Maryland People's Counsel v. Heintz

• Decision Date: 05 November 1986
• Docket Number: No. 51,51
• Citation: 516 A.2d 599,69 Md.App. 74
• Parties: MARYLAND PEOPLE'S COUNSEL et al. v. Frank O. HEINTZ et al. Sept. Term 1986.
• Court: Court of Special Appeals of Maryland

Page 74

69 Md.App. 74

516 A.2d 599

MARYLAND PEOPLE'S COUNSEL et al. v. Frank O. HEINTZ et al.

No. 51 Sept. Term 1986.

Court of Special Appeals of Maryland.

Nov. 5, 1986.

Gregory V. Carmean (John M. Glynn, on the brief), Baltimore, for appellants.

Kirk J. Emge (Sandra Hall-Eckroade, on the brief), Baltimore, for appellee, Public Service Com'n of Maryland.

Glenn A. Stover (Stephen J. Sfekas, Miles & Stockbridge, Valerie A. Zimkus, and Michael J. Morrissey, Fairfax, Va., on the brief), Baltimore, for appellee, AT & T Communications of Md., Inc.

Argued before BISHOP and ROSALYN B. BELL, JJ., and JAMES S. GETTY, Associate Judge of the Court of Special Appeals (retired), Specially Assigned.

ROSALYN B. BELL, Judge.

This case is a direct result of the court-approved plan which divested American Telephone and Telegraph Company (AT & T) of its allegedly monopolistic position in telecommunications. See United States v. American Tel. & Tel. Co., 552 F.Supp. 131 (D. D.C. 1982), aff'd mem. sub nom., Maryland v. United States, 460 U.S. 1001, 103 S.Ct. 1240, 75 L.Ed.2d 472 (1983). At issue is the post-divestiture regulation by the Maryland Public Service Commission of rates for interexchange telecommunications in Maryland. The Office of People's Counsel, appellant, ¹ asks us to hold that the rates established were unjust and unreasonable. We decline that request.

For the purpose of telecommunications regulation after the divestiture, the United States District Court divided Maryland into four geographic areas called Local Access and Transport Areas (LATAs). Interexchange telecommunications are communications that originate in one LATA and terminate in another--in other words, long distance communications within the State of Maryland. Prior to divestiture the Chesapeake and Potomac Telephone Company (C & P), a wholly-owned AT & T subsidiary, provided this service subject to regulation by the Maryland Public Service Commission. After C & P was divested from AT & T, C & P was only permitted to provide service within each LATA. It was no longer permitted to provide intrastate inter-LATA service or interexchange service.

AT & T Communications of Maryland, Inc. (ATTCOM), appellee, was formed to compete with other long distance companies permitted to provide inter-LATA service in Maryland. ² In November 1983, ATTCOM filed an application with the Public Service Commission seeking permission to provide interexchange telephone service in this State beginning January 1, 1984, ³ and seeking approval of its proposed tariffs. These tariffs would have produced $13,700,000 more in revenues for ATTCOM than C & P's rates for the same service at that time.

The Commission granted ATTCOM permission to provide interexchange service but directed the company to refile its proposed tariffs reflecting (1) any approved access charge for C & P authorized in an unrelated pending rate case, ⁴ (2) a rate of return equal to C & P's authorized rate of return ⁵ determined in that unrelated case, and (3) an effective date of December 31, 1983.

ATTCOM complied with the Commission's directive and refiled proposed rates this time generating $119,331,000 in gross annual revenues. The Commission approved the proposed tariffs in an order dated December 30, 1983. According to the order, the Commission suspended the proposed tariffs for one day and allowed them to become effective on January 1, 1984, subject to a refund following an investigation by the Commission into the reasonableness of the rates. ⁶

Extensive hearings were held from April through July pertaining to the reasonableness of the proposed rates, including four evening public hearings at various locations around the State. Testimony was presented by ATTCOM, C & P and GTE-Sprint, the Office of People's Counsel, Federal Executive Agencies and the Commission staff. During the course of the hearings, in addition to evidence of operating expenses and other specific financial data, testimony was presented concerning the manner in which ATTCOM should be regulated by the Commission.

In Re MCI Telecommunications Corporation, LXXV Md. PSC 331 (1984), the Commission determined that nondominant carrier MCI, which was formed to compete in the interexchange telecommunications market, was not to be regulated as traditional utilities had been in the past. ⁷ Debate centered around whether ATTCOM should be accorded the same treatment as a nondominant carrier since it was a subsidiary of former monopolistic C & P. The economists who presented testimony differed in opinion as to whether ATTCOM should be regulated in the same manner as traditional telephone companies in light of the divestiture and resultant competition for intrastate interexchange service.

The Commission staff concluded that although ATTCOM retained considerable market power in the interexchange market, major changes in the telecommunications industry had subjected all of the providers of interexchange service in Maryland, including ATTCOM, to potential and actual competition. Thus, the staff recommended that the Commission gradually reform its regulation of ATTCOM away from traditional policies and practices. ⁸

After reviewing all the evidence, the Commission concluded the staff's approach was correct. Specifically, the Commission ruled that while continued rate regulation of ATTCOM was required, ATTCOM should have the opportunity to operate efficiently in the competitive interexchange market and to have some flexibility in adjusting its rates in response to these competitive forces. The Commission also concluded that this flexibility would be in the public's best interest.

The Commission established a revenue requirement of $114,342,000. This determination was made pursuant to Md. Code Ann. Art. 78, § 69(a) (1957, 1980 Repl.Vol., 1986 Cum.Supp.) which requires setting a revenue requirement based on rate base, rate of return, and operating expenses. ⁹ The Commission then took this revenue requirement and created a "range of reasonableness" around the revenue figure. This range then was to serve as the basis for the setting of just and reasonable rates.

With respect to the establishment of these flexible rates, the Commission found that it was not wholly appropriate to rely exclusively on cost-of-service evidence and the "traditional" rate-making revenue requirement methodology to develop rates for ATTCOM. The Commission established this zone of reasonableness based upon several factors, especially the changing competitive market and the financial characteristics of ATTCOM. In view of this changing competitive market and ATTCOM's financial situation, the Commission concluded that it was necessary to authorize a margin of variance around the revenue requirement figure yielded by applying the traditional rate-making approach. The Commission opined that 5% below the revenue requirement determined by the traditional approach would allow for the setting of just and reasonable rates, and rates yielding $119,331,000 proposed by the Company were set as the maximum flexible rates. The Commission granted ATTCOM the flexibility to set its rates to yield a maximum of $119,331,000 and to reduce its rates to yield a minimum of $108,631,000, thus producing this "range of reasonableness."

The Office of People's Counsel appealed this decision to the Circuit Court for Prince George's County. The circuit court affirmed the Commission's decision. This appeal arises from that affirmance. On appeal, the Counsel contends:

"I. [Md.Code Ann. Art. 78,] Section 69(a) [ (1957, 1980 Repl.Vol., 1986 Cum.Supp.) ] mandates that the findings on rate base and rate of return must be applied in determining just and reasonable rates.

"II. [Md.Code Ann. Art. 78,] Section 68(a) [ (1957, 1980 Repl.Vol., 1986 Cum.Supp.) ] does not broaden the Commission's authority in determining the revenue requirement.

"III. The rates finally approved by the Commission [are] unjust, unreasonable and unlawful."

I. SCOPE OF REVIEW

Before we address the merits of appellant's contentions, we note that a great deal of discretion is necessarily vested in the Commission. People's Counsel v. Public Serv. Comm'n, 52 Md.App. 715, 722, 451 A.2d 945 (1982), cert. denied, 295 Md. 441 (1983). The limited scope of judicial review of Commission decisions is set out in Md.Code Ann. Art. 78, § 97 (1957, 1980 Repl.Vol.):

"Every final decision, order, rule or regulation of the Commission shall be prima facie correct and shall be affirmed unless clearly shown to be (1) in violation of constitutional provisions, or (2) not within the statutory authority or jurisdiction of the Commission, or (3) made upon unlawful procedure, or (4) arbitrary or capricious, or (5) affected by other error of law, or (6) if the subject of review is an order entered in a contested case after hearing, such order is unsupported by substantial evidence on the record considered as a whole."

Specifically, a Commission decision is "prima facie correct and the burden is on those who seek to set it aside on appeal to show by clear and satisfactory evidence that there is illegality or unreasonableness." Baltimore Gas & Elec. Co. v. McQuaid, 220 Md. 373, 387, 152 A.2d 825 (1959); Public Serv. Comm'n v. Delmarva Power & Light Co., 42 Md.App. 492, 499, 400 A.2d 1147, cert. denied, 286 Md. 746 (1979).

In Baltimore Transit Company v. Public Service Commission, 206 Md. 533, 558, 112 A.2d 687 (1955), the Court of Appeals noted that a reviewing court must accord the Commission "the respect due an informed body aided by a competent and experienced staff." That observation is particularly appropriate in the area of telecommunications today.

II. STATUTORY FRAMEWORK

The jurisdiction and power of the Public Service Commission extends, to the extent permitted by the laws of the United States, to all public service companies operating a utility business. Md.Code Ann. Art. 78, §§ 1, 23 (1957, 1980 Repl.Vol.). The Commission is empowered to...