in Re Application of Indiana Michigan Power Co to Reconcile Costs ( 2016 )

STATE OF MICHIGAN
COURT OF APPEALS
___________________________________________
In re Application of INDIANA MICHIGAN POWER
COMPANY to Reconcile Costs.
INDIANA MICHIGAN POWER COMPANY, UNPUBLISHED
November 29, 2016
Appellant,
v No. 326405
MPSC
MICHIGAN PUBLIC SERVICE COMMISSION, LC No. 00-017283
Appellee.
In re Application of INDIANA MICHIGAN
POWER COMPANY to Reconcile Costs.
_________________________________________
INDIANA MICHIGAN POWER COMPANY,
Petitioner-Appellant,
v No. 327716
MPSC
MICHIGAN PUBLIC SERVICE COMMISSION, LC No. 00-017603
Appellee.
Before: RONAYNE KRAUSE, P.J., and O’CONNELL and GLEICHER, JJ.
PER CURIAM.
In these consolidated appeals, appellant Indiana Michigan Power Company (I&M)
appeals from orders entered on September 26, 2014, and May 14, 2015, by the Michigan Public
Service Commission (PSC) denying I&M’s request to reconcile net lost revenues for the 12-
month period ending December 31, 2012, and approving I&M’s request to reconcile its energy
optimization revenues and expenses for 2013, respectively. For the reasons discussed below, we
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remand these cases for reconsideration in light of Enbridge Energy Ltd P’ship v Upper Peninsula
Power Co, 313 Mich. App. 669; 884 NW2d 581 (2015).
I. BACKGROUND
On January 27, 2010, I&M filed a general rate case application. The application, which
was docketed as Case No. U-16180, relied on a 2010 test year, sought a revenue increase of
$62.5 million, and included proposals for several rate adjustment mechanisms to track and align
costs and rates, including a Net Lost Revenue Recovery Tracker (NLRT). On October 14, 2010,
the PSC entered an order approving the parties’ settlement agreement and a rate increase of $35
million. Paragraph 15k of the settlement agreement provided:
The Company requested a pilot Energy Optimization (EO) decoupler that limits
recovery to lost sales resulting from I&M’s EO plan approved in U-15808.
I&M’s Net Lost Revenues will be recovered through a surcharge mechanism as
discussed in the direct testimony of Staff witness Morgan and as modified in the
rebuttal testimony of Company witness Roush. When calculating I&M’s Net Lost
Revenues for 2011, I&M will use one-half the certified EO savings reflected in
I&M’s 2010 sales forecast and one-half of its certified EO savings for 2011. The
Company will be authorized to create a regulatory asset for the Net Lost
Revenues effective January 1, 2011 to be recovered through the Net Lost Revenue
Recovery Surcharge. The Company shall file an annual reconciliation of any over
or under recovery of the Net Lost Revenue Recovery Surcharge coincident with
Energy Optimization Annual Report/Reconciliation—no later than April 30th of
each year. Since EO savings are cumulative, future EO reconciliations should
reflect one-half of the certified EO savings for 2010 and 2011.
I&M filed an application in its EO plan reconciliation on April 29, 2011. The application
was docketed as Case No. U-16311. I&M requested authority to reconcile its EO plan costs, and
also requested that in accordance with the approved Settlement Agreement in Case No. U-16180,
it be authorized to recover Net Lost Revenues as reflected in the updated EO billing factors.
While the application in Case No. U-16311 was pending I&M filed a general rate case on
July 1, 2011. The rate case was docketed as Case No. U-16801. I&M relied on a 2012 test year
and requested a rate increase of $24.5 million, noting that its existing rates were established in
the approved Settlement Agreement in Case No. U-16180. I&M sought approval of “proposed
changes to its terms and conditions for services as well as its proposed rate adjustment
mechanisms.” The application made no specific reference to the NLRT approved in Case No. U-
16180.
The PSC issued an order on January 12, 2012, approving a Settlement Agreement in Case
No. U-16311. The Settlement Agreement provided in pertinent part:
The parties agree to defer to I&M’s filing in 2012 all issues concerning I&M’s
proposed mechanism to recover lost power supply and distribution revenues, as
authorized in paragraph 15.k. of the Settlement Agreement in Case No. U-16180.
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On February 15, 2012, the PSC approved a Settlement Agreement in Case No. 16801.
The order approved a rate increase for I&M in the amount of $14.6 million. Neither the PSC
order nor the parties’ Settlement Agreement made reference to the NLRT approved in Case No.
U-16180.
On April 10, 2012, this Court released its decision in In re Application of Detroit Edison
Co, 296 Mich. App. 101; 817 NW2d 630 (2012). In that case, Detroit Edison requested authority
to realign electric rates for certain institutional customers and, among other things, to use a
revenue decoupling mechanism (RDM).1 The PSC issued an order allowing Detroit Edison to
adopt an RDM. This Court reversed this portion of the PSC’s order, holding that pursuant to
MCL 460.1089(6), the PSC had authority to approve the use of an RDM for gas utilities, but not
electric utilities. Id. at 108-110.
On April 27, 2012, I&M filed an application, docketed as Case No. U-16739, seeking
authority to reconcile EO revenues and expenses for 2011, and to recover net lost revenues of
$1,137,616. I&M sought to recover the NLT through the implementation of an NLRT, which
I&M asserted was both consistent with other NLRTs approved by the PSC and distinguishable
from the RDM that the PSC disallowed in In re Application of Detroit Edison Co.
II. FACTS AND PROCEEDINGS IN UNDERLYING CASES
A. Docket No. 326405
On April 30, 2013, I&M filed an application, docketed as Case No. U-17283, requesting
that the PSC “commence an Energy Optimization (EO) Plan Cost Reconciliation proceeding for
the period ended December 31, 2012 and approve [I&M’s] reconciliation of Certified Net Lost
Revenues (CNLR) resulting from the EO plan.” On December 19, 2013, the PSC issued an
order approving a partial Settlement Agreement. The Settlement Agreement provided in
pertinent part:
4. Subsequent to the prehearing conference, the parties have engaged in
audit procedures and settlement discussions and, as a result, have reached
agreement on the following issues in this case. The parties to this Partial
Settlement Agreement agree as follows:
a. The 2012 payments for electric and gas totaled $4,420,319 to the
Independent Energy Optimization Program Administrator satisfy the payment
requirements set forth in MCL 460.1091(1).
1
A revenue decoupling mechanism is a “mechanism that adjusts for sales volumes that are above
or below the projected levels that were used to determine the revenue requirement authorized in
the natural gas provider’s most recent rate case. In determining the symmetrical revenue
decoupling true-up mechanism utilized for each provider, the commission shall give deference to
the proposed mechanism submitted by the provider.” MCL 460.1089(6).
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b. The proposed reconciliation of 2012 Energy Optimization revenues and
payments should be approved and results in a net under-recovery of $710,067
(including interest) through December 31, 2012. The total net under-recovery of
$903,516 includes $193,449 of the 2011 under-recovery and should be reflected
as the beginning balance of I&M’s 2013 Energy Optimization costs and
reconciliation.
c. The proposed revised Energy Optimization surcharges incorporated
into the tariff sheets attached hereto as Attachment 1 should be approved for bills
beginning with the first billing cycle of January 2014 or the first billing cycle in
the month following a Commission order.
5. The parties reserve the right to address in briefs all other issues raised
by I&M’s testimony and exhibits but not resolved by this Partial Settlement
Agreement. Specifically, the parties intend to address in brief issues arising from
I&M’s proposals related to the Net Lost Revenue Tracker in this case.
The Proposal for Decision (PFD) concluded that I&M’s NLRT terminated when new
rates were approved in Case No. U-16801, and stated:
Contrary to I&M’s arguments, the cumulative nature of the reconciliation
calculations in which sales reductions (savings) in one year are carried forward
into future years, does not mean that the mechanism was intended to apply to
rates set in future rate cases. Instead, the provision that Energy Optimization
savings are cumulative and thus future period reconciliations should reflect prior
period savings also shows that the mechanism is intrinsically linked to the rate
case in which it was authorized, because the savings are calculated with reference
to the sales level established in that case.
Although the settlement agreement refers to future reconciliations, i.e.
indicating that reconciliations were expected for more than just one year, this also
does not mean that the mechanism was intended to apply once base rates were
revised.
The PFD rejected I&M’s argument that the Staff’s contention that the NLRT did not
survive beyond Case No. U-16180 constituted a collateral attack on the Settlement Agreements
entered in Case Nos. U-16180, U-16311, U-16379, and U-16801, and concluded that the NLRT
established in Case No. U-16180 did not exist independently from the rates established in that
case.
The PFD also contained the following relevant statement:
As discussed in section II above, the parties also disagree whether the
Commission could have approved the pilot decoupling mechanism of Net Lost
Revenue Tracker in Case No. U-16801, based on the Court of Appeals rulings
that the Commission does not have authority to approve a revenue decoupling
mechanism. This PFD finds that it is not necessary to resolve the dispute whether
the Net Lost Revenue Tracker is truly a revenue decoupling mechanism covered
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by the Court’s rulings. As I&M argues, the decision in the first of these cases, In
re Application of Detroit Edison Co, 296 Mich. App. 101 (2012), was not issued
until April 10, 2012. By that point, Case No. U-16801 had been resolved by
settlement agreement, with a final Commission order issued February 15, 2012.
Had the parties agreed to include a Net Lost Revenue Tracker in that settlement
agreement, it would have been presumptively lawful, consistent with the
Commission’s August 14, 2013 decision in Case No. U-16990.
The PSC entered an order on September 26, 2014, adopting the findings and conclusions
set out in the PFD. The order concluded as follows:
The Commission finds the PFD well-reasoned and adopts its findings and
conclusions as discussed below. First, the Commission agrees that the NLRT is
indeed linked to the sales approved in the rate case. I&M admitted as much when
Mr. Yontz testified that while the method from Case No. U-16180 was used in
calculating the lost revenues for 2012 and 2013, the revised sales from Case No.
U-16801 were used in the calculation. More importantly, because these lost sales
are cumulative, and past losses are apparently used to adjust the sales projection
in the next rate proceeding, it is essential that the company provide some
explanation of how these accumulated losses were accounted for, so that other
parties might have an opportunity to evaluate and audit the changes in sales due to
past EO efforts. In I&M’s case, this accounting did not occur because the
company did not include any discussion of the NLRT in its filing in Case No. U-
16801.
I&M argues that pursuant to MCL 462.25 and MCL 460.57, any rate, fare,
charge, tariff, or rate schedule remains effective until the Commission
affirmatively terminates it. In addition, I&M cites the November 9, 2009 order in
Case No. U-15645 as a recent example where the Commission explicitly ended
the CIM for Consumers Energy Company. I&M points out that, in contrast, the
Commission did not affirmatively end the NLRT when it approved the settlement
agreement in Case No. U-16801. Therefore, according to I&M, the NLRT
continued after new rates were approved in that case.
There are several problems with this argument. First, MCL 462.25 and
MCL 460.57 refer to rates, fares, charges, tariffs, and the like, but the NLRT is
merely a mechanism for calculating a particular charge. The actual charge
associated with the NLRT is the surcharge that was approved in Case No. U-
16739, related solely to the settlement agreement in Case No. U-16180, which has
in fact continued because the Commission has not affirmatively ended the charge.
Second, past trackers including forestry, uncollectibles, the CIM and various
RDMs have consistently been raised by the applicants in subsequent rate
proceedings, especially when the applicant seeks to continue the tracker. While
I&M points to cases where trackers were contested and expressly terminated, it
can point to no cases, and indeed the Commission is unaware of any, where a
tracker (many of which began as pilots that were adjusted or refined in later cases)
was automatically continued when it was not at least raised by the applicant in a
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subsequent rate proceeding. If, as I&M asserts, the NLRT is indeed a vital
ratemaking mechanism, it was incumbent on the company (not the Staff or
intervenors) to ensure that the mechanism was addressed in any subsequent
general proceeding.
The PSC denied I&M’s request to reconcile certified net lost revenues for the 12-month
period ending December 31, 2012, ended the surcharge for net lost revenues approved in the
order entered on December 20, 2012, Case No. U-16739, and ordered I&M to file a
reconciliation of revenues collected under the surcharge established in Case No. U-16739.
B. Docket No. 327716
On April 30, 2014, I&M filed an application, docketed as Case No. U-17603, seeking
approval of its EO reconciliation of costs for the 12-month period ending December 31, 2013,
and requesting approval of an NLRT surcharge.
The PFD noted that the parties agreed that I&M’s EO reconciliation, which showed an
EO underrecovery of $261,083, plus interest, for 2013 should be approved. In response to
I&M’s argument that the PSC’s September 26, 2014, order was wrongly decided, the PFD
stated:
Further, based on a review of the record and the briefs of the parties, this
PFD concludes that the proper disposition of I&M’s CNLPR surcharge request is
controlled by the Commission’s September 26, 2014 and February 12, 2015
orders in Case No. U-17283. In that case, the Commission found that I&M’s Net
Lost Revenue tracking mechanism was not continued when rates were revised in
Case No. U-16801. I&M sought rehearing of the Commission’s decision in Case
No. U-17283. In its February 12, 2015 order in that docket, the Commission
rejected I&M’s request for rehearing. I&M has not presented new arguments in
this case that were not presented to the Commission in its rehearing request,
including its argument that the Commission’s September 26, 2014 order was
wrongly decided, that I&M acted in good faith, that public policy favors revenue
decoupling mechanisms to encourage energy efficiency, and that the
Commission’s order works a hardship on I&M. Thus, although I&M claims this
case raises new issues not raised in Case No. U-17283, this PFD does not find
support for I&M’s position. On this basis, this PFD recommends that the
Commission reject I&M’s proposed CNLR surcharge.
The PSC entered an order on May 14, 2015, adopting the findings and conclusions set out
in the PFD. The PSC noted that the NLRT was approved in Case No. U-16180, and concluded:
Subsequently, in April 2011, in Case No. U-16311, an EO reconciliation
case, I&M filed a request to implement a NLRT surcharge in accordance with
approvals in the October 14 order. In the settlement in that case, the parties
apparently agreed to defer the surcharge until a later reconciliation. While Case
No. U-16311 was pending, I&M filed another rate case, Case No. U-16801. I&M
did not request any trackers in that case and, significantly did not mention or
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discuss the NLRT in its application or prefiled testimony. As such no party was
given an opportunity to assess the efficacy of the NLRT or make any
modifications to the tracker, as is very often done with pilot mechanisms. Case
No. U-16801 was also settled, this time with no mention of the NLRT. The
settlement agreement was approved in an order issued on February 15, 2012.
That order did not authorize I&M to implement, or continue, the NLRT. As the
Commission has repeatedly explained, I&M’s failure to request authority to
continue the NLRT in the rate case subsequent to the case where the mechanism
was initially approved was fatal to its claims in Case No. U-17283 and to those in
the instant proceeding.
I&M appealed the PSC’s September 26, 2014, and May 14, 2015, orders. This Court
consolidated the appeals for purposes of hearing and decision.
III. Standard of Review
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. Mich Consol 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 establish that a PSC order is unlawful, the
appellant must show that the PSC failed to follow a mandatory statute or abused its discretion in
the exercise of its judgment. In re MCI Telecom Complaint, 460 Mich. 396, 427; 596 NW2d 164
(1999). An order is unreasonable if it is not supported by the evidence. Associated Truck Lines,
Inc v Pub Serv Comm, 377 Mich. 259, 279; 140 NW2d 515 (1966).
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; Attorney
General v Pub Serv Comm, 165 Mich. App. 230, 235; 418 NW2d 660 (1987).
A reviewing court gives due deference to the PSC’s administrative expertise, and is not to
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). We give respectful consideration to the PSC’s construction
of a statute that the PSC is empowered to execute, and we will not overrule that construction
absent cogent reasons. If the language of a statute is vague or obscure, the PSC’s construction
serves as an aid to determining the legislative intent, and will be given weight if it does not
conflict with the language of the statute or the purpose of the Legislature. However, the
construction given to a statute by the PSC is not binding on us. In re Complaint of Rovas
Against SBC Mich, 482 Mich. 90, 103-109; 754 NW2d 259 (2008). Whether the PSC exceeded
the scope of its authority is a question of law that we review de novo. In re Complaint of
Pelland Against Ameritech Mich, 254 Mich. App. 675, 682; 658 NW2d 849 (2003).
IV. Analysis
On appeal, I&M argues that the PSC erred by finding that the NLRT approved in Case
No. U-16180, i.e., the first general rate case, was terminated because I&M did not raise its
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applicability in Case No. U-16801, i.e., the second general rate case. The PSC’s past practice
showed that a tracker such as the NLRT continued absent an agreement by the parties or a
directive from the PSC to terminate it. I&M relied on this past practice and so omitted reference
to the NLRT in its application in the second general rate case. Under the circumstances, the PSC
is equitably estopped from taking the position that the NLRT terminated upon the
implementation of new rates in the second general rate case. I&M also argues that the PSC’s
decision to terminate the NLRT deprived it of approximately $4.475 million in revenue it would
have collected if the PSC had left the NLRT in place, and it of the right to fair and just treatment
guaranteed by the Michigan Constitution. Const 1963, art 1, § 17.
We hold that these cases must be remanded for reconsideration in light of Enbridge
Energy Ltd P’ship v Upper Peninsula Power Co, 313 Mich. App. 669; 884 NW2d 581 (2015).
As noted above, in In re Application of Detroit Edison, this Court held that the PSC
lacked the statutory authority to approve the use of an RDM by an electric utility because MCL
460.1089(6) authorized the use of an RDM by a gas utility only. In re Application of Detroit
Edison, 296 Mich. App. at 108-110.
In Enbridge Energy, this Court considered the question whether the PSC had the statutory
authority to approve a settlement agreement that provided for the use of an RDM by an electric
utility. In that case, the Upper Peninsula Power Company (UPPC) filed an application in June
2009 seeking a rate increase. The UPPC and other parties, including the PSC Staff, entered into
a settlement agreement that granted UPPC a rate increase and implemented an RDM for the test
year 2010. Enbridge Energy, 313 Mich. App. at 671. In May 2011, UPPC filed an application for
reconciliation of costs associated with the RDM and to recover a shortfall in revenues. While
that application was pending, this Court decided In re Application of Detroit Edison.
Notwithstanding this Court’s decision in In re Application of Detroit Edison, the PSC concluded
that the RDM agreed to by UPPC and other parties could stand because it merely had to comply
with the settlement agreement, and that it had the authority to approve the settlement agreement.
Enbridge filed a formal complaint arguing that the PSC lacked the authority to approve the use of
an RDM by an electric utility. The PSC rejected that argument and dismissed the complaint. Id.
at 671-673.
In Enbridge Energy, this Court reversed the PSC’s decision, holding that the PSC
exceeded its statutory authority by approving the underlying settlement agreement and
dismissing Enbridge’s complaint. The Enbridge Energy Court emphasized that while MCL
460.1089(6) authorized the PSC to approve the use of an RDM by gas utilities, no corresponding
statute authorized the PSC to approve the use of an RDM by an electric utility. The PSC held
that the fact that the RDM at issue was approved in the context of a settlement agreement was
not dispositive. Enbridge Energy, 313 Mich. App. at 675-677. The Enbridge Energy Court
concluded:
In sum, the PSC exceeded its clear statutory authority when it approved
the RDM in Case No. U-16568. The fact that the approval was accomplished in
the context of a settlement agreement does not transform the PSC’s ultra vires act
into a legal one. See, e.g., Timney v Lin, 106 Cal App 4th 1121, 1127-1129; 131
Cal Rptr 2d 387 (Cal App, 2003) (“[E]ven though there is a strong public policy
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favoring the settlement of litigation, this policy does not excuse a contractual
clause that s otherwise illegal or unjust.”). We stress that our holding is based on
the fact that reasonable minds could not have disputed the extent of the PSC’s
authority at the time it approved the settlement agreement. [Enbridge Energy,
313 Mich. App. at 678.]
I&M argues that Enbridge Energy is inapplicable because the NLRT is distinguishable
from the RDM found void in Enbridge Energy. I&M notes that a PSC Staff witness stated that
the NLRT was more limited in scope than other mechanisms approved by the PSC and focused
on lost revenues.
We remand these cases to the PSC for reconsideration in light of Enbridge Energy. The
PSC has “only that authority granted to it by the Legislature.” Mich Elec Coop Ass’n v Pub Serv
Comm, 267 Mich. App. 608, 616; 705 NW2d 709 (2005). No statutory authority allows the PSC
to approve an RDM for an electric utility. In re Application of Detroit Edison, 296 Mich. App. at
108-110. The relevant question, then, is whether the definition of an RDM is sufficiently
expansive to include the NLRT approved in Case No. U-16180.
The issue whether the NLRT is factually distinct from RDMs approved by the PSC in
other cases requires analysis of the specific structure of the NLRT and comparison of that
structure to RDMs approved by the PSC. The performance of such an analysis is more suited to
the PSC in the first instance. We defer to the administrative expertise of the PSC. Attorney
General, 237 Mich. App. at 88. Moreover, it is apparent that the PSC approves a number of
RDMs and similar mechanisms. To have the PSC rule on the validity of the NLRT in light of
Enbridge Energy would provide guidance for future cases.
Whether these cases continue is entirely dependent on the applicability of Enbridge
Energy. Therefore, an analysis of the issues raised by I&M is premature.
V. CONCLUSION
We conclude that analysis of the issues raised by I&M is premature in light of Enbridge
Energy and remand these matters to the PSC for reconsideration in light of that case. We do not
retain jurisdiction.
/s/ Amy Ronayne Krause
/s/ Peter D. O'Connell
/s/ Elizabeth L. Gleicher
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