Attorney General v. Public Service Com'n

• Decision Date: 02 February 1996
• Docket Number: Docket No. 177465
• Citation: 215 Mich.App. 356,546 N.W.2d 266
• Parties: , 169 P.U.R.4th 414, Util. L. Rep. P 26,508 ATTORNEY GENERAL, Appellant, v. PUBLIC SERVICE COMMISSION.
• Court: Court of Appeal of Michigan — District of US

Page 266

546 N.W.2d 266

215 Mich.App. 356, 169 P.U.R.4th 414,

Util. L. Rep. P 26,508

ATTORNEY GENERAL, Appellant, v. PUBLIC SERVICE COMMISSION.

Docket No. 177465.

Court of Appeals of Michigan.

Submitted Nov. 21, 1995, at Lansing.

Decided Feb. 2, 1996, at 9:30 a.m.

Released for Publication April 29, 1996.

Frank J. Kelley, Attorney General, Thomas L. Casey, Solicitor General, and Donald E. Erickson and Orjiakor N. Isiougu, Assistant Attorneys General, for Attorney General.

Frank J. Kelley, Attorney General, Thomas L. Casey, Solicitor General, and Don L. Keskey and Patricia S. Barone, Assistant Attorneys General, for Public Service Commission.

Foster, Swift, Collins & Smith, P.C. by William K. Fahey and Stephen J. Rhodes, Lansing, for Michigan Consolidated Gas Company.

Before MARKMAN, P.J., and CORRIGAN and PAYANT, ^* JJ.

PER CURIAM.

The Attorney General appeals portions of a June 30, 1995, order of the Michigan Public Service Commission, which allows Michigan Consolidated Gas Company (Mich Con) to include gains and losses it may incur from hedging in the gas futures market in its gas cost recovery (GCR) factors and which changes the method by which Mich Con credits or surcharges customers for the difference between the actual cost of gas and its projected cost as embodied in the GCR factors. We affirm.

I

M.C.L. § 460.6h(1)(b); M.S.A. § 22.13(6h)(1)(b) created a mechanism whereby the PSC may include a "gas cost recovery clause" in the rates or rate schedule of a gas utility. Such a clause permits the monthly adjustment of rates for gas in order to allow the utility to recover the booked costs of gas sold by the utility as long as the utility incurs such costs under "reasonable and prudent" policies and practices. Gas utilities must file annual GCR plans describing the expected sources and volumes of the utilities' gas supply, the changes in the cost of gas anticipated for the following year, and a five-year forecast of gas requirements, sources of supply, and cost projections. The PSC conducts a review and either approves, rejects, or amends the annual GCR plan and five-year forecast. The statute also requires the PSC to commence a reconciliation proceeding not less than once a year and not later than three months after the end of each twelve-month period covered by a gas utility GCR plan, during which proceeding the PSC reconciles the revenues received against the allowances for costs. The PSC must require a gas utility to refund to customers or credit against their bills any net overcharge because of the GCR clause and must authorize the recovery of any undercharge.

On July 19, 1993, Mich Con sought PSC approval of its 1994 GCR plan. Among other things, Mich Con requested permission to implement a two-year trial "hedging program," under which Mich Con would trade natural gas futures contracts and "hedge" them, i.e., Mich Con would lock in the then-current futures price as a substitute for the actual spot market price at the time of delivery. Mich Con also requested modification of its existing refunding procedures.

The hearing officer granted intervenor status to a number of parties, including the Attorney General. On April 8, 1994, the hearing officer issued his proposal for decision, recommending that the PSC adopt Mich Con's GCR plan with certain exceptions and modifications. In particular, the hearing officer recommended that Mich Con be permitted to implement both its hedging program as modified by the PSC staff and its proposed refunding and surcharging system as modified.

Exceptions were filed to the proposal for decision by Mich Con, the Attorney General, the PSC staff, and others. In an opinion and order dated June 30, 1994, the PSC held that a two-year trial hedging program should be allowed subject to modifications proposed by the PSC staff: all gains realized in futures trading should be shared with ratepayers, while losses in excess of $4 million should be borne solely by Mich Con; Mich Con's board of directors must adopt a written trading strategy and provide written policies and procedures before trading begins; and Mich Con must provide the PSC with a copy of its monthly futures trading report in addition to the information provided annually during the GCR reconciliation phase. The PSC agreed with Mich Con's position that its natural gas prices had become increasingly volatile, thereby subjecting it to the risk that its prices would be higher than anticipated, and that other mechanisms were not sufficient to solve this problem. It also agreed that Mich Con's proposed program constituted genuine hedging, not speculation, in that Mich Con was not trying to "beat the market" but only to improve its position in light of its portfolio of gas contracts. The PSC concluded:

Based on the foregoing discussion, the Commission finds that Mich Con should be allowed to implement a trial hedging program, as modified by Mr. Ballinger, for 1994-95. The Commission is persuaded that Mr. Ballinger's proposal includes sufficient safeguards to protect customers. Furthermore, if the Commission finds that a position the company has taken is for speculation, it can simply disallow inclusion in the company's cost of gas of any losses and costs associated with that position. Nevertheless, by implementing a trial hedging program, Mich Con can gain experience and gather information to aid the Commission in determining whether hedging or other financial risk management tools, should be used to manage energy costs. At the end of the trial period, the Commission will evaluate the program to determine if it should be continued. The Commission may also terminate the program at any time, if the circumstances warrant that action.

As to Mich Con's modification of Mr. Ballinger's proposal, i.e., the symmetrical sharing of gains and losses, the Commission finds that it should be rejected. Mich Con has a statutory duty under Act 304 to engage in reasonable and prudent policies and practices. As a safeguard to its customers, it must accept a smaller part of the gains and a larger part of the losses, at least during the trial period.

The PSC also agreed that Mich Con could alter its refunding system. Mich Con had previously used an "historical" refunding system under which it refunded or surcharged customers on the basis of their actual historical consumption. In place of the historical system, Mich Con proposed refunding and surcharging on the basis of a separate GCR factor that would allow a monthly fluctuation in the cost of gas to customers to reflect immediately recognized disparities between the estimated cost of gas and the actual cost of gas. Mich Con argued that such a system of refunding would be sufficiently accurate because customers subject to refunds and surcharges have become more homogeneous over time. Mich Con argued that because of this homogeneity and because the customer base tends to be stable over time, the substantial costs of the historical refund system outweighed its benefits. Although conceding that the historical refunding method is probably more precise than the proposed refunding method, Mich Con estimated that the cost of compiling and analyzing the data necessary to make accurate customer-by-customer refunds or surcharges is $600,000 annually. The PSC staff agreed with Mich Con that the cost of the historical method now outweighed its benefits. However, instead of the month-by-month adjustments proposed by Mich Con, the staff recommended that any net annual overcharge or undercharge be "rolled over" into the next year's GCR reconciliation. The PSC summarized the hearing officer's reasons for accepting the modified proposal as follows:

The ALJ [administrative law judge] agreed with the Staff's analysis, finding that the advantages of a prospective, or roll-in methodology, outweigh the disadvantages and that it is a reasonable response to the emergence of a homogeneous mix of GCR customers. Noting that Mich Con and the Staff agreed that the avoidable costs of the prospective system, i.e., $600,000 will be realized by customers in the next rate order, the ALJ rejected the argument that customers are already paying for the cost of the historical refunding system and therefore it should not be changed. The ALJ found that the avoidable costs are significant when compared with the average amount of the refund per customer. As a result, the ALJ concluded that public policy dictates that if the prospective refunding system is less costly and more efficient, but reasonably achieves the same accuracy as the historical refunding system, it should be approved.

The ALJ also rejected the AG's interpretation of refund under Act 304. Rather, relying on Section 6h, the ALJ concluded that Act 304 provides the Commission with the authority to establish a refund procedure. In contrast, the ALJ found that Mich Con's definition of refund in the context of Act 304, i.e., that the utility should not retain the amount for refund and it should be paid out to its customers, is consistent with the statute.

The ALJ further rejected the AG's proposed modifications to the Staff's methodology. The ALJ found that, because the prospective refunding system requires adjustments to the cost of gas in the GCR reconciliation, sufficient safeguards will prevent Mich Con from recovering a cost of gas in excess of that approved by the Commission. The ALJ also found it unnecessary to track over- or under-recoveries of gas costs by rate class because the percentage of monthly GCR consumption demonstrates the homogeneity of Mich Con's customers.

The PSC agreed with the hearing officer and stated further:

[C]ontrary to the Attorney General's position, there is no statutory presumption favoring the current historical refunding system.

In light of this statutory authority, the ALJ properly analyzed this issue and, therefore, the commission adopts his findings. In particular, the record supports the conclusion that the...