ENERGY EXPRESS, INC.1 vs. DEPARTMENT OF PUBLIC UTILITIES.
Suffolk.
May 4, 2017. - August 3, 2017.
477 Mass. 571 (2017)
Present: GANTS, C.J., LENK, HINES, GAZIANO, LOWY, BUDD, & CYPHER, JJ.
Gas Company. Public Utilities. Department of Public Utilities. Words, “Customer.”
CIVIL ACTION commenced in the Supreme Judicial Court for the county of Suffolk on September 22, 2016.
The case was reported by Lowy, J.
William S. Harwood for the intervener.
Kirk G. Hanson, Assistant Attorney General, for the defendant.
Shaela McNulty Collins & Kenneth W. Christman, for Bay State Gas Company, amicus curiae, submitted a brief.
LOWY, J. Prior to 1999, the supply, transportation, and distribution of natural gas to consumers in the Commonwealth were “bundled” together and provided by a State-endorsed monopoly, referred to as a “local distribution company” or “LDC.” The Legislature “unbundled” these components, allowing private companies, referred to as “marketers,” to compete as suppliers of natural gas in the Commonwealth. Transportation and distribution of gas, however, remained the sole province of the LDCs. To ensure that consumers who opted to purchase gas from marketers continued to receive a sufficient supply of gas, the Department of Public Utilities (department) required LDCs to assign to marketers a proportional share of the “capacity” along interstate pipelines, based on the needs of the marketers’ customers.
Background. There are three primary components to the natural gas industry: (1) the gas commodity itself; (2) “upstream capacity,” which involves the transmission and storage of gas from the source in pipelines, often across State boundaries; and (3) local distribution of gas to the consumer. Historically, in Massachusetts, the LDC provided all three components. The gas company in this case, Bay State Gas Company (Bay State),2 is an LDC.
In the 1990s, Massachusetts partially “unbundled” the industry. D.T.E. 98-32-B, at 8, 27-28 (1999) (Unbundling Order I). See generally 220 Code Mass. Regs. §§ 14.00 (2008). The department determined, however, that of the three primary components of the gas industry, only the unbundling of the gas commodity itself was feasible.3 Unbundling Order I, supra at 27-28. The department was concerned that allowing competition for the second component, upstream capacity, “would run the risk that interstate capacity could be diverted to serve markets outside the Commonwealth or other non-traditional customers within the [S]tate market . . . .” Id. at 8. The department did not envision opening the third component, distribution, to competition. See id. at 7-8. Thus, unbundling was limited to the sale of the commodity itself. Id. at 7-8, 27-28. Consumers could elect to purchase natural gas from marketers, such as the intervener in these proceedings, Energy Express, Inc. (Energy Express), instead of an LDC.
Because the department did not open upstream capacity to private competition, LDCs remain responsible for entering into con-
As a result of the unbundling process, some consumers were now purchasing their gas from one entity (a marketer) and having it transported to them by another (an LDC). In light of this change, the department had to determine the best way to ensure that those consumers could depend on the reliable delivery of their natural gas. To that end, the department adopted a mandatory “slice-of-system” assignment approach for upstream capacity. Unbundling Order I, supra at 34-35. Under this system, the LDC must secure all the upstream capacity necessary for both its sales and transportation customers. Id. at 12-13. Then, the LDC proportionally assigns capacity to each marketer, based on the pro rata gas needs of its customers who elect to purchase gas from that marketer. Id. This ensures that there will be sufficient capacity along the interstate pipelines to transport the gas “upstream” from the supply source to consumers. See id. at 34-35.
Pursuant to the LDC‘s assignment of capacity, a marketer like Energy Express directly pays the proportional costs of capacity to a pipeline, on behalf of its customers, just as an LDC like Bay State does for its sales customers. Id. at 12-13 (marketer “assume[s] the same cost structures with regard to the assigned capacity“). LDCs pass that cost on to their customers in compliance with applicable regulations and its department-approved rates, 220 Code Mass. Regs. § 14.03(4)(c), (d) (2009), while marketers have the ability to freely negotiate the extent to which they pass these costs on to their customers. See 220 Code Mass. Regs. § 14.04 (2008).
The upstream capacity cost is determined by Federal law, through the Federal Energy Regulatory Commission (FERC).
That is precisely what happened in this case. The Portland Natural Gas Transmission System (pipeline) was permitted to charge a certain rate, subject to FERC review. Bay State paid that rate to the pipeline. Subsequently, FERC determined that the pipeline had charged too much and ordered the pipeline to issue a refund. Because Bay State was the contracting party with the pipeline, and not the marketers, Bay State received the full refund.
The department ordered Bay State to issue a refund to its sales and transportation customers, which it did.
Standard of review. When reviewing a decision of the department that does not raise a constitutional question, but is limited to evaluating whether the department committed legal error, “‘[t]he burden of proof is on the appealing party to show that the order appealed from is invalid, and we have observed that this burden
We afford the department deference, based on its “expertise and experience in areas where the Legislature has delegated decision-making authority” to the department. Bay State Gas Co., supra at 813-814, quoting DSCI Corp., supra, and citing
Discussion. Energy Express argues that (1) the department committed an error of law and abused its discretion in interpreting “customer” as used in
1. Interpretation of “customer.” General Laws
“order said gas company to refund to its customers any sums refunded to said gas company for the period subsequent to the effective date of the order of the department approving rates for the gas company as above set forth and may impose such restrictions, limitations, terms and conditions in such order as are considered necessary by it . . . .”
In this case, Bay State received a refund from a pipeline, pursuant to FERC‘s determination that the pipeline had overcharged for upstream capacity. The department then ordered Bay State to pass that refund on to its customers. Energy Express claims that it, as an assignee of Bay State with respect to upstream capacity along the pertinent pipeline, should be interpreted as a “customer” under
When interpreting a statute, we ascertain the intent of the Legislature by relying on all of the statute‘s “words construed by the ordinary and approved usage of the language, considered in connection with the cause of its enactment, the mischief or imperfection to be remedied and the main object to be accomplished” (citation omitted). Meikle v. Nurse, 474 Mass. 207, 210 (2016). Yet, we simultaneously afford deference to the department‘s reasonable interpretations of the statutes that it administers. Bay State Gas Co., 459 Mass. at 813-814.
Energy Express claims that it became a “customer” of Bay State for the purposes of
The department interprets “customer,” in the context of the natural gas market, to mean an entity that purchases natural gas or related services for its own consumption. The department points out that its regulations define a “retail customer” as one “located in Massachusetts that purchases natural gas for its own consumption and not for resale in whole or in part.” 220 Code Mass. Regs. § 14.02 (2008). Although this may not be the only possible definition of customer, it is the one adopted by the department, is reasonable, and is entitled to our deference. Bay State Gas Co., 459 Mass. at 813-814.
The legislative history of
Further, we defer to the department‘s determination that the consumers of natural gas, and not the marketers, are ultimately responsible for the upstream capacity costs. See Unbundling Order I, supra at 12 (“Under mandatory assignment, [customers who purchase gas from marketers] will retain the responsibility for the costs associated with the capacity procured and maintained by the [LDC]“). Bay State must procure sufficient upstream capacity on behalf of both its sales and transportation customers. D.T.E. 04-1, at 53 (2005) (Unbundling Order II). Therefore, Bay State is the upstream capacity provider for its transportation customers. The upstream capacity is procured on the transportation customers’ behalf, and the costs of that procurement are “inextricably linked” to Bay State‘s obligation to procure capacity for them. Unbundling Order I, supra at 6. See Unbundling Order II, supra at 53 (directing LDCs to “continue to plan for and procure upstream pipeline capacity” for both sales and transportation customers). As a practical administrative necessity to ensure an adequate and reliable supply of gas for its transportation customers, Bay State assigns the transportation customers’ proportional share of upstream capacity to the marketers that sell gas to those transportation customers. See Unbundling Order I, supra at 34-35 (adopting mandatory “slice-of-system” assignment of upstream capacity to marketers as necessity for reliability); Unbundling Order II, supra at 52-53 (declining to deviate from mandatory capacity assignment adopted in Unbundling Order I).
That marketers such as Energy Express pay those costs up front does not alter the transportation customers’ ultimate responsibility for their pro rata share of the capacity costs. Bay State also pays these costs up front. Yet, Bay State is not entitled to the
Rather, Energy Express acquires its own customers who remain dependent on Bay State to procure and provide upstream capacity. Bay State then adds together the total upstream capacity requirements of Energy Express‘s customers, obtains that capacity from a pipeline, and assigns it to Energy Express. Energy Express simply stands in Bay State‘s shoes. Thus, just as Bay State initially pays the upstream capacity costs to the pipeline on its sales customers’ behalf, Energy Express does the same for its customers. It follows that Energy Express‘s contracts with its customers determine the extent to which it passes on these costs, in a manner parallel to how Bay State‘s department-approved rates pass such costs on to its sales customers. See 220 Code Mass. Regs. § 14.03(4)(c), (d) (LDCs’ rates established pursuant to regulatory requirements and codified in “tariff“). Regardless of such recovery, these customers are the parties responsible for the cost and thus the parties entitled to the refund. See
Further, if an LDC‘s transportation customer switches marketers, or if a marketer leaves the market, the department has determined that the upstream capacity allotment and its associated costs must follow the transportation customer. See Unbundling Order I, supra at 31. These costs do not become attached to the marketer who paid them on the transportation customer‘s behalf. Id. In other words, no matter who is selling natural gas to the customer, the customer requires — and receives — the same capacity, which is accompanied by the same costs.
For these reasons, it is reasonable for the department to attribute the final responsibility of upstream capacity costs to the transportation customers, while requiring the marketers to pay that cost initially.
Energy Express‘s argument that the department‘s interpretation unfairly enriches the customers also fails. Energy Express claims that giving its customers the refund results in those customers receiving a windfall. Yet, whether the customers receive a wind-
2. The filed rate doctrine. The filed rate doctrine, as applicable in this case, requires that “interstate power rates filed with FERC or fixed by FERC must be given binding effect by [S]tate utility commissions determining intrastate rates.” Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953, 962 (1986). As a result, Bay State submits to the department its “Distribution and Default Service Terms and Conditions” (referred to as a “tariff“), which includes the terms on which it may assign upstream capacity to marketers. Once the department approves the tariff, Bay State must comply with the provisions of the tariff. 220 Code Mass. Regs. § 14.03(2), (4)(c), (d). Charging a rate exceeding the limitations of the tariff would constitute a violation of the filed rate doctrine. See Nantahala Power & Light Co., supra.
Energy Express argues that giving the refund to its customers has the effect of requiring Energy Express to pay an amount for upstream capacity that exceeds Bay State‘s filed rate. To support its position, Energy Express points out that the tariff assigns the upstream capacity to marketers at the maximum FERC rate. The pipeline in this case charged a rate that FERC subsequently determined was too high. Energy Express paid that rate to the pipeline initially. Thus, Energy Express contends that if it does not receive the refund, it paid a rate exceeding what FERC allowed, which would then in turn violate the tariff. We disagree.
Energy Express‘s argument is again premised on a mischaracterization of the nature of the transaction. As noted above, Energy Express is not the party responsible for the upstream capacity costs — its customers are. Energy Express merely paid the upstream capacity cost on behalf of its customers. Energy Express was able to decide how much of that cost to pass on to its customers. If Energy Express did not recover those costs, it elected not to do so pursuant to the freely negotiated terms of its private contracts with those customers. The department‘s mandatory “slice-of-system” assignment procedure did not obligate
3. Department policy. Finally, Energy Express argues that the department‘s order is contrary to its own policy to allow the competitive market to lead to the efficient outcome. This court will not second guess the department‘s implementation of its own policy, in the absence of a legal justification for doing so, which Energy Express has not provided. Bay State Gas Co., 459 Mass. at 813-814, citing
Energy Express argues that the department interfered in the private market by ordering a refund to customers who freely negotiated the price they would pay to their marketers. Critically, however, Energy Express sells the gas commodity to its customers. It does not sell upstream capacity. Indeed, it cannot sell upstream capacity to these customers because upstream capacity has not been opened to private competition in Massachusetts. See Unbundling Order II, supra at 26. Although Energy Express incurred the upfront costs for upstream capacity in order to sell to these customers, it may pass these costs on to them as well. Energy Express is also free to decline to pass on the full cost to these customers. This option gives Energy Express a seemingly significant competitive advantage over Bay State, which is bound by its department-approved tariff. See 220 Code Mass. Regs. § 14.03(4)(c), (d). If, however, Energy Express chooses to retain some or all of those costs, that choice does not entitle Energy Express to a refund, which is intended to benefit the consumers to whom it sells natural gas. See
Conclusion. The department reasonably interpreted “customer”
Order affirmed.
in the Commonwealth, which is a significant factor in attributing responsibility for upstream capacity costs to the consumer, is not the rule in Maine.