Broadly speaking, electric distribution companies, such as the NSTAR Electric Company (NSTAR), provide two types of services: supply services and distribution services, each described below. Under the 1997 Electric Restructuring Act, St. 1997, c. 164, distribution companies must unbundle the rates they charge for each of their services, see St. 1997, c. 164, §§ 192, 193, amending G. L. c. 164, §§ 1, ID, and are expected to recover fully their supply-related costs through their supply service rates. See D.T.E. 02-40-B at 15 (2002). This case concerns
In 2007, NSTAR filed a petition with the Department of Public Utilities (department), see Fitchburg Gas & Elec. Light Co. v. Department of Pub. Utils.,
We conclude that the department has failed to provide an adequate statement of its reasons for imposing the above condition. Specifically, we are unable to determine whether this aspect of the department’s order rests on a determination that NSTAR did not follow the correct procedural path in removing supply-related bad debt costs from its distribution rates, or rather on a determination that NSTAR did not in fact remove such costs from its distribution rates at all. We conclude further that certain of the department’s factual determinations are not adequately supported by subsidiary findings and that an aspect of the department’s analysis is legally erroneous. The department’s order is to be vacated and the matter is to be remanded to the department for further proceedings.
1. Background. As relevant here, NSTAR provides two distinct types of services: the procurement and supply of electric power (supply service) and the distribution of that electricity over power lines (distribution service). See 220 Code Mass. Regs. § 11.04 (2008); Attorney Gen. v. Department of Pub. Utils.,
Although NSTAR enjoys a regulated geographic monopoly in electric distribution, see 220 Code Mass. Regs. § 11.04(2), it faces competition in the supply aspects of its business from “competitive” suppliers, that is, firms that generate or otherwise procure electricity without owning or operating the means to distribute electricity to consumers. See G. L. c. 164, § 1A, as appearing in St. 1997, c. 164, § 193. NSTAR competes with such competitive suppliers on the basis of its supply rates rather than its distribution rates. So that its supply rates accurately reflect supply costs and thus send the correct price signal to customers choosing between NSTAR and various competitive suppliers, the department’s policy is that NSTAR’s supply rate should ensure full recovery of all of its supply-related costs. See generally D.T.E. 02-40-B at 15 (2002).
One component of supply-related costs consists of those costs associated with customers defaulting on the supply-related components of their bills (supply-related bad debt costs). See D.T.E. 03-88 at 3 (2003). Yet, distribution companies like NSTAR historically have recovered at least part of these supply-related bad debt costs through their distribution rates rather than their supply rates. See D.T.E. 03-88A-F at 4 (2005). Accordingly, by a 2003 order, the department began proceedings to require distribution companies to move supply-related bad debt cost recovery from distribution rates to supply rates. D.T.E. 03-88, supra.
The proceedings commenced by that order were resolved by a settlement agreement between distribution companies and various other entities, including the Attorney General. This agreement, reached on January 21, 2005 (January Settlement), and approved by the department shortly thereafter, see D.T.E. 03-88A-F, supra, called for supply-related bad debt cost recovery to be moved from distribution rates to supply rates. However, art. 2.4 of the January Settlement specified that any such shift would not take place “until the next general distribution rate case in which a [distribution [cjompany proposes or the [djepartment directs the removal of [djefault [sjervice-related costs, or unless otherwise proposed to be adjusted by the [djistribution [cjompany, subject to approval by the [djepartment.” The department em
On December 6, 2005, NSTAR entered into a second settlement agreement with the Attorney General and others (December Settlement). The December Settlement was intended to have the same effect as a general distribution rate case and was approved as such by department order. See D.T.E. 05-85 (2005). The parties “agree[d] to an Alternative Rate Stabilization Plan that [would], on January 1, 2006, reduce the sum of the distribution rates [and a second category of rates] of NSTAR Electric below what they otherwise would have been and then ensure that the sum of those rates shall change only in a manner specified [by the December Settlement] for seven years.”
NSTAR contends that the December Settlement removed supply-related bad debt cost recovery from NSTAR’s distribution rates and that the department’s order approving the settlement thus constituted approval by the department of NSTAR’s removal of such costs from its distribution rates. On this basis, NSTAR filed in early 2007 a request to adjust upward its “basic service adder,” a component of its supply-related “basic service rate,” so as to recover supply-related bad debt expenses.
The department, however, took the position that the December Settlement “did not identify any changes to the level of bad debt included in [NSTAR’s distribution rates] [nor] what level of supply-related bad debt, if any, was removed from [NSTAR’s] distribution rates.” D.T.E./D.P.U. 07-4 at 5 (2007) (initial order). The department therefore ordered that NSTAR offset any increase in its supply rates with a corresponding decrease in its distribution rates. Id. at 7.
NSTAR then filed a motion for reconsideration or clarification, which the department granted. D.T.E./D.P.U. 07-4-A (2007) (order granting reconsideration). However, after holding further proceedings, the department again determined that NSTAR could not increase its supply rates without a corresponding decrease in its distribution rates. See D.T.E./D.P.U. 07-4-B at 21 (2010) (final order on reconsideration). NSTAR thereafter filed a petition for review of the department’s final order on reconsidera
2. Standard of review. In reviewing an order issued by the department, “we give deference to the department’s expertise and experience in areas where the Legislature has delegated to it decision-making authority [and] 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.” Fitchburg Gas & Elec. Light Co. v. Department of Telecomm. & Energy,
3. Discussion. We begin with three observations that neither party contests on appeal. The first is that NSTAR is only entitled to the relief it seeks on a showing that it has stopped recovering supply-related bad debt costs through its distribution rates. The second is that any such change in NSTAR’s distribution rates must have taken place as part of a general rate case
Where the parties disagree is on the meaning and effect of the December Settlement. NSTAR contends that the December Settlement incorporates by reference certain documents that were appended to it as exhibits. In NSTAR’s view, these exhibits demonstrate that the December Settlement removed supply-related bad debt costs from NSTAR’s distribution rates.
The department’s position on appeal is that the December Settlement has binding effect only as to issues clearly and explicitly addressed in the text of the agreement. D.T.E./D.P.U. 07-4-B, supra at 15. The provisions of the December Settlement do not expressly mention bad debt costs. Therefore, in the department’s view, the December Settlement did not effect the requisite change in NSTAR’s distribution rates.
As suggested by the above paragraphs, the parties’ arguments are somewhat at cross purposes. The department is focused on the plain language of the December Settlement — what the settlement said. NSTAR’s primary focus is the effect of the December Settlement — what the settlement did. Notwithstanding the clarity of the department’s position on appeal, this confusion finds its source in the department’s three orders in this case, particularly the department’s final order on reconsideration. As discussed, infra, we are unable to discern the legal basis relied upon by the department to support that order. Further, the order fails to address a significant portion of the record, and it does not contain sufficient subsidiary findings of fact to demonstrate that its ultimate conclusions are supported by substantial evidence. Because these infirmities leave us unable to determine whether the department’s order is supported by sound reasoning and fact finding, “we decline to affirm the department’s order, and remand for further proceedings.” Massachusetts Inst. of Tech. v. Department of Pub. Utils., supra at 859.
a. The department’s statement of reasons. The deference we grant to an agency’s determination of questions entrusted to its expertise places a “heavy burden” on parties challenging the department’s orders. See Fitchburg Gas & Elec. Light Co. v. Department of Pub. Utils., supra at 636. See also part 2, supra. Nevertheless, “[t]he principle of according weight to an agency’s discretion ... is ‘one of deference, not abdication.’ ” Moot v. Department of Envtl. Protection,
(i) Legal basis. “While we can conduct a meaningful review of ‘a decision of less than ideal clarity if the agency’s path may reasonably be discerned,’ we will not ‘supply a reasoned basis for the agency’s action that the agency itself has not given.’ ” Costello v. Department of Pub. Utils., supra at 535-536, quoting Bowman Transp., Inc. v. Arkansas-Best Freight Sys.,
In its final order on NSTAR’s motion for reconsideration, the department alternated its analysis between the language of the December Settlement and the effect of the December Settlement, without stating which rationale formed the basis for its decision.
At the beginning of the “analysis and findings” supporting the order, the department states that it had “reopen[ed] the record to permit [NSTAR] to provide additional evidence . . . that supply-related bad debt was removed from the distribution [rates] approved” by the December Settlement. D.T.E./D.P.U. 07-4-B, supra at 11. It then states that “for the reasons outlined below . . . [NSTAR] has failed to provide evidence to support its contention” that it had removed such costs from its rates in January, 2006. Id.
The “reasons outlined below,” however, relate primarily to whether the text of the December Settlement clearly discussed the removal of supply-related bad debt from NSTAR’s distribution rates, not whether such costs were in fact removed. Indeed, later in its analysis, the department emphasized that NSTAR was “incorrect” in suggesting that it could make its case for a nonrevenue-neutral rate adjustment without showing that the December Settlement “containfed] a specific and explicit provision providing for the transfer of supply-related bad debt.” D.T.E./D.P.U. 07-4-B, supra at 15-16. Yet, as NSTAR points out, if this were true no rehearing would have been necessary.
Moreover, the department’s two potential grounds of decision are inconsistent. As noted above, the parties agree that, under the January Settlement, NSTAR is only entitled to the relief it seeks on a showing that it has ceased recovery of supply-related bad debt costs through its distribution rates and that this change to its distribution rates took place as the result of a “propos [al]
However, in interpreting the language of the December Settlement, the department argues that a settlement agreement only has legally binding effect to the extent of its “specific and explicit” language. The department contends further that the December Settlement lacks any specific and explicit language related to supply-related bad debt costs. On this theory, the December Settlement would not have any legally binding effect on NSTAR’s supply-related bad debt costs. Further, even if NSTAR had stopped recovering supply-related bad debt costs in January, 2006, that change would not have resulted from a “propos[al] or . . . directive]” in a general rate case. Accordingly, the terms of the January Settlement would still prevent NSTAR from obtaining the relief that it seeks.
It was incumbent on the department to explain its adverse decision, making clear which of these lines of reasoning it had adopted and why that ground for decision comports with relevant provisions of the applicable enabling statutes, regulations, and policies. See Guarino v. Director of the Div. of Employment Sec.,
Absent such clarity, we are left to speculate as to the grounds for the department’s order. See Attorney Gen. v. Commissioner of Ins.,
“[Substantial evidence is ‘such evidence as a reasonable mind might accept as adequate to support a conclusion.’ ” New Boston Garden Corp. v. Assessors of Boston,
Here, the department has not set forth sufficient subsidiary findings to allow meaningful review of its apparent conclusion that NSTAR’s January 1, 2006, distribution rates include bad debt costs.
Moreover, the limited evidence discussed by the department is inconclusive. Neither the department’s initial order, D.T.E./D.P.U. 07-4, supra, nor the department’s final order on reconsideration, D.T.E./D.P.U. 07-4-B, supra, provides any express subsidiary findings to support a determination that NSTAR’s January 1, 2006, distribution rates included NSTAR’s supply-related bad debt costs. The department’s final order on reconsideration could generously be read as reasoning that the absence of any language addressing bad debt costs in the text of the December Settlement indicates that the January 1, 2006, rates established by that agreement left unchanged NSTAR’s method of recovering supply-related bad debt costs. As explained in part 3.b, infra, however, the department’s interpretation of the text of the December Settlement is influenced by an error of law.
The order granting reconsideration, D.T.E./D.P.U. 07-4-A, supra, makes two additional findings with regard to whether NSTAR’s January 1, 2006, rates provided for supply-related bad debt cost recovery:
The relevance assigned by the department to the timing of NSTAR’s submission of expert evidence is not apparent from the department’s order. To the extent the department intended its observation on NSTAR’s timing as a basis for a determination that NSTAR’s expert witness was not credible, “such disbelief [does not alone] create affirmative” substantial evidence in support of the department’s ultimate finding. Boston Edison Co. v. Boston Redevelopment Auth., 374 Mass 37, 67 n.21 (1977), citing Cohen v. Board of Registration in Pharmacy,
b. Incorporation by reference. Although the department’s failure to provide an adequate statement of the legal and factual basis of its final order on reconsideration would alone require remand, we address also an error in the department’s interpretation of the December Settlement.
We begin with an observation on the principles applicable to the interpretation of the December Settlement. The consistent policy of the department has been to interpret approved settlement agreements in line with our general principles of contract law. See Southern Union Co. v. Department of Pub. Utils., 458
Although the precise nature of the “explicit statement” that the department would require of NSTAR is not clear from the department’s orders, the application of any such heightened clarity requirement would amount to a sub rosa change in department policy. Such a “new policy may not [generally] be retroactively applied where a prior agency policy existed.” Biogen IDEC MA, Inc. v. Treasurer & Receiver Gen.,
Article 2.5 of the December Settlement provides: “The tariffs that would be implemented on January 1, 2006 and May 1, 2006, and supporting workpapers are set forth as ‘Exhibit NSTAR-3 (Settlement)’ through ‘Exhibit NSTAR-22 (Settlement).’ ” Considered in the broader context of art. 2, we conclude that art. 2.5 incorporates the above-referenced exhibits as fully integrated components of the December Settlement.
In determining whether the language referring to exhibits 3-22 should be read only as referencing those exhibits as illustrative of the parties’ agreement, or as fully incorporating those exhibits into the parties’ agreement, we are guided first by the plain meaning of the language chosen by the parties. See de-Freitas v. Cote,
The December Settlement as a whole is incomplete in material respects when read without the exhibits marked “NSTAR-3 (Settlement)” through “NSTAR-22 (Settlement).” Articles 2.2-2.4 of the December Settlement set forth, in summary terms, the changes that NSTAR was to make to each of these rates in January and May of 2006. Each of these articles refers generally to the aggregate change in the rates that would be charged by “NSTAR Electric.” However, at the time of the agreement, NSTAR’s electric distribution business operated through three separately regulated operating companies, each with its own rate schedule. The language of arts. 2.1-2.5 does not address how the changes contemplated by the agreement were to be apportioned between each operating company.
The department contends that if it were bound by working papers and other addenda to settlement agreements, it could “no longer . . . rely on the principle that its approval of a proposed settlement approves only the settlement agreement’s express terms,” and that it would therefore be unable to continue to approve settlements for fear of the unforeseen consequences of such approval.
The department determined that the spreadsheets in the exhibits were not sufficiently labeled or explained so as to alert the department to any understanding by the settling parties that such documents provided for the removal of bad debt costs from NSTAR’s distribution rates. D.T.E./D.P.U. 07-4-B, supra at 18. Certainly, the absence of clear labeling renders the import of the exhibits “not obvious to a layperson.” Springfield v. Department of Telecomm. & Cable,
Here, the department has failed to apply its “expertise to determine [the technical meaning of] the language in question” to the parties and to others experienced in the electric distribution industry. See Springfield v. Department of Telecomm. & Cable, supra. Specifically, the department has not addressed NSTAR’s central arguments as to the meaning that the exhibits incorporated into the December Settlement would have had to parties experienced in the electric distribution industry.
4. Conclusion. The department has failed to make findings and to provide a statement of the reasons for its decision adequate to support meaningful judicial review. Accordingly, we remand the case to the county court where an order is to enter vacating D.T.E./D.P.U. 07-4-B (2010) and remanding the matter to the department for “a statement of reasons, including subsidiary findings,” of its conclusions of law and relevant facts. See Massachusetts Inst. of Tech. v. Department of Pub. Utils.,
So ordered.
Notes
The specific type of supply service provided by NSTAR is referred to as “default service.” G. L. c. 164, § 1B (d). The department also uses the term “basic service." See D.T.E./D.P.U. 07-4-B at 1 & n.1 (2010).
Prior to approving any “general increase in rates, prices and charges for gas or electric service, [the department] shall. . . hold a public hearing and make an investigation.” G. L. c. 164, § 94. This procedure is informally referred to as a “general rate case.” See, e.g., Attorney Gen. v. Department of Pub. Utils.,
The department’s brief filed with this court is clearer, placing far greater emphasis on the contractual interpretation question than its orders in D.T.E./D.P.U. 07-4-A (2007) and D.T.E./D.P.U. 07-4-B, supra. However, an agency’s ground of decision must be clear from its own order, not from “appellate counsel’s post hoc rationalizations.” Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto Ins. Co.,
Taken together, the department’s prior orders suffer from the same confusion. In its initial order, the department stated as its reason for denying NSTAR’s petition the absence of explicit language in the December Settlement addressing
Where, as here, one of the department’s arguments rests on an error of law, see part 3.b, infra, it is of particular importance that the basis for the department’s decision be articulated with clarity.
“[T]he obstacle is not [necessarily] the absence of evidence which may support the [department’s] decision . . . but rather the absence of findings” demonstrating the existence of such evidence and explaining its import. Mayor of Revere v. Civil Serv. Comm’n,
NSTAR relies also on two additional exhibits, marked “NSTAR-1 (Settlement)” and “NSTAR-2 (Settlement),” which were not incorporated into the December Settlement but were nonetheless submitted to the department along
We would be hesitant to conclude that the department approved an unexplained and unnecessary rate change, designed to accomplish nothing at all. Cf. G. L. c. 164, § 94 (requiring department to “make an investigation as to the propriety of . . . proposed [rate] changes” prior to approval).
The department’s final order references the department’s first two orders in these proceedings, see D.T.E./D.P.U. 07-4-A, supra at 13, and we assume, arguendo, that the department may rely on subsidiary findings contained in these two prior orders, but not discussed in the final order presently on review.
It remains unresolved whether the fact that the department “has legislatively been authorized to approve the agreement at issue here” would require that we “defer to the department’s interpretation of the agreement” (emphasis in original). Southern Union Co. v. Department of Pub. Utils.,
In contrast, Massachusetts law recognizes that contracting parties may memorialize their bargain in imprecise terms. Accordingly, “[w]e have stated that ‘[c]ontract interpretation is largely an individualized process,’ ” Starr v. Fordham,
The department suggests that the need for such heightened clarity was foreshadowed by its prior and consistent admonitions that “acceptance by the [department of any settlement does not constitute a determination as to the merits of any allegations or contentions made in a proceeding that are not expressly covered by the agreement.” D.T.E./D.RU. 07-4-B, supra at 17. Imprecision in the operative provisions of a contract does not turn such provisions into mere “allegations or contentions.”
Nor does the language in art. 2.4 of the January Settlement impose a heightened standard of clarity concerning the manner in which the parties to the December Settlement could address the issue of bad debt cost recovery. Although that provision requires that the removal of bad debt costs from the
Such a reading of ambiguous language in the context of the contract as a whole must take into account “the objects sought to be accomplished” by the contracting parties. Shea v. Bay State Gas Co.,
The rate modifications contemplated in the exhibits differ slightly among the three operating companies, as do the over-all rates charged by each company.
In approving the December Settlement, the department did require NSTAR to “file new tariffs ... in place of the illustrative tariffs submitted with their initial filing.” D.T.E. 05-85 at 32, 34 (2005). The department suggests that this requirement of filing a new tariff demonstrates that the tariffs were not incorporated into the agreement because the terms of the agreement required that the department accept the agreement “in its entirety”; otherwise, the agreement would be deemed withdrawn. However, the department’s order also contains other modifications, “interpretations],” and clarifications of the terms agreed to by the settling parties. See, e.g., D.T.E. 05-85, supra at 31-32 (requiring “[department approval” over aspects of settlement implementation; “interpreting]” a section “to be contingent upon approval of the NSTAR Electric merger”). Accordingly, we conclude that the settling parties waived the requirement that the department approve the December Settlement “in its entirety,” that is, without modification. See McCarthy v. Tobin,
We do not preclude the department from addressing such concerns on a prospective basis. Cf. Boston Gas Co. v. Department of Pub. Utils.,
The department argues that to require it to “investigate and make findings on every element” of the rates included in a settlement would “defeat the purpose” of settling rather than proceeding to a fully litigated rate case. See D.T.E./D.P.U. 07-4-B, supra at 17.
For example, the department has not addressed NSTAR’s argument that it would have been objectively apparent to the department and the other settling parties that the distribution rate change planned for January 1, 2006, would effect a removal of NSTAR’s supply-related bad debt costs because there was no other possible explanation for the planned adjustment.
We note also that NSTAR relies on two further exhibits which were not incorporated into the agreement, exhibits “NSTAR-1 (Settlement)” and “NSTAR-2 (Settlement).” See note 7, supra. A party may properly set forth “the transaction in all its length and breath” in order to shed light on the meaning of contractual language. Robert Indus., Inc. v. Spence,