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Washington Gas Light Co. v. Maryland Public Service Commission

Court of Special Appeals of Maryland

November 1, 2017


         Circuit Court for Montgomery County Case No. 407503V

          Kehoe, Berger, Leahy, JJ.


          Kehoe, J.

         Washington Gas Light Company ("WGL") has appealed from a judgment of the Circuit Court for Montgomery County which affirmed a decision of the Maryland Public Service Commission. At issue was the Commission's decision to deny portions of WGL's proposed 2015 amendment to its Strategic Infrastructure Development and Enhancement Plan. WGL asserts to us that both the circuit court and the Commission misinterpreted Public Utility Article ("PUA") § 4-210 of the Maryland Code. The statute sets out a procedure by which a natural gas utility company can recover, on an accelerated basis, certain kinds of expenses incurred by the company in making improvements to its gas transmission and distribution infrastructure in order to improve public safety and system reliability.

         The appellees are the Office of People's Counsel (the "OPC") and the Commission. They assert that the Commission's understanding of PUA § 4-210 was correct.

         I. Background

         A. The STRIDE Law

         A public service company in Maryland may charge its customers a rate which is intended to yield to the company a reasonable return only upon the company's assets that are '"used and useful in providing service to the public."' Columbia Gas of Maryland, Inc. v. Pub. Serv. Comm'n of Maryland, 224 Md.App. 575, 587, cert. denied, 445 Md. 488 (2015) (quoting PUA § 4-101(3)). This means that the company ordinarily bears the cost of system improvements until the projects are completed. WGL's "rate base, " that is, the conglomeration of assets whose values are used to calculate a reasonable return, includes assets located outside of Maryland.

         Most of the analytical heavy lifting in this case was performed by Judge Kevin F. Arthur in People's Counsel v. Public Service Commission, 226 Md.App. 483, 489-90 (2016) ("STRIDE I"). He explained (footnotes and some citations omitted):

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 (1992)[.]
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 (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.

         In 2013, and in order to establish an incentive for gas companies to make much-needed safety and reliability-related improvements to their systems, the General Assembly enacted PUA § 4-210. This statute is often referred to as the "STRIDE law"-- an acronym for "Strategic Infrastructure Development and Enhancement." Section 4-210 authorizes the Commission to allow gas companies to recover costs for system improvements through a fixed annual surcharge that is collectible from customers as the work is performed. This makes it possible for the companies to recover costs for eligible projects more quickly than is possible through the typical ratemaking process. Judge Arthur's summary of the way that the STRIDE law works is more than adequate for our purposes.

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; (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).

Id. at 491-92.

         B. WGL's 2015 STRIDE Application

         WGL provides natural gas to customers in Montgomery, Prince George's, Charles, Calvert, St. Mary's, and Frederick Counties in Maryland, as well as the District of Columbia and parts of Northern Virginia stretching into the Shenandoah Valley. The system consists of transmission and distribution pipelines that transport natural gas to customers across the service area. The costs of installing and maintaining transmission pipelines are shared by WGL's customers throughout its service territory, as those pipelines serve and support the entire WGL system. Costs associated for distribution lines are allocated to customers in the jurisdiction in which the line is located, as they serve more limited areas.

         WGL filed its initial STRIDE application 2013. All of the proposed infrastructure improvements were located within WGL's Maryland service territory and the Commission approved it, subject to modifications, in May 2014.[1] In 2015, WGL filed a proposed amendment to its STRIDE plan. Relevant to this appeal, it sought approval for four new transmission system replacement projects.

         Transmission Program 1 entailed replacing portions of high pressure transmission lines located in Tyson's Corner and Arlington, Virginia. The segments to be replaced had been identified by WGL as requiring full or partial replacement based on their age as well as safety and reliability considerations. In its application, WGL stated that Transmission Program 1 "is a proactive measure to enhance system safety, by replacing specific sections of high risk transmission main."

         Transmission Program 2 involved the installation of remote control valves that would enable WGL to respond more quickly to emergencies by isolating and shutting off gas flow to pipe segments that are either damaged or in high risk of damage. These valves would reduce the danger to the public and emergency responders as well as limit the amount of greenhouse gases that would be released should a pipe rupture. Eight of the 12 valves were located in Maryland.

         Transmission Program 3 proposed to replace aging block valves that had become difficult to operate. Block valves are used during emergencies or construction to isolate a segment of pipeline and reduce the pressure to it. All of the impacted valves were located in Maryland.

         Transmission Program 4 addressed corroded pressure gauge and grease risers on transmission pressure valves. Located upstream and downstream from the valves themselves, pressure gauge risers control gas pressure during routine maintenance and emergencies. Grease risers serve to lubricate the valves. Replacing them was a proactive step to prevent high pressure gas leaks. Two of the nine affected valves were located in Maryland.

         In its application, WGL wrote, "Washington Gas requests authority to include and recover through the STRIDE Rider the costs of transmission system replacements and enhancements directly assigned to Maryland, or allocated to Maryland based on the cost allocation methodology approved by the Commission in the Company's most recent Maryland base rate case[.]" In other words, WGL sought advanced cost recovery from Maryland customers under the STRIDE law only for the portion of the out-of-state projects that would be eventually allocated to Maryland customers through the normal rate-making process. WGL estimated that the four projects would cost $38, 590, 000 between 2015 and 2018. In support of its application, WGL reported to the Commission that, based on the 42.62 percent jurisdictional allocation factor normally used during rate cases, $16, 447, 058 of that total would be apportioned to Maryland customers and would eventually be included in WGL's Maryland rate base.

         C. The Proceedings Before the Commission

         The Commission delegated WGL's Amendment Application to the Public Utility Law Judge Division. After determining that the Commission had jurisdiction over the matter, the parties conducted discovery, and written testimony was filed.

         The parties appeared before a public utility law judge for an evidentiary hearing on April 29, 2015. The Commission staff and the Maryland Office of People's Counsel objected to several aspects of WGL's proposal. The main point of contention relevant to this appeal was WGL's request for advanced reimbursement for the transmission and other program improvements at sites located outside of Maryland.[2] Although Commission staff conceded that those projects would be eligible for STRIDE cost recovery surcharges if they were located in Maryland, staff interpreted PUA § 4-210(b) as restricting the Commission's approval of STRIDE projects to those located within Maryland.

         WGL did not agree. In summary, the utility posited that PUA § 4-210 permitted the Commission to approve STRIDE cost recovery for improvements located outside of Maryland, as long as the improvements benefit Maryland customers by improving overall system reliability. (WGL's arguments to the Commission were essentially the same as it presents to this Court and we will address them in detail later.)

         The public utility law judge concluded that:

the STRIDE law is clear and unambiguous; the incentive for cost recovery outside a base rate proceeding is available to "accelerate gas infrastructure improvements in the State, " subject to Commission evaluation of the company's plan and the Commission's determination that the proposed projects under the plan are "reasonable and prudent" and "designed to improve public safety or infrastructure reliability in the short term and long term." For this reason, the public utility law judge issued a proposed order that conditionally

         approved the Maryland portions of Transmission Programs 2 and 4, but denied STRIDE cost recovery for the out-of-state parts of those programs. Transmission Program 1 was rejected, since it was located entirely out-of-state. The public utility law judge recommended approval of Program 3, which involved only projects within Maryland.

         WGL appealed the proposed order to the Commission. Once again, WGL argued that PUA § 4-210 permitted advanced reimbursement for projects located outside of Maryland and that the public utility law judge had misinterpreted the statute. The Commission was not persuaded:

the Proposed Order finds that cost recovery under the STRIDE law is available only for gas infrastructure improvements physically located "in the State." We agree, finding that § 4-210(b) of the STRIDE law clearly expresses the legislative intent behind the statute. To be clear, gas companies are not precluded from making transmission infrastructure improvements beyond State lines; they simply cannot employ the STRIDE surcharge mechanism to recover costs associated with them. To interpret § 4-210(b) any other way would be ...

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