Detroit Edison Co. v. Michigan Public Service Com'n

• Decision Date: 01 June 1979
• Docket Number: Docket Nos. 61295,61294
• Citation: 331 N.W.2d 159,416 Mich. 510
• Parties: The DETROIT EDISON COMPANY, Plaintiff-Appellant, v. MICHIGAN PUBLIC SERVICE COMMISSION, Defendant-Appellee, Attorney General for the State of Michigan and Ford Motor Company, Intervening Defendants-Appellees. ATTORNEY GENERAL FOR the STATE OF MICHIGAN, Plaintiff-Appellee, v. MICHIGAN PUBLIC SERVICE COMMISSION, Defendant-Appellee, and The Detroit Edison Company, Intervening Defendant-Appellant. ,
• Court: Michigan Supreme Court

Page 159

331 N.W.2d 159

The DETROIT EDISON COMPANY, Plaintiff-Appellant, v. MICHIGAN PUBLIC SERVICE COMMISSION, Defendant-Appellee,

Attorney General for the State of Michigan and Ford Motor

Company, Intervening Defendants-Appellees.

ATTORNEY GENERAL FOR the STATE OF MICHIGAN, Plaintiff-Appellee, v. MICHIGAN PUBLIC SERVICE COMMISSION, Defendant-Appellee, and The Detroit Edison Company, Intervening

Defendant-Appellant.

Docket Nos. 61295, 61294, June Term, 1979.

Calendar No. 4.

416 Mich. 510, 331 N.W.2d 159

Supreme Court of Michigan.

Argued June 5, 1979.

Decided Dec. 23, 1982.

Foster, Swift, Collins & Coey, P.C. by Theodore W. Swift, David W. McKeague, Lansing, Detroit Edison Co. by Leon S. Cohan, Detroit, for plaintiff-appellant.

Arthur E. D'Hondt, James E. Riley, Asst. Attys. Gen., Walter V. Kron, Robert J. Taube, James E. Riley, Asst. Attys. Gen., Lansing, for defendant-appellee Michigan Public Service Com'n.

Frank J. Kelley, Atty. Gen., Robert A. Derengoski, Sol. Gen., Hugh B. Anderson, Roderick S. Coy, Asst. Attys. Gen., Lansing, for plaintiff-appellee.

Conner, Harbour & Dew by P.D. Connor, Ann Arbor, Ford Motor Co. by James D. Irvine, Dearborn, for intervening defendant-appellee Ford Motor Co.

FITZGERALD, Chief Justice (for affirmance).

In our order granting leave to appeal, we stated as the first issue whether "the charge allowed by the fuel cost adjustment clause [is] a charge to recover past costs, or a charge based on past experience reflected in a current charge". ¹ The answer to this question is decisive in resolving all of the issues presented in this case.

The cornerstone of the position taken by Edison, and accepted by the opinion for reversal, is that the FCAC adopted in February 1974 was intended to impose a fuel adjustment in the billing month to recover fuel costs incurred two months before. If that is the way the clause operated, then the December 1974 and January 1975 fuel costs had not yet been billed when the MPSC changed the FCAC in February 1975.

On the other hand, if, as the MPSC maintains, the FCAC was designed to impose a fuel adjustment in the billing month as an estimate of fuel costs based on prior experience, then Edison did not suffer any gap in collection of fuel costs in the months in question because the December 1974 and January 1975 billings included the fuel costs for those months.

We think it is clear that the February 1974 FCAC used prior costs as an estimate of current costs, and would affirm.

I

Three features of the FCAC demonstrate that it was not designed to recover all past costs, but was intended only to estimate current costs on the basis of past experience.

First, the FCAC based its adjustment on the consumption of electricity in the billing month, not on consumption in the prior month whose fuel costs were used. If the superseded FCAC was intended to produce a dollar-for-dollar recovery of excess fuel costs, it would have applied the adjustment factor on the basis of actual fuel costs in a given month to the amount of energy used by a customer in that month. However, the superseded FCAC applied the adjustment factor to the amount of energy used in the billing month, which was one or two months after the month in which the fuel was used. Consequently, there never would be an exact match of excess fuel costs and FCAC billings unless energy use in the cost month was the same as energy use in the billing month. Any variation would lead to a corresponding over- or undercollection of fuel expenses. Similarly, individual Edison customers were never billed the actual cost of the energy they had used; rather, they were billed an amount based on a formula using an earlier month's costs and current month's usage.

A second feature of the FCAC that demonstrates that it was a charge for estimated fuel costs in the billing month is that customers leaving Edison were not assessed an additional charge for the excess fuel costs in their last two months of service, nor were new customers excused from paying the adjustment charge for their first two months of service. If, as Edison and the opinion for reversal contend, the superseded FCAC was in fact a charge to recover past costs, customers leaving Edison would avoid paying for fuel they used and new customers would be forced to pay for fuel charges incurred before they received service.

Finally, perhaps the clearest evidence that the FCAC was not designed to recover past costs is the fact that the superseded FCAC was applied in the month following its inception. The fuel clause became effective February 4, 1974, and Edison first applied it to residential customers in its March 1974 bills. ² Under the fuel clause formula, the adjustment was based on January 1974 costs. Using the analysis of the opinion for reversal, and Edison the March bill was a deferred charge for January's costs. However, Edison had already collected all it was entitled to for January under its pre-FCAC rate structure. Thus, application of the February 1974 FCAC to collect for costs incurred in January 1974 would have meant that Edison was collecting more for January than was authorized under the rate structure in effect in January, the clearest possible kind of prohibited retroactive ratemaking. ³ Only if the billings in March 1974 were meant to charge for March fuel costs, estimated with the actual January data, could the FCAC be permissible prospective ratemaking.

The opinion for reversal says that with the change in the FCAC in February 1975, "Edison was entitled to collect at some time for December and January as such." As the foregoing analysis of the FCAC demonstrates, Edison did collect for December 1974 and January 1975--in its December 1974 and January 1975 billings. There was no gap in Edison's billing of fuel costs recoverable under its FCAC. ⁴

II

Litigation over whether fuel adjustment clauses are deferred or current charges has been fairly common in federal courts. Indeed, those courts have developed a standard terminology for characterizing the two kinds of systems, referring to a fuel clause that recovers all past costs as a "cost of service" tariff, and to a clause that uses past costs to estimate current ones as a "fixed rate" tariff. ⁵

We find several cases from the United States Courts of Appeals dealing with very similar facts persuasive authority for finding the superseded Edison FCAC to have been a fixed-rate tariff, designed to estimate current costs on the basis of past experience.

Boston Edison Co. v. Federal Energy Regulatory Comm., 611 F.2d 8 (CA 1, 1979), is a case factually very similar to the instant case. Boston Edison appealed an order of the Federal Energy Regulatory Commission that had struck down a surcharge to cover fuel cost expenses allegedly left unrecovered when Edison converted from a two-month lag billing formula to a current month formula. The First Circuit noted that under the former fuel clause, fuel costs from one month were applied to energy use in the second succeeding month. Thus, the old clause was not designed to achieve dollar-for-dollar recovery as would a true cost of service tariff. The Court also noted that Edison failed to assess additional charges on customers leaving the system as would be expected under a true deferred billing system. The Court therefore concluded that the fuel clause was a fixed-rate tariff and, therefore, no surcharge could be allowed. Both of the reasons underlying the First Circuit's decision are present in the instant case.

In Public Service Co. of New Hampshire v. Federal Energy Regulatory Comm., 195 U.S.App.D.C. 130, 600 F.2d 944 (1979), cert. den. 444 U.S. 990, 100 S.Ct. 520, 62 L.Ed.2d 419 (1979), four electric companies sought review of the commission's orders refusing to allow surcharges to compensate for alleged uncompensated fuel costs to which the companies claimed to have become entitled when they switched from fuel clauses based on fuel costs in the billing month rather than for some prior period. Two of the companies had fuel clauses based on fuel costs from two months preceding the billing month, which coincides with the system used in the fuel clauses in the instant case. As did Edison in the present case, the companies began billing under the superseded clauses immediately after they became effective.

The District of Columbia Circuit held that the fuel clauses were fixed-rate tariffs primarily on the basis of two facts. The first was that the formulas mismatched the costs from an earlier month with the power consumption in the billing month.

"Thus, the fuel adjustment charge that was used was not based on the cost of fuel that had been used to generate the power for which users were billed. Since customer usage varies from month to month, this mismatch--applying a fuel adjustment factor based on one month to kilowatt-hours used during another month--would not lead to exact recovery of actual fuel expenses. Thus, the superseded clauses did not simply defer recovery of the cost of fuel. The clauses brought about a charge that differed from actual cost. This result is inconsistent with petitioners' claim that the clauses were cost of service tariffs with deferred billing. But the result squares with the Commission's view that the clauses were fixed rate tariffs which used fuel costs in a prior period as a proxy for actual current costs." (Emphasis in original; footnote omitted.) 195 U.S.App.D.C. 138-139, 600 F.2d 952-953.

Second, the Court said that the companies' billing was not actually deferred because they began billing immediately after the clauses became effective, rather than waiting until the "billing lag" had elapsed.

The District of Columbia Circuit concluded that the fuel clauses were fixed-rate tariffs and, accordingly, the refusal to impose surcharges was proper. Again, the reasons supporting the Court's decision apply with equal force to the facts of the case before us.

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