Southbridge Water Supply Co. v. Department of Public Utilities

• Decision Date: 03 July 1975
• Citation: 331 N.E.2d 523,368 Mass. 300
• Parties: SOUTHBRIDGE WATER SUPPLY COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 523

331 N.E.2d 523

368 Mass. 300

SOUTHBRIDGE WATER SUPPLY COMPANY

v. DEPARTMENT OF PUBLIC UTILITIES.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued March 7, 1975.

Decided July 3, 1975.

Mark A. Michelson, Boston (Thomas F. Maffei, Boston, with him), for the Southbridge Water Supply Co.

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

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

HENNESSEY, Justice.

This is an appeal by Southbridge Water Supply Company (the company) pursuant to G.L. c. 25, § 5, from an order of the Department of Public Utilities (the department) which (a) denied the company's motion to modify a decision of the department as to the 'rate base' to be used in determining the company's water rates and corresponding rate of return on capital and (b) ordered the company to pay certain refunds to its customers, for overcharges allegedly resulting from a delay in the customary billing dates to customers.

On October 16, 1969, the company filed a proposed schedule of rates and charges with the department, to be effective on November 1, 1969. The department suspended the effectiveness of the proposed schedule and on August 18, 1970, held a hearing thereon at the Southbridge town hall.

On September 9, 1970, the department issued a decision in which it disallowed the company's proposed rates because it found that the company had incorrectly calculated its rate base, principally by using the year-end rather than the year-average test rate base for plant in service. This appeal raises no question as to any other item in the rate-base calculation or as to the rate of return allowed by the department. The department ordered the company to file a new schedule of rates and charges calculated to produce lower revenues, predicated on the change to a year-average rate base. On September 22, 1970, the company filed a motion for modification addressed solely to this aspect of the department's decision and order. On October 5, 1971, the department heard argument, but no evidence, on the company's motion for modification and a motion by the town of Southbridge (the town) to reopen the rate proceedings. On December 23, 1971, the department denied both motions. The company filed an appeal from that decision.

In the meantime, the company had complied with the department's original decision by filing, also on September 22, 1970, a 'new schedule of rates and charges . . . to be effective not less than twenty-one (21) days after . . . filing.' This revised schedule, M.D.P.U. No. 15, stated that it was 'Effective: On all bills rendered on or after October 13, 1970.' Neither within the twenty-one days after filing nor at any time was any motion made or any other formal action taken by anyone to question any aspect of these new rates. Nevertheless, in its decision of December 23, 1971, on the motions to modify and to reopen, the department, without prior notice or hearing of any kind, ordered the company to make certain refunds based on the increase in rates.

The facts may be stated as follows: The company is a Massachusetts corporation duly authorized to supply water to the inhabitants of the towns of Southbridge, Sturbridge and Charlton. The company's last rate increase was granted in 1965, at which time the new rates were calculated to produce a 6% rate of return on a rate base of $1,247,902. By the time the company filed the present request for a rate increase in 1969, its rate of return had deteriorated while its over-all investment in plant and equipment had more than doubled. In 1968, for example, the company's rate of return had eroded to 3.81% on a rate base of $2,442,709. Even using the rate base later calculated by the department for 1968, namely, $2,061,267, the company's rate of return was only 4.51%. In 1969, the year in which the proposed new schedule of rates and charges was filed, the company was operating at a net cash loss which by the end of the year amounted to $3,649.68. In 1970, the company's net cash loss for the first six months had increased to $12,917. There was evidence that the company's financial position, prior to its filing the request for a rate increase, seriously affected its day to day operations.

While the new rates approved by the department were in theory calculated to produce a net operating income of $187,163, equalling a 9.08% rate of return on a rate base of $2,061,267, the experience since the effective date of the new rates, October 13, 1970, indicates that the net operating income and rate of return theoretically permitted by the department have never been realized. In fact, during the first two full years of operation under the new rates, the company's rate of return, even on the 1968 average rate base, had already substantially fallen short of what was projected by the department. For example, in 1971, the first full year, the actual rate of return on the department's rate base was 8.07%. In 1972 the rate of return had declined to 7.43%. The respective net operating income figures were $166,422 and $153,233. Continuing increases in the company's real estate taxes and depreciation were among the principal causes for this declining return.

Since the company's last rate increase in 1965, it had been engaged in an extensive but necessary program of capital improvements. By far the largest increase in the company's investment took place with the acquisition and development of a reservoir (with related structures and equipment) known as the Cohasse Brook reservoir, which was completed and taken in the company's books in December, 1968, at a total cost of $1,089,955. The addition of this reservoir increased the company's net plant in service and its water storage capacity by more than 60%. This increase should be adequate to meet the needs of the town of Southbridge for many years.

This great increase in the company's net plant in service automatically resulted in a substantial increase in the company's operating expenses, taxes and depreciation. In addition, the financing of the new reservoir at 6.92% approved by the department in 1968, increased the company's over-all cost of debt by more than 21%, from 5.09% to 6.17%. It increased the company's debt-equity ratio from 42% to 58%.

Although the company had so greatly increased its actual net plant in service in 1968, the department nevertheless rejected the company's 1968 'year-end, as opposed to a year-average, method of determining the rate base for the test year.' In its initial opinion the department gave no reason for this decision. In its denial of the company's motion for modification, the department stated only that it had used 'conventional methods that have been generally recognized and accepted as proper procedures. We see no grounds for modifying our original decision.'

Since, in accordance with the department's rules, the Cohasse Brook reservoir, completed in 1968 after several years' work, was taken into the rate base only as of December 31, 1968, the use of year-average rather than year-end figures for the rate base had the effect of excluding one-half the value of the Cohasse Brook reservoir from the rate base for 1968 and until the company's next rate application. According to the department's figures, this reduced the company's rate base from $2,608,552 to $2,061,267 (a reduction of $547,285 or 21%). At the 9.08% return allowed by the department, as to which no question has been raised, the effect of the use of the year-average rather than year- -end rate base was to reduce the company's annual return by $49,693.

1. We consider first the company's contention that the department's refusal to apply the year-end rate base is illegal, as confiscatory on the one hand, and on the other hand, as an arbitrary and capricious order not based on substantial evidence and therefore error of law within the meaning of G.L. c. 30A, § 14(8). ¹ The company does not, of course, claim that it should be allowed to recapture the charges it has lost, by reason of the illegal rates, between 1968 and 1974. Rather, it seeks a remand of the matter to the department on terms which require expeditious relief as to future rates.

We assume, without deciding, and as the department contends, that it has not been shown that the contested rate base results in confiscation. Nevertheless, we conclude that in the unusual circumstances of this case, the department's decision and rulings as to the rate base constitute error of law.

The unusual circumstances as shown in an uncontroverted record are, in major part, that the company completed and took into its books in December, 1968, the Cohasse Brook reservoir; that this addition was constructed with the approval of the department, and for the purpose of providing for anticipated future increased demands; that the new reservoir increased the value of the company's plant by more than 60%; ² at the 9.08% return allowed by the department, as to which no challenge has been made, the effect of the use of the year-average rather than year-end rate base was to reduce the company's annual return by a significant sum, ³ that the company has suffered and will continue to suffer from the deleterious effects of regulatory lag and attrition; ⁴ and that although the company has made substantial and unusual additions to plant, it has not experienced a corresponding increase in revenues or decrease in expenses.

It is appropriate for us to weigh these circumstances in light of the fact that the company would have been entitled by the very terms of the decision to a new rate structure producing on all its property the full return allowed by the department if the company had filed a new rate application at any time after September 9, 1970, using any test year beginning with 1969. Such new rates would long since have been in effect. The company chose not to follow that course and, by reason of the elapsed time in obtaining decisions...