Public Service Commission v. Baltimore Gas & Electric Co.

BISHOP, Judge. The Public Service Commission of Maryland (the Commission) and the People’s Counsel appeal from orders of the Circuit Court for Calvert County which reversed, on appeal, two orders of the Commission denying Baltimore Gas and Electric Company (B.G. & E.) recovery of all of its replacement power costs for two separate power outages which occurred at B.G. & E.’s Calvert Cliffs nuclear generating plant. Md.Ann.Code, art. 78, § 91, 98 (1980, 1983 Cum. ⁵⁰⁰ Supp.). The Commission had permitted 75% recovery in one of the cases and 25% in the other. 1 The Court directed the Commission to enter orders allowing B.G. & E. to recover the entire cost of replacement power for both outages.

It held that by examining the two outages to determine whether they could have been avoided through better planning, preventive maintenance, more diligent efforts, closer supervision and more prudent management, the Commission exceeded its statutory authority to determine whether B.G. & E. had maintained the productive capacity of its generating plants at a reasonable level. We disagree. The principal question is one of statutory interpretation regarding the scope of the Commission’s authority to determine fuel rate adjustments for electric companies under the Public Service Commission Law, Md.Ann.Code, art. 78, § 54F(f) (1983 Cum.Supp.). I. Procedural Background In March of 1981, and again in February and March of 1982, B.G. & E. filed applications with the.

Commission to adjust its electric fuel rate. The February and March 1982 applications were consolidated into one case. The fuel rate is the separately stated prescribed amount per kilowatt-hour which an electric company charges its customers to recover its actual cost of fuel. 2 Md.Ann.Code, art. 78, ⁵⁰¹ § 54F(b) (1983 Cum.Supp.). It is subject to adjustment by the Commission pursuant to Section 54F(e) which provides that: The fuel rate may be adjusted in accordance with this section only if the calculated actual fuel rate is more than 5 percent above or below the sum of the components of the fuel rate then in effect.

An electric company having a decrease of more than 5 percent shall promptly file an application to adjust its fuel rate downward. To the extent that actual accumulated fuel costs are not recovered under this section, they may be deferred as an operating expense and be recovered in any base rate proceeding if the Commission finds that the costs were justified and recovery of the costs is consistent with the provisions of this article governing rates. In each case, the Commission suspended the proposed rates for thirty days. Md.Ann.Code, art. 78, § 54F(c) (1983 Cum.Supp.).

Thereafter, the Commission held public evidentiary hearings to determine whether: (1) Only changes in the actual costs of the components of the fuel rate [were] included in the proposed change[s]; (2) The applicant has used the most economical mix of all types of generation and purchase; (3) The applicant has made every reasonable effort to minimize fuel costs and followed competitive procurement practices;* * 3 (4) The applicant has maintained the productive capacity of all its generating plants at a reasonable level. Md.Ann.Code, art. 78, § 54F(f) (1983 Cum.Supp.). “The Commission may disallow ... [the proposed fuel rate if it is the] result of the applicant’s failure to comply with the[se] requirements ... unless cause be shown to the contrary.” ⁵⁰² Md.Ann.Code, art. 78, § 54F(g) (1983 Cum.Supp.). The burden of proving compliance is on the applicant. Md.Ann. Code, art. 78, § 54F(i) (1983 Cum.Supp.).

The disputed issues in this case were the standard to be used and the extent of the Commission’s statutory authority to determine whether B.G. & E. had “maintained the productive capacity of all its generating plants at a reasonable level.” Md.Ann.Code, art. 78, § 54F(f)(4) (1983 Cum.Supp.).

II

Facts In each case, B.G. & E. showed that its productive capacity was outstanding in comparison with that of nuclear power units of electric companies in the rest of the country. In fact, in 1980, the Calvert Cliffs plant set a new productivity record. Its availability factor, the percentage of time the plant was ready for or was actually in service, for the twelve month period ending January 31, 1981, was 81.61% as compared with 68.4% which was the expected industry average. In its order, the Commission acknowledged that B.G. & E. won an award “for the best operating record in 1980 of any commercial nuclear power plant in the United States.” In 1981, the Calvert Cliffs plant increased its output by 12% and set another plant record.

Its availability factor was 83.1% as compared to the 68.4% expected industry average, and its capacity factor, the average load on the equipment compared to its rating, was the fourth highest among nuclear power units in the United States. In each case, however, the People’s Counsel presented evidence that particular forced outages could have been avoided by reasonable and prudent management designed to prevent employee error. In both cases the Commission decided that the level of productive capacity and the fuel costs were unreasonable because the forced outages were unnecessary, since they were caused by imprudent managerial decisions. This concept was succinctly explained in B.G. & E.’s brief at page 4: ⁵⁰³ One fact which directly determines a utility’s available sources of generation, and therefore its fuel rate, is plant outages. “Scheduled” outages of generating plants are planned in advance to facilitate maintenance work on equipment and the allocation of manpower. “Forced” outages occur at random, prompted by equipment malfunctions and other operational problems.

In the event of any outage, replacement power must be obtained from a utility’s own reserve units or purchased from another utility or the PJM Interconnection (whichever is least expensive). The cost of replacement power is then included in the calculation of the utility’s fuel rate. Outages at B.G. & E.’s Calvert Cliffs plant invariably necessitate the procurement of replacement power at a higher cost than the cost of generation at Calvert Cliffs. This higher cost results because nuclear energy is produced far less expensively than power from traditional, alternative fuels, such as coal and oil.

The temporary increase in B.G. & E.’s fuel costs caused by an outage may necessitate adjustment of B.G. & E.’s fuel rate. In December of 1980, at Calvert Cliffs Unit No. 1 a forced outage occurred near the end of the planned refueling and maintenance outage as the generator turbine was rolled in preparation for the resumption of operations. This seventeen day unplanned outage was caused by damage from a foreign object in the generator turbine — a standard V2" nut which, according to B.G. & E.’s own report, apparently fell from hoisting equipment used for maintenance procedures performed on the turbine during the planned outage. The People’s Counsel presented evidence that the presence of the nut from the maintenance equipment in the turbine was the result of negligence on the part of B.G. & E. Whitfield A. Russell, an engineer who specializes in utility matters, testified that because the company “did not carefully control access to its units nor inventory parts and equipment entering a secured area around the disassembled equipment,” the Commission should not permit B.G. & E. to recover the cost of replacement power for that outage. ⁵⁰⁴ Another forced outage occurred near the end of a maintenance outage at Calvert Cliffs Unit No. 1 in July of 1981, after condensor tubes had been removed from the unit for testing.

B.G. & E.’s own report concluded that the outage was caused by the failure of a B.G. & E. maintenance employee to replace one of the condensor tubes with a “dummy tube”, or plug, when the condensor tube was removed for testing. As a result, when operations resumed with a start up of the unit on July 14, 1981, saline bay water leaked through the unplugged opening and contaminated the unit’s feed water system. Because the leak was not detected until approximately ten hours later, the report also concluded that several acts and omissions on the part of B.G. & E. operations and chemistry personnel contributed to the severity of the outage. The incident caused a forced outage of approximately eight days.

The People’s Counsel presented evidence that the bay water leak was the result of negligence on the part of B.G. & E. David Rosenbaum, an expert testifying on behalf of the People’s Counsel, stated that the outage was the result of serious error in judgment and management and could have been avoided through better planning, more diligent efforts, closer supervision and more prudent management. Specifically, he stated that B.G. & E. did not have adequate inventory and inspection procedures in place with regard to tube replacements and that the situation was increased in severity because B.G. & E. did not (1) have adequate instrumentation on line during the unit’s start up; (2) have a sufficient number of qualified chemistry technicians present; and (3) adequately train chemistry and operating personnel on the effect of gross salt water leakage. Accordingly, he recommended that the Commission disallow all replacement power costs associated with the outage.

III

Commission Ruling In each of these cases, the Commission held that B.G. & E. did not meet its burden of establishing that it had ⁵⁰⁵ maintained the productive capacity of the Calvert Cliffs Unit No. 1 at a reasonable level because the company did not have adequate control, inspection and monitoring procedures in place which could prevent outages similar to those at issue. In view of the unit’s high annual productive capacity as compared with the rest of the country, the Commission did not disallow the entire cost of replacement power for either outage. The Commission permitted B.G. & E. to recover 75% of its replacement power costs associated with the December 1980 outage caused by the lh" nut and 25% of that occasioned by the July 1981 outage caused by the missing plug. The Commission applied the following standard: Under the provisions of Section 54F(f)(4), an electric company has the burden of establishing that it “... has maintained the productive capacity of all its generating plants at a reasonable level.” As we have stated in previous decisions, the first step in determining whether the requirements of Section 54F(f)(4) have been met is to measure the plant’s performance on the basis of equivalent availability factors which take into account outages, partial outages and deratings.

The productive capacity of the plant will be measured by a comparison of the performance for the most recent 12 month period against (a) the plant’s own performance record averaged over the last three years, or (b) the availability factor, such as compiled by the North American Electric Reliability Council (“NAERC”), for similar size units, whichever is higher. If the plant’s actual performance equals or exceeds the higher of the two standards, then there is a rebuttable presumption that the Company has complied with Section 54F(f)(4). However, if the actual performance falls below the higher of the two standards or if evidence indicates that a specific outage or series of outages may be the result of imprudent management, the Commission will review the ⁵⁰⁶ facts and circumstances surrounding the specific outages at the generating plant in question. [P]erfect performance is not possible nor required by Section 54F(f)(4). Therefore, an outage occasioned by human error is not a per se violation of this statutory standard.

However, a decision must be made by the Commission as to whether the facts and decisions associated with the incident constituted mismanagement. In making this determination, the Commission will examine the extent to which the increased costs for replacement generation could have been avoided through better planning, preventive maintenance, more diligent efforts, closer supervision, and more prudent management. Specifically, in reviewing a-particular outage, the Commission will examine whether the Company had instituted reasonable and appropriate procedures to prevent human error or equipment failure and to minimize the consequences of those occurrences. (Emphasis added). [I]f an electric company’s procedures are found to be reasonable and appropriate, the company will be permitted to recover all of the replacement power costs which are incurred as a result of a forced outage.

If the management procedures are found to be deficient, the Commission will consider the overall performance of the unit in making a determination as to whether or not the company should be allowed to recover replacement power costs. Under such circumstances, the Commission will consider the degree of management responsibility for the outage, as well as the level of performance which was experienced by the unit in question. However, if the outage is attributable to imprudent management and the plant’s performance during the most recent 12 month period does not exceed the average availability factor as compiled by the NAERC for similar size units, the electric ⁵⁰⁷ company will generally be precluded from recovering any of the replacement power costs associated with the outage. B.G. & E. and the three electric companies which filed amicus briefs 4 contend that the Circuit Court properly held that the Commission exceeded its statutory authority under Section 54F(f)(4) by examining the facts and circumstances surrounding specific outages at the Calvert Cliffs generating plant.

They argue that the Section contemplates an objective and periodic measurement of overall productivity, and that the Commission cannot justify its subjective investigation into the causes and responsibility for specific outages. Appellants, the Commission and the People’s Counsel, contend that the Commission has the authority to preclude an electric company from recovering replacement power costs which were incurred as a result of imprudent or unreasonable actions on the part of the company. They argue that by enacting Section 54F, the legislature intended that the Commission would subject the fuel rate costs to greater scrutiny, and that the Commission’s finding that a portion of the replacement power costs which resulted from the outages should not be recovered from rate payers was not unlawful, arbitrary, capricious, or unsupported by substantial evidence.

IV

Section 54F A Standard of Review Section 97 of Article 78 states that: Every final decision, order, rule or regulation of the Commission shall be prima facie correct and shall be ⁵⁰⁸ 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. We summarized the standard of review in Public Service Commission v. Delmarva Power & Light Co., 42 Md.App. 492 , 400 A.2d 1147 , cert. denied 286 Md. 746 (1979). The Court of Appeals has On many occasions noted that the decisions of the Commission are prima facie correct, and that the burden of proof is on the party seeking to set aside an order to show clear and satisfactory evidence that the Commission’s decision is unreasonable or unlawful. 42 Md.App. at 499 , 400 A.2d 1147 . B.G. & E. contends that the Commission’s decision was unlawful because it exceeded the statutory authority granted by Section 54F(f)(4).

See, e.g., Waller v. Public Service Commission, 265 Md. 111, 116 , 288 A.2d 374 (1972). Specifically, it argues that a determination of whether a particular outage could have been avoided is plainly inconsistent with the language, context and legislative history of Section 54F(f)(4) which requires the Commission to determine whether the utility “has maintained the productive capacity of all its generating plants at a reasonable level.” B Statutory Interpretation The cardinal rule of statutory interpretation is to determine the intent of the legislature arid to do this a court looks first to the language of the statute. Ryder Truck Lines v. Kennedy, 296 Md. 528, 535 , 463 A.2d 850 (1983). ⁵⁰⁹ If that language is ambiguous or unclear, a court must use other tools to discover the legislative intent or purpose. 296 Md. at 536 , 463 A.2d 850 . The key phrase used in § 54F(f)(4), “reasonable level”, is an ambiguous one since no standard is prescribed for determining what level is reasonable.

The legislature chose not to define the phrase. In determining legislative intent, therefore, a court must read the language of the statute in context and in relation to all of its provisions, its legislative history, administrative interpretation and legislative purpose. Department of State Planning v. Hagerstown, 288 Md. 9, 14-15 , 415 A.2d 296 (1980). (1) Legislative History and Purpose Under Section 54F electric companies may recover only those fuel costs reasonably incurred within the meaning of the four factors identified in Section 54F(f), and those costs allowed under Section 54F(g) where, even though the applicant failed to comply with these requirements, there is cause to the contrary that it should recover.

Those factors are: (1) Only changes in the actual costs of the components of the fuel rate are included in the proposed change; (2) The applicant has used the most economical mix of all types of generation and purchase; (3) The applicant has made every reasonable effort to minimize fuel costs and followed competitive procurement practices; (4) The applicant has maintained the productive capacity of all its generating plants at a reasonable level. In 1978, Section 54F implemented a procedure which replaced the “fuel rate adjustment clause” method by which electric companies had previously recovered their fuel costs. Under the former method, there was no separately stated fuel rate. Rather, using the fuel rate adjustment clause, an electric company was permitted “to automatically adjust its ⁵¹⁰ rate to reflect fluctuations in the cost of fuel from the level of costs included when base rates were established at a rate hearing procedure.” Public Service Commission v. Baltimore Gas & Electric, 40 Md.App. 490, 492 , 393 A.2d 193 (1978), cert. denied, 284 Md. 747 (1979).

The procedure was designed to by-pass the delay caused by lengthy base rate proceedings in order to permit a more rapid recovery of the rapidly fluctuating fuel costs. Public Service Commission v. Delmarva Power, 42 Md.App. 492, 494, n. 1 , 400 A.2d 1147 , cert. denied, 286 Md. 746 (1979). The use of this type of fuel rate adjustment clause had been authorized for a number of years. See, 1955 Md.Laws ch. 441; 1975 Md.Laws ch. 418; 1977 Md.Laws ch. 695.

Initially, the fuel rate was subject to Commission review only at base rate proceedings. 1955 Md.Laws ch. 441. In 1975, however, the legislature required any electric company which passed on a change in the fuel rate to its customers to “verify and justify the adjusted fuel cost to the Commission” each month. 1975 Md.Laws ch. 418. The Commission was also authorized to hold public hearings when it deemed necessary. Id.

Finally, the legislature provided that such public hearings would be held at least every six months. 1977 Md.Laws ch. 695. At those hearings, the Commission was required to order a company to charge off and amortize, by means of a temporary decrease of rates any charges it finds were unjustified by determining that the company has improperly calculated the charge, has failed to use proper fuel procurement, practices, or has used this charge to the detriment of the public. Id. Section 54F implemented a pre-adjustment review of proposed fuel rate changes by the Commission and was enacted in response to dissatisfaction with the fuel rate adjustment clause.

The FRA clause worked satisfactorily for a number of years, but the rapidly rising costs of oil imposed by the ⁵¹¹ OPEC cartel and parallel increases in the cost of coal raised an understandable howl of protest which caused .the Governor of Maryland, the members of the Legislature, citizens’ groups and consumers to complain bitterly over the effect of the FRA on the spiraling cost of electric service in Maryland and throughout the country. Delmarva Power, 42 Md.App. at 494 , 400 A.2d 1147 . The preamble of the statute provides that it was enacted [f]or the purpose of providing more definite standards for the Public Service Commission to evaluate whether fuel and purchased power rate adjustments are justified; providing for separate standards concerning electric companies that produce or generate power and whose gross annual revenues exceed $25,000,000; and generally relating to fuel and purchased power rate adjustments. 1978 Md.Laws ch. 173. Under the new procedure, electric companies whose gross annual revenues exceeded $25,000,000 could no longer automatically adjust their rates to reflect fuel cost changes.

Md.Ann.Code, art. 78, § 54F(a) (1983 Cum.Supp.). Rather, they could charge their customers a separately stated fuel rate which reflected the actual cost of fuel. Md.Ann.Code, art. 78, § 54F(b) (1983 Cum.Supp.). If this cost increased or decreased by more than 5%, an application was to be filed with the Commission for a change in the current fuel charge.

Md.Ann.Code, art. 78, § 54F(e) (1983 Cum.Supp.). The Commission was to conduct public evidentiary hearings at which the applicant had the burden of establishing the four factors set out in 54F(f) in order to justify passing the cost on to the customer. Md.Ann.Code, art. 78, § 54F(f), (i) (1983 Cum.Supp.). The Commission is empowered to disallow the proposed fuel rate if the applicant fails to establish these factors unless contrary cause is shown.

Md.Ann. Code, art. 78, § 54F(g) (1983 Cum.Supp.). The issue of whether the Commission may make a subjective investigation of power outages at a generating unit in determining whether the electric company has “maintained ⁵¹² the productive capacity of all its generating units at a reasonable level” as required by Section 54F(f)(4) may find some resolution in the actions of the legislature during the legislative session when that section was adopted. In the process of choosing not to define “reasonable level”, the legislature rejected bills which defined that standard in terms of statistical comparisons. Specifically, in 1978 the legislature did not adopt S.B. 1150 and H.B. 1823, both of which stated ... the Commission ... shall ... disallow recovery of any fuel costs that it finds without just cause to be the result of: (2) failure of the utility to maintain the productive