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North Carolina v. Intervenor Residents of Bent Creek/Mt. Carmel Subdivisions

Filed: January 27, 1982.


Appeal as of right by Carolina Water Service, Inc. of North Carolina pursuant to G.S. § 7A-30(3) from a decision of the Court of Appeals reported at Meyer, Justice.


In its application filed with the Commission on 2 July 1979, the Company sought to increase its rates for water and sewer service for the Bent Creek and Mt. Carmel Acres subdivisions in Buncombe County. The Company proposed an annual increase in gross revenues of $34,370 based upon a test year ending 31 December 1978.

The Company's income statement for the year ended 31 December 1978, filed as a part of its application, indicated an actual net operating loss of $31,652 which, after pro forma adjustments, decreased to a loss of $7,851. Under the requested increase of $34,370 the pro forma net operating income would have become $14,843, providing a rate of return on original cost net investment of approximately 7.66%. Prior to the hearing of the case which began on 6 November 1979, the Public Staff of the Commission and residents of Bent Creek and Mt. Carmel Acres subdivisions intervened. Accounting and engineering personnel of the Public Staff conducted audits and investigations into the Company's application, its service area, and its books of account.

At the conclusion of the hearing, the Hearing Examiner, on 19 February 1980, issued a Recommended Order and held that while the 7.66% rate of return requested by the Company would otherwise have been appropriate, the Company should be penalized 2.02% for inadequate service and should therefore receive only a 5.64% rate of return or an increase of $25,784 in annual revenues. Rates approved by the Hearing Examiner as just and reasonable had the effect of increasing the monthly charge for water to an average customer using 496 cubic feet of water per month from $9.40 to $11.00 and increasing the flat monthly sewer charge from $8.00 to $11.00. Intervenor/Residents filed exceptions to the Recommended Order and orally argued the issues before the Commission. The Commission, finding that the Recommended Order of the Hearing Examiner should be approved, filed its "Final Order Overruling Exceptions and Affirming Recommended Order" on 17 April 1980.


Intervenor/Residents' first argument before the Court of Appeals was the the Commission, in establishing new rates, should not have considered certain expenses allocated to the Company because they reflected charges for services rendered by affiliated companies pursuant to contracts not filed with and approved by the Commission as required by G.S. § 62-153. Intervenor/Residents argued that failure to file the contracts and seek Commission approval should result in the disallowance of expenses incurred pursuant to such contracts. The Court of Appeals, noting that because of the poor financial condition of the Company few payments had been made to affiliated companies,*fn2 concluded that once the Commission found the contracts to be just and reasonable there was no reason to disregard expenses incurred under such contracts. The Court of Appeals held that G.S. § 62-153 does not prohibit the Utilities Commission from considering fees owed to affiliated corporations under unfiled contracts as expenses of the public utility for purposes of ratemaking so long as the Commission does determine in the ratemaking procedure that the agreements between the utility and the affiliated corporations are

just and reasonable and it does not appear that their purpose is to conceal or divert profits from the public utility to an affiliate. For the reason stated by the Court of Appeals, we concur in that holding and deem it unnecessary to comment further on that aspect of this appeal.


The central issue raised on this appeal is whether the Commission erred in approving the Company's increased rates for water and sewer service based in part on $27,661 of operating and general expenses allocated during the test year from affiliated companies. Resolution of this issue requires a review of the evidence presented in the ratemaking proceeding before the Commission.

Utilities, Inc., of Northbrook, Illinois, has no employees and is a holding company whose sole function is to own the capital stock of its approximately thirty-five subsidiary water and sewer operating companies located in nine states. All of the employees and the operation of all the approximately thirty-five subsidiary companies are directed by another wholly owned subsidiary, Water Service Corporation (hereinafter "Service Corporation") also located in Northbrook, Illinois. One of the wholly owned subsidiaries of Utilities, Inc., is Carolina Water Service, Inc. of North Carolina, a North Carolina corporation, which owns and operates the systems in the Lee's Ridge, Bent Creek and Mt. Carmel Acres subdivisions in Buncombe County as well as systems in subdivisions at Pine Knoll Shores located near Morehead City, North Carolina, and Whispering Pines, located near Southern Pines, North Carolina. Another of Utilities, Inc.'s, subsidiaries is Carolina Water Service, Inc., a Delaware corporation (hereinafter "CWS") which owns and operates systems in South Carolina. Another such subsidiary is Sugar Mountain Utilities, Inc. (hereinafter "Sugar Mountain") which operates a subdivision system in Sugar Mountain, Avery County, North Carolina.

The Company serves approximately 470 homes in the Bent Creek and Mt. Carmel subdivisions. To maintain the water and sewer systems and provide customer assistance, the Company employs two operating personnel who reside in that area. Service complaints from that area are handled via a toll-free telephone call by a full-time administrative secretary employed by Sugar Mountain at its office in Avery County where the manager and

assistant manager of Sugar Mountain are also located. The Company's office in the Bent Creek/Mt. Carmel Acres area consists of a mobile home adapted for use as an office, for record-keeping, and for basic lab tests. CWS provides administrative and secretarial services to the Company from its offices in South Carolina. Service Corporation, from its offices in Northbrook, pays the salaries and employee benefits such as life insurance and pension plans, etc., of all employees involved in the operation of all the affiliated companies including the two parties employed directly by the Company as well as the salaries of employees of the affiliated companies which furnish administrative, billing, computer, auditing, engineering, personnel, and accounting functions for the Company. Service Corporation furnishes such services to the Company pursuant to a contract now filed with and approved by the Utilities Commission.*fn3

Among the various items of the test-year operating expenses of the Company in its application before the Commission was the $27,661 of operating and general expenses previously referred to which included the $19,471 share of the operating expenses of Service Company and the $8,190 share of the operating expenses of CWS allocated to the Company. The Company presented extensive evidence of the method by which the expenses of the affiliates were allocated as expenses of the Company and that such allocation represented a fair proportion of the costs of the affiliates. The Hearing Examiner concluded in his Recommended Order that "the allocation methods actually applied were reasonable and that the allocated general and operating and maintenance expenses derived by such allocations were reasonable, including those paid to [Service Company]." The Commission found and concluded that the Hearing Examiner's findings and conclusions "are all fully supported by the record" and affirmed the Recommended Order. Intevenor/Residents argued in the Court of Appeals that the order of the Commission approving the rate increase was unsupported by competent, material, and substantial evidence as to the reasonableness of expenses allocated to the Company by these affiliated companies. They contended that such allocated expenses could not properly be included in the Company's operating expenses because the evidence in

the record did not show that the affiliated companies incurred the allocated expenses in a reasonable manner.

While the Court of Appeals recognized that there was evidence in the record that Service Company and CWS "actually incurred these expenses," that "the Commission appears to have considered the reasonableness of the method of allocation . . .," and "that the amounts allocated to the Company was a fair proportion of the whole,"*fn4 that court held in effect that there was no evidence whatsoever that the expenses incurred by those affiliated companies in providing the services were just and reasonable. For reasons subsequently stated, we cannot agree.

The Commission is vested with full 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).

Utilities Commission v. Duke Power Co., 305 N.C. 1, 10 S.E.2d , (1982).

All findings of fact made by the Commission, which are supported by competent, material, and substantial evidence, are conclusive. On appeal, the authority of the reviewing court, whether the Court of Appeals or this Court, to reverse or modify the Order of the Commission, or to remand the matter to the Commission for further proceedings, is limited to that specified in ...

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