People's Counsel v. MPSC

Decision Date27 July 1999
Docket NumberNo. 120,120
PartiesOFFICE OF PEOPLE'S COUNSEL v. MARYLAND PUBLIC SERVICE COMMISSION.
CourtMaryland Court of Appeals

Michael J. Travieso, People's Counsel (John D. Sayles, Asst. People's Counsel, on brief), Baltimore, for Appellant.

Bryan G. Moorhouse (Susan S. Miller, Public Service Com'n, on brief), Baltimore; David K. Hall (Bell Atlantic-Maryland, Inc.; James P. Garland, Miles & Stockbridge, on brief), Baltimore, for Appellee.

Argued before BELL, C.J., and ELDRIDGE, RODOWSKY, CHASANOW, RAKER, WILNER and CATHELL, JJ BELL, Chief Judge.

The central issue in this case is whether telecommunication rates set pursuant to Maryland Code (1957, 1995 Repl.Vol.) Article 78, § 69(e)1, an "alternative" form of regulation, must meet the "just and reasonable rates" requirement of the traditional rate of return regulatory scheme, and in particular § 68(a).

The Public Service Commission (the "Commission" or "PSC"), in Order No. 73011, In Matter of the Inquiry into Alternative Forms of Regulating Telephone Companies, Case No. 8715, 1995 WL 848271, adopted an alternative form of regulation, specifically a price cap regulatory plan. In so doing, it concluded that § 69(e) permits it to subscribe to a "broader and more forward-looking measure of rate reasonableness than can be obtained through an examination and matching of the [telecommunications company's] rate base, revenues, and expenses." More particularly, the Commission adopted the view that § 69(e) obviates the requirement that it set "just and reasonable rates" as §§ 68(a) and 69(a) prescribe.

Disagreeing with the Commission's interpretation of the inter-relationship among these statutory provisions and alleging that the Commission's factual determinations were arbitrary and capricious, the Office of People's Counsel ("People's Counsel" or "OPC") sought judicial review of the Commission's Order in the Circuit Court for Wicomico County. Although that court disagreed with the Commission, finding that § 69(e) did not relieve it of meeting the obligation § 68(a) imposes, to set "just and reasonable rates," it nevertheless affirmed the Commission's Order. The court concluded that "it does not follow... that the determination of whether a rate is `just and reasonable' is confined to or dictated by the provisions of Sec. 69(a). That `subsection' applies to the determination when public service company rates are set by the `traditional method' outlined in Sec. 69(a). It no more applies to determinations made pursuant to the authority of Sec. 69(e) than to those made pursuant to the authority of Sec. 69(b)."

We shall affirm the judgment of the circuit court.

Factual and Procedural Context

The Commission has regulated the telecommunication industry in Maryland since 1910. See 1910 Maryland Laws, ch. 180, § 13. Traditionally, the Commission utilized "test year" data to project the future cost of service and expenses of Bell Atlantic (the former Chesapeake and Potomac ("C & P") Telephone Company of Maryland) and, ultimately, to set telephone rates. The rates are designed to yield to Bell Atlantic a "revenue requirement" sufficient to pay its prudent expenses and to allow it the opportunity to earn a fair return on investments. See Public Service Comm'n v. Baltimore Gas & Electric Co., 273 Md. 357, 360 n. 2, 329 A.2d 691, 694 n. 2 (1974),

in which this Court, citing 1 A.J.G. Priest, Principles of Public Utility Regulation 45 (1969), summarized the determinations that undergird public utility rates, as follows:

"The orthodox making of public utility rates requires four basic determinations: (1) what are the enterprise's gross utility revenues under the rate structure examined; (2) what are its operating expenses, including maintenance, depreciation and all taxes, appropriately incurred to produce those gross revenues; (3) what utility property provides the service for which rates are charged and thus represents the base (rate base) on which a return should be earned and (4) what percentage figure (rate of return) should be applied to the rate base in order to establish the return to which investors in the utility enterprise are reasonably entitled."

Thus, the Commission's role is to determine what rates the utility should be allowed to charge in future years to cover prudent expenses and earn a reasonable profit.

The "rate-of-return" regulatory scheme is prescribed primarily in two statutes: Maryland Code (1957, 1995 Repl. Volume, 1997 Cum.Supp.) Article 78, §§ 68(a) and 69(a). Pursuant to § 68(a),

"The Commission shall have the power to determine just and reasonable rates of public service companies, whether as maximum, minimum or maximum and minimum, respectively. The rates so determined shall be fixed by order to be served upon each public service company affected thereby. This subsection does not apply to small rural electric cooperatives."

Section 69(a) addresses, inter alia, the "[s]tandard for determining rates and charges" and provides:

"(a) `Just and reasonable rates' defined; common carriers excepted.'Just and reasonable rates' means rates which are not in violation of any of the provisions of the article, which fully consider and are consistent with the public good, and which will result in an operating income to the public service company, except common carriers, yielding, after reasonable deduction for depreciation and other necessary and proper expenses and reserves, a reasonable return upon the fair value of the company's property used and useful in rendering services to the public."

In the early 1980's, the Commission began modifying the regulation of Bell Atlantic's rates in an effort to allow Bell Atlantic more pricing flexibility, with the intent that Bell Atlantic would have the incentive to operate more efficiently. Subsequently, in the early 1990's, the Commission began to investigate alternatives to rate-of-return rate-making for Maryland's regulated telephone companies; however, recognizing that its authority in this area was limited by statute, § 68(a) requiring the Commission to "determine just and reasonable rates of public service companies," it was unable to adopt certain attractive price plans recommended by Bell Atlantic. In response to requests from the industry and the Commission, the Maryland General Assembly amended the PSC Law in 1995, see 1995 Maryland Laws, ch. 140 and 141, by adding § 69(e) to Article 78. That section, effective June 1, 1995, states:

"(e) Regulation of telephone company. —Notwithstanding the provisions of subsection (a) of this section or any other provision of law to the contrary, the Commission may regulate a telephone company by means of alternative forms of regulation, which may include, but not limited to, the use of price regulation, revenue regulation, ranges of authorized return, rate of return, categories of services, or price indexing, if it finds, after notice and hearing that the alternative form of regulation protects consumers by, at a minimum, producing affordable and reasonably priced basic local exchange service, as defined by the Commission, by ensuring the quality, availability, and reliability of telecommunications services through the State; encourages the development of competition; and is in the public interest."

Soon after § 69(e) took effect, four "price cap" proposals, each offering an alternative method of regulating Bell Atlantic's rates, were filed with the Commission. Also filed with the Commission were requests to reduce Bell Atlantic's rates. The first "price cap" proposal, contained in a "Petition for Implementation of Competition Plus: A True Price Cap Plan for Maryland," was made by MCI Communications, Inc. ("MCI".) The MCI proposal was followed a short time later by a petition, filed by the Office of People's Counsel, to reduce Bell Atlantic's rates. Subsequently, the Commission, by Order No. 73011, In the Matter of the Inquiry Into Alternative Forms of Regulating Telephone Companies, Case No. 8715, 1995 WL 848271, instituted a formal proceeding to investigate the alternatives for regulating telephone companies permitted by § 69(e), its newly acquired statutory authority. Bell Atlantic also filed a "Petition for Adoption of a Price Cap Form of Alternative Regulation." The PSC Staff and People's Counsel later filed separate price cap proposals. The Commission's order, which adopted a procedural schedule and required the parties to develop and file a list of issues, contemplated an investigation that would include "one evidentiary proceeding which will encompass an examination of all alternative regulation proposals ... as well as a review of Bell Atlantic's rates as necessary to meet the requirements of [section] 69(e)." Also, it made clear that "[a]ll parties should be aware that the Commission envisions that this proceeding will involve something less than a traditional rate case."

Following the receipt of written testimony, evidentiary hearings before the full Commission, at which witnesses were cross-examined on their written testimony, and argument by the parties, the Commission issued Order No. 73011, In the Matter of the Inquiry Into Alternative Forms of Regulating Telephone Companies, Case No. 8715, adopting a Price Cap Plan,2 (hereinafter, the "Price Cap Order"), to replace the rate-of-return regulation. The Commission thus abandoned traditional rate setting under § 69(a) in favor of a price cap under the new § 69(e). The order described the plan adopted as an incentive-based price cap regime designed to simulate market competition. Under the plan, the PSC set the initial price for telecommunication services ("going-in-rates"), with future price changes being controlled by a formula that takes into account the rate of inflation, the increasing productivity of the Company and costs, such as taxes and regulatory requirements ("exogenous changes"), that are beyond the Company's control.

The Price Cap Plan the...

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