Midland Cogeneration Venture Ltd. Partnership v. Public Service Commission

Taylor, J.

(concurring in part and dissenting in part). I disagree with the majority’s analysis and disposition of most of the issues presented. Prefacing my analysis of the points with which I take exception (majority issues i, m-vi) is a short description of the backdrop against which the issues must be seen.

I

The Public Service Commission was created partly to protect the smaller customers of public utilities enjoying service monopolies.¹ Utilities are businesses with shareholders who generally expect to realize returns on their investments. As a result, utilities are caught between the authority of the psc on the one hand and the expectations of shareholders on the other.

In 1987, Consumers Power began reorganizing its corporate structure,² and to that end created a holding company (CMS Energy Corporation) and various subsidiaries (including Selective Collection Services) and joint business ventures (Midland Cogeneration Venture Limited Partnership among them). It began transferring some of its nonregulated subsidiaries, i.e., those whose function did not fall directly within the jurisdiction of the psc, over to yet other subsidiaries. After Consumers’ reorganization, the psc began to experience difficulty tracking the contractual arrangements between these related entities, and, as a result, the psc’s ability to set fair rates in the manner it had previously also declined. That is, just examining Consumers’ books, ledgers, and contracts did not tell the whole story any more.

For example, in this case the psc heard testimony to the effect that Consumers and its affiliate(s) were not engaging in normal arms-length transactions, and there was concern that Consumers was acceding to rates for goods or services provided by its own affiliates that were higher than the rates it would have been charged in the open market. The extra profit would then show up on the affiliate’s books, and CMS shareholders would reap an inflated return. Consumers could then, it was advanced, claim that the inflated prices it had paid a related entity justified an increase in the rates paid by ratepayers for their utility services. In this way, smaller ratepayers would subsidize the nonutility (thus nonregulated) businesses to which Consumers was related.

The laws giving the psc the power to regulate utilities did not, and perhaps cannot, change so as to follow Consumers’ metamorphosis through its complicated business restructuring. As a consequence, the psc may be thwarted in its mission of protecting the smaller utility customers.

The majority understandably wants the psc to successfully continue its regulatory mission. For that reason, and with good intentions, the majority arrives at the conclusion that the psc has the statutory authority to force Consumers to provide information concerning unregulated affiliates and related companies. I cannot agree with the majority’s position for the reasons discussed infra. I believe the psc lacks the statutory authority, and therefore lacks the power, to use its authority over Consumers to force an entity over which the psc has no authority to turn over information concerning its own business to the psc.

However, I would note that the psc already has in its arsenal the power to accomplish its mission, albeit with different tactics, in the following way.

The psc’s regulatory function includes the power to set rates. MCL 460.6(1), 460.6a(l), (2); MSA 22.13(6X1), 22.13(6a)(l), (2); Union Carbide Corp v Public Service Comm, 431 Mich 135, 147-148; 428 NW2d 322 (1988). That power is the tool with which the psc can prevent cross-subsidization of nonutilities by ratepayers. The burden of proof is on the utility to justify the inclusion of affiliate-based costs in its rate base. The psc need only draw an adverse inference whenever information it reasonably believes is relevant and within the control of an affiliate or other related entity has not been furnished. See the footnote in Tortora v General Motors Corp, 373 Mich 563, 569; 130 NW2d 21 (1964). Any corporation interested in making a profit will be only too glad to provide better, more detailed information to the psc, including information obtained from an affiliate, in an effort to justify the highest supportable rate of return for its investors. If an affiliate, joint venture, or subsidiary such as mcv is not cooperative, the psc may draw an adverse inference or, equivalently, find that the parent utility has thereby failed to carry its burden of proof that a higher rate of return should be allowed.

The same reasoning applies to the question whether the psc has the power to regulate by tariff the price of an initial contract for the transportation of on-system gas. For the reasons I give below, the psc does not have the power to set that price directly. Again, however, nothing prevents the psc from accomplishing through different tactics its mission of protecting Consumers’ customers from paying unfairly high rates. The psc has the authority to impute to Consumers the profit it would have reaped had the affiliates’ services been rendered at an appropriate rate, i.e., the rate(s) indicated in the tariffs or whatever price the psc considers reasonable. Union Carbide, supra at 149. Here, the psc has the authority to decide whether Consumers’ dealings with mcv involved unreasonable, imprudent, or otherwise improper terms, and whether the cost to Consumers for the consideration it received should be included in Consumers’ rate base or disallowed. Consumers Power Co v Michigan Public Service Comm No 1, 196 Mich App 436, 454; 493 NW2d 902 (1992). In this way, the utility shareholders, rather than the ratepayers, will bear the brunt of any shortfall in revenue caused by the utility selling its wares at giveaway prices or buying goods or services at inflated prices. Conversely, the shareholders may reap the benefits of any unregulated sales contract set at a price above the price reflected in the tariff. This is as it should be.

I now turn to the specifics of the areas of disagreement I have outlined above.

ii

I disagree with the majority that the psc has authority to impose the seven conditions in question (see majority’s issue i).

The psc does not exist by its own right. It was created by statute, and it lacks power to do anything unless it is given a specific power by the Legislature in a statute. If there is no statute telling the psc that it can do something, then the psc cannot do that thing. Union Carbide, supra at 146, 151; Consumers Power Co v Public Service Comm, 189 Mich App 151, 176; 472 NW2d 77 (1991). For example, although the psc may set a utility’s rates, it cannot make management decisions for the utility. Union Carbide, supra at 148; CMS Energy Corp v Attorney General, 190 Mich App 220, 228; 475 NW2d 451 (1991).

The psc also cannot regulate nonutility companies. However, under some circumstances the line between a utility and one of its nonregulated, related entities may be disregarded, i.e., the corporate veil of the nonregulated company may be pierced and it may be regulated when the companies are extremely closely intertwined. See CMS Energy, supra at 232. I agree with the majority opinion in this case that the relationship between Consumers and mcv does not allow mcv’s corporate veil to be pierced. Michigan Bell Communications, Inc v Public Service Comm, 155 Mich App 40, 46-47; 399 NW2d 49 (1986). So unless there is a statute that specifically allows the psc to require the related entities to report and give information to the psc, the psc does not have the power to establish the conditions it has set forth in its order.

Requiring the related entities to supply such information to the psc is but the first step of a process of regulating entities that the psc lacks the power to regulate, and constitutes an improper assertion of psc jurisdiction. Panhandle Eastern Pipe Line Co v Public Service Comm of Indiana, 332 US 507, 511-512; 68 S Ct 190; 92 L Ed 128 (1947).

III

I disagree with the majority’s analysis of the psc’s requirement that Consumers must set its initial on-system gas transportation contract prices at amounts reflected in the new tariff schedule (see majority’s issue in). Section 10 of 1929 PA 9, MCL 483.110; MSA 22.1320, allows a utility to negotiate the initial price to be paid for gas transportation service with its customers. The psc does not have the power to regulate that initial price. Section 10 does provide that after the initial contract has been filed as required, the terms of a gas-transportation-service contract may not be altered or amended without the approval of the psc. Despite this express language, the psc ordered that any initial contract price must be set at the rate(s) set forth in the psc’s newly adopted tariffs.

These tariffs are not rules or standards, they are rates. To let the psc force Consumers to enter into initial contracts at a specific rate abrogates § 10.

The majority says that § 6 of the Public Service Commission Act, 1939 PA 3, MCL 460.6; MSA 22.13(6), and § 4 of the Public Utilities Commission Act, 1919 PA 419, MCL 460.54; MSA 22.4, give the psc the power to regulate the initial contract price. The meat of this argument has already been rejected by our Supreme Court. See Union Carbide, supra at 147, 151, and Huron Portland Cement Co v Public Service Comm, 351 Mich 255; 88 NW2d 492 (1958), where the Supreme Court has said these two sections only set out the psc’s power in general terms; they do not grant specific powers. Section 10 is specific where the other two sections are not, and under the ordinary rules of statutory construction, the specific supersedes the general whenever there is a conflict.³

The majority also argues that, because § 10 does not actually say that the psc cannot regulate the initial contract price, it may do so. This argument assumes that unless the Legislature passes a law to prevent the psc from acting, then it can act. But the converse of this argument is actually the rule: unless the Legislature allows the psc to act by passing a statute empowering it to do so, the psc cannot act. The Legislature has not empowered the psc to control initial contract prices; therefore, it has no such power. If the general jurisdictional statutes upon which the majority relies implicitly gave the psc such authority, then there would have been no need for the passage of § 10 of 1929 PA 9 or the many other statutes. Union Carbide, supra at 147 (quoting with approval Huron Portland Cement, supra at 263)._

The majority and the psc appear to believe that if Consumers is allowed to proceed as it historically has, it will enter into initial gas-transportation contracts at unreasonable prices to the detriment of ratepayers. However, when it enacted § 10 of 1929 PA 9, the Legislature obviously believed that allowing the buyer and the seller to set the initial price would result in reasonable pricing. The transportation customers in question are typically large industrial users who have access to alternate sources of fuel; thus, the prospect of unreasonable leverage by one side or the other is unlikely. But even if there were reason for these economic concerns, it is for the Legislature, not this Court or the psc, to amend § 10.

To the extent that this Court held otherwise in Antrim Resources v Public Service Comm, 179 Mich App 603; 446 NW2d 515 (1989), I believe it erred. However, I am forced to concur with the majority’s decision to affirm the decision of the psc in this regard, but only because this Court made the Antrim reasoning binding precedent under Administrative Order No. 1990-6, 436 Mich lxxxiv, extended by Administrative Order No. 1991-11, 439 Mich cxliv, and Administrative Order No. 1992-8, 441 Mich lii, in Antrim Resources v Public Service Comm, 186 Mich App 668, 669; 465 NW2d 394 (1991).

IV

I disagree with the majority regarding the test used by the psc to disallow $100,000 out of approximately $1.4 million paid by Consumers to Selective Collection Services, Consumers’ unregulated sister subsidiary, for bill collection services (see majority’s issue iv). The majority concludes that Consumers was required to demonstrate that there was a good business reason for turning its collection work over to scs in the first place, in addition to showing that the amount paid to scs by Consumers was reasonable. But case law requires only that the psc allow a utility to recover all reasonable costs of doing business, General Telephone Co v Public Service Comm, 341 Mich 620, 631; 67 NW2d 882 (1954), and this test applies also to the costs of doing business with affiliates, General Telephone Co v Public Service Comm, 78 Mich App 528, 534; 260 NW2d 874 (1977). The reasonable-cost test does not include an inquiry into whether Consumers had a good business reason to transfer the activity to another entity. As long as the cost associated with contracting out its debt-collection work is a reasonable cost of doing business, the fact that Consumers could itself collect on debts is not fatal or even relevant to the psc’s inquiry.

As it now stands, the majority has approved the psc’s new test, or the addition of a second prong to the original test, which the psc contrived in the first place in an effort to stop Consumers from forming subsidiaries. The majority thus diverges from the law. If Consumers’ formation of subsidiaries is an evil to be avoided, then it is for the Legislature, not this Court or the psc, to prohibit such formation or to authorize such regulation.

Our Supreme Court has specifically held that the power to control and regulate public utilities does not include the power to order a utility to follow particular principles of economic management. Union Carbide, supra at 151. The psc does not have the power to make management decisions concerning the economic operations of a public utility, or to order the cessation of noneconomic management practices. Id. at 152, 154-155; Attorney General v Public Service Comm, 412 Mich 385; 316 NW2d 187 (1982). The panel in Attorney General held that the scope of the psc’s inquiry in a securities-issue proceeding "[did] not extend to the wisdom of the project which a utility [sought] to fund through the issuance of long-term securities.” Id. at 391-392, quoted with approval in Union Carbide, supra at 154. In this context, asking whether there was a good business reason for Consumers’ decision to contract out its collection work is tantamount to asking whether it was a wise decision, a test rejected by our Supreme Court.

I would also find that the psc used the wrong standard to disallow the specific sum of $100,000. Rate making is a legislative function, one entrusted to the expertise of the psc by the Legislature. Legislative policy decisions by the psc, if made properly, are not reviewable by the courts. Michigan Consolidated Gas Co v Public Service Comm, 389 Mich 624, 644-645; 209 NW2d 210 (1973) (Williams, J., dissenting). When the psc establishes a rate, it is making a rule for the future and so is acting legislatively, not judicially. Pennwalt Corp v Public Service Comm, 166 Mich App 1, 8-9; 420 NW2d 156 (1988). But when reviewing past actions taken and decisions made by a utility, the psc itself must apply judicial-type standards, i.e., a "reasonable utility management” test, instead of engaging in endless Monday morning quarterbacking. Residential Ratepayer Consortium v Public Service Comm, 198 Mich App 144; 497 NW2d 558 (1993). I would remand this case to the psc and direct that the psc apply the reasonable utility management standard, which is a judicial rather than a legislative standard, to retrospectively consider the arrangement between Consumers and scs and to determine whether any portion of the amount paid to scs by Consumers should be disallowed.

v

I would find that the psc improperly refused to offset Consumers’ $9.8 million gain resulting from the sale of pension assets in 1987 by corresponding special compensation expenses booked that same year (majority’s issue v). If such a gain is to be considered in reducing rates, then contemporaneous reasonably incurred expenses must also be recognized. Michigan Consolidated Gas Co, supra at 640; Ass’n of Businesses Advocating Tariff Equity v Public Service Comm, 430 Mich 33, 39; 420 NW2d 81 (1988). Fairness dictates that Consumers be allowed to recover its reasonable expenses. General Telephone Co, supra, 341 Mich 631. The fact that ratepayers funded Consumers’ pension programs through the payment of rates does not mean that the ratepayers must reap the benefit of the realized gain. I would find that, once the money was paid to the utility, the money lost its character as "ratepayers’ money” in this case. Bd of Public Utilities Comm’rs v New York Telephone Co, 271 US 23; 46 S Ct 363; 70 L Ed 808 (1926).⁴

vi

I would find that the psc improperly imputed "phantom” revenues to Consumers in the amount of an economic-development customer discount called "Rate D” (majority’s issue vi). This discount was to be made available to certain new industrial customers, as the psc’s 1985 order says:_

The Commission is convinced that the attraction of new large industry to Michigan can generally benefit the citizens of this state and, specifically, Consumers’ customers. Michigan’s citizens benefit by increased jobs and tax receipts for state and local governments; Consumers’ ratepayers benefit by increased gas sales by Consumers and thereby increased revenues, which should result in a corresponding decrease in the cost of service to all customers.

In reviewing the proposed rate, the Commission finds that the new rate will not alter any existing approved rate, nor will it result in an increase in the cost of service to any customer. [Emphasis supplied.]

However, after the psc reached the conclusion that the discount rate would not alter any existing approved rate or cause an increase in the cost of service to other customers, and without evidence of a change in circumstances, it imputed a sum equal to the total amount of the Rate D discount— money that Consumers, of course, never actually received. The psc simply assumed that Consumers was subsidizing the Rate D payers by charging other ratepayers more. Consumers was treated as if it had actually received the discounted sum even though no evidence was presented showing that the psc’s original finding was unreasonable because the situation had changed. I would therefore apply Pennwalt Corp, supra at 9, most recently cited with approval in Consumers Power Co v Public Service Comm No 1, supra, 196 Mich App 447. As in Pennwalt, the burden was on the challenger to come forward with evidence of a change in circumstances, and that burden was not carried in this case.

In all other respects I agree with the majority opinion.

1 See Panhandle Eastern Pipe Line Co v Michigan Public Service Comm, 328 Mich 650, 664; 44 NW2d 324 (1950), aff'd 341 US 329; 71 S Ct 777; 95 L Ed 993 (1951).

2 See CMS Energy Corp v Attorney General, 190 Mich App 220, 225; 475 NW2d 451 (1991).

3 Imlay Twp Primary School Dist No 5 v State Bd of Ed, 359 Mich 478, 485; 102 NW2d 720 (1960); City of Marysville v Pate, Hirn & Bogue, Inc, 154 Mich App 655, 661; 397 NW2d 859 (1986).

4 This is not a case where ratepayers were charged with the costs or burden of investment in the pensions as a rate expense. Cf. CMS Energy Corp v Attorney General, 190 Mich App 220, 229, 234; 475 NW2d 451 (1991).