Summary
In Pennwalt Corp, it was held that "[t]he crucial question is not whether the methodology was unreasonable, but whether the overall rates were unreasonable or unlawful."
Summary of this case from City of Novi v. City of DetroitOpinion
Docket No. 88747.
Decided January 20, 1987. Leave to appeal applied for.
Dickinson, Wright, Moon, Van Dusen Freeman (by Peter S. Sheldon and Jeffery V. Stuckey), for Pennwalt Corporation.
A. Robert Pierce, Jr., and David L. Clark, and Fischer, Franklin, Ford, Simon Hogg (by George Hogg, Jr., Philip E. Chaffee, and Sidney M. Berman), for the Detroit Edison Company.
The Detroit Edison Company appeals from an October 30, 1985, order of the Ingham Circuit Court, reversing a 1976 rate-making determination by the Michigan Public Service Commission involving Pennwalt Corporation. The circuit court found that Pennwalt was entitled to a refund because the commission had used an improper methodology to compute Pennwalt's steam and electrical service rates. The court remanded the case to the commission with the instruction that the commission compute the 1976 rates utilizing the proper methodology, calculate the amount overcharged, and effect the refund. From that order, Edison appeals.
Edison argues that even if an improper methodology was used in 1976 a refund is not required unless Pennwalt demonstrates that the overall rate was unreasonable or unlawful. Edison asserts that in a subsequent rate case Pennwalt's own expert witness conceded that Edison would have suffered an annual revenue deficiency of at least $500,000 for 1975 even after accounting for the rates established in 1976. We reverse the decision of the circuit court and hold that Pennwalt is not entitled to a refund.
In 1964, the Detroit Edison Company purchased Pennwalt's in-house steam generating equipment and entered into a twenty-five-year lease for the land on which the equipment was situated. The lease provided that the equipment was to be operated in situ with rates to be determined and regulated by the commission.
When Edison sought an increase in its industrial steam and electric service rates in 1975, it filed two separate petitions with the commission. One petition, U-4741, the subject of the instant appeal, dealt strictly with rates for Pennwalt. The second petition dealt with steam and electrical rates for all other Edison customers.
In both cases, there was a question of whether income tax consequences should be allocated between the two sets of customers according to taxable income or according to pre-tax operating income. The commission ultimately adopted the pre-tax operating income allocation method. From that determination, Pennwalt appealed.
In the circuit court, Edison argued that subsequent rate increases rendered the appeal moot because no remedy was available. The circuit court agreed and granted summary judgment. On appeal to this Court, we reversed, holding that a remedy existed in that the circuit court could have ordered the refund of excess payments. 109 Mich. App. 542; 311 N.W.2d 423 (1981).
On remand, the circuit court permitted additional evidence to be introduced regarding the propriety of the income tax allocation method adopted by the commission. Finding a reason to believe that the method adopted was arbitrary and capricious and hence unlawful, the circuit court, pursuant to MCL 462.26(c); MSA 22.45(c), transmitted the additional evidence to the commission with instructions that it reconsider its income tax allocation methodology.
The commission reviewed the additional evidence and on November 18, 1984, issued an opinion. In that opinion, the commission reversed itself and determined that the methodology based on pre-tax income which it had previously adopted was less precise than the methodology based upon taxable income. The commission concluded its opinion as follows:
Reallocating income taxes to reflect that change [in methodology] would result in a revenue deficiency lower than computed in the prior order. The amount of the reduction was not briefed by the parties and is not readily apparent from the record. The Commission therefore expresses no opinion on that subject.
In concluding that a reduction in the revenue deficiency is supported by the additional evidence, the Commission does not also conclude that the rates set on July 26, 1976 were unreasonable. As Detroit Edison argues, when the Commission issued its order on July 26, 1976 then current conditions already justified a further rate increase. That increase, of course, could not be put into place until the record in Pennwalt's next rate case was closed and the Commission issued an order. The Commission believes it is for the courts to determine whether Detroit Edison's argument should prevent a refund to Pennwalt. The Commission mentions this point only to make clear that the Commission has not found the rates set on July 26, 1976 to be unreasonable.
On review of the commission's decision as modified by its 1984 opinion, the circuit court affirmed the determination that an improper methodology had been utilized. On that basis, the court reasoned that the rates which Pennwalt had paid during the eighteen-month period U-4741 had been in effect were unreasonable or unlawful and ordered a refund, the amount of which was to be determined by the commission. From that order, Edison appeals.
In Building Owners Managers Ass'n of Metropolitan Detroit v Public Service Comm, 424 Mich. 494, 509; 383 N.W.2d 72 (1986), our Supreme Court held that a procedurally defective rate increase is subject to refund only if it is subsequently determined that the actual rates charged pursuant thereto were unreasonable. In reaching its decision, the Court relied in part upon federal authority and quoted at length from Federal Power Comm v Hope Natural Gas Co, 320 U.S. 591; 64 S Ct 281; 88 L Ed 333 (1944), in which the utility sought to have the Court invalidate a rate ordered by the FPC because of technical errors:
" Under the statutory standard of `just and reasonable' it is the result reached not the method employed which is controlling. Cf. Los Angeles Gas E Corp v Railroad Comm, 289 U.S. 287, 304-305, 314 [ 53 S Ct 637; 72 L Ed 1180 (1933)]; West Ohio Gas Co v Public Utilities Comm, 294 U.S. 63, 70 [ 55 S Ct 316; 79 L Ed 761 (1935)]; West v Chesapeake P Tel Co, 295 U.S. 662, 692-693 [ 55 S Ct 894; 79 L Ed 1640 (1935)] (dissenting opinion). It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end. The fact that the method employed to reach that result may contain infirmities is not then important. Moreover, the Commission's order does not become suspect by reason of the fact that it is challenged. It is the product of expert judgment which carries a presumption of validity. And he who would upset the rate order under the Act carries the heavy burden of making a convincing showing that it is invalid because it is unjust and unreasonable in its consequences. Cf. Railroad Comm v Cumberland Tel T Co, 212 U.S. 414 [ 29 S Ct 357; 53 L Ed 577 (1909)]; Lindheimer v Illinois Bell Tel Co, [ 292 U.S. 151, 164, 169; 54 S Ct 658; 78 L Ed 1182 (1933)]; Railroad Comm v Pacific Gas E Co, 302 U.S. 388, 401 [ 58 S Ct 334; 82 L Ed 319 (1938)].
"The rate-making process under the Act, i.e., the fixing of `just and reasonable' rates, involves a balancing of the investor and the consumer interests. Thus we stated in the Natural Gas Pipeline Co. case that `regulation does not insure that the business shall produce net revenues.' [ Federal Power Comm v Natural Gas Pipeline Co] 315 US [575] 590 [ 62 S Ct 736; 86 L Ed 1052 (1942)]. But such considerations aside, the investor interest has a legitimate concern with the financial integrity of the company whose rates are being regulated. From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business." [ 320 U.S. 602-603. Emphasis added. 424 Mich. 510 -511.]
See also, Northern Michigan Water Co v Public Service Comm, 381 Mich. 340; 161 N.W.2d 584 (1968), Michigan Consolidated Gas Co v Public Service Comm, 389 Mich. 624; 209 N.W.2d 210 (1973).
In the instant case, the circuit court erred by focusing solely on the propriety of the methodology employed. The crucial question is not whether the methodology was unreasonable, but whether the overall rates were unreasonable or unlawful. Building Owners Ass'n, supra. It is the burden of the party seeking a refund to establish that the established rates are unreasonable or unlawful. MCL 462.26(e); MSA 22.45(e); Building Owners Ass'n, supra.
In the instant case, Pennwalt has only demonstrated that one of the variables in the income tax allocation methodology was improper. This factor was only one of several factors which were considered in establishing the overall rates. During the eighteen months that U-4741 was in effect, Pennwalt paid approximately $11.6 million for steam and electrical energy to Edison. In the subsequent rate case between the parties, U-5218, Pennwalt's own expert witness conceded that Edison was incurring an annual revenue deficiency of approximately $500,000 as a result of the rates established in U-4741. This testimony was based on Edison's operating experience with 1975 as the test year. This period ended seven months before the rates set in U-4741 went into effect. From the above, we conclude that Pennwalt has failed to demonstrate that the overall rates were unlawful or unreasonable.
Pennwalt asserts that if the proper methodology had been used its rates would have been $1.9 million lower during the period of time U-4741 was in effect.
The commission ultimately found in U-5218 that the revenue deficiency for the 1975 test year was $1,480,000.
In so holding, we do not invade the fact-finding province of the commission. Detroit Edison Co v MPSC, 155 Mich. App. 461; 400 N.W.2d 644 (1986). As previously quoted, the commission concluded its most recent opinion by stating:
In concluding that a reduction in the revenue deficiency is supported by the additional evidence, the Commission does not also conclude that the rates set on July 26, 1976 were unreasonable. As Detroit Edison argues, when the Commission issued its order on July 26, 1976, then current conditions already justified a further rate increase.
The circuit court read the above passage as not being a finding of unreasonableness or reasonableness. If the first quoted sentence stood alone, we would agree. However, when read in light of the second sentence, the above passage is a finding that the rates established in 1976 were reasonable.
By so holding, we do not decide the overall rates may never be shown to be unreasonable by demonstrating that an improper methodology was used to determine one of the component factors. If the methodology results in a substantial overpayment in regard to that one factor, there may be situations where it could be inferred that the overall rate was unreasonable. However, even if we were to assume in the instant case that Pennwalt fulfilled its burden of proof, a contrary result is not required. Edison's convincing proofs amply rebutted Pennwalt's proofs and supported the commission's finding that the 1976 rates were reasonable.
In light of our resolution, the other issues raised by the parties need not be addressed.
The order of the circuit court is reversed and an order of summary disposition in Detroit Edison's favor is hereby entered.
BRONSON, J., did not participate.