Appendix — Boston Edison Co. v. Department of Public Utilities

Supreme Court brief1978

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AUG 15 Jo79

MICHA EL

In THE

Supreme Court of the GQnited States

OctosER TERM, 1978

oO er

No. 78- 478 -259

BOSTON EDISON COMPANY,

DEPARTMENT OF PUBLIC UTILITIES OF THE

COMMONWEALTH OF MASSACHUSETTS, ET. AL.

Appellees.

Appellant,

ON APPEAL FROM THE SUPREME JUDICIAL COURT

OF THE COMMONWEALTH OF MASSACHUSETTS

APPENDIX TO JURISDICTIONAL STATEMENT

Epwarp B. Haniry

Wuu1am G. MEsERvVE

Ropes & Gray

225 Franklin Street

Boston, Massachusetts 02110

(617) 423-6100

Victor H. Kazang1an

Joun J. Desmonp III

Boston Edison Co.

800 Boylston Street

Boston, Massachusetts 02199

Attorneys for Appellant,

Boston Edison Company

August 15, 1978

TABLE OF CONTENTS

Decision and order of the Supreme Judicial Court

of the Commonwealth of Massachusetts in Boston

Edison Company v. Department of Public Util-

ities, S.J.C. No. 832 (April 19, 1978). ...

Boston Edison Company’s petition for rehearing

by the Supreme Judicial Court of the Common-

wealth of Massachusetts dated May 1, 1978.

The Supreme Judicial Court’s denial of Boston Edi-

son Company’s petition for rehearing dated June

eer ee

Notice of Appeal to the Supreme Court of the

United States filed by Boston Edison Company

with the Supreme Judicial Court of the Common-

wealth of Massachusetts on July 17, 1978. |.

Decision and order of the Department of Public

Utilities of the Commonwealth of Massachusetts

in D.P.U. 18515 dated August 12,1976...

Decision and order of the Department of Public

Utilities of the Commonwealth of Massachusetts

in D.P.U. 18200/18200-A dated September 30,

2 gras ber cle Mig ean eh wea G eat eies

Amended order of the Department of Public Util-

ities of the Commonwealth of Massachusetts in

D.P.U. 18200/18200-A dated October 17, 1975. ..

Page

145

186

COMMONWEALTH OF MASSACHUSETTS.

SupreME JupiciaL Court FoR THE COMMONWEALTH,

At Boston,

April 19, 1978.

In THE casE No. SJC-832

BOSTON EDISON COMPANY

vs.

DEPARTMENT OF PUBLIC UTILITIES

pending in the Supreme Judicial Court for the County of

Suffolk No. 75-340, 75-341, 75-367, 76-304, 76-342

OrvereED, that the following entry be made in the docket;

viz., —

The cases are remanded to the county court for entry of

judgment in accordance with the opinion.

By the Court,

Freperick J. Quinuan, Clerk.

April 19, 1978

—s

BOSTON EDISON COMPANY

vs.

DEPARTMENT OF PUBLIC UTILITIES

HENNESSEY, C. J. These are five consolidated appeals

from final decisions, orders, and rulings of the Department

of Public Utilities (Department) in two separate rate pro-

ceedings involving Boston Edison Company (Company).

In the first proceeding, D.P.U. 18200/18200-A (hereafter

18200/18200-A), the Department granted a rate increase

based on 1974 as the test year. In the second, D.P.U. 18515

(hereafter 18515), the Department granted an increase

based on 1975 as the test year. The appeals were filed in

the Supreme Judicial Court for the county of Suffolk

(county court) under G.L. ec. 25, $5. A single justice

ordered the appeals consolidated, and he reserved and re-

ported them without decision to this court. He similarly

reserved and reported the Company’s motion for a stay,

which the Company has renewed, and several motions to

dismiss filed by the Department. Because of the length of

this opinion, a table of contents is appended at the conclu-

sion.

We consider first those issues relating to the more recent

rate decision, 18515. In so doing, we dispose of two appeals

— filed hy the Company and by an intervenor Stanley U.

Robinson, IIT (Robinson), — alleging various claims of con-

fisecation and challenging the propriety of various adjust-

ments to the Company’s rate base and cost-of-service

calculations. We next consider the three appeals challeng-

ing the Department’s earlier decision in 18200/18200-A.

These appeals were filed by Boston Edison, Robinson, and

General Motors Corporation (General Motors), an inter-

vener in the proceedings below. Boston Edison and Robin-

son have limited their appeals in 18200/18200-A primarily

to the issues also raised by General Motors, and these relate

solely to rate structure. Specifically, the issues in 18200/

et eee ee te ec

18200-4 concern the propriety of the Department’s partially

exempting certain residential customers from the rate in-

crease. Finally, we consider two motions to dismiss, made

in the county court, which were reported to us by the single

justice.

On May 11, 1977, shortly after oral argument on these

appeals, the full court ordered interim relief for the Com-

pany by way of a $6,619,000 cost-of-service adjustment to

cover increased property taxes.’ We find no error in the

Department’s decision in 18200/18200-A. We conclude that

the Department’s decision in 18515 was erroneous not only

with respect to the property tax issue mentioned above but

also with respect to certain lobbying expenses and the dis-

allowed adjustment for “AFUDC not normalized.” Some

of these errors are in the Company’s favor, and one goes

in favor of the ratepayers.

We take notice of the Department’s recent decision in

D.P.U. 19300 (19300), granting Boston Edison additional

rate relief based on 1976 figures. Although that decision

moots a number of the issues involved in these appeals, we

nevertheless reach the merits of all the issues before us.

Wellesley College v. Attorney Gen., 313 Mass. 722, 731

(1943). See Potomac Elec. Power Co. v. Public Serv.

Comm’n, 380 A.2d 126, 149 n.33 (D.C. Ct. App. 1977). We

do so because the parties have fully briefed the issues, and

because the questions raised are likely to arise again in the

reasonably near future, evading judicial review again at

that time. See Potomac Elec. Power Co. v. Public Serv.

Comm'n, swpra.

The net amount of items allowed and disallowed on ap-

peal exceeds the amount of interim relief granted, but we

conclude that a prospective rate adjustment is now im-

The merits of the property tax issue are discussed in the cost-

of-service section of this opinion, infra.

possible, since new rates have superseded those set in 18515,

and since a rate increase may not be awarded retroactively

as matter of law. See Newton v. Department of Pub. Utis.,

367 Mass. 667, 679-680 (1975); New England Tel. & Tel.

Co. v. Department of Pub. Utils., R.L. ;

(1976).* We further conclude that a refund to Boston Edi-

son customers also is not in order at this time. See id.;

Fryer v. Department of Pub. Utils., Mass. ;

(1978). We remand the cases to the single justice for the

entry of judgment.

I. HisrTory OF THE PROCEEDINGS.

On November 12, 1974, Boston Edison filed with the De-

partment a proposed schedule of rates and charges designed

to raise its 1975 revenues by about $70,000,000. The De-

partment docketed this request as D.P.U. 18200 and held

extensive public hearings. The Company had presented

its direct ease by May, 1975, but because interested parties

had intervened in the proceedings, it appeared that a final

decision would be unlikely until September, 1975. The

Company, therefore, filed a petition for interim rate relief

requesting an immediate rate increase of $47,700,000, pend-

ing a final decision by the Department on its full request.

The interim request was separately docketed as D.P.U.

18200-A but, on the Company’s motion, the two proceedings

were thereafter consolidated. The Department evaluated

these rate proposals using calendar year 1974 as the test

year, and on September 30, 1975, it issued a decision and

order which, as subsequently amended, authorized new rate

schedules designed to increase Boston Edison’s annual reve-

® 358 A.2d 1, 20 (1976).

> Mass. Adv. Sh. (1978) 744, 752.

ee ee Ce

nues by $29,538,000. The appeals from that decision relate

primarily to the problem of rate structure. The Depart-

ment found that residential users as a class had not con-

tributed significantly to the growth in peak load demand

for electricity. Consequently, the Department exempted

the first 384 kilowatt hours (KWH) of monthly residential

usage from the general rate increase.

Two and one-half weeks after the Department’s decision

in 18200/18200-A, Boston Edison made a second rate filing

seeking $49,500,000 in additional annual revenues. The De-

partment docketed this case as D.P.U. 18515, and again

numerous parties intervened in the proceedings. This

time, using calendar year 1975 as the test year, the Depart-

ment determined on August 12, 1976, that the Company was

entitled to $10,960,000 in rate relief. The Company and

intervener Robinson — who argues that the increase is too

generous — challenge that decision on numerous grounds

relating to cost of service, rate base, and rate of return.

The rate structure portion of 18515 is under advisement by

the Department until the issues raised by the Company’s

request for increased revenues have been resolved.2. In

the meantime, the Department has permitted Boston Edison

to collect a rate increase of $10,960,000 under the rate strue-

ture established in 18200/18200-A. Residential users re-

mained exempt from the increase, to the extent of the first

* We see no need to remand 18515 for additional proceedings

concerning rate structure. We take notice that in 19300, the

Department has fashioned a rate structure apportioning the most

recent rate increase among Boston Edison customers and that it

has abandoned the concept of the 384 KWH exemption. No pur

pose would be served by further proceedings in 18515, since Boston

Edison could not collect a rate increase now based on 1975 as the

test year. However, if any of the parties feels that a remand would

be appropriate, this court will entertain a motion to reconsider this

aspect of the decision filed seasonably and promptly.

384 KWH consumed each month, until the Department’s

superseding decision in 19300.

In connection with its motion for a stay in the county

court, Boston Edison submitted two affidavits, one by Ralph

M. Kelmon, the Company’s treasurer (IXelmon affidavit),

and the other by Robert D. Saunders, senior rate engineer

in Boston Edison’s rate research and forecasting depart-

ment (Saunders affidavit). The Kelmon affidavit presented

updated financial resuits for calendar year 1976 based on

eight months’ actual data and a four-month forecast. It

also provided information with respect to the increase in the

property tax rate in the city of Boston for the fiscal year

that commenced on July 1, 1976. The Saunders affidavit

presented updated information with respect to growth in

1976 sales over 1975 sales, also based on eight months’

actual data and a four-month forecast.

When these consolidated appeals were reserved and re-

ported by the single justice. to the full court, the two affi-

davits were included in the record on appeal, but “without

prejudice to the rights of the parties to argue to the Full

Court ... the question of whether or ‘not said evidence is

relevant, material, necessary, or otherwise properly in-

cludible in the record on appeal.” No evidentiary objec-

tions were made at oral argument by any party, and we

have admitted both affidavits in order “to bring the proof

as nearly as reasonably possible down to the date of final

decision.” Opinion of the Justices, 328 Mass. 679, 687

(1952). New England Tel. & Tel. Co. v. Department of

Pub. Utils., Mass. ? (1976) 3° New England Tel.

& Tel. Co. v. Department of Pub. Utils., 360 Mass. 443, 448

(1971); Boston Gas Co. v. Department of Pub. Utils., 359

Mass. 292, 200-301 (1971).

II. NATURE AND Scope oF JupiciaAL REVIEW.

Boston Edison alleges that the Department’s decision in

18515 deprived the Company of the opportunity to earn a

fair return on its investment. The Company contends, and

properly so, that, to the extent that it asserts a claim of

confiscation, it is entitled to an independent review as to

both law and fact. New England Tel. é Tel. Co. v. Depart-

ment of Pub. Utils., Mass. ; (1976).4 Boston

Gas Co. v. Department of Pub. Utils., 368 Mass. 51, 54

(1975).° New Eng. Tel. & Tel. Co. v. Department of Pub.

Utils., 360 Mass. 443, 449 (1971). Mystic Valley Gas Co. v.

Department of Pub. Utils., 359 Mass. 420, 424 (1971). In

so far as any of the challenged rulings do not independently

or in cumulative effect give rise to a claim of confiscation,

the standard of review is as set forth in the State Admin-

istrative Procedure Act. G.L. ¢. 30A, $14 (7), as ap-

pearing in St. 1973, ¢. 1114, §3. New England Tel. & Tel.

Co. v. Department of Pub. Utils., MO. (1976).!

New England Tel. é Tel. Co. v. Department of Pub. Utils.,

360 Mass. 443, 449 (1971).

Ill. Crams or CONFISCATION.

Boston Edison advances two theories of confiscation. It

first alleges that the rate of return allowed by the Depart-

ment in 18515 was unreasonably low, thereby depriving the

Conpany of the opportunity to earn a fair return on its

investment in violation of arts. 1, 10, and 12 of the Decla-

ration of Rights of the Constitution of the Commonwealth

and the Fourteenth Amendment to the Constitution of the

4 Mass. Adv. Sh. (1976) 2246, 2249.

* Mass. Adv. Sh. (1975) 1865, 1869.

f Mass, Adv. Sh. (1976) 2246, 2249.

United States. Clearly this allegation entitles the Company

to independent review as to both law and fact. However,

Boston Edison seeks to have the court employ this same

degree of scrutiny in reviewing each of the many cost-of-

‘ service adjustments subsidiary to the Department’s final

decision in 18515. For this reason, apparently, the Company

alleges a second theory of confiscation — “confiscation by

adjustment.” The Company contends that, even if the

allowed rate of return was not confiscatory, the numerous

adjustments to cost of service “ensured that the Company

could never earn the return to which the Department found

it was entitled.” We do not consider whether these allega-

tions even give rise to a claim of confiscation because we

conclude instead that Boston Edison failed to meet its

burden of proving confiscation on either theory.

Confiscation occurs when the Department’s ratemaking

decision deprives a utility of the opportunity to realize a

fair and reasonable return on its investment. Boston Gas

Co. v. Department of Pub. Utils., 368 Mass. 780, 789-790

(1975).* “A return is fair and reasonable if it covers utility

operating expenses, debt service, and dividends, if it com-

pensates investors for the risks of investment, and if it is

sufficient to attract capital and assure confidence in the en-

terprise’s financial integrity.” Fitchburg Gas & Elec. Light

Co. v. Department of Pub. Utils., Mass. , (1977) .®

See Permian Basin Area Rate Cases, 390 U.S. 747, 792

(1968) ; Federal Power Comm’n v. Hope Natural Gas Co.,

320 U.S. 591, 603 (1944); Bluefield Water Works & Im-

provement Co. v. Public Serv. Comm’n of W. Va., 262 U.S.

679, 690 (1923). Yet, it is not enough for a utility merely

to allege confiscation in the hope that this court will dis-

® Mass. Adv. Sh. (1975) 3088, 3100.

h Mass. Adv. Sh. (1977) 273, 277.

agree with the particulars of a complex decision and will

supplant it with another more to the Company’s liking.

This court will not interfere with the exercise of the rate-

making power unless confiscation is clearly established on

the record before us. See New England Tel. & Tel. Co. v.

Department of Pub. Utils., 327 Mass. 81, 85-86 (1951); St.

Joseph Stock Yards Co. v. United States, 298 U.S. 38, 53

(1936). Cf. Fitchburg Gas & Elec. Light Co. v. Department

of Pub. Utils., supra at | In the instant case, we are

not persuaded that Boston Edison will suffer confiscation.

As in previous rate proceedings, the Department adopted

and applied the “cost of capital” method of determining the

fair rate of return on the Company’s rate base. No issue

is now presented as to the cost of debt capital or as to the

capital structure of the Company. The Company main-

tains, however, that the 13% return allowed on common

stock seriously understated the Company’s cost of equity

capital and that, as a result, the composite rate of return

allowed by the Department — 9.49% — was confiscatory or

otherwise contrary to law.

There is no dispute that the return on equity capital must

at least equal “ ‘the amount which the company would have

to pay in order to “hire” its equity capital under current

conditions.’” New England Tel. & Tel. Co. v. Department

of Pub. Utils., 327 Mass. 81, 88 (1951). We have recognized,

however, that fixing the fair rate of return is a matter of

judgment, not a mechanical exercise. New England Tel. &

Tel. Co. v. Department of Pub. Utils., 360 Mass. 443, 474

(1971). The rate of return is not an irfimutable number, but

rather one chosen from a range of reasonable rates and

determined by the Department to be appropriate under the

circumstances. Id. The question before us as to equity

capital is whether the 13% figure was above the line of con-

1Mass. Adv. Sh. (1977) at 278.

fiscation. Having reviewed the record, we hold that the

Department’s cost of equity determination is not confisca-

tory or otherwise illegal.

Five witnesses testified as to the rate of return, and their

estimates as to the cost of equity ranged from 11.2% to

15.5%. Each of these experts presented a sophisticated

analysis that gave the outward appearance of objectivity,

but, on closer scrutiny, it is apparent that the method ap-

plied by each contained inconsistencies. Each provided an

opinion which a reasonable mind might accept as adequate

to support a conclusion, see G.L. ¢. 830A, § 1 (6), but each

based his analysis on assumptions that were controversial

in themselves. The Department did not base its decision on

the testimony of any one witness. Rather, the Department’s

written decision evaluates the strengths and weaknesses of

each witness’s testimony, culling from the mass of evidence

those elements which, we agree, are worthy of weight. In

so doing, the Department based its cost of equity judgment

on a reasoned composite of all the evidence. That is a

process which this court has strongly encouraged. See

Wannacomet Water Co. v. Department of Pub. Utils., 346

Mass. 453, 465-471 (1963). Compare Boston Gas Co. v. De-

partment of Pub. Utils., 368 Mass. 780, 804 (1975,) with

New England Tel. & Tel. Co. v. Department of Pub. Utils.,

360 Mass. 448, 474-475 (1971).

“(T]he return to the equity owner should be commensur-

ate with returns on investments in other enterprises having

corresponding risks.” Federal Power Comm’n v. Hope Nat-

ural Gas Co., 320 U.S. 591, 603 (1944). See Fitchburg Gas

& Elec. Light Co. v. Department of Pub. Utils., Mass.

: (1977) ;* Permian Basin Area Rate Cases, 390 U.S.

747, 792 (1968). Clearly, the 13% return on equity satisfied

i Mass. Adv. Sh. (1975) 3088, 3124.

* Mass. Adv. Sh. (1977) 278, 277.

this standard. The Company’s witness Benore arrived at

15.5% as his estimate of the cost of equity by comparing the

potential return on the Company’s shares with the return

on industrials shares generally. This comparison is of mini-

mal value because of the dissimilarity of the risks facing

public utilities and those facing industrials. See J. Bauer,

Updating Public Utility Regulations: Assuring Fair Rates

and Fair Returns 107 (1966); Note, An Earnings-Price

Approach to Fair Rate of Return in Regulated Industries,

20 Stan. L. Rev. 287, 289 (1968). The dissimilarity between

utility and industrial shares is further demonstrated by

recent history, since, according to the Company’s own evi-

dence, the two groups of securities have not been even

roughly comparable since 1965.°

However, the record contains evidence allowing a com-.

parison of Boston Edison’s financial condition to that of

fifteen other similarly situated public utilities. These figures ~

were current at the time of the Department’s decision, and

they show that with a 13% return on equity, Boston Edison

enjoyed returns commensurate with the returns earned by

similar utilities.* The Company ranked at or near the bot-

tom of the sample in several indicators of equity return’

* From 1960 to 1965, common stock prices of utilities performed

in line with industrials. Since then, the price of utility stocks

generally has declined 55% while industrials have declined only

1%. During the same post-1965 period, earnings for industrials

have inereased 77% as compared to 25% for utilities,

*The rate of return allowed on common equity was also 13% in

18200/18200-A, the Company’s last previous general rate proceed-

ing, also the subject of this opinion.

*The Company’s growth rate in units sold was the slowest of the

sample. The Company also ranked last in ratio of market price to

book value, and it ranked next to last in earnings as a percentage

of book value. The Department discounted the significance of the

market-to-book ratio except in so far as it related to a potential

yet Boston Edison’s stock yielded higher dividends than any

other stock in the sample. More importantly, the Company’s

earnings per share were 10.54% of market price, using test

year 1975 earnings and the year-end price. Equivalent fig-

ures for comparable utilities ranged from 8.84% to 15.24%,

and Boston Edison’s allowed yield of 13% was the sixth

highest of the sixteen. The record as a whole does not sus-

tain a claim of confiscation based on a comparison between

Boston Edison and other public utilities.

In addition to being commensurate with the returns al-

lowed comparable companies facing comparable risks, the

return on equity “should be sufficient to assure confidence

in the financial integrity of the enterprise, so as to maintain

its credit and to attract capital.” /ederal Power Comm’n v.

Hope Natural Gas Co., 320 U.S. 591, 603 (1944). See Fitch-

burg Gas & Elec. Light Co. v. Department of Pub. Utils.,

Mass. 5 (1977).! Boston Edison failed to estab-

lish confiscation measured by this standard, as well. A poll

introduced by the Company indicated that one out of every

eight financial institutions would be attracted, at a 13%

return, to the common stock of a public utility whose A-

rated bonds were selling to yield 10%. Boston Edison’s

bonds are one step lower than A-rated, but the strong im-

provement in money market conditions between the time

these investors were polled and the time of the Depart-

ment’s decision in 18515 caused the Department to conclude

that a 18% return on equity would be sufficient to attract

capital and maintain investor confidence. We agree.

investor’s evaluation of the comparative risk of investing in Boston

Edison stock, a factor that is discussed infra.

The Company argues strenuously that its high debt-to-equity

ratio makes an investment in Boston Edison stock uniquely risky.

We note, however, that five out of the other fifteen utilities in the

sample had higher debt-to-equity ratios.

'Mass. Adv. Sh. (1977) 273, 277.

Although the Company’s bonds are not A-rated, the

record shows that at the time of the Department’s decision,

bonds of a grade comparable to those of the Company had

recently sold to yield 11.75%. This evidence cuts both ways.

It shows a reluctance on the part of some investors to buy

Boston Edison bonds, while the Company’s return on equity

is 13%, unless they receive a greater return than 10%.

Nevertheless, it also shows quite clearly that, with a 13%

return on equity, there were enough investors in the market

willing to buy Boston Edison bonds if the Company were to

pay a return slightly higher than that on which investors

polled had previously premised their vote of confidence.

Moreover, the financial market in which the Company oper-

ates improved substantially over the course of the 18515

proceedings. The Attorney General argues persuasively

that this trend continued up to the time of oral argument

in this case. At the beginning of test year 1975, the prime

interest rate was 10.25%; by the close of the 18515 pro-

ceedings in May, 1976, the rate had dropped to 6.75%. As

the Company’s senior vice president testified, this drop in

the interest rate, together with the general improvement in

the stock market, has had a restorative effect on the value

of the Company’s stock: toward the end of 1974, the price of

Boston Edison stock ranged from $15 to $17 a share; by the

end of test year 1975, the price had risen to $22 a share; by

the end of the 18515 proceedings, the stock was selling at

$24.50 a share.® Clearly, there is an improving market for

the Company’s outstanding shares, and Boston Edison can-

not claim confiscation based on lack of investor confidence.

The principal factor causing Boston Edison’s witnesses

to advocate a 15% return on equity was the Company’s

belief that the capital attraction standard of the Hope

® In 1977, the stock reached a high of $28.38.

Natural case’ requires the Department to allow a return on

equity sufficient to maintain the market price of the Com-

pany’s stock at a level slightly higher than the stock’s book

value. The Department concedes that the 13% return al-

lowed in 18515 will not accomplish this result, and it also

recognizes that, in a proper case, a market price lower than

book value provides some evidence of confiscation. See, e.g.,

New England Tel. & Tel. Co. v. Department of Pub. Utus.,

Mass. ; (1976).™ The per se rule advocated by

the Company finds no support in our cases, and we are not

inclined to adopt it now. Experience has shown that, in

making a determination as elusive as estimating the cost of

equity capital, “mathematical formulas and rules of thumb

are obsolete.” 1 A.J.G. Priest, Principles of Public Utility

Regulation 196 (1969).

The Company’s principal argument here is that, if it is-

sues new shares, their cost to the new buyers must equal

the book value of existing stock in order to avoid “diluting”

the equity of existing shareholders in the corporation. In

order to accomplish this, the Company argues, the rate of

return must be sufficient (1) to cover the cost of issuing the

additional shares, (2) to absorb the drop in market price

caused, apparently, by the temporary glut of Boston Edison

shares, and (3) to then maintain a market price equal to

the book value of shares previously outstanding. Boston

Kdison asserts that, in order to complete the massive con-

struction program it has undertaken, the Company may

decide to issue additional stock. It further asserts that,

if it must issue stock at a price lower than book value, it

will dilute the equity of existing shareholders and that, as a

*" Federal Power Comm’n v. Hope Natural Gas Co., 320 U.S. 591,

603 (1944).

™ Mass. Adv. Sh. (1976) 2246, 2259.

ae at Oe

result, investors will not be attracted to Boston Edison

stock at any price. The Company cites no case in which

this has occurred, and we know of none.

The Department, of course, must set the rate of return

high enough to preserve the financial integrity of the Com-

pany, but there was no showing in 18515 that the Company

has been unable to attract capital in the past or that to issue

common stock under present circumstances would jeopard-

ize the Company’s ability to attract capital in the future.

The record contains speculation to that effect, but nothing

more.® This is not a case in which the utility has a demon-

strable inability to attract capital and where investors

face a risk of continual dilution even as the utility finances

its normal operations. In such a case, the utility might

fairly allege that the dilution is attributable to State action,

and this court has recognized that—as a prima facie

matter, at least — “forced dilution is confiscation.” New

England Tel. & Tel. Co. v. Department of Pub. Utus.,

Mass. _ , (1976)." See New England Tel. & Tel. Co. v.

Department of Pub. Utils., 360 Mass. 443, 477 (1971). In

this case, however, Boston Edison’s need for additional

eapital stems from a special project — a construction pro-

gram of limited duration and unprecedented size. We

cannot say as matter of law that the Constitution requires

ratepayers to sustain the price of Boston Edison’s stock

*The Company argues that the derating of its first mortgage

bonds and the disappointing performance of its common stock indi-

cate a lack of investor confidence in the Company. But, because of

similar problems throughout the electric industry, it is equally

likely that these signs merely show investor disillusionment with

these two classes of securities, regardless of their issuer. See

Katzin, Electric Utility Financing Today, 55 Ore. L. Rev. 479

(1976). The record shows that Boston Edison has tried novel

financing techniques successfully in recent vears. This, too, seems

to be an industry-wide experience. /d.

" Mass. Adv. Sh. (1976) 2246, 2259.

above book value except to the extent absolutely necessary

to maintain sufficient investor confidence to allow the busi-

ness to continue as usual. Ultimately, it is investor confi-

dence, not dilution considered by itself, that is the consti-

tutionally significant criterion. “The due process clause

has been applied to prevent governmental destruction of

existing economic values. It has not and cannot be applied

to insure values or to restore values that have been lost by

the operation of economic forces.” Market St. Ry. v. Rail-

road Comm’n of Cal., 324 U.S. 548, 567 (1945). We are

not persuaded that a market price lower than book value

necessarily indicates a lack of opportunity to earn a fair

return on equity. The record supports a conclusion to the

contrary, namely, that investors are more interested in the

return on the market price they pay than in the current

book value of their stock

We find that the 13% cost of equity figure set by the De-

partment is above the line of confiscation. The Company

also argues that the determination is unsupported by sub-

stantial evidence, but we find substantial evidence to sup-

port any cost of equity judgment between 11.2% and 15.5%.

Robinson argues that the 13% figure is so high as to be

confiscatory of the ratepayers, but we disagree. The figure

set by the Department falls within the range of permissible

judgment.

Boston Edison’s failure to establish the indicia of con-

fiseation is equally fatal to the claim that it has suffered

“confiscation by adjustment.” The Company’s only argu-

ment addressing the merits of this second claim is that the

Department arbitrarily increased the Company’s test year

revenues and decreased its test year expense figures. As

will be seen in the cost-of-service discussion, infra, the De-

partment’s adjustments were not arbitrary and, with three

exceptions which we address, the adjustments of which the

Company complains were not unlawful.

IV. Review Unper G. L. c. 3A.

A. Calculation of the Rate Base in 18515.

A public utility’s rate base is its total investment (less

depreciation) in property that is used and useful to the

public in providing utility service during the test year.

E.g., New England Tel. & Tel. Co. v. Department of Pub.

Utils., 360 Mass. 443, 450 (1971). The rate base ultimately

adopted by the Department in 18515 was $986,692,000,

which is about $40,000,000 lower than the $1,027,006,000 rate

base figure proposed by the Company. Boston Edison con-

tends that, in computing the rate base, the Department com-

mitted the following errors: (1) it based its computation

on the Company’s average investment during the test year

rather than on its total investment at year end; (2) it ex-

cluded from the rate base certain funds — known as “coin-

pensating balances” — kept on deposit in various banks

to ensure the availability of short-term credit; (3) it ex-

cluded the unamortized portion of the Company’s invest-

ment in certain pollution control equipment which can no

longer be used economically and which was not used during

the test year; (4) it excluded the Company’s investment in

land held for possible future use; and (5) it reduced the

cash working capital allowance includable in the rate base

by rejecting the use of a standard accounting convention

and instead estimating the Company’s future working capi-

tal needs from evidence of the Company’s actual experience.

1. Year average vs. Year end. In its proposed caleula-

tion of rate base, Boston Edison used year-end 1975 figures,

which it urged the Department to adopt in order to offset

the effects of attrition and regulatory delay. The inter-

veners, on the other hand, urged the Department to use the

“vear average” calculation — that is, the average of the

year-end figures for 1974 and 1975. It has become the De-

partment’s established practice to use the year-average

method, but in 18515 the Department departed from this

method to include the full year-end value of the Mystic 7

station (Mystie 7), less depreciation, in the rate base. This

adjustment gave Boston Edison approximately seven-

eighths of the differential resulting from the two methods

of caleulation. The Company’s protest on appeal is that

the Department did not abandon its established practice

altogether for the test-year 1975. There was no error.

The Department is not compelled to use any particular

method for caleulating the rate base, provided that the

end result is not confiseatory — a matter in which the utility

bears the burden of proof. Fitchburg Gas & Elec. Light

Co. v. Department of Pub. Utils., Mass. > n.d

(1977).°. New England Tel. & Tel. Co. v. Department of

Pub. Utils., Mass. , (1976).° New England Tel.

€& Tel. Co. v. Department of Pub. Utils., 360 Mass. 443, 453

(1971). In this instance, the Department tailored the appli-

cation of the year-average and year-end methods to yield a

fair and principled result.’

2. Compensating balances. The Company’s calculation

of rate base included $22,592,000 in compensating balances

kept on deposit in various banks to ensure the availability

° Mass, Adv. Sh. (1977) 273, 277 n.5.

P Mass, Adv. Sh. (1976) 2246, 2250.

* The Company’s reliance on Southbridge Water Supply Co. v.

Department of Pub. Utils., 368 Mass. 300, 308-309 (1975) (Mass.

Adv. Sh. [1975] 2245, 2256-2258), is misplaced. In that case we

held that it was error of law for the Department to apply the year-

average method under the special circumstances presented. In this

case, the Department has not adhered strictly to the year-average

method; on the contrary, it has afforded year-end treatment to

Mystic 7, a station that was in service for the last six months of the

test year. For a related discussion of the Southbridge case, see

note 13, infra.

of short-term credit. The Department excluded this sum

from the rate base in 18515. Boston Edison concedes that

its ioan agreements with these banks do not limit the Com-

pany’s ability to withdraw these funds, but it stresses that,

as a practical matter, it must maintain compensating bal-

ances if it hopes to continue short-term borrowing.

The Department’s objection is that the Company has not

attempted to trace and measure what portion, if any, of the

compensating balances are used and useful to the rate-

payers. The record does not show the purposes for which

the short-term credit is used; the Company has not broken

down the $22,592,000 sum to apportion short-term credit

between operating costs and capital costs, which are not

includable in rate base. In such undifferentiated form, com-

pensating balances do not reflect any measure of useful-

ness to customers asked to pay a rate of return on them.

For this reason, the Department exciuded the entire amount

from the rate base, relying on our decision in New England

Tel. é Tel. Co. v. Department of Pub. Utils., 360 Mass. 443,

460 (1971). There was no error. The same failure of

proof has occurred here as occurred in that case. More-

over, the Company was put on notice by the Department’s

decision in 18200/18200-A that the need for compensating

balances and the necessary amount thereof should be

clearly established as part of a working capital lag study.

In the absence of such evidence, it was not improper for

the Department to exclude the Company’s proposed rate

base adjustment.

3. Exclusion of the scrubber from rate base. In 1970,

Boston Edison invested $5,283,000 in a scrubber, a pollution

control device designed to permit the use of inexpensive

high sulphur fuel oil without increasing air pollution. The

Company built the scrubber as an experiment which, if

successful, might have saved ratepayers a substantial

amount in fuel clause charges. Tests showed that the

scrubbing process did indeed work, but the scrubber has

been permanently retired because changes in Federal air

quality regulations have made operating the device econo-

mically unfeasible.

The Department has permitted the Company to recover

the entire amount of its investment from the ratepayers.

For this reason the Department has allowed the Company

to amortize the investment over a ten-year period; one-

tenth of the investment will be reflected in the rates, as part

of the cost of providing electrical service, each year for ten

years. But the Department will not permit the Company

to earn a return on the unamortized portion of the invest-

ment in the meantime. For this reason, the Department

excluded the unamortized portion from the rate base in

18515. There was no error. The record shows that the

scrubber was not used or useful to the ratepayers during

the test year and would not be put back in operation in the

future. This court has sanctioned the Department’s gen-

eral policy of excluding retired plant from the rate base

provided that the Department applies its policy consistently

to the affected utility and provided that the exclusion does

not have a confiscatory effect. See Fitchburg Gas & Elec.

Light Co. v. Department of Pub. Utils., Mass. , -

(1977).4 Special circumstances may necessitate an

exception to the Department’s policy on occasion, see

Boston Gas Co. v. Department of Pub. Utils., 367 Mass.

92, 101-102 (1975), but no special circumstances appear in

this case.

4. Plant held for future use. The Company included

$1,895,691 in its proposed year-end rate base as “plant held

for future use.” Of this amount, $1,663,000 was allocated

4 Mass, Adv. Sh. (1977) 273, 279-280.

ee ee

Ee eT ee nT ae

for land, and $232,691 for plant that had been retired in

1972. The Company introduced no plan for the use of

either. There was no error in excluding the two items from

the rate base.

When the Company anticipates a need for constructing a

new plant, it buys land in the area under consideration,

often well before the time when the land will actually be

used in construction. The Company contends that, in the

long run, a program of this sort might reduce the Com-

pany’s total land acquisition costs. This may be true, but

in the meantime the land is not used and useful in pro-

viding service to the ratepayers. Moreover, the Company

remains free to sell the land at a profit, which goes to the

stockholders, not to the ratepayers. One such sale occurred

during the test year.

The Department’s general policy is to exclude from the

rate base items that are not currently used and useful to

the ratepayers. E.g., New England Tel. & Tel. Co., 11

P.U.R.4th 297 (Mass. Dep’t of Pub. Utils. 1975). This

policy is in accord with that of many jurisdictions, see 1

A.J.G. Priest, Principles of Public Utility Regulation 180

& n.138 (1969), and there was no reason to depart from it

in this case.

5. Cash working capital. The cash working capital al-

lowance in the rate base represents the amount of money

the utility must supply from its own funds to meet operat-

ing expenses as they arise during the period between the

rendition of service and the receipt of payment therefor.

Ordinarily, the allowance equals 12.5% of those total an-

nual operating expenses that require working capital. That

is, the company should have enough cash on hand to cover

forty-five days of operating expenses (12.5% of the year),

on the assumption that there will be a lag of forty-five days

between rendition of service and payment by the customer.

The forty-five day figure is a widely used convention, but

it is axiomatic that the regulatory agency “may quite

reasonably and properly take into account factors which

reduce the need as well as those which increase it.” Ala-

bama-Tenn. Nat. Gas Co. v. Federal Power Comm’n, 203

F.2d 494, 498 (3d Cir. 1953).

Using the forty-five day standard, the Company included

$30,457,000 in its proposed rate base as cash working cap-

ital. It ineluded another $28,917,000 to cover an additional

sixty-day lag in the collection of revenues associated with

fuel expenses. The interveners objected that if the De-

partment allowed both items in the rate base, it would in

effect be allowing the Company a return on 105 days of

working capital purportedly needed to cover fuel ex-

penses.'"° The Company’s witness had admitted on cross-

examination, however, that there was a ninety-day lag for

fuel costs, not a 105-day lag.

The Department, therefore, rejected Boston Edison’s

proposals and recalculated the Company’s working capital

needs according to the evidence. It allowed ninety days of

working capital to cover fuel costs; sixty days of working

capital to cover purchased power costs; and the usual forty-

five days of working capital to cover all other operating

expenses. The recalculation lowered the Company’s pro-

posed working capital allowance by $4.6 million. The De-

partment’s decision was supported by substantial evidence.

B. Cost-of-Service Adjustments in 18515.

The Department used the historic test-year approach in

determining the Company’s revenue needs. After calculat-

ing the adjusted average rate base for 1975, the Depart-

sixty days’ additional cash to cover additional fuel costs equals 105

days’ working capital.

ment considered the actual revenues and expenses for that

year in order to determine the cost of service. It then

made such adjustments as it deemed necessary to arrive at

a proper basis for determining the revenues needed by the

Company to enable it to earn a fair return on the rate base.

Boston Edison maintains that in this process the Depart-

ment overstated its test-year base revenues and under-

stated its expenses, thereby depriving the Company of

revenue to which it was entitled.

Specifically, Boston Edison argues first that the Depart- .

ment distorted the base revenue figure by adjusting the

Company’s calculation to include additional future reve-

nues projected to be earned from Mystic 7, which had been

‘ ineluded in the rate base on a vear-end basis. The Com-

pany also contends that in computing its test-year ex-

penses, the Department committed the following errors:

(1) it disallowed an adjustment based on an estimated

property tax increase; (2) it understated the average an-

nual cost of refueling the Company’s nuclear power plant;

(3) it disallowed the Company’s proposed tax adjustment

for depreciation on “AFUDC not normalized”;" (4) it

understated the Company’s income tax expense by over-

stating the amount of the Company’s interest deduction

associated with short-term credit; (5) it failed to annualize

depreciation on certain additions to plant in service; (6) it

disallowed depreciation on easements; (7) it disallowed

certain lobbying and political expenses; and (8) it miscal-

culated property taxes on land held for possible future use.

These alleged errors are discussed in the following para-

graphs.

1. The revenue adjustment. The largest cost-of-service

adjustment challenged by the Company concerns the Mystic

11 See subsection 4, infra.

7 station. This is a 600-megawatt fossil-fueled generating

plant that was put in operation in June, 1975 — thereby

adding about 13% to the Company’s plant in service. Al-

though the station was in operation for only half of the

test year, it would be in operation for the whole time that

new rates would be in effect. For this reason, the addition

of Mystic 7 greatly complicated the Department’s task in

18515.

The essence of the test-year method is the correlation of

revenues, expenses and assets (rate base) over a selected

period of time. See, e.g., Potomac Elec. Power Co. v. Pub-

lic Serv. Comm’n, 380 A.2d 126, 133 (D.C. Ct. App. 1977).

The method has been likened to freezing the action of a

motion picture in order to examine a single frame in detail.

Note, An Earnings-Price Approach to Fair Rate of Return

in Regulated Industries, 20 Stan. L. Rev. 287 (1968). The

Department examines a test period — usually the most re-

cent twelve-month period for which complete financial in-

formation exists — on the theory that the revenue, expense,

and rate base figures during that period accurately reflect

the utility’s present financial situation and fairly predict

the Company’s future performance. See Potomac Elec.

Power Co. v. Public Serv. Comm’n, supra. To the extent

that known or anticipated changes in revenues, expenses,

or rate base will distort the correlation among these ele-

ments, adjustments are made in the test-year data to

reflect those changes. The approach depends on keeping

the three elements in phase, however, and if an out-of-

period adjustment is made to one, corresponding adjust-

ments to the others may be necessary to preserve a fair

relationship. See, eg. Los Angeles v. Public Utils.

Comm'n, 7 Cal. 3d 331, 336 (1972); Pacific Tel. & Tel. Co.

v. Public Utils. Comm’n, 62 Cal. 2d 634, 644-645 (1965);

State ex rel. Utils, Comm’n v. Morgan, 278 N.C, 235, 237-

238 (1971).’? The Department’s decision in 18515 stretched

this principle almost to the breaking point.

All parties agreed that the test-year figures would have

to be adjusted substantially in 18515 to account for the

addition of Mystic 7 to the Company’s net plant in service.

Boston Edison proposed expense and rate base adjust-

ments, and the Department accepted these proposals. The

Department also made a revenue adjustment, however,

adding about $11,200,000 of the projected increase in 1976

revenues to the 1975 base revenue figure. It did so on the

theory that this increase was attributable to Mystic 7.

Boston Edison challenges the propriety of this action on

appeal, and in the alternative, it challenges the size of the

adjustment. The Company’s position has considerable

merit. The Department’s action was extraordinary, and,

if it were not for the magnitude of the related adjustments

in this case, we would likely find that it was unsupportable.

Cf. City of New York v. Public Serv. Comm’n of N.Y., 42

App. Div. 2d 259 (N.Y. 1973). However, the Department

carefully tailored its usual approach to suit the special cir-

cumstances of a difficult case. On balance, we conclude that

its judgment was supported by substantial evidence and

did not amount to error of law.

The Department had added the Company’s full year-end

investment in Mystic 7 to the rate base. The effect of this

year-end treatment was to allow a return on about

12See also Michigan Bell Tel. Co., 85 P.U.R.3d 467, 470-471

(Mich. Pub. Serv. Comm’n 1970); West Keansburg Water Co., 83

P.U.R.3d 423, 427-428 (N.J. Bd. of Pub. Util. Comm’rs 1970);

New York State Elec. & Gas Corp., 88 P.U.R.3d 300, 306 (N.Y.

Pub. Serv. Comm’n 1971); Rochester Gas &@ Elec. Corp., 88

P.U.R.3d 271, 275-276 (N.Y. Pub. Serv. Comm’n 1971); North

Carolina Gas Serv. Div. of Pa. & 8. Gas Co., 41 P.U.R.3d 91,

101-102 (N.C. Utils. Comm’n 1961); United Inter-Mountain Tel.

Co., 79 P.U.R.3d 499, 529 (Tenn. Pub. Serv. Comm’n 1969); Gen-

$72,500,000 of property that would have been excluded from

the year-average rate base altogether if the Department

had not made an exception to its usual practice. It must

be emphasized that year-average calculation of the rate

base has been the Department’s rule, and year-end treat-

ment, even for additions to plant during the test year, has

been a rare exception in Massachusetts. The Department’s

discretionary decision to apply the year-end approach to

Mystie 7 redounded greatly to the Company’s benefit. This

benefit was one of the premises on which the Department

based its forward-looking revenue adjustment.”

Moreover, the Department made discretionary increases

in test-year expense figures, thereby increasing the asserted

revenue deficiency. The Department allowed the Com-

pany’s adjustments for annualized depreciation, projected

wages, and property taxes associated with Mystic 7, adding

these out-of-period expenses to the test-year cost of ser-

vice. The latter two expense adjustments have been al-

lowed in the past without a corresponding revenue adjust-

ment, see New England Tel. d Tel. Co. v. Department of

eral Tel. Co. of Wis., 34 P.U.R.3d 497, 506 (Wis. Pub. Serv.

Comm'n 1960); Cheyenne Light, Fuel & Power Co., 79 P.U.R.3d

80, 86-88 (Wyo. Pub. Serv. Comm’n 1969).

*S A somewhat persuasive argument can be made, on the author

ity of the Southbridge case, that year-end treatment for Mystic 7

was not discretionary, but required by law. See Southbridge Water

Supply Co. v. Department of Pub. Utils., 368 Mass. 300, -

(1975) (Mass. Adv. Sh. [1975] 2245, 2256-2258). In Southbridge,

the utility had taken a new reservoir into its rate base on the last

day of the test year, thereby increasing its net plant in service by

more than 60%. Id. at 304 (Mass. Adv. Sh. [1975] at 2250-2251).

This court held that it was error of law for the Department to

require year-average calculation in the special circumstances pre-

sented. Id. (Mass. Adv. Sh. [1975] at 2251). Clearly, the rule in

Southbridge was relevant to this case, but Southbridge is distin-

guishable, and, although the question is a close one, we do not think

it would be appropriately applied here, where Mystic 7 was in use

for six months during the test year.

Pub. Utils., Mass. , - (1976) ;. New England Tel.

& Tel. Co. v. Department of Pub. Utils., 360 Mass. 443,

481-482 and 490-491 (1971), but the annualization of de-

peciation on plant added during the test year is an unusual

adjustment for the Department to allow. Like the year-end

treatment for Mystic 7, this adjustment must be viewed in

context; it was yet another element of a larger, singular

exercise of regulatory discretion, namely the adjustment of

test-year data to reflect a fair and accurate relationship

among the rate base, revenues, and expenses.

Boston Edison argues that there is no causal relationship

between the addition of Mystic 7 in 1975 and the increased

base revenues in 1976. Therefore, the Company argues, it

is arbitrary and capricious to attribute any portion of the

increase in retail revenues to the addition of Mystic 7.

We need not disagree with the Company’s premise in

order to reject its conclusion. Clearly, the addition of Mys-

tie 7 did not cause retail customers to consume more elec-

tricity, and so it did not cause the base revenue figure to

rise in 1976. However, the Company’s argument overlooks

the reason for making any adjustment to test-year data at

all, namely to make the rates accurately reflect the relation-

ship between rate base, revenues, and expenses while the

rates are in effect.

An accurate relationship among these three elements

might have been established if the Department had used a

purely year-average rate base with virtuaily unadjusted

test-year figures. Alternatively, the relationship might have

been established by using a purely year-end rate base with

forward-looking adjustments to the whole gamut of reve-

nues and expenses. In this case, the Department deter-

mined that neither method would be appropriate by itself.

* Mass. Adv. Sh. (1976) 2246, 2255-2256.

The Department essentially used the former method to

strike a balance among these three elements in 18515, ex-

cept that it used the latter method with regard to Mystic 7.

As to Mystic 7, the Department used (1) a year-end rate

base ; (2) a full year of Mystic 7 operating expenses (as will

be seen infra), increased to reflect all the out-of-period ex-

pense adjustments requested by the Company in this con-

text; and (3) an out-of-period base revenue adjustment de-

signed to make the rates reflect (a) the fact that Boston

Edison had built Mystic 7 to meet a projected demand and

to turn that demand into revenue, and (b) the fact that the

Company would enjoy this increased revenue at a time when

the rates set in 18515 would be in effect. It is not necessary,

therefore, to prove a causal relationship in order to conclude

that an adjustment of the base revenue figure was appro-

priate under the circumstances and attributable to Mystic 7.

The fact which we find most persuasive, however, is that

in 18200/18200-A the Company had conceded the need for a

similar revenue adjustment and had itself proposed the fig-

ure adopted by the Department in that case.* In light of

the Department’s substantial additions to the rate base and

expense figures, we cannot say that it was erroneous for the

Department to make some corresponding revenue adjust-

ment in 18515. See West Keansburg Water Co., 83 P.U.R.

3d 423, 427-438 (N.J. Bd. of Pub. Utils. Comm’rs 1970)."*

‘* Since this factor in all probability will not be present in future

cases, we give notice to the Department that if this issue should

arise again, a similar adjustment may necessitate even closer

judicial serutiny.

It can be argued that the Department erred in failing to

articulate fully in its written opinion the reasoning underlying the

revenue adjustment. See G.L. ce. 30A, §11(8). We find the

Department’s stated reasons to be seanty indeed, but conclude that

a fuller statement of the Department’s reasoning should be excused

under the special cireumstances presented here, The Department

The Company next challenges the amount of the adjust-

ment. The adjustment proposed by the Company in 18200/

18200-A was $6,379,000 — 100% of Boston Edison’s pro-

jected increase in base revenues from 1974 to 1975. In 18515,

the interveners again proposed an adjustment equal to 100%

of the projected revenue increase; their proposed adjust-

ment was $16.7 million. The Department reasoned that —

unlike in 18200/18200-A, in which Mystic 7 was not on line

during any part of the test vear — it would not be fair to

add the entire projected increase to test-year revenues, since

some of those revenues would be attributable not to Mystic

7, but to the remainder of the rate base, caleulated according

to the usual year-average method. The Department there-

fore determined that “[a] reasonable way to adjust reve-

nues to mesh with the Mystic 7 increase in rate base is to

attribute the expected revenue additions to Mystic 7 in the

same proportion that the Mystic 7 test year additions to

rate base (about $145 million) bear to total test vear addi-

tions to rate base (about $216 million). The result of this

is to add some $11.2 million to test year revenues.”"* The

adjustment made by the Department represented 67.1% of

the projected revenue increase — as opposed to the 100%

adjustment urged by the interveners and 0% urged by Bos-

ton Edison.

The Company argues that it is unfair to include a full

year’s revenue increase attributable to Mystic 7 without

originally made au out-of-period base revenue adjustment in

18200/18200-A because Boston Edison had conceded the need for

such an adjustment. In 18515, the Department merely followed its

own precedent set in 18200/18200-A. The Company clearly knew

the reasons for the adjustment — both from the decision in the

earlier case and from the controversy which the proposed revenue

adjustment caused in the proceedings before the Department in

18515.

16 $145 Million

= ‘ ; 67. 4 ili = $11.2 million.

$216 million 67.1% ; 67.1% of $16.7 million = $ million

having the data also reflect a full year’s expenses attribu-

table to that plant. However, as the Company’s treasurer

noted in 18200, the three plants Mystic 7 replaced — Mysties

1, 2 and 3— operated until June, 1975, and the operation

expenses attributable to these units were replaced by equiv-

alent expenses associated with Mystic 7. The unadjusted

test-year data included six months’ expenses for Mystics 1,

2 and 3 and six months’ expenses for Mystic 7. In effect,

therefore, the Department’s decision in 18515 reflects a full

year of Mystic 7’s expenses. The Company itself asserted

this equivalency in 18200.

The Company argued for the first time on appeal that

another reasonable way to calculate the adjustment would

have been to attribute the projected growth in 1976 retail

revenues to the total amount of plant in service, not just to

the Company’s net additions during the test year. This

method would have resulted in a revenue adjustment of only

$2,505,000."7 The Company was free to suggest this alterna-

tive below, but it never did so. Despite its concessions in

18200/18200-A, and although the interveners pressed for an

identical method of adjustment in 18515, the Company failed

to present an alternative formula to the Department, choos-

ing to argue instead that no revenue adjustment at all

should be necessary. The proposal urged by the Company

on appeal was not before the Department, and, given the

unusual circumstances in this case, we cannot say that the

Department erred in choosing a higher figure that was sup-

ported by reason and by the record.

Boston Edison’s final argument with regard to the revenue

adjustment is that it partially deprived the Company of

the opportunity to use its normal growth in revenues to off-

The investment in Mystie 7 ( $145,000,000) divided by total net

plant in service ($960,412,000) equals 15%. Fifteen per cent of

the projected revenue inerease ($16,700,000) equals $2,505,000.

set the effects of attrition. Attrition is “the tendency of

the rate of return to diminish in a period of comparatively

high construction costs.” New England Tel. & Tel. Co. v.

Department of Pub. Utils., 331 Mass. 604, 622 (1954). In

1973, 1974, 1975 and 1976, the Company’s actual rate of re-

turn has been lower than that allowed by the Department,

and we have held that the Department has a responsibility

to take evidence of attrition into account, by some method,

in order “to arrive at rates which afford the Company the

opportunity to earn a ‘fair and reasonable return on hon-

estly and prudently invested capital.’” New England Tel.

dé Tel. Co. v. Department of Pub. Utils., es ye

(1976),* quoting from Boston Gas Co. v. Department of Pub.

Utils., 367 Mass. 92, 97 (1975). The Department took attri-

tion into consideration in this case by affording year-end

rate base treatment to Mystic 7. It was entitled to conclude

that this would be a sufficient remedy, and there is nothing

in the record to suggest a conclusion to the contrary.

2. Estimated increase in property taxes. In its pro-

posed cost-of-service calculation, Boston Edison included

adjustments to reflect the projected increase in 1976 prop-

erty tax rates for Boston and for various other municipali-

ties in which the C_mpany’s property is located. The De-

partment denied these adjustments, and its sole rationale

was that “[i]t is proper to annualize a known increase in

property taxes, but not an estimated one.” This reasoning

is inconsistent with the Department’s own precedents and

also with the decisions of this court. See New England Tel.

dé: Tel. Co. v. Department of Pub. Utils., 360 Mass. 443, 481-

482 (1971) ; Boston Gas Co., D.P.U. No. 17885-A at 3 (Mass.

Dep’t of Pub. Utils., May 7, 1974) ; Western Mass. Elec. Co.,

D.P.U. No. 17604 at 12 (Mass. Dep’t of Pub. Utils., May 1,

8 Mass. Adv. Sh. (1976) 2246, 2253-54.

1974). These cases show that the Department has long fol-

lowed a policy of adjusting test-year property taxes to re-

flect known post-test-year increases. The Department has

also permitted adjustments reflecting estimated increases

when the record shows that the estimate is likely to be cor-

rect, or in any event when the estimate appears to be rea-

sonable.

The record before the Department in 18515 contained a

reasoned estimate of the 1976 Boston property tax increase.

But moreover, the Kelmon affidavit, included in the record

on appeal, now shows the actual amount of that increase.

It shows that $6,619,000 in increased property taxes is allo-

cable to Boston Edison’s retail electric operations,"* and we

have previously ordered interim relief for the Company in

that amount. The interim order will become final when

judgment is entered on these consolidated appeals in the

county court.

There was no error, however, in the Department’s rejee-

tion of an adjustment purporting to estimate property tax

increases in municipalities other than Boston. The Depart-

ment could conclude that the record in 18515 did not permit

a reasonable estimate of those increases to be made, and the

record on appeal does not contain further information on

this issue. The Company’s own prior rate proceedings be-

fore the Department show that, when a reasonable projec-

tion is not made, estimated increases may be disallowed.

Boston Edison Co., 6 P.U.R.4th 77, 80 (Mass. Dep’t of Pub.

Utils. 1974).

3. Refueling costs. Periodically, Boston Edison must

shut down its nuclear power station for a number of weeks

*®§ Boston Edison also sells electricity at wholesale, and it sells

steam to be used for heating. Part of the tax increase is borne by

these customers, who are not affected by this decision.

in order to change the nuclear fuel and make repairs that

cannot be made with the plant in operation. No such “re-

fueling outage” occurred during the test year, but the Com- |

pany nevertheless added $4,000,000 to its test-year expense

figures on the theory that, ideally, an outage should occur

every twelve months during the period in which new rates

are in effect. The Department disallowed part of the ad-

justment, noting in its decision that the Company’s actual

practice has been to schedule an outage only about once

every sixteen months. This schedule was projected to con-

tinue in the future. Although the Company hopes to adopt a

twelve-month schedule eventually, it did not show when this

is likely to happen. The Department allowed a $3,1 00,000

adjustment, the annual cost of a refueling outage that occurs

only about every sixteen months. There was no error.

The Company mentions two additional arguments in pass-

ing, contending that the Department miscalculated in reduc-

ing the Company’s proposed refueling outage adjustment.

There is no merit in either argument. To allow an addi-

tion $800,000 — as the Company first suggests — would be

to attribute to the test-year cost of service a maintenance

expense for which Boston Edison had already received re-

imbursement under the terms of a warranty settlement

reached with the General Electric Company. The second

argument is that the Company should be entitled to relief

because it inadvertently understated the cost of a refueling

outage by $200,000. This argument comes too late; the De-

partment’s decision was fully supported by cost-of-service

figures put in the record by Boston Edison.

4. “AFUDC not normalized.” Boston Edison raises

three issues in connection with its proposed “adjustment

for AFUDC not normalized.” The Company’s adjustment

would have increased the cost-of-service figure to reflect

fully the income taxes paid during the year. We discuss

each of the issues separately against a background that is

necessary as a preliminary matter. We conclude that this

adjustment was erroneously disallowed by the Department.

a. “AFUDC.” The Allowance for Funds Used During

Construction (AFUDC) is a standard account used by

utilities and regulators to identify, for ratemaking pur-

poses, the capital costs associated with a particular con-

struction project. See Uniform System of Accounts for

Klectrie Companies par. 432 (Mass. D.P.U. rev. ed. 1961).

Its function is to compensate the utility for capital costs

incurred during construction — that is, incurred before the

cost of the completed project has been added to the rate

base. As the Company incurs capital costs relevant to this

account, it also “accrues AFUDC” — that is, it becomes

eligible to have these costs reflected in the rates at some

time in the future. The Department does not allow the

utility to reeover AFUDC accruals at the time the capital

expense is incurred. Instead, the Department requires the

utility to add the total obligation thus accrued to the cost

of the new plant when it is eventually added to the rate

hase. The utility then recovers the amount of the AFUDC

accruals gradually over the service life of the plant in the

form of depreciation recognized as an expense incurred in

providing electrical service. See generally Litke, Allowance

for Funds Used During Construction, Pub. Utils. Fort-

nightly at 19 (September 28, 1972).

The Department defines AFUDC as “the net cost for the

period of construction of borrowed funds used for econstrue-

tion purposes and a reasonable rate upon other funds when

so used.” Uniform System of Accounts for Electric Com-

panies par. 432 (Mass. D.P.U. rev. ed. 1961). Ag this defi-

nition shows, AFUDC comprises two distinct parts: (1) a

debt portion, which represents the interest expense on

borrowed money, and (2) a so called “equity” portion,

which represents an opportunity cost incurred when the

utility finances construction with its own internally-gen-

erated funds, foregoing a more lucrative investyent in

something else. See Litke, swpra. The equity portion is

an imputed cost. It does not reflect an out-of-pocket ex-

pense, but the Department has consistently treated it as an

element of the cost of service.® See, e.g., Boston Edison

Co., 6 P.U.R.4th 77, 79 (1974).

When the finished plant goes into operation, the Com-

pany’s cost of service reflects two distinguishable kinds of

depreciation. First there is the kind of depreciation that

returns the utility’s investment in its physical plant and

which is tax deductible. See I.R.C. § 167. Then there is

AFUDC, a kind of “depreciation” that repays capital costs

incurred in building the plant. AFUDC receipts reflected

in the rates are not tax deductible. Therefore, in addition

to bearing the capital cost of new construction, the rate-

payers must pay the tax on income attributable to AFUDC.

The determination of when the ratepayers should do so

adds another aspect to the issues raised by Boston Edison.

b. “Normalization.” Should the utility’s rates recog-

nize the Company’s AFUDC tax liability in the year in

1° The rationale underlying the accrual of equity AFUDC is that

“the cost of capital is not measured by interest payments alone, but

rather by all the economic costs of the entire financing arrange-

ment. A part of these costs is borne by the equity investors who

are willing to assume risks and without which financing by debt

capital would not be possible.” Litke, supra at 19. If the Company

had its plant built by an independent contractor who turned the

finished plant over to the utility on a “turn key” basis, the price to

the utility would include a premium for the contractor’s having

put his own capital at risk. The equity portion of AFUDC sim-

ilarly compensates the utility for putting internally generated

funds at risk when it builds the plant itself.

which ratepayers become obligated to pay AFUDC or later,

in the vear in which the Company actually pays the tax?

The former method is called “normalization,” and accoun-

tants do not agree on whether normalization is advantage-

ous to the ratepayers in the long run. It is certainly ad-

vantageous to the utilities. See generally 1 A.J.G. Priest,

Principles of Public Utility Regulation 124-136 (1969).

When a utility incurs a construction-related capital cost

and accrues AFUDC on its books, that transaction has no

present income tax consequences, only tax consequences in

later years. Nevertheless, when AFUDC is accrued, a

determinable, future tax liability is created. Taxes are

said to be “normalized” when ratepayers are charged not

the actual income taxes paid during the test year, but

a larger, hypothetical figure. This figure represents the

taxes actually paid plus an amount equal to the future tax

liability on AFUDC accrued during the test year. Tn other

words, the ratepayers pay the tax in advance. According

to one commentator, normalization is popular with utilities

since it requires ratepayers to pay a tax allowance which,

instead of being transmitted forthwith to the United States

Treasury, is available to the Company as a fund of cost-

free capital until the taxes associated with AFUDC be-

come due in later years.*” See J.C. Bonbright, Principles

of Publie Utilitv Rates 220 (1961) (discussing normaliza:

tion in connection with accelerated depreciation). For the

purposes of this appeal, the importance of normalization is

this: if AFUDC has been normalized, then the ratepayers

have already paid the taxes; if AFUDC has not been nor-

malized, then the rates must provide sufficient revenues to

7° It should be pointed out that the deferred tax reserves gener-

ated by normalization are subtracted from the rate base. There-

' fore, although the Company obtains the use of this money without

ineurring any additional cost, the Company is not entitled to earn

a return on the fund at the expense of the ratepayers.

pay the taxes as they become due — in addition to paying

back the capital costs incurred during construction.

ce. Lhe three components of Boston Edison's “allowance

for AFUDC not normalized.” We now turn to the issues

raised by Boston Edison’s appeal in 18515.

1) Taxes, on AFUDC accrued from 1960 to 1973, which

are now due and have not been normalized. Boston Kdi-

son began accruing AFUDC in 1960. It did not begin

normalizing taxes on the debt portion until the Department

allowed it to do so in D.P.U. 17795-A, a rate proceeding

employing a 1973 test year. Boston Edison Co., 6 P.U.R.4th

77, 79 (1974). The Department has never allowed Boston

Edison to normalize taxes on the equity portion of AFUDC.

Projects that were under construction between 1960 «nd

1973 are now in service. Boston Edison customers, there-

fore, are now paying AF UDC each year, and the Company

is incurring a corresponding income tax expense each year.

There is no deferred-tax reserve to meet this expense, be-

cause this AFUDC has never been normalized. In 18515,

the Department disallowed an adjustment that would have

recognized the tax expense in calculating the test-year cost

of service. Its decision was erroneous as matter of law.

The Department reasoned that “it is an inordinate bur-

den on current ratepayers to require them to support

present normalization as well as pre-normalization costs

[that is, present taxes]. Therefore, notwithstanding the

fact that the tax liability for pre-normalization AFUDC

may in fact have arrived, we do not think it should be

charged to the Company’s present customers... .” This

reasoning misses the mark. Tax expense is clearly an

element of the Company’s cost of service, whether or not

the Company accumulates a deferred-tax reserve. Nor-

malization determines only when the tax will be reflected

in the rates. It does not relieve current ratepayers of an

expense that is properly part of the cost of service. This

is so with regard to taxes on both the debt and the equity

portions of AFUDC.

2) Taxes, on AFUDC accrued on Mystic 7 in 1974-1975,

that have not been normalized. Under the Department’s

policies, a utility may accrue AFUDC whenever it incurs

capital costs associated with a particular construction proj-

ect and may do so until the project is completed. Mystic

7 went into operation in June, 1975. The Company in-

curred construction related capital costs up until that time.

It was therefore entitled to accrue, and did acerue, AFUDC

in the same amount.

None of the AFUDC accrued on Mystie 7 in 1974 and the

first six months of 1975 has been normalized. The Depart-

ment has never allowed equity AFUDC associated with any

project to be normalized. Moreover, although the Depart-

ment’s rule now is to permit normalization of debt AFUDC,

it made exceptions with regard to debt AFUDC accrued on

Mystic 7 during 1974*' and the first six months of 1975”

The Department’s reasons for making those exceptions are

not germane to this appeal. What is important is that the

taxes have not been paid previously, and they are now fall-

ing due, a bit each year. The Company proposed an ad-

justment that would have included in the cost of service

taxes on AFUDC payable during the test year. For the

reasons discussed in part 1 of this discussion, supra, the

disallowance of this adjustment was error of law.

The Attorney General argues that to allow this adjust-

ment would be to allow double recovery in this ease, since

the full original cost of Mystie 7 was included in the rate

*' This ruling came in 18200/18200-A, and the Department’s deci-

sion to refuse normalization has not been appealed.

*? This ruling came in 18515, and, again, the refusal is not before

us.

base both in 18200/18200-A and in 18515. There is no pos-

sibility of double recovery here. Boston Edison actually

accrued AFUDC in 1974 and 1975, and there can be no

denying it. When the Company instituted rate proceedings

in 18200/18200-A, the Department used 1974 as the test

year and attributed Mystic 7 to the test-year rate base in

order to set fair rates for the future. Those rates took

effect on October 1, 1975. Therefore, the ratepayers have

been paying a return on Mystic 7 as an item in the rate

base since October, 1975. The Company accrued AFUDC

only up until June, 1975. There is no overlapping and

therefore no possibility of double recovery.

3) Taxes on the equity portion of AFUDC — other than

that associated with Mystic 7 — accrued from 1973 to 1975.

Taxes on the equity portion of AFUDC have never been

normalized. The construction projects on which AFUDC

was accrued are now in operation and providing electrical

services to the ratepayers. The third component of Boston

Edison’s adjustment for “AFUDC not normalized” would

have generated revenues to meet the taxes on the equity

portion of all AFUDC — other than that relating to Mystic

7 —accrued since 1973, but not normalized. The preced-

ing discussion makes it clear that these taxes are properly

includable in the test-year cost of service and that the

Department erred in refusing the adjustment.

d. The effect of mootness on this determination. Taken

together, the three components of the adjustment for

“AFUDC not normalized” would have increased Boston

Edison’s test-year income tax expense by $2,360,000. Since

we take notice that new rates have become effective since

this appeal was filed, the Company may not now collect

this amount retroactively in the form of a rate increase

based on 1975 as the test year. The Company will never-

theless recapture most of its capital costs incurred during

construction, since the Company will recover depreciation

on the same AFUDC accruals here in issue for each year

of the associated plant’s useful life. In the future, the

depreciation recovered by the Company will not be de-

creased by income tax expense.

0. Income tax: Calculation of interest expense associ-

ated with short-term debt. In order to caleulate Boston

Kdison’s test-year income tax expense for ratemaking pur-

poses, the Department had to determine the amount of the

Company’s deduction for interest associated with short-

term credit. Relying on evidence offered by the interven-

ers, the Department calculated the interest on $106,000,000,

the year-average balance of short-term debt during the

test year. The Company objects that the amount of inter-

est thus derived should have been reduced by two further

adjustments which the Department refused to make. It

argues that the Department erroneously failed to adjust

the interest calculation by $4,903,000 to reflect a saving in

short-term interest which the Company would have real-

ized (1) if it had issued certain secured notes at the begin-

ning of the test year rather than at the end, as actually

happened, and (2) if it had also issued certain preference

stock at the beginning of the year rather than toward the

end of the first quarter. There was no error. It does not

appear that the year-average figure required “adjustment

for abnormal conditions.” Michigan Wis. Pipe Line Co. v.

Federal Power Comm'n, 263 F.2d 553, 556 (6th Cir. 1959).

Cf. United Gas Pub. Serv. Co. v. Texas, 303 U.S. 123, 145

(1938). On the contrary, the Department could find that to

use the Company’s average short-term debt in calculating

its test-year income taxes was an appropriate way to reflect

the Company’s usual short-term borrowing experience.

The Company had issued secured notes and preference

stock during the test year in order to refinance short-term

debt, but the Department reasoned that it was incorrect to

assume from this that the Company would enjoy a decrease

in the level of short-term debt over the period in which new

rates would be in force. The net effect of the Company’s

proposed adjustments would have been to assume a normal

short-term debt level of only $72,000,000. The Department

found, however, that “[t]hat figure is not a fair reflection

of either the past or the future.” Substantial evidence

supported the figure chosen by the Department, and we

cannot say that there was error of law.

6. Annualized depreciation on test-year additions to

plant in service. The Department declined to adjust the

test-year expense figures to allow the Company a full year’s

depreciation on additions —other than Mystie 7° — to

plant in service made during the test year. The amount of

the proposed adjustment was $735,000. The Department

has determined to calculate the rate base on a year-average

basis, and the Department could reasonably conclude that

to allow the Company to annualize depreciation on plant not

in existence at the beginning of the test vear would have

been inconsistent with that approach. See Fall River Gas

Co., D.P.U. No. 17708 at 9 (Mass. Dep’t of Pub. Utils., Oct.

11,1973). Cf. Utah Tel. Co., 81 P.U.R.3d 156, 160-161 (Utah

Pub. Serv. Comm’n 1969). See generally Kansas Power &

Light Co., 8 P.U.RAth 337, 362-363 (Kan. State Corp.

Comm’n in 1975).

7. Depreciation on easements. As of December 31, 1975,

Boston Edison had spent abont $3,990,000 in acquiring ease-

23 The Department allowed the Company to annualize its depreci-

ation expense associated with Mystie 7. This adjustment has been

discussed previously, supra at (Mass. Adv. Sh. [1978] at

), in connection with the Mystic 7 revenue adjustment.

ments in order to construct transmission and distribution

lines. In 18515, the Company claimed depreciation on these

easements, at the rate of 3%, as part of its cost of service.

The Department rejected this $120,000 adjustment, reason-

ing that easements are interests in land which — unlike the

power lines built on them — do not have a limited useful

lite. See Western Mass. Elec. Co., D.P.U. No. 18252 at 12

(Mass. Dep’t of Pub. Utils., Dec. 15, 1975). There was no

error. The Department added the full original cost of the

easements to the Company’s rate base; that is, it did not

subtract depreciation from the original cost as it would for

other items on which the Company is entitled to a return.

The result might well be different if the easements them-

selves were limited to a term of years, but that is not the

Company’s objection in this case.

8. Lobbymg and political expenses. The Department

disallowed about $43,000 in political contributions and lob-

bying expenses during the test year. The Company con-

tends that this disallowance was erroneous. Robinson, on

his part, claims error in the Department’s failure to elimi-

nate a great deal more of the Company’s cost-of-service

expenses, which he alleges were attributable to lobbying.

We consider each appeal separately.

a. Boston Edison’s appeal. Of the expenses disallowed,

$10,000 represented a contribution to a group called Citizens

for Economy in Government. That organization is no longer

in existence, and for this reason alone the Department re-

duced the Company’s cost-of-service figure by $10,000. Bos-

ton Edison maintains that this adjustment was arbitrary

and capricious; the Department concedes the point in its

brief. The Department’s decision was erroneous as to this

ruling.

Another $10,000 represented a contribution to the Massa-

chusetts Taxpayers Foundation, a registered lobbyist whose

principal activities, the record shows, are directed toward

proposing and influencing legislation and executive action.

Boston Edison concedes that the recipient of its contribu-

tion is a lobbying organization, but contends that the De-

partment erred in disallowing this expense because no evi-

dence was offered to show that the Company’s contribution

was in fact used for lobbying. This argument has no merit.

It is the Company’s burden to show that each item of ex-

pense is properly part of the cost of service, and lobbying

expenses are widely held to be excludable from a utility’s

operating expenses for ratemaking purposes. See, e.g.,

Pacific Tel. & Tel. Co. v. Public Utils. Comm’n, 62 Cal. 2d

634, 669-670 (1965); Illinois Bell Tel. Co. v. Illinois Com-

merce Comm’n, 55 Ill. 2d 461, 479-480 (1973); Central Me.

Power Co., 15 P.U.R.4th 455, 475-476 (Me. Pub. Utils.

Comm’n 1976).

The Company also objects to the disallowance of $22,658

in lobbying expenses in addition to the two contributions

discussed above. There was no error as to this adjustment.

The record in 18515 contains two reports detailing certain

of Boston Edison’s lobbying expenditures during the test

year. A disclosure statement originally filed with the Fed-

eral Power Commission reported that the Company had

inenrred $75,103 in lobbying expenses to be borne by the

stockholders. A second statement, filed with the Depart-

ment, reported only $52,444 for such activities. The dis-

crepancy is not explained in the record, and the Department

chose to believe the higher figure. The Company offers an

explanation for the first time on appeal; it is not persuasive,

and, in any event, it comes too late.

b. Robinson’s appeal. Robinson argues that three

further items of expense allowed by the Department should

have been disallowed as lobbying expenses.

During the test year, Boston Edison paid $109,261 to the

Massachusetts Electric and Gas Association (MEGA), an

organization that acts as a lobbyist, but also engages in a

number of other activities on behalf of the Company. Bos-

ton Edison reported that only $25,792 of this amount was

paid for lobbying assistance; the Department accepted this

allocation, after cross-examination, and allowed the rest to

be reflected in the new rates. There is substantial evidence

in the record to support the Department’s determination.

Robinson further challenges the Department’s refusal to

disallow the salaries of certain Boston Edison employees

who were paid by the Company to lobby on its behalf in

addition to performing other public relations functions for

the Company. Boston Edison had paid several “vice presi-

dents for corporate relations” a total of $183,741 in salaries

during the test year. The part of this expense which the

Company reported as an excludable lobbying expense was

$17,194. The Department accepted these figures despite

the Company’s inability to support the allocation on cross-

examination. We conclude that there was no substantial

evidence to support the allocation and that it was error of

law for the Department to allow these expenses, absent

proof that they are properly part of the cost of service.

Substantial evidence means “such evidence as a reason-

able mind might accept as adequate to support a conclu-

sion.” G.L. e. 380A, §1 (6). New England Tel. & Tel. Co. v.

Department of Pub. Utils, Mass. , (1977). The

Company’s method of allocating its employees’ time be-

tween lobbying and nonlobbying activities appears to have

been arbitrary. Boston Edison’s witness testified that

some of the time billed to the ratepayers was counted as

100% lobbying time, some as 15% lobbying, some as 12%

lobbying, and a considerable amount as 0% lobbying, in-

‘Mass. Adv. Sh. (1977) 1195, 1202.

cluding all time spent in the office. The witness was unable

to explain how one employee could have caused a total of

400 hours spent lobbying to be allocated at 0%. Moreover,

he admitted on cross-examination that he had no rule for

sorting out these options and no rationale that would sup-

port the use of this or any other percentage method of

allocation. The Department accepted the allocation never-

theless. It is true, of course, that these employees perform

services for the Company other than lobbying, and that the

expenses associated with these services may be includable

in the cost of service. The record does not suggest an

alternative allocation, however. The Company did not

prove that these expenses should be borne by its customers,

and for this reason the Department’s decision to allow

$166,547 in contested salaries as an element of the cost of

service was erroneous.”

The final item challenged by Robinson concerns time

spent by Boston Edison employees learning about the

November, 1976, public power referendum. The record

does not indicate the cost of this activity. Moreover, the

Department determined after careful consideration that

this expense could fairly be classified as educational rather

than political. There was no error.

9. Alleged miscalculation of the amount of property

taxes to be eliminated from the cost of service. In accor-

dance with its decision to exclude plant held for future use

from the rate base,”* the Department adjusted the Com-

pany’s test-year property tax expense by subtracting

$195,000 in property taxes associated with that plant. The

24 $183,741 (total salaries) minus $17,194 (amount previously

disallowed) equals $166,547.

25The rate base exclusion is discussed at

Adv. Sh. [1978] at ).

supra (Mass.

Company contends that only $35,000 should have been sub-

tracted. The Department’s decision is fully supported by

the record. The Company does not argue this point vigor-

ously, and we are persuaded by the Attorney General’s

demonstration that the rates already reflect the additional

$160,0000 sought here.

C. Ground Rules Established by the Department in 18515

for Boston Edison’s Next Rate Case.

In 18515, the Department ordered “that the Company

affirmatively demonstrate, in any future rate case, that it

has moved to improve the efficiency of its operations and

the productivity of all its employees, both management and

nonmanagement. Such a demonstration, at a minimum,

would include a showing that employees’ wages, salaries,

and numbers are not excessive and that the construction

program is the least that will provide necessary and ade-

quate service.” The Company maintains that it is beyond

the power of the Department to impose such a requirement

and that, in any event, this requirement is unfair on its

face. There was no error. Under G.L. ec. 164, the Depart-

ment possesses broad investigative and supervisory au-

thority over electric utilities and may properly inquire

into these aspects of their operations in furtherance of its

mandate to “keep itself informed as to... the manner in

which they are conducted with reference to the... con-

venience of the public.” G.L. ¢. 164, §76.% It has long

*° See also G. L. ¢. 164, § 76 (general supervisory and investiga-

tive powers); id. §76A (supervision of utility’s dealings with

affiliates) ; id. § 85 (power to examine company records) ; id. § 93

( power to investigate and adjust prices to order improvement in

service ) ; id. § 94 (authority to conduct investigation as to propriety

of rate increase request). See also Cambridge Elec. Tight Co. v.

Department of Pub. Utils., 363 Mass. 474, 494 & n.31 (1973).

been held that “the State, through the regulary constituted

authorities, has taken complete control of these corpora-

tions so far as is necessary to prevent the abuses of

monopoly.” Weld v. Gas & Elec. Light Comm’rs, 197 Mass.

556, 558 (1908). The efficiency of Boston Edison and the

magnitude of its construction program are matters of

legitimate public interest, and the Company will not be

heard to protest at this point that the requirement imposed

by the Department constitutes an undue constraint on man-

agerial prerogatives. See Consumers Power Co., 14

P.U.R.4th 1, 14-21 (Mich. Pub. Serv. Comm’n 1976). If the

Department administers its requirement unfairly, that is-

sue will, of course, be open to review at the appropriate

time.

D. Intervention in the Proceedings Below.

The Department permitted Robinson, a mathematician,

and one Torgeir Kvale (Kvale), an engineer, to intervene

in 18515. Boston Edison maintains that the interests of

these individuals were already represented by the Massa-

chusetts Consumers Council, which had intervened “for and

in behalf of the people of the commonwealth.” G.L. ¢. 6,

§ 115, inserted by St. 1963, c. 773, § 2. The Company argues,

therefore, that the Department erred in permitting Robinson

and Kvale to intervene and also in refusing to limit their

participation to filing a written statement of position. The

Administrative Procedure Act grants the Department broad

discretion with regard to interveners.”” However, that dis-

27 General Laws c. 30A, § 10, inserted by St. 1954, c. 681, § 1, in

effect during the departmental proceeding, provided that: “Unless

otherwise provided by any law, agencies may ... (4) allow any

person showing that he may be substantially and specifically

affected by the proceeding to intervene as a party in the whole or

any portion of the proceeding, and allow any other interested per-

cretion is not unlimited. See Newton v. Department of Pub.

Utis., 339 Mass. 535, 543 n.1 (1959).

Robinson and Kvale both had presented evidence of ex-

pertise in ratemaking issues. Both were “interested per-

sons” within the meaning of the statute, and the Depart-

ment clearly had discretion to allow these individuals to

intervene. The more serious question concerns the extent

to which Robinson was permitted to participate.**

The Department limited Kvale’s intervention to making

a statement, through an attorney, on one of the several

issues about which he had expressed concern. This limited

intervention clearly falls within the Department’s discretion

to allow interested persons “to participate by presentation

of argument orally or in writing, or for any other limited

purpose, as the agency may order.” G.L. e¢. 30A, $10, cel.

(4), as in effect prior to St. 1977, c. 965. Robinson’s par-

ticipation was an entirely different matter. Of the 4,700

or so pages of transcript in 18515, over 900 pages were

taken up by Robinson’s cross-examination of witnesses.

Another 250 were taken up with the presentation of and

cross-examination concerning his direct evidence. We em-

phasize that he was representing only himself; the Depart-

ment’s regulations prohibit non-lawyers from representing

the interests of others.

Because of the extent of Robinson’s participation, his

intervention presents a close question. We cannot agree

son to participate by presentation of argument orally or in writing

or for any other limited purpose, as the agency may order.” See

St. 1977, e. 965, which struck out § 10 and inserted new provisions

governing adjudicatory proceedings.

*® We do not reach the question whether an individual ratepayer

can be a person “substantially and specifically affected by the pro-

ceeding” within the meaning of G.L. ¢. 30A, § 10, cl. (4).

that the Department was obliged to limit him to the filing

of a written statement of position. In most circumstances,

Robinson’s role would be of doubtful validity. Given the

difficulty of the case before it, we cannot say that the De-

partment erred in seeking an intervener’s extensive help

in fully elucidating the issues. The Department operates

under a statutory deadline when conducting rate proceed-

ings, G.L. ¢. 25, § 18, inserted by St. 1975, c. 684, § 90, and

its decision that intervention will expedite the case is en-

titled to great weight. Our decision in Save the Bay, Inc.

v. Department of Pub. Utils., 366 Mass. 667 (1975), relied

on by the Company, is not to the contrary. We add that

similarly extensive participation by an intervener in any

future case should be permitted by the Department only if

careful consideration discloses special circumstances in jus-

tification.

E. Rate Structure in 18200/18200-A.

Once having determined what increase was necessary to

meet Boston Edison’s revenue deficiency in 18200/18200-A,

the Department considered various proposals offered by

the Company and the interveners for allocating the increase

among the Company’s customers. The Department ac-

cepted the basic principle underlying the Company’s pro-

posed rate structure and fashioned experimental rates allo-

eating the rate increase according to the relative contribu-

tion of customer classes to the growth in peak-load demand

for electricity.”2 However, the Department modified the

29 General Motors contends that the Department abused its dis-

cretion by declining to use as its sole criterion the cost of service to

each class. There is no merit to this argument. Trustees of Clark

Univ. v. Department of Pub. Utils., Mass. _

(1977) (Mass. Adv. Sh. [1977] 698, 704). See generally, Cudahy

& Malko, Electric Peak-Load Pricing: Madison Gas and Beyond,

1976 Wis. L. Rev. 47.

Company’s proposal by exempting the first 384 KWH of

monthly residential usage from the rate increase, on the

ground that this seginent of residential usage had not con-

tributed significantly to the growth in peak-load demand.

Boston Edison and General Motors challenge this exemp-

tion on appeal. They argue that the Department lacked

statutory authority to make any exemption at all and that

the exemption made is not supported by substantial evi-

dence. In addition, General Motors maintains that the ex-

emption violates its rights under art. 10 of the Declaration

of Rights of the Massachusetts Constitution. There was no

error.

Under the provisions of G.L. c. 164, § 94, most recently

amended by St. 1973, ¢. 816, §§ 2, 3, the Legislature has

given the Department regulatory authority over “all rates,

prices and charges” to be collected in the Commonwealth

for the sale of electricity. As we have previously noted,

this statute gives the Department “jurisdiction of the entire

rate structure” in electric rate cases. Boston Real Estate

Bd. v. Department of Pub. Utils., 334 Mass. 477, 485 (1956)

(emphasis in the original), The statute contains no excep-

tion, but the appellants now submit that the 384 KWH

exemption created in 18200/18200-A exceeded the Depart-

ment’s authority. There is no merit to this contention.

What Boston Edison and General Motors object to is “dif-

ferent treatment for different classes of customers, reason-

ably classified,” which we have long held to be within the

statutory powers of the Department. /d. at 495.

This is not a case of irrational discrimination. See Lef-

kowitz v. Public Serv. Comm’n, 40 N.Y.2d 1047, 1048 (1976).

Cf. New England Tel & Tel. Co. v. Department of Pub.

Utils., Mass. . os (1976)." The Department de-

" Mass. Adv. Sh. (1976) 2246, 2272-2273.

termined that Boston Edison’s need for rate relief stemmed

from its construction program; that new construction had

been necessitated by the growth in peak-load demand; and

that, since average residential usage had not contributed

significantly to the growth in peak-load demand, residential

users should not participate fully in the rate increase. The

Department could reasonably conclude, on the record before

it, that the challenged exemption would encourage energy

conservation in the public interest, both by residential users

below the 384 KWH level and by Boston Edison’s largest

industrial customers. For this reason, the Department’s

determination must be affirmed if supported by the record.

See Apartment House Council of Metropolitan Wash., Inc.

v. Public Serv. Comm’n of the Dist. of Columbia, 332 A.2d

53, 58 (D.C. Ct. App. 1975).

Evidence given by a Boston Edison witness clearly indi-

cates that the Company’s increased costs resulted ultimately

from the growth in peak-load demand. It also indicates

that the “general service class” of commercial and indus-

trial users was primarily responsible for that growth and

that residential customers who kept their consumption be-

low 384 KWH monthly contributed least to the need for new

plant construction. The 384 KWH figure represents the

average residential usage in recent years, and the record

shows that this figure has remained relatively steady while

commercial and industrial demands have increased. We

conclude that there is substantial evidence to support the

Department’s decision to exempt certain customers.

General Motors points out that the rate structure in

18200/18200-A increases Boston Edison’s margin of profit

on power sold to industrial customers in order to offset the

relatively low margin of profit on power sold to residential

ratepayers. It asserts that this price differential amounts

to confiscation of its property in violation of the Massachu-

setts Constitution. This position finds no support In =

eases, and there is considerable judicial precedent to the

contrary in other jurisdictions. See Norfolk & gage

Conley, 236 U.S. 605, 608-609 (1915) ; Minneapolis oe ,

v. Federal Power Comm’n, 278 F.2d 870, 871 (D.C. a

1960) ; Allied Chem. Corp. v. Georgia Power Co., . os

548, 553-554 (1976) ; Petrolane Gas Serv., Inc. v. Idaho ‘

Utils. Comm’n, 85 Idaho 593, 602 (1963) ; Carpenter v. ce

sylvania Pub. Util. Comm’n, 141 Pa. Super. 447, 450 ( : :

We decline to adopt General Motors’s argument as the law

of the Commonwealth.

V. CONCLUSION.

Boston Edison’s consolidated appeals raise one additional

issue, the Company’s claim that it is entitled to —

from the Commonwealth. The Company complains that t :

Department took an inordinate length of time to ap rye

rate increases in 18200/18200-A and 18515 and that the

Commonwealth, therefore, should compensate the Company

by the amount of its revenue deficiency in the interim. The

Company raises this issue by appeal, and the Attorney Gen-

eral has filed motions to dismiss so much of the appeals as

seeks damages from the Commonwealth. Those motions are

allowed. Boston Edison should address these arguments to

the Legislature. The Department met es dead-

lines in rate proceedings which it characterized as pernepe

the most complex ever to come before the Department.

The record does not support the Company’s assertion that

the delay was inordinate or intentional.

Judgment is to be entered in the county court affirming

the Department’s decision in 18200/18200-A. Judgment

similarly is to be entered in 18515 affirming the decision in

part and reversing as to those subsidiary determinations of

the Department found to be erroneous as matter of law,

supra. These determinations are: (1) the disallowance of

an expense adjustment for an estimated Boston property

tax increase; (2) the disallowance of an expense adjustment

for taxes associated with “AFUDC not normalized”; (3)

the disallowance of a contribution made to a citizens’ group;

and (4) the allowance of an allocated portion of salaries

paid to Boston Edison employees engaged, inter alia, in

political lobbying, where substantial evidence did not sup-

port the allocation. The interlocutory order granting

$6,619,000 in interim rate relief is affirmed. If relief could

be granted representing the net amount of the several ad-

justments allowed and disallowed, the Company would be

entitled to an amount greater than the $6,619,000 in interim

relief already granted. However, it is clear that such addi-

tional relief may not be granted, for the reason, as we have

Stated supra, that the more recent decision in 19300 super-

sedes that in 18515. Tht law is clear that Boston Edison

may not receive additional relief retroactively. See Arizona

Grocery Co. v. Atchison, Topeka & Santa Fe Ry., 284 U.S.

370, 386 (1932); New England Tel. & Tel. Co. v. Public

Utius. Comm’n, R.I. , 1976." The cases are re-

manded to the county court for the entry of judgment.

So ordered.

¥ 358 A.2d 1, 20 (1976).

Oe he alee ent eee

TABLE OF CONTENTS

Subject

Sa ee ee eee SL

I. History of the proceedings .......-----++-++>:

II. Nature and scope of judicial review

III. Claims of confiscation ....

IV. Review under G. L.c. 830A ........- 2-05 sere eee

A. Rate Base in 18515 ..........- eee e eee eee

1. Year-average calculation ........------:

Compensating balances .......--------:

The “serubber” .

Plant held for future use ............--

Cash working capital ............-+--:

B. Cost of service adjustments in 18515 ..........

The revenue adjustment...._.......- . - .

Estimated property tax increase........

Refueling costs . Re faa ek oe

“AFUDC not normalized”

Caleulation of interest deduction .

Annualized depreciation on additions to

Se Ne

Depreciation on easements .............

Lobbying and political expenses .......

Alleged miscalculation of property tax ad-

, eee

C. Ground rules established in 18515 ............

Te Dates Oe Te ck hier eda ccnckotunens

EK. Rate structure in 18200/18200-A .............

V. Conclusion .

Page

24 3 »

}5)

ROPES & GRAY

225 FRANKLIN STREET

BOSTON O2!1!10

May 1, 1978

HonorasB_e Epwarp F. Hennessey

Chief Justice

Supreme Judicial Court

Pemberton Square

Boston, Mass. 02108

Re: Boston Edison Company v. Department of Public

Utilities — No. SJC 832

Dear Mr. Chief Justice:

Boston Edison Company hereby petitions the Supreme

Judicial Court for rehearing of its decision dated April 19,

1978, in the above-entitled case. It does so because the

deviations from prior authority, the non-recognition of sub-

stantial arguments, and the apparent misunderstanding of

the state of the record or of certain undisputed facts con-

tained therein, all reflect misapprehension sufficient to war-

rant rehearing. The issues raised by the petition are as

follows:

I. The Allowed Return of Common Equity

In upholding the Department’s finding that a 13% return

on Boston Edison’s common equity was fair and reasonable,

the Court, at p. 15 of its Opinion, accepts the Department’s

conclusion that such a return will not produce a market

price for the Company’s stock which is at or above book

value. Nevertheless, the Court limits its previous yerg

in New England Tel. é Tel. v. Department of Pub. Uti S,

Mass. Adv. Sh. (1976) 2246, 2259 that “forced as

confiseation” to instances where new equity must be so

below book in order to sustain a utility’s “normal ine

tions.” Opin. 17 In substance, the Court holds that a uti i :

like Boston Edison which needs additional capital to func

a construction program “of limited duration and unprece-

dented size” does not enjoy the same protection from <

fiscation by dilution available to a utility which must go to

the capital markets “to allow the business to continue as

usual”. Opin. 17

For an electric utility, construction of new plant to meet

the needs of tomorrow is just as vital as maintenance of

existing plant to meet the needs of today. Both are dy pa

imperatives of equal obligation for a regulated utility. n

the case of a modern electric utility the construction of new

generating units may require massive expenditures pier

long lead times. Thus, projects of “limited duration 20

unprecedented size” in effect constitute business as usua

in this industry. Under such circumstances, the sharehold-

ers of an electric utility should be entitled to the same pro-

tection from enforced dilution which they would have if the

utility were raising funds “to allow the business to con-

tinue as usual”. This is particularly true where the project

of “limited duration” may extend for six or more vears' and

require the repeated marketing of new equity.

Since the Court may have misapprehended the implica-

tions of its decision upon all utilities, Boston Edison Te-

spectfully requests the Court to reconsider its holding

1 At the hearings in January, 1976, Mr. Galligan testified that

construction of Pilgrim IT was not then expected to be completed

until the fall of 1982 — some six years later. (Tr. 232)

which forces an electric utility to choose between repeatedly

issuing stock below book or abandoning the construction of

additional plant necessary to meet future service needs.

II. The Scope of Judicial Review

In its decision, the Court acknowledges that to the extent

that the Company asserts a claim of confiscation, it is en-

titled to an independent review as to both law and fact.

Opin. 7 However, in reviewing the various cost of service

and rate base adjustments, it fails to employ that standard.

Instead it confines itself to a review under G.L. ec. 30A,

§ 14(7).

In New England Tel. & Tel. v. Department of Pub. Utils.,

360 Mass. 443 at 449 (1971), the Court held that if the

Company has alleged confiscation, it is entitled to an inde-

pendent judicial review as to both law and facts. See also

Mystic Valley Gas Co. v. Department of Pub. Utils., 359

Mass. 420, 424 (1971); Boston Gas Co. v. Department of

Pub. Utils., Mass. Adv. Sh. (1975) 1865, 1869. And in New

England Tel. d Tel. v. Department of Pub. Utils., Mass.

Adv. Sh. (1976) 2246, 2249, the Court stated: “So far as

unconstitutional confiscation is claimed, the Company is

entitled to an independent judicial review as to both law

and fact...” (emphasis added).

In this case, the Court placed Boston Edison’s explicit

claim of confiscation outside the range of its traditional

scrutiny. It did so by holding that the Company had failed

“to establish the indicia of confiscation.” Opin. 18 How-

ever, such a threshhold requirement has never been invoked

in any of the aforementioned cases. Even more significant,

this threshhold requirement was well satisfied here. At

pages 14-19 of its original brief as well as in oral argument

to the Court, Boston Edison summarized in some detail the

extensive testimony offered at the hearings which demon-

strated that the rates set by the Department were confisca-

tory.’ In addition, the updated financial data presented to

the Court by affidavit showed that even if the rate increase

allowed by the Department were annualized, the Bee s

return on equity in 1976 would have been only 9.41% or

some $22,349,000 below the return purportedly allowed by

the Department. (A. 205) There could hardly be more com-

pelling “indicia” that confiscation had actually resulted

from the Department’s inadequate rate order.

From the language of the decision, it appears that the

Court may have misapprehended the distinction between

the allowed return on equity and the return actually earned.

For after finding the 13% return allowed by the Depart-

ment to be adequate, the Court immediately concludes that

the Company has therefore failed to establish the “indicia

of confiscation.” Opin. 18 However, it is submitted that no

such conclusion can properly be drawn. Even if the allowed

return were adequate, rates may still be confiscatory unless

they also provide the Company with a reasonable opportun-

ity to actually earn the return which was purportedly al-

lowed. In fact, that is a form of confiscation which Boston

Edison alleged and proved in this case.

Furthermore, the Court appears to have misapprehended

the Company’s position in stating that the only argument

involving the merits of the Company’s confiscation by ad-

justment claim is that “the Department arbitrarily in-

creased the Company’s test year revenues and decreased its

test year expense figures”. Opin. 18 While such adjust-

? For example, the spread between the allowed returns on equity

and the returns actually earned which are shown at p. 16 of the

Company’s brief (see also ftnte. p. 43) is every bit as dramatic

as the difference which existed in New England Tel & Tel. v.

Department of Pub. Utils., Mass. Adv. Sh. (1976) 2246, 2253.

ments were certainly alleged to be the partial cause of con-

fiscation®, the confiscatory results were instead established

through the testimony and affidavits which described in

detail the Company’s grave financial condition. It is the

latter testimony which supports the Company’s claim of con-

fiscation. However, the Court appears to have overlooked

this extensive and compelling testimony in determining the

standard of review which it would apply in considering the

cost of service and rate base adjustments.

In short, it is respectfully submitted that the standard of

review invoked by the Court in this case was inconsistent

with its prior precedent and improper in light of the evi-

dence of confiscation. Accordingly, a rehearing is war-

ranted.

Ill. Compensating Balances

In justifying the exclusion of compensating balances

from Boston Edison’s rate base, the Court relies upon a

grouna irst asserted in the Department’s brief to this

Court to the effect that the short term debt to which those

balances were related was never apportioned as between

operating costs and capital costs. Opin. 21 However, that

rationale was never offered by the Department in its deci-

sion. (See A. 105-108)* Accordingly, it should now come

too late. Compare, Opin. 34-35; 38.

Assuming, however, that the failure to apportion short

term debt as between capital and operating costs is indeed

*Improper rate base reductions as well as an inadequate rate

of return were also alleged to be factors causing confiscation.

‘In its brief to the Court, the Company adequately responded

to each of the arguments which the Department had actually ad-

vanced in its decision in an attempt to justify the exclusion of

compensating balances from rate base. See Co. Brief, pp. 100-111.

fatal to the inclusion of compensating balances in rate base,

then under the same rationale, current ratepayers should

not receive the benefit of the income tax deduction asso-

ciated with that same short term debt. However, the effect

of the Court’s treatment of this item it so give ratepayers

the benefit of this income tax deduction when calculating

income taxes for cost of service purposes — even though it

was never established whether that short term debt is used

for operating or capital purposes — while relieving them

of one of the burdens associated with these borrowings,

namely the obligation to meet the cost of maintaining com-

pensating balances. Despite the fact that this inconsistency

had been specifically pointed out in the briefs (see Co. Reply

Brief, pp. 53-55), it appears from the decision that the

Court may have overlooked it.

ven if the Court did intend both that short term debt

should be generally deductible in calculating income taxes

for cost of service purposes but that compensating balances

should be excluded from rate base, the Cgmpany also vigor-

ously argued before the Department’ and again before the

Court® that at the bare minimum, current ratepayers

should not receive the benefit of the income tax deduction

created by the interest expense on the compensating bal-

ances themselves. If ratepayers are neither providing the

capital which is used as compensating balances nor paying

a return on it, there is no reason why they should receive

the benefit of the interest deduction which results from the

interest charges associated solely with that capital. Since

the Court appears to have overlooked this point in its deci-

sion, Boston Edison respectfully submits that a rehearing

is necessary in order to avoid an inadvertent inequity.

> Ex. BE-300, pp. 14-15.

® Co. Brief, pp. 110-111; Co. Reply Brief, pp. 56-58.

IV. The Mystic Scrubber

The Court excluded the Mystie scrubber from the Com-

pany’s rate base with the summary statement that “Special

circumstances may necessitate an exception to the Depart-

ment’s policy [of excluding retired plant from rate base]

on occasion . .*., but no special circumstances appear in this

case.” Opin. 23 However, the relevant “special cireum-

stances” were discussed at length in the Company’s brief

(pp. 111-119), in its Reply Brief (pp. 58-61), and in the

letter sent by its counsel to the Court on April 13, 1977

(pp. 3-5) responsive to the Assistant Attorney General’s

post hearing letter. As a result,-Boston Edison requests

that that portion of the Court’s decision be reviewed in

light of the special circumstances which it submits did,

indeed, exist in this case, but which appear to have been

overlooked.

V. Plant Held for Future Use

One of the principal grounds upon which the Court ex-

cluded plant held for future use from the Company’s rate

base was that “the Company remains free to sell the land

at a profit, which goes to the stockholders, not to the rate-

payers. One such sale occurred during the test year.”

Opin. 24 However, although the Department had found in

its decision that if such plant “were sold at a profit, the

gain would go to the stockholders, not to the ratepayers”

(A. 113), there was absolutely no evidence in the record

which supported that statement.

Similarly, although the Department then argued in its

Brief to this Court that “the Company remains free to sell

the land at a price above cost, the profit going to stock-

holders and not ratepayers. It completed one such sale

during the test year, for $56,815.” (Dept. Brief, p. 161),

those statements were completely unsupported by the

record. This is readily apparent by examining the cita-

tions upon which the Department purported to rely in sup-

port of its argument. Since the Court appears to have mis-

apprehended the facts on this point, Boston Edison respect-

fully submits that it should reconsider its treatment of this

issue.

VI. Cash Working Capital

In approving the Department’s calculation of the cash

working capital allowance which is included in rate base,

the Court stated that those working capital needs were cal-

culated “according to the evidence”. Opin. 25 In fact, the

Department, in making its caleulations, arbitrarily con-

sidered only selected portions of te evidence bearing upon

the Company’s working capital needs.

In the proceedings before the Department, the Company

suggested that the Department use the so-called 45-day

working capital convention in calculating the Company’s

working capital needs. This method was challenged by the

Attorney General. As a result, the Company presented

extensive testimony (Tr. 4490-4521) and a meticulous study

(Ex. BE-405) describing in detail the Company’s working

capital needs. Nevertheless, the Department utilized

neither the 45-day convention nor the detailed study. In-

stead it arbitrarily considered only those items which

tended to reduce the calculation of the Company’s working

capital needs, while ignoring those which might increase it.

The Department’s decision was, therefore, contrary to the

evidence actually before it. Although the Court’s decision

upholds the Department, it appears from the language of

the opinion that the Court overlooked the more detailed

study which had been admitted into evidence. Accordingly,

a rehearing is warranted.

Moreover, even if the Department’s basic approach had

been correct, it failed to adjust that calculation in order to

reflect the effects of bi-monthly billing. The deficiency in

the Department’s methodology was specifically highlighted

in the Company’s Reply Brief (pp. 65-66), but this point,

too, appears to have been overlooked by the Court in reach-

ing its decision..

VII. The Mystic 7 Revenue Adjustment

At pages 6 and 7 of its decision, the Court accepted into

evidence both the Saunders and Kelmon affidavits which

presented updated 1976 financial results for Boston Edison.

It recognized that the admission of these affidavits was

consistent with its obligation “to bring the proof as nearly

as reasonably possible down to the date of final decision”.

Opinion of the Justices, 328 Mass. 679, 687 (1952) Never-

theless, after admitting those affidavits, the Court failed

to utilize the updated information which they provided in

ruling upon the Mystic 7 revenue adjustment.

Specifically, the Company had argued’ that even if the

Department’s revenue adjustment were appropriate (as

the Court subsequently found), the amount of that adjust-

ment should be substantially revised in light of the more

recent evidence, presented by affidavit, which dealt with the

growth of 1976 kwh sales over 1975 kwh sales. The Depart-

ment’s adjustment had been based on a projected growth in

1976 base revenues of $16,700,000 (A. 122-123). The

Saunders affidavit, which was based on eight months’ actual

1976 data and a four-month forecast, showed that the

growth in 1976 base revenues would actually approximate

only $7,900,000. (A. 219-220) Thus, even if the Depart-

ment’s methodology were adopted, merely by using the up-

7 See Co. Brief pp. 48-49 and Co. Reply Brief pp. 21-22.

dated financial information which the Court was bound by

law to consider, the Company was still entitled to an addt-

tional $5,582,000 in retail revenues. The Court’s opinion

overlooks this extremely critical point vigorously asserted

by the Company.

There are other cogent reasons for rehearing the issue

of the contested Mystic 7 adjustment:

First, the Court appears to believe that the inclusion of

Mystic 7 in rate base at its year-end value “redounded

greatly to the Company’s benefit.” Opin. 29 While under

other circumstances that might be true, in this case the

beneficial effects of including Mystic 7 at its year-end value

were largely negated by the base revenue adjustment.®

Second, the Court, in distinguishing this case from the

Southbridge Water Supply Co. ease, Mass. Adv. Sh. (1975)

9945, 2256-2258", states that because Mystic 7 was in opera-

tion for six months during the test year, this case somehow

presented a less compelling situation than did Southbridge

for including the new plant in rate base at its year end

value. See Opin. 29-30, ftnte. 13 In fact, the opposite

would seem to be true. For here, unlike Southbridge, six

months of actual operating experience was already reflected

in the cost of service figures. That means that the inclusion

8’ The calculation is shown at p. 49 of the Co. Brief.

® $70,000,000 (the additional value of Mystic 7 actually included

in rate base because of the “year end” treatment of this plant)

xX 9.49% X 2.0567668 — $13,663,101, the amount of the revenue

deficiency resulting from the inclusion of Mystic 7 in rate base

at its year end value. However, the Department’s revenue adjust-

ment then eliminated $11,200,000 of that deficiency.

10 The Company had argued at pp. 19-21 of its Reply Brief that

to be consistent with Southbridge, Mystic 7 should be included in

rate base at its year end value with no base revenue adjustment.

of the Mystic plant in rate base at its year end value would

actually be less likely to distort the predictive value of the

test year figures than was the case in Southbridge.

Third, at p. 32 of its decision, the Court finds “most

persuasive” the argument that the Company had accepted

a similar revenue adjustment in a prior case.’ However,

the facts in D.P.U. 18200 were completely different from

those in D.P.U. 18515. In that prior case, as the Company

has previously pointed out,” Mystic 7 was included in rate

base during a test year when the plant was never even in

service. Since the plant did not become operational until

some six months after the test year had concluded, some

adjustment to reflect the effect of the increased loads which

would exist during its first year of operation was appro-

priate. However, a totally different factual situation was

presented in D.P.U. 18515 because Mystic 7 was actually in

service during the test year. In fact, elimination of any base

revenue adjustment would have been more consistent with

the prior case, for there it had been determined that 1975

revenues, not 1976 revenues, were an appropriate match

for a rate base which included Mystic 7.

Fourth, in dealing with the Company’s argument that the

revenue adjustment should not be made without including

a full year’s expenses attributable to the Mystic plant, the

Court incorrectly states that the operational expenses for

Mystic 7 would merely replace operational expenses for

Mysties 1, 2 and 3 which had been retired in June, 1975 but

™ Since the rates set in D.P.U. 18200 proved to be inadequate

to permit the Company to earn the allowed return, it is, of course,

possible that the Company was wvong in that case and that the

error should have been correcte:{ in D.P.U. 18515. That possi-

bility appears to have been overlooked.

2 See Co. Brief pp. 44-47.

which were nevertheless included in the cost of service fig-

ures. Opin. 34 Although this argument was made by the

Assistant Attorney General in a letter to the Court dated

April 8, 1977, in the Company’s April 13, 1977, reply to that

letter, which the Court apparently overlooked, it demon-

strated that that argument was simply not accurate. (See

April 13, 1977 letter, pp. 5-6)

VII. The Pilgrim Refueling Outage |

The Court summarily rejects two arguments which the

Company is said to have raised “in passing” which would

have diminished the size of the Department’s reduction to

the Company’s proposed refueling outage adjustment.

First, with respect to the $800,000 adjustment related to the

G.E. warranty settlement, the Court finds that to include

this amount in the cost of service “would be to attribute to

the test vear cost of service a maintenance expense for

which Boston Edison had already received reimbursement”.

Opin. 38 However, that rationale is not borne out by the

facts. The G.E. warranty settlement related to pre-test year

maintenance expenses. Moreover, a much greater sum than

the amount of that settlement had already been flowed

through to ratepayers in previous cases in anticipation of

the settlement with General Electric. As the Company

pointed out at pp. 1-3 of its April 13, 1977 letter to the

Court where it responded to a similar erroneous assertion

made in the post-hearing letter sent by the Assistant Attor-

ney General, the $800,000 adjustment proposed by the Com-

pany was, in fact, required in order to avoid providing rate-

payers with a double credit for that settlement.

Furthermore, the Court’s position on this item appears

to be directly contrary to its treatment of the $160,000

property tax eredit on plant held for future use. See Opin.

52 There the Court refused to allow the Company the

benefit of a property tax credit received in the test year on

the grounds it related to a previous year’s expenses. Here,

however, it required the Company to give the ratepayers

the benefit of the warranty credit even though it, too, re-

lated to a previous year’s expense. These two results are

difficult to reconcile.

Second, with respect to the $200,000 adjustment relating

to the understatement of the cost of the refueling outage,

the Court rather inexplicably asserts that “This argument

comes too late.” Opin. 38 The adjustment in question was

supported by the evidence and argued by the Company in

the briefs submitted to the Department. However, the De-

partment apparently overlooked the point in its final deci-

sion. As a result, it was then raised again in both the

Company’s Brief (pp. 61-62) and its Reply Brief (pp. 28-30)

to this Court. Under such circumstances, it is submitted

that the argument has not been raised “too late”.

IX. The Short Term Interest Deduction

In affirming the Department’s calculation of short term

interest expenses for purposes of computing cost of service

income taxes, the Court gives no indication in its opinion

that it considered the Company’s argument that such an

approach produces a serious mismatching of the various

elements in the ratemaking process. (See Co. Reply Brief,

pp. 47-49) Furthermore, the Court never addressed the

argument that if the Department’s approach of using pro-

jected short term debt balances is adopted, then to be con-

sistent, it should also project AFUDC balances in normaliz-

ing the debt portion of AFUDC. (See Co. Brief, pp. 78-80;

Co. Reply Brief, pp. 49-61) A rehearing should be allowed

so that those issues, which apparently were overlooked, can

he fully considered.

X. Retroactive Rate Relief

In its decision, the Court found that the Department had

improperly eliminated depreciation on AFUDC not nor-

malized from the Company’s cost of service. That error had

reduced the Department’s calculation of the Company’s

revenue deficiency and hence its retail rates by some

$2,357,000. In addition, the Company was deprived of

$5,582,000 solely because of the failure to use updated finan-

cial data in connection with the Mystic 7 adjustment. The

improper treatment of the G.E. warranty settlement in the

amount of $800,000 and the failure to correct the Depart-

ment’s $200,000 clerical error in modifying the refueling

outage adjustment reduced the Company’s revenue defi-

ciency by another $1,000,000. Thus, the correction of these

errors alone, which are produced with no change in the

substantive treatment of any of the other issues raised on

appeal, would have entitled the Company to nearly

$9,000,000 in additional retail revenues on an annual basis.

That loss becomes approximately $15,000,000 if it is com-

puted on a twenty-month basis.”

In this case, the revenues improperly denied the Com-

pany appreciably exceed the revenues granted. In such

circumstances of extraordinary hardship, it is submitted

that basie concepts of fairness inherent in due process and

equal protection should move the Court to reconsider its

conclusion that rate relief “may not be awarded retro-

actively as a matter of law.” Opin. 4 Instead, consistent

with the approach in Potomac Electric Power Co. v. Public

Service Comm’n., 380 A.2d 126, 147-149 (D.C. Ct. App.

1977), which the Court cites with approval elsewhere in its

** The approximate interval between the Department’s original

decision of August 12, 1976 and the Court’s decision of April 19,

1978. ;

decision on other issues, the Court should fashion a remedy

by which revenues unjustifiably denied by the Department

will not be irretrievably lost.

Respectfully submitted,

Epwarp B. Haniry

Witiiam G. Meserve

Attorneys for the Petitioner

Boston Edison Company

EBH/WGM :cae

ec: All parties

SuprEME JupiciaL Court For THe CoMMONWEALTH

COURT HOUSE

BOSTON

FREDERICK J. QUINLAN

Clerk

WILLIAM M. CLORAN

Assistant Clerk

June 22, 1978

Wiuiam G. Meserve, Esa.

Ropes & Gray

225 Franklin Street

Boston, Massachusetts 02110

Dear Mr. Meserve:

Re: Boston Edison Company v. D.P.U. Supreme

Judicial Court No. SJC-832

Your application for a rehearing in re the above cap-

tioned case has been considered by the court and is denied.

Very truly yours,

Frep QuINLAN

Clerk

c.c.: Margot Botsford, A.A.G.

1 Ashburton Place, 20th floor, Boston 02108

Laurence M. Johnson, Esq.

Newman & Meserve

125 High St., Boston 02110

Stanley U. Robinson, III, Esq.

9 Wheelock Road, Wayland 01778

Torgeir K. Kvale, Esq.

218 Beethoven Ave., Waban 02168

Norman C. Ross, Asst. Corporation Counsel

Boston City Hall, Boston 02201

Andrew J. Newman, Esq.

Guterman, Horvitz, Rubin & Rudman

3 Center Plaza, Boston 02108

COMMONWEALTH OF MASSACHUSETTS

SUPREME JUDICIAL COURT

FOR THE COMMONWEALTH

Suffolk County April Sitting, 1977

No. 832

BOSTON EDISON COMPANY,

Petitioner

DEPARTMENT OF PUBLIC UTILITIES,

Respondent

NOTICE OF APPEAL TO THE SUPREME COURT

OF THE UNITED STATES

Notice is hereby given that Boston Edison Company, the

petitioner above named, appeals to the Supreme Court of

the United States from the decision and order of the Su-

preme Judicial Court for the Commonwealth of Massachu-

setts entered in this proceeding on April 19, 1978, which

affirmed the September 30, 1975 decision and order of the

Department of Public Utilities in the proceeding docketed

by the Department as D.P.U. 18200/18200-A and which af-

firmed in part and reversed in part the August 12, 1976

decision and order of the Department of Public Utilities in

the proceeding docketed by the Department as D.P.U. 18515.

This appeal is taken pursuant to 28 U.S.C. § 1297(2).

Epwarp B. Haniry

WiuiaM G. MEsERVE

Ropes & Gray

225 Franklin Street

Boston, Massachusetts 02110

Victor H. KazanJian

Joun J. Desmonn, IIT

Boston Edison Company

800 Boylston Street

Boston, Massachusetts 02199

Attorneys for the Petitioner

Boston Edison Company

Dated: July 17,1978

CERTIFICATE OF SERVICE

S.J.C. No. 832 July 17, 1978

I, William G. Meserve, a member of the Bar of this Court

and an attorney for the Petitioner, Boston Edison Com-

pany, hereby certify that I have served a copy of the fore-

going Notice of Appeal to the Supreme Court of the United

States upon the other parties to these consolidated appeals

by causing a copy of the same to be mailed, postage prepaid,

to the following persons:

Margot Botsford, Esq.

Assistant Attorney General

One Ashburton Place (20th Floor)

Boston, Mass. 02109 :

Laurence M. Johnson, Esq.

Newman & Meserve

125 High Street

Boston, Mass. 02110

Stanley U. Robinson, IIT

Nine Wheelock Road

Wayland, Mass. 01778

Torgeir K. Kvale

218 Beethoven Avenue

Waban, Mass. 02168

i ai a

Norman C, Ross, Esq.

Assistant Corporation Counsel

Boston City Hall

Boston, Mass. 02201

Andrew J. Newman, Esq.

Guterman, Horvitz, Rubin & Rudman

Three Center Plaza

Boston, Mass. 02108

Wituiam G. Meserve

Ropes & Gray

225 Franklin Street

Boston, Massachusetts 02110

COMMONWEALTH OF MASSACHUSETTS

Suffolk, ss.

Subscribed and sworn to before me this 17th day of

July, 1978.

Exisa M. Lopez, Notary Public

My Commission expires Nov. 22, 1979

The Commonwealth of Massachusetts

DEPARTMENT OF PUBLIC UTILITIES

August 12, 1976

D.P.U. 18515

INVESTIGATION BY THE DEPARTMENT ON

ITS OWN MOTION AS TO THE PROPRIETY OF THE

RATES AND CHARGES STATED IN M.D.P.U. NOS.

311 THROUGH 327, INCLUSIVE, FILED BY BOSTON

EDISON COMPANY ON OCTOBER 17, 1975, TO BE-

COME EFFECTIVE NOVEMBER 1, 1975.

TABLE OF CONTENTS

BIPPTRATIAIIU .. . « . « «ow 5 ce i nw ewe e were ses sceeses

oe.) kd )) neers eer

RATE BASE ioe Me eee tre cas ke a iiaae wn

A. Average vs. Year-End Rate Base .........-----

B. Compensating Balances..........-..----ss55>-

C. Mystic Unite 1, 2,3 ...... 1.2... cece ecco eeees

D. The Scrubber De PA yw eacaek cs swe

E. Plant Held for Future Use...........-.---+++:

F. Pilgrim 1 Facilities Transferred to Pilgrim 2....

G. Alloeation of L Street Plant

H. Materials and Supplies .................+.++-+

er BOM C0, Uo gid wae sare Asian 844 64.0 ts

J. Pilgrim Station Stabilizing Line

K. Working Capital

ee era ee

Rate Base Summary .

REVENUES

A. Adjustment for Mystic 7 ...............-0205-

B. Interest on Overdue Accounts ..............++.

C. NEPCO Contract Revenues ...................

D. Wholesale-Retail Allocation ..................-.

E. Contract Fuel Clause Revenues ................

EXPENSES

Ry eRe eee ee ee

. - Bmp Wem Tee... onc conc es etc cenavenenes

(. Amortization of the Price-Waterhouse Report .

D. Amortization of Leasehold Improvements ......

ee PE eee Tee eee ee ee

F. Nuclear Refueling and Maintenance Expense ...

G. The 1976-77 Wage and Salary Adjustments .....

H. Adjustment for Changes in Number of Employees

5. Bitimsatod Property TOO... . 2. conc cscnceces,

101

102

103

104

105

106

107

108

ORDER

TABLE OF CONTENTS — Continued

Annualization of 1975 Property Taxes. ....__...

Contested Property Taxes ....................

Property Taxes on CWIP __.

Depreciation on Easements ...................

Depreciation Adjustments on Plant Added in 1975

Depreciation Rates ...

Operation and Maintenance

Customer Deposits .

Contributions |

Ineome Taxes

1. Interest Expense-Short Term Debt

2. AFUDC Not Normalized

CAPITAL STRUCTURE

A. Common Equity Balance

D. Capital Stock Expense

RATE OF RETURN

Interest Rate on Chicago Note ....

Investment in Nuclear Subsidiaries

oS 2 Se O's € 6.6 8 CS EOE 6 OS Se SS OS OS

SP ee ee ee ee xh os ee Oe i oe ee oe a ee a Ok ee ay

108

109

110

112

113

114

117

118

121

122

123

124

125

126

141

142

The Commonwealth of Massachusetts

DEPARTMENT OF PUBLIC UTILITIES

August 12, 1976

D.P.U. 18515

Investigation by the Department on its own motion as to

the propriety of the rates and charges stated in M.D.P.U.

Nos. 311 through 327, inclusive, filed by Boston Edison

Company on October 17, 1975, to become effective Novem-

ber 1, 1975.

APPEARANCES: Ropes and Gray (by: Edward B. Hanify, Esq.

and William G. Meserve, Esq., of counsel),

225 Franklin Street, Boston, Massachusetts

02110

and

Victor H. Kazanjian, Esq., General Counsel,

and John J. Desmond, III, Associate General

Counsel, 800 Boylston Street, Boston, Massa-

chusetts. For Boston Edison Company.

Francis X. Bellotti, Attorney General (by:

Michael Meyer, Esq., Kenneth Barna, Esq.

and Lisa Fitzgerald, Wsq., Assistant Attor-

neys General and Nicholas J. Seobbo, Chief

Financial Analyst), One Ashburton Place,

Boston, Massachusetts. For the Office of the

Attorney General and the Massachusetts Con-

sumers’ Council.

APPEARANCES: Guterman, Horvitz, Rubin & Rudman (by:

(Continued) Andrew J. Newman, Esq., of Counsel), Three

Center Plaza, Boston, Massachusetts. For

Boston Insurance Exchange Building, Inc.,

Stastreet Trust, and Associated Industries of

Massachusetts.

Barry A. Margolin, Esq., 364 Boylston Street,

Boston, Massachusetts. For Massachusetts

Fair Share.

John J. Cassidy, Esq., General Services Ad-

ministration, 18th F Street, Washington, D.C.

20405. For the Federal Executive Agencies.

Mr. Stanley U. Robinson, III, Nine Wheelock

Road, Wayland, Massachusetts. Pro se.

Mr. Torgier Kvale, 281 Beethoven Avenue,

Waban, Massachusetts. Pro se.

INTRODUCTION

By Order dated September 30, 1975 (D.P.U. 18200/

18200A, as amended), the Department approved a rate in-

crease in the amount of $29.5 million for Boston Edison

Company (“Company”). Less than three weeks later the

Company filed the present application for a further in-

crease of $48.8 million, since raised to $49.5 million.

The increase was to go into effect November 1, 1975, but

was suspended until July 1, 1976 and later to September 1,

1976.

On May 19, 1976, after 34 days of hearings, the Depart-

ment determined that, due to the number and complexity

of issues relating to rate relief, there was substantial dan-

ger that the important question of rate design would

not receive adequate attention within the statutory suspen-

sion period. The Department had hoped that both the rate

relief and rate design aspects of this case could be com-

pleted in sufficient time so that a single order could be is-

sued prior to the suspension date. However, it does not ap-

pear that the hearing and briefing schedule for the rate de-

sign phase of the case will permit the issuance of a single

order. Accordingly, this Order is limited to the question of

the extent to which the Company is entitled to a rate in-

crease. As to this question, it is intended that this Order

shall be the Department’s final decision.

The Company’s basic contention is that because of regu-

latory lag and continuing inflation, it has suffered financial

decline to a point where its ability to serve its customers

adequately is seriously endangered. The Company appears

once again to embrace its historic position that the only

remedy for its financial difficulties is rate relief.

The Intervenors” principal argument is that the Com-

pany’s financial health will improve as a result of increased

revenues from a new plant which the Company has recently

constructed. This contention is considered as part of the

general discussion of revenues below.

It is our view that rate relief should be a last resort, and

that it should be granted only after there has been a proper

showing that every reasonable effort has been made to hold

expenses down and to ease the burden imposed by the con-

struction program. Although the Company contends that it

has made efforts to economize, the record does not indicate

that the Company has acted as vigorously as it might have

to reduce or eliminate expenses incurred for non-essential

services; nor does it show any substantial and sustained

“Tntervenors” as used herein, shall refer to the Attorney Gen-

eral and the Massachusetts Consumers’ Council unless otherwise

indicated.

attempt to relieve the financial strain attributable to con-

struction.

We have elsewhere expressed concern as to whether rate

increases are justified absent a showing of efficient opera-

tions. Fall River Gas Co., D.P.U. 18416 (1976). We there-

fore require that the Company affirmatively demonstrate,

in any future rate case, that it has moved to improve the

efficiency of its operations and the productivity of all its

employees, both management and non-management. Such

a demonstration, at a minimum, would include a showing

that employees’ wages, salaries and numbers are not exces-

sive and that the construction program is the least that will

provide necessary and adequate service.

In the Fall River case we made a similar requirement,

with the evidence to relate to the period between the date

of the Order and the next rate filing. Had such a require-

ment been applicable to the present case it would have been

virtually meaningless, as the present application came less

than three weeks after the last rate Order. We therefore

direct that the period shall be that from the end of the test

period used in this case (December 31, 1975) to the date of

the next application.

We now proceed to a consideration of the issues relating

to rate base, revenues and expenses, and rate of return.

RATE BASE

A. Average vs Year-End Rate Base

The test period applicable here is the year 1975. The

Company urges the use of a year-czd rate base to offset

the alleged adverse effects of regulatory lag. The Inter-

venors vigorously oppose this, urging the use of an aver-

age rate base.

In our view, an average rate base is the appropriate

measure. Ordinarily its use is a reasonably reliable basis

for determining the amount of plant and other investment

needed during the test year to produce the revenues for

that year. However, exceptions are made when an unusu-

ally large unit has come into service during the year.

That is the case here. On June 14, 1975, the new 600

megawatt plant called Mystie Unit No. 7 (“Mystic 7”) went

into commercial operation. This investment constituted

about one-seventh of the year-end rate base, a far greater

than normal addition. In Boston Edison Co., D.P.U. 18200

(1975), the test period was 1974, so that the plant came on

line almost six months after the close of the test period.

The Department nevertheless recognized that the situation

was one calling for special consideration. We normalized

the test year by assuming that Mystic 7 was in operation

throughout the period, by making certain additions to test

year revenues, adjustments to the cost of service, and other

adjustments to the test vear rate base.

The treatment given Mystic 7 in the present decision is

consistent with, though not the saine as, that in D.P.U.

18200. Independently of that consideration, the treatment

here is one which produces a just and reasonable result.

We conclude that, as in D.P.U. 18200, Mystie 7 should be

assumed to have been in the rate base throughout the test

year. It should be included in the rate base at the net

amount attributable to it, after depreciation, as of the end

of the year. This, with appropriate adjustments to reve-

nues (discussed hereinafter), will provide a proper return

on this investment and will at the same time give a fair

approximation of the revenues to be expected from it.

Thus, a reasonable matching of rate base, revenues and ex-

penses as to this item will have been achieved with such

precision as the nature of the problem permits.

The unusual circumstances of Mystic 7 aside, however,

we are not persuaded by anything in this record or by the

Company’s argument that we ought to abandon our well-

established practice of employing an average rate base. As

we said recently in Western Massachusetts Electric Co.,

D.P.U. 18252 (1975):

**The rate making process seeks to reproduce in the fu-

ture the actual results of the test year, properly ad-

justed. It follows that the process should be concerned

with arriving at a fair return on the average rate base

which will obtain in the future, rather than a beginning

or end of period rate base.

Criticism of the use of average rate base may be an-

swered by appropriate adjustments to the test year and

by use of the most current date available. p. 3.

Accordingly, for investment other than Mystic 7, we will

use as the Company’s proper rate base, the average of the

beginning of year and end of year account balances.

B. Compensating Balances

In its ecaleulation of rate base the’ Company included

$22.6 million of balances which it alleges it is required to

maintain with various lending institutions in order to as-

sure lines of credit for short-term borrowing. It repre-

sented that that amount was actually on deposit and at-

tributable to the Company’s electric operations.

The argument runs that if the Company borrows, say,

$1,000 at 8% with no compensating balance requirement, it

would be able to use that amount in its construction pro-

gram at a cost of $80 per annum. If, on the other hand,

it were required to maintain a $100 compensating balance,

it would pay the same $80 for only $900 of usable funds.

Up to that point the argument is correct, if such are the

facts. There are several difficulties, however. One is that

in no case has the Company come forward with a loan

agreement showing a compensating balance requirement.’

It is common knowledge in the industry that the rigidity

with which the requirement is enforced varies to a consid-

erable degree with money market conditions, the banks

being less disposed towards strictness when funds are

plentiful.

Second, there is no showing as to any portion of the

$22.6 million that it would not have been maintained but

for the requirement. There is in the rate base a cash work-

ing capital allowance which the Company calculates at

$30.5 million. It is probable in the highest degree that at

least some substantial portion of the amount claimed as

vompensating balances would be maintained in the lending

banks in any event. Absent any showing of lack of dupli-

cation, some overlap must be assumed as a matter of com-

mon sense.

Third, the establishment of compensating balances ap-

pears to be a device for the convenience of the banks. Such

balances are not used and useful in the public interest. The

publie would certainly be no better off than if the Company

were to pay the same effective rate of interest on the por-

tion of the loan truly available for its use, with no com-

pensating balances. Not only do compensating balances

disguise the extraction from the borrower of a higher ef-

fective rate of interest than appears on the face of the

loan, but they also result in a more impressive balance

sheet for the bank than would otherwise be the case, since

the ratio of loans to deposits 1s made to appear more

favorable.

? The annual reports of the Company to stockholders and to the

Federal Power Commission state that there are no legal restrictions

on the withdrawal by the Company of compensating balances.

Fourth, the rejection of these balances as part of the

rate base represents established precedent which the pres-

ent record does little, if anything, to contradict.

The Company proposes an alternative to the inclusion of

compensating balances in rate base. It suggests that a sep-

arate return could be calculated for the balances on the

basis of actual cost instead of the overall rate of return.

Such an approach, the Company says, would eliminate the

possibility that it could earn a greater rate of return on

compensating balances than the interest rate it was re-

quired to pay on its short-term debt (a possibility we noted

in diseussing this issue in D.P.U. 18200).

The proposal must be rejected for the reasons discussed

above. Simply stated, compensating balances do not repre-

sent an investment upon which the ratepayers should be

required to pay a return — even a reduced return.

The Company’s final argument in this area is that the

interest expense figure used in the income tax calculation

should be reduced by the amount of compensating balances

times the prime interest rate used to calculate short-term

interest expense and the cost of the First National Bank of

Chicago Note. The Company contends that such adjust-

ment would prevent the ratepayers from getting a tax

benefit in the form of an interest deduction on compensat-

ing balances.

While compensating balances may increase the effective

rate of interest on borrowed funds, as discussed above,

they do not increase the interest expense which is deduct-

ible for income tax purposes under Section 163 of the In-

ternal Revenue Code. Thus, the ratepayers are not getting

an income tax benefit from compensating balances.

For all these reasons, the Company’s positions with re-

spect to compensating balances are rejected.

C. Mystic Units 1, 2 and 3

On June 1, 1975, the Company retired three generating

units known as Mystie 1, 2 and 3. The Company argues

that the investment should be included in plant in service

for rate base purposes because the units are used and use-

ful up to the time of their retirement. If they are excluded,

says the Company, then all new plant + uich went on line

in 1975 and which will be in service at the time any new

rates go into effect should be included at its full value, not

merely at its average value for the year.

The Company has included in its rate base a net amount

of $1.7 million for the three plants. This number comes

from subtracting $10.2 million of accumulated depreciation

from the $11.9 million of December 31, 1974 balance of

plant cost.

The $1.7 million represents retired plant. The Depart-

ment has consistently held that the public should not be

required to pay a return on property that is no longer used

and useful. Fitchburg Gas & Electric Co., D.P.U. 18031-A

(1975). Reasons peculiar to this case reinforce that policy.

It is, of course, the result reached and not the method

employed which is controlling. “It is not the theory but the

impact of the rate order which counts. If the total effect of

the rate order cannot be said to be unjust and unreason-

able, judicial inquiry is at an end.” Federal Power Com-

mission v. Natural Gas Pipeline Co. of America, 315 U.S.

575, 586 (1942). Similarly, the Supreme Judicial Court said

in Boston Gas Co. v. Department of Public Utilities, 324

N.E.2d 372, 376 (1975), that “our fundamental law requires

no particular theory or method to be used in determining

rate base...”

Here the Department is giving a full vear’s effect in the

rate base to Mystic 7 even though it did not go into opera-

tion until about the time Mystic 1, 2 and 3 were taken off

line. The addition of Mystic 7 was a known change requir-

ing special treatment. In normalizing the test year by

hypothesizing the inclusion of Mystic 7, it is equally appro-

priate to exclude Mystic 1, 2 and 3. This exclusion is cor-

rect as a matter of consistency with the overall treatment

of plant account in the rate base.

D. The Scrubber

The Company has included in its rate base $4.1 million

for the unamortized portion of a pollution control device

known as a scrubber, which was used to reduce the sulphur

content of flue gas in an oil-fueled generating station. It

was part of a project at the Mystic Station conducted in

conjunction with the Environmental Protection Agency.

The record indicates that its potential for savings was

substantial.

In 1974, however, it was removed from service when

facilities to process the sulphur crystals recovered as part

of the scrubbing process became unavailable. The evidence

that it failed for economic reasons is not challenged.

The reason the Company has set up the unamortized por-

tion in the rate base is so that it may write off over a period

of time. It proposes a five-year period. The account in

which the serubber now appears is called “Unamortized

Research and Development Costs”. It is the same item dis-

eussed in D.P.U. 18200, at which time it was classified as

“Property Held for Future Use”. In that (:cision we ex-

eluded it from rate base.

The treatment proposed by the Company would give it

the same return on the unamortized balance as if the serub-

ber were still used and useful and, in addition, would allow

it to charge off amortization of 20% a year. Thus the rate-

payer would, for the next five years, be paying more than

if the $4.1 million scrubber were in full operation and being

written off at the same 3% rate as that of fixed assets.

The Company is not entitled to earn a return on this

item, which has been completely retired and was not used

or useful at any time during the test year. At the same

time, the stockholders alone should not be required to ab-

sorb the loss. The investment was a management decision

which cannot reasonably be called an imprudent expendi-

ture. It was simply a project that did not mature as

expected.

It is ordered that the item be deducted from the rate

base, but that it be amortized at the same rate as the over-

all rate of return granted herein (or as may be granted in

subsequent rate cases) until it is fully written off. In that

way the ratepayers will properly bear their share of the

investment, but will be paying no return on it and will be

paying for it over a limited period. The amortization will

be at no greater rate than the return that a depreciating

asset would have earned, and here no depreciation will be

charged to cost of service.

The stockholders are also bearing a part of the burden

of the investment. They are being required to forego a

return. See, Worcester Gas Light Co., D.P.U. 16316 (1970),

cited in Fitchburg Gas and Electric Light Co., D.P.U.

18031-A (1975). They should recover their investment as

promptly as is reasonable, but should not profit from the

failure of the project. The disposition ordered here achieves

that result without causing the ratepayers to bear charges

any higher than a fair rate of return would require. In-

stead of return, the charges will go to reduce the remaining

part of the investment, with eventual reduction of the cost

of service when the item is fully amortized.

E. Plant Held for Future Use

Included in the Company’s proposed rate base is $1.9

million of Plant Held for Future Use, of which $1.7 million

is land. The Company argues that it should all be included

in rate base, because it is necessary that sites for future

use be acquired well in advance, and because in the long

run a prudent acquisition program of this sort may reduce

the costs to be borne eventually by the ratepayers.

Implicit in the Company’s argument is the suggestion

that should Plant Held for Future Use not be included in

rate base, the Company would have no incentive to acquire

such plant and thus save money on an expenditure which

might otherwise have to be made under unfavorable cir-

cumstances. This suggestion, however, has not been borne

out by experience as far as we can determine.

Quite apart from the question of whether the inclusion of

Plant Held for Future Use in rate base acts as an incentive

or a deterrent to sound investment policies, we are not dis-

posed to require the Company’s customers to give a return

on plant which is not currently used and useful in provid-

ing service to them. Such is the case with Plant Held for

Future Use. Moreover, we have no assurance that such

plant will ever be used for the henefit of the Company’s

customers. If part of it were sold at a profit, the gain

would go to the stockholders, not to the ratepayers. That

has happened in the past and it will doubtlessly happen

again in the future. See, New England Telephone and

Telegraph Company, D.P.U. 18210 (1975).

We conclude that this item is not a proper part of rate

base.

F. Pilgrim | Facilities Transferred to Pilgrim 2

In 1974, a part of the Company’s investment in Pilgrim 1

was retired on the Company’s books, because that part was

sold to other utilities as part of their participation in Pil-

grim 2. The remainder, amounting to $8.1 million, has been

included in the Company’s caleulation of rate base.

The Intervenors oppose this inclusion, saying that it is

part of the, as vet, unfinished Pilgrim 2 and should be ex-

cluded as Construction Work In Progress (“CWIP”). The

record shows, however, that the plant in question, consist-

ing principally of a breakwater and other shore protection

with associated dredging, was used and useful during the

test year in the service of the Company’s customers. Cur-

rently, it is being used by Pilgrim 1 and can be used by both

Pilgrim units.

The record indicates that the facilities were necessary for

Pilgrim 1. That they may also become useful or necessary

for Pilgrim 2 should not deprive them of their proper status

as part of the rate base. This is consistent with the result

reached in D.P.U. 18200. The Intervenors, in another con-

nection, urge that the Department follow the dictates of the

Supreme Judicial Court in Boston Gas Co. v. Department

of Public Utihties, swpra, at p. 379 in which it said.

A party to a proceeding before a reguiatory agency such

as the Department has a right to expect and obtain rea-

soned consistency in the agency’s decisions. This does

not mean that every decision of the Department in a par-

ticular proceeding becomes irreversible in the manner of

judicial decisions constituting res judicata, but neither

does it mean that the same issue arising as to the same

party is subject to decision according to the whim or

eaprice of the Department every time it is presented.

(FMmphasis added.)

There is no reason to depart from the result previously

reached.

G. Allocation of L Street Plant

A plant known as the L Street Plant is devoted primarily

to the generation of steam. Because the pressure from the

boilers is too high for the steam distribution system, the

Company has chosen to use a steam turbine as a pressure-

reducing valve. As part of this process a generator is oper-

ated which produces electricity. The Company has allocated

such facilities as the steam turbine and the electric genera-

tors to electric operations. The allocation amounts to $2

million.

The Intervenors object on the ground that the Company

has not met the burden of showing that as much as 22% of

the L Street Plant is used for electric operations.

However, when the Company’s witness explained the

method by which the allocation had been made, the Inter-

venors did not challenge him by cross-examination or other-

wise on the point. In light of this circumstance, we find it

somewhat odd that the Intervenors would now complain that

the Company has failed to meet its burden of proof that as

much as 22% of the L Street Plant is used for electric

operations.* Perhaps more to the point, however, is the

fact that at page 351 of the Company’s Annual Report for

1975 to the Federal Power Commission (“FPC”) the 22%

allocation figure appears with the note that it was approved

by the FPC. All things considered, therefore, we find the

proof more persuasive than the challenge. The Company’s

allocation figure is accepted.

’'We might observe here that the 22% allocation is consistent

with the Company’s description of the L Street Plant as one which

is principally used for the generation of steam for the Company’s

steam-heating customers.

H. Materials and Supplies

The Company included $19.2 million for materials and

supplies in its rate base calculations. The Intervenors point

out in their initial brief that the Company’s witness testified

to a figure of $16.7 million and that a like figure appears in

the Form 1 Report to the FPC. They therefore urge its

use here.

In its reply brief, the Company states that the $16.7 mil-

lion is the correct year-end figure for materials and supplies

before allocating part of it to steam-heating operations.

After that allocation, the correct year-end number is $15.6

million.

However, the year-end number is not the one to use. The

item is being calculated on an average basis. The 1974 year-

end balance for materials and supplies was $22.8 million.

The 1975 year-end balance was $15.6 million. The average

of the two is the $19.2 million proposed by the Company.

That figure is accepted.

I. Sale of Land

The Company includes in rate base $57,000 for real estate

sold during 1975. The Intervenors would rule it out. The

item is quite small and warrants no extensive discussion.

As the land has been sold, the Company is not entitled to

earn a return on it. It is excluded.

J. Pilgrim Station Stabilizing Line

The Company’s average rate base includes $2.9 million

for a line the purpose of which is to provide emergency

service in the event of the unavailability of either of two

generating plants. It is also a back-up line for the trans-

mission system if certain other tr

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