Reply brief of the staff of the maryland public service commission

PUBLIC SERVICE COMMISSION

)

)

IN THE MATTER OF THE COMPLAINT )

DISTRIBUTORS AND DELMARVA ) __________________

OIL ASSOCIATION AGAINST )

DELMARVA POWER & LIGHT ) Case No. 8768

COMPANY ) __________________

)

)

Complainants Mid-Atlantic Petroleum Distributors Association and Delmarva Oil Heat Association (“MAPDA”) filed their Complaint with the Maryland Public Service Commission (“PSC” or “Commission”) on May 28, 1997. The Complaint alleged that Delmarva Power & Light Company (“Delmarva”) and its affiliates violated several provisions of COMAR 20.40.01 et. seq., the Commission’s Promotional Practice Regulations (“PPRs”). Delmarva filed an Answer and a Motion to Dismiss on July 2, 1997. On July 14, 1997, Staff recommended that the matter be delegated to the Hearing Examiner Division and set for hearing. The parties then conducted discovery. Delmarva renewed its Motion to Dismiss on November 17, 1997, and also moved for summary judgment.

The Hearing Examiner presided over oral argument on Delmarva’s Motion at a hearing held on May 8, 1998. Staff participated in the hearing, but limited its argument to asserting that Delmarva should file additional information, which included: a cost allocation manual, descriptions of name and logo usage, verification that Delmarva was not providing billing for non-core affiliates, and a description of employees in shared facilities. The Hearing Examiner ruled that most of the issues raised by MAPDA were resolved by the Commission’s Order in its generic affiliate transactions proceeding,¹ and granted summary judgment on those issues. However, the Hearing Examiner also ruled that two issues remained subject to dispute: 1) the activities of Delmarva’s ESBU Division with respect to possible cross-subsidization to non-utility activities; and 2) the required filings and approvals of promotional practices of Delmarva and its affiliates for non-regulated activities.² An evidentiary hearing took place on October 7, 1998, at which Delmarva witnesses gave their direct testimony and were cross-examined. During this hearing, Staff entered Delmarva’s cost-allocation manual into evidence.

MAPDA filed its Initial Brief on February 5, 1999, and Delmarva filed its Initial Brief on March 8, 1999. Staff did not file an Initial Brief, but reserved the right to file a reply. To date, Staff’s participation in this case has been limited to seeking additional information from Delmarva to ensure that the record is complete, notably with respect to Delmarva’s cost-allocation manual. Staff does not now take a position on the merits of MAPDA’s Complaint. However, because Delmarva challenged the constitutionality of the PPRs in its Initial Brief, Staff hereby files this Reply Brief, limited to the constitutional issues raised by Delmarva.

In its Initial Brief (“Delmarva Brief”), Delmarva argued that if the PPRs are applied as MAPDA requests, they are unconstitutional prior restraints on free speech, and do not survive the intermediate level of Constitutional scrutiny under which courts evaluate regulations restricting commercial speech. Accordingly, the issues Staff addresses herein are:

1. 
   Do the Commission’s Promotional Practice Rules regulate speech?
   
2. 
   If the Promotional Practice Rules do regulate speech, are they an unconstitutional prior restraint on free speech, or in violation of Constitutional standards concerning regulation of commercial speech?
   

In its Brief, Delmarva notes that in adopting the promotional practice rules, “the Commission ‘was obviously concerned with … the significant impact [the promotional practices of the time] could have on utility revenue requirements’”. Delmarva Brief at 10, citing Mid-Atlantic Petroleum Distributor’s Association v. Baltimore Gas and Electric Company, 75 Md. PSC 582, 587 (1984). Delmarva further explained that the Hearing Examiner’s proposed order in the cited case stated that “any amendment of the [promotional practices] regulations must be narrowly drawn so as to protect the general body of ratepayers from the adverse rate consequences associated with large-scale promotional practices.” Delmarva Brief at 1, quoting Mid-Atlantic, 75 Md. PSC at 588 (emphasis in original). Staff agrees that the primary purpose of the PPRs is to protect utility ratepayers against the possibility of adverse rate impact from excessively expensive promotional practices. However, the PPRs achieve this goal by regulating conduct, not speech.

1. 
   Financing land or the construction of a building when it is not owned or otherwise possessed by the utility or its affiliate;
   

2. 
   Furnishing consideration to a person for work done or to be done on property not owned or otherwise possessed by the utility or its affiliate, except for studies to determine comparative capital or operating costs and expenses or to show the desirability or feasibility of selecting one form of energy over another;
   

3. 
   Acquiring from any person any tangible or intangible property or service for a consideration in excess of its value or furnishing to any person tangible or intangible property or service for a consideration of less than its value;
   

4. 
   Furnishing consideration to a person directly or indirectly or through a third party which draws any monetary support from a regulated utility to influence the sale , installation, purchase, or use of any appliances or equipment;
   

5. 
   Providing free, or at less than cost or value, wiring, piping, appliances, or equipment to a person; provided that a utility , engaged in an appliance merchandising sales program is not to be precluded from conducting legitimate close-outs of appliances, clearance sales, or sales of damaged or returned appliances;
   

6. 
   Providing free, or at less than cost or value, installation, operation, repair, modification, or maintenance of appliances, equipment, wiring or piping to any person;
   

7. 
   Granting a trade-in allowance on the purchase of any appliance or equipment in excess of the value of the trade-in, or granting a trade-in allowance for the appliance or equipment when the allowance varies by the type of energy consumed in the trade-in;
   

8. 
   Extending credit to finance the acquisition of any appliance or equipment at a lower rate of interest or under more favorable payment terms (but excluding those applicable to default) than those generally applicable to sales by non-utility dealers in appliances or equipment;
   

9. 
   Furnishing consideration to a person for any advertising or publicity purpose of that person, except for payments not exceeding one-half the reasonable cost or value for joint advertising or publicity with a bona fide dealer in appliances or equipment for the sale or other provision of same, if the utility is prominently identified as a sponsor of the advertisement; and
   

10. 
    Guaranteeing the maximum cost of electric or gas utility service.
    

All but one of the prohibitions listed above are directed at the furnishing of consideration for various non-speech sales activities in which a utility or its affiliate might engage. The sole exception is item I, which prohibits a utility or affiliate from giving consideration to pay for a third party’s advertising, except for one-half the cost of joint advertising campaigns.³ This provision does not restrict speech by a utility or affiliate on its own behalf at all. The restriction limits utility expenditures in joint advertising campaigns. With regard to this provision, the purpose is limited to preventing a utility from paying an excessive share of the advertising of appliance dealers as a means of promoting gas or electricity sales.

In addition to the specific practices prohibited by COMAR 20.40.01.02, standards governing promotional practices are enumerated in COMAR 20.40.01.03. This section requires that costs of promotional practices be just and reasonable, and recoverable through sales stimulation. COMAR 20.40.01.03A. The section also requires that promotional practices be free of undue discrimination (COMAR 20.40.01.03B), and consistent with the utility’s filed tariff. COMAR 20.40.01.03C. None of these provisions restrict utility or affiliate speech in any way.

The focus of Delmarva’s argument is on the filing requirements of COMAR 20.40.01.04 and 20.40.01.05. Under the filing rule, a utility or affiliate seeking to initiate a new promotional practice, or alter an existing one, must file with the Commission a schedule stating:

1. 
   The name, number, or letter designation of each promotional practice;
   
2. 
   The class of persons to which the promotional practice is being offered or granted;
   

3. 
   Whether the promotional practice is being offered or granted to the persons within the class;
   

4. 
   A description of the promotional practice which includes a statement of the terms and conditions governing it;
   

5. 
   A description of the advertising or publicity employed with respect to the promotional practice;
   

6. 
   If the promotional practice is offered or granted, in whole or in part, by an affiliate or other person, the identity of the affiliate or person and the nature of that party’s participation; and
   

7. 
   Other information relevant to a complete understanding of the promotional practice.
   

The provisions of COMAR 20.40.01.04 and 20.40.01.05 are also devoid of any regulation of speech. Item five does require the utility to submit a description of proposed advertisements or publicity, but does not require submission of the actual content, or give the Commission the right to prohibit any particular content. Moreover, the PPRs include a prohibition against paying for third party advertising or more than half of joint advertising, item five of the filing requirement is necessary to provide the Commission with the information necessary to enforce this provision. The filing requirement may also be a means of enforcing the cost standard in COMAR 20.40.01.03A, ensuring that the cost of planned promotional practice advertisements is just and reasonable. In fact, the filing requirement taken as a whole does not regulate speech in any way. Its purpose is to ensure that the Commission is given enough information regarding proposed promotional practices to assure itself that the proposed practice is not among the prohibited practices listed above (COMAR 20.40.01.02), and does not violate the standards of COMAR 20.40.01.03. Since the specifically prohibited practices and the explicit standards for promotional practices do not regulate speech, neither does the filing requirement.

There are circumstances under which certain types of conduct are considered equivalent to speech, and therefore protected under the First and Fourteenth Amendments of the United States Constitution. However, these circumstances are generally limited to occasions when the conduct at issue involves some form of personal, political, or artistic expression. See e.g. Texas v. Johnson, 491 U.S. 397, 105 L.Ed.2d 342, 109 S.Ct. 2533 (1989)(burning the United States flag as a political statement is a form of expressive conduct protected by the First Amendment); Iota XI Chapter of Sigma Chi Fraternity v. George Mason University, 993 F.2d 386 (4^th Cir. 1993)(fraternity contest deemed form of expressive conduct); Nunez v. Davis, 1999 WL 129509 (9^th Cir. 1999)(clerk sending court employees to training seminars expressive conduct where judge had prohibited employees who did not assist political campaign from attending training seminars). The conduct regulated by the Commission’s PPRs is not expressive conduct protected by the First and Fourteenth Amendments. The PPR’s prohibit utilities and their affiliates from spending ratepayer money on certain practices which might increase gas and electricity sales. While increasing sales is a desirable goal for most business organizations, the practices regulated by the PPRs are not a form of expressive conduct and therefore not protected speech.

As Delmarva notes, protected commercial speech is speech “which does no more than propose a commercial transaction, ” or “expression related solely to the economic interests of the speaker and its audience.” Delmarva Brief at 15, fn. 7, quoting Virginia State Bd. Of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 762 (1976) and Central Hudson Gas & Electric Corp. v. Public Service Comm’n of New York, 447 U.S. 557, 561 (1980). The PPRs do not regulate speech proposing commercial transactions. Instead, they directly prohibit the utilities and their affiliates from engaging in certain types of transactions. In enforcing the PPRs, the Commission is not concerned with the content of the utilities’ speech. It is concerned with the utilities’ actions and the extent to which those actions are paid for by utility ratepayers. The whole purpose of the Commission is to regulate the rates and conduct of public service companies. The PPRs are merely one of many means the Commission uses to carry out that mandate.

2. 
   If the Promotional Practices Rules Do Regulate Speech, They Are Permissible Under the United States Constitution
   

The standards which the Commission uses in evaluating proposed promotional practices are clearly stated in COMAR 20.40.01.03. While Delmarva notes that there is nothing in the PPRs which requires the Commission to limit its evaluation to these standards, there is also nothing in the regulation permitting the use of other standards. In addition, the Commission is bound by the limited purpose its own precedent ascribes to the PPRs, which is “to protect the general body of ratepayers from the adverse rate consequences associated with large-scale promotional practices.” Delmarva Brief at 1, quoting Mid-Atlantic, 75 Md. PSC at 588 (emphasis in original).

Commission discretion is further restricted by the limits on Commission jurisdiction over otherwise unregulated activities of utilities and affiliates. That jurisdiction extends only so far as “necessary to assure just and reasonable rates for and the adequate provision of regulated utility service.” Re Affiliated Transaction and Affiliate Standards of Conduct of Companies Providing Gas or Electric Service, 183 PUR 4^th 277, 289 (1998); Re Investigation Into the Allocation of Costs Between the Regulated and Unregulated Business Activities of the Baltimore Gas and Electric Company, 86 Md. PSC 225, 230 (1995). Taken together, the explicit standards of COMAR 20.40.01.03 and Commission precedent narrowly circumscribe the Commission’s ability to reject a promotional practice, and ensure that the Commission does not have unbridled discretion to reject a proposed promotional practice.

The Commission is also required to render its decision regarding a promotional practice within thirty days, or the utility may engage in the practice. COMAR 20.40.01.05. Delmarva likens this to the time limit at issue in Jakanna, which specified that a merchant had to apply for a license at least 14 days before a proposed liquidation sale, but did not require government officials to render a decision within that 14 days. Delmarva Brief at 19. According to Delmarva, the thirty-day response required in the PPRs is likewise an “illusory restriction” because the Commission may bar a promotional practice at any time after the thirty days are up. Id. However, the difference between the PPRs and the regulation at issue in Jakanna is that the Company may engage in its proposed practice if the Commission does not render a decision in thirty days. The fact that the Commission may subsequently prohibit the practice does not render the time constraint illusory. Once the Company is permitted to engage in a practice, Commission action requiring the Company to cease and desist is not a prior restraint of speech. It is simply an exercise of the Commission’s regulatory and supervisory powers regarding a practice which experience has proven to be unlawful or harmful to ratepayers.

Assuming for the sake of argument that the Commission’s PPRs actually regulate speech, they also meet the requirements for regulation of commercial speech enunciated in Central Hudson Gas & Electric Corp. v. Public Service Comm’n of New York, 447 U.S. 557, 65 L.Ed.2d 341 (1980). Under the Central Hudson standard, for communication which is “neither misleading nor related to unlawful activity…[t]he State must assert a substantial interest to be achieved by restrictions on commercial speech,” and the “limitation on expression must be designed carefully to achieve the State’s goal.” Central Hudson, 447 U.S. at 564, 65 L.Ed. at 350. The regulation must directly advance the State’s interest, and the regulation is invalid if the State’s interest could be equally well served by a more limited restriction. Id.

As noted above, the State interest served by the PPRs is to ensure that utility ratepayers are not required to pay the costs of excessively expensive promotional practices engaged in by electric and gas companies and their affiliates. Delmarva itself concedes that the Commission has a substantial interest in maintaining a fair and equitable rate structure. Delmarva Brief at 20. Delmarva complains, however, that the PPRs do not directly advance the interest of protecting ratepayers if they are applied in a circumstance where there is no showing of a burden on ratepayers. Delmarva misses the point.

All of the practices prohibited under COMAR 20.40.01.02 involve a utility giving consideration, defined as something of value, to a third party for the purpose of increasing its sales. If a utility or an affiliate engages in one of the prohibited practices with funds collected from ratepayers, or with facilities or employees paid for by ratepayers, an impact on rates is unavoidable. The value expended by the utility has either been collected from ratepayers already, or is a cost for which the utility will eventually seek reimbursement for through its rates. Therefore, the practices prohibited in the PPRs would impact rates if permitted. Accordingly, the PPRs both directly advance the State’s interest in protecting ratepayers, and are narrowly tailored to achieve that goal.

Requiring that a utility or affiliate file a proposed promotional practice with the Commission does not by itself advance the interest of protecting ratepayers. However, that filing is the primary means by which the Commission may assess whether a proposed practice will contravene that interest. The filing requirement of COMAR 20.40.01.04 and COMAR 20.40.01.05 requires a utility or affiliate to provide a limited amount of information to enable the Commission to decide whether a proposed practice will have an excessive impact on rates, and whether the proposed practice meets the standards set forth in COMAR 20.40.01.03. In the absence of such filings, the remainder of the PPRs would be useless. Consequently, the filing requirement is necessary to advance the Commission’s substantial interests. Given the very limited amount and type of information which must be filed, it is also a very narrowly tailored requirement.

Delmarva notes that Central Hudson invalidated a complete ban on utility advertising, in part because the Court found that there was only a tenuous link between the ban and the government’s interest in maintaining an equitable rate structure. Delmarva Brief at 22, citing Central Hudson, 447 U.S. at 469. As discussed above, the link between the banned promotional practices in the PPRs and rate impacts is direct and clear, however. Delmarva also asserts that its customers pay no part of the cost of Connectiv Services, Inc.’s advertising program. Delmarva Brief at 22. If this is so, then it is almost certain that Delmarva has not engaged in one of the prohibited promotional practices. However, since Delmarva has not filed its practices with the Commission, the Commission was denied the opportunity to assess the truth of Delmarva’s assertions, except through Complainants’ filing of the instant case.

The Commission’s PPRs do not regulate speech. They merely prohibit a utility or its affiliate from engaging in certain commercial transactions which would adversely affect ratepayers. Even if the PPRs are regarded as regulation of speech, they do not place an impermissible prior restraint on free speech, and they are well within the bounds of Constitutionally acceptable regulation of commercial speech.

WHERFORE, Staff respectfully requests that the Hearing Examiner find that the Commission’s Promotional Practice Rules do not regulate speech, or to the extent that the Promotional Practice Rules do regulate speech, they are not an unconstitutional prior restraint on free speech, or an impermissible regulation of commercial speech.

Respectfully submitted,

Lloyd J. Spivak

Assistant Staff Counsel

Public Service Commission of Maryland

William Donald Schaeffer Tower

6 St. Paul Street – 17^th Floor

Baltimore, MD 21202-6806

Phone: (410) 767-8086

CERTIFICATE OF SERVICE
I HEREBY CERTIFY THAT on this 29^th day of March, 1999, copies of the foregoing Reply Brief of the Staff of the Maryland Public Service Commission were either hand-delivered or mailed to all parties of record in Case Number 8768.

________________________________

Lloyd J. Spivak

Assistant Staff Counsel

Public Service Commission of Maryland

William Donald Schaeffer Tower

6 St. Paul Street – 17^th Floor

Baltimore, MD 21202-6806

Phone: (410) 767-8086

1 Re Affiliated Transaction and Affiliate Standards of Conduct of Companies Providing Gas or Electric Service, 183 PUR 4^th 277 (1998).

2


^ In the Matter of the Complaint of Mid-Atlantic Petroleum Distributors and Delmarva Oil Heat Association Against Delmarva Power & Light Company, Case No. 8768, Ruling on Motion to Dismiss and Motion for Summary Judgment, May 26, 1998, p. 9.

3 This provision could be construed to limit utility and affiliate speech in the form of political contributions and civic activities, which would most definitely implicate Constitutional free speech protections. However, those forms of speech are addressed elsewhere in the Commission’s regulations, at COMAR 20.07.04.08. This regulation addresses accounting practices and does not attempt to prohibit any form of speech. It merely prevents utilities and affiliates from incorporating their political and civic expenditures in rates. Moreover, this regulation is pursuant to and consistent with the F.E.R.C. regulations concerning utility accounting practices, found in paragraphs 15444-15447 of Federal Energy Regulatory Commission Accounting and Reporting Requirements for Public Utilities and Licensees (Publication Number FERC-0114).

4 Staff notes that the ordinance invalidated in Jakanna directly regulated the content of advertisements, rather than the practice of conducting the type of sale at issue. The license was required for the advertisement, not for the sale itself.

5


^ The Jakanna Court stated that a prior restraint exists where there is “a statute, ordinance, or regulation that prevents expression unless and until a license or permit is obtained from a governmental official or group…” Jakanna 344 Md. at 599.

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