Baltimore Gas and Elec. Co. v. Heintz

• Citation: 582 F. Supp. 675
• Decision Date: 14 March 1984
• Docket Number: Civ. No. Y-83-2571.
• Court: U.S. District Court — District of Maryland
• Parties: BALTIMORE GAS AND ELECTRIC COMPANY, et al. v. Frank O. HEINTZ, et al.

582 F. Supp. 675

BALTIMORE GAS AND ELECTRIC COMPANY, et al. v. Frank O. HEINTZ, et al.

Civ. No. Y-83-2571.

United States District Court, D. Maryland.

March 14, 1984.

Roger D. Redden, Francis X. Wright, James A. Biddison, Jr., and David A. Brune, Baltimore, Md., for plaintiffs.

Kirk J. Emge, Baltimore, Md., for defendant The Public Service Com'n of Maryland.

Gregory V. Carmean, Baltimore, Md., for defendant Maryland Office of People's Counsel.

Marianne M. Keler, Washington, D.C., for amicus curiae S.E.C.

MEMORANDUM

JOSEPH H. YOUNG, District Judge.

The Baltimore Gas & Electric Co. (BG & E), a public utility supplying natural gas and electricity to Baltimore City and nine Maryland counties, has been stymied by the Maryland Public Service Commission (PSC) in its efforts to rearrange its corporate organization. The utility and its proposed holding company, BGE Corp., filed this declaratory judgment action seeking to have the state law under which the PSC acted (Md.Ann.Code art. 78, § 24(e)) declared unconstitutional or in conflict with federal law.

Having reviewed the numerous documents filed by the parties — including the intervening defendant People's Counsel of Maryland and an amicus curiae (the Securities and Exchange Commission) — and having conducted a hearing on the matter, the Court finds that Section 24(e), as applied to the plaintiffs, is unconstitutional, as it violates the Commerce Clause of the United States Constitution.

FACTS

The factual allegations necessary for resolution of this case are undisputed, making disposition on the cross motions for summary judgment appropriate.

About seventy percent of the outstanding stock of BG & E is held by residents of states other than Maryland, making it clear that the securities of BG & E are commodities in interstate commerce.

The attempted reorganization of the utility began when BG & E incorporated its proposed holding company, called BGE Corp., and filed an application with the PSC to transfer all the assets of BG & E to the new holding company on the basis of a share-for-share exchange with the stockholders of the existing corporation. When the joint application of the utility and its proposed holding company was filed with the PSC in November, 1982, the announced reason for the reorganization was to separate the utility and non-utility divisions of the company under the holding company structure, which would "facilitate the regulation of utility operations" and allow the company's non-utility divisions to diversify into activities other than the distribution of gas and electricity, without being held accountable to the PSC.

The Maryland Public Service Commission appointed a panel which took evidence and heard argument on the application in three hearings (in January, March and April of 1983). Midway through the hearing process, the office of the Maryland People's Counsel, which represents the interests of consumers in regulatory proceedings and in litigation, filed a motion to dismiss based on Section 24(e), which prohibits certain types of public utility holding companies altogether, allows some with the approval of the PSC, and allows others even without the approval of the PSC. Specifically, Section 24(e) provides:

No public service company shall take, hold, or acquire any part of the capital stock of any public service company of the same class, organized or existing under or by virtue of the laws of this State, without prior authorization of the Commission. No stock corporations of any description (except, with the authorization of the Commission, a company of the same class) shall take, hold, or acquire more than ten percent of the total capital stock of any public service company organized under or by virtue of the laws of this State, unless such stock is to be taken as collateral security and the Commission approves of its being so taken; and no such public service company shall be party to the violation of this subsection. For the purposes of this subsection, a company controlling a public service company shall be deemed a public service company of the same class as the controlled public service company.

Although this entire provision is relevant because of the plaintiffs' equal protection claim, the portion of Section 24(e) which prevented BG & E's corporate reorganization mandates that "no stock corporation of any description" may acquire any significant portion of the stock of a utility which is a Maryland corporation, with one exception not relevant here. It should be noted that another exception to this outright prohibition allows a "company of the same class" — or a company engaged in providing the same type of service (e.g., electricity or telephone service) — to acquire another company with PSC approval. Because the BGE Corp. was a "stock corporation" not already owning a utility company of the same class as BG & E, and because BG & E is a Maryland corporation, the Commission read the law as absolutely barring BGE Corp. from acquiring more than 10 percent of the stock of BG & E.

After a fourth hearing, the full commission rejected the joint application of BGE Corp. and BG & E on June 16, 1983. Shortly thereafter, the plaintiffs brought this declaratory judgment action.

The history of the application of Section 24(e) is important in view of the equal protection claim of the plaintiffs. The plaintiffs have cited a number of instances in which the PSC allowed acquisitions of utility companies to take place, apparently in violation of the law. Indeed, the Commission acknowledged in its answer to the complaint that

... there have been some instances in which the acquisition of the stock of a utility company by a holding company which does not already control a public service company of the same class has been approved by the Commission.

In the field of energy regulation, however, the plaintiffs cite only two examples of PSC approval of energy utilities held by holding companies which are not owners of other utilities in Maryland:

(1) Columbia Gas of Maryland, Inc. (a Delaware corporation distributing gas to three Maryland counties) is a subsidiary of Columbia Gas Systems, Inc., also a Delaware corporation. It should be noted that this corporate organization is not a violation of the letter of Section 24(e), since the subsidiary utility is not a Maryland corporation.

(2) Potomac Edison Company (a Maryland corporation which distributes electricity to parts of seven Maryland counties) is a subsidiary of the Allegheny Power System, Inc.

The defendants maintain — and it has not been disputed — that in those proceedings where acquisitions apparently in violation of Section 24(e) were approved, the PSC was not aware of Section 24(e), or if it was aware of the provisions of Section 24(e), the prohibition was not "expressly addressed and resolved by the Commission."

STATE INTEREST

The plaintiffs claim that Section 24(e) violates the Commerce clause of the United States Constitution, that its application to BG & E is a violation of the equal protection and due process clauses of the Constitution, and that it is an unlawful attempt by the state to legislate in an area which has been pre-empted by federal law. The validity of all three challenges to Section 24(e) depends largely on whether the State of Maryland has a legitimate state interest which is rationally served by the prohibition contained in Section 24(e). Therefore, the state interest asserted by the defendants is a logical starting point.

The parties have expended considerable effort looking for and debating the state interest considered by the Maryland legislature when Section 24(e)'s predecessor was first enacted, in the early part of this century. The parties appear to agree that the law was lifted in its entirety from legislation approved in New York state, since portions of the New York law which could not be applicable in Maryland (at one point, the bill talked of regulatory "commissions," although Maryland had only one relevant commission) appear in the original bill approved by the Maryland legislature. The plaintiffs argue that there was no legitimate state interest when the bill which contained what is now Section 24(e) was approved, since the evils perceived in relation to utility holding companies in New York were absent from Maryland; indeed, they argue there were no utility holding companies in Maryland at that time.

The plaintiffs' argument is doubly flawed. First, even if the perceived evils were not present in Maryland at the time the legislation was enacted, the Maryland legislature could have legitimately feared that utility holding companies were a growing national trend, and could have acted to prohibit the companies from coming to Maryland before any of them were formed. The second problem is that, at least for the purposes of Equal Protection and Due Process analysis, it matters not what state interest the legislature announced for Section 24(e). The state interest to be weighed or examined by the Court is any ground which can be conceived of to justify the state law. McDonald v. Board of Election, 394 U.S. 802, 809, 89 S.Ct. 1404, 1408, 22 L.Ed.2d 739 (1969). The reason for sanctioning this judicial creativity (in imagining an appropriate legislative purpose even where the legislative history shows none) is evident: if a law served no legitimate state interest when passed, but a legitimate state interest rationally served by the law has since appeared, it would be inane to require the legislature to repeal the earlier law, and re-enact it with an announcement of the appropriate, legitimate state purpose.

Before discussing the state interest asserted in this case, it should be noted that the United States Supreme Court recently recognized that state governments, having granted utilities monopoly powers, have a particularly vital interest in regulating those companies.

... the regulation of utilities is one of the most important of the

...