The opinion of the court was delivered by: Lake, Justice.
Appeal as of right by intervenor-appellant Carolina Utility Customers Association pursuant to N.C.G.S. § 7A-29(b) from a final order of the Utilities Commission in a general rate case granting applicant-appellee Pennsylvania & Southern Gas Company a partial rate increase. Heard in the Supreme Court 10 September 1996.
On 17 February 1995, applicant-appellee Pennsylvania & Southern Gas Company, a division of NUI Corporation and doing business as North Carolina Gas Service ("the Company"), filed an application with the North Carolina Utilities Commission seeking a $773,503 increase in annual gross revenues and approval of a mechanism for the future recovery of manufactured gas plant costs. On 14 March 1995, the Commission entered an order setting the Company's application for investigation and hearing and declared this case a general rate case pursuant to N.C.G.S. § 62-137. Subsequently, the Commission by order allowed the formal intervention of Carolina Utility Customers Association, Inc. ("CUCA"). The intervention and participation of the Public Staff-North Carolina Utilities Commission ("Public Staff") was recognized pursuant to statute.
On 14 June 1995, the Company and the Public Staff filed a stipulation resolving all revenue requirements and rate design issues raised by the Company's application. The parties to the stipulation agreed that the Company should be granted an annual rate increase of $384,771, that the Company should be allowed to earn an 11.4% return on common equity, and that certain "proposed rates [were] just and reasonable to all customer classes." CUCA did not join in this stipulation and opposed certain provisions contained therein. This matter came on for hearing before the Commission on 27 June 1995.
At that hearing, the Company offered the direct, supplemental and rebuttal testimonies of James W. Carl, its vice president; Robert F. Lurie, the treasurer of NUI Corporation; and Bernard L. Smith, the vice president of accounting for the Company. On direct, Mr. Carl testified regarding the Company's cost of service and several studies allocating costs to the Company's various customer classes and determining the rate of return on those classes. On the basis of these studies, Mr. Carl made recommendations for the design of rates. In his supplemental testimony, Mr. Carl explained the negotiation procedures with the Public Staff and identified the various changes to the Company's filed case that were incorporated into the stipulation as a result of negotiations with the Public Staff. Mr. Lurie, on direct examination, testified that he had performed a discounted cash flow analysis of the projected costs of capital for the Company. Based on this study, Mr. Lurie's initial recommendation for a return on equity for the Company was 13.34%.
CUCA offered the testimony of Kevin W. O'Donnell, a consultant in the field of utility regulation. Mr. O'Donnell testified that with respect to the Company's cost of equity capital, he had performed both a discounted cash flow analysis and a comparable earnings analysis, and based on these studies, the Company's cost of equity capital was 10.4%. Mr. O'Donnell further testified regarding cost of service and rate design. He criticized Mr. Carl's cost-of-service studies and stated that, in his opinion, rates should be based strictly on cost, that the rate design put forth by the Company did not reflect this approach, and that rates of return for the various customer classes essentially should be equalized over time. Finally, Mr. O'Donnell criticized the Company's continued use of "full margin" transportation rates. In his supplemental testimony, Mr. O'Donnell testified that a 0.15% flotation factor should be added to his original return on equity recommendation so as to allow the Company to earn 10.55% on equity.
On rebuttal, Mr. Carl testified regarding problems with the cost-of-service analysis performed by Mr. O'Donnell and the practical difficulties associated with Mr. O'Donnell's recommendation for levelized rates of return for each customer class. Mr. Carl further testified that the Company should be allowed to continue using "full margin" transportation rates. Mr. Lurie testified on rebuttal that the stipulated rate of return on equity of 11.4% was just and reasonable.
On 20 September 1995, the Commission approved the stipulated revenue requirement and rate design and entered an order granting a partial rate increase. In reaching its decision, the Commission concluded: (1) that the cost of the Company's equity capital was 11.4%; (2) that "[i]t is not appropriate to set rates in this proceeding based solely on any one or more of the estimated cost-of-service studies presented by CUCA and Pennsylvania & Southern"; (3) that the stipulated rate design was "just and reasonable for purposes of this proceeding and [did] not subject any customer or class of customers to rate shock or unjust or discriminatory rates"; and (4) that the Company's transportation rates should continue to be established on a "full margin" basis.
CUCA appeals to this Court contending the Commission committed reversible error by (1) adopting a return on equity of 11.4%, the return specified in said stipulation; (2) failing to adopt a single cost-of-service study for use in designing rates; and (3) approving the continued use of "full margin" transportation rates by the Company. For the reasons stated herein, we reverse the decision of the North Carolina Utilities Commission and remand this case for further proceedings not inconsistent with this decision.
The goals, policies and principles underlying the Commission's regulation of public utilities, and its concomitant duties pursuant thereto, are well established in the statutory and case law of this state. This Court emphasized and summarized these fundamental principles of public utility law in State ex rel. Util. Comm'n v. General Tel. Co. of Southeast, 281 N.C. 318, 189 S.E.2d 705 (1972), wherein the Court stated:
The Legislature has conferred upon the Utilities Commission the power to police the operations of the utility company so as to require it to render service of good quality at charges which are reasonable. G.S. 62-31; G.S. 62-32; G.S. 62-130; and G.S. 62-131. These statutes confer upon the Commission, not upon this Court or the Court of Appeals, the authority to determine the adequacy of the utility's service and the rates to be charged therefor.
General Tel., 281 N.C. at 335-36, 189 S.E.2d at 717 (emphasis added). In this regard, N.C.G.S. § 62-81(a) provides in relevant part:
All cases or proceedings, declared to be or properly classified as general rate cases under G.S. 62-137, or any proceedings which will substantially affect any utility's overall level of earnings or rate of return, shall be set for trial or hearing by the Commission . . . . All such cases or proceedings shall be tried or heard and decided in accordance with the rate-making procedure set forth in G.S. 62-133 . . . .
N.C.G.S. § 62-81(a) (1989) (emphasis added). Thus, the Commission must comply with the overall requirements of regulation established and specified in considerable detail by the Legislature in chapter 62 of the General Statutes. General Tel., 281 N.C. at 336, 189 S.E.2d at 717. While public utilities are subject to such regulation, in all other respects they are private, investor-owned companies, and they must be allowed to attract from volunteer investors, within our free enterprise system, such additional capital as is periodically required for the expansion or improvement of services. Id. at 337, 189 S.E.2d at 718. Utilities accomplish this by offering their shareholders and other potential investors the opportunity to earn a return on investment that, in light of the potential risk, outweighs or is at least comparable to returns available in other investment options. Id.
In order to meet the twin goals of assuring sufficient shareholder investment in utilities while simultaneously maintaining the lowest possible cost to the using public for quality service, the Legislature set forth in section 62-133 the precise steps the Commission must follow in fixing rates in a general rate case such as the one at bar. General Tel., 281 N.C. at 335-37, 189 S.E.2d at 717-18. This statute provides in part:
§ 62-133. How rates fixed.
(a) In fixing the rates for any public utility . . . , the Commission shall fix such rates as shall be fair both to the public utilities 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 . . . in providing the service rendered to the public . . . .
(2) Estimate such public utility's revenue under the present and proposed rates.
(3) Ascertain such public utility's reasonable operating expenses . . . .
(4) Fix such rate of return on the cost of the property ascertained . . . as will enable the public utility by sound management to produce a fair return for its shareholders, . . . to maintain its facilities and services . . . , 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.
(5) Fix such rates to be charged by the public utility as will earn in addition to reasonable operating expenses ascertained . . . the rate of return fixed . . . on the cost of the public utility's property
(d) The Commission shall consider all other material facts of record that will enable it to determine what are reasonable and just rates.
N.C.G.S. § 62-133 (Supp. 1997). The Commission's ultimate goal in setting rates is to determine what constitutes a reasonable charge for services proposed to be rendered in the immediate future. State ex rel. Util. Comm'n v. Morgan, 277 N.C. 255, 267, 177 S.E.2d 405, 413 (1970). The determination of this question is for the Commission, in accordance with the direction of this section. Id.
The rates fixed by the Commission are deemed prima facie just and reasonable. N.C.G.S. §§ 62-94(e), -132 (1989). The decision of the Commission will be upheld on appeal unless it is assailable on one of the statutory grounds enumerated in section 62-94(b). State ex rel. Util. Comm'n v. Mebane Home Tel. Co., 35 N.C. App. 588, 591, 242 S.E.2d 165, 166 (1978), aff'd, 298 N.C. 162, 257 S.E.2d 623 (1979). Section 62-94 provides in relevant part:
(b) So far as necessary to the decision and where presented, the court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning and applicability of the terms of any Commission action. The court may affirm or reverse the decision of the Commission, declare the same null and void, or remand the case for further proceedings; or it may reverse or modify the decision if the substantial rights of the appellants have been prejudiced because the Commission's findings, inferences, conclusions or decisions are:
(1) In violation of constitutional provisions, or
(2) In excess of statutory authority or jurisdiction of ...