Great Lakes Steel Div. of Nat. Steel Corp. v. Michigan Public Service Com'n

• Decision Date: 06 February 1984
• Docket Number: Docket No. 61299
• Citation: 130 Mich.App. 470,344 N.W.2d 321
• Parties: GREAT LAKES STEEL DIVISION OF NATIONAL STEEL CORPORATION and Michigan Energy Users Group, Plaintiffs-Appellants, v. MICHIGAN PUBLIC SERVICE COMMISSION, Defendant-Appellee, and Michigan Consolidated Gas Company, Intervening Defendant-Appellee. 130 Mich.App. 470, 344 N.W.2d 321
• Court: Court of Appeal of Michigan — District of US

Page 321

344 N.W.2d 321

GREAT LAKES STEEL DIVISION OF NATIONAL STEEL CORPORATION and Michigan Energy Users Group Plaintiffs-Appellants, v. MICHIGAN PUBLIC SERVICE COMMISSION, Defendant-Appellee and Michigan Consolidated Gas Company, Intervening Defendant-Appellee.

Docket No. 61299.

130 Mich.App. 470, 344 N.W.2d 321

Court of Appeals of Michigan.

Submitted Oct. 5, 1983.

Decided Nov. 21, 1983.

Released for Publication Feb. 6, 1984.

[130 MICHAPP 473] Hill, Lewis, Adams, Goodrich & Tait by Douglas H. West and Diane M. Soubly, Detroit, for Great Lakes Steel Div. of Nat. Steel Corp.

[130 MICHAPP 474] Albert J. Thorburn, Lansing, for Michigan Energy Users Group.

Frank J. Kelley, Atty. Gen., Louis J. Caruso, Sol. Gen., and Arthur E. D'Hondt and R. Philip Brown, Asst. Attys. Gen., for Michigan Public Service Com'n.

Foster, Swift, Collins & Coey, P.C. by Webb A. Smith and William K. Fahey, Lansing, David P. Van Note and Daniel L. Schiffer, Detroit, for Mich. Consolidated Gas Co.

Before ALLEN, P.J., and BEASLEY and CLEMENTS, ^* JJ.

ALLEN, Presiding Judge.

Plaintiffs appeal as of right two opinions and orders pursuant thereto of the Circuit Court for Ingham County. One opinion, issued October 23, 1981, by Acting Circuit Judge Thomas G. Roberts, affirmed a November 6, 1979, order entered by defendant Michigan Public Service Commission (MPSC) authorizing defendant Michigan Consolidated Gas Company (MCG) to increase its rates to produce additional revenues of $56,357,000 and to adopt a new and innovative rate structure allocating to industrial classes of customers a portion of the winter heating costs which otherwise would be borne by residential customers. The second opinion, issued one year earlier on October 23, 1980, by Circuit Judge Michael Harrison, denied plaintiffs' motion to discover MPSC's decisional thought process.

Plaintiffs are industrial companies purchasing from MCG some 40 billion cubic feet of natural gas [130 MICHAPP 475] per year at a cost of approximately $124 million a year under the rates established by the MPSC when this action was filed in Ingham County Circuit Court. In addition to Great Lakes Steel, plaintiff companies include the members of the Michigan Energy Users Group, a voluntary association of industrial firms comprised of BASF Wyandotte Corporation, Chrysler Corporation, McLouth Steel Corporation, Monsanto Company, and Pennwalt Corporation.

In 1979, following extensive hearings conducted pursuant to the Administrative Procedures Act, the MPSC found a total revenue deficiency of $56,353,000 and ordered revenues from sales of natural gas increased accordingly so as to provide a reasonable return on investment.

In this situation, having determined that additional revenues are needed, the MPSC must adopt a new rate structure which will yield the additional revenues. This is called the "rate design" phase and is a two-step process. First, the MPSC allocates how much of the new revenue should be borne by each class of customer, viz., commercial, residential, industrial, schools, etc. Second, rates for each class are structured to produce the newly-allocated revenues.

In the instant case, as part of this two-step process, the MPSC staff submitted two proposals. Through witness Wilbur McNinch, a rate design proposal was submitted containing the same differentials between classes as last approved by the MPSC in case U-5365 ¹ and would have resulted, if adopted, in an increase of approximately equal percentage in the revenue of the several rate classes. A second rate design proposal was submitted[130 MICHAPP 476] by staff witness Hasso Bhatia. This proposal was designed to provide relief to low income residential gas customers who had difficulty paying their winter heat bills and was also intended to encourage gas conservation by all residential gas users. Unlike the primary proposal which allocated the increase approximately equally between classes, the alternate proposal caused the industrial customers as a class to pay some $6,000,000 more than they would pay under the McNinch proposal. However, expressed in percentage terms, the increase over the McNinch proposal was not significant, representing only 1.5% of the total average rate for industrial customers.

The alternate proposal was strongly opposed by plaintiffs and, on August 10, 1979, was rejected by the hearing officer on grounds that it lacked evidentiary support and would not benefit low income customers. The hearing officer recommended adoption of the primary rate design proposal. Nevertheless, on November 6, 1979, a majority of the MPSC overruled the recommendation of the hearing officer and adopted the residential winter heating rate structure proposed by Bhatia. Later, one member of the MPSC filed a dissent on grounds that a factual basis was lacking for achieving the purpose of benefiting low income residential customers and improving conservation of energy.

On December 5, 1979, plaintiffs filed an appeal in the Circuit Court for Ingham County as provided in Sec. 26(a) of 1909 P.A. 300. M.C.L. Sec. 462.26(a); M.S.A. Sec. 22.45(a). Plaintiffs' complaint alleged that the residential winter heating rate established by the MPSC order dated November 6, 1979, (1) exceeded the statutory authority of the MPSC; (2) was violative of due process of law; (3) was not supported by competent, material and substantial [130 MICHAPP 477] evidence on the record; and (4) was arbitrary, capricious and clearly an abuse of discretion. On May 22, 1980, the circuit court granted plaintiffs leave to file a second amended complaint alleging that one or more MPSC members had been prejudiced as to the adoption of the residential winter heating rate. In connection with the preparation of the second amended complaint, plaintiffs sought by interrogatories to discover what facts had been considered and what actions had been taken by one member of the MPSC majority in arriving at his decision regarding rate design. Objection was filed by the MPSC on grounds, inter alia, that the thought process rule barred such discovery. In an opinion dated October 23, 1980, Judge Harrison found that none of the exceptions to the thought process rule applied and declined to permit the requested discovery. In a subsequent opinion, dated October 23, 1981, Judge Roberts found that the MPSC decision was supported by competent, material and substantial evidence on the record. On November 13, 1981, Judge Roberts entered an order affirming the MPSC order.

Both orders were appealed as of right to this Court and come to us on the original record made before the MPSC and on the transcript of the hearings in circuit court. On appeal plaintiffs do not challenge the total revenue requirements found to be necessary as a result of the deficiency of $56,353,000 in gas sales revenues. Plaintiffs concede that this amount of rate relief is appropriate but question both the allocation of the increase among the various classes of MCG's customers and the rate structure within the residential class. ² Specifically, plaintiffs claim that the MPSC's order [130 MICHAPP 478] of December 6, 1979, as approved by the circuit court, (1) is not based upon competent, material, and substantial evidence as mandated in this Court's opinion in Consumers Power Co. v. Public Service Comm., 78 Mich.App. 581, 261 N.W.2d 10 (1977), (2) is arbitrary and capricious, and (3) results in unlawful and unreasonable rates. Plaintiffs further claim that in connection with the drafting of the second bill of complaint, the circuit court improperly denied discovery into the "thought processes" of the MPSC. Defendants MPSC and MCG argue that (1) as members of the industrial class of customers, plaintiffs are without standing to challenge the rate structure within the residential class, (2) the function of designing rates and allocating revenues among classes of customers is a legislative function, reviewable on appeal for abuse of discretion, and (3) that imposition of the competent, material and substantial evidence standard of review would impose new and unwarranted restrictions on the MPSC's broad discretion to experiment and try new and novel rate structures and policies designed to cope with the recent decline in the long term supply of gas resources. Defendants also argue that the trial court properly denied discovery into the MPSC's thought process.

I

Did the circuit court err in refusing to set aside the MPSC

rate order?

Because plaintiffs support the "primary rate design" proposal initially proposed by witness McNinch, and oppose the alternate rate design proposal of witness Bhatia, it is helpful to indicate how the two proposals differ. As indicated earlier, they differ both in allocation and structure. Under [130 MICHAPP 479] the McNinch proposal, the revenue responsibility of each class is allocated by approximately equal increases. The alternate proposal results in some $6,000,000 more being allocated to industrial rate class 6 and the interruptible rate class 7. As to structure, the McNinch proposal provided for a flat or uniform charge for each unit of gas purchased by a particular customer. Under the alternate proposal, different rates were charged for different "blocks" of gas usage. ³ Plaintiffs contend that, both as to allocation and structure, the MPSC's order is not supported by competent, material and substantial evidence on the whole record nor by detailed findings of fact as required by Consumers Power Co., supra.

The Attorney General and MCG raise the threshold issue that, because plaintiffs' bill of complaint only challenged the allocation of rates and did not contain any allegations which would lead this Court to believe that plaintiffs were challenging the rate structure, plaintiffs are precluded from raising any issue as to structure. In support of this argument, defendants point out that plaintiffs are industrial class customers, that, as such, they are not aggrieved by the MPSC's...