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### STATE OF MICHIGAN

COURT OF APPEALS

IN RE APPLICATION OF DETROIT EDISON COMPANY FOR 2012 COST RECOVERY PLAN FOR PUBLICATION May 12, 2015 9:05 a.m.

MICHIGAN ENVIRONMENTAL COUNCIL,

Appellant,

v No. 318388 MPSC LC No. 13-020404-FC

MICHIGAN PUBLIC SERVICE COMMISSION,

Appellee,

and

DETROIT EDISON COMPANY,

Petitioner-Appellee.

Before: B OONSTRA , P.J., and S AAD and M URRAY , JJ.

P ER C URIAM

. Petitioner Michigan Environmental Council (MEC) appeals by rig ht from an order of the Michigan Public Service Commission (PSC) granting the applicati on filed by Detroit Edison Company (Edison) to implement a power supply cost recovery (PSC R) plan in its rate schedules for the 2012 metered jurisdictiona l sales of electricity, and f or approval of its five-year forecast. We affirm.

I. PERTINENT FACTS AND PROCEDURAL HISTORY

This case concerns MEC’s challenge to Edison’s Reduced Emissio n Fuel (REF) project. This project involves applying chemical additives to coal to pr oduce REF. Edison maintains that the use of REF results in reduced sulfur dioxide (SO2), mercury , and possibly nitrous oxides (NOx) emissions, and thus reduced emission expenses. Edison pr oposed to sell at book cost a-2- portion of its coal inventory to affiliated unregulated fuels c ompanies Belle River Fuels Company (BRFC) and the St. Clair Fuels Company (SCFC). The coa l would be chemically treated at those plants a nd then sold back to Edison.

The PSC considered the REF project in an earlier case 1 but did not grant Edison permission to implement the project at that time, finding that it needed more information on the efficacy of the methods for reducing emissions. The PSC also r equired Edison to demonstrate that the REF project was a reasonable and prudent method of ach ieving maximum emission reduction at minimum cost, and tha t the REF project complied wi th the PSC’s Code of Conduct. 2

On September 30, 2011, Edison filed an application requesting authority to implement a PSCR plan in its rates schedules for the 2012 metered jurisdict ional sales of electricity. The application indicated that Edison intended to move forward with implementation of its REF project, but represented that th e decision would have no impact on the requested maximum PSCR factor for 2012.

The Proposal for Decision (PFD) issued by the administrative l aw judge (ALJ) assigned to the case recommended that Edison be denied permission to imp lement the REF project; however, the PSC granted Edison’s application to implement a PS CR plan. The PSC addressed Edison’s REF project as follows:

The Commission finds that Detro it Edison’s REF project should be approved and that it complies wi th the Code of Conduct and the Guidelines. The Commission reviewed the company’s testimony and Exhibits A-21 t hrough A-23 and finds that Detroit Edison, in compliance with the directive in the December 6 order, provided the Commission w ith sufficient additional infor mation to evaluate the reasonableness and prudence of the REF project.

1 See PSC Case No. U-16434.

2 The Legislature enacted 2000 PA 141, the Customer Choice and E lectricity Reliability Act (Act 141), MCL 460.10 et seq ., to further the deregulation of the electric utility industry

. Detroit Edison Co v Public Serv Comm No 1 , 261 Mich App 1, 4; 680 NW2d 5 12 (2004), vacated in part on other grounds 472 Mich 897 (2005). Act 141 required the PSC to implement a code of conduct to be applicable to all r egulated electric utilities. MCL 460.10a(4) provides: (4) No later than December 2, 2000, the commission shall establ ish a code of conduct that shall apply to all electric utilities. The code o f conduct shall include, but is not limited to, measures t o prevent cross-subsidization, information sharing, and preferential treatment, betw een a utility’s regulated and u nregulated services, whether those services are provided by the utility or the utili ty’s affiliated entities. The code of conduct established under this subsection shall als o be applicable to electric utilities and alternat ive electric suppliers consisten t with section 10, this section, and section 10b through 10cc.

The PSC adopted its Code of Conduct in 2001.-3- The Commission believes that the REF project is a reasonable m eans of attaining maximum emission reductions for minimum cost. As exp lained by Detroit Edison, at SCPP and BRPP, PSCR customers will receive a reduction in annual working capital expense through the sale, at market pric e, of a portion of the company’s coal inventory to its affiliated fuels companies. The affiliated fuels companies will treat the coal with REF adder and then res ell the treated coal to Detroit Edison. The cost of the REF adder will be offset by a corresponding savings in PSCR emissions allowance expense, resulting in a netcost of zero or less to PSCR customers. At MPP, Detroit Edison receives a coal fee rate from the affiliated fuels company, reducing the cost of every ton of coa l treated with REF adder that is consumed, which translates into a credit for the company’s PSCR
customers.

In response to the ALJ’s findi ng that Detroit Edison did not p rovide any of the actual contracts between the company and its affiliated fue ls companies for consideration, the Commission agrees with Detroit Edison that A ct 304 only requires a description of all relevant major contracts, but doe s not require admission of the actual contract s. In addition, the Commission agrees with Detroit Edison and the Staff that the company’s eligibility for the tax credits and the potential for the affiliated fuels companies to profit from the REF project is irrelevant to an Act 304 proceeding. As explained by Detroit E dison, Act 304 does not permit “the Commission to include third party expenses or revenues related to coal or any other fuel supply into Act 304 review an d ratemaking.” Detroit Edison’s replies to exceptions, p. 27. As a result, th e Commission may not consider whether the tax cre dits may be used to offset fuel costs.

The Commission disagrees with the Attorney General that REF co sts should be treated as O&M costs. As explained by Detroit Edison

, MCL 460.6j(13)(d) refers to “fuel movement that occurs after th e utility receives the fuel at the power plant.” Detroit Edison’s replies to exce ptions, p. 21. The Commission finds that all of the coal processing costs take pla ce before the coal is delivered to the company.

Based on the evidence presented in Exhibits A-21 and A-23, the Commission finds that the REF project complies with the Code of Conduct. There is structural separation between the company and its affi liated fuels companies; they do not engage in joint advertising, marketing, or other promotional activities related to the provision of the fuels pr ocessing service; and there is no preferential treatment for or subsidization of the affiliated fuels companies by Detroit Edison.

The Commission finds that Detroi t Edison has complied with Sec tion III.C of the Code of Conduct. As discu ssed previously, the record su pports that Detroit Edison purchases coal from a third party at market price, then sells the coal at the same market price to its affiliated fuels companies. The cost of the coal for the affiliated fuels companies is Detroit Edison’s booked costs, or its fully embedded cost. Therefore, both the market cost and the fully allocated embedded cost is-4- higher than the other, compensation to Detroit Edison by the af filiated fuels companies complies with Secti on III.C of the Code of Conduct.

When the affiliates resell the treated coal to Detroit Edison, it is for the same market price the affiliated fuels companies paid to the co mpany (or in this case, the fully allocated embedded cost), plus the cost of REF adder. The price of the treated coal is offset by a corresponding savings in PSCR e missions allowance expense, resulting in zero cost for the treated coal. Under Se ction III.C of the Code of Conduct, compensation to the affiliated fuels companies by Detroit Edison for the treated coal must be the lower of market price o r 10% over fully allocated embedded costs. Because market price and the fully a llocated embedded cost are the same in this case, the Commission finds t hat market price is lower than 10% over the fully allocated embedded cost. By p aying the affiliated fuels companies market price for the treated coal, D etroit Edison has complied with Section III.C of the Code of Conduct.

The Commission agrees with Detro it Edison that the company did not violate the pre-sale notification requirements of the Guideline s with the sale of its coal inventory. As stated by De troit Edison, the pre-sale noti fication requirement was intended to provide the Commission with notice of intent to sell significant utility plant property, and not the routine sales involved here . The Commission finds that Detroit Edison’s sale of its coal inventory is not u tility plant property, but is part of the utility’s day-to-day business.

Based on the testimony and evidence provided by Detroit Edison , the Commission finds credible Detro it Edison’s claim that it invest igated REF arrangements with the two other licensees, CERT and A.J. Gallag her, but that DTEES offered Detroit Edison the best deal. Detroit Edison pro vided substantial testimony about the price of REF a dder at other licensees’ faci lities and provided ample evidence that Detroit Edison’s customers would have paid more had the company contracted with these other companies.

The PSC approved Edison’s application for a PSCR plan for Edis on’s 2012 metered jurisdictional electric sales and the REF project. This appeal followed.

II. STANDARD OF REVIEW

The standard of review for PSC orders is narrow and well defin ed. Pursuant to MCL 462.25, all rates, fares, charge s, classification and joint rates, regulations, practices, and services prescribed by the PSC a re presumed, prima facie, to be lawful and reasonable. See Michigan Consol Gas Co v Public Serv Comm , 389 Mich 624, 635-636; 209 NW2d 210 (1973). A party aggrieved by an order of the PSC has the burden of prov ing by clear and convincing evidence that the order is unlawful or unreasonable. MCL 462.2 6(8). To establish that a PSC order is unlawful, the appellant must show that the PSC failed to follow a mandatory statute or abused its discretion in the exercise of its judgment. See In re MCI Telecom Complaint , 460 Mich 396, 427; 596 NW2d 164 (1999). An order is unreasonable i f it is not supported by the-5- evidence. See Associated Truck Lines, Inc v Public Serv Comm , 377 Mich 259, 279; 140 NW2d 515 (1966).

A final order of the PSC must be authorized by law and be supp orted by competent, material, and substantial eviden ce on the whole record. Const 1963, art 6, § 28; Attorney General v Public Serv Comm , 165 Mich App 230, 235; 418 NW2d 660 (1987).

This Court gives due deference to the PSC’s administrative exp ertise, and is not to substitute its judgment for that of the PSC. Attorney General v Public Serv Comm No 2 , 237 Mich App 82, 88; 602 NW2d 225 (1999). We give deference to the PSC’s interpretation of its own Code of Conduct; however we a pply principles of statutory c onstruction in our review of that Code and its statutory underpinnings. See In re Complaint of Consumers Energy Co , 255 Mich App 496, 503-504; 660 NW2d 785 (2002). If the language of a statute is vague or obscure, the PSC’s construction serves as an aid to determining legislat ive intent, and will be given weight if it does not conflict with the language of the statute or the purpose of the Legislature. However, the construction given to a statute or the PSC’s Code of Conduct by the PSC is not binding on us. See In re Complaint of Rovas Against SBC Mich , 482 Mich 90, 103-109; 754 NW2d 259 (2008). Whether the PSC e xceeded the scope of its aut hority is a question of law that we review de novo. In re Complaint of Pelland Against Ameritech Mich , 254 Mich App 675, 682; 658 NW2d 849 (2003).

III. CODE OF CONDUCT

On appeal, MEC argues that the PSC erred in finding that Ediso n’s REF project complied with the Code of Conduct. We disagree.

The purpose of the PSC’s Code of Conduct is to “promote fair c ompetition by establishing measures to prevent cross-subsidization, informati on sharing, and preferential treatment between the regulated and unregulated operations of e lectric utilities, alternative electric suppliers, and their a ffiliates.” Code of Conduct, Pr eface.

Section II of the Code of Conduc t, entitled Separation, provid es in part:

An electric utility or alternat ive electric supplier that offe rs, itself or through its affiliates, both re gulated and unregulated services shall do so with the structural or functional separation needed to prevent cross-sub sidization, information sharing, and prefer ential treatment between the reg ulated and unregulated services. This in cludes, but is not limited to, th e following:

B. An electric utility’s or a lternative electric supplier’s re gulated services shall not subsidize in any manner, direc tly or indirectly, the unregu lated business of its affiliates or other separate entities.

Section III of the Code of Conduct, entitled Discrimination, p rovides in part:

An electric utility or alternative supplier that offers, itsel f or through its affiliates, both regulated and unregulated services shall not u nduly discriminate in-6- favor of or against any party, including its affiliates. This includes, but is not limited to, the following:

C. If an electric utility or alternative electric supplier off ering regulated service in Michigan provides services, pr oducts, or property to any affili ate or other entity within the corporate structure, compensation shall be based upo n the higher of fully allocated embedded cost or market price. If an affiliate or other entity within the corporate structure pr ovides services, products, or property to an electric utility or alternative electric supplier offering regu lated service in Michigan, compensation for serv ices and supplies shall be at th e lower of market price or 10% over fully allocated e mbedded cost or market price

. MEC argues that Edison’s sale of coal to the fuels companies, and the repurchase of treated coal at the same price from them, violates the Code of Conduct in that: (1) the sale subsidizes the fuels companies because the companies are able t o receive favorable tax treatment as a result of the transactions, and (2) Edison’s sale of the c oal at the fully allocated embedded cost and repurchase of the coal at the same price violates the pricing provision of the Code of Conduct.

MEC cites no authority to support its arguments. An appellant ’s failure to properly address the merits of an argument constitutes the abandonment o f an issue. Woods v SLB Prop Mgt, LLC , 277 Mich App 622, 626; 750 NW2d 228 (2008). At any rate, we find that MEC’s argument is without merit. The C ode of Conduct prohibits acts that result in cross-subsidization and preferential treatment between a regulated utility and an u nregulated affiliate. Code of Conduct, Preamble. A “subsidy” is defined as “any grant or con tribution of money.” Random House Webster’s College Dictionary (1997), p 1284. Nothing in the Code prevents an unregulated affiliate from making a profit from a project with a regulated utility. The fuels companies gained tax benefits from selling treated coal to Edis on. The undisputed evidence showed that Edison could not have obtained those same tax benef its. There is no evidence establishing that, had Edison done business with an unaffiliate d company rather than with its affiliates, that company would not have also obtained the same tax benefits. Edison did not give or grant money to the fuels com panies, and did not subsidize th e companies in any indirect way.

In addition, MEC presents no ev idence to support its assertion that Edison’s sale of coal to the fuels companies at the fully allocated embedded cost, wh ich is the same as the market price at which Edison bought the coal, and Edison’s repurchase of the coal from the fuels companies at the same price, vio late the pricing provisions of the Code of Conduct. MEC asserts that the value added to the coal from the treatment by the fuel s companies should have factored into the repurchase price, but does not indicate how that could have been done or if Edison could have done so effectively without violating Section III.C of the Code of Conduct.

Further, MEC’s assertion that the PSC should have required Edi son to submit the actual contracts with the fuels companies rather than simply describin g the contracts is without merit. MCL 460.6j(3) states that a PSCR plan “shall describe all major contracts and power supply arrangements entered into by the utility[.]” The PSC did not i ndicate that it was unable to resolve the issue without exa mining the actual contracts.-7- Finally, we reject MEC’s assertion that the PSC’s finding that Edison investigated the possibility of entering into contracts with unaffiliated compan ies was not supported by the evidence. Edison’s witness testified that other Edison employe es had investigated the possibility of contracting with unaffiliated companies but that no such arr angements were made. The PFD described the witness’s testimony as not credible, but the PSC found to the contrary. The PSC was entitled to accept the testimony from Edison’s witness even if the record contained evidence that contradicted that testimony. See Great Lakes Steel Div of Nat’l Steel Corp v PSC , 130 Mich App 470, 481-482; 344 NW2d 321 (1983).

MEC obviously disagrees with the PSC’s conclusion regarding su bsidization, but has offered no direct evidence to establish that Edison’s arrangeme nt with the fuels companies violated the Code of Conduct. MEC has not established that the PSC’s order is unlawful or unreasonable. MCL 462.26(8).

IV. FUELS COMPANIES’ TAX CREDIT REVENUE

Next, MEC argues that the PSC erred in holding that the approx imately $500,000 in revenue generated for the fuels c ompanies from tax credits was irrelevant to determining whether Edison took all appropriate steps to minimize its costs. We di sagree.
MCL 460.6j(6) provides:

(6) In its final order in a power supply and cost review, the c ommission shall evaluate the reasonableness and prudence of the decisions under lying the power supply cost recovery plan filed by the utility pursuant to subs ection (3), and shall approve, disapprove, or amend the power supply cost recovery pl an accordingly. In evaluating the decisions underlying the power supply cost re covery plan, the commission shall consider the co st and availability of the elec trical generation available to the utility; the cost of short-term firm purchases available to the utility; the availability of interruptible service; the ability of the utility to reduce or to eliminate any firm sales to out-of-state customers if the utility is not a multistate utility whose firm sales are subject to other regulatory authority; whether the utility has taken all appropriate actions to minimize the cost of fuel; and other relevant factors. The commission shall approve, reject, or ame nd the 12 monthly power supply cost recovery factors requested by the utility in its power supply cost recovery plan. The factors shall not reflect items the co mmission could reasonably anticipate would be d isallowed under subsection (13) . The factors ordered shall be described in fixed dollar amounts per units of electricity, but may include specific amounts con tingent on future events.

The PSC has only that authority granted to it by statute. Union Carbide Corp v Public Serv Comm , 431 Mich 135, 148-150; 428 NW2d 322 (1998). The Legislature must grant authority by “clear and unmist akable” statutory language. Michigan Electric Coop Ass’n v Public Serv Comm , 267 Mich App 608, 616; 705 N W2d 709 (2005).

The gravamen of MEC’s argument is that the PSC erred by failin g to consider the fact that the fuels companies received favorable tax treatment by de aling with Edison, and that-8- Edison should have negotiated mo re advantageous arrangements wi th the fuels companies to account for the fact that the companies were able to obtain tax credits for selling treated coal to Edison. However, MEC points to no statutory authority that all ows the PSC to consider another party’s tax benefits when determ ining whether a utility’s decis ions underlying its PSCR plan were reasonable and prudent. These tax advantages were not ava ilable to Edison, and Edison had no apparent control over the amount of the credit each comp any would receive. In addition, MEC fails to explain how Edison could determine what amounts to account for when negotiating the contracts, i.e., how much in tax credits the fuels companie s would obtain, and whether Edison could account for these amounts and still comply with se ction III.C of the Code of Conduct.

The PSC had no clear authority to consider the fuels companies ’ tax credits when determining whether Edison’s PSCR decisions were reasonable and prudent. Thus, the PSC did not err in failing to consider the tax credits. The PSC’s deci sion was not unlawful or unreasonable. MCL 462.26(8).

Finally, MEC argues that the PSC’s order was not supported by competent, material, and substantial evidence on the whole record. We disagree. MEC wa ived this issue by failing to raise it before the PSC. See Shaw v Ecorse , 283 Mich App 1, 22; 770 NW2d 31 (2009). Nevertheless, we find that the i ssue is without merit. MEC’s a rgument is simply a restatement of the unpersuasive arguments made elsewhere.

V. CONCLUSION

For the reasons stated above, we hold that the PSC’s order gra nting Edison’s application to implement a PSCR plan in its rate schedules for the 2012 met ered jurisdictional sales of electricity and for approval of Edison’s five-year forecast is lawful and reasonable. MCL 462.26(8).

Affirmed.

/s/ Mark T. Boonstra /s/ Henry William Saad /s/ Christopher M. Murray