Attorney General v. Public Service Com'n No. 1, Docket No. 65918

• Decision Date: 07 June 1984
• Docket Number: Docket No. 65918
• Parties: ATTORNEY GENERAL, Plaintiff-Appellant, v. PUBLIC SERVICE COMMISSION # 1, and Detroit Edison Company, Defendants-Appellees.
• Court: Court of Appeal of Michigan — District of US

Page 539

349 N.W.2d 539

133 Mich.App. 719

ATTORNEY GENERAL, Plaintiff-Appellant, v. PUBLIC SERVICE COMMISSION # 1, and Detroit Edison Company,

Defendants-Appellees.

Docket No. 65918.

Court of Appeals of Michigan.

Submitted Feb. 7, 1984.

Decided April 16, 1984.

Released for Publication June 7, 1984.

Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., and Hugh B. Anderson, Asst. Atty. Gen., for plaintiff-appellant.

Don L. Keskey and S. David Kutinsky, Asst. Attys. Gen., for Public Service Commission.

Leon S. Cohan, Bruce R. Maters and David L. Clark, Detroit, for the Detroit Edison Co.

Before CYNAR, P.J., and J.H. GILLIS and ANDERSON, ^* JJ.

PER CURIAM.

The Attorney General appeals as of right from the July 19, 1982, order of Ingham County Circuit Court Judge Robert Holmes Bell which affirmed four Michigan Public Service Commission rate orders issued between January, 1979, and January, 1982, approving certain monthly electric billing adjustments for The Detroit Edison Company pursuant to the "Other Operations and Maintenance Expense Indexing System".

The challenged adjustment procedure was originally proposed so that changes in operation and maintenance expense, excluding fuel, purchased power and production maintenance (Other O & M), affect future customer rate levels only to the extent that cost levels change for other retail consumer goods as measured by the National Consumer Price Index.

The indexing system was first established for Detroit Edison in Michigan Public Service Commission docket U-5502, by order dated September 28, 1978. This was a comprehensive rate case in which a thorough examination was made of all of Edison's costs and revenue requirements for rate-making purposes. The order in U-5502 read, in part:

"Staff witness Roger F. Fischer summarized the proposal. After establishing the reasonable level of 'Other O & M' expense in this proceeding, the annual rate adjustment would be determined at a December hearing, starting with December 1978. The December hearing would first determine the change in the all-commodities National CPI from September of the prior year through August of the current year. For a hearing in December 1978, the change in the CPI from September 1977 through August 1978 would be calculated. Then the allowable change in 'Other O & M' expenses would be determined by multiplying the base amount by the precentage change in the CPI. The original base amount plus the calculated allowable change would then become the new base amount for the next period. Next the hearing would determine the allowable change per Kwh by dividing the allowable change by the 12-months' jurisdictional Kwh sales first determined in the current proceeding. Annual jurisdictional sales for future annual changes would be determined in future rate cases. The amount of change per Kwh would be applied to customers' bills for 12 months starting with the February billing month following the December hearing. Subsequent rate cases would include only the base 'Other O & M' expense determined in this proceeding and not any subsequent changes or actual expense amount. The Staff's proposal would not bar Applicant completely from seeking a change in the indexing system, but would place a substantial burden on Applicant to show the necessity for such a change.

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"At present, the Commission oversees 'Other O & M' expenses by examining general categories of expenditures in the O & M classification. Because of the legal limits on Commission power, the traditional focus of regulation, the size and complexity of Applicant's operations and the limits of time and resources, the Commission and its Staff have not superintended the details of 'Other O & M' expenses. While any relatively large and patently unreasonable expenses may be identified and acted upon in the present process, apparently reasonable 'Other O & M' expenses, whether incurred or projected, are routinely allowed. Because the only cost to Applicant of moderate increases in O & M expenses is that which results from regulatory delay, Applicant has not had the strong incentive to economize which exists in competitive industries in the private sector. And, there is no accepted objective standard by which the Commission may measure management efficiency.

"The adoption of the Staff's proposal would subject Applicant's management to pressures for economy which are analogous to the cost pressures which exist in the private sector. If Applicant's management were to allow 'Other O & M' expenses to increase at a faster rate than the CPI, Applicant's stockholders, and not the ratepayers, would pay the bill. If Applicant's management were to keep 'Other O & M' expenses below the increase in the CPI, then Applicant's earnings might be increased.

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"The indexing system as proposed by the Staff incorporates generally accepted rate making principles, and employs them in a new and imaginative way. Essentially, the indexing system uses recently-available historical data on inflation rates as a predictor of future inflation rates, much the same way as regulatory agencies have often used historical costs as a predictor of future costs. Indeed, those who have advocated that the Commission use historical rather than projected costs for the purpose of predicting future costs in setting future rates should have no difficulty accepting the principle that historical inflation rates can legitimately be used to predict future inflation rates for the purposes of the indexing system adjustment.

"In practice, the annual increase in the CPI, for example, during the period September 1977 through August 1978 will be ascertained in a December 1978 hearing, and an adjustment will be made in Applicant's electric rates commencing in February 1979. The assumption is that the inflation rate from February 1979 through January 1980 will approximate the September 1977 through August 1978 inflation rate, and that over the long run the historical inflation rate will be under as much and as often as over the current rate, so the differences will be roughly off-setting. The indexing system thus proposes to keep the allowance for 'Other O & M' expenses current. The purpose is not to compensate Applicant in the following year for inflation which may have been suffered in the previous year. This, arguably, would be retroactive ratemaking.

"For reasons stated above the Commission FINDS that the Staff's proposal is reasonable in principle and should be adopted.

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"The Commission FINDS that the indexing provision should be implemented beginning in the calendar year 1978. The first hearings should be in December 1978, and hearings should be held in December each year thereafter.

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"However, the Commission FINDS that the indexing system established by this order should be subject to alteration on application of Applicant or suggestion of the Staff or intervening parties. It would not be in the public interest to freeze the systems so adjustments could not be made. The Commission is establishing a new program. In most new programs there are 'bugs' which must be eliminated to make the program work properly. In addition, the long-run future is uncertain. The Commission simply must have the flexibility to deal directly with unanticipated serious problems. However, where Applicant requests a change in the indexing system, Applicant will have a heavy burden to demonstrate the necessity of the change.

"Because the indexing system is a new and to some extent an experimental program, the Commission FINDS that there should be a comprehensive evaluation on the indexing system after five years' experience. * * * As a part of the comprehensive evaluation, Applicant, the Staff, and intervening parties may propose changes in, or even elimination of, the indexing system."

The original order in U-5502 which established the indexing system is not challenged in this appeal. Challenged here are four subsequent orders implementing the adjustment. These orders were issued on January 29, 1979 (Docket U-5502), January 30, 1980 (Docket U-5502), January 30, 1981 (Docket U-6006), and January 26, 1982 (Docket U-6488).

On March 31, 1983, the commission ordered in...