Massachusetts Institute of Technology v. Department of Public Utilities

• Decision Date: 18 September 1997
• Citation: 684 N.E.2d 585,425 Mass. 856
• Parties: , Util. L. Rep. P 26,629 MASSACHUSETTS INSTITUTE OF TECHNOLOGY v. DEPARTMENT OF PUBLIC UTILITIES & another. 1
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 585

684 N.E.2d 585

425 Mass. 856, Util. L. Rep. P 26,629

MASSACHUSETTS INSTITUTE OF TECHNOLOGY v. DEPARTMENT OF PUBLIC UTILITIES & another. ¹

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued Feb. 4, 1997.

Decided Sept. 18, 1997.

John A. DeTore, Boston (Alan K. Posner with him), for the Massachusetts Institute of Technology.

H. Reed Witherby, Special Assistant Attorney General, for the Department of Public Utilities.

David S. Rosenzweig, Boston, for the intervener.

Before LYNCH, GREANEY, FRIED and MARSHALL, JJ.

MARSHALL, Justice.

The Massachusetts Institute of Technology (MIT) appealed to a single justice, pursuant to G.L. c. 25, § 5, from an order of the Department of Public Utilities (department) that authorizes the Cambridge Electric Light Company (company) to impose a monthly customer transition charge (CTC) on MIT, following MIT's construction of its own cogeneration facility and its departure as a full-service customer from the company. ² The single justice reserved and reported the case to the full court. ³

The CTC was authorized by the department to permit recovery of the company's so-called "stranded costs" ⁴ from MIT because of MIT's size in relation to the company, and its decision to self-generate. ⁵ According to MIT, the CTC authorized by the department in this case is the first such tariff imposed on a cogeneration facility anywhere in the country; the CTC would require MIT to pay an additional monthly charge exceeding $110,000, resulting in an annual charge of $1.3 million to MIT. ⁶

On appeal, MIT argues that in approving the CTC, the department failed to apply its own PURPA regulations, 220 Code Mass. Regs. §§ 8.00-8.07 (1993). MIT next claims that the department failed to make the necessary subsidiary findings in support of its calculation of the stranded costs that formed the basis of the CTC. Third, MIT asserts that the department's allocation of 75% of the company's stranded costs allegedly attributable to MIT is arbitrary and capricious. Finally, MIT argues that this court must reverse the department's order because imposing the CTC on MIT results in the inequitable retroactive application of new decisional law.

We conclude that, contrary to the claim of MIT, the imposition of a customer transition charge, as such, does not violate State PURPA regulations, 220 Code Mass. Regs. §§ 8.00-8.07. However, because the department's subsidiary findings, see G.L. c. 30A, § 11(8), ⁷ are insufficient for us to give any meaningful review to the calculation of the stranded costs that formed the basis of the CTC, and are similarly insufficient for us to determine whether its decision to permit the company to recover 75% of the costs attributable to MIT is arbitrary, we decline to affirm the department's order, and remand for further proceedings. See G.L. c. 30A, § 14(7). We are also unable to conclude on the basis of the department's inadequate decision whether the imposition of the approved CTC on MIT violates principles prohibiting the inequitable retroactive application of new decisional law.

I

In 1985, MIT began investigating the option of constructing its own electricity-generating, cogeneration facility. ⁸ In an attempt to keep MIT as a customer of the company, in 1992 the company proposed several options to MIT, including a buy-sell agreement, discounted rates, cogeneration deferral payments, and other potential ratemaking concessions. ⁹ After MIT and the company failed to reach any agreement with respect to MIT remaining as an all-requirements customer, MIT began construction of its multimillion dollar, twenty-megawatt cogeneration facility in 1993. ¹⁰ Operations commenced on September 16, 1995. The cogeneration facility satisfied all of the criteria for, and was designated, a qualifying cogeneration facility (qualifying facility or QF) under the Public Utility Regulatory Policies Act of 1978 (PURPA), 16 U.S.C. § 824-824k (1994). ¹¹ Although MIT's cogeneration facility can generate enough power to meet MIT's normal electricity requirements, MIT still must purchase auxiliary services from the company to meet its needs when the facility experiences an outage, and to cover peak periods of usage. ¹²

In May, 1994, prior to the completion of the construction of its facility, MIT filed a petition with the department to establish "just and reasonable" rates for three types of auxiliary services MIT would require from the company after completion of its cogeneration facility: standby service, maintenance service, and supplemental service. ¹³ In response, on March 15, 1995, the company filed for approval its proposed rates for these services; it also proposed an additional monthly customer transition charge (CTC) of $7.49 per kilovolt amperes (kVa) to be assessed on all applicable ¹⁴ customers on a monthly basis. The department consolidated MIT's request and the company's proposed CTC and its proposed auxiliary rates into a single case, D.P.U. 94-101/95-36.

The CTC proposed by the company was intended to recover what it claimed were the stranded costs that would result from MIT's departure as a major customer of the company. ¹⁵ The company claimed that, absent approval of the CTC, there was a likelihood of substantial cost shifting to residential and other small customers because of the loss of a customer the size of MIT relative to the company's system. Although the CTC for which the company sought approval was designed to apply to any of its departing customers with demands above a specific level, to date MIT is the only customer to which the CTC is applicable; the remaining applicable customers have not indicated that they would or might depart as customers of the company.

In the proceedings before the department, the company explained the basis on which it had calculated the monthly CTC charge for which it sought authorization. It began by defining a load at-risk class, the class of customers whose departure from its system the company claimed would result in a significant loss of revenue to it. (The company determined that this class consisted of seven customers with an average monthly demand level of 2,000 kVa or greater.) ¹⁶ Next, the company calculated the total net stranded cost that it claimed it would incur if every member of the load at-risk class were to depart as a full-service customer from the company. To calculate this cost, it first calculated the gross annual revenue associated with the class (nearly $21 million). ¹⁷ From this amount the company subtracted an amount equal to the "avoidable variable expenses" that would not be incurred if all of the load at-risk customers left the system (almost $6 million). The company claimed that this resulted in an annual revenue requirement figure of approximately $15 million.

Next, the company mitigated what it claimed was the "gross amount of stranded costs" for the load at-risk class by the amount of (1) expected revenues from continued services provided to the customers should they depart (approximately $ 4.5 million); (2) potential revenues from reselling the generating capacity available to be marketed as a result of the custom departure (approximately $3 million); and (3) the revenues associated with anticipated load growth on the company's system (approximately $1.6 million). Subtracting these mitigating factors, the company claimed "net stranded cost" of approximately $6 million. The company then divided the net stranded cost amount by the 66,806,000 kVa purchased annually by the entire load at-risk class of seven customers, and then divided the resulting amount by twelve to arrive at a monthly charge of $7.49 per kVa. It sought authorization from the department to impose this monthly CTC charge on MIT.

Regarding the CTC proposed by the company, MIT filed a motion to dismiss or for partial summary judgment, which was denied. ¹⁸ MIT also challenged the calculation of the CTC proposed by the company on several grounds: that the CTC was premature, was based on incorrect assumptions concerning the company's capacity and costs, was based on incorrect calculations, was premised on faulty economics, was applied incorrectly to certain types of customers, and was contrary to established policy. The Attorney General, intervening as of right pursuant to G.L. c. 12, § 11E, also challenged the CTC proposed by the company. Contrary to MIT's position, he argued that the department has authority under G.L. c. 164, § 94, to approve a CTC tariff. Nevertheless, he urged the department to reject the company's proposed CTC because, as the department later described his position, "the company had been on notice since at least 1985 that MIT was actively considering self-generation and that the Company did not undertake any meaningful effort to mitigate the foreseeable consequences of losing MIT as a full requirements customer." According to the Attorney General, the company had failed to demonstrate that the costs for which it sought reimbursement through the CTC were prudently incurred. ¹⁹

The city of Cambridge (city) also submitted a brief opposing the CTC sought by the company. It requested that the department abstain from ruling on the company's proposed auxiliary rates and its proposed CTC until the department had ruled on its own investigation into the restructuring of the electric industry. ²⁰ The city argued, in the alternative, that the company's failure to prepare for the emergence of cogenerators in its customer base had created the stranded costs that the company now sought to recover through the CTC; the city urged the department to disallow the company from recovering these costs from its remaining customers.

On September 28, 1995, the department issued its order (D.P.U.94-101/95-36), in which it approved in relevant part each of the company's proposed auxiliary rates. In regard to the company's proposed CTC, the department concluded that a CTC was allowable and did not violate PURPA because it did not...