Severstal Sparrows Point, LLC v. Pub. Serv. Com'n of Md.

• Decision Date: 17 September 2010
• Docket Number: No. 418, Sept. Term, 2009.,418, Sept. Term, 2009.
• Citation: 194 Md.App. 601,5 A.3d 713
• Parties: SEVERSTAL SPARROWS POINT, LLC, et al. v. PUBLIC SERVICE COMMISSION OF MARYLAND.
• Court: Court of Special Appeals of Maryland

5 A.3d 713

194 Md.App. 601

SEVERSTAL SPARROWS POINT, LLC, et al.

v.PUBLIC SERVICE COMMISSION OF MARYLAND.

No. 418, Sept. Term, 2009.

Court of Special Appeals of Maryland.

Sept. 17, 2010.

Todd R. Chason (Michael C. Powell, Gordon, Feinblatt, Rothman, Hoffberger & Hollander LLC of Baltimore, MD and Nancy A. White, Squire, Sanders & Dempsey LLP of Washington, D.C., on the brief), for appellant.

Abigail R. Hopper (Heather H. Polzin, Gen. Counsel, on the brief) Baltimore, MD, for appellee.

Panel: EYLER, DEBORAH S., MEREDITH and MATRICCIANI, JJ.

EYLER, DEBORAH S., J.

This appeal challenges orders of the Maryland Public Service Commission ("PSC"), the appellee, capping for three months the electricity supply price for certain small commercial customers and allowing Baltimore Gas and Electric Company ("BGE") to recoup the shortfall caused by the price cap by increasing the electricity distribution rate for large commercial customers. Severstal Sparrows Point, LLC ("Sparrow's Point") and Maryland Energy Group and W.R. Grace & Co. (collectively "MEG"), the appellants, are large commercial customers or associations of large commercial customers whose electricity distribution rates were increased temporarily by the PSC's action. Sparrows Point, for example, incurred during the three-month period approximately $400,000 in charges for electricity distribution over what it otherwise would have paid.

We hold that the PSC's action exceeded its authority and therefore was unlawful.

[5 A.3d 715, 194 Md.App. 604]

FACTS AND PROCEEDINGS

In Maryland, the electricity utility industry is comprised of two primary components: electric energy supply (power), which is a commodity, and electric energy distribution (power lines), which is a service.¹ Historically, these components were "bundled" together and provided to customers exclusively by one utility company in each distribution territory.² BGE controlled one such distribution area. Because it operated as a monopoly, BGE's rates for its bundled services were set by the PSC pursuant to Title 4, Subtitle 2 of the Public Utility Companies Article of the Maryland Code. The appropriate rate was determined 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.

Bldg. Owners and Mngrs. Ass'n v. Pub. Serv. Comm'n, 93 Md.App. 741, 753, 614 A.2d 1006 (1992) (" BOMA "). Depending on whether the net income was significantly higher or lower than the test year income, the PSC was empowered to make increases or decreases to rates. Id. Finally, the PSC was authorized to allocate any increase or decrease among the classes of customers. Id.

In 1999, the General Assembly enacted the Electric Customer Choice Act ("1999 Act"), codified at Md.Code (2008 Repl.Vol., 2009 Supp.),section 7-501 et seq., of the Public Utility Companies Article ("PUC"), with, among its goals, those of establishing "customer choice of electricity supply" and creating "competitive retail electricity supply and electricity supply services markets." ³ PUC §§ 7-504(1) and (2). To further these goals, the component parts of electric service were to be unbundled. Distribution was to remain monopolized and, therefore, the rates charged were to remain closely regulated by the PSC. Supply was to be deregulated, however, with the rates charged to be largely established by the market. In other words, electricity customers would, for the first time, be permitted to shop on the open market for a third-party electrical energy supplier.

The 1999 Act did not take immediate effect, but was anticipated to be phased in over four years. In the interim, BGE rates were capped at below-market prices as part of a global settlement involving the transfer of BGE's generation assets, the disposition of certain "stranded costs," and other matters. See RSP Order, supra, 2007 WL 1536549 at *23, 2007 Md. PSC LEXIS 11 at *68.

Although the 1999 Act permitted consumers to shop for their supply of electricity, its drafters recognized that not all consumers could or would do so. For that reason, the law was written to obligate the electricity utilities such as BGE to continue to provide "backstop" electricity supply, known as Standard Offer Service ("SOS"),to consumers who chose not to shop for their electric supply or, for whatever reason, could not obtain electricity on the open market. The legislative goal was to phase out SOS over time as the competitive market more fully developed in Maryland. While most commercial electricity customers now shop for their energy supply, most residential customers and many small commercial customers do not. They continue to receive SOS electricity supply by default.

There are two types of SOS customers, based upon electricity demand. Type I customers are small-usage residential and commercial consumers. Type II customers are larger-usage commercial consumers. For all SOS customers in its distribution area, BGE procures the electricity supply from third parties at periodic wholesale auctions.⁴ Because BGE procures electricity supply for Type I and Type II SOS customers at separate auctions, the price charged for electricity supply usually differs between the two classes of customers.

By order effective on June 1, 2008, the PSC changed the definition of "Small Commercial Customers" for purposes of SOS. As a result, some small commercial customers who previously had received SOS as Type I customers became Type II customers.⁵ We shall refer to them as "New Type II Customers."

Before then, on April 21, 2008, BGE procured at auction the Type II SOS electricity supply for June 1 through August 31, 2008 ("Summer 2008"), the three-month period immediately following the change in definition of "Small Commercial Customers." On April 24, 2008, the PSC held a hearing to review the auction results. The next day, the PSC confirmed the auction results and allowed BGE to proceed to finalize the contracts for Type II SOS electricity supply for Summer 2008. On May 1, 2008, BGE filed Supplement 414 to its tariff, which included the proposed Type II SOS prices for Summer 2008. BGE's filing showed that, for Summer 2008, the New Type II Customers would incur a price increase of about 40% over what they had paid for electricity supply the previous summer.

On May 16, 2008, the PSC issued a Letter Order ("May 16 Order") explaining that, due to the changed definition of "small commercial customers" and the recently approved results of the Type II SOS auction, New Type II Customerscould "see their total bills for the three month period of June through August 2008 increase significantly over the total amounts paid for the same three month period in 2007." It implemented the following action plan to address the upcoming price spike:

Pursuant to [PUC] § 4-204(a) [ ], and to provide the New Type II Customers a "transition period" to allow them the opportunity to take any necessary steps to mitigate future potential bills [sic] increases, the PSC hereby suspends the portions of the ... BGE Tariff Filing ... that affect the rates of the New Type II Customers....

Further, the [PSC] directs [BGE] to file substitute tariff pages that would revise the rates that apply to the New Type II Customers such that the total bills for the New Type II Customers will, on average, increase no more than15% for the period June 1-August 31, 2008 as compared to the same three-month period in 2007 (assuming similar usage by each New Type II Customer). To be clear, the revisions should be reflected in the nondistribution portion of the respective bills. In addition, [BGE] should propose an adjustment to the distribution charge for nonresidential [sic] for the period June 1, 2008 through August 31, 2008 to collect the estimated costs that will be incurred by [BGE] to reduce the rates of the New Type II Customer as set forth above (the "Estimated Mitigation Costs").... In the [PSC's] view this one-time transition mechanism is mandated by the public interest in order to avoid an unanticipated price spike and is authorized under [PUC] § 4 [-]201 [ ].

(Emphasis added; footnote omitted.) The May 16 Order closed by stating that the PSC would consider BGE's substituted tariff pages at its upcoming May 28, 2008 administrative meeting.

Four days later, on May 20, 2008, MEG filed an omnibus petition to intervene and "motion for reconsideration and for evidentiary hearing."

On May 22, 2008, BGE filed revised tariffs and rates for Summer 2008. Its filing reflected a capped 15% SOS rateincrease for all New Type II Customers. It also included Rider 29, titled "Type II Rate Mitigation and Recovery Charge." That rider provided for a $.00137 per kWh charge to be added to the distribution rate for all non-residential customers ⁶ to recover what BGE estimated would be $7.4 million in lost revenues due to the three-month SOS price cap for the New Type II Customers.

On May 27, 2008, MEG filed an Opposition to the May 16 Order and Sparrows Point filed a protest. Both parties presented legal arguments as to why the PSC did not have the authority to compensate BGE for the 85% decrease in the supply price to be charged the New Type II Customers during Summer 2008 by increasing the distribution rate for nonresidential customers like themselves. Energy suppliers competing for customers on the open market also filed challenges to the May 16 Order. They argued that, by artificially capping the SOS rates for New Type II Customers below market price, the PSC was improperly inserting itself into the electric utility market.

On May 28, 2008, the PSC held its administrative meeting. The issue of substituted rates for New Type II Customers was item 19 on the agenda. After members of the PSC staff...