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...)

                                             -7-
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.

                                             -8-
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


                                             -9-
      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


                                          - 10 -
[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


                                            - 11 -
“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.


                                             - 12 -
       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.




                                             - 13 -
