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

Court of Appeals of Maryland

August 29, 2018

Maryland Office of People's Counsel, et al.
Maryland Public Service Commission, et al.

          Argument: October 10, 2017

          Circuit Court for Queen Anne's County Case No. 17-C-15-019974

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


          Barbera, C.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.



         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 company[1] - a species of "public service company" under Maryland law[2] - 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 Exelon gained control over 80 percent of the Maryland market through multiple affiliates, public policy might be disproportionately shaped by Exelon's interests as a vertically integrated electricity company. Some intervenors preferred that PHI remain a company that had no affiliation with generation assets. It was important to those parties that regulators be able to compare a "wires only" company with a company associated with energy generation that might prefer a high price for electricity. Several parties also raised concerns over the price Exelon offered to pay to acquire PHI - the acquisition premium - describing it as a "windfall" to PHI's shareholders.

         During the proceedings, Exelon amended its merger proposal to reflect commitments reached in two settlement agreements with most of the intervenors, including The Alliance for Solar Choice, and Montgomery County and Prince George's County. The Commission held five additional days of hearings in April 2015 to consider the settlements.

         After considering the oral and written testimony along with other evidence, the Commission approved the application, subject to conditions, by a three to two vote. On May 15, 2015, the Commission issued an 86-page order explaining its decision, together with a 48-page appendix setting forth the conditions for approval of the transaction ("PSC Order"). The two dissenting members issued a 52-page dissenting opinion ("PSC Dissent"). In the Matter of the Merger of Exelon Corporation and Pepco Holdings, Inc., Case No. 9361, Order No. 86990, 2015 WL 5566183 (May 15, 2015).

         The Commission found that, contrary to the objections of some intervenors, the merger would not diminish the Commission's regulatory authority, would not create disincentives to distributed and renewable energy sources, and would not cause an increase in rates. The Commission concluded that, when subject to the conditions set forth in the Commission order, the merger was "consistent with the broader public interest [and] will bring specific and measurable benefits and no harm" to Maryland consumers, including increased service reliability and lower rates (compared to what rates would be without the merger). PSC Order at 2. The Commission premised its approval of the acquisition on various conditions including, among other things: "ring-fencing," local control, and affiliate protections to ensure that PHI utilities' assets are protected from risks incurred by Exelon's generation business; a one-time $100 consumer rate credit totaling $66 million; an investment of $43 million in energy efficiency programs; a payment of $14.4 million to Green Sustainability Funds for Montgomery and Prince George's counties; a $4 million investment in workforce development programs; and construction of renewable energy facilities. PSC Order at A-1 - A-48. The Commission also retained the right to order Exelon to divest itself of assets and operations of Delmarva and Pepco in Maryland under specified circumstances. PSC Order at 49, A-37 - A-38. The dissenting Commissioners disagreed, citing many of the alleged harms described by intervenors.

         4. Judicial Review of the Commission Decision

         In June 2015, several intervenors who had opposed the merger before the Commission and had not entered into one of the settlements sought judicial review of the Commission's decision in the Circuit Court for Queen Anne's County. On January 8, 2016, the Circuit Court issued an opinion affirming the final decision of the Commission. The Circuit Court declined to stay the transaction.

         People's Counsel and the Sierra Club noted appeals to the Court of Special Appeals, but did not seek a stay to prevent the merger from closing. In the meantime, following the District of Columbia Public Service Commission's approval of the merger, the transaction closed in March 2016.

         On January 27, 2017, the Court of Special Appeals affirmed the decision of the Circuit Court in an unreported decision. 2017 WL 382886 (2017). People's Counsel and the Sierra Club filed petitions for certiorari, which we granted. The Commission, Exelon and its subsidiaries, as well as Montgomery and Prince George's counties, have appeared as Respondents.

         The Petitioners have posed two questions, which we rephrase as follows:

(1) Did the Commission err as a matter of law, or act arbitrarily or capriciously, when it failed to consider the acquisition premium Exelon paid to PHI shareholders as inconsistent with the public interest or as a harm to consumers?
(2) Was the Commission's assessment of the alleged harms to the renewable and distributed generation markets arbitrary or capricious?



         A. Standard of Review

         1. Review of a Commission Decision

         In an appeal from judicial review of an agency decision, we review the agency's decision rather than the decision of the Circuit Court or of the Court of Special Appeals. Accokeek, Mattawoman, Piscataway Creeks Community Council, Inc. v. Public Service Commission, 451 Md. 1, 11 (2016). Accordingly, we review directly the Commission's decision and apply the same standard of review as those courts did.

         2. General Standard of Review for Commission Decisions

         There is a statute that sets forth the standard for judicial review of ...

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