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Energy Express, Inc. v. Department of Public Utilities

Supreme Judicial Court of Massachusetts, Suffolk

August 3, 2017


          Heard: May 4, 2017.

         Civil action commenced in the Supreme Judicial Court for the county of Suffolk on September 22, 2016.

         The case was reported by Lowy, J.

          William S. Harwood for the plaintiff.

          Kirk G. Hanson, Assistant Attorney General, for the defendant.

          Shaela McNulty Collins & Kenneth W. Christman, for Bay State Gas Company, amicus curiae, submitted a brief.

          Present: Gants, C.J., Lenk, Hines, Gaziano, Lowy, Budd, & Cypher, JJ.

          LOWY, J.

         Prior to 1999, the supply, transportation, and distribution of natural gas to consumers in the Commonwealth were "bundled" together and provided by a State-endorsed monopoly, referred to as a "local distribution company" or "LDC." The Legislature "unbundled" these components, allowing private companies, referred to as "marketers, " to compete as suppliers of natural gas in the Commonwealth. Transportation and distribution of gas, however, remained the sole province of the LDCs. To ensure that consumers who opted to purchase gas from marketers continued to receive a sufficient supply of gas, the Department of Public Utilities (department) required LDCs to assign to marketers a proportional share of the "capacity" along interstate pipelines, based on the needs of the marketers' customers.

         Under Federal law, the interstate pipeline companies may be required to issue refunds to companies like LDCs who purchased pipeline capacity. Then, under State law, the LDCs may be required to pass that refund on to its "customers." G. L. c. 164, § 94F. The issue in this case is whether the assignment of capacity by an LDC to a marketer causes the marketer to become a "customer" of the LDC, such that it is entitled to a share of that refund under G. L. c. 164, § 94F. Given the deference we afford the department in interpreting the statutes and regulations for which it is responsible, we accept the department's conclusion that only an end consumer, and not a marketer, is entitled to the refund.


         There are three primary components to the natural gas industry: (1) the gas commodity itself; (2) "upstream capacity, " which involves the transmission and storage of gas from the source in pipelines, often across State boundaries; and (3) local distribution of gas to the consumer. Historically, in Massachusetts, the LDC provided all three components. The gas company in this case, Bay State Gas Company (Bay State), [2] is an LDC.

         In the 1990s, Massachusetts partially "unbundled" the industry. D.T.E. 98-32-B, at 8, 27-28 (1999) ("Unbundling Order I"). See generally 220 Code Mass. Regs. §§ 14.00 (2008). The department determined, however, that of the three primary components of the gas industry, only the unbundling of the gas commodity itself was feasible.[3] Unbundling Order I at 27-28. The department was concerned that allowing competition for the second component, upstream capacity, "would run the risk that interstate capacity could be diverted to serve markets outside the Commonwealth or other non-traditional customers within the [S]tate market . . . ." Id. at 8. The department did not envision opening the third component, distribution, to competition. See Id. at 7-8. Thus, unbundling was limited to the sale of the commodity itself. Id. at 7-8, 27-28. Consumers could elect to purchase natural gas from marketers, such as the intervener in these proceedings, Energy Express, Inc. (Energy Express), instead of an LDC.

         Because the department did not open upstream capacity to private competition, LDCs remain responsible entering into contracts for upstream capacity on the interstate pipelines. Accordingly, Bay State, as an LDC, must procure sufficient capacity along interstate pipelines based on the gas needs of both customers who continue to purchase the bundled service from them ("sales customers") and those who elect to purchase gas from marketers ("transportation customers").[4] Thus, even consumers who purchase their gas from Energy Express, a marketer, remain customers of Bay State, an LDC, for purposes of the second and third components of the natural gas industry (i.e., upstream capacity and local distribution).

         As a result of the unbundling process, some consumers were now purchasing their gas from one entity (a marketer) and having it transported to them by another (an LDC). In light of this change, the department had to determine the best way to ensure that those consumers could depend on the reliable delivery of their natural gas. To that end, the department adopted a mandatory "slice-of-system" assignment approach for upstream capacity. Unbundling Order I at 34-35. Under this system, the LDC must secure all of the upstream capacity necessary for both its sales and transportation customers. Id. at 12-13. Then, the LDC proportionally assigns capacity to each marketer, based on the pro rata gas needs of its customers who elect to purchase gas from that marketer. Id. This ensures that there will be sufficient capacity along the interstate pipelines to transport the gas "upstream" from the supply source to consumers. See id. at 34-35.

         Pursuant to the LDC's assignment of capacity, a marketer like Energy Express directly pays the proportional costs of capacity to a pipeline, on behalf of its customers, just as an LDC like Bay State does for its sales customers. Id. at 12-13 (marketer "assume[s] the same cost structures with regard to the assigned capacity"). LDCs pass that cost on to their customers in compliance with applicable regulations and its department-approved rates, 220 Code Mass. Regs. § 14.03(4) (c), (d) (2009), while marketers have the ability to freely negotiate the extent to which they pass these costs on to their customers. See 220 Code Mass. Regs. § 14.04 (2008).

         The upstream capacity cost is determined by Federal law, through the Federal Energy Regulatory Commission (FERC). FERC may set maximum rates that pipelines may charge to LDCs for upstream capacity. See 15 U.S.C. § 717d (2012). Sometimes, a pipeline may charge a rate, subject to FERC's review. If FERC subsequently determines that the rate was too high, FERC will order the pipeline to refund the excess payment to the appropriate LDCs. See G. L. c. 164, § 94F; 18 C.F.R. § ...

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