Opinion ID: 376668
Heading Depth: 3
Heading Rank: 3

Heading: Detroit Edison's Special Circumstances.

Text: 48 Finally, appellant maintains that Detroit Edison's economically pinched situation and its reliance upon AFDC to project an attractive balance sheet imposed upon it a commensurately greater obligation to explicate fully the AFDC device than might otherwise be imposed, and to detail all the contingencies upon which its ultimate recovery allegedly hinged. It is asserted that but for the use of AFDC, in the year prior to appellant's purchase, Detroit Edison would have had to report an operating loss. Such a reported loss, it is alleged, would have pointed up the general deterioration of the utility's real (i. e., cash) earnings, a trend which might make procurement of construction financing impossible, thus raising a risk that capital projects might not be completed and AFDC not recovered. Additionally, it is argued that even if Detroit Edison continued to receive financial infusions, the economic stability of the company was threatened by events such as the removal from service of the Monroe # 2 generating facility and the utility's inability to obtain rate relief from the Michigan Public Service Commission, and that these developments were not properly reported in the prospectus. These contentions are factually and theoretically wide of the mark. 49 A dispassionate review of the record casts doubt on the accuracy of appellant's characterization of the utility's financial condition. In its long history, Detroit Edison has never failed to recover its costs from its revenues, nor has it ever foregone a dividend payment, even in times far more perilous than 1972. In fact, the dividend actually increased in the year following appellant's stock purchase. The attempt to demonstrate that the utility did not recoup its expenses from operating revenue in 1971 is based in substantial part on the deduction of dividend payments from operating revenues, a novel accounting procedure which may charitably be described as disingenuous. Moreover, many of the adverse developments adverted to by appellant, such as the removal from service of the Monroe # 2 generator and the persisting friction with the Michigan Public Service Commission were in fact revealed in the prospectus. Thus, there seems no factual predicate for the claim that only an artificial accounting convention stood between Detroit Edison and ruination, or that key developments bearing upon the validity of utilizing that convention were not disclosed. 50 More to the point, this challenge to the adequacy of the prospectus' disclosure is based on the discredited notion that AFDC is comparable to a projection of future income, and accordingly, must be accompanied by revelation of all factors which may bear upon prospective business conditions. This is fundamentally incorrect; AFDC is not a projection of future income, but a deferral mechanism whereby expenses are charged to a more appropriate future period. The only contingencies upon which its recovery is based are the well-founded assumptions that Detroit Edison will continue in business and that rate making bodies will continue to permit utilities to recover their capital investments. This belief was fully justified in appellee's case despite the fact that the Michigan Public Service Commission had not always permitted as quick a recapture as was desired by Detroit Edison. 51 Thus, appellant's ascription of a sinister motive to Detroit Edison to misrepresent the nature of AFDC is entirely unconvincing. The drafting of the prospectus does not support the claim that the issuer intended to cozen the neophyte, the small investor or anyone else; on the contrary, as has been previously remarked, the definition of AFDC set forth in this prospectus was unsurpassed in its length and comprehensiveness, and its language was suggested and approved by staff members of the SEC and FPC. While the absence of motive and intent does not relieve an issuer of liability under Section 11, it may tend to decrease the likelihood that the presentation of AFDC in the prospectus will in fact be misleading. In any event, appellant has not established a convincing predicate for its contention that Detroit Edison had an enhanced duty of disclosure with respect to AFDC.