Engie Gas & LNG LLC v. Dep't of Pub. Utils.

ENGIE GAS & LNG LLC¹ v. DEPARTMENT OF PUBLIC UTILITIES (and another case²).

SJC-12051

SJC-12052

Supreme Judicial Court of Massachusetts

May 5, 2016

August 17, 2016

NOTICE: All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports. If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us

Suffolk.

Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, & Hines, JJ.³

Department of Public Utilities. Practice, Civil, Review of order of Department of Public Utilities. Electric Company. Public Utilities, Electric company, Judicial review. Gas. Administrative Law, Judicial review, Rulemaking, Agency's authority, Rate regulation. Statute, Construction.

Civil actions commenced in the Supreme Judicial Court for the county of Suffolk on October 26 and November 2, 2015.

The cases were reported by Cordy, J.

Thaddeus A. Heuer (Adam P. Kahn & Jesse Harlan Aldermanwith him) for ENGIE Gas & LNG LLC.

David K. Ismay for Conservation Law Foundation.

Seth Schofield, Assistant Attorney General, for the Attorney General.

Thomas H. Hayman, Special Assistant Attorney General (Francis R. Powell, Special Assistant Attorney General, with him) for the Department of Public Utilities.

Cheryl M. Kimball & Matthew A. Sanders, for NSTAR Electric Company & others, amici curae, submitted a brief.

CORDY, J. These consolidated appeals are before us on a single justice's reservation and report of challenges made to an order of the Department of Public Utilities (department). Those challenges raise the question of the department's authority to review and approve ratepayer-backed, long-term contracts entered into by electric distribution companies for additional natural gas pipeline capacity in the Commonwealth pursuant to G. L. c. 164, § 94A, which requires gas and electric companies to receive departmental approval for any contract for the purchase of gas or electricity lasting longer than one year.

The plaintiffs, ENGIE Gas & LNG LLC and Conservation Law Foundation, contend that the order amounted to improper rulemaking in violation of the Administrative Procedure Act, G. L. c. 30A. They also argue that the department's determination that it has authority pursuant to G. L. c. 164, § 94A, to approve such contracts constitutes an error of law because it contravenes G. L. c. 164, § 94A, as amended through St. 1997, c. 164 (restructuring act).⁴

We disagree that the order of the department is an improperly promulgated rule or regulation. We nevertheless reach the statutory question presented by the plaintiffs, and conclude that the order is invalid in light of the statutory language and purpose of G. L. c. 164, § 94A, as amended by the restructuring act, because, among other things, it would undermine the main objectives of the act and reexpose ratepayers to the types of financial risks from which the Legislature sought to protect them.⁵,⁶ 1. Background. The department regulates the rates that both electric distribution companies⁷ and local distribution natural gas companies⁸ may charge their customers (ratepayers). G. L. c. 164, § 94A. See Fitchburg Gas & Elec. Light Co. v. Department of Pub. Utils., 460 Mass. 800, 801 (2011); Attorney Gen. v. Department of Pub. Utils., 453 Mass. 191, 192 (2009).

In 2015, the Department of Energy Resources (DOER) filed a petition asking the department to investigate the means by which new natural gas delivery capacity⁹ might be added to the NewEngland market in order to mitigate price volatility experienced by ratepayers in the Commonwealth, especially in the winter months. See D.P.U. 15-37 (Oct. 2, 2015). The DOER specifically asked whether the department, pursuant to its authority under G. L. c. 164, § 94A, could approve long-term contracts¹⁰ by Massachusetts electric distribution companies for the purchase and resale of interstate natural gas pipeline capacity. The DOER stated that the ultimate goal of such purchases would be to lower "gas constraint-driven high prices" for electricity in New England by lowering the prices, particularly in the wintertime, of wholesale electricity across the region.

In support of its request, the DOER asserted that gas pipeline constraints have caused unreasonably high winter electric prices in New England. Unlike local natural gas distribution companies, which regularly contract for gas capacity, electric generators that use natural gas to produce electricity¹¹ are generally unwilling or unable to enter into long-term contracts to secure firm gas capacity. For these generators, there is added risk for such contracting becausethere is no means by which they can be reasonably assured of receiving enough revenue to cover the cost of securing the gas capacity over the course of each year. Pipeline companies, on the other hand, are not willing to build new pipeline capacity without having long-term contracts in place. Thus, pipeline companies do not have sufficient assurances such that they are willing to build additional pipeline capacity for natural gas-fired electric generators, despite the increasing natural gas demand for heating and as a source of supply for electric power. The DOER characterized this situation as a "mismatch" of needs and incentives that requires a "solution."

Under the DOER's proposal, (1) the department would authorize, pursuant to G. L. c. 164, § 94A, electric distribution companies to enter into contracts to purchase gas pipeline transportation capacity to be funded by the Commonwealth's ratepayers through rates set and approved by the department; (2) the pipeline owners (which in this case will include affiliates of electric distribution companies) will use those transportation contracts to help finance the construction of new gas pipeline capacity in the region; (3) after the pipelines are expanded, the electric distribution companies will release (resell) their contracted-for capacity to electric generators or "into the market";¹² and (4) the release of that capacity will increase gas supply and thus lower the wholesale price of gas and electricity.

Noting that the question was one of first impression, the DOER asked the department to determine whether "(1) there is an innovative mechanism for electric distribution companies . . . or other suitable parties to secure new, incremental gas delivery capacity into the region to the benefit of electric ratepayers; (2) review for cost-recovery of [electric distribution company] contracts for natural gas capacity by the [d]epartment under G. L. c. 164, § 94A . . . is appropriate; and (3) the standard of review the [d]epartment would apply to contracts submitted for approval under that section should be different." The DOER stated that ratepayer-funded gas capacity contracts entered into by electric distribution companies would solve the "mismatch" problem by providing sufficient financial assurance to pipeline companies to build new pipelines and infrastructure in order to provide gas to natural gas-fired electric generators.

In response to the petition of the DOER, the department opened an investigation into the means by which new natural gas capacity might be added to the New England market, including measures that electric distribution companies might pursue. After considering input from stakeholders, including written comments submitted by the plaintiffs, the department issued D.P.U. 15-37, entitled, "Order Determining Department Authority Under G. L. c. 164, § 94A" (order). The department determined that the plain language of § 94A provides the department with the statutory authority to approve gas capacity contracts entered into by electric distribution companies, so long as the department first determines that such long-term contracts are in the public interest. D.P.U. 15-37, at 19, 43. The department further concluded that it could properly allow cost recovery for the contracts, including the cost of building the necessary pipeline infrastructure, through electric distribution rates. Id. at 12, 46. The department additionally determined that its findings were consistent with the restructuring act because the contracts entered into by the electric distribution companies would not result in the companies' reentry to producing, manufacturing, or generating electricity at wholesale, as contemplated by the restructuring act. Id. at 26-27.

The order further outlined the filing requirements and standard of review applicable to future proceedings seeking approval of ratepayer-backed contracts for gas capacity entered into by electric distribution companies. Id. at 36, 44-45. Since issuing the order, the department has docketed three petitions by electric distribution companies for the approval of such contracts; however, none has been approved at this time. The contemplated contracts are for a term of twenty years.

In October and November, 2015, the plaintiffs filed separate petitions in the Supreme Judicial Court for Suffolk County pursuant to G. L. c. 25, § 5, asking that the order be set aside on the ground that it is based on an erroneous interpretation of law. A consolidated hearing was held before the single justice, who denied the motions for judgment of default and reserved and reported the matters to the full court.¹³

2. Propriety of appeal. We first consider whether this appeal is properly before us. The plaintiffs ask the court to review the department's order pursuant to G. L. c. 25, § 5, which authorizes "an appeal as to matters of law from any final decision, order or ruling." The department argues, however,that the order is not the product of an adjudicatory proceeding, nor did it adjudicate the rights of the plaintiffs; therefore, it is not appealable under § 5. See Providence & Worcester R.R. v. Energy Facilities Siting Bd., 453...