The state’s social contract with utilities

THE ONGOING LOCKOUT of about 1,250 workers by National Grid raises important conflicts between the provisions of labor law and the statutes governing the public service obligations of the state’s utilities. While it is not generally appropriate for the state’s Department of Public Utilities to take over and run a utility, the DPU does have broad supervisory and remedial powers that can be welded to send a message that the public interest must be protected.

First some history. Back in early part of the twentieth century, many states enacted laws setting up the “social contract” between the public utilities and the public. This was the era in which piped gas and electricity (instead of whale oil!) were becoming popularized. Cities and towns gave short-term franchises to local businesspeople to run pipes and string wires down the street. A new concept—first put forth by progressive leaders such as Wisconsin governor Robert La Follette but also supported by industry moguls like Samuel Insull – was that it would be more efficient to provide gas and electricity to a geographic area through a single monopoly network than to have duplicate pipes or electricity cables running down each street.  It was also recognized that a utility company could provide service at a lower cost if the company were able to write off its capital investment over many years, instead of being forced to undergo a renewed franchise license every five or ten years.

The social contract that emerged has several parts: (1) the utility would be granted a monopoly in perpetuity and would have an eminent domain right to take private land to install pipes or wires; (2) the utility would have an obligation to serve all comers, any customer who wanted service, on a nondiscriminatory way; (3) the utility would have the right to charge customers rates that allowed it to recover its prudently incurred operating costs, plus a reasonable return on capital invested; and (4) the state public utility commission would have general supervisor authority over all those components of the “deal.”

Here in Massachusetts, the powers of the DPU have been used from time to time when circumstances arise that, in the view of the regulatory agency, indicate that the utility is not properly carrying out its part of the bargain.

In 1986, when I was chairman of the agency, we issued an order finding that Boston Edison’s management was not carrying out its public service responsibilities. We concluded that the company was failing in its responsibilities to plan for the future energy needs of its customers—by adopting a planning approach that attempted to place all business risks associated with the company’s operations on its ratepayers. We stated that the company’s management had “become paralyzed and has abdicated its managerial responsibilities,” noting that the failure was preventing the implementation of cost-effective energy conservation and load management programs. Our remedy was to lower the company’s allowed rate of return from the previously allowed 15.25 percent to 12 percent; to exclude from rates $900,000 in the company’s management incentive compensation program; and to deliver copies of the decision to the company’s board of directors so we could be sure that the contents of the decision would be presented to the chief governing body of the company. The company had requested a multi-million dollar rate increase and received none.

In addition, in response to consumer complaints about recurrent service outages in sections of Brookline and the South End, we found that the company was not meeting its own standards of reliability on the distribution system, and we ordered it to adopt new procedures and report back regularly on their implementation.

In a different sort of case, in 1984, we concluded that Commonwealth Electric Company had violated our billing and termination regulations and had treated its customers in “insensitive, demeaning, abusive, and discriminatory fashion.” We ordered the company to make a number of changes in its procedures, management, and personnel, and to enhance its training program for people in its customer service areas. The cost of all those changes, plus an independent consultant to monitor the company’s performance, would be borne by its shareholders.

Let’s turn now to the labor dispute at National Grid. The company is within its rights, under federal labor law, to engage in a lock-out of it distribution service personnel. But that right cannot be wielded with impunity if the resulting situation is a violation of the utility’s public service obligation. Certainly, the extended disruption in an ability to offer safe and timely hook-ups to residential and commercial customers could be viewed as a violation of that obligation. Buildings under construction need natural gas, too, to be completed. These delays result in true financial and personal hardship to people and businesses.

In light of these public service responsibilities, it would be well within the DPU’s jurisdiction to examine the negotiation process employed by the management in this dispute. Was it designed to achieve an equitable result in a reasonable amount of time, or did the company management have other objectives in mind? There are always two sides to this kind of dispute, and it might be that the union could also be found at fault for its approach, driving the company to the lock-out. It would not be unreasonable, though—given the length of this disruption and its effects on the community—to hold a review after the fact and hold the company accountable in the event its actions were imprudent.

The DPU may also have statutory authority to go further, in essence to take over operation of the utility by claiming a public emergency, but that is a remedy that should never be lightly employed. Better to make it known that the utility will be held accountable for its actions, to provide a gentle nudge to management to make sure it is thinking things through very carefully with regard to how well it is carrying out its public service obligation.

Paul F. Levy was chairman of the Massachusetts Department of Public Utilities from 1978-79 and then again from 1983-87.