Fitchburg Gas & Elec. Light Co. v. Department of Public Utilities

• Decision Date: 14 February 1977
• Citation: 371 Mass. 881,359 N.E.2d 1294
• Parties: FITCHBURG GAS AND ELECTRIC LIGHT COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 1294

359 N.E.2d 1294

371 Mass. 881

FITCHBURG GAS AND ELECTRIC LIGHT COMPANY

v. DEPARTMENT OF PUBLIC UTILITIES.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Oct. 6, 1976.

Decided Feb. 14, 1977.

Gerald A. Maher, New York City (Richard L. Brickley, Boston, and James L. Winston, New York City, with him), for plaintiff.

Michael Eby, Sp. Asst. Atty. Gen., for Dept. of Public Utilities.

Before HENNESSEY, C.J., and BRAUCHER, KAPLAN and WILKINS, JJ.

HENNESSEY, Chief Justice.

The Fitchburg Gas and Electric Light Company (Fitchburg) filed with the Department of Public Utilities (Department) new rate schedules designed to increase its annual revenues by $2,300,000. The Department issued a decision and order authorizing new rate schedules designed to increase Fitchburg's annual revenues by $2,096,000. That order excluded from Fitchburg's rate base § 1,399,900, the unamortized value of certain facilities with Fitchburg retired prematurely in 1971 [371 Mass. 882] and 1972. After our opinion in BOSTON GAS CO. V. DEPARTMENT OF PUB. UTILS., --- MASS. --- , 324 N.E.2D 372 (1975)^A, the Department held hearings on the subject of its exclusion of this property and issued a final order which affirmed the original order excluding the unamortized abandoned property from the rate base for purposes of establishing just and reasonable rates. ¹ Fitchburg appeals from this final decision and order under G.L. c. 25, § 5.

The property involved in this dispute comprises certain coal handling facilities, boiler plant equipment, and turbogenerators, which Fitchburg acquired at various dates between 1915 and 1953. Fitchburg used these properties until 1971--1972, when new Massachusetts environmental pollution regulations rendered them obsolete. Finding the costs of compliance with the antipollution regulations excessive, Fitchburg decided to retire these properties and to purchase replacement capacity from the Boston Edison Company (Edison). The parties agree that this decision was a reasonable one. At the time of the unforeseen early retirement Fitchburg had not recovered the full cost of these properties through depreciation.

In 1972 Fitchburg requested Department permission to amortize over a period of ten years the undepreciated cost of the coal handling facilities, and to amortize over a perod of 23.5 years the undepreciated cost of the boilers and turbogenerators. The Department granted those requests and agrees that one could not reasonably expect Fitchburg to have accelerated the depreciation rate on these properties so that their cost would have been amortized fully at the time of retirement. The Department argues that as a result of its decision, Fitchburg's customers (as part of their cost of service) are paying for plant facilities which provide no customer service, in order that Fitchburg can recover its entire original investment in these facilities. On the other hand, one can argue that such payments benefit current customers to the extent that Fitchburg needs to attract additional capital to meet present needs. ² Additionally, consumers are paying Fitchburg for the power Fitchburg currently buys from Edison and resells to them.

Fitchburg also requested that the Department include the unamortized cost of the abandoned property in Fitchburg's rate base, the basis on which its rate of return is computed. The Department denied this request in its final order, applying its general policy that the risk of unforeseen, premature retirement of facilities equitably should fall in part on Fitchburg's stockholders. This policy protects investors against loss of actual investment by requiring that consumers absorb the costs of useless property, but limits the burden on consumers by requiring that stockholders forgo a return on unused property. ³ Hence the Department decided to allow Fitchburg to recoup fully its original investment in the abandoned property while denying further return on this investment. ⁴ The Department opines that its policy is equitable and encourages efficient management and careful planning.

Fitchburg complains that the reduced rate base produces a 10.8% rate of return on equity capital and a 9.13% over-all rate of return. The Department authorized returns of 13% and 9.87%, respectively. Consequently, Fitchburg maintains, the Department's decision to exclude the unamortized abandoned property from its rate base leads to effective rates of return which are confiscatory and, even if the rates are not actually confiscatory, constitutes error of law under G.L. c. 30A, § 14(7). Confiscatory rates violate arts. 1, 10, and 12 of the Declaration of Rights of the Massachusetts Constitution, and the Fourteenth Amendment to the United States Constitution. In addition, Fitchburg claims that the Department's decision is unsupported by substantial evidence and, therefore, violates G.L. c. 30A, § 14(7). We disagree. We conclude that the Department's decision was a reasonable exercise of its economic and regulatory judgment and that Fitchburg has failed to meet its burden of proof on the issues of confiscatory or erroneous effective rates of return.

1. The Department's power to regulate public utility rates is limited by a utility's constitutional right to a fair and reasonable return on investment. Boston Gas Co. v. Department of Pub. Utils.,--- Mass. ---, --- ^b, 336 N.E.2d 713 (1975). A return is fair and reasonable if it covers utility operating expenses, debt service, and dividends, if it compensates investors for the risks of investment, and if it is sufficient to attract capital and assure confidence in the enterprise's financial integrity. ⁵ Federal Power Comm'n v. Hope Natural Gas Co.,320 U.S. 591, 603, 64 S.Ct. 281, 88 L.Ed. 333 (1944), cited in Mystic Valley Gas Co. v. Department of Pub. Utils., 359 Mass. 420, 424, 269 N.E.2d 233 (1971). When a utility claims that its rates are confiscatory, this court affords it independent review as to law and fact. Boston Gas Co. v. Department of Pub. Utils., --- Mass. ---, --- ^c, 336 N.E.2d 713 (1975). Mystic Valley Gas Co. v. Department of Pub. Utils., supra at 424, 269 N.E.2d 233. In addition, the Department's rate setting powers are circumscribed by the standards enumerated in G.L. c. 30A, § 14(7).

A utility which alleges confiscatory or otherwise unlawful rates has the burden of proof on its allegations, see Wannacomet Water Co. v. Department of Pub. Utils., 346 Mass. 453, 463, 194 N.E.2d 109 (1963); New England Tel. & Tel. Co. v. Department of Pub. Utils., 327 Mass. 81, 91, 97 N.E.2d 509 (1951). Thus, to obtain the relief Fitchburg requests, ⁶ it must establish clearly either that the Department's decision to exclude the unamortized cost of the abandoned plant from the Fitchburg rate base itself was confiscatory (see note 7 infra), or violative of G.L. c. 30A, § 14(7), or that the decision resulted in a confiscatory or otherwise illegal effective return on investment. We will examine the legal arguments and the relevant facts as to these issues.

2. Fitchburg maintains that the Department's order, excluding the unamortized cost of abandoned facilities from Fitchburg's rate base, lacks substantial evidentiary support and therefore violates the provisions of G.L. c. 30A, § 14(7). ⁷ In essence, it argues that, because no evidence contradicts the prudence of its investment in these facilities or of its decision to retire these facilities prematurely and because noted authorities on public utility regulation support the inclusion of such facilities in a utility's rate base, the Department must place the unforeseen loss on Fitchburg's consumers. The Department, conceding the prudence of Fitchburg's decisions, presents similar noted authorities which support its order as rooted in sound judgment. The parties agree that the order rests on a Department policy which has been applied consistently to Fitchburg in particular and to utility companies generally since 1954.

The permissibility of excluding such abandoned property from a utility company's rate base is a question which this court has faced and decided. BOSTON GAS CO. V. DEPARTMENT OF PUB. UTILS., --- MASS. --- , 324 N.E.2D 372 (1975)^D. We found supporting authority in academic works and agency decisions for the conflicting arguments of the utility and the Department in that case. ⁸ Id. at --- ^e, 324 N.E.2d 372. Consequently, we found the Department free to select a rule of its choice on this subject as long as the rule was consistently applied, did not have a confiscatory effect, and as long as no special circumstances compelled application of a different rule. ⁹ Id. at --- - --- ^f, 324 N.E.2d 372.

We see no reason to alter our view that the Department may institute a policy that the unamortized cost of prematurely abandoned property should be excluded from rate base calculations, even though the utility's original investment decision and retirement decisions were prudently made. Therefore, Fitchburg's allegation that the Department's exclusionary order lacked substantial evidentiary support must fail, and we turn to Fitchburg's contentions that the order has a confiscatory or otherwise illegal effect and that this effect constitutes 'special circumstances' which require the application of a different rule.

3. Fitchburg contends that, even if the Department's rate base accounting rule which excludes prematurely abandoned property is legal in general, the order applying that rule in Fitchburg's case is illegal because it produces rates which are confiscatory and which are so inadequate that they constitute 'special circumstances' compelling a contrary order pursuant to G.L. c. 30A, § 14(7), ¹⁰ as applied in SOUTHBRIDGE WATER SUPPLY CO. V. DEPARTMENT OF PUB. UTILS., --- MASS. --- , 331 N.E.2D 523 (1975)^G. In describing the special circumstances which render the Department's order legally erroneous, Fitchburg focuses on the decreased return which the smaller rate base produces. It argues that...