Fryer v. Department of Public Utilities

• Decision Date: 21 March 1978
• Citation: 373 N.E.2d 977,374 Mass. 685
• Parties: Ruth F. FRYER v. DEPARTMENT OF PUBLIC UTILITIES (and a companion case 1 ).
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 977

373 N.E.2d 977

374 Mass. 685

Ruth F. FRYER v. DEPARTMENT OF PUBLIC UTILITIES (and a companion case¹).

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Jan. 6, 1978.

Decided March 21, 1978.

Nathan S. Paven, Boston, for Frank Armsworthy and others.

Herbert Baer, Boston, for Ruth F. Fryer.

Mitchell J. Sikora, Jr., Asst. Atty. Gen., for the Department of Public Utilities.

Before HENNESSEY, C. J., and QUIRICO, BRAUCHER, KAPLAN and ABRAMS, JJ.

HENNESSEY, Chief Justice.

Ruth F. Fryer, d/b/a Dover Water Company (Water Company) and certain interveners, customers of the Water Company (customers), appealed from certain portions of the decision and orders of the Department of Public Utilities (Department) in a 1975 proceeding, D.P.U. 18365 (18365). The appeals were consolidated for hearing. As will be seen, certain orders of the Department in a 1974 decision, D.P.U. 18080 (18080), are relevant. A single justice of this court stayed the order of the Department pending these appeals, and reserved and reported the appeals to this court.

We affirm the decision and orders of the Department. The case is a novel one in several aspects. The facts are as follows. The Water Company was formed in 1961 by its sole proprietress, Ruth F. Fryer. The Department approved its initial schedule of rates and charges in 1963. The Water Company had operated under those rates for eleven years to the time of its application for an increase in 1974. It served 233 residential users spread over an area zoned for lots of one or more acres within the town of Dover. The proprietress ran the Water Company as a family enterprise. Her daughter, as a part time employee, had assisted her with the books. For engineering and labor, she contracted with Dover Pump and Equipment Company (Pump Company), a sole proprietorship of her husband, Paul. For other general labor and assistance she employed her three sons on a part time basis. There were no other part time or full time employees.

Mrs. Fryer's application for a rate increase was her first. She had informed the Dover selectmen, as well as some of her customers, of her intention to seek a rate increase. The Department had timely issued the requisite order of notice of the hearing on the proposed increase, including notice for publication in the Quincy Patriot Ledger.

According to the testimony and records of Mrs. Fryer at the hearing in 18080, the Water Company had never achieved a profit. She submitted data from test year 1973 extracted from the Water Company's annual return to the Department for that year. Among other things, the 1973 figures showed the Water Company's total operating expenses to have been $49,122, its total operating revenues to have been $42,688 and (after taxes and interest payments) its net income to have been a loss of $31,254. Mrs. Fryer stressed the rising expenses of a necessary purification system as a major factor in the Water Company's ongoing losses. She sought an annual increased rate revenue of $29,536 and thereby projected an annual reduction of the Water Company's loss from $31,254 to an adjusted $5,064. Her testimony and data were the only evidence submitted.

In its decision of December 30, 1974, the Department observed that the "Company's request is a departure from the conventional rate proceeding, in that the proprietor is seeking no return on the investment" and that even the requested increase would result in a minor loss from operations. Consequently it dispensed with computation of a rate base and cost of capital, and allowed the proposed tariff.

On March 31, 1975, the customers filed their petition in protest to the increased rates and charges. The Department issued notice and conducted a public hearing and investigation over five sessions during the summer and fall of 1975. Through the course of the hearings the customers attacked the data supporting the recent rate increase. Through the testimony of a newly retained accountant, the Water Company filed amended annual returns for the years 1972, 1973, and 1974 and conceded the inaccuracy of certain figures in the 1973 return. No accountant had carefully maintained the Water Company's books until its preparation for the 18365 hearing.

The customers attacked a number of the components of the rate increase. Their major contentions follow. First, they questioned the Water Company's depreciation on capital equipment (mains and transmission lines) contributed by developers over the years at no cost to the Water Company. For the year 1973 such contributions to capital amounted to.$25,533.52; for the year 1974, $28,448.48.

Second, they challenged the contractual arrangement between the Water Company and the Pump Company. The Pump Company operated and maintained the generating, pumping, and transmission system of the Water Company. In addition, Paul Fryer was employed by the town of Dover as a water inspector and a board of health agent. The service agreement between the water and pump companies had never been reduced to writing. Paul Fryer considered his hourly rate to be $10; his wife regarded it to be $7. The Pump Company's bills to the Water Company had increased by $12,800 from 1972 to 1974. In test year 1973, the Pump Company had billed the Water Company for $20,290 and received $13,650. If Paul Fryer's hourly rate for that year had been $7, his billings would represent 2,988 hours or about sixty hours a week on Water Company work. Paul Fryer's bills and services were reviewed from 1973 forward. He found it difficult to substantiate the time, place, and amount of work for a number of them. Consequently, the customers questioned the need, reasonableness, and accuracy of the service billings and argued that the Water Company's failure to file with the Department or otherwise to disclose a contract with an affiliated company required the exclusion of the contractual expenses from the rate determination under G.L. c. 165, § 4A, and G.L. c. 164, § 85.

Third, the customers contested as an allowable expense the Water Company's interest payments on the unpaid balance of loans from Paul Fryer in the aggregate amount of $13,745 during the period 1972 through 1974. The interest expense paid to the Pump Company for 1974 was $5,646.84. The consumers doubted the arm's-length quality of the loans. They insisted on the exclusion of the interest expense because of the Water Company's failure to seek approval for loans of more than one year from the Department in accordance with G.L. c. 164, § 14. The consumers similarly sought the exclusion of annual interest expenses resulting from four bank loans never submitted for Department approval by the Water Company and purportedly not used for Company purposes.

Finally, the customers attacked a variety of smaller expenses (1) for lack of reliable documentation, (2) for their intrafamilial character (approximately $20,000 of the Water Company's $37,000 in 1974 expenditures went to members of the Fryer family) and (3) for lack of allocation between Water Company use, household use, and Pump Company use of expenditures (a) for gasoline, (b) for automobile insurance, (c) for family members' health and life insurance, (d) for telephone and household costs, and (e) for advertising. As a remedy they sought the rescission of the rate increase and the refund of the increased charges collected.

In its decision and orders, the Department cancelled the rate increase, refused to order a refund of the collected increase from the Water...