Opinion
19-P-1383
11-04-2020
ATTORNEY GENERAL v. DEPARTMENT OF PUBLIC UTILITIES.
MEMORANDUM AND ORDER PURSUANT TO RULE 23.0
The Attorney General appeals from an order of the Department of Public Utilities (department) authorizing NSTAR Electric Company and Western Massachusetts Electric Company, each doing business as Eversource Energy (collectively, the companies), to increase their rates. See G. L. c. 25, § 5. A single justice of the Supreme Judicial Court transferred the matter to this court. See G. L. c. 211A, § 10.
Typically, we would expect the utility company impacted by a department decision to participate in the appeal. Here, we observe that the only parties to this appeal are the Attorney General and the department.
Specifically, the Attorney General challenges the department's allowance of a ten percent return on common equity (ROE) to the companies' owners, arguing that the department did not provide an adequate statement of reasons for its decision. We agree that the department's order does not adequately explain the basis for the ROE determination and, as a result, we cannot conduct a meaningful review of the department's decision. Thus, we shall vacate that portion of the department's decision authorizing a ten percent ROE, and remand the matter to the department for further proceedings consistent with this memorandum and order.
1. Background. a. Regulation of utility rates. "[T]he amount a public utility, such as an electric company, may charge its rate payers, and therefore the return it can make on its investment, is ultimately determined by the department." Fitchburg Gas & Elec. Light Co. v. Department of Pub. Utils., 467 Mass. 768, 771 (2014). Electric utilities must periodically file with the department schedules that show "all rates, prices and charges ... for the sale and distribution of gas or electricity" that the company proposes to charge or collect from customers. G. L. c. 164, § 94. The department may also "investigate the propriety of any proposed rate, price, or charge" and may "direct[ ] a change in any schedule filed." Fitchburg Gas & Elec. Light Co., supra, quoting G. L. c. 164, § 94.
Before the department approves a rate increase under § 94, it must determine whether the proposed rates are "just and reasonable." Bay State Gas Co. v. Department of Pub. Utils., 459 Mass. 807, 814 (2011), quoting Attorney Gen. v. Department of Telecomms. & Energy, 438 Mass. 256, 264 n.13 (2002). To accomplish this task, the department evaluates the reasonableness of the utility's proposed annual revenue requirement, which is the amount of money customers will pay to the utility every year. See Bay State Gas Co., supra; Boston Gas Co. v. Department of Telecomms. & Energy, 436 Mass. 233, 234 (2002). The annual revenue requirement is generally calculated by adding: (1) the amount of money a utility must collect to cover its reasonable operating expenses and (2) the cost of capital. See Boston Gas Co., supra at 234-235.
The cost of capital is a percentage set by the department that represents "a reasonable rate of return for investors." Attorney Gen. v. Department of Pub. Utils., 453 Mass. 191, 200 n.11 (2009). "[A] fair and reasonable return [is] one that ‘covers utility operating expenses, debt service, and dividends, ... compensates investors for the risks of investment, and ... is sufficient to attract capital and assure confidence in the enterprise's financial integrity.’ " Fitchburg Gas & Elec. Light Co., 467 Mass. at 777 n.10, quoting Fitchburg Gas & Elec. Light Co. v. Department of Pub. Utils., 371 Mass. 881, 884 (1977). The calculation at issue in this case, ROE, is one component of the cost of capital. ROE is the allowed rate of profit for a regulated utility. Boston Edison Co. v. Department of Pub. Utils., 375 Mass. 1, 11 (1978). The determination of a ROE generally has a significant impact on both the utility's investors and the Commonwealth's ratepayers. Here, the ROE at issue will result in an annual increase in customer rates of approximately $37 million.
The Attorney General is the statutorily designated advocate for the Commonwealth's utility ratepayers. See G. L. c. 12, § 11E. In that role, she "may intervene, appear and participate in administrative, regulatory, or judicial proceedings on behalf of any group of consumers in connection with any matter involving rates, charges, prices and tariffs of an electric company" doing business in the Commonwealth. See § 11E.
b. The companies' request for rate increase. On January 17, 2017, the companies filed a joint petition with the department seeking, among other things, approval of an increase in their base distribution rates. In their petition, the companies sought to increase NSTAR's distribution rates by approximately $56.1 million and Western Massachusetts Electric Company's distribution rates by approximately $34.7 million. The companies requested that the department authorize a 10.5 percent ROE for both companies.
The Attorney General intervened pursuant to G. L. c. 12, § 11E. The department granted her full intervener status. It also granted full or limited intervener status to a number of other entities. The Attorney General and several of the interveners asserted that the companies' requested ROE was too high; they proposed lower ROEs, ranging from 8.75 percent to 9.5 percent.
The entities granted full party intervener status are: the Acadia Center; the Associated Industries of Massachusetts; the city of Cambridge; the towns of Aquinnah, Barnstable, Bourne, Brewster, Chatham, Chilmark, Dennis, Edgartown, Eastham, Falmouth, Harwich, Mashpee, Oak Bluffs, Orleans, Provincetown, Sandwich, Tisbury, Truro, West Tisbury, Wellfleet, and Yarmouth, as well as Barnstable County and Dukes County, acting together as the Cape Light Compact; Conservation Law Foundation; the Department of Energy Resources; the Federal Executive Agencies; the Low-Income Weatherization and Fuel Assistance Program Network and the Massachusetts Energy Directors Association; the Northeast Clean Energy Council; the Retail Energy Supply Association; the Energy Consortium; the University of Massachusetts; and the Western Massachusetts Industrial Group.
The entities granted limited intervener status are: the town of Barnstable; the Cape and Vineyard Electric Cooperative; ChargePoint, Inc.; Choice Energy, LLC; Direct Energy Business, LLC, Direct Energy Business Marketing, LLC, Direct Energy Services, LLC, and Direct Energy Solar, LLC; the Energy Consumers Alliance of New England, Inc., doing business as the Massachusetts Energy Consumers Alliance and the Sierra Club; the city of Newton and the towns of Arlington, Lexington, Natick, and Weston; PowerOptions, Inc.; Sunrun, Inc., the Energy Freedom Coalition of America, LLC; and Vote Solar. Six other entities were granted limited participant status.
c. The department's order. On November 30, 2017, the department issued the order that is the subject of this appeal. Among other things, the order authorizes the companies to earn a ten percent ROE. The order contains a detailed summary of the evidence that the department considered in making its ROE calculation. That evidence included ROEs proposed by the companies and certain interveners, including the Attorney General, whose expert proposed an 8.875 percent ROE. The various ROE calculations are supported by three financial models: the discounted cash flow model, the risk premium model, and the capital asset pricing model. The parties' experts used these models to arrive at their proposed ROEs.
The parties' discounted cash flow models produced ROE estimates ranging from 7.5 percent to 10.88 percent. The department found that all of the discounted cash flow models were reasonable and provided a "credible basis" to set a ROE. The parties' capital asset pricing models produced ROE estimates ranging from 7.5 percent to 11.46 percent. The department found that these models had "limited value" for determining an appropriate ROE "because of a number of questionable assumptions that underlie the model." The parties' risk premium models ranged from 5.26 percent to 10.34 percent. The department noted that "an equity risk premium analysis can overstate the amount of company-specific risk and, therefore, the cost of equity." Thus, the estimated ROEs that the parties' experts calculated using these quantitative models ranged from 7.5 percent to 11.46 percent. The department also considered market conditions, company-specific risk factors, and qualitative factors, including evidence that the companies met or exceeded all of their performance standards for the relevant period.
Although Sunrun, Inc.'s expert witness calculated an equity risk premium of 5.26 percent, this risk premium was an input in his capital asset pricing model. The capital asset pricing model produced a ROE estimate of 7.5 percent. Other experts calculated a separate bond yield plus risk premium. Accordingly, the range of ROE estimates derived using a risk premium analysis ranged from 7.5 percent to 10.34 percent.
After considering this evidence, the department concluded:
"Based on a review of the evidence presented in this case, the arguments of the parties, and the considerations set forth above, the [d]epartment finds that an allowed ROE of [ten] percent is within a reasonable range of rates that will preserve the [c]ompanies' financial integrity, will allow it to attract capital on reasonable terms and for the proper discharge of its public duties, will be comparable to earnings of companies of similar risk and, therefore, is appropriate in this case. In making these findings, the [d]epartment has considered both qualitative and quantitative aspects of the parties' various methods for determining the [c]ompanies' ROE, as well as the arguments of and evidence presented by the parties in this proceeding (footnote omitted)."
2. Discussion. The Attorney General's primary argument is that the department's order lacks the factual findings and legal reasoning necessary to permit meaningful judicial review of the decision. Specifically, she argues that the order merely recites the evidence that the department considered in making its ROE determination, but does not explain how the department weighed that evidence, how it applied its agency expertise, or how it arrived at its final ROE calculation. The department responds that its ROE determinations are the product of informed judgment and specialized expertise that cannot be reduced to a mathematical formula. According to the department, because its authorization of a ten percent ROE was within the range of permissible ROEs, its decision is effectively "unassailable."
When 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." NSTAR Elec. Co. v. Department of Pub. Utils., 462 Mass. 381, 385 (2012), quoting Fitchburg Gas & Elec. Light Co. 440 Mass. at 631. Because we grant deference "to an agency's determination of questions entrusted to its expertise," parties challenging the department's orders face a "heavy burden." NSTAR Elec. Co., supra at 386. See Fitchburg Gas & Elec. Light Co., supra at 636. However, our review of department decisions "is not perfunctory," Costello v. Department of Pub. Utils., 391 Mass. 527, 533 (1984), and "[w]e carefully review the department's findings for error." Id. See Massachusetts Inst. of Tech. v. Department of Pub. Utils., 425 Mass. 856, 868 (1997). To facilitate that review, G. L. c. 30A, § 11 (8), provides that agency decisions "shall be accompanied by a statement of reasons for the decision, including determination of each issue of fact or law necessary to the decision." NSTAR Elec. Co., supra at 387, citing Hamilton v. Department of Pub. Utils., 346 Mass. 130, 137 (1963). Each determination of an issue of fact or law must be supported by subsidiary findings adequate to prove " ‘a guide to [the department's] reasons’ so that this court may ‘exercise ... [its] function of appellate review.’ " Massachusetts Inst. of Tech., supra at 868, quoting Hamilton, supra at 137.
Here, we are unable to discern the legal reasoning supporting the department's ROE determination. As previously noted, the order provides a detailed summary of the evidence that the department considered in setting a ROE and apparently concluded that the range produced by the parties' discounted cash flow models, 7.5 percent to 10.88 percent, provided a credible basis for determining an appropriate ROE. But the department does not explain how it arrived at the ten percent ROE it ultimately selected. Among other things, the department did not explain whether or how market conditions impacted its ROE decision, how it factored the parties' financial models into its ROE decision, or how it applied its agency expertise to the evidence to arrive at the ROE it ultimately selected. These shortcomings are particularly problematic here because the department's own factual findings appear to support a lower ROE as requested by the Attorney General and other interveners. Indeed, the department found that all of the parties' discounted cash flow models were credible and apparently rejected or discounted all of the parties' capital asset pricing models and equity risk premium models, stating that it would consider upward biases in evaluating the discounted cash flow models, that it would give more weight to the Attorney General's and interveners' capital asset pricing models, and that the companies' risk premium model was flawed and overstated the required ROE, but then failed to explain why it selected a ROE closer to that proposed by the companies. In sum, although it is true that ten percent is within the range proposed by the parties, we cannot discern why the department chose that number rather than some other number within the range.
We note that a difference measured in tenths of a percentage point may seem insignificant in the abstract, but in practice the difference between the 8.875 percent ROE requested by the Attorney General and the ten percent ROE the department authorized amounts to millions in additional annual utility costs borne by consumers.
--------
The result is that we are forced to speculate as to how the department reached the result it did. "While we can conduct a meaningful review of ‘a decision of less than ideal clarity if the agency's path may be reasonably discerned,’ we will not ‘supply a reasoned basis for the agency's action that the agency itself has not given.’ " NSTAR Elec. Co., 462 Mass. at 387, quoting Costello, 391 Mass. at 535–536. Accordingly, the case must be remanded to the department "for ‘a statement of reasons, including subsidiary findings,’ of its conclusions of law and relevant facts." NSTAR Elec. Co., supra at 397, quoting Massachusetts Inst. of Tech., 425 Mass. at 875. While we recognize that the department has discretion in setting an appropriate ROE and that mathematical precision is not required, the department must explain how it arrived at a chosen ROE so that the decision can be reviewed by the courts and understood by ratepayers.
3. Conclusion. The portion of the department's order authorizing a ten percent ROE is vacated, and the matter is remanded to the department for further proceedings consistent with this memorandum and order.
So ordered.