Petition of the Off. Of People's Counsel

• Court: Court of Appeals of Maryland
• Decided: February 23, 2024
• Docket: 11/23
• Status: Published

Opinion

In the Matter of the Petition of the Maryland Office of People’s Counsel, No. 11, September Term, 2023, Opinion by Booth, J.

PUBLIC UTILITIES – ADMINISTRATIVE LAW – AGENCY DEFERENCE. When undertaking judicial review of a decision of the Maryland Public Service Commission (“Commission”) approving a public service company’s application for a rate increase under Section 3-203 of the Public Utilities Article of the Maryland Code, a reviewing court is to apply an arbitrary or capricious standard of review to the Commission’s interpretation of its own order that it entered in connection with its approval of the acquisition of the public service company.

The Supreme Court of Maryland held that the Commission’s interpretation of its own merger order in connection with a public service company’s application for a rate increase was not arbitrary or capricious. Circuit Court for Baltimore City Case No.: 24-C-21-003749 Argued: December 4, 2023 IN THE SUPREME COURT

OF MARYLAND

No. 11

September Term, 2023

IN THE MATTER OF THE PETITION OF THE MARYLAND OFFICE OF PEOPLE’S COUNSEL

Fader, C.J., Watts, Hotten, Booth, Biran, Gould, Eaves,

JJ.

Opinion by Booth, J.

Filed: February 23, 2024

Pursuant to the Maryland Uniform Electronic Legal Materials Act (§§ 10-1601 et seq. of the State Government Article) this document is authentic.

2024.02.2 3 09:35:53 -05'00' Gregory Hilton, Clerk The General Assembly has provided for judicial review of [decisions of the Public Service] Commission, but that review is to be deferential to the Commission’s expertise and findings. The role of the courts is to ensure that the Commission has exercised its discretion in carrying out this important responsibility within the bounds prescribed by the General Assembly and the Constitution.

Office of People’s Counsel v. Md. Public Service Commission, 461 Md. 380, 384 (2018)

In Maryland, the General Assembly has determined that an acquisition of a public

service company by another public service company should be reviewed by the Maryland

Public Service Commission (“Commission”), an administrative body with specialized

knowledge of utility markets. The Commission must determine whether the proposed

transaction is “consistent with the public interest, convenience, and necessity, including

benefits and no harm to consumers.”1 The Legislature has identified certain factors for the

Commission to consider and has also vested considerable discretion in the Commission to

consider other matters that it may find pertinent when undertaking its assessment. One

factor that the Commission is required to consider is the potential impact that the

acquisition will have on rates and charges paid by Maryland customers, and the services

and conditions of operation of the public service company after the merger or acquisition.

After it completes its analysis, the Commission must either approve or reject the

transaction, or approve it with conditions.

Md. Code Ann., Public Utilities Article (“PU”) § 6-105(g)(3)(i) (2020 Repl. Vol., 1

2023 Supp). The Legislature has also granted the Commission the authority to set rates charged

by a public service company to Maryland customers. In undertaking this duty, the

Commission is required to utilize its expertise to establish a rate that enables a utility

company to cover prudent expenses and earn a reasonable profit.

When the Commission exercises any of the above-described powers or duties, it

does so within the context of an administrative proceeding. And, as we discuss in detail

herein, the General Assembly has set forth specific parameters for judicial review of

Commission decisions.

This case concerns the Commission’s approval of an application for a base rate

increase filed by Washington Gas and Light Company (“Washington Gas”) 2 in August

2020 (the “rate administrative proceeding”). The rate administrative proceeding occurred

approximately two and one-half years after the Commission concluded an administrative

proceeding in which it approved the acquisition of Washington Gas by AltaGas Limited

(“AltaGas”) (the “merger administrative proceeding”).3 The Office of People’s Counsel

2 Washington Gas is a public service company that provides natural gas and delivery services to customers in the Maryland counties of Montgomery, Prince George’s, Charles, Calvert, St. Mary’s, and Frederick, as well as customers in Washington, D.C., and jurisdictions in Virginia. To transport natural gas to its customers, Washington Gas operates a system of distribution pipelines spanning its geographic service area throughout Maryland, Virginia, and Washington, D.C.

3 AltaGas is a North American diversified energy infrastructure business with operations in Canada and the United States. Its headquarters is located in Calgary, and its business is focused on three business segments: utilities, gas, and power. 2 (“OPC”)4 participated in the merger administrative proceeding, as well as the rate

administrative proceeding.

This appeal centers on a determination that the Commission made in the rate

administrative proceeding concerning the proper interpretation of a condition the

Commission had included in its final order approving the merger. That condition required

that Washington Gas customer rates reflect “merger-related savings” of “not less than

$800,000 per year over the five years” following the merger’s closing. The Commission

interpreted that requirement to mean that Washington Gas’s post-merger costs must be

$800,000 per year less than they would have been but for the merger. Washington Gas

agrees. OPC, by contrast, contends that the condition required Washington Gas’s post-

merger costs to be $800,000 per year less than they were the year before the merger.

OPC did not file a petition for judicial review of the Commission’s final order

approving the merger, but it did file a petition for judicial review of the Commission’s

order approving Washington Gas’s request for a rate increase. After the circuit court

4 The People’s Counsel—a position created by the General Assembly—is an attorney licensed in Maryland who is appointed by the Attorney General with the advice and consent of the Senate. PU § 2-202. The duties of the Office of People’s Counsel (“OPC”) include evaluating “each matter pending before the Commission to determine if the interests of residential and noncommercial users are affected.” Id. § 2-204(a)(1)(i). If OPC “considers the interest of residential and noncommercial users to be affected, [it] shall appear before the Commission and courts on behalf of residential and noncommercial users in each matter or proceeding over which the Commission has original jurisdiction[.]” Id. § 2-204(a)(2). 3 affirmed the Commission’s rate increase decision, which was then affirmed by the

Appellate Court of Maryland, OPC filed a petition for writ of certiorari, which we granted.

OPC raises the question of whether the Commission erred in its interpretation of the

condition in its merger order that provided the method by which Washington Gas was

required to compute its “merger-related savings” when applying for a rate increase. We

are also asked to determine the standard of review that a court must apply when reviewing

the Commission’s interpretation of its own prior decision or order. For the reasons we set

forth more fully herein, we hold that a court is to apply the “arbitrary or capricious”

standard of review. Applying that standard here, we conclude that the Commission’s

interpretation of its own order was not arbitrary or capricious.

I

Statutory Framework

The jurisdiction and powers of the Commission extend to all public service

companies operating a utility business in Maryland, to the full extent permitted by the

Constitution and the laws of the United States. Md. Code Ann., Public Utilities Article

(“PU”) § 2-112 (2020 Repl. Vol., 2023 Supp.). Generally, the Commission has supervisory

and regulatory authority over public service companies to “ensure their operation in the

interest of the public[,]” and to “promote adequate, economical, and efficient delivery of

utility services in the State without unjust discrimination[.]” Id. § 2-113(a)(1)(i). The

Commission also has broad enforcement authority to ensure compliance with laws,

4 “including requirements with respect to financial condition, capitalization, franchises,

plant, manner of operation, rates, and service.” Id. § 2-113(a)(1)(ii).

A. The Commission’s Authority Over Public Service Company Mergers In general, one may not acquire a public gas or electric company that operates in

Maryland without prior authorization from the Commission. Id. § 6-105(e)(1). To obtain

that authorization, the applicant must file an application with the Commission containing

detailed information concerning the transaction and provide certain documentation. Id. §

6-105(f).

The Commission is then required to “examine and investigate each application” and

to conduct any necessary administrative proceedings for review of the application. Id. § 6-

105(g)(1). The applicant has the burden of persuading the Commission that the

“acquisition is consistent with the public interest, convenience, and necessity, including

benefits and no harm to consumers.” Id. § 6-105(g)(3)(i), (5). In connection with its

review, the Commission is required to consider a list of 12 statutory factors.5 Id. § 6-

5 Those factors are:

(i) the potential impact of the acquisition on rates and charges paid by customers and on the services and conditions of operation of the public service company; (ii) the potential impact of the acquisition on continuing investment needs for the maintenance of utility services, plant, and related infrastructure; (iii) the proposed capital structure that will result from the acquisition, including allocation of earnings from the public service company; (iv) the potential effects on employment by the public service company;

5 105(g)(2)(i)–(xii). The Legislature has granted the Commission considerable discretion in

connection with its decision to approve an acquisition. Specifically, the Commission may

consider “any other issues” that it “considers relevant to the assessment of acquisition in

relation to the public interest, convenience, and necessity.” Id. § 6-105(g)(2)(xii).

At the conclusion of the proceeding, the Commission is to issue a written decision

that is based on the record and that states the grounds for its conclusions. Id. § 3-113(a).

If the Commission is satisfied that the applicant has borne its burden, it is required to issue

an order granting the application. Id. § 6-105(g)(3)(i). The Commission, however, has the

discretion to “condition an order authorizing the acquisition on the applicant’s satisfactory

performance or adherence to specific requirements.” Id. § 6-105(g)(3)(ii). If the

Commission concludes that the applicant has failed to meet its burden, it shall issue an

order denying the application. Id. § 6-105(g)(4). An interested party that is dissatisfied

with the Commission’s final decision may file a petition for judicial review. Id. § 3-202.

(v) the projected allocation of any savings that are expected to the public service company between stockholders and rate payers; (vi) issues of reliability, quality of service, and quality of customer service; (vii) the potential impact of the acquisition on community investment; (viii) affiliate and cross-subsidization issues; (ix) the use or pledge of utility assets for the benefit of an affiliate; (x) jurisdictional and choice-of-law issues; (xi) whether it is necessary to revise the Commission’s ring fencing and code of conduct regulations in light of the acquisition; and (xii) any other issues the Commission considers relevant to the assessment of acquisition in relation to the public interest, convenience, and necessity.

PU § 6-105(g)(2). 6 B. The Commission’s Rate-Making Authority Under PU § 4-201, a public service company has a duty to “charge just and

reasonable rates for the regulated services that it renders,” and the Commission retains the

power to set rates that comply with the statute. Id. § 4-102(b). A “just and reasonable rate”

is a rate that, among other things, is “consistent with the public good” and “will result in

an operating income to the public service company that yields, after reasonable deduction

for depreciation and other necessary and proper expenses and reserves, a reasonable return

on the fair value of the public service company’s property used and useful in providing

service to the public.” Id. § 4-101(2), (3).6 In undertaking its statutory duties, the

“Commission’s role is to determine what rates the utility should be allowed to charge in

future years to cover prudent expenses and earn a reasonable profit.” Office of People’s

Counsel v. Md. Public Service Comm’n, 355 Md. 1, 8 (1999). The Commission is required

6 In other cases involving this Court’s review of the Commission’s authority over public utility rate-making, this Court has cited to 1 A.J.G. Priest, Principles of Public Utility Regulation 45 (1969), which summarizes the factors that underlie the establishment of public utility rates as follows:

The orthodox making of public utility rates requires four basic determinations: (1) what are the enterprise’s gross utility revenues under the rate structure examined; (2) what are its operating expenses, including maintenance, depreciation and all taxes, appropriately incurred to produce those gross revenues; (3) what utility property provides the service for which rates are charged and thus represents the base (rate base) on which a return should be earned and (4) what percentage figure (rate of return) should be applied to the rate base in order to establish the return to which investors in the utility enterprise are reasonably entitled.

See Office of People’s Counsel v. Md. Public Service Comm’n, 355 Md. 1, 8 (1999); Public Service Comm’n v. Baltimore Gas & Electric Co., 273 Md. 357, 360 n.2 (1974). 7 to enter an order when setting a “just and reasonable rate,” PU § 4-102(c), which is subject

to judicial review. PU § 3-202(a).

We turn to the Commission’s merger administrative proceeding that resulted in its

decision to approve AltaGas’s acquisition of Washington Gas, as well as the Commission’s

subsequent rate case administrative proceeding that resulted in its approval of a rate

increase—the latter proceeding being the subject of OPC’s contentions in this matter.

II

Background and Procedural History

A. The Commission Proceedings Related to the Merger In 2017, AltaGas, Washington Gas, and WGL Holdings, Inc. (“WGL”) (sometimes

hereinafter collectively referred to as the “Applicants”) filed an application seeking

authorization from the Commission, as required by PU § 6-105, for AltaGas to acquire

Washington Gas. Thereafter, the Commission initiated an administrative proceeding to

evaluate whether the application was “consistent with the public interest, convenience, and

necessity, including benefits and no harm to consumers[.]” PU § 6-105(g)(3). In addition

to the entry of appearances for OPC and the Commission Staff, 11 parties filed petitions to

intervene, which the Commission granted. The administrative proceeding included direct,

rebuttal and rejoinder testimony, as well as extensive evidentiary hearings and briefing.

8 During the pendency of the proceeding, several of the intervenors entered into a settlement

agreement with the Applicants that was filed with the Commission.7

In addition to the terms of the settlement agreement, the Applicants offered several

commitments or conditions8 for the Commission’s consideration in connection with its

approval of the merger. Two conditions proposed by the Applicants—Conditions 44 and

289—are at the center of this matter. As will be discussed in more detail below: (1)

Condition 44, among other things, required Washington Gas to provide at least $800,000

in annual “merger-related savings” to its Maryland customers (net of transition costs) for

five years after the merger; and (2) Condition 28 required Washington Gas to issue post-

merger reports providing a “side-by-side comparison by function” of its pre-merger and

post-merger “corporate and shared-services costs.” The parties in the instant case disagree

on the manner in which “merger-related savings” required by Condition 44 would be

7 The parties to the settlement agreement were the Applicants, and the intervenors: Maryland Energy Administration, Prince George’s County, Montgomery County, and the Baltimore Washington Laborers and Public Employees District Council, an affiliate of the Laborers International Union of North America. 8 The Commission’s merger order and the parties use the terms “condition” and “commitment” interchangeably. We will use the term “condition”—which is the term used in PU § 6-105(g)(3)(ii). 9 When the conditions were initially submitted by the Applicants, Condition 28 was numbered “Condition 26” and Condition 44 was numbered “Condition 41.” Because the substance of the conditions did not change from the time that they were submitted until the Commission approved them (except for one sentence in what would ultimately become Condition 28), we refer to these conditions by the numbers as set forth in the final merger order. 9 calculated in future base rate increase cases. Specifically, the parties dispute whether the

required savings were to be measured against what Washington Gas’s costs would have

been but for the merger, as the Commission and Washington Gas contend, or whether they

were to be measured against Washington Gas’s costs incurred in the year before the merger,

as set forth in the comparison required by Condition 28, as OPC contends.

Washington Gas and Commission Staff presented different methodologies to the

Commission for how “merger-related savings” should be computed in future rate cases.

Because the testimony concerning these competing methodologies is pertinent to OPC’s

contentions here, we summarize some of the key testimony that was presented to the

Commission, and the Commission’s consideration of the same in the merger order that it

ultimately entered.

1. Washington Gas’s Methodology for Computation of “Merger-Related Savings” Washington Gas presented a methodology for computing “merger-related savings”

that centered around “synergy savings.” Washington Gas submitted expert testimony by

Todd J. Jirovec, a Principal in the power and utilities practice of a business named

Strategy&. Mr. Jirovec testified that “synergy savings” or “synergies” are “tangible

financial benefits” that arise when two companies merge and “represent a general reduction

in costs or improvement to performance” that would not be realized in the absence of the

merger. He explained that utility merger-related savings are typically achieved in three

areas: (1) cost reduction, (2) cost avoidance, or (3) revenue enhancement. Mr. Jirovec

described the types of synergies that are generally available through a utilities merger 10 transaction, and also explained that, in his experience, “no two transactions are necessarily

the same in enabling the realization of synergies.”

After providing an overview of synergy savings that are typically available in a

utility merger and factors that may influence synergy levels generally, Mr. Jirovec testified

concerning the specific synergy savings that he computed in connection with the proposed

merger of AltaGas and Washington Gas. He explained how he developed his merger

synergy computations, stating that “[w]e requested data from each company, interviewed

AltaGas and Washington Gas staff, reviewed publicly available data and filings, and

reviewed internal financial and other data. Based on these sources of input, we constructed

baselines of comparable spending levels where merger savings are typically available.”

Mr. Jirovec testified that the Applicants were expected to realize merger-related

savings in the following corporate and administrative support functions: (1) corporate

programs (by eliminating overlapping annual expenditures that both companies incur

related to business and support activities); (2) supply chain (by reducing annual amounts

that each company spends in the areas of materials and supplies and contract services); (3)

functional alignment (by consolidating corporate and administrative support functions);

and (4) portfolio shift (arising from economies of scale gained from the merger, which

would enable Washington Gas to provide corporate and administrative services on a more

efficient basis).

11 Mr. Jirovec produced a chart entitled “Net Annual Merger-Related Benefit

Commitment to Maryland Customers[,]”10 that reflected his prediction that the merger

would provide Washington Gas’s Maryland customers with a net benefit of $4.1 million

over five years after subtracting amortized transition costs11 associated with the merger.

Notably, in arriving at his bottom-line prediction of the merger’s net benefit to Washington

Gas’s customers, Mr. Jirovec’s projections included a component of post-merger corporate

costs that AltaGas would allocate to Washington Gas as part of its overall combined

operations.

Mr. Jirovec’s chart computed the annualized net benefit that would be realized by 10

Washington Gas’s Maryland customers as follows (expressed in millions of dollars):

Maryland Year 1 Year 2 Year 3 Year 4 Year 5 TOTAL Allocable Share % Corporate 39.18% $ 5.0 $ 5.1 $ 5.2 $ 5.3 $ 5.5 $ 26.0 Allocations Synergies 39.18% $ (2.8) $ (6.1) $ (7.3) $ (7.7) $ (8.3) $ (32.2) Amortized 39.18% $ 0.4 $ 0.4 $ 0.4 $ 0.4 $ 0.4 $ 2.1 Transition Costs Net $ 2.7 $ (0.6) $ (1.7) $ (2.0) $ (2.4) $ (4.1) (Benefit) Cost Annualized $ (0.8) $ (0.8) $ (0.8) $ (0.8) $ (0.8) $ (4.1) Net (Benefit) Cost

11 “Transition costs” are non-recurring costs that are incurred to facilitate the integration of the merger. As we will discuss more fully herein, Washington Gas proposed, and the Commission agreed, that Washington Gas’s transition costs could be amortized over five years. 12 2. Commission Staff’s Methodology for Computing “Merger-Related Savings” Commission Staff presented a different methodology for how “merger-related

savings” should be computed in a post-merger rate increase case. Commission Staff

presented expert testimony by Robert Welchlin, a Director of Overland Consulting, a firm

that specializes in consulting in the electric, gas, water, and telecommunications industries.

Mr. Welchlin expressed the opinion that there were few opportunities for Washington Gas

to realize synergy savings from the merger.

In the event that the Commission approved the merger, Mr. Welchlin recommended

that the Commission modify the Applicants’ proposed Condition 44, which addressed how

Washington Gas would compute “merger-related savings” in connection with any

application for a rate increase. First, to prevent Washington Gas from “experiencing a

potentially significant increase in corporate costs” following the merger, Mr. Welchlin

recommended that the Commission prohibit the companies from allocating to Washington

Gas any portion of AltaGas’s existing corporate costs unless Washington Gas could

demonstrate that the chargeable costs were no higher than the costs that Washington Gas

recorded on its books in the last full year prior to the merger. To ensure compliance with

this proposed condition, Mr. Welchlin recommended that the Commission require

Washington Gas to track its pre- and post-merger costs, and certify that its comparison was

“based solely on corporate-level expenses[.]” Mr. Welchlin suggested that the prohibition

on any post-merger allocation of AltaGas’s corporate costs to Washington Gas “should end

as soon as Washington Gas demonstrates to the Commission that the merged company is 13 charging the utility no more, adjusted for inflation, than Washington Gas would have

incurred had it not merged with AltaGas.” In order to fairly compare pre- and post-merger

corporate costs, Mr. Welchlin recognized that it would be “necessary to bring pre-merger

dollar amounts to current price levels[,]” which he opined could “be done by applying an

annual inflation factor, such as the consumer price index, to the annual pre-merger amount”

or by using a 2.5% annual escalator.

To ensure that Washington Gas’s computations followed the above framework, Mr.

Welchlin recommended that the Commission revise Condition 44 to specifically define

“merger-related savings” as the “reduction in pre-merger spending that occurred because

of the merger that could not have been achieved but for the merger.” He expressed his

view that the condition should “explicitly adopt this definition, indicat[ing] that all pre[-]

and post-merger costs identified for the purpose of calculating savings will be actual

spending, and that each unique area of savings will be separately quantified and tracked by

Washington Gas.”

Mr. Welchlin opined that, without a specific definition of “merger-related savings” in

the condition, “merger[-related] savings can be anything Washington Gas wants it to be.”

He reiterated that the “net merger benefit” should be the “net merger savings from synergies,

after subtracting transition costs to achieve the merger and, in this case, after subtracting

additional corporate costs that will be allocated to Washington Gas from AltaGas[.]”

14 3. The Commission’s Approval of the Merger and Pertinent Merger Conditions Included in Its Order After considering the oral and written testimony, along with other evidence, the

Commission approved the application, subject to conditions. On April 4, 2018, the

Commission issued a 64-page order explaining its decision, together with a 21-page

appendix setting forth 52 conditions for approval of the transaction (“Merger Order”). In

the Matter of the Merger of AltaGas Ltd. & WGL Holdings, Inc., No. 9449, Order No.

88631, 2018 WL 1705968 (Md. Pub. Serv. Comm’n April 4, 2018).

The Merger Order included a description of the Applicants’ proposal, the procedural

history, the specific positions of the Commission Staff, OPC, the intervenors, and the

Commission’s analysis of the statutory factors enumerated in PU § 6-105(g)(2). After

reviewing the evidence, and the various positions of the participants, the Commission

determined that the merger “satisfied the three-part test” set forth in PU § 6-105(g)(3)(i).

That is, subject to the imposed conditions, “the acquisition [was] consistent with the public

interest, convenience, and necessity, including benefits and no harm to consumers.”

In approving the merger, the Commission stated that it “carefully applied” its own

precedent and the statutory standards enumerated in PU § 6-105 to the “facts of this case,”

pointing out that “every merger proposal is different.” The Commission evaluated and

imposed certain requirements on the Applicants, including (1) a one-time direct payment

to customers, (2) conditions designed to ensure “synergy savings,” (3) the establishment of

a gas expansion fund, (4) safety programs, and (5) the payment of charitable contributions

to provide benefits to Maryland consumers. 15 In connection with its approval, the Commission imposed 52 conditions, which

covered a range of topics. We focus on two of them—Conditions 44 and 28. As the

language and context of these conditions are pertinent to the present case, we discuss them

in detail below.

a. Condition 44 Condition 44 addressed the manner in which Washington Gas would be required to

demonstrate that it had achieved “merger-related savings” in post-merger base rate increase

cases for a period after the merger closing. It appeared in a section entitled “Cost,

Accounting, Tax, and Rate Neutrality,” and required Washington Gas to “track and account

for merger-related savings, and transition costs to enable those savings, in its next two base

rate cases in which the test year in question includes transition costs.”12 “Merger-related

12 In its entirety, Condition 44 stated:

Washington Gas will track and account for Merger-related savings, and transition costs to enable those savings, in its next two base rate cases in which the test year in question includes transition costs. Washington Gas will amortize the transition costs over five years, will not seek recovery in rate proceedings over those five years of any amortized transition costs or corporate costs allocated from AltaGas to Washington Gas in excess of Merger-related savings, and will ensure that customer rates reflect an annual net benefit to Washington Gas’s Maryland customers of not less than $800,000 per year over the five years following Merger Close commencing with the first post-Merger base rate case (i.e., $4 million over five years). In the event that Washington Gas files a base rate case in Maryland in 2018, and the Merger Close occurs before or during the pendency of that rate case, then Washington Gas will consent to a ratemaking adjustment to reduce Washington Gas’s revenue requirements by $800,000 as a known and measurable reduction in Washington Gas’s cost of service during the new rate-effective period. ‘Transition costs’ as used in this [condition] are

16 savings” were defined as “the tangible financial benefits achieved as a result of the Merger

for the five years after Merger Close that would not have been possible if the individual

companies were to continue to operate separately.” “Transition costs” were defined as

“incremental non-recurring costs to facilitate the integration of the companies.”

Condition 44 also required that Washington Gas (1) “amortize the transition costs

over five years,” (2) “not seek recovery in rate proceedings over those five years of any

amortized transition costs or corporate costs allocated from AltaGas to Washington Gas in

excess of merger-related savings,” and (3) “ensure that customer rates reflected an annual

net benefit to Washington Gas’s customers of not less than $800,000 per year over the five

years following Merger Close commencing with the first post-Merger base rate case.” The

phrases “corporate costs allocated from AltaGas” and “net benefit” were not defined.

Notably, although the Commission required that other proposed conditions be

revised, the Commission did not make any changes to the language of Condition 44 as

proposed by the Applicants. The Merger Order reflects that the Commission credited Mr.

Jirovec’s testimony and specifically referenced the Applicants’ commitment in Condition

44 to ensure that “customer rates reflect an annual net benefit to Washington Gas’s

incremental non-recurring costs to facilitate the integration of the companies. ‘Merger-related savings’ as used in this [condition] refers to the tangible financial benefits achieved as a result of the Merger for the five years after Merger Close that would not have been possible if the individual companies were to continue to operate separately. 17 Maryland customers of not less than $800,000 per year over five years following the

Merger Close.”

By contrast, the Commission did not adopt Mr. Welchlin’s recommendation that

Condition 44 be amended to define “merger-related savings” as “a reduction in

[Washington Gas’s] pre-merger spending” that “could not have been achieved but for the

merger,” to be determined by computing Washington Gas’s cost-savings based on

Washington Gas’s actual spending. The Commission offered the following rationale:

Although some parties have contended . . . that post-merger synergy savings are too vague to quantify, we conclude that [Condition 44] ensures that customer rates will decline or otherwise be lower than they would have been absent the merger and therefore complies with [the benefits] portion of our statute. Also, as Applicants observe, unlike in most merger situations which do not realize synergy savings for years after closing, the Applicants are applying these savings to ratepayers beginning in the first year. Therefore, we find that the synergy savings will result in direct ratepayer benefits.

The Commission commented on “the difficulty of quantifying” merger-related savings in

previous cases, and specifically mentioned the “Exelon/Constellation” merger, a

transaction it approved in 2012.13 However, the Commission distinguished that merger

from the Washington Gas merger, observing that Condition 44 would allow the

Commission “to quantify these savings in the present case.”

13 See In the Matter of the Merger of Exelon Corp. & Constellation Energy Group, Inc., No. 9271, Order No. 84698, 2012 WL 833884 (Md. Pub. Serv. Comm’n Feb. 17, 2012). In that proceeding, Exelon Corporation (“Exelon”), Constellation Energy Group (“CEG”), the Baltimore Gas and Electric Company (“BGE”) and Exelon Energy Delivery Company sought the Commission’s approval for a transaction in which Exelon would, by acquiring all of the stock of CEG, acquire the power to exercise substantial influence over the policies and actions of BGE. 18 b. Condition 28 As we will discuss below, OPC contends that Condition 28 established the

mechanism to measure the “merger-related savings” required by Condition 44. Condition

28 appeared in a section entitled “Affiliate Requirements” and required Washington Gas to

provide the Commission with a “side-by-side comparison by function” of the pre-Merger

and post-Merger “corporate and shared-services costs incurred by Washington Gas for the

five years after Merger Close.”14 “For purposes of [Condition 28], pre-Merger mean[t]

calendar year 2016.” Additionally, “[i]n the event Washington Gas file[d] a base rate case

prior to the receipt of the first year comparison,” it was required to “include as part of its

14 In its entirety, Condition 28 stated:

Washington Gas shall provide a side-by-side comparison by function of the pre-Merger corporate and shared-services costs incurred by Washington Gas as compared to the post-Merger corporate and shared-services costs incurred by Washington Gas for the five years after Merger Close[]. The comparisons shall be filed on an annual basis as a separate letter, and the first letter shall be filed no later than the end of the second quarter following the first full year after Merger Close. The comparisons shall include information by account under the Federal Energy Regulatory Commission (“FERC”) Uniform System of Accounts. In the event that Washington Gas files a base rate case prior to the receipt of the first year comparison, Washington Gas will include as part of its base rate application a side-by-side comparison, by function, of pre- and post-Merger corporate and shared-services costs available through the test year, to the extent applicable. Additionally, in the second quarter after the first full calendar year following Merger Closing, and for every subsequent year for the next ten years, Washington Gas shall prepare and file with the Commission a report showing (i) AltaGas’s annual charges to Washington Gas and (ii) Washington Gas’s corporate and shared services costs. For purposes of this paragraph, pre-Merger means calendar year 2016. 19 base rate application a side-by-side comparison, by function, of pre- and post-Merger

corporate and shared-services costs available through the test year, to the extent applicable.”

Given that the Merger Order deviated from the terms of the settlement agreement

on matters that are not related to the instant dispute (in which the Applicants had reserved

the right to reject the merger rather than proceeding to closing), the Commission directed

the Applicants to advise the Commission in writing of their intentions to close on the

merger transaction no later than April 16, 2018. The Applicants agreed to the revised

conditions, and the merger transaction closed as contemplated. No party filed a petition

for judicial review of the Merger Order.

B. The Rate Administrative Proceeding On August 28, 2020, Washington Gas applied to the Commission for authorization

to increase its base rates. The Commission delegated the matter to a public utility law

judge (“PULJ”) to conduct evidentiary proceedings. See PU § 3-104(d)(1).

1. Administrative Proceedings Before the PULJ In support of its application, Washington Gas provided voluminous exhibits and

written testimony from several witnesses. Likewise, OPC introduced numerous exhibits

and written testimony. Although there were other disputed issues presented to the PULJ,

we focus below on the competing testimony presented by Washington Gas’s Chief

Regulatory Accountant, Robert E. Tuoriniemi, and OPC’s witness, Sebastian Coppola, on

the specific issue of compliance with Condition 44.

20 a. Mr. Tuoriniemi’s Testimony and Evidence Concerning Washington Gas’s Compliance with Condition 44 Mr. Tuoriniemi explained that the purpose of his testimony was “to describe and

support the test year amounts,[15] certain ratemaking and pro forma accounting adjustments,

the ratemaking and pro forma amounts, and to show the calculation justifying the

company’s request for a base rate increase.”

With respect to Condition 44 specifically, Mr. Tuoriniemi explained his

understanding that the condition “require[d] Washington Gas to ensure that customer rates

reflect an annual net benefit to Washington Gas’s Maryland customers of not less than

$800,000 per year over five years following [the merger close] commencing with the first

post-Merger base rate case.” Mr. Tuoriniemi described his methodology for computing

“merger-related savings,” “transition costs,” “corporate costs allocated from AltaGas,” and

“net benefit”—the terms used in Condition 44—to ensure that the request for a rate increase

complied with that condition in the Merger Order.

With respect to the “merger-related savings” arising from Washington Gas’s merger

with AltaGas, Mr. Tuoriniemi testified that during the test year, Washington Gas

eliminated $21,703,998 of actual costs that it no longer incurred post-merger, and the

portion attributed to its Maryland operations totaled $9,135,835. Mr. Tuoriniemi explained

that the “primary savings identified” were labor-related expenses arising from positions

As explained by Mr. Tuoriniemi, the “test year” represents the “actual amounts” 15

of expenses and revenues Washington Gas accrued in the twelve months leading up to March 31, 2020. 21 that had been eliminated.16 Aside from labor, Mr. Tuoriniemi testified that the other

savings that had been identified related to expenses associated with the board of directors,

investor relations, external audits, director and officer insurance costs, as well as supply

chain activities.

Next, Mr. Tuoriniemi explained his methodology for computing “transition costs”

and assessing them in the test year.17 He testified that the test year included $609,188 of

amortization expense related to the transition costs, and that Maryland’s share of those

costs totaled $255,439.

16 Mr. Tuoriniemi provided the following explanation for the basis of his calculation of test year synergy savings:

[Washington Gas] compiled cost savings by department and those were aggregated in total synergy savings. These represent the synergies identified to date . . . . [O]nly test year amounts are included in the calculation of the adjustment . . . . The amounts in the adjustment start at different dates in the test year. Therefore, the adjustment calculates the pro-rated savings included in the test year for these costs. For positions that were eliminated, the cost savings include the position’s total compensation and an estimate of benefits. The exception is for pension and post-retirement benefits where a specific calculation was only available for the Chief Executive Officer position as it is publicly disclosed in the Company’s Form 10-K filings. 17 Specifically, in assessing the impacts of merger-related costs on Washington Gas, Mr. Tuoriniemi explained that he categorized the costs into the following types: (1) costs incurred by Washington Gas to gain approval of the merger; (2) costs incurred by Washington Gas to close the merger; (3) costs incurred to integrate AltaGas, WGL Holdings, Inc., and Washington Gas, including any amortization thereof; (4) costs for services rendered to Washington Gas by AltaGas and its affiliates; and (5) costs incurred by Washington Gas that were eliminated by the merger. 22 With respect to “corporate costs allocated from AltaGas,” Mr. Tuoriniemi described

those as “[c]osts for services rendered to Washington Gas by [AltaGas] and its affiliates”

and costs that were “charged for services.” Mr. Tuoriniemi computed Maryland’s share of

these costs as $8,051,332.

Finally, with respect to the “net benefit” to Maryland customers, Mr. Tuoriniemi

presented direct testimony describing the difference between the $9,135,835 in “merger-

related savings,” and $8,051,332 in “corporate costs allocated from AltaGas,” which he

computed to be $1,084,503. Mr. Tuoriniemi described this figure as the “net synergy

savings,” which, once reduced by the $255,439 in amortized transition costs, resulted in a

“net benefit” to Maryland customers of $829,064, which he referred to as the “net change

in costs post-merger.”

In addition to his description of his methodology summarized above, Mr. Tuoriniemi

presented the following chart demonstrating how he calculated the net benefit for the test

year to be $829,064, thereby exceeding the $800,000 requirement set forth in Condition 44:

Total Company[18] Maryland

Test Year Charges from AltaGas $ 18,774,305 $ 8,051,332 Adjusted Test Year Synergy Savings (21,703,998) (9,135,835) Net Synergy Charge (Savings) (2,929,693) (1,084,503) Test Year Transition Cost Amortization 609,188 255,439 Net Change in Costs Post Merger $ (2,320,505) (829,064)

18 Washington Gas’s service area includes Maryland, Virginia, and the District of Columbia. Only Maryland’s data are relevant to this matter. 23 Mr. Tuoriniemi testified that the amounts in the table were based upon entries in the

company’s books (with respect to costs) and an internal compilation of cost savings by

department (with respect to synergy savings). In addition to Mr. Tuoriniemi’s testimony,

he presented documentary evidence consisting of 12 pages,19 which included detailed

calculations of synergy savings, including merger-related savings, such as salary and

benefits information for positions that had been eliminated as a result of the merger and

corporate cost savings related to board of director expenses, insurance, and supply chain

Because Washington Gas had achieved the requisite net merger benefit for

Maryland customers during the test year (i.e., the $800,000 required by Condition 44), Mr.

Tuoriniemi did not make a ratemaking adjustment to the operating expense that

Washington Gas sought to recover. Therefore, Mr. Tuoriniemi explained, the entire

$829,064 of savings remained in the test year as a reduction in operating expenses.

b. Mr. Coppola’s Testimony and Evidence Offering an Alternative Analysis of Washington Gas’s Compliance with Condition 44 In contrast to Washington Gas’s analysis of its compliance with Condition 44, OPC

took the position that Condition 44 and Condition 28 were “inextricably linked.” Namely,

OPC contended that one could not undertake an analysis of Condition 44 without

considering the annual filing required by Condition 28, which required that for a period of

19 Mr. Tuoriniemi’s merger-related savings calculations were itemized in documentary evidence titled “Adjustment No. 20 – Merger Commitment-Synergy Savings” (“Adjustment 20”). 24 five years after the merger close, Washington Gas would provide a side-by-side

comparison of pre-merger and post-merger corporate costs and shared-services costs. In

support of its position, OPC submitted direct testimony from its own expert witness,

Sebastian Coppola, offering an alternative Condition 44 analysis.

Mr. Coppola agreed that Condition 44 sought to “ensure that post-merger costs

billed from [AltaGas] and transition costs [did] not exceed the cost savings from the

merger,” and that it guaranteed that customers would realize “at least a net benefit of $4

million over five years from the combined operations of Washington Gas and [AltaGas.]”

However, in his view, by requiring that Washington Gas file an annual report comparing

pre- and post-merger corporate and shared services costs for a period of five years, Mr.

Coppola opined that it was “clear that the Commission wanted to ensure that corporate and

shared-services costs would not increase significantly post-merger from pre-merger levels

in 2016.”

Notably, Mr. Coppola undertook an analysis of “merger-related savings,” utilizing

the same methodology that Mr. Welchlin had recommended during his testimony before

the Commission in the merger proceeding. Specifically, Mr. Coppola approached the

analysis from a vantage point of ensuring that Washington Gas’s corporate costs did not

increase from the pre-merger 2016 baseline (aside from an adjustment for inflation). In

undertaking his analysis, Mr. Coppola identified “those corporate and shared-services

functions where there had been a significant increase in post-merger costs that are contrary

to reasonable expectations of cost synergies that would be generated from the merger and

25 the combined corporate functions and activities.” Mr. Coppola then disallowed the

allocation to Washington Gas of any AltaGas corporate costs and shared service costs

associated with corporate functions, including accounting, tax, finance, human resources,

information technology, legal compliance, and supply chain. Mr. Coppola took

Washington Gas’s 2016 pre-merger costs and increased them by 2% from 2016 to 2019 to

account for inflation. He then compared those inflation-adjusted pre-merger levels to the

test year levels and calculated the difference. He then summed those function-specific cost

increases and determined the percentage that would be allocated to Maryland customers.

After subtracting the amount of amortized transition costs, Mr. Coppola calculated a total

proposed disallowance of $4,259,730.

c. The PULJ’s Proposed Order On February 12, 2021, the PULJ issued her proposed order approving the rate

increase, but at a lower rate than Washington Gas requested.20 On February 26, 2021, OPC

appealed the PULJ’s decision to the Commission on several grounds, one of which

involved Condition 44.21

20 The PULJ approved increasing Washington Gas’s rates to generate an additional $11.9 million in revenue. Washington Gas had requested $28.4 million. 21 A proposed order of a PULJ becomes final unless a party notes an appeal to the Commission within the time period for appeal designated in the proposed order. PU § 3- 113(d)(2)(i). 26 2. Commission’s Decision On April 9, 2021, the Commission issued Order No. 89799 (the “Rate Order”),

which resolved all the parties’ contentions. The Commission rejected OPC’s argument

that Conditions 44 and 28 were “inextricably intertwined” and that Washington Gas was

required to include a side-by-side comparison of pre- and post-merger corporate and shared

costs to establish that the Company had experienced the annual $800,000 in synergy

savings. The Commission noted that Conditions 28 and 44 were “separate [conditions]”

that were “contained in two separate sections” of the appendix to the Merger Order, and

that “neither condition refer[red] to the other.” The Commission further observed that

Condition 28 “explicitly require[d] Washington Gas to provide the Company’s annual

report in its next rate case if that case occurs before the first annual report is due.” The

Commission stated that “[t]his language strongly suggests that if Washington Gas does not

file a base rate case before its first annual report is due, [Condition] 28’s report is not

required in Washington Gas’s next rate case.” The Commission observed that Washington

Gas had complied with Condition 28 by filing the annual report in the second quarter of

2020.

The Commission agreed with Washington Gas that Condition 44 gave Washington

Gas “more flexibility” in its computation of “merger-related savings” than the position

advanced by OPC, so long as Washington Gas “established that Maryland ratepayers

received over $800,000 in synergy-related savings during the test-year.” The Commission

credited Mr. Tuoriniemi’s testimony that, as described by the Commission, Washington

27 Gas “achieved test-year synergy-related savings in Maryland of $829,603, slightly in

excess of the annual savings required by” Condition 44. The Commission therefore

concluded, “the PULJ had substantial evidence in the record upon which to conclude that

no downward adjustment was necessary.” The Commission found that Washington Gas

satisfied Condition 44 and granted its request to recover amortized transition costs and

corporate costs allocated from AltaGas during the test year.

Thereafter, OPC filed a petition for a rehearing, which the Commission denied by

Order No. 89893. In rejecting OPC’s argument that the Commission was required to read

Conditions 28 and 44 together, the Commission stated that it previously explained “the

basis for its decision,” did not need to repeat it, and found “no reason to reconsider its

conclusions.” The Commission explained that “Mr. Tuoriniemi provided detailed

testimony regarding the synergy savings required by [Condition] 44[,]” and that his

“testimony was not contested in the record.” The Commission stated that, although “OPC

stated it found the supporting documentation confusing and noted that post-merger costs

had increased[,]” “the PULJ and the Commission concluded that [Mr.] Tuoriniemi’s

testimony and exhibits sufficiently complied with the requirements of [Condition] 44.”

The Commission reiterated its prior determination that Condition 44 “did not require costs

to decrease so long as overall annual synergy savings exceeded $800,000.” (Emphasis

added). The Commission stated that “[t]he record supported that conclusion,” and it

therefore denied OPC’s petition.

28 3. Judicial Review of the Commission’s Decision On August 30, 2021, OPC filed a petition for judicial review in the Circuit Court

for Baltimore City. After the circuit court affirmed the Commission’s decision, OPC

appealed to the Appellate Court of Maryland, which affirmed the circuit court’s judgment

in an unreported opinion. Matter of Maryland Office of People’s Counsel, No. 775, Sept.

Term, 2022, 2023 WL 3316541 (App. Ct. Md. May 9, 2023).

The Appellate Court noted that the Public Utilities Article sets forth a “particularly

discretionary standard of review” for Commission decisions. Id. at *3. In upholding the

Commission’s decision, the Appellate Court explained that the Commission was entitled

to credit Mr. Tuoriniemi’s testimony regarding synergy savings over Mr. Coppola’s

testimony and, based upon this testimony, conclude that Condition 44 was satisfied. Id. at

*5. The court further noted that “[t]o overturn a Commission decision as arbitrary or

capricious, a petitioner must overcome a very deferential standard to rebut the presumption

that the Commission exercised its discretion properly.” Id. (quoting Office of People’s

Counsel, 461 Md. at 400). The Appellate Court concluded that OPC failed to overcome

that standard, that the Commission’s decision was based upon expert testimony that the

Commission chose to credit, and that it was not within the province of the court to substitute

its judgment for that of the Commission. Id.

Lastly, the Appellate Court addressed OPC’s contention that the parties to the

merger had “promised the Commission” that the merger would result in “corporate cost

savings for five years of at least $800,000 per year.” Id. at *5. The Appellate Court stated

29 that “[t]he Commission expressly determined” “that the merger required no such thing.”

Id. The court pointed out that in its order denying OPC’s petition for rehearing, the

Commission stated that Condition 44 “did not require costs to decrease as long as overall

annual synergy savings exceeded $800,000.” Id. The court concluded that the record

before the Commission provided sufficient support for its determination that Condition 44

was satisfied. Id.

Thereafter, OPC filed a petition for writ of certiorari, to consider the following

questions, which we have rephrased for clarity:22

1. When undertaking judicial review of a Commission’s decision approving a public service company’s application for a rate increase, does a reviewing court apply an arbitrary or capricious standard of review to the Commission’s interpretation of its own prior order approving the acquisition of the public service company?

2. In connection with its approval of a public service company’s application for a rate increase, was the Commission’s interpretation of its own prior order arbitrary or capricious?

22 The questions presented in OPC’s petition for writ of certiorari were:

1. Should the Commission’s interpretation of the Merger Order be given the usual deference afforded Commission evidentiary findings, rather than reviewed in light of the parties’ reasonable understanding of the Merger Order at the time it was issued?

2. Does an increase of $7.8 million in corporate costs post-merger comply with the Merger Order’s plain language, intent, and purpose that the merger produce “tangible financial benefits” in the form of a “reduction in distribution rates” for customers? 30 For the reasons set forth more fully herein, we answer yes to the first question and

no to the second question and, therefore, affirm the judgment of the Appellate Court.

III

Discussion

As noted above, the first issue we are asked to decide is what standard of review a

court is to apply when a party seeks judicial review of the Commission’s decision to

approve a public service company’s request for a rate increase and alleges that in

connection therewith, the Commission erred in interpreting its own prior order. Before we

address OPC’s contentions, we describe the highly deferential standard that the General

Assembly has enacted for judicial review of Commission decisions, and our case law

discussing this standard.

A. Standard of Review In an appeal from judicial review of an agency decision, we review the agency’s

decision rather than the decision of the circuit court or the Appellate Court. Office of

People’s Counsel, 461 Md. at 391. In many contested case proceedings involving judicial

review of a final decision of various state agencies, a court’s standard of review is governed

by the statutory standard in the Administrative Procedure Act (“APA”).23

23 Maryland’s Administrative Procedure Act (“APA”) is codified at Maryland Code Ann., State Government Article (“SG”) § 10-201, et seq. 31 1. Review of a Commission Decision For Commission decisions or orders, the General Assembly has set forth a separate

standard for judicial review in the Public Utilities Article, which states:

Every 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;

(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. PU § 3-203. “Thus, the standard of review does not depend on whether we would reach

the same conclusions as the Commission, but on whether the Commission’s decision or

process is infected by specific defects.” Office of People’s Counsel, 461 Md. at 391–92.

With respect to factual matters, “[b]ecause the Commission is well informed by its

own experience and specialized staff, a court reviewing a factual matter will not substitute

its judgment on review of a fairly debatable matter.” Communications Workers of Am. v.

Public Service Comm’n, 424 Md. 418, 433 (2012) (citations omitted).

Concerning our standard of review applicable to matters committed to an agency’s

discretion, we have explained:

32 When an agency acts in its discretionary capacity, it is taking actions that are specific to its mandate and expertise and, unlike conclusions of law or findings of fact, have a non-judicial nature. For this reason, we owe a higher level of deference to functions specifically committed to the agency’s discretion. As long as an administrative agency’s exercise of discretion does not violate regulations, statutes, common law principles, due process and other constitutional requirements, it is ordinarily unreviewable by the courts. Courts thus generally only intervene when an agency exercises its discretion arbitrarily or capriciously.

Id. at 434 (cleaned up).

Moreover, “to the extent that the agency is expected to apply its expertise to carry

out its decision-making responsibility, courts will accord it greater leeway before labelling

its exercise of that responsibility as arbitrary or capricious.” Office of People’s Counsel,

461 Md. at 400. “To overturn a Commission decision as arbitrary or capricious, a petitioner

must overcome a very deferential standard to rebut the presumption that the Commission

exercised its discretion properly.” Id.

As we have said on more than one occasion, the standard of review of Commission

decisions under PU § 3-203 is consistent with the standard of review applicable to all

administrative agencies, including review under the APA. Office of People’s Counsel, 461

Md. at 392; see also Office of People’s Counsel, 355 Md. at 15; Town of Easton v. Public

Service Comm’n, 379 Md. 21, 31 (2003). “In particular, the specific bases for reversing a

Commission decision are the same as set forth for reversing an agency decision in the

provision for judicial review in the APA.” Office of People’s Counsel, 461 Md. at 392.

However, although the statutory standards of review that govern Commission

decisions and other types of administrative agencies are consistent, they are not identical.

33 In Office of People’s Counsel, we noted that “PU § 3-203 also appears to be a more

deferential standard in some respects compared to the standard of review under the APA.”

Id. We pointed out that “the General Assembly has directed that the Commission’s

decision is ‘prima facie correct’ and is to be affirmed unless the listed defects are ‘clearly

shown.’” Id. Observing that this language is absent from the APA’s provision governing

judicial review, we stated that the “distinction [did] not appear to be unintended.” Id. We

pointed out that the “statute establishing the Commission preceded the APA” and that the

“APA provision concerning judicial review was enacted just two years after the enactment

of the . . . judicial review provision in the Commission’s statute.” Id. (footnote omitted).

And as we previously expressed, had the Legislature intended that the standard for judicial

review of Commission proceedings be the same as the standard for judicial review under

the APA, “it is inconceivable that it would have excluded the . . . Commission from the

APA.” Mid-Atlantic Power Supply Ass’n v. Public Service Comm’n, 361 Md. 196, 214

(2000).

Recognizing the textual differences between the two statutes—and “[i]n giving

meaning” to the “language in PU § 3-203 without rendering it surplusage”—we have

explained that a court should “be particularly mindful of the deference owed to the

Commission on those issues on which courts typically accord some degree of deference to

administrative agencies—i.e., findings of fact, mixed questions of law and fact, and the

construction of particular statutes administered, and regulations adopted, by the agency.”

Office of People’s Counsel, 461 Md. at 393–94 (footnotes omitted). By contrast, we

34 observed that, on questions in which a court would not typically apply agency deference—

such as general questions of law, jurisdiction, or constitutional questions—“PU § 3-203

requires no greater deference to the Commission than any other agency.” Id. at 394. These

types of “legal questions are completely subject to review by courts.” Id. (internal

quotations omitted). “In sum, with respect to the Commission, this Court has tended to

accord particular deference (though not total deference) to [its] decisions.” Id. (cleaned

up).

In this case, OPC alleges that because it is raising an “error of law”—namely, that

the Commission erred in its interpretation of its Merger Order—we should consider the

language of the Merger Order without deference to the Commission’s interpretation.

Because not all allegations involving “errors of law” involve a monolithic application of

agency deference principles, it is useful to describe when we may apply agency deference,

and if so, how much.

2. When, and to What Extent, We Apply Agency Deference to “Errors of Law” We recently summarized the standards of review that we apply when a court is

undertaking judicial review of an agency decision that is based on an alleged “error of law.”

Comptroller v. FC-GEN Operations Invs. LLC, 482 Md. 343, 360 (2022). We explained

that the phrase “‘errors of law’ encompasses a variety of legal challenges, including: (1)

the constitutionality of an agency’s decision; (2) whether the agency had jurisdiction to

consider the matter; (3) whether the agency correctly interpreted and applied applicable case

law; (4) and whether the agency correctly interpreted an applicable statute or regulation.” 35 Id. Here, we add a fifth category to our list of “errors of law”—judicial review of an agency’s

interpretation of its own decision or order that it enters in connection with an administrative

proceeding in which it is required to apply its technical expertise and discretion.

As noted in our discussion above, “[a]lthough we do not apply any agency deference

when undertaking a review of the first three types of legal challenges, we occasionally apply

agency deference when reviewing errors of law related to the fourth category.” Id. In this

case, we are asked to determine whether we apply agency deference to the fifth category.

Before we turn to our discussion of what standard of review we apply to this newly identified

category, it is useful to summarize our agency deference principles as they apply to the first

four categories.

With respect to an agency’s interpretation of a statute that it administers, this Court

applies a “sliding-scale approach” in which the weight that we may give to an agency’s

interpretation depends on a number of factors. Md. Dep’t of the Environment v. Assateague

Coastal Trust, 484 Md. 399, 451 (2023). “We give more weight when the interpretation

resulted from a process of reasoned elaboration by the agency, when the agency has applied

that interpretation consistently over time, or when the interpretation is the product of

contested adversarial proceedings or formal rule making.” Id. at 451–52 (quoting FC-GEN,

482 Md. at 363); see also Md. Dep’t of the Env’t v. County Comm’rs of Carroll County, 465

Md. 169, 203–04 (2019); Baltimore Gas & Electric Co. v. Public Service Comm’n, 305 Md.

145, 161 (1986).

36 When the “error of law” involves an administrative agency’s interpretation of its

own rule or regulation, we have explained that even more deference is in order. Assateague

Coastal Trust, 484 Md. at 452–53 (citing Kor-Ko Ltd. v. Md. Dep’t of the Env’t, 451 Md.

401, 424–25 (2017)). “Because an agency is best able to discern its intent in promulgating

a regulation, the agency’s expertise is more pertinent to the interpretation of an agency’s

rule than to the interpretation of its governing statute.” Kor-Ko Ltd., 451 Md. at 412–13

(citations omitted). “Put another way, the courts do not play the role of an über

administrative agency in reviewing the actions of state or local administrative bodies, but,

rather we exercise discipline in our review so as not to cross the separation of powers

boundary.” Id. at 413.

When applying an arbitrary or capricious standard of review, this Court has

analogized it to the standard under federal administrative law,24 in that one challenging the

24 In Office of People’s Counsel, we characterized Maryland’s arbitrary or capricious standard as “similar to the standard under federal administrative law.” 461 Md. at 399. We explained the federal standard as follows:

The leading case defining the federal standard is Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983). There, the [United States] Supreme Court identified several factors that could render an agency action arbitrary or capricious, including whether: (1) there is a rational connection between the facts found and the choice made; (2) the decision was based on a consideration of the relevant factors; (3) there has been a clear error of judgment; (4) the agency relied on factors which Congress has not intended it to consider; (5) the agency has entirely failed to consider an important aspect of the problem; (6) there is an explanation for a decision that runs counter to the evidence; and (7) the decision is so implausible that it could not be ascribed to a difference in view or the product

37 agency’s decision “must show that the agency exercised its discretion unreasonably or

without a rational basis.” Office of People’s Counsel, 461 Md. at 399 (citing Harvey v.

Marshall, 389 Md. 243, 297–304 (2005)). “Whether an agency decision is arbitrary or

capricious also depends, to some extent, on the degree of discretion that the Legislature has

conferred on the particular agency with respect to the particular decision.” Id. The

standard is not easily defined and is highly contextual. Id. at 399–400. “However, to the

extent that the agency is expected to apply expertise to carry out its decision-making

responsibility, courts will accord it greater leeway before labelling its exercise of that

responsibility as arbitrary or capricious.” Id. at 400.

3. Application of the Above Standards to OPC’s Allegation of “Error of Law” Here Applying the above principles to OPC’s contentions in this case, OPC is not

contending that the Commission’s decision was unconstitutional, outside of its statutory

authority or jurisdiction, or was made as a result of an unlawful procedure—i.e., the types

of legal questions in which the Court never applies deference. Rather, OPC ascribes an

“error of law” to the Commission’s interpretation of its own Merger Order—i.e., an “error

of law” in which agency deference may be applied.

of agency expertise. This standard is not an invitation for a court to second- guess an agency’s judgment: “a decision of less than ideal clarity” will be upheld “if the agency’s path may be reasonably discerned.” Bowman Transp., Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 285-86 (1974).

Id. at 399 n.16 (cleaned up). 38 OPC contends that our review of the Commission’s interpretation of its own Merger

Order is analogous to the Commission’s interpretation of a statute. From that premise,

OPC points out that this Court does not always apply agency deference to an agency’s

interpretation of a statute that it is charged with administering, and by analogy, we should

apply no deference here. For the following reasons, we determine that OPC’s argument is

inconsistent with the highly deferential standard of review required by PU § 2-203, our

case law describing the deference principles required by this statute, and our jurisprudence

applying agency deference in other administrative contexts.

First, in arguing that we should not apply agency deference with respect to this

particular “error of law,” OPC omits any discussion or analysis of the highly deferential

language contained in PU § 3-203. Under the plain language of the statute, Commission

decisions, orders, and regulations are “prima facie correct” and “shall be affirmed unless

clearly shown to be” “affected by [an] error of law.” PU § 3-203(5) (emphasis added).

The standard of review advanced by OPC would be inconsistent with our prior

interpretation of this language—namely that a reviewing court must be “particularly

mindful of the deference owed to the Commission on those issues on which courts typically

accord some degree” of agency deference, including “the construction of particular

statutes” that the Commission administers, and the regulations adopted by the agency.

Office of People’s Counsel, 461 Md. at 393–94 (emphasis added).

Second, OPC’s argument fails to recognize that our standards of judicial review do

not treat all “errors of law” the same when considering whether to apply agency

39 deference.25 As discussed above, there are types of “errors of law” for which we apply no

deference, there are other types in which we may apply some degree of deference, and

there are still other types in which we apply a higher degree of deference.

Third, OPC’s analogy of the asserted “error of law” here to the Commission’s

interpretation of a statute is inapt. This case does not require that we consider the plain

language of a statute or the Legislature’s purpose and intent in enacting it. The “error of

law” that we are being asked to consider here involves the Commission’s interpretation of

its own decision or order that it entered in connection with an administrative proceeding

in which it is required to apply its technical expertise and discretion. As discussed above,

in carrying out its statutory duties associated with the approval of an acquisition of a public

service company, the Commission has broad discretion to consider “any other issues” that

it “considers relevant to the assessment of acquisition in relation to the public interest,

convenience, and necessity[,]” PU § 6-105(g)(2)(xii) (emphasis added), and to impose

conditions as part of its order to ensure “the applicant’s satisfactory performance or

adherence to specific requirements.” PU § 6-105(g)(3). As the Appellate Court has

25 For example, to support its contention that this Court does not apply deference when an agency “has committed an error of law,” OPC cites to a case in which the Court refused to apply deference to a county zoning board of appeals’ application of this Court’s zoning opinions in three “recent cases.” See Lewis v. Dep’t of Natural Resources, 377 Md. 382, 437 (2003), superseded by statute on other grounds as recognized in Bereano v. State Ethics Comm’n, 403 Md. 716, 756 (2008). This case does not lend support to OPC’s position. It would be illogical for this Court to defer to a local zoning board’s interpretation of this Court’s case law. It would, however, be appropriate for this Court to apply deference to the Commission’s interpretation of its own prior order involving the same public service company on matters within the Commission’s area of technical expertise. 40 observed, “[a] great deal of discretion is necessarily vested in the Commission in order that

it may properly discharge its important and complex duties.” Office of People’s Counsel

v. Public Service Comm’n, 52 Md. App. 715, 722 (1982). The Merger Order, including its

attendant conditions, was approved in connection with the Commission’s exercise of its

expertise and discretionary authority to impose conditions when approving an acquisition

of a public service company. It was approved as part of a contested administrative

proceeding in which any party had the right to seek judicial review. Thereafter, the Merger

Order was interpreted and applied by the Commission in connection with an application

for a utility rate increase—a subsequent administrative proceeding in which the

Commission was also utilizing its technical expertise.

We determine that where the allegation of an “error of law” involves the

interpretation of the Commission’s own merger order under the circumstances presented

here, it falls on the outermost deference spectrum, thereby commanding a more deferential

review under the “arbitrary or capricious” standard. The Commission is best able to discern

its intent behind the conditions that it imposed in the exercise of its discretionary authority

to impose merger conditions, as well as when applying those conditions in a subsequent

rate case involving the same public service company. Such a standard is consistent with

the highly deferential standard required by PU § 2-203 and our case law applying agency

deference principles involving an agency’s interpretation of its own regulations. See Kor-

Ko Ltd., 451 Md. at 420–21 (deferring to the Maryland Department of the Environment’s

“interpretation of its own regulations” because the Court was “especially mindful of that

41 agency’s expertise in its field[,]” and concluding that the interpretation was “permissible

legally, and neither arbitrary nor capricious”).

For these reasons, we hold that the “arbitrary or capricious” standard of review

applies when a reviewing court is asked to consider an administrative agency’s

interpretation of its own prior decision or order that it entered in connection with an

administrative proceeding in which it was required to apply its technical expertise and

discretion. We shall apply this standard in assessing whether the Commission properly

interpreted its own Merger Order in the subsequent rate administrative proceeding.

B. The Parties’ Competing Interpretations of Condition 44 OPC argues that under the language of the Merger Order, Condition 44 and

Condition 28 are “inextricably intertwined.” According to OPC, the text of Condition 44

addressed only the requirement that Washington Gas “track and account for merger-related

savings and transition costs to enable those savings, in its next two base rate cases” but did

not specify how those savings are to be measured. OPC points out that “merger-related

savings” in Condition 44 is defined to include only “tangible financial benefits,” which,

according to OPC, foreclosed Washington Gas’s ability to seek a rate increase based on

“vague” and “inherently speculative” testimony about “hypothetical” costs that

Washington Gas might have incurred absent the merger.

OPC asserts that Condition 28, by its “plain terms,” was intended to serve a

“ratemaking function” and to provide the mechanism by which Washington Gas was

required to measure “merger-related savings” in post-merger rate cases by comparing its

42 post-merger corporate and shared-services costs to its pre-merger costs using 2016 as the

baseline. OPC contends that Condition 28 is the only condition in the Merger Order that

provided the actual comparative cost data needed to make a calculation of “tangible

financial benefits.” Furthermore, OPC asserts that if Condition 28 does not serve a “rate-

making function,” it is simply an annual report that has no purpose.

As explained by OPC’s expert witness, Mr. Coppola, by requiring in Condition 28

that Washington Gas file an annual report comparing the pre- and post-merger corporate

and shared services costs for a period of five years, it was “clear” that the Commission

wanted to ensure that corporate and shared-services costs would not significantly increase

from pre-merger costs. According to OPC’s interpretation, reading Conditions 28 and 44

together, the Commission’s Merger Order effectively prohibited Washington Gas from

seeking any rate increase attributable to any post-merger increase in corporate costs for a

period of five years. In other words, OPC contends that, when one reads Conditions 44

and 28 together, a five-year ceiling was established on Washington Gas’s post-merger

corporate and shared costs, whereby the merger synergy savings to Washington Gas’s

ratepayers would be determined by computing Washington Gas’s pre-merger costs less

$800,000. Under its reading, OPC contends that these conditions “guaranteed that the

merger would reduce rates by at least $800,000 per year for five years after the merger.”

OPC also contends that its interpretation of Condition 44 is consistent with

Commission precedent involving other public service company mergers in which the

Commission rejected public service companies’ attempts to quantify merger savings by

43 comparing post-merger costs to “hypothetical projections of what might have occurred

absent the merger.” OPC asserts that in those decisions, the Commission found such

hypothetical savings “too vague to quantify,” “inherently speculative,” and “too intangible

to qualify as a benefit” under PU § 6-105.

OPC asserts that in approving the rate increase in the Rate Order, the Commission

erred in accepting Washington Gas’s “merger-savings” analysis under Condition 44

because Mr. Tuoriniemi’s computation reflected an increase of $7.8 million in post-merger

corporate costs, which it contends violates the conditions in the Merger Order that

prohibited the allocation of any increased post-merger costs. Accordingly, OPC asserts

that the Rate Order approving the rate increase that included the allocation of these

corporate costs failed to produce “tangible financial benefits” to Maryland ratepayers in

the form of a “reduction in distribution of rates.”

Washington Gas and the Commission disagree with OPC’s interpretation of

Condition 44. They contend that Condition 44 was the mechanism that Washington Gas

was required to follow to demonstrate “merger-related savings” in post-merger rate cases.

They assert that the plain language of Condition 44 required that Washington Gas

demonstrate that “merger-related savings” were at least $800,000 more than amortized

merger transition costs plus corporate costs allocated from AltaGas to Washington Gas.

The Commission and Washington Gas assert that nowhere—in either the Merger Order

generally, or Condition 44 specifically—is there any blanket prohibition on increased

44 corporate costs (relative to 2016 or otherwise).26 Washington Gas and the Commission

point out that Condition 44 makes no reference to Condition 28. They contend that the

“merger-related savings” provision in Condition 44 provided Washington Gas with greater

flexibility to establish the net benefit to customers.

The Commission and Washington Gas assert that Condition 28 is an annual

informational reporting requirement, and that the Commission routinely requires annual

filings such as the filing required by this condition.

Finally, the Commission and Washington Gas argue that Mr. Tuoriniemi’s

testimony and exhibits substantiated the calculation that Washington Gas had generated

merger-related benefits of $829,064 and that it was within the Commission’s discretion to

accept that testimony and evidence. They contend that Mr. Tuoriniemi’s testimony and

evidence comport with the methodology outlined by the plain language of Condition 44,

and that it was within the Commission’s discretion to credit it.27

26 Washington Gas points out that Conditions 23 and 24 expected increases in labor costs following the merger that would need to be recovered by a rate increase. 27 Washington Gas also points out that OPC has not challenged the Commission’s decision on the basis that it was unsupported by substantial evidence. Based upon the questions presented in its petition for writ of certiorari, and OPC’s arguments set forth in its briefs, we agree that OPC has not alleged that the Commission’s decision is unsupported by substantial evidence. Rather, OPC argues more generally that the Commission acted arbitrarily and capriciously because it misinterpreted its own order approving the merger and conditions therein and by permitting Mr. Tuoriniemi to utilize the methodology or framework that he used to show that Washington Gas had demonstrated the requisite “merger-related savings.” 45 Concerning OPC’s assertion that the Commission “deviated from precedent” by

permitting Washington Gas to compute “merger-related savings” on prospective savings

occasioned by synergies, Washington Gas points out that the Commission expressly

considered that argument and rejected it in its analysis of that point in the Merger Order,

by distinguishing the merger-related savings proposed by the Applicants in those cases and

finding that the proposed synergy savings presented by Washington Gas in the merger

proceeding would result in “direct ratepayer benefits.”

C. The Commission’s Interpretation of Its Merger Order Was Not Arbitrary or Capricious Based upon the record in this case, we determine that the Commission’s

interpretation of its Merger Order, including Condition 44, was not arbitrary or capricious.

In connection with the issuance of its Rate Order, the Commission considered and

rejected OPC’s argument that Conditions 44 and 28 were “inextricably intertwined” and

that Washington Gas was required to include a side-by-side comparison of pre- and post-

merger corporate and shared costs to establish that the Company experienced the annual

$800,000 in synergy savings. The Commission reasoned:

The [conditions] are contained in two separate sections of Appendix A to the [Merger Order], and neither [condition] refers to the other.

Additionally, [Condition] 28 explicitly requires Washington Gas to provide the Company’s annual report in its next rate case if that case occurs before the first annual report is due. This language strongly suggests that if Washington Gas does not file a base rate case before its first annual report is due, [Condition] 28’s report is not required in Washington Gas’s next rate case. Washington Gas did file the Company’s [Condition 28] report in the second quarter of 2020. Therefore, the Commission agrees with Washington Gas that [Condition] 44 permits Washington Gas more flexibility than OPC 46 contends, so long as it establishes that Maryland ratepayers received over $800,000 in synergy-related savings during the test-year.

Thereafter, in denying OPC’s motion for reconsideration, the Commission reiterated that

Condition 44 “did not require costs to decrease so long as the overall annual synergy

savings exceeded $800,000.”

The Commission’s explanation was reasonable. As the Commission correctly

noted, neither condition refers to the other. Nor is there any language in Condition 44 to

suggest that the Commission intended that the method for calculating synergy savings must

be derived from the pre-merger corporate and shared-services costs data that is required to

be included in the annual reports under Condition 28.

Under OPC’s interpretation of Condition 44, the Merger Order not only prohibits

rate increases attributable to corporate costs but also requires rate decreases. OPC asserts

that when Conditions 44 and 28 are read together, Condition 44 “guaranteed that the merger

would reduce rates by at least $800,000 per year for five years after the merger.” The

Commission’s conclusion that Condition 44 provided Washington Gas with more

flexibility is consistent with its explanation in the Merger Order in which it stated that “we

conclude that this Condition ensures that customer rates will decline or otherwise be lower

than they would have been absent the merger and therefore complies with [the benefits]

portion of our statute.” (Emphasis added). This language reflects that the Commission

understood that the net benefit to Maryland customers could be achieved by synergy-

related savings that were not directly tied to a reduction in actual spending based on

47 Washington Gas’s pre-merger costs. In other words, the language in the Merger Order is

consistent with the Commission’s explanation in its Rate Order, which it reiterated in its

order denying OPC’s petition for rehearing, that Condition 44 “did not require costs to

decrease so long as overall annual synergy savings exceeded $800,000.”

Moreover, we also observe that the Commission’s explanation of its interpretation

of Condition 44 that it articulated in the rate administrative proceeding is also consistent

with its analysis and consideration of that condition in the merger administrative

proceeding. As discussed above, during the merger administrative proceeding, Robert

Welchlin, an expert for the Commission Staff, recommended that the Commission require

that “merger-related savings” be computed using the same methodology that Mr. Coppola

employed in the rate-making case. That is, Mr. Welchlin suggested that the Commission

should prohibit the companies from allocating to Washington Gas any portion of AltaGas’s

existing corporate costs unless Washington Gas could demonstrate that the chargeable

costs were no higher than the costs Washington Gas recorded on its books in the last full

year prior to the merger. Mr. Welchlin recommended that the Commission revise

Condition 44 to specifically define “merger-related savings” as a “reduction in pre-merger

spending that occurred because of the merger that could not have been achieved but for the

merger.” (Emphasis added). The Commission considered and rejected suggestions to

modify Condition 44 to require Washington Gas to compute “merger-related savings”

based upon actual cost savings using the 2016 pre-merger baseline. Based upon our review

of the record of both proceedings, the Commission’s interpretation of Condition 44 in the

48 ratemaking administrative proceeding is consistent with its discussion and analysis of that

condition in the merger administrative proceeding—in which it considered and rejected

entreaties to modify the definition of “merger-related savings” in Condition 44 to mean

actual cost savings.

We turn next to OPC’s argument that, if Condition 28 is not intended to serve a

ratemaking function—and is instead simply an informational filing, as asserted by the

Commission and Washington Gas—it is meaningless. The Commission and Washington

Gas assert that the annual filings required by the Commission are not meaningless and

serve important functions. During oral argument, counsel for the Commission explained

that the Commission regularly imposes annual filing conditions on public service

companies that are reviewed by Commission Staff in its accounting division.28 We cannot

determine, based upon this record, that the Commission’s explanation that Condition 28 is

an annual informational filing29 and was not intended to ensure that Washington Gas’s

corporate costs would not increase from its pre-merger levels in 2016, is arbitrary or

capricious. We observe that the General Assembly requires that public service companies

28 In response to questions from the Court, counsel for the Commission explained the purpose of annual reports such as the report required by Condition 28. He explained that the reports are reviewed by the Commission Staff’s accounting division, who have the authority to bring any concerns to the Commission’s attention. 29 The record of the merger administrative proceeding supports this explanation. For example, in its post-merger-hearing brief, Commission Staff stated that, through Condition 28, “Washington Gas has committed to make an annual informational filing[.]” Commission Staff also stated that “[t]he side-by-side comparison that would be filed annually [pursuant to Condition 28 is] intended to be informational only.” 49 file with the Commission annual reports that must conform to any similar federal regulatory

requirements, and those reports must contain detailed information covering a variety of

financial, operational, and regulatory matters. See PU § 6-201, et seq. In this case,

Washington Gas filed an annual report in accordance with Condition 28. Although the

information in Condition 28 could have been used to compute “merger-related savings,”

nothing in Condition 44 indicated that it was required. As discussed in detail above,

Commission decisions are prima facie correct and shall be affirmed unless clearly shown

to be arbitrary or capricious. The Commission has provided a rational explanation for

including Condition 28 in the Merger Order, and we determine that OPC has not satisfied

its high statutory burden by clearly showing that the explanation is arbitrary or capricious.

Finally, we cannot say on this record that the Commission’s interpretation of its

Merger Order in this case is inconsistent with its prior merger cases. As discussed above,

in the merger proceeding, the Commission specifically commented on the concerns

expressed by some individuals that post-merger synergy savings would be “too vague to

quantify” in future rate cases and rejected recommendations to add more restrictive

language to the condition that would tie “merger-related savings” to an actual reduction in

costs from the 2016 baseline. The Commission made a specific reference to the

“Exelon/Constellation” merger, and distinguished this merger based upon the information

that Washington Gas had provided to demonstrate synergy savings. The Commission

explained that “unlike . . . most merger situations which do not realize synergy savings for

years after closing, the Applicants are applying these savings to ratepayers beginning in

50 the first year.” The Commission therefore found that “synergy savings will result in direct

ratepayer benefits.”

The record in the merger administrative proceeding reflects that the Commission

considered arguments similar to those advanced by OPC here and rejected them. No

petition for judicial review was filed in connection with the Commission’s final decision

in the merger administrative proceeding. In the context of the rate administrative

proceeding, OPC has not overcome the prima facie correctness of the Commission’s

interpretation of its own Merger Order by clearly showing that the Commission interpreted

Condition 44 in a manner that is arbitrary or capricious.

IV

Conclusion

For the reasons set forth herein, we hold as follows:

1. When undertaking judicial review of a Commission’s decision approving a

public service company’s application for a rate increase, a reviewing court is to apply an

arbitrary or capricious standard of review to the Commission’s interpretation of its own

prior order approving the acquisition of the public service company.

2. The Commission’s interpretation of its own Merger Order in connection with

Washington Gas’s application for a rate increase was not arbitrary or capricious.

JUDGMENT OF THE APPELLATE COURT AFFIRMED. COSTS TO BE PAID BY THE PETITIONER.