Fitchburg Gas & Elec. Light Co. v. Dep't of Pub. Utilities

• Decision Date: 14 April 2014
• Docket Number: SJC–11397.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: FITCHBURG GAS AND ELECTRIC LIGHT COMPANY & others v. DEPARTMENT OF PUBLIC UTILITIES.

467 Mass. 768

7 N.E.3d 1045

FITCHBURG GAS AND ELECTRIC LIGHT COMPANY¹ & others²

v.DEPARTMENT OF PUBLIC UTILITIES.

SJC–11397.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Dec. 5, 2013.

Decided April 14, 2014.

David S. Rosenzweig, Boston, (Erika J. Hafner with him) for the plaintiffs.

Pierce O. Cray, Assistant Attorney General (Rebecca Tepper with him) for the defendant.

Present: IRELAND, C.J., SPINA, CORDY, BOTSFORD, GANTS, DUFFLY, & LENK, JJ.

CORDY, J.

This matter comes before us on a reservation and report, without decision, by a single justice of this court of an administrative appeal filed pursuant to G.L. c. 25, § 5. The petitioners, electric companies as defined by G.L. c. 164, § 1, within the jurisdiction of the Department of Public Utilities (department), appeal a final order of the department imposing on the petitioners monetary assessments for the Storm Trust Fund (assessment), pursuant to G.L. c. 25, §§ 12P, 18. In accordance with the language of the fourth sentence of G.L. c. 25, § 18, third par., the order specifically prohibited the petitioners from seeking recovery of the assessment in any rate proceeding. The petitioners claim that this prohibition on recovery, as required by the statute and imposed by the department's order, is an unconstitutional taking in violation of art. 10 of the Massachusetts Declaration of Rights and the Fifth and Fourteenth Amendments to the United States Constitution. They seek a declaration that the recovery prohibition is unconstitutional, severance of the prohibition from the remainder of the statutory scheme, and reversal of the department's order.

The petitioners essentially assert three grounds on which the recovery prohibition constitutes a taking. First, they claim that the recovery prohibition, as it operates on the assessment, effects a per se taking without just compensation. We conclude that it does not, because a mere obligation to pay such an assessment, regardless of whether recovery is permitted or precluded, does not rise to the level of a compensable per se taking. Second, they assert that it constitutes a taking by way of a confiscatory rate because the recovery prohibition denies the petitioners and their shareholders the opportunity to earn a reasonable rate of return on their investment. This claim is inadequate because it does not present a specific rate set by the department that is allegedly confiscatory. Third, the petitioners contend that the department's order imposing the assessment and articulating the recovery prohibition constitutes a regulatory taking under Penn Cent. Transp. Co. v. New York City, 438 U.S. 104, 124, 98 S.Ct. 2646, 57 L.Ed.2d 631 (1978)( Penn Central ). We conclude that it does not, because the order simply requires the petitioners to pay an assessment that serves a legitimate public purpose and does not in and of itself interfere with the petitioners' over-all property rights. Accordingly, we remand the case to the single justice to affirm the department's order.

Background. 1. Storm assessment. In 2012, the Legislature created a Storm Trust Fund within the department to enable the department to “investigat[e] the preparation for and responses to storm and other emergency events by the electric companies.” St. 2012, c. 216, § 1 (inserting G.L. c. 25, § 12P). Statute 2012, c. 216, also authorized the department to impose “a separate assessment proportionally against each electric company” based on the intrastate operating revenues derived from each company's sales of electric service. G.L. c. 25, § 18, as amended by St. 2012, c. 216, § 2. The statute sets a minimum annual amount for the industry-wide assessment and permits annual increases, up to a defined cap.³Id. In addition, the statute expressly prohibits electric companies from passing the cost of this assessment on to consumers: “Notwithstanding any general or special law to the contrary, no electric company may seek recovery of any assessments made under this paragraph in any rate proceeding before the department.” See id. at third par. This is the only assessment within § 18 to prohibit such recovery; the other two enumerated assessments, which serve different purposes, explicitly permit the electric companies to include the assessment as an operating expense, which is then factored into their rate. See id. at first and second pars. (“Assessments made under this section may be credited to the normal operating cost of each company”); Boston Gas Co. v. Department of Telecomm. & Energy, 436 Mass. 233, 234–235, 763 N.E.2d 1045 (2002).

The petitioners challenge a September, 2012, order of the department imposing the storm assessment for fiscal year 2013. See Storm Trust Fund Assessment, D.P.U. 12–ASMT–5, at 1 (2012). The total assessment for all electric companies was $191,153, distributed pro rata based on the 2011 operating revenues of each company, and to be credited to the Storm Trust Fund. Id. The order explicitly stated, “Pursuant to G.L. c. 25, § 18, no electric company may seek recovery of any amount assessed herein in any rate proceeding before the Department.” Id. at 2.

2. Department oversight of utility rates. Whether recovery of a cost is permitted or prohibited is relevant to the takings analysis because the amount a public utility, such as an electric company, may charge its rate payers, and therefore the return it can make on its investment, is ultimately determined by the department. The department has the authority “to prescribe the ‘rates, prices and charges' which utilities may charge.” Boston Edison Co. v. Boston, 390 Mass. 772, 774, 459 N.E.2d 1231 (1984), quoting G.L. c. 164, § 94. See Opinion of the Justices, 300 Mass. 591, 595, 14 N.E.2d 392 (1938). Public utilities must file rate schedules with the department on a regular basis and when seeking to change a rate; the department may then “investigate the propriety of any proposed rate, price or charge” and “direct[ ] a change in any schedule filed.” G.L. c. 164, § 94.

A rate is ultimately based on two calculations: the rate base, reflecting the utility's reasonable operating expenses, and the rate of return beyond the recoupment of expenses. See Bay State Gas Co. v. Department of Pub. Utils., 459 Mass. 807, 808 & n. 2, 947 N.E.2d 1077 (2011); Boston Gas Co., 436 Mass. at 234, 763 N.E.2d 1045. “Together these computations yield a return on investment.” Fitchburg Gas & Elec. Light Co. v. Department of Pub. Utils., 371 Mass. 881, 884 n. 5, 359 N.E.2d 1294 (1977). Public utilities submit calculations for each of these elements, which are subject to modification and approval by the department by way of any number of calculation methods. See Boston Gas Co. v. Department of Pub. Utils., 367 Mass. 92, 93, 98, 324 N.E.2d 372 (1975). The rate base is meant to include all costs “incurred by efficient management.” Boston Gas Co. v. Department of Pub. Utils., 387 Mass. 531, 539, 441 N.E.2d 746 (1982). See Bay State Gas Co., 459 Mass. at 814–815, 947 N.E.2d 1077. As such, the department typically “exclude[s] from the rate base items that are not currently used and useful to the ratepayers,” Boston Edison Co. v. Department of Pub. Utils., 375 Mass. 1, 21, 375 N.E.2d 305, cert. denied, 439 U.S. 921, 99 S.Ct. 301, 58 L.Ed.2d 314 (1978), as well as costs that are “excessive, unwarranted, or incurred in bad faith.” Boston Gas Co., 387 Mass. at 539, 441 N.E.2d 746. It is also within the department's purview to determine an appropriate rate of return, which covers operating expenses and adequately compensates investors based on the risk of investment. Fitchburg Gas & Elec. Light Co., supra at 884, 359 N.E.2d 1294. Cf. Hingham v. Department of Telecomm. & Energy, 433 Mass. 198, 205–206, 740 N.E.2d 984 (2001) (based on shareholder risk, department determined that fourteen per cent return was more appropriate than fifteen per cent return requested by utility).

Discussion. The petitioners challenge the constitutionality of the recovery prohibition in G.L. c. 25, § 18, third par., both facially and as applied to them through the department's order, which imposesthe assessment and reiterates the recovery prohibition. Where a petition pursuant to G.L. c. 25, § 5, raises constitutional questions, we employ our own independent judgment as to both law and facts. See Lowell Gas Co. v. Department of Pub. Utils., 324 Mass. 80, 86, 84 N.E.2d 811, cert. denied, 338 U.S. 825, 70 S.Ct. 71, 94 L.Ed. 501 (1949). Because we presume that statutes are constitutional, the petitioners bear the substantial burden of proving a constitutional violation. See United States v. Sperry Corp., 493 U.S. 52, 60, 110 S.Ct. 387, 107 L.Ed.2d 290 (1989); Blixt v. Blixt, 437 Mass. 649, 652, 774 N.E.2d 1052 (2002), cert. denied, 537 U.S. 1189, 123 S.Ct. 1259, 154 L.Ed.2d 1022 (2003).

At the core of the parties' dispute is a question of the appropriate legal framework for takings claims made by regulated public utilities in relation to their rates, and not a challenge to a specific rate proceeding. On the whole, the petitioners claim that the recovery prohibition in G.L. c. 25, § 18, third par., is an unconstitutional taking, because it is a direct, per se government taking of their shareholders' property without just compensation, and because it denies them the opportunity to achieve a reasonable rate of return on their investment. In addition, they contend that the department's order imposing the assessment and articulating the recovery prohibition is a regulatory taking. See Penn Central, 438 U.S. at 124, 98 S.Ct. 2646.

The department argues that the petitioners have not satisfied the requirements under general takings jurisprudence for their per se and regulatory takings claims. In addition, with regard to the petitioners' reasonable rate of return argument, the department asserts that under confiscation jurisprudence, the petitioners have not met their burden of presenting a specific affected rate and demonstrating that...