Columbia Gas of Maryland, Inc. v. Public Service Commission

HOTTEN, J. Appellant, Columbia Gas of Maryland, Inc. (“Columbia”), is a natural gas utility that serves customers in Western Mary ⁵⁷⁷ land. In 2013, it purchased a parcel of land known as the Cassidy Property in Hagerstown, Maryland. Appellees are the Maryland Public Service Commission (“the Commission”) and the Office of the People’s Counsel (“OPC”). 1 As part of its last request that the Commission increase Columbia’s rates and charges, Columbia sought to recover anticipated remediation costs regarding two of its properties, including the Cassi-dy Property. Following three days of evidentiary hearings, the Chief Public Utility Law Judge (“the CPULJ”) of the Commission denied appellant’s request because it failed to provide evidence that the existing customers should bear the cost of the Cassidy Property clean up when they received no benefit.

Thereafter, appellant appealed to the Commission, which affirmed the CPULJ’s decision and determined that the Cassidy Property was not “used and useful” in providing service to current customers. Appellant sought judicial review in the Circuit Court for Washington County, alleging that the Commission acted arbitrarily and capriciously, violated Maryland’s Public Utilities Article, and that its decision constituted an unlawful taking, without just compensation, in violation of both the Maryland and United States Constitutions. The circuit court affirmed the Commission’s decision, prompting appellant’s appeal, and the following questions for our consideration. [I.] Was the Commission’s denial of Columbia’s request for recovery of costs to acquire and remediate property in Hagerstown arbitrary and capricious? [II.] Did the Commission’s denial of Columbia’s request for recovery of costs to acquire and remediate property in Hagerstown constitute an error of law in that it violated the Maryland Public Utilities Article? ⁵⁷⁸ [III.] Did the Commission’s denial of Columbia’s request for recovery of costs to acquire and remediate property in Hagerstown constitute an unlawful taking without just compensation, in violation of the Maryland and United States Constitutions? For the foregoing reasons, we shall affirm the judgment of the circuit court.

FACTUAL AND PROCEDURAL HISTORY Appellant is a public service company, which provides its customers natural gas through a pipeline distribution network in Western Maryland. It is subject to an enforcement action by the Maryland Department of Environment (“MDE”) to clean up the site it owns at the former Hagerstown Manufactured Gas Plant (“MGP”). Before natural gas became commercially available, Columbia’s predecessors used the Hagerstown MGP site to manufacture gas from 1887 to 1952. On an adjacent property, known as the Cassidy Property, the former Hagerstown MGP operated a coal tar pond before it was sold in the early 1920s.

The Cassidy Property was part of a larger parcel owned by the Hagerstown American Light and Heat Company, which began coal gas manufacturing operations on the larger parcel in 1891. The larger parcel consisted of 7.1 acres. The Cassidy Property consisted of a 4.5 acre parcel and was sold to the Cassidy Trucking Company in the 1920s. 2 The Hagerstown American Light and Heat Company continued to operate its manufactured gas on the remaining 2.6 acre parcel until 1949, when it ceased operations. In 1968, appellant purchased the 2.6 acre parcel and began its operations as a service center, where appellant’s employees run the Company’s main hub of gas distribution operations and maintenance activity to serve natural gas to customers.

In 2013, appellant purchased the remaining 4.5 acres known as ⁵⁷⁹ the Cassidy Property. Appellant testified that the current uses of the Hagerstown MGP site included: “(1) use for all service center operations, (2) use for driver training and parking, and (3) storage of the byproducts of the MGP process.” On February 27, 2013, appellant filed an application with the Commission seeking authority to increase the Company’s rates and charges with a proposed effective date of March 29, 2013. Among the many elements of its rate increase request, Appellant estimated that it would take approximately five years for remediation of the Hagerstown MGP site, and that the company would incur new costs ranging from $6 million to under $21 million as a result. On March 4, 2013, the Commission suspended the proposed effective date of the increased rates for a period of 150 days, which was later expanded to an additional 30 days, and delegated the case to the CPULJ division for review.

Eviden-tiary hearings were held at the Commission’s offices in Baltimore from June 18 until June 20, 2013. During that time, written testimony and exhibits were entered into the record, and witnesses were presented and subject to cross-examination. On August 9, 2013, the CPULJ Division issued a proposed order, which granted in part and denied in part appellant’s application. Thereafter, appellant filed a notice of appeal to the Commission, challenging the proposed order because it denied appellant the right to recover from its ratepayers costs incurred from the purchase and environmental remediation of the Cassidy Property.

On September 23, 2013, the Commission issued its Order No. 85858 and denied appellant’s appeal regarding the Cassidy Property. Appellant filed a petition for judicial review in the Circuit Court for Washington County on October 23, 2013. Thereafter, the court issued a memorandum and order affirming the Commission’s decision. ⁵⁸⁰ Appellant noted a timely appeal. Additional facts shall be provided, infra, to the extent they prove relevant in addressing the issues presented.

STANDARD OF REVIEW This case is governed by Maryland Code (1998 Repl.Vol. 2010), § 3-203 of the Public Utilities Article [hereinafter “Public Utilities”], which provides: 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, unsupported by substantial evidence on the record considered as a whole. We review decisions of the Commission as “consistent with the standard of review applicable to all administrative agencies.” Office of People’s Counsel v. Maryland Pub. Serv. Comm’n, 355 Md. 1, 15 , 733 A.2d 996 (1999).

Thus, “[s]o long as a reasoning mind could have reached the same conclusion as the agency, we will not disturb the agency’s decision. Because the Commission is well informed by its own expertise and specialized staff, a court reviewing a factual matter will not substitute its own judgment on review of a fairly debatable matter.” Communications Workers of Am. v. Pub. Serv. Comm’n of Maryland, 424 Md. 418, 433 , 36 A.3d 449 (2012) (citations omitted).

This Court elaborated: We review the decision of an administrative agency to determine if it is in accordance with the law or whether it is arbitrary, illegal, and capricious.... We are limited to determining if there is substantial evidence in the record as ⁵⁸¹ a whole to support the agency’s findings and conclusions, and to determine if the administrative decision is premised upon an erroneous conclusion of law.... In applying the substantial evidence test, we must decide whether a reasoning mind reasonably could have reached the factual conclusion the agency reached____When reviewing the agency’s legal conclusions, we may substitute our judgment for that of the agency if there are erroneous conclusions of law.... Spicer v. Baltimore Gas & Elec.

Co., 152 Md.App. 151, 159 , 831 A.2d 472 (2003) (quoting Rideout v. Dep’t of Pub. Safety and Corr. Serv., 149 Md.App. 649, 656 , 818 A.2d 250 (2003) (internal quotations and citations omitted)). DISCUSSION I. The ultimate issue surrounding this case was whether the property for which environmental remediation cost recovery was sought, is “used and useful” in providing service to current utility customers.

The Commission 3 applies the statutory ratemaking policy that requires a “just and reasonable rate” pursuant to Public Utilities § 4-101: ⁵⁸² In this title, “just and reasonable rate” means a rate that: (1) does not violate any provision of this 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. Public Utilities § 4-102 directs the Commission to set just and reasonable rates: (a) Scope of section.—This section does not apply to small rural electric cooperatives. (b) Power.—The Commission shall have the power to set a just and reasonable rate of a public service company, as a maximum rate, minimum rate, or both. (c) Order.—(1) The Commission shall issue an order, including the rate set under subsection (b) of this section.

(2) The Commission shall serve the order on each affected public service company. The Commission established a general ratemaking policy for extraordinary expenses in the context of request for environmental cleanup costs in 1989: By way of background, we will explain our general ratemaking policy pertaining to extraordinary expenses incurred by a public service company. The Commission has long recognized that utilities will, from time to time, incur necessary and proper expenses which are sufficiently extraordinary as to warrant special ratemaking treatment. Such expenses are extraordinary in the sense that the costs are not annually recurring, are not able to be anticipated, and are of substantial magnitude.

Typically, rather than include the entirety of such costs in the formulation of test year expenses, the Commission has determined it to be fair and ⁵⁸³ equitable to amortize the extraordinary expense over a period of years. Also, because equity or debt is being utilized during the period of amortization to pay the extraordinary expense, the unamortized portion of the extraordinary expense is included in the calculation of the rate base.c [ 4 ] However, as an exception to this general rule, the Commission occasionally will determine that the unamortized portion should not be included in the calculation of the rate base. Such a determination is based upon a finding that the circumstances of the extraordinary expense were of a type that, for reasons of equity, the expense should be shared between the ratepayers and the stockholders. By excluding the unamortized portion of the extraordinary expense from rate base, the Commission shifts from ratepayers to stockholders the carrying charge associated with the unamortize[d] balance. 5 First, appellant contends that the Commission’s denial of its environmental remediation costs, which includes purchase of the property and cleanup for the Cassidy Property, was arbitrary and capricious.

Appellant asserts that Commission orders dating back to 1989 have allowed regulated gas companies in Maryland to recover these costs from customers. Appellant refers to six tests, including an exception, which must be applied to a gas company seeking to recover environmental remediation costs from its customers. The six tests appellant outlines are, “[rjemediation [cjosts must be [qjuanti-fíable,” “[rjemediation [cjosts [mjust [njot [bje [ijncurred [biased on [ijmprudence or [mjismanagement,” “[tjhe [ejnvi-ronmental [rjemediation [mjust [bje [ljegally [mjandated,” “[tjhe [ejnvironmental [hjazard [mjust [rjeside on [pjroperty [ujsed and [ujseful to [appellant’s] [cjustomers,” “[mjust [cjur- ⁵⁸⁴ rently [b]e a [g]as [c]ompany [s]erving [g]as [customers,” and the exception to the “[u]sed and [ujseful” test. In rejecting Appellant’s request, the Commission discussed the same 1989 order and indicated: In considering whether the purchase and remediation costs of either or both of the parcels in this case should be included in rate base, the Commission’s holding in In the Matter of the Application of Chesapeake Utilities Corporation (Citizens Gas and Cambridge Gas Divisions) for an Increase in Rates for Natural Gas Service and to Consolidate the Natural Gas Tariffs, Case No. 8157, is instructive.

After noting that the record contained no persuasive evidence that the incurrence of the clean-up costs was due to imprudence or mismanagement by the utility, the Commission deemed the environmental remediation costs as operating expenses incurred in the current course of doing business.[ ] In so doing, however, the Commission stated, “[flor ratemaking purposes, the important fact about this site is that it is the location of a currently