Public Service Commission v. Baltimore Gas & Electric Co.

Melvin, J., delivered the opinion of the Court. By its order filed November 29,1977, the Circuit Court for Howard County (Macgill, J.) reversed Order No. 62300 of the Public Service Commission of Maryland, dated April 22,1977. Order No. 62300 had been filed in proceedings before the Commission known as Case No. 6792, entitled “In the Matter of Tariff, Entitled Supplement 127 to P.S.C. Md. E-6, of the Baltimore Gas and Electric Company adding to Rider 1, Fuel Rate Adjustment, the Base Cost For Nuclear Generation”. It directed Baltimore Gas and Electric Company (Company) “to refund to its retail customers $31,867,000, together with an accrued interest computed at six (6) percent”.

Judge Macgill ruled that in the circumstances “the Commission did not have the power to order the refund in question”. People’s Counsel ⁴⁹² and the Commission filed timely appeals to this Court and the Company has filed a cross-appeal, 1 I On September 30,1974, the Company filed Supplement 127 to its Electric Tariff, which would have added to the Company’s existing two-part Fuel Rate Adjustment Clause a new third part providing a base cost for nuclear fuel to be used when Unit No. 1 of its Calvert Cliffs Nuclear Generating Station was to be activated as a source of electric power for its customers. The basic purpose of a “fuel rate adjustment clause” is to enable a utility company to automatically adjust its rates currently to reflect fluctuations in the cost of fuel from the level of costs included when base rates were established at a rate hearing procedure. At the time Supplement 127 was filed, the only statutory authority for such an automatic adjustment of base rates was contained in Section 54 of the Public Service Commission Law (Md. Ann. Code, Art. 78): “§ 54.

Sliding scale of charges and dividends. Any gas or electric company may establish a sliding scale for the automatic adjustment of charges for gas, electricity, or any service rendered and dividends to be paid to stockholders of the company. No such scale shall be effective, however, until filed with the Commission; and nothing in this section shall be construed as derogating in any respect from the paramount jurisdiction of the Commission over the rates of such companies. (1955, ch. 441.)” ⁴⁹³ At the time Supplement 127 was filed, no Commission rule, regulation or order prescribed any standard for FRA (Fuel Rate Adjustment) clauses, nor did the broad language of the statute restrict the “sliding scale” to fuel costs.

Prior to filing Supplement 127 and since 1967 the Company’s FRA clause on file with the Commission provided for a two-part formula. The FRA Clause providing for a two-part formula was filed with and allowed to become effective by the Commission in 1967. The two-part formula was employed in recognition of the difference in the cost of fossil fuels for generating electricity at the Company’s two newly constructed minemouth generating stations in Pennsylvania 2 as compared to the cost of fossil fuels for generation at its other plants in the Baltimore area. In 1974 the base fuel costs in the two-part FRA.

Clause was set at 30 cents per million Btu at the minemouth generating plants and 59.91 cents per million Btu at the company’s other plants. “Fuel costs” not only included the bare cost of the fuel but also certain miscellaneous fuel-related costs in accordance with a “Uniform System of Accounts” of the Federal Power Commission 3 that was apparently acceptable to the Maryland Commission at that time. When Supplement 127 was filed with the Commission on September 30,1974, the base cost of nuclear fuel was set at 15.66 cents per million Btu as a third part of the FRA Clause. In the meantime, in April, 1974, in a separate proceeding (Case No. 6759), the Commission, in response to “numerous inquiries and complaints from Maryland customers of electric utility companies concerning fuel rate adjustment costs”, began an investigation of the “policies and practices and factors comprising the fuel rate adjustment costs ... charged to customers” of all Maryland electric utility companies. As already indicated, Supplement 127 was filed pursuant to Section 54 of Code Article 78, requiring any “sliding scale ⁴⁹⁴ for the automatic adjustment of charges for ... electricity” to be filed with the Commission.

Under Section 70(a) of the Public Service Commission Law (Code Article 78), as it existed at the time, the Commission may let the new rate go into effect upon the date specified in the application therefor or it may suspend the new rate for an initial period of not more than 120 days beyond the date specified in the application. On October 16,1974, the Commission’s Chief Engineer sent the Commission a memorandum recognizing the “definite consumer benefit resulting from nuclear generation included in the FRA” and recommending that Supplement 127 be approved subject to the Commission’s final order in Case No. 6759, the generic FRA investigation. However, the Chief Engineer questioned in his memorandum the inclusion of certain nuclear eo^t elements in the clause”. 4 The memorandum did not question the use of a multi-part FRA Clause and explained’the customer benefit of Supplement 127 as follows: “First, some discussion is given regarding the benefit of the revision. Currently the cost of fuel for nuclear generation as compared to oil and coal costs, all in comparable terms of cents per million BTU, is about one-fourth of that for coal and about one-tenth of that for oil.

Further nuclear fuel costs (as used in the FRA) will remain nearly constant for a 12-month period, whereas oil and coal costs change monthly (usually an increase). Therefore inclusion of nuclear generation, in the FRA determination will have the effect of offsetting the trend in FRA increases. In other words including the nuclear generation will not result in a dramatic reduction in the FRA. As an example, assume the present coal, oil and nuclear fuel costs, and that nuclear generation is included in the FRA for the first time in January 1975.

At that time the FRA would be ⁴⁹⁵ about 80y per 100 KWH with nuclear generation, and about $1.00 without Thereafter tine FRA would change up or down, with changing oil and coal prices, from the 80 cent instead of one dollar level. When Calvert Cliffs Unit No. 2 becomes operational, the FRA will undergo another ‘step-down’,....” On October 28, 1974, the Commission, on its own motion and acting under Article 78, Section 70, suspended Supplement 127 for a period of not more than 120 days from November 1, 1974, and instituted Case No. 6792 to consider “the justice and reasonableness” of Supplement 127. The matter was set for a hearing on November 1,1974, before the Commission’s Chief Hearing Examiner. Thus began the lengthy proceedings that culminated 30 months later in the Commission’s Order No. 62300 of April 22,1977, requiring the Company to refund $31,867,000 plus 6% interest, purporting to represent the Company’s overrecovery of fuel rate adjustment charges as a result of the application of the Company’s three-part FRA Clause between February 1975 (when the clause was first utilized to determine the monthly FRA charge to retail customers) and December 1976 (when the Company, pursuant to the Commission’s directive in a separate generic rate case —- Case No. 6985 —■ abandoned the three-part FRA Clause and filed a one-part FRA Clause).

In addition to the hearing on November 1,1974, there were hearings before the Chief Examiner on January 23, 1975; February 26,1975; August 21,1975; and September 29,1975. These hearings were consolidated hearings for Cases 6759 and 6792. Following the November 1, 1974 hearing the Chief Examiner in an interim report to the Commission on December 20, 1974, recommended that the Commission “terminate its suspension of Supplement 127 ... but retain jurisdiction to make whatever changes in the clause that may be necessary in the public interest after the hearing in this matter has been concluded”. This recommendation was based in turn on the recommendation of the Commission’s Chief ⁴⁹⁶ Engineer, who stated in a memorandum dated November 15, 1974, as follows: “We have had occasion to analyze the subject proposal in considerable depth, including results of evaluations conducted by members of this department.

There is no question that the proposed tariff revision would operate to the benefit of all customers. In order to illustrate the dimension of this benefit, it would appear that adoption of the proposed Supplement would offset the current fuel rate adjustment by approximately 20%. Since Calvert Cliffs Unit No. 1 is scheduled to commence operation sometime in January 1975, this benefit to the customers would first appear in the February 1975’s fuel rate adjustment. Hence time is of the essence in order to gain the apparent consumer benefit.

On the other hand, I have certain reservations as regards the manner in which the nuclear generation would be included in the fuel rate adjustment determination and also as regards the tariff base cost of 15.66?; per million Btu as proposed by the Company. “In conclusion, it would definitely be in the public interest for the Commission to allow Supplement 127 to go into effect on an interim basis subject to the Commission’s findings in Case No. 6792. In this manner the customers of the Company would receive the total benefit as provided in the subject Supplement. It is therefore further suggested that the effective date for Supplement 127 to become operative on an interim basis should be on/or before January 1,1975, as the Company determines its fuel rate adjustment on a calendar month basis and its first nuclear generation is scheduled for the month of January 1975.” Thereafter, on December 23,1974, by its Order No. 61065, ⁴⁹⁷ the Commission terminated the suspension of Supplement 127. The termination order, in pertinent part, reads as follows: “WHEREAS, the Commission is of the opinion and so finds that it would be in the public interest to terminate the suspension at this time, subject to such future modifications in the proposed Supplement 127 as may be desirable based on evidence deduced after full hearing.

(Emphasis added.) “IT IS, THEREFORE, this 28rd day of December, in the year Nineteen Hundred and Seventy-four, by the Public Service Commission of Maryland, “ORDERED: (1) That the suspension of Supplement 127 to Tariff P.S.C. Md. E-6, filed by Baltimore Gas and Electric Company, imposed by Order No. 61006, entered in this proceeding on October 28, 1974, be, and the same is hereby, terminated. (2) That the Commission retains jurisdiction to require such modifications in Supplement 127 to Tariff P.S.C. Md. E-6, filed by Baltimore Gas and Electric Company, as may be determined after the hearing in this matter has been concluded.” On January 28, 1975, the Commission, at the Company’s request, accepted Supplement 132 (reducing the period of calculation of the fuel rate adjustment from 12 months to 3 months) for Supplement 127, permitting it to take effect with February 1975 billings, subject to the same condition that was attached to Supplement 127, Le., “that the Commission retains jurisdiction to require such modifications as may be determined after hearing in this matter has been concluded”. On February 4, 1975, People’s Counsel filed a Petition for Fuel Rate Adjustment Relief in Case No. 6759, the generic FRA proceeding that was the companion case to Case No. 6792, seeking among other things, a ruling that in calculating the monthly FRA the cost of fossil fuel (coal, oil, gas) should include no items other than those specified in Account 151 of the Uniform System of Accounts. At that time Maryland electric utilities calculated the FRA on the basis of Accounts ⁴⁹⁸ 501 and/or 547.

Account 501 included 15 items, whereas Account 151 was limited to the actual cost of fossil fuel plus the cost of transportation for fuel. On February 24, 1975, the Commission issued Order No. 61148 in Case No. 6759 (the FRA generic case) which directed the Company and all other electric companies having FRA Clauses based on Account 501 of the Uniform System of Accounts to, in the future, beginning with the billing month of April 1975, calculate their monthly adjustments so as “to limit the excess cost of fuel to be recovered to the items included in Account 151 of the Uniform System of Accounts prescribed by this Commission”. The Commission made no attempt to order refunds or make retroactive adjustments to charges that had previously been collected on the basis of Account 501. On March 21, 1975, in response to Order No. 61148, the Company filed Supplement 135 to its Electric Service Tariff to replace Supplement 132.

By this filing the Company proposed to change the base costs of fossil fuels in its three-part clause: The base cost of fuel per million Btu for minemouth generating stations was changed from 30 cents to 28.69 cents and for its other fossil fuel stations from 59.91 cents to 59.27 cents. As Order No. 61148 did not apply to nuclear fuel costs, Supplement 135 retained the previously established base cost of 15.66 cents per million Btu for that fuel as part of the three-part formula for determining the monthly FRA. The Commission, by letter to the Company, dated April 1, 1975, approved the proposed change in the Company’s tariff. The letter from the Executive Secretary of the Commission stated: “We have received the tariff, entitled Electric Supplement 135 to P.S.C. Md. E-6, filed with the Commission on March 21, 1975, by Baltimore Gas and Electric Company pursuant to Commission Order No. 61148 entered on February 24, 1975, in Case No. 6759. “The Commission has directed me to advise you that it has reviewed the aforesaid tariff and ⁴⁹⁹ determined that it should be permitted to become effective with April, 1975 billings.” Thus, Supplement 135, which obviously contemplated the continued use by the Company of a multi-part FRA Clause, was approved by the Commission and “permitted to become effective” without suspension or any other condition.

Thereafter, the Company, as it had in the past, continued to file with the Commission monthly “FRA letters” showing precisely how it calculated its monthly FRA charges using its three-part formula. In the meantime, on February 5, 1975, the Commission solicited programs from eight certified public accounting firms for “an indepth, independent and competent review ... of the practices and procedures of the four principal generating companies in Maryland [including Baltimore Gas and Electric Company] in order to develop the factual situation with regard to the fuel rate adjustment clause as applied to customer billing by each utility”. The firm selected was to formalize the results of its review, analysis and recommendations “in a document suitable for submission” in the hearings in the Commission’s on-going investigation of FRA costs charged to customers of all Maryland electric utility companies (Case No. 6759), and to serve as an expert witness in these hearings. The Commission picked the firm of Haskins & Sells, who on July 11, 1975 filed its report with the Commission.

The report concluded that the use of a multipart FRA Clause, such as had been employed by the Company and accepted by the Commission since 1967, “does not give consideration to the relative generating mix which produced current costs”. The effect of this failure to “give consideration to the relative generating mix” was to allow the Company to recover each month, as part of its FRA. charge to its customers, some of the fixed costs associated with the construction of the Calvert Cliffs nuclear plant. This effect resulted from the methodology used by the Company in calculating the monthly FRA charges under the Company’s multi-part FRA Clause. As nearly as we can determine from the record the same ⁵⁰⁰ methodology had been used by the Company and accepted by the Commission since 1967.

When the base cost of nuclear fuel was added, the method of calculating the FRA charges was the same as it had been since 1967; the only change being that instead of a two-part clause there was now a.three-part clause. How the “relative generating mix” is overlooked by using a multi-part FRA Clause and results in an overrecovery of fuel costs was explained in the Haskins & Sells report as follows: “Multiple Part Clause and Nuclear Generation The Company’s fuel adjustment clause employs, effective January 1, 1975, a three part formula, whereby nuclear, minemouth and other generation are given separate consideration. Each part of the formula uses a separately stated ‘base fuel cost’ for each of the three types of source generation. The ‘base fuel cost’ for each source of generation is compared to the current cost of fuel to determine the increase or decrease above or below base fuel cost which will be a billing determinant under the fuel adjustment clause.

We believe the three part formula, as presently used, does not give adequate consideration to the base fuel cost included in base rates. The Company, by letter dated February 20, 1975, indicated to the MPSC that the average base cost of fuel was 54.79per million Btu for the twelve months ended July 31, 1974 (test year in last rate case) and that this average base cost was included in base electric rates. Such base fuel costs were related to the generating mix experienced by the Company for such test year. However, the three part formula presently in use does not give consideration to the relative generating mix which produced current costs as can be seen from the following example. ⁵⁰¹ Assume that during the test year of a rate case the output of Source A and B was weighted 50%-50% and that the base cost was 1* for Source A and 1.2* for Source B. The cost included in the determination of base electric rates therefore would be determined as follows: Base Unit Test Year Source Cost_ Output Test Year Cost A 1* ' 1,000,000 $10,000 B 1.2* 1,000,000 $12,000 Total 2,000,000 $22.000 Average Cost 1.1* Assume that subsequent to the test year the facts above remained the same except that the output from Source A was 1,500,000 and Source B was 500,000.

The costs are therefore as follows: Source Current Unit Cost __ Test Year Output Test Year Cost A 1,500,000 $15,000 B 1.2* 500,000 6,000 Total 2,000,000 $21,000 Average Cost 1.05* When the generating mix changes the average cost can go either up or down (down in the above example). In the above example the average cost of 1.1* would have been included in base electric rates for the current year. Since the ‘current unit cost’ is equal to the ‘Base Unit Cost’ on a Source by Source basis, the two part fuel adjustment clause would reflect no adjustment even though the average ‘current year cost’ has decreased. The ‘base fuel cost’ for one million Btu’s of output from the nuclear plant was established at 15.66* which is the current cost of this fuel.

Because this ‘base fuel cost’ is less than the ‘base fuel cost’ of ⁵⁰² 54.79(¿ included in base electric rates mentioned above, it would appear that the Company is overrecovering fuel costs for energy generated by its Calvert Cliffs Unit 1 nuclear plant.” Thus the use by the Company, in calculating its monthly FRA charges, of a separate base cost for fuel used at each of its three types of generating plants (nuclear, minemouth and other stations) rather than an actual average cost of fuel used in the aggregate at all its generating stations, was found by Haskins & Sells to be inappropriate and to result in an “overrecovery” of fuel costs in the case at hand. The record shows, nevertheless, that the Company’s use of the comparably cheaper nuclear fuel resulted in savings to its customers of approximately 4 million dollars per month — even though the savings were calculated in accordance with its three-part FRA Clause using the same methodology that the Commission had been accepting since 1967. The appellants concede that “the Supplements in question would act to lower by some amount the fuel rate adjustment revenues collected under the then-existing fuel rate adjustment clause.” They contend, however, that the use of the multi-part FRA Clause, taking into account the cheaper nuclear fuel, does not lower the FRA charges as much as they would have been lowered had the Company’s formula taken into proper consideration the “generating mix” of the three sources of electric generation. Thus, they argue, to the extent that the formula fails to properly consider the “generating mix”, an “overrecovery” of fuel costs results which permits the Company to use the overrecovery to recover part of the fixed costs of constructing the nuclear plant, and that these fixed costs can properly be recovered only in a generic rate proceeding and not through collections under an FRA Clause.

In its July 11th report and in subsequent testimony before the Chief Examiner, Haskins & Sells make it clear that although the Company’s multi-part FRA Clause enabled it to recover part of the fixed costs of the nuclear plant, it was not recovering twice for these costs, i.e., through its base rates ⁵⁰³ set in its last rate case (using the test year ending July 31, 1974) and also through FRA revenues. The report stated: . . [W]hile there may be overrecovery of fuel costs from nuclear generation, we recognize that the fixed costs of nuclear generating units are significantly in excess of similar costs for fossil units and, therefore, base electric rates do not provide for this increased cost of producing energy. We assume that in accepting the Company’s 15.66y MBTU for nuclear generation the MPSC considered this to be an offset to the increased fixed costs which will not be recovered until new base rates are established in a rate proceeding. This procedure does not result in a precise offset of the two types of cost and we recommend that when a nuclear or any other new plant goes into operation, the fuel adjustment formula recover only the cost of fuel used for producing energy sold.

This will be accomplished only by using the one part formula. However, we wish to point out that in adopting this procedure, the Company must receive an immediate increase in base rates when a major generating station is placed in service if the fixed costs per kw of capacity is significantly higher than the related embedded fixed costs if it is to be treated in an equitable manner.” (Emphasis added) In addition to recommending a one-part FRA Clause, Haskins & Sells recommended numerous other specific changes in the structure of the Company’s existing FRA Clause. By letter dated July 18, 1975, Haskins & Sells responded to a Commission request to quantify the amount of overrecovery of fuel costs. The letter stated: “We did not report a dollar amount of overrecovery of fuel costs because equity