Md. Office of People's Counsel v. Md. Pub. Serv. Comm'n

• Decision Date: 29 August 2018
• Docket Number: No. 15, Sept. Term, 2017,15, Sept. Term, 2017
• Citation: 461 Md. 380,192 A.3d 744
• Parties: MARYLAND OFFICE OF PEOPLE'S COUNSEL, et al. v. MARYLAND PUBLIC SERVICE COMMISSION, et al.
• Court: Court of Special Appeals of Maryland

461 Md. 380

192 A.3d 744

MARYLAND OFFICE OF PEOPLE'S COUNSEL, et al.

v.MARYLAND PUBLIC SERVICE COMMISSION, et al.

No. 15, Sept. Term, 2017

Court of Appeals of Maryland.

August 29, 2018

Argued by Joseph G. Cleaver, Asst. People's Counsel (Paula M. Carmody, People's Counsel, Theresa V. Czarski, Deputy People's Counsel, William F. Fields, Senior Asst. People's Counsel and Ronald Herzfeld, Asst. People's Counsel, Maryland Office of People's Counsel, Baltimore, MD), and argued by Susan Stevens Miller (Earthjustice, Washington, DC), on briefs, for Petitioners.

Argued by H. Robert Erwin, Gen. Counsel (Joseph M. English, Asst. Gen. Counsel, Public Service Commission of Maryland, Baltimore, MD; Lisa Brennan, Associate County Attorney, Marc P. Hansen, County Attorney and John P. Markovs, Deputy County Attorney, Rockville, MD; Gary R. Alexander and James K. McGee, Alexander & Cleaver, P.A., Annapolis, MD), and argued by David W. DeBruin (Matthew E. Price and Zachary C. Schauf, Jenner & Block LLP, Washington, DC; James L. Shea, J. Joseph Curran, III, F. William DuBois and Christopher S. Gunderson, Venable LLP, Baltimore, MD), on briefs, for Respondents.

Amicus Curiae for Edison Electric Institute: Emily S. Fisher, Esquire, Vice President, Law & Corporate Secretary, Edison Electric Institute, 701 Pennsylvania Avenue, NW, Washington, DC 20004.

Argued Before: Barbera, C.J., Greene, Adkins, McDonald, Watts, Hotten, Getty, JJ.

McDonald, J.The Maryland General Assembly has determined that an acquisition of a company that supplies electricity in the State, including a merger with another utility, should be reviewed by the administrative body with specialized knowledge of utility markets and energy generation and distribution – the Respondent Public Service Commission ("Commission"). The Commission must assess whether such a transaction is "consistent with the public interest, convenience, and necessity, including benefits and no harm to consumers." The Legislature has identified specific issues for the Commission to consider, and has also given the Commission discretion to examine other matters that the Commission may find pertinent to its assessment. After it has completed its analysis, the Commission is to either approve, reject, or set conditions for approval of the transaction.

The General Assembly has provided for judicial review of such decisions of the Commission, but that review is to be deferential to the Commission's expertise and findings. The role of the courts is to ensure that the Commission has exercised its discretion in carrying out this important responsibility within the bounds prescribed by the General Assembly and the Constitution.

This case concerns the Commission's approval of the acquisition of Respondent Pepco Holdings, Inc. ("PHI") and its utility subsidiaries by Respondent Exelon Corporation ("Exelon"). Petitioners, the Office of People's Counsel ("People's Counsel"), the Sierra Club, and Chesapeake Climate Action Network, have presented two questions concerning the merits of the Commission's decision. First, People's Counsel raises the question whether the Commission was required to regard an "acquisition premium" paid by Exelon to PHI shareholders as part of the transaction as a harm to consumers or as inconsistent with the public interest. Second, all Petitioners question whether the Commission acted arbitrarily or capriciously in how it addressed alleged harms to the distributed generation and renewable energy markets.

The Circuit Court for Queen Anne's County and the Court of Special Appeals held that the Commission acted within its authority when it approved the transaction. We agree.

I

Background

A. The Commission's Authority over Utility Mergers

As a general rule, one must obtain prior authorization from the Commission to acquire control of an electric company¹ – a species of "public service company" under Maryland law² – that operates in the State. Maryland Code, Public Utilities Article ("PU"), § 6-105(e). To obtain that authorization, the acquirer is to submit an application to the Commission containing detailed information about the transaction and providing certain documentation. PU § 6-105(f).

The Commission is to "examine and investigate" the application and to conduct any necessary administrative proceedings for review of the application. PU § 6-105(g)(1). The applicant has the burden of persuading the Commission that the acquisition is "consistent with the public interest, convenience, and necessity, including benefits and no harm to consumers." PU § 6-105(g)(3), (5). In connection with its review, the Commission is to consider the following factors:

(i) the potential impact of the acquisition on rates and charges paid by customers and on the services and conditions of operation of the public service company;

(ii) the potential impact of the acquisition on continuing investment needs for the maintenance of utility services, plant, and related infrastructure;

(iii) the proposed capital structure that will result from the acquisition, including allocation of earnings from the public service company;

(iv) the potential effects on employment by the public service company;

(v) the projected allocation of any savings that are expected to the public service company between stockholders and rate payers;

(vi) issues of reliability, quality of service, and quality of customer service;(vii) the potential impact of the acquisition on community investment;

(viii) affiliate and cross-subsidization issues;

(ix) the use or pledge of utility assets for the benefit of an affiliate;

(x) jurisdictional and choice-of-law issues;

(xi) whether it is necessary to revise the Commission's ring fencing and code of conduct regulations in light of the acquisition; and

(xii) any other issues the Commission considers relevant to the assessment of acquisition in relation to the public interest, convenience, and necessity.

PU § 6-105(g)(2).

At the conclusion of any proceedings, the Commission is to issue a written decision that is based on its consideration of the record of the proceedings and that states the grounds for the conclusions it has reached. PU § 3-113(a). If the Commission finds that the applicant has borne its burden, the Commission is to issue an order granting the application. PU § 6-105(g)(3)(i). The Commission may condition its approval of a transaction. PU § 6-105(g)(3)(ii). If the Commission finds that the burden is not met, it is to issue an order denying the application. PU § 6-105(g)(4).

B. The Transaction

1. The Companies

Exelon is a utility services holding company incorporated in Pennsylvania and headquartered in Chicago, Illinois. Its principal subsidiaries before the merger at issue in this case were Baltimore Gas & Electric ("BGE"), a Maryland public utility; PECO Energy Company, a Pennsylvania public utility; Commonwealth Edison Company, an Illinois public utility; and Exelon Generation Company, LLC ("Exelon Generation"). Together, the three utility subsidiaries provide electricity service to 6.6 million customers, of whom about 1.2 million are in Maryland. They also provide natural gas distribution service to more than 1 million customers, of whom about half are in Maryland. Exelon Generation operates Exelon's generation business, including its generation fleet and Constellation, its wholesale energy marketing and competitive retail sales business. Many of Exelon's generation assets rely on nuclear power.

PHI is a utility services holding company incorporated in Delaware and headquartered in Washington, D.C.³ PHI owns three public utilities – Potomac Electric Power Company ("Pepco"), Delmarva Power & Light Company ("Delmarva"), and Atlantic City Electric Company ("ACE"). Pepco delivers electricity to customers in Montgomery County and Prince George's County, as well as the District of Columbia. Delmarva delivers electricity to the Eastern Shore of Maryland and Delaware.⁴ ACE delivers electricity in New Jersey, but not in Maryland. Together, the three utility subsidiaries of PHI provide electricity service to about 1.8 million customers, of whom about 1.3 million are in Maryland.⁵

2. The Merger Proposal

On August 19, 2014, Exelon and PHI submitted to the Commission an application for approval of a proposed merger between the companies. Exelon proposed acquiring PHI in a cash-for-stock transaction for $27.25 per share – a total of $6.8 billion. The purchase price exceeded PHI's book value at that time ($3.1 billion) as well as its average market capitalization during the prior year ($5 billion based on an average stock price of $19.94). After the merger, Exelon would provide electricity service to more than 80 percent of Maryland customers through its subsidiaries.

3. Commission Consideration of the Merger Proposal

More than 25 parties, including the Sierra Club and Chesapeake Climate Action Network,⁶ Montgomery County, and Prince George's County, the two counties where the majority of PHI customers reside,⁷ petitioned to intervene in the Commission proceedings concerning the merger application. Other participants in the proceedings included People's Counsel and the Commission's Technical Staff ("Staff").

Beginning in January 2015, the Commission held five hearings to receive public comment and an initial 12 days of evidentiary hearings. The intervenors cited many potential issues with the merger. We will not attempt to list them all, but will focus on those germane to this appeal. According to some of the intervenors, Exelon's nuclear power assets posed financial risks due to safety concerns, and also created a conflict of interest with respect to other types of energy production. This conflict existed with respect to specific alternative sources of energy, such as solar or wind, as well as with respect to the method by which energy is delivered to consumers (i.e. , distributed generation vs. wholesale markets). Another significant issue to those opposing the merger was market consolidation. There was concern that, if...