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Washington Gas Light Co. v. Maryland Public Service Commission

Court of Appeals of Maryland

August 14, 2018


          Filing Date Argued: May 7, 2018.

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


          GETTY, J.

         Legislative intent

(b) 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.
-Statement of "Legislative Intent," Senate Bill 8, 2013 Md. Laws, ch. 161, § 1.

         In this appeal, we are asked to interpret Public Utility Article ("PU") § 4-210 of the Maryland Code, known also as the STRIDE statute.[1] In short, the STRIDE statute allows Maryland gas companies more timely cost recovery if they submit plans that increase the pace of natural gas infrastructure improvements.

         The General Assembly passed the STRIDE statute (Senate Bill 8) in response to increasing concerns about threats to public safety posed by aging and deteriorating gas infrastructure throughout the state.[2] The Fiscal and Policy Note for Senate Bill 8 highlighted the occurrence of "30 'significant [pipeline] incidents' in Maryland from 2002 through 2011, totaling $12 million in property damage and causing one fatality and 16 injuries." Dep't Leg. Servs., Fiscal and Policy Note, Senate Bill 8, at 6 (2013 Session) (hereinafter cited as "Senate Bill 8 Fiscal Note"). To underscore the importance of providing Maryland residents with a safe and reliable gas distribution infrastructure throughout the State, the legislature codified a rarely used express statement of legislative intent. See PU § 4-210(b).

         Petitioner Washington Gas Light Company ("Washington Gas") asserts that the Maryland Public Service Commission ("the Commission"), the Circuit Court for Montgomery County, and the Court of Special Appeals each erred in their statutory analysis, from which they ultimately concluded that the STRIDE statute provides accelerated cost recovery only for gas infrastructure projects located in the State of Maryland. Respondents Maryland Office of People's Counsel ("OPC")[3] and the Commission argue that the prior tribunals' interpretation of PU § 4-210 was correct. We are therefore called upon to conduct statutory interpretation, analyzing both the plain language and the legislative history of PU § 4-210.

         For the following reasons, we conclude that PU § 4-210 is unambiguous and requires that "gas infrastructure improvements" be located "in the State" in order to promptly recover investment costs separate from base rate proceedings. We also hold that the STRIDE statute's legislative history supports this interpretation. Accordingly, we affirm the judgment of the Court of Special Appeals.


         A. The Parties

         Washington Gas is a public service company that provides natural gas and delivery services to customers in the Maryland counties of Montgomery, Prince George's, Charles, Calvert, St. Mary's, and Frederick, as well as customers in Washington, D.C. and jurisdictions in Virginia. To transport natural gas to its customers, Washington Gas operates a system of distribution pipelines spanning its geographic service area throughout Maryland, Virginia, and Washington, D.C.

         The Commission is tasked with regulating Maryland public service companies, including Washington Gas, and its duties are summarized in Maryland Off. of People's Counsel v. Md. Pub. Serv. Comm'n:

The Maryland Public Service Commission is an independent unit in the executive branch of State government (PU[] § 2-101(b)), with jurisdiction over public service companies that operate utility businesses within the State. PU[] § 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 [.]" PU[] § 2-113(a)(1)(i).

226 Md.App. at 488. The statutory authority for the Commission's regulation of public service companies is provided in Title Four of the Public Utilities Article.

         Washington Gas has a duty to "charge just and reasonable rates for the regulated services that it renders," PU § 4-201, and the Commission retains "the power to set a just and reasonable rate of a public service company[.]" PU § 4-102(b). Generally, the Commission determines just and reasonable rates for a public service company by accounting for the company'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." Bldg. Owners & Managers Ass'n of Metro. Baltimore, Inc. v. Pub. Serv. Comm'n of Maryland, 93 Md.App. 741, 753 (1992). The Commission may order an adjustment in the company's rates if the utility's level of income deviates significantly from the test year's net income. See id. Importantly, prior to the enactment of the STRIDE statute, a public service company would recover the costs of investment in infrastructure improvements through distribution rates, determined with the Commission, after the work was completed. PU § 4-101(3) (defining "just and reasonable rate" as "a reasonable rate on the fair value of the public service company's property used and useful in providing service to the public." (Emphasis added)).

         B. The STRIDE statute - PU § 4-210

         Beginning in 2011, the General Assembly considered legislation to accelerate replacement of aging gas infrastructure and allow cost recovery separate from base rate proceedings. See S.B. 8, 2013 Reg. Sess. (cross-filed as H.B. 89); S.B. 541, 2012 Reg. Sess. (cross-filed as H.B. 662); S.B. 332, 2011 Reg. Sess. (cross-filed as H.B. 856). On February 22, 2013, the General Assembly enacted a bill titled "An Act Concerning Gas Companies-Rate Regulation-Infrastructure Replacement Surcharge," the STRIDE statute, creating an exception to the normal ratemaking process. The law took effect on June 1, 2013. 2013 Md. Laws, ch. 161, § 2.

         The STRIDE statute created § 4-210 of the Public Utilities Article. To increase the pace of natural gas infrastructure improvements, promote public safety, and enhance gas pipeline system reliability, the General Assembly created incentives for public service companies to submit STRIDE-compliant infrastructure plans, which would receive more timely cost recovery than would otherwise be available under the traditional rate setting process. Pursuant to the STRIDE statute, a public service company may file "a plan to invest in eligible infrastructure replacement projects" with the Commission accompanied by "a cost-recovery schedule . . . that includes a fixed annual surcharge on customer bills to recover reasonable and prudent costs" of those projects. PU § 4-210(d)(1). An "eligible infrastructure replacement" project is defined as "a replacement or an improvement in an existing infrastructure of a gas company." PU § 4-210(a)(3).

         Further, an "eligible infrastructure replacement" project: "(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." Id. A STRIDE plan filed by a public service 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." PU § 4-210(d)(2).

         Unlike most legislation, the STRIDE statute included a 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." PU § 4-210(b). If the Commission approves a proposed infrastructure project under the STRIDE statute, a public service company may recover costs through a fixed annual surcharge that is collectible while the approved work is being performed. See PU § 4-210(d)(3).

         C. Legal Proceedings

         Washington Gas filed a STRIDE plan with the Commission on November 7, 2013, that was approved by the Commission. PU § 4-210(d). The proposed 2013 STRIDE plan consisted of four distribution system replacement programs, all of which were located within the company's Maryland service territory. Subsequently on March 10, 2015, Washington Gas filed an application for approval of a proposed amendment to add four new transmission system programs. While the majority of the assets included in the amended application were physically located in Maryland, three proposals contained individual projects located outside of Maryland. Specifically, Transmission Program 1 contained two projects replacing pipeline in Virginia, Transmission Program 2 contained four infrastructure replacement projects in Virginia, and Transmission Program 4 contained six replacement projects in Virginia or Washington, D.C.

         The Commission was required to approve or deny the amended application within 150 days of the amendment's filing. PU § 4-210(e)(2). The Commission deferred its decision and delegated the matter to a public utility law judge on March 16, 2015. PU § 3-104(d)(1). The Commission staff and the OPC intervened in the proceeding before the public utility law judge, then-Chief Judge Terry J. Romine.

         An evidentiary hearing was held on April 29, 2015, and initial and reply briefs were filed on May 14 and May 21, 2015, respectively. The parties mainly disputed whether Washington Gas could recover costs for infrastructure replacement projects located outside of Maryland through the STRIDE statute. Washington Gas contended that since Maryland customers would benefit from the improvements located outside of Maryland, PU § 4-210 permitted STRIDE cost recovery on those out-of-state assets. On May 27, 2015, Chief Judge Romine issued an order, concluding that for "an infrastructure replacement project to be an 'eligible infrastructure replacement' under the STRIDE law," and thus qualifying for accelerated cost recovery associated with the project through the STRIDE surcharge mechanism, the project "must be located on pipeline system located in the State and subject to the Commission's jurisdiction." Further, Chief Judge Romine stated that the STRIDE statute "is clear and unambiguous; the incentive for cost recovery outside a base rate proceeding is available to 'accelerate gas infrastructure improvements in the State.'" Since Transmission Programs 1, 2, and 4 included infrastructure located outside of Maryland, Chief Judge Romine ...

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