Court of Appeals Rejects Public Service Commission Order on Affiliate Transactions

In May of 2000, the Public Service Commission, following an investigation which began in March of 1999, issued "Guidelines for Transactions Between Affiliates" which applied to all public utilities that provide natural gas or electricity subject to regulations by the commission. The guidelines required the utilities to report to the commission any transfer of assets or property to non-utility affiliates which exceeded $100,000. The utility was required to make available to the commission how the transfer price was determined. Further, the guidelines required that transfers from regulated to non-regulated entities be at the higher of cost or fair market value and transfers from non- regulated to regulated entities to be at the lower of cost or fair market value. All services and supplies provided by non-regulated enterprises shall be at market price or 10% over fully allocated cost, whichever is less.

The Michigan Alliance for Fair Competition, representing electrical and HV AC contractors was a part of the affiliate transaction "contested case". The utilities filed suit against the Public Service Commission in the Michigan Court of Appeals. The decision issued on July 19, 2002 ruled that the affiliate transaction guidelines were invalid and unlawful. In a lengthy opinion, the court said that the Public Service Commission should have used the Administrative Procedures Act (AP A) rules making procedure, rather than the "contested case" procedure which the PSC utilized on this issue.

The Public Service Commission has two ways to right rules and guidelines. They can use the APA rules procedure which requires public notice, public hearings, approval by the Joint Committee on Administrative Rules of the Michigan Legislature, and approval by the Governor's Office of Regulatory Reform. They can also utilize a "contested case" procedure which is usually generated by a complaint being filed against a utility. The contested case-procedure requires the PSC to notify all interested parties who then have the opportunity to participate in the case.

Members of the construction industry have been following this issue closely because the now famous "Code of Conduct" was also written under the contested case procedure.