Md. Office of People's Counsel v. Md. Pub. Serv. Comm'n ( 2018 )

Maryland Office of People’s Counsel, et al. v. Maryland Public Service Commission, et
al.
No. 15, September Term 2017
Public Utilities – Public Service Commission – Acquisition of Electric Company –
Consideration of Acquisition Premium. Under Maryland law, the Public Service
Commission is charged with reviewing the proposed acquisition of an electric company in
the State to ensure that the acquisition is “consistent with the public interest, convenience,
and necessity, including benefits and no harm to consumers.” The Commission acted
within its delegated discretion and was not arbitrary or capricious when it approved the
acquisition of Pepco Holdings, Inc. and its utility subsidiaries by Exelon Corporation
without finding that an “acquisition premium” paid by Exelon caused consumer harm or
was inconsistent with the public interest. Maryland Code, Public Utilities Article, §§3-
203, 6-105(g).
Public Utilities – Public Service Commission – Acquisition of Electric Company –
Consideration of Effect on Alternative Generation Markets. Under Maryland law, the
Public Service Commission is charged with reviewing the proposed acquisition of an
electric company in the State to ensure that the acquisition is “consistent with the public
interest, convenience, and necessity, including benefits and no harm to consumers.” The
Commission acted within its delegated discretion and was not arbitrary or capricious when
it approved the acquisition of Pepco Holdings, Inc. and its utility subsidiaries by Exelon
Corporation and determined that alleged harm to renewables and distributed generation
markets was speculative. Maryland Code, Public Utilities Article, §§3-203, 6-105(g).
Circuit Court for Queen Anne’s County
Case No. 17-C-15-019974
Argument: October 10, 2017
IN THE COURT OF APPEALS
OF MARYLAND
No. 15
September Term, 2017
MARYLAND OFFICE OF PEOPLE’S COUNSEL,
ET AL.
V.
MARYLAND PUBLIC SERVICE COMMISSION,
ET AL.
_____________________________________
Barbera, C.J.
Greene
Adkins
McDonald
Watts
Hotten
Getty,
JJ.
______________________________________
Opinion by McDonald, J.
Watts, J., dissents.
______________________________________
Filed: August 29, 2018
2018-08-29
14:06-04:00
The Maryland General Assembly has determined that an acquisition of a company
that supplies electricity in the State, including a merger with another utility, should be
reviewed by the administrative body with specialized knowledge of utility markets and
energy generation and distribution – the Respondent Public Service Commission
(“Commission”). The Commission must assess whether such a transaction is “consistent
with the public interest, convenience, and necessity, including benefits and no harm to
consumers.” The Legislature has identified specific issues for the Commission to consider,
and has also given the Commission discretion to examine other matters that the
Commission may find pertinent to its assessment. After it has completed its analysis, the
Commission is to either approve, reject, or set conditions for approval of the transaction.
The General Assembly has provided for judicial review of such decisions of the
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.
This case concerns the Commission’s approval of the acquisition of Respondent
Pepco Holdings, Inc. (“PHI”) and its utility subsidiaries by Respondent Exelon
Corporation (“Exelon”). Petitioners, the Office of People’s Counsel (“People’s Counsel”),
the Sierra Club, and Chesapeake Climate Action Network, have presented two questions
concerning the merits of the Commission’s decision. First, People’s Counsel raises the
question whether the Commission was required to regard an “acquisition premium” paid
by Exelon to PHI shareholders as part of the transaction as a harm to consumers or as
inconsistent with the public interest. Second, all Petitioners question whether the
Commission acted arbitrarily or capriciously in how it addressed alleged harms to the
distributed generation and renewable energy markets.
The Circuit Court for Queen Anne’s County and the Court of Special Appeals held
that the Commission acted within its authority when it approved the transaction. We agree.
I
Background
A. The Commission’s Authority over Utility Mergers
As a general rule, one must obtain prior authorization from the Commission to
acquire control of an electric company1 – a species of “public service company” under
Maryland law2 – that operates in the State. Maryland Code, Public Utilities Article (“PU”),
§6-105(e). To obtain that authorization, the acquirer is to submit an application to the
Commission containing detailed information about the transaction and providing certain
documentation. PU §6-105(f).
The Commission is to “examine and investigate” the application and to conduct any
necessary administrative proceedings for review of the application. PU §6-105(g)(1). The
applicant has the burden of persuading the Commission that the acquisition is “consistent
1
An “electric company includes, with certain exceptions not pertinent here, a
company that “physically transmits or distributes electricity in the State to a retail electric
customer.” PU §1-101(h).
2
PU §1-101(x).
2
with the public interest, convenience, and necessity, including benefits and no harm to
consumers.” PU §6-105(g)(3), (5). In connection with its review, the Commission is to
consider the following factors:
(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;
(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).
3
At the conclusion of any proceedings, the Commission is to issue a written decision
that is based on its consideration of the record of the proceedings and that states the grounds
for the conclusions it has reached. PU §3-113(a). If the Commission finds that the
applicant has borne its burden, the Commission is to issue an order granting the application.
PU §6-105(g)(3)(i). The Commission may condition its approval of a transaction. PU §6-
105(g)(3)(ii). If the Commission finds that the burden is not met, it is to issue an order
denying the application. PU §6-105(g)(4).
B. The Transaction
1. The Companies
Exelon is a utility services holding company incorporated in Pennsylvania and
headquartered in Chicago, Illinois. Its principal subsidiaries before the merger at issue in
this case were Baltimore Gas & Electric (“BGE”), a Maryland public utility; PECO
Energy Company, a Pennsylvania public utility; Commonwealth Edison Company, an
Illinois public utility; and Exelon Generation Company, LLC (“Exelon Generation”).
Together, the three utility subsidiaries provide electricity service to 6.6 million customers,
of whom about 1.2 million are in Maryland. They also provide natural gas distribution
service to more than 1 million customers, of whom about half are in Maryland. Exelon
Generation operates Exelon’s generation business, including its generation fleet and
Constellation, its wholesale energy marketing and competitive retail sales business. Many
of Exelon’s generation assets rely on nuclear power.
4
PHI is a utility services holding company incorporated in Delaware and
headquartered in Washington, D.C.3 PHI owns three public utilities – Potomac Electric
Power Company (“Pepco”), Delmarva Power & Light Company (“Delmarva”), and
Atlantic City Electric Company (“ACE”). Pepco delivers electricity to customers in
Montgomery County and Prince George’s County, as well as the District of Columbia.
Delmarva delivers electricity to the Eastern Shore of Maryland and Delaware.4 ACE
delivers electricity in New Jersey, but not in Maryland. Together, the three utility
subsidiaries of PHI provide electricity service to about 1.8 million customers, of whom
about 1.3 million are in Maryland.5
2. The Merger Proposal
On August 19, 2014, Exelon and PHI submitted to the Commission an application
for approval of a proposed merger between the companies. Exelon proposed acquiring
PHI in a cash-for-stock transaction for $27.25 per share – a total of $6.8 billion. The
purchase price exceeded PHI’s book value at that time ($3.1 billion) as well as its average
market capitalization during the prior year ($5 billion based on an average stock price of
3
In connection with the transaction, PHI has changed its name and form of business
organization and is now known as Pepco Holdings, LLC.
4
Delmarva also distributes natural gas to about 126,000 customers living in
Delaware.
The subsidiaries of PHI that provide electric service in Maryland – Pepco and
5
Delmarva – are also Respondents in this appeal.
5
$19.94). After the merger, Exelon would provide electricity service to more than 80
percent of Maryland customers through its subsidiaries.
3. Commission Consideration of the Merger Proposal
More than 25 parties, including the Sierra Club and Chesapeake Climate Action
Network,6 Montgomery County, and Prince George’s County, the two counties where the
majority of PHI customers reside,7 petitioned to intervene in the Commission proceedings
concerning the merger application. Other participants in the proceedings included People’s
Counsel and the Commission’s Technical Staff (“Staff”).
Beginning in January 2015, the Commission held five hearings to receive public
comment and an initial 12 days of evidentiary hearings. The intervenors cited many
potential issues with the merger. We will not attempt to list them all, but will focus on
those germane to this appeal. According to some of the intervenors, Exelon’s nuclear
power assets posed financial risks due to safety concerns, and also created a conflict of
interest with respect to other types of energy production. This conflict existed with respect
to specific alternative sources of energy, such as solar or wind, as well as with respect to
the method by which energy is delivered to consumers (i.e., distributed generation vs.
wholesale markets). Another significant issue to those opposing the merger was market
6
The Sierra Club and Chesapeake Climate Action Network have filed joint briefs
and are represented by the same counsel. For ease of reference, we shall refer to them
collectively as “the Sierra Club” in this opinion.
7
The concerns of both Montgomery County and Prince George’s County were
apparently resolved during the course of the administrative proceeding and they appear as
Respondents supporting the position of the Commission and Exelon in this Court.
6
consolidation. There was concern that, if Exelon gained control over 80 percent of the
Maryland market through multiple affiliates, public policy might be disproportionately
shaped by Exelon’s interests as a vertically integrated electricity company. Some
intervenors preferred that PHI remain a company that had no affiliation with generation
assets. It was important to those parties that regulators be able to compare a “wires only”
company with a company associated with energy generation that might prefer a high price
for electricity. Several parties also raised concerns over the price Exelon offered to pay to
acquire PHI – the acquisition premium – describing it as a “windfall” to PHI’s
shareholders.
During the proceedings, Exelon amended its merger proposal to reflect
commitments reached in two settlement agreements with most of the intervenors, including
The Alliance for Solar Choice, and Montgomery County and Prince George’s County. The
Commission held five additional days of hearings in April 2015 to consider the settlements.
After considering the oral and written testimony along with other evidence, the
Commission approved the application, subject to conditions, by a three to two vote. On
May 15, 2015, the Commission issued an 86-page order explaining its decision, together
with a 48-page appendix setting forth the conditions for approval of the transaction (“PSC
Order”). The two dissenting members issued a 52-page dissenting opinion (“PSC
Dissent”). In the Matter of the Merger of Exelon Corporation and Pepco Holdings, Inc.,
Case No. 9361, Order No. 86990, 2015 WL 5566183 (May 15, 2015).
The Commission found that, contrary to the objections of some intervenors, the
merger would not diminish the Commission’s regulatory authority, would not create
7
disincentives to distributed and renewable energy sources, and would not cause an increase
in rates. The Commission concluded that, when subject to the conditions set forth in the
Commission order, the merger was “consistent with the broader public interest [and] will
bring specific and measurable benefits and no harm” to Maryland consumers, including
increased service reliability and lower rates (compared to what rates would be without the
merger). PSC Order at 2. The Commission premised its approval of the acquisition on
various conditions including, among other things: “ring-fencing,” local control, and
affiliate protections to ensure that PHI utilities’ assets are protected from risks incurred by
Exelon’s generation business; a one-time $100 consumer rate credit totaling $66 million;
an investment of $43 million in energy efficiency programs; a payment of $14.4 million to
Green Sustainability Funds for Montgomery and Prince George’s counties; a $4 million
investment in workforce development programs; and construction of renewable energy
facilities. PSC Order at A-1 – A-48. The Commission also retained the right to order
Exelon to divest itself of assets and operations of Delmarva and Pepco in Maryland under
specified circumstances. PSC Order at 49, A-37 – A-38. The dissenting Commissioners
disagreed, citing many of the alleged harms described by intervenors.
4. Judicial Review of the Commission Decision
In June 2015, several intervenors who had opposed the merger before the
Commission and had not entered into one of the settlements sought judicial review of the
Commission’s decision in the Circuit Court for Queen Anne’s County. On January 8, 2016,
the Circuit Court issued an opinion affirming the final decision of the Commission. The
Circuit Court declined to stay the transaction.
8
People’s Counsel and the Sierra Club noted appeals to the Court of Special Appeals,
but did not seek a stay to prevent the merger from closing. In the meantime, following the
District of Columbia Public Service Commission’s approval of the merger, the transaction
closed in March 2016.
On January 27, 2017, the Court of Special Appeals affirmed the decision of the
Circuit Court in an unreported decision. 2017 WL 382886 (2017). People’s Counsel and
the Sierra Club filed petitions for certiorari, which we granted. The Commission, Exelon
and its subsidiaries, as well as Montgomery and Prince George’s counties, have appeared
as Respondents.
The Petitioners have posed two questions, which we rephrase as follows:
(1) Did the Commission err as a matter of law, or act arbitrarily or
capriciously, when it failed to consider the acquisition premium
Exelon paid to PHI shareholders as inconsistent with the public
interest or as a harm to consumers?
(2) Was the Commission’s assessment of the alleged harms to the
renewable and distributed generation markets arbitrary or
capricious?
II
Discussion
A. Standard of Review
1. Review of a Commission Decision
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 of the Court of Special Appeals.
Accokeek, Mattawoman, Piscataway Creeks Community Council, Inc. v. Public Service
9
Commission, 451 Md. 1, 11 (2016). Accordingly, we review directly the Commission’s
decision and apply the same standard of review as those courts did.
2. General Standard of Review for Commission Decisions
There is a statute that sets forth the standard for judicial review of Commission
actions. It 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;
(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 the specified defects. In this case, Petitioners do not contend that the
Commission’s decision was unconstitutional, outside of its statutory authority or
jurisdiction, or made as a result of an unlawful procedure. Rather, they contend that the
Commission decision is legally erroneous and arbitrary or capricious in specific respects.
It has often been said that the standard of review of Commission decisions is
“consistent with the standard of review applicable to all administrative agencies.” E.g.,
10
Office of People’s Counsel v. Public Service Commission, 355 Md. 1, 15 (1999); Town of
Easton v. Public Service Commission, 379 Md. 21, 31 (2003). The standard of review set
forth in PU §3-203 is certainly consistent with that applied to other administrative agencies
under Maryland Administrative Procedure Act (“APA”), which does not apply to the
Commission. In particular, the specified 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. See Maryland Code, State Government Article, §§10-203(a)(3)(v), 10-222(h).
However, PU §3-203 also appears to be a more deferential standard in some respects
compared to the standard of review under the APA. In particular, with respect to decisions
of the Commission, 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.”
That language is absent from the APA’s provision concerning judicial review. The
distinction does not appear to be unintended. The statute establishing the Commission
preceded the APA and the APA provision concerning judicial review was enacted just two
years after enactment of the current version of the judicial review provision in the
Commission’s statute.8 See Mid-Atlantic Power Supply Ass’n v. Public Service
8
When the Commission was originally created more than a century ago, the General
Assembly provided that, in court proceedings arising out of decisions of the Commission,
“the burden of proof shall be upon the party adverse to the … Commission, to show by
clear and satisfactory evidence that the … order of the Commission … is unreasonable or
unlawful ….” Chapter 180, §46, Laws of Maryland 1910. That provision was carried
forward in subsequent iterations of the law governing the Commission. See 1939 Maryland
Code, Article 23, §420; 1951 Maryland Code, Article 78, §78.
The current language of the judicial review provision first appeared in the 1955
revision of the law governing the Commission. Chapter 441, Laws of Maryland 1955. In
11
Commission, 361 Md. 196, 214 (2000). (“Had the Legislature intended that the standard
for judicial review of … Commission proceedings be the same as … under the APA, it is
inconceivable that it would have excluded the … Commission from the APA”).
In giving meaning to this language in PU §3-203 without rendering it surplusage,9
we believe that it calls for a court to 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,10 mixed questions of law and fact,11 and the
1998, it was recodified as part of what is now the Public Utilities Article without
substantive change. Chapter 8, Laws of Maryland 1998.
The State Administrative Procedure Act was first enacted in 1957. Chapter 94,
Laws of Maryland 1957.
9
Mid-Atlantic Power Supply Ass’n v. Public Service Commission, 361 Md. at 215(“statutes are to be read to give meaning to every word used and to do otherwise
contravenes this cardinal rule of statutory construction”); GEICO v. Insurance
Commissioner, 332 Md. 124, 132 (1993) (a statute should not be read “to render … any
portion of it meaningless, surplusage, superfluous or nugatory”).
10
Town of Easton, 379 Md. at 30 (“a decision of the Commission ... will not be
disturbed on the basis of a factual question except upon clear and satisfactory evidence that
it was unlawful and unreasonable”); Communication Workers of America v. Public Service
Commission, 424 Md. 418, 411 (2012) (“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.”) (citation omitted).
11
Office of People's Counsel, 355 Md. at 14 (referring to the more deferential
standard applied to “mixed questions of law and fact”). Chesapeake & Potomac Telephone
Co. of Maryland v. Public Service Commission, 230 Md. 395, 411 (1963) (noting that, even
when the Commission’s factual findings “leave much to be desired,” affirmance of its
decision is appropriate when “the path which it followed can be discerned”) (quoting
Baltimore Transit Company v. Public Service Commission, 206 Md. 533, 545 (1955)).
12
construction of particular statutes administered, and regulations adopted, by the agency.12
On those questions on which a court does not typically defer to an agency – general
questions of law, jurisdiction and constitutionality – PU §3-203 requires no greater
deference to the Commission than any other agency. Such legal questions “are completely
subject to review by courts.”13 In sum, with respect to the Commission, “this Court has
tended to accord particular deference (though not total deference) to PSC decisions.”
Accokeek, Mattawoman, Piscataway Creeks Community Council, Inc., 451 Md. at 12; see
also Baltimore Gas & Elec. Co., 305 Md. at 170 (recognizing that this Court has
“consistently held that Commission orders enjoy a high degree of judicial deference on
review”) (citations omitted).
B. Whether the Commission Should Have Concluded that the Acquisition Premium
Was a Consumer Harm or Was Inconsistent with the Public Interest
The initial issue, raised by People’s Counsel alone, concerns the price Exelon paid
PHI shareholders to purchase their shares and obtain control of PHI. It is undisputed that
Exelon paid a premium to acquire PHI – referred to the “acquisition premium” – but there
is disagreement to some extent on the amount of the acquisition premium and, in any event,
12
Baltimore Gas & Electric Co. v. Public Service Commission, 305 Md. 145, 161-
62 (1986) (contemporaneous interpretation of statute by agency charged with its
administration entitled to “great deference”); Communication Workers of America, 424
Md. at 434 (although not dispositive, agency’s interpretation of statute entitled to “some
deference”).
13
Communications Workers of America, 424 Md. at 433-34; Town of Easton, 379
Md. at 30.
13
whether the acquisition premium is significant for purposes of the Commission’s review
under PU §6-105. People’s Counsel argues that the acquisition premium was a harm to
consumers and was inconsistent with the public interest.
1. Defining the Acquisition Premium
As the label implies, the purpose of paying an acquisition premium – sometimes
called a “control” or “takeover” premium – is to acquire control of a company. The price
paid to PHI shareholders, including the acquisition premium, reflects what Exelon thought
was necessary for PHI management and shareholders to approve Exelon’s offer to purchase
the company. The purchase price here included a premium because it exceeded the
company’s market valuation prior to the announcement of the transaction.14
Such premiums are typical in any acquisition of a publicly traded company. See
Lynn A. Stout, Are Takeover Premiums Really Premiums? Market Price, Fair Value, and
Corporate Law, 99 Yale L.J. 1235, 1259-60, 1264-67 (1990). At any given market price
for a share of stock, there will be shareholders who do not wish to sell because they place
a greater value on the stock than the current market clearing price. That category of
shareholder, and the value they place on their shares, is likely to grow if word gets out that
someone wishes to buy all shares to take control of the company. Thus, if Exelon had
attempted to purchase a controlling interest at the market price on the open market, it would
14
People’s Counsel would also compute the premium as the excess of the purchase
price over book value of PHI and makes references to both measures of the acquisition
premium in its briefs. Ultimately, People’s Counsel argues that it is unnecessary to pick
one or the other to resolve this case.
14
have driven the market price higher, encouraging some shareholders to “hold out” for even
higher prices. Recognizing this dynamic, an acquirer may bring its proposed premium
directly to the acquired company’s board to avoid the time, expense, and uncertainty of
attempting to acquire a company one share at a time. There is thus always likely to be an
“acquisition premium” above the market clearing price when an acquirer seeks to take
control of a company by purchasing its shares.
The purchaser’s willingness to pay the acquisition premium presumably depends on
the benefits it anticipates from the acquisition. In a merger situation, such benefits are
often referred to as “synergies” resulting from the combination of the separate entities. It
may also be the case that, when the company being acquired holds a monopoly position
and the acquisition may enhance the monopoly position of that company or of the acquirer,
part of the premium may represent the value of the enhanced monopoly position. In the
case of a utility, a regulated monopoly, the company’s monopoly position is partly the
result of the company’s franchise – an aspect of the business imbued with the public
interest, as public policy otherwise discourages enhancement of monopoly status. See
Maryland Code, Commercial Law Article, §11-201 et seq. (Maryland Antitrust Act).
2. The Applicable Standard of Review for this Issue
An initial question is the standard of review. People’s Counsel argues that the
Commission erred as a matter of law in failing to consider the acquisition premium as a
harm to consumers or as inconsistent with the public interest. In framing the question in
that way, People’s Counsel is urging that we apply the least deferential standard of review
to the Commission’s decision. However, it has also argued that the Commission’s “failure
15
to make any findings whatsoever on the appropriate treatment of the [acquisition premium]
renders its decision arbitrary or capricious” – a standard more deferential to the
Commission.
In our view, the latter standard of review applies here. As explained above, the fact
that the acquisition of an electric company is likely to involve payment of an acquisition
premium to the departing shareholders is nothing new and hardly unexpected. See Electric
Public Utilities Co. v. West, 154 Md. 445 (1928) (review of Commission decision
concerning utility acquisition that involved premium). Yet the Legislature did not include
it in the list of specific factors that the Commission is required to consider under PU §6-
105(g)(2)(i)-(xi).
There is one reference to shareholders in the list of factors that the Legislature
included in the statute: the Commission is to assess “the projected allocation of any savings
that are expected to the public service company between stockholder and rate payers [.]”
PU §6-105(g)(2)(v). This is a clear legislative command that the public interest requires
an evaluation of the split of the anticipated benefits, presumably expressed in dollar terms,
between consumers and shareholders of the resulting consolidated company. However, the
funds that are to be allocated are the “savings that are expected to the public service
company.”
The acquisition premium is not itself “savings,” nor is it “expected” (as the amount
of the premium is already known at the time of the application). Furthermore, in the case
of a cash-for-stock transaction, such as this one, the acquisition premium is not received
by the acquired public service company, but is paid directly to the departing shareholders.
16
It appears that the Legislature was requiring the Commission to consider the allocation of
merger synergies resulting from the transaction, not necessarily the acquisition premium
paid to effect the transaction.15
This is not to say that the two concepts are unrelated. The acquirer may intend to
recover any premium paid to departing shareholders from future savings generated by the
consolidation. In that respect, the amount of the acquisition premium that the acquirer is
willing to pay may depend in part on the proportion of the expected savings allocated to
the consolidated entity.
In any event, the acquisition premium might also affect some of the other
considerations listed in the statute. For example, a large premium could weaken the
15
The Dissenting Opinion believes that PU §6-105(g)(2)(v) requires the
Commission to consider the acquisition premium in terms of an allocation of benefits
between ratepayers and shareholders of the company being acquired in the transaction
(PHI) as opposed to the shareholders of the surviving company (Exelon). Dissenting slip
op. at 5-6. It suggests that the Commission did so in a prior case – In the Matter of the
Merger of Exelon Corp. and Constellation Energy Corp. 103 Md. PSC 22, 201 WL
833884, Case 9271, Order 84698 (February 17, 2012) (“PSC Constellation Order”). See
Dissenting slip op. at 6-7.
It is certainly true that the Commission was aware of the acquisition premium in the
prior case as the Commission referred to it – as well as to the fees paid to bankers, lawyers,
accountants, and others – in the introductory portion of the order in that case. PSC
Constellation Order at pp. 34-35. However, when the Commission analyzed the allocation
of expected merger savings pursuant to PU §6-105(g)(2)(v) in that case, it did not refer to
the acquisition premium but rather to the allocation of synergy savings. See PSC
Constellation Order at pp. 90-91. It is also notable that, in doing so, the Commission
referred to the allocation of expected savings between the ratepayers and shareholders who,
because the acquisition resulted from a stock-for-stock transaction, became shareholders
of the surviving company as a result of the transaction (unlike the PHI shareholders in the
cash-for-stock transaction in this case).
17
proposed capital structure of the new entity, depending on how the acquisition is financed.
It could also discourage future investments or encourage later cost-saving lay-offs to make
up the expense. But these effects do not come from the acquisition premium alone. The
acquisition premium is one of many facts that may apply to the statutory considerations.
People’s Counsel has not indicated how the Commission should have considered the
acquisition premium as it would relate to the enumerated factors in the statute.
There is no indication in PU §6-105 that the Commission is required to consider the
acquisition premium in its analysis. There is no other applicable law that requires the
Commission to consider the acquisition premium. Of course, the final catch-all provision
of the statute authorizes the Commission to consider “any other issues the Commission
considers relevant …” and the acquisition premium could be such an issue. PU §6-
105(g)(2)(xii).
In sum, while the absence of the acquisition premium from the list of factors in PU
§6-105(g)(2) does not foreclose the Commission from exercising its discretion to consider
the acquisition premium as part of its analysis, the Commission is not legally compelled to
do so. In that context, the appropriate standard of review is whether the Commission was
“arbitrary or capricious” in not considering the acquisition premium as a harm to
consumers or as contrary to the public interest. PU §3-203(4).
This Court has characterized the arbitrary or capricious standard as similar to the
standard under federal administrative law,16 in that one challenging an agency decision
16
See Maryland Department of Environment v. Anacostia Riverkeeper, 447 Md. 88,
121 n.40 (2016) (recognizing that deference under federal standard is comparable). The
18
must show that the agency exercised its discretion unreasonably or without a rational basis.
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.
Communication Workers of America, 424 Md. at 434 (“[W]hen 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 which] we
owe a higher level of deference.”) (quotation marks and citation omitted). It is not a
standard easily defined. Harvey, 389 Md. at 297. Courts may look for consistency with
the policy goals stated in the pertinent statutes or regulations and with the agency’s past
decisions. Id. at 302-3. Because the standard is highly contextual, neither of these is a
precise measuring stick. 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.
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 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 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).
19
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. We apply this standard in assessing whether the
Commission properly considered the factors listed in PU §6-105(g)(2) and exercised its
discretion as to what weight to accord factors other than those specifically listed in the
statute.
3. Application in this Case
In its order in this case, the Commission noted that the ratio of the credits provided
to ratepayers in connection with the transaction compared to the acquisition premium paid
to the selling shareholders was within the range of such ratios in previous transactions
approved by the Commission. PSC Order at 67. It also noted that Exelon had committed
not to seek to recover the acquisition premium and its other transaction costs in the rates
charged by its utility subsidiaries. Id. at 69. As one of the conditions for its approval of
the transaction, the Commission required that Exelon adhere to that commitment. Id. at A-
39. However, the Commission did not otherwise address the acquisition premium in its
analysis of consumer harm or the public interest.17
The question then is whether the Commission was arbitrary or capricious in failing
to treat the acquisition premium as a consumer harm or as inconsistent with the public
17
The two dissenting members of the Commission argued that there was a “severe
inequity” between the benefit of the merger to ratepayers compared to the benefit received
by the departing PHI shareholders who were paid the acquisition premium and that it would
be “appropriate for the Commission to consider and remedy” this inequity. PSC Dissent
at D-43 – D-44.
20
interest. One possibility would be if the Commission deviated, without adequate
explanation, from a long-standing practice of treating acquisition premiums as consumer
harms. See Frederick Classical Charter School, Inc. v. Frederick County Board of
Education, 454 Md. 330, 406-7 (2017) (agency cannot casually ignore prior policies and
standards). However, as noted above, in its decision in this case, the Commission
considered whether this premium was in line with acquisition premiums in previous
applications and found that it was within that range. And, as in prior cases, it prohibited
the acquiring company from recovering the acquisition premium from ratepayers. As far
as we can tell, under those circumstances, the Commission has never considered the
acquisition premium as a consumer harm. It was not unreasonable for the Commission to
maintain a view consistent with its prior decisions.
Although a long-held view of an agency could be arbitrary or capricious if it is
illogical, that is not the case here. It is difficult to see how consumers are necessarily worse
off as a result of the payment of a premium, or would necessarily be better off if an
acquiring company paid a smaller premium. While the acquiring company might have
spent part of a premium for the benefit of consumers, it could also have simply issued a
larger dividend to its own shareholders. Moreover, the same could be said for any of the
other transaction costs involved in executing a merger, such as legal and accounting fees.
In an effort to relate the payment of the premium to consumer harm, People’s
Counsel analogizes this situation to cases where the sale of tangible property by a utility
created a customer entitlement. It is true that ratepayers have an interest in the property of
a utility in some circumstances. See, e.g., Washington Gas Light Co. v. Public Service
21
Commission, 450 A.2d 1187, 1238-39 (D.C.Ct.App. 1982) (excess propane sold at a
profit); Democratic Cent. Comm. of Dist. of Columbia v. Washington Metro. Area Transit
Comm'n, 485 F.2d 786, 808-11, 822 (D.C. Cir. 1973) (“WMTC”), cert. denied, 415 U.S.
935 (1974) (land that could no longer be used for the intended purpose).18 However, this
is because the property either has been included in the rate base or would have been if the
property were sold at a loss. The Commission has adopted a similar approach in its own
decisions. See, e.g., In re Chesapeake & Potomac Tel. Co, of Md., 74 Md. PSC 595, 618,
1983 WL 911083, Case 7735, Order 66504 (December 30, 1983) (recognizing that because
real property and taxes paid on it were part of the rate base, proceeds from sale should
benefit ratepayers). However, the Commission has not taken this approach with the sale
of stock in a utility. See In the Matter of the Current and Future Financial Condition of
Baltimore Gas and Electric Company, 100 Md. PSC 348, 2009 WL 3817449, Case 9173,
Order 82986 (October 30, 2009) (proposed cash-for-stock acquisition); In the Matter of the
Application FirstEnergy Corp. and Allegheny Energy Corp., 102 Md. PSC 11, 2011 WL
722020, Case 9233, Order 83788 (January 18, 2011) (proposed stock-for-stock merger); In
18
Although land is not consumed in the course of providing utility service, the D.C.
Circuit reached this result by analogizing depreciation with the related concepts of
obsolescence and depletion. The land at issue in that case had been incorporated into the
rate base earlier, but was excluded after it could no longer serve its original purpose. 485
F.2d at 788-89. Because ratepayers would have been responsible if the land were sold at a
loss, “[e]lemental justice require[d]” ratepayers share in the proceeds even after being
reimbursed what they had previously paid through fares. Id. at 811 n. 227. Compare Boise
Water Corp. v. Idaho Pub. Utilities Comm'n, 578 P.2d 1089, 1092-93 (Idaho 1978)
(distinguishing WMTC based on shareholders having provided the initial capital for the
property in question while ratepayers did so in WMTC); see also Philadelphia Suburban
Water Co. v. Pennsylvania Pub. Utility Comm’n, 427 A.2d 1244, 1247-48 (Pa. 1981).
22
the Matter of the Merger of Exelon Corp. and Constellation Energy Corp. 103 Md. PSC
22, 2012 WL 833884, Case 9271, Order 84698 (February 17, 2012) (proposed stock-for-
stock merger).
The Commission’s approach is not unreasonable. Unlike tangible property owned
by the utility, shares of stock represent an ownership interest in the utility. They are not
depreciable assets because they do not have a finite useful life. They are not consumed in
the course of providing utility service. Shares of utility stock are not part of the rate base
and the risk and reward of a fluctuating stock price does not lie with the ratepayer. Indeed,
one of the express conditions adopted by the Commission for approval of this merger is
that recovery of the acquisition premium will not be included in the ratemaking structure
– consistent with the Commission’s approach in previous orders.
People’s Counsel also argues that permitting the departing shareholders to receive
the entire acquisition premium violates longstanding notions of the public interest.
According to People’s Counsel, although acquisition prices of non-regulated19 businesses
are primarily determined by market forces, the primary consideration here must be the
public interest because that is the foundation of utility regulation.
It is true that the public interest is important to nearly everything a utility does.
However, “the use of the words “public interest” in a regulatory statute is not a broad
license to promote the general public welfare. Rather, the words take meaning from the
19
This term is somewhat of a misnomer, as all businesses are subject to regulation
in some form. Presumably, it is used to distinguish between heavily regulated businesses
such as utilities and those with greater freedom to decide to refuse service or set prices.
23
purposes of the regulatory legislation.” NAACP v. Federal Power Commission, 425 U.S.
662, 669 (1976). Although an acquisition of a public service company must be consistent
with the public interest, it does not follow that public service companies cannot be market
participants capable of entering into transactions involving stock. People’s Counsel has
provided no authority to the contrary.
This is not to suggest that an acquisition premium can never be considered by the
Commission, either as a potential harm or as contrary to the public interest. The Legislature
has authorized the Commission to consider “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)(xii). In a particular case, the Commission may find that a
premium is so large that it poses a potential harm to consumers. For example, the
Commission could conceivably find that a very large premium is evidence that the acquirer
could not carry out the acquisition without laying off essential employees, or has unrealistic
expectations about future profits that risk consumer harm. In evaluating the credibility of
executives of an acquired company who testify in favor of a transaction, the Commission
could consider whether that testimony was influenced by any personal financial benefit
that they would receive from the acquisition premium. But those are determinations for
the Commission to make in its discretion under subparagraph (xii).
In sum, the Legislature has granted the Commission discretion to decide which
issues, in addition to those specified in the statute, are relevant in determining whether a
proposed merger or acquisition of a utility will harm consumers or be inconsistent with the
public interest. In its order in this case, the Commission discussed the issue of the
24
acquisition premium generally and resolved it consistently with its prior decisions. That
approach was not inconsistent with language of the statute that it was applying or with the
policy underlying it. The Commission’s limited discussion of the acquisition premium –
and the condition it placed on Exelon’s recovery of that payment – was not arbitrary or
capricious. It was within the Commission’s discretion to consider the issue to the degree
it did.
C. Whether the Commission was Arbitrary or Capricious in Evaluating Harm to
Renewable and Distributed Generation Markets
Both People’s Counsel and the Sierra Club assert that the Commission was arbitrary
or capricious in its assessment whether the merger would cause harm to consumers with
regard to markets for alternative energy generation. In particular, they argue that Exelon
has incentives to oppose technologies – such as renewable and distributed generation of
electricity20 – that could depress prices or challenge traditional power generation, while
PHI as an independent utility did not have the same incentive. They conclude that the
merger would therefore harm the markets for those technologies. In its decision, the
Commission acknowledged these contentions, but found the prospect “that Exelon may
20
Distributed generation refers to the generation of electricity by many small
sources – for example, by consumers with rooftop solar panels – as opposed to a single hub
like a power plant. Such technologies may compete with the traditional power generation
in which existing utilities have invested. See James Rathz, Nevada Rate Change Signals
the Start of Larger Utilities Battle, The Regulatory Review, (May 24, 2016) available at
https://www.theregreview.org/2016/05/24/rathz-nevada-rate-change-signals-the-start-of-
larger-utilities-battle/ (examining impact of falling costs of solar power and storage).
25
encourage BGE, Delmarva and Pepco to be resistant to other new grid developments, to be
little more than speculation” that did not rise to the level of harm. PSC Order at 39 n.186.
As indicated earlier, the assessment whether an agency decision is arbitrary or
capricious is a deferential standard in which a court may consider such things as the
agency’s expertise, policy goals stated in pertinent statutes or regulations, consistency with
the agency’s past decisions, and whether it is possible to follow the path of the agency’s
reasoning.
With respect to relevant policy goals, the General Assembly has recognized that
“[g]lobal warming poses a serious threat to the State’s future health, well-being, and
prosperity[.]” Maryland Code, Environment Article (“EN”), §2-1201(2).21 The State has
implemented a number of programs to combat climate change. These include net
metering,22 renewable energy portfolio standards (RPS),23 tax credits for renewable
energy,24 and markets for emissions allowances and renewable energy credits.25 Renewable
21
The General Assembly has created a Commission on Climate Change to advise
the Governor and General Assembly on ways to mitigate the causes of climate change. EN
§2-1301. The Department of the Environment is tasked with developing and finalizing
plans to reduce greenhouse gas emissions. EN §2-1201 et seq.
22
PU §7-306. Net-metering is a practice under which a utility charges a customer
that produces its own power only for the net difference between energy consumed and
energy produced by the customer. Whenever a customer produces more energy than it
uses, the utility essentially buys the extra power from the customer.
23
PU §7-701 et seq.
24
Maryland Code, Tax–General Article, §10-720.
25
EN §2-1002(g); PU §7-708.
26
energy, distributed generation, and related practices have the potential to advance
Maryland environmental policy. The Commission properly considered these issues
pursuant to the General Assembly’s directive that it take into account the public interest in
assessing an acquisition. In particular, in its order, the Commission found that Exelon’s
commitments to enhance certain interconnection protocols were consistent with the public
interest. PSC Order at 78-80. It also found that renewable energy developments provided
a benefit to all Maryland citizens, and were thus consistent with the public interest as well.
Id.
According to People’s Counsel and the Sierra Club, the Commission failed to
adequately discuss the potential harm of the transaction to consumers with respect to
alternative energy generation. However, the Commission’s findings with respect to loss of
voice, harm to the regulatory process, and related issues all relate to this issue as well. The
Sierra Club urges us to see these as distinct theories, but it is not dispositive that the
Commission made these findings in response to other alleged harms. These were presented
as related potential harms, all premised on Exelon abusing its status as a vertically
integrated electricity distribution monopoly. Although intervenors alleged multiple ways
that such power could manifest as harm, each is based on the market power Exelon would
obtain as a result of the transaction. The Commission was not required to repeat itself in
its fact findings and analysis when a reasoning mind can readily grasp the connection
between related issues.
It is indisputable that the Commission made fact findings that are applicable to this
issue. Specifically, the Commission found that PHI had existing incentives comparable to
27
Exelon’s to oppose disruptive technologies. PSC Order at 39-40. Indeed, the Commission
noted that both Delmarva and Pepco recently acted on these incentives by seeking
increased fixed charges for their customers. However, the Commission also found that
Exelon would continue to comply with the Commission’s orders and regulations, and that
the merger would not limit the Commission’s legal authority. Id. Nor would the
transaction undermine the Commission’s ability to exercise its “full regulatory powers”
over utilities. Accordingly, the Commission concluded that “if there is a public policy area
such as EmPOWER Maryland, distributed generation, or reliability and resiliency, where
sufficient initiatives are not being proposed by BGE, Delmarva and Pepco, the Commission
will be readily able to direct that such programs be proposed.” Id. At 39.
These findings provide support the Commission’s conclusion that harm to the
renewable and distributed generation markets by virtue of the merger was speculative.
These utilities have an incentive to preserve the status quo with or without the merger.
That incentive cannot manifest as harm without the relevant policymakers’ approval. The
Commission found that PHI was acting on that incentive even though it did not own
generation assets. The Commission also found that, although Exelon owns both generation
and distribution assets, it was complying with regulations that constrain acting on that
incentive. Regardless of whether the transaction was approved, the Commission would
retain its authority and ability to regulate the parties in future proceedings.
In regulating entities that operate in a dynamic and changing economy, the
Commission will be confronted from time to time with technological advancements that
may radically transform the business of the regulated entity or the service it provides. The
28
Commission will have to make judgments as to how and when to put its thumb on the scale
in steering such development consistent with the directions it receives from the Legislature.
Nearly a century ago, in a ratemaking case, the Commission was asked to approve an
increase in streetcar fares to counter the effect of a new technology – the automobile – on
the revenues generated by streetcar ridership. The Commission declined to do so. This
Court agreed that the Commission was not required to speculate on “extraordinary
obsolescence,” which the Court defined as “an extensive supersession of property used for
the transmission or the generation of power, or instrumentalities used for the transportation
of passengers.” West v. United Railways & Electric Co., 155 Md. 572, 605 (1928). The
Court stated that such developments “can be considered by the Commission in light of
actual facts and such allowance and adjustments made as may be proper under the
circumstances.” Id.In the same way, it was not arbitrary or capricious for the Commission to decline to
forecast future technological developments in the context of a merger application and to
rely on its regulatory authority to prevent harms to these emerging technologies regardless
of the existing and future incentives of Exelon and PHI to oppose such technologies.
29
III
Conclusion
Under PU §3-203, the decision of the Commission is treated as “prima facie
correct,” unless it can be “clearly shown” to suffer from one of several possible defects.
We cannot say that such a showing has been made in this case and, accordingly, must reach
the same conclusion as the Circuit Court and the Court of Special Appeals. We affirm the
Commission’s decision.
JUDGMENT OF THE COURT OF SPECIAL APPEALS
AFFIRMED. COSTS TO BE PAID BY PETITIONERS.
30
Circuit Court for Queen Anne’s County
Case No. 17-C-15-019974
Argued: October 10, 2017
IN THE COURT OF APPEALS
OF MARYLAND
No. 15
September Term, 2017
______________________________________
MARYLAND OFFICE OF PEOPLE’S
COUNSEL ET AL.
v.
MARYLAND PUBLIC SERVICE
COMMISSION ET AL.
______________________________________
Barbera, C.J.
Greene
Adkins
McDonald
Watts
Hotten
Getty,
JJ.
______________________________________
Dissenting Opinion by Watts, J.
______________________________________
Filed: August 29, 2018
Respectfully, I dissent. As President Franklin Delano Roosevelt stated: “The test of
our progress is not whether we add more to the abundance of those who have much; it is
whether we provide enough for those who have too little.” This case involves one utility
company’s acquisition of another, where the acquisition’s total benefits to Maryland’s
ratepayers were measurable in millions of dollars, while the acquisition’s benefits to the
acquired utility company’s stockholders exceeded a billion dollars.
I would hold that the Maryland Public Service Commission (“the Commission”),
Respondent, erred as a matter of law in failing to expressly address whether it was
consistent with the public interest for Maryland’s ratepayers to receive benefits from
Exelon Corporation (“Exelon”)’s acquisition of Pepco Holdings, Inc. (“Pepco”)1 that were
minimal compared to the $1.2 billion acquisition premium that Exelon paid Pepco’s
stockholders.2
1
Pepco Holdings, Inc. owns multiple utility companies, including Delmarva Power
& Light Company and Potomac Electric Power Company—which is also known as
“Pepco.” To clarify, I will refer to Pepco Holdings, Inc. as “Pepco.”
2
An acquisition premium is the difference between the value of all of the to-be-
acquired company’s stock when an acquisition is announced, and the higher price—i.e.,
the premium—that the acquiring company pays for all of the to-be-acquired company’s
stock. See In the Matter of the Merger of Exelon Corp. and Constellation Energy Grp.,
Inc., 103 Md. P.S.C. 22 (2012) (The Commission stated that an acquisition “certainly [was]
good for [the to-be-acquired company’s stock]holders — they [would] be paid a substantial
premium over the value of their shares at the time [that] the [acquisition] was announced.”
(Cleaned up)). Here, the $1.2 billion acquisition premium was the approximate difference
between the value of all of Pepco’s stock on April 29, 2014, when the acquisition was
announced (approximately $5.7 billion), and the higher price that Exelon paid for all of
Pepco’s stock (approximately $7 billion).
Before the Commission, as a witness for the Maryland Office of People’s Counsel,
Petitioner, a public utility rate consultant testified that the acquisition premium should have
been considered to be $1.842 billion, because the $1.2 billion figure failed to account for
(Continued...)
In its Order approving the acquisition, the Commission required Exelon to
contribute $109.2 million toward a Customer Investment Fund, which would be comprised
of $43.2 million for energy efficiency programs, and $66 million for a $100 rate credit for
each of Pepco’s residential ratepayers. The Commission observed that two stakeholders—
namely, the Maryland Office of People’s Counsel (“People’s Counsel”), Petitioner, and the
Maryland Energy Administration—contended that the $109.2 million Customer
Investment Fund was insignificant compared to the $1.2 billion acquisition premium. The
Commission reasoned that the ratio of the $109.2 million Customer Investment Fund to the
$1.2 billion acquisition premium was within “the range of ratios on which [the
Commission] ha[d] conditioned other mergers[.]” The Commission also rejected the idea
that the $66 million in rate credits was insufficient in light of past mergers and the $1.2
billion acquisition premium, determining that the $66 million in rate credits, “when
combined with other benefits in this case, appropriately balance[d] the allocation of short-
and long-term benefits to ratepayers[.]”
A review of the Commission’s Order reveals that, aside from noting that the ratio
of the Customer Investment Fund to the acquisition premium was similar to such ratios in
past cases, the Commission engaged in no analysis whatsoever as to the issue of whether
the acquisition’s benefits to ratepayers were sufficient in light of the $1.2 billion acquisition
premium. In my view, the Commission was required, but failed, to expressly address
the increase in the value of Pepco’s stock while it and Exelon were negotiating the
acquisition between January 28, 2014 and April 29, 2014. Because the acquisition
premium’s exact amount is not dispositive for purposes of the questions presented, I will
assume that the acquisition premium was $1.2 billion.
-2-
whether it was consistent with the public interest for there to be such a large disparity
between the acquisition’s benefits to ratepayers and the $1.2 billion acquisition premium.
I would reverse the Court of Special Appeals’s judgment and remand with instructions to
reverse the Circuit Court for Queen Anne’s County’s judgment, with instructions to vacate
the Commission’s Order and remand so that the Commission can expressly address
whether it was consistent with the public interest for ratepayers to receive benefits that so
minimally compared to the $1.2 billion acquisition premium.3
The relevant statute, Md. Code Ann., Pub. Util. (1998, 2010 Repl. Vol.) (“PU”) §
6-105 (Acquisition of Electric Company or Gas Company), provides as follows. To
acquire an electric company, a would-be acquiring company must file an application with
the Commission. See PU § 6-105(e)(1), (f). The Commission must determine whether
granting the application would be, among other things, “consistent with the public
interest[.]” PU § 6-105(g)(3)(i), (g)(4). If the Commission does not find that granting the
application would be consistent with the public interest, the Commission must deny the
application. See PU § 6-105(g)(4). PU § 6-105(g)(2) sets forth factors that the
Commission is required to consider, stating in pertinent part:
The Commission shall consider the following factors in considering an
acquisition under this section:
***
(v) the projected allocation of any savings that are expected to the
public service company between stockholders and rate[]payers;
3
I would not reach the second question presented, which pertains to the alleged
“harm to the distributed generation and renewable energy markets resulting from Exelon’s
acquisition of” Pepco.
-3-
***
(xii) any other issues [that] the Commission considers relevant to the
assessment of acquisition in relation to the public interest, convenience, and
necessity.
Here, two of the Commission’s five members dissented, stating that, under PU § 6-
105(g)(2)(v) and (xii), “it [was] appropriate for the Commission to consider and remedy
the hugely disparate allocation of benefits between” ratepayers and Pepco’s stockholders.
The dissenting members of the Commission explained:
Assuming [that] the [acquisition] is consummated, [Pepco’s
stock]holders will receive a $1.2 billion [acquisition] premium. In contrast,
ratepayers will receive approximately $66 million in rate credits[,] and $57
million in indirect energy efficiency programming funds [that are] directed
toward county and utility programs. Even if we credit the alleged synergy
savings[4] — $37 million for the first five years[,] and $17 million each
following year — the ratepayer benefits are dwarfed by the [acquisition]
premium. To put it another way, it would take ratepayers over sixty years of
recouping $17 million per year in synerg[y savings] to match the value [that
Pepco’s stock]holders — mostly non-Marylanders — received from selling
two Maryland utility franchises [— Delmarva Power & Light Company and
Potomac Electric Power Company —] to the highest bidder.
It is not consistent with the public interest for the vast majority of
benefits of the “franchise” — that is, the exclusive right [that is] granted by
the State to provide utility services to Maryland [ratepayer]s — to flow to
[Pepco’s] stockholders instead of ratepayers. The [Commission] should
have addressed this disparity[,] and either rejected the [acquisition] or
lessened this inequity by providing additional benefits to ratepayers.
(Emphasis added) (cleaned up).
4
Synergy savings are reductions in operating costs that result from one utility
company’s acquisition of another, in that the “combined companies will operate better and
more efficiently, and at considerable savings compared to the costs of operating
separately.” In the Matter of the Application of the Merger of FirstEnergy Corp. and
Allegheny Energy, Inc., 102 Md. P.S.C. 11 (2011).
-4-
I agree with the dissenting members of the Commission, and would conclude that
the Commission violated PU § 6-105(g)(2)(v) and (xii) by failing to expressly consider
whether it was consistent with the public interest for ratepayers to receive benefits that
were insignificant compared to the $1.2 billion acquisition premium. The issue of the
disparity between the acquisition’s benefits to ratepayers and the $1.2 billion acquisition
premium was “relevant to the assessment of acquisition in relation to the public interest[.]”
PU § 6-105(g)(2)(xii). Although it is up to the Commission to determine what is relevant
to such an assessment, see id., it is evident that the Commission deemed the $1.2 billion
acquisition premium relevant, given that the Commission mentioned the same twice when
summarizing the stakeholders’ contentions, as well as twice when explaining why it
approved of the acquisition. In any event, it is clearly “relevant . . . to the public interest,”
id., where an acquiring company pays a substantial acquisition premium to an acquired
utility company’s stockholders, while contributing a comparatively small amount toward
benefits to ratepayers.
I disagree with the Commission’s contention that PU § 6-105(g)(2)(v) pertains only
to synergy savings, and does not require the Commission to consider an acquisition
premium. PU § 6-105(g)(2)(v) states that the Commission must consider “the projected
allocation of any savings that are expected to the public service company between
stockholders and rate[]payers[.]” The “public service company” at issue is the to-be-
acquired public service company, and the “stockholders” at issue are those of that public
service company. Obviously, once the acquiring company pays the stockholders an
acquisition premium for their stock, the stockholders who are not ratepayers will not
-5-
benefit further from the acquisition in any way—whether through synergy savings or
otherwise. In other words, the synergy savings do not matter to most, if not all, of the
stockholders; the acquisition premium does. Accordingly, it would be nonsensical for PU
§ 6-105(g)(2)(v) to mean that the Commission must consider “the projected allocation of
[synergy] savings . . . between stockholders and rate[]payers”—because the stockholders
who are not ratepayers will not benefit from synergy savings at all. A commonsense
reading of PU § 6-105(g)(2)(v) is that the Commission must consider “the projected
allocation of any savings”—i.e., funds—that the acquiring company provides to ratepayers
on one hand, and the funds that the acquiring company provides to the to-be-acquired
public service company’s stockholders on the other hand.
Notably, in this case, the Majority is writing on a blank slate, in that this Court has
never analyzed PU § 6-105 before. Although the Commission has applied PU § 6-105 in
past acquisitions and the Commission’s decisions are entitled to deference, the
Commission’s decisions do not bind any court. That said, In the Matter of the Merger of
Exelon Corp. and Constellation Energy Grp., Inc., 103 Md. P.S.C. 22 (2012) is persuasive.
Exelon, id., demonstrates that the Commission should have expressly addressed whether it
was consistent with the public interest for ratepayers to receive benefits that were minimal
compared to the $1.2 billion acquisition premium. In Exelon, id., the Commission
determined that Exelon’s acquisition of Constellation Energy Group (“Constellation”)—
-6-
which, in turn, owned all of Baltimore Gas and Electric Company (“BGE”)’s stock5—was
consistent with the public interest. The Commission observed that Constellation’s
stockholders would “be paid a substantial premium over the value of their shares at the
time the deal was announced.” Exelon, 103 Md. P.S.C. 22 (cleaned up). The Commission
posed the following question: “[O]bviously[,] the [acquisition] is good for those who
have a personal or professional financial interest in the deal, but is it consistent with
the public interest?” Id. (emphasis added). Significantly, in answering that question in
the affirmative, the Commission considered the issue of “whether a $100 rate credit
sufficiently benefit[ted] BGE residential [ratepayer]s in light of the much higher
payments [that were] received by . . . [Constellation’s stock]holders.” Id. (emphasis
added). The Commission discussed the issue, and ultimately determined that it was not
necessary to require a higher rate credit, given that Exelon had made “commitments to fund
energy efficiency programs[.]” Id.
The Commission also addressed the matter of whether synergy savings would
benefit ratepayers. Id. The Commission noted that synergy savings are “inherently
5
In 1995, Constellation was formed with the intention that BGE and Potomac
Electric Power Company would merge into it. See Exelon, 103 Md. P.S.C. 22. In 1997,
however, BGE and Potomac Electric Power Company cancelled the merger because the
Commission had ordered that, for the merger to proceed, Constellation would have needed
to cut “electric rates by nearly $250 million over the next four years[,] and relinquish nearly
$200 million more in power costs [that were then] passed on to” ratepayers. Kevin L.
McQuaid, BGE, [Potomac Electric Power Company] Abandon Merger[:] Regulatory
Obstacles End Two-Year Quest, The Baltimore Sun (Dec. 23, 1997),
http://articles.baltimoresun.com/1997-12-23/news/1997357048_1_pepco-merger-bge
[https://perma.cc/33W4-E8GK]. In or after 1999, Constellation became the holding
company for BGE’s stock. See Exelon, 103 Md. P.S.C. 22.
(Continued...)
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speculative” and “too intangible to qualify as a benefit” to ratepayers under PU § 6-105.
The Commission concluded that PU § 6-105 “require[d] that BGE ratepayers receive at
least a portion of [synergy savings] as immediately and certainly as Constellation’s
[stock]holders.” Id. (emphasis added) (cleaned up). Accordingly, the Commission
ordered Exelon to contribute toward a Customer Investment Fund an amount that was equal
to half of the projected synergy savings. See id.6
Exelon, 103 Md. P.S.C. 22, indicates that, where an acquisition results in a
substantial acquisition premium, the Commission must expressly address whether the
acquisition’s benefits to ratepayers are sufficient to be consistent with the public interest in
light of the substantial acquisition premium. Here, the Commission failed to do so.
I am unpersuaded by In the Matter of the Proposed Merger of the Potomac Elec.
Power Co. and Delmarva Power and Light Co., 93 Md. P.S.C. 134 (2002) and In the Matter
6
Significantly, in a footnote in its discussion of synergy savings, the Commission
stated that PU § 6-105(g)(2)(v) “explicitly requires that [the Commission] consider the
allocation of benefits between ratepayers and [stock]holders.” Exelon, 103 Md. P.S.C. at
22 n.357 (emphasis added). The Commission’s use of the word “benefits,” which
generally has a broad meaning, supports the principle that PU § 6-105(g)(2)(v) does not
merely require the Commission to consider synergy savings; instead, PU § 6-105(g)(2)(v)
requires the Commission to consider all benefits to stockholders and ratepayers, including
both synergy savings and funds that are invested for the ratepayers’ sake. Indeed, in the
paragraph in which the footnote appears, the Commission ordered Exelon to invest millions
of dollars into a Customer Investment Fund. See id. at 22. Also, in the same paragraph,
the Commission referred to the “benefits” that “Constellation’s [stock]holders” would
“immediately and certainly” receive—which was ostensibly a reference to, among other
things, the acquisition premium that Exelon paid Constellation’s stockholders. See
id. Constellation was the to-be-acquired company, while Exelon was the acquiring
company. See id. In short, in Exelon, id., as explained above, the Commission considered
the synergy savings, as well as the allocation of benefits between ratepayers and
Constellation’s, the to-be-acquired company’s, stockholders.
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of the Merger of AltaGas Ltd. and WGL Holdings, Inc., ___ Md. P.S.C. ___, Case No.
9449, Order No. 88631, 2018 WL 1705968 (Apr. 4, 2018), which indicate that it is
improper for the Commission to consider an acquisition premium. These decisions are
inconsistent not only with Exelon, 103 Md. P.S.C. 22, in which the Commission expressly
considered an acquisition premium, but also with PU § 6-105(g)(2)(v) and (xii), which, as
discussed above, require the Commission to consider an acquisition premium.
In Potomac Elec. Power, 93 Md. P.S.C. 134, the Commission determined that
Potomac Electric Power Company’s acquisition of Delmarva Power & Light Company was
consistent with the public interest. The Commission rejected a contention by an opponent
of the acquisition that Potomac Electric Power Company had “failed to demonstrate that
[the acquisition agreement] adequately insulate[d] ratepayers from financial risks [that
were] associated with the substantial acquisition premium[.]” Id. The Commission
reasoned that the “acquisition premium [was] a transfer of wealth between [stock]holders
that ha[d] nothing to do with the cost of providing utility service.” Id.
In AltaGas, 2018 WL 1705968 at *22, the Commission determined that AltaGas
Ltd. (“AltaGas”)’s acquisition of Washington Gas Light Company (“Washington Gas”)
was consistent with the public interest. The Commission observed that People’s Counsel
raised the same contention regarding an acquisition premium that it did in this case, stating:
In the Exelon-[Pepco] merger proceeding, [People’s Counsel] raised
the novel theory that ratepayers should be entitled to a share of the acquisition
premium [that was] paid by the acquiring company (Exelon[]) to purchase
the regulated company (Potomac Electric Power Company[]). The
Commission declined to accept [People’s Counsel]’s arguments in that
proceeding, and the [] Court of Special Appeals rejected [People’s
Counsel]’s arguments on appeal. In the present case, [People’s Counsel] has
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reiterated its arguments, claiming that the “extreme disparity between
[stock]holder benefits flowing from the acquisition premium, and the rate
credits to Washington Gas [ratepayer]s” is contrary to the public interest,
which requires that AltaGas “make a payment equivalent to this amount to
Washington[] Gas’s Maryland [ratepayer]s[,] or to causes that will benefit
the Maryland public.” [A witness for People’s Counsel] further argued that
the merger “is a sale of public franchise for private gain” that necessitates a
contribution to ratepayers. Finally, [People’s Counsel] argued that the size
of the acquisition premium puts financial stress on AltaGas that could cause
harm to ratepayers.
Id. at *41 (cleaned up). The Commission rejected People’s Counsel’s contention regarding
the acquisition premium, reasoning:
We again decline to accept [People’s Counsel]’s arguments on this
matter. Pursuant to PU[] § 6-105[(g)(2)], we are required to consider eleven
specified factors in reviewing an acquisition. However, the acquisition
premium is not an enumerated factor, indicating that the General Assembly
did not intend that the Commission review the acquisition premium for
reasonableness[,] or as a source of additional [ratepayer] benefits. Of course,
[PU] § 6[-]105(g)(2)(xii) authorizes us to consider “any other issue[s that]
the Commission considers relevant to the assessment of acquisition in
relation to the public interest, convenience, and necessity.” Nevertheless, we
will not disturb our prior holding that the acquisition premium represents a
negotiated, private transfer of funds between [stock]holders[,] and is not
properly [a] source of funds to obtain further [ratepayer] benefits. This
[acquisition] is not the sale of the franchise[—]the Washington Gas franchise
remains where it always has been, with Washington Gas.
Id. These cases are not in accord with the Commission’s analysis in Exelon, 103 Md.
P.S.C. 22, and are inconsistent with PU § 6-105(g)(2)(v) and (xii).
The Commission’s contentions in this case are similar to its reasoning in AltaGas,
id. On brief, the Commission argues that PU § 6-105(g)(2) does not require it to consider
an acquisition premium. At oral argument, the Commission’s counsel disputed People’s
Counsel’s assertion that Exelon’s acquisition of Pepco constituted a sale of Pepco’s
franchises, stating: “[T]he franchise[s are] exactly where [they were] before this
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[acquisition]. [A] franchise is with [Potomac Electric Power Company], and [a] franchise
is with Delmarva [Power & Light Company]. . . . The franchise[s were] not sold to Exelon.”
On a related note, the Commission’s counsel asserted that the $1.2 billion acquisition
premium did not harm ratepayers because “the ratepayers don’t own [Pepco’s]
franchise[s].”
I disagree with the Commission’s interpretation of PU § 6-105(g)(2) in this case and
in AltaGas, 2018 WL 1705968, at *41. The circumstance that PU § 6-105(g)(2) does not
expressly mention acquisition premiums does not mean that the Commission may refrain
from considering them. To the contrary, as discussed above, PU § 6-105(g)(2)(v) and (xii)
require the Commission to consider acquisition premiums. I acknowledge that, as the
Commission’s counsel noted at oral argument, and as the Commission stated in AltaGas,
id., an acquisition of a utility company does not constitute a sale of the acquired utility
company’s franchise. Additionally, the Commission’s descriptions of acquisition
premiums in AltaGas, id. (An “acquisition premium represents a negotiated, private
transfer of funds between [stock]holders[.]”) and Potomac Elec. Power, 93 Md. P.S.C. 134
(An “acquisition premium is a transfer of wealth between [stock]holders that has nothing
to do with the cost of providing utility service.”) are accurate.
These observations by the Commission, however, are beside the point because they
ignore the Commission’s obligation to consider the public interest under PU § 6-
105(g)(2)(v) and (xii). An acquisition premium is not consistent with the public interest
simply because it will not increase “the cost of providing utility service” or otherwise harm
ratepayers, Potomac Elec. Power, id., or simply because the acquired utility company’s
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“franchise [will] remain[] where it always has been,” AltaGas, 2018 WL 1705968, at *41.
Where an acquisition results in a substantial acquisition premium, PU § 6-105(g)(2)(v) and
(xii) require the Commission to determine whether it is consistent with the public interest
for the acquiring company to pay so much to the acquired company’s stockholders, while
contributing so little toward benefits to ratepayers—for example, through a Customer
Investment Fund. By way of illustration, in Exelon, 103 Md. P.S.C. 22, where Exelon
sought to acquire Constellation, the Commission ordered Exelon to contribute toward a
Consumer Investment Fund an amount that was equal to half of the projected synergy
savings, so that ratepayers would “receive at least a portion of these benefits as immediately
and certainly as Constellation’s [stock]holders.” (Cleaned up). Similarly, here, the
Commission should have expressly addressed whether the disparity between the
acquisition’s benefits to Pepco’s stockholders and the acquisition’s benefits to ratepayers
was consistent with the public interest, and possibly should have, as the dissenting
members of the Commission aptly put it, “either rejected the [acquisition] or lessened this
inequity by providing additional benefits to ratepayers.”
At oral argument, the Commission’s counsel quoted the following passage in In the
Matter of the Current and Future Fin. Condition of Balt. Gas and Elec. Co., 100 Md. P.S.C.
348 (2009), in which the Commission approved Constellation’s sale of nearly half of
Constellation Energy Nuclear Group, LLC to Electricite de France International, S.A. for
$1 billion:
We could, we suppose, look at the fact that [Constellation] will
emerge from this [sale] with net proceeds on the order of one billion dollars
after retiring debt[,] and divert a large portion of those proceeds to rate relief.
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We will resist the temptation. [Constellation] is entitled to the fair proceeds
of a properly conditioned [sale], and [PU] § 6-105 does not give us unbridled
authority to restructure the deal or fundamentally alter its outcome.
Although Balt. Gas & Elec., id., involved a sale of less than half of a utility company
rather than an outright acquisition of a utility company—and thus did not involve an
acquisition premium—the Commission’s position appears to be that, just as it declined to
“divert a large portion of [] proceeds” of a sale “to rate relief” in Balt. Gas & Elec., id., the
Commission did not order Exelon to divert funds from the $1.2 billion acquisition premium
to rate credits in this case. To the extent that the Commission takes that position, it is a red
herring. The question is not whether the Commission had the authority to order Exelon to
lower the amount of the $1.2 billion acquisition premium. The question is whether it was
consistent with the public interest for Exelon to contribute only $109.2 million toward a
Customer Investment Fund, which was insignificant compared to the $1.2 billion
acquisition premium. The Commission erred as a matter of law by failing to expressly
address whether it was consistent with the public interest for ratepayers to receive benefits
that were minimal compared to the $1.2 billion acquisition premium. That failure
constituted a violation of PU § 6-105(g)(2)(v) and (xii), and requires reversal.
For the above reasons, respectfully, I dissent.
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