Boston Gas Co. v. Department of Public Utilities

Citation405 Mass. 115,539 N.E.2d 1001
PartiesBOSTON GAS COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.
Decision Date12 June 1989
CourtUnited States State Supreme Judicial Court of Massachusetts

James K. Brown (Bonny E. Sweeney, Boston, with him) for plaintiff.

Lawrence Fletcher-Hill, Asst. Atty. Gen., for defendant.

Roscoe Trimmier, Jr., Boston, amicus curiae, for United Way of Massachusetts Bay, et al.

Franklin M. Hundley, Eric J. Krathwohl, & Daniel R. Avery, Boston, for Cambridge Elec. Light Co., et al.

Thomas G. Robinson, Westborough, amicus curiae, for Massachusetts Elec. Co.

Patrick W. Hanifin, Wayne S. Henderson & Laurence S. Fordham, Boston, amicus curiae, for New England Legal Foundation.

Before WILKINS, LIACOS, ABRAMS, LYNCH and O'CONNOR, JJ.

WILKINS, Justice.

The Boston Gas Company (company), by this appeal from an order of the Department of Public Utilities (department), challenges those aspects of the department's 1988 rate decision that disallowed certain advertising expenses and all charitable contributions as costs of service that could be recognized in the company's rates charged to its customers. The case is before us on a reservation and report by a single justice of this court.

The first issue concerns the department's refusal on the record before it to recognize the company's institutional or image advertising as a cost of service. The second issue involves the department's determination (also on the record before it) to disallow all charitable contributions as a cost of service. Each issue calls for us to consider the continuing soundness of this court's rulings on these general questions in New England Tel. & Tel. Co. v. Department of Pub. Utils., 360 Mass. 443, 482-490, 275 N.E.2d 493 (1971) (the New England Tel. case). In that opinion, this court announced rules of law mandating the recognition of reasonable advertising and charitable giving expenses as costs of service. Because circumstances have changed in respects we shall explain, we agree with the department that the rules of the New England Tel. case should be abandoned. We accept as proper the new standards announced by the department but agree with the company that the department should have granted the company the opportunity to meet those new standards. We shall remand the case for further proceedings in light of this opinion.

1. The department was warranted in disallowing, as a cost of service to be reflected in the company's rates, institutional advertising, advertising that is designed to improve the image of the company and that contains no information which might be directly helpful or beneficial to the company's customers.

Our opinion in the New England Tel. case was written at a time when it was generally believed, as cited authorities stated (360 Mass. at 483-484, 275 N.E.2d 493), that a utility should be encouraged to foster growth and that growth would benefit consumers and shareholders alike. We concluded that a utility was "entitled to expend reasonable sums in an effort to retain its current customers, to acquire additional customers, and to sell to all such customers as many of its services as it has available for sale." Id. at 483, 275 N.E.2d 493. We said that the utility's managers should make the decision whether institutional advertising is helpful to its business and, if so, what amounts the company should spend. Id. Quoting from a Vermont opinion, the court accepted the view that, although such expenses should be carefully scrutinized, they should be disallowed only if it appears clear that they are excessive, unwarranted, or incurred in bad faith. Id. at 484, 275 N.E.2d 493. We concluded that the department had attempted without warrant to interfere with the prerogatives of the utility's business managers and thus had acted beyond its authority. Id.

Almost ten years later, the Legislature enacted a statute disallowing as a cost of service amounts expended by gas and electric companies for promotional (and political) advertising, subject to certain exclusions. G.L. c. 164, § 33A, inserted by St.1981, c. 375, § 5, as appearing in St.1984, c. 189, § 119. This expression of public policy for such companies substantially undercuts the basis for the court's treatment of advertising expenses in the New England Tel. case. Section 33A, which is set forth in full in the margin, 1 is concerned with discouraging gas and electric companies from promoting the use of gas and electricity, respectively. The language of § 33A was taken largely from the Federal Public Utility Regulatory Policies Act of 1978. See 16 U.S.C. § 2623(b)(5) and § 2625(h)(2) (1982) (electric utilities), and 15 U.S.C. § 3203(b)(2) and § 3204(b)(2) (1982) (gas utilities). 2 The object of the Federal act was to promote energy conservation by federally regulated utilities in response to the nationwide energy crisis and to encourage States to adopt similar regulations. See Federal Energy Regulatory Comm'n v. Mississippi, 456 U.S. 742, 745, 102 S.Ct. 2126, 2130, 72 L.Ed.2d 532 (1982). If the use of energy was not encouraged by promotional advertising, it was assumed that less energy would be used.

This case, of course, does not involve promotional advertising. Promotional advertising is advertising designed "to inform customers of new service or of other information which might be helpful or economical." New England Tel., supra 360 Mass. at 482, 275 N.E.2d 493. The recognition or rejection of such advertising is now governed by § 33A with its prohibitions subject to stated exceptions. The New England Tel. case also did not involve promotional advertising. Each party in the New England Tel. case accepted promotional advertising as an appropriate cost of service. The debate then, as in this case, was over institutional or image advertising.

One might argue that § 33A, therefore, has nothing to do with the advertising allowance dispute in this case and that the New England Tel. case is still controlling. We disagree. By enacting § 33A, the Legislature has taken from gas and electric utility management the right to determine that all reasonable promotional advertising costs are includible costs of service. Because, as a matter of public policy, advertising costs most directly related to the growth of the use of gas and electric services have been substantially limited as allowable costs of service, we should consider whether the result in the New England Tel. case concerning image advertising has validity at this time.

That the Legislature which enacted § 33A had before it, but did not enact, a provision intended to disallow all advertising expenses as a cost of service (1981 House Bill No. 6316, § 8B) does not bar us from reconsidering the result in the New England Tel. case. Legislative silence on the subject of image advertising cannot fairly be seen either as a ratification of our decision in the New England Tel. case or as a limitation on this court's authority to rule concerning image advertising.

The New England Tel. case espoused a broad principle of managerial prerogative concerning advertising for the benefit of the company. That reasoning, which no longer fully obtains at least as to gas and electric companies, may explain why a utility should be allowed to advertise to promote its image, but it does not explain why ratepayers, as opposed to shareholders, should shoulder the expense of advertising that does not benefit them in any fairly discernible and direct way. We thus agree with the department, and the strong trend of judicial decisions issued since our opinion in the New England Tel. case, 3 that the cost of institutional or image advertising may be treated as a cost of service only if it benefits ratepayers directly. 4

The company argues that, if this court should accept the department's standard for the recognition of image advertising as a cost of service, the company did not have a fair chance to present its case for recognition of advertising expenses because the department applied its new standard in the decision that announced it. It is generally unacceptable for an agency to announce a new standard in its final decision in an adjudicatory proceeding and then rule, often not surprisingly, that a party who had no notice of that standard failed to meet it. See New England Tel. & Tel. Co. v. Department of Pub. Utils., 371 Mass. 67, 84, 354 N.E.2d 860 (1976); NLRB v. Majestic Weaving Co., 355 F.2d 854, 860-861 (2d Cir.1966). If the department does not make changes in ratemaking principles by regulation or by prospective adjudicatory decision making, it must grant the party or parties to an adjudicatory proceeding the opportunity to satisfy the requirements of a new rule once that rule (or the possibility of the adoption of a new rule) is announced. The company, therefore, should have been allowed to present, and on remand may now present, a prospective case for the allowance of institutional advertising expenses as a cost of service, either because the proposed expenses satisfy the department's new standard for the recognition of institutional or image advertising or because they fall within an exclusion in § 33A.

2. The department disallowed charitable contributions as a cost of service because the company did not establish on the record "that its corporate charitable giving is reasonable and provides some clear benefit to ratepayers that is essential to serving them." The company's "general assertions of benefit" were not sufficient, in the department's view, "to tie the level of giving to increased sales or decreased costs." In deciding as it did, the department abandoned the position it had taken in 1986, allowing one-half the cost of charitable contributions to be borne by ratepayers. In this proceeding, the company sought to include $172,028 as an allowance for charitable giving.

Whether to allow charitable giving as a cost of service was considered in the New England Tel. case (360 Mass. at 489, ...

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