Court Opinion

ID: 9929276
Source: CourtListenerOpinion
Date Created: 2024-02-02 06:05:58.532422+00
Date Added: 2024-06-11T10:06:28.313510
License: Public Domain

If this opinion indicates that it is “FOR PUBLICATION,” it is subject to
                revision until final publication in the Michigan Appeals Reports.

                          STATE OF MICHIGAN

                          COURT OF APPEALS

In re APPLICATION OF CONSUMERS ENERGY
COMPANY FOR RECONCILIATION.

CONSUMERS ENERGY COMPANY,                                        FOR PUBLICATION
                                                                 February 1, 2024
             Petitioner-Appellant/Cross-Appellee,                9:10 a.m.

v                                                                No. 362931
                                                                 Public Service Commission
MICHIGAN PUBLIC SERVICE COMMISSION,                              LC No. 00-020526

             Appellee/Cross-Appellee,

and

CADILLAC RENEWABLE ENERGY, LLC,
GENESEE POWER STATION LIMITED
PARTNERSHIP, GRAYLING GENERATING
STATION LIMITED PARTNERSHIP, HILLMAN
POWER COMPANY, LLC, TES FILER CITY
STATION LIMITED PARTNERSHIP, NATIONAL
ENERGY OF LINCOLN, LLC, and NATIONAL
ENERGY OF MCBAIN, LLC,

             Appellees,

and

ASSOCIATION OF BUSINESSES ADVOCATING
FOR TARIFF EQUITY,

             Appellee/Cross-Appellant.

Before: BORRELLO, P.J., and SWARTZLE and PATEL, JJ.

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SWARTZLE, J.

        In Michigan, an energy utility estimates its upcoming power-supply costs as part of its rate-
setting process. Like any estimate, the utility’s estimate can be off, sometimes way off.
Anticipating the problem of how to reimburse a utility for increased power-supply costs, our
Legislature enacted a reconciliation process, by which the utility can apply to the Public Service
Commission (PSC) to increase upcoming rates to help recoup prior unanticipated costs.

         Not all missed estimates are, however, created equal—some are due to acts outside of the
utility’s control, while others result from the utility’s negligence or imprudent management. In a
lightly regulated market, short sellers, hostile takeovers, proxy wars, and the like, serve as the
discipline against poor estimates by management. In a highly regulated market like the one for
energy in Michigan, however, that discipline must primarily come from elsewhere. Relevant here,
our Legislature has conditioned a utility’s recoupment of under-recovered costs on that utility
having acted reasonably and prudently with respect to decisions impacting those costs.

        In this appeal, Consumers Energy Company argues that the PSC erred in concluding that
the utility did not act reasonably and prudently with respect to a prolonged outage. The record
confirms, however, that Consumers provided “unreasonable or imprudent management” (or, put
another way, failed to provide “reasonable and prudent management”) with respect to the outage,
causing the very increased costs of which it now complains. Seeing no reversible error, we affirm.

                                        I. BACKGROUND

        To better understand this dispute, it is helpful to look briefly at how the energy market in
Michigan deals with large-scale power outages. When an electricity-generating facility has an
outage, or when the demand for electricity in a given area is unexpectedly high, the utility that
services the affected area will provide replacement electricity to its affected customers. The
replacement electricity often comes from electricity-generating facilities owned by other utilities,
and this electricity is exchanged on a market for “wholesale electricity.” Midcontinent
Independent System Operator, Inc. (MISO) oversees the market for wholesale electricity in much
of Michigan, and utilities can purchase and sell “zonal credits” through MISO’s “planning resource
auction.” In essence, a “zonal credit” represents the right of the credit holder to a unit of
deliverable “unforced capacity” that can be bought or sold on the MISO-managed market.

         The cost of this replacement electricity is generally higher than the cost of the electricity
generated by a utility’s own facility. A utility can include the higher cost of replacement electricity
in its cost-recovery plan so that consumers bear the ultimate burden of the higher cost, as opposed
to the utility. If, at the end of the year, the utility faces an “underrecovery” of power-supply costs,
then that utility can seek to “true up” the actual costs of power supply with its earlier, too-low
estimate through the PSC’s reconciliation process. The costs are passed along to consumers in the
form of higher future rates.

        In 2020, Consumers Energy had a planned outage for upgrades at Unit 3 of its Ludington
Pumped Storage Plant. The upgrades and consequent outage had an original estimated completion
date in Spring 2020, 140 days after it began. The outage was extended, however, to 366 days after
material defects on a “discharge-ring extension” were found during installation. Consumers

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Energy had selected Toshiba America Energy Systems Corporation as its contractor on the upgrade
project, and Toshiba manufactured and installed the defective extension.

       The original estimate for the Unit 3 outage was included in Consumers Energy’s power-
supply-cost plan for 2020. With the significantly longer outage, however, Consumers Energy had
to purchase replacement electricity, and the utility claimed that this resulted in an under-recovery
of power-supply costs. Consumers Energy accordingly sought reconciliation between its
estimated and actual power-supply costs for the year.

        The PSC’s Administrative Law Judge Sally L. Wallace presided over the reconciliation
proceedings. ALJ Wallace permitted several parties to intervene, including the Michigan
Department of Attorney General and cross-appellant Association of Businesses Advocating Tariff
Equity (ABATE). The department opposed Consumers Energy’s application for reconciliation
because, as it argued, the utility’s increased power costs resulted from its unreasonable and
imprudent management under MCL 460.6j. ABATE agreed with the department and further
argued, in the alternative, that Consumers Energy generated revenue from the sales of its zonal
credits through MISO, and that revenue should be included in the overall calculus as an offset
against the higher cost of replacement power.

       During an evidentiary hearing, a witness for Consumers Energy confirmed that the Unit 3
outage was longer than expected because material defects on the discharge-ring extension were
discovered during installation. The witness explained that, to fix the problem, Toshiba ultimately
had to design and manufacture a replacement. He acknowledged that contractor errors were
responsible for most of the Unit 3 delays, though he cited the COVID-19 pandemic as an additional
source of increased cost.

        Another witness for Consumers Energy testified that the utility owned 51% of the
Ludington Plant and DTE Energy owned the rest. The scheduled upgrade to the plant was a joint
project between Consumers Energy, DTE, and Toshiba. Similar to the utility’s other witness, this
witness put the blame for increased costs on the contractor because it had designed, manufactured,
and installed the materially defective discharge-ring extension. The witness further explained that
it was a joint decision of both Consumers Energy and DTE that Toshiba should repair the defective
extension. They moved away from this plan to repair only after several third-party experts
concluded that any repair would itself be defective. Consumers Energy eventually instructed
Toshiba to manufacture an entirely new discharge-ring extension.

        For its part, ABATE provided written testimony from a consultant. The consultant noted
that Consumers Energy’s revenue from selling zonal credits was larger than its under-recovery of
power-supply costs for 2020. The consultant argued that Consumers Energy would not have
realized the increased revenue from sales of the zonal credits but-for the extended outage of Unit
3. Given this, the consultant concluded that the PSC should offset any purported under-recovery
of Consumers Energy by that utility’s revenues generated from the sale of its zonal credits.

        The department’s expert testified that Consumers Energy had incurred higher power-
supply costs as a direct result of Toshiba’s manufacture and installation errors, and the expert put
the fault ultimately on mismanagement by the utility. As for ABATE’s argument in the alternative,
the expert disagreed that the increased revenue from the sale of zonal credits could be attributed

                                                -3-
to the outage; instead, the spot-price of zonal credits depended on a myriad of factors, including
capacity-import limits. To illustrate, the expert pointed to significant price fluctuations for the
credits throughout Unit 3’s extended outage.

        ALJ Wallace subsequently issued a “proposal for decision” recommending that the PSC
partially approve Consumers Energy’s proposed reconciliation. Relevant to this appeal, the ALJ
recommended that the PSC (a) reject the utility’s proposal related to the Unit 3 outage extension,
but also (b) allow the utility to keep certain damages it might collect from Toshiba related to the
defective equipment. The ALJ specifically found that the outage was a result of Toshiba’s errors
in the manufacture and installation of the discharge-ring extension, and, in overseeing and
managing its contractor, Consumers Energy did not meet the standard for recouping costs under
MCL 460.6j(13)(c). As for ABATE’s alternative argument, ALJ Wallace found that the revenues
that Consumers Energy collected from the sale of zonal credits could not be attributed solely to
the Unit 3 outage, and therefore those revenues could not offset the increased power-supply costs.

         Consumers Energy filed exceptions with the PSC, and the utility argued that it had
presented clear and satisfactory evidence that the outage was not caused by its own unreasonable,
imprudent, or negligent actions. ABATE likewise filed exceptions with the PSC, consistent with
its earlier position. Responses to the exceptions were also submitted.

         The PSC subsequently issued its order approving Consumers Energy’s application for
reconciliation, but as modified by ALJ Wallace. In its ruling, the PSC considered whether cost
recovery was warranted because (i) the higher costs were incurred as part of reasonable and
prudent actions of the utility, or (ii) clear and convincing evidence demonstrated that the costs
were beyond the utility’s control, citing MCL 460.6j(15) as support for its analysis. The PSC
concluded that “the replacement power costs were incurred as a result of the errors of [Toshiba]
and that [Toshiba] was acting as an agent of Consumers [Energy] under the overall supervision of
the utility.” The PSC rejected ABATE’s alternative argument for reasons similar to those set forth
by the ALJ.

       Consumers Energy now appeals, and ABATE cross-appeals.

                                         II. ANALYSIS

         “A final order of the PSC must be authorized by law and be supported by competent,
material, and substantial evidence on the whole record.” In re Application of Consumers Energy
Co to Increase Rates, 338 Mich App 239, 242; 979 NW2d 702 (2021) (cleaned up). An aggrieved
party must “show by clear and satisfactory evidence that the order of the [PSC] complained of is
unlawful or unreasonable.” MCL 462.26(8). “To establish that a PSC order is unlawful, the
appellant must show that the PSC failed to follow a statutory requirement or abused its discretion
in the exercise of its judgment.” In re Application of Consumers Energy Co to Increase Rates,
338 Mich App at 242. This Court accords “due deference to the PSC’s administrative expertise
and is not to substitute its judgment for that of the PSC.” Id. An order of the PSC “is unreasonable
if it is not supported by the evidence,” In re Implementing Section 6w of 2016 PA 341 for
Cloverland Electric Coop, 329 Mich App 163, 175; 942 NW2d 38 (2019) (cleaned up), and the
PSC’s findings of fact are entitled to deference, In re Complaint of Rovas Against SBC Mich, 482
Mich 90, 101; 754 NW2d 259 (2008).

                                                -4-
       “Issues of statutory interpretation are reviewed de novo.” In re Application of Consumers
Energy Co to Increase Rates, 338 Mich App at 243 (cleaned up). “If the language of the statute is
unambiguous, the Legislature must have intended the meaning clearly expressed, and the statute
must be enforced as written.” In re Implementing Section 6w, 329 Mich App at 177-178 (cleaned
up).

                                          A. MCL 460.6j

         Consumers Energy argues that it should be able to recover its power-supply costs because
it reasonably and prudently managed all activities relating to the repair and upgrade of Unit 3.
MCL 460.6j governs the recovery and reconciliation of power-supply costs, and MCL 460.6j(12)
states in relevant part:

       Not less than once a year, and not later than 3 months after the end of the 12-month
       period covered by an electric 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, 1969 PA 306, MCL 24.271 to 24.287. The commission
       shall permit reasonable discovery 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. [Emphasis added.]

Further, MCL 460.6j(13) provides:
       In its order in a power supply cost reconciliation, the commission shall do all of the
       following:

                                              * * *

       (c) Disallow net increased costs attributable to a generating plant outage of more
       than 90 days in duration unless the utility demonstrates by clear and satisfactory
       evidence that the outage, or any part of the outage, was not caused or prolonged by
       the utility’s negligence or by unreasonable or imprudent management. [Emphasis
       added.]

And MCL 460.6j(15) provides:

       In its order in a power supply cost reconciliation, the commission shall authorize
       an electric utility to recover from customers any net amount by which the amount
       determined to have been recovered over the period covered was less than the

                                                -5-
       amount determined to have been actually expensed by the utility for power supply,
       and to have been incurred through reasonable and prudent actions not precluded
       by the commission order in the power supply and cost review. For excess costs
       incurred through management actions contrary to the commission’s power supply
       and cost review order, the commission shall authorize a utility to recover costs
       incurred for power supply in the reconciliation period in excess of the amount
       recovered over the period only if the utility demonstrates by clear and convincing
       evidence that the excess expenses were beyond the ability of the utility to control
       through reasonable and prudent actions. For excess costs incurred through
       management actions consistent with the commission’s power supply and cost
       review order, the commission shall authorize a utility to recover costs incurred for
       power supply in the reconciliation period in excess of the amount recovered over
       the period only if the utility demonstrates that the level of those expenses resulted
       from reasonable and prudent management actions. . . . [Emphasis added.]

        Consumers Energy first argues that the statutory schemes of MCL 460.6j(12), (13)(c), and
(15) are not interchangeable or compatible because each references a different standard, and the
PSC erred when it did not apply the correct legal standard under MCL 450.6j(13)(c).

        As this Court has explained, “Statutes that relate to the same subject matter or share a
common purpose are in pari materia and must be read together as one law to effectuate the
legislative purpose as found in harmonious statutes. If two statutes lend themselves to a
construction that avoids conflict, that construction should control.” In re Implementing Section
6w, 329 Mich App at 178 (cleaned up).

         When reading the statutes in pari materia, each provision quoted above states that the PSC
shall determine whether the utility acted reasonably and prudently when considering the costs that
the utility is seeking to recoup. There is no grammatical or logical dissonance between the
operative standards set forth in the subsections—“reasonableness and prudence” (12);
“unreasonable or imprudent management” (13(c)); and “reasonable and prudent management”
(15)—regardless of whether they are framed in the affirmative sense (see (12) and (15)) or the
negative sense (see 13(c)). Each centers on the reasonableness and prudence of acts made by the
utility, whether in terms of generic “actions” or more specific “management actions.”

        In other words, MCL 460.6j as a whole makes clear that, for the utility to recover certain
costs via reconciliation, the utility has the burden to show that its actions associated with the higher
costs were reasonable and prudent. Thus, whether the PSC cited MCL 460.6j(15) instead of MCL
460.6j(13)(c), is a distinction without a difference in the context of this appeal. And, in any event,
the PSC made clear that it was, in fact, applying the language from MCL 460.6j(13)(c), both (i)
when it cited an earlier order that relied on that provision in resolving a similar dispute, and (ii)
when it adopted the ALJ’s recommendation, which cited MCL 406.6j(13)(c) as the basis for
recommending the disallowance. The claim that the PSC applied the wrong standard is without
merit.

       Similarly, the claim that the PSC applied a strict-liability standard is without merit. The
PSC performed a straightforward application of the statutory-reconciliation provisions to the facts
at hand, and it disallowed recovery of certain costs because those costs were associated with

                                                  -6-
unreasonable and imprudent actions of a contractor under the direct and immediate supervision of
Consumers Energy. This is consistent with the standard set in statute by our Legislature, not one
developed in the common law by judges. As this Court has recently explained, cases like this do
not present us with “a common-law tort action in which the other parties are seeking to hold
Consumers Energy liable for negligence.” In re Application of Consumers Energy Co for Gas
Cost Recovery, ___ Mich App ___, ___; ___ NW2d ___ (2022) (Docket No. 356330). Moreover,
there is nothing “strict liability” about the standard in MCL 460.6j; rather, there is a form of “fault”
built into the statute, in the form of the utility having to act in a reasonable and prudent manner to
qualify for recoupment of expenses.

       To be clear, the PSC did not reject Consumers Energy’s proposed reconciliation merely
because the utility incurred higher expenses. Rather, the PSC concluded that Toshiba, as
Consumers Energy’s contractor, was the agent of the utility when it engaged in actions that caused
a longer outage and higher costs, and the utility had responsibility for the supervision of its
contractor. Moreover, in concluding that Consumers Energy did not satisfy its evidentiary burden
under MCL 406.6j, the PSC had more than enough evidence in the record to show that the utility’s
delay and mismanagement of the problem contributed to the outage and associated costs.

       The PSC’s conclusions were supported by competent, material, and substantial evidence
on the whole record. It is undisputed that the Unit 3 outage lasted for more than 90 days, and the
testimony demonstrated that the outage arose primarily from errors committed by Toshiba as
supervised by Consumers Energy. The PSC did not err in disallowing the recovery of replacement
power costs associated with the extension of the Unit 3 outage.

                             B. REVENUE FROM ZONAL CREDITS

        With respect to ABATE’s cross appeal, we need not reach the merits. During oral
argument, the Court confirmed that the issues raised in the cross appeal would have practical effect
only if the Court were to agree with Consumers Energy on its main appeal. Although ABATE
raises interesting, substantive issues of statutory interpretation and pricing of zonal credits on the
MISO market, even if this Court were to agree with ABATE, this would not alter the end result—
i.e., Consumers Energy’s requested reconciliation of costs associated with the Unit 3 extended
outage was properly rejected by the PSC. Any analysis of the merits would be dicta, and, therefore,
resolution of the issues raised by ABATE will have to wait another day.

                                         III. CONCLUSION

       For these reasons, the PSC did not reversibly err when it modified Consumers Energy’s
reconciliation plan to disallow the costs associated with the extension of the outage to Unit 3.

       Affirmed.

                                                               /s/ Brock A. Swartzle
                                                               /s/ Stephen L. Borrello
                                                               /s/ Sima G. Patel

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