130 A.3d 1061 (Md.App. 2016), 1689-2014, Maryland Office of People's Counsel v. Maryland Public Service Commission

Docket Nº:1689-2014
Citation:130 A.3d 1061, 226 Md.App. 483
Opinion Judge:Arthur, J.
Attorney:ARGUED BY: Gary L. Alexander (Gregory T. Simmons, Paula M. Carmody, People's Counsel on the brief) all of Baltimore, MD, FOR APPELLANT. ARGUED BY: Daniel Hurson (Baltimore Gas & Electric Company on the brief) Joseph English (Public Service Commission of Maryland, John D. Corse, Exelon Business Se...
Judge Panel:Meredith, Arthur, Sharer, J. Frederick (Retired, Specially Assigned), JJ.
Case Date:January 28, 2016
Court:Court of Special Appeals of Maryland

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130 A.3d 1061 (Md.App. 2016)

226 Md.App. 483




No. 1689-2014

Court of Special Appeals of Maryland

January 28, 2016

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Appeal from the Circuit Court for Baltimore City, W. Michel Pierson, JUDGE.

ARGUED BY: Gary L. Alexander (Gregory T. Simmons, Paula M. Carmody, People's Counsel on the brief) all of Baltimore, MD, FOR APPELLANT.

ARGUED BY: Daniel Hurson (Baltimore Gas & Electric Company on the brief) Joseph English (Public Service Commission of Maryland, John D. Corse, Exelon Business Services Co., LLC on the brief) all of Baltimore, MD, FOR APPELLEE.

Meredith, Arthur, Sharer, J. Frederick (Retired, Specially Assigned), JJ.


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[226 Md.App. 487] Arthur, J.

In 2013 the General Assembly enacted legislation enabling regulated gas companies to recover the estimated costs of certain infrastructure replacement projects through a surcharge on customer bills. See Md. Code (1998, 2010 Repl. Vol., 2014 Supp.), § 4-210 of the Public Utilities Article (" PUA" ). Shortly after the statute took effect, Baltimore Gas and Electric Company (" BGE" ) sought approval of a plan to accelerate the replacement of outdated gas distribution infrastructure and to begin imposing a customer surcharge during the initial implementation of the plan. The Public Service Commission [226 Md.App. 488] approved the plan, subject to the condition that BGE could not implement the surcharge until it submitted additional information about the individual infrastructure projects that were to be undertaken in 2014.

The Circuit Court for Baltimore City affirmed the Commission's order after the Office of People's Counsel (" OPC" ) petitioned

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for judicial review. On appeal, OPC contends: (1) that the Commission erred by authorizing BGE to collect estimated project costs before the completion of each project; and (2) that the Commission acted unlawfully by conditionally approving the plan before the Commission had evaluated the individual projects. We conclude that OPC has shown no basis for reversing the Commission's decisions.


A. Parties to this Appeal

This appeal involves three entities established by or regulated under the Public Utilities Article of the Maryland Code.

The Maryland Public Service Commission is an independent unit in the executive branch of State government (PUA § 2-101(b)), with jurisdiction over public service companies that operate utility businesses within the State. PUA § 2-112(a). The Commission's primary duties are to " supervise and regulate" the companies subject to its jurisdiction to " ensure their operation in the interest of the public" and to " promote adequate, economical, and efficient delivery of utility services in the State without unjust discrimination[.]" PUA § 2-113(a)(1)(i).

BGE is a public service company regulated by the Commission. In general, public service companies have a duty to " furnish equipment, services, and facilities that are safe, adequate, just, reasonable, economical, and efficient, considering the conservation of natural resources and the quality of the environment." PUA § 5-303. BGE provides gas service to approximately 655,000 customers across 800 square miles in Baltimore City and central Maryland.

[226 Md.App. 489] OPC is an agency that acts independently of the Public Service Commission. OPC has a duty to " appear before the Commission and courts on behalf of residential and noncommercial users in each matter or proceeding over which the Commission has original jurisdiction, including a proceeding on the rates, service, or practices of a public service company[.]" PUA § 2-204(a)(2).

B. Traditional Rate-Making Procedures

Title 4 of the Public Utilities Article governs the Commission's rate regulation authority. The Commission has " the power to set a just and reasonable rate of a public service company[.]" PUA § 4-102(b). A public service company has a corresponding duty to " charge just and reasonable rates for the regulated services that it renders." PUA § 4-201.

In ordinary ratemaking proceedings, the Commission analyzes data from a prior " test year" to project a utility's future income and expenses: The [Public Service Commission] establishes [just and reasonable] rates by examining the utility's income and expenses during a test year, calculating the rate base (the fair value of the property used and useful in rendering service) during that year, determining the utility's cost of capital (its required rate of return), and then multiplying that rate of return against the rate base. The result is the amount of income to which the utility is entitled. To the extent that level of income significantly differs from the test year's net income, the Commission orders an adjustment in the utility's rates -- an increase or a decrease, as the case may be.

Bldg. Owners & Managers Ass'n of Metro. Baltimore, Inc. v. Pub. Serv. Comm'n of Maryland, 93 Md.App. 741, 753, 614 A.2d 1006 (1992); see Office of People's Counsel v. Maryland Pub. Serv. Comm'n, 355 Md. 1, 8, 733 A.2d 996 (1999)

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(citing Pub. Serv. Comm'n of Maryland v. Baltimore Gas & Elec. Co., 273 Md. 357, 360 n.2, 329 A.2d 691 (1974)); Maryland People's Counsel v. Heintz, 69 Md.App. 74, 84-85, 516 A.2d 599 (1986).

[226 Md.App. 490] In a conventional proceeding to set rates, the Commission will " calculate the test year's rate base, i.e., 'the fair value of the company's property used and useful' in rendering the service." Severstal Sparrows Point, LLC v. Pub. Serv. Comm'n of Maryland, 194 Md.App. 601, 620, 5 A.3d 713 (2010) (quoting PUA § 4-101(3)). A public service company ordinarily is not entitled to recover costs simply because the costs were incurred prudently; instead, the Commission normally requires the company to show that the costs relate to an asset " used and useful" in providing service. E.g. Columbia Gas of Maryland, Inc. v. Pub. Serv. Comm'n of Maryland, 224 Md.App. 575, 584-86, 121 A.3d 224 (2015) (holding that Commission did not err in denying portion of gas company's request for rate increase that sought to recover anticipated remediation costs for property not used and useful in providing gas service).

A recent rate case, In the Matter of the Application of the Washington Gas Light Company for Authority to Increase Its Existing Rates and Charges and to Revise Its Terms and Conditions for Gas Service, Order No. 84475, 102 Md. PSC 332 (2011), illustrates limits on this traditional recovery model. Along with a rate increase application, Washington Gas Light sought approval of an " Accelerated Pipe Replacement Plan," by which it would finance replacement of its aging gas infrastructure through a customer surcharge. Id. at 341, 378-79. The Commission declined to approve that proposed surcharge, commenting that approving a surcharge merely because a company plans to increase its infrastructure investments " would represent a fundamental shift from long-standing rate-making principles[.]" Id. at 342; see also

id. at 383. The Commission determined that the gas company could recover the costs of its plan by filing " more frequent rate cases" to adjust the rate " in smaller increments" after the assets were placed in service. Id. at 342.1

[226 Md.App. 491] C. Enactment of the 2013 STRIDE Law

Between 2011 and 2013, the General Assembly considered a series of bills that would empower the Public Service Commission to authorize gas companies to promptly recover infrastructure replacement costs through a customer surcharge.[2] The 2013 General Assembly enacted " An Act Concerning Gas Companies -- Rate Regulation -- Infrastructure Replacement Surcharge." The proposal was commonly referred to as the Strategic Infrastructure Development and Enhancement (STRIDE) law. The law took effect on June 1, 2013. See 2013 Md. Laws, ch. 161, § 2.

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The legislation added section 4-210 to the Public Utilities Article. This new section includes an express statement of legislative intent: " It is the intent of the General Assembly that the purpose of this section is to accelerate gas infrastructure improvements in the State by establishing a mechanism for gas companies to promptly recover reasonable and prudent costs of investments in eligible infrastructure replacement projects separate from base rate proceedings." PUA § 4-210(b).

Pursuant to this section, a gas company may file " a plan to invest in eligible infrastructure replacement projects" accompanied by " a cost-recovery schedule . . . that includes a fixed annual surcharge to recover reasonable and prudent costs" of those projects. PUA § 4-210(d)(1). A plan filed by a gas company must include: " (i) a time line for the...

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