A New Rule of Statutory Construction by Harry D. Shapiro and Elizabeth A. Mullen Harry D. Shapiro A. Introduction Elizabeth A. Mullen Baltimore Gas and Electric Co. (BGE), founded in 1816, is a public utility that holds a state-sanctioned monopoly on the distribution of electric power provided to more than 1.8 million customers throughout Maryland. BGE is an investor-owned electric company that has an obligation to provide standardoffer service to residential customers in the state. To address an approximately 72 percent increase in total electricity charges to BGE s residential customers, then-gov. Robert Ehrlich called a special session of the General Assembly in 2006. The General Assembly enacted SB 1, which established a rate stabilization plan that provided in part: From July 1, 2006, to May 31, 2007, customers could not be charged a total rate that was more than 115 percent of the rate on June 30, 2006; During that period, BGE s residential customers would receive a deferral credit, known as the rate stabilization credit (RS credit), equal to the difference between the actual cost of the electricity, including the delivery charge, and the 15 percent cap on the rates; BGE would recover the RS credit plus related costs incrementally from its customers over the subsequent 10-year period through a usagebased mechanism known as the rate stabilization charge (RS charge); The RS credit and RS charge would apply to all residential customers in BGE s distribution system regardless of whether they purchased electricity from BGE or a third-party supplier; The RS credit or the subsequent RS charge for the rate stabilization costs on the residential customer s bill had to be included as a nonbypassable credit or charge on the electricity distribution portion of the bill ; BGE had to apply to the Public Service Commission, which regulates the state s public utilities, for a tariff implementing the rate stabilization plan; The commission was required, within 20 days after the filing of the tariffs by BGE, to issue an order implementing the Rate Stabilization Plan in accordance with the statutes. 1 The provision of electric power to a Maryland consumer involves two distinct components supplying the electricity and delivering it. 2 BGE s electricity rates include charges for both the electricity supply, sometimes also referred to as the sale of electricity, and the electricity distribution, the transmission of electricity to the consumer through a power grid or other delivery infrastructure. Before 2000, both the sale and delivery of electricity were components of one rate, set by the commission and charged by BGE as the sole provider of electric power to customers in its service area. In 1999 the Maryland General Assembly enacted legislation to make the state s regulated, monopolistic electricity market a less regulated and more competitive. As a result of the deregulation scheme, multiple competing electricity suppliers were created. Regardless of the supplier selected by a consumer, all electric power would be delivered to the consumer through the utility with the franchise for the service area. Accordingly, BGE remained responsible for the distribution of electricity within its service area even though it was only one of multiple electricity sellers. The various electricity suppliers set their own rates for the supply of electricity, and under the deregulation scheme, charges for the supply of electricity were temporarily capped until 1 Md. Code Ann. Pub. Util. article section 7-548. 2 State Dep t of As s es s m ents and T ax ation v. B altim ore G as & Elec tric C o., 63 A.3d 15 (Md. 2013). State Tax Notes, December 9, 2013 621
Special Report July 1, 2006. The General Assembly also eliminated the franchise tax on revenue from the sale of electricity and directed that the tax apply only to revenue from electricity distribution. 3 B. Procedural History Following the enactment of SB 1, the commission granted BGE s request for new tariffs implementing the RS credits and charges. The tariffs were published by the commission as Rider 12 to the BGE electric retail rates. 4 The House and Senate floor reports and the revised Senate fiscal and policy note for SB 1 stated that the RS credits and RS charges had to be placed on the distribution portion of each consumer bill. If the credits were applied to the electricity production portion of the bill, BGE would have had a competitive advantage over the other electricity suppliers, according to the reports. A Maryland customer would have been able to avoid the RS charges by selecting another electricity supplier after having obtained the benefits of the credits. 5 SB 1 also required that residential customers be charged the full cost of the electricity supplied by BGE. 6 Despite the clear direction provided by the General Assembly that the RS credits and RS charges be applied to the delivery portion of each customer s monthly bill, the Maryland Court of Appeals decided in BGE that because the crisis necessitating SB 1 occurred because of a potential 72 percent increase in the cost of electricity, the anticipated cost increase took precedence over the statutory language. 7 That is a substantial departure from the rules governing interpretation of statutes, and it is troubling to say the least. In construing a statute, the court of appeals has repeatedly enunciated the following rules: When this Court interprets a statute, our purpose is to effectuate the intent of the legislature, and, in order to discern that intent, we look first to the plain meaning of the statute s language.... The cardinal rule of statutory interpretation is to ascertain and effectuate the intent of the Legislature. Statutory construction begins with the plain language of the statute, and ordinary, popular understanding of the English language dictates interpretation of its terminology.... The statute must be read so that no word, clause, sentence, or phrase is rendered superfluous or nugatory.... If the plain language of a statute is clear and unambiguous, we look no further because there is no need to resort to the various, and sometimes inconsistent, external rules of construction, for the Legislature is presumed to have meant what it said and said what it meant. 8 Also, the commission issued a qualified rate order 9 specifying that the RS credits and RS charges are non-bypassable charges that will be paid by all residential electricity customers of [BGE] as a component of the monthly charge for electric delivery service (Sec. 7-530). 10 Because the commission is the administrative agency that interprets the public utilities article of the Maryland Code, the court of appeals agreed with BGE that the tax court s decision was not entitled to any presumption of correctness. Even so, the court of appeals gave no weight to the qualified rate order or any presumption of correctness to the determination of the commission, which regularly interprets provisions of the public utilities article. C. The Refund Action BGE concluded that SB 1 decreased its distribution revenue during the period that the RS credit was applied to consumer invoices, thereby temporarily decreasing the amount of franchise tax paid. BGE s subsequent collection of RS charges would 3 Tax-General Article section 8-402(a)(2). 4 Although these new tariffs specifically applied to the delivery charge, the court of appeals says the new tariffs do not alter the underlying distribution rate billed to the residential customers. This ignores the tariff s express language that the deferral credit... will be included as a non-bypassable per kwh credit applicable to all residential delivery service customers. 5 House floor report, HB 1, 2006 special session, at 6; Senate revised fiscal and policy note, 2006 special session, at 5; Senate floor report, 2006 special session, at 6. 6 Md. Code Ann. Pub. Util. article section 7-524(a)(1). 7 63 A.3d 15.Although the opinion agrees that the legislation (PU section 7-524(a)(1)) required that BGE bill its residential customers the full cost of the electricity that was being supplied, and that the RS credits and RS charges must apply to the charges for distribution of the electricity, nevertheless this did not demonstrate legislative intent that the RS credits and RS charges applied to the monthly distribution charge to the customer. 8 Comptroller v. Science Applications I nternational Corp., 950 A.2d 766, 773 (2008); see also Supervisor of Assessments v. Stellar GT, 955 A.2d 269, 275, 282-297 (2008); Comptroller v. Citicorp., 884 A.2d 112, 117-118 (2005); Stouffer v. Pearson, 887 A.2d 623, 628-629 (2005); Reed v. Supervisor, 731 A.2d 868, 872-873 (1999); Anne Arundel County v. M uir, 817 A.2d 938, 945-946 (2003); Rouse-Fairwood Development Limited Partnership v. Supervisor, 773 A.2d 535, 552-553 (2001). 9 In accordance with SB 1, BGE applied to the commission for a tariff to implement the plan. The qualified rate order was necessary to further implement SB 1. Qualified Rate Order No. 81181 was dated Dec. 28, 2006, and was issued in Case No. 9089. The resulting qualified rate order approved the deferral of electricity supply costs through RS credits and the subsequent recovery of the costs through RS charges. 10 Qualified rate order at 8. Although the order addressed the charges, there is no difference between the credits and charges regarding their effect on a consumer s monthly charge for electric delivery services. 622 State TaxNotes,December 9,2013
11 This amount is equal to 2 percent of the $322 million worth of credits included in the distribution portion of residential electricity consumers bills. 12 Slip Op. at page 8. Special Report increase its distribution revenue in future years, thereby increasing its later franchise tax liability. When the case was argued before the court of appeals, BGE had been paying the franchise tax on the RS charges for more than five years. In June 2006 BGE presented its franchise tax position to the State Department of Assessments and Taxation (SDAT), which responded that the placement of the deferral credits on the distribution portion of the bill did not reduce the distribution revenue subject to the tax. BGE filed its 2006 Form 11, Public Service Company Franchise Tax Return, in accordance with SDAT s response. However, soon after that, BGE filed an amended Form 11 reducing its distribution revenue by the total amount of RS credits provided on the distribution portion of consumer invoices. Based on the amended Form 11, the franchise tax owed for the tax period was reduced by $6.4 million. 11 In July 2007 SDAT denied the refund. BGE appealed SDAT s final determination to the Maryland Tax Court, which affirmed the decision. BGE then appealed to the circuit court for Anne Arundel County, which reversed the tax court s decision and granted the refund and interest. In its memorandum opinion and order, the circuit court held that the tax court s interpretation of the relevant statutes of the public utilities article was incorrect as a matter of law and entitled to no deference or presumption of correctness. 12 The circuit court was persuaded by the plain language of section 7-524 of the public utilities article, which required both the credit charges and credit deferrals are to be reflected on the electric distribution portion of each residential customer s bill. The court stressed that because the credit deferral was placed on the distribution portion of their monthly bill, customers were prevented from switching to a new electrical producer and thus not having to pay the future credit charges. Although the opinion notes that the credit deferrals were designed to reduce the cost of supply, because PU section 7-524 requires the credit deferrals be reflected in the distribution portion of the bill, the credits should reduce the distribution charges. The circuit court agreed that although the plan was not designed to provide franchise tax relief, the language of section 7-524 of the public utilities article had that effect. The circuit court pointed to the commission s qualified rate order, which stated that the future revenues under the qualified rate stabilization charges [are] included in BGE s gross income under its usual method of accounting. The circuit court concluded that the tax court s interpretation would leave BGE subject to double tax liability one round of taxes for the credit deferral and another round of taxes upon receipt of the credit charges. Although the legislature may not have intended to affect the franchise tax, the reading of section 7-548(c)(2)(i) of the public utilities article, in conjunction with sections 7-524(a)(1), 7-524(a)(2), and 7-548(a)(3), indicates that a reduction of BGE s franchise tax liability is not an unreasonable consequence. SDAT appealed, and in January 2012 the court of special appeals affirmed. It also recognized that the issue before the tax court involved a pure question of law that could be reviewed de novo. Because the public utilities article is not a tax statute that the tax court regularly interprets or administers, the court of special appeals also declined to give deference to the tax court s interpretation. The court of special appeals affirmed that the relevant sections of the public utilities article supported BGE s position that the credits reduced BGE s franchise tax liability because they are applied to the charges for electricity distribution. The court acknowledged that although the General Assembly did not intend to preclude the credits and charges from franchise tax liability, the temporary reduction of BGE s franchise tax liability was not an unreasonable consequence of the public utilities article. The court of special appeals concluded that: The plain reading of public utilities article section 7-524(a)(1) requires BGE to charge the full price for the cost of generating electricity, and if the credit were applied to the charge for the electricity, the customer would not be charged the full cost for the electricity. The legislative history supported the plain reading of public utilities article section 7-524(a)(1), meaning that the legislature required BGE to charge the full price for the charge for electricity. Although the legislature may not have intended to affect the franchise tax, the reading of section 7-548(c)(2)(i) of the public utilities article, in conjunction with sections 7-524(a)(1), 7-524(a)(2), and 7-548(a)(3), indicates that a reduction of BGE s franchise tax liability is not an unreasonable consequence. Futher, when the intent of the legislature is not immediately apparent, the court will consider the consequences that result from one meaning rather than another and will adopt that State TaxNotes,December 9,2013 623
Special Report consideration which avoids an illogical or unreasonable result, or one which is inconsistent with common sense. 13 The court of appeals rejected BGE s argument that the plain language of the public utilities article treated the RS credits and RS charges as part of its distribution revenue, thereby deferring part of its franchise tax liability. Despite the lower court decisions based on the plain language of the statute, the court of appeals was persuaded by the absence of any reference to a franchise tax reduction in the legislation. However, there was no discussion in the revised Senate fiscal note or the Senate or House floor reports of two other provisions, one of which had a much greater impact on the state s tax revenue than the temporary reduction in the franchise tax had BGE s position been sustained. First, section 7-512-1(e) of the public utilities article increased the funds to be collected for the electric universal services program each year from $34 million to $37 million. As a result, BGE received an additional $3 million in gross receipts that would be subject to the franchise tax and will increase state revenue. Second, SB 1 section 6 provides for a significant reduction in state income tax revenue. It requires that BGE give all residential electricity customers credits totaling approximately $39 million each year for 10 years, or $390 million in total. The section 6 credit will result in a $39 million reduction in BGE s income each year for 10 years. Given that Maryland s corporate income tax rate is much higher than the franchise tax rate (7 percent compared with 2 percent 14 ), the reduction in state revenue caused by SB 1 section 6 is far greater than the reduction caused by the RS credits. Further, the section 6 credit results in a permanent decrease in state income tax revenue, while the rate stabilization credits only defer BGE s payment of some franchise taxes. The response of the court of appeals to the lack of any discussion of the 10-year, $39 million credit is found in footnote 14: While there may be some merit to this contention, it is also apparent that the various income tax consequences of this bill could be quite complex, while the effect on the franchise tax, if intended as urged by BGE, would be readily ascertainable. The $39 million annual credit could have been explained in very few words, but the legislature simply did not discuss the tax consequences of the legislation that was designed to avoid a substantial 13 Slip Op. at pages 17-18. 14 That figure reflects the 2006 corporation income tax rate. As of 2008, the rate increased to 8.25 percent. Tax- General Article section 10-105(b). increase in electricity cost (this would not be the first major piece of legislation with unintended consequences). That line of reasoning is troubling because it now requires the General Assembly to enumerate every intended and unintended consequence of its legislative actions in order for those consequences to be recognized and afforded legal effect. The SDAT regulations governing the reporting of gross receipts also make it clear that the amended returns filed by BGE were correct because the distribution revenue could not include the amount that was offset by the RS credits. COMAR 18.08.01.01B(5)(a) provides that the term gross receipts means the operating revenue prescribed by the Federal Energy Regulatory Commission (FERC). Each year, BGE must file a Form No. 1 with the FERC. On the form, BGE reports its operating revenue in accordance with generally accepted accounting principles and FERC regulations. A former director of the FERC Division of Audits testified that BGE correctly excluded the [RS credits] because they were not billed to the distribution customers. BGE reported on its amended return the same amount that was designated as the operating revenue on the FERC Form No. 1. 15 The FERC expert also cited SEC Staff Accounting Bulletin 101 in support of his position regarding the exclusion of the RS credits from operating revenue. Itwasn tthat BGEchosetorelate the credits and charges to distribution revenues rather than supply revenues the FERC Uniform System of Accounts requiresittodoso. Although the court of appeals acknowledged that BGE did use the figure from the FERC report in calculating its franchise tax, it said the same regulations make clear that adjustments may be necessary for consistency with Maryland law and that the amounts to be excluded from total operating revenues must be in accord with the franchise tax law. That statement is misleading. What the regulation actually says is that the operating revenue as prescribed by FERC must be used, unless otherwise 15 The figure on line A-1 of the amended Form No. 11 filed with the SDAT had to be adjusted by excluding the competitive transition charge revenue, which is not part of the operating revenue amount reported on the FERC Form No. 1. This was explained in an attachment to the amended Form No. 11. 624 State Tax Notes, December 9, 2013
specified by Maryland law or regulation. 16 However, the court of appeals did not cite any Maryland law or regulation that specifically requires that the credits be included in operating revenue. It could not cite such a law because that would be contrary to the Uniform System of Accounts prescribed by FERC. The court of appeals said: By not adjusting the figure [total operating revenues] for gross charges for the sale of electricity to take account of the deferred fuel costs regulatory asset, BGE chose to relate the credits and charges to distribution revenues rather than supply revenues a result not dictated by its FERC Report. Operating revenue has nothing to do with deferred fuel costs, which are a regulatory asset under the FERC rules. It wasn t that BGE chose to relate the credits and charges to distribution revenues rather than supply revenues the FERC Uniform 16 COMAR 18.08.01.01B5(a). Special Report System of Accounts requires it to do so. Nothing in the record supports the above statement from the court of appeals opinion. D. Conclusion The court of appeals reversed and remanded the circuit court and court of special appeals decisions, thereby disregarding the plain meaning of SB 1, the legislative history, and the determination of the franchise tax base that relies on the FERC accounting rules. To imply that a complex, major statute cannot have any franchise tax consequences unless the legislature specifically says so evokes a resultsoriented approach to statutory construction that ignores the unintended consequences that are too often the result of major legislation. Harry D. Shapiro is a partner and chair of the Tax Practice at Saul Ewing LLP, and Elizabeth A. Mullen, a Saul Ewing special counsel in our Washington office. Shapiro represented BG&E before the Maryland Tax Court, Anne Arundel County Circuit Court, Court of Special Appeals and Court of Appeals, and Mullen assisted in preparing the brief in the Court of Appeals. State TaxNotes,December 9,2013 625