T H E N E W S I N F 0 C U S

end up being borne by ratepay-

ers," he observed.

"We have a real good textbook case of what can go wrong," ac-

cording to Jennings. "Other regu- lators should take a look."

--Sonya Bruce

Rags to Riches to Restraining Order

Michigan Commission Scrutinizes Midland Profits Consumers Power, saved from a bog of bankruptcy by an emer-

gency financial stabilization plan adopted by the Michigan Public Ser-

vice Commission in 1985, is now on the brink of collecting about $1:2 bil-

lion in notes resulting from the sale

of the abandoned Midland nuclear plant assets to the Midland Cogeneration Venture Limited Part-

nership. In March, State Attorney General Frank J. Kelley asked for and got a temporary restraining order enjoining Consumers, or its

parent holding compan)4 CMS En- erg~ from diverting the $1.2 billion

to other businesses until the Michi- gan Public Service Commission de-

termines the appropriate disposi- tion of the Midland proceeds.

The Attorney General's argu- ment is that the quid pro quo for the financial bailout which en- abled Consumers Power to obtain

extraordinary rate relief was the company's agreement to allow Commission scrutiny of its pro- ceeds from the sale or salvage of Midland assets. "Having re-

ceived over $400 million in quid, Consumers Power Company now

appears to be reneging on the quo," says the AG.

Consumers Power reorganized in the late 1980's. CMS Energy be-

came Consumers' parent; CMS Enterprises became a subsidiary

of CMS Energy and a sister to Consumers; and several new sub-

sidiaries, including Midland Group Limited and MEC Devel-

opment Company, were created. The Midland Cogeneration Ven-

ture (MCV) was established, and, according to the Michigan PSC,

Consumers unilaterally assigned Midland plant assets at a booked value of approximately $1.5 bil- lion for eventual sale to the MCV

partnership which was going to develop a gas cogeneration plant

at Midland with Dow Chemical and other partners. (See TEJ, Oc- tober 1989 and April 1990 issues for related stories.)

This March, Consumers Power announced it was voluntarily end-

ing the annual collection of $79 million in financial stabilization

revenues, meaning an immediate 5% rate decrease for customers. On the same da~ CMS Energy Corporation, the parent compan)~

announced it had received a $1.2 billion debt interest and a 49% eq-

uity interest in the Midland Cogeneration Venture from Con- sumers in exchange for a CMS En- ergy debenture.

CMS Chairman and CEO Wil- liam T. McCormick, Jr., said at the time the transaction was consis- tent with the company's policy of maintaining the health of Con-

sumers Power and that it would also provide CMS Energy "the

means to expand its nonutility, en- ergy-related businesses and to take such other actions as are ap-

propriate to optimize shareholder value."

MCV had issued notes to MEC Development, a Consumers Power subsidiary, for $1.2 billion.

By March, Consumers had sold its two subsidiaries, MEC Devel-

opment and CMS Midland, to CMS. This meant, according to PSC Technical Services Director

Hasso C. Bhatia in testimony in

April before the Commission, that "essentially all payments from the

MCV partnership for the equity investment and interest on notes

as well as the notes would go di- rectly to CMS Energy" not Con-

sumers. In its March order, the Commis-

sion said a potential result of such transactions "is to deprive Con-

sumers of any of the cash flow or other financial benefit from the

transfer of Midland plant assets previously owned by Consum-

ers," which is inconsistent with previous Commission financial

stabilization orders designed to improve Consumers' cash flow. All this prompted the Commis- sion's current proceeding to re-

view whether Consumers has complied with the letter and spirit of the financial stabilization or- ders and if not, whether refunds, other relief, or financial restric- tions on Midland plant proceeds are appropriate.

In its injunction request in

March, the Attorney General's of-

10 The Electricity Journal

T H E N E W S I N F O C U S

rice stated the Company's unilat-

eral determination that it would no longer collect financial stabili-

zation relief and that it could do what it likes with proceeds from the sale of Midland assets oc-

curred "coincidentally" when the company was about to receive

$1.2 billion for the sale of Midland assets. The AG claims the com- pany "apparently intends to use the $1.2 billion for purposes other

than the financial stability of Con- sumers Power Company's Michi-

gan utility operations" and adds that "in fact, Consumers Power Company documents indicate that the Company may use the

Midland asset proceeds to finance the construction of a natural gas

cogeneration facility in New York--a transaction which would jeopardize the financial stability for which CPCo's ratepayers have

already paid dearly." Consumers spokesman Kelly

Farr responds that ratepayers were never at risk with the Mid-

land conversion. When the com- pany decided in 1986 to convert

the plant, it took $1.5 billion, re- moved it from the pending rate

case, and transferred it to MCV. Shareholders assumed the risk of

the conversion, not knowing whether it would succeed, he

said. The plant is now up and running and came in ahead of

schedule and under budget, and "it is not fair to confiscate the re- wards of assuming that risk," Farr said.

Farr added there has been no decision on what to do with the $1.2 billion, but that McCormick

has indicated on several occasions

that the money might be used for

stock buybacks, dividends, "possi- ble future acquisitions to further

enhance shareholder value," debt reduction and /o r "growing our

existing energy-related nonutflity businesses." He noted, "We've

made no bones about our interest in getting involved in the

Shoreham conversion" and that CMS Energy is a participant in

the Long Island Power Authority's feasibility study of

converting Shoreham. That re- port should be ready by summer.

But as for allegations that the $1.2 billion would be used to acquire Shoreham, they are "a long way from anything we've said," ac-

cording to Farr. Bhatia said in his testimony that

while Consumers has done "a good job to bring the utility back

on its feet," he is concerned CMS Energy "may have subordinated

its utility obligations to pursue its

wider corporate objectives."

Bhatia indicates CMS officials' po- sition is that the use of the Mid-

land proceeds is a management prerogative of no concern to the

Commission, but he worries aloud that Consumers may be

"acting as a banker for the CMS" and that CMS "is counting on its

management skills and the ability to make this thing work."

Is that a problem? Bhatia re- sponded: "If we have learned any-

thing from the Midland nuclear fi-

asco it is that utility managers, even the smart ones, need moni- toring."

A January 1990 report on Con- sumers Power by Balfour Mac-

laine Capital Markets Inc., which accompanied the AG's injunction

request, questioned "manage- ment's commitment to the regu-

lated utility business." It ex- pressed concern about a possible

Some feel that CMS subordinated its utility obligations to pursue other objectives.

June 1990 11

T H E N E W S I N F 0 C U S

"senior management" strategy

that might redeploy utility re-

sources "into potentially more lu- crative (and more risky) endeav-

ors," leaving the utility "as a leveraged shell or 'cost conduit'

whereby shareholder investment in utility assets is minimized and

proliferating costs are passed di- rectly to ratepayers through vari-

ous adjustment clauses." The Commission's decisions on

what jurisdiction it has over the

$1.2 billion and how the money is

to be used are expected in late May. Regardless of the outcome,

look for further court battles. --Susan L. Whittington

Self-Dealing Raised

FERC Nixes PGX Deal

In a move that could be a death knell for many similar industry

deals in the works, the Federal En- ergy Regulatory Commission in

April unanimously shot down a wholesale power marketing agree-

ment of a marketing subsidiary set up by Portland General Electric in

1988. In rejecting the proposal, FERC

noted that "this is the first case to come before this commission which has required us to deter- mine whether a traditional utility may sell power to an affiliated power marketer at rates which are not based on the seller's cost of service, whereupon the affiliated power marketer may then sell to a wholesale customer at ]higher]

market-based rates." In the Portland dea l the market-

ing affiliate was paying PGE about one-third the cost of gener-

ating the power, but selling it for more than 100% of costs, accord-

ing to the FERC order. The cozy arrangement between PGE and its

marketing offspring, Portland General Exchange, a / k / a PGX,

drew scathing remarks from the

P

FERC commissioners. "Corporate

shell game," said Charles Trabandt. "Unduly preferential,"

said Chairman Martin Allda~ The vote to reject the contract was unanimous.

Under the scheme, PGX began selling PGE-generated finn

power to two California munici- palities in September 1988, at what PGX says are "market rates." The city of Burbank was

buying 10 MW and the city of Glendale 20 MW, with the deal running through 2012. PGX would have taken in fees ranging from $4.3 million in 1988 to $8.6 million in 2012. PGE asked FERC to approve the arrangement

nearly a year after the power began flowing to the two Califor- nia cities.

The commission and staff were irked by several aspects of the ar- rangement. First, they were irri-

tated that PGE had the chutzpah to set up PGX and have it in busi-

ness, selling power for almost a year before it notified the FERC.

"We do not look favorably upon utilities undertaking sales such as

these in violation of the section 205 ]Federal Power Act] require- ments that a rate schedule be on file for any wholesale sale in inter-

state commerce," said a footnote in FERC's order.

Beyond that, the regulators were incensed at the corporate

shell game that PGE appeared to be playing. Under the deal, PGX

gets all the power it sells to the two California cities from PGE,

but pays only one-third of PGE's fixed costs for the power. In turn, PGX was charging the two cities

more than 100% of the fixed costs. PGX figured to make an easy $3.5 million a year in profits on the

transaction, according to a FERC staff estimate, for what was basi-

cally a risk-free paper shuffle. Trabandt was livid. "These

deals with Glendale and Burbank are PGE power sales which have, for lack of a better term, been laundered through PGX to get market rates," he said. "Why should we not simply take the po- sition in this first case that the public interest is not served by

these kinds of affiliate relation- ships? Why shouldn't we, right now, right here, just say no?"

12 The Electricity Journal