Petition of the Off. Of People's Counsel

In the Matter of the Petition of the Maryland Office of People’s Counsel, No. 11, September Term, 2023, Opinion by Booth, J. PUBLIC UTILITIES – ADMINISTRATIVE LAW – AGENCY DEFERENCE. When undertaking judicial review of a decision of the Maryland Public Service Commission (“Commission”) approving a public service company’s application for a rate increase under Section 3-203 of the Public Utilities Article of the Maryland Code, a reviewing court is to apply an arbitrary or capricious standard of review to the Commission’s interpretation of its own order that it entered in connection with its approval of the acquisition of the public service company. The Supreme Court of Maryland held that the Commission’s interpretation of its own merger order in connection with a public service company’s application for a rate increase was not arbitrary or capricious. Circuit Court for Baltimore City Case No.: 24-C-21-003749 Argued: December 4, 2023 IN THE SUPREME COURT OF MARYLAND No. 11 September Term, 2023 IN THE MATTER OF THE PETITION OF THE MARYLAND OFFICE OF PEOPLE’S COUNSEL Fader, C.J., Watts, Hotten, Booth, Biran, Gould, Eaves, JJ.

Opinion by Booth, J. Filed: February 23, 2024 Pursuant to the Maryland Uniform Electronic Legal Materials Act (§§ 10-1601 et seq. of the State Government Article) this document is authentic. 2024.03.21 11:41:58 -04'00' Gregory Hilton, Clerk The General Assembly has provided for judicial review of [decisions of the Public Service] Commission, but that review is to be deferential to the Commission’s expertise and findings. The role of the courts is to ensure that the Commission has exercised its discretion in carrying out this important responsibility within the bounds prescribed by the General Assembly and the Constitution. Office of People’s Counsel v. Md. Public Service Commission, 461 Md. 380, 384 (2018) In Maryland, the General Assembly has determined that an acquisition of a public service company by another public service company should be reviewed by the Maryland Public Service Commission (“Commission”), an administrative body with specialized knowledge of utility markets. The Commission must determine whether the proposed transaction is “consistent with the public interest, convenience, and necessity, including benefits and no harm to consumers.”1 The Legislature has identified certain factors for the Commission to consider and has also vested considerable discretion in the Commission to consider other matters that it may find pertinent when undertaking its assessment.

One factor that the Commission is required to consider is the potential impact that the acquisition will have on rates and charges paid by Maryland customers, and the services and conditions of operation of the public service company after the merger or acquisition. After it completes its analysis, the Commission must either approve or reject the transaction, or approve it with conditions. Md. Code Ann., Public Utilities Article (“PU”) § 6-105(g)(3)(i) (2020 Repl. Vol., 1 2023 Supp).

The Legislature has also granted the Commission the authority to set rates charged by a public service company to Maryland customers. In undertaking this duty, the Commission is required to utilize its expertise to establish a rate that enables a utility company to cover prudent expenses and earn a reasonable profit. When the Commission exercises any of the above-described powers or duties, it does so within the context of an administrative proceeding. And, as we discuss in detail herein, the General Assembly has set forth specific parameters for judicial review of Commission decisions.

This case concerns the Commission’s approval of an application for a base rate increase filed by Washington Gas and Light Company (“Washington Gas”) 2 in August 2020 (the “rate administrative proceeding”). The rate administrative proceeding occurred approximately two and one-half years after the Commission concluded an administrative proceeding in which it approved the acquisition of Washington Gas by AltaGas Limited (“AltaGas”) (the “merger administrative proceeding”).3 The Office of People’s Counsel 2 Washington Gas is a public service company that provides natural gas and delivery services to customers in the Maryland counties of Montgomery, Prince George’s, Charles, Calvert, St. Mary’s, and Frederick, as well as customers in Washington, D.C., and jurisdictions in Virginia. To transport natural gas to its customers, Washington Gas operates a system of distribution pipelines spanning its geographic service area throughout Maryland, Virginia, and Washington, D.C. 3 AltaGas is a North American diversified energy infrastructure business with operations in Canada and the United States. Its headquarters is located in Calgary, and its business is focused on three business segments: utilities, gas, and power. 2 (“OPC”)4 participated in the merger administrative proceeding, as well as the rate administrative proceeding.

This appeal centers on a determination that the Commission made in the rate administrative proceeding concerning the proper interpretation of a condition the Commission had included in its final order approving the merger. That condition required that Washington Gas customer rates reflect “merger-related savings” of “not less than $800,000 per year over the five years” following the merger’s closing. The Commission interpreted that requirement to mean that Washington Gas’s post-merger costs must be $800,000 per year less than they would have been but for the merger. Washington Gas agrees.

OPC, by contrast, contends that the condition required Washington Gas’s post- merger costs to be $800,000 per year less than they were the year before the merger. OPC did not file a petition for judicial review of the Commission’s final order approving the merger, but it did file a petition for judicial review of the Commission’s order approving Washington Gas’s request for a rate increase. After the circuit court 4 The People’s Counsel—a position created by the General Assembly—is an attorney licensed in Maryland who is appointed by the Attorney General with the advice and consent of the Senate. PU § 2-202.

The duties of the Office of People’s Counsel (“OPC”) include evaluating “each matter pending before the Commission to determine if the interests of residential and noncommercial users are affected.” Id. § 2-204(a)(1)(i). If OPC “considers the interest of residential and noncommercial users to be affected, [it] shall appear before the Commission and courts on behalf of residential and noncommercial users in each matter or proceeding over which the Commission has original jurisdiction[.]” Id. § 2-204(a)(2). 3 affirmed the Commission’s rate increase decision, which was then affirmed by the Appellate Court of Maryland, OPC filed a petition for writ of certiorari, which we granted. OPC raises the question of whether the Commission erred in its interpretation of the condition in its merger order that provided the method by which Washington Gas was required to compute its “merger-related savings” when applying for a rate increase. We are also asked to determine the standard of review that a court must apply when reviewing the Commission’s interpretation of its own prior decision or order.

For the reasons we set forth more fully herein, we hold that a court is to apply the “arbitrary or capricious” standard of review. Applying that standard here, we conclude that the Commission’s interpretation of its own order was not arbitrary or capricious. I Statutory Framework The jurisdiction and powers of the Commission extend to all public service companies operating a utility business in Maryland, to the full extent permitted by the Constitution and the laws of the United States. Md. Code Ann., Public Utilities Article (“PU”) § 2-112 (2020 Repl.

Vol., 2023 Supp.). Generally, the Commission has supervisory and regulatory authority over public service companies to “ensure their operation in the interest of the public[,]” and to “promote adequate, economical, and efficient delivery of utility services in the State without unjust discrimination[.]” Id. § 2-113(a)(1)(i). The Commission also has broad enforcement authority to ensure compliance with laws, 4 “including requirements with respect to financial condition, capitalization, franchises, plant, manner of operation, rates, and service.” Id. § 2-113(a)(1)(ii). A. The Commission’s Authority Over Public Service Company Mergers In general, one may not acquire a public gas or electric company that operates in Maryland without prior authorization from the Commission.

Id. § 6-105(e)(1). To obtain that authorization, the applicant must file an application with the Commission containing detailed information concerning the transaction and provide certain documentation. Id. § 6-105(f). The Commission is then required to “examine and investigate each application” and to conduct any necessary administrative proceedings for review of the application.

Id. § 6- 105(g)(1). The applicant has the burden of persuading the Commission that the “acquisition is consistent with the public interest, convenience, and necessity, including benefits and no harm to consumers.” Id. § 6-105(g)(3)(i), (5). In connection with its review, the Commission is required to consider a list of 12 statutory factors.5 Id. § 6- 5 Those factors are: (i) the potential impact of the acquisition on rates and charges paid by customers and on the services and conditions of operation of the public service company; (ii) the potential impact of the acquisition on continuing investment needs for the maintenance of utility services, plant, and related infrastructure; (iii) the proposed capital structure that will result from the acquisition, including allocation of earnings from the public service company; (iv) the potential effects on employment by the public service company; 5 105(g)(2)(i)–(xii). The Legislature has granted the Commission considerable discretion in connection with its decision to approve an acquisition.

Specifically, the Commission may consider “any other issues” that it “considers relevant to the assessment of acquisition in relation to the public interest, convenience, and necessity.” Id. § 6-105(g)(2)(xii). At the conclusion of the proceeding, the Commission is to issue a written decision that is based on the record and that states the grounds for its conclusions. Id. § 3-113(a). If the Commission is satisfied that the applicant has borne its burden, it is required to issue an order granting the application.

Id. § 6-105(g)(3)(i). The Commission, however, has the discretion to “condition an order authorizing the acquisition on the applicant’s satisfactory performance or adherence to specific requirements.” Id. § 6-105(g)(3)(ii). If the Commission concludes that the applicant has failed to meet its burden, it shall issue an order denying the application. Id. § 6-105(g)(4).

An interested party that is dissatisfied with the Commission’s final decision may file a petition for judicial review. Id. § 3-202. (v) the projected allocation of any savings that are expected to the public service company between stockholders and rate payers; (vi) issues of reliability, quality of service, and quality of customer service; (vii) the potential impact of the acquisition on community investment; (viii) affiliate and cross-subsidization issues; (ix) the use or pledge of utility assets for the benefit of an affiliate; (x) jurisdictional and choice-of-law issues; (xi) whether it is necessary to revise the Commission’s ring fencing and code of conduct regulations in light of the acquisition; and (xii) any other issues the Commission considers relevant to the assessment of acquisition in relation to the public interest, convenience, and necessity. PU § 6-105(g)(2). 6 B. The Commission’s Rate-Making Authority Under PU § 4-201, a public service company has a duty to “charge just and reasonable rates for the regulated services that it renders,” and the Commission retains the power to set rates that comply with the statute.

Id. § 4-102(b). A “just and reasonable rate” is a rate that, among other things, is “consistent with the public good” and “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.” Id. § 4-101(2), (3).6 In undertaking its statutory duties, the “Commission’s role is to determine what rates the utility should be allowed to charge in future years to cover prudent expenses and earn a reasonable profit.” Office of People’s Counsel v. Md. Public Service Comm’n, 355 Md. 1, 8 (1999). The Commission is required 6 In other cases involving this Court’s review of the Commission’s authority over public utility rate-making, this Court has cited to 1 A.J.G. Priest, Principles of Public Utility Regulation 45 (1969), which summarizes the factors that underlie the establishment of public utility rates 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. See Office of People’s Counsel v. Md. Public Service Comm’n, 355 Md. 1, 8 (1999); Public Service Comm’n v. Baltimore Gas & Electric Co., 273 Md. 357 , 360 n.2 (1974). 7 to enter an order when setting a “just and reasonable rate,” PU § 4-102(c), which is subject to judicial review.

PU § 3-202(a). We turn to the Commission’s merger administrative proceeding that resulted in its decision to approve AltaGas’s acquisition of Washington Gas, as well as the Commission’s subsequent rate case administrative proceeding that resulted in its approval of a rate increase—the latter proceeding being the subject of OPC’s contentions in this matter. II Background and Procedural History A. The Commission Proceedings Related to the Merger In 2017, AltaGas, Washington Gas, and WGL Holdings, Inc. (“WGL”) (sometimes hereinafter collectively referred to as the “Applicants”) filed an application seeking authorization from the Commission, as required by PU § 6-105, for AltaGas to acquire Washington Gas. Thereafter, the Commission initiated an administrative proceeding to evaluate whether the application was “consistent with the public interest, convenience, and necessity, including benefits and no harm to consumers[.]” PU § 6-105(g)(3).

In addition to the entry of appearances for OPC and the Commission Staff, 11 parties filed petitions to intervene, which the Commission granted. The administrative proceeding included direct, rebuttal and rejoinder testimony, as well as extensive evidentiary hearings and briefing. 8 During the pendency of the proceeding, several of the intervenors entered into a settlement agreement with the Applicants that was filed with the Commission.7 In addition to the terms of the settlement agreement, the Applicants offered several commitments or conditions8 for the Commission’s consideration in connection with its approval of the merger. Two conditions proposed by the Applicants—Conditions 44 and 289—are at the center of this matter. As will be discussed in more detail below: (1) Condition 44, among other things, required Washington Gas to provide at least $800,000 in annual “merger-related savings” to its Maryland customers (net of transition costs) for five years after the merger; and (2) Condition 28 required Washington Gas to issue post- merger reports providing a “side-by-side comparison by function” of its pre-merger and post-merger “corporate and shared-services costs.” The parties in the instant case disagree on the manner in which “merger-related savings” required by Condition 44 would be 7 The parties to the settlement agreement were the Applicants, and the intervenors: Maryland Energy Administration, Prince George’s County, Montgomery County, and the Baltimore Washington Laborers and Public Employees District Council, an affiliate of the Laborers International Union of North America. 8 The Commission’s merger order and the parties use the terms “condition” and “commitment” interchangeably.

We will use the term “condition”—which is the term used in PU § 6-105(g)(3)(ii). 9 When the conditions were initially submitted by the Applicants, Condition 28 was numbered “Condition 26” and Condition 44 was numbered “Condition 41.” Because the substance of the conditions did not change from the time that they were submitted until the Commission approved them (except for one sentence in what would ultimately become Condition 28), we refer to these conditions by the numbers as set forth in the final merger order. 9 calculated in future base rate increase cases. Specifically, the parties dispute whether the required savings were to be measured against what Washington Gas’s costs would have been but for the merger, as the Commission and Washington Gas contend, or whether they were to be measured against Washington Gas’s costs incurred in the year before the merger, as set forth in the comparison required by Condition 28, as OPC contends. Washington Gas and Commission Staff presented different methodologies to the Commission for how “merger-related savings” should be computed in future rate cases. Because the testimony concerning these competing methodologies is pertinent to OPC’s contentions here, we summarize some of the key testimony that was presented to the Commission, and the Commission’s consideration of the same in the merger order that it ultimately entered. 1.

Washington Gas’s Methodology for Computation of “Merger-Related Savings” Washington Gas presented a methodology for computing “merger-related savings” that centered around “synergy savings.” Washington Gas submitted expert testimony by Todd J. Jirovec, a Principal in the power and utilities practice of a business named Strategy&. Mr. Jirovec testified that “synergy savings” or “synergies” are “tangible financial benefits” that arise when two companies merge and “represent a general reduction in costs or improvement to performance” that would not be realized in the absence of the merger. He explained that utility merger-related savings are typically achieved in three areas: (1) cost reduction, (2) cost avoidance, or (3) revenue enhancement. Mr. Jirovec described the types of synergies that are generally available through a utilities merger 10 transaction, and also explained that, in his experience, “no two transactions are necessarily the same in enabling the realization of synergies.” After providing an overview of synergy savings that are typically available in a utility merger and factors that may influence synergy levels generally, Mr. Jirovec testified concerning the specific synergy savings that he computed in connection with the proposed merger of AltaGas and Washington Gas.

He explained how he developed his merger synergy computations, stating that “[w]e requested data from each company, interviewed AltaGas and Washington Gas staff, reviewed publicly available data and filings, and reviewed internal financial and other data. Based on these sources of input, we constructed baselines of comparable spending levels where merger savings are typically available.” Mr. Jirovec testified that the Applicants were expected to realize merger-related savings in the following corporate and administrative support functions: (1) corporate programs (by eliminating overlapping annual expenditures that both companies incur related to business and support activities); (2) supply chain (by reducing annual amounts that each company spends in the areas of materials and supplies and contract services); (3) functional alignment (by consolidating corporate and administrative support functions); and (4) portfolio shift (arising from economies of scale gained from the merger, which would enable Washington Gas to provide corporate and administrative services on a more efficient basis). 11 Mr. Jirovec produced a chart entitled “Net Annual Merger-Related Benefit Commitment to Maryland Customers[,]”10 that reflected his prediction that the merger would provide Washington Gas’s Maryland customers with a net benefit of $4.1 million over five years after subtracting amortized transition costs11 associated with the merger. Notably, in arriving at his bottom-line prediction of the merger’s net benefit to Washington Gas’s customers, Mr. Jirovec’s projections included a component of post-merger corporate costs that AltaGas would allocate to Washington Gas as part of its overall combined operations. Mr. Jirovec’s chart computed the annualized net benefit that would be realized by 10 Washington Gas’s Maryland customers as follows (expressed in millions of dollars): Maryland Year 1 Year 2 Year 3 Year 4 Year 5 TOTAL Allocable Share % Corporate 39.18% $ 5.0 $ 5.1 $ 5.2 $ 5.3 $ 5.5 $ 26.0 Allocations Synergies 39.18% $ (2.8) $ (6.1) $ (7.3) $ (7.7) $ (8.3) $ (32.2) Amortized 39.18% $ 0.4 $ 0.4 $ 0.4 $ 0.4 $ 0.4 $ 2.1 Transition Costs Net $ 2.7 $ (0.6) $ (1.7) $ (2.0) $ (2.4) $ (4.1) (Benefit) Cost Annualized $ (0.8) $ (0.8) $ (0.8) $ (0.8) $ (0.8) $ (4.1) Net (Benefit) Cost 11 “Transition costs” are non-recurring costs that are incurred to facilitate the integration of the merger.

As we will discuss more fully herein, Washington Gas proposed, and the Commission agreed, that Washington Gas’s transition costs could be amortized over five years. 12 2. Commission Staff’s Methodology for Computing “Merger-Related Savings” Commission Staff presented a different methodology for how “merger-related savings” should be computed in a post-merger rate increase case. Commission Staff presented expert testimony by Robert Welchlin, a Director of Overland Consulting, a firm that specializes in consulting in the electric, gas, water, and telecommunications industries. Mr. Welchlin expressed the opinion that there were few opportunities for Washington Gas to realize synergy savings from the merger.

In the event that the Commission approved the merger, Mr. Welchlin recommended that the Commission modify the Applicants’ proposed Condition 44, which addressed how Washington Gas would compute “merger-related savings” in connection with any application for a rate increase. First, to prevent Washington Gas from “experiencing a potentially significant increase in corporate costs” following the merger, Mr. Welchlin recommended that the Commission prohibit the companies from allocating to Washington Gas any portion of AltaGas’s existing corporate costs unless Washington Gas could demonstrate that the chargeable costs were no higher than the costs that Washington Gas recorded on its books in the last full year prior to the merger. To ensure compliance with this proposed condition, Mr. Welchlin recommended that the Commission require Washington Gas to track its pre- and post-merger costs, and certify that its comparison was “based solely on corporate-level expenses[.]” Mr. Welchlin suggested that the prohibition on any post-merger allocation of AltaGas’s corporate costs to Washington Gas “should end as soon as Washington Gas demonstrates to the Commission that the merged company is 13 charging the utility no more, adjusted for inflation, than Washington Gas would have incurred had it not merged with AltaGas.” In order to fairly compare pre- and post-merger corporate costs, Mr. Welchlin recognized that it would be “necessary to bring pre-merger dollar amounts to current price levels[,]” which he opined could “be done by applying an annual inflation factor, such as the consumer price index, to the annual pre-merger amount” or by using a 2.5% annual escalator. To ensure that Washington Gas’s computations followed the above framework, Mr. Welchlin recommended that the Commission revise Condition 44 to specifically define “merger-related savings” as the “reduction in pre-merger spending that occurred because of the merger that could not have been achieved but for the merger.” He expressed his view that the condition should “explicitly adopt this definition, indicat[ing] that all pre[-] and post-merger costs identified for the purpose of calculating savings will be actual spending, and that each unique area of savings will be separately quantified and tracked by Washington Gas.” Mr. Welchlin opined that, without a specific definition of “merger-related savings” in the condition, “merger[-related] savings can be anything Washington Gas wants it to be.” He reiterated that the “net merger benefit” should be the “net merger savings from synergies, after subtracting transition costs to achieve the merger and, in this case, after subtracting additional corporate costs that will be allocated to Washington Gas from AltaGas[.]” 14 3.

The Commission’s Approval of the Merger and Pertinent Merger Conditions Included in Its Order After considering the oral and written testimony, along with other evidence, the Commission approved the application, subject to conditions. On April 4, 2018, the Commission issued a 64-page order explaining its decision, together with a 21-page appendix setting forth 52 conditions for approval of the transaction (“Merger Order”). In the Matter of the Merger of AltaGas Ltd. & WGL Holdings, Inc., No. 9449, Order No. 88631, 2018 WL 1705968 (Md. Pub. Serv.

Comm’n April 4, 2018). The Merger Order included a description of the Applicants’ proposal, the procedural history, the specific positions of the Commission Staff, OPC, the intervenors, and the Commission’s analysis of the statutory factors enumerated in PU § 6-105(g)(2). After reviewing the evidence, and the various positions of the participants, the Commission determined that the merger “satisfied the three-part test” set forth in PU § 6-105(g)(3)(i). That is, subject to the imposed conditions, “the acquisition [was] consistent with the public interest, convenience, and necessity, including benefits and no harm to consumers.” In approving the merger, the Commission stated that it “carefully applied” its own precedent and the statutory standards enumerated in PU § 6-105 to the “facts of this case,” pointing out that “every merger proposal is different.” The Commission evaluated and imposed certain requirements on the Applicants, including (1) a one-time direct payment to customers, (2) conditions designed to ensure “synergy savings,” (3) the establishment of a gas expansion fund, (4) safety programs, and (5) the payment of charitable contributions to provide benefits to Maryland consumers. 15 In connection with its approval, the Commission imposed 52 conditions, which covered a range of topics.

We focus on two of them—Conditions 44 and 28. As the language and context of these conditions are pertinent to the present case, we discuss them in detail below. a. Condition 44 Condition 44 addressed the manner in which Washington Gas would be required to demonstrate that it had achieved “merger-related savings” in post-merger base rate increase cases for a period after the merger closing. It appeared in a section entitled “Cost, Accounting, Tax, and Rate Neutrality,” and required Washington Gas to “track and account for merger-related savings, and transition costs to enable those savings, in its next two base rate cases in which the test year in question includes transition costs.”12 “Merger-related 12 In its entirety, Condition 44 stated: Washington Gas will track and account for Merger-related savings, and transition costs to enable those savings, in its next two base rate cases in which the test year in question includes transition costs.

Washington Gas will amortize the transition costs over five years, will not seek recovery in rate proceedings over those five years of any amortized transition costs or corporate costs allocated from AltaGas to Washington Gas in excess of Merger-related savings, and will ensure that customer rates reflect an annual net benefit to Washington Gas’s Maryland customers of not less than $800,000 per year over the five years following Merger Close commencing with the first post-Merger base rate case (i.e., $4 million over five years). In the event that Washington Gas files a base rate case in Maryland in 2018, and the Merger Close occurs before or during the pendency of that rate case, then Washington Gas will consent to a ratemaking adjustment to reduce Washington Gas’s revenue requirements by $800,000 as a known and measurable reduction in Washington Gas’s cost of service during the new rate-effective period. ‘Transition costs’ as used in this [condition] are 16 savings” were defined as “the tangible financial benefits achieved as a result of the Merger for the five years after Merger Close that would not have been possible if the individual companies were to continue to operate separately.” “Transition costs” were defined as “incremental non-recurring costs to facilitate the integration of the companies.” Condition 44 also required that Washington Gas (1) “amortize the transition costs over five years,” (2) “not seek recovery in rate proceedings over those five years of any amortized transition costs or corporate costs allocated from AltaGas to Washington Gas in excess of merger-related savings,” and (3) “ensure that customer rates reflected an annual net benefit to Washington Gas’s customers of not less than $800,000 per year over the five years following Merger Close commencing with the first post-Merger base rate case.” The phrases “corporate costs allocated from AltaGas” and “net benefit” were not defined. Notably, although the Commission required that other proposed conditions be revised, the Commission did not make any changes to the language of Condition 44 as proposed by the Applicants. The Merger Order reflects that the Commission credited Mr. Jirovec’s testimony and specifically referenced the Applicants’ commitment in Condition 44 to ensure that “customer rates reflect an annual net benefit to Washington Gas’s incremental non-recurring costs to facilitate the integration of the companies. ‘Merger-related savings’ as used in this [condition] refers to the tangible financial benefits achieved as a result of the Merger for the five years after Merger Close that would not have been possible if the individual companies were to continue to operate separately. 17 Maryland customers of not less than $800,000 per year over five years following the Merger Close.” By contrast, the Commission did not adopt Mr. Welchlin’s recommendation that Condition 44 be amended to define “merger-related savings” as “a reduction in [Washington Gas’s] pre-merger spending” that “could not have been achieved but for the merger,” to be determined by computing Washington Gas’s cost-savings based on Washington Gas’s actual spending.

The Commission offered the following rationale: Although some parties have contended . . . that post-merger synergy savings are too vague to quantify, we conclude that [Condition 44] ensures that customer rates will decline or otherwise be lower than they would have been absent the merger and therefore complies with [the benefits] portion of our statute. Also, as Applicants observe, unlike in most merger situations which do not realize synergy savings for years after closing, the Applicants are applying these savings to ratepayers beginning in the first year. Therefore, we find that the synergy savings will result in direct ratepayer benefits. The Commission commented on “the difficulty of quantifying” merger-related savings in previous cases, and specifically mentioned the “Exelon/Constellation” merger, a transaction it approved in 2012.13 However, the Commission distinguished that merger from the Washington Gas merger, observing that Condition 44 would allow the Commission “to quantify these savings in the present case.” 13 See In the Matter of the Merger of Exelon Corp. & Constellation Energy Group, Inc., No. 9271, Order No. 84698, 2012 WL 833884 (Md. Pub.

Serv. Comm’n Feb. 17, 2012). In that proceeding, Exelon Corporation (“Exelon”), Constellation Energy Group (“CEG”), the Baltimore Gas and Electric Company (“BGE”) and Exelon Energy Delivery Company sought the Commission’s approval for a transaction in which Exelon would, by acquiring all of the stock of CEG, acquire the power to exercise substantial influence over the policies and actions of BGE. 18 b. Condition 28 As we will discuss below, OPC contends that Condition 28 established the mechanism to measure the “merger-related savings” required by Condition 44.

Condition 28 appeared in a section entitled “Affiliate Requirements” and required Washington Gas to provide the Commission with a “side-by-side comparison by function” of the pre-Merger and post-Merger “corporate and shared-services costs incurred by Washington Gas for the five years after Merger Close.”14 “For purposes of [Condition 28], pre-Merger mean[t] calendar year 2016.” Additionally, “[i]n the event Washington Gas file[d] a base rate case prior to the receipt of the first year comparison,” it was required to “include as part of its 14 In its entirety, Condition 28 stated: Washington Gas shall provide a side-by-side comparison by function of the pre-Merger corporate and shared-services costs incurred by Washington Gas as compared to the post-Merger corporate and shared-services costs incurred by Washington Gas for the five years after Merger Close[]. The comparisons shall be filed on an annual basis as a separate letter, and the first letter shall be filed no later than the end of the second quarter following the first full year after Merger Close. The comparisons shall include information by account under the Federal Energy Regulatory Commission (“FERC”) Uniform System of Accounts. In the event that Washington Gas files a base rate case prior to the receipt of the first year comparison, Washington Gas will include as part of its base rate application a side-by-side comparison, by function, of pre- and post-Merger corporate and shared-services costs available through the test year, to the extent applicable.

Additionally, in the second quarter after the first full calendar year following Merger Closing, and for every subsequent year for the next ten years, Washington Gas shall prepare and file with the Commission a report showing (i) AltaGas’s annual charges to Washington Gas and (ii) Washington Gas’s corporate and shared services costs. For purposes of this paragraph, pre-Merger means calendar year 2016. 19 base rate application a side-by-side comparison, by function, of pre- and post-Merger corporate and shared-services costs available through the test year, to the extent applicable.” Given that the Merger Order deviated from the terms of the settlement agreement on matters that are not related to the instant dispute (in which the Applicants had reserved the right to reject the merger rather than proceeding to closing), the Commission directed the Applicants to advise the Commission in writing of their intentions to close on the merger transaction no later than April 16, 2018. The Applicants agreed to the revised conditions, and the merger transaction closed as contemplated. No party filed a petition for judicial review of the Merger Order.

B. The Rate Administrative Proceeding On August 28, 2020, Washington Gas applied to the Commission for authorization to increase its base rates. The Commission delegated the matter to a public utility law judge (“PULJ”) to conduct evidentiary proceedings. See PU § 3-104(d)(1). 1. Administrative Proceedings Before the PULJ In support of its application, Washington Gas provided voluminous exhibits and written testimony from several witnesses.

Likewise, OPC introduced numerous exhibits and written testimony. Although there were other disputed issues presented to the PULJ, we focus below on the competing testimony presented by Washington Gas’s Chief Regulatory Accountant, Robert E. Tuoriniemi, and OPC’s witness, Sebastian Coppola, on the specific issue of compliance with Condition 44. 20 a. Mr. Tuoriniemi’s Testimony and Evidence Concerning Washington Gas’s Compliance with Condition 44 Mr. Tuoriniemi explained that the purpose of his testimony was “to describe and support the test year amounts,[15] certain ratemaking and pro forma accounting adjustments, the ratemaking and pro forma amounts, and to show the calculation justifying the company’s request for a base rate increase.” With respect to Condition 44 specifically, Mr. Tuoriniemi explained his understanding that the condition “require[d] Washington Gas to ensure that customer rates reflect an annual net benefit to Washington Gas’s Maryland customers of not less than $800,000 per year over five years following [the merger close] commencing with the first post-Merger base rate case.” Mr. Tuoriniemi described his methodology for computing “merger-related savings,” “transition costs,” “corporate costs allocated from AltaGas,” and “net benefit”—the terms used in Condition 44—to ensure that the request for a rate increase complied with that condition in the Merger Order. With respect to the “merger-related savings” arising from Washington Gas’s merger with AltaGas, Mr. Tuoriniemi testified that during the test year, Washington Gas eliminated $21,703,998 of actual costs that it no longer incurred post-merger, and the portion attributed to its Maryland operations totaled $9,135,835.

Mr. Tuoriniemi explained that the “primary savings identified” were labor-related expenses arising from positions As explained by Mr. Tuoriniemi, the “test year” represents the “actual amounts” 15 of expenses and revenues Washington Gas accrued in the twelve months leading up to March 31, 2020. 21 that had been eliminated.16 Aside from labor, Mr. Tuoriniemi testified that the other savings that had been identified related to expenses associated with the board of directors, investor relations, external audits, director and officer insurance costs, as well as supply chain activities. Next, Mr. Tuoriniemi explained his methodology for computing “transition costs” and assessing them in the test year.17 He testified that the test year included $609,188 of amortization expense related to the transition costs, and that Maryland’s share of those costs totaled $255,439. 16 Mr. Tuoriniemi provided the following explanation for the basis of his calculation of test year synergy savings: [Washington Gas] compiled cost savings by department and those were aggregated in total synergy savings. These represent the synergies identified to date . . . . [O]nly test year amounts are included in the calculation of the adjustment . . . . The amounts in the adjustment start at different dates in the test year.

Therefore, the adjustment calculates the pro-rated savings included in the test year for these costs. For positions that were eliminated, the cost savings include the position’s total compensation and an estimate of benefits. The exception is for pension and post-retirement benefits where a specific calculation was only available for the Chief Executive Officer position as it is publicly disclosed in the Company’s Form 10-K filings. 17 Specifically, in assessing the impacts of merger-related costs on Washington Gas, Mr. Tuoriniemi explained that he categorized the costs into the following types: (1) costs incurred by Washington Gas to gain approval of the merger; (2) costs incurred by Washington Gas to close the merger; (3) costs incurred to integrate AltaGas, WGL Holdings, Inc., and Washington Gas, including any amortization thereof; (4) costs for services rendered to Washington Gas by AltaGas and its affiliates; and (5) costs incurred by Washington Gas that were eliminated by the merger. 22 With respect to “corporate costs allocated from AltaGas,” Mr. Tuoriniemi described those as “[c]osts for services rendered to Washington Gas by [AltaGas] and its affiliates” and costs that were “charged for services.” Mr. Tuoriniemi computed Maryland’s share of these costs as $8,051,332. Finally, with respect to the “net benefit” to Maryland customers, Mr. Tuoriniemi presented direct testimony describing the difference between the $9,135,835 in “merger- related savings,” and $8,051,332 in “corporate costs allocated from AltaGas,” which he computed to be $1,084,503.

Mr. Tuoriniemi described this figure as the “net synergy savings,” which, once reduced by the $255,439 in amortized transition costs, resulted in a “net benefit” to Maryland customers of $829,064, which he referred to as the “net change in costs post-merger.” In addition to his description of his methodology summarized above, Mr. Tuoriniemi presented the following chart demonstrating how he calculated the net benefit for the test year to be $829,064, thereby exceeding the $800,000 requirement set forth in Condition 44: Total Company[18] Maryland Test Year Charges from AltaGas $ 18,774,305 $ 8,051,332 Adjusted Test Year Synergy Savings (21,703,998) (9,135,835) Net Synergy Charge (Savings) (2,929,693) (1,084,503) Test Year Transition Cost Amortization 609,188 255,439 Net Change in Costs Post Merger $ (2,320,505) (829,064) 18 Washington Gas’s service area includes Maryland, Virginia, and the District of Columbia. Only Maryland’s data are relevant to this matter. 23 Mr. Tuoriniemi testified that the amounts in the table were based upon entries in the company’s books (with respect to costs) and an internal compilation of cost savings by department (with respect to synergy savings). In addition to Mr. Tuoriniemi’s testimony, he presented documentary evidence consisting of 12 pages,19 which included detailed calculations of synergy savings, including merger-related savings, such as salary and benefits information for positions that had been eliminated as a result of the merger and corporate cost savings related to board of director expenses, insurance, and supply chain operations. Because Washington Gas had achieved the requisite net merger benefit for Maryland customers during the test year (i.e., the $800,000 required by Condition 44), Mr. Tuoriniemi did not make a ratemaking adjustment to the operating expense that Washington Gas sought to recover.

Therefore, Mr. Tuoriniemi explained, the entire $829,064 of savings remained in the test year as a reduction in operating expenses. b. Mr. Coppola’s Testimony and Evidence Offering an Alternative Analysis of Washington Gas’s Compliance with Condition 44 In contrast to Washington Gas’s analysis of its compliance with Condition 44, OPC took the position that Condition 44 and Condition 28 were “inextricably linked.” Namely, OPC contended that one could not undertake an analysis of Condition 44 without considering the annual filing required by Condition 28, which required that for a period of 19 Mr. Tuoriniemi’s merger-related savings calculations were itemized in documentary evidence titled “Adjustment No. 20 – Merger Commitment-Synergy Savings” (“Adjustment 20”). 24 five years after the merger close, Washington Gas would provide a side-by-side comparison of pre-merger and post-merger corporate costs and shared-services costs. In support of its position, OPC submitted direct testimony from its own expert witness, Sebastian Coppola, offering an alternative Condition 44 analysis. Mr. Coppola agreed that Condition 44 sought to “ensure that post-merger costs billed from [AltaGas] and transition costs [did] not exceed the cost savings from the merger,” and that it guaranteed that customers would realize “at least a net benefit of $4 million over five years from the combined operations of Washington Gas and [AltaGas.]” However, in his view, by requiring that Washington Gas file an annual report comparing pre- and post-merger corporate and shared services costs for a period of five years, Mr. Coppola opined that it was “clear that the Commission wanted to ensure that corporate and shared-services costs would not increase significantly post-merger from pre-merger levels in 2016.” Notably, Mr. Coppola undertook an analysis of “merger-related savings,” utilizing the same methodology that Mr. Welchlin had recommended during his testimony before the Commission in the merger proceeding.

Specifically, Mr. Coppola approached the analysis from a vantage point of ensuring that Washington Gas’s corporate costs did not increase from the pre-merger 2016 baseline (aside from an adjustment for inflation). In undertaking his analysis, Mr. Coppola identified “those corporate and shared-services functions where there had been a significant increase in post-merger costs that are contrary to reasonable