Heard: May 4, 2017.
action commenced in the Supreme Judicial Court for the county
of Suffolk on September 22, 2016.
case was reported by Lowy, J.
William S. Harwood for the plaintiff.
G. Hanson, Assistant Attorney General, for the defendant.
McNulty Collins & Kenneth W. Christman, for Bay State Gas
Company, amicus curiae, submitted a brief.
Present: Gants, C.J., Lenk, Hines, Gaziano, Lowy, Budd, &
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
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.
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),
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. 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.
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"). 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).
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.
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).
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.