Maryland People's Counsel v. Heintz

⁷⁷ ROSALYN B. BELL, Judge. This case is a direct result of the court-approved plan which divested American Telephone and Telegraph Company (AT & T) of its allegedly monopolistic position in telecommunications. See United States v. American Tel. & Tel. Co., 552 F.Supp. 131 (D. D.C. 1982), aff'd mem. sub nom., Maryland v. United States, 460 U.S. 1001 , 103 S.Ct. 1240 , 75 L.Ed.2d 472 (1983).

At issue is the post-divestiture regulation by the Maryland Public Service Commission of rates for interexchange telecommunications in Maryland. The Office of People’s Counsel, appellant, 1 asks us to hold that the rates established were unjust and unreasonable. We decline that request. For the purpose of telecommunications regulation after the divestiture, the United States District Court divided Maryland into four geographic areas called Local Access and Transport Areas (LATAs).

Interexchange telecommunications are communications that originate in one LATA and terminate in another—in other words, long distance communications within the State of Maryland. Prior to divestiture the Chesapeake and Potomac Telephone Company (C & P), a wholly-owned AT & T subsidiary, provided this service subject to regulation by the Maryland Public Service Commission. After C & P was divested from AT & T, C & P was only permitted to provide ’Service within each LATA. It was no longer permitted to provide intrastate inter-LATA service or interexchange service.

AT & T Communications of Maryland, Inc. (ATTCOM), appellee, was formed to compete with other long distance companies permitted to provide inter-LATA service in Maryland. 2 In November 1983, ATTCOM filed an application ⁷⁸ with the Public Service Commission seeking permission to provide interexchange telephone service in this State beginning January 1, 1984, 3 and seeking approval of its proposed tariffs. These tariffs would have produced $13,700,000 more in revenues for ATTCOM than C & P’s rates for the same service at that time. The Commission granted ATTCOM permission to provide interexchange service but directed the company to refile its proposed tariffs reflecting (1) any approved access charge for C & P authorized in an unrelated pending rate case, 4 (2) a rate of return equal to C & P’s authorized rate of return 5 determined in that unrelated case, and (3) an effective date of December 31, 1983. ATTCOM complied with the Commission’s directive and refiled proposed rates this time generating $119,331,000 in gross annual revenues.

The Commission approved the proposed tariffs in an order dated December 30, 1983. According to the order, the Commission suspended the proposed tariffs for one day and allowed them to become effective on ⁷⁹ January 1, 1984, subject to a refund following an investigation by the Commission into the reasonableness of the rates. 6 Extensive hearings were held from April through July pertaining to the reasonableness of the proposed rates, including four evening public hearings at various locations around the State. Testimony was presented by ATTCOM, C & P and GTE-Sprint, the Office of People’s Counsel, Federal Executive Agencies and the Commission staff. During the course of the hearings, in addition to evidence of operating expenses and other specific financial data, testimony was presented concerning the manner in which ATTCOM should be regulated by the Commission.

In Re MCI Telecommunications Corporation, LXXY Md. PSC 331 (1984), the Commission determined that non-dominant carrier MCI, which was formed to compete in the interexchange telecommunications market, was not to be regulated as traditional utilities had been in the past. 7 Debate centered around whether ATTCOM should be accorded the same treatment as a nondominant carrier since it was a subsidiary of former monopolistic C & P. The economists who presented testimony differed in opinion as to whether ATTCOM should be regulated in the same manner as traditional telephone companies in light of the ⁸⁰ divestiture and resultant competition for intrastate interexchange service. The Commission staff concluded that although ATTCOM retained considerable market power in the interexchange market, major changes in the telecommunications industry had subjected all of the providers of interexchange service in Maryland, including ATTCOM, to potential and actual competition. Thus, the staff recommended that the Commission gradually reform its regulation of ATTCOM away from traditional policies and practices. 8 After reviewing all the evidence, the Commission concluded the staffs approach was correct. Specifically, the Commission ruled that while continued rate regulation of ATTCOM was required, ATTCOM should have the opportunity to operate efficiently in the competitive interexchange market and to have some flexibility in adjusting its rates in response to these competitive forces.

The Commission also concluded that this flexibility would be in the public’s best interest. The Commission established a revenue requirement of $114,342,000. This determination was made pursuant to Md. Code Ann. Art. 78, § 69(a) (1957, 1980 Repl.Vol., 1986 Cum.Supp.) which requires setting a revenue requirement based on rate base, rate of return, and operating expenses. 9 The Commission then took this revenue requirement and created a “range of reasonableness” around the revenue figure. This range then was to serve as the basis for the setting of just and reasonable rates.

With respect to the establishment of these flexible rates, the Commission found that it was not wholly appropriate to rely exclusively on cost-of-service evidence and the “tradi ⁸¹ tional” rate-making revenue requirement methodology to develop rates for ATTCOM. The Commission established this zone of reasonableness based upon several factors, especially the changing competitive market and the financial characteristics of ATTCOM. In view of this changing competitive market and ATTCOM’s financial situation, the Commission concluded that it was necessary to authorize a margin of variance around the revenue requirement figure yielded by applying the traditional rate-making approach. The Commission opined that 5% below the revenue requirement determined by the traditional approach would allow for the setting of just and reasonable rates, and rates yielding $119,331,000 proposed by the Company were set as the maximum flexible rates.

The Commission granted ATTCOM the flexibility to set its rates to yield a maximum of $119,331,000 and to reduce its rates to yield a minimum of $108,631,000, thus producing this “range of reasonableness.” The Office of People’s Counsel appealed this decision to the Circuit Court for Prince George’s County. The circuit court affirmed the Commission’s decision. This appeal arises from that affirmance. On appeal, the Counsel contends: “I. [Md.Code Ann. Art. 78,] Section 69(a) [(1957, 1980 Repl.Vol., 1986 Cum.Supp.) ] mandates that the findings on rate base and rate of return must be applied in determining just and reasonable rates. “II. [Md.Code Ann. Art. 78,] Section 68(a) [(1957, 1980 Repl.Vol., 1986 Cum.Supp.)] does not broaden the Commission’s authority in determining the revenue requirement. “III.

The rates finally approved by the Commission [are] unjust, unreasonable and unlawful.” I. SCOPE OF REVIEW Before we address the merits of appellant’s contentions, we note that a great deal of discretion is necessarily vested ⁸² in the Commission. People’s Counsel v. Public Serv. Comm’n, 52 Md.App. 715, 722, 451 A.2d 945 (1982), cert. denied, 295 Md. 441 (1983). The limited scope of judicial review of Commission decisions is set out in Md.Code Ann. Art. 78, § 97 (1957, 1980 Repl.Vol.): “Every final decision, order, rule or regulation of the Commission shall be prima facie correct and shall be affirmed unless clearly shown to be (1) in violation of constitutional provisions, or (2) not within the statutory authority or jurisdiction of the Commission, or (3) made upon unlawful procedure, or (4) arbitrary or capricious, or (5) affected by other error of law, or (6) if the subject of review is an order entered in a contested case after hearing, such order is unsupported by substantial evidence on the record considered as a whole.” Specifically, a Commission decision is “prima facie correct and the burden is on those who seek to set it aside on appeal to show by clear and satisfactory evidence that there is illegality or unreasonableness.” Baltimore Gas & Elec.

Co. v. McQuaid, 220 Md. 373, 387 , 152 A.2d 825 (1959); Public Serv. Comm’n v. Delmarva Power & Light Co., 42 Md.App. 492, 499 , 400 A.2d 1147 , cert. denied, 286 Md. 746 (1979). In Baltimore Transit Company v. Public Service Commission, 206 Md. 533, 558 , 112 A.2d 687 (1955), the Court of Appeals noted that a reviewing court must accord the Commission “the respect due an informed body aided by a competent and experienced staff.” That observation is particularly appropriate in the area of telecommunications today.

II

STATUTORY FRAMEWORK The jurisdiction and power of the Public Service Commission extends, to the extent permitted by the laws of the United States, to all public service companies operating a utility business. Md.Code Ann. Art. 78, §§ 1, 23 (1957,1980 Repl.Vol.). The Commission is empowered to ⁸³ “supervise and regulate all public service companies subject to its jurisdiction to assure their operation in the interest of the public and to promote adequate, economical, and efficient delivery of utility services in the State without unjust discrimination, giving consideration to the public safety, the economy of the State, the conservation of natural resources, and the preservation of environmental quality.” Md.Code Ann. Art. 78, § 56 (1957, 1980 Repl.Vol.). To carry out this function, “[t]he powers of the Commission shall be liberally construed; and the Commission shall have the powers specifically conferred ... and also all implied and incidental powers necessary and proper to carry out effectually the provisions of [Article 781.” Md.Code Ann. Art. 78, § 1.

A public service company is required to “[c]harge just and reasonable rates, in accordance with the provisions of [Article 78], for the utility services rendered by it.” Md. Code Ann. Art. 78, § 28(d) (1957,1980 Repl.Vol.). ATTCOM is a public service company and is subject to the Commission’s authority. Md.Code Ann. Art. 78, § 2(o), (z) (1957, 1980 Repl.Vol.). Section 68(a) of that Article provides the Commission with “the power to determine just and reasonable rates of public service companies.” Md.Code Ann. Art. 78, § 68(a) (1957, 1980 Repl.Vol., 1986 Cum.Supp.).

Specifically, § 68(a) provides: “The Commission shall have the power to determine just and reasonable rates of public service companies, whether as maximum, minimum or maximum and minimum, respectively. The rates so determined shall be fixed by order to be served upon each public service company affected thereby.” “Just and reasonable rates” contained in § 68(a) are defined in Md.Code Ann. Art. 78, § 69(a) (1957, 1980 Repl.Vol., 1986 Cum.Supp.): “(a) ... ‘Just and reasonable rates’ means rates which are not in violation of any of the provisions of this article, which fully consider and are consistent with the public ⁸⁴ good, and which will result in an operating income to the public service company, except carriers of inflammables, yielding, after reasonable deduction for depreciation and other necessary and proper expenses and reserves, a reasonable return upon the fair value of the company’s property used and useful in rendering service to the public.” III. STATUTORY AUTHORITY TO SET RATES The proper reading of § 68(a) and § 69(a) is the primary issue in this case. Appellant contends that under these two provisions, the Commission is required to follow what is known as the traditional rate-making methodology when setting just and reasonable rates.

Appellant argues that only the traditional method will yield just and reasonable rates, and any deviation from that method is not within the Commission’s statutory authority and is arbitrary or capricious. We disagree with both arguments. We need to set out first what has been termed the traditional method for rate making. Traditional Rate Making Under § 69(a), the legislature set out the traditional formula to establish the required revenue for a utility.

This formula is best illustrated by the following simplistic equation: R=0+(V—D)r where R=total revenue required; 0=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. ⁸⁵ Under the traditional rate-making approach, the Court of Appeals has consistently interpreted the Public Service Commission Law to require findings with respect to rate base and a reasonable rate of return in establishing the revenue requirement and in turn just and reasonable rates. Decades prior to the 1955 codification of § 69(a), the Court of Appeals determined that the Commission was authorized to determine the fair value of a utility’s property. Havre de Grace & Perryville Bridge Co. v. Public Serv. Comm’n, 132 Md. 16, 27 , 103 A. 319 (1918).

In Miles v. Public Service Commission, 151 Md. 337, 339 , 135 A. 579 (1926), the Court of Appeals again stressed that ascertaining the fair value of a public service corporation’s property and in turn its rate base “is to enable the commission to determine the rate allowed, in order that the public may receive adequate and safe service at a reasonable price____” More recently, in Chesapeake and Potomac Telephone Company v. Public Service Commission, 201 Md. 170, 181 , 93 A.2d 249 (1952), the Court rejected abandoning the fair value test stating that the test “is explicit” in Maryland. Two years later the Court reaffirmed that position: “This being so, a finding of a fair rate base and the setting of a reasonable return thereon are requisite.” Baltimore Transit Co., 206 Md. at 542 , 112 A.2d 687 . After the codification of § 69(a), the Court continued to adhere to its position that § 69(a) requires that the Commission determine the revenue requirement based on its findings on rate base and rate of return. In Hagerstown v. Public Service Commission, 217 Md. 101, 111-12 , 141 A.2d 699 (1958), the Court noted that the provisions of newly codified § 69(a) were implicit before 1955 and stated: “There is no indication that what is now section 69 of Art. 78 and the closely related section[ ] 68 ... were intended to establish any new or revolutionary method of rate-making.” See Chesapeake & Potomac Tel.

Co. v. Public Serv. Comm’n, 230 Md. 395, 411 , 187 A.2d 475 (1963) (Commission followed its statutory duty in determining the fair value of the company’s property and allowed a rate of ⁸⁶ return based upon that fair value); Potomac Edison Co., 279 Md. at 579, 369 A.2d 1035 (ascertainment of fair rate base and setting of a reasonable return thereon are focal points of the typical rate proceeding). Thus, under the traditional approach, the revenue requirement was a fixed figure derived from determining the rate base and rate of return. Just and reasonable rates were then set to yield that exact revenue amount or something less than that amount.

Section 69(a) and Relationship Between Just and Reasonable Rates and Revenue Requirement Appellant argues both that the revenue requirement is the only figure that can be utilized to establish a just and reasonable rate or in the alternative that no higher figure may be utilized as the maximum ceiling for a just and reasonable rate. We will consider each argument in turn. Appellant latches on to precedents cited and asserts that “[b]y ignoring its own finding on rate base and rate of return the Commission in this case not only strayed from the ‘typical rate proceeding’ but ignored the mandate of Section 69(a).” According to appellant, “[t]he findings required on rate base and rate of return by Section 69(a) are not simply factors which the Commission must consider in discharging its responsibility to set rates but are the essential elements of the fundamental rate-making procedure which is to be applied.” Once the Commission has determined the required revenue, it has no discretion in setting rates—just and reasonable rates are those that yield the fixed required revenue. 10 Appellant theorizes that the rates approved by the Commission should have provided ATTCOM with only the required revenue of $114,342,000 and that the rate-making law does not give the Commission the discretion to set rates ⁸⁷ based on a zone around the required revenue figure. We disagree.

There is no doubt that under § 69(a), the revenue requirement arrived at must be tied to the rate base and rate of return set by the Commission. The Commission did not ignore its findings on rate base and rate of return. It used them to arrive at a revenue figure and then created a margin of variance around that figure to set just and reasonable rates. The range of rates was approved to further the public interest in achieving adequate and safe service as § 69(a) mandates the Commission must do when setting rates.

The figure yielded pursuant to the traditional formula ensures that the utility can “make ends meet.” The formula also ensured that the public receive safe and adequate service when a monopolistic telecommunications market existed. Absent those stable market conditions, that bare formula may not yield adequate income for the utility to continue to deliver safe and adequate telecommunications. When this situation happens, as in the case sub judice, § 69(a) permits the Commission to derive a just and reasonable rate at variance with the revenue figure to promote the public interest. Even under the traditional model, however, the Commission’s ruling was proper.

The Commission set a revenue requirement based on the rate base and rate of return. The Court of Appeals has emphasized that there is no fixed formula for arriving at or calculating these figures. The Court has already established a “zone of reasonableness” around those two individual elements: “There is no requirement that there must be any given percentage of return on the fair value of property. Between the lowest return that is not unreasonable to the point of being confiscatory and the highest that is not inordinate, there is a rather wide zone in which a return may be reasonable under some circumstances and not under others.

In deciding that the return allowed was reasonable, the Commission took into account, as it point ⁸⁸ ed out, that the Company does not enjoy a monopoly, as other utilities do, that its business is shrinking while that of the others is growing, that they need more capital for increased service and it does not." Baltimore Transit Co., 206 Md. at 555 , 112 A.2d 687 . Thus, it is clear there is a zone around those figures which will be deemed reasonable. See also Chesapeake & Potomac Tel. Co., 201 Md. at 190 , 93 A.2d 249 .

Included in the determination of the reasonableness of the zone around the rate of return and rate base is whether the company faces competition. If the Commission is permitted leeway to determine the rate base and rate of return, but prohibited from exercising discretion in arriving at a just and reasonable rate based on those figures, this would exalt form over substance. Appellant conceded at oral argument that the Commission has the discretionary power to set the interim figures. This being so, impliedly it has the same discretionary power under Art. 78, § 1 to set the final rates based on the interim elements of the formula.

Moreover, there is nothing in rate making which requires that the rate of return be a fixed percentage. See Baltimore Transit Co., 206 Md. at 555 , 112 A.2d 687 . All that is required is that the Commission determine a “reasonable return." While the Commission established the rate of return at 11.91%, it could have set the rate at the 13.02% figure ATTCOM requested. 11 Had it chosen to do this, the result would have been the same and the crucial issue on appeal would be whether there was substantial evidence to support that figure. Instead, the Commission determined that an