Chapter 16: Public Utilities

Annual Survey of Massachusetts Law

Volume 1964

Article 19

1-1-1964

Chapter 16: Public Utilities

Herbert Baer

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CHAPTER 16

Public Utilities

HERBERT BAER

A.

§16.1. Water companies: Rates. The decision of the Department of Public Utilities in Wannacomet Water CO.l was appealed by both

the town of Nantucket, which the company serves, and by the com-pany.2 The town appealed the determination of the Department which allowed as part of the rate base the full cost of installing meters in concrete vaults under the public way, contending that the expen-diture was unnecessarily large and that the meters could have been in-stalled less expensively in the houses served. The company had pre-sented evidence that much of its patronage was seasonal in nature, and that meters installed inside houses would have to be removed each year if the house were closed during winter, in order to protect against freezing. Since a meter must be installed between the main and the customer's first water outlet, in houses without basements, of which there are many on the island, outside installation of meters is necessary. The Supreme Judicial Court implied that the Department could have disallowed a portion of this expenditure if it had been found to be unreasonable, but held it could not disturb a departmental decision which approved a business judgment made after careful consideration of the conflicting interests affected by the decision.

The company appealed from the Department's decision to reduce the rate base by $76,000, because of an insufficiency in its reserve for depreciation. Considerable scholarly thought has been given to the question of whether a deficiency in reserve for depreciation, arising out of the company's failure to make adequate provisions for depre-ciation in the past, should be eliminated by an immediate adjustment of earned surplus or by gradually amortizing the deficiency through increased future depreciation. On the one hand, there is an element of unfairness in allowing a company to charge a deficiency accumu-lated in the past against present and future customers, when the bene-fit of this deficiency may have accrued to past customers if rates were lower than they would have been had adequate depreciation charges

HERBERT BAER is Counsel of the Department of Public Utilities and a member of the firm of Maloney, Williams, Baer and Doukas, Boston.

§16.1. 1 D.P.U. 13525 aune, 1962), noted in 1962 Ann. Surv. Mass. Law §15.6.

2 Wannacomet Water Co. v. Department of Public Utilities, !l46 Mass. 453, 194

§16.1 PUBLIC UTILITIES 199

been made to operating expenses. On the other hand, if a company has passed on the reduced depreciation expenses in the past to its customers through reduced rates, there is an element of unfairness in precluding it from now recovering the additional depreciation by in-cluding operating expenses in the rates for present or future years. Another consideration that has been suggested is whether the deficiency arose without fault of the utility company or exists only when judged in the light of modem accounting principles not generally accepted at the time the deficiency arose.

This issue, as the Court recognized, must be determined by the appli-cation of standards of fairness, reasonableness, and public interest by the administrative agency, which is especially constituted to deal with this type of depreciation. Only if the agency acts arbitrarily will the Court interfere with the agency's decision. And in this case the De-partment's decision was affirmed.

The company had the burden of establishing its own rate base. Since the Department's determination of the deficiency was based upon testimony introduced by the company itself, it could not be said that there was not substantial evidence to support its conclusion. No evidence was introduced by the company of past earnings, or of actions by the commission, upon which the Court could hold that the Depart-ment's method of treating the deficiency was arbitrary.

The Court also reaffirmed its prior holdingS that the Department was justified in allowing as a return on the earned surplus portion of the rate base, the composite return allowed on the debt and common equity (other than earned surplus) portion of the rate base. The company argued that the return on earned surplus should be the same as the return on the remaining common equity. The Department did not explicitly make a finding of a return on earned surplus different from the return on the remaining equity, but the Court apparently felt that if the over-all return allowed by the Department permits a return on earned surplus not less than the composite re-turn on debt and other common equity, which are in themselves reasonable, the over-all return allowed by the Department is not confiscatory.

The only witnesses before the Department on rate of return were company witnesses, who concluded that the cost of equity capital was between 10 and 11 percent. Although the Department did not adopt the conc:lusions of these witnesses, it used some of the data adduced by them to arrive at its conclusion that a rate of return on the common equity portion of the rate base in the area of 8 percent was reasonable. This return was in excess of the return earned by some of the com-panies selected by the experts for comparative purposes in their studies. With some of the Justices dissenting, the Court found that there was sufficient evidence to support the Department's finding on this issue.

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§16.2

In addition to the data on other companies, the Court referred to evidence of the elements of dissimilarity between Wannacomet and larger companies referred to by the experts; the remoteness from New England of some of these companies; and the probability that Wanna-comet's financing expenses would be less than those of a publicly held company, because it is a wholly owned subsidiary.

The determination of the Court that the Department could con-sider the fact that the company was a wholly owned subsidiary is a qualification of its earlier holding in New England Telephone and Telegraph Co. v. Department of Public Utilities,4 in which it stated:

We do not see that the situation is materially altered by the hope or even the expectation that the American company will take the full 68.9% to which it is entitled out of any new stock issue. It is not bound to take any and might not do SO.5

This language has sometimes been interpreted to mean that the Department must ascertain capital cost as if the company were publicly held, even though it may be largely or wholly owned by another corporation. The two cases may, however, be reconciled. In the light of its most recent pronouncement, the Court's statement in the

New England Telephone and Telegraph Co. case must be taken to

mean that the Department may not assume that a parent company will continue the purchase of common stock of its subsidiary no matter what the price; nor may it base its finding on the fact that a parent might be induced to purchase additional common stock of its subsidiary, even at a low return, because of the pressure on it to protect an existing investment. On the other hand, the Department is not required to blind itself to the actual circumstance of the stock ownership of the company, so long as its ultimate finding as to rate of return is a fair one.

§16.2. Bus companies: Routes. In United States v. Berkshire Street Railway CO.,1 the Federal Government attempted to foreclose

a tax lien on a certificate of public convenience and necessity issued by the Department of Public Utilities under Section 7 of Chapter 159A of the General Laws. The Federal Government is permitted to place liens on "property" or "rights to property,"2 but the court held that state law must be looked to for the meaning of the word "property" in the federal statute, and that under state law the certif-icate was a privilege and not property.s

Holyoke Street Railway Co. v. Department of Public Utilities4 dealt

with an amendment of a 1954 order of the Department granting a certificate to Peter Pan Bus Lines, Inc. to carry passengers between

4 Ibid.

Ii Id. at 94-95, 97 N.E.2d at 516.

§16.2. 1219 F. Supp. 861 (D. Mass. 19611). 226 U.S.C. §61121 (1962).

§16.2 PUBLIC UTILITIES 201

Springfield and Northampton via Holyoke. At that time service

be-tween Northampton and Springfield was provided by transfer of pas-sengers between appellant and the Springfield Street Railway. While the petition for the certificate was pending before the Department, Peter Pan and the appellant entered into a written contract in which the latter agreed not to object to the grant of the certificate, and the former agreed that, if granted the certificate, it would pay the appel-lant an amount per passenger carried to or from the appelappel-lant's service area. The agreement stated that if the certificate were amended, the agreement nevertheless would remain in full force. The Department issued the certificate, making the agreement a condition of the certificate, but reserving the right to modify or cancel this agree-ment if it found such action to be in the public interest. In 1958 the Department amended the certificate by canceling the agreement.

The Supreme Judicial Court held that the companies could properly contract with each other about intercompany competition but that they could not make a contract that would interfere with the exercise of the Department's powers over the competitive relationship between two carriers, a matter which is one of the most basic concerns of regulation. Therefore the contract in its inception was valid but could not continue to be effective if the Department's decision declar-ing it to be against public policy was itself valid.

On the question of the validity of the Department's order, the Court noted that the Department had amended the certificate on the basis of its findings that substantial losses were being incurred by Peter Pan on the route covered by the certificate; that the volume of traffic which had been expected when the certificate was granted did not materialize; and that there was no evidence of diversion of traffic from the appellant. The evidence had been heard by the hear-ing officer who, at the close of the hearhear-ing, asked Peter Pan to furnish an exhibit showing the additional passengers picked up as the result of the grant of this certificate. The Department made its decision without having received the additional exhibit.

The Court held that there was evidence that Peter Pan made pay-ments to the appellant during the first year of the contract. These payments indicated the number of passengers that had been picked up or discharged in the appellant's territory.

Whether these passengers were diverted from the Holyoke Com-pany cannot be ascertained with precision. It is reasonable, how-ever, to infer that many of these would have used Holyoke Company's service if the Peter Pan service had not been avail-able. . .. That type of evidence was peculiarly within Peter Pan's control for it had, or could have had, the records of the fares which were collected and of where it picked up and dis-charged its passengers.1I

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The Court's reversal then is based on the fact that the findings were made upon incomplete evidence. This is a departure from the customarily applied standard that the Department's findings will be upheld if supported by substantial evidence. Evidence of the amount of diversion of traffic was not, as the Court stated, "peculiarly within Peter Pan's control." On the contrary, the best evidence of diversion was the Holyoke Company's records of passengers carried in this territory before, as compared to passengers carried after, the issuance of the certificate to Peter Pan. Statistics as to the number of persons carried by Peter Pan do not show damage to the Holyoke Company, since these passengers may never have traveled on the Holyoke line but may have been new passengers attracted to bus transportation because of the availability of a through route.

The Department's determination to make its finding without the additional exhibit requested by the hearing officer may well have been based on its determination that the evidence requested was not material and that Holyoke had failed to present material evidence under its control. However, the implication of the Court's decision is that the Department had no reason for ignoring the hearing ex-aminer's request. Apparently the Court does not dispute that there was substantial evidence to support the finding. If the hearing officer had made no request for additional evidence, the decision would have been affirmed. It would seem that the mere existence of such a re-quest by the hearing officer should not affect the validity of a decision made on the basis of a transcript of the testimony and exhibits by the Department which is not in any way bound by the recommenda-tions of the hearing officer.

§I6.3. Railroads: Service. In New York Central Railroad Co. v.

Department of Public Utilities,l the railroad appealed from a refusal

of the Department to grant an exemption2 _{of certain land from the}

operation of the Framingham zoning by-law. The decision of the Department was based on its determination that the railroad had failed in its burden of proof,s but the Supreme Judicial Court held that the decision failed to comply with the requirement of the Administrative Procedure Act that it should be accompanied by a statement of the reasons for the decision, including a determination of each issue of fact or law necessary to the decision.4 It determined that the findings of fact were inadequate, although the evidence was sufficient to enable the Department to make definite findings.

B.

§I6.4. Electric utilities: Rates. Section 94 of Chapter 164 of the General Laws permits electric companies to enter into contracts for the sale of electricity at rates other than those contained in their filed

§16.3. 11964 Mass. Adv. Sh. 921, 199 N.E.2d 319, also noted in §§13.8, 14.10 supra. 2 C.L., c. 4OA, §10.

§16.4 PUBLIC UTILITIES 203

schedules. Reason exists for this exception because of the existence of customers whose characteristics are so unique that service under filed rates is not feasible. Perhaps the best examples are the contracts between utilities for sharing of capacity. The statute gives no clue to the limitations, if any, on the use of the contract form of rate setting. In 1963 the legislature evidenced an interest in greater scrutiny of these arrangements by the amendment to Section 94 which gives the Department of Public Utilities authority to review the propriety of contracts prior to their effective date.1

The first formal proceeding under the new statute dealt with a proposed contract under which Boston Edison Company proposed to provide electric heat and hot water service to an apartment building under construction.2 _{Charges were to be computed under a filed}

commercial rate, but the company promised a refund to the extent that the total bill exceeded $6000, plus a stated amount for each degree day in excess of 6000 per annum. The company argued that this type of arrangement was necessary in order to attract customers to electric heating, which is relatively new and untried in this area.

It would appear from the Department's decision disapproving this arrangement that the burden will be placed upon the companies to show not only a convincing need for special treatment of a partic-ular customer, but also that the special treatment itself is not broader than the necessities require. In the case at hand, the contract gave the customer preferential treatment, not only by affording a credit if

consumption exceeded certain limits, but also by affording the same credit if the company increased its Rate D in a general rate increase. The department found that the evidence of the need for this prefer-ence was unconvincing.

In Cambridge Electric Light Company,S the Department was called upon to review a proposed rate for electric street lighting to be charged to the Metropolitan District Commission. The proposed rate had been constructed on the basis of studies of the costs of installing street lighting made in 1957 and 1961 for the purpose of creating a rate for City of Cambridge street lighting. In setting the MDC rate the company deducted from these costs the costs of certain portions of the street lighting installations furnished by the MDC and added certain additional costs incurred in parkway lighting but not in lighting city streets. The result was a rate $38.40 per annum less than the city rate for the same size and type of light.

The Department found fault with this method because it was based upon the cost of installation at 1957-1961 price levels, although many of the installations were done far earlier. The rate was based in effect upon a reproduction-cost rate-base rather than an original-cost rate-base, which the Department has traditionally used. The company had in fact recognized this in connection with its City of Cambridge rate and made it applicable to installations made after January 1,

§16.4. 1 Acts of 1969, c. 615, §l.

204 1964 ANNUAL SURVEY OF MASSACHUSETTS LAW §16.5

1958, the earlier lower rate continuing to apply to older installations. Having disapproved the rate, however, the Department felt obliged to fix a new rate. No evidence was available as to the actual cost of MDC installations. The Department determined that the filed rate should apply to lights installed after January 1, 1958, but that for lights installed earlier the rate charged the city for older lights should apply. This decision is presently before the Supreme Judicial Court on appeal by the MDC, which will test the propriety of the Depart-ment's method of fixing the rate. The issue is one of fairness as between classes of customers, and the traditional standard in rate matters of fairness of rate of return is not appropriate. Over·all cost of service is a matter that is easily determined, and in· fixing total revenues it furnishes an objective basis. But the cost of serving each class of customers involves subjective apportionment, on which reason-able men may differ. The Department's decision is apparently grounded on the theory that existing rates may be used as a basis for distinction, unless the differentials are demonstrably unfair.

§I6.5. Passenger transportation agencies: Rates. Under deprecia-tion rates allowed by the Department of Public Utilities and the Internal Revenue Service, allowances for depreciation of buses fre-quently exceed the diminution in their fair market value. If a bus is sold after it has been substantially depreciated, a profit is frequently realized. It is often argued in bus company rate cases that this profit should not be considered as an item of operating revenue, since the bus cannot be sold again by the company. Rates set for the future on a basis which includes this revenue will fall short of producing adequate revenues. On the other hand, if there exists a pattern of periodic sales of buses at a profit, rates will be too high if these profits are not taken into consideration. In Wilson Bus Lines, Inc.,1 the

Department attempted to steer a middle course. It tested proposed rates on an income statement adjusted to reflect in operating revenues the profit from bus sales, amortized on a two·year basis.

§I6.6. Water companies: Rates. The Department of Public Util-ities reopened for further evidence three rate cases which had been remanded to it by the Supreme Judicial Court.1 The Department's finding on rate of return was based upon an extension of the principle, affirmed by the Court in New England Telephone and Telegraph CO.,2

that the Department could fix a rate of return on an assumed debt ratio higher than the actual ratio, if it did not consider the latter reasonable. In the water company cases the Department had based its findings upon an assumed issue of preferred stock, which some evidence indicated could be issued more economically in replacement

§16.5. 1 D.P.U. 14397 (April, 1964).

§16.6. 1 Salisbury Water Supply Co. v. Department of Public Utilities, Oxford Water Co. v. Department of Public Utilities, Massachusetts Water Works Co. v. Department of Public Utilities, 344 Mass. 716, 184 N.E.2d 44 (1962), noted in 1962 Ann. Surv. Mass. Law §15.l.

§14.l

fairly large lot zoning in some areas. But the language of Simon

also held a warning that the combination of the particular circum-stances and the one-acre limit tended to be controlling factors in the decision. In Aronson the Court concluded that the limits, as they

related to the petitioner's particular property, had been- passed. The town's attempt by this large lot zoning to preserve this particular land and other land in the same vicinity for conservation and recreational purposes revealed its goal of preventing any present economic develop-ment of the land. Thus the owner had the unwelcome opportunity of paying taxes on the land until such time as the town determined to purchase it for public purposes. The Court found that the restric-tions had no reasonable relation to public health, safety, or welfare under the Simon concepts that could not have been met equally well

by lot sizes that were substantially smaller and would permit the owner to develop his land for the residentially zoned purposes.

The Court carefully limited its decision to the specific property and the specific facts of the case. It is certainly obvious that under con-ventional constitutional and statutory interpretive standards a given regulation may be generally valid, yet invalid as to specific property.s It does not require much prescience, however, to suggest that the Court is not likely to find requirements of large lot zoning valid without some clear indication that the substantial economic loss to the owner is offset by a marked public benefit.4 This might occur in some areas for health reasons, but safety and welfare reasons, including those relating to amenities and beauty, would seem never to

be sufficient under the Aronson test. We may reasonably assume, in

fact, that a town's density standards will not be definitely safe from successful attack unless lot size requirements do not exceed one acre, and even this is probably not a valid limit in an already heavily built-up area where the size of lots already built built-upon is substantially smaller.

The Court, however, did not really apply the conventional police power test of balancing private loss against public benefit in Aronson,

since it found that the specific town objectives were attainable only under eminent domain and not under the police power. Arguably, of course, this conclusion does not undermine the theory of creeping zoning. Given proper public objectives the courts will still apply the private-public balancing test and thus may support large lot zones in certain areas. Certainly towns are under no compulsion to zone all residential districts to the same lot size or other density standard. But

3 The Court cited Barney &: Carey Co. v. Town of Milton, 324 Mass. 440, 444, 87 N.E.2d 9, 12-13 (1949), as well as Nectow v. Cambridge, 277 U.S. 183, 48 Sup. Ct. 447, 72 L. Ed. 842 (1928), and Euclid v. Ambler Realty Co., 272 U.S. 365, 47 Sup. Ct. 114,71 L. Ed. 303 (1926).

166 1964 ANNUAL SURVEY OF MASSACHUSETIS LAW

§14.2

the Court's discussion of the Simon standards in its Aronson opinion,

particularly its noting that the law of diminishing returns will set in at some point when lot sizes are increased, cannot give anything but cold comfort to those towns whose lot size minimums exceed much over one acre.

It has been stated that the tremendous expenditures for highways in the 1950's and 1960's will have to be duplicated for waste disposal and pollution control systems in the 1970's and 1980's. Large lot zoning, with concomitant large frontage requirements, increases utility and service costs disproportionately. The thought of the costs of creating only adequate sewerage systems in those areas built up of single homes on large lots staggers our fiscal imagination. The present price of suburban sprawl- in increased highway, road, utility, and other direct costs as well as in such major indirect costs as dying central cities, inadequate public transportation systems, racial and color segregation, and distortion of anticipated educational patterns will be further increased as air and water pollution become more obvious and pressing problems. Large lot zoning also represents an addition to the famous words on the Statute of Liberty: "Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore, Send these, the homeless, tem-pest-tost, to me," - "but not right here."

The impossibility of developing middle income housing on large lots led to the introduction in the 1964 legislative session of a bill to amend the zoning enabling act so as to prohibit lot size minimums exceeding relatively small size limits.1I Perhaps because the originally proposed limits represented such a major change from typical by-law standards, the bill was eventually referred to a legislative commission.6

But the bill, perhaps in modified form, will be introduced again in 1965. Even those who favor no limitations on home rule in towns will hardly find themselves out of sympathy with the goals of this type of legislation.

§14.2. Special permits. The Supreme Judicial Court continued to apply its stringent rule that the record must state the facts upon which the Board of Appeals based its decision. In the case of

MacGibbon v. Board of Appeals of Duxbury,1 the owner of certain

shore lots desired to fill them and, as required by the Duxbury zoning by-law, he filed for a special permit. The Board of Appeals denied the special permit and the petitioner appealed. The Court annulled the decision of the Board of Appeals and remanded the case for fur-ther findings, because the Board's action must be responsive to the

II Senate Doc. No. 276 (1964). The bill would have added a paragraph to §2 of C.L., c. 4OA, limiting maximum zoning requirements for single family residential lots to fifteen thousand square feet with a one-hundred foot frontage. The limi-tations, however, were subject to certain exemptions.

6 Resolves of 1964, c. 117. The commission has not yet acted, as of early 1965.

§16.7

205

of common equity.8 The effect of the assumed recapitalization was to reduce the rate of return to which the company was entitled.

c.

§I6.7. Transportation agencies. Chapter 563 of the Acts of 1963 abolished the Metropolitan Transit Authority and established the Massachusetts Bay Transportation Authority, the latter encompassing sixty-four cities and towns in addition to the fourteen formerly in-cluded in the MTA area. The new authority continues to be respon-sible for the operation of the MT A transportation system and is given authority to extend the system.

Among the more distinctive features of this agency is its authority to enter into contractual relations with private transportation agencies for the provision of mass transportation, at the same time holding regulatory authority over them. Private companies within the 64-municipality area may continue to operate under their existing authority, but the MBT A is given all the authority over them formerly held by the Department of Public Utilities, except the responsibility for safety of equipment and operation.! Some carriers and routes may be subject to regulation by both the DPU and the MBTA, by reason of having contacts both within and without MBT A territory. In the event of a conflict between the DPU and the MBT A, the former is given authority to resolve the dispute.2

8 Oxford Water Co., D.P.U. 13584 (May, 1964); Massachusetts Water Works Co., D.P.U. 13583 (May, 1964); Salisbury Water Supply Co., D.P.U. 13376 (May, 1964).

§16.7. ! G.L., c. 161A, §5(k).