In re Detroit Edison Co. for 2012 Cost Recovery Plan

• Decision Date: 23 June 2015
• Docket Number: Docket No. 318388.
• Citation: 311 Mich.App. 204,874 N.W.2d 398
• Parties: In re APPLICATION OF DETROIT EDISON COMPANY FOR 2012 COST RECOVERY PLAN.
• Court: Court of Appeal of Michigan — District of US

311 Mich.App. 204

874 N.W.2d 398

In re APPLICATION OF DETROIT EDISON COMPANY FOR 2012 COST RECOVERY PLAN.

Docket No. 318388.

Court of Appeals of Michigan.

Submitted May 6, 2015, at Lansing.

Decided June 23, 2015, at 9:05 a.m.

Bruce R. Maters, Jon P. Christinidis, and David S. Maquera and Fahey Schultz Burzych Rhodes PLC, Okemos (by William K. Fahey and Stephen J. Rhodes ) for the Detroit Edison Company.

Olson, Bzdok & Howard, PC (by Emerson Hilton and Christopher M. Bzdok, Traverse City,), and Shannon Fisk for the Michigan Environmental Council.

Bill Schuette, Attorney General, Aaron D. Lindstrom, Solicitor General, Matthew Schneider, Chief Legal Counsel, B. Eric Restuccia, Deputy Solicitor General, and Steven D. Hughey and Anne M. Uitvlugt, Assistant Attorneys General, for the Michigan Public Service Commission.

Before: BOONSTRA, P.J., and SAAD and MURRAY, JJ.

PER CURIAM.

Michigan Environmental Council (MEC) appeals by right from an order of the Michigan Public Service Commission (PSC) granting the application filed by Detroit Edison Company (Edison) to implement a power supply cost recovery (PSCR) plan in its rate schedules for the 2012 metered jurisdictional sales of electricity, and for approval of its five-year forecast. We affirm.

I. PERTINENT FACTS AND PROCEDURAL HISTORY

This case concerns MEC's challenge to Edison's reduced-emission fuel (REF) project. This project involves applying chemical additives to coal to produce REF. Edison maintains that the use of REF results in reduced sulfur dioxide (SO2), mercury, and possibly nitrous oxide (NOx) emissions, and thus reduced emission expenses. Edison proposed to sell at book cost a portion of its coal inventory to affiliated unregulated fuels companies Belle River Fuels Company (BRFC) and the St. Clair Fuels Company (SCFC). The coal would be chemically treated at those plants and then sold back to Edison.

The PSC considered the REF project in an earlier case¹ but did not grant Edison permission to implement the project at that time, concluding that it needed more information on the efficacy of the methods for reducing emissions. The PSC also required Edison to demonstrate that the REF project was a reasonable and prudent method of achieving maximum emission reduction at minimum cost, and that the REF project complied with the PSC's "Code of Conduct."²

On September 30, 2011, Edison filed an application requesting authority to implement a PSCR plan in its rates schedules for the 2012 metered jurisdictional sales of electricity. The application indicated that Edison intended to move forward with implementation of its REF project, but represented that the decision would have no impact on the requested maximum PSCR factor for 2012.

The Proposal for Decision issued by the administrative law judge (ALJ) assigned to the case recommended that Edison be denied permission to implement the REF project; however, contrary to the ALJ's recommendation, the PSC approved the REF project, stating as follows:

The Commission finds that Detroit Edison's REF project should be approved and that it complies with the Code of Conduct and the Guidelines. The Commission reviewed the company's testimony and Exhibits A–21 through A–23 and finds that Detroit Edison, in compliance with the directive in the December 6 order [in Case No. U–16434], provided the Commission with sufficient additional information to evaluate the reasonableness and prudence of the REF project.

The Commission believes that the REF project is a reasonable means of attaining maximum emission reductions for minimum cost. As explained by Detroit Edison, at [Edison's St. Clair Power Plant and its Belle River Power Plant], PSCR customers will receive a reduction in annual working capital expense through the sale, at market price, of a portion of the company's coal inventory to its affiliated fuels companies. The affiliated fuels companies will treat the coal with REF adder and then resell the treated coal to Detroit Edison. The cost of the REF adder will be offset by a corresponding savings in PSCR emissions allowance expense, resulting in a net cost of zero or less to PSCR customers. At [Edison's Monroe Power Plant], Detroit Edison receives a coal fee rate from the affiliated fuels company, reducing the cost of every ton of coal treated with REF adder that is consumed, which translates into a credit for the company's PSCR customers.

In response to the ALJ's finding that Detroit Edison did not provide any of the actual contracts between the company and its affiliated fuels companies for consideration, the Commission agrees with Detroit Edison that [1982 PA 304 (Act 304), MCL 460.6j et seq. ] only requires a description of all relevant major contracts, but does not require admission of the actual contracts. In addition, the Commission agrees with Detroit Edison and the Staff that the company's eligibility for the tax credits and the potential for the affiliated fuels companies to profit from the REF project is irrelevant to an Act 304 proceeding. As explained by Detroit Edison, Act 304 does not permit "the Commission to include third party expenses or revenues related to coal or any other fuel supply into Act 304 review and ratemaking." Detroit Edison's replies to exceptions, p. 27. As a result, the Commission may not consider whether the tax credits may be used to offset fuel costs.

The Commission disagrees with the Attorney General that REF costs should be treated as O & M costs. As explained by Detroit Edison, MCL 460.6j(13)(d) refers to "fuel movement that occurs after the utility receives the fuel at the power plant." Detroit Edison's replies to exceptions, p. 21. The Commission finds that all of the coal processing costs take place before the coal is delivered to the company.

Based on the evidence presented in Exhibits A–21 and A–23, the Commission finds that the REF project complies with the Code of Conduct. There is structural separation between the company and its affiliated fuels companies; they do not engage in joint advertising, marketing, or other promotional activities related to the provision of the fuels processing service; and there is no preferential treatment for or subsidization of the affiliated fuels companies by Detroit Edison.

The Commission finds that Detroit Edison has complied with Section III.C of the Code of Conduct. As discussed previously, the record supports that Detroit Edison purchases coal from a third party at market price, then sells the coal at the same market price to its affiliated fuels companies. The cost of the coal for the affiliated fuels companies is Detroit Edison's booked cost, or its fully allocated embedded cost. Therefore, both the market cost and the fully allocated embedded cost is higher than the other, compensation to Detroit Edison by the affiliated fuels companies complies with Section III.C of the Code of Conduct.

When the affiliates resell the treated coal to Detroit Edison, it is for the same market price the affiliated fuels companies paid to the company (or in this case, the fully allocated embedded cost), plus the cost of REF adder. The price of the treated coal is offset by a corresponding savings in PSCR emissions allowance expense, resulting in zero cost for the treated coal. Under Section III.C of the Code of Conduct, compensation to the affiliated fuels companies by Detroit Edison for the treated coal must be the lower of market price or 10% over fully allocated embedded cost. Because market price and the fully allocated embedded cost are the same in this case, the Commission finds that market price is lower than 10% over the fully allocated embedded cost. By paying the affiliated fuels companies market price for the treated coal, Detroit Edison has complied with Section III.C of the Code of Conduct.

The Commission agrees with Detroit Edison that the company did not violate the pre-sale notification requirements of the Guidelines with the sale of its coal inventory. As stated by Detroit Edison, the pre-sale notification requirement was intended to provide the Commission with notice of intent to sell significant utility plant property, and not the routine sales involved here. The Commission finds that Detroit Edison's sale of its coal inventory is not utility plant property, but is part of the utility's day-to-day business.

Based on the testimony and evidence provided by Detroit Edison, the Commission finds credible Detroit Edison's claim that it investigated REF arrangements with the two other licensees, CERT and A.J. Gallagher, but that [DTE Energy Services] offered Detroit Edison the best deal. Detroit Edison provided substantial testimony about the price of REF adder at other licensees' facilities and provided ample evidence that Detroit Edison's customers would have paid more had the company contracted with these other companies. [In re Detroit Edison's Application for a 2012 PSCR Plan, order of the Public Service Commission, entered June 28, 2013 (Case No. U–16892), pp. 31–34, 2013 WL 3355854.]

The PSC approved Edison's application for a PSCR plan for Edison's 2012 metered jurisdictional electric sales and the REF project. This appeal followed.

II. STANDARD OF REVIEW

The standard of review for PSC orders is narrow and well defined. Under MCL 462.25, all rates, fares, charges, classification and joint rates, regulations, practices, and services prescribed by the PSC are presumed, prima facie, to be lawful and reasonable. See Mich. Consol. Gas Co. v. Pub. Serv. Comm., 389 Mich. 624, 635–636, 209 N.W.2d 210 (1973). A party aggrieved by an order of the PSC has the burden of proving by clear and convincing evidence that the order is unlawful or unreasonable. MCL 462.26(8). To establish that a PSC order is unlawful, the appellant must show that the PSC failed to follow a mandatory statute or abused its discretion in the exercise of its judgment. See In re MCI Telecom. Complaint, 460 Mich. 396, 427, 596 N.W.2d 164 (1999). An order is unreasonable if it is not supported by...