Southern Union Co. 1 v. Dep't of Pub. Utilities.

458 Mass. 812

941 N.E.2d 633

SOUTHERN UNION COMPANY 1

v.DEPARTMENT OF PUBLIC UTILITIES.

SJC–10683.

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Oct. 7, 2010.Decided Feb. 11, 2011.

Robert J. Keegan, Boston, for the plaintiff.Sookyoung Shin, Assistant Attorney General, for the defendant.Present: IRELAND, SPINA, CORDY, BOTSFORD, & GANTS, JJ.IRELAND, J.

Southern Union Company, doing business as New England Gas Company (company), appeals from an order of the Department of Public Utilities (department) denying the company's request to recover an earnings sharing adjustment under a rate settlement agreement that it had made with the Attorney General and the Low–Income Energy Affordability Network.² See G.L. c. 25, § 5. A single justice of this court reserved and reported the matter, without decision, to the full court. Because we conclude that the settlement agreement allows the company to recover the earnings sharing adjustment, we reverse and remand the matter to the single justice with instructions.

Background. The company distributes natural gas to customers in six communities in the Fall River and North Attleborough service areas. As of 2006, the company was experiencing a significant revenue deficiency. In June, 2006, the company filed with the department a notice of intent to file a rate case under G.L. c. 164, § 94, to obtain an increase in its distribution base rates by $7.8 million annually, beginning in 2007.³ Approximately one year later, in June, 2007, in lieu of filing a base rate case, the company entered into a proposed settlement agreement with the Attorney General and the Low–Income Energy Affordability Network.⁴ Following two public hearings, the department approved the agreement on July 31, 2007. See Southern Union Co. (New England Gas Co.), D.P.U. 07–46 (2007).

The agreement authorized the company to increase its annual base rates between August 1, 2007, and July 1, 2009, by approximately $4.2 million. Specifically, the agreement permitted the company to increase its rates by $2,200,739, beginning on August 1, 2007, and to increase them again by an additional $2 million, beginning on April 1, 2008. The agreement prohibited the company from seeking any further rate adjustment that would become effective before July 1, 2009, except in certain circumstances. Two of those circumstances, central to this appeal, appear in § 2.10 and § 2.11 of the agreement. Those sections appear under the heading, “Earnings Sharing and Rate Relief.”

Section 2.10 provides:

“If the Company's ROE [return on equity] for distribution service only, calculated using the earnings available for common equity and the year's average balance of common equity used in the return on common equity calculation as reported to the Department in the Company's Annual Return filed with the Department exceeds 12 percent, customers and the Company will share equally (50%/50%) in the excess. Similarly, if the ROE were to fall below 8 percent, customers and the Company will share equally (50%/50%) in the deficiency. For any year in which the ROE is outside this bandwidth, the 50 percent portion that is to be paid to or collected from customers would be made through distribution rate adjustments in the succeeding year, and the impact of this prior year adjustment would be excluded in calculating the subsequent year's sharing. Any adjustment under this [§ ] 2.10 shall be subject to investigation and a full adjudicatory hearing before the Department.” (Emphasis added.)

Section 2.11 provides:

“ For 2007 and 2008, as tested on a calendar year basis, should the Company's ROE drop 3 percent below a 10 percent ROE to 7 percent, the Settling Parties agree that the Company has the right to file a distribution base rate case. For 2007 and 2008, as tested on a calendar year basis, should the Company's return increase 3 percent above a 10 percent ROE to 13 percent, the Attorney General may request the Department to open a rate case, which proceeding shall be commenced within 90 days from request. At least 30 days prior to the Company filing for rate relief under this article, the Company shall confer with the Attorney General and provide all work papers, calculations and assumptions supporting its ROE determination.” (Emphasis added.)

Despite the company's having received a rate increase under the agreement of $2,200,739, beginning on August 1, 2007, the company was still operating at a serious deficit in early 2008. The company reported to the department that its ROE for calendar year 2007 was negative 7.54 per cent. On July 17, 2008, the company invoked § 2.11 of the settlement agreement and filed with the department a petition for a prospective base rate increase of $5,598,982. The company arrived at the almost $5.6 million figure using 2007 as a test year.

On September 16, 2008, while the company's petition under § 2.11 was pending, the company filed a second petition with the department, invoking § 2.10. In that petition, the company sought a one-time, retrospective earnings sharing rate adjustment to recover an earnings deficiency of $4,110,329, for calendar year 2007. That $4.1 million represented fifty per cent of pretax revenues that the company would have needed in order to raise its ROE from a negative 7.54 per cent to a positive eight per cent.

The Attorney General intervened in the company's § 2.10 petition, pursuant to G.L. c. 12, § 11E ( a ).⁵ She argued that the settlement agreement does not allow the company to seek relief under both § 2.10 and § 2.11 because the agreement contains no “explicit language” to that effect; that allowing the company to recover under § 2.10 for a loss in 2007 would violate the rule against retroactive ratemaking, see Fitchburg Gas & Elec. Light Co. v. Department of Telecomm. & Energy, 440 Mass. 625, 637, 801 N.E.2d 220 (2004); and that allowing recovery under both § 2.10 and § 2.11 would violate the prohibition in § 3.8 of the agreement against recovering double costs.⁶ She also claimed that, where the agreement is silent on the method of recovering an earnings sharing adjustment—i.e., whether through a permanent change to ongoing base rates, or through a one-time adjustment pursuant to the local distribution adjustment factor (LDAF) ⁷—and where earnings sharing adjustments in other utilities cases have been accomplished through permanent base rate changes, the same method should apply here. Therefore, the Attorney General contended, the company's attempts to invoke both § 2.10 and § 2.11 are duplicative efforts to achieve the same goal: a permanent increase in base rates.

The Attorney General also challenged the company's calculation of the amount it sought to recover under § 2.10. She argued, among other things, that the company had failed to file an appropriate annual return, provide substantial evidence concerning the appropriateness of adjustments to its annual return, and normalize cost recovery for weather and the annualization of all distribution rate increases.

The company responded that the settlement agreement clearly and unambiguously allows recovery under both § 2.10 and § 2.11; that those sections “operate independently of one another, rely on different thresholds for recovery, are calculated differently, and contemplate two different types of adjustments: one temporary and one involving a more permanent change in base rates”; that recovery under § 2.10 does not constitute retroactive ratemaking because it was specifically authorized by the department in approving the settlement, and because the recovery of past costs are authorized in other circumstances, such as through cost of gas adjustment clauses, see Fitchburg Gas & Elec. Light Co. v. Department of Telecomm. & Energy, supra at 637–639, 801 N.E.2d 220; and that recovery under both sections does not violate § 3.8 because the amounts sought are not the same costs.

The company further claimed that the Attorney General's reliance on department precedent to argue that the method of applying the earnings sharing adjustment should be through a prospective change to base rates, rather than through the LDAF, is misplaced because the precedent relied on involves long-term performance based ratemaking (PBR) plans, unlike the two-year settlement agreement at issue in this case.⁸ The company added that, although the LDAF would be a more workable method of accomplishing a recovery under § 2.10 because, unlike a general base rate increase, recovery under an LDAF allows for recovery of distribution-related costs on a one-time reconciling basis, the company acknowledged that the department has the authority to allow the recovery through a base rate adjustment. The company added, however, that, in such a situation, the department would have to order the rates raised and then lowered, in order to achieve the proper amount of recovery. As for the Attorney General's challenges to the company's calculation of the amount it sought to recover under § 2.10, the company denied that it had committed any error in that regard.

On February 2, 2009, the department issued two orders: (1) granting the company's request, under § 2.11, for an increase in its annual base rate by $3,675,666 (less than the $5.6 million requested), see New England Gas Co., D.P.U. 08–35 (2009); and (2) denying the company's request, under § 2.10, for an earnings sharing adjustment of $4.1 million. See New England Gas Co., D.P.U. 08–64–B (2009). The company appeals only from the second order.

In denying the company's § 2.10 petition, the department concluded that the settlement agreement contains no “clear and unambiguous language expressly permitting [the company] to pursue both the rate case [under § 2.11] and ESM [earnings sharing mechanism] recoveries [under § 2.10].” The department further reasoned, based on how ESMs had been implemented in other utilities cases involving PBR plans (although not involving settlement agreements with provisions...