REPORTED
IN THE COURT OF SPECIAL APPEALS
OF MARYLAND
No. 2173
September Term, 2014
______________________________________
MARYLAND OFFICE OF PEOPLE’S
COUNSEL, et al.
v.
MARYLAND PUBLIC SERVICE
COMMISSION, et al.
______________________________________
Graeff,
Kehoe,
Friedman,
JJ.
______________________________________
Opinion by Graeff, J.
Concurring Opinion by Friedman, J.
______________________________________
Filed: December 15, 2015
* Judge Douglas R. M. Nazarian did not
participate, pursuant to Md. Rule 8-605.1, in the
Court’s decision to report this opinion.
This case arises from an order issued by the Maryland Public Service Commission
(the “Commission” or the “PSC”), one of the appellees. The order authorized Potomac
Electric Power Company (“Pepco” or the “Company”), another appellee, to: (1) increase
its rates for the distribution of electricity by $27,883,000; and (2) impose a Grid Resiliency
Charge (“GRC”) to contemporaneously recover costs associated with the Advanced
Priority Feeders Project. 1
Appellants, AARP Maryland (“AARP”) and the Maryland Office of the People’s
Counsel (“OPC”) filed separate petitions for judicial review in the Circuit Court for
Baltimore City, challenging, inter alia, the decision on the GRC. Pepco sought judicial
review of the decision to increase its rates by $27,883,000, as opposed to the $60.8 million
requested, arguing that the decision to award a return on equity (“ROE”) of 9.36%, as
opposed to 10.25 %, was erroneous. On November 14, 2014, the circuit court affirmed the
Commission’s decision to fund the GRC, but it reversed the Commission’s decision on the
ROE and remanded for further proceedings.
On appeal, the parties present several questions for our review,2 which we have
combined and rephrased slightly, as follows:
1
In the Matter of the Application of Potomac Electric Power Company for an
Increase in Its Retail Rates for the Distribution of Electric, Case No. 9311, Order No.
85724 (2013) (“Order No. 85724”).
2
AARP appealed only the circuit court’s decision to affirm the Commission’s
decision to permit the Grid Resiliency Charge (“GRC”), and therefore, it posed only one
question related to that issue. OPC contends that the circuit court erred in its ruling on both
the GRC and the Return on Equity (“ROE”).
1. Did the circuit court err in finding that the Commission’s decision to
permit Pepco to impose a Grid Resiliency Charge on customers was
within its broad statutory authority, not arbitrary and capricious, and
supported by substantial evidence?
2. Did the circuit court err in finding that the Commission did not act
reasonably when setting Pepco’s ROE?
For the reasons set forth below, we shall affirm in part, and reverse in part, the
judgment of the circuit court.3
FACTUAL AND PROCEDURAL BACKGROUND
Background on Public Utility Regulation
Maryland Code (2010 Repl. Vol.) §§ 2-101, 2-113 and 4-102 of the Public Utilities
Article (“PU”), set forth the power of the Public Service Commission to supervise and
regulate public service companies and the rates that they may charge customers.4 Section
2-112 states, in pertinent part, as follows:
(b) General powers. — (1) The Commission has the powers
specifically conferred by law.
(2) The Commission has the implied and incidental powers needed
or proper to carry out its functions under this division.
(c) Liberal construction. — The powers of the Commission shall be
construed liberally.
3
This Court has jurisdiction to hear this appeal pursuant to Md. Code (2010 Repl.
Vol.) § 3-209 of the Public Utilities Article (“PU”), which states: “A party aggrieved by a
final judgment in any proceeding under this subtitle may appeal the judgment to the Court
of Special Appeals in the manner provided by law for appeals in other civil cases.”
4
“‘Public service company’ means a common carrier company, electric company,
gas company, sewage disposal company, telegraph company, telephone company, water
company, or any combination of public service companies.” PU § 1-101(x)(1).
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The rate that the Commission sets, and that public utilities may charge, must be a
“just and reasonable rate for the regulated services.” PU §§ 4-102(b), 4-201. A “just and
reasonable rate” is defined as a rate that:
(1) does not violate any provision of [the Public Utilities] article;
(2) fully considers and is consistent with the public good; and
(3) except for rates of a common carrier, will result in an operating
income to the public service company that yields, after reasonable deduction
for depreciation and other necessary and proper expenses and reserves, a
reasonable return on the fair value of the public service company’s property
used and useful in providing service to the public.
PU § 4-101. This rate is “designed to yield to [a public utility] a ‘revenue requirement’
sufficient to pay its prudent expenses and to allow it the opportunity to earn a fair return
on investments.” Office of People’s Counsel v. Maryland Pub. Serv. Comm’n, 355 Md. 1,
7-8 (1999).
In Maryland People’s Counsel v. Heintz, 69 Md. App. 74, 84 (1986), cert. denied,
309 Md. 48 (1987), this Court explained the traditional formula to establish rates with the
following equation:
𝐑 = 𝐎 + (𝐕 − 𝐃 )𝐫
where R=total revenue required; O=operating expenses; V=value of
property; D=depreciation; and r=rate of return. The property value minus
depreciation yields the rate base. The public service company’s required
revenue is derived after adding the operating expenses to the product of the
rate of return times the rate base. Just and reasonable rates are then set from
this revenue figure taking into consideration the public’s interest in receiving
adequate and efficient service. Traditionally, a just and reasonable rate was
that rate which produced the required revenue figure.
More recently, this Court stated that the rate that a public utility may charge is
determined by
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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.
Bldg. Owners and Mngrs. Ass’n v. Pub. Serv. Comm’n, 93 Md. App. 741,
753, 614 A.2d 1006 (1992) (“BOMA”). Depending on whether the net
income was significantly higher or lower than the test year income, the PSC
[is] empowered to make increases or decreases to rates. Id.
Severstal Sparrows Point, LLC v. Pub. Serv. Comm’n of Maryland, 194 Md. App. 601, 604
(2010).
The Court of Appeals similarly has explained the ratemaking process as follows:
“The orthodox making of public utility rates requires four basic
determinations: (1) what are the enterprise’s gross utility revenues under the
rate structure examined; (2) what are its operating expenses, including
maintenance, depreciation and all taxes, appropriately incurred to produce
those gross revenues; (3) what utility property provides the service for which
rates are charged and thus represents the base (rate base) on which a return
should be earned[;] and (4) what percentage figure (rate of return) should be
applied to the rate base in order to establish the return to which investors in
the utility enterprise are reasonably entitled.”
Office of People’s Counsel, 355 Md. at 8 (quoting Pub. Serv. Comm’n v. Baltimore Gas &
Elec. Co., 273 Md. 357, 360 n.2 (1974)).
Recent Changes in Reliability Regulations
In its order in this case, the Commission stated that, “[a]s far back as August 2010,
the reliability and resiliency of Maryland’s electric distribution infrastructure has been one
of the major focuses of this Commission.” In the Matter of the Application of Potomac
Electric Power Company for an Increase in Its Retail Rates for the Distribution of Electric,
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Case No. 9311, Order No. 85724, at 159 (2013) (“Order No. 85724”). In 2011, the
Maryland General Assembly passed the Maryland Electricity Service Quality and
Reliability Act—Safety Violations, requiring the Commission to adopt stricter regulations
regarding utility performance. HB 391 (Reg. Sess. 2011) (enacting PU §§ 7-213, 13-201,
13-202). On April 17, 2012, the Commission held a rule making session, Rule Making 43
(“RM43”), and adopted revisions to the Code of Maryland Regulations (“COMAR”) that
established minimum service quality and reliability standards for Maryland’s electric
companies. See COMAR 20.50.12.01-.12. Among other provisions, RM43 included a
requirement that the electric utilities report on three reliability indexes: the Customer
Average Interruption Duration Index (“CAIDI”); the System Average Interruption
Duration Index (“SAIDI”); and the System Average Interruption Frequency Index
(“SAIFI”).5 It also requires that utilities demonstrate compliance with minimum standards
established by the Commission. See COMAR 20.50.12.02.
In 2012, Governor Martin O’Malley issued Executive Order 01.01.2012.15,
establishing the Grid Resiliency Task Force, which was charged with evaluating methods
5
CAIDI “represents the average outage duration any customer who experienced an
outage would experience over the course of a year. It can also be viewed as the average
customer restoration time. CAIDI is measured in units of time.” SAIDI “represents the
average outage duration for each customer in the service territory over the course of a year.
SAIDI is measured in units of time.” SAIFI “represents the average number of
interruptions that a customer would experience over the course of a year. Unlike CAIDI
and SAIDI figures, which represent interruption durations, SAIFI is measured in units of
interruptions per customer.” Weathering the Storm: Report of the Grid Resiliency Task
Force 19 (Sep. 24, 2012), available at http://perma.cc/LBB4-YAH6.
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for improving the resiliency and reliability of Maryland’s electric distribution system and
assessing “what steps can be taken to strengthen Maryland’s electric distribution to better
withstand the stresses that come with severe weather events.” Weathering the Storm:
Report of the Grid Resiliency Task Force 6 (Sep. 24, 2012), available at
http://perma.cc/LBB4-YAH6.6 The Task Force was created in response to “the potential
impact of climate change on regional weather patterns and the prolonged power outages
brought by recent hurricanes, blizzards, and the Derecho.”
On September 24, 2012, the Task Force issued its report, recommending, inter alia,
that Maryland’s electric utilities “temporarily go above and beyond their requirements
under RM43 in order to jumpstart the improvements and enable Marylanders to see real
results in a compressed time frame” (Recommendation #2). Recognizing that acceleration
of reliability improvements would place a financial burden on utilities, the Task Force
recommended that the Commission “authorize contemporaneous cost recovery through a
tracker-like mechanism” to permit electric utilities to recover costs “exclusively for these
6
The parties cite the Grid Resiliency Task Force Report as Commission Exhibit 1,
and Pepco suggests that the document was entered into evidence. The record transmitted
to this Court, however, indicates that the report was only marked for identification. In any
event, the report, which was included in the record extract without objection, is a document
of which we can take judicial notice. See Homan v. Branstad, 864 N.W.2d 321, 323 n.1
(Iowa 2015) (taking judicial notice of a government task force report); In re Mandate of
Funds for Ctr. Twp. of Marion County Small Claims Court, 989 N.E.2d 1237, 1239 (Ind.
2013) (same); Reilly v. City & County of San Francisco, 48 Cal. Rptr. 3d 291, 295 n.3 (Ct.
App. 2006) (same).
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accelerated and incremental investments and expenses.”7 The Task Force stated that
“any tracker recovery mechanism must include significant oversight and approval by the
PSC” and would require the utility to “project, with some degree of certainty, the costs of
the various resiliency measures to be undertaken in advance of PSC approval of the plan.”
This would allow “transparency surrounding the process, as well as oversight on the costs
to be collected from ratepayers.”
Pepco’s Application
On November 30, 2012, Pepco, a public service company that provides electric
distribution services to approximately 530,000 customers in Montgomery and Prince
George’s counties, filed an Application for Adjustments to its Retail Rates for the
Distribution of Electric Energy. It stated that, “in order to maintain and enhance its
infrastructure and implement cost-effective distribution technologies, Pepco must continue
to make substantial investments in infrastructure and must have a reasonable opportunity
to recover its costs.”
In April 2013, pursuant to its authority under PU § 4-204, the Commission held a
hearing. The hearing lasted ten days, and twelve parties participated: Pepco, OPC, AARP,
the Commission’s Technical Staff (“Staff”), Montgomery County, Town of Somerset in
Chevy Chase, Mayor and Council of Rockville, City of Gaithersburg, U.S. General
Services Administration (“GSA”), Maryland Energy Administration (“MEA”),
7
A “tracker” is a concurrent surcharge allowing a utility to begin recovering costs
from its ratepayers immediately upon expenditure, rather than waiting until its next rate
case. Order No. 85724, at 135 n.597.
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POWERUPMONTCO of Montgomery County, and Apartment and Office Building
Association of Metropolitan Washington (“AOBA”).
Pepco requested a rate increase of $60,827,000, with an increase in the ROE from
9.31% to 10.25%. It sought to increase its revenue through multiple adjustments.8 With
respect to rate base, which represents the investments the Company has made in plant and
equipment to provide electric service, and operating income, which is derived from the
revenues the Company receives minus the reasonable costs incurred in providing service,
Pepco proposed three separate reliability plant ratemaking adjustments (“RMA”).
Specifically, Pepco proposed “RMA1,” which “annualizes the effect of reliability projects
completed in the test year”; “RMA2,” which “reflects the effect of reliability plant that was
added to Electric Plant in Service (“EPIS”) from January through March 2013”; and
“RMA3,” which “reflects the impact of reliability projects that are projected to be placed
8
The complete list of proposed areas of rate base and operating income adjustments
included the following: (1) Reliability Plant Additions; (2) Net Operating Loss Carry-
Forward (NOLC); (3) Depreciation; (4) Amortization of 2012 Major Storms; (5)
Vegetation Management; (6) Cash Working Capital; (7) Annual Incentive Plan; (8) Energy
Advisors and Energy Engineers; (9) AMI Meters; (10) Average Overtime Expense; (11)
Rate Case Expense; (12) Uncollectibles; (13) Employee Activity Costs; (14) Supplemental
Executive Retirement Plan Expense; (15) Directors and Officers Liability Insurance; (16)
Materials and Supplies; (17) Excess Outside Legal Expense; (18) Accenture Expenses;
(19) Case No. 9214 Expense; (20) “Excess” Long-Term Debt Costs; (21) Allowance for
Funds Used During Construction; and (22) Interest Synchronization. We will address only
the issues presented the appeal.
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in service between April and December of 2013, up to twelve months after the test year.”
See Order No. 85724, at 10-11.9
With respect to the ROE, Pepco stated that, at the current rates, its current adjusted
ROE was 4.71%, a level “far below its authorized [ROE] as set by the Commissioner.”
Pepco requested a ROE of 10.25%.
Separate from the requested adjustments to the base rates, Pepco asked to establish
a surcharge tracker, the GRC, which would “enable Pepco to accelerate investment in
infrastructure in a condensed time frame consistent with Recommendation Two of the Grid
Resiliency Task Force.” The Commission summarized Pepco’s request as a $192 million
surcharge, consisting of “three specific reliability projects: $17 million for Accelerated
Vegetation Management; $151 million for Selective Undergrounding of six feeders;[10] and
$24 million for an Accelerated Priority Feeders project to accelerate the hardening of 24
feeders over two years.” Joseph F. Janocha, Manager of Rate Economics for Pepco
Holdings, Inc. (“PHI”), testified that the GRC was “intended to be a short term mechanism
. . . to initially recover costs associated with a specific, limited group of projects,” and it
included a final reconciliation procedure to resolve any discrepancy between the estimated
9
Although the circuit court’s decision regarding RMA1, RMA2, and RMA3 is not
the subject of this appeal, we mention the RMAs because the Maryland Office of the
People’s Counsel (“OPC”) compares the standard the Commission used to approve and
reject these adjustments with the standard the Commission applied when approving the
GRC.
10
“Feeders” are relatively low voltage distribution lines that originate at distribution
substations and deliver electricity to end users (i.e., customers) attached to the feeder grid.
Order No. 85724, at 16.
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revenue requirement, i.e., the amount Pepco expected to spend on accelerated
reliability/resiliency improvement projects, and the amount Pepco actually spent
improving infrastructure and installing assets. Any discrepancy would “be reflected in the
reconciliation process and customers would be appropriately credited, including interest.”
Public Service Commission Order No. 85724
On July 12, 2013, the Commission issued Order No. 85724, a 166-page order
addressing Pepco’s rate increase application. With respect to Pepco’s rate base and
operating income, the Commission found that RMA1 and RMA2 represented additions to
plants in service through March 2013, which Pepco updated for actual spending.
Therefore, it determined that those reliability projects should be reflected in the rate base,
and it increased the rate base accordingly. With respect to RMA3, which it deemed to be
a mere forecast of anticipated spending that was not a known and measurable adjustment,
the Commission rejected this proposal.
In addressing Pepco’s proposed ROE, the Commission stated that it was guided by
the principles of Bluefield Waterworks & Implement Co. v. Public Service Commission of
West Virginia, 262 U.S. 679, 692 (1923) and Federal Power Commission v. Hope Natural
Gas Co., 320 U.S. 591, 603 (1944), which require that a return be sufficient to attract capital
on reasonable terms, maintain the utility’s financial integrity, and provide an opportunity
to obtain a revenue comparable to other investments carrying similar risks. Addressing the
evidence before it, the Commission concluded that a ROE of 9.36% was just and
reasonable.
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Finally, with respect to the GRC, the Commission approved the proposal, in part. It
approved only the Accelerated Priority Feeders project, subject to the conditions that
Pepco: (1) provide additional detail for each feeder to be improved; (2) submit a revised
calculation of revenue requirement that excluded the two rejected projects; (3) submit a
base rate case petition that coincided with the projected completion of the approved project;
and (4) submit an annual report regarding the status and costs of the project.
In sum, the Commission rejected Pepco’s request for a rate increase of $60,827,000,
but it authorized Pepco to file revised rates for an increase in revenue of $27,883,000. It
stated that this revenue increase would have an impact on the average residential
customer’s monthly bill of 2.19% or $2.41. The Commission also approved the GRC
proposal with respect to the Acceleration Priority Feeders component, subject to the
conditions specified.11
Proceedings in the Circuit Court for Baltimore City
After the Commission issued its order, Pepco, Montgomery County, AARP, and
OPC, filed separate petitions for judicial review, which were consolidated. In total, the
11
Commissioner Lawrence Brenner filed a separate statement, concurring in part.
He stated that, although he would have preferred an approach other than the GRC, he
nonetheless concurred because he believed that the Accelerated Priority Feeders project
was “worthwhile,” and he wanted to avoid a Commission stalemate that would have
resulted in the project not being approved. Commissioner Harold D. Williams also filed a
separate statement, in which he dissented regarding the decision to allow the GRC.
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parties challenged nine separate decisions of the Commission, including its decisions
setting Pepco’s ROE and authorizing Pepco to implement the GRC.12
On November 14, 2014, after hearing argument, the circuit court issued its Order
and Memorandum Opinion. The court affirmed the Commission on eight of the issues,
including the GRC. It reversed the Commission’s decision regarding the ROE, however,
remanding to the Commission “to make more specific findings regarding the impact of
improved service reliability and the BSA [bill stabilization adjustment] in calculating
Pepco’s ROE.”
On December 15, 2014, and December 19, 2014, OPC and AARP, respectively,
filed notices of appeal.
DISCUSSION
I.
Standard of Review
“We review decisions of the Commission as ‘consistent with the standard of review
applicable to all administrative agencies.’” Columbia Gas of Maryland, Inc. v. Pub. Serv.
Comm’n of Maryland, 224 Md. App. 575, 580 (2015) (quoting Office of People’s Counsel
12
The circuit court listed the issues raised by the parties are as follows: (1) Pepco’s
ROE; (2) the inclusion of AMI meters in Pepco’s rate base; (3) Pepco’s cash working
capital allowance; (4) the inclusion of Pepco’s supplemental executive retirement plan in
the rate base; (5) the inclusion of Pepco’s directors’ and officers’ liability insurance in the
rate base; (6) the limitation of test year data to no more than four months of projected data
(the “8 and 4 rule”); (7) the grid resiliency charge (GRC); (8) the inclusion of net operating
loss carryforward in Pepco’s rate base; and (9) accumulated depreciation.
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v. Maryland Pub. Serv. Comm’n, 355 Md. 1, 15 (1999)). The limited scope of judicial
review of Commission decisions is set forth in PU § 3-203, as follows.
Every final decision, order, or regulation of the Commission is prima
facie correct and shall be affirmed unless clearly shown to be:
(1) unconstitutional;
(2) outside the statutory authority or jurisdiction of the Commission;
(3) made on unlawful procedure;
(4) arbitrary or capricious;
(5) affected by other error of law; or
(6) if the subject of review is an order entered in a contested proceeding
after a hearing, the order is unsupported by substantial evidence on the record
considered as a whole.
This Court has explained the scope of our review as follows:
Because a final decision of the Commission is prima facie correct, it
“will not be disturbed on the basis of a factual question except upon clear and
satisfactory evidence that it was unlawful and unreasonable.” Office of the
People’s Counsel v. Maryland Public Service Commission, 355 Md. 1, 14
(1999). Indeed, if reasoning minds could reasonably reach the Commission’s
decision from the facts in the record, then the decision is based upon
substantial evidence, and we will not reject that conclusion. Liberty Nursing
Center, Inc. v. Department of Health and Mental Hygiene, 330 Md. 433,
442-43 (1993).
Finally, in reviewing a decision of an agency, our role “is precisely
the same as that of the circuit court.” Department of Health & Mental
Hygiene v. Shrieves, 100 Md. App. 283, 303-04 (1994). Consequently, we
“do not evaluate the findings of fact and conclusions of law made by the
circuit court.” Consumer Protection Division v. Luskin’s, Inc., 120 Md. App.
1, 22 (1998), rev’d in part on other grounds, 353 Md. 335 (1999). This Court
is not concerned with whether the circuit court applied the correct standard
of review so long as we are satisfied that the agency decision is proper. Giant
Food, Inc. v. Department of Labor, Licensing and Regulation, 124 Md. App.
357, 363 (1999), rev’d on other grounds, 356 Md. 180 (1999).
Mid-Atl. Power Supply Ass’n v. Maryland Pub. Serv. Comm’n, 143 Md. App. 419, 432
(2002) (parallel citations omitted). Accord Severstal Sparrows Point, 194 Md. App. at 610.
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II.
Grid Resiliency Charge
Appellants contend that the Commission erred in authorizing Pepco to impose the
GRC. In support, both OPC and AARP argue that the Commission exceeded its statutory
authority to approve the GRC because it was not a “just and reasonable rate.” OPC
additionally argues that the Commission “acted arbitrarily and capriciously when it
abandoned the ‘known and measurable’ standard for reliability projects and adopted the
‘accelerated and incremental’ standard.” And AARP argues that the Commission’s
decision to approve the GRC was not reasonable because there was not substantial evidence
that Pepco would have suffered financial strain without the GRC surcharge.
Pepco contends that appellants’ argument that the Commission lacked the statutory
authority to approve the GRC is not properly before this Court because it was not raised
before the Commission. In any event, Pepco asserts, the Commission had the statutory
authority to approve the GRC “pursuant to its plenary rate-making authority under PU § 4-
101.” Pepco further disputes OPC’s argument that the decision to approve the GRC was
arbitrary and capricious, asserting that the Commission provided a reasoned analysis for
its approval of the GRC. With respect to AARP’s argument that the approval of the GRC
was not supported by substantial evidence of financial strain, Pepco asserts that such a
finding was not required.
The Commission contends that it had authority to authorize the GRC under its
“broad powers” pursuant to PU § 2-112(b)(2). It further argues that its decision was not
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arbitrary and capricious, asserting that it provided several valid reasons for approving the
GRC. With respect to AARP’s argument that “the Commission acted arbitrarily and
capriciously because ‘there was no substantial evidence presented showing that Pepco
would encounter any financial strain . . . without the benefit of the GRC,” the Commission
asserts that AARP is applying the wrong test. It argues that the proper test is “just and
reasonable,” not a showing of financial strain.
A.
Proceedings Below
In support of its GRC proposal, Pepco submitted the testimony of three company
witnesses: Frederick J. Boyle, Senior Vice President and Chief Financial Officer of PHI,
William M. Gausman, Senior Vice President of Strategic Initiatives for PHI, and
Mr. Janocha, Manager of Rate Economics for PHI. Mr. Boyle explained that Pepco’s rate
increase application included accelerated service reliability programs that addressed
recommendations set forth by the Grid Resiliency Task Force. He testified that Pepco
would not accelerate these proposed projects without the GRC:
These accelerated expenditures are incremental to the Company’s base
capital and operating cost plans. Absent the Grid Resiliency Charge, the
Company, while meeting its current reliability standards, will not perform
these projects in this time frame. As the Task Force acknowledged, taking
on this added level of investment will impose “undue financial pressure on
the utilities,” and therefore the Task Force recommended that the
Commission authorize contemporaneous cost recovery through a tracker-like
mechanism for the accelerated investments.”
After discussing in more detail each of the three proposed accelerated reliability projects,
Mr. Boyle noted that “the proposed Grid Resiliency Charge will appear as a separate line
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item on customers’ bills. . . . If the charges are approved, the monthly bill impact for a
residential customer using 1,000 kWh per month would be $0.96 in 2014; $1.70 in 2015
and $1.93 in 2016.”
Mr. Boyle explained that the GRC “in no way affects the Commission’s ability or
authority to conduct a prudence review of Grid Resiliency Charge investments and
expenses, and – as with any other investment or expense – ultimately determine to exclude
or reduce recovery for any item that the Commission deems imprudent.” He also discussed
Pepco’s proposed “true-up” process, which would result “in customers[] paying for the
actual amount of the project based on when the asset was actually placed into service.”13
On cross-examination, Mr. Boyle explained that, although Pepco’s GRC proposal
indicated the company’s intent to keep the GRC in effect for three years, Pepco would
nonetheless continue to collect the GRC until Pepco brought its next rate case. Mr. Boyle
conceded that Pepco had not yet committed to a specific date on which the company would
initiate another rate case.
13
In its initial brief to the Commission, Pepco described the “true-up” process as
follows:
To address any potential variance between actual expenditures and the
projections on which the Grid Resiliency Charge is based, the Company has
built in a monthly over/under recovery calculation to track as a deferred
balance any difference between projected expenditures and actual
expenditures, and the balance would be reconciled upon termination of the
Grid Resiliency Charge. The deferred balance will accrue interest calculated
monthly at the Company’s short-term debt rate.
(footnotes omitted).
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Mr. Gausman’s direct testimony was similar to Mr. Boyle’s testimony. Most
notably, Mr. Gausman testified that, without the GRC tracker, the company would not
perform the proposed projects on an accelerated schedule:
Performing these projects on the accelerated schedule is not included in the
Company’s scope of work to meet its SAIFI and SAIDI performance
requirements under the Service Quality and Reliability Standards. The
company is prepared to perform these projects to address the acceleration
recommended in the Task Force Report. However, as discussed by Company
Witness Boyle and as discussed further, the Company cannot take on the
additional investment on top of the significant financial commitment that has
already been made. Additional investments to further accelerate the
reliability standards can only be made with approval of the Grid Resiliency
Charge.
Mr. Janocha testified that the GRC, “Pepco’s proposed tracker mechanism,” was
based on recommendations of the Task Force report. He explained:
The company is proposing a recovery mechanism associated only with
incremental accelerated investments and expenses associated with the
reliability projects discussed by Company Witness Gausman. The Grid
Resiliency Charge will be incorporated into the tariff through a new tariff
rider, which is provided as Schedule (JFJ)-6. The Grid Resiliency Charge
would be in effect for approximately three years beginning in January 2014.
Mr. Janocha also described how the GRC was calculated:
The revenue requirement and resulting charge included in the Grid
Resiliency Charge Rider are calculated using projected cost data including,
but not limited to: the actual costs of engineering, design and construction;
the cost of removal (net of salvage) and property acquisition; and actual
labor, materials, and capitalized Allowance for Funds Used During
Construction (AFUDC). The Company will track the capital investments
individually for each project through a separate work order in a Construction
Work in Progress (CWIP) account and record a monthly accrual of AFUDC
which will be included in the CWIP balance.
The revenue requirement includes a return on investment and return
of investment through depreciation based on the capital costs. The revenue
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requirement also includes a provision for the recovery of accelerated tree
trimming expenses, which the Company proposes to amortize over two years
beginning in January 2014.
Mr. Janocha noted that the GRC would be subject to deferred accounting. Pepco
would track the differences between actual and forecasted expenditures through a “monthly
over/under recovery calculation.” “The deferred balance would be reconciled upon
termination of the Grid Resiliency Charge.” Pepco proposed to file an “annual report
showing the status of each project, tasks completed, percentage of projects completed, and
actual expenditures to date.” Mr. Janocha then discussed how the GRC rates would be
developed for each of Pepco’s tariff rate schedules. As with Pepco’s other witnesses,
Mr. Janocha stated that the GRC charge would terminate when it filed its next rate case
after all the GRC projects are “placed into service.”
In his rebuttal testimony, Mr. Janocha responded to concerns regarding the use of
projected costs, as well as the argument that the Commission had rejected similarly
structured surcharges:
The nature of the costs being recovered through the Grid Resiliency
Charge and the mechanism developed for cost recovery have features that
distinguish it from either a forecasted test year or the previously presented
surcharge mechanisms. First, the Grid Resiliency Charge is intended to be a
short term mechanism intended to initially recover costs associated with a
specific, limited group of projects presented in this proceeding. Ultimately,
the long term recovery of the capital investment would be through base
distribution rates. By contract, the Reliability Investment Recovery
Mechanism proposed by the Company in Case No. 9286 was designed as a
more long term mechanism, intended as an initial recovery mechanism for a
wide range of reliability investments.
Second, the nature of the projects included for recovery through the
Grid Resiliency Charge are such that electric plant is placed in service on
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essentially a continuous basis from the outset of each project. The Grid
Resiliency Charge accounts for this by calculating an annual revenue
requirement using an average rate base. Consequently, on an annual basis,
customers are effectively paying for infrastructure as it is being placed into
service.
Mr. Janocha reiterated that customers would pay only for investments actually put
into service:
[T]he proposed deferred accounting mechanism provides a level of customer
protection through which customers will ultimately have paid only for
approved electric plant that is placed in service. The Grid Resiliency Charge
mechanism includes a final reconciliation of the forecasted revenue
requirement to the actual revenue requirement associated with electric plant
actually placed into service. Additionally, all investment associated with the
Grid Resiliency Charge will be subject to review in a future base distribution
case. Any costs that may be disallowed will be reflected in the reconciliation
process and customers would be appropriately credited, including interest.
In opposition to Pepco’s GRC proposal, OPC submitted testimony from two
witnesses: David E. Dismukes, Consulting Economist with the Acadian Consulting Group,
and Peter J. Lanzalotta, Principal with Lanzalotta & Associates LLC. Mr. Dismukes
recommended that the Commission reject the Company’s GRC proposal, asserting that it
was “premature, inconsistent with the recommendations included in the Governor’s
Resiliency Task Force Report, includes a number of inherent mechanism design flaws, and
is inconsistent with prior Commission precedent on infrastructure trackers.” With respect
to his prematurity argument, Mr. Dismukes stated that, there were “a number of
prerequisite investigations that must be completed before a true resiliency-based set of
standards can be established for Maryland.”
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With respect to his assertion that the GRC proposal had “inherent mechanism design
flaws,” Mr. Dismukes stated that the proposed GRC contained a number of “administrative
deficiencies,” including the following:
1) The “defined term” of the program is ambiguous.
2) The GRC revenue requirement will be developed on a projected rather
than actual basis.
3) The Company does not explain how or when the prudence of its
investments will be evaluated.
4) The Company’s proposed annual reporting process is insufficient.
5) The GRC proposal does not include any ratepayer protections.
Further, “coupling” the BSA with the proposed GRC could create
capital inefficiencies and lead to a string of ever-increasing surcharges
(for both BSA-allowed revenue losses and GRC-allowed capital
investments).
6) The GRC has no sunset provisions.
Mr. Dismukes asserted that the GRC proposal was inconsistent with prior
Commission precedent, stating that the Commission had addressed several similar
infrastructure cost recovery mechanisms, and it had rejected each one. He stated:
The consistent theme in each of these rejections has included the
Commission’s belief that its current regulatory structure is adequate in
addressing reliability investment needs, and the position that the practical
implementation of investment cost trackers, projected rate base, or forward
test years can likely result in greater inefficiencies, disincentives, and harm
than the problems these proposals are purportedly designed to correct. The
Commission should defer any decision on issues like the GRC, and how to
incorporate the accelerated and incremental resiliency and reliability
investments proposed by the Task Force, until a comprehensive
investigations of these opportunities, has been conducted.
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At the hearing before the Commission, Mr. Dismukes agreed that the Commission
was not precluded by precedent from approving the GRC. He stated, contrary to OPC’s
position on appeal that the Commission lacked statutory authority to approve the GRC, that
the “Commission can do whatever it wants in the public interest.”
Mr. Lanzalotta similarly recommended that the Commission reject all three of
Pepco’s proposed GRC projects, asserting that Pepco had “not demonstrated that such work
[would] successfully improve reliability during major outage events.” He discussed
specific reasons why various aspects of the GRC proposal failed to ensure reliability
improvements.
AARP submitted testimony from one witness, Ralph C. Smith, Senior Regulatory
Utility Consultant with Larkin & Associates, PLLC, in opposition to Pepco’s GRC
proposal. Mr. Smith asserted that “Pepco has merely stated that it cannot undertake
additional reliability projects without its new proposed surcharge. However, Pepco has not
proven this.” Mr. Smith recommended that the Commission reject Pepco’s GRC proposal,
stating that his position was “primarily based on an opposition to piecemeal ratemaking,
surcharges and riders that seek recovery of costs outside of traditional base rates, a concern
that has been shared by this Commission as reflected in its decisions on such proposals in
the past.” He further stated that he had “additional concerns regarding the specific details
of Pepco’s proposed [GRC].” Noting that a “utility is obligated to provide reasonable
service and to invest in the maintenance and reliability of its distribution system as a normal
duty.” Mr. Smith stated that Pepco had
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failed to document adequate reasons why a specific rider is needed to
continue or expand its program of investments and tree trimming
expenditures that is needed to deliver adequate and reasonable reliability of
electric distribution service. Nor has the Company presented adequate
cost-benefit analysis to justify its proposed additional charges to ratepayers
for this surcharge. Relying on a surcharge for recovery of costs also
unbalances the traditional regulatory process and rewards the Company by
allowing rate recovery and financing costs for selected expenditures made
between rate cases, and without the balanced review of all elements of the
utilities revenue requirement that would occur in a rate case.
Mr. Smith further asserted:
Pepco has a line of credit to $350 million (for which Maryland ratepayers are
being charged) and that existing credit line supports Pepco’s access to
low-cost temporary financing sources, such as commercial paper, that have
a cost rate far below some of the long-term capital source such as Pepco’s
shareholder equity. The existence of Pepco’s short-term borrowing sources
and the lower finance costs associated with such sources should be
considered in addressing whether and how Pepco could finance authorized
Grid Resiliency expenditures between rate cases, and also for determining
the financing cost rate that should be applied if a new surcharge were to be
authorized in the current case.
(footnote omitted).
After considering all the evidence presented regarding Pepco’s GRC proposal, the
Commission rendered its decision. The Commission began by explaining the “backdrop”
for its decision, as well as its general view on accelerated reliability work:
As far back as August 2010, the reliability and resiliency of
Maryland’s electric distribution infrastructure has been one of the major
focuses of this Commission. Since then we have departed from our
traditional ratemaking principles by allowing end-of-test year reliability
plant and three month post-test year reliability spending adjustments in rate
cases. In several of the rate cases since then we have been asked to approve
a concurrent surcharge for proposed reliability projects, but to date we have
found those proposals lacking. Last year, following the power outages
throughout the State caused by the Derecho storm, the [Task Force]
appointed by the Governor recommended that such reliability spending
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surcharges may be appropriate. It is with this backdrop that we consider in
this case Pepco’s proposed Grid Resiliency Charge.
The Company has identified specific infrastructure improvements that
would produce accelerated and incremental reliability benefits. These
projects, by virtue of their incremental benefits, are designed to exceed the
scope of the utility’s plan to realize their RM43 annual performance
standards. We find that a properly defined tracker proposal, when aligned
with specific and measurable milestones and expenditures, can be
appropriate to support the projects that are required to address the immediate
challenges to improving reliability in Maryland. Although the proposals for
trackers presented to us to date have been lacking in certain areas, the need
for accelerated reliability work coupled with an aligned cost recovery
mechanism is in our view justified, and indeed beneficial to ratepayers, under
certain circumstances.
The [Task Force] Report stated that accelerated reliability cost
recovery would be “exclusively for accelerated and incremental investments
and expenses.” Hence, a paramount question for us in deciding whether to
grant the Company’s GRC Proposal is whether, on this current record, we
find that the proposed projects are accelerated and incremental to what is
required to meet the current minimum reliability standards. And if so, the
next question is whether the level of increased reliability and resiliency
gained warrant a departure from Commission precedent.
The Commission then addressed Pepco’s GRC proposal. With respect to the
Advanced Priority Feeders, the only proposal at issue here, the Commission stated as
follows:
Company Witness Gausman stated that the priority feeders chosen under the
GRC Proposal include “outage data without exclusions for major events.”
(emphasis added). Currently, the Company takes corrective action on the
poorest performing 3% of feeders, identified by a methodology that excludes
major storm events. We find that the remediation to the priority feeders will
provide cost effective incremental reliability benefits to the end users
associated with feeders particularly prone to outages due to major storm
events. The fact that this Accelerated Priority Feeders project includes 24
feeders in addition to the 55 feeders already in the 2013 base construction
plan satisfies the acceleration component of the GRC.
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Accordingly, the Commission approved Pepco’s GRC proposal with respect to the
Advanced Priority Feeders component, subject to the following conditions:
First, because this is a new tool we are considering undertaking for
accelerated reliability work, we are obligated to the State and to the
ratepayers to closely monitor the success and effectiveness of such a
mechanism. To accomplish this, a tracker proposal must specifically identify
a list of qualifying projects, a timeline, and interim milestones. The project
descriptions must contain sufficient detail so as to track progress and related
costs, and a commitment that any deviation from the project list requires
further Commission approval. We recognize that the Company has supplied
this information to some degree for the GRC. In this case, however, we direct
the Company to provide additional detail for each feeder that includes the
following: (1) a description of the proposed hardening work; (2) a
performance objective for each project; (3) incremental milestones and
estimated costs for each feeder project; and (4) estimated total costs.
Second, we also recognize that Company Witness Janocha laid the
foundation for a detailed cost recovery mechanism and rate design in his
discussion of a new tariff rider. We approve this methodology for calculating
the revenue requirement and resulting charge under the GRC Rider.
However, since we do not approve either the Vegetation Management or
Selective Undergrounding components of the Company’s GRC proposal at
this time, we direct the Company to submit a revised calculation of revenue
requirement to set the initial rates specific to the approved list of qualifying
feeder projects as described by Witness Janocha. We note that the GRC cost
recovery in 2014 attributed to priority feeders is estimated to be $0.06 per
month for a typical residential customer. Given that the GRC would be
limited in scope to the Accelerated Priority Feeders project, we decline to
adopt the Company’s proposed incentive structure.
Third, we share the concerns and criticism by several of the other
parties with respect to the lack of a sunset date and certain other consumer
protection measures in the GRC proposal design. To this end, we direct the
Company to submit a base rate case petition that aligns with the projected
completion date of the qualifying projects, and stipulate that the qualifying
projects and GRC revenues are subject to full review in the next base rate
case following the completion of these projects. At that time, if the net
capitalized amount of the qualifying projects is deemed reasonable and
prudent, such costs will be rolled into the rate base resulting in termination
of the GRC mechanism.
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Lastly, we agree with concerns raised by several parties to the case
that the Company’s proposal in its current form does not contain assurances
that expenditures will be just and reasonable. To this end, we direct the
Company to provide an annual report to the Commission and Staff which
includes: (1) the status of each project and respective milestones completed;
(2) actual money spent to date on each project and respective milestone; (3)
the reconciliation of projected costs and recoveries that includes a true-up
calculation of over- and under- recoveries; and (4) a proposed rate for the
GRC for the subsequent year, including bill impact estimates. Following the
annual report submission, the Commission will issue an order to establish the
Company’s proposed new annual GRC adjustment for the following year.
The Commission then discussed why it denied the Accelerated Vegetation
Management component of the GRC, as well as the Selective Undergrounding project. It
then concluded by stating that it “conditionally approve[d] [Pepco’s] GRC proposal,
limited in scope to its Advanced Priority Feeders component.” Order No. 85724, at 159-
64.
On appeal, the circuit court affirmed the Commission’s decision to allow the GRC,
concluding that PU § 2-112(b)(2) grants the Commission “implied and incidental powers
needed or proper to carry out its functions” and PU § 2-112(c) states that “the powers of
the Commission shall be construed liberally.” The court stated that the Commission
“carefully considered Pepco’s GRC proposal and based its decision on the testimony of the
various witnesses,” it “provided a reasoned explanation of partially granting Pepco’s GRC
request, and explained why it was willing to impose this surcharge, which it had previously
declined to do in prior rate cases.”
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B.
Statutory Authority to Approve the GRC
OPC and AARP argue that the Commission did not have statutory authority to
approve the GRC. In particular, they assert that, pursuant to PU § 4-101, the Commission
is authorized to approve rates only if they are “just and reasonable,” and one requirement
of just and reasonable rates is that the rate will result in an operating income that yields “a
reasonable return on the fair value of the public service company’s property used and useful
in providing service to the public.” PU § 4-101(3). They assert that the Commission
exceeded its statutory authority when it authorized cost recovery through the GRC because
it authorized collection of a return on property before it was in service, and therefore, before
it was “used and useful” in providing service to the public.
Pepco contends that this argument is not properly before this Court because
appellants did not raise it before the Commission. In support, Pepco cites Brodie v. Motor
Vehicle Administration of Maryland, 367 Md. 1 (2001), for the proposition that “a
reviewing court will not consider a statutory interpretation argument unless [it] was
presented to the agency.”
AARP does not dispute that it did not raise the issue of the Commission’s authority
to approve the GRC, but it asserts that this Court can address the issue nevertheless. 14 In
support, it cites Md. Rule 8-131(a), asserting that “issues about the jurisdiction of the trial
14
Although both AARP and OPC filed reply briefs, only AARP addressed Pepco’s
preservation argument.
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court over the subject matter may be ‘raised in and decided by the appellate court whether
or not raised in and decided by the trial court.’”
We agree with Pepco that the issue whether the Commission exceeded its statutory
authority in approving the GRC is not properly before this Court. In Brodie, 367 Md. at 2,
the Court of Appeals was presented with a single question: “[W]hether the MVA was
authorized to revoke a driver’s license that already had been revoked.” Id. The Court
concluded that it was unable to address the question because that issue was raised for the
first time in the circuit court. Id. at 3-4. The Court noted the general rule that, in an action
for judicial review of an adjudicatory decision by an administrative agency, a reviewing
court ordinarily
“may not pass upon issues presented to it for the first time on judicial review
and that are not encompassed in the final decision of the administrative
agency. Stated differently, a . . . court will review an adjudicatory agency
decision solely on the grounds relied upon by the agency.”
Id. at 4 (quoting Dep’t of Health v. Campbell, 364 Md. 108, 123 (2001)). The Court
concluded:
Since Brodie’s entire challenge to the administrative decision was
based on an issue not raised before the agency, the Circuit Court should have
affirmed the administrative decision without reaching the issue. Dept. of
Health v. Campbell, supra, 364 Md. at 123-124, 771 A.2d at 1060 (“Because
the issue . . . [was] presented to the Circuit Court for the first time and never
raised . . . [before] the Administrative Law Judges, that court erred in” ruling
upon the issue). Likewise, we shall uphold the decisions below without
reaching the only issue presented to us.
Id. Accord Pub. Serv. Comm’n of Maryland v. Panda-Brandywine, L.P., 375 Md. 185, 204
(2003) (An issue that was not raised before the Commission or encompassed in the final
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decision of the agency should not be addressed by the appellate court on judicial review of
that decision.).
In the present case, the record reflects that appellants did not argue before the
Commission that the Commission did not have the statutory authority to impose the GRC.
Indeed, as indicated, Mr. Dismukes, OPC’s witness, stated that, with respect to the GRC,
the Commission could “do whatever it wants in the public interest.” Because the parties
did not raise before the Commission the argument they raise on appeal, i.e., that the
Commission did not have the statutory authority to approve the GRC, we will not address
the argument.
We do not agree with AARP that this issue involves a question of jurisdiction that
can be raised at any time. The Commission’s subject matter jurisdiction to consider
electric utility rate adjustments is not being challenged, but rather, the challenge is whether
the statutory scheme permitted the Commission to approve the GRC, a “tracker” surcharge.
In Brodie, 367 Md. at 3-4, the Court of Appeals held that a challenge to the statutory
authority of an administrative agency to take a certain action would not be reviewed by the
appellate court if that argument was not made to the administrative agency. That holding
compels our conclusion here.
We turn, therefore, to the issues that are preserved for this Court’s review.
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C.
Arbitrary and Capricious
OPC argues that “the Commission acted arbitrarily and capriciously” in affirming
the GRC. It asserts that, “without any valid reason, [the Commission] contradicted three
years of its own previous decisions imposing a ‘known and measurable’ standard” on future
test-year expenditures.15 It contends that the Commission ignored traditional utility
ratemaking principles, and instead, it “adopted an ‘accelerated and incremental’ standard
for the GRC.”
The Commission has broad powers under the Public Utilities Article to regulate
utility rates. See PU §§ 2-112, 2-113, 4-102. As this Court has explained, the “only
statutory imperative is to construct and approve just and reasonable rates . . . which, among
other things, fully consider and are consistent with the public good.” Bldg. Owners &
Managers Ass’n of Metro. Baltimore, Inc. v. Pub. Serv. Comm’n of Maryland, 93 Md. App.
741, 762 (1992) (citation and quotations omitted).
15
In support, OPC cites several cases. See e.g. In re Potomac Electric Power Co.,
103 Md. P.S.C. 293, 304 (July 20, 2012) (Case No. 9286, Order No. 85028) (rejecting
Pepco’s request for a new monthly surcharge to recover, in advance, before a new rate case,
certain reliability-oriented capital projects”); In Re Washington Gas Light, 102 Md. P.S.C.
332, 341-42 (Nov. 14, 2011) (Case No. 9267, Order No. 84475) (rejecting BGE’s request
to impose a surcharge to finance a project to replace its piping infrastructure); In re
Baltimore Gas & Elec. Co., 101 Md. P.S.C. 149, 154, 164-65 (June 21, 2010) (Case No.
9208, Order No. 83410) (rejecting Baltimore Gas and Electric Company’s request to
impose a “tracker” surcharge to pay for the installation of smart meters, and noting the
narrow range of circumstances in which surcharges are appropriate to include “very large,
non-recurring expense items that have the potential to seriously impair a utility’s financial
well-being and that do not contribute to the Company’s rate base”).
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As appellees note, the terms “known and measurable” are not included in the statute.
OPC, therefore, does not allege in this argument that the Commission did not have
authority to approve the GRC in the absence of costs that are known and measureable.
Rather, OPC claims that the “known and measurable” standard is what the Commission
has used for reliability projects, in this case with the RMA3 and in previous cases, and the
Commission’s failure to do so in approving the GRC renders its decision arbitrary and
capricious.
OPC acknowledges that the Commission may have some discretion to determine if
a rate is “just and reasonable.” It argues, however, that the Commission does not have
discretion “to arbitrarily adopt standards which appear to be irrational, inconsistent with
previous agency decisions and enunciated policies adopted in prior cases regarding matters
within its discretion, and without any adequate explanation for the inconsistency.”16
The Commission acknowledges that it previously has stated “that costs based only
upon estimates are not known and measurable,” and it has denied recovery for such costs.
Both the Commission and Pepco, however, assert that the decision to approve the GRC in
this case was not arbitrary because the proposal was different from those other cases, and
there were circumstances justifying the different result here. The Commission states that
the proposal here was based on more specific, verifiable estimates of costs through prior
16
OPC contends that, if the Commission had applied the “known and measurable
standard to the GRC, as it did in its rejection of RMA3, the GRC would have failed to meet
the standard because Pepco could give only estimates for the work involved to upgrade the
feeders involved.
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proposals. Moreover, Pepco notes that, unlike other proposals, the Commission approved
the GRC only after imposing conditions, which included detailed reporting by Pepco and
a sunset, at which time the Commission would make a determination “whether the
expenditures were prudent.” Moreover, both the Commission and Pepco assert that the
Commission gave a reasoned analysis why it approved the surcharge.
As OPC notes, in Harvey v. Marshall, 389 Md. 243, 302-03 (2005), the Court of
Appeals stated that an agency action may be “‘arbitrary or capricious’ if it is irrationally
inconsistent with previous agency decisions.” Here, for the reasons set forth below, we
conclude that the decision to approve the GRC was not arbitrary and capricious.
The parties agree that, in recent years, the Commission has rejected requests for
surcharges, and it typically has denied recovery for estimated costs that are not “known
and measureable.” That does not, however, render the Commission’s decision in this case
arbitrary, for a couple of reasons.
First, the Commission’s prior decisions were based on the specific facts of those
cases, not a hard-and-fast rule that surcharges based on estimated expenses could never be
approved. See, e.g., In re Delmarva Power & Light Co., 100 Md. P.S.C. 435, 443 (Dec.
30, 2009) (Case No. 9192, Order No. 83085) (“[A]s a general rule” the Commission is
“reluctant to deviate from the costs and revenues incurred in a test year,” but a “possible
exception to the test year principle is reliability plant investment,” which would depend on
“the nature of the improvements and the revenue they generate.”) (emphasis added); In re
Delmarva Power & Light Co., 102 Md. P.S.C. 236, 241 (Jul. 8, 2011) (Case No. 9249,
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Order No. 84170) (“[N]ew and different circumstances might persuade [the Commission]
to deviate from the principles that have driven our recent decisions not to allow
infrastructure surcharges.”).
Second, a change in circumstances occurred. In 2012, the Derecho and Superstorm
Sandy, and the power outages that ensued, revealed weaknesses in the electric grid
infrastructure and the need to make accelerated repairs to achieve a more reliable system.17
One of the recommendations issued by the Task Force was to “allow a tracker cost recovery
mechanism for accelerated and incremental investments.” To improve resiliency, the Task
Force recommended:
Allowing utilities to recover costs through a tracker-like mechanism for the
accelerated and incremental investment. Given that these investments would
be above and beyond what is contemplated by the enhanced RM43
regulations, the Task Force believes that it would be appropriate to provide
more contemporaneous cost recovery for these additional expenses. The
tracker mechanism would not apply to the normal investment required to
meet the enhanced RM43 regulations.
The Commission made clear that this was the context in which its decision was
made. It clearly explained its rationale for approving the GRC in this case, when it had
17
On June 29, 2012, a powerful line of thunderstorms known as a derecho
(deh-REY-cho), caused more than 4 million customers to lose power during a prolonged
heat wave, resulting in 34 heat-related deaths that occurred in areas that lost power.
National Oceanic and Atmospheric Administration, Service Assessment – The Historic
Derecho of June 29, 2012, at ix (2013), available at http://perma.cc/92MW-D5A3.
Hurricane Sandy, known as “Superstorm Sandy,” made landfall on October 29, 2012,
causing approximately $50 billion worth of damage, and leaving approximately 8.5 million
customers without power. National Oceanic and Atmospheric Administration, Service
Assessment – Hurricane/Post-Tropical Cyclone Sandy October 22-29, 2012, at iv, 1
(2013), available at http://perma.cc/N6FA-VZ5P.
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denied requests for a surcharge in the past. It stated that, “although the proposals for
trackers presented to us to date have been lacking in certain areas, the need for accelerated
reliability work coupled with an aligned cost recovery mechanism is in our view justified,
and indeed beneficial to ratepayers, under certain circumstances.” The Commission noted
that the GRC involved “specific infrastructure improvements that would produce
acceleration and reliability benefits,” which were designed to exceed Pepco’s annual
performance standards. It further found that “the remediation to the priority feeders will
provide cost effective incremental reliability benefits to the end users associated with
feeders particularly prone to outages due to major storm events.” Accordingly, it approved
Pepco’s GRC proposal with respect to the Advanced Priority Feeders component, subject
to conditions, set forth supra, that allowed the Commission to monitor the effectiveness of
the GRC, including an annual report providing a reconciliation of projected costs and
recoveries.
Thus, the Commission explained the reason why it departed from its prior practice
of denying recovery of estimated costs that were not “known and measurable.” In light of
the circumstances, including “the need for accelerated reliability work,” as well as the
mechanism to monitor the cost-effectiveness of the tracker, we agree with the circuit court
that the Commission did not act arbitrarily and capriciously in approving the GRC.
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D.
Substantial Evidence
AARP’s next argument stems from the statement by the Commission that it was
granting “a limited rate increase and the partial GRC due to the financial strain of Pepco’s
increased reliability spending, and only while demanding specific and measurable
improvements in Pepco’s reliability performance exceeding those set forth in our present
COMAR standards.” (Emphasis added.). It asserts that there was “no substantial evidence
in the record to suggest Pepco would have suffered any financial strain by making the $24
million of improvements in its feeder project without the imposition of the GRC
surcharge.”
Pepco and the Commission argue that AARP’s focus on financial strain is
misplaced. Pepco asserts that “[n]o statute, regulation or Commission precedent requires
the Commission to make a finding that a company would suffer undue financial pressure
by undertaking a project on an accelerated basis without contemporaneous recovery
through a tracker.” Rather, Pepco contends, “under its plenary ratemaking authority, the
Commission has the discretion to consider all relevant factors in determining whether to
approve the GRC as a just and reasonable rate.” Similarly, the Commission argues that the
“test for whether the Commission can impose the GRC surcharge is not whether Pepco can
demonstrate financial strain if it is compelled to complete the $24 million without cost
recovery but whether the GRC surcharge meet[s] the definition of a just and reasonable
rate under PU[] § 4-101.”
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We agree with appellees. To be sure, this Court has said that the traditional formula
for ratemaking “ensures that the utility can ‘make ends meet.’” Heintz, 69 Md. App. at 87.
The required analysis, however, is whether approved rates are “just and reasonable.”
Where, as here, the issue is whether a company should be permitted a surcharge to provide
$24 million in reliability improvements that go above and beyond the legal requirements,
the question is whether the requested surcharge is “just and reasonable,” not whether the
company has the ability to borrow the money to make these voluntary improvements.
Under the circumstances here, the Commission found that, with the appropriate
monitoring and regulatory mechanisms in place, it was just and reasonable to compensate
Pepco for the financial burden of accelerating reliability projects in accordance with the
recommendations in the Task Force report. There was substantial evidence in the record
to find that the GRC was a just and reasonable charge. The circuit court properly rejected
appellants’ contention to the contrary.
III.
Return on Equity
OPC’s next argument involves the Commission’s determination granting Pepco a
ROE of 9.36%. It asserts that the Commission’s determination regarding the ROE was
supported by substantial evidence, and therefore, “the circuit court’s decision should be
reversed.”
Pepco argues that the “circuit court correctly ruled that the Commission’s ROE
award was arbitrary and capricious and not supported by substantial evidence.” It asserts
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that, although “[t]he Commission framed the question presented to be whether anything
had changed since the 2011 Rate Case, it then proceeded to ignore undisputed record
evidence of what had changed in awarding a 9.36% ROE.”
A.
Proceedings Below
As indicated, Pepco requested a ROE of 10.25%. This was an increase from the
9.31% ROE that the Commission awarded in a Rate Case filed in 2011. See In re Potomac
Electric Power Co., 103 Md. P.S.C. 293 (Jul. 20, 2012) (Case No. 9286, Order No. 85028).
Robert B. Hevert, Managing Partner of Sussex Economic Advisor, LLC, summarized his
analysis regarding his 10.25% ROE recommendation, stating that he began with a review
of the Commission’s Order No. 85028 in the 2011 Rate Case. He explained that, in
“keeping with the Commission’s preference for the use of multiple analytical methods, [he]
relied on three widely-accepted approaches: the Constant Growth Discounted Cash Flow
(DCF) model; two forms of the Capital Asset Pricing Model (CAPM); and the Bond Yield
Plus Risk Premium approach.” He stated that his “recommendations and conclusions
consider the Company’s relatively small size and the extent to which the [BSA] mechanism
may have a measurable effect on Pepco’s Cost of Equity,” and that he “calculated the costs
of issuing common stock, and reflected those flotation costs in [his] estimate of the
Company’s Cost of Equity.”18
18
A Bill Stabilization Adjustment Rider (“BSA”) allows an electric company to
decouple its electric rate from sales volume. Dep’t of Legis. Servs., (continued . . . )
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Mr. Hevert noted that the Commission had adjusted Pepco’s ROE 50 basis points
in the 2011 Rate Case as a result of the BSA. He argued that there should be no such
adjustment in this case in light of subsequent orders by the Commission that diluted the
rate-stabilizing effect of the BSA. Mr. Hevert stated that, “[i]n the vast majority of cases,
utility commissions have not made explicit adjustments to the authorized ROEs in response
to the implementation of decoupling mechanisms,” and therefore, he did not believe an
adjustment of 50 basis points to Pepco’s ROE was appropriate. He stated that a “downward
adjustment of 10 basis points to, at most 25 basis points may be supported.”
Subsequently, one Commissioner asked: “[W]hat is the justification that indicates
returns should increase really just kind of four months after we set a return of 9.31 percent
. . . what market indicators have revised so drastically” to support Pepco’s proposed
increase? Mr. Hevert stated that he relied on a case giving another utility a 9.81% ROE,
and then, “because there was the 50 basis point adjustment for the BSA, that would put us
at 10.31 percent.”
(. . . continued) Fiscal and Policy Note, H.B. 29 at 2 (2013), available at
http://perma.cc/C6ZQ-EK5X. It is “a lagged addition to or reduction from a customer’s
monthly bill that aligns actual revenues with expected revenues set in rate cases.” Id. For
example, if there is a lower-than-expected revenue in one month, an increase is applied to
a subsequent billing period, and if there is a higher-than-expected revenue in one month, a
reduction is applied to the customer’s bill in a subsequent month. Id. at 4. The BSA
protects electric companies from being financially impacted by energy conservation and
efficiency programs, as well as unanticipated charges due to severe weather. Id. In 2012,
given a concern that revenue decoupling may have eliminated incentive to restore electrical
services quickly, the Commission issued orders that limited the ability to collect lost sales
revenue after a “major outage event.” Id. Electric companies were “still allowed to collect
revenue for lost energy sales for blue sky outages, short-term outages of less than 24 hours,
and for storms that do not meet the ‘major outage event’ threshold.” Id.
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Commission Brenner later questioned Mr. Hevert about what had changed since
Pepco’s last rate case, in which the Commission set the ROE at 9.31%. Mr. Hevert
acknowledged that interest rates were about the same, and the level of market volatility
was “about the same as it was before.” He continued:
So I agree with you that the capital markets are not materially different
than they were when the order came out. Certainly the data is different,
certainly composition of some of the proxy groups are different. . . . So when
I put all those things together, I do think that the required return still would
be in that range beginning with 10.25 percent.
Charles King, President Emeritus at Snavely King Majoros & Associates, Inc.,
testified on behalf of OPC regarding the appropriate ROE. Mr. King explained that, under
the current statutory and common law scheme,
there are essentially three standards for determining an appropriate return on
equity from the standpoint of the equity owners of a regulated utility. The
first is the “comparable earnings” standard, i.e., that the earnings must be
“commensurate with the returns on investments in other enterprises having
corresponding risks.” The second is that earnings must be sufficient to assure
“confidence in the financial integrity of the enterprise,” and the third is that
they must allow the utility to attract capital.
Using a “classic DCF (Discounted Cash Flow) procedure,” Mr. King evaluated a selection
of comparison utility companies and calculated a mean and median ROE of 9.61% and
9.34% respectively. With respect to the BSA, Mr. King agreed that the 50-basis point
adjustment “might be too high,” noting that the risk-reducing effect of the BSA had been
eroded by the Commission’s decision “not to incorporate the effects of major storms into
that tracker. Without the assurance that the revenue lost from service interruptions resulting
from major weather events, the BSA loses a portion of its risk-reducing potential.”
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Mr. King ultimately recommended a ROE of 9.1% if the GRC was not approved and a
ROE between 8.19 and 8.85% if the GRC was approved.
The Commission’s Staff presented testimony from Dr. Özlen D. Luznar, Regulatory
Economist in the Commission’s Division of Electricity, who recommended that a ROE for
Pepco “be set at 9.36% . . . to earn a just and reasonable return to provide reliable service
to its customers.” With respect to the BSA, Dr. Luznar stated that, although the
Commission in the past had approved a “50 basis [point] adjustment to the final ROE due
to the risk mitigating effects of the BSA,” it recently had noted “the risk mitigating
limitations of the BSA in the current regulatory environment.” Accordingly, Dr. Luznar
did not make an adjustment for the BSA in arriving at his recommended ROE of 9.36%.
The Commission, in making its decision regarding the ROE, noted that it had issued
a decision addressing Pepco’s application for a rate increase approximately four months
prior to the application at issue here. In that case, it “found Pepco’s request for a 10.75%
ROE ‘excessive and totally unjustified,’” noting “that Pepco faced minimal risk because
of its status as a monopoly provider of electric distribution service, its lack of ownership
of any generating facilities, and its stable service territory.” It further “found that the low
interest rate environment that existed at the time of the Order provided Pepco with ample
opportunity to attract necessary capital at reasonable rates.” After considering the
economic factors Pepco faced at the time, the Company’s need for capital, and its poor
service reliability performance at the time, the Commission granted Pepco, in Case No.
9286, a ROE of 9.31%.
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The Commission turned to the present case. It stated:
The obvious question in this case, therefore, regarding Pepco’s
request for a 10.25% ROE is, what has changed in less than one year since
we last established a just and reasonable ROE, that now might justify a higher
return?
Pepco has not demonstrated any significant changes in the economic
environment faced by the Company. It is still a monopolistic provider of
electric distribution service that operates in a stable service territory. Its
customer base is heavily residential, which alleviates the risk of large scale
closures or relocations faced by utilities operating in heavily dense
commercial or industrial service territories. It does not own generation,
which reduces the danger of market price fluctuations and environmental
compliance issues faced by generation owners. Moreover, while the
Company has taken certain actions to improve its reliability service, it is
noteworthy that only four months passed between our determination on July
20, 2012 that Pepco’s ROE should be 9.31%, and the Company’s current
filing for a new rate case on November 30, 2012.
***
Pepco is currently facing a low-interest rate environment, regardless of
whether the cause is Federal Reserve policy, a continued slow recovery from
a historic recession, or both. Given Pepco’s predilection for filing rate cases
frequently with the Commission, we see no logic in inflating Pepco’s ROE
today, during a time of historic low interest rates, based on speculation that
those rates could increase sometime beyond the Company’s likely rate
effective period. Moreover, as Mr. Hevert and Mr. King testified, PHI had
no difficulty raising a significant quantity of capital in its recent debt
issuances. To the contrary, the Company generated $450 million of new
long-term debt between April 2012 and March 2013. For that reason, OPC
argues that Pepco’s current ROE of 9.31% should be viewed as a ceiling on
any ROE award. While we may not agree with OPC’s strict ceiling, we do
agree that Pepco has demonstrated its access to necessary capital on
reasonable terms through its recent debt issuances and capital infusions, and
conversely has not demonstrated a need for an increase in its ROE.
“Finding no significant factors that justif[ied] a radical departure from the ROE
previously granted to Pepco,” the Commission addressed the methodologies utilized by the
parties to evaluate a just and reasonable ROE for Pepco. The Commission then stated:
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Considering all of the methodologies presented, we will accept Staff’s
recommended ROE of 9.36% as just and reasonable. In reaching this
conclusion, we are guided by the principles of Bluefield Water Works and
Hope Natural Gas, which require a return that is sufficient to attract capital
on reasonable terms, maintain the financial integrity of the utility, and
provide an opportunity to achieve a level of revenue commensurate with that
available in other investments of similar risk. Both OPC and AOBA
advocated for a lower ROE (9.1% and 9.3%, respectively), while Pepco’s
10.25% proposal is anomalously high in relation to the other
recommendations and well above the 9.31% ROE approved by the
Commission less than one year ago.[19]
Order No. 85724, at 105-06 (footnotes omitted). The Commission explained that its
approval of a 9.36% ROE included flotation costs, i.e., “expenses associated with the sale
of new issues of common stock.”
The Commission then stated that it would “not reduce Pepco’s ROE by a specific
amount because of its [BSA].” It explained:
The BSA was designed to account for changes in electricity usage due to
variations in weather and state-mandated energy-efficiency and conservation
programs, and to remove the disincentive a utility would otherwise have to
promote such programs, which, in the absence of the BSA, could reduce the
company’s sales revenue. In Pepco’s last rate case, we upheld a 50 basis point
reduction to the Company’s ROE as a result of the previous approval of
Pepco’s BSA. The BSA stabilizes Pepco’s earnings by decoupling its
distribution revenues from its volumetric sales, thereby helping ensure
recovery of the Company’s revenue requirement and reducing regulatory lag.
Without the BSA, “Pepco would see more dramatic swings in its earnings
than currently.” Because of those benefits, OPC and AOBA argue that
Pepco’s current ROE award should be reduced by a similar amount.
As noted by Pepco and Staff, however, we have recently issued two
orders in Case No. 9257 that have somewhat altered the Company’s risk as
19
As indicated, OPC recommended that Pepco’s ROE be reduced if the Commission
granted Pepco’s request for a GRC because the surcharge would reduce Pepco’s revenue
risk. The Commission did not address this recommendation given “the limited scope of
the GRC approved.”
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it relates to decoupling. In Order No. 84653, we determined that Maryland
utilities with BSAs, including Pepco, will be prohibited from collecting lost
utility revenue through their decoupling mechanisms if the utilities are
unable to restore service to their customers within 24 hours of the onset of a
Major Storm. We stated that the BSA suspension will exist for the time
period beginning 24 hours after the onset of a Major Storm and continuing
until all Major Storm-related interruptions are restored. In the more recent
Order No. 85177, we determined that utilities will be prevented from
collecting decoupling revenue even during the first 24 hours of a Major
Outage Event. As a result of these orders, the risk-reducing benefits of the
BSA to Pepco are somewhat diminished, and the rationale for an explicit
reduction in the ROE less certain.
Id. at 106-07.
The Commission then noted that, in a prior order issued on February 22, 2013, it
had found that, although the BSA “serves to limit the risk, and therefore the appropriate
ROE,” id. at 108 n.463, given “the issuance of Order Nos. 84653 and 85177, and the greater
prevalence of BSAs in electric utility proxy groups . . . ‘a strict basis point reduction of 50
points may no longer be warranted.’” Id. at 108. The Commission then concluded: “We
find so here as well. We will not reduce Pepco’s ROE by an express amount as a result of
its BSA, though we will, as in BGE’s proceeding, consider the BSA as one of many
relevant variables that informs our determination of a just and reasonable return.” Id.
The circuit court reversed the Commission’s decision on the ROE, stating that the
Commission framed the issue as “what has changed” since Pepco’s last rate case, in which
the Commission penalized Pepco with a 100-point basis reduction, 50 points for the BSA
and 50 points for service problems, but the Commission then “failed to make findings about
improvements Pepco had made to service or how much the BSA should reduce the ROE
in the current case.” The circuit court stated:
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Had the Commission simply based its ruling on the evidence
presented at the April 2013 evidentiary hearings, then [] under the deferential
substantial evidence test, the [c]ourt would likely uphold the Commission’s
decision. But the Commission instead linked its decision in this case to the
prior 2011 rate case while ignoring evidence of Pepco’s service reliability
improvements and not specifying how the BSA would impact Pepco’s ROE
beyond being a “relevant factor” in the Commission’s discretion. The
Commission therefore failed to act reasonably.
Accordingly, the circuit court reversed on this issue and “remand[ed] the case to the
Commission with instructions to make more specific findings regarding the impact of
improved service reliability and the BSA in calculating Pepco’s ROE.”
B.
Just and Reasonable Rate
OPC contends that the Commission’s determination regarding the ROE was
supported by substantial evidence, and therefore, the circuit court’s decision should be
reversed. It asserts that the circuit court exceeded its “scope of review in speculating that
the Commission’s decision somehow incorporated a 50 basis point (0.5%) penalty that was
imposed upon Pepco in its prior rate case . . . for providing poor service,” but a review of
the record reveals that the Commission’s decision “was based upon, and supported by, the
expert evidence in this case.” OPC states that there are only two questions involved in
review of the Commission’s determination regarding the ROE: (1) “was there substantial
evidence to support the Commission’s determination that Pepco should be authorized a
9.36% return on equity?”; and (2) “is the final rate afforded to Pepco just and reasonable,
or, not so low as to be confiscatory?” OPC asserts that, if the answer to both questions is
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yes, the Commission’s decision was proper and the circuit court’s decision should be
reversed.
Pepco argues that the circuit court “correctly ruled that the Commission’s ROE
award was arbitrary and capricious and not supported by substantial evidence.” It notes
that, in 2011, the Commission awarded it a 9.31% ROE, which was the result of a full
percentage point reduction, a 50 basis point penalty for service reliability issues and a 50
basis point reduction to account for the “risk reducing effects of the BSA.” It argues that,
“without these two 50 basis point reductions, the Commission in 2011 would have awarded
Pepco an ROE of 10.31%,” as opposed to 9.31%. Pepco contends that, although “the
Commission framed the question presented to be whether anything had changed since the
2011 Rate Case, it then proceeded to ignore undisputed record evidence of what had
changed in awarding a 9.36% ROE.” In particular, Pepco states that the Commission: (1)
“ignored the undisputed evidence of Pepco’s dramatically improved service quality and
failed to make any findings as to service quality”; and (2) “failed to explain or make
findings regarding the BSA’s impact on the ROE it awarded,” asserting that the
Commission’s “statement that it was taking the BSA into account in establishing [the] ROE
cannot be reconciled with the testimony of the Staff witness Dr. Luznar whose specific
recommendation the Commission expressly adopted.”
In assessing the parties’ contentions, it is important to keep in mind the purpose of
the ROE, as well as the scope of judicial review of the Commission’s determination
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regarding this factual issue. As indicated, utilities are entitled to a rate that will yield a
reasonable return on the value of property used to render service:
A public utility is entitled to such rates as will permit it to earn a return on
the value of the property which it employs for the convenience of the public
equal to that generally being made at the same time and in the same general
part of the country on investments in other business undertakings which are
attended by corresponding risks and uncertainties.
Bluefield Waterworks, 262 U.S. at 692. Whether a rate of return is reasonable depends on
many circumstances, including the money market, business conditions, and the amount of
risk involved. Id. at 693.
In Federal Power Commission, 320 U.S. at 603, the United States Supreme Court
made clear that judicial review of a Commission ratemaking order focuses on whether the
rate order is “just and reasonable.” The Court explained:
Under the statutory standard of ‘just and reasonable’ it is the result reached
not the method employed which is controlling. It is not theory but the impact
of the rate order which counts. If the total effect of the rate order cannot be
said to be unjust and unreasonable, judicial inquiry under the Act is at an end.
The fact that the method employed to reach that result may contain
infirmities is not then important. Moreover, the Commission’s order does not
become suspect by reason of the fact that it is challenged. It is the product of
expert judgment which carries a presumption of validity. And he who would
upset the rate order under the Act carries the heavy burden of making a
convincing showing that it is invalid because it is unjust and unreasonable in
its consequences.
Id. at 602 (citations omitted).
The Court of Appeals similarly has recognized the discretion of the Commission in
determining the rate of return, as well as “the limited nature of our role on judicial review.”
Potomac Edison Co. v. Pub. Serv. Comm’n, 279 Md. 573, 581 (1977). As long as the ROE
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is within “the zone of reasonableness,” judicial scrutiny in the ratemaking process ends.
Id. at 582-83.
Here, there is no argument that the rate approved, including the ROE, was not in the
zone of reasonableness. Rather, the argument is a procedural one, i.e., that the Commission
framed the issue as what had changed since the last rate proceeding, but then it failed to
address why the previous 100 basis point reduction was inapplicable to the present case.
We do not agree that there was any impropriety here.
To be sure, the Commission discussed the prior rate case that was decided
approximately one year earlier, but it did so in the context of the economic factors relevant
to addressing the appropriate ROE in this case. The Commission found that there were not
“significant changes in the economic environment,” noting that Pepco still was “a
monopolistic provider of electric distribution service that operates in a stable service
territory,” its customer base was “heavily residential, which alleviates the risk of large
scale closures or relocations faces by utilities operating in heavily dense commercial or
industrial service territories,” Pepco was facing a “low-interest rate environment,” and it
had generated “a significant quantity of capital in its recent debt issuances.” In light of
those factors, the Commission found that there was no showing justifying “a radical
departure from the ROE previously granted to Pepco.”
The Commission then turned to the testimony of the witnesses, who “provided
similar analytical methods for evaluating a just and reasonable ROE.” It rejected OPC’s
argument that, because Pepco had not demonstrated a need for an increase in its ROE, the
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9.31% current rate should be the ceiling, and it rejected Pepco’s “anomalously high”
proposal of 10.25%, noting that Pepco’s unreasonable “use of weighting factors and
overreliance on generation-owning utilities” in its proxy group contributed to its excessive
proposal, as did its proposal for flotation costs using a premise that the Commission
repeatedly had rejected. Instead, the Commission accepted the recommendation of
Dr. Luznar of a 9.36% ROE as just and reasonable. In so finding, the Commission noted
that Pepco was entitled to “a return that is sufficient to attract capital on reasonable terms,
maintain the financial integrity of the utility, and provide an opportunity to achieve a level
of revenue commensurate with that available in other investments of similar risk.”
Applying the principles of judicial review of a decision of the Commission on the
rate of return, we cannot say that the decision here was arbitrary or unsupported by
substantial evidence. The Commission set forth the factors that it considered in arriving at
the ROE, and there was substantial evidence to support its decision.
Pepco contends, however, that the decision was defective because the Commission
stated that it adopted the ROE recommended by Dr. Luznar, but Dr. Luznar did not include
any reduction for the BSA in her recommended 9.36% ROE, whereas the Commission did
take the BSA into account as a “variable.” We are not persuaded.
The Commission clearly explained that, although it previously had upheld a 50 basis
point reduction to the ROE as a result of the BSA because it helped to stabilize a utility’s
earnings, its recent orders preventing the collection of lost revenue after a major storm had
diminished the risk-reducing benefits of the BSA. Nevertheless, the Commission stated
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that, although the BSA did not warrant a reduction of the ROE “by an express amount,”
the BSA would be considered “as one of many relevant variables that informs our
determination of a just and reasonable return.” The Commission noted that its decision in
this case was similar to that in a previous case, where it found that the BSA, although
limited by recent orders, continues to “limit the risk, and therefore the appropriate ROE.”
We perceive no abuse of discretion by the Commission in considering the BSA as a factor
in determining a just and reasonable return for Pepco.
In sum, appellants have failed to show that the 9.36% ROE awarded was not just
and reasonable based on this evidence presented to the Commissioner. Accordingly, the
decision should be upheld, and the circuit court erred in reversing it.
JUDGMENT AFFIRMED IN PART
AND REVERSED IN PART. COSTS
TO BE PAID 25% BY MARYLAND
OFFICE OF PEOPLE’S COUNCIL,
25% BY AARP MARYLAND, AND
50% BY POTOMAC ELECTRIC
POWER COMPANY.
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REPORTED
IN THE COURT OF SPECIAL APPEALS
OF MARYLAND
No. 2173
September Term, 2014
_________________________
MARYLAND OFFICE OF PEOPLE’S
COUNSEL, et al.
v.
MARYLAND PUBLIC SERVICE
COMMISSION, et al.
_________________________
Graeff,
Kehoe,
Friedman,
JJ.
_________________________
Concurring opinion by Friedman, J.
_________________________
Filed: December 15, 2015
I concur in every respect with the majority opinion. Regarding Part II-B, Grid
Resiliency Charge: Statutory Authority to Approve the GRC, I specifically agree: (1) that
OPC did not make the argument at the Public Service Commission (“PSC”) that approval
of the proposed Grid Resiliency Charge (“GRC”) would exceed the PSC’s statutory
authority; (2) that this Court does not generally review issues which are not first raised
before the administrative agency; and (3) that our precedents commend that we decline
even to discuss the merits of an unpreserved claim. Majority slip op. at 27-28. Adopting a
different approach would inject an element of uncertainty into the thousands of contested
administrative proceedings that take place annually before state and local agencies.
Were we to consider the statutory authority argument on its merits, however, I
would conclude that PU § 4-101(3) provides a sufficient statutory basis for the approval of
the GRC.1 I would find unpersuasive OPC’s and AARP’s contention that the “used and
useful” language in PU § 4-101(3) is a straitjacket that prevents the PSC, in the exercise of
its reasoned judgment, from adopting a “just and reasonable” rate that includes some
1
And, to be explicit, I do not find the need to resort to the PSC’s “implied and
incidental powers” of PU § 2-112(b)(2) or to a more liberal construction of PU § 4-101(3),
as is permitted by PU § 2-112(c), to reach this result.
measure of cost projection2 and subsequent “true-ups.”3 See Baltimore Gas & Elec. Co. v.
McQuaid, 220 Md. 373 (1959) (rejecting rigid interpretation of “used and useful”).
I’m writing separately to assure PEPCO ratepayers that they are not paying an illegal
surcharge merely because the OPC failed to raise the issue before the PSC.
2
See Majority slip op. at 18-19 (discussing projected costs).
3
Id. at 16 n.13 (defining the “true-up” process as a means of accounting for “any
difference between projected expenditures and actual expenditures”).
-2-
Maryland Office of People's Counsel v. Maryland Public Service Commission
Court: Court of Special Appeals of Maryland
Date filed: 2015-12-15
Citations: 226 Md. App. 176, 127 A.3d 582
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