in Re Application of Upper Peninsula Power Co to Increase Rates

STATE OF MICHIGAN
COURT OF APPEALS
__________________________________________
In re Application of UPPER PENINSULA POWER
COMPANY to Increase Rates.
CITIZENS AGAINST RATE EXCESS, UNPUBLISHED
May 31, 2018
Appellant,
v No. 336949
Public Service Commission
MICHIGAN PUBLIC SERVICE COMMISSION LC No. 00-017895
and UPPER PENINSULA POWER COMPANY,
Appellees.
Before: MURRAY, C.J., and SERVITTO and BOONSTRA, JJ.
PER CURIAM.
Appellant Citizens Against Rate Excess (CARE) appeals as of right the September 8,
2016 order issued by the Michigan Public Service Commission (PSC), approving in part a
request by appellee Upper Peninsula Power Company (UPPCO) to increase its rates for retail
electric service based on calculations for a projected 2016 “test year”1 and its representation that
it would likely suffer a revenue deficiency for the year. We affirm.
I. FACTS AND PROCEEDINGS
UPPCO is a Michigan public electric utility that serves approximately 54,000 retail
electric customers in the Upper Peninsula counties of Alger, Baraga, Delta, Houghton, Iron,
Keweenaw, Marquette, Menominee, Ontonagon, and Schoolcraft. Pertinent to the instant
dispute, in 2014, pursuant to PSC approval in PSC Case No. U-17564, all of the common stock
of UPPCO was acquired indirectly by Balfour Beatty Infrastructure Partners GP Limited (BBIP)
from Integrys Energy Group Inc (“Integrys”).
1
The PSC defines a test year as the “starting point for establishing just and reasonable rates for a
regulated utility and its customers” where the PSC “establish[es] representative levels of
revenues, expenses, rate base, and capital structure for use in the rate-setting formula.”
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On September 18, 2015, UPPCO filed an application, with supporting testimony and
exhibits, requesting authority to increase its retail electric service rates. UPPCO stated that, in its
last rate case for the 2014 test year, the PSC had granted rate relief based on a 10.15% return on
common equity and requested a return for the projected test year of 10.75%. On that basis,
UPPCO calculated a base rate revenue deficiency of $17,489,261, or $13,155,928 after it offset a
revenue credit of $4,333,333 as required by a June 6, 2014 order in PSC Case No. U-17564.
UPPCO sought alternative ways of making up its asserted shortfall. It first proposed that it
further defer $6,474,616 of forecasted expenses associated with its 2016 transition and pension
and benefit costs to spread out the needed rate increases over a longer time period. This would
lead to a current rate increase of $6,681,312 annually. Alternatively, if the PSC disallowed the
deferment, it sought to increase its rates by $13,155,928 annually.
Initially, following a proposal and hearing, on March 19, 2016, UPPCO self-implemented
a rate increase of $6,259,025,2 pursuant to then MCL 460.6a(1), which it applied through raising
the rates of all rate classes by an equal percentage. At the same time, the parties submitted
various testimonies and exhibits concerning UPPCO’s initial application and an evidentiary
hearing was held.
After the evidentiary hearing, the administrative law judge (ALJ) issued a Proposal for
Decision (PFD) that recommended approving UPPCO’s alternate proposal, along with the PSC
Staff’s conditions. As a result, UPPCO filed an exception and contested both the requirement to
record any future pension expense below $1.7 million as a regulatory liability and the condition
it not receive a return on $27.7 million of the $59 million total regulatory pension asset. The
company offered another compromise. It sought to include the $27.7 million in its rate base, in
return for offering an additional revenue credit of $390,000 each year from the 2016 test year
until December 31, 2021. In its reply to UPPCO’s exceptions, CARE argued that the PSC
should take the ALJ’s position that all of the initial conditions proposed by PSC Staff should be
imposed, including not allowing UPPCO to receive a rate of return on the $27.7 million. CARE
also specifically maintained that a return of the $27.7 million itself was a reasonable exercise of
the PSC’s ratemaking authority, and objected to a supporting affidavit that UPPCO had
introduced to support its other positions. In its reply, the PSC Staff indicated that it did not
oppose UPPCO’s proposed compromise, and that the proposed credit “mitigates Staff’s
concerns.”
With respect to the issues on appeal, the PSC agreed with UPPCO’s reasoning
concerning the calculation of power supply cost recovery (PSCR) factors. It stated that it
is not persuaded that it should deviate from past practice on this issue, because
CARE has not provided any evidence showing that it is logical to add [Real Time
Market Pricing (RTMP)] customers to the PSCR calculations. RTMP customers
are already paying the LMP and are not PSCR customers; thus, pursuant to the
2
The discrepancy between this amount and the $6,474,616 UPPCO initially sought was
apparently due to an initial accounting error.
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Commission’s direction, UPPCO reduces total fuel, purchased power, and
transmission O&M costs by RTMP sales and RTMP transmission revenues. . . .
Since their energy costs are passed on directly to RTMP customers, these
customers are not included in PSCR calculations. UPPCO provided unrefuted
evidence showing that it does not “supply energy to the RTMP customer from its
generation and purchased power portfolio.” 5 Tr 679. The Commission therefore
approves the proposed $58.57/MWh PSCR base rate and 1.0623 loss factor.
With respect to the treatment of separate classes of ratepayers, the PSC held:
The Commission is not persuaded that CARE has presented a superior rate
design formula. Rate schedules vary widely in terms of cost causation, and a
degree of nuance is required for accurate rate design. A rate formula that relies on
a hard and fast floor and ceiling cannot comply with the legislative mandate for
cost based rates. Reliance on a total system-wide jurisdictional average cost
conflicts with the Commission’s duty to examine the actual costs to serve the
various classes of customers, and move those classes of customers to cost based
rates. MCL 460.11(12).
With respect the treatment of Accumulated Deferred Income Tax (ADIT) balances, the
PSC noted the following when it approved UPPCO’s proposed rate base:
After a review of the record, arguments of the parties, and the PFD, the
Commission finds that CARE’s exceptions should be rejected. As the ALJ found,
UPPCO provided ample evidence, both testimony and exhibits, explaining the
adjustment to ADIT and support for its contention that the revenue offset
approved in the settlement agreement in Case No. U-17564 was intended to
mitigate the impact of the ADIT adjustment.
With respect to the recovery of pension costs, the PSC provided a lengthy description of
the process that led to the compromise proposal, and provided the following analysis of CARE’s
objections and its approval of the compromise:
The Commission also rejects CARE’s objections, which seem to confuse
the regulatory asset with the expense. CARE appears to have taken the agreed-
upon test year expense of approximately $1.7 million and multiplied it by 25
(years) to arrive at a total regulatory asset of $42.5 million, based on the
assumption that $1.7 million would be amortized annually for 25 years. This is
neither how the total regulatory asset amount is arrived at nor how amortization
works. The total regulatory asset is $59 million, which will be amortized over 25
years. The amount that is amortized each year is only one component of the
pension expense. The test year pension expense represents an annual amount that
is recalculated each year, and that will change in the next rate case.
In general, new ratemaking proposals should be avoided on rebuttal,
because the proposal may not be properly fleshed out. In this case, the utility and
the Staff have agreed upon an additional customer credit and a set of conditions,
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and the Commission finds that the credit and conditions should be approved
because they amount to a reasonable outcome for a very specific set of
circumstances. The Commission agrees with the ALJ that UPPCO’s alternative
proposal, which brings the test year pension expense in line with historical
pension expenses, is superior to the Staff’s proposed expense, which is based on
setting pension expense at a level consistent with what was represented by UPPCo
in Case No. U-17564. The sale caused the need for the top-up contribution. The
Staff has not disputed that the top-up was required under ERISA, nor that UPPCo
was required to reimburse Integrys. The spinoff is indisputably the act that
changed UPPCo’s plan to a retiree-heavy plan, due to the change in the
demographics of the employee base - 87% of plan participants are now former
employees. 5 Tr 443, 446. However, the settlement agreement provided that
there could be no change to employee benefits as a result of the sale.
Given that the sale actually resulted in dramatic changes to the ratio of
current to former plan participants, the effects of the sale should be taken into
account. Amortizing the expense over a longer period of time will lower the cost
to ratepayers during the test year without harming the company. The top-up was
a required pension contribution that would, under normal circumstances, be
treated as part of working capital. While the Commission recognizes that these
circumstances are unprecedented, the Commission also acknowledges that the
top-up was required by law and ensured that there would be no change to current
or former employees’ benefits. Thus, the Commission is not persuaded that it
should be removed from rate base. The Commission finds that: (1) UPPCo shall
use a test year pension expense of $1.7 million, and shall record any future
pension expense below that amount, on a yearly basis, as a regulatory liability; (2)
UPPCo shall treat the total $59 million related to pension expense as a regulatory
asset, and shall receive a return of and on that amount; and (3) UPPCo shall
implement an additional $390,000 revenue credit beginning with the 2016 test
year through December 31, 2021.
CARE filed a petition for rehearing. Following replies from UPPCO and the PSC Staff,
the PSC denied CARE’s petition.
II. ANALYSIS
A. STANDARDS OF REVIEW
The following standards apply to this Court’s review of PSC decisions:
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. A party aggrieved by an order of the PSC has
the burden of proving by clear and satisfactory evidence that the order is unlawful
or unreasonable. 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
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the exercise of its judgment. And, of course, an order is unreasonable if it is not
supported by the evidence. In sum, a final order of the PSC must be authorized
by law and supported by competent, material, and substantial evidence on the
whole record.
An agency’s interpretation of a statute, while entitled to respectful
consideration, 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. [In re
Review of Consumers Energy Co Renewable Energy Plan, 293 Mich. App. 254,
267-268; 820 NW2d 170 (2011), amended 293 Mich. App. 801 (2011) (quotation
marks and citations omitted).]
With respect to the PSC’s factual determinations:
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. []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.[] [Id. (quotation
marks and citations omitted).]
With respect to CARE’s argument that the PSC’s order is unreasonable because it is not
supported by competent, material, and substantial evidence on the whole record, the following
principles apply:
In general, the PSC has wide latitude when choosing whether to credit
expert witness testimony in a PSC case. It is for the PSC to weigh conflicting
opinion testimony of the qualified (competent) experts to determine how the
evidence preponderated. Expert opinion testimony is substantial if offered by a
qualified expert who has a rational basis for his views, whether or not other
experts disagree. Substantial evidence is more than a mere scintilla of evidence,
but may be less than a preponderance of the evidence. The testimony of even one
expert can be substantial evidence in a PSC case. [Id. at 284-285 (quotation
marks and citations omitted).]
In addition, the PSC is entitled to consider all lawful elements in determining rates, and is not
bound by a single formula or method as it may make pragmatic adjustments when warranted. In
re Application of Consumers Energy Co, 281 Mich. App. 352, 360; 761 NW2d 346 (2008).
B. UPPCO’S CALCULATED BASE RATE
The PSC’s decision to approve UPPCO’s calculated PSCR rate of $58.57/MWh is
supported by expert testimony offered by UPPCO, and CARE has not demonstrated that the
PSC’s decision to accept UPPCO’s calculated PSCR base rate, with line loss factors, was
unlawful or unreasonable.
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The underlying dispute on this issue involves whether RTMP customers’ power use
should be included in the calculation of the PSCR base rate. In support of its position, CARE
points to language in MCL 460.6j(11) and (12) which, at the time of the instant dispute,3
provided:
(11) Not more than 45 days following the last day of each billing month
in which a power supply cost recovery factor has been applied to customers’ bills,
the utility shall file with the commission a detailed statement for that month of the
revenues recorded pursuant to the power supply cost recovery factor and the
allowance for cost of power supply included in the base rates established in the
latest commission order for the utility, and the cost of power supply. The detailed
statement shall be in the manner and form prescribed by the commission. The
commission shall establish procedures for insuring that the detailed statement is
promptly verified and corrected if necessary.
(12) Not less than once a year, and not later than 3 months after the end of
the 12-month period covered by a utility’s power supply cost recovery plan, the
commission shall commence a proceeding, to be known as a power supply cost
reconciliation, as a contested case pursuant to chapter 4 of the administrative
procedures act of 1969, Act No. 306 of the Public Acts of 1969. Reasonable
discovery shall be permitted before and during the reconciliation proceeding in
order to assist parties and interested persons in obtaining evidence concerning
reconciliation issues including, but not limited to, the reasonableness and
prudence of expenditures and the amounts collected pursuant to the clause. At the
power supply cost reconciliation the commission shall reconcile the revenues
recorded pursuant to the power supply cost recovery factors and the allowance for
cost of power supply included in the base rates established in the latest
commission order for the utility with the amounts actually expensed and included
in the cost of power supply by the utility. The commission shall consider any
issue regarding the reasonableness and prudence of expenses for which customers
were charged if the issue was not considered adequately at a previously conducted
power supply and cost review.
CARE argues that because the PSC approved $48,284,554 as the PSCR base rate, UPPCO was
then required to use this figure, along with the total power use of all of its customers, to calculate
the base rate. As UPPCO argues, however, its expert, Aaron Wallin, testified that with respect to
the RTMP customers, the company did not purchase or generate power for them. Therefore, the
portion of the $48,284,554 representing the RTMP customers should be removed when
3
The current version of these provisions, as amended by 2016 PA 341, effective April 20, 2017,
is substantially similar.
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calculating the base rate, and their power use should also be removed from the “total” power
used by all of UPPCO’s customers.4
As the PSC argues, this concept is supported by the fact that RTMP customers are
charged in a different way for UPPCO’s service in transmitting power to them from their actual
providers. In PSC Case No. U-15224, the PSC approved a tariff for the RTMP customers of
UPPCO. The basis for the allowance of the tariff was the PSC’s finding that the RTMP
customers would not otherwise be responsible for UPPCO’s PSCR mechanism:
UPPCo represents that ex parte approval of the application is appropriate
because it will not result in an increase in existing rates or costs of service to
existing tariff customers. Because customers taking service under this Program
will be subject to actual LMPs, the Program will not be subject to UPPCo’s power
supply cost recovery mechanism. The Commission agrees that ex parte approval
is appropriate, because approval of UPPCo’s application will not result in an
increase in existing customer rates or charges.
Wallin’s testimony comports with that earlier decision. Wallin also testified at length about the
reason for the different treatment of the RTMP customers from the PSCR customers. Wallin
testified that UPPCO does not have costs associated with generating or purchasing power for the
RTMP customers, and that those customers’ purchases essentially “pass through” UPPCO’s
lines. With respect to the assertion of CARE’s witness, Jester, that UPPCO was using its own
facilities, or purchases, to serve RTMP customers, Wallin pointed to the fact that it purchased
1,940 MWhs more power in the RT or MISO market than it sent to RTMP customers, because it
had to purchase additional power for its other customers, to make up for shortfalls in its
generation and non-MISO purchases. The PSC was free to believe Wallin’s testimony rather
than Jester’s. In re Review of Consumers Energy Co Renewable Energy Plan, 293 Mich. App. at
268. Because the testimony of even one expert can be “substantial” evidence in a PSC case, id.
at 284-285, CARE has not shown that the PSC’s approval of the $58.57/MWh PSCR base rate
was unreasonable.
CARE also appears to confuse or conflate the PSC’s initial approval of UPPCO’s 2016
“power purchases” with its later rejection of CARE’s proposed PSCR base rate and line loss
calculations. The PSC did not, as CARE argues, “[approve] recovery of $48,284,554 PSCR
expense allowance” for PSCR base rates. It only approved recovery of $35,673,332 in PSCR
expenses, after the $12,515,176 representing purchases by the RTMP customers were removed
4
Subtracting $12,515,176 in RTMP sales and transmission from $48,284,554 (or $48,380,940
from Exhibit A-8, line 39) results in $35,769,378. The difference in reduction from the
$35,673,332 used by Wallin represents these costs, as well as reductions for costs for
“opportunity” sales, “capacity,” and “REC” sales, for a total of $12,707,608. Wallin testified
that the initially calculated RTMP sales were 240,850 MWhs. During his rebuttal testimony,
Wallin stated that the company had 209,984 MWh in RTMP sales.
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from the initial figure. Thus, the PSC was not forced to use either this latter amount, or the
corresponding 240,850 MWh of power the RTMP customers used, in the PSCR base rate.5
CARE’s arguments concerning the calculation of the line losses are similarly flawed. As
with the PSCR base rate, CARE argues that line losses should be based on the total amount of
power transmitted, 814,273 MWh, based on Jester’s testimony that because a significant portion
of the power delivered to the RTMP customers was provided by UPPCO power supply
resources, it was not reasonable to charge all of the power used by UPPCO itself to the PSCR
customers. However, Wallin testified that for the same reason he did not include RTMP sales in
PSCR base rates, they should not be included in line loss calculations. He maintained that
UPPCO did not incur line losses, which he termed “distribution system losses,” with RTMP
sales, “since the RTMP customer load is served directly from the transmission system.” Also, as
noted above, in rebuttal to Jester’s testimony, Wallin testified that the company purchased more
power from the RT or MISO market than it sent to RTMP customers.
In summary, CARE has not demonstrated that the PSC’s decision to accept UPPCO’s
calculated PSCR base rate, with line loss factors, was unlawful or unreasonable. Testimony was
presented to support UPPCO’s position, the decision to exclude RTMP customers is supported
by the PSC’s previous order, and CARE has not demonstrated that UPPCO’s treatment of RTMP
revenues and power use was inconsistent with its expert’s testimony.
C. COST OF SERVICE RATES
We likewise reject CARE’s argument that the PSC’s order approving the cost of service
rates for different types of UPPCO’s customers was unlawful or unreasonable.
Initially, CARE’s arguments below were substantially different from its argument on
appeal. In its initial brief, CARE proposed that rate design should be performed based on the
relationship of the rate to the total system-wide jurisdictional average price. CARE contended
that the average price for each kilowatt-hour (kWh) for each rate class should not exceed 150%
of, or be less than 75% of, UPPCO’s overall average price of a kWh. Later, in its exceptions to
the proposal for decision, CARE did argue that Michigan law requires just and reasonable rates.
However, while claiming that it was not advocating that the PSC adopt average rates, it then
“recommended capping the average cost resulting from rates proposed in each rate schedule at
5
We also reject CARE’s argument that there is a discrepancy between the “Net PSCR costs” of
$35,673,332 in line 48 of Exhibit A-8, and the amounts in lines 2, 6, and 12 of Exhibit A-6,
schedule F1.2, p 3, representing a total of $48,284,554 for the operating and maintenance costs
for fuel and transmission and the demand cost of fuel. As the PSC notes, line 26 of Exhibit A-6,
schedule F1.2, p 2 contains the $12,515,177 representing the revenue collected from RTMP
customers. And as shown in the columns from A-1 through Z-4 on line 26, this revenue was
allocated from RTMP customers to the other rate class customers. This supports Wallin’s
assertion that RTMP customers were not being subsidized by other customers. Instead, as
Wallin stated, the opposite occurs.
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$0.18 per kWh and not allowing the average cost for any rate schedule to fall below $0.09 per
kWh” or, as the PSC took this to mean, “that rates be capped . . . such that all rates range from
$0.09 to $0.18 per kWh.” Although CARE argues on appeal that the PSC’s order did not take
into account various factors to arrive at a required “reasonable” rate for each customer class, it
proposed below actual rate disparity caps. Moreover, in the PSC, CARE did not point to any
evidence or testimony to support its proposed rate caps. To the contrary, UPPCO provided
substantial expert testimony explaining how it arrived at its proposed rates, how the rates fit
within the limitations of MCL 460.11, and the rationale behind the disparities. Because
UPPCO’s expert testimony was uncontroverted, the PSC was permitted to rely on it and approve
UPPCO’s proposal. In re Review of Consumers Energy Co Renewable Energy Plan, 293 Mich
App at 268, 284-285.
With respect to statutory interpretation generally, the Court in Spectrum Health Hosps v
Farm Bureau Mut Ins Co of Mich, 492 Mich. 503, 515; 821 NW2d 117 (2012), stated:
The primary goal of statutory interpretation is to ascertain the legislative
intent that may reasonably be inferred from the statutory language. The first step
in that determination is to review the language of the statute itself. Unless
statutorily defined, every word or phrase of a statute should be accorded its plain
and ordinary meaning, taking into account the context in which the words are
used. We may consult dictionary definitions to give words their common and
ordinary meaning. When given their common and ordinary meaning, the words
of a statute provide the most reliable evidence of its intent[.] [Quotation marks
and citation omitted.]
CARE cites a number of subsections in MCL 460.11, along with MCL 460.54, MCL 460.557(2),
MCL 462.4(a), and MCL 462.22(c), in support of its position that the PSC was required to
review ratemaking principles in addition to cost causation. At the relevant time, MCL
460.11(12) provided:
The commission shall approve rates equal to the cost of providing service
to customers of electric utilities serving less than 1,000,000 retail customers in
this state. The rates shall be approved by the commission in each utility’s first
general rate case filed after passage of 2008 PA 286. If, in the judgment of the
commission, the impact of imposing cost of service rates on customers of a utility
would have a material impact, the commission may approve an order that
implements those rates over a suitable number of years. The commission shall
ensure that any impact on rates due to the cost of service requirement in this
subsection is not more than 2.5% per year. [Emphasis added.]
Because UPPCO serves fewer than 1,000,000 Michigan retail customers, the PSC was required
to approve rates “equal to the cost of providing service to customers” or, as discussed by the
parties, “cost-based rates.” DeMerritt testified on UPPCO’s behalf that the company’s cost of
service study (COSS) was designed to identify data to be used in designing cost-based rates.
When asked to explain the idea behind the COSS, DeMerritt also testified that “[t]he costs that
customers become responsible to pay should be those costs that the particular customers caused
the utility to incur because of the characteristics of the customers’ usage of utility service,” and
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stated that evaluation of the methodology should be based on “whether it provides a sound
rationale or theoretical basis, whether the results reflect cost causation and are representative of
the costs of serving different types of customers, as well as the stability of the results over time.”
Likewise, UPPCO’s witness, James M. Beyer, testified that UPPCO’s principles when
developing rates were to use the COSS, to use “embedded and marginal costs” for guidance, that
the rate design should reflect cost of service to the extent practical, and where increases or
decreases would be substantial, to moderate the change in rates to “incorporate reasonable rate
stability.” He testified that the intent of the proposed revenue allocation “provides higher rate
increases for schedules in which the existing rate levels do not sufficiently recover the cost of
providing service” while having lower rate increases where “the current rates (for that type of
customer) exceeds the costs to provide services” in order to “realign and move each of the
schedules toward rates that better reflect the cost of providing service, as required by [MCL
460.11(12)].” PSC Staff witness, Charles E. Putnam, provided a similar analysis of UPPCO’s
plan. The testimony from these witnesses supports the PSC’s decision that UPPCO’s proposed
rate increases would represent a move toward, if not an entire shift toward, the cost-based
mandate in MCL 460.11(12). Even CARE’s witness acknowledged that, with respect to
interruptible customers, any cost of service allocation solely based on interruptibility should not
result in increased costs to other customer classes because “[a]ny contrary result clearly indicates
a cross-subsidy and is unreasonable and unjust to uninterruptible customers.”
Although CARE acknowledges that cost-base rates are required under MCL 460.11(12),
it also maintains that the PSC acted improperly when it did not attempt to harmonize and
reconcile this provision with related statutes discussing rate reasonableness in order to avoid
nullifying language in the related statutes. Specifically, CARE points to MCL 460.11(11) and
(14), which at the time of the decision provided:
(11) Within 2 years of the effective date of the amendatory act that added
this subsection, an electric utility serving fewer than 120,000 retail customers in
this state may file an application with the commission to modify the cost
allocation methods and rate design methods used to set that utility’s existing rates.
Within 180 days of the effective date of the amendatory act that added this
subsection, an electric utility serving 120,000 or more but fewer than 1,000,000
retail customers in this state shall file an application with the commission to
modify the cost allocation methods and rate design methods used to set that
utility’s existing rates. This subsection does not apply to a cooperative electric
utility that has elected to become member-regulated under the electric cooperative
member-regulation act, 2008 PA 167, MCL 460.31 to 460.39. Upon receipt of an
application under this subsection, the commission shall commence a proceeding
for that electric utility, limited to examining and implementing any modifications
to the cost allocation methods and rate design methods used by that utility. An
electric utility’s application must meet both of the following conditions:
(a) Be consistent with the cost of providing service provisions of
subsection (12).
(b) Explore different methods for allocation of production, transmission,
distribution, and customer-related costs and overall rate design, based on cost of
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service, that support affordable and competitive electric rates for all customer
classes.
***
(14) An analysis of affordable rates under this section shall include both of
the following:
(a) An analysis of rate impacts directly attributable to proposed cost
allocation methods, not including expiring costs associated with non-base energy
and non-base energy delivery that have, except for an expiring contract described
in section 5 of the energy for economic development act of 2010, 2010 PA 297,
MCL 460.995, specific statutory time durations.
(b) An analysis of the expected impact overall on customer bills.
CARE uses these subsections to argue that, along with reviewing UPPCO’s proposed rates to
ensure that the company was moving toward cost-based rates, the PSC was also required to
“explore different methods for allocation of production, transmission, distribution and customer-
related costs and overall rate design” to analyze the impacts of the rates to see whether the
proposed rates would be just and reasonable, affordable, and competitive for all customer
classes.
However, these subsections are not applicable. With respect to subsection (11), the
requirements come into play only when a utility “[files] an application with the [PSC] to modify
the cost allocation methods and rate design methods used to set that utility’s existing rates.”
Here, however, UPPCO was clear that its cost allocation and rate design proposal did not include
an application pursuant to subsection (11).
Subsection (14) applies only to “[a]n analysis of affordable rates.” This in turn refers to
language in subsection (3), which provides:
(3) Within 60 days of [June 17, 2004], the commission shall commence a
proceeding for each affected electric utility to examine cost allocation methods
and rate design methods used to set rates. In each proceeding, each affected
utility shall file within 60 days of the commencement of that proceeding a
proposal to modify the existing cost allocation methods and rate design methods
that have been used to set existing rates and shall provide notice to all of that
utility’s customers outlining the proposed cost allocation methods and rate design
methods. A proposal filed by an affected electric utility must meet both of the
following conditions:
(a) Be consistent with subsection (1), which authorizes the commission to
modify the 50-25-25 method of allocating production-related and transmission
costs to better ensure rates are equal to the cost of service.
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(b) Explore different methods for allocation of production, transmission,
distribution, and customer-related costs and overall rate design, based on cost of
service, that support affordable and competitive electric rates for all customer
classes. [MCL 460.11(3) (emphasis added).]
Similar language is found in subsection (6), which governs the requirements of an ALJ’s
findings in a proceeding commenced under subsection (3). However, pursuant to subsection
(10), which states that “[s]ubsections (1) to (9) apply only to electric utilities with 1,000,000 or
more retail customers in this state,” neither subsection (3) nor subsection (6) apply in the instant
case. CARE’s citation to subsection (14) as support for its arguments is thus without merit.
None of the other statutes cited by CARE support its position on appeal. MCL 460.54
vests the PSC with the same ratemaking authority regarding utilities as its predecessor regulatory
body had in regard to railroads. MCL 460.557(2) provides that in response to a complaint, the
PSC may conduct an investigation and fix the price of electricity charged by the utility. MCL
462.4(a) provides that common carriers are required to furnish adequate services and facilities
and that the rates charged should be just and reasonable. And MCL 462.22(c) states that if the
PSC believes a rate to be unjust, it may investigate after giving the utility notice. None of these
provisions support a conclusion that rates that vary by rate class are inherently unjust or
unreasonable.
Moreover, even if CARE is correct in maintaining that rates must be reasonable even
while a utility moves toward cost-based pricing under MCL 460.11(12), CARE fails to discuss
that the Legislature placed its own specific mandate concerning reasonableness in MCL
460.11(12). Even as a company is required to move toward cost-base rates, it is constrained by
the limitation that “[t]he commission shall ensure that any impact on rates due to the cost of
service requirement in this subsection is not more than 2.5% per year.” MCL 460.11(12). As
discussed by Beyer, UPPCO was required to follow the prohibition that no class’s rate increase
could be more than 2.5 percentage points higher than the overall increase when designing its rate
structure, and it did so. The PSC noted that UPPCO’s proposal was in line with this limitation,
as was the staff’s proposal. CARE has not shown that the PSC acted unlawfully when it ensured
that UPPCO’s proposal followed the Legislature’s plainly expressed direction about what
constitutes a reasonable rate increase.
In addition, CARE provides only general citations to what it claims are other relevant
factors to review, without actually using them to analyze the proposed rate allocations. CARE
does not discuss the relative costs of service to provide power to the various customer classes or
how this should affect the reasonableness of their gas costs.
Also, as UPPCO argues, CARE’s brief does not cite any evidence of record that its own
proposed hard-cap rate design would have resulted in rates that are more affordable or “just and
reasonable,” would more reasonably balance investor and customer interests, or would be
consistent with the value of service to customers. Apparently recognizing the lack of any
evidence to support its own proposal below, CARE has now abandoned its own proposal in favor
of an argument that the PSC’s analysis was simply flawed.
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Moreover, in its initial brief, CARE included a rate breakdown for UPPCO’s different
classes of customers. This shows that CARE included the rate increases for the RTMP
customers in its breakdown of the rate increases by customer class, and these customers are not
counted in the PSCR mechanism. With respect to the cost-of-service rate allocation, UPPCO’s
witness testified that CARE’s expert likewise improperly included RTMP customers in his
calculations. Additionally, it is the RTMP customers who form the lowest average recovery rate
of $0.0014/kWh. Therefore, even apart from the relevant statutory language, CARE’s
underlying calculations concerning rate disparity are flawed.
For these reasons, we conclude that CARE has not met its burden of showing that the
PSC’s order approving the cost-of-service rates for different types of UPPCO’s customers was
unlawful or unreasonable.
D. CASE NO. U-17654 SETTLEMENT AGREEMENT
We also conclude that the PSC did not act unreasonably or unlawfully when it followed
the terms of the settlement agreement in PSC Case U-17654, and permitted UPPCO to add the
$70 million representing the transferred ADIT to the company’s base rate and thus earn a return
on it.
Part of the settlement agreement in PSC Case U-17654 provided that, along with the
acquisition of UPPCO, the prior ADIT balance would be reset. As an initial matter, the PSC
argues that CARE, who was a party to the settlement agreement, should not be permitted to
collaterally attack it in the instant case. Conversely, CARE argues that the “Commission was not
bound by the fact that for tax purposes Integrys and BBIP elected to treat the transfer of
ownership in UPPCO as a taxable sale of assets” when deciding whether to allow UPPCO to
recover on the $70 million in the instant case. Both arguments require consideration and
application of a portion of the agreement.
An agreement to settle a pending lawsuit is a contract, governed by the legal rules
applicable to the construction and interpretation of other contracts. Kloian v Domino’s Pizza,
LLC, 273 Mich. App. 449, 452; 733 NW2d 766 (2006); Gramer v Gramer, 207 Mich. App. 123,
125; 523 NW2d 861 (1994). “Interpretation of unambiguous and unequivocal contracts is a
question of law.” Gramer, 207 Mich. App. at 125. The settlement agreement in PSC Case U-
17654 provided, in relevant part:
8. This Settlement Agreement has been made for the sole and express
purpose of recommending approval of the Proposed Transaction in Case No. U-
17564 without prejudice to the rights of parties to take new and/or different
positions in other proceedings. If the Commission approves this Settlement
Agreement without modification, the parties and the Commission shall not make
any reference to or use of the Settlement Agreement or the order approving it as a
reason, authority, rationale or example for taking any action or position or making
any subsequent decision in this case or any other cases or proceedings; provided,
however, such reference or use may be made to enforce the Settlement Agreement
and order.
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The parties discuss In re Application of Consumers Energy to Increase Electric Rates,
498 Mich. 967; 873 NW2d 108 (2016), in support of their respective arguments. In that case,
which concerned the deployment of smart-meter infrastructure, the Supreme Court ruled that
issues preserved by a specific reservation made by the Attorney General in the settlement
agreement could be subsequently addressed independently from matters that had been previously
settled. In re Application of Consumers Energy to Increase Electric Rates, 498 Mich. 967, 967.
It thus remanded the case to this Court to consider the parties’ other arguments. Id. In that case,
however, the Attorney General expressly reserved specific issues for further litigation. Here
CARE did not do so, but instead agreed to the sale, and thus the corresponding ADIT treatment.
Therefore, In re Application of Consumers Energy to Increase Electric Rates is not dispositive.
Even assuming, however, that CARE is not foreclosed from raising a claim concerning
the ADIT, CARE’s argument that the PSC should not be bound by the settlement agreement is
without merit. The portion of the agreement cited by CARE does not refer to any right or
obligation of the PSC. In making its argument that the PSC should not follow the agreement,
CARE disregards the last phrase of Section 8, which specifically states that the parties and the
PSC may “reference” or “use” the agreement “to enforce the Settlement Agreement and order.”
Moreover, CARE ignores Section 7 of the agreement, which provides:
7. The parties jointly recommend that the Commission issue its Order
Adopting Settlement Agreement and resolve this case with prejudice, granting all
required and requested approvals in connection with the Proposed Transaction.
The PSC did so, issuing an order that states, in pertinent part:
C. This order is issued pursuant to Section 6q of 2008 PA 286, MCL
460.6q, and provides all required and related approvals in connection with the
proposed transfer of ownership and control by [Integrys] to [BBIP] for the
purchase of 100% of the capital stock of [UPPCO].
Thus, the PSC specifically approved all of the underlying transactions involved in the sale.
Therefore, even if CARE could argue against the position it took in PSC Case No. U-17564 in
which it specifically requested that the PSC decide “with prejudice, granting all required and
requested approvals in connection with the Proposed Transaction,” it was not unreasonable or
unlawful for the PSC to follow its earlier clear direction, and thus approve the inclusion in rate
base in the instant case that corresponds to the treatment of the ADIT in PSC Case U-17654.
Citing MCL 24.285 and the statute that requires the PSC to consider the whole record in
contested cases, CARE next argues, inconsistently, both that the PSC failed to do so, and that it
did so and found the evidence lacking as to whether an agreed-upon $26 million offset was
designed to reduce the impact of the ADIT treatment on ratepayers. In particular, CARE points
to the PSC’s discussion of the settlement agreement which also explicitly described the nature of
the $26 million credit when discussing UPPCO’s argument that the PSC Staff’s initial
calculation concerning the pension expense was unreasonable because it failed to account for the
offset. In disagreeing with UPPCO’s argument, the PSC stated:
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As an initial matter, the Commission finds that UPPCo is mistaken in its
characterization of the credit arrived at in Case No. U-17564. Neither the
settlement agreement nor the order in that case state how the amount was arrived
at or what the credit was specifically intended to offset.5
_______________________________________________________________
5
The Commission finds no corroboration in Case No. U-17564, or record
evidence in this case to support the ALJ’s statement that the pension top-up “is
part of the $26,000,000 revenue credit that reduces UPPCO’s revenue
requirements over 6 years.” PFD, p. 97.
__________________________________________________________________
CARE is correct that this appears to contradict the PSC’s later holding that, with respect to the
ADIT balance:
As the ALJ found, UPPCo provided ample evidence, both testimony and
exhibits, explaining the adjustment to ADIT and support for its contention that the
revenue offset approved in the settlement agreement in Case No. U-17564 was
intended to mitigate the impact of the ADIT adjustment.
Although the PSC’s initial statement could be read as a finding that the earlier settlement
agreement and order did not specifically require the PSC to use the $26 million to offset the
pension expense, the two provisions appear contradictory. However, UPPCO produced
testimony in the instant case and in PSC Case No. U-17564 that the offset was to help mitigate
the effect of the ADIT treatment. Specifically, Bradley Johnson, Barbara Siehr, Manz, Robert
Keough and Bente Villadsen all testified in case no. U-17564 regarding the ADIT treatment.
Therefore, to the extent that the two findings by the PSC in the instant could be read as
inconsistent, the PSC did have evidence to support its determination that the record showed that
the revenue offset was designed, at least in part, to offset the negative consequences of ADIT
account treatment.
Finally, CARE provides no evidence or testimony to support its own position. Instead, it
raises a general argument that the ADIT account treatment is somehow unfair to UPPCO’s
customers. CARE acknowledges that the circumstance of the sale, and corresponding ADIT tax
treatment, was legal and within the province of the parties to the sale. It has presented no
testimony or other evidence that UPPCO performed an accounting error. CARE essentially
wants this Court to find that UPPCO’s witnesses are not credible, but witness credibility was for
the PSC to decide. Moreover, CARE has presented nothing to support its contention that the
PSC could ignore a portion of UPPCO’s legitimate rate base, particularly when CARE and the
PSC had already agreed to do so.
E. PENSION EXPENSE
We also conclude that the PSC did not act unlawfully or unreasonably when it approved
the compromise concerning UPPCO’s pension expense.
CARE first appears to argue that the PSC’s decision was either not fully explained or was
not based on sufficient evidence because two of the documents that UPPCO provided to show
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the calculations used to arrive at the 25-year, $1.7 million amortization compromise were not
offered into evidence or subject to cross-examination. In its initial brief, UPPCO discussed the
compromise proposal that C. Kenneth Vogl and Susan Crimmins Devon had discussed in their
rebuttal testimonies concerning the longer amortization of the pension expense. UPPCO also
submitted “Attachment B,” which it stated reflected “[t]he impact of this alternative proposal on
the revenue deficiency in this case.” This attachment contains what is essentially both a revised
Schedule A-1 (or more accurately a revision of the initial revision to this schedule) and a revised
Schedule C-15. The Schedule A-1 was amended to recalculate the deferral of pension and
transaction costs of $6,474,616 to reflect only a deferral of transaction costs, or $2,098,126, and
to add a pension recovery amount of $1,700,000, and to then update the “adjusted net operating
income” from $8,445,662 to $11,122,184 and the “revenue deficiency” from $7,241,555 to
$8,937,315. These items, though not previously submitted in table form, were the subject of
testimony from both Devon and Vogl. Although the PSC’s argument that this did not constitute
a new “calculation” seems questionable, Attachment B was not, as CARE suggests, some piece
of new evidence or methodology that CARE was unable to cross-examine Devon and Vogl
about. In fact, CARE acknowledged as much in its reply brief, stating:
The proposed increase of $1,700,000 for expense on line 22 in page 1 of
Attachment B, which is added to UPPCO’s revenue deficiency apparently reflects
Mr. Vogl’s testimony in which he states the impact of reducing the annual
expense by amortizing it over 25 years instead of over 12.5 years yields an
additional annual revenue requirement totaling $1,699,279.
Although CARE did note in its reply brief that Attachment B was not submitted into evidence or
subjected to cross-examination, it did not object to its use. Rather, it used the figures included in
it to argue that the amount of total recovery from the ratepayers over the 25-year amortization
schedule would be $42,500,000 for what it calculated to be only $4,644,185 of actual deferred
costs, with the rest representing interest in the amount of $37,855,815. In doing so, CARE did
not contend that any of the amounts in Attachment B were incorrect, or request further
discovery, cross-examination, or other relief. CARE also does not claim on appeal that any of
the amounts on Attachment B are incorrect.6
Attachment C was first included in UPPCO’s exceptions to the PFD. UPPCO had
disagreed with the ALJ’s adoption of the staff’s condition that the company not be permitted to
recover any profit on the recovery of the $27.7 million in pension expense. The company
wanted to include it in its rate base, and offer an additional revenue credit of $390,000 each year
from the 2016 test year until December 31, 2021. Attachment C was included as a summary of
this proposal.
6
In addition, CARE’s argument that it was unable to cross-examine UPPCO’s witnesses about
either the compromise plan the company proposed or the items later set out in Attachment B is
without merit. CARE’s attorney cross-examined both Vogl and Devon at length about this
proposal.
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In its reply to UPPCO’s exceptions, CARE did not object to the use of Attachment C or
even mention it. Nor did it claim that any of the calculations contained therein were incorrect,
but instead argued that the PSC should take the ALJ’s position that all of the initial conditions
proposed by staff should be imposed, including disallowing UPPCO to receive a rate of return on
the $27.7 million. Moreover, CARE specifically argued that a return of the $27.7 million itself
was a reasonable exercise of the PSC’s ratemaking authority. Even in its motion for rehearing,
while CARE noted that the Attachments had not been admitted, CARE used the calculations
therein to support its position that the PSC’s analysis of pension expense did not match the
amounts in the Attachments. CARE did not argue that Attachment C represented “additional
facts” below. As with the use of Attachment B, while this could reasonably be considered a new
calculation of sorts, it was due to a new compromise proposal, which the staff also agreed with.
As UPPCO maintains, the offering of a rate or credit compromise is not a question of fact that
needs to be supported by separate evidence and subject to cross-examination. Also, as with
Attachment B, CARE did not contend that any of the amounts in Attachment C were incorrect or
were based on incorrect underlying data, or request further discovery, cross-examination, or
other relief.
We conclude that CARE’s adoption and use of the figures in Attachments B and C
qualify as a waiver of the argument that the PSC’s reliance on them to make its decision was
improper. “A party may not take a position in the trial court and subsequently seek redress in an
appellate court that is based on a position contrary to that taken in the trial court.” Living
Alternatives for the Developmentally Disabled, Inc v Dep’t of Mental Health, 207 Mich. App.
482, 484; 525 NW2d 466 (1994). Additionally, it is unclear what CARE thinks will change
should this Court accede to its request to remand with instructions to the PSC “to precisely and
clearly identify more than conclusory findings regarding the amounts for pension expense it is
approving.” The underlying data is the same, with the attachments created only for convenience.
And as discussed, testimony was presented about the reasons behind, and the rationale for,
CARE’s initial compromise proposal. Even if this “evidence” was excluded and this matter is
remanded, CARE has not demonstrated that the PSC would not reach the same conclusion.
CARE also appears to argue that the PSC did not have enough information to make a
decision because the testimony by Vogl and Devon was incomplete and they did “not identify or
explain the mathematical amounts or formulas used to calculate [the $59 million] amortization
amount” or sufficiently tie the initially projected test year $3.9 million expense calculation with
the subsequent 25-year, $1.7 million amortization compromise. Specifically CARE argues that,
while Vogl compared UPPCO’s 2016 pension expense projection totaling $3,907,694 with
proposed amortizations over 12.5 or 25 years, and testified the first year of the 25-year
amortization would be lower than UPPCO’s projected $3,907,694 2016 pension expense, he
failed to identify or explain the mathematical amounts or formulas used to calculate this
amortization amount, and UPPCO’s Schedule C12, which CARE maintains “identifies projected
O&M expenses, but . . . does not identify any connection between UPPCO’s projected 2016
expenses and $59 million (amortization).” Similarly, CARE maintains that, while Devon
testified that the $1.7 million amortization would replace UPPCO’s 2016 pension expense
totaling $3.9 million with the $1.7 million, and compared the $1.7 million with prior annual
pension expense amounts, “[r]eplacing a test year $3.9 million expense calculation with a 25-
year, $1.7 million amortization is not the same.”
-17-
This argument, which was not raised below and therefore is unpreserved, amounts to a
complaint that the witness’s testimony should not be believed. However, underlying all of
CARE’s convoluted arguments of the line items in the various exhibits is a failure to recognize
that it is the PSC’s role to find expert testimony credible or incredible. In re Review of
Consumers Energy Co Renewable Energy Plan, 293 Mich. App. at 284-285. CARE’s counsel
extensively cross-examined both witnesses and could have explored this alleged deficiency had
he chosen to do so. In addition, because CARE has not demonstrated that the PSC’s use of
Attachments B or C was improper, this undercuts CARE’s argument that Vogl’s and Devon’s
underlying calculations were not presented to the PSC.
CARE also maintains that “[a]t best the results included in the PSC’s order are based
upon speculation and over-emphasizing UPPCO’s interests, fail to balance UPPCO’s interests
and those of its ratepayers, and fail to consider the overall impact of these decisions on
customers.” However, before the PSC, CARE acknowledged that the company should be able to
recover the $27.7 million, and CARE has not otherwise provided any argument or evidence
sufficient to support its position.
Affirmed.
/s/ Christopher M. Murray
/s/ Deborah A. Servitto
/s/ Mark T. Boonstra
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