Energy Express, Inc. v. Department of Public Utilities , 477 Mass. 571 ( 2017 )

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SJC-12262
ENERGY EXPRESS, INC.1 vs. DEPARTMENT OF PUBLIC UTILITIES.
Suffolk. May 4, 2017. - August 3, 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 plaintiff.
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
1
Doing business as Metromedia Energy, Inc., intervener.
2
"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.
Under Federal law, the interstate pipeline companies may be
required to issue refunds to companies like LDCs who purchased
pipeline capacity. Then, under State law, the LDCs may be
required to pass that refund on to its "customers." G. L.
c. 164, § 94F. The issue in this case is whether the assignment
of capacity by an LDC to a marketer causes the marketer to
become a "customer" of the LDC, such that it is entitled to a
share of that refund under G. L. c. 164, § 94F. Given the
deference we afford the department in interpreting the statutes
and regulations for which it is responsible, we accept the
department's conclusion that only an end consumer, and not a
marketer, is entitled to the refund.
Background. There are three primary components to the
natural gas industry: (1) the gas commodity itself; (2)
3
"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 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
2
Bay State does business in Massachusetts under the name
Columbia Gas of Massachusetts.
3
The department revisited the unbundling of the market in
2005, but again concluded that the circumstances of the natural
gas industry in Massachusetts still would not support a
competitive market for upstream capacity. D.T.E. 04-1, at 26
(2005).
4
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 entering into
contracts for upstream capacity on the interstate pipelines.
Accordingly, Bay State, as an LDC, must procure sufficient
capacity along interstate pipelines based on the gas needs of
both customers who continue to purchase the bundled service from
them ("sales customers") and those who elect to purchase gas
from marketers ("transportation customers").4 Thus, even
consumers who purchase their gas from Energy Express, a
marketer, remain customers of Bay State, an LDC, for purposes of
the second and third components of the natural gas industry
(i.e., upstream capacity and local distribution).
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
4
There is a third type of customer, for whom the LDC is not
responsible for procuring upstream capacity, referred to as
"capacity-exempt" customers. The supply, transportation, and
distribution of gas to these customers has no bearing on this
case.
5
their natural gas. To that end, the department adopted a
mandatory "slice-of-system" assignment approach for upstream
capacity. Unbundling Order I at 34-35. Under this system, the
LDC must secure all of 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). FERC
6
may set maximum rates that pipelines may charge to LDCs for
upstream capacity. See 15 U.S.C. § 717d (2012). Sometimes, a
pipeline may charge a rate, subject to FERC's review. If FERC
subsequently determines that the rate was too high, FERC will
order the pipeline to refund the excess payment to the
appropriate LDCs. See G. L. c. 164, § 94F; 18 C.F.R.
§ 154.501(a) (2010). In Massachusetts, the department can then
order the LDC to pass on the refund to its customers. G. L.
c. 164, § 94F.
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. G. L. c. 164,
§ 94F. Energy Express requested to intervene in the pertinent
administrative proceedings and was permitted to do so.5 Energy
5
Initially, Bay State planned to issue refunds only its
sales customers, and not its transportation customers. As a
result of the proceeding in which Energy Express intervened, the
department determined that this refund method would
7
Express argued that it, and not its customers (i.e., Bay State's
transportation customers), should receive a proportional share
of the refund directly, an amount exceeding $250,000, because
Energy Express paid the upstream capacity costs up front. In a
written order,6 the department rejected Energy Express's position
and concluded that neither § 94F nor basic fairness required Bay
State to provide a proportional share of the refund to Energy
Express. Energy Express appealed to the county court pursuant
to G. L. c. 25, § 5, and a single justice granted Energy
Express's unopposed motion to reserve and report the case to the
full court. We affirm.
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 is heavy." Bay State Gas Co. v. Department of
Pub. Utils., 459 Mass. 807, 813 (2011), quoting DSCI Corp. v.
Department of Telecomm. & Energy, 449 Mass. 597, 603 (2007).
disproportionately benefit Bay State's sales. Both parties
agree that the refund should not be limited to Bay State's sales
customers.
6
Neither Bay State nor Energy Express requested an
evidentiary hearing, but filed briefs and a joint stipulation of
facts.
8
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 G.
L. c. 30A, § 14. Accordingly, we uphold the department'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 [or] capricious, an abuse of discretion,
or otherwise not in accordance with law." Bay State Gas Co.,
supra at 814, quoting DSCI Corp. supra, and citing G. L. c. 30A,
§ 14 (7).
Discussion. Energy Express argues that (1) the department
committed an error of law and abused its discretion in
interpreting "customer" as used in § 94F to exclude marketers;
(2) that the department's interpretation violates the Federal
"filed rate" doctrine; and (3) the department's interpretation
conflicts with its policy to allow the competitive market to
determine the most efficient outcome. We address each argument
in turn.
1. Interpretation of "customer." General Laws c. 164,
§ 94F, governs where a gas company, such as Bay State, must
refund excess upstream capacity costs to its "customers." Once
Bay State receives the FERC-ordered refund from the pipeline,
Section 94F empowers the department to
9
"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 § 94F. In support of this
position, Energy Express argues that the department
misinterprets the plain language and legislative history of
§ 94F; that Energy Express paid, and was ultimately responsible
for, the costs associated with upstream capacity and that the
department's interpretation imposes an unfair result on Energy
Express, while providing its customers a windfall. We disagree.
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
10
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 § 94F when Bay State assigned Energy
Express its proportional share of the upstream capacity. Energy
Express argues that the language and purpose of § 94F suggest
that the refund should go to the party who actually paid the
department-approved rate, which FERC subsequently concluded was
excessive. This misconstrues § 94 and mischaracterizes the
marketers' role with respect to upstream capacity.
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 § 94F supports interpreting
"customer" to mean the entity that consumes the natural gas. In
Central States Elec. Co. v. Muscatine, 324 U.S. 138, 140-141
(1945), the United States Supreme Court considered whether a
11
utility company or the consumers were entitled to a natural gas
rate refund. The Court opined that, although the purpose of the
Federal Natural Gas Act was "to protect the ultimate consumer at
retail," that legislation left to the States the regulation of
intrastate distribution and sales. Id. at 144. The refund at
issue in that case stemmed from such intrastate activity, and
thus the Court concluded that only the State's law could provide
the mechanisms by which the refund could reach the consumer.
Id. at 144-146. The enactment of § 94F in 1953 -- just eight
years after Central States Elec. Co. -- provided such a
mechanism. See St. 1953, c. 331. Under § 94F, the department
may order an LDC to issue that refund to its intended
beneficiaries, who are, according to the Supreme Court, the
"ultimate consumer at retail."7 Central States Elec. Co., supra
at 144. Thus, Energy Express does not purchase gas for its own
consumption and, therefore, does not qualify as a customer under
the department's interpretation, based on the plain language and
purpose of § 94F.
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
7
We note also that the natural gas industry was unbundled
in 1999, more than forty years after the enactment of § 94F,
which has never been amended. St. 1953, c. 331. This would
further suggest that marketers such as Energy Express were not
the "customers" the Legislature had in mind.
12
Unbundling Order I 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 at 6. See Unbundling Order II 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 at 34-35
(adopting mandatory "slice-of-system" assignment of upstream
capacity to marketers as necessity for reliability); Unbundling
Order II at 52-53 (declining to deviate from mandatory capacity
assignment adopted in Unbundling Order I).
13
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 refund, which demonstrates its customers'
ultimate responsibility for the costs. See G. L. c. 164, § 94F.
Energy Express is merely the assignee of Bay State with respect
to the transportation customers' upstream capacity. See
Unbundling order I at 34-35. Energy Express cannot
independently purchase capacity from Bay State or the pipeline,
nor does it provide capacity to customers. See Unbundling Order
II at 26 (declining to open upstream capacity to private
competition).
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
14
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 G. L. c. 164, § 94F. See
also Central States Elec. Co., 324 U.S. at 144.
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 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
15
the customers receive a windfall depends on the extent to which
Energy Express passes on the costs of the upstream capacity that
Bay State assigned Energy Express on behalf of that customer.
As the department noted in its order, if Energy Express passed
on the cost and received the refund, it would be Energy Express
that received the windfall. This distribution of cost is set by
Energy Express's private contract. We accept the department's
determination that the terms of the private contract between
Energy Express and its customers cannot absolve the customers of
their ultimate responsibility for the upstream capacity costs.
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.
16
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 Energy Express to absorb
those costs.
17
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 the defendant has not provided. Bay State Gas
Co., 459 Mass. at 813-814, citing G. L. c. 30A, § 14 (7).
Moreover, the defendant's argument is internally flawed, as it
once again hinges on the erroneous position that Energy
Express's initial obligation to pay for the upstream capacity
equates to an ultimate responsibility for those costs. As
discussed above, although Energy Express pays the upstream
capacity costs up front, it does so on behalf of its customers
who, for valid regulatory reasons, bear the final responsibility
for those costs.
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 at 26. Although Energy
Express incurred the upfront costs for upstream capacity in
18
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 G. L. c. 164, § 94F. See also Central States Elec. Co., 324
U.S. at 140. The extent to which marketers decide to assume
part of their customer's upstream capacity costs, however, is
precisely the type of determination best left to the competitive
markets.8
Conclusion. The department reasonably interpreted
"customer" as used in § 94F to include only those entities that
consume the natural gas provided or transported by Bay State.
This interpretation does not include Energy Express, which does
not consume the gas. Therefore, § 94F does not entitle Energy
8
To the extent the Maine Public Utilities Commission, in a
decision cited by Energy Express, reached a different result
based on Maine's distinct regulatory scheme, we accept the
department's conclusion that the Maine decision is
distinguishable. The mandatory slice-of- system assignment
requirement utilized in the Commonwealth, which is a significant
factor in attributing responsibility for upstream capacity costs
to the consumer, is not the rule in Maine.
19
Express to a refund. Energy Express's arguments that the filed
rate doctrine entitles it to the refund and that the department
has violated its own policy by providing the refund to
transportation customers are similarly premised on a faulty
characterization of Energy Express's role in the natural gas
market.
Order affirmed.