Boston Gas Co. v. Department of Public Utilities

• Decision Date: 15 April 1971
• Citation: 359 Mass. 292,269 N.E.2d 248
• Parties: , 90 P.U.R.3d 145 BOSTON GAS COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 248

269 N.E.2d 248

359 Mass. 292, 90 P.U.R.3d 145

BOSTON GAS COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued March 4, 1971.

Decided April 15, 1971.

Hans F. Loeser, Boston (Verne W. Vance, Jr., and James K. Brown, Boston, with him) for Boston Gas Co

William E. Searson, III, Asst. Atty. Gen. (Walter H. Mayo, III, Asst. Atty. Gen., and John F. McGarry, Deputy Asst. Atty. Gen., with him), for the Dept. of Public Utilities.

Before TAURO, C.J., and SPALDING, CUTTER, REARDON and BRAUCHER, JJ.

CUTTER, Justice.

Boston Gas Company (Company) filed with the Department of Public Utilities (D.P.U.) on February 12, 1969, new rate schedules to become effective March 1, 1969. The D.P.U. suspended these rates until January 9, 1970, pending investigation. On January 8, 1970, it disallowed the rates, which originally had been designed to produce additional gross annual revenues of $3,493,600. ¹ It, however, permitted Company to file new rates to produce additional annual gross revenues of $1,974,000. Later (because of D.P.U. mistakes in computations) a new order (March 4, 1970) permitted the additional gross revenues to be increased to $2,021,022 (see fn. 1). Company then filed its appeal in the county court under G.L. c. 25, § 5 (as amended through St.1956, c. 190). ² A single justice reported

the case for the determination of the full court upon the record before the D.P.U. and certain papers filed in the county court. Upon Company's petition, another single justice (June 24, 1970) directed that additional evidence ³ be transmitted to this court (but without any 'determination by * * * (the county c)ourt that * * * (such) additional evidence is properly includible in' the record).

GENERAL BACKGROUND.

Company, a wholly owned subsidiary of Eastern Gas & Fuel Associates, serves thirty-two cities and towns (including Boston) running in a strip from Groton and Shirley on the northwest to Rockland and Whitman on the southeast. It obtains natural gas from the pipelines of Algonquin Gas Transmission Company. All but about two per cent of the gas sold by Company in 1968 was natural gas. The small amount of manufactured gas was used to meet winter 'peak' demand. In the further, for such 'peak' needs, Company plans to rely on liquified natural gas (LNG) stored by it.

Company's last rate increase was in 1956. It avoided increases from 1956 to 1969 (at a time when most other prices were rising rapidly) by greater use of labor saving machinery, by increased employee productivity, by efforts to increase sales, and because of the savings effected by the introduction of natural gas in the 1950's. In 1969, an application for higher rates was induced by continuing inflationary pressures, increases in wages and operating expenses, the need of additional plant investment, and other factors. The amount of the requested increase was influenced (see fn. 1) by Company's competition with other utilities and (especially in the home heating market) with the 'unregulated fuel oil industry.' Home heating has become an increasingly large part of Company's business.

Before the D.P.U. both Company and counsel for the department dealt with the issues as being (a) Company's proper rate of return and its rate base; and (b) Company's cost of rendering the services which produce its revenues. In the late autumn of 1969, at the hearings, 1968 was the most recent year for which complete figures were available and was used as a 'test year' (see fn. 23, infra). The D.P.U., however, made certain adjustments of the 1968 figures, the propriety of which Company disputes.

RATE OF RETURN AND COST OF CAPITAL.

1. On December 31, 1968, Company's long-term debt consisted of $27,305,000 of first mortgage bonds, due in 1990, and $16,000,000 of short-term debt. In 1969 the short-term debt was converted into $15,000,000 of three-year notes. This conversion gave Company, at the time of the hearings, a capital structure of 53.7% debt and 46.3% common stock equity. It was then anticipated that soon there would be $14,000,000 of new debt financing to meet Company's planned construction expenditures in 1969--1970. If this amount of financing had taken place, Company would have had 60% debt and 40% equity. ⁴ The D.P.U.

determined that it was prudent for Company to continue a 'policy of financing by debt' and proceeded [359 Mass. 297] to fix fair return by adjusting Company's outstanding debt ratio to an assumed 60% (with a 40% equity ratio) in order to reflect the expected cost of additional debt capital soon to be acquired. This the D.P.U. said was so as not to 'predicate a finding of fair rate of return on a capital structure and cost of capital which will not actually exist during the period when the proposed rates are expected to be in effect.'

The D.P.U. thereupon computed the composite cost of debt to Company as follows:

                        Issue           Net Cost Rate     Annual Charges
                ---------------------  -----------------  --------------
                First Mortgage Bonds   4.68% (Actual)       $1,228,734
                issued 1965, due 1990
                ($26,255,000)
                3-year Notes           8.00%                 1,200,000
                ($15,000,000)
                Anticipated 1969-70    8.00% (Estimated)     1,120,000
                ($14,000,000)
                

On this expected debt of $55,255,000, the annual charges anticipated by the D.P.U. were $3,548,734 with an expected composite debt cost rate of 6.42%.

On January 8, 1970, when the D.P.U. announced its rate decision, it thus expected that Company would be able to borrow at 8%. Later financing, however, did not work out as well as had been anticipated. Company in fact was authorized by the D.P.U. on March 25, 1970, to redeem its $15,000,000 of notes from the proceeds of $20,000,000 of additional first mortgage bonds, payable in not more than twenty-five years from the date of issue. On April 23, 1970, the D.P.U. approved additional provisions of the new bonds, including an 'effective interest cost of the bonds to' Company of 9.73%. ⁵

Company thereupon (as has been stated) obtained in the county court an order directing the D.P.U. to transmit to this court the evidence concerning the unexpectedly high cost and more limited amount of the new 1970 debt. If Company's actual outstanding debt, after the new bond issue, had been employed in arriving at the rate decision (in computing Company's cost of debt and debt ratio) the computation would have been as follows:

                    Mortgage Debt       Net Cost Rate
                    -------------       -------------
                1965 issue $26,255,000      4.68%
                1970 issue $20,000,000      9.73%
                

or a composite debt rate of 6,86% on $46,255,000 of mortgage debt (constituting 56% of Company's capital), instead of the 6.42% composite rate (on $55,255,000) estimated by the D.P.U. in its rate decision.

2. Company contends that, in fixing the cost of debt for rate purpose, the new composite 6.86% cost of debt rate on Company's total mortgage debt of $46,255.000 should be used, and that Company should be treated For us to remand the case for new hearings, to adduce the new evidence before the D.P.U., would result in undesirable additional delay of these proceedings already more than two years old. ⁷ The limited additional evidence (fn. 3, supra) relates to matters of public record contained in the D.P.U.'s own files. The 1969 Company annual return (see G.L. (Ter.Ed.) c. 164, § 83) merely adds the return of that year to the series of such returns (beginning in 1964) already in evidence before the D.P.U. The two 1970 financing decisions reveal that both parties at the rate hearings, and the D.P.U. itself in its rate decision, in fact made an inaccurate 'prophecy' (see Lowell Gas Co. v. Department of Pub. Util., 324 Mass. 80, 89, 84 N.E.2d 811, 817), concerning the amount of the new bond issue and the necessary interest rate. It is now possible and proper for us (since the 'rate order is challenged on constitutional grounds in this court') and for the D.P.U., to examine and evaluate the current facts with the aid of 'the improved vision of intervening experience.' See Boston Consol. Gas Co. v. Department of Pub. Util., 327 Mass. 103, 104--107, 97 N.E.2d 521; Opinion of the Justices, 328 Mass. 679, 686--690, 106 N.E.2d 259, 263 (where the Justices said that this court, with respect to consitutional issues, in performing its duty to afford 'a utility claiming confiscation * * * an independent judicial review as to both law and fact,' must have authority to require the production of 'new evidence necessary to bring the proof as nearly as reasonably possible down to the date of final decision' ⁸). See also New England Tel. & Tel. Co. v. Department of Pub. Util., 331 Mass. 604, 606, 121 N.E.2d 896 (additional evidence submitted to the county court by stipulation). Federal cases, considering to some extent evidence becoming available during the pendency of an appeal from an administrative decision, include Pittsburgh v. Federal Power Commn., 99 U.S.App.D.C. 113, 237 F.2d 741, 751--753 (Ct.App.D.C.), and Scenic Hudson Preservation Conference v. Federal Power Nothing in G.L. c. 25, § 5, ⁹ compels us to delay proceedings by remanding the case (in advance of our decision) to the D.P.U. for reopened hearings on the additional evidence (fn. 3). Particularly is this so in view of the character of that additional evidence and the ease with which it may be verified. To the extent that our decision is affected by the additional evidence, ¹⁰ we remand the case to the D.P.U. to verify its accuracy, and to make appropriate corrections in the rate decision based on that evidence. We assume that, as a practical matter, the existence of the D.P.U. decisions on the 1970 bond issue (and of the facts thereby determined) cannot be questioned. On that assumption, we state the applicable principles of decision.

as having the 56%--44% debt-equity capital structure then in effect (with D.P.U. acquiescence) after the 1970 bond issue. The D.P.U. now argues that this court...