438 Mass. 256 | Mass. | 2002
These consolidated cases, which are before us on a reservation and report, without decision, by a single justice of this court, involve consolidated appeals pursuant to G. L. c. 25, § 5, from a final order of the Department of Telecommunications and Energy (department) that approved a rate plan filed by Boston Edison Company, Cambridge Electric Light Company (Cambridge Electric), Commonwealth Electric Company (Commonwealth Electric) and Commonwealth Gas Company
The background of the cases is as follows. On February 1, 1999, the distribution companies filed their rate plan with the department. They represented that consummation of the merger was contingent on the department’s approval of the plan. The plan was filed expressly pursuant to § 94. The distribution companies requested that the department approve the plan “as just and reasonable and consistent with the public interest,” and as consistent with “[department precedent.”
As previously stated, the rate plan had three main components: (1) a four-year freeze in distribution rates for the distribution companies from the date of the consummation of the merger; (2) the recovery of merger-related costs; and (3) a service-quality plan to prevent any degradation in service as a result of the merger. Because the first two components of the plan are at issue, some additional information concerning these components follows. With respect to the rate freeze,
The merger-related costs consist of transaction costs, system
The distribution companies proposed to recover merger-related costs in two ways. First, for ratemaking purposes, they proposed to amortize the transaction and system integration costs (and associated tax effects) at the rate of $13.5 million a year over a ten-year period. Second, they proposed to amortize the acquisition premium at the rate of $20.6 million a year over a forty-year period.
In their rate plan the distribution companies sought to adjust the base rates of Cambridge Electric and Commonwealth Electric to correct an alleged error made in the calculation of base rates in their respective restructuring plans mandated by § 193 of St. 1997, c. 164, “An Act relative to restructuring the
Prior to conducting evidentiary hearings, the department issued an interlocutory order stating that “this proceeding does not include a relitigation of the [department’s policy on the recovery of merger-related costs, including the recovery of a merger-related acquisition premium.” That policy, simply put,
In Mergers & Acquisitions, the department established guidelines and standards for mergers and acquisitions, and for the recovery of related costs. Id. at 1, 6-9, 18-19. The department recognized the significant changes occurring in the utility industry at the State and Federal levels, noting that “[i]n an increasingly competitive market, mergers or acquisitions may represent one of many measures that could achieve savings, efficiencies, increased reliability, and better quality of service for Massachusetts utilities.” Id. at 5. The department stated its expectation that all utilities “explore thoroughly all cost-savings measures and potential opportunities [including some form of consolidation] to achieve efficiencies of all kinds.” Id.
The department noted that the standard for judging merger or acquisition proposals is set forth in G. L. c. 164, § 96, and requires the department to determine that the transaction is consistent with the “public interest.”
The department held public hearings concerning the distribution companies’ proposed rate plan, and conducted ten days of evidentiary hearings at which over 400 exhibits were introduced. The department ultimately entered a 109-page decision and order approving the rate plan.
In its order, the department first addressed the appropriate standard of review. Because the department had no jurisdiction over the merging parent companies, it acknowledged that the merger fell outside the scope of § 96. The department noted, however, that its approval of the rate plan was essential to the merger, and that the merger would have an impact on ratepayers similar to the impact resulting from mergers within its jurisdiction because the acquisition premium would be “pushed down” to the distribution companies and because the distribution companies were seeking to recover that cost as well as other merger-related costs. Consequently, the department characterized the circumstances as raising an issue of first impression and requiring “some degree of adaptation of our standard of review.” The department concluded that adaptation was war
Regarding the proposed rate plan, the department approved of the distribution companies’ proposed base rate freeze (subject to certain exogenous cost adjustments not relevant here
With respect to the proposed correction to Cambridge Electric’s and Commonwealth Electric’s distribution rates, the department found that these companies had made an inadvertent mistake in collecting distribution revenue. The department further determined that, if no adjustment were made, the companies would undercollect distribution revenue by approximately $49.8 million. The department concluded that
[ujndercollecting the revenue requirement is inequitable for Cambridge Electric and [Commonwealth Electric] because it does not allow them a fair opportunity to earn their allowed rates of return,” and therefore allowed the proposed adjustments to distribution rates.
Turning to merger-related costs, the department allowed the distribution companies to amortize the merger costs, including
The department then compared the merger-related savings during the initial ten-year period to the merger-related costs during the forty-year period after consummation of the merger. The department calculated the net present value of annual amortization of the acquisition premium during the thirty years following the initial ten-year period to be approximately $179 million. The sum of that amount ($179 million), and the amount of merger-related costs during the initial ten-year period ($340.7 million), represents total costs of the merger of $519.7 million, which the department noted was “considerably less than the merger-related savings of $632.5 million.” Thus, the department concluded that “the merger will produce significant benefits for ratepayers” and allowed the merger-related costs to be included
1. The applicable standard of review of petitions under G. L. c. 25, § 5, was explained in Massachusetts Inst. of Tech. v. Department of Pub. Utils., 425 Mass. 856, 867-868 (1997):
“Our standard of review ... is well settled: a petition that raises no constitutional questions requires us to review the department’s finding to determine only whether there is an error of law. . . . The burden of proof is on the appealing party to show that the order appealed from is invalid, and we have observed that this burden is heavy. . . . Moreover, we give deference to the department’s expertise and experience in areas where the Legislature has delegated to it decision-making authority, pursuant to G. L. c. 30A, § 14. We 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. G. L. c. 30A, § 14 (7). Moreover, we have acknowledged that the department has broad authority to determine ratemaking matters in the public interest.” (Citations omitted.)
In addition, “as we have said and ruled in a variety of contexts, questions of policy are for an administrative agency.” Attorney Gen. v. Department of Pub. Utils., 390 Mass. 208, 228 (1983), and cases cited. See Massachusetts Oilheat Council v. Department of Pub. Utils., 418 Mass. 798, 805 (1994) (“it would not be appropriate for this court to substitute its judgment for a judgment of the department regarding energy policy that cannot be said to be irrational”).
2. The plaintiffs argue that the rate freeze and allowance of merger-related costs should not have been permitted by the department in the absence of an investigation, pursuant to § 94,
The review sought by the plaintiffs is used by the department in investigating a gas or electric company’s request for approval of a general increase in rates pursuant to § 94. As previously noted, § 94 imposes certain procedural requirements on the department when a gas or electric company makes such a request, including the requirements of (1) notifying the Attorney General; (2) conducting a public hearing; and (3) investigating the “propriety” of the proposed rates. These procedural requirements are not implicated in this case because, as recognized by the department, the distribution companies’ rate plan sought only an adjustment in certain rates (as discussed below in Part 3) and' a rate freeze, not a “general increase in rates.” The department did not err by failing to investigate the “propriety” of the rates.
The department’s decision to apply the “public interest” standard in § 96 was proper. The “public interest” standard constitutes an overriding consideration in the department’s regulatory and ratemaking scheme. See Boston Real Estate Bd. v. Department of Pub. Utils., 334 Mass. 477, 495 (1956) (“The controlling consideration of the public interest in the exercise of the department’s statutory regulating power is implicit throughout the statute. It is the standard which supports the grant of power over rates and regulations in general, and it is not necessary to specify further”). See also Wolf v. Department of Pub. Utils., 407 Mass. 363, 369 (1990) (“the mission of the agency is to regulate in the public interest”). The department realized it could not directly apply § 96, because it had no jurisdiction over the parent companies and was not approving the merger. The department, however, astutely recognized the
The case of Cambridge Elec. Light Co. v. Department of Pub. Utils., 333 Mass. 536 (1956), does not require a different conclusion. In that case, Cambridge Electric Light Company sought a determination from the court that, in a ratesetting proceeding under § 94, the department should be bound to apply its determination of the company’s stock price from a previous stock issuance decision under G. L. c. 164, § 18. Id. at 538. The court disagreed, stating that different considerations underlie
Finally, we do not consider the Attorney General’s argument that the department improperly revived a ratemaking practice known as the “fair value” method, because the Attorney General failed to raise the contention before the department. The argument is not properly before us. Hingham v. Department of Telecom. & Energy, 433 Mass. 198, 215 (2001).
3. We conclude that the adjustment in distribution rates for Cambridge Electric and Commonwealth Electric, while fully offset by decreases in their respective transition charges, does not represent “a general increase in rates” under § 94, thereby requiring a rate investigation. The adjustment, as noted by the department, simply allowed the two companies to collect the distribution rates that had been permitted in their restructuring plans. Those adjustments did not permit the companies to increase rates to recover increased costs of service. Because the adjustment leaves the Act-mandated DSM charge unchanged, we reject the argument of TEC and Harvard that the companies are “double collecting]” DSM charges. Further, the department acted within its discretion in rejecting, albeit implicitly, evidence proffered that the adjustment was not warranted. Nor did the adjustment represent disfavored single-issue ratemaking. The department did not change rates to account for a cost increase
4. In view of our conclusion that the department was not required to investigate the “propriety” of the rate plan pursuant to § 94, we reject TEC and Harvard’s various arguments that the department’s approval of the rate plan violated requirements of § 94. We similarly reject the Attorney General’s arguments that are based on the incorrect premise that a § 94 investigation into the “propriety” of rates was required.
5. The department requires costs and savings allocation “to prevent a utility from subsidizing non-regulated aspects of a utility’s business from the regulated side.” The Attorney General essentially argues that an allocation system was necessary during the rate freeze. The department considered this argument, and noted that, “[e]ven though [the distribution companies] have shown that estimated aggregate savings from the merger would exceed the expected aggregate merger costs, [it] has no assurance that individual regulated utilities would not be assigned merger-related costs which are not commensurate with savings.” The department recognized the need for “an established formula that designates proper allocators of costs among all subsidiaries.” However, the department realized that the “complexity of the two corporate structures to be merged and the uncertainty regarding the final structure of the post-merger entity” “require[d] the [distribution companies] to gain sufficient experience with regard to the integration of operations and the appropriate allocation of cost responsibility among the subsidiaries.” Thus, the department required the distribution
6. The plaintiffs challenge the department’s findings that the rate plan serves the “public interest.” First, as to the adjustment approved for Cambridge Electric’s and Commonwealth Electric’s distribution rates, we reject the contention (for the reasons explained in our discussion of the department’s approval of the adjustment) that “net harm” results to customers from the adjustment. We reiterate that this adjustment did not constitute a request for a “general increase in rates” under § 94.
We similarly reject the argument that “net harm” results to customers as a result of the rate freeze. This argument is based on the contention that the distribution companies will achieve savings during the four-year rate freeze, but will not pass on those savings to customers in the form of lower rates, and that “there was a complete lack of fairness . . . between shareholders and ratepayers [customers]” in the distribution of merger-related benefits or savings. These contentions (1) rest on an improper comparison between the rates in effect during the four-year rate freeze following the merger and the projected savings in the amount of $632.5 million during the ten years following the merger; and ignore (2) the significant difference between merger-related savings and merger-related costs during that period (with savings exceeding costs by $291.8 million); (3) the risks borne by the distribution companies during the four-year rate freeze to achieve savings; (4) the fact that in the absence of the rate freeze, rates would likely increase, even if only to account for inflation; (5) the fact that the department would be monitoring cost-saving measures and results during
7. The cases are remanded to the county court where a judgment is to be entered affirming the decision and order of the department.
So ordered.
Commonwealth Gas Company subsequently changed its name to NSTAR Gas Company.
General Laws c. 164, § 94, grants the department the authority to approve of, and regulate, rates imposed by gas and electric companies within its jurisdiction.
BEC Energy was the parent company of Boston Edison Company and Commonwealth Energy System was the parent company of Cambridge Electric, Commonwealth Electric, and Commonwealth Gas Company.
The merger itself did not require approval from the department because the parent companies were not subject to G. L. c. 164. Conversely, the distribution companies are subject to the department’s jurisdiction. See G. L. c. 164, §§ 1, 2, 3.
The Attorney General intervened as a matter of right pursuant to G. L. c. 12, § 11E. The department permitted TEC and Harvard to intervene.
For Cambridge Electric and Commonwealth Electric, the rate freeze proposed would reflect an upward rate adjustment in their distribution rates to account for an alleged error that had been made in a prior proceeding. More discussion on this aspect of the proposal will follow.
Under generally accepted accounting principles, the merger was accounted for as a “purchase accounting” transaction. In accordance with this type of accounting method, any acquisition premium paid is recorded on the books of the acquired company and is amortized over a certain time period not to exceed forty years. Without the approval of the department, the distribution companies could not place or “push” this expense on their books and attempt to recover it.
Section 37 of St. 1997, c. 164, required that rates charged by an “electric company” organized under the Act include certain charges relating to energy efficiency or conservation, the demand-side management charge (DSM charge), see G. L. c. 25, § 19, and relating to the promotion of renewable energy, the renewable energy charge (RE charge), see G. L. c. 25, § 20. In Shea v. Boston Edison Co., 431 Mass. 251, 253 (2000), we examined those charges in detail and rejected constitutional challenges to them.
General Laws c. 164, § 96, provides in pertinent part: “Companies subject to this chapter may . . . consolidate or merge with one another . . . provided . . . that the department, after notice and a public hearing, has determined that such purchase and sale or consolidation or merger, and the terms thereof, are consistent with the public interest.” The amendments made to § 96 following the department’s order in D.P.U. 93-167-A, at 1, 6-9, 18-19 (1994) (Mergers & Acquisitions), made no alterations to this language and have no significance in this case. See St. 1997, c. 164, §§ 242, 243.
The department explained the “public interest” standard under § 96 in Boston Edison Co., D.P.U. 850, at 7-8 (1983), as follows:
“[Ejven if a particular proposal has negative aspects, we will find that such a proposal is consistent with the public interest if, upon consideration of all its significant aspects viewed as a whole, the public interest is at least as well served by approval of the proposal as by its denial.”
Section 94 provides, in pertinent part:
“Whenever the department receives notice of any changes proposed to be made in any schedule filed under this chapter which represent a general increase in rates, prices and charges for gas or electric service, it shall notify the attorney general of the same forthwith, and shall thereafter hold a public hearing and make an investigation as to the propriety of such proposed changes . . . .”
In determining the “propriety” of rates, the department must find that they are “just and reasonable.” See Attorney Gen. v. Department of Pub. Utils., 392 Mass. 262, 265 (1984); Incentive Regulations for Elec. & Gas Cos., D.P.U. 94-158, at 42 (1995).
As when evaluating a proposed merger, the department may consider various factors in determining whether the “public interest” standard has been satisfied, including: “(1) effect on rates; (2) effect on the quality of service; (3) resulting net savings; (4) effect on competition; (5) financial integrity of the post-merger entity; (6) fairness of the distribution of resulting benefits between shareholders and ratepayers; (7) societal costs; (8) effect on economic development; and (9) alternatives to the merger or acquisition.” See Mergers & Acquisitions, D.P.U. 93-167-A, at 7-9 (1994).
The department defines “exogenous costs” as positive or negative cost changes beyond a company’s control that would significantly affect the company’s operations.
General Laws c. 164, § 93, provides that “[o]n written complaint of the attorney general ... as to the quality or price of the gas or electricity sold and delivered, the department shall notify said company . . . and shall thereupon, after notice, give a public hearing to such complainant and said company, and after such hearing may order any reduction or change in the price or prices of gas or electricity .... Such an order may likewise be made by the department, after notice and hearing as aforesaid, upon its own motion.”
It is not of any significance that § 94 also expressly applies a “public interest” standard in reviewing “special contract[s]” for the sale or distribution of gas or electricity.