Opinion ID: 2365347
Heading Depth: 1
Heading Rank: 6

Heading: Alternative Methods of Adopting Policy Directives

Text: Citing Consumer Protection v. Consumer Pub., 304 Md. 731, 501 A.2d 48 (1985); Balto. Gas & Elec. v. Public Serv. Comm'n, 305 Md. 145, 501 A.2d 1307 (1986); Dept. of Health v. Chimes, 343 Md. 336, 681 A.2d 484 (1996); and Md. HMO's v. Cost Review, 356 Md. 581, 741 A.2d 483 (1999), and seeking to distinguish CBS v. Comptroller, 319 Md. 687, 575 A.2d 324 (1990), the PSC contends that this Court has generally not required agencies to proceed by regulation when adopting policy and that we ought to follow that approach here as well. The cases relied upon do not support the position advanced by the PSC. They stand merely for the proposition that agencies have some measure of, though not unlimited, freedom to develop and apply standards that interpret or implement statutes that they administer through contested-case adjudications rather than through the adoption of regulations. They do not hold that an agency, through a mechanism other than contested-case adjudication, may adopt standards that constitute regulations under the APA without complying with the APA requirements. In Consumer Protection, the Consumer Protection Division of the Attorney General's Office charged a company that advertised and sold diet pill plans with false and misleading advertising and produced evidence in the contested-case proceeding that the pills had no significant effect in causing weight reduction. The final agency order enjoined the company from making certain representations in its advertising, required certain other statements to be included in that advertising, and directed refunds to Maryland customers who had purchased the product during a certain period. In an action for judicial review of that order, the company argued, among other things, that the advertising practices found misleading by the Division were industry-wide and that, if they were to be prohibited, the Division was required to effect that prohibition by means of a regulation, rather than in a case-specific proceeding. We rejected that argument on two grounds: first, that the company had not established that the advertising practices were, in fact, industry-wide, and second, that, in any event, agencies are not precluded from announcing new principles in adjudicative proceedingsthat the choice between rule-making and adjudication lies, in the first instance, with the agency. Consumer Protection, supra, 304 Md. at 753-54, 501 A.2d at 60. In reaching that second conclusion, we adopted the principle stated in SEC v. Chenery Corp., 332 U.S. 194, 202-03, 67 S.Ct. 1575, 1580, 91 L.Ed. 1995, 2002 (1947), that, although [t]he function of filling in the interstices of the [statute] should be performed, as much as possible, through the quasi-legislative promulgation of rules to be applied in the future, there was no rigid requirement to that effect, and the agency must retain power to deal with the problems on a case-to-case basis if the administrative process is to be effective. Consumer Protection, 304 Md. at 754, 501 A.2d at 60. It was appropriate, we held, for the Consumer Protection Division to proceed by adjudication, because its directives did not change existing law or even formulate rules of widespread application but merely applied the statutory standards to the facts in the record. Id. at 756, 501 A.2d at 61. A similar argument was made, and rejected, in Balto. Gas & Elec., supra, 305 Md. 145, 501 A.2d 1307. Acting under its statutory authority to review fuel rate adjustments proposed by utilities, the PSC, in four case-specific proceedings, adopted certain standards for evaluating applications for such adjustments. One of those standards dealt with assuring the utility's compliance with the statutory mandate that it maintain the productive capacity of its generating plants at a reasonable level. Applying that standard in contested-case proceedings, the PSC disallowed part of the cost sustained by BGE to replace power that was lost when one of its generating plants sustained an outage that the Commission found was preventable. BGE sought judicial review, contending, in part, that the standard was in the nature of a regulation that should have been adopted in conformance with the State Documents Law. As in Consumer Protection, we held that the standard was properly applied in an adjudicatory proceeding and did not need to be adopted as a regulationthat the Commission did not abstractly formulate new rules of binding and universal future effect, but simply articulated the standards through which it interpreted and implemented [the statute] during the course of specific contested proceedings, as it was required to do by [statute]. Id. at 168, 501 A.2d at 1318. A contrary conclusion, but based on the same reasoning, was reached in CBS v. Comptroller, 319 Md. 687, 575 A.2d 324 (1990). The issue there was the implementation of the statutory three-factor formula for apportioning to Maryland the income of a unitary corporation that does business outside the State. One of the factors compared the corporation's total sales with its sales in Maryland. A COMAR regulation adopted by the Comptroller provided that sales, other than sales of tangible personal property, were to be regarded as attributable to Maryland if either the income-producing personal property was in the State or the income-producing activity was performed both in and outside Maryland but more of the activity was performed here than in any other State. CBS, a corporation headquartered in New York, had traditionally apportioned all of its advertising revenue to other States, and the Comptroller had always acceded to that apportionment. In 1980, however, the Comptroller decided to apportion advertising revenue in a new waybased on the percentage of total network audience that was in Marylandand that changed the sales factor ratio significantly. CBS challenged the new approach, claiming that it should have been accomplished through rule-making rather than through adjudication. Distinguishing Consumer Protection and Balto. Gas & Elec., we agreed that when a policy of general application, embodied in or represented by a rule, is changed to a different policy of general application, the change must be accomplished by rulemaking. CBS, supra, 319 Md. at 696, 575 A.2d at 328. With respect to the policy change at issue, we concluded that the effect of the Comptroller's audit was to announce a substantially new generally applicable policy with respect to apportionment of network advertising income of national broadcasting corporations and that the change, for practical purposes, amounted to a change in a generally applicable rule. Id. at 699, 575 A.2d at 330. These cases, which all deal with when the application of new standards through the adjudicatory process is permissible, do not assist the PSC here. The PSC may well have been able to formulate and apply the directives embodied in Order No. 76292 in case-specific adjudicatory proceedings, as, in part, it had previously done with respect to BGE, although that issue is not before us. When it chose instead to adopt them through a generic, rather than an adjudicatory, proceeding and then apply them across-the-board to all non-municipal utilities, it made a conscious choice not to use the Consumer Protection approach. In Chimes, supra, 343 Md. 336, 681 A.2d 484 and Md. HMO's, supra, 356 Md. 581, 741 A.2d 483, we found that certain standards adopted by the respective agencies to implement existing regulations did not, themselves, constitute regulations subject to the APA requirements. In Chimes, the Developmental Disabilities Administration had adopted regulations governing the reimbursement of private service providers, one provision of which made clear that the reimbursement formula was subject to the agency's budget appropriations and that the agency could take cost containment measures to control total expenditures. The case arose when, in order to control costs for budgetary reasons, the agency adopted a growth cap that had the effect of limiting the reimbursement. A provider sought judicial review, complaining that the growth cap constituted a regulation under the APA. We held otherwise, pointing out that the growth cap applied to a limited number of providers in their capacity as contractors, that it applied only in a particular program, in a particular year, and in response to a particular budget crisis, and that, as a result, it was not a rule of widespread application and did not change existing law. Chimes, supra, 343 Md. at 346, 681 A.2d at 489. Md. HMO's involved an inflation adjustment system used by the Health Services Cost Review Commission in the implementation of its hospital rate-setting function, which we held did not represent any change in the policies or standards applied by the Commission. As we have already observed, the PSC directives at issue here do constitute significant changes in policy that affect most of the electric and gas utilities regulated by the Commission. They are precisely the kinds of policy directives that, if not applied in case-specific adjudicatory proceedings, the Legislature intended to be in the form of regulations subject to the APA requirements. Because there was no compliance with those requirements, the directives set forth in Order No. 76292 are simply not effective. Absent some further proceeding by the PSC, there is no need for us or the Circuit Court to address the other issues raised in this appeal. JUDGMENT OF THE CIRCUIT COURT FOR WICOMICO COUNTY REVERSED; CASE REMANDED TO THAT COURT WITH INSTRUCTIONS TO ENTER DECLARATORY JUDGMENT UNDER PUBLIC UTILITIES ARTICLE, § 3-201 THAT DIRECTIVES CONTAINED IN ORDER NO. 76292 ARE INEFFECTIVE FOR THE REASONS STATED IN THIS OPINION; COSTS IN THIS COURT AND IN CIRCUIT COURT TO BE PAID BY PUBLIC SERVICE COMMISSION.