Michigan Supreme Court Lansing, Michigan

Marilyn Kelly, Chief Justice

Michael F. Cavanag h
Elizabeth A. Weave r

Maura D. Corriga n Robert P. Young, Jr. Stephen J. Markma n Diane M. Hathaway,
J ustices 

# Order

May 1, 2009

134667-69 134671 134673-74 134676-77

________________ _______________ _____________

In re APPLICATION OF DETROIT EDISON COMPANY

________________ _______________ _____________ ATTORNEY GENERAL, Appellant,

v SC: 134667 COA: 259845 MPSC: U-13808 MICHIGAN PUBLIC SE RVICE COMMISSION, DETROIT EDISON COMPANY, and CONSTELLATION NEWENERGY, INC., Appellees.

________________ __________________ __________/

________________ _______________ _____________

In re APPLICATION OF DETROIT EDISON COMPANY

________________ _______________ _____________ DETROIT EDISON COMPANY, Appellee,

v SC: 134668 COA: 264099 MPSC: U-13808 MICHIGAN PUBLIC SE RVICE COMMISSION, ASSOCIATION OF BU SINESSES ADVOCATING TARIFF EQUITY, MICHIGAN ENVIRONMENTAL COUNCIL, PUBLIC INTEREST RESEARCH GROUP IN MICHIGAN, and CONSTELLATION NEWENERGY, INC., Appellees, and2

ATTORNEY GENERAL, Appellant.

________________ __________________ __________/

________________ _______________ _____________

In re APPLICATION OF DETROIT EDISON COMPANY

________________ _______________ _____________ ATTORNEY GENERAL, Appellant,

v SC: 134669 COA: 264191 MPSC: U-13808 MICHIGAN PUBLIC SE RVICE COMMISSION, DETROIT EDISON COMPANY, ENERGY MICHIGAN, INC., CONSTELLATION NEWENERGY, INC., and ASSOCIATION OF BUSINESSES ADVOCATING TARIFF EQUITY, Appellees.

________________ __________________ __________/

________________ _______________ _____________

In re APPLICATION OF DETROIT EDISON COMPANY

________________ _______________ _____________ DETROIT EDISON COMPANY, Appellee,

v SC: 134671 COA: 264099 MPSC: U-13808 ASSOCIATION OF BU SINESSES ADVOCATING TARIFF EQUITY, MICHIGAN ENVIRONMENTAL COUNCIL, PUBLIC INTEREST RESEARCH GROUP IN MICHIGAN, CONSTELLATION NEWENERGY, INC., and ATTORNEY GENERAL, Appellees, and

MICHIGAN PUBLIC SE RVICE COMMISSION, Appellant.

________________ __________________ __________/

________________ _______________ _____________

In re APPLICATION OF DETROIT EDISON3

COMPANY

________________ _______________ _____________ DETROIT EDISON COMPANY, Appellee,

v SC: 134673 COA: 264099 MPSC: U-13808 MICHIGAN PUBLIC SE RVICE COMMISSION, ASSOCIATION OF BU SINESSES ADVOCATING TARIFF EQUITY, CONSTELLATION NEWENERGY, INC., and ATTORNEY GENERAL, Appellees, and

MICHIGAN ENVIRONMENTAL COUNCIL, and PUBLIC INTEREST RESEARCH GROUP IN MICHIGAN, Appellants.

________________ __________________ __________/

________________ _______________ _____________

In re APPLICATION OF DETROIT EDISON COMPANY

________________ _______________ _____________

MICHIGAN ENVIRONMENTAL COUNCIL and
PUBLIC INTEREST RE SEARCH GROUP IN MICHIGAN, Appellants,

v SC: 134674
COA: 264131
MPSC: U-13808
MICHIGAN PUBLIC SE RVICE COMMISSION, DETROIT EDISON COMPANY, and CONSTELLATION NEWENERGY, INC., Appellees.

________________ __________________ __________/

________________ _______________ _____________

In re APPLICATION OF DETROIT EDISON COMPANY

________________ _______________ _____________4

DETROIT EDISON COMPANY, Appellee,

v SC: 134676 COA: 264099 MPSC: U-13808 MICHIGAN PUBLIC SE RVICE COMMISSION, MICHIGAN ENVIRONMENTAL COUNCIL, PUBLIC INTEREST RE SEARCH GROUP IN MICHIGAN, CONSTELLATION NEWENERGY, INC., and ATTORNEY GENERAL, Appellees, and

ASSOCIATION OF BU SINESSES ADVOCATING TARIFF EQUITY,

Appellant.

________________ __________________ __________/

________________ _______________ _____________

In re APPLICATION OF DETROIT EDISON COMPANY

________________ _______________ _____________

ASSOCIATION OF BU SINESSES ADVOCATING TARIFF EQUITY, Appellant,

v SC: 134677
COA: 264156
MPSC: U-13808
MICHIGAN PUBLIC SE RVICE COMMISSION, DETROIT EDISON COMPANY, ENERGY MICHIGAN, INC., CONSTELLATION NEWENERGY, INC., and ATTORNEY GENERAL, Appellees.

________________ __________________ __________/

On order of the Court, leave to appeal having been granted and the briefs and oral arguments of the parties having been consider ed by the Court, we REVERSE the July 3, 2007 judgment of the Court of Appeals on th e issue of Detroit Edison Company (Edison) recovering a portion of the control premium that DTE Energy paid to acquire MCN Energy, and we AFFIRM the Court of Appe als judgment that “transmission costs” may be recovered through a power supply cost rec overy (PSCR) clause on different grounds. The Public Service Commission (PSC) excl uded the control premium costs from5

Edison’s general rate. On appeal, Edis on bore the burden “to show by clear and satisfactory evidence that the order of the commission complained of is unlawful or unreasonable.” MCL 462.26(8); see MCL 460.4 (adopting MCL 462.26 standards). Judicial review of administrative agency de cisions must “not invade the province of exclusive administrative fact-finding by di splacing an agency's choice between two reasonably differing views.” MERC v Detroit Symphony Orchestra , 393 Mich 116, 124 (1974); see also In re Payne , 444 Mich 679, 692-693 (1994) (“When reviewing the
decision of an administrative agency for substan tial evidence, a cour t should accept the agency's findings of fact if they are suppor ted by that quantum of evidence. A court will not set aside findings merely because alterna tive findings also could have been supported by substantial evidence on the record.”). The Court of Appeals did not give due deference to the PSC’s findings of fact and Edison failed to meet its burden. Accordingly, we reinstate the PSC’s decisi on excluding the cont rol premium costs from Edison’s general rates. The Court of Appeal s also held that “[p]ayments made by Edison for transmission costs . . . are necessarily ‘transportation costs,’ and therefore are properly recoverable in a PSCR clause.” In re Detroit Edison Application , 276 Mich App 216, 229 (2007). Electric utilitie s can recover two types of po wer supply costs through a PSCR clause: (1) “booked costs, including tran sportation costs, reclamation costs, and disposal and reprocessing costs, of fuel bur ned by the utility for electric generation;” or (2) “booked costs of purchas ed and net interchanged pow er transactions.” MCL 460.6j(1)(a). The Court of Appeals interp retation does not give any meaning to the limitation that the “transportatio n costs” must be those “of fuel burned by the utility for electric generation.” (Emphasis added). Ho wever, the second clause, “booked costs of purchased and net interchange d power transactions,” is a technical phrase that has acquired a “peculiar and appropriate” meaning in the regulation of electric utilities to include “transmission costs” charged by third-parties. MCL 8.3a; see In re Wisconsin Electric Power Company

, unpublished opinion and order of the Public Service Commission, issued September 16, 2002 (Case No. U-12725) at 16. Accordingly, it
“shall be construed and underst ood according to such peculia r and appropriate meaning,” MCL 8.3a, and the PSC did no t err in permitting Edison to recover transmission costs through its PSCR clause. The Court of Appeal s affirmance of the PSC decision is thus affirmed on this alternate ground.

C ORRIGAN , J. ( concurring in part an d dissenting in part ).

I respectfully dissent from th e order reversing the Court of Appeals and reinstating
the decision of the Public Service Commission (PSC) excluding the recovery of the control premium sought by the Detroit Edison Company (Edison) in this general rate case. Although I concur with the Court’ s decision to affirm the PSC regarding the recovery of transmission costs, and although no one disputes that Edison may attempt to substantiate savings in its next general rate case to recover a portion of the control premium, I write separately because th e PSC erred by foreclosing Edison from recovering any part of the control premiu m paid to acquire MCN Energy Group Inc.6

(MCN) in this rate case. In my view, the PSC’s decision regarding the control premium was not supported by competent, material, and substantial evidence on the whole record. Accordingly, I would affirm the Court of Appeals decision to reverse the PSC and remand for further proceedings concer ning the control premium issue.

On June 20, 2003, Edison, the largest electric utility prov ider in Michigan, filed an application for a general rate case. The PSC described the subsequent proceedings as “among the most complex cases ever consider ed.” Indeed, the ca se involved myriad matters, including an increase in Edison’s rate schedules, determination of its stranded costs, implementation of its power supply co st recovery clause, and recovery of its control premium. Specifically, Edison sough t recovery from its ratepayers for an
allocated share of the contro l premium arising from the acquisition of MCN. According to Edison, its ratepayers benefited financially from the cost savings or synergies that the control premium made possible.

The PSC staff opined that substantial savings to ratepayers resulted from the acquisition and that these synergistic savings justified the pass-through of the acquisition control premium. The hearing referee also essentially determined that Edison’s control premium argument was persuasive , stating in relevant part:

The [hearing referee] finds De troit Edison’s and Staff’s position persuasive. The [hearing referee] finds that the savings are real substantial and a direct result of the merger and planning going into the merger which contributed to effectuating the savings which justifies the pass through of the acquisition control premium with one exception, that exception being that the [hearing referee] is pers uaded by the arguments of the AG, ABATE, and MEC/PIRGIM th at 40 years is too long a period of time to project savings.

* * *

The [hearing referee] does recogni ze concerns raised regarding the ability of Detroit Edison to show thes e savings in perpetuity or more specifically in this case 40 years into the future. The [hearing referee] agrees that such forecasting calls in to play too many variables for such long-term projections including, re gulatory practices, electric choice industry restructuring, alternative en ergy sources, and even the needs of DTE Energy, Detroit Edison, and MCN as a result of the merger. The [hearing referee] further recognizes that the approval in this rate case is limited to those costs and savings actually realized thus far. Detroit Edison in its next rate case will, likewise, be required to substantiate the asserted savings for continuing recovery. At that time, Staff and Intervenors, as in this case, may present challenges to the asserted cost savings.7

Nevertheless, the PSC rejected the hearing referee’s recommendation to include $46.2 million for the control prem ium. The PSC reasoned that

DTE’s decision to pay $ 893 million over the market price of MCN to acquire MCN’s assets was not subject to any form of oversight by the Commission and is curious in light of the acknowledgmen t by a Detroit
Edison witness that MCN was “financially distresse d” at the time of the merger. The Commission is persua ded that Detroit Edison never adequately explained why it would pa y such an enormous premium for a company that was in such poor fina ncial condition. The Commission is without any basis to questio n either the appropriateness of the merger or the reasonableness of the price paid by DTE to acquire MCN. Moreover, if DTE subsequently sells MCN for a pr ofit, the Commission will likely be powerless to recoup any po rtion of the sale pric e for Detroit Edison’s ratepayers, and could possibl y be asked to raise rates again to cover the cost of lost synergies. Any system that requires ratepayers to endure rate
increases for both found and lost synergies is truly dubious.

Additionally, the Commission is sk eptical of Detroit Edison’s contention that the alleged synergy savings associated with the merger could be expected to last for the im mediate future let alone the next 40 years. A significant core function of Detroit Edison—its fossil and nuclear generation groups—“were excluded fro m the merger transition process” because they “were not impacted by the merger.” Detroit Edison even
admitted that some of the centrali zation of activities could have been achieved without the merger.

According to Detroit Edison, much of the value created from the MCN acquisition was in the form of cost reductions realized through combining overlapping func tions and internal services. But a significant portion of the labor savings appears to be attributable to early retirements and voluntary resignations, which are not necessarily permanent. Other aspects of the merger produced confus ion and customer consternation. A still pending investigati on of Detroit Edison’s and Mich Con’s [Michigan Consolidated Gas Company] efforts to combine thei r billing systems, which apparently contributed to the inco rrect billing of approximately 480,000
Mich Con customers in Ja nuary 2002, has yet to be resolved. The costs
associated with the billi ng system problems apparently were not included in the calculation of the merger synergies. Still, othe r savings were derived by considering cost savings on early-terminated contracts without any consideration of the expenses caused by the early termination of such
contracts. While Detroit Edison clai ms that, without the merger, Detroit Edison’s O&M expenditu res for 2004 would ha ve increased by $848

million, the fact remains that the company’s post-merger O&M spending exceeds its pre-merger spending levels by over $100 million. [Citations omitted.]

Disagreeing with the recommendation of the PSC staff and the findings of the hearing referee, the PSC held that “none of the control premium requested by Detroit Edison
should be includ ed in Detroit Edison’s rates.”

The Court of Appeals thereafter reversed the PSC’s ruling that Edison may not recover its allocated share of the control pr emium in a unanimous published opinion. In re Application of Detroit Edison Co , 276 Mich App 216 (20 07). The Court stated:

As the PSC staff opined and the hearing referee recommended, we hold that the substantial savings to Ed ison customers are a direct result of the acquisition of Michigan Conso lidated Gas Company (MichCon) and that these synergistic savings fully justify the pass-through of the acquisition control premium. Edison s eeks and is entitled to that portion of the control premium that permits Edison to accomp lish these synergistic savings. We hold that Edis on is clearly entitled to recover its share of the control premium that resulted in these synergistic savings. Like the hearing referee, we reject the arguments of the AG and MEC/PIRG IM in opposition to Edison’s rate request regarding th e control premium. Of course, the PSC should determine the precise amount of the appropriate recovery and the period over which to amortize Edison ’s recovery of its portion of this control premium. [ Id . at 235-236.]

The Court of Appeals further explained that “[t]he PSC’s clearly erroneous decision resulted in a reduction of $46.2 million in Ed ison’s revenue requir ement for 2004, and a significant reduction of hundreds of millions in the future.” Id . at 237. Additionally, the Court of Appeals held that Edison must “substa ntiate savings in its next rate case in order to continue recovering the control premium.” Id

.

In my view, the PSC erred when it foreclosed Edison from recovering any control premium in this general rate case. The PS C possesses only the authority granted by the Legislature. Consumers Power Co v Pub Service Comm , 460 Mich 148, 155 (1999). Words and phrases contained in the PSC’s enabling statutes mu st be read in the context of the statutory scheme. Id . at 155-156. Moreover, this Court has often stated that any exercise of power by an agency “must be co nferred by clear and un mistakable language, since a doubtful power does not exist.” Mason Co Civic Research Council v Mason Co

, 343 Mich 313, 326-327 (1955) (citation and q uotation marks omitted). Although MCL 460.6 grants the PSC broad auth ority over matters pertaining to public utilitie s, this Court has consistently held that th e broad language in MCL 460.6 “serves as an outline of the PSC’s jurisdiction, not a gran t of specific powers.” Consumers Power Co, supra at 160.9

Here, the PSC’s determination that “none of the control premium requested by Detroit
Edison should be included in Detroit Edison’s rates” has precluded Edison from receiving a control premium recovery in these rates. No one disputes the Court of Appeals holding that Edison may substantiate savings resulti ng from the control prem ium in future rate

cases. In re Application of De troit Edison Co, supra at 237. 1 Nevertheless, I disagree
with the PSC’s decision to discount the c onclusions of both PSC staff and the hearing referee concerning control premium recove ry in this partic ular rate case. 2 As the Court of Appeals properly observed, “the PSC’s decisi on is not supported by competent, material,
and substantial evidence on the whole record.” Id. at 238. 3

I also question the PSC’s rationale for ignoring the recommendation of the hearing referee and denying Edison any recovery whatso ever of its control premium in this case. After first stating that it had no basis to que stion the purchase price, the PSC went on to question Edison for “never [h aving] adequately explained why it would pay such an enormous premium for a company that was in such poor financ ial condition.” But, as the Court of Appeals stated, the re cord evidence indicated that MCN’s market value at the time it was acquired reflected the diminished fi nancial value of the company and that the purchase price was within the range for comparable transactions. In re Application of Detroit Edison Co, supra at 238. Thus, the record does not support the PSC’s characterization of the amount paid for MC N as being an “enormous premium.” The PSC obviously rejected the bus iness judgment of management involved in the acquisition of MCN. As this Court has stated, howeve r, “the PSC’s authority to regulate a utility’s rates and charges does not include the po wer to make management decisions.” Consumers Power Co, supra at 158. Whether the PSC would have made a different management decision concerning the merger is irrelevant to whether Edison can recoup synergies or cost savings reaped by its ratepayers.

Additionally, the PSC expressed skepticis m that “the allege d synergy savings associated with the merger could be expected to last for the immediate future let alone the next forty years.” Skepticism regarding lo ng term savings is not a valid ground for

1 As counsel for the PSC stated at oral ar gument: “The Commission ruled on the evidence before it. The Commission did not reject th e control premium on the basis that they could not award such a grant.”

2 The control premium recovery sought by Edison was not unprecedented. Indeed, the PSC acknowledged its authority to adjust rates in light of acquisition savings in a previous case, when it stated th at “public policy dictates that we allow recovery of and on acquisition adjustments only where ratepayers receive a net benefit from the change in ownership.” See order of the PSC, Nove mber 23, 2004 (Cas e No. U-13808), p 46 (citation and question marks omitted).

3 See Const 1963, art 6, § 28.I, Corbin R. Davis, Clerk of the Mi chigan Supreme Cour t, certify that the foregoing is a true and complete copy of the order entered at the direction of the Court.

_______________________________________ __ Clerk May 1, 2009

0428 10

denying Edison recovery of the documented ne t cost savings proven for 2004. Even if the PSC’s skepticism regarding long term savings is well-f ounded, I agree with the PSC staff, the hearing referee, and the Court of Appeals that although Edison’s amortization forecast may have been too speculative, Ed ison is nevertheless entitled to recover the actual savings proven for 2004 in this case and to attempt to substantiate such savings in its next general rate case in order to recover some of the control premium. In re Application of Detro it Edison Co, supra at 235-237.

The PSC also note d that Edison’s postmerger O & M spending exceeded its premerger spending levels by over $100 milli on. This statement is irrelevant, given record evidence that Edison’s O & M expenses would have been significantly higher if they had not been offset by th e merger savings. A rate cann ot be created by recognizing reductions in certain costs while ignor ing the increases in other costs. Michigan
Consolidated Gas Co v Pub Service Comm , 389 Mich 624, 633 (1973).

Accordingly, because the Court of Appeal s correctly resolved the control premium issue, I dissent from this Court’s order of re versal because it allows the PSC to foreclose any recovery sought by Edison concerning it s allocated share of th e control premium in
this case.

M ARKMAN , J., joins the statement of C ORRIGAN , J.