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North Carolina v. Duke Power Co.

Filed: January 27, 1982.

STATE OF NORTH CAROLINA EX REL. UTILITIES COMMISSION; NORTH CAROLINA TEXTILE MANUFACTURERS ASSOCIATION, INC.; THE CITY OF DURHAM; CAROLINA ACTION; KUDZU ALLIANCE; GREAT LAKES CARBON CORPORATION; AND RUFUS L. EDMISTEN, ATTORNEY GENERAL
v.
DUKE POWER COMPANY



Appeal as of right by Duke Power Company (hereinafter "Duke") pursuant to G.S. § 7A-30(3) from a decision of the Court of Appeals, Meyer, Justice. Justice Carlton concurring in part, dissenting in part. Chief Justice Branch and Justice Exum join in this dissenting opinion.

Meyer

On 29 February 1980 Duke filed an application with the Commission to adjust and increase its rates and charges for electric service to its retail customers in North Carolina by an average of approximately 9.61% or $91,572,000. In the application, Duke proposed to make the rate adjustments effective 30 March 1980. In an order dated 21 March 1980, the Commission determined, inter alia, that the application constituted a general rate case (G.S. § 62-137), suspended the proposed adjustments for a period of up

to 270 days (G.S. § 62-134), and ordered public hearings on the proposed rates and publication of notices of such hearings. The Commission set the test period as the twelve month period ending 31 December 1979. After interventions, the matter was heard by the Commission in public hearings in various areas of the State through June and July, 1980.

On 7 October 1980, the Commission issued its Final Order which disallowed $34,122,000 of the increase requested by Duke and allowed $57,450,000 thereby reducing the increase from the requested 9.61% to 6.03% or 63% of the amount requested. The increase was allowed for service rendered on and after 3 October 1980. In its Final Order the Commission, inter alia, (1) increased Duke's accumulated depreciation account, thereby reducing the rate base, by the amount of $3,879,000 as an offset to a pro forma adjustment in that same amount made by Duke in its test year depreciation expense and (2) fixed the rate of return on common equity at 14.1%. One commissioner dissented from the Final Order on the ground that there was no evidence to support the Commission's determination as to the fair rate of return on equity.

Duke appealed and the Court of Appeals allowed Duke's motion for accelerated hearing and decision of appeal by order dated 13 January 1981. In an opinion filed 5 May 1981, the Court of Appeals concluded that "[i]t is reasonably certain that the final disposition of this appeal will be determined by the Supreme Court [and] [w]e, therefore, will not attempt to recapitulate the evidence or set out a detailed statement of [our] reasoning . . . ." The Court of Appeals then held that the Commission's adjustment to Duke's accumulated depreciation account does not contravene G.S. § 62-133(b)(1) and (c), and that the Commission's determination of a 14.1% fair rate of return on common equity is supported by competent evidence and that the Commission adequately stated the reasons for its determination.

Duke's exceptions before the Court of Appeals and before this Court relate solely to two components of the Commission's rate determination. Duke contends that the Commission erred, first, by understating Duke's rate base by improperly deducting therefrom $3,879,000 in accumulated depreciation contrary to G.S. § 62-133(b)(1); and second, by failing to state and explain its reasons for failing to follow Duke's uncontradicted evidence that

15.0% was the minimum fair rate of return on its common equity. We do not find that the Commission erred in either respect.

I. Standard Of Judicial Review

Before proceeding to address the substantive issues of this case, we must first determine the appropriate standard of judicial review of the Commission's rate determination order.

Duke's appeal to this Court of the decision of the Court of Appeals is as of right pursuant to G.S. § 7A-30(3). See also G.S. § 62-96. Duke's appeal to the Court of Appeals was pursuant to G.S. § 7A-29. See also G.S. § 62-90. G.S. § 62-94(b) specifies the standard of judicial review by the Court of Appeals.

That section provides, inter alia, that the reviewing court may (1) affirm, (2) reverse, (3) declare null and void, (4) modify, or (5) remand for further proceedings, decisions of the Commission. The Court's power to affirm or remand is not specifically circumscribed by the statute. However, the power of the Court to reverse or modify and, a fortiori, to declare null and void, is substantially circumscribed to situations in which the court must find (a) that appellant's substantial rights, (b) have been prejudiced, (c) by Commission findings, inferences, conclusions or decisions which are

(1) in violation of constitutional provisions; or

(2) in excess of statutory authority or jurisdiction of the Commission, or

(3) made upon unlawful proceedings, or

(4) affected by other errors of law, or

(5) unsupported by competent, material and substantial evidence in view of the entire record as submitted, or

(6) arbitrary or capricious.

Utilities Comm. v. Oil Co., 302 N.C. 14, 19-20, 273 S.E.2d 232, 235 (1981).

Subsection (c) of G.S. § 62-94 requires the reviewing Court, in making the foregoing determinations, to "review the whole record." In order to determine whether the decision of the Court of Appeals is proper, this Court must determine which of the

listed criteria the Court of Appeals should have addressed and whether that court addressed those criteria in its review of the proceedings and order of the Commission. The criteria to be employed is in turn determined by the issues presented to the Court of Appeals, for it is the nature of the contended error that dictates the criteria.

As to the issue concerning depreciation, Duke presented in its brief to the Court of Appeals the following issue:

1. Did the Commission's action in reducing the original cost of Duke's property in service at the end of the test period by an amount of depreciation which did not represent a portion of original cost "consumed by previous use recovered by depreciation expense" contravene G.S. §§ 62-133(b)(1) and (c)?

The Court of Appeals answered that issue as follows:

With regard to the first question presented in the appellant's brief, in our opinion, the Commission was correct in reducing Duke's rate base by increasing its depreciation reserve by $3,879,000 due to the fact that Duke had made similar adjustments to its depreciation and amortization expenses for the test year without making corresponding adjustments to its accumulated depreciation account. The adjustments did not contravene N.C. Gen. Stat. § 62-133(b)(1) and (c). Moreover, we believe that without such adjustments, Duke's rates would have been artificially high, thereby allowing it to earn more than a fair rate of return.

It is apparent that both Duke and the Court of Appeals treated the issue as a contention that the action of the Commission, in making the adjustment to accumulated depreciation, was "affected by error of law." The Court of Appeals applied the correct criteria for review as it held that the adjustment to accumulated depreciation "did not contravene N.C. Gen. Stat. § 62-133(b)(1) and (c)." Having determined that the Court of Appeals applied the correct standard of review on the depreciation issue, this Court must consider whether the Court of Appeals erred in affirming the action of the Commission.

As to the issue concerning the rate of return on equity fixed by the Commission, Duke presented in its brief to the Court of Appeals the following issue:

2. Is the Commission's determination that 14.1% is a fair rate of return on equity unsupported by substantial evidence and arbitrary and capricious when (i) the Commission rejected, without setting out any justification, uncontradicted evidence that 15.0% is the minimum fair rate of return on equity and (ii) the method by which the Commission established the rate of return on equity cannot be determined from the Commission's order?

The Court of Appeals answered that issue as follows:

With regard to the second question presented in appellant's brief, in our opinion, the Commission's determination that 14.1% is a fair rate of return on common equity is fully supported by the record and was not arbitrary and capricious. In its order, the Commission made findings supported by competent evidence and adequately stated the reasons for its determination that 14.1% should be the rate of return on Duke's common equity.

We conclude from the issue presented and the conclusion reached by the Court of Appeals on the issue of the rate of return on equity that both Duke and the Court of Appeals treated the issue as a contention that the Commission's decision in fixing the rate of return at 14.1% was "arbitrary or capricious" or "unsupported by competent, material and substantial evidence in view of the entire record as submitted." It is obvious to this Court that the Court of Appeals applied the correct criteria for review as it held that the Commission's determination of 14.1% rate of return "is fully supported by the record and was not arbitrary and capricious" and that the Commission "made findings supported by competent evidence and adequately stated the reasons for its determination . . . ." Having determined that the Court of Appeals applied the correct standard of review on the rate of return issue, this Court must consider whether the Court of Appeals erred in holding that the Commission's decision was not arbitrary or capricious and was in fact supported by the record.

II. The Statute

For a proper understanding of the issues presented by this appeal and addressed by this Court, it is necessary to set forth the provisions of G.S. § 62-133(a) through (d) in their entirety.

(a) In fixing the rates for any public utility subject to the provisions of this Chapter, other than motor carriers and certain water and sewer utilities, the Commission shall fix such rates as shall be fair both to the public utility and to the consumer.

(b) In fixing such rates, the Commission shall:

(1) Ascertain the reasonable original cost of the public utility's property used and useful, or to be used and useful within a reasonable time after the test period, in providing the service rendered to the public within this State, less that portion of the cost which has been consumed by previous use recovered by depreciation expense plus the reasonable original cost of investment in plant under construction (construction work in progress). In ascertaining the cost of the public utility's property, construction work in progress as of the effective date of this subsection shall be excluded until such plant comes into service but reasonable and prudent expenditures for construction work in progress after the effective date of this subsection shall be included subject to the provisions of subparagraph (b)(5) of this section.

(2) Estimate such public utility's revenue under the present and proposed rates.

(3) Ascertain such public utility's reasonable operating expenses, including actual investment currently consumed through reasonable actual depreciation.

(4) Fix such rate of return on the cost of the property ascertained pursuant to subdivision (1) as will enable the public utility by sound management to produce a fair return for its shareholders, considering changing economic conditions and other factors, as they then exist, to maintain its facilities and services in accordance with the reasonable requirements of its customers in the territory covered by its franchise, and to compete in the market for capital funds on terms which are reasonable and which are fair to its customers and to its existing investors.

(4a) Require each public utility to discontinue capitalization of the composite carrying cost of capital funds used to finance construction (allowance for funds) on the construction work in progress included in its rate base upon the effective date of the first and each subsequent general rate order issued with respect to it after the effective date of this subsection; allowance for funds may be capitalized with respect to expenditures for construction work in progress not included in the utility's property upon which rates were fixed. In determining net operating income for return, the Commission shall not include any capitalized allowance for funds used during construction on the construction work in progress included in the utility's rate base.

(5) Fix such rates to be charged by the public utility as will earn in addition to reasonable operating expenses ascertained pursuant to subdivision (3) of this subsection the rate of return fixed pursuant to subdivisions (4) and (4a) on the cost of the public utility's property ascertained pursuant to subdivision (1).

(c) The original cost of the public utility's property, including its construction work in progress, shall be determined as of the end of the test period used in the hearing and the probable future revenues and expenses shall be based on the plant and equipment in operation at that time. The test period shall consist of 12 months' historical operating experience prior to the date the rates are proposed to become effective, but the Commission shall consider such relevant, material and competent evidence as may be offered by any party to the proceeding tending to show actual changes in costs, revenues or the cost of the public utility's property used and useful, or to be used and useful within a reasonable time after the test period, in providing the service rendered to the public within this State, including its construction work in progress, which is based upon circumstances and events occurring up to the time the hearing is closed.

(d) The Commission shall consider all other material facts of record that will enable it to determine what are reasonable and just rates.

Certain fundamental legal principles are applicable and must be adhered to in applying the statute in the resolution of the issues before us. We begin with the proposition that the Commission is vested with the power to regulate the rates charged by utilities. G.S. § 62-2. The General Assembly has delegated to the Commission, and not to the courts, the duty and power to establish rates for public utilities. Utilities Commission v. Telephone Co., 266 N.C. 450, 146 S.E.2d 487 (1966), citing Utilities Commission v. Champion Papers, Inc., 259 N.C. 449, 130 S.E.2d 890 (1963). The rates fixed by the Commission must be just and reasonable. G.S. §§ 62-130 and 131. See Telephone Co. v. Clayton, Comr. of Revenue, 266 N.C. 687, 147 S.E.2d 195 (1966). Rates fixed by the Commission are deemed prima facie just and reasonable. G.S. § 62-94(e).

The burden of showing the impropriety of rates established by the Commission lies with the party alleging such error. See Utilities Commission v. Light Co. and Utilities Commission v. Carolinas Committee, 250 N.C. 421, 109 S.E.2d 253 (1959). The rate order of the Commission will be affirmed if upon consideration of the whole record we find that the Commission's decision is not affected by error of law and the facts found by the Commission are supported by competent, material and substantial evidence, taking into account any contradictory evidence or evidence from which conflicting inferences could be drawn. See Utilities Comm. v. Springdale Estates Assoc., 46 N.C. App. 488, 265 S.E.2d 647 (1980). Of course, an appellant may show on appeal that the Commission's order is not supported by competent, material and substantial evidence. Utilities Comm. v. Edmisten, Attorney General, 291 N.C. 424, 230 S.E.2d 647 (1976); Utilities Commission v. Coach Co., 261 N.C. 384, 134 S.E.2d 689 (1964); Utilities Commission v. R.R., 238 N.C. 701, 78 S.E.2d 780 (1953).

III. Depreciation

Duke by this appeal seeks the ultimate reversal of the Commission's order which increased Duke's accumulated depreciation account by $3,879,000 as an offset to a pro forma adjustment of the same amount made by Duke to its test period depreciation expenses. We are here concerned only with adjustments for the test period. We are not concerned in this case with adjustments for changes occurring after the test period but before the hearing.

The figure of $3,879,000 is the total of two adjustments by Duke:

Adjustment to annualize

depreciation expense ................. $2,076,000

Adjustment to annualize nuclear

fuel disposal cost ................... 1,803,000

-----------

$3,879,000

While, at present, construction work in progress (CWIP) may be included in the rate base as construction of a facility progresses, it is not depreciated (and therefore not added to accumulated depreciation) until the completed facility comes into service, or in the statute's terminology, until it is used or useful in providing service rendered to the public. Duke made the pro forma adjustment to the test period depreciation expenses to annualize those expenses -- that is, to adjust the test year depreciation expenses to reflect a full year's depreciation which it will be entitled to in the future year when the rates being considered would be effective, rather than the partial year reflected in the actual test year's depreciation expenses for facilities which came into service at various times during the test year and were depreciated only for a part of the year.

The Commission, in effect, concluded that Duke added $3,879,000 as a pro forma adjustment to its operating expenses for the test period to compensate for future depreciation expense without flowing a corresponding amount to its accumulated depreciation reserve. Duke contends that this is authorized because one section of the statute (G.S. § 62-133(c)) allows an adjustment favorable to them for future depreciation expense while another section of the statute (G.S. § 62-133(b)(1)) does not allow, and indeed prohibits, a corresponding and offsetting adjustment to its rate base. We do not agree.

Duke's position with regard to the Commission's offsetting adjustment in the accumulated depreciation account is fully and accurately reflected in the testimony of its witness William R. Stimart, Duke's financial and accounting expert, who testified that such a deduction in the rate base was inappropriate because it did not represent depreciation that had been collected from ratepayers:

I have not deducted from rate base the adjustment to annualize depreciation expense consistent with G.S. 62-133(b)(1) which states that the original cost of a public utility's property is to be reduced by 'that portion of the cost which has been consumed by previous use recovered by depreciation expense.' The amount of this adjustment to depreciation expense has not been consumed by previous use recovered by depreciation expense. Since the proposed rates will not become effective until after the test period, the ratepayers will not have paid the level of depreciation expense we are seeking in this case. (R.p. 114)

The Commission acknowledged that the additional $3,879,000 it added to the accumulated depreciation reserve and subtracted from the rate base had not been collected from Duke's customers. (R.pp. 2 & 5)

Duke vigorously contends that the Commission's action in reducing its rate base is contrary to what Duke considers to be the legislature's mandate in G.S. § 62-133(b)(1) that the rate base consist of the plant in service at the end of the test period. Duke argues that this issue is controlled by the well-established principle of statutory construction that a section of a statute dealing with a specific situation controls, with respect to that situation, other sections which are general in their application, and that when the section dealing with a specific matter is clear and understandable on its face, it requires no construction. See Phillips v. Phillips, 296 N.C. 590, 596, 252 S.E.2d 761, 765 (1979); Utilities Commission v. Electric Membership Corp., 275 N.C. 250, 260-61, 166 S.E.2d 663, 670 (1969); Utilities Commission v. Coach Co., 236 N.C. 583, 588-89, 73 S.E.2d 562, 566 (1952). Duke contends that since G.S. § 62-133(b)(1) deals specifically with the issue of what depreciation may be deducted from plant in service in determining rate base, that specific statutory section is controlling. While we recognize the validity of this principle of construction urged by Duke, it is not controlling here.

Though we are dealing with several sections and subsections of G.S. § 62-133, we are here dealing with but one statute. By the adoption of this statute, the legislature intended to establish an overall scheme for fixing rates, and it must be interpreted in its entirety in order to comply with the legislative intent. In this instance

the more appropriate principle of statutory construction is stated as follows:

The different parts of a statute reflect light upon each other, and statutory provisions are regarded as in pari materia where they are parts of the same act. Hence, a statute should be construed in its entirety, and as a whole. All parts of the act should be considered, and construed together. It is not permissible to rest a construction upon any one part alone, or upon isolated words, phrases, clauses, or sentences, or to give undue effect thereto. The legislative intention, as collected from an examination of the whole as well as the separate parts of a statute, is not to be defeated by the use of particular terms.

73 Am. Jur. 2d Statutes § 191 (1974).

As we subsequently demonstrate herein, Duke itself was dependent on this latter principle of statutory construction in increasing pro forma its actual test year depreciation expense by $3,879,000.

The Commission increased accumulated depreciation to reflect that Duke's ratepayers were being charged a full year's depreciation, for ratemaking purposes, on such plant despite the fact that such plant was not in service for the full year. It is axiomatic that an increase in accumulated depreciation results in a decrease in the rate base. The utility's rate base is determined in pertinent part by ascertaining the original cost of plant in service and subtracting therefrom the reserve for accumulated depreciation. Therefore any increase in the reserve for accumulated depreciation causes a corresponding reduction in the rate base. It follows, of course, that when the approved rate of return is applied to the rate base thus reduced, the ultimate result is the prospect of a lower level of revenues for Duke. It is this adjustment to accumulated depreciation that Duke contends is error.

We will now consider whether the statute authorizes the reduction in rate base resulting from the Commission's adjustment to accumulated depreciation to offset Duke's pro forma adjustment increasing test year depreciation expense ...


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