Columbia Gas of Maryland, Inc. v. Public Service Commission

REPORTED

IN THE COURT OF SPECIAL APPEALS

OF MARYLAND

No. 0835

September Term, 2014

COLUMBIA GAS OF MARYLAND, INC.

v.

PUBLIC SERVICE COMMISSION OF
MARYLAND, et al.

Kehoe,
Hotten,
Reed,

JJ.*

Opinion by Hotten, J.

Filed: August 28, 2015

* Judge Douglas R. M. Nazarian did not
participate in the Court’s decision to designate
this opinion for publication in the Maryland
Appellate Reports pursuant to Maryland Rule 8-
605.1
Appellant, Columbia Gas of Maryland, Inc. (“Columbia”), is a natural gas utility

that serves customers in Western Maryland. In 2013, it purchased a parcel of land known

as the Cassidy Property in Hagerstown, Maryland. Appellees are the Maryland Public

Service Commission (“the Commission”) and the Office of the People’s Counsel

(“OPC”).1 As part of its last request that the Commission increase Columbia’s rates and

charges, Columbia sought to recover anticipated remediation costs regarding two of its

properties, including the Cassidy Property. Following three days of evidentiary hearings,

the Chief Public Utility Law Judge (“the CPULJ”) of the Commission denied appellant’s

request because it failed to provide evidence that the existing customers should bear the

cost of the Cassidy Property clean up when they received no benefit. Thereafter, appellant

appealed to the Commission, which affirmed the CPULJ’s decision and determined that

the Cassidy Property was not “used and useful” in providing service to current customers.

Appellant sought judicial review in the Circuit Court for Washington County, alleging that

the Commission acted arbitrarily and capriciously, violated Maryland’s Public Utilities

Article, and that its decision constituted an unlawful taking, without just compensation, in

violation of both the Maryland and United States Constitutions. The circuit court affirmed

the Commission’s decision, prompting appellant’s appeal, and the following questions for

our consideration.

1
The OPC is a State of Maryland agency, which works independently to represent
Maryland’s residential consumers in electric, natural gas, telecommunications, private
water and certain transportation matters before the Maryland Public Service Commission,
federal regulatory agencies and the courts. The People’s Counsel is appointed by the
Attorney General, with the advice and consent of the Senate, and acts independently of the
Maryland Public Service Commission and Office of Attorney General.
[I.] Was the Commission’s denial of Columbia’s request for
recovery of costs to acquire and remediate property in
Hagerstown arbitrary and capricious?

[II.] Did the Commission’s denial of Columbia’s request for
recovery of costs to acquire and remediate property in
Hagerstown constitute an error of law in that it violated the
Maryland Public Utilities Article?

[III.] Did the Commission’s denial of Columbia’s request for
recovery of costs to acquire and remediate property in
Hagerstown constitute an unlawful taking without just
compensation, in violation of the Maryland and United States
Constitutions?

For the foregoing reasons, we shall affirm the judgment of the circuit court.
FACTUAL AND PROCEDURAL HISTORY

Appellant is a public service company, which provides its customers natural gas

through a pipeline distribution network in Western Maryland. It is subject to an

enforcement action by the Maryland Department of Environment (“MDE”) to clean up the

site it owns at the former Hagerstown Manufactured Gas Plant (“MGP”).

Before natural gas became commercially available, Columbia’s predecessors used

the Hagerstown MGP site to manufacture gas from 1887 to 1952. On an adjacent property,

known as the Cassidy Property, the former Hagerstown MGP operated a coal tar pond

before it was sold in the early 1920s. The Cassidy Property was part of a larger parcel

owned by the Hagerstown American Light and Heat Company, which began coal gas

manufacturing operations on the larger parcel in 1891. The larger parcel consisted of 7.1

acres. The Cassidy Property consisted of a 4.5 acre parcel and was sold to the Cassidy

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Trucking Company in the 1920s.2 The Hagerstown American Light and Heat Company

continued to operate its manufactured gas on the remaining 2.6 acre parcel until 1949, when

it ceased operations.

In 1968, appellant purchased the 2.6 acre parcel and began its operations as a service

center, where appellant’s employees run the Company’s main hub of gas distribution

operations and maintenance activity to serve natural gas to customers. In 2013, appellant

purchased the remaining 4.5 acres known as the Cassidy Property. Appellant testified that

the current uses of the Hagerstown MGP site included: “(1) use for all service center

operations, (2) use for driver training and parking, and (3) storage of the byproducts of the

MGP process.”

On February 27, 2013, appellant filed an application with the Commission seeking

authority to increase the Company’s rates and charges with a proposed effective date of

March 29, 2013. Among the many elements of its rate increase request, Appellant

estimated that it would take approximately five years for remediation of the Hagerstown

MGP site, and that the company would incur new costs ranging from $6 million to under

$21 million as a result.

On March 4, 2013, the Commission suspended the proposed effective date of the

increased rates for a period of 150 days, which was later expanded to an additional 30 days,

and delegated the case to the CPULJ division for review. Evidentiary hearings were held

at the Commission’s offices in Baltimore from June 18 until June 20, 2013. During that

2
The Cassidy Trucking Company operated as a trucking business and not a
regulated gas business.
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time, written testimony and exhibits were entered into the record, and witnesses were

presented and subject to cross-examination.

On August 9, 2013, the CPULJ Division issued a proposed order, which granted in

part and denied in part appellant’s application. Thereafter, appellant filed a notice of appeal

to the Commission, challenging the proposed order because it denied appellant the right to

recover from its ratepayers costs incurred from the purchase and environmental

remediation of the Cassidy Property.

On September 23, 2013, the Commission issued its Order No. 85858 and denied

appellant’s appeal regarding the Cassidy Property. Appellant filed a petition for judicial

review in the Circuit Court for Washington County on October 23, 2013. Thereafter, the

court issued a memorandum and order affirming the Commission’s decision.

Appellant noted a timely appeal. Additional facts shall be provided, infra, to the

extent they prove relevant in addressing the issues presented.

STANDARD OF REVIEW

This case is governed by Maryland Code (1998 Repl. Vol. 2010), § 3-203 of the

Public Utilities Article [hereinafter “Public Utilities”], which provides:

Every final decision, order, or regulation of the Commission is prima facie
correct and shall be affirmed unless clearly shown to be:

(1) unconstitutional;

(2) outside the statutory authority or jurisdiction of the Commission;

(3) made on unlawful procedure;

(4) arbitrary or capricious;

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(5) affected by other error of law; or

(6) if the subject of review is an order entered in a contested
proceeding after a hearing, unsupported by substantial evidence on
the record considered as a whole.

We review decisions of the Commission as “consistent with the standard of review

applicable to all administrative agencies.” Office of People’s Counsel v. Maryland Pub.

Serv. Comm’n, 355 Md. 1, 15 (1999). Thus, “[s]o long as a reasoning mind could have

reached the same conclusion as the agency, we will not disturb the agency’s decision.

Because the Commission is well informed by its own expertise and specialized staff, a

court reviewing a factual matter will not substitute its own judgment on review of a fairly

debatable matter.” Communications Workers of Am. v. Pub. Serv. Comm’n of Maryland,

424 Md. 418, 433 (2012) (citations omitted). This Court elaborated:

We review the decision of an administrative agency to determine if it is in
accordance with the law or whether it is arbitrary, illegal, and capricious. . .
. We are limited to determining if there is substantial evidence in the record
as a whole to support the agency’s findings and conclusions, and to determine
if the administrative decision is premised upon an erroneous conclusion of
law. . . . In applying the substantial evidence test, we must decide whether a
reasoning mind reasonably could have reached the factual conclusion the
agency reached. . . . When reviewing the agency’s legal conclusions, we may
substitute our judgment for that of the agency if there are erroneous
conclusions of law. . . .

Spicer v. Baltimore Gas & Elec. Co., 152 Md. App. 151, 159 (2003) (quoting Rideout v.

Dep’t of Pub. Safety and Corr. Serv., 149 Md. App. 649, 656, (2003) (internal quotations

and citations omitted)).

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DISCUSSION

I.

The ultimate issue surrounding this case was whether the property for which

environmental remediation cost recovery was sought, is “used and useful” in providing

service to current utility customers.

The Commission3 applies the statutory ratemaking policy that requires a “just and

reasonable rate” pursuant to Public Utilities § 4-101:

In this title, “just and reasonable rate” means a rate that:

(1) does not violate any provision of this article;

3
Public Utilities § 2-113 provides:

(a) In general.— (1) The Commission shall:

(i) supervise and regulate the public service companies subject to the
jurisdiction of the Commission to:

1. ensure their operation in the interest of the public; and

2. promote adequate, economical, and efficient delivery of
utility services in the State without unjust discrimination; and

(ii) enforce compliance with the requirements of law by public service
companies, including requirements with respect to financial
condition, capitalization, franchises, plant, manner of operation, rates,
and service.

(2) In supervising and regulating public service companies, the Commission
shall consider the public safety, the economy of the State, the conservation
of natural resources, and the preservation of environmental quality.

(b) Construction.— The powers and duties listed in this title do not limit the
scope of the general powers and duties of the Commission provided for
by this division.

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(2) fully considers and is consistent with the public good; and

(3) except for rates of a common carrier, 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.

Public Utilities § 4-102 directs the Commission to set just and reasonable rates:

(a) Scope of section.— This section does not apply to small rural
electric cooperatives.

(b) Power.— The Commission shall have the power to set a just and
reasonable rate of a public service company, as a maximum rate,
minimum rate, or both.

(c) Order.— (1) The Commission shall issue an order, including the
rate set under subsection (b) of this section.

(2) The Commission shall serve the order on each affected
public service company.

The Commission established a general ratemaking policy for extraordinary

expenses in the context of request for environmental cleanup costs in 1989:

By way of background, we will explain our general ratemaking policy
pertaining to extraordinary expenses incurred by a public service company.
The Commission has long recognized that utilities will, from time to time,
incur necessary and proper expenses which are sufficiently extraordinary as
to warrant special ratemaking treatment. Such expenses are extraordinary in
the sense that the costs are not annually recurring, are not able to be
anticipated, and are of substantial magnitude. Typically, rather than include
the entirety of such costs in the formulation of test year expenses, the
Commission has determined it to be fair and equitable to amortize the
extraordinary expense over a period of years. Also, because equity or debt
is being utilized during the period of amortization to pay the extraordinary
expense, the unamortized portion of the extraordinary expense is included in

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the calculation of the rate base.[4] However, as an exception to this general
rule, the Commission occasionally will determine that the unamortized
portion should not be included in the calculation of the rate base. Such a
determination is based upon a finding that the circumstances of the
extraordinary expense were of a type that, for reasons of equity, the expense
should be shared between the ratepayers and the stockholders. By excluding
the unamortized portion of the extraordinary expense from rate base, the
Commission shifts from ratepayers to stockholders the carrying charge
associated with the unamortize[d] balance.5

First, appellant contends that the Commission’s denial of its environmental

remediation costs, which includes purchase of the property and cleanup for the Cassidy

Property, was arbitrary and capricious. Appellant asserts that Commission orders dating

back to 1989 have allowed regulated gas companies in Maryland to recover these costs

from customers.

Appellant refers to six tests, including an exception, which must be applied to a gas

company seeking to recover environmental remediation costs from its customers. The six

tests appellant outlines are, “[r]emediation [c]osts must be [q]uantifiable,” “[r]emediation

[c]osts [m]ust [n]ot [b]e [i]ncurred [b]ased on [i]mprudence or [m]ismanagement,” “[t]he

[e]nvironmental [r]emediation [m]ust [b]e [l]egally [m]andated,” “[t]he [e]nvironmental

[h]azard [m]ust [r]eside on [p]roperty [u]sed and [u]seful to [appellant’s] [c]ustomers,”

“[m]ust [c]urrently [b]e a [g]as [c]ompany [s]erving [g]as [c]ustomers,” and the exception

to the “[u]sed and [u]seful” test.

4
Rate base represents the investment the company makes in plant and equipment
in order to provide service to its customers.
5
Re Chesapeake Utilities Corporation, 80 Md. PSC 187 (Case No. 8157, Order
No. 68462, June 9, 1989), at *2.
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In rejecting Appellant’s request, the Commission discussed the same 1989 order and

indicated:

In considering whether the purchase and remediation costs of either
or both of the parcels in this case should be included in rate base, the
Commission’s holding in In the Matter of the Application of Chesapeake
Utilities Corporation (Citizens Gas and Cambridge Gas Divisions) for an
Increase in Rates for Natural Gas Service and to Consolidate the Natural
Gas Tariffs, Case No. 8157, is instructive. After noting that the record
contained no persuasive evidence that the incurrence of the clean-up costs
was due to imprudence or mismanagement by the utility, the Commission
deemed the environmental remediation costs as operating expenses incurred
in the current course of doing business. [ ] In so doing, however, the
Commission stated, “[f]or ratemaking purposes, the important fact about this
site is that it is the location of a currently operating gas distribution facility.”

In that case, the Commission permitted Chesapeake Utilities to recover the cost of

remediation of a property in rate base. It indicated, “[f]or ratemaking purposes, the

important fact about this site is that it is the location of a currently operating gas distribution

facility.” Id. at *2. In the case at bar, the Cassidy Property stored waste, but did not provide

services to appellant’s current customers. The site to be remediated must provide service

to the Company’s customers in order to be eligible to recover the costs in rate base.

The Commission reviews requests to recover environmental cleanup costs

individually, based on the particular facts and circumstances of each case.6 The

6
Public Utilities § 3-113 states:

(a) Basis and form of orders.— A decision and order of the
Commission in a contested proceeding shall:

(1) be based on consideration of the record;

(2) be in writing;
(continued . . .)
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Commission applies the general ratemaking policy as stated above, and, where appropriate,

allows extraordinary environmental remediation expenses to be passed on to customers in

accordance with Public Utilities § 4-101(3). But nothing in that general policy entitles

appellant, or any other company, to recover costs simply because they have been incurred.

Instead, the company must prove that the asset is “used and useful” and that the remediation

costs were incurred prudently.

Appellant’s contention that the Commission established an exception to the “used

and useful” test must fail. Appellant avers that the “necessary and proper” standard should

apply to the expense of cleaning up the Cassidy Property and the Commission improperly

applied the “used and useful” test to the remediation cost. However, appellant fails to

consider that regardless of whether the Commission first determines whether the expense

is necessary and proper, the ultimate decision depends on whether there is a connection

between the property and the service it provides to current customers.

The Commission discussed the environmental remediation costs and concluded:

[Appellant] attempts to draw this connection by arguing on appeal that
storage of environmentally damaging MGP byproducts on the Cassidy
Property between the 1920’s and 2013 provides a benefit to current
customers. However, in testimony [appellant] admitted that such storage of
by-products did not render the Cassidy property used and useful in the class

(. . . continued)

(3) state the grounds for the conclusions of the Commission;
and

(4) in the case of a complaint proceeding between two public
service companies, be issued within 180 days after the close
of the record.

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rate-making sense as it was not in the rate base and Columbia earned no
recovery on it.[ ] The storage of by-products on the Cassidy Property for the
past 90 years does not constitute a benefit to current customers. The
argument that the [appellant’s] distribution system would not exist but for
the site of which the Cassidy Property was once a part, is tenuous at best, and
is also rejected.

A[t] the hearing in this case, the CPULJ questioned [appellant]
Witness Kempic at length about the Cassidy Property and the Company’s
environmental remediation of the site. The CPULJ confirmed that the
[appellant] purchased the Cassidy Property to remediate it.[ ] Mr. Kempic
testified that since its re-purchase the Cassidy Property is being used for a
driver training course occasionally.[ ] However, when the CPULJ questioned
Mr. Kempic as to how the [appellant] would use the Cassidy Property in the
future once remediated, Mr. Kempic admitted that the [appellant] didn’t
know how the property might be used, and wouldn’t know until the
remediation was complete.[ ] Thus, the CPULJ properly disregarded
testimony as to the use of the Cassidy Property for a driver training course;
the CPULJ’s finding that the Cassidy Property was purchased purely to lower
the remediation cost exposure of that parcel[] is fully supported by the record
in this case. Repurchase of the Cassidy Property for this reason does not
provide the necessary connection between the remediated property and the
service today’s Columbia customers will receive from it. Thus the Cassidy
Property is not used and useful.

We agree. Appellant failed to demonstrate the nexus between the Cassidy Property

and the service today’s customers receive from it to be considered used and useful for

ratemaking purposes. The record provides evidence that the Service Center Property

remains used and useful to appellant’s current customers. Therefore, its inclusion in rate

base was proper. The CPULJ and Commission’s factual findings were supported by

substantial evidence on the record and were not arbitrary or capricious.

II.

Next, appellant avers that the Commission’s denial of its claim for recovery costs

constituted an error of law. Specifically, appellant contends that the Commission awarded

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environmental remediation cost recovery in other instances, in accordance with the

environmental protection directives in the statute, but not in the underlying case. The

specific statutes appellant refers to are Public Utilities §§ 5-303 and 2-113(a)(2). Public

Utilities § 5-303 states:

A public service company shall furnish equipment, services, and facilities
that are safe, adequate, just, reasonable, economical, and efficient,
considering the conservation of natural resources and the quality of the
environment.

The case at bar involved the issue of who would pay for the environmental

remediation, the current customers or appellant’s shareholders. The Commission applied

its statutory environmental protection directives, however it has never said that it is an

automatic cost recovery. Before the Commission can allow the costs of environmental

remediation to be passed onto the ratepayers, it must look for evidence that remediation

was legally mandated. See Public Utilities § 4-101(3).

The Commission allowed recovery of the portion of the remediation expense

associated with the Service Center Property, because it determined that the expense was

necessary, proper, used and useful in providing service to the public. However, after the

Commission determines that an expense is necessary and proper, it determines whether the

public service company’s property is used and useful in providing service to the public.

See Public Utilities § 4-101(3). In other cases in which the Commission awarded

environmental remediation cost recovery, including cases appellant has cited to, the

Commission determined that the property in those cases were used and useful in providing

service to the public. Here, the Commission determined that the costs associated with

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remediation of both the Service Center Property and the Cassidy Property were necessary

and proper expenses. However, the Commission concluded that only the Service Center

Property was used and useful in providing service to the public. The Commission properly

applied its factual findings regarding the Cassidy Property and it did not ignore the statutes

in rendering its determination. Thus, we perceive no error of law.

III.

Lastly, appellant contends that the Commission’s denial of its claim constituted an

unlawful taking without just compensation, in violation of the Maryland and United States

Constitutions. Appellant quotes Bluefield Waterworks & Improvement Co. v. P.S.C. of

West Virginia, 262 U.S. 679 (1923):

Rates which are not sufficient to yield a reasonable return on the value
of the property used at the time it is being used to render the service are
unjust, unreasonable and confiscatory, and their enforcement deprives the
public utility of its property in violation of the Fourteenth Amendment.

***

The return should be reasonably sufficient to assure confidence in the
financial soundness of the utility and should be adequate, under efficient and
economical management, to maintain and support its credit and enable it to
raise the money necessary for the proper discharge of its public duties.

Id. at 690, 693. Additionally, appellant quotes Federal Power Commission v. Hope

Natural Gas Co., 320 U.S. 591 (1944):

From the investor or company point of view it is important that there
be enough revenue not only for operating expenses but also for the capital
costs of the business. These include service on the debt and dividends on the
stock. By that standard the return to the equity owner should be
commensurate with returns on investments in other enterprises having
corresponding risks. That return, moreover, should be sufficient to assure

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confidence in the financial integrity of the enterprise, so as to maintain its
credit and to attract capital.

Id. at 603 (internal citation omitted).

Appellant avers that based on these cases, denial of recovery of remediation costs

would be unconstitutional because the Cassidy Property costs would exceed its net income

in upcoming years and materially harm the company’s financial condition. Appellant

presented testimony that:

If [appellant] is not permitted to recover all costs related to the cleanup
of the site, accounting guidance requires that these costs be removed from
the regulatory asset and recorded as an expense upon receipt of the
Commission order related to this case. The total impact removing these costs
from a regulatory asset and recording them to expense approximates $4.7
million dollars. As stated earlier, this is far greater than [appellant’s] total
annual net income (for instance, [appellant’s] net income for 2012 was
approximately $2.6 million dollars). The impact of deeming the costs related
to the clean-up of the Hagerstown MGP site as non-recoverable would be
financially devastating to the Company, even threatening the Company’s
ability to continue as a going concern if these costs are not recovered[.] If a
company cannot sustain itself financially, this raises the possibility that the
gas distribution service provided to the customers may be jeopardized. The
full costs associated with [appellant’s] environmental remediation at the
former MGP site should be recoverable consistent with the Commission’s
prior decisions in similar cases.

The Chief Public Utility Law Judge considered this testimony in rendering its

decision and determined:

I find claims that these costs will result in a going concern issue for
the [appellant] to be speculative at best. The sale of the remediated Cassidy
property may help to offset the cost to the stockholders in the long run, and I
find that the financial impact over the period of remediation can be weathered
by [appellant] without putting the Company at too great a financial risk.

The Commission agreed with the Judge’s determination. We do not consider this to be a

violation of the Maryland or United States Constitutions. Appellant has not provided
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authority holding that a refusal to permit a utility company to recover remediation costs in

rate base constitutes an unlawful taking without just compensation. Accordingly, we shall

affirm.

JUDGMENT OF THE CIRCUIT
COURT FOR WASHINGTON
COUNTY IS AFFIRMED. COSTS TO
BE PAID BY APPELLANT.

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