in Re Application of Dte Electric Company to Increase Rates

STATE OF MICHIGAN

COURT OF APPEALS
___________________________________________

In re Application of DTE ELECTRIC COMPANY
to Increase Rates.

DTE ELECTRIC COMPANY, UNPUBLISHED
February 13, 2018
Petitioner-Appellant,

v No. 331599
MPSC
MICHIGAN PUBLIC SERVICE COMMISSION, LC No. 00-017767
MICHIGAN CABLE TELECOMMUNICATIONS
ASSOCIATION, MICHIGAN
ENVIRONMENTAL COUNCIL, NATURAL
RESOURCES DEFENSE COUNCIL, and
ATTORNEY GENERAL,

Appellees.

In re Application of DTE ELECTRIC COMPANY
to Increase Rates.
_________________________________________

ASSOCIATION OF BUSINESSES
ADVOCATING TARIFF EQUITY,

Appellant,

v No. 331868
MPSC
DTE ELECTRIC COMPANY, LC No. 00-017767

Petitioner-Appellee,

and

MICHIGAN PUBLIC SERVICE COMMISSION,
NATURAL RESOURCES DEFENSE COUNCIL,
and MICHIGAN CABLE

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TELECOMMUNICATIONS ASSOCIATION,

Appellees.

In re Application of DTE ELECTRIC COMPANY
to Increase Rates.
_________________________________________

RESIDENTIAL CUSTOMER GROUP,
DOMINIC CUSUMANO, and LILLIAN
CUSUMANO,

Appellants,

v No. 332159
MPSC
DTE ELECTRIC COMPANY, LC No. 00-017767

Petitioner-Appellee,

and

MICHIGAN PUBLIC SERVICE COMMISSION
and MICHIGAN CABLE
TELECOMMUNICATIONS ASSOCIATION,

Appellees.

Before: BOONSTRA, P.J., and METER and GADOLA, JJ.

PER CURIAM.

In these consolidated appeals, appellants DTE Electric Company, the Association of
Businesses Advocating Tariff Equity (ABATE), the Residential Customer Group (RCG), and
Dominic and Lillian Cusumano appeal various aspects of an order entered on December 11,
2015, by the Michigan Public Service Commission (PSC) in a general rate case1 filed by DTE.
We affirm in each case.

1
A “general rate case” is “a proceeding initiated by a utility in an application filed with the
commission that alleges a revenue deficiency and requests an increase in the schedule of rates or
charges based on the utility’s total cost of providing service.” MCL 460.6a(16)(b).

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 I. BACKGROUND

On December 19, 2014, DTE filed an application seeking a rate increase. The
application stated, in pertinent part:

4. The Company has determined the need for additional annual revenues
in the amount of approximately $370 million effective as soon as possible in
2015, in order to recover, inter alia, the Applicant’s costs associated with
environmental compliance, the capital costs associated with the addition of plant,
including additional generation, safety and reliability of its electric distribution
system and generation plants and capacity upgrades; capital structure costs
changes; the operation and maintenance of Applicant’s electric distribution
system and generation plants; and the costs associated with inflation.

The application was based on a test year of July 1, 2015, through June 30, 2016. Among other
things, DTE sought: (1) to capitalize $45 million in annual expenses associated with its
Enhanced Vegetation Management Program (EVMP), a program designed to expand clearing in
its rights of way; (2) to continue its Advanced Metering Infrastructure (AMI)2 initiative; and (3)
to achieve a return on equity (ROE) of 10.75%.

On December 11, 2015, the PSC issued an order authorizing DTE to increase its rates by
$238,177,188.

Regarding DTE’s EVMP, the PSC concluded that reliability could be improved if DTE
could accomplish the goals of the EVMP, and it therefore approved $11.25 million as an
operation-and-maintenance expense to fund a pilot program. The PSC disallowed the
capitalization requested by DTE.

Regarding DTE’s request for an ROE of 10.75%, the PSC concluded:

The Commission finds that an ROE of 10.3% will best achieve the goals
of providing appropriate compensation for risk, ensuring the financial soundness
of the business, and maintaining a strong ability to attract capital. With respect to
the modeling results, the Commission has considered the many criticisms leveled
on both sides, but does not find it necessary to reject any of the proffered data.

DTE Electric has an ambitious capital investment program, much of which
is related to environmental and generation expenditures that are unavoidable and
are saddled with time requirements. The Commission observes that 10.3% is only
slightly above the upper point of the Staff’s recommended ROE range.
Nationally, and in Michigan, ROEs have shown a steady decline, and the

2
An AMI meter measures and records real-time data on power consumption and reports that
consumption to the utility on a regular basis; an AMI meter is also known as a “smart meter.”
See In re Applications of Detroit Edison Co, 296 Mich App 101, 114; 817 NW2d 630 (2012).

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 Attorney General is correct that Michigan’s economy has stabilized; thus, the
Commission finds that it is appropriate to reduce DTE Electric’s ROE slightly.
Unlike the 2010 order cited to by the company, economic conditions in DTE
Electric’s service territory have improved markedly, and access to credit is no
longer an issue. For these reasons, and those cited by the ALJ, the Commission
finds that the risk associated with DTE Electric has also decreased, and that an
ROE of 10.3% appropriately reflects these changes.

Regarding DTE’s AMI opt-out program, the PSC noted that RCG contended that the
program should be altered or eliminated; however, the PSC relied on its previous decisions and
appellate opinions to conclude that RCG raised no new arguments and that its challenge to the
AMI opt-out program should be rejected once again.

Finally, the PSC approved DTE’s request to amortize $12.7 million associated with a
January 1, 2012, tax increase by the city of Detroit, finding that the accounting treatment was
consistent with that set forth in previous PSC orders.

DTE filed an appeal challenging the PSC’s decision to disallow capitalization of
expenses associated with the EVMP. ABATE filed an appeal challenging the PSC’s
establishment of an ROE of 10.3%. RCG and the Cusumanos filed an appeal challenging the
PSC’s decision to preserve the AMI opt-out program. The appeals were consolidated for hearing
and decision.

II. STANDARD OF REVIEW

The standard of review for PSC orders is narrow and well-defined. In re Application of
Consumers Energy Co to Increase Rates (On Remand, 316 Mich App 231, 236; 891 NW2d 871
(2016). 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. MCL 462.25. A
party aggrieved by an order of the PSC has the burden of proving by clear and satisfactory
evidence that the order is unlawful or unreasonable. MCL 462.26(8). To establish that a PSC
order is unlawful, an appellant must show that the PSC failed to follow a mandatory statute or
abused its discretion in the exercise of its judgment. In re MCI Telecommunications Complaint,
460 Mich 396, 427; 596 NW2d 164 (1999). An order is unreasonable if it is not supported by
the evidence. Associated Truck Lines, Inc v Pub Serv Comm, 377 Mich 259, 279; 140 NW2d
515 (1966).

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; Attorney
General v Pub Serv Comm, 165 Mich App 230, 235; 418 NW2d 660 (1987).

We give due deference to the PSC’s administrative expertise, and we are
not to substitute our judgment for that of the PSC. We give respectful
consideration to the PSC’s construction of a statute that the PSC is empowered to
execute, and we will not overrule that construction absent cogent reasons. If the
language of a statute is vague or obscure, the PSC’s construction serves as an aid
to determining the legislative intent, and will be given weight if it does not

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 conflict with the language of the statute or the purpose of the Legislature.
However, the construction given to a statute by the PSC is not binding on this
Court. Whether the PSC exceeded the scope of its authority is a question of law
that we review de novo. [In re Application of Consumers Energy Co to Increase
Rates, ___ Mich App ___; ___ NW2d ___ (2017) (Docket Nos 330675, 330745,
and 330797); slip op at 5 (citations omitted).]

III. ANALYSIS

DOCKET NO. 331599

Appellant DTE argues that the PSC erred as a matter of law by disallowing the
capitalization of EVMP costs. DTE contends that the evidence showed that the activities
associated with the EVMP constituted a “first clearing” and that DTE would be acting in
accordance with applicable accounting-system requirements by capitalizing EVMP costs.

The construction and maintenance of electric utility lines involves the “first clearing” of
vegetation in an area and the subsequent maintenance of the vegetation to ensure the continuing
safe and reliable operation of the lines. After the widespread ice storm at the end of 2013, DTE
sought to become more proactive in clearing vegetation around power lines. As noted, when
DTE filed the instant rate case, it requested authority to capitalize $45 million in EVMP costs.
DTE witness Russell Pogats characterized the expanded trimming as a first clearing because it
constituted a different procedure than that undertaken during routine maintenance. The essence
of DTE’s argument is that because the costs associated with a first clearing are properly
capitalized under the Uniform System of Accounts for electric utilities, and because DTE
characterized the expanded trimming as a first clearing, the PSC was required to approve the
capitalization.

The PSC stated that it was “not presently convinced that [the EVMP] is fundamentally
different from enhanced clearing, the costs of which have never been capitalized.” This
statement by the PSC was based on competent, material, and substantial evidence. Indeed, the
engineering testimony by PSC Staff witness Peter Derkos indicated that the EVMP was simply
an expanded vegetation-maintenance program because the initial clearing and grading of the
areas at issue had been done previously. The PSC is entitled to rely on evidence from an expert
witness, even if other expert witnesses present contradictory testimony. In re Application of
Consumers Energy to Increase Electric Rates (On Remand), 316 Mich App 231, 240; 891 NW2d
871 (2016), citing Great Lakes Steel Div of Nat’l Steel Corp v Mich Pub Serv Comm, 130 Mich
App 470, 481; 344 NW2d 321 (1983). We find no basis for reversal. 3

3
In contrast to DTE’s insinuation, at no point did the PSC find that expenses associated with a
first clearing of vegetation should not be capitalized in accordance with the Uniform System of
Accounts. The PSC found that absent a cost-benefit analysis and a pilot program to demonstrate
sustained reliability, the expanded removal of vegetation under the EVMP should not be
capitalized in this rate case, but that, instead, $11.25 million should be authorized as an

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 DOCKET NO. 331868

Appellant ABATE argues that the PSC erred by approving an ROE of 10.3%. ABATE
states that no witness supported the approval of an ROE of 10.3%. ABATE contends that the
PSC provided no rationale for choosing the rate it did and that the rate chosen by the PSC must
be deemed arbitrary and capricious. We disagree.

The establishment of a reasonable utility rate is not subject to precise
computation. What is reasonable depends upon a comprehensive examination of
all factors involved, having in mind the objective sought to be attained in its use.
As long as the PSC chooses a rate that is neither so low as to be confiscatory nor
so high as to be oppressive, the PSC has discretion to set the rate at the level it
chooses. [In re Application of Consumers Energy Co to Increase Rates, ___ Mich
App ___; slip op at 5 (quotation marks and citation omitted.]

Testimony from witnesses supported the PSC’s approval of an ROE of 10.3%. DTE
witness Michael Vilbert recommended an ROE range of 9.5% to 10.8%, but requested an ROE
of 10.75% due to Michigan’s challenging economic environment and DTE’s level of risk.
Vilbert used a proxy sample of 28 regulated utility companies and applied three economic
models to reach his conclusions. Staff witness Harshleen Sandhu used a proxy group of 10
companies and applied various economic models to calculate ROEs ranging from 7.51% to
10.25%. The Attorney General’s witness recommended an ROE of 9.75%, and observed that
average ROEs approved by other state regulatory commissions had declined from in excess of
12.7% in 1990 to 9.66% in 2015. ABATE’s witness recommended an ROE of 9.5%, and also
observed that average ROEs had declined for the past several years. The PSC was entitled to
rely on the evidence from these experts, even if other witnesses presented contradictory
testimony. In re Application of Consumers Energy to Increase Electric Rates, 316 Mich App at
240.

The rate of 10.3% was only slightly above the Staff’s recommended range. The PSC
acknowledged that ROEs were trending downward nationally and that Michigan’s economy had
stabilized, and thus reasoned that DTE’s ROE could be reduced slightly without impeding DTE’s
access to credit. The PSC must “consider and give due weight to all lawful elements necessary”
to determine an appropriate rate. MCL 460.557(2). The PSC “is not bound by any single
formula or method” in determining rates and “may make pragmatic adjustments when warranted
by the circumstances.” Detroit Ed Co v Pub Serv Comm, 221 Mich App 370, 375; 562 NW2d
224 (1997). After examining the evidence, the PSC determined that an ROE of 10.3% was
appropriate. In doing so, the PSC acted consistently with its statutory authority, MCL
460.557(2), and acted within its discretion, Detroit Ed Co, 221 Mich App at 375.

DOCKET NO. 332159

operating-and-maintenance expense for a pilot program. The wording of the PSC’s order (“not
presently convinced”) makes clear that it was not foreclosing the possibility that it could
authorize the capitalization of EVMP costs in a future general rate case.

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 Appellants RCG and the Cusumanos argue that the PSC lacked the authority, absent
specific statutory guidance, to mandate the installation of smart meters in customers’ homes by
approving DTE’s AMI program and its attendant tariffs on an “opt-out” basis. This Court has
already fully addressed this issue and the accompanying sub-arguments (dealing with alleged
constitutional violations and alleged “surcharges” on people opting out of the AMI program) in
In re Application of Consumers Energy Co to Increase Rates, ___ Mich App ___; slip op at 6-10.
In re Application of Consumers Energy Co to Increase Rates is binding authority, MCR
7.215(J)(1), and mandates a rejection of appellants’ arguments in the present case.

Regarding the challenge by appellants to the “appropriateness” of the AMI opt-out fees,
the PSC noted that appellants did not present new evidence regarding the fees, and concluded
that because the current opt-out charges were appropriate and supported by evidence in the
record in Case No. U-17053, it need not reexamine the issue in the instant case.

On July 31, 2012, DTE filed an application requesting approval of its AMI opt-out
program for residential customers. The PSC docketed the case as Case No. U-17053. Witness
Robert Sitkauskas, the Manager of DTE’s AMI Technology Group, presented testimony and
exhibits detailing initial fees to be charged to opt-out customers to cover work done by meter
technicians to install and modify meters for customers who did not wish to participate in the
program, and monthly fees to cover special meter reads and other ongoing services. Sitkauskas
testified that DTE proposed an initial fee of $87 and monthly fees of $15.

On May 15, 2013, the PSC issued an order approving DTE’s opt-out program in Case
No. U-17053.4

In the instant case, the PSC made the following statement regarding its reliance on the
evidence presented in Case No. U-17053:

The Commission agrees with the RCG that no new formal cost of service
study (COSS) or other cost support was introduced in this rate case to justify the
current opt-out program charges. This fact is not disputed. However, the
Commission also agrees with DTE Electric and the Staff that ample cost support
was presented regarding the approved charges in Case No. U-17053. According
to Pennwalt Corp v Pub Serv Comm, [166 Mich App 1, 9; 420 NW2d 156
(1988)], the Commission may rely on that evidence and the Commission’s
previous determinations regarding those surcharges in this case in the absence of
new evidence or evidence of a change of circumstances that would necessitate a
reconsideration. It is worth noting that Case No. U-17053 was a contested case
proceeding that met the requirements of the Michigan Administrative Procedures
Act of 1969, MCL 24.201, et seq. (APA), and satisfied due process concerns such
as notice and an opportunity to be heard. Many utility customers intervened in

4
In In re Application of Detroit Ed Co to Implement Opt Out Program, unpublished opinion per
curiam of the Court of Appeals, issued February 19, 2015 (Docket Nos. 316728 and 316781),
this Court affirmed the PSC’s order.

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 Case No. U-17053 and the RCG could also have intervened. Further, the fact that
the Court of Appeals affirmed the Commission’s approval of DTE Electric’s opt-
out program and charges further assures the Commission that its decision in Case
No. U-17053 is supported by competent, material, and substantial evidence on the
whole record. Here, in the absence of new evidence or evidence of a change of
circumstances, the Commission concludes that the current opt-out charges are
appropriate and supported by the record evidence supplied in Case No. U-17053.
The Commission also agrees with the PFD and adopts the Staff’s proposal
recommending a review of the utility’s opt-out charges in either its next rate case
or six months after the completion of AMI meter installations, whichever occurs
first.

The issue of the appropriateness of DTE’s opt-out fees was fully litigated and decided in
the contested case proceeding in Case No. U-17053. The PSC correctly found that the issue need
not be “completely relitigated” in this case because appellants established no basis for doing so.
Pennwalt Corp, 166 Mich App at 9.

Finally, appellants RCG and the Cusumanos argue that the PSC unlawfully and
unreasonably included in DTE’s rates a city of Detroit tax expense that became effective on
January 1, 2012, and thus predates the relevant test year in this case. They contend that inclusion
of this tax in DTE’s rates constituted unlawful retroactive ratemaking and undermines the
concept of the test year. We disagree.

Retroactive ratemaking is prohibited; the PSC acts in a legislative capacity when it
establishes a rate and cannot subsequently change that rate absent statutory authority. Mich Bell
Tel Co v Pub Serv Comm, 315 Mich 533, 544-547; 24 NW2d 200 (1946); Mich Consol Gas Co v
Pub Serv Comm, 264 Mich App 424, 429; 691 NW2d 29 (2004).

The city of Detroit increased its corporate tax rate from 1% to 2%, effective January 1,
2012. DTE’s tax witness testified that the PSC had allowed amortization of deferred tax
balances in previous cases, and that DTE was requesting similar treatment in this case. The PSC
found that the requested treatment did not constitute retroactive ratemaking, and noted that
DTE’s request was consistent with accounting treatment authorized in prior PSC cases.

We conclude that the PSC’s decision to allow DTE to amortize payments associated with
the tax did not constitute retroactive ratemaking. By definition, retroactive ratemaking occurs
when the PSC, absent specific legislative authority, changes a rate established in a previous
order. Mich Bell Tel Co, 315 Mich at 544-547.

In Attorney General v Pub Serv Comm, 262 Mich App 649, 650; 686 NW2d 804 (2004),
this Court affirmed the PSC’s decision allowing DTE to defer unexpected expenses incurred in
1997 and to amortize those expenses in 1998 and 1999. This Court concluded that the
amortization did not constitute retroactive ratemaking because the PSC’s decision did not allow
DTE to change rates charged in a prior year. Id. at 657. Similarly, in the instant case, the PSC
allowed DTE to use deferred cost-accounting as part of the procedure for establishing a
prospective rate in this general rate case. The PSC did not change a rate established in a
previous case and thus did not implement retroactive ratemaking.

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Affirmed.

/s/ Mark T. Boonstra
/s/ Patrick M. Meter
/s/ Michael F. Gadola

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