Public Service Commission v. Baltimore Gas & Electric Co.

Murphy, C. J., delivered the opinion of the Court. On September 10, 1973, the Baltimore Gas and Electric Company (the Company) filed revised schedules of electric and steam rates with the Public Service Commission (the Commission) designed to produce an additional $32,400,000 (a 10% increase in gross annual revenues. The Company’s ³⁵⁹ application was predicated upon the use of an end of the test year period or “terminal” rate base in valuing its utility property for rate making purposes, a rate of return of 8.35% and an increase from 3.0% to 3.2% in the composite rate of annual depreciation for the Company’s electric properties. The Commission suspended the Company’s proposed rates for the maximum period authorized by Maryland Code (1969 Repl.

Vol.) Art. 78, § 70 and held extensive hearings involving 3,000 pages of testimony and numerous exhibits (Commission’s Case No. 6700). 1 By its Order No. 60684 and Opinion dated, respectively, March 8 and 26, 1974, the Commission concluded that the appropriate test year for rate making purposes was the twelve-month period ending October 31, 1973; that the “use of this recent test period gives almost current recognition to the level of expenses as affected by inflation and minimizes the impact of regulatory lag”; that it was appropriate in the circumstances to utilize an average, rather than a terminal rate base, and that the average fair value of the Company’s total utility property for rate making purposes for the test period was $1,656,625,000; that a fair and reasonable rate of return on the Company’s rate base was 8.2%; and that the increased rate of annual depreciation sought by the Company for its electric properties would not be allowed. As a result, the Commission authorized the Company to increase its electric and steam rates by approximately $9,000,000. The Company appealed to the Circuit Court for Calvert County; it claimed that the Commission’s decision to employ an average, rather than a terminal rate base, constituted error since it failed to give due consideration to substantial evidence of inflation, attrition and regulatory lag, and was therefore unlawful, arbitrary, capricious and not supported by substantial evidence. The Company contended that the Commission also erred in finding that 8.2% constituted a fair rate of return on its rate base and that the ³⁶⁰ Commission’s failure to authorize an increase in the composite depreciation rate on its electric properties from 3.0% to 3.2% completely ignored the uncontradicted evidence that such increase was justified and required.

On the record made before the Commission, the lower court (Bowen, J.), by decree dated August 29, 1974, reversed the Commission’s decision to use an average rate base in valuing the Company’s property for rate making purposes; the court directed instead that the Commission use an end of the test year or terminal rate base. It also reversed the Commission’s finding with respect to depreciation of the Company’s electric properties and ordered that the claimed depreciation rate of 3.2% be allowed. The court remanded the case to the Commission for redetermination of the proper rate of return in accordance with its opinion and “in the context of the holdings herein on Depreciation and Rate Base.” From the court’s decree, the Commission, People’s counsel, and the Mayor and City Council of Baltimore (an intervenor in the proceedings below) appealed; the Company filed a cross-appeal, claiming that the court’s decree should be modified to require a rate of return not lower than 8.5%. The Public Service Commission Law, Code, Article 78, § 68 (the Law) empowers the Commission “to determine just and reasonable rates of public service companies.” Section 69 of the Law specifies that “just and reasonable rates” mean “rates which are not in violation of any of the provisions of this article, and which will result in an operating income to the public service company, . . . 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.” 2 Section 72 provides that ³⁶¹ all final valuations made by the Commission shall be prima facie evidence of value.

Section 84 (b) of the' Law provides that “[i]n any proceeding involving a new rate, or change in any rate, whether temporary or permanent, the burden of proof shall be on the proponent of the new rate or change in rate.” Judicial review of final decisions or orders of the Commission is authorized by §§ 89-98, inclusive, of the Law. Section 91 (a) provides that such review “shall be instituted in the circuit court for any county within which operations are carried on by the public service company involved, or in any equity court in Baltimore City.” A “further review” is authorized by appeal to the Court of Appeals. § 98. The scope of judicial review of orders of the Commission is set forth in § 97: “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.” Consistent with these statutory provisions, we said in C. & P. Tel Co. v. Public Service, 230 Md. 395, 401 , 187 A. 2d 475, 478 (1963), that “every final decision of the Commission prima facie shall be correct and shall be affirmed on appeal to the courts unless shown to be unconstitutional, or without statutory authority or made upon unlawful procedure, or arbitrary or capricious, or unsupported by substantial evidence on the record considered as a whole, or is affected by other error of law.” (emphasis supplied) In Balto. Gas Co. v. McQuaid, 220 Md. 373, 382 , 152 A. 2d 825, 829-30 (1959), a case involving, as here, a determination of the rate base of a public service company, we said: “Our inquiry is limited to ³⁶² finding whether there was illegality or unreasonableness in the Commission’s action — when that inquiry is finished, judicial scrutiny ends and the judicial function in the rate making process is over.” Recognizing that rate making is a legislative function, Gregg v. Public Service Commission, 121 Md. 1 , 87 A. 1111 (1913), we have held repeatedly that a reviewing court will not substitute its judgment for that of the Commission, a body informed by experience and aided by a competent and experienced staff, and that consequently an order of the Commission will not be disturbed on appeal except upon clear and satisfactory evidence that it is unlawful or unreasonable.

See Public Service Commission v. Balto. Trans. Co., 207 Md. 524 , 114 A. 2d 834 (1955); Balto. Trans.

Co. v. Pub. Ser. Comm., 206 Md. 533 , 112 A. 2d 687 (1955); Montgomery Co. v. Public Serv. Comm., 203 Md. 79 , 98 A. 2d 15 (1953); Pub.

Serv. Commn. v. United Rwys. Co., 155 Md. 572 , 142 A. 870 (1928); Public Service Commn. v. Byron, 153 Md. 464 , 138 A. 404 (1927). We do not, therefore, in considering the legality and reasonableness of the Commission’s decision in this case, afford prima facie correctness to the decree of the court below; nor do we determine merely whether the court abused its discretion in reviewing the Commission’s order, as suggested by the Company.

We do not directly review the reasonableness of the determinations made by the lower court, but instead consider whether there was substantial evidence before the Commission on the record considered as a whole to support its use of an average rate base, a 3.0% composite rate of depreciation, and a 8.2% rate of return. In so determining, we are governed by principles of judicial review of decisions of administrative agencies so well articulated for the Court by Chief Judge Hammond in Insurance Comm’r v. Nat’l Bureau, 248 Md. 292, 309-10 , 236 A. 2d 282, 291-92 (1967): “Whichever of the recognized tests the court uses — substantiality of the evidence on the record as a whole, clearly erroneous, fairly debatable or against the weight or preponderance of the evidence ³⁶³ on the entire record — its appraisal or evaluation must be of the agency’s fact-finding results and not an independent original estimate of or decision on the evidence. The required process is difficult to precisely articulate but it is plain that it requires restrained and disciplined judicial judgment so as not to interfere with the agency’s factual conclusions under any of the tests, all of which are similar. There are differences but they are slight and under any of the standards the judicial review essentially should be limited to whether a reasoning mind reasonably could have reached the factual conclusion the agency reached.

This need not and must not be either judicial fact-finding or a substitution of judicial judgment for agency judgment.” (Emphasis supplied.) Rate Base As heretofore indicated, the rate base is the “fair value of the company’s property used and useful in rendering service to the public” upon which the Company is entitled to earn a reasonable rate of return, viz., a return which will result in as much net operating income as will yield a reasonable return on the rate base fixed. Article 78, § 69; C. & P. Tel. Co. v. Public Service, supra. As we observed in Balto.

Gas Co. v. McQuaid, supra: “Rate making necessarily is predictive since it is the legislative process of making a rule for the future. Gregg v. Public Service Commission, 121 Md. 1, 28 ; McCardle v. Indianapolis Water Co., 272 U. S. 400, 408-409 , 71 L. Ed. 316, 324 ('It must be determined whether the rates complained of are yielding and will yield, * * * a sum sufficient to constitute just compensation for the use of the property employed to furnish the service; that is, a reasonable rate of return on the value of the property at the time of the investigation and for a reasonable time in the immediate future’); Chesapeake & Potomac Tel. Co. v. Public Service Comm., 201 Md. 170, 180 , ³⁶⁴ quoting from San Diego Land & Town Co. v. Jasper, 189 U. S. 439, 442 , 47 L. Ed. 892 (‘* * * “what the company is entitled to demand, * * * is a fair return upon the reasonable value of the property at the time it is being used for the public.” ’). This being so, the courts have recognized, as we have noted, that the rate of return of tomorrow need not be fixed solely on the facts of today but that reasonable estimates of what tomorrow may bring also may be relied on. . . .” 220 Md. at 382-83 , 152 A. 2d at 830 .

The rate base, usually measured over a twelve-month period called the test year, is calculated primarily in one of two ways: valuation as of the last day of the test year (end of the test year or terminal rate base), or valuation averaged over the entire test year (average rate base). The Company submitted evidence to the Commission showing both a terminal rate base ($1,742,035,000) and an average rate base ($1,656,625,000) for the test period; a witness for People’s counsel, the Commission’s Chief Auditor, also made calculations of both bases, fixing the terminal rate base at $1,735,220,000 and the average at $1,648,717,000. The Company argued that a terminal rather than an average rate base should be employed to compensate for attrition, inflation, regulatory lag and the shortfall in earnings. It relied upon our decision in McQuaid where we approved the Commission’s use of a terminal rate base to take these factors into account. 3 In adopting the average rate base, the Commission accepted the Company’s fair value calculations and followed the recommendation of witnesses for People’s counsel and the General Services Administration, an ³⁶⁵ intervenor in the proceedings.

In its opinion, the Commission said: “In the last proceeding involving the rates of Baltimore Gas and Electric Company (Case No. 6542) the Commission used an average rate base and specified several reasons. In this immediately prior case the Commission on October 13, 1972, entered its Order No. 60005 authorizing an annual increase in electric rates to produce not more than $13,213,000; an annual increase in gas rates to produce not more than $1,815,000; and an annual increase in rates for steam service to produce not more than $147,000. In authorizing the increase at that time, the Commission used a test year that had ended on June 30, 1972, some three and one-half months earlier. “In the present proceeding, Case No. 6700, the Commission issued its order authorizing higher rates on March 8, 1974, using as the test year, the 12 months period ended October 31,1973. “Pursuant to this Order, the Company filed rates which became effective with meter readings taken on and after March 15, 1974, and these higher rates have applicability as early as within three and one-half months of the end of the test period thus reducing regulatory lag. “In its decision in Case No. 6542, the Commission noted the relatively short time period that had elapsed since its Order dated May 26, 1971, authorizing the Company to increase rates in the then immediately prior case (Case No. 6395) and the application filed by the Company on April 17, 1972, in Case No. 6542 for an increase in rates. The Commission again notes the relatively short time period that has expired since its Order dated October 13, 1972, in Case No. 6542 and the filing of the petition on September 10, 1973, in this proceeding (Case No. 6700).” ³⁶⁶ “The Commission is of the opinion that a terminal rate base should not be adopted in this proceeding in view of the very recent test period for this Company and the short period of time that has elapsed since the last rate case.

We conclude, therefore, that rates for the future for the Company should be set on the fair value rate base averaged over the 12 month period ended October 31, 1973, which gives appropriate recognition to past inflation.” In reversing the Commission’s decision, the lower court concluded that the Company was experiencing rapid growth and that the terminal rate base formed a more accurate basis of fixing rates to be paid in the future. The court said that a review of the authorities indicated a pattern of using an average rate base where economic conditions were relatively stable, companies were growing, and there was little elapsed time between the request for rate relief and the decision of the regulatory agency. The court said that where evidence shows substantial attrition or substantial regulatory lag, a terminal rate base should be used. It held that the Commission’s choice of methods “must be based on the evidence presented to it and must be consistent with its actions in similar situations to satisfy the test of reasonableness.” The court held that the Company had presented “conclusive evidence” of attrition and had shown rapid inflation, rapid growth, and an inability to earn the rate of return authorized by the Commission in the Company’s immediately preceding rate case.

For these reasons, it concluded that “conclusive evidence” existed supporting the use of a terminal rate base and that, accordingly, the Commission’s use of an average rate base was unreasonable. We think the Commission’s determination to employ an average rate base in valuing the Company’s property used and useful in rendering service to the public was not illegal, arbitrary or capricious, but on the contrary was supported by substantial evidence on the record considered as a whole and should have been affirmed. In determining fair value for ³⁶⁷ rate making purposes, “the Commission is not bound to accept any one factor or method, or any particular combination of these or to accept any particular kind of evidence.” C. & P. Tel. Co. v. Public Service, supra, 230 Md. at 404 , 187 A. 2d at 480 .

Furthermore, the Commission’s “finding of fair value must only reflect ‘the reasonable judgment of the Commission, based on all relevant facts of which several only, or indeed but one, may prove to be controlling.’ ” Id. (quoting Balto. Trans. Co. v. Pub.

Serv. Comm., 206 Md. at 547 , 112 A. 2d at 693 ). Thus, to the extent that the Commission was reasonably convinced of the existence of the problems of inflation, attrition and regulatory lag, “[i]t could have attempted to meet them in various ways,” McQuaid, supra, 220 Md. at 382 , 152 A. 2d at 829 . See generally Southwestern Bell Tel.

Co. v. State Corp. Comm ’n, 192 Kan. 39 , 386 P. 2d 515 (1963); New England Tel. & Tel. Co. v. Department of Public Utilities, Mass., 275 N.E.2d 493 (1971); New England Tel. & Tel. Co. v. State, 113 N. H. 92, 302 A. 2d 814 (1973); State v. New Jersey Bell Tel. Co., 30 N. J. 16, 152 A. 2d 35 (1959); Narragansett Electric Co. v. Kennelly, 88 R. I. 56, 143 A. 2d 709 (1958), and cases cited therein.

We are satisfied from our review of the record that the Commission considered all of these factors in deciding to adopt an average rate base. We note that in the Company’s preceding rate case (No. 6542), the Commission used an average rate base. The Company did not appeal this determination. This valuation, including the method of valuation, becomes prima facie evidence in subsequent proceedings.

Article 78, § 72. As we have explained, “ ‘This is not to say that its failure to protest . . . would bind or estop the Company but certainly, its acquiescence in the rate base found and used by the Commission [in the earlier case] must be put on the scale when there is weighed the lawfulness and reasonableness of the current finding.’ ” C. & P. Tel. Co. v. Public Service, supra, 230 Md. at 408 , 187 A. 2d at 482 , quoting Balto. Trans.

Co. v. Pub. Ser. Comm., supra, 206 Md. at 548-49 , 112 A. 2d at 693 . Of course, the ³⁶⁸ Commission is not bound by its prior use of the average rate base.

Considering, however, that the burden of proof is upon the proponent of the new rates, the Commission’s use of and the Company’s acquiescence in the average rate base in the immediately preceding rate case is an element tending to support the reasonableness of the Commission’s present decision. That inflation, attrition, and regulatory lag may exist does not mandate the Commission’s use of a terminal rate base to resolve these problems. Balto. Gas Co. v. McQuaid, supra; New England Tel. & Tel.

Co. v. Department of Public Utilities, supra; Southwestern Bell Tel. Co. v. State Corp. Comm’n, supra. But cf. North Carolina ex rel. Util.

Comm’n v. Piedmont Nat. Gas. Co., 254 N. C. 536 , 119 S.E.2d 469 (1961); Arlington County Bd. of Supervisors v. Virginia Elec. & Power Co., 196 Va. 1102 , 87 S.E.2d 139 (1955). In the present case, the Commission