In re Ind. Mich. Power Co.

• Decision Date: 21 October 2014
• Docket Number: Docket Nos. 314829,314979.
• Citation: 859 N.W.2d 253,307 Mich.App. 272
• Parties: In re APPLICATION OF INDIANA MICHIGAN POWER COMPANY FOR A CERTIFICATE OF NECESSITY.
• Court: Court of Appeal of Michigan — District of US

307 Mich.App. 272

859 N.W.2d 253

In re APPLICATION OF INDIANA MICHIGAN POWER COMPANY FOR A CERTIFICATE OF NECESSITY.

Docket Nos. 314829

314979.

Court of Appeals of Michigan.

Submitted Sept. 10, 2014, at Lansing.

Decided Oct. 21, 2014, at 9:10 a.m.

Clark Hill PLC, Birmingham, (by Robert A.W. Strong ) for the Association of Businesses Advocating Tariff Equity.

Bill Schuette, Attorney General, B. Eric Restuccia, Deputy Solicitor General, and Steven D. Hughey and Spencer A. Sattler, Assistant Attorneys General, for the Public Service Commission.

Bill Schuette, Attorney General, Aaron D. Lindstrom, Solicitor General, Matthew Schneider, Chief Legal Counsel, and Donald E. Erickson, Assistant Attorney General, for the Attorney General.

Warner Norcross & Judd LLP, (by Matthew T. Nelson, Grand Rapids, Richard J. Aaron, and David R. Whitfield, Grand Rapids) for the Indiana Michigan Power Company.

Before: FITZGERALD, P.J., and GLEICHER and RONAYNE KRAUSE, JJ.

Opinion

PER CURIAM.

The Michigan Public Service Commission (PSC) entered an order approving a certificate of necessity (CON) for a life cycle management (LCM) project, comprised of 117 subprojects, at the Donald C. Cook Nuclear Power Plant owned by the Indiana Michigan Power Company (Indiana Michigan). The PSC preapproved recovery of a CON amount of $773,611,000 for projected project costs, as well as a 10% management reserve of $77,361,100, for a total of $850,972,100. In these consolidated appeals,¹ appellant Association of Businesses Advocating Tariff Equity (ABATE) and appellant Attorney General appeal as of right. We affirm in part and reverse in part.

This appeal requires construction of MCL 460.6s. Subsection (1) of this statute provides that an electric utility can seek a CON for “a significant investment in an existing electric generation facility,” and that a “significant investment” may include “a group of investments reasonably planned to be made over a multiple year period not to exceed 6 years for a singular purpose such as increasing the capacity of an existing electric generation plant.” Subsection (4) requires that the PSC specify the costs approved if it approves a CON. Subsection (9) provides that the PSC must include in rates all reasonable and prudent costs for which the CON has been granted when the facility is considered “used and useful.”

Appellants maintain that Indiana Michigan's LCM project does not qualify for a CON under the statute.

Alternatively, they argue that the PSC erred by approving a management reserve for the LCM project. ABATE argues that eight subprojects that required an incremental expenditure for a potential future uprate should not have been approved, and the Attorney General argues that greater specification of costs allowed and disallowed was necessary.

The PSC did not err by construing the statute so as to determine that the LCM project is a significant investment comprised of a group of investments being made for a singular purpose. Moreover, the PSC did not err by approving the eight subprojects contested by ABATE. However, we conclude that the management reserve was not supported by substantial evidence on the whole record. We decline to address the specification-of-costs issue because it was not properly preserved.

I. FACTS

In 1975 and 1978, the Donald C. Cook Nuclear Power Plant placed its two nuclear reactors in service. The Nuclear Regulatory Commission (NRC) had issued 40–year operating licenses for each reactor in 1974 and 1977, consistent with their expected 40–year life spans. In 2005, the NRC granted Indiana Michigan 20–year license renewals for the units, allowing them to operate until 2034 and 2037. Indiana Michigan indicated that the extension to 60 years would require “that the plant's systems, structures, and components be inspected, maintained, refurbished, and replaced on a managed basis.” In fact, the NRC exacted a commitment to manage the aging of passive, long-lived components as a condition of continued operations. Indiana Michigan confirmed that continued investment was required to maintain highly reliable operations.

Specifically, Indiana Michigan claimed that to take advantage of the license renewals, it had to undertake a multiyear project involving LCM investment in the equipment, systems, and facilities of the plant. It explained that life cycle management is “a process for the timely detection and mitigation of aging effects in [systems, structures and components] that are important to plant safety, reliability and economics,” and for this project included “non-recurring capital replacements required to operate for an extended license period.”

Indiana Michigan sought a CON for its LCM project, which was originally projected to cost $1.169 billion. The LCM project included 117 subprojects that were to be implemented from the second half of 2011 through 2018. The subprojects involved replacing various components. The cost of each subproject was separately calculated, and included a risk reserve. Indiana Michigan also proposed a management reserve, incorporated in the $1.169 billion, to cover unknown contingencies for the project as a whole. It acknowledged that a power uprate of capacity was feasible (meaning power output could be increased) and that “a very small investment in the upsizing of certain equipment to accommodate a potential future uprate” was also included in the LCM project, as it would be less costly to upsize now.

Paul Chodak III, the president and chief operating officer of Indiana Michigan, testified that the

investments are reasonable and necessary at the Cook Plant to allow it to comply with its NRC licenses, operate safely and reliably, and continue to provide low-cost energy to [Indiana Michigan's] customers. If the LCM Project is not performed, the availability of the generation of the Cook Plant would deteriorate, which would adversely impact the cost of generation available to [Indiana Michigan's] customers. The LCM Project is the most reasonable and prudent means of meeting our customers' needs through the end of this license period....

Michael Carlson, the vice president of site support services at the Cook plant, added that without capital to support the LCM project, the reactors would have to be shut down before their extended license lifetimes due to equipment degradation.

ABATE and the Attorney General argued that the LCM project was akin to capital expenditures for maintenance that would simply allow for continued operations. They maintained that the project did not qualify as a “significant investment in an existing electric generation facility” because it was not a “group of investments” made “for a singular purpose such as increasing the capacity of an existing electric generation plant.” Regarding this point, the PSC concluded that the requirement that a project be for a “singular purpose” did not require that the project increase capacity and that “an LCM project, for the singular purpose of assuring that safe and reliable power can continue to be produced from a nuclear generation facility until the end of its extended license, comports with the requirements of Section 6s(1) and thus is eligible for a CON.” Further, it concluded that the costs should cover the six-year period of 2013 through 2018 (rather than the second half of 2011 though 2018 as had been requested), and that the costs for this abbreviated period would total $773,611,000.

Appellants also argued that a management reserve should be disallowed. The PSC agreed that Indiana Michigan had not carried its burden of proving that a proposed management reserve of $220 million, in addition to the risk reserve included in the CON amount, was reasonable. However, acknowledging that “knowledge of the future is not achievable given the complexity of the LCM project and the tasks and resources required to achieve it,” the PSC found “it appropriate to include a management reserve of 10% of the base cost of the project,” which amounted to $77,361,100.

Finally ABATE argued that, to the extent eight subprojects involved upsizing some equipment to accommodate a potential future uprate, they should be disallowed. The PSC held that the cost of replacing a turbine nearing the end of its life with significant signs of wear should be allowed. With respect to the seven other projects, the PSC held that they should be permitted even though there were incremental costs associated with future uprates for which a current need could not be established.

II. STANDARD OF REVIEW

In In re Application of Consumers Energy Co. For Rate Increase, 291 Mich.App. 106, 109–110, 804 N.W.2d 574 (2010), this Court described the scope of our review as follows:

The standard of review for PSC orders is narrow and well defined. Pursuant to 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 also 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 statutory requirement or abused its discretion in the exercise of its judgment. In re MCI Telecom. Complaint, 460 Mich. 396, 427, 596 N.W.2d 164 (1999). A reviewing court gives due deference to the PSC's administrative expertise, and should not substitute its judgment for that of the PSC. Attorney General v. Pub. Serv. Comm. No. 2, 237 Mich.App. 82, 88, 602 N.W.2d 225 (1999).

A final order of the PSC must be authorized by law and be supported by competent, material, and substantial evidence on the whole record. Const 1963, art 6, § 28 ; In re Application of Consumers Energy Co., 279 Mich.App. 180, 188, 756 N.W.2d 253 (2008). Whether the PSC exceeded the scope of its authority is a question of

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