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 eаrlier 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
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 submit
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 § 26(a) of
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 heаrings 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
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 Mc-Ninch, and oppose the alternate rate design proposal of witness Bhatiа, it is helpful to indicate how the two proposals differ. As indicated earlier, they differ both in
allocation
and
structure.
Under
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 decision to adopt the "block” design within the residential class, and that, consequently, they lack standing to question the revenue structure portion of the MPSC’s order.
We find the threshold argument too technical. While the complaint challenged only the allocation of $6,000,000 more to the industrial class, it is not denied that it is the establishment of "rate blocks”
Next, the Attorney General and MCG disclаim the substantial evidence standard advanced by plaintiffs and, instead, argue that the proper standard of review in matters involving ratemaking, which is essentially a legislative rather than a judicial function,
Detroit Edison Co v Public Service Comm,
First, we are not here concerned with rate increases in the usual manner in which increases are granted. Here, the rate increase of some $56 million is not contested. Only the manner in which that increase is allocated among the several classes of customers is challenged. The mandate found in Const 1963, art 6, § 28, that decisions and orders of any administrative agency be "supported by competent, material, and substantial evidence on the whole record” applies only to decisions and rulings
"which are judicial or quasi-judicial’’.
As
"The courts have neither the authority nor the expertise to determine what rate structure most equitably spreads a rate increase among commercial, industrial, household and other users.”
In any event, it was for the PSC to weigh the conflicting opinion testimony of the qualified ("competent”) experts to determine how the evidence preponderated on this point. See
Aquilina v General Motors Corp,
Second, the challenged residential winter rate was not adopted as a permanent order but instead was adopted on an experimental basis.
4
In
Great Lakes Steel Div of Nat’l Steel Corp v Public Service Comm,
"The commission need not, in making а determination on a request for partial and immediate relief, have
We recognize that the above quotation refers to a partial rate order rather than to an experimental order as in the case before us. Nevertheless, by analogy the same reasoning persuasively extends to an experimental order.
Third, while never directly addressed in Michigan, the question of the adoption of experimental rates has been recognized in other jurisdictions. As stated in 2 Davis, Administrative Law Treatise, § 18.08, p 599:
"[A] well-devised regulatory system 'permits rates to be experimentally laid down and experimentally tried out. It preserves that flexibility of adaрtation, the maintenance of which is necessary to the life and growth of our great and changing commerce’.” Citing
Arizona Grocery Co v Atchison, T & S F R Co,
Similarly, the concept of experimental rates on a test basis was sustained in
Market Street R Co v Railroad Comm of the State of California,
"The fixing of future rates always involves an element of prediction. Even monopolies must sell their
Where rates are adopted on an experimental basis, they cannot be reviewed under the substantial evidence standard of review. By their very nature, unless arbitrary or capricious, they must await results on a test basis. In the instant case, the MPSC acted to implement the residential winter heating rаte on a test basis in order to determine to what degree the new rate would conserve gas usage and what relief would be afforded home owners.
Fourth, were this simply a testimonial conflict to be resolved on the basis of the credibility of competing witnesses, the primacy accorded to the findings of the hearing examiner, who was the only person to see and hear the live witnesses, might require us to set aside the MPSC’s contrary conclusions absent persuasive reasons for according the testimony different weight or assessing its credibility differently.
Michigan Employment Relations Comm v Detroit Symphony Orchestra, Inс,
"In considering the standards set forth in this section, it is expected that State regulatory authorities * * * take into account the need to protect ratepayers against sudden shifts in electric utility rates which might lead to significant economic hardships. The State regulatory authorities * * * may consider phasing in the implementation of the standards, providing for temporary exemptions from implemented standards, or providing other means determined appropriate by the State authorities * * * to mitigate any such hardships.
"States are also, of course, free to implement, pursuant to State authority, cost of service based rates, time of day rates, seasonal rates, and other concepts relatеd to any standard established by this subtitle * * *.
* * *
"Subsection (d) establishes the Federal standards to be considered under this procedure: cost of service, declining block rates, time of day rates, seasonal rates, interruptible rates, and load management techniques.” 1978 US Code Cong & Ad News, p 7807.
These federal policies are reflected in the legislation to which the above report refers. 16 USC 2624 provides for special reduced residential electric rates pursuant to the "lifeline” concept, which the conference committee summarized thus:
"The purpose of this section is to authorize lifeline rаtes as an exception to the Federal standard on cost of service (section lll[d][l]). Thus, if a State regulatory authority * * * adopts the Federal standard on cost of
A similar federal policy of protecting necessitous citizens from the catastrophic effects of leapfrogging natural gas heating costs is found in 15 USC 3204(a), which providеs in relevant part:
"The procedures for termination of service * * * are procedures prescribed by the State regulatory authority (with respect to gas utilities for which it has ratemaking authority) * * * which provide that—
"(2) during any period when termination of service to a gas consumer would be especially dangerous to health * * * and such consumer establishes that
"(A) he is unable to pay for such service in accordance with the requirements of the utility’s billing, or
"(B) he is able to pay for such service but only in installments,
"such service may not be terminated.”
The MPSC’s experimental rate order in the instant case appears to us to be consistent with these federal doctrines and to be a rational approach to resolving the need to both provide the utility a reasonable rate of return but at the same time to mitigate the hardship falling on residential customers. After all, the acquisition and transportation of natural gas is imbued with a public trust and may be regulated in furtherance of state and national policies. Thus, this is not a question of 'competent,, material and substantial evidence on the record taken as a whole” but is one of rationality and reasonableness and is reviewable according to such circumscribed parаmeters. As stated in
Michigan Bell Telephone Co v Public Service
"On matters involving the exercise of good common sense and judgment only, the determination of the commission must be held to be final unless such determination in its application results in the establishment by 'clear and convincing’ proof of a rate so low as to be confiscatory or so high as to be oppressive. What return a public utility shall be entitled to earn upon its invested capital, and what items shall be considered as properly going to make up the sum total of that invested capital, are questions of fact for the determination of the commission, and their conclusions thеreon, upon which the rate is based, are unassailable unless, as a necessary result, it can be affirmatively asserted that the resultant rate is unreasonable and unlawful.” (Emphasis supplied.)
Accord,
Attorney General v Public Service Comm,
Finally, we observe that in the most recent case involving review of orders of the MPSC,
Attorney General v Public Service Comm,
"The scope of appellate review of orders of the Public Service Commission is quite narrow. To begin with, all rates, fares, charges, classification and joint rates, rеgulations, practices, and services prescribed by the commission are deemed, prima facie, to be lawful and reasonable. MCL 462.25; MSA 22.44;
Michigan Consolidated Gas Co v Public Service Comm,
To summarize: we hold that the residential winter heating rate design adopted by order of the MPSC in the instant case is reviewable under the standard of reasonableness or abuse of discretion. To hold otherwise would too narrowly circumscribe the powers of the MPSC to adopt innovative and experimental rates. When so reviewed, we find Dr. Bhatia’s testimony more than sufficient to sustain the contested orders. While his direct, prefiled, written testimony contained only nine pages, his cross-examination covered 162 pages. When asked whether the proposed rate design might in effect raise residential rates, he responded that it "lowers the bills for almost
95%
of the customers compared to the proposal of Mr. McNinch, for example”. When pressed on the details of the "block” sliding scale design, he explained that "about 80% of customers will use up 30 mcf in winter months will save about $4 or about 6% per month”. Clearly, this tеstimony supplied a sufficient factual basis for the MPSC’s conclusion that the rate design would benefit low income persons. Dr. Bhatia was extensively examined concerning availability and costs of alternate fuel. This testimony supplied the factual basis for the MPSC’s finding that industrial customers are able to use alternate energy sources and that the higher cost of alternative fuel should be considered in designing rates for such customers. Otherwise,
Evidence supporting the MPSC’s finding that industry is in better position to bear a greater portion of increased costs is found in the testimony that of more than $12 million in uncollectible billings, none was attributable to industrial customers. Furthermore, it is common knowledge that many industries are equipped to use more than one type of fuel, that block rates which increase as more fuel is used encourage conservation of fuel, and that industrial customers, in contrast to residential customers, may pass on price increases to ultimate consumers. Considerations outside the record may nevertheless be used by the MPSC based on its own expertise and experience.
Great Lakes Steel v PSC, supra,
Based on the testimony of witness Bhatia and on the experimental authority and the expertise of the MPSC, we cannot identify a "clear and convincing” basis on which to conclude that the order complained of was unlawful or unreasonable or was an abuse of discretion. Accordingly, we conclude that the circuit court did not err in refusing to set aside the order of the MPSC.
Did the circuit court err in refusing to permit pretrial discovery of items which allegedly formed the basis of the majority’s rate order?
Acting on the apparent belief that one member of the MPSC had prejudged the residential winter heating rate issue, plaintiffs submitted interrogatories 5 through 9, requesting the following information:
"5. Identify with particularity, or in lieu thereof attach copies thereof to defendant’s answers to these interrogatories, any document, note, memorandum, letter or similar writing, however characterized, which was in any way relied upon or referred to by either member of the majority of the defendant commission in connection with its findings, conclusions and/or statements referred to in interrogatories 4a through 4f above, other than the record of the proceedings before the commission.
"6. State the names of all persons, including members of the defendant commission, who in аny way participated in the decision that an 'alternate rate design’ would be presented by a member of the commission’s staff, in addition to the rate design sponsored by staff witness Wilbur McNinch.
"7. State the names of all persons, including members of the defendant commission, who in any way participated in the decision to designate Dr. Hasso Bhatia as the staff member responsible for presenting such 'alternate rate design’.
"8. List the names of all individuals who participated in writing preliminary or final versions of the commission’s majority opinion and order in Case U-5955, which was finally adopted by the commission majority on Novеmber 6, 1979.
"9a. Describe in detail each and every note, memorandum, report, letter or other similar writing by whatever name, within defendant’s custody or control, other than that which is a part of the record of the proceed
"9b. If defendant is willing to do so without a formal request for production of documents under Michigan General Court Rule 310, please provide copies of all of the above documents with answеrs to these interrogatories.”
In an opinion dated October 23, 1980, Circuit Judge Michael Harrison held that, while the interrogatories were directed to facts which may tend to establish prejudgment, the interrogatories seek information which is part of the decision-making process and which under
United States v Morgan,
We find the interrogatories so inclusive that, for practical purposes, they delve into the MPSC’s mental process. For example, interrogatory 5 seeks "any document, note, memorandum, letter or similar writing, however characterized, which was
in any way relied upon or referred to by either member of the majority”.
Surely, this inquiry is so broad as to touch upon the mental process by which a conclusion is reached. Interrogatory 6 asks for the "names of all persons * * * who in any way participated in the decision that an 'alternate rate design’ would be presented by a member of the commission staff”. Interrogatory 8 requests
Nor do we agree with plaintiffs’ claim that the instant case falls within either of two well-recognized exceptions to the
Morgan
thought process rule: (1) where thе decision makers have demonstrated bad faith or improper behavior,
National Nutritional Foods Ass’n v Food & Drug Administration, United States Dep’t of Health, Education & Welfare,
491 F2d 1141 (CA 2, 1974), or (2) where the administrative record is inadequate to explain the action taken,
Citizens To Preserve Overton Park, Inc v Volpe,
Whether the instant situation falls within the second exception depends upon case law on how "inadequate” a record must be before it falls within the exception. Case law suggests that the
In the instant case, unlike the situations in the above cited cases, there is a record and the MPSC made findings of fact explaining why it arrived at the decision made. Although plaintiffs claim the explanation is inadequate on the technical grounds mentioned in Part I of this opinion, the explanation is fully adequate for the issue raised here.
Viculin v Civil Service Dep’t,
Affirmed. No costs, questions of public importance being involved.
Notes
Case U-5365 was the previous MCG rate case. The staff proposal called for continuing the structure of commodity charges as last approved in that case.
Plaintiffs primarily oppose the allocation of the increase among the classes of customers, but also contest the particular rate structure within the residential class; viz., "block” design.
Residential customers were charged a $4 a month service charge, $2.23 per 1,000 cubic feet (mcf) for the first 10 mcf of gas used, $2.03 per mcf for the next 20 mcf of gas used, and $2.53 per mcf for all additional gas consumed during the six winter months, November through April.
Recognizing that Dr. Bhatia was unable to quantify the amount of conservation that would occur or precisely correlate income levels with gas consumption the MPSC found "the only realistic method by which to study and analyze this rate design is to implement it and monitor the results”. MPSC Opinion, p 57.