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January 31, 2014

COA rejects retroactive pricing in gas-cost-recovery proceedings

In In re Application of Michigan Consolidated Gas Co., the Court of Appeals held that the Michigan Public Service Commission (“PSC”) could not apply its prospective rate change to purchases completed before the change’s effective date, regardless of whether Michigan Consolidated Gas Company (“Mich Con”) accelerated its purchases to avoid the rate change or the purchases lacked PSC approval prior to the effective date.  The Court then upheld the PSC prospective rate change itself.
 
Michigan Consolidated Gas Company (“Mich Con”) purchased natural gas from the MichCon Gathering Company.  In these transactions, Mich Con had been pricing its “exchange gas” (the difference in gas between the point of gathering and point of sale) purchases at a “jurisdictional rate.”  The PSC issued an order on September 28, 2010 indicating that Mich Con “shall prospectively price its” purchases using a “city-gate index rate.”  Because it knew about this upcoming price change, Mich Con accelerated certain purchases, making them before the effective date of the change.  Some of these purchases were also not “approved through completion of the PSC’s review process” prior to the change’s effective date.  The PSC subsequently issued another order stating that it would re-price certain Mich Con gas purchases from 2009 and 2010 at the “city-gate” rate indicated in its previous order.  Mich Con argued that (1) the PSC did not follow proper procedures when making these rate adjustments, and (2) that the PSC’s rate change was “impermissible retroactive ratemaking.”
 
The Court of Appeals held that the PSC followed proper procedures under MCL 460.6h, but that the PSC’s retroactive rate change was improper.  The court indicated that MCL 460.6h provided the PSC with processes for establishing gas cost recovery factors.  Specifically, subsection 12 permits “reconciliation proceedings,” in which the PSC can adjust costs that it previously approved.  Here, according to the court, the PSC engaged in such a proceeding when it issued its rate-adjustment order.  In contrast, the court indicated that the PSC’s decision to retroactively apply city-gate pricing was “unreasonabl[e, and] capricious[.]”  Since it was undisputed that the subject purchases occurred before price change’s effective date, the PSC could not subject those purchases to new pricing policy—regardless of whether Mich Con accelerated its purchases or the fact that those purchases lacked PSC’s final approval as of the effective date.  As the policy expressly stated it would only apply prospectively, it would be unreasonable to allow the PSC to apply the new pricing retroactively.
 
N.B. The Court of Appeals vacated its January 30, 2014 opinion to correct an error.  The new opinion indicates that a gas utility may include “gas cost recovery factors” in its rates charged to customers under MCL 460.6h, rather than “power supply cost recovery factors.”  Click here for the new opinion.

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