Stow Mun. Elec. Dept. v. Department of Public Utilities

• Decision Date: 30 December 1997
• Citation: 688 N.E.2d 1337,426 Mass. 341
• Parties: , Util. L. Rep. P 26,652 STOW MUNICIPAL ELECTRIC DEPARTMENT v. DEPARTMENT OF PUBLIC UTILITIES. HUDSON LIGHT AND POWER DEPARTMENT v. DEPARTMENT OF PUBLIC UTILITIES. MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 1337

688 N.E.2d 1337

426 Mass. 341, Util. L. Rep. P 26,652

STOW MUNICIPAL ELECTRIC DEPARTMENT v. DEPARTMENT OF PUBLIC UTILITIES.

HUDSON LIGHT AND POWER DEPARTMENT v. DEPARTMENT OF PUBLIC UTILITIES.

MASSACHUSETTS MUNICIPAL WHOLESALE ELECTRIC COMPANY v. DEPARTMENT OF PUBLIC UTILITIES.

Supreme Judicial Court of Massachusetts Suffolk.

Argued Sept. 9, 1997.

Decided Dec. 30, 1997.

Michael B. Meyer, Boston, for Stow Municipal Electric Department.

Paul K. Connolly, Jr., Boston, for Hudson Light and Power Department.

Nicholas J. Scobbo, Jr., Boston, for Massachusetts Municipal Wholesale Electric Company.

Pierce O. Cray, Assistant Attorney General, for the Department of Public Utilities.

Before WILKINS, C.J., and ABRAMS, LYNCH, GREANEY, FRIED, MARSHALL and IRELAND, JJ.

ABRAMS, Justice.

Hudson Light and Power Department (Hudson), the town of Stow (Stow), and Massachusetts Municipal Wholesale Electric Company (MMWEC) ¹ appeal from Department of Public Utilities (department) order No. 94-176. Stow and Hudson each appeal from the department's valuation of Hudson's property within Stow. Hudson also appeals from the department's determination that it was not entitled to consequential damages and stranded costs. The parties appealed the department's decision to a single justice of this court. See G.L. c. 25, § 5. The single justice reserved and reported the cases to the full court. We affirm the department's decision as to the valuation of Hudson's property in Stow and consequential damages. We reverse the department's decision denying Hudson stranded costs.

1. Facts and procedural history. Pursuant to St. 1898, c. 143, Hudson has supplied Stow, as well as several other towns, with all its electricity for nearly one hundred years. To meet its obligations to Stow and other customers, Hudson participates in power sales agreements (PSAs) with MMWEC and other suppliers. Under these agreements, Hudson agreed to buy power at prices considerably higher than today's market rates, which have decreased due to restructuring and increased competition in the electric industry. In Massachusetts Mun. Wholesale Elec. Co. v. Danvers, 411 Mass. 39, 577 N.E.2d 283 (1991), we stated that one of these PSAs, and step-up provisions included therein, remained enforceable against participants such as Hudson even though the Vermont Supreme Court had declared it void ab initio with respect to other participants. See Vermont Dep't of Pub. Serv. v. Massachusetts Mun. Wholesale Elec. Co., 151 Vt. 73, 558 A.2d 215 (1988), cert. denied, 493 U.S. 872, 110 S.Ct. 202, 107 L.Ed.2d 155 (1989).

In 1993 and 1994, Stow voted at two town meetings, as authorized by G.L. c. 164, § 42, to "municipalize" the town's electricity distribution system, create the Stow Municipal Electric Department, and purchase Hudson's property located within the town "at a price to be agreed on." Stow and Hudson negotiated for 150 days, but did not reach an agreement.

On November 22, 1994, Stow petitioned the department pursuant to G.L. c. 164, § 43, ² for a determination of a purchase price and damages, if any. Stow and Hudson agreed that the proper measure of the purchase price was cost less depreciation, rather than comparable sales or capitalized earnings. They disagreed, however, about how to calculate the agreed-to formula. Stow argued that the proper measure was original cost less depreciation, which it calculated to be $254,613. It arrived at this figure based on the total book cost of Hudson's property less straightline depreciation, multiplied by an allocation factor representing the ratio of Stow's electricity use to Hudson's total load.

Hudson argued that the proper measure was reproduction cost new less depreciation, which it calculated to be $4,896,030. This figure was based on the current cost of materials and labor for each component of its property in Stow, less a three-part depreciation factor: 25% for estimated service life; 25% for "life extension," based on Hudson's claim that the equipment has a longer-than-average life due to its maintenance program; and 50% for observed condition. Also, Hudson presented its own original cost less depreciation figure of $2,124,059, based on reproduction cost new less depreciation, scaled back for inflation. The department, reasoning that the statute's language required it to use original cost as a starting point but also permitted it to consider "any other element which may enter into a determination of a fair value," determined that the purchase price would be 50% original cost less depreciation plus 50% reproduction cost new less depreciation. Stow and Hudson each challenge the department's valuation.

Hudson argued that it was entitled to recover consequential damages resulting from the severance of Stow from its system. Because Stow's departure would result in decreased utilization of certain equipment, Hudson claimed that it should be compensated for "underutilization." The department rejected this claim because Hudson had not shown "direct and certain" damages.

Hudson also argued that Stow should reimburse it for its "stranded costs," that is, the money it had already spent or was committed to spend under the PSAs and, it claimed, it could not recover without Stow as a customer. The department reasoned that, although the PSAs and rights under them may constitute "property" within the meaning of § 43, it would not be in the public interest to include them in the valuation of Hudson's property in Stow. It also declined to award stranded costs to Hudson because, in its view, Hudson had not established either that such costs existed or were unrecoverable, or that it had taken and will take all reasonable steps to mitigate stranded costs.

2. Standard of review. "Our review of petitions under G.L. c. 25, § 5, is limited, although not perfunctory." Wolf v. Department of Pub. Utils., 407 Mass. 363, 367, 553 N.E.2d 922 (1990). We uphold the department's decision unless it is shown that it is based on an error of law, unsupported by substantial evidence, arbitrary or capricious, an abuse of discretion, or otherwise not in accordance with law. Massachusetts Inst. of Tech. v. Department of Pub. Utils., 425 Mass. 856, 867-868, 684 N.E.2d 585 (1997) (MIT ), citing G.L. c. 30A, § 14(7). "General Laws c. 25, § 5, allocates to [the plaintiffs] the burden of proving such error. This burden is a heavy one. We give great deference to the department's expertise and experience in areas where the Legislature has delegated to it decision making authority." Wolf, supra at 367, 553 N.E.2d 922, quoting Costello v. Department of Pub. Utils., 391 Mass. 527, 533, 462 N.E.2d 301 (1984).

Our review of the department's decision, however, is impossible unless the decision is "accompanied by a statement of reasons ... including determination of each issue of fact or law necessary to the decision." MIT, supra at 868, 684 N.E.2d 585, citing Costello, supra at 533, 462 N.E.2d 301. The department must make adequate subsidiary findings to support its determination of each issue of fact or law. See MIT, supra at 868, 684 N.E.2d 585. Because of the novelty and importance of the issues associated with industry restructuring, the need for an adequate statement of reasons is even more pressing. See id.

3. Valuation. Both Stow and Hudson take issue with the 50-50 valuation, arguing diametrically opposed positions. Stow argues that the department committed an error of law by using a 50% weighting of reproduction cost new less depreciation rather than 100% original cost less depreciation, both because this court's rulings foreclose it and because use of reproduction cost new less depreciation violates the statutory prohibition of "enhancement on account of future earning capacity." Stow further argues that the combination of its depreciation method to calculate original cost less depreciation with Hudson's method to calculate reproduction cost new less depreciation was arbitrary and capricious. Finally, Stow argues that the department's calculations are based on speculation about future changes in the industry rather than substantial evidence. By contrast, Hudson argues that the department should have used only reproduction cost new less depreciation. Alternatively, Hudson argues that, if original cost less depreciation is to be used, the department should have used Hudson's calculation of original cost less depreciation.

General Laws c. 164, § 43, requires the department to determine "what price should be paid, having in view the cost of the property less a reasonable allowance for depreciation and obsolescence, and any other element which may enter into a determination of a fair value of the property so purchased." The department's goal under this statute is to set a purchase price that represents "a fair value." The indefinite article suggests that there may be a range of fair values from which the department may select in its discretion. The department interpreted the word "cost" to mean the actual original cost of the property. This interpretation is within the department's discretion. See Southbridge v. Southbridge Water Supply Co., 371 Mass. 209, 216, 355 N.E.2d 920 (1976) ("actual cost" means original cost). Thus, the department properly used Stow's original cost less depreciation figure as a starting point, rather than using Hudson's original cost less depreciation figure, which is actually a scaled-back reproduction cost new less depreciation.

The department's 50% weighting of reproduction cost new less depreciation was well within its discretion. First, the statute permits the department to consider "any other element which may enter into a determination of a fair value" in addition to the original cost. Reproduction cost new less depreciation, the current cost (less depreciation) of the materials and labor to reproduce the system, is such an element. We have said that reproduction cost is "probative of fair cash value" of...