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April 2, 1979

Emily GREENAPPLE, Plaintiff,
The DETROIT EDISON COMPANY, Morgan Stanley & Co. Incorporated, and Price Waterhouse & Co., Defendants

The opinion of the court was delivered by: WARD

Defendant, The Detroit Edison Company ("Detroit Edison" or "the Company") moves pursuant to Rule 56, Fed.R.Civ.P., for summary judgment dismissing the complaint. Plaintiff moves pursuant to Rule 23(c)(1), Fed.R.Civ.P., for class action certification and cross-moves pursuant to Rule 56, Fed.R.Civ.P., for summary judgment in her favor. For the reasons hereinafter stated, defendant's motion for summary judgment is granted, plaintiff's cross-motion for summary judgment is denied, and plaintiff's motion for class action certification is denied as moot.

The Facts

Defendant, Detroit Edison is a public utility engaged in the generation, transmission, distribution and sale of electric energy in southeastern Michigan. Detroit Edison's securities are publicly owned and its common stock is traded on the New York Stock Exchange. New issues of securities by Detroit Edison must be registered with the Securities and Exchange Commission ("SEC") pursuant to the Securities Act of 1933 ("Securities Act"). 15 U.S.C. § 77a Et seq. In addition, as a public utility, defendant is subject to the general jurisdiction of the Federal Power Commission ("FPC") *fn1" and the Michigan Public Service Commission ("MPSC") both of which regulate the defendant's accounting practices and the manner in which it keeps its books and financial records. Detroit Edison is a "Class A" utility within the meaning of Section 1 of the General Instructions to the accounting regulations of the FPC, 18 C.F.R. Part 101, and is obliged to maintain its books of account and financial records in accordance with the Uniform System of Accounts ("Uniform System of Accounts") promulgated by the FPC. Defendant is permitted to issue and sell its securities to the public after receiving appropriate authorization from the MPSC and where necessary, the FPC.

 In September, 1972 Detroit Edison sold four million shares of its common stock to a group of underwriters co-managed by Morgan Stanley & Co., Incorporated ("Morgan Stanley") for resale in a public offering throughout the United States. In connection with this offering a registration statement, including a prospectus dated September 25, 1972 ("prospectus"), was filed with the SEC pursuant to the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77a Et seq. A copy of the prospectus was sent to each person purchasing any of the four million shares. In response to this public offering, plaintiff, Emily Greenapple, purchased 200 shares of Detroit Edison common stock at $ 19.375 per share for a total cost of $ 3875.

 On February 10, 1975 plaintiff filed the complaint in the present action alleging that Detroit Edison's prospectus deceptively omitted to state certain material facts thereby subjecting Detroit Edison to liability under Sections 11, 12(2) and 17(a) of the Securities Act, 15 U.S.C. §§ 77k, 77L (2) and 77q, and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. Also named as defendants in the complaint were Price Waterhouse & Co. ("Price Waterhouse"), Detroit Edison's outside auditors, and Morgan Stanley, the lead underwriter.

 After interposing answers to plaintiff's complaint and prior to the commencement of discovery, all of the original defendants moved for summary judgment. The Court denied the motion without prejudice to renewal upon plaintiff's completion of discovery. Plaintiff subsequently conducted and completed substantial pre-trial discovery, including depositions of numerous officers and partners of Detroit Edison, Price Waterhouse and Morgan Stanley. Upon completion of discovery, the original defendants renewed their motion for summary judgment and plaintiff cross-moved for summary judgment.

 By a stipulation dated April 26, 1978, the action between the plaintiff and original defendants Morgan Stanley and Price Waterhouse was dismissed. Thus, only the issue of defendant Detroit Edison's liability is presently before the Court.


 It is a well-settled rule in this Circuit that in considering motions for summary judgment, a district court "cannot try issues of fact, it can only determine whether there are issues to be tried." S. E. C. v. Research Automation Corp., 585 F.2d 31, 33 (2d Cir. 1978); American Mfrs. Mut. Ins. Co. v. American Broadcasting-Paramount Theatres, Inc., 388 F.2d 272, 279 (2d Cir. 1967). However, if the motion for summary judgment reveals that there is no genuine issue as to any material fact and that one party is entitled to judgment as a matter of law, then summary judgment is appropriate even in cases that, at first blush, appear to involve complex factual and legal issues. See First National Bank v. Cities Service Co., 391 U.S. 253, 88 S. Ct. 1575, 20 L. Ed. 2d 569 (1968); 6 Moore's Federal Practice P 56.15(1.-0), at 56-398 (1976). After a thorough review of the briefs, affidavits, depositions, and other materials filed by the parties in connection with the present motions and after considering the facts in the light most favorable to the plaintiff, the Court is of the view that summary judgment in favor of the defendant is indeed appropriate here. Plaintiff has failed to establish any material omissions or misrepresentations in defendant's prospectus which would subject the defendant to liability under the securities laws.

 In order to evaluate the parties' contentions properly it is necessary to discuss briefly the nature of the accounting concept of "allowance for funds used during construction" and the nature of defendant's disclosure of this concept. Defendant's prospectus sets forth, in tabular form, its revenues, expenses and income for the years 1967 through 1971 and the twelve month period ended June 30, 1972. The statement indicates for each accounting period the level and sources of utility revenues and the corresponding expenses incurred in utility operations, concluding with a statement of the company's "Operating Income" for each period. Prospectus, PX 1, p. 7.

 Under a separate heading designated as "Other Income," the Company reported items of its non-operating income which consisted principally of amounts identified as "allowance for funds used during construction." Both the identification of these sums as AFDC and their inclusion in "Other Income" were explicit requirements of the Uniform System of Accounts in 1972.

 Income Account 419.1 of the Uniform System of Accounts, 18 C.F.R. Part 101, Income Accounts, § 419.1, in effect at the time defendant issued its prospectus, provided as follows:

419.1 Allowance for funds used during construction.
This account shall include concurrent credits for allowance for funds used during construction based upon the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate upon other funds when so used. (See electric plant instruction 3(17).) *fn2"
Electric Plant Instruction 3(17), 18 C.F.R. Part 101, Electric Plant Instructions § 3(17), further specifies when and how AFDC should be calculated, and required that amounts determined as AFDC should be capitalized and included in plant construction cost. Such amounts then form part of the overall cost of the plant and are subject to depreciation when the plant is placed in service. See Income Account 403, 18 C.F.R. Part 101, Income Accounts § 403. In this manner the costs of funds used in construction are, like ...

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