Nstar Elec. Co. v. Dep't of Pub. Utilities

• Decision Date: 04 June 2012
• Docket Number: SJC–10904.
• Citation: 462 Mass. 381,968 N.E.2d 895
• Parties: NSTAR ELECTRIC COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

462 Mass. 381

968 N.E.2d 895

NSTAR ELECTRIC COMPANY

v.DEPARTMENT OF PUBLIC UTILITIES.

SJC–10904.

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued Dec. 8, 2011.

Decided June 4, 2012.

Robert J. Keegan (Cheryl M. Kimball with him), Boston, for the plaintiff.

David A. Guberman, Assistant Attorney General, for the defendant.

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

LENK, J.

Broadly speaking, electric distribution companies, such as the NSTAR Electric Company (NSTAR), provide two types of services: supply services and distribution services, each described below. Under the 1997 Electric Restructuring Act, St.1997, c. 164, distribution companies must unbundle the rates they charge for each of their services, see St.1997, c. 164, §§ 192, 193, amending G.L. c. 164, §§ 1, 1D, and are expected to recover fully their supply-related costs through their supply service rates. See D.T.E. 02–40–B at 15 (2002). This case concerns the mechanics of NSTAR's attempt to shift the recovery of one of its supply-related costs, supply-related bad debt costs, from its distribution rates to its supply rates.

In 2007, NSTAR filed a petition with the Department of Public Utilities (department), see Fitchburg Gas & Elec. Light Co. v. Department of Pub. Utils., 460 Mass. 800, 801 n. 2, 956 N.E.2d 213 (2011), through which it sought to begin recovery of its supply-related bad debt costs through its supply rates rather than, as before, through its distribution rates. In that petition, NSTAR asserted that it had stopped recovering such costs through its distribution rates in early 2006. Notwithstanding that contention, the department conditioned its approval of NSTAR's petition on a corresponding (in NSTAR's view, further) reduction in NSTAR's distribution rates.

We conclude that the department has failed to provide an adequate statement of its reasons for imposing the above condition. Specifically, we are unable to determine whether this aspect of the department's order rests on a determination that NSTAR did not follow the correct procedural path in removing supply-related bad debt costs from its distribution rates, or rather on a determination that NSTAR did not in fact remove such costs from its distribution rates at all. We conclude further that certain of the department's factual determinations are not adequately supported by subsidiary findings and that an aspect of the department's analysis is legally erroneous. The department's order is to be vacated and the matter is to be remanded to the department for further proceedings.

1. Background. As relevant here, NSTAR provides two distinct types of services: the procurement and supply of electric power (supply service) and the distribution of that electricity over power lines (distribution service). See 220 Code Mass. Regs. § 11.04 (2008); Attorney Gen. v. Department of Pub. Utils., 453 Mass. 191, 192–193 nn.4–7, 900 N.E.2d 862 (2009). Generally speaking, NSTAR's customers pay for distribution services through distribution rates, and they pay for supply services—that is, for the power they actually consume—through supply rates.¹Id. See 220 Code Mass. Regs. § 11.04; Attorney Gen. v. Department of Pub. Utils., supra at 193 nn.5, 6, 900 N.E.2d 862.

Although NSTAR enjoys a regulated geographic monopoly in electric distribution, see 220 Code Mass. Regs. § 11.04(2), it faces competition in the supply aspects of its business from “competitive” suppliers, that is, firms that generate or otherwise procure electricity without owning or operating the means to distribute electricity to consumers. See G.L. c. 164, § 1A, as appearing in St.1997, c. 164, § 193. NSTAR competes with such competitive suppliers on the basis of its supply rates rather than its distribution rates. So that its supply rates accurately reflect supply costs and thus send the correct price signal to customers choosing between NSTAR and various competitive suppliers, the department's policy is that NSTAR's supply rate should ensure full recovery of all of its supply-related costs. See generally D.T.E. 02–40–B at 15 (2002).

One component of supply-related costs consists of those costs associated with customers defaulting on the supply-related components of their bills (supply-related bad debt costs). See D.T.E. 03–88 at 3 (2003). Yet, distribution companies like NSTAR historically have recovered at least part of these supply-related bad debt costs through their distribution rates rather than their supply rates. See D.T.E. 03–88A–F at 4 (2005). Accordingly, by a 2003 order, the department began proceedings to require distribution companies to move supply-related bad debt cost recovery from distribution rates to supply rates. D.T.E. 03–88, supra.

The proceedings commenced by that order were resolved by a settlement agreement between distribution companies and various other entities, including the Attorney General. This agreement, reached on January 21, 2005 (January Settlement), and approved by the department shortly thereafter, see D.T.E. 03–88A–F, supra, called for supply-related bad debt cost recovery to be moved from distribution rates to supply rates. However, art. 2.4 of the January Settlement specified that any such shift would not take place “until the next general distribution rate case in which a [d]istribution [c]ompany proposes or the [d]epartment directs the removal of [d]efault [s]ervice-related costs, or unless otherwise proposed to be adjusted by the [d]istribution [c]ompany, subject to approval by the [d]epartment.” The department emphasizesthatthis clause ensured its ability to review the specifics of each distribution company's rate changes and to verify that such changes did not result in multiple recoveries of supply-related bad debt costs.

On December 6, 2005, NSTAR entered into a second settlement agreement with the Attorney General and others (December Settlement). The December Settlement was intended to have the same effect as a general distribution rate case and was approved as such by department order. See D.T.E. 05–85 (2005). The parties “agree[d] to an Alternative Rate Stabilization Plan that [would], on January 1, 2006, reduce the sum of the distribution rates [and a second category of rates] of NSTAR Electric below what they otherwise would have been and then ensure that the sum of those rates shall change only in a manner specified [by the December Settlement] for seven years.”

NSTAR contends that the December Settlement removed supply-related bad debt cost recovery from NSTAR's distribution rates and that the department's order approving the settlement thus constituted approval by the department of NSTAR's removal of such costs from its distribution rates. On this basis, NSTAR filed in early 2007 a request to adjust upward its “basic service adder,” a component of its supply-related “basic service rate,” so as to recover supply-related bad debt expenses.

The department, however, took the position that the December Settlement “did not identify any changes to the level of bad debt included in [NSTAR's distribution rates] [nor] what level of supply-related bad debt, if any, was removed from [NSTAR's] distribution rates.” D.T.E./D.P.U. 07–4 at 5 (2007) (initial order). The department therefore ordered that NSTAR offset any increase in its supply rates with a corresponding decrease in its distribution rate. Id. at 7.

NSTAR then filed a motion for reconsideration or clarification, which the department granted. D.T.E./D.P.U. 07–4–A (2007) (order granting reconsideration). However, after holding further proceedings, the department again determined that NSTAR could not increase its supply rates without a corresponding decrease in its distribution rates. See D.T.E./D.P.U. 07–4–B at 21 (2010) (final order on reconsideration). NSTAR thereafter filed a petition for review of the department's final order on reconsiderationin the county court. See G.L. c. 25, § 5. A single justice reserved and reported the matter to the full court.

2. Standard of review. In reviewing an order issued by the department, “we give deference to the department's expertise and experience in areas where the Legislature has delegated to it decision-making authority [and] 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, arbitrary and capricious, an abuse of discretion, or otherwise not in accordance with law.” Fitchburg Gas & Elec. Light Co. v. Department of Telecomm. & Energy, 440 Mass. 625, 631, 801 N.E.2d 220 (2004), quoting Massachusetts Inst. of Tech. v. Department of Pub. Utils., 425 Mass. 856, 867–868, 684 N.E.2d 585 (1997). See G.L. c. 25, § 5; G.L. c. 30A, § 14.

3. Discussion. We begin with three observations that neither party contests on appeal. The first is that NSTAR is only entitled to the relief it seeks on a showing that it has stopped recovering supply-related bad debt costs through its distribution rates. The second is that any such change in NSTAR's distribution rates must have taken place as part of a general rate case ² or its equivalent. The third is that the December Settlement operates as the equivalent of a general rate case.

Where the parties disagree is on the meaning and effect of the December Settlement. NSTAR contends that the December Settlement incorporates by reference certain documents that were appended to it as exhibits. In NSTAR's view, these exhibits demonstrate that the December Settlement removed supply-related bad debt costs from NSTAR's distribution rates.

The department's position on appeal is that the December Settlement has binding effect only as to issues clearly and explicitly addressed in the text of the agreement. D.T.E./D.P.U. 07–4–B, supra at 15. The provisions of the December Settlement do not expressly mention bad debt costs. Therefore, in the department's view, the December Settlement did not effect the requisite change...