Salisbury Water Supply Co. v. Department of Public Utilities

• Decision Date: 09 July 1962
• Citation: 184 N.E.2d 44,344 Mass. 716
• Parties: , 45 P.U.R.3d 66 The SALISBURY WATER SUPPLY COMPANY v. DEPARTMENT OF PUBLIC UTILITIES. The OXFORD WATER COMPANY v. DEPARTMENT OF PUBLIC UTILITIES. MASSACHUSETTS WATER WORKS COMPANY. v. DEPARTMENT OF PUBLIC UTILITIES.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 44

184 N.E.2d 44

344 Mass. 716, 45 P.U.R.3d 66

The SALISBURY WATER SUPPLY COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.

The OXFORD WATER COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.

MASSACHUSETTS WATER WORKS COMPANY. v. DEPARTMENT OF PUBLIC UTILITIES.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued May 11, 1962.

Decided July 9, 1962.

Edward B. Hanify, Boston (Lane McGovern, Boston, with him), for plaintiffs.

John J. Coffey, Asst. Atty. Gen., for defendant.

Before WILKINS, C. J., and SPALDING, WHITTEMORE, CUTTER, and SPIEGEL, JJ.

WILKINS, Chief Justice.

These are appeals by three water companies under G.L. c. 25 § 5 (as amended through St.1956, c. 190), to review orders of the department, which disallowed schedules of increased rates and charges filed by the respective companies. ¹ The cases are reserved and reported without decision by the single justice.

In each case the department, acting on its own motion, suspended the operation of the schedules for ten months beyond the time when the rates and charges would otherwise have become effective, the maximum period permissible under G.L. c. 165 § 2; c. 164 § 94 (as amended through St.1948, c. 471), and conducted an investigation as to their propriety. At the conclusion of the investigations each company was allowed to file new schedules of lesser rates than those which were disallowed. These were filed with an express reservation of the right to appeal. See Department of Public Utilities v. New England Tel. & Tel. Co., 325 Mass. 281, 291-292, 90 N.E.2d 328.

The principal issue raised by each company is whether the return allowed by the department is sufficient not only to cover the utility's operating expenses, taxes, and depreciation but also to 'maintain financial integrity, attract capital, and compensate investors for the risks assumed.' New England Tel. & Tel. Co. v. Department of Public Utilities, 331 Mass. 604, 617, 121 N.E.2d 896, 903. Each makes the contention, among others, that the record does not contain 'substantial evidence' upon which the department could have based its findings, as required by the State Administrative Procedure Act. G.L. c. 30A §§ 1(6), 14(8)(e). City of Newton v. Department of Public Utilities, 339 Mass. 535, 548, 160 N.E.2d 108; Fortier v. Department of Public Utilities, 342 Mass. 728, 734-735, 175 N.E.2d 495. ¹ Compare G.L. c. 30A § 14(8)(f); Lowell Gas Co. v. Department of Public Utilities, 324 Mass. 80, 86-87, 84 N.E.2d 811; New England Tel. & Tel. Co. v. Department of Public Utilities, 327 Mass. 81, 85, 97 N.E.2d 509.

"Substantial evidence' means such evidence as a reasonable mind might accept as adequate to support a conclusion.' G.L. c. 30A § 1(6). Sinclair v. Director of the Div. of Employment Security, 331 Mass. 101, 102, 117 N.E.2d 164; Norwood Ice Co. v. Milk Control Comm., 338 Mass. 435, 441, 155 N.E.2d 758; Singer Sewing Mach. Co. v. Assessors of Boston, 341 Mass. 513, 517, 170 N.E.2d 687. McCarthy v. Contributory Retirement Appeal Bd., 342 Mass. 45, 47, note 2, 1972 N.E.2d 120.

The hearings before the department were 'adjudicatory proceedings' under G.L. c. 30A § 1(1). City of Newton v. Department of Public Utilities, 339 Mass. 535, 542, 160 N.E.2d 108. 'Every agency decision shall be in writing or stated in the record. The decision shall be accompanied by a statement of reasons for the decision, including determination of each issue of fact or law necessary to the decision * * *.' G.L. c. 30A § 11(8). One of the duties of judicial review is to determine 'upon consideration of the entire record' whether substantial rights have been prejudiced because the agency decision was 'unsupported by substantial evidence.' G.L. c. 30A § 14(8). Norwood Ice Co. v. Milk Control Comm., 338 Mass. 435, 441, 155 N.E.2d 758; Bay State Harness Horse Racing & Breeding Ass'n Inc. v. State Racing Comm., 342 Mass. 694, 701, 175 N.E.2d 244.

The plaintiffs are small operating water companies, the common stock of which is wholly owned by Greenwich Water System, Inc., which is a subsidiary of American Water Works Company, Inc. The Salisbury Water Supply Company (Salisbury) provides service in Salisbury for 2,408 customers, 1,732 of whom are seasonal. This was the first general increase in rates and charges requested by the company since it began operations in 1915. The Oxford Water Company (Oxford) serves approximately 1,680 customers in Oxford. Massachusetts Water Works Company (Millbury) serves approximately 1,625 customers in Millbury.

A detailed analysis of the finances of the three companies cannot be set forth in a judicial opinion of reasonable length. Nor is such a course necessary at this time, because we are of opinion that the decisions of the department are open to the objections urged by the companies that there are a lack of substantial evidence and an absence of reasons for the decisions.

The department granted each company's requests for rulings numbered 11, 12, and 13: The eleventh request was that the company 'is entitled to a fair return on its net investment in property used or useful in fulfilling its obligations to provide the general public with adequate * * * service.' '12. A fair return is one which is sufficient to insure confidence in the financial soundness of the utility, adequate to maintain and support its credit, sufficient to enable it to attract the capital required to meet its public obligations and commensurate with that generally being earned on investments in business undertakings attended by corresponding risks. 13. The rate of return employed for testing the reasonableness of rates must be such that the utility has a reasonable chance actually to earn a fair return in the foreseeable future, taking into account the continued necessity, if any, of making plant additions and replacements at higher unit costs, and the general tendency of the return to erode under the impact of inflation on operating expenses.'

At the hearings the companies introduced evidence to show that in order for them to provide a fair return on their equity and debt capital, rearranged in proportions beneficial to the company (G.L c. 165 § 2; c. 164 § 13), they should increase their rates to produce annual gross revenues of substantially higher percentages. Salisbury sought a revenue increase of $31,178, or 32%; Oxford $52,310, or 76.3%; and Millbury $35,087, or 30.7%.

The companies called as a witness an expert in the field of public utility financing whose qualifications were unquestioned. He estimated that the cost of common stock to these companies, considering their smallness and the risk, and exclusive of financing expenses, would be 11%; and that the cost of debt capital would be for Salisbury 6.25%, for Oxford 5.88%, and for Millbury 5.88%. Based on the expert's estimates of cost of capital, the companies computed the respective amounts of increase they sought as follows: (1) Salisbury--on a rate base of $485,167.79 to provide a return of 7.73% ¹--$37,524. (2) Oxford--on a rate base of $399,276.70 to provide a return of 7.74% ¹--$30,893. (3) Millbury--on a rate base of $496,860.67 to provide a return of 7.94% ²--$39,433.

No evidence was offered by the department or any town in any of the cases. The department accepted the rate basis used by Salisbury, and reduced the rate based used by Oxford and Millbury to $382,430 and 489,460, respectively. It allowed as rates of return: Salisbury 6.5%; Oxford 6%; and Millbury 6%. The decisions of the department fail completely to give any reasons and do not, and cannot,...