Court Opinion

ID: 4192277
Source: CourtListenerOpinion
Date Created: 2017-08-03 14:06:59.387179+00
Date Added: 2024-06-11T07:47:26.409026
License: Public Domain

NOTICE: All slip opinions and orders are subject to formal
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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.