Fitchburg Gas and Electric Light Company v. Department of Telecommunications …

• Decision Date: 08 October 2003
• Citation: 440 Mass. 625,801 NE 2d 220
• Parties: FITCHBURG GAS AND ELECTRIC LIGHT COMPANY vs. DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

440 Mass. 625

801 NE 2d 220

FITCHBURG GAS AND ELECTRIC LIGHT COMPANY vs. DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY.

Supreme Judicial Court of Massachusetts, Suffolk.

October 8, 2003.

January 8, 2004.

Present: Marshall, C.J., Greaney, Ireland, Spina, Cowin, & Sosman, JJ. Scott J. Mueller (Meabh Purcell with him) for the plaintiff

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

MARSHALL, C.J.

In May, 2001, pursuant to an investigation launched on its own initiative, the Department of Telecommunications and Energy (department)¹ determined that, for a period of 139 months between 1987 and 1998, Fitchburg Gas and Electric Light Company (Fitchburg) overcharged its gas customers by including identical inventory finance charges (IFCs) in both its base rate and its supplemental cost of gas adjustment clause (CGAC). The department calculated the amount of double billing at $675,052 and ordered Fitchburg to refund that amount to its ratepayers, with interest, over a similar period. Fitchburg appealed pursuant to G. L. c. 25, § 5. A single justice of this court reserved and reported the matter, without decision, to the full court. We affirm. 1. Background. We begin with a general overview of the relevant statutory and regulatory background. The department is authorized by the Legislature to enforce legislation and to promulgate rules and regulations governing the provision of telecommunications and energy services within the Commonwealth. Among its other duties, the department regulates the rates a gas company may charge to its retail customers, or "ratepayers." See G. L. c. 164, § 1E (authority to establish rules and regulations for gas company base rates); G. L. c. 164, § 58 (procedures for gas and electricity price regulation); G. L. c. 164, § 76 (general supervision of gas companies).

Two kinds of regulated gas company charges are at issue in this appeal: the base rate and the CGAC, both of which are components of the total amount ratepayers pay for gas services in Massachusetts. See 220 Code Mass. Regs. § 6.06 (1993). The base rate is the principal device through which a gas company operating within the Commonwealth generates revenue from its ratepayers. See Boston Gas Co. v. Department of Telecom. & Energy, 436 Mass. 233, 234 (2002). During the relevant period, a gas company's base rate was determined on a "cost of service/rate of return" basis, calculated to permit utilities to recover reasonable operating expenses and to earn a fair return on investment. See Boston Gas Co. v. Department of Telecom. & Energy, 436 Mass. 233, 234 (2002). Base rates are established in departmental proceedings conducted in accordance with G. L. c. 164, § 94, which, among other things, requires the department to hold a public hearing on, and to investigate the propriety of, any requested base rate changes, and to inform the Attorney General of the proposed changes. G. L. c. 164, § 94.² Base rates are then set prospectively, based on historical data, i.e., a "test year," from which the gas company projects its future costs based on various estimates. See Boston Gas Co. v. Department of Telecom. & Energy, supra at 234-235; Boston Edison Co. v. Department of Pub. Utils., 375 Mass. 1, 6, 7 (1978). Once established by the department, a base rate does not fluctuate with a gas company's actual costs, but only changes when the company files for, and pursuant to the procedures set out in G. L. c. 164, § 94, the department approves, a base rate change. See Boston Gas Co. v. Department of Telecom. & Energy, supra at 234, 235.

In contrast, the CGAC is a price component established by departmental regulations that permits a utility, on a semi-annual basis, to recoup the actual costs of gas by passing those costs on to the ratepayers. See 220 Code Mass. Regs. § 6.06; G. L. c. 164, §§ 76, 76C. The department computes the CGAC according to a complex mathematical formula that factors both projected gas costs for a certain period and a "reconciliation adjustment" of the difference between the actual costs incurred during the relevant period and the forecast. See 220 Code Mass. Regs. §§ 6.06-6.08 (1993). Unlike the base rate, which is not subject to retroactive adjustment and may only be changed pursuant to the hearing procedures set out in G. L. c. 164, § 94, the CGAC "may, for good cause shown, be modified by the [d]epartment" in such manner as it "may determine to be in the public interest." 220 Code Mass. Regs. §§ 6.02, 6.12(1) (1993). See Consumers Org. for Fair Energy Equality, Inc. v. Department of Pub. Utils., 368 Mass. 599, 601-602 (1975) (describing history and function of fuel adjustment clauses).

Inventory finance charges are charges that a company may incur when it borrows money to purchase gas inventory.³ From 1979⁴ until 1987, the department permitted gas companies to include the cost of IFCs in either their base rate or their individually developed CGAC, so long as these costs were not included in both charges. See, e.g., Haverhill Gas Co., D.P.U. 246, at 2, 4 (1980); Bay State Gas Co., D.P.U. 962, at 1-2 (1982). In 1987, the department adopted a uniform CGAC formula that included IFCs.⁵ Wyman-Gordon Co., D.P.U. 1669-C (1987). 220 Code Mass. Regs. § 6.06. Including IFCs in the CGAC rather than in the base rate allows a gas company to pass fluctuations in its interest rate costs on to consumers in a speedier, less expensive, and more market-sensitive manner than if the company were required to adjust its IFCs through the costly base rate proceedings set out in G. L. c. 164, § 94. For this reason, gas companies generally favor including IFCs in their CGAC. See, e.g., Bay State Gas Co., D.P.U. 962, supra at 8-10.

We summarize the facts as found by the department and in the undisputed record on appeal. In 1984, Fitchburg applied for an increase in its base rate, using 1983 as its "test year" from which to project its future costs. Fitchburg's 1983 base-rate costs included IFCs, and it sought to include IFCs in the prospective new base rate. Before the department could approve the requested base rate increase, and for reasons unrelated to the present litigation, Fitchburg and the Attorney General negotiated a settlement that reduced Fitchburg's requested base rate increase from $1,450,983 to $816,218. The settlement, which was subsequently approved by the department, did not include any description or specific breakdown of the cost components in the base rate, and did not contain any discussion of IFCs.

Fitchburg did not include IFCs in its CGAC in 1983, 1984, 1985, or 1986. In 1987, when the department first included IFCs in a standardized CGAC formula promulgated by regulation, Fitchburg began to include IFCs in its CGAC. Between 1987 and 1998, Fitchburg regularly submitted CGAC on a semi-annual basis to the department. See 220 Code Mass. Regs. § 6.06. The department, pursuant to its standard policy, gave Fitchburg's CGAC applications "tentative" approval, while expressly reserving the right to review and require changes to the CGAC application, including modifications that "require the [c]ompany to refund to its customers any amounts that are found by the [d]epartment to be the result of imprudent [c]ompany action." However, in that period, the department never required Fitchburg to adjust the amount of the IFCs in its CGAC, and costs were passed on to ratepayers.

Fitchburg did not seek to raise its base rate again for fourteen years, until 1998. See Fitchburg Gas & Elec. Light Co., D.T.E. 98-51, at 1 (1998). During the 1998 base rate increase proceedings, Fitchburg included IFCs in its 1997 "test year," thereby alerting the department that Fitchburg might be collecting IFCs in its base rate in addition to its CGAC. On November 1, 1999, the department, on its own initiative, commenced an investigation to determine "(1) whether any over-collecting of a return on gas inventory by Fitchburg has occurred; (2) the amount of any over-collection; and (3) whether Fitchburg's ratepayers are entitled to reimbursement resulting from an over-collection."

Between March 14, 2000, and February 15, 2001, the department held hearings at which both Fitchburg and the Attorney General, as an intervener, presented documentary and testimonial evidence. See G. L. c. 12, § 11E. On May 31, 2001, the department issued its investigative order. It found that from May 1, 1987, to November 30, 1998 (a period of 139 months), Fitchburg improperly overcharged its ratepayers by including IFCs in both its base rate and its CGAC. The department determined that the overcharges amounted to $675,052, and ordered Fitchburg to repay that amount to its ratepayers, with interest. See 220 Code Mass. Regs. § 6.08(2) (1993). To "strike[] an appropriate balance between the need to make ratepayers whole for the overcharges and the need to maintain the financial integrity of the [c]ompany," the department permitted Fitchburg to amortize its payment to customers for a period not to exceed 139 months.⁶

Fitchburg filed a timely notice of appeal from the department's final order, pursuant to G. L. c. 25, § 5. On January 22, 2003, the single justice reserved and reported the case to the full court.

2. Standard of review. The standard of review for petitions under G. L. c. 25, § 5, is well settled:

"[A] petition that raises no constitutional questions requires us to review the department's finding to determine only whether there is an error of law. . . . The burden of proof is on the appealing party to show that the order appealed from is invalid, and we have observed that this burden is heavy. . . . Moreover, we give deference to the department's expertise and experience in areas where the Legislature has delegated to it decision-making authority, pursuant to G. L. c. 30A, § 14. We shall uphold an agency's decision unless it is based on an error of law, unsupported by substantial evidence, unwarranted by facts found on the record as submitted,

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