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Maryland Office of People's Counsel v. Maryland Public Service Commission

Court of Special Appeals of Maryland

January 28, 2016


Page 1062

         Appeal from the Circuit Court for Baltimore City, W. Michel Pierson, JUDGE.

         ARGUED BY: Gary L. Alexander (Gregory T. Simmons, Paula M. Carmody, People's Counsel on the brief) all of Baltimore, MD, FOR APPELLANT.

         ARGUED 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 Assigned), JJ.


Page 1063

         [226 Md.App. 487] Arthur, J.

          In 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took effect, Baltimore Gas and Electric Company (" BGE" ) sought approval of a plan to accelerate the replacement of outdated gas distribution infrastructure and to begin imposing a customer surcharge during the initial implementation of the plan.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.

         The Circuit Court for Baltimore City affirmed the Commission's order after the Office of People's Counsel (" OPC" ) petitioned

Page 1064

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.


         A. Parties to this Appeal

         This appeal involves three entities established by or regulated under the Public Utilities Article of the Maryland Code.

         The 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 § 2-113(a)(1)(i).

         BGE is 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 Maryland.

          [226 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).

         B. Traditional Rate-Making Procedures

         Title 4 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.

          In 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)

Page 1065

(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).

          [226 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).

         A 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.[1]

         [226 Md.App. 491] C. Enactment of the 2013 STRIDE Law

         Between 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.[2] 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.

Page 1066

          The 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).

         Pursuant 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 § 4-210(d)(2).

          The 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 § 4-210(e)(3).

         The 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 § 4-210(a)(3).

          The 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).

         The 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).[3]


Page 1067

         Factual and Procedural Background

         A. BGE's Application

         On 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."

         BGE 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." [4] According to BGE, those assets had been installed many decades ago, in most cases more than 50 years earlier.

          [226 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 non-residential customers.

         Upon 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.[5]

         B. Hearing Before the Commission

         The 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.

         In 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.

         BGE's 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

Page 1068

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.

         OPC 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.

         Dr. 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 [12] 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[.]"

         Disputing 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.

         The 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.

         C. The Commission's Conditional Approval of the Application

         On 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."

         The 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

Page 1069

for approval under PUA ยง 4-210(e)(3). The Commission ...

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