ATTORNEY GENERAL vs. DEPARTMENT OF PUBLIC UTILITIES & another (and five companion cases¹).
Supreme Judicial Court of Massachusetts, Suffolk
September 23, 1983
Suffolk. March 9, 1983. — September 23, 1983.
390 Mass. 208
Present: HENNESSEY, C.J., WILKINS, LIACOS, ABRAMS, & O‘CONNOR, JJ.
¹ South Middlesex Opportunity Council vs. Department of Public Utilities. City of Boston vs. Department of Public Utilities. Stanley U. Robinson, Third vs. Department of Public Utilities (two appeals). Massachusetts Public Interest Research Group, Inc. vs. Department of Public Utilities. Boston Edison Company moved to intervene in each appeal (except for one appeal of Stanley U. Robinson, Third), and those motions were allowed by a single justice of this court.
Where an order of the Department of Public Utilities denying a motion that a commissioner disqualify himself from certain proceedings was mailed on July 21, 1982, and a petition for appeal from the order was filed on August 13, 1982, dismissal of the appeal for failure to comply with the twenty-day requirement of
The fact that a commissioner of the Department of Public Utilities, as Director of Resource Development for the Massachusetts Executive Office of Energy Resources before his appointment as commissioner, had filed a brief in a proceeding before the department seeking determination that a nuclear power plant project was reasonable did not require the commissioner to disqualify himself in a subsequent proceeding in which a public utility sought to recover the cost of the project following its abandonment. [213-216] LIACOS, J., dissenting, expressed the view that since the commissioner could properly have participated in these proceedings only under a rule of necessity this court should subject the department‘s decision to special scrutiny. [235-238]
The Department of Public Utilities did not abuse its discretion in denying a motion by a residential ratepayer to intervene in a proceeding in which a public utility was seeking to recover for the cost of an abandoned nuclear power plant project. [216-217]
The Department of Public Utilities has authority to permit a public utility to recover prudently incurred costs of a construction project reasonably abandoned prior to its completion and to recover carrying charges on amounts amortized. [222-228]
In a proceeding by a public utility seeking to recover, as a cost of service reflected in its rates, its investment in a nuclear power plant abandoned prior to completion, the Department of Public Utilities was warranted in concluding that the investment was a prudent one up to June 30, 1980, that disallowing any recovery would be a serious threat to the company‘s financial integrity, that the project was financeable at various times, that carrying charges on a portion of the amount being amortized should be allowed, and that the utility‘s loss after taxes should be allocated between ratepayers and shareholders with June 30, 1980, marking the dividing line; and the department was also warranted in approving rates reflecting the amortization of the after-tax cost of the utility‘s investment in the plant and carrying charges on a portion of those amortized costs. [228-232] Liacos, J., dissenting.
In the circumstances, the Department of Public Utilities acted within its discretion in approving a public utility‘s rate proposal even though the proposal only narrowed, rather than eliminated, the differences in class rates of return. [232-234]
CIVIL ACTIONS commenced in the Supreme Judicial Court for the county of Suffolk on December 18, 1981, and July 28, August 5, August 6, August 9, and August 13, 1982.
The cases were reported by Lynch, J.
Sarah E. Wald, Assistant Attorney General, for the Attorney General.
Nicholas J. Scobbo, Jr. (John R. Devereaux, Assistant Corporation Counsel, with him) for the city of Boston.
Charlie Donaldson, of New York, for Massachusetts Public Interest Research Group, Inc.
Stanley U. Robinson, III, pro se.
Harold J. Keohane & John A. Detore, Special Assistant Attorneys General, for Department of Public Utilities.
R. K. Gad, III (Douglas S. Horan & Roscoe Trimmier, Jr., with him) for Boston Edison Company.
WILKINS, J. On September 23, 1981, the board of directors of the Boston Edison Company (Edison) voted to cancel the construction in Plymouth of a second nuclear power plant, called Pilgrim II.2 On October 16, 1981, Edison filed with the Department of Public Utilities (department) revised electric rate schedules providing for a general rate increase, effective November 1, 1981. Edison proposed to recover, as a cost of service reflected in its rates, its investment in Pilgrim II, that is, its share of the net costs of the project, estimated (after salvage) to exceed $278,000,000.3 Pursuant to its authority under
All the appeals are from the department‘s April 30, 1982, decision (
PROCEDURAL ISSUES
The department and Edison argue that the appeal of Massachusetts Public Interest Research Group, Inc. (MASSPIRG), was not seasonably filed and that it must be dismissed. We need not pass on this question to the extent the issues MASSPIRG raises are also raised by appellants whose appeals were timely. We could, in such a situation, simply treat MASSPIRG‘s brief as one filed by an amicus curiae.4 There is, however, one issue raised by MASSPIRG not advanced by any other party in these appeals and, because of that issue, we must consider the timeliness of MASSPIRG‘s appeal.
Following the department‘s April 30, 1982, decision, various motions for reconsideration were filed. On May 20, pursuant to its authority under
On August 13, 1982, MASSPIRG filed its petition for appeal with the secretary of the department. That petition was not filed within ten days of the department‘s final order concerning the motions filed following the April 30 decision. In the circumstances, the April 30 decision was probably the final order from which, under
MASSPIRG‘s petition for appeal, however, was not filed with the department‘s secretary within twenty days of service (on July 21) of notice of the July 20 denial of its motion to recuse, but rather it was filed on August 13. MASSPIRG seeks to bridge the three day gap (from August 10 to August 13) by reliance on
Although we conclude that MASSPIRG‘s appeal must be dismissed, we think it appropriate to comment on the underlying claim that Commissioner Selgrade should have disqualified himself in this proceeding because he appeared in the prior, related proceeding (D.P.U. 19494) on behalf of the Massachusetts Executive Office of Energy Resources (MEOER) of which he was the Director of Resource Development. Although his involvement was not extensive, he did participate in writing and in filing a brief in D.P.U. 19494 on behalf of MEOER in support of a determination that the Pilgrim II project was reasonable. The brief expressed unenthusiastic approval of the project.5 Commissioner Selgrade was appointed a commissioner of the department on September 15, 1981, while D.P.U. 19494 was pending. He recused himself from that matter, which was decided by the other two commissioners one week later.
The earlier proceeding (D.P.U. 19494) was an investigation by the department of future demand for electricity in Edison‘s service territory, the appropriate level of Edison‘s reserve capacity, and alternatives to Edison‘s program for the construction of Pilgrim II. The hearings in D.P.U. 19494 concluded on September 28, 1979, after 121 days of
On March 16, 1982, responding to Commissioner Selgrade‘s request, the State Ethics Commission advised Commissioner Selgrade that, on the facts presented by him, he would not violate the conflict of interest law (
MASSPIRG was a party to the earlier proceeding (D.P.U. 19494) and had notice, therefore, of Commissioner Selgrade‘s involvement in the earlier proceeding. One of MASSPIRG‘s current counsel filed an affidavit with the motion to recuse stating that he did not know of the commissioner‘s involvement in the earlier proceeding until May 28, 1982. We do not know when other representatives of MASSPIRG learned of the commissioner‘s participation in the earlier proceeding, but the inference is unavoidable that some representatives of MASSPIRG knew or should have known of that involvement at the time of Commissioner Selgrade‘s participation.
There are several reasons for our conclusion. MASSPIRG‘S motion that Commissioner Selgrade recuse himself sought recusal only as to his further participation in the proceeding on the question of Edison‘s recovery of the cost of Pilgrim II. All action after the recusal motion was filed was taken by all three commissioners, including the commissioner who dissented on the Pilgrim II issue. None of that subsequent action involved the Pilgrim II recovery issue directly. The motion was made after the proceeding had been substantially concluded following many days of hearings and the filing of a decision of over 250 pages. Other parties, including the Attorney General, have not argued this issue to us. Commissioner Selgrade participated in the earlier proceeding as a State employee advocating policies of the Executive Department which may or may not have been consistent with his own views. MASSPIRG was served a copy of the MEOER brief signed by Commissioner Selgrade and thus had notice of his involvement in that matter well before the present proceeding began. The State Ethics Commission considered the matter and ruled that Commis-
Stanley U. Robinson, Third, a residential ratepayer, filed two appeals from determinations of the department in the rate proceeding. The first appeal challenges the department‘s denial of his petition to intervene in the proceeding as a party. The other is an appeal from the department‘s final order.
The department denied Robinson‘s motion to intervene as a party but granted him “limited participant status,” stating that he did not have status as a party but that he could conduct discovery and file memoranda or briefs. The Attorney General was designated as Robinson‘s “lead counsel.” The issue of Robinson‘s participation as a party was within the broad discretion of the department under
Edison moved to dismiss Robinson‘s appeal from the department‘s final decision on the ground that under
ABANDONMENT OF PILGRIM II
The principal dispute in these appeals involves the propriety of the department‘s determination to permit Edison to recover, by amortization over thirteen years, a portion of its investment in Pilgrim II and to permit Edison to collect a carrying charge on a portion of the unamortized balance. We conclude that there is no legal impediment to the department‘s permitting Edison, or any other utility, to recover its prudent investment in a nuclear power plant reasonably abandoned before completion and to recover carrying charges on amounts amortized. We further con-
The department‘s April 30, 1982, decision in this case devoted almost 100 pages to a discussion of “Pilgrim II Cost Recovery.” The department began by considering the background of Pilgrim II, including its decision in D.P.U. 19494. The department concluded that it was not barred by any rule of law from allowing recovery of costs of Pilgrim II even though Pilgrim II never generated any electricity. It characterized the abandonment of Pilgrim II as an extraordinary loss, a loss of a magnitude never before considered by the department. This loss required “separate, independent and unique rules that properly reflect the just balance of the affected interests” (ratepayers and investors). The department looked for guidance to decisions in other jurisdictions, including a decision of the Federal Energy Regulatory Commission, and saw the results as overwhelmingly favoring recovery of some part of the loss.
Edison, the department said, had the burden of proving that Pilgrim II was a prudent investment from its inception to cancellation. D.P.U. 19494 was dispositive of the issue of the reasonableness of Edison‘s construction program, based on the record in that proceeding. However, D.P.U. 19494 did not consider events occurring after the record closed in that proceeding, and it did not determine Edison‘s ability to finance Pilgrim II. The department‘s decision then discussed the evidence on which the Attorney General and other parties relied in arguing that Edison‘s investment in Pilgrim II was imprudent, or at least became so, long before Edison determined to cancel the project on September 23, 1981. Next, the department considered Edison‘s contentions in support of its claim that Pilgrim II was a reasonable, prudent investment up to the date Edison cancelled the project.
The department stated certain general conclusions. The Pilgrim II loss was large compared to the size of Edison and,
The department then stated that, if Edison were to absorb the Pilgrim II loss, “regulatory policies, and the returns they dictate, appear to us to be inadequate to compensate investors for the new level of risk. Investors who are inadequately compensated do not remain investors for long. . . . The disdain of the financial markets for this Company will be formidable . . . .” The cost of new capital would increase and service would deteriorate unavoidably because of the scarcity of reasonably priced capital. The question “[i]n a very real sense,” as the department saw it, was not who should bear the costs of the abandonment of Pilgrim II but “rather, when should those costs be faced.” Edison, it said, must have the ability to raise capital to invest in facilities to reduce its 65% dependency on oil for generating electricity. The controlling consideration is that the company must be able to meet its service obligation. The department saw “no realistic way” to make capital available
The department then considered the question of the prudence of Edison‘s actions during the history of the project. It noted particular factors that affected the reasonableness of the project from time to time. The cost of oil was increasing, and Pilgrim I had saved Edison‘s customers millions of dollars. However, the cost of construction, regulatory delays in obtaining approval of the construction of Pilgrim II, and a decline in projected demand for electricity presented problems. The accident at Three Mile Island occurred in the spring of 1979. Through 1978 and 1979 the propriety of continuing with the project became less clear, but, in the department‘s view, not to the point where prudence required abandonment. In the first half of 1980, problems arose from the delay in obtaining a construction permit from the Nuclear Regulatory Commission and from projections of increased costs of construction over an extended and uncertain construction schedule. At a June, 1980, meeting, Edison‘s directors voted to proceed with licensing efforts but to limit project expenditures. The department concluded that Edison should have cancelled the project in June, 1980, because “project uncertainty had become intolerably high by June, 1980.” Cancellation was then, in the department‘s view, “the only prudent course of action.”8
| Edison request | $278,300,000 |
| Less disallowed expenses (Post-June, 1980, expenses of Pilgrim II [26.9% of all Pilgrim II expenses], and AFUDC attributable to common equity) | 76,700,000 |
| $201,600,000 | |
| Less tax benefit attributable to amount for which recovery is allowed (73.1% of the total tax benefit) | 84,800,000 |
| Amount allowed to be recovered amortized over thirteen years | $116,800,000 |
| Amount subject to carrying charges, determined by deducting pre-July, 1980, debt and preferred AFUDC from $116,800,000 | $ 34,200,000 |
| Amount subject to carrying charges of 14% per annum | $ 82,600,000 |
| Annual amortization amount (excluding income taxes) | |
| Annual amount with carrying charges | $ 9,900,000 |
| Annual amount of AFUDC | 2,600,000 |
| $ 12,500,000 |
This court has not previously dealt with the question whether the department may lawfully permit a utility to recover prudently incurred costs of a construction project reasonably abandoned prior to its completion. The appellants point out that Pilgrim II never generated any electricity and argue that, until such an asset has “come on line,” its costs may not be reflected in rates. They point to no statutory basis for this argument. We have considered the right of a utility to reflect in its rates the prudently incurred cost of plant reasonably abandoned before it was fully depreciated. We have deferred to the policy of the department concerning recovery of the cost of such abandoned facilities. See Boston Edison Co. v. Department of Pub. Utils., 375 Mass. 1, 20-21 (1978) (experimental, abandoned pollution control device amortized over ten years; no error in excluding the unamortized retired plant from the rate base); Fitchburg Gas & Elec. Light Co. v. Department of Pub. Utils., 371 Mass. 881, 886-887 (1977) (same result as to reasonably abandoned production facilities). We have required that the department be consistent in its treatment of particular items of unamortized retired plant of a company, in the absence of an appropriate statement of reasons for any change in treatment. See Boston Gas Co. v. Department of Pub. Utils., 367 Mass. 92, 104 (1975). Thus, a department determination to permit unamortized retired plant in the rate base could not be changed in a subsequent proceeding without some justification. Id. See Boston Gas Co. v. Department of Pub. Utils., 368 Mass. 780, 802 (1975). In none of these opinions is there even a suggestion that the department might lack statutory authority to permit recovery of the undepreciated cost of prudently aban-
Judicial decisions elsewhere concerning the recovery of the cost of nuclear plants abandoned before completion are rare and not particularly instructive for the purposes of this case. In Central Me. Power Co. v. Public Utils. Comm‘n, 433 A.2d 331, 344-345 (Me. 1981), the appeal was presented on the assumption that the cost of abandoned plant could be recovered. The utility argued unsuccessfully that the commission, in allowing an amortization of expenses (exclusive of associated AFUDC) over five years, had not engaged in a reasonable balancing of the interests of ratepayers and shareholders. The assumption that abandoned plant could be recovered also was made in Wisconsin Pub. Serv. Corp. v. Madison Gas & Elec. Co., 109 Wis. 2d 256, 265 (1982), where the utility was able to persuade the court that the procedure the commission designated for the recovery of costs in fact prevented recovery of the allowed costs and was arbitrary. In Office of Consumers’ Counsel v. Public Utils. Comm‘n, 67 Ohio St. 2d 153, 166 (1981), appeal dismissed sub nom. Cleveland Elec. Illuminating Co. v. Office of Consumers’ Counsel, 455 U.S. 914 (1982), a divided court, relying strictly on special provisions of an Ohio statute, reversed an agency decision that allowed amortization of the costs of abandoned nuclear facilities as beyond the agency‘s statutory authority.9 Except for this Ohio case, which is of no guidance to us, we are aware of no appellate judicial opinion in which the authority of a State regulatory agency to allow recovery of the prudent costs of an abandoned nuclear plant was even raised, much less successfully challenged.
of the court‘s interpretation it would approve continued amortization. Cleveland Elec. Illuminating Co., No. 81-146-EL-AIR, No. 81-1565-EL-UNC at 27 (Pub. Utils. Comm‘n of Ohio 1982). In deciding this subsequent rate proceeding, the commission further stated that the return it allowed “provides revenues sufficient to provide for amortization of [the unamortized] balance over a reasonable period of time.” Id. at 28.
The Public Service Commission of Wyoming denied recovery of an investment in abandoned nuclear power plants, relying on a statutory provision that it consider “the property and business of any public utility, used and useful for the convenience of the public” (emphasis supplied).
Nevada Power Co., 41 P.U.R.4th 367, 386 (Nev. Pub. Serv. Comm‘n 1980) (costs of abandoned plant already set off and recovered against excessive earnings should not be amortized); Northern States Power Co., No. 10,097, at 7-8, 10 (Pub. Serv. Comm‘n of N.D. Dec. 31, 1980) (losses from cancellation of generating plant in Minnesota amortized; cost of abandoned plant in Wisconsin not to be amortized while decision of Federal Energy Regulatory Commission awaited as to allocation of costs among utilities).
The department had the authority to permit the recovery of a company‘s prudent investment in plant reasonably abandoned before completion. The general statutory authority of the department permits the department to approve rates reflecting such an investment (
recognition of its prudent costs in ratemaking. The same conclusion is appropriate concerning the department‘s allowance of carrying charges on amounts amortized and charged to the cost of operations.
We do not substitute our judgment for that of an administrative agency where no constitutional question is presented. We decline to prescribe a common law of utility ratemaking. Ratemaking is a legislative, not a judicial, function. Our involvement, beyond constitutional questions, has been to assure that the agency has adhered to statutory requirements. Where agency action is irrational, we will find an error of law. See Southbridge Water Supply Co. v. Department of Pub. Utils., 368 Mass. 300, 308-309 (1975). But, as we have said and ruled in a variety of contexts, questions of policy are for an administrative agency. See, e.g., School Comm. of Newton v. Labor Relations Comm‘n, 388 Mass. 557, 573 (1983); Boston Edison Co. v. Assessors of Watertown, 387 Mass. 298, 302 (1982); Massachusetts Elec. Co. v. Department of Pub. Utils., 376 Mass. 294, 302 (1978); New England Tel. & Tel. Co. v. Department of Pub. Utils., 372 Mass. 678, 684 (1977); Boston Gas Co. v. Department of Pub. Utils., 367 Mass. 92, 98 (1975). We come then to the appellants’ challenges to the reasoning of the department in its decision and to their claim that the department‘s decision to allow recovery of a portion of Edison‘s investment in Pilgrim II and a carrying charge on a portion of the amortized balance was not supported by substantial evidence.
We conclude that the department‘s decision was reasonable in its analysis and thus not arbitrary or capricious and that there was substantial evidence to support its findings. Many of the appellants’ arguments present logical reasons, with supporting evidence, for arriving at conclusions contrary to the department‘s conclusions on particular issues, such as the prudence of Edison‘s investment decisions and the financeability of the project at various times. Our task under the State Administrative Procedure Act (
We accept as within the department‘s discretion the conclusion to allow some direct recovery of the costs of Pilgrim II, and carrying charges on a portion of that recovery. The department‘s judgment as to the consequences of its allowance or disallowance of such recoveries was logically expressed. Investor confidence is not an insignificant element in utility regulation. A judgment that the adverse consequences of disallowing any recovery would be a serious threat to the company‘s financial integrity, and indirectly to its customers, was warranted. Obviously, many future
We comment briefly on certain challenges made to the department‘s decision. The department correctly placed the burden on Edison to demonstrate the prudence of its decision to commence and to continue with the Pilgrim II project. We do not see a fatal shift in this burden in the department‘s comments on the inadequacy of certain arguments made by the interveners or in the department‘s statement at one point that on the basis of particular facts it could not find “imprudence.”
Once in its decision the department suggests that the project was financeable in part because of “the state regulatory commitment to maintain [Edison‘s] financial integrity in the face of the need for that particular facility.” It is no doubt true that a rate regulatory agency‘s determination of the feasibility of a project will tend to establish both investor confidence and the financeability of the project through future rates approved by that same agency. However, the department made no explicit statement on the reasonableness of Edison‘s investment in Pilgrim II until September 22, 1981, the day before Edison cancelled the project. On the other hand, the record in D.P.U. 19494 closed in February, 1980, and the expectation of departmental approval was reasonable considering the substantial savings to consumers shown on that record if Pilgrim II were completed. The department‘s decision that the project was financeable at various times was not based solely on the conclusion in D.P.U. 19494 that the project was reasonable. The prospects of financing Pilgrim II at various times were enhanced by the reasonable expectation that the department‘s decision in D.P.U. 19494 would be favorable.
The appellants argue that, if Edison could finance billions of dollars for Pilgrim II, it was plainly wrong for the department to conclude that Edison could not absorb the
The Attorney General has argued separately that the department‘s decision was arbitrary and capricious in its allowance of carrying charges and in its treatment of the income tax benefits resulting from the abandonment of the project. The city of Boston also argues against the allowance of carrying charges.
We have discussed carrying charges in our general consideration of the department‘s authority and discretion. We see no error in the department‘s allowance of carrying charges on the non-AFUDC portion of the amount being amortized. The amount of the carrying charge is subject to adjustment in future rate proceedings.17 The circumstances of this case are sufficiently different from the Western Mass. Elec. Co. case, D.P.U. 558 (July 31, 1981), so that the disallowance of a carrying charge there (where the recovery of an investment of approximately $2,700,000 in two abandoned nuclear plants in Montague was allowed over four years) and the allowance of a carrying charge here do not demonstrate arbitrary or capricious action. The department‘s judgment that Edison would need the funds to finance future plans is not unreasonable on this record.
The Attorney General argues that the department acted arbitrarily in its treatment of the Federal tax benefits derived from the abandonment of the project. The department allocated Edison‘s loss after taxes between ratepayers and shareholders, with June 30, 1980, marking the dividing line.18 This allocation was within the department‘s discretion. In the absence of any contest on this issue raised be-
We, therefore, conclude that the department had the authority to allow Edison‘s rates to reflect the amortization of a portion of the after-tax cost of Pilgrim II and carrying charges on a portion of those amortized costs. We further conclude that the department‘s decision complied with the requirements of
STREET LIGHTING RATES
The city of Boston challenges the increase in the street lighting rates as “unduly or irrationally discriminatory,” citing American Hoechest Corp. v. Department of Pub. Utils., 379 Mass. 408, 411 (1980). Edison proposed, and the department agreed, that the revenue to be generated by the rate increase would be allocated among the various classes of customers so that those classes currently providing higher than average rates of return would receive lower than average percentage increases.20 In the test year used in this case, the street lighting class generated a rate of return to Edison above the average. The average rate of return for
Because the department has now acted on an Edison rate filing (Boston Edison Co., D.P.U. 1350 [May 31, 1983]) subsequent to the one under consideration here, the issue of the street lighting rates contained in this proceeding may well be moot because retroactive adjustments are not permissible. See Boston Edison Co. v. Department of Pub. Utils., 375 Mass. 1, 38 (1978). We nevertheless comment on the propriety of the department‘s action because the issue of allocation of revenue needs among classes of customers will be a recurring one.
A choice between alternative methods of allocation of revenue needs made by Edison and approved by the department is appropriate as long as it does not have a confiscatory effect and is not otherwise illegal. See Massachusetts Elec. Co. v. Department of Pub. Utils., 376 Mass. 294, 302 (1978). The issue is the propriety of the department‘s decision on Edison‘s filing and not the merits of any alternative proposal advanced by an intervener in the proceeding. See Trustees of Clark Univ. v. Department of Pub. Utils., 372 Mass. 331, 335 (1977).
We conclude that the department acted within its discretion in approving Edison‘s proposal even though the proposal only narrowed the differences in class rates of return. Cost of service need not be the sole criterion used in establishing rate classifications. American Hoechest Corp. v. Department of Pub. Utils., 379 Mass. 408, 411-412 (1980). The department was warranted in its discretion in concluding that a “correction” of differentials in one step would be more disruptive than a series of gradual adjustments over time. A class generating a disproportionately large
CONCLUSION
In the appeals of the Attorney General and of the city of Boston, judgments shall be entered affirming the decision of the department. The appeals of MASSPIRG and SMOC shall be dismissed for the separate reasons stated in this opinion. Judgments shall be entered, respectively, affirming the determination of the department not to permit Stanley U. Robinson, Third, to intervene as a party and dismissing his appeal from the department‘s decision.
So ordered.
LIACOS, J. (dissenting). The impact of the court‘s decision in this case is to make the ratepayers of Boston Edison Company the guarantors of business decisions in which neither they nor the Department of Public Utilities (department) had a voice. The court upholds a split decision of the three commissioners of the department and, thus, requires ratepayers to pay, over a period of years as part of their cost of service, for a project from which they have received no benefit or service whatsoever.
Many years ago, this court recognized the reason for public regulation of utility rates, saying “we have adopted,
1. Commissioner Selgrade‘s participation. One can agree with the court that the propriety of Commissioner Selgrade‘s participation in the proceedings below was not raised in a timely fashion, and yet conclude that this circumstance should be considered in reviewing the department‘s decision.
Given this circumstance, I believe that we have a duty to subject the department‘s decision to special scrutiny, since Commissioner Selgrade cast the deciding vote in favor of permitting recovery. We are essentially in the position of a court reviewing an administrative decision made by an officer who, while admittedly biased, decided the matter under the rule of necessity. In such a case, “the reviewing court . . . may and probably should review with special intensity.” 3 K.C. Davis, Administrative Law § 19.9, at 405 (1980). See Board of Educ., Laurel Special School Dist. v. Shockley, 52 Del. 277, 279-280 (1959); Fanwood v. Rocco, 33 N.J. 404, 417-418 (1960); Connelly v. Jersey City Hous. Auth., 63 N.J. Super. 424, 429 (1960); Rinaldi v. Mongiello, 7 N.J. Super. 410, 412 (1949); Wisconsin Tel. Co. v. Public Serv. Comm‘n, 232 Wis. 274, 329 (1939), cert. denied, 309 U.S. 657 (1940); McCormack, The Purpose of Due Process: Fair Hearing or Vehicle for Judicial Review?, 52 Tex. L. Rev. 1257, 1261-1262 (1974); Comment, Administrative Bias:
2. Abandonment of Pilgrim II. Under
While it may be said that we will not find an error of law lightly, we have not embraced a stance which permits the department to commit errors as long as they do not violate the Constitution or a separate, specific statutory provision other than
Southbridge Water Supply Co. v. Department of Pub. Utils., supra, stands for the proposition that we are under a duty to review a decision of the department to determine if an error of law has occurred.5 It also stands for the proposition that the mere fact that the department possessed general authority to take an action does not end our inquiry, and that the application of even a previously accepted rule may constitute an error of law. We have applied these propositions to reach results favorable to utilities; evenhandedness would suggest that we are bound to apply them in cases where the department‘s decision is challenged by other parties.
The circumstances surrounding Pilgrim II, however, do not suggest that a unique rule, imposing the loss on the consumers, should be adopted. Of primary importance is the fact that the decision to allocate the funds of Boston Edison‘s investors in Pilgrim II was made, without encouragement from the department, by Edison‘s business managers. Edison waged a long and successful battle to retain control over Pilgrim II. The sole expression of regulatory support for the project, the department‘s decision in D.P.U. 19494, came two days before Edison cancelled the project. Our decision in Plymouth County Nuclear Information Comm., Inc. v. Energy Facilities Siting Council, 374 Mass. 236 (1978), had the effect of leaving to Edison the decisions whether to add physical plants, and how to do so. Had the decisions of Edison‘s managers proved sound, Edison would have been entitled to receive a fair return on its investment. This opportunity to earn a fair return on a sound investment is all that a utility is entitled to receive. “[P]ublic utilities are not ‘guaranteed’ either a fair rate of return, or any return whatever, on their investment” (emphasis in original). 2 A.J.G. Priest, Public Utility Regulation 788 (1969). See FPC v. Sierra Pac. Power Co., 350 U.S. 348, 354-355 (1956); Missouri ex rel. Southwestern Bell Tel. Co. v. Public Serv. Comm‘n, 262 U.S. 276, 290-291 (1923) (Brandeis, J., dissenting).
The finding that management‘s decision was not imprudent should not, in and of itself, shift the risk of loss to the ratepayers. This follows because the standard of prudence is devoid of content. Since the department is not permitted to substitute its judgment for the judgment of Edison‘s business managers, see ante at 229, it is only in the extreme instance of mismanagement that the department has authority to find imprudence. In contrast, investors are entitled
The department‘s reasons for permitting recovery are neither adequate nor internally consistent. On one hand, recovery is said to be necessary to compensate investors for a “new” level of risk caused by the cancellation of Pilgrim II. On the other hand, recovery is said to be necessary because rates in the past did not reflect the risk of cancellation. Neither argument is sound. It is doubtful that Edison has not been compensated for the risk of cancellation. It was entitled to a return which compensated it for the risks, including the risk of a plant cancellation, inherent in the nature of the enterprise. See FPC v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944); Bluefield Water Works & Improvement Co. v. Public Serv. Comm‘n, 262 U.S. 679, 692-693 (1923). Rather, the risk then being small, the amount of compensation was not great. Now that Pilgrim II has been cancelled, the “risk” is not new; all that is new is the extent of the loss.8
The department also argued that recovery should be allowed because Edison is not entitled to receive speculative returns on its investments. But a public utility is not supposed to make speculative investments that would justify speculative returns. The department‘s finding concerning prudence and the financeability of Pilgrim II, turns in large measure on subsidiary findings that the project did not pre-
For the reasons stated above, I would hold that the department committed an error of law in permitting Edison to recover its investment in Pilgrim II. I need not consider whether I would reach the same conclusion if the decision below were untainted, or if the department or some other governmental body had taken a greater role, see
I believe it is appropriate to comment briefly on the magnitude of the loss and the financeability of Pilgrim II. The court notes, as did the department, that the loss would equal “approximate[ly] two-thirds of Edison‘s entire net worth, more than 25% of its permanently invested capital, and more than earnings retained and reinvested over its eighty-six year history.” Ante at 219. If this statement accurately reflects the magnitude of the loss, it becomes difficult to accept the department‘s conclusion that the project was financeable.9 Such was the dissenting view of Commissioner Sprague. Commissioner Sprague also noted that the amount of the net loss to Edison will be significantly reduced by the amount of tax benefits it will receive (from $278.3 million to $162.3 million). He then noted that Edison had retained earnings of $152 million as of December 31, 1981, and that it paid out $39.5 million in dividends to its common shareholders. He then calculated that the loss could be eliminated immediately by using retained earnings and by omitting one quarterly dividend. He also noted