from the Circuit Court for Baltimore City, W. Michel Pierson,
BY: Gary L. Alexander (Gregory T. Simmons, Paula M. Carmody,
People's Counsel on the brief) all of Baltimore, MD, FOR
BY: Daniel Hurson (Baltimore Gas & Electric Company on the
brief) Joseph English (Public Service Commission of Maryland,
John D. Corse, Exelon Business Services Co., LLC on the
brief) all of Baltimore, MD, FOR APPELLEE.
Meredith, Arthur, Sharer, J. Frederick (Retired, Specially
Md.App. 487] Arthur, J.
2013 the General Assembly enacted legislation enabling
regulated gas companies to recover the estimated costs of
certain infrastructure replacement projects through a
surcharge on customer bills. See Md. Code (1998,
2010 Repl. Vol., 2014 Supp.), § 4-210 of the Public
Utilities Article (" PUA" ). Shortly after the
statute took effect, Baltimore Gas and Electric Company
(" BGE" ) sought approval of a plan to accelerate
the replacement of outdated gas distribution infrastructure
and to begin imposing a customer surcharge during the initial
implementation of the plan. The Public Service Commission
[226 Md.App. 488] approved the plan, subject to the condition
that BGE could not implement the surcharge until it submitted
additional information about the individual infrastructure
projects that were to be undertaken in 2014.
Circuit Court for Baltimore City affirmed the
Commission's order after the Office of People's
Counsel (" OPC" ) petitioned
for judicial review. On appeal, OPC contends: (1) that the
Commission erred by authorizing BGE to collect estimated
project costs before the completion of each project; and (2)
that the Commission acted unlawfully by conditionally
approving the plan before the Commission had evaluated the
individual projects. We conclude that OPC has shown no basis
for reversing the Commission's decisions.
Parties to this Appeal
appeal involves three entities established by or regulated
under the Public Utilities Article of the Maryland Code.
Maryland Public Service Commission is an independent unit in
the executive branch of State government (PUA §
2-101(b)), with jurisdiction over public service companies
that operate utility businesses within the State. PUA §
2-112(a). The Commission's primary duties are to "
supervise and regulate" the companies subject to its
jurisdiction to " ensure their operation in the interest
of the public" and to " promote adequate,
economical, and efficient delivery of utility services in the
State without unjust discrimination[.]" PUA §
a public service company regulated by the Commission. In
general, public service companies have a duty to "
furnish equipment, services, and facilities that are safe,
adequate, just, reasonable, economical, and efficient,
considering the conservation of natural resources and the
quality of the environment." PUA § 5-303. BGE
provides gas service to approximately 655,000 customers
across 800 square miles in Baltimore City and central
Md.App. 489] OPC is an agency that acts independently of the
Public Service Commission. OPC has a duty to " appear
before the Commission and courts on behalf of residential and
noncommercial users in each matter or proceeding over which
the Commission has original jurisdiction, including a
proceeding on the rates, service, or practices of a public
service company[.]" PUA § 2-204(a)(2).
Traditional Rate-Making Procedures
of the Public Utilities Article governs the Commission's
rate regulation authority. The Commission has " the
power to set a just and reasonable rate of a public service
company[.]" PUA § 4-102(b). A public service
company has a corresponding duty to " charge just and
reasonable rates for the regulated services that it
renders." PUA § 4-201.
ordinary ratemaking proceedings, the Commission analyzes data
from a prior " test year" to project a
utility's future income and expenses:
The [Public Service Commission] establishes [just and
reasonable] rates 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. To the extent that level of income significantly
differs from the test year's net income, the Commission
orders an adjustment in the utility's rates -- an
increase or a decrease, as the case may be.
Bldg. Owners & Managers Ass'n of Metro. Baltimore,
Inc. v. Pub. Serv. Comm'n of Maryland, 93 Md.App.
741, 753, 614 A.2d 1006 (1992); see Office of
People's Counsel v. Maryland Pub. Serv. Comm'n,
355 Md. 1, 8, 733 A.2d 996 (1999)
(citing Pub. Serv. Comm'n of Maryland v. Baltimore
Gas & Elec. Co., 273 Md. 357, 360 n.2, 329 A.2d 691
(1974)); Maryland People's Counsel v. Heintz, 69
Md.App. 74, 84-85, 516 A.2d 599 (1986).
Md.App. 490] In a conventional proceeding to set rates, the
Commission will " calculate the test year's rate
base, i.e., 'the fair value of the company's
property used and useful' in rendering the service."
Severstal Sparrows Point, LLC v. Pub. Serv. Comm'n of
Maryland, 194 Md.App. 601, 620, 5 A.3d 713 (2010)
(quoting PUA § 4-101(3)). A public service company
ordinarily is not entitled to recover costs simply because
the costs were incurred prudently; instead, the Commission
normally requires the company to show that the costs relate
to an asset " used and useful" in providing
service. E.g. Columbia Gas of Maryland, Inc. v.
Pub. Serv. Comm'n of Maryland, 224 Md.App. 575,
584-86, 121 A.3d 224 (2015) (holding that Commission did not
err in denying portion of gas company's request for rate
increase that sought to recover anticipated remediation costs
for property not used and useful in providing gas service).
recent rate case, In the Matter of the Application of the
Washington Gas Light Company for Authority to Increase Its
Existing Rates and Charges and to Revise Its Terms and
Conditions for Gas Service, Order No. 84475, 102 Md. PSC
332 (2011), illustrates limits on this traditional recovery
model. Along with a rate increase application, Washington Gas
Light sought approval of an " Accelerated Pipe
Replacement Plan," by which it would finance replacement
of its aging gas infrastructure through a customer surcharge.
Id. at 341, 378-79. The Commission declined to
approve that proposed surcharge, commenting that approving a
surcharge merely because a company plans to increase its
infrastructure investments " would represent a
fundamental shift from long-standing rate-making
principles[.]" Id. at 342; see also
id. at 383. The Commission determined that the gas
company could recover the costs of its plan by filing "
more frequent rate cases" to adjust the rate " in
smaller increments" after the assets were placed in
service. Id. at 342.
Md.App. 491] C. Enactment of the 2013 STRIDE
2011 and 2013, the General Assembly considered a series of
bills that would empower the Public Service Commission to
authorize gas companies to promptly recover infrastructure
replacement costs through a customer surcharge. The 2013
General Assembly enacted " An Act Concerning Gas
Companies -- Rate Regulation -- Infrastructure Replacement
Surcharge." The proposal was commonly referred to as the
Strategic Infrastructure Development and Enhancement (STRIDE)
law. The law took effect on June 1, 2013. See 2013
Md. Laws, ch. 161, § 2.
legislation added section 4-210 to the Public Utilities
Article. This new section includes an express statement of
legislative intent: " It is the intent of the General
Assembly that the purpose of this section is to accelerate
gas infrastructure improvements in the State by establishing
a mechanism for gas companies to promptly recover reasonable
and prudent costs of investments in eligible infrastructure
replacement projects separate from base rate
proceedings." PUA § 4-210(b).
to this section, a gas company may file " a plan to
invest in eligible infrastructure replacement projects"
accompanied by " a cost-recovery schedule . . . that
includes a fixed annual surcharge to recover reasonable and
prudent costs" of those projects. PUA §
4-210(d)(1). A plan filed by a gas company must include:
" (i) a time line for the completion of each eligible
project; (ii) the estimated cost of each project; [226
Md.App. 492] (iii) a description of customer benefits under
the plan; and (iv) any other information the Commission
considers necessary to evaluate the plan." PUA §
Commission is required to " take a final action to
approve or deny the plan" within 180 days after the gas
company files the plan. PUA § 4-210(e)(1)(ii). The
Commission " may approve a plan if it finds that the
investments and estimated costs of eligible infrastructure
replacement projects are: (i) reasonable and prudent; and
(ii) designed to improve public safety or infrastructure
reliability over the short term and long term." PUA
term " [e]ligible infrastructure replacement" is
defined as " a replacement or an improvement in an
existing infrastructure of a gas company that: (i) is made on
or after June 1, 2013; (ii) is designed to improve public
safety or infrastructure reliability; (iii) does not increase
the revenue of a gas company by connecting an improvement
directly to new customers; (iv) reduces or has the potential
to reduce greenhouse gas emissions through a reduction in
natural gas system leaks; and (v) is not included in the
current rate base of the gas company as determined in the gas
company's most recent base rate proceeding." PUA
cost-recovery schedule associated with a plan must include a
fixed annual surcharge, which may not exceed $2 per month for
each residential customer, and which is capped pursuant to a
formula for non-residential customers. PUA §
4-210(d)(4)(i). After the approval of a plan, the gas company
must file an annual reconciliation " to adjust the
amount of a surcharge to account for any difference between
the actual cost of a plan and the actual amount recovered
under the surcharge." PUA § 4-210(h). A surcharge
established by the cost-recovery schedule " shall be in
effect for 5 years from the date of initial implementation of
an approved plan." PUA § 4-210(g)(1)(i).
statute sets forth specific requirements for calculating the
" estimated cost" of each eligible project included
in the plan. PUA § 4-210(d)(3). Of central importance to
the instant [226 Md.App. 493] appeal is a statutory provision
that specifies when the estimated project costs may be
recovered through the surcharge. Subparagraph (d)(3)(ii)
provides that the " estimated project costs . .
. are collectible at the same time the eligible
infrastructure replacement is made." PUA §
4-210(d)(3)(ii) (emphasis added).
and Procedural Background
August 2, 2013, one month after the effective date of the
statute, BGE submitted an " Application . . . for
Approval of a Gas System Strategic Infrastructure Development
and Enhancement Plan and Accompanying Cost Recovery
Mechanism." According to the application, BGE wished to
" accelerate significantly" the replacement of
" gas system assets that have reached the end of their
useful life," in order to " enhance safety and
reliability for its customers."
proposed to completely replace the oldest and most leak-prone
components of its gas distribution system over a period of 30
years. The application stated that BGE planned to replace the
entire population of five " asset classes."
According to BGE, those assets had been installed many
decades ago, in most cases more than 50 years earlier.
Md.App. 494] BGE planned to invest a total of $400 million
during the initial five-year period from 2014 to 2018. BGE
proposed a monthly surcharge of $0.32 per residential
customer and $1.87 per non-residential customer, beginning
February 2014. The surcharge would then increase each year
until 2017, when it would be capped at $2 per month for
residential customers and $11.55 per month for
receiving the application, the Commission suspended the
proposed rates and initiated proceedings to evaluate the
plan. OPC participated in the proceedings to represent the
interests of ratepayers.
Hearing Before the Commission
parties presented testimony and arguments at an evidentiary
hearing on November 12, 13, and 14, 2013, in accordance with
PUA § 3-107 and COMAR 20.07.02.
support of the application, four BGE executives testified
regarding the details of the proposed infrastructure
replacements, the expected customer benefits, and the
customer surcharge. According to BGE's witnesses, the
five " asset classes" described in the application
represented only 21 percent of BGE's gas distribution
system mileage, but had accounted for 73 percent of all gas
leak repairs in 2012. BGE estimated that the plan would
roughly double the existing rate at which BGE had been
replacing its pipelines.
proposal envisioned that customers would begin paying a
surcharge on their monthly bills contemporaneously with, and
in many cases after, its upgrades of the gas-delivery
infrastructure. For example, the company expected to invest
$65 million in its STRIDE projects in 2014 and
to collect $3 million from customers that year. According to
BGE, the total charges collected over five years would cover
less than 10 percent of BGE's cumulative investments in
the projects. The [226 Md.App. 495] company would then
recover the remainder of the costs over the useful life of
the replaced assets.
offered testimony from Dr. Karl Pavlovic, an energy industry
consultant, who recommended that the Commission deny the
application. Among other things, Dr. Pavlovic contended that
BGE's plan was deficient in that it did " not
identify or specify the investment costs" for replacing
the targeted assets.
Pavlovic opined that BGE's proposed cost-recovery
mechanism would contravene the established ratemaking
principle that " investment cost recovery from rate
payers does not begin until the associated assets are placed
in service and used and useful." He interpreted language
from PUA § 4-210(d)(3)(ii), stating that "
estimated project costs . . . are collectible at the same
time the eligible infrastructure replacement is made,"
to mean that " project costs can be included in the
surcharge once a project is completed."
(Emphasis added.) According to Dr. Pavlovic, the surcharge
should not be based on future cost projections, but "
should be calculated on actual historical costs in a 
month period and collected over the subsequent 12 month
period." The foundation of his interpretation was his
understanding that cost recovery under the new statute should
be " consistent with the principles underlying the
revenue requirement model[.]"
Dr. Pavlovic's interpretation, BGE and its witnesses
contended that the intent of the legislation was to
accelerate improvements by providing for prompt cost recovery
contemporaneously with the implementation of the projects.
Commission's staff also participated in the hearing
pursuant to PUA § 3-104(e). A staff engineer commented
that BGE's submissions were not detailed enough for staff
to evaluate whether the plan met all statutory requisites for
approval, because BGE had not identified specific projects to
be implemented. The staff recommended that the Commission
direct BGE to present a more detailed list of proposed 2014
projects within 30 days after an initial order, so that the
[226 Md.App. 496] Commission staff could ensure that each
project met eligibility requirements. A BGE representative
agreed to supply the remaining necessary information after
the conclusion of the case.
The Commission's Conditional Approval of the
January 29, 2014, the final day of the 180-day period for
consideration of the application ( see PUA §
4-210(e)(1)), the Commission issued Order No. 86147. The
Commission set forth its findings and conclusions in a
40-page opinion that accompanied the order. The Commission
declared: " [W]e find that BGE's Application meets
the requirements of [s]ection 4-210 and we conditionally
grant the Company's request. . . . We approve the
proposed cost recovery surcharge subject to the requirements
set forth in [s]ection 4-210 and this Order."
Commission nevertheless found BGE's submissions to be
lacking in a few important respects. Specifically, the
Commission found that the BGE had not sufficiently identified
the " time line for completion of each eligible
project" and the " estimated cost of each
project" pursuant to PUA § 4-210(d)(2)(i) and (ii).
(Emphasis added.) As a result, the Commission could not yet
determine whether the proposed investments and estimated
costs were " reasonable and prudent" to qualify
for approval under PUA § 4-210(e)(3). The Commission