Boston Gas v. Dept. Telecomm. & Energy

Decision Date07 March 2002
Docket NumberSJC-08538
Citation436 Mass. 233
PartiesBOSTON GAS COMPANY(FN1) vs. DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY. Docket No.:MASSACHUSETTS SUPREME COURT County: Suffolk
CourtUnited States State Supreme Judicial Court of Massachusetts Supreme Court

Summary: Department of Telecommunications and Energy. Public Utilities, Rate setting. Administrative Law, Rate setting, Substantial evidence.

Civil action commenced in the Supreme Judicial Court for the county of Suffolk on January 30, 2001.

A motion for a stay was heard by Sosman, J., and the case was reported by her.

After remand by this court for further proceedings, the case was reported by Greaney, J.

Robert J. Keegan (David S. Rosenzweig with him) for the plaintiff.

Pierce O. Cray, Assistant Attorney General, for the defendant.

Present: Marshall, C.J., Greaney, Ireland, Spina, Cowin, Sosman, & Cordy, JJ.

COWIN, J.

This case arises out of an order by the Department of Telecommunications and Energy (department) regulating the manner in which Boston Gas Company, doing business as Keyspan Energy Delivery New England (company), switches from a "cost of service/rate of return" (COS/ROR) ratemaking model to a "performance based regulation" (PBR) model. The company appeals from an order of the department adjusting the company's proposed rates by imposing an "accumulated inefficiencies" factor. According to the department, this factor compensates consumers for some of the inefficiencies the company built up under the old COS/ROR model. The company argues that the department's decision to add an accumulated inefficiencies factor and the quantification of that factor are not supported by substantial evidence. In addition, the company argues that the department's order constitutes prohibited retroactive ratemaking. While we conclude that the department had a sound basis for imposing some accumulated inefficiencies factor, the department's quantification of the accumulated inefficiencies factor is unsupported by substantial evidence. We therefore vacate the department's order.2

1. Regulatory background. General Laws c. 164, § 94, grants the department the authority to regulate rates for gas and electric companies. Each utility separately establishes its rates in individual adjudicatory proceedings before the department. Prior to 1995, the department set rates by using a COS/ROR ratemaking model. COS/ROR "permits utilities to charge rates that allow them to recover reasonable operating expenses and to earn a fair return on investment." D.P.U. 94-158 at 3 (1995). Under this system, the department first determines a utility's reasonable expenses. Next, the department calculates a figure representing a reasonable return on the utility's investment. The sum of these two figures is the utility's "total revenue requirement." Retail rates are set so that the utility can generate revenue equal to the total revenue requirement.

A drawback of COS/ROR regulation is that it does not provide sufficient incentives for utilities to reduce their costs; a utility can simply pass extra costs to the customers in the form of higher rates. In addition, the rate established in an adjudicatory proceeding before the department remains the same until the utility initiates a rate change proceeding. Therefore, under COS/ROR, there was a delay between the time that the utility experienced increased costs and the corresponding proceeding establishing increased rates. This delay, called a "regulatory lag," actually benefits consumers because they continue to pay at the lower rate until the conclusion of the rate setting proceeding. Despite the advantage to consumers of the "regulatory lag," the department determined that, on the whole, the COS/ROR system resulted in higher rates for consumers.

In 1995, the department issued an order expressing its preference for PBR ratemaking. The Legislature subsequently endorsed this decision by enacting G. L. c. 164, § 1E, inserted by St. 1997, c. 164, § 193, which authorizes the department "to promulgate rules and regulations to establish and require performance based rates for each... gas company... in the commonwealth." The form of PBR at issue in this case is called "price cap" regulation. Under a price cap model, the department first determines an initial "cast off rate."3 This rate is then increased annually by accounting for inflation over time. However, the cast off rate is also reduced annually to account for the company's expected improvements in productivity. This adjustment to the cast off rate is called the "productivity offset."

The theory behind the price cap model is that it encourages the utility to improve its efficiency. See MCI Telecommunications Corp. v. Department of Telecommunications & Energy, 435 Mass. 144, 147 (2001). If the utility improves its productivity by more than the amount anticipated by the productivity offset, it keeps the extra profits. However, if the utility does not achieve the expected productivity gains, it will face a revenue shortfall. It is because of this incentive-producing benefit that the department endorsed PBR.

2. Facts and proceedings below. The company filed proposed changes to its rates with the department on May 17, 1996. In response to the department's shift to PBR, the company proposed a five-year plan based on a price cap model. The company proposed a "cast off rate" pursuant to the old COS/ROR model, and then adjusted the cast off rate by a price cap formula. The company's price cap formula included a productivity offset based on, inter alia, a "consumer dividend," which is a downward adjustment in rates intended to account for efficiency gains a utility is expected to achieve as a result of the shift to PBR.

The department issued its decision (initial order) after conducting an investigation of the company's proposal. The department made downward adjustments to the company's cast off rate and increased the productivity offset by doubling the company's proposed consumer dividend of 0.5 per cent and adding a 1.0 per cent "accumulated inefficiencies factor." The stated purpose of the "accumulated inefficiencies factor" was to compensate consumers for inefficiencies "in the Company's current operations that the Department was unable to discover in its earnings review and would be unable to discover in a traditional rate case." In response to the company's motion for reconsideration, the department lowered the consumer dividend to 0.5 per cent, but retained the 1.0 per cent accumulated inefficiencies factor.

The company appealed from the department's order to the Supreme Judicial Court pursuant to G. L. c. 25, § 5, and a single justice reserved and reported the matter to the full court. At this point in the proceedings, the department agreed that it had not made adequate subsidiary findings and moved to remand the matter for further proceedings. This court discharged the report and ordered the single justice to remand the matter to the department. In its order following remand (remand order), the department retained the accumulated inefficiencies factor, but reduced it from 1.0 per cent to 0.5 per cent. The company appealed once again to a single justice pursuant to G. L. c. 25, § 5, who reserved and reported the matter to the full court.

3. Standard of review. Although the department has "broad authority to determine ratemaking matters in the public interest," we must overturn the department's decision if "it is based on an error of law, unsupported by substantial evidence, unwarranted by facts found on the record as submitted, arbitrary and capricious, an abuse of discretion, or otherwise not in accordance with law." Massachusetts Inst. of Tech. v. Department of Pub. Utils., 425 Mass. 856, 867-868 (1997).

The company claims that the department's decision to impose an accumulated inefficiencies factor is not supported by substantial evidence. Substantial evidence is "such evidence as a reasonable mind might accept as adequate to support a conclusion." Cobble v. Commissioner of the Dep't of Social Servs., 430 Mass. 385, 390 (1999), quoting G. L. c. 30A, § 1 (6). In determining whether an agency decision is supported by substantial evidence, we must consider the record as a whole and reverse the agency's decision if "the cumulative weight of the evidence tends substantially toward opposite inferences." Id. at 391. Although we must carefully consider any evidence in the record that detracts from the agency's conclusion, we "accord due weight to the 'experience, technical competence, and specialized knowledge' of the department." Martorano v. Department of Pub. Utils., 401 Mass. 257, 261 (1987), quoting G. L. c. 30A, § 14 (7). The appealing party carries the burden of showing that the order appealed from is unsupported by substantial evidence. Massachusetts Inst. of Tech. v. Department of Pub. Utils., supra at 867.

4. The imposition of the accumulated inefficiencies factor. The initial order justifies the department's decision by relying on NYNEX Price Cap, D.P.U. 94-50 (1995) (NYNEX), an earlier decision that imposed an accumulated inefficiencies factor in a rate setting proceeding for NYNEX, a utility in the telecommunications industry. There, the department stated that, because the average utility will be more efficient under PBR regulation, the department must find that the company has built up inefficiencies in its years under COS/ROR. Without an accumulated inefficiencies factor, according to the department, consumers "would receive none of the benefits associated with eliminating these inefficiencies."

The department reasserts this theory in its remand order, and finds support for it from the testimony of two company witnesses. These two witnesses argued that the underlying theory of PBR creates greater incentives for utilities to reduce costs.4 The company asserts that these statements stand only for the proposition that PBR creates greater risks for the company, as well as increased financial incentive to compensate for that risk. It is precisely that...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT