 460.6s(4) requires a contested case hearing on a
CON application, MCL 460.6s(1) requires various findings before a CON can be approved, and
a determination regarding the amount of estimated costs that should or should not be approved
requires factual input and factual findings. Since a determination of factual matters is required,
the substantial evidence test applies.
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ABATE further argues that the PSC’s decision regarding the management reserve was
arbitrary and capricious. This Court recently held in In re Detroit Edison Co Application, 297
Mich App 377, 383; 823 NW2d 433 (2012), aff’d 495 Mich 884 (2013), quoting Attorney
General v Pub Serv Comm, 206 Mich App 290, 296; 520 NW2d 636 (1994), that MCL 462.26(8)
“requires a reviewing court to determine only whether an order is unlawful or unreasonable, not
whether it is arbitrary and capricious.”
Finally, the standard of review for an agency’s interpretation of a statute was set forth in
In re Complaint of Rovas Against SBC Mich, 482 Mich 90, 103; 754 NW2d 259 (2008), quoting
Boyer-Campbell v Fry, 271 Mich 282, 296-297; 260 NW 165 (1935):
“[T]he construction given to a statute by those charged with the duty of executing
it is always entitled to the most respectful consideration and ought not to be
overruled without cogent reasons. However, these are not binding on the courts,
and [w]hile not controlling, the practical construction given to doubtful or obscure
laws in their administration by public officers and departments with a duty to
perform under them is taken note of by the courts as an aiding element to be given
weight in construing such laws and is sometimes deferred to when not in conflict
with the indicated spirit and purpose of the legislature.”
This standard requires “respectful consideration” and “cogent reasons” for
overruling an agency’s interpretation. Furthermore, when the law is “doubtful or
obscure,” the agency’s interpretation is an aid for discerning the Legislature’s
intent. However, the agency’s interpretation is not binding on the courts, and it
cannot conflict with the Legislature’s intent as expressed in the language of the
statute at issue. [Citation omitted; first alteration added; second alteration in
Rovas.]
III. SIGNIFICANT INVESTMENT
In this case of first impression, we hold that the PSC did not err in construing MCL
460.6s(1) so as to conclude that the proposed Life Cycle Management Project is a “significant
investment in an existing electric generation facility” and that it qualified as “a group of
investments reasonably planned to be made over a multiple year period not to exceed 6 years for
a singular purpose.”
MCL 460.6s(1) provides:
An electric utility that proposes to construct an electric generation facility, make a
significant investment in an existing electric generation facility, purchase an
existing electric generation facility, or enter into a power purchase agreement for
the purchase of electric capacity for a period of 6 years or longer may submit an
application to the commission seeking a certificate of necessity for that
construction, investment, or purchase if that construction, investment, or purchase
costs $500,000,000.00 or more and a portion of the costs would be allocable to
retail customers in this state. A significant investment in an electric generation
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facility includes a group of investments reasonably planned to be made over a
multiple year period not to exceed 6 years for a singular purpose such as
increasing the capacity of an existing electric generation plant. The commission
shall not issue a certificate of necessity under this section for any environmental
upgrades to existing electric generation facilities or for a renewable energy
system. [Emphasis added.]
Whether the investment at issue qualifies as a “significant investment” within the meaning of the
statute depends on how the statute is construed.
The primary goal of statutory interpretation is to give effect to the intent of the
Legislature. Farrington v Total Petroleum, Inc, 442 Mich 201, 212; 501 NW2d
76 (1993). The first step in that determination is to review the language of the
statute itself. House Speaker v State Administrative Bd, 441 Mich 547, 567; 495
NW2d 539 (1993). If the statute is unambiguous on its face, the Legislature will
be presumed to have intended the meaning expressed, and judicial construction is
neither required nor permissible. Lorencz v Ford Motor Co, 439 Mich 370, 376;
483 NW2d 844 (1992). Should a statute be ambiguous on its face, however, so
that reasonable minds could differ with respect to its meaning, judicial
construction is appropriate to determine the meaning. Sam v Balardo, 411 Mich
405, 418; 308 NW2d 142 (1981); Heinz v Chicago Road Investment Co, 216
Mich App 289, 295; 549 NW2d 47 (1996). [In re MCI, 460 Mich 396, 411-412;
596 NW2d 164 (1999).]
ABATE asserts that the other qualifying projects would increase power supply and that
the doctrine of ejusdem generis requires an interpretation that a “significant investment” must be
one that will also increase power supply. The investment at issue here, ABATE urges, “is not for
new capacity but is intended to keep old capacity running in the future.” According to ABATE,
such “preventative maintenance” does not fall within the scope of MCL MCL 460.6s(1).
“Under the statutory construction doctrine known as ejusdem generis, where a general
term follows a series of specific terms, the general term is interpreted ‘to include only things of
the same kind, class, character, or nature as those specifically enumerated.’” Neal v Wilkes, 470
Mich 661, 669; 685 NW2d 648 (2004), quoting Huggett v Dep’t of Natural Resources, 464 Mich
711, 718-719; 629 NW2d 915 (2001). In Huggett, 464 Mich at 718, the Court stated:
This canon gives effect to both the general and specific terms by “treating the
particular words as indicating the class, and the general words as extending the
provisions of the statute to everything embraced in that class, though not
specifically named by the particular words.” [Belanger v Warren Bd of Ed, 432
Mich 575, 583; 443 NW2d 372 (1989)], quoting 2A Sands, Sutherland Statutory
Construction (4th ed), § 47.17, p 166.
The series of terms at issue is “construct an electric generation facility, make a significant
investment in an existing electric generation facility, purchase an existing electric generation
facility, or enter into a power purchase agreement for the purchase of electric capacity.” While
three possibilities in the series could increase the capacity of a plant, this shared characteristic
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does not transform “mak[ing] a significant investment in an existing electric generation facility”
into a general term. It is specific in its own right. Moreover, it does not follow the terms that
appellees would identify as “specific” such that it might be viewed as an extension of those
terms. Accordingly, ejusdem generis does not guide our construction.
“Significant investment” is expressly defined in the statute to include “a group of
investments reasonably planned to be made over a multiple year period not to exceed 6 years for
a singular purpose such as increasing the capacity of an existing electric generation plant.”
Appellants argue, in essence, that “singular” should be construed to mean unique or
extraordinary. Black’s Law Dictionary (10th ed), defines “singular,” when used as an adjective,
as “individual; each.” In The American Heritage Dictionary, Second College Edition (1991),
“singular” is defined, when used as an adjective, as “[b]eing only one; individual” or
alternatively as “[d]eviating strongly from a norm; rare.” The two lead definitions in Webster’s
New Twentieth Century Dictionary Unabridged (1979), are “individual; separate or of or having
to do with an individual or peculiar to one; private” and “remarkable; eminent; extraordinary.”
The dictionaries suggest that “singular” is generally thought to mean “individual,” “one,” or
“extraordinary.” Since the term is subject to two interpretations, it is ambiguous and judicial
construction is required to effectuate Legislative intent. We note the juxtaposition of “group of
investments” with “singular purpose.” This context indicates that the Legislature’s intent was to
include a qualifying group of investments that had a common purpose, but not to require an
extraordinary purpose.
Appellants note that the phrase “such as increasing the capacity of an existing electric
generation plant” describes “singular purpose,” and argue that the singular purpose therefore
must be to increase capacity. However, had the Legislature intended that result, it would have
said that a significant investment would include “a group of investments . . . for the singular
purpose of increasing the capacity of an existing electric generation plant.” The phrase “such as”
connotes that “increasing the capacity of an existing electric generation plant” was meant to be
an example of a singular purpose, not the only singular purpose that would qualify.2
Appellants indicate that the 117 subprojects at issue in essence involve replacing old
equipment and qualify as legally insignificant capital expenditures. However, it appears that the
project more closely amounts to a full-scale renovation of the Cook Nuclear Power Plant. The
PSC found that it was “for the singular purpose of assuring that safe and reliable power can
continue to be produced from a nuclear generation facility until the end of its extended license.”
This finding was supported by the testimony of Chodak and Carlson. Thus, the LCM project,
comprised of 117 subprojects, appears to be the type of significant investment that the
Legislature contemplated would qualify for a CON and concomitant pre-approval of costs. We
find no reason to disagree with the PSC’s interpretation of MCL 460.6s(1).
2
ABATE argues that “such” must be defined in accord with the definition recognized in People
v Alexander, 234 Mich App 665, 677; 599 NW2d 749 (1999). There, the Court was construing
the phrase “such an institution” and looked to dictionary definitions of “such.” The Court was
not construing the phrase “such as,” which is generally followed by an example.
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IV. EIGHT SUBPROJECTS
As part of a 2010 feasibility study to define work associated with a power uprate, Indiana
Michigan solicited an evaluation of “the existing plant systems and components in regard to Life
Cycle Management considering the recent operating license extension.” The power uprate was
abandoned but the study was used in designing the LCM Project. In the interest of cost
efficiency, some LCM components were sized for uprated capacity to accommodate future
demand. Specifically, the testimony indicated that “costs associated with upsizing are included
in 7 of the 117 LCM sub-projects. By including the cost of upsizing in the LCM Project, we will
avoid having to replace this equipment at a large expense should our customers require the
power uprate.” Evidence demonstrated that an eighth project involved the Unit 2 Low Pressure
and High Pressure Steam Turbines, which needed extensive repairs due to erosion and were
nearing the end of their service lives. The testimony supported that the turbines in place were no
longer commercially available and would be replaced with a technologically improved turbine
that would incidentally add capacity. Further testimony supported the prudence of proactively
replacing aging and obsolete equipment before failure or unreliability, which would serve to
avert unscheduled downtime and the need for expedited repairs and replacement, and would
allow the safety of the units to be maintained at their current levels. Moreover, there was
testimony that the projects were “necessary to allow the Cook Plant to safely and reliably reach
the end of the extended operating licenses.”
The PSC determined that these subprojects should be covered as part of the CON. It
found it reasonable to replace the Unit 2 turbine “as part of the LCM rather than wait for a
catastrophic failure that could result in an extended and costly outage.” Also, the PSC
“agree[d] . . . that the modest incremental cost associated with upsizing certain components is
justified in light of the possibility that the plant may be uprated in the not-too-distant future. The
Commission also agrees that the other contested subprojects meet the LCM screening criteria.”
MCL 640.6s(4) provides in pertinent part:
The commission shall grant the request [for a CON] if it determines all of the
following:
(a) That the electric utility has demonstrated a need for the power that
would be supplied by the existing or proposed electric generation facility . . .
through its approved integrated resource plan that complies with subsection (11).
(b) The information supplied indicates that the existing or proposed
electric generation facility will comply with all applicable state and federal
environmental standards, laws, and rules.
(c) The estimated cost of power from the existing or proposed electric
generation facility or the price of power specified in the proposed power purchase
agreement is reasonable. . . .
(d) The existing or proposed electric generation facility or proposed
power purchase agreement represents the most reasonable and prudent means of
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meeting the power need relative to other resource options for meeting power
demand, including energy efficiency programs and electric transmission
efficiencies.
(e) To the extent practicable, the construction or investment in a new or
existing facility in this state is completed using a workforce composed of
residents of this state as determined by the commission. This subdivision does
not apply to a facility that is located in a county that lies on the border with
another state. [Emphasis added.]
Although some costs involved in the LCM indirectly relate to potential future uprates, we
find no statutory barrier to their PSC approval. MCL 640.6s(4)(a) requires a determination
regarding whether there is a “need for the power that would be supplied by the existing or
proposed electric generation facility.” The statutory language does not require a separate finding
of need for each individual outlay forming the group of investments that comprises a “significant
investment” in an existing facility under MCL 460.6s(1). If the need for power is established,
the facility must be “the most reasonable and prudent means of meeting the power need” under
MCL 640.6s(4)(b). MCL 640.6s(4)(c) requires an additional determination that the “estimated
cost of power from the existing or proposed electric generation facility . . . is reasonable. . . .” If
an investment or part of an investment was not needed to accomplish the singular purpose for
which a significant investment was being made, it and its cost would arguably fail the
“reasonable and prudent” test.
Here, the evidence established that the LCM Project and 117 subprojects would allow for
continued operation of the facility for the duration of the extended licenses; the facility would
continue to serve the need already being served. Thus, the need for the power supplied by the
facility was established. The evidence also established that the turbine was both an uprate and an
LCM project, that the seven other subprojects would be of a quality that would allow for future
uprates, and that there was an incremental cost, at least for some of the seven, for this allowance.
However, the evidence clearly supported that the turbine was needed. That it increased capacity
was incidental; it was being replaced because of need rather than a current desire to uprate
capacity. Moreover, because there was a current need for the seven subprojects, whether current
need existed for each aspect of the subprojects did not have to be determined under MCL
640.6s(4). Rather, subsection (4) merely required that the costs be reasonable and prudent.
Given testimony that the components being replaced needed replacement currently and would
have to be replaced again at a much higher cost if there was an uprate, it cannot be said that the
PSC acted unlawfully or unreasonably in determining that the current expense for replacements
with features that would accommodate an uprate was both reasonable and prudent. Although
there was a risk involved that the uprates might never occur, substantial evidence supported the
determination that, on balance, the current expenditure was warranted.
V. MANAGEMENT RESERVE
Indiana Michigan offered testimony establishing that individual cost estimates were
calculated for each subproject and the estimates included individual risk reserves. However,
Indiana Michigan claimed that while there was a high level of confidence in the cost estimating,
it was “unrealistic to assume that all anomalies have been both recognized and accounted for in
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the estimates” and accordingly, Indiana Michigan chose “to apply a 20% [management] reserve
to overall cost estimate.” It distinguished “risk reserve” from “management reserve” as follows:
Risk reserve is included in the funding of each project as it progresses to address
discrete potential defined issues or “known unknowns” [such as deviations from
the projected inflation rate, abnormal seasonal weather and attendant construction
delays, and variances in commodities prices.] This amount of this reserve is
based on the occurrence probability and consequences of the risk and where
possible is based on data from similar projects that have been benchmarked. . . .
If the given risk is not realized, then the funding reserved for its mitigation will
not be expended.
In contrast, Indiana Michigan explained that management reserve
is allocated for “unknown unknowns,” [e.g. upgrading security in response to the
9/11 terrorist attacks, and price volatility of materials due to unforeseen world
events, natural disasters, or other unexpected issues discovered during project
implementation,] and its amount is based on guidance established by
organizations such as the American Association of Cost Engineers, which
provides clear guidance based on the level of project definition.
Indiana Michigan claimed that the amount it was requesting for management reserve was
based on accepted industry practices and is a necessary and prudent project
management tool for forecasting total project costs. Management reserve is a real
project cost that is routinely forecast in construction projects and ultimately held
for necessary cost growth due to unknown unknowns within the project (or sub-
projects for the LCM). Unknown unknowns occur when internal or external
factors impact the project that a project manager[, who assesses risk reserve,]
cannot reasonably predict or estimate.
Both risk reserve and management reserve have been included in the
project cost estimate because their purposes are significantly different.
***
[M]anagement reserve is an accepted and recommended practice to include in a
project cost estimate in addition to risk reserve contingency as stated by Project
Management Institute (PMI) in their guidebook labeled A Guide to the Project
Management Body of Knowledge (PMBOK), the Institute of Nuclear Power
Operations (INPO) as stated in their document labeled 09-002, Excellence in
Nuclear Project Management, the American Association of Cost Engineers
(AACE) in their document labeled AACE International Recommended Practice
No. 41R-08, and the American National Standards Institute (ANSI) in their
document labeled ANSI/EIA Standard 748A – Standard for Earned Value
Management.
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Disagreement with the use of management reserve assumes that the Cook
project team knows exactly what will happen in the future, and has already
accounted for each outcome in the project cost estimate. While that level of
knowledge is desirable, it is simply not achievable due to the complexity of the
project and the tasks and resources required to complete it.
The PSC Staff originally opposed the management reserve, maintaining that the costs
were purely speculative and that risk reserve of 15% to 25% had already been built into the
subprojects. The Staff believed that
it is appropriate and necessary to allow the Commission to review these costs if
and when they are incurred, and customers deserve some assurance that costs are
being reasonably and prudently controlled on the LCM project. Furthermore,
MCL 460.6s(9) already has an allowance for costs to be increased up to 110% of
the amount that the Commission approves in this case if the Commission finds
that the excess costs are reasonable and prudent.[3] If [Indiana Michigan’s]
approximate 20% management reserve is approved, combined with the 10%
allowance permitted in MCL 460.6s(9), this could increase the amount an
additional 30% above the individual subproject forecasted costs. It is important to
note that this “30% contingency” is over and above the “15-25% risk reserve”
contingency that is already built into the individual subprojects described above.
Indiana Michigan responded by claiming that 32 subprojects specified in a certain report
had a cost and a contingency, but that to develop the cost for the LCM Project, “we removed all
the contingency” “so we had a raw cost” “and then we added the indirect costs[, a straight 10%,]
and those were the individual sub-project costs.”4 Further, there was testimony that
“management reserve is the only source of contingency in the LCM project” and
that contingency costs are an appropriate and necessary component of a cost
estimate of any major capital project. It is a standard practice, not just in the
utility industry, but throughout the construction industry to include contingency
costs in capital project estimates to account for real costs that will be incurred but
cannot be known at the start of a project. . . . Management reserve is a different
area of contingency not covered by risk reserves.
Indiana Michigan maintained that if “management reserve margins are not included in the
approved cost estimate as typically done, then the total cost estimate will be understated and not
reflect the foreseeable cost of the project.”
3
Subsection (9) provides for this allowance after completion of the project; it is not pre-
approved as a cost of the project, which is what Indiana Michigan is seeking.
4
There was no explanation of what comprised “indirect costs” and it is not clear whether there is
a basis for distinguishing them from contingency costs.
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The Administrative Law Judge recommended that the management reserve be denied,
concluding in pertinent part that Indiana Michigan had not met its burden of proof:
Although [Indiana Michigan] argues that the record is clear that the only
contingency in the LCM project is the management reserve, . . . Staff correctly
points out that the evidence regarding removal of all other contingencies . . . came
late in the proceeding during cross-examination and was not supported by
documentary evidence. . . .
Further, the record is not clear that there are not multiple layers of
contingencies as Staff suggests.
The PSC concluded that Indiana Michigan had “failed to carry its burden of proof to
show that its proposed management reserve, over and above what appears to be risk reserve
added to at least some projects, is reasonable. The portion of the record in this case dedicated to
[Indiana Michigan’s] testimony is rife with contradictions and late attempts to correct
misstatements made in the course of the proceeding.” The PSC therefore removed the proposed
management reserve from the costs approved but, professing to understand “that knowledge of
the future is not achievable given the complexity of the LCM project and the tasks and resources
required to achieve it, the Commission finds it appropriate to include a management reserve of
10% of the base cost of the project.”
Preliminarily, MCL 460.6s does not expressly speak to whether a management reserve
can be included as an approved cost. Regarding approval of costs, the statute simply says:
In a certificate of necessity under this section, the commission shall
specify the costs approved for the construction of or significant investment in the
electric generation facility, the price approved for the purchase of the existing
electric generation facility, or the price approved for the purchase of power
pursuant to the terms of the power purchase agreement. [MCL 460.6s(6).]
MCL 460.6s(9) then provides:
Once the electric generation facility or power purchase agreement is considered
used and useful or as otherwise provided in subsection (12), the commission shall
include in an electric utility’s retail rates all reasonable and prudent costs for an
electric generation facility or power purchase agreement for which a certificate of
necessity has been granted. The commission shall not disallow recovery of costs
an electric utility incurs in constructing, investing in, or purchasing an electric
generation facility or in purchasing power pursuant to a power purchase
agreement for which a certificate of necessity has been granted, if the costs do not
exceed the costs approved by the commission in the certificate. Once the electric
generation facility or power purchase agreement is considered used and useful or
as otherwise provided in subsection (12), the commission shall include in the
electric utility’s retail rates costs actually incurred by the electric utility that
exceed the costs approved by the commission only if the commission finds that the
additional costs are reasonable and prudent. If the actual costs incurred by the
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electric utility exceed the costs approved by the commission, the electric utility
has the burden of proving by a preponderance of the evidence that the costs are
reasonable and prudent. The portion of the cost of a plant, facility, or power
purchase agreement which exceeds 110% of the cost approved by the commission
is presumed to have been incurred due to a lack of prudence. The commission
may include any or all of the portion of the cost in excess of 110% of the cost
approved by the commission if the commission finds by a preponderance of the
evidence that the costs were prudently incurred. [Emphasis added.]
Thus, subsection (9) provides that approved costs can be recovered in rates when a facility
becomes used and useful. If the costs are not preapproved but are nonetheless incurred,
subsection (9) provides that they may be recovered if reasonable and prudent. Thus, the question
is not whether the utility will be able to recover the costs, but whether they will be pre-approved.
Appellants argue that the provision in subsection (9) for recovery of actual costs implies
that a management reserve was not contemplated as part of the costs pre-approved with issuance
of a CON. However, nothing in subsection (6) or subsection (9) would preclude pre-approval of
a management reserve cost. If testimony established that a management reserve was a legitimate
cost associated with a qualifying project, subsection (6) would merely require that it be specified.
Subsection (9) provides that all reasonable and prudent costs for a facility covered by a CON be
included in rates, whether pre-approved or not. If preapproved, there is no concern that the
utility would get a windfall if ultimately the costs were not incurred; although subsection (9)
states that pre-approved “costs” cannot be disallowed, if they are not incurred they would not
qualify as a “cost.” Thus, if preapproved there is an assurance of recovery in rates if incurred. If
not pre-approved, the utility does not absorb the cost but simply loses the benefit of pre-
approval.
Here, ample testimony supported the inclusion of a cost for contingencies in the
estimated costs of the LCM Project. However, the testimony was confused regarding whether
contingencies were covered in part by risk reserve built into the individual subprojects. Indiana
Michigan first presented testimony indicating that some contingencies were covered by risk
reserve and then presented undocumented testimony indicating that all contingencies had been
stripped out of at least some subprojects. Given the questions that remained regarding
management reserve, the PSC did not err when it found that Indiana Michigan did not establish
that management reserve was a reasonable cost by substantial evidence on the whole record.
Indiana Michigan had proposed a management reserve of 20% of estimated costs. There
was no evidence explaining the origin of this figure or its reasonableness. Thus, even if Indiana
Michigan had established that a management reserve was a reasonable cost generally, it failed to
establish that the amount of the cost was reasonable. Coextensively, there was no factual basis
for the PSC’s determination that 10% of estimated costs represented a reasonable management
reserve. Citing Consumers Power Co v Pub Serv Comm, 189 Mich App 151, 187; 472 NW2d 77
(1991), it is suggested that the PSC’s provision for 10% as a management reserve was within a
range of values presented and was therefore supported by substantial evidence. However, the
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PSC expressly found that the reasonableness of a 20% management reserve was not supported by
the record.5 It then included a 10% management reserve, not because record evidence supported
this cost, but “because the Commission understands that knowledge of the future is not
achievable given the complexity of the LCM project and the tasks and resources required to
achieve it.” It remains unclear why the PSC chose 10% as opposed to 1% or 15%. Since the
amount of this cost was not supported by substantial evidence on the whole record, there was no
showing that the cost was reasonable within the meaning of MCL 460.6s(4)(c), and the PSC’s
order was not reasonable within the meaning of MCL 462.26(8) to the extent that it approved
this cost. Accordingly, this cost should not have been preapproved and Indiana Michigan should
be entitled to these costs only if it is able to establish after the fact that the costs were reasonable
and prudent.
VI. NEED FOR SPECIFICATION OF COSTS OF THE 117 SUBPROJECTS
The Attorney General argues that the PSC did not specify the costs it allowed and those it
disallowed as required by MCL 460.6s(6), which provides:
In a certificate of necessity under this section, the commission shall specify the
costs approved for the construction of or significant investment in the electric
generation facility, the price approved for the purchase of the existing electric
generation facility, or the price approved for the purchase of power pursuant to
the terms of the power purchase agreement.
The Attorney General asserts that a remand is necessary for specification. Further, the Attorney
General insists this issue was preserved by several citations to MCL 460.6s(6) in exceptions to
the proposal for decision. The Attorney General mentioned that MCL 460.6s(6) requires
specification of costs in the context of its argument that the PSC had to approve or reject but
could not amend or modify Indiana Michigan’s application for a CON, an argument that the
Attorney General has not pursued on appeal. Moreover, the Attorney General noted that MCL
460.6s(6) relates to the nature and reasonableness of costs, and discussed this provision in the
context of discussing whether contingent costs can be approved as a specific cost. The Attorney
General never challenged the failure to specify costs allowed and disallowed. “Failure to file
exceptions to a proposal for decision in a timely manner constitutes a waiver of the objection.”
Attorney General v Pub Serv Comm, 174 Mich App 161, 164; 435 NW2d 752 (1988). This issue
is not preserved.
5
In arguing that projects with uprate modifications should be excluded from the LCM project, a
witness for the Attorney General argued that those projects should be removed along with the
proposed management reserve, and that an adjusted 20% management reserve should then be
added back in. Again, there was no evidence addressing where this figure came from or why it
should be regarded as reasonable. Moreover, it did not establish a range of values that would
have supported the 10% range chosen by the PSC.
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The record indicates that the costs for each subproject were broken down and that these
were the costs approved by the PSC. However, it is not clear from the record on appeal to what
extent costs were itemized. The statute speaks of “costs approved” but does not indicate the
level of specificity required. It could mean the total cost of each composite project or require
itemization of each project. If itemization is called for, what degree of itemization should be
required? With a project of this complexity, itemization down to nuts and bolts would
presumably be too cumbersome to be useful. Had the Attorney General argued below that the
statute contemplated more specificity, the pros and cons of more specificity and the degree of
appropriate specificity would have been developed and addressed by the PSC. Moreover, in
considering this question it would be helpful to understand how the PSC will assess cost
overruns so that it can be determined what is an overrun and what was a pre-approved cost.
Since we have neither this information nor the benefit of the PSC’s determination regarding this
issue, we decline to consider it.
We affirm in part and reverse in part.
/s/ E. Thomas Fitzgerald
/s/ Elizabeth L. Gleicher
/s/ Amy Ronayne Krause
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