Boston Gas Co. v. Department of Public Utilities

• Decision Date: 04 March 1975
• Citation: 367 Mass. 92,324 N.E.2d 372
• Parties: BOSTON GAS COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 372

324 N.E.2d 372

367 Mass. 92

BOSTON GAS COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Nov. 8, 1974.

Decided March 4, 1975.

Hans F. Loeser, Verne W. Vance, Jr., and Scott C. Moriearty, Boston, for Boston Gas Co.

Robert H. Quinn, Atty. Gen., Walter H. Mayo, III, Asst. Atty. Gen., and David M. O'Connor, Legal Asst. Atty. Gen., for the Department of Public Utilities.

Before QUIRICO, BRAUCHER, KAPLAN and WILKINS, JJ.

QUIRICO, Justice.

These are consolidated appeals taken by the Boston Gas Company (Company) under G.L. c. 25, § 5, as amended by St.1971, c. 485. One appeal is from the decision, order and rulings of the Department of Public Utilities (Department) dated June 29, 1973, and the other is from the decision, order and rulings of the Department dated October 10, 1973. Both orders relate to schedules for increased rates and charges filed by the Company with the Department on August 16, 1972, to take effect on September 1, 1972, but suspended by the Department until July 1, 1973, pursuant to G.L. c. 164, § 94.

The appeals were entered in the Supreme Judicial Court for Suffolk County. Thereafter, at the request of the parties, a single justice of the court ordered the appeals consolidated and reserved and reported them, without decision, to the full court 'for such decree to be entered as may be appropriate under G.L. c. 25, § 5.'

The schedules of rates and charges filed by the Company on August 16, 1972, would have produced about $7,900,000 of additional revenues annually. The Department's order of June 29, 1973, disallowed those schedules and instead authorized the Company to file new schedules which would produce additional gross revenues of $3,881,764. On motion of the Company and certain interveners the Department reconsidered five matters which formed part of the basis for its order of June 29, 1973. The reconsideration resulted in the Department's order of October 10, 1973, which, inter alia, authorized the Company to file new schedules which would produce additional gross revenues of $656,344 over and above the $3,881,764 previously authorized. ¹

Of the many issues raised by the Company's appeals, only one has been briefed by the Company as 'significant enough to warrant the attention of this Court.' The other issues either were resolved to the Company's satisfaction by the Department's second order or have been waived. The only issue requiring our decision is whether the Department properly excluded from the Company's test year rate based an item of $1,908,941 representing the net amount of unamortized retired plant. ²

The item of 'unamortized retired plant' derives almost entirely from the Company's abandonment in 1969 of its oil gas manufacturing plant and related facilities located at Everett and Commercial Point in Boston. In 1970, the Department authorized the Company to amortize the then remaining undepreciated investment in the plant and facilities as an expense item spread over a ten year period, thus permitting the Company, in effect, to recoup that investment. At issue here is whether the Company is entitled to more than that--specifically, whether it is entitled to have the unamortized balance of that investment included in its rate base and thus further entitled to have included in its test year expenses an allowance for the cost of the capital invested in that plant. The Department decided that it is not. We hold, for reasons peculiar to this case and which we discuss below, that it is.

The question whether this unamortized investment in gas manufacturing plant and facilities is properly includable in the Company's rate base was considered by this court, in a different form, in Boston Gas Co. v. Department of Pub. Util., 359 Mass. 292, 269 N.E.2d 248 (1971) (hereinafter referred to as the 1971 opinion). We describe the background of the present controversy, much of which is also revealed in the 1971 opinion. See 359 Mass. at 295, 308--309, 311--316, 269 N.E.2d 248 (1971).

The Company (including several other companies to which it has from time to time succeeded by merger or otherwise) has been engaged in the gas business since the middle of the Nineteenth Century. ³ For the first century of its existence the Company manufactured all of the gas which it distributed and sold. When the Algonquin Gas Transmission Company natural gas pipeline was completed and started bringing gas to the New England area in the early or mid 1950's, the Company converted its operations, its equipment, distribution system and customer appliances to permit the use of natural gas with resulting reduction in its gas manufacturing operations. By 1968 about ninety-eight per cent of the gas sold by the Company was natural gas obtained from the pipeline company, and only the remaining two per cent was manufactured by it.

The rates at which the pipeline company sold natural gas to the Company included a 'demand charge' computed in part on the basis of the greatest quantity of gas taken by the Company from the pipeline in any single day in the preceding year, this day being sometimes called the 'peak day.' In the case of a gas company serving a substantial number of customers heating buildings with gas, the peak day often occurs sometime in the coldest winter months. In effect, a gas company whose daily take of natural gas from the pipeline fluctuates widely pays a higher rate for the gas then would a company with a substantially uniform daily take. It is therefore in the interest of a gas company and its customers that those extreme fluctuations in the daily take from the pipeline be avoided or minimized. One of the common ways of doing this is by resort to 'peak-shaving' operations. Basically, peak-shaving consists of the use of gas from a source other than the pipeline to avoid or level the uneven peak demands on the pipeline. See Phillips, The Economics of Regulations, 642--647 (1965).

For the years prior to and for part of the year 1968 the Company accomplished peak-shaving by the use of gas which it manufactured in its own plant maintained on a standby status for that purpose. In late 1968, however, the Company put into operation a new liquefied natural gas (LNG) facility intended to replace, in the near future, the obsolescent manufactured gas plant as a peak-shaving device. Because the full cost of the manufactured gas plant had not been amortized or depreciated by the time it was retired from use and replaced by the new LNG facility, the question arose as to the proper treatment for rate purposes of the retired plant. This question was complicated in the 1971 opinion by the fact that it developed in the context of a comparison by the Department of the Company's financial situation in two hypothetical test years, one a year in which only LNG was used for peak-shaving and the other a year in which no LNG was used for that purpose. We said, at 314--315, 269 N.E.2d at 261: 'Company contends that, in computing the savings to be expected in an all-LNG hypothetical test year, the D.P.U. did not include (for purposes of comparison with the hypothetical no-LNG year) any return on the $3,794,000 of Company's investment in manufactured gas facilities which had not been amortized (or depreciated) by the beginning of 1968. It would seem that this item (i.e. carrying any unamortized balance of a prudent investment in an obsolete facility after it has been supplanted by a modern facility) would be proper for consideration in some manner in comparing the results of a hypothetical all-LNG year with those of a hypothetical no-LNG year. Precisely what the D.P.U. has done with this item in its comparison is not clear from its decision or from the D.P.U.'s brief. The computation and comparison must be reexamined, and any discrepancy appropriately corrected, with a clear explanation of the relevant steps in the comparison.'

The Department concedes that on remand of the case following our 1971 opinion it permitted the Company to include the value of its unamortized retired plant in its rate base. Re Boston Gas Co., D.P.U. 16102--B at 4--5 (June 30, 1971). In the next two rate proceedings involving the Company, the Department again permitted the inclusion of the unamortized retired plant in the rate base. Re Boston Gas Co., D.P.U. 16515 at 9 (June 21, 1971). Re Boston Gas Co., D.P.U. 17330 at 4 (July 12, 1972). Not until the present proceeding did the Department change its position and for the first time exclude this property from the Company's rate base. Re Boston Gas Co., D.P.U. 17461 at 7--9 (June 29, 1973--the rate order). Re Boston Gas Co., D.P.U. 17461--A at 1--2 (October 10, 1973--the supplemental rate order).

The Company argues that the 1971 opinion is dispositive of the issue in this case. We disagree. As the language previously quoted from that opinion manifests, the record then before us was unclear as to how the Department had treated this item. Our decision merely required that on remand the Department 'consider' the retired plant in its comparison of the hypothetical all-LNG and no-LNG test years and that it make clear its treatment of this item. The quoted language was obviously not meant as a final determination whether the retired plant should be included in the Company's rate base.

The Company further argues that this item must be included in its rate base 'as a matter of law and sound public policy.' There is a long accepted and often repeated principle that a regulated public utility such as the Company is entitled to charge rates which afford it the opportunity to meet its costs of service, including a fair and reasonable return on honestly and prudently invested capital, but the application of the principle is often difficult. Lowell Gas Co. v. Department of Pub. Util., 324 Mass. 80, 94--96, 84 N.E.2d 811 (1949); New England Tel. & Tel. Co. v. Department of Pub. Util., 360 Mass. 443, 450, 275 N.E.2d 493 (1971). The amount ...