Association of Businesses Advocating Tariff Equity v. Public Service Com'n

• Decision Date: 29 December 1994
• Docket Number: 141284,Docket Nos. 141277,142119 and 142493
• Citation: 208 Mich.App. 248,527 N.W.2d 533
• Parties: , 158 P.U.R.4th 431, Util. L. Rep. P 26,446 ASSOCIATION OF BUSINESSES ADVOCATING TARIFF EQUITY, Appellant, v. PUBLIC SERVICE COMMISSION and Consumers Power Company, Appellees. CONSUMERS POWER COMPANY, Appellant, v. PUBLIC SERVICE COMMISSION and Association of Businesses Advocating Tariff Equity, Appellee, and Attorney General, Appellee Cross-Appellant. ATTORNEY GENERAL, Appellant, v. PUBLIC SERVICE COMMISSION, Consumers Power Company, and Association of Businesses Advocating Tariff Equity, Appellees. ASSOCIATION OF BUSINESSES ADVOCATING TARIFF EQUITY, Appellant, v. PUBLIC SERVICE COMMISSION, Consumers Power Company, and Attorney General, Appellees.
• Court: Court of Appeal of Michigan — District of US

Page 533

527 N.W.2d 533

208 Mich.App. 248, 158 P.U.R.4th 431,

Util. L. Rep. P 26,446

ASSOCIATION OF BUSINESSES ADVOCATING TARIFF EQUITY, Appellant, v. PUBLIC SERVICE COMMISSION and Consumers Power Company, Appellees.

CONSUMERS POWER COMPANY, Appellant, v. PUBLIC SERVICE COMMISSION and Association of Businesses

Advocating Tariff Equity, Appellee,

and

Attorney General, Appellee Cross-Appellant.

ATTORNEY GENERAL, Appellant, v. PUBLIC SERVICE COMMISSION, Consumers Power Company, and Association of Businesses Advocating Tariff

Equity, Appellees.

ASSOCIATION OF BUSINESSES ADVOCATING TARIFF EQUITY, Appellant, v. PUBLIC SERVICE COMMISSION, Consumers Power Company, and Attorney General, Appellees.

Docket Nos. 141277, 141284, 142119 and 142493.

Court of Appeals of Michigan.

Submitted Oct. 19, 1994, at Lansing.

Decided Dec. 29, 1994, at 9:30 a.m.

Released for Publication Feb. 21, 1995.

Hill Lewis by Roderick S. Coy, Timothy P. Collins, and Joseph R. Assenzo, Lansing, for the Association of Businesses Advocating Tariff Equity.

David A. Mikelonis, James E. Brunner, and H. Richard Chambers, Jackson, and Loomis, Ewert, Ederer, Parsley, Davis & Gotting, P.C. by Michael G. Oliva and Ronald W. Bloomberg, Lansing, for Consumers Power Co.

Don L. Keskey, Henry J. Boynton, Philip J. Rosewarne, and Patricia S. Barone, Asst. Attys. Gen., Lansing, for Public Service Commission.

Frank J. Kelley, Atty. Gen., Thomas L. Casey, Sol. Gen., and Luis F. Fernandez and Paul E. Novak, Asst. Attys. Gen., for Atty. Gen.

Before NEFF, P.J., and MARILYN J. KELLY and JOSLYN, ^* JJ.

PER CURIAM.

These four consolidated appeals as of right, M.C.L. § 462.26; M.S.A. § 22.45, are from a May 7, 1991, decision of the Public Service Commission (PSC) and a July 1, 1991, PSC decision denying petitions for rehearing. The PSC case, No. U-7830 Step 3B, involved a request by Consumers Power Company for rate relief of over $2 billion. The PSC found that Consumers was entitled to about $760 million of rate relief. After certain offsets, the net award was about $346 million, to be collected over ten years and without interest. We affirm.

I

Consumers filed an application for an electric rate increase on November 18, 1983, No. U-7830, seeking to recover costs related to the development and construction of a two-unit, 1,300 megawatt, nuclear power plant at Midland, Michigan. Plans for the plant were announced in 1967. Consumers canceled the project on July 16, 1984. According to Consumers, the plant was then eighty-five percent complete and Consumers had invested approximately $4.2 billion in the project.

Construction of the nuclear facility was fraught with difficulties and delay. One witness characterized the cost to remedy a problem of improperly compacted soil as equivalent to paying for a third reactor. The Atomic Energy Commission and subsequently the Nuclear Regulatory Commission (NRC) maintained oversight of the project. The NRC found serious quality assurance and quality control problems. In the aftermath of the accident at Three Mile Island in Pennsylvania on March 19, 1979, federal authorities increased their regulatory vigilance.

At its inception, the Midland project was a joint venture of Consumers and Dow Chemical Company. Dow's eventual financial stake in the project amounted to about $500 million. Consumers and Dow negotiated a contract in June 1978 that permitted Dow to walk away from the project without liability unless both nuclear units were in commercial operation by December 31, 1984. This date became known as the "drop dead" date.

The architect, engineer, and primary contractor for the project, Bechtel Power Corporation, prepared analyses known as "forecasts" regarding the course of the project to completion. In late 1979 or early 1980, Bechtel developed "Forecast 6." It forecast the "most probable fuel load dates" for Unit 2 to be in April 1984 and for Unit 1 to be in September 1984. It was highly unlikely that these load dates would permit commercial operation of both the reactors by the drop dead date.

In February 1980, Consumers and Bechtel tried to improve the construction schedule in order to allow for a November 1983 load date. However, a review team made up of Consumers' personnel did not seriously question the conclusions in Forecast 6, but concluded that a November 1983 load date was as "aggressive" a plan as could be realistically pursued.

At a March 5, 1980, meeting of Consumers' directors, management presented Forecast 6 as well as a "breakeven study" and a study regarding alternatives for the project known as the "Midland Alternatives Study." A virtual doubling in the expected cost of the plant was explained to the directors in March 1980. The directors approved a resolution authorizing the company to proceed with construction of both units in accordance with the Forecast 6 estimates.

A revised version of Forecast 6 was issued by Consumers' review team on May 5, 1980. The report characterized a November 1983 fuel load date as "very optimistic." A "schedule analysis" prepared by June 1980 gave a ten percent probability of loading fuel by November 1983 (given favorable assumptions), a fifty percent probability of loading fuel by February 1984, and a ninety percent probability of loading fuel by April 1984.

At a board meeting on July 2, 1980, Consumers' directors considered revised Forecast 6 and the review team's analyses. There was also discussion of potential problems with federal regulatory approval. Management recommended adopting a schedule that anticipated loading fuel in July and December 1983. The directors adopted the recommendation.

After July 1980, the project continued to experience difficulties, some regulatory and some financial. In December 1982, federal authorities ordered a partial halt to construction because of quality assurance problems. Apparently no further significant construction occurred. Dow withdrew from the project in July 1983. On July 16, 1984, Consumers' directors halted construction completely.

II

Shortly after Consumers ceased construction on the plant, it filed an amendment to its pending electric rate application in No. U-7830 seeking to recover its entire investment in the Midland project. Although Consumers claimed a cost of over $4 billion, its request was eventually reduced to about $2.1 billion, for various reasons. Consumers sought relief in three steps. Step 3 initially sought several hundred million dollars for the cost of the project. Step 3 was subsequently divided into Steps 3A and 3B, with Step 3A being a request for several hundred million dollars of immediate rate relief known as "financial stabilization" relief because of Consumers' precarious financial situation. This appeal deals with Step 3B, in which Consumers sought relief for the balance of its investment in the Midland project.

This Court previously affirmed the PSC's decision in Step 2, Consumers Power Co v. Public Service Comm No 1, unpublished opinion per curiam of the Court of Appeals, decided January 14, 1991 (Docket Nos 102652, 103983, 105990, and 117930). The PSC's decision in Step 3A was also affirmed. Attorney General v. Public Service Comm., 189 Mich.App. 138, 472 N.W.2d 53 (1991) [Attorney General I].

The proceeding in this case, Step 3B, involved three hundred days of hearings and resulted in a record of about 39,000 pages of testimony and 2,400 accepted exhibits. The hearing referee recommended rate relief of $1.3 billion based on project costs incurred until December 2, 1982. This recommendation was consistent with the position of the PSC staff.

The PSC found that Consumers' decision on July 2, 1980, to go forward with construction of both units with the expectation that fuel would be loaded in 1983 was so unrealistic that Consumers acted imprudently at that time. The PSC concluded that all expenditures after July 2, 1980, were imprudent and, therefore, the PSC disallowed recovery of those expenditures. The PSC permitted Consumers to recover about $760 million, which was then reduced by certain amounts including the amount of financial stabilization rate relief granted in Step 3A.

In its opinion, at 199-202, the PSC explained that from July 2, 1980, Consumers adopted a path that was virtually certain to fail and was unduly influenced by its relationship with Dow at the expense of its obligations to ratepayers.

By early 1980, Consumers' management and Board of Directors knew or should have known that construction of the Midland plant was not going well. They knew or should have known as they faced critical decisions in 1980 that the probability of success was unacceptably low. Although the Commission recognizes the company's duty to its shareholders, it also had a duty to its ratepayers. Consequently, prudence would have required Consumers' management to recommend and the Board of Directors to approve at the July 2, 1980 meeting a decision to alter their strategy of continuing at all costs to try to meet the Dow drop-dead date without adequate consideration of the company's duty to its ratepayers. The path chosen by the company was so risky that it had by then become clear that it was virtually certain to fail at enormous cost to the company's ratepayers or investors or both.

* * * * * *

As the project strove to maintain progress against this background of ongoing problems, Consumers commenced a period of planning and decision-making in late 1979 that culminated in the July 2, 1980 decision of its Board of Directors to continue the project on the basis of Adjusted Forecast 6, which estimated project costs of $3.1 billion and projected a July 1983 Unit 2 fuel load date. In adopting this schedule, Consumers' management and Board of Directors ignored the recommendations of both the primary contractor and the company's own internal review team and disregarded several schedule evaluations of the work remaining to complete the project. They were fully aware of the previous history of...