Midland Cogeneration Venture Ltd. Partnership v. Public Service Commission

501 N.W.2d 573, 199 Mich. App. 286

• Court: Michigan Court of Appeals
• Decided: April 19, 1993
• Docket: Docket 124705, 128175
• Status: Published

Opinions

McDonald, P.J.

Consumers Power Company and Midland Cogeneration Venture Limited Partnership (mcv) appeal as of right a December 7, 1989, order of the Public Service Commission (psc), and related orders subsequently entered by the psc. The psc and the Association of Businesses Advocating Tariff Equity (abate) respond as appellees.

The consolidated proceedings below covered psc Docket Nos. U-8678, U-8924, and U-9197. Docket No. U-8678 was commenced in February of 1987 by the psc, on its own motion, for the purpose of investigating and regulating Consumers’ provision of gas-transportation services. Docket No. U-8924 is a gas rate case instituted by Consumers’ November 1987 application for an annual rate increase of not less than $2.2 million. Docket No. U-9197 was commenced in August of 1988 on Consumers’ application to revise its gas plant and equipment depreciation rates.

Among other things, the psc ordered a reduction in Consumers’ retail gas rates by approximately $28.4 million annually, established tariff rates for the utility’s intrastate gas-transportation services, and imposed a number of information access and reporting "conditions” for future cases. The psc’s conditions require Consumers to ensure psc access to the books and records of its holding company, CMS Energy Corporation (cms), and each of the utility’s corporate affiliates and joint ventures, furnish the psc with certain financial statements of the holding company and nonutility subsidiaries, and file various annual statements and reports regarding the utility’s interaffiliate transfers and transactions. Additionally, the conditions direct Consumers, cms, and Consumers’ subsidiaries and joint ventures to employ certain accounting procedures and controls and keep their books in a manner consistent with general accounting principles.

In its appeal, mcv challenges only the conditions imposed by the psc, to the extent that they directly apply to mcv as an affiliate or joint venture of Consumers. Consumers’ appeal challenges the conditions and raises five issues concerning the gas sales and transportation rates set by the psc.

i

Consumers reorganized its corporate structure in 1987. Cms was formed as a parent corporation, holding Consumers as its principal subsidiary. New subsidiaries were formed and Consumers transferred a number of its subsidiaries to its parent and sister subsidiaries. For example, an affiliate corporation, Selective Collection Services (scs), which is engaged in the business of collecting past-due utility bills for Consumers and other utility companies, is a former Consumers subsidiary that was transferred pursuant to the corporate reorganization.

During the course of these proceedings, the psc’s staff indicated that its investigation of Consumers’ dealings with its corporate affiliates was frustrated because the staff had been denied access to the records of affiliates such as scs when the staff sought to compare the rates scs charged to Consumers with the rates it charged to other utilities. The staff’s senior economist testified that Consumers’ corporate reorganization raises regulatory concerns about possible cross-subsidization of nonutility investments through utility rates and recommended the imposition of certain reporting, bookkeeping, and information-access conditions covering Consumers’ holding company, sister subsidiaries, affiliates, and joint ventures to enable the staff to investigate these concerns in future cases.

In its December 7, 1989, order, the psc, with slight modification, adopted the following seven conditions proposed by its staff:

1. That the utility ensure that the Commission has access to books and records of the holding company and each of its affiliates and their joint ventures. Any objections to not providing all books and records must be raised before the Commission and the burden of showing that the request is unreasonable or unrelated to the proceeding is on the respondents.

2. Each utility, holding company, and each of its subsidiaries and the joint ventures of the holding company and/or its subsidiaries shall employ accounting and other procedures and controls related to cost allocations and transfer pricing to ensure and facilitate full review by the Commission and to protect against cross-subsidization of non-utility activities by the utility’s customers.

3. The holding company and each of its subsidiaries and the joint ventures of the holding company and/or its subsidiaries shall keep their books in a manner consistent with general accounting principles and, where applicable, consistent with the Uniform System of Accounts.

4. The utility shall furnish the Commission with:

a. The quarterly and annual financial statements of the consolidated utility and/or its parent holding company;

b. Annual statements concerning the nature of intercompany transactions concerning the utility and a description of the basis upon which cost allocations and transfer pricing have been established in these transactions;

c. Annual balance sheets and income statements of the non-regulated subsidiaries of the utility and/or the non-consolidated subsidiaries of the holding company.

d. The utility shall submit, as a separate exhibit in its next general rate case an audit report of its transactions between the utility and its non-utility affiliates;

e. Provide federal income tax on a consolidated or non-consolidated basis depending on filing.

5. The utility shall avoid a diversion of management talent that would adversely affect the utility.

An annual report identifying personnel transferred from the utility to non-utility subsidiaries is required.

6. The utility shall notify the Commission in writing within thirty days prior to any transfer to non-utility affiliates of any utility assets or property exceeding a fair market value of $100,000. Asset transfers from regulated to non-regulated shall be at the higher of cost or fair market value and non-regulated to regulated shall be at the lower of cost or fair market value. That all services and supplies provided by non-regulated enterprises shall be at market price or 10% over fully allocated cost, whichever is less.

7. Market, technological, or similar data transferred, directly or indirectly, from the utility to a non-utility affiliate shall be transferred at the higher of cost or fair market value.

Conditions 1, 2, 3, and 4(a)-(c), without modification, were imposed on the activities of cms and Consumers’ nonregulated aifiliates and joint ventures. However, the psc modified conditions 4(d), 4(e), 5, 6, and 7 to require only that Consumers file annual reports covering the subject matters discussed in those conditions.

Although mcv had not been a party to the proceedings up to that point, it filed a claim of appeal from the psc’s decision, challenging the psc’s authority to impose conditions upon mcv should it be deemed an "affiliate” or "joint venture” covered by the first three conditions. Mcv is a limited partnership created in 1987 for the purpose of constructing and operating a gas-fired electric cogeneration facility at the site of Consumers’ abandoned Midland nuclear power plant. CMS Midland, Inc., a wholly owned subsidiary of cms, is a general partner in mcv and holds a forty-nine percent voting interest in the partnership. Cms or its subsidiaries also hold various debt securities and contractual obligations of mcv. Consumers is a major purchaser of power from mcv, as well as a supplier of natural gas to the cogeneration facility.

Mcv moved for peremptory reversal, arguing that the psc failed to provide adequate notice of its intent to impose the conditions in the rate proceedings or make adequate findings of fact in support of imposing the conditions, that it is a qualifying cogeneration facility under the Public Utility Regulatory Policies Act of 1978 (purpa), 16 USC 823a et seq., and that federal law preempts the psc from attempting to regulate its affairs through the imposition of conditions. In response to mcv’s motion, this Court remanded the case to the psc for further proceedings and for the preparation of a supplemental opinion clarifying whether mcv is an "affiliate” or "joint venture” covered by the conditions, and if so, explaining the necessity and authority for imposing the conditions on mcv.

The psc issued its supplemental opinion on August 30, 1990, after hearing additional testimony offered by mcv, the Attorney General, and the psc’s staff. Noting that only the first three conditions were at issue with regard to mcv, the psc explained that its intent was to apply the conditions to all of the entities over which cms has exerted or could exert control to such a degree that there is a potential for abuse of Consumers’ ratepayers for the profit of cms, not on the basis of the identity or legal status of the entities involved, but because of the activities and transactions that they perform in concert. The psc further stated that the conditions are properly interpreted as applying to mcv, finding that mcv is effectively controlled by cms and Consumers despite the lack of a majority voting interest in the partnership. The psc explained that condition 1 requires Consumers to ensure psc access to the books of mcv to the extent it has the ability to do so, but this condition may be modified in the future if events demonstrate that cms and Consumers are no longer able to direct the activities of mcv. Although the psc found that the record-keeping requirements of conditions 2 and 3 apply directly to mcv, the psc found that mcv’s record and bookkeeping procedures are already in compliance with condition 3 and that it is not necessary to impose any additional requirements on mcv under condition 2. The psc found that the conditions are necessary to provide information on all sides of Consumers’ interaffiliate transactions in order for the psc to establish and maintain just and reasonable rates. The psc’s statutory authority to order production of books, records, and documents and to compel the attendance of witnesses under § 23 of the Railroad Commission Act, 1909 PA 300, MCL 462.23; MSA 22.42, and § 6 of the Public Utilities Commission Act, 1919 PA 419, MCL 460.56; MSA 22.6, was cited as legal authority for the conditions imposed. Finally, the psc concluded that the reporting and information-access requirements in no way constitute regulation of mcv that would be inconsistent with the purpa, stating that mcv’s status as a qualifying facility under the purpa does not immunize it from complying with the law and procedural rules applicable to discovery.

At oral argument, mcv indicated that its appeal is limited to conditions 2 and 3, given the psc’s clarification on remand that the obligation to ensure access to books and records under condition 1 is directed at Consumers, not mcv. Consumers announced its intention to withdraw from its appeal its challenge to any and all of the conditions. The psc opposed the withdrawal, noting that the issue of the psc’s authority to order discovery regarding Consumers’ holding company and affiliates is a recurring one. We agree with the psc that the propriety of all seven conditions should be reviewed at this time.

The psc possesses no common-law powers but is a creature of the Legislature, and all of its authority must be conferred by clear and unmistakable language in specific statutory enactments, because doubtful power does not exist. Union Carbide Corp v Public Service Comm, 431 Mich 135, 146, 151; 428 NW2d 322 (1988); Consumers Power Co v Public Service Comm, 189 Mich App 151, 176; 472 NW2d 77 (1991). Moreover, the psc’s general power to fix and regulate rates does not carry with it, either explicitly or by necessary implication, the power to make management decisions. Union Carbide, supra at 148.

Turning first to those conditions that are directed solely at Consumers, we note that conditions 4 through 7, as adopted in modified form by the psc, simply require Consumers to furnish certain financial statements and file various periodic reports regarding its parent corporation and nonregulated affiliates and its transactions with them. We find these conditions to be authorized by § 5 of the Public Utilities Commission Act, MCL 460.55; MSA 22.5, which provides, in clear and unmistakable language, specific statutory authority for the regulatory agency to require any regulated public utility to make such reports and supply such data as is reasonably necessary for the proper performance of its regulatory duties:

In addition to the reports now required to be made by any public utility under the laws of the state relating to the Michigan railroad commission, it shall be competent for the public utilities commission to require the making of such additional and further reports and the supplying of such data as is reasonably necessary for the proper performance of the powers and duties hereby contemplated. Any report required to be made by a utility operated and controlled by a corporation, joint stock company or association shall be verified by the affidavit of the president and secretary thereof. In all other cases such verification shall be made by the owner, or one [1] of them, or by the general manager. Said commission shall have power and authority to make, adopt and enforce rules and regulations for the conduct of its business and the proper discharge of its functions hereunder, and all persons dealing with the commission or interested in any matter or proceedings pending before it shall be bound by such rules and regulations. The commission shall also have authority to make and prescribe regulations for the conducting of the business of public utilities, subject to the jurisdiction thereof, and it shall be the duty of every corporation, joint stock company, association or individual owning, managing or operating any such utility to obey such rules and regulations. Any such corporation, joint stock company, association or individual refusing or neglecting so to do, or refusing or neglecting to make any report required hereunder, shall be liable to a penalty of not less than one hundred [100] dollars, nor more than one thousand [1,000] dollars; and the officer or individual in default shall also be deemed to be guilty of a misdemeanor and upon conviction thereof shall be subject to a fine of not less than ten [10] dollars nor more than one thousand [1,000] dollars, or to imprisonment in the county jail not more than six [6] months, or both such fine and imprisonment in the discretion of the court.

This statutory grant of authority and all of the other rights, powers, and duties of the former Public Utilities Commission were transferred to the psc under § 4 of the Public Service Commission Act, 1939 PA 3, MCL 460.4; MSA 22.13(4). We find that the statutory language quoted above authorizes the psc to require a regulated utility to provide information regarding the utility’s parent corporation and nonregulated affiliates where such information is reasonably necessary for the proper performance of the psc’s duties. There are many instances where information about nonregulated parent and affiliated corporations conceivably could be reasonably necessary for the psc’s proper performance of its duties. In the proceedings below, witnesses for the Attorney General and the psc staff testified in detail regarding the psc’s need for information on both sides of interaffiliate transactions to determine the reasonableness of cost allocations and claimed operating expenses, and to ensure that Consumers’ ratepayers do not subsidize nonutility operations.

There is also statutory authority for condition 1, which provides that in addition to furnishing the psc with information regarding its holding company and affiliates, Consumers must also ensure that the psc has access to the books and records of its parent company, affiliates, and joint ventures, to the extent Consumers has the ability to do so. Section 6 of the Public Utilities Commission Act, MCL 460.56; MSA 22.6, authorizes the psc to examine any books, accounts, and records "kept on behalf’ of any public utility subject to its jurisdiction and to require, by order or subpoena, the production of any books, papers, or records "relating to the management or operation of’ any such utility:

Said commission shall have authority to examine, or cause to be examined, the books, accounts and records kept on behalf of any public utility subject to the jurisdiction thereof. For the purpose of making such examination any member of the commission or any examiner or employee thereof shall be given free and full access to said books, accounts and records. Any person, or persons, in any way preventing or obstructing such examination or interfering with the person or persons authorized to make the same shall be deemed guilty of a misdemeanor. It shall also be competent for the commission to require by order or subpoena, which may be served in the same manner as is a subpoena issued out of the circuit court, the production of any books, papers or records relating to the operating or management of any such utility. The owner or manager or the officers of any corporation, company, or association, owning or operating any such utility, may likewise be summoned to appear before the commission to answer such questions as may be put to him touching the operation and business of such utility. Neglect or refusal to obey any such order or subpoena or refusal to testify shall render the person or persons in default guilty of a misdemeanor. Said commission may also apply to any circuit court of the state for compulsory process to enforce any such order or subpoena, and said court shall have jurisdiction to compel obedience in the same manner as compliance with an order of the court might be enforced under the laws of the state pertaining thereto.

We find nothing in the statutory language that necessarily requires that books and records held on behalf of a utility or relating to the operation or management of its business actually belong to or be in the possession of the regulated utility itself.¹ It is at least conceivable that Consumers’ parent, affiliates, or joint ventures could hold some papers, books, or records on behalf of Consumers or relating to its management or operation, to which the psc may desire access at some point.

We do not now attempt to determine which books and records of the parent or the affiliates are covered by this statute or precisely define the circumstances under which such books and records are kept "on behalf of’ a utility or "relate to” the utility’s management or operation for purposes of the statute. The psc’s condition ¹ provides a procedure for Consumers to object that the psc’s specific requests for materials are unreasonable or unrelated to the proceedings at hand. Any objection that the requested records are neither kept on Consumers’ behalf nor relate to Consumers’ management or operation may be raised and decided through that procedure, as well as any question of improper disclosure of confidential or proprietary information. Furthermore, we do not address the ability of the psc to obtain parent or affiliate books or records through the issuance of a summons or subpoena under the provisions of the Public Utilities Commission Act, the Administrative Procedures Act, MCL 3.560(101) et seq.; MSA 24.201 et seq., or other statutes and rules, the psc’s conditions having been imposed by neither summons nor subpoena in this case.

We now turn to conditions 2 and 3, which are the subject of mcv’s appeal. Unlike the conditions imposing reporting and information-access requirements on Consumers, we are unable to find any statutory grant of authority that would allow the psc to impose accounting and bookkeeping requirements directly on mcv. While the psc’s discovery authority may extend to books and records held by Consumers’ affiliates and joint ventures, it does not necessarily follow that the psc has authority to control the bookkeeping practices of these nonregulated entities. Indeed, the very same witness for the psc staff who proposed the conditions testified on remand that the psc lacks authority to directly impose these requirements on nonregulated entities such as mcv. Moreover, the choice of accounting and bookkeeping methods to be employed by a business is a managerial decision. It is not enough to state that employment of standardized accounting practices by mcv is necessary to develop an audit trail to facilitate the psc’s review of intercompany transactions for purposes of setting Consumers’ rates, or other proper regulatory purposes. As noted in Union Carbide, supra, the fact that certain management practices might make the regulatory process lengthier and more difficult does not alone justify the psc’s interference with management decisions. 431 Mich 149. Rather, there must be clear and unmistakable statutory authority for the psc’s action.²

Section 6 of the Transmission of Electricity Through Highways Act, 1909 PA 106, MCL 460.556; MSA 22.156, does grant the psc discretion to "prescribe uniform methods of keeping accounts to be observed by all persons, firms, or corporations engaged in [the] business of transmitting and supplying electricity.” However, under the purpa, qualifying cogeneration facilities such as mcv are generally exempt from the rate, financial, or organizational regulations imposed upon electric utilities by state regulators. 18 CFR 292.602(c).³ The psc also has specific statutory authority under § 13 of 1929 PA 9, MCL 483.113; MSA 22.1323, to "prescribe the manner and the form or system of accounts, financial records and operating memoranda or data to be set up and kept by all common purchasers and common carriers of natural gas.” Mcv does regularly purchase gas for use at its cogeneration facility. However, in order to be a "common purchaser” or "common carrier” subject to Act 9, mcv must also be engaged in the business of selling or transmitting gas that it purchases. MCL 483.104; MSA 22.1314, MCL 483.106; MSA 22.1316. Here, there is no indication that mcv uses its purchased gas for anything other than its own consumption. Similarly, the various provisions of the Railroad Commission Act cited on appeal by the psc and abate relate to the power to require information from regulated "common carriers,” a term that has no application to mcv. MCL 462.3(a); MSA 22.22(a). That portion of § 5 of the Public Utilities Commission Act, quoted above, that authorizes the psc to adopt rules and regulations for the conduct of its business and the proper discharge of its function, and make such rules and regulations binding on "all persons dealing with the commission or interested in any matter or proceeding pending before it,” arguably allows the psc to impose conditions on nonregulated entities to facilitate relevant discovery in cases before it. However, in Union Carbide, supra, the Supreme Court indicated that this statute refers to rules and regulations that have been properly promulgated by the psc, as opposed to conditions imposed in the final order of the psc in a contested case. 431 Mich 152. Additionally, it is questionable whether a business becomes "interested” in psc proceedings simply by being an affiliate or joint venture of Consumers. Finally, the broad language of § 6 of the Public Service Commission Act, MCL 460.6; MSA 22.13(6), provides no support for the psc’s conditions, because the statute merely serves as an outline of the psc’s jurisdiction, not as a grant of specific authority or powers. 431 Mich 147; Huron Portland Cement Co v Public Service Comm, 351 Mich 255, 263; 88 NW2d 492 (1958).

Absent specific statutory authority, the psc’s determination that cms and Consumers control mcv does not authorize the psc to regulate mcv’s accounting and bookkeeping practices as it would a regulated utility. In order for the psc to disregard mcv’s separate identity, mcv must operate as a mere instrumentality, agent, or adjunct of Consumers designed for an improper purpose such as avoiding Consumers’ legal obligations or investigation and control by the psc. Yankoviak v Public Service Comm, 349 Mich 641, 648-649; 85 NW2d 75 (1957); People ex rel Attorney General v Michigan Bell Telephone Co, 246 Mich 198, 204; 224 NW 438 (1929). It is true that this Court has previously upheld the psc’s treatment of Consumers and cms as one, where Consumers had transferred its Midland plant assets to cms in order to avoid regulation of proceeds generated from the subsequent sale of those assets to mcv. CMS Energy Corp v Attorney General, 190 Mich App 220, 232; 475 NW2d 451 (1991). However, mcv was not involved in that intercompany transaction. Consumers and mcv may share common interests and act in concert, but mcv does not appear to be a mere instrumentality of Consumers, nor did the psc make any express finding that it was. Moreover, it cannot be said that mcv was established as a separate entity for the purpose of avoiding regulation by the psc; rather, mcv was formed for the purpose of operating a qualifying cogeneration facility, which under the purpa must exist independently of Consumers. See 18 CFR 292.206.⁴ Nor can it be said that mcv is subject to psc regulation because it conducts an integral part of Consumers’ business as a public utility. See Michigan Gas Storage v Public Service Comm, 405 Mich 376, 392; 275 NW2d 457 (1979); Michigan Bell Communications, Inc v Public Service Comm, 155 Mich App 40, 48-52; 399 NW2d 49 (1986).

Abate argues that by requiring consistency with general accounting principles and the development of internal procedures and controls for the allocation of costs and the pricing of goods and services, the psc is requiring mcv to do that which is reasonably expected to occur in the normal course of business. The psc argues that because the conditions do not impose any specific requirements beyond what mcv already does in the course of business, mcv lacks standing to appeal because it is not aggrieved by the conditions. We find these arguments unpersuasive. A party is aggrieved by a judgment or order when it operates on the party’s rights and property, or bears directly on the party’s interest. Grace Petroleum Corp v Public Service Comm, 178 Mich App 309, 312; 443 NW2d. 790 (1989). Here, conditions 2 and 3 affect mcv’s right to control its accounting and bookkeeping practices, and mcv is therefore aggrieved by the psc’s order. Although the psc’s conditions do not require mcv to change its current accounting or bookkeeping practices, they do prohibit mcv from changing those practices if it so desires. Accordingly, we hold that conditions 2 and 3 are inapplicable to mcv.⁵

ii

Consumers argues that the psc is preempted by federal law from considering revenues received by its subsidiary Michigan Gas Storage Company (mgs) from "at risk” interstate gas-transportation service when the psc sets intrastate rates. In 1985, the Federal Energy Regulatory Commission (ferc) issued Order No. 436, 50 Fed Reg 42408 (1985). Essentially, the rule was designed to encourage pipelines to provide natural-gas transportation services to third parties, even though the transported gas may be sold in competition with their own. The rule provides for the ferc to set interstate gas-transportation rates using projected or representative levels of service in order to encourage pipelines to provide as much of this "open access” or "at risk” transportation service as possible, by allowing pipelines to retain revenues earned in excess of projected levels rather than passing the earnings along to other customers of the utility in the form of credits. In Associated Gas Distributors v Fed Energy Regulatory Comm, 263 US App DC 1; 821 F2d 981 (1987), cert den 485 US 1006 (1988), the court generally approved the rule, but vacated it on grounds that the ferc had failed to adequately address certain issues, such as the effect on the pipelines’ "take or pay” contractual liabilities. The ferc has subsequently issued interim orders upholding various provisions of the rule.

Consumers excluded all rate base, revenue, and expense effects related to "at risk” transportation sales from its projection of mgs’ cost of service for purposes of calculating Consumers’ test-year net operating income. In addition to other adjustments, the psc staff recommended including all of mgs’ transportation revenue and expenses in mgs’ cost of service projection. The staff also recommended an expansion of the psc’s preexisting "90/ 10” refund program to require refunding of certain transportation revenues received by mgs in excess of $547,000 (the projected revenue figure set by the ferc). In his proposal for decision, the hearing referee adopted both the psc’s staff’s adjustments to mgs’ costs of service and the proposed extension of the 90/10 refund program. However, the psc found that the proposed expansion of the 90/10 refund program was not necessary, noting the relatively unsettled state of federal regulation in the area of interstate gas transportation. Still, the psc included in mgs’ cost of service the expenses and revenues associated with mgs’ open-access transportation program at the projected levels established by the ferc.

We agree with the psc that Consumers’ federal preemption issue is not properly before the Court at this time. Because both the total cost of service for mgs’ transportation customers and the total transportation revenue were included at the projected levels set by the ferc, i.e., $547,000, the net result is a wash, as Consumers conceded at oral argument. It follows that Consumers is not aggrieved by the psc’s order in this regard. The psc has made no adjustments to the rates and projections established by the ferc and none of mgs’ open-access transportation revenues have been refunded or credited to the utility’s other customers. The fact that the psc "left the door open” for consideration of refunds or credits in future cases is insufficient to make the issue ripe for decision in this appeal. Grace Petroleum Corp, supra at 313. Accordingly, we do not reach the federal preemption issue and express no opinion regarding its merits.

iii

Consumers next challenges the psc’s requirement that all on-system gas transportation be performed pursuant to the newly established transportation tariffs. Before the psc’s orders in this case, Consumers had provided gas transportation services by entering into individual contracts with transportation customers and filing those contracts with the psc pursuant to § 10 of 1929 PA 9, MCL 483.110; MSA 22.1320, which provides:

A common purchaser or common carrier of natural gas, before receiving the gas for transmission or delivery, shall file with the commission a schedule of the rates and price at which the common purchaser or common carrier will receive gas at delivery stations from a well, field, or source of supply, as well as the rates or charges at which the common purchaser or common carrier will deliver gas to connecting carriers or distributing lines or customers, and, if the common purchaser or common carrier is operating as a carrier for hire, the rates and charges which the common purchaser or common carrier will charge for the service to be performed by it. A common purchaser or common carrier operating as a carrier for hire also shall file a copy of each contract for purchasing, receiving, or supplying gas. The price to be paid and the rates and charges shall be stated and set up in the manner and form required by the commission and outlined in the rules of the commission for filing of rates of artificial gas utilities or pursuant to rules and conditions of service adopted by the commission, which the commission may make for the regulation of common purchasers and common carriers of natural gas. Thereafter, a common purchaser or common carrier of natural gas may alter or amend its price paid, rates, charges, and conditions of service by application to and approval by the commission in the same manner and by the same process and under the same legal limitations and like right as are now provided by statute for the regulation by the commission of the rates for electricity transmitted in this state and process of appeal as provided in section 26 of Act No. 300 of the Public Acts of 1909, being section 462.26 of the Michigan Compiled Laws.

Apparently, it has not been the psc’s practice to approve or disapprove the prices, conditions of service, or other terms set forth in initially filed gas-transportation contracts unless and until Consumers seeks to change the price or other terms set forth in the contracts. However, in establishing the gas-transportation tariffs in the instant case, the psc ordered that on-system transportation be performed in accordance with the new tariffs, instead of according to the terms of contracts filed pursuant to Act 9, although the continued use of Act 9 contracts was left as an option for off-system transportation service. The psc explained the change in approach as follows:

While the Commission will allow Consumers to continue its existing use of Act 9 contracts for off-system transportation for either producers or end-users, we do not agree that Consumers has any right to utilize Act 9 contracts for on-system transportation following implementation of the transportation program and tariffs adopted by this order.

Act 9 does not explicitly provide for transportation in the form currently utilized by Consumers. Indeed, a strong argument can be made that Section 10 of Act 9 requires not only the filing of transportation contracts, but also the filing of and adherence to a schedule of rates and charges in the form of tariffs.

In its infancy, transportation service represented a marked departure from traditional utility service. The Commission’s initial regulatory response of allowing transportation services to be contracted for on a case-by-case basis was appropriate. The use of contracts allowed transportation to mature and to be studied as it developed so that an appropriate regulatory response could be formulated. To do otherwise might have unduly hindered the development of transportation to the detriment of both Consumers and its transportation customers. However, now that transportation has emerged from its initial evolutionary period, the Commission finds it is no longer appropriate for Consumers to perform on-system transportation by the filing of contracts. Rather, following the implementation of the transportation program provided for in this order, all on-system transportation shall be performed pursuant to Consumers’ T-l and T-2 tariffs.

The psc further noted its general authority to regulate gas rates and services under § 6 of 1939 PA 3, MCL 460.6; MSA 22.13(6), as well as its specific authority to fix rates and charges for the transmission of gas under § 4 of the Public Utilities Commission Act, MCL 460.54; MSA 22.4.

Consumers interprets § 10 of Act 9 as granting utilities an absolute right to set the initial price of transportation services by contract without psc approval, and argues that by requiring adherence to the newly established tariffs the psc effected an unauthorized repeal of the statute. We find Consumers’ interpretation of § 10 of Act 9 questionable. This Court has previously observed that the statute is simply silent with regard to psc approval of the initial contract price and that this silence should not be interpreted as granting utilities unfettered discretion in setting initial prices and conditions of service without any regulatory oversight, inasmuch as the statute expressly empowers the psc to adopt rules and conditions of service governing the filing of such contracts:

The statute is silent as to psc approval of the initial price. It provides, however, that these contracts "be stated and set up in the manner and form required by the commission and outlined in its rules and regulations for filing of rates of artificial gas utilities or in accordance with such rules, regulations and conditions of service as may be hereafter adopted by the commission and which it is hereby empowered to make for the regulation of such common purchasers.

Clearly, the statute does not contemplate that producers and Mich Con may enter into initial contracts for the purchase of gas which contain pricing provisions or rate schedules determined at the parties’ whim and caprice. The statute mandates that these initial contracts adhere to the rules and regulations of the psc. [Antrim Resources v Public Service Comm, 179 Mich App 603, 611; 446 NW2d 515 (1989), interpreting nearly identical provisions of the statute before amendment in 1987.]

Here, the psc’s requirement that the terms of Consumers’ on-system contracts conform with the newly established gas-transportation tariffs may be viewed as a rule or standard adopted by the psc in accordance with the express language of the statute. The psc may establish such standards in the context of a contested-case proceeding in lieu of the rule-making procedures of the Administrative Procedures Act. Id. at 615; Northern Michigan Exploration Co v Public Service Comm, 153 Mich App 635, 649; 396 NW2d 487 (1986). See MCL 24.207(f); MSA 3.560(107)(f).

We find the psc’s interpretation of § 10 of Act 9 to be consistent with the psc’s broad rate-making authority under § 4 of the Public Utilities Commission Act and § 6 of 1939 PA 3. Consumers’ construction of the statute would restrict the psc’s exercise of its rate-making authority to an individual contract-by-contract approach, frustrating the psc’s ability to establish and maintain uniform and nondiscriminatory rates throughout the gas-transportation industry. Reading the various statutes together, we find the approach adopted by the psc to be consistent with the legislative purpose.

IV

Consumers next challenges the psc’s disallowance of $100,000 out of approximately $1.4 million paid by Consumers for bill collection services performed by scs, an unregulated sister subsidiary, in the psc’s calculation of Consumers’ operating expenses. The disallowance was recommended by the psc’s staff. Staff witness Susan Devon testified that this figure represented forty-seven percent of the "excess earnings” generated by scs through its business with Consumers. She noted that Consumers provides eighty-two percent of scs’ business, and that, according to an exhibit submitted by Consumers, scs’ return on common equity was slightly in excess of fifty percent, far greater than Consumers’ own authorized return. She further testified that Consumers denied the staff access to scs books and records that would indicate whether the forty percent collection fee scs charges Consumers is competitive compared to the rates scs charges to other utilities it serves. However, the staff was able to independently verify that at least one other utility using scs services pays only a thirty-five percent collection fee. One utility, Michigan Consolidated Gas Company, pays a thirty-five percent fee to all of the national independent collection agencies it uses. On cross-examination, Devon conceded that the staff’s independent study revealed that one other utility, Southeastern Michigan Gas Company, was also charged a forty percent fee by scs. Devon explained that this accounted for only two percent of the uncollectable debts Southeastern turns over to various collection agencies, whereas Consumers turns over virtually one hundred percent of its uncollectables to scs. Devon also acknowledged that some of the other outside collection agencies listed in the staff’s study charged as much as fifty percent for some collections, but explained that these were smaller, independent collection agencies that she did not think were comparable to scs.

Consumers called its general customer information and credit manager, Judith Voisine, as a rebuttal witness, and presented exhibits showing that the fees scs charges vary according to certain variables, including the age of the account and whether the utility desires that a "precollection letter” be utilized. Voisine explained that Consumers pays scs the forty percent fee, instead of the thirty-five percent fee paid by Michigan Gas Company, because it has selected the precollection-letter option whereby a series of three collection letters are sent out approximately thirty days after the due date of a bill. The accounts that remain unpaid after ninety days are designated uncollectable. She explained that because scs receives only a 22.5 percent commission on uncollectable dollars transferred to active Consumers’ accounts, the effective rate of its commissions was actually thirty percent for 1987. She acknowledged, however, that the precollection-letter option is not a service normally provided for utilities by outside collection agencies, which typically offer only uncollectable-account collection service. She explained that scs was formed to improve the effectiveness of Consumers’ collection efforts, hold collection costs down (particularly with respect to small accounts under $100), and to gain a measure of control over the methods used to recover Consumers’ uncollectables. As proof of scs’ success, she offered two exhibits showing that the ratio of Consumers’ bad-debt loss to revenue had steadily improved over the years, giving Consumers the best ratio of the four major Michigan utilities in 1987, as well as the best ratio in comparison to the ten largest combination utilities nationwide. She acknowledged, however, that the poor relative performance of other Michigan utilities could be attributable to factors other than the collection service used, such as depressed economic conditions in the service area involved.

The psc adopted the recommended disallowance, finding that Consumers had failed to meet its burden of establishing both a good business reason for transferring its debt collection activities to an unregulated subsidiary and that the costs associated with its decision to do so are reasonable. On appeal, Consumers has the burden of proving by clear and satisfactory evidence that the psc’s decision is unlawful or unreasonable. MCL 462.26(8); MSA 22.45(8). A decision of the psc is unlawful when it involves an erroneous interpretation or application of law, and unreasonable when it is unsupported by the evidence. Attorney General v Public Service Comm, 165 Mich App 230, 235; 418 NW2d 660 (1987). Any factual determinations must be supported by competent, material, and substantial evidence on the whole record. Const 1963, art 6, § 28.

We are unpersuaded by Consumers’ argument that the psc’s decision was based upon an erroneous legal standard merely because the psc required Consumers to establish a good business reason for transferring its debt collection activities to an affiliate in addition to establishing the reasonableness of the debt collection fees it paid to scs. It is well recognized that expenses incurred in transactions between utilities and their affiliates deserve special scrutiny, given the potential lack of arms-length bargaining and improper subsidization of the affiliate’s unregulated operations through the utility’s rates. See generally 64 Am Jur 2d, Public Utilities, § 187, pp 702-703. The psc need not assume that the fees charged to a utility by its affiliate are fair, and the utility has the burden of proving the reasonableness of its transaction with its affiliates. Michigan Bell Telephone Co v Public Service Comm, 85 Mich App 163, 168-169; 270 NW2d 546 (1978); General Telephone Co v Public Service Comm, 78 Mich App 528, 534; 260 NW2d 874 (1977). When setting rates, the psc is not bound by any particular formula or method in determining what is just and reasonable, but has broad discretion to determine the factors relevant to its analysis and to make adjustments as necessitated by the particular circumstances of a given case. Attorney General v Public Service Comm, 189 Mich App 138, 147-148; 472 NW2d 53 (1991).

We find that the psc’s requirement of a "good business reason” for Consumers’ transfer of its debt collection activities to scs is a lawful exercise of the psc’s discretion. Consumers’ reason for the transfer was not made the sole criterion by which the scs expenses were judged, but simply one of the factors in determining the overall reasonableness of the charges. Given the fact that scs performs at least some activities that are not usually performed by outside collection agencies but by utilities themselves, such as sending precollection letters for accounts that the utility has not yet designated uncollectable, it seems reasonable to require Consumers to come forward with some legitimate reason for transferring such activities to an affiliate. Furthermore, although the transfer was a managerial decision made by Consumers, which the psc may not control directly, the psc clearly possesses the authority to deny Consumers recovery through its rates of any increased expenses incurred as the result of Consumers’ unsound or noneconomic business choices. See Union Carbide Corp, supra at 149-150.

We also find no merit in Consumers’ contention that the psc’s decision is not supported by competent, material, and substantial evidence on the whole record. Substantial evidence exists for a decision of the psc if it is supported by opinion testimony offered by a single qualified expert witness with a rational basis for the expert’s views, whether or not other experts disagree. Great Lakes Steel Div of National Steel Corp v Public Service Comm, 130 Mich App 470, 481; 344 NW2d 321 (1983). Here, the testimony of staff witness Devon supports the psc’s conclusion that Consumers had failed to prove the reasonableness of its scs expenses. Although she was not able to rule out the possibility that other utilities were able to obtain collection services at lower rates because of differences in the age of the accounts involved or the quality of the collection services provided, Devon was able to show that Consumers was paying five percent more than at least one other utility, casting some doubt on the reasonableness of Consumers’ expenses. Moreover, the testimony of Consumers’ own rebuttal witness indicates Consumers paid scs for collection of relatively young accounts, turning the accounts over for collection after only ninety days, whereas other utilities may attempt to collect such past-due active accounts on their own before turning the accounts over to an outside collection agency. Moreover, there was evidence that scs earns a rate of return on equity in excess of fifty percent, more than three times Consumers’ own authorized rate of return. While not alone determinative, the rate of return earned by an affiliate is evidence that may be considered by the psc in determining the reasonableness of a utility’s transactions with its affiliates. General Telephone Co, supra at 536.

V

Consumers next argues that the psc unreasonably and unlawfully refused to offset $9.8 million of gain resulting from the sale of certain pension assets in 1987 by commensurate expenses booked in 1987 and associated with a special compensation program. During 1987, but after the test year ending on June 30, 1987, Consumers settled a portion of its pension obligation through the sale of certain pension fund assets and the purchase of a single premium annuity to be used to provide benefits for retirees. The net gain realized as a result of the settlement of this obligation was $39 million. Approximately $29 million of the gain was offset against Consumers’ expenses associated with its 1987 early retirement program, such as increased benefit obligations, severance payments, relocation expenses, and vacation accrual. However, the psc refused to offset the remaining gain against Consumers’ expense for the special-compensation program, adopting instead the recommendation of the psc staff that the gas portion (30.8 percent) of the remaining gain be amortized over a five-year period, resulting in a reduction of $651,000 in the cost of service for the test year.

Consumers argues that by recognizing the nonrecurring pension asset gain, but not Consumers’ "contemporaneous” nonrecurring special-compensation program expense, the psc acted arbitrarily and in violation of Consumers’ due process rights. Consumers relies upon Michigan Consolidated Gas Co v Public Service Comm, 389 Mich 624; 209 NW2d 210 (1973), and General Telephone Co, supra. In Michigan Consolidated Gas Co, the Supreme Court affirmed a preliminary injunction permitting the utility to increase its rates above the level ordered by the psc, finding that the psc acted arbitrarily and unreasonably by taking into account certain future expense reductions while refusing to consider increases in other costs in the future. Similarly, in General Telephone Company, this Court upheld the disallowance of an adjustment to the utility’s operating income to reflect anticipated increases in directory revenue extending beyond the test year, where the psc had refused to consider anticipated wage increases for that same period on grounds that the increases were too speculative.

We find these cases distinguishable. Unlike the comparable items of future expense and revenue involved in Michigan Consolidated Gas Co and General Telephone Co, there are significant, qualitative differences between Consumers’ gain on the sale of pension assets and its special-compensation expense. Consumers’ gain was fully realized in 1987 as a result of transactions occurring that year, albeit outside the test year. In contrast, Consumers’ special-compensation expense was a "mark-to-market” adjustment for a special-compensation plan that ran from October 1984 through December 1986. There is no indication that the utility incurred any actual cash expense associated with the adjustment to its books in 1987.

It is also significant that the revenues and expenses in question are nonrecurring. In general, nonrecurring expenses are not recognized for rate-making purposes, even if the expense is otherwise reasonable and proper. Consumers’ own witness, Royal Lefere, testified that Consumers’ special-compensation expense was a nonrecurring expense of the type that generally should not be used for rate-making purposes. Consumers’ gain from the sale of pension assets might also be viewed as a nonrecurring event that normally should be ex-eluded for rate-making purposes. However, the psc found that because Consumers’ ratepayers had funded Consumers’ pension programs through past rates, they are entitled to benefit from the transaction just as they would pursuant to Statement of Financial Accounting Standard No. 87 had Consumers not settled its pension obligations through the purchase of an annuity. In other words, the psc reasoned that because ratepayers would have received the benefit of the increased market value of the pension assets over the years had they not been sold, it is proper to carry forward the gain in future years by amortization. It is true that ratepayers generally do not acquire any interest in property a utility purchases with its revenues. Bd of Public Utilities Comm’rs v New York Telephone Co, 271 US 23, 32; 46 S Ct 363; 70 L Ed 808 (1926). However, ratepayers may indeed acquire a protect-able interest in the utility’s capital gains received on the disposition of utility assets where-the ratepayers have been charged with the costs or burden of investment in those assets as a rate expense. See Washington Gas Light Co v Public Service Comm, 450 A2d 1187, 1239 (DC App, 1982); Democratic Central Committee v Washington Metro Area Transit Comm, 158 US App DC 7; 485 F2d 786 (1973), cert den 415 US 935 (1974). See also CMS Energy Corp v Attorney General, supra.

The psc’s action is consistent when viewed from this theoretical perspective. To the extent that there were nonrecurring expenses associated with the ratepayers’ interest in Consumers’ pension program, i.e., the $29 million expended in 1987 for the early retirement program, an offset was allowed. This nonrecurring expense might also have been amortized over the five-year period, but the netting of associated gain would result in an amortization amount of zero. Consumers’ booked special-compensation-plan expense, however, lacked any nexus to its ratepayers’ long-term interest in the utility’s pension and retirement programs to justify including the expense in the cost of service for a future test year. Accordingly, we find that Consumers has failed to meet its burden of establishing by clear and satisfactory evidence that the psc’s action was unlawful or unreasonable.

VI

Finally, Consumers argues that the psc acted arbitrarily and capriciously in imputing "phantom” revenues to Consumers in the amount of the fifty percent distribution charge discount established for Consumers’ Rate D economic-development rate. In 1985, the psc approved Consumers’ application for the Rate D economic-development rate. The discount rate was to be available to all new industrial customers with a load of at least 100,000 mcf annually and all existing customers who would install additional gas-fired equipment designed to add at least 100,000 mcf annually to the customer’s normal base-period gas requirements. Rate D is comprised of a monthly service charge, gas-cost recovery factor, and a distribution charge discounted fifty percent from the distribution charge that would otherwise apply to the service provided, i.e., the distribution charge provided for in the applicable general service rate schedule. The purpose of this discounted rate is to attract additional industrial activity in Consumers’ service area, thereby improving the economic development of the state. Additionally, all of the parties agree that this discounted rate is not intended to result in any increase in the cost of service to Consumers’ other customers. In theory, the incremental cost of providing the discount-rate service to Rate D customers is expected to be less than or equal to the reduced rate Rate D customers are charged.

The psc’s December 17, 1985, order approving Rate D indicates that because the new rate was not expected to result in any increase in costs to other customers, the psc approved the rate without conducting a contested-case hearing; yet the order specifically prohibits Consumers from recovering any Rate D revenue loss from other rate categories:

In reviewing the proposed rate, the Commission finds that the new rate will not alter any existing approved rate, nor will it result in an increase in the cost of service to any customer. Therefore, pursuant to [MCL 460.6a(l); MSA 22.13(6a)(l)] a hearing is not required.

Although the Commission is convinced that in approving the proposed rate no other customer class will be adversely affected, the Commission will prohibit Consumers from recovering any revenue loss that may result due to implementing the proposed rate from any other rate category. As a further safeguard, the Commission will require Consumers to make periodic reports detailing the revenues derived as a result of the implementation of the rate. The Commission can then expeditiously make necessary modifications to the rate if any adverse impact upon present or proposed rates is identified outside the context of a general rate case proceeding.

In the instant proceedings, the psc staff recommended doubling Consumers’ expected distribution charge revenues at the fifty percent discounted rate, $193,698, in effect imputing the distribution charges Consumers would have received for the service but for the discount. The psc adopted its staff’s proposal, concluding that the imputation of revenues is necessary to protect Consumers’ other classes of customers from subsidizing the Rate D rate:

In both its original application and its application for extension of Rate D, Consumers alleged that Rate D would not alter any existing rate or rate schedule and would not result in any increases in the cost of service to any of its existing customers. Further, in originally approving the rate the Commission specifically noted that it "will prohibit Consumers from recovering any revenue loss that may result due to implementing the proposed rate from any other rate category.” (Order dated December 17, 1985, p 3.) The Commission finds that the Staffs inclusion of imputed revenues is necessary and appropriate to protect Consumers’ other ratepayers as provided for in our December 17, 1985 order.

We again find that Consumers has failed to meet its burden of establishing that the psc’s action is unlawful or unreasonable. The psc’s theory in support of imputing the revenue seems logical, reasonable, and consistent with its 1985 order. It was understood from the outset that Consumers would charge only half of what it would normally receive in distribution charges for the Rate D rate, but would not collect from its other customers any excess of expenses after revenues. Imputing additional revenue in the amount of the fifty percent distribution charge reduction in effect results in a pro tanto reduction of Consumers’ distribution expenses recoverable through general rates, thereby ensuring that no cross-customer subsidization occurs. Contrary to Consumers’ argument, it is not left with a distribution charge of zero, but will receive the full $193,698 in distribution charge revenue provided for under the Rate D discount to recover its various nongas costs of providing the service.

Consumers complains that there is absolutely no evidence in the record showing that Rate D resulted or will result in any increase in the cost of service to its other classes of customers. However, it is also true that Consumers has failed to cite any record evidence indicating that the cost of service to its other classes of customers does not increase as a result of the discounted Rate D service. We find that the onus was on Consumers to come forward with evidence establishing that the cost of service to its other customers was unaffected by the fifty percent shortfall in normal distribution charge revenue obtained for the Rate D service, particularly because the discount rate was approved by the psc ex parte and solely on the basis of Consumers’ assurances that its other classes of customers would not be adversely affected. Consumers’ reliance upon Pennwalt Corp v Public Service Comm, 166 Mich App 1; 420 NW2d 156 (1988), is misplaced in this regard. There, it was only because the propriety of the challenged utility costs had been fully litigated in a previous rate proceeding that the burden was placed upon the challenger to come forward with new evidence or evidence of a change in circumstances.

Except as modified in section i of this opinion, the psc’s orders are affirmed.

Wahls, J., concurred.

1 Compare § 28(d) of the Railroad Commission Act, MCL 462.28(d); MSA 22.47(d), where the authority to require production of relevant books, papers, and accounts contains the qualification "kept by such railroad.” (Emphasis added.)

2 We do not make any determination at this time whether the psc’s authority under § 210(f) of the purpa, 16 USC 824a-3, to implement federal rules and regulations regarding transactions between qualifying cogeneration facilities and electric utilities may authorize the psc to regulate mcv’s accounting and bookkeeping practices, because no such rule implementation was involved in these proceedings relating to Consumers’ gas service.

3 We find it unnecessary to address whether the purpa also exempts mcv from other types of state regulation, because we conclude that there is simply no statutory authority for the psc to regulate mcv’s accounting and bookkeeping in any event.

4 This is not to say that the psc may not disregard mcv’s separate identity for certain purposes where a proper factual predicate exists; for example, if mcv were to adopt new accounting and bookkeeping procedures for the purpose of assisting Consumers to avoid investigation and regulation by the psc.

5 We express no opinion with respect to the validity of conditions 2 and 3 to the extent they apply to Consumers’ other affiliates and joint ventures not represented in this appeal.