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

• Decision Date: 31 January 1989
• Docket Number: 101252,Docket Nos. 100702
• Citation: 434 N.W.2d 648,173 Mich.App. 647
• Parties: In the Matter of the Application of Tondu Energy Systems, Inc., for immediate ex parte approval of a power sales contract with Consumers Power Company. ASSOCIATION OF BUSINESSES ADVOCATING TARIFF EQUITY (ABATE), Appellant, Cross- Appellee, v. PUBLIC SERVICE COMMISSION, Consumers Power Company, Scott Paper Company, and Attorney General, Appellees, and Tondu Energy Systems, Inc., Appellee, Cross-Appellant. ASSOCIATION OF BUSINESSES ADVOCATING TARIFF EQUITY (ABATE), Michigan Public Service Commission, Tondu Energy Systems, Inc. and Consumers Power Company, Appellees, v. ATTORNEY GENERAL, Appellant.
• Court: Court of Appeal of Michigan — District of US

Page 648

434 N.W.2d 648

173 Mich.App. 647

In the Matter of the Application of Tondu Energy Systems,

Inc., for immediate ex parte approval of a power

sales contract with Consumers Power Company.

ASSOCIATION OF BUSINESSES ADVOCATING TARIFF EQUITY (ABATE), Appellant, Cross- Appellee, v. PUBLIC SERVICE COMMISSION, Consumers Power Company, Scott

Paper Company, and Attorney General, Appellees,

and

Tondu Energy Systems, Inc., Appellee, Cross-Appellant.

ASSOCIATION OF BUSINESSES ADVOCATING TARIFF EQUITY (ABATE),

Michigan Public Service Commission, Tondu Energy

Systems, Inc. and Consumers Power

Company, Appellees, v. ATTORNEY GENERAL, Appellant.

Docket Nos. 100702, 101252.

Court of Appeals of Michigan.

Submitted Jan. 29, 1988.

Decided Dec. 19, 1988.

Released for Publication Jan. 31, 1989.

Hill, Lewis, Adams, Goodrich & Tait by Robert A.W. Strong, Detroit, for Association of Businesses Advocating Tariff Equity.

Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., and Don L. Keskey and James A. Ault, Asst. Attys. Gen., for the Michigan Public Service Com'n.

David A. Mikelonis and Craig A. Marks, Jackson, and Loomis, Ewert, Ederer, Parsley, Davis & Gotting by George W. Loomis, Harvey J. Messing and Richard J. Aaron, Lansing, for Consumers Power Co.

Fraser, Trebilcock, Davis & Foster, P.C. by David E.S. Martin and Thomas J. Waters, Lansing, for Scott Paper Co.

Varnum, Riddering, Schmidt & Howlett by Peter Armstrong and Bruce Goodman, Grand Rapids, for Tondu Energy Systems, Inc.

Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., and Hugh B. Anderson, Asst. Atty. Gen., for the Attorney General.

Before DANHOF, C.J., and MacKENZIE and JOSLYN, ^* JJ.

DANHOF, Chief Judge.

These appeals involve challenges to the February 19, 1987, approval by the Michigan Public Service Commission of a contract between Consumers Power Company and Tondu Energy Systems, Inc. Pursuant to this contract, into which Consumers and Tondu entered on July 31, 1986, Consumers will purchase electricity from a facility to be developed by Tondu. This facility will also produce steam, and the steam will be sold to another corporate customer pursuant to a contract not subject to PSC approval. The term of the project will be thirty-five years, and Consumers will only be obligated to pay for energy actually delivered.

Tondu applied for immediate ex parte approval by the PSC of the July 31, 1986, agreement in its September 12, 1986, filing. The PSC ordered that a notice of opportunity to submit comments be published during the week of September 21, 1986. Following receipt of both favorable and unfavorable comments, the PSC issued its "order approving application and notice of hearing" on November 4, 1986. In that order, the PSC approved the July 31, 1986, agreement for purposes of compliance and consistency with the Public Utility Regulatory Policies Act of 1978 (PURPA), P.L. 95-617, 92 Stat. 3117. The PSC further granted requests for hearing made by the Attorney General and the Association of Businesses Advocating Tariff Equity (ABATE) for the limited purpose of examining the appropriate capacity payment rate at which Consumers would purchase electricity from the facility to be developed by Tondu under the July 31, 1986, agreement. The Residential Ratepayer Consortium was also to participate. The amounts set forth in the July 31, 1986, agreement were 4.69 cents per kilowatt hour (cents/kwh) for energy delivery in peak hours, and 3.99 cents/kwh for energy delivered off-peak hours, subject to adjustments in the third and following years for operating at different capacity factors. The higher the capacity factor at which Tondu could operate its facility (the more efficiently it could operate), the higher the payment would be. The "break-even" capacity was 76.8 percent of the theoretical maximum.

The PSC also noted in its November 4, 1986, order that Consumers' payments to Tondu were different from rates filed with the PSC by Consumers in annual avoided cost filings. These annual filings set forth the price at which Consumers would purchase electricity from certain facilities. The relationship of Consumers' annual avoided costs and the rate it should pay Tondu, as well as other aspects of its avoided cost filings, were contested below. Since this variation could not have been addressed before Tondu's submission, the PSC indicated that it would be addressed in the hearing. Finally, the PSC directed attention in the hearing to the issue of whether the methodologies for determining a proper capacity rate had been followed. These methodologies were said to have been approved in Consumers' settlement agreement in PSC Case No. U-6798. It was a major PSC proceeding, and it was concluded by a settlement agreement adopted by the PSC's order of August 27, 1982. That settlement agreement contained a formula for determining capacity payments. Pursuant to it, the rate for payment to a qualifying facility for energy would be determined. To be a qualifying facility as defined in PURPA, a facility must be a small power producer (not relevant here) or, as is the proposed Tondu facility, a cogeneration facility--one which produces both electricity and some other form of useful energy such as steam or heat. 16 U.S.C. 796(18)(A). None of the other issues which ABATE, the Attorney General, or the Residential Ratepayer Consortium sought to be raised were to be addressed in the scheduled hearing. Most particularly, the issue of the need for the capacity represented by the Tondu project was not to be addressed.

Following administrative hearings before a PSC hearing officer, the PSC issued its opinion and order of February 19, 1987. The PSC found the assumptions used in reaching the July 31, 1986, agreement were those contained in Consumers' June 12, 1985, avoided cost filing, with the exception that a proxy plant which played a part in the rate structure was to come on-line in 1990, not 1997. The PSC further found that the avoided capacity payment rates contained in the July 31, 1986, agreement were not reached in accordance with the U-6798 methodologies. It also concluded that Tondu and Consumers had failed to establish the propriety of several assumptions.

First, a discounting methodology was rejected. Disallowance of this methology resulted in dramatic changes in the avoided capacity rate in Consumers' June 12, 1985, avoided cost filing--3.97 cents/kwh from the prior filing was reduced, without changing one assumption, to 1.77 cents/kwh. Next, changing the start-up date for the proxy plant from 1997 to 1990 increased the avoided capacity cost from 2.97 cents/kwh to 4.69 cents/kwh.

While not rejecting use of the proxy plant methodology, the PSC found changing the start-up date resulted in radical swings of the indicated capacity rate and would not reflect Consumers' avoided costs over the life of the July 31, 1986, agreement. The PSC therefore found the methodology inappropriate. It also found the evidence failed to justify the rates contained in the July 31, 1986, agreement. Specifically, the PSC identified improper assumptions regarding the fixed charge rate of the proxy plant and the projected capital cost of the project.

The PSC accepted the starting point of a $1,250/kwh capital cost at year-end 1984. However, it rejected Consumers' witness Ford's inflation factors (used to adjust the capital cost due to projected increases in construction costs) of 5.9 percent for 1985, 7.2 percent for 1986, and 6.7 percent for the period 1987 through 1990. Instead, it held that it was appropriate to use escalation rates from a Consumers' filing in Case U-8431 of between 4.0 percent and 4.2 percent through 1988, and it therefore adopted a 4.2 percent escalation rate.

The PSC next addressed the fixed charge rate. It found Consumers' value of 20.17 percent inappropriate. It cited witness Peloquin's explanation that capital costs dropped during the first half of 1986. Witness Logan's calculated fixed charge was 19.3 percent, although he did support Consumers' higher value of 20.17 percent. Consumers' fixed charge rate in its July 17, 1986, avoided cost filing was 16.1 percent. The PSC concluded a rate "more in line" with the Peloquin rate should be utilized, and found 17.5 percent a "more reasonable figure."

The PSC adopted these new figures and the other ones as contained in the July 31, 1986, agreement. Using the U-6798 methodology, the PSC developed arithmetically an average capacity rate of $39.9/mwh (megawatt hour, or one million watts) or 3.99 cents/kwh. It found the higher rates as contained in the July 31, 1986, agreement were excessive and could not be approved. However, because the PSC felt that the parties should not be left without guidance, and based on prior cases and the fact that future cases would be reviewed on a new basis anyway because the statute had been modified, the PSC indicated that if Tondu submitted a new agreement within ninety days setting an average capacity payment of 3.99 cents/kwh or less, no further action of the PSC would be necessary and the contract would be considered approved by the PSC.

The PSC then addressed several miscellaneous issues:

1. A motion by Consumers objecting to consideration of Consumers' future capacity needs pursuant to a ruling of the hearing officer was ruled moot and not further addressed.

2. ABATE's request for official notice of facts (Consumers' Rate S) was rejected as late.

3. The question of whether the Tondu project was a qualifying facility was found to be entirely within the jurisdiction of the Federal Energy Regulatory Commission (FERC), and the PSC further noted that both the July 31, 1986, agreement and Consumers' tariffs required the Tondu project to be a qualifying facility.

The PSC then made appropriate findings and orders in accordance with its opinion. ABATE and the Attorney General sought rehearing and the PSC issued its "order denying applications for rehearing" on May 14, 1987.

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