Case Title: State ex rel. Utilities Comm'n v. Carolina Util. Assoc'n, Inc

Citation: 351 N.C. 223

Docket Number: 170A99

State: north-carolina

Court: North Carolina Supreme Court

Date: 2000-02-04T00:00:00Z

Document:
PSNC amended the requested increase to $11,843,472 through
1
its prefiled rebuttal testimony.  PSNC later revised the
requested increase to $14,045,773 through PSNC witness Boone’s
IN THE SUPREME COURT OF NORTH CAROLINA
No. 170A99
STATE OF NORTH CAROLINA EX REL. UTILITIES COMMISSION; PUBLIC
SERVICE COMPANY OF NORTH CAROLINA, INC. (Applicant); PUBLIC
STAFF-NORTH CAROLINA UTILITIES COMMISSION (Intervenor); and
MICHAEL F. EASLEY, ATTORNEY GENERAL (Intervenor)
v.
CAROLINA UTILITY CUSTOMERS ASSOCIATION, INC. (Intervenor)
Appeal as of right by intervenor-appellant Carolina Utility
Customers Association pursuant to N.C.G.S. § 7A-29(b) from an
order of the Utilities Commission entered 30 October 1998 in a
general rate case granting applicant-appellee Public Service
Company of North Carolina, Inc., a partial rate increase.  Heard
in the Supreme Court 13 October 1999.
J. Paul Douglas, Corporate Counsel, for applicant-appellee
Public Service Company of North Carolina, Inc.
Robert P. Gruber, Executive Director, by Antoinette R. Wike,
Chief Counsel, and Amy Barnes Babb, Staff Counsel, for
intervenor-appellee Public Staff.
Michael F. Easley, Attorney General, by Margaret A. Force,
Assistant Attorney General, intervenor-appellee.
Sutherland, Asbill & Brennan, LLP, by Keith R. McCrea, pro
hac vice; and West Law Offices, P.C., by James P. West, for
intervenor-appellant Carolina Utility Customers Association,
Inc.
PARKER, Justice.
On 2 April 1998 applicant-appellee Public Service Company of
North Carolina, Inc. (“PSNC”) filed an application with the North
Carolina Utilities Commission (“the Commission”) seeking a rate
increase of $21,518,027 per year.   The Commission allowed the
1
supplemental testimony.  
formal intervention of Carolina Utility Customers Association,
Inc. (“CUCA”) by order dated 7 April 1998.  On 28 April 1998 the
Commission entered an order setting PSNC’s application for
investigation and hearing and declared this case a general rate
case pursuant to N.C.G.S. § 62-137.  The intervention and
participation of the Public Staff-North Carolina Utilities
Commission (“Public Staff”) and the Attorney General was
recognized pursuant to statute.
After the parties submitted prefiled direct and rebuttal
testimony to the Commission, PSNC, in an effort to expedite this
proceeding, met privately with the Public Staff to negotiate an
agreement regarding revenue requirements.  No other parties were
included in those negotiations.  Neither PSNC nor the Public
Staff filed a stipulation or formal settlement with the
Commission as a result of their negotiations.  Rather, PSNC and
the Public Staff each agreed to present their own witnesses.  The
Public Staff’s witnesses would testify according to the
negotiated terms, and PSNC agreed not to challenge the Public
Staff’s testimony pertaining to the private agreement.
On 8 July 1998 pursuant to legislative mandate, the
Commission entered an order requiring a study of natural gas
transportation rates and setting the Commission’s transportation
rate study for hearing beginning 31 August 1998.  The Commission
noted that its order would establish an expedited schedule for
the study but emphasized the importance of coordinating the
transportation rate study with this pending general rate case.
This matter came on for hearing before the Commission on
25 August 1998.  The Commission entered an “Order Granting
Partial Rate Increase” on 30 October 1998.  The Commission
authorized a $12,394,757 increase of PSNC’s annual revenues. 
PSNC filed revised tariffs and rate schedules that were designed
to implement the Commission’s 30 October 1998 order.  On
2 December 1998 the Commission entered an order approving the
revised tariffs.  CUCA now appeals from the Commission’s order
granting a partial rate increase.
CUCA contends that the Commission committed reversible error
by (1) relying on the private agreement between PSNC and the
Public Staff to resolve contested issues; (2) adopting a return
on equity of 11.4%; (3) adopting a capital structure composed of
51.91% common equity, 4.02% short-term debt, and 44.07% long-term
debt; (4) adopting the “peak and average” cost-of-service
allocation methodology; (5) failing to make sufficient findings
of fact regarding the cost-of-service to the various classes of
customers in adopting a rate design; and (6) failing to address
the impact of rider D on rate schedules 145 and 150.  For the
reasons stated herein, we affirm the decision of the North
Carolina Utilities Commission.
In fixing rates to be charged by a public utility, 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.”  State ex
rel. Utils. Comm’n v. Carolina Util. Customers Ass’n, 348 N.C.
452, 457, 500 S.E.2d 693, 698 (1998).  The Commission must follow
the steps set forth in N.C.G.S. § 62-133 in fixing rates in a
general rate case.  See State ex rel. Utils. Comm’n v. General
Tel. Co. of Southeast, 281 N.C. 318, 336, 189 S.E.2d 705, 717
(1972).  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(a), (b), (d) (1999).  The Commission must
determine, in accordance with the direction of this section, what
constitutes a reasonable charge for proposed services.  See
Carolina Util. Customers Ass’n, 348 N.C. at 459, 500 S.E.2d at
699; see also State ex rel. Utils. Comm’n v. Morgan, 277 N.C.
255, 267, 177 S.E.2d 405, 413 (1970).
The rates fixed by the Commission are deemed prima facie
just and reasonable pursuant to N.C.G.S. § 62-94(e).  This Court
will uphold the Commission’s decision unless it may be attacked
on one of the statutory grounds enumerated in N.C.G.S. §
62-94(b).  See Carolina Util. Customers Ass’n, 348 N.C. at 459,
500 S.E.2d at 699.  Section 62-94 provides in pertinent 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 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.
  (c)  In making the foregoing determinations, the
court shall review the whole record or such portions
thereof as may be cited by any party and due account
shall be taken of the rule of prejudicial error.  The
appellant shall not be permitted to rely upon any
grounds for relief on appeal which were not set forth
specifically in his notice of appeal filed with the
Commission.
N.C.G.S. § 62-94(b), (c) (1999).
Under section 62-94(b) this Court must review the
Commission’s order on appeal to determine whether the findings of
fact are supported by competent, material, and substantial
evidence in view of the entire record.  See Carolina Util.
Customers Ass’n, 348 N.C. at 460, 500 S.E.2d at 699.  Substantial
evidence means “such relevant evidence as a reasonable mind might
accept as adequate to support a conclusion.”  Consolidated Edison
Co. of N.Y. v. N.L.R.B., 305 U.S. 197, 229, 83 L. Ed. 126, 140
(1938).
This Court cannot affirm the Commission’s order unless the
facts and findings included therein are contained in the record. 
See Carolina Util. Customers Ass’n, 348 N.C. at 460, 500 S.E.2d
at 700.  Section 62-79(a) establishes the standard against which
Commission orders will be analyzed on appeal:
  (a)  All final orders and decisions of the Commission
shall be sufficient in detail to enable the court on
appeal to determine the controverted questions
presented in the proceedings and shall include:
(1)
Findings and conclusions and the reasons or
bases therefor upon all the material issues
of fact, law, or discretion presented in the
record, and
(2)
The appropriate rule, order, sanction, relief
or statement of denial thereof.
N.C.G.S. § 62-79(a) (1999).  “Failure to include all necessary
findings of fact is an error of law and a basis for remand under
section 62-94(b)(4) because it frustrates appellate review.” 
Carolina Util. Customers Ass’n, 348 N.C. at 460, 500 S.E.2d at
700.
I.  Private Agreement
CUCA argues that the Commission’s reliance upon the private
agreement between PSNC and the Public Staff constitutes
prejudicial error.  Further, CUCA contends that a heightened
standard of review should be applied on appeal where the
Commission adopts the recommendations of parties who testified
according to negotiated terms between fewer than all of the
parties to the dispute.  We disagree.
This Court addressed the issue of nonunanimous agreements in
Carolina Util. Customers Ass’n, 348 N.C. at 466, 500 S.E.2d at
701.  In that case, the utility and the Public Staff filed a
stipulated agreement resolving all revenue requirements and rate
design issues.  See id. at 455, 500 S.E.2d at 697.  The
Commission subsequently adopted a rate of return on equity
directly from that stipulation without any deduction.  See id. at
461, 500 S.E.2d at 700.  On appeal, the utility and the Public
Staff argued that this Court should apply a lower standard of
review and that the Commission’s order should be reviewed for
reasonableness as a whole since the nonunanimous stipulation
fulfilled the “substantial evidence” requirement in N.C.G.S. §
62-94(b)(5).  See id. at 462, 500 S.E.2d at 701.
This Court recognized that “the legislature has established
an elaborate procedural, hearing, and appeals process that
contemplates the full consideration of all evidence put forth by
each of the parties certified via the statute to have an interest
in the outcome of contested proceedings.”  Id. at 463, 500 S.E.2d
at 701.  The Court acknowledged the value of settlements to the
efficient administration of justice but emphasized that
“[c]hapter 62 contemplates a full and fair examination of
evidence put forth by all of the parties.”  Id. at 464, 500
S.E.2d at 702.  Permitting the Commission to adopt a stipulation
between fewer than all of the parties “would effectively absolve
the Commission of its statutory and due process obligations to
afford all parties a fair hearing.”  Id.
We held that the Commission should afford full consideration
to nonunanimous stipulations along with all other evidence
presented by any of the parties in the proceeding.  See id. at
466, 500 S.E.2d at 703.  The Court further reasoned:
The Commission may even adopt the recommendations or
provisions of the nonunanimous stipulation as long as
the Commission sets forth its reasoning and makes “its
own independent conclusion” supported by substantial
evidence on the record that the proposal is just and
reasonable to all parties in light of all the evidence
presented.
Id.  Thus, we rejected the argument that the Commission’s order
should be subjected to a lower standard of review where the
Commission adopts a nonunanimous stipulation.  See id.
Applying the foregoing principles to this case, we similarly
reject CUCA’s argument that the Commission’s order should be
subjected to a heightened standard of review where the witnesses
testified according to a nonunanimous private agreement.  We hold
that the proper standard of review requires only that the
Commission made an independent determination supported by
substantial evidence on the record.  Even where the parties
negotiate a private agreement regarding the evidence to be
presented, the Commission satisfies the requirements of
chapter 62 by independently considering and analyzing all the
evidence and any other facts relevant to a determination that the
proposal is just and reasonable to all parties.
In this case the Public Staff presented six witnesses whose
testimony addressed every issue of material fact.  Although PSNC
did not contest the Public Staff’s testimony on issues covered by
the private agreement, PSNC also never withdrew its prefiled
testimony.  Therefore, the Commission could have rejected the
Public Staff’s testimony in favor of the evidence supporting
PSNC’s original application.  However, as we shall discuss
further, the Commission considered and analyzed the evidence
presented by all parties before independently adopting the Public
Staff’s recommendations.  We hold that the Commission’s order
contains findings sufficient to justify its conclusions. 
Further, the Commission’s findings are supported by competent,
material, and substantial evidence in view of the entire record.
II.  Return on Equity
CUCA maintains that the Commission’s conclusion of an 11.4%
return on equity is unsupported by competent, material, and
substantial evidence in view of the entire record.  We disagree.
The “rate of return” on equity, PSNC’s outstanding common
stock, “is a percentage that the Commission concludes should be
earned on the value of the utility’s investment, commonly
referred to as the ‘rate base.’”  Carolina Util. Customers Ass’n,
348 N.C. at 461, 500 S.E.2d at 700.  Several variables factor
into determining a “just and reasonable” rate of return,
including:
(1) the rate base which earns the return; (2) the gross
income received by the applicant from its authorized
operations; (3) the amount to be deducted for operating
expenses, which must include the amount of capital
investment currently consumed in rendering the service;
and (4) what rate constitutes a just and reasonable
rate of return on the predetermined rate base.
Id. at 461-62, 500 S.E.2d at 700.
The Commission’s conclusion of what constitutes a fair rate
of return on common equity must be predicated on adequate factual
findings.  See State ex rel. Utils. Comm’n v. Public Staff, 322
N.C. 689, 693, 370 S.E.2d 567, 570 (1988).  The Commission must
consider and make its determination based upon all factors
particularized in N.C.G.S. § 62-133, including “all other
material facts of record” that will aid the Commission in
determining what are just and reasonable rates.  N.C.G.S. §
62-133(d); see also Carolina Util. Customers Ass’n, 348 N.C. at
462, 500 S.E.2d at 701.  “The Commission must then arrive at its
‘own independent conclusion’ as to the fair value of the
applicant’s investment, the rate base, and what rate of return on
the rate base will constitute a rate that is just and reasonable
both to the utility company and to the public.”  Carolina Util.
Customers Ass’n, 348 N.C. at 462, 500 S.E.2d at 701 (quoting
State ex rel. Utils. Comm’n v. State, 239 N.C. 333, 344, 80
S.E.2d 133, 141 (1954)) (alteration in original).
A thorough review of the record in this case, including
particularly the Commission’s order, reveals that the
Commission’s 11.4% rate of return on common equity conclusion
comes from the direct testimony and exhibits of Public Staff
witness Hinton.  The Commission complied with the standards
established by sections 62-79(a), -94(b) and -133 by
independently analyzing the testimony of PSNC witness Andrews,
CUCA witness O’Donnell, and Public Staff witness Hinton before
reaching its conclusion that 11.4% was the appropriate cost of
common equity.
PSNC witness Andrews employed three different methodologies
in determining the appropriate rate of return on common equity. 
Andrews performed two separate analyses using the “discounted
cash flow” (“DCF”) model.  Andrews’ first DCF analysis focused
entirely on historical dividend data, although Andrews “cautioned
repeatedly” against using the DCF model in light of the irregular
dividend history of the natural gas industry.  Andrews compiled a
composite of twenty-one gas distributing companies which, like
PSNC, derived more than 80% of their total revenues from the sale
of gas or similar business.  From that composite group, Andrews
selected the four companies with the highest costs of common
equity (“the first quartile”) and averaged their costs of common
equity, resulting in a return requirement of 9.33%.  Andrews’
second DCF analysis involved a “rolling 5-year” approach in which
Andrews averaged the costs of common equity of the first quartile
for the years 1993-1997, producing an average cost of common
equity of 11.21%.
Andrews also incorporated his DCF model into a risk premium
analysis, which he referred to as a hybrid premium DCF-over-debt
analysis, resulting in costs of common equity of 11.74% for
treasury bills, 11.26% for intermediate-term government bonds,
and 11.12% for long-term government bonds.  Finally, Andrews
performed a “capital asset pricing model” (“CAPM”) analysis using
as the expected return on the market the average annual returns
of the Standard & Poor’s 500 from 1988 through 1997 as reported
by Ibbotson & Associates.  Andrews’ CAPM analysis yielded a cost
of common equity ranging from 11.41% to 14.35%.  Overall, Andrews
recommended a point estimate of cost of common equity of 12.10%
in a range from 11.60% to 12.60%.
CUCA witness O’Donnell developed his recommended required
return on common equity according to two different methodologies. 
First, O’Donnell used the DCF method to analyze the dividend
yield and anticipated dividend growth of PSNC.  O’Donnell
performed a DCF study specific to PSNC which produced a return
requirement between 10.3% and 11.3%.  O’Donnell “checked” this
result by applying the DCF method to a group of twenty-one
companies that he “consider[ed] to be of comparable risk” to
PSNC.  This study produced a return on equity range of 9.80% to
10.80%.  Second, O’Donnell used the “comparable earnings” method
to assess the reasonableness of his DCF results.  O’Donnell
studied the actual historical earned returns on common equity of
all industries, natural gas companies, and companies comparable
in risk to PSNC.  Based upon this analysis O’Donnell concluded
that a reasonable estimate of the cost of equity to PSNC was
within the range of 10.5% to 11.5%.  Overall, O’Donnell
recommended a return requirement for PSNC of 10.8%.
Public Staff witness Hinton also based his recommendation on
the DCF model and the comparable earnings approach.  First,
Hinton applied the DCF model to PSNC and two groups of comparable
risk companies.  From this analysis Hinton concluded that the
appropriate cost of equity was within the range of 10.5% to
11.5%.  Second, Hinton tested the reasonableness of his DCF
results by employing a comparable earnings analysis for
comparable local gas companies with a “B+” Standard & Poor’s
stock ranking.  That analysis indicated historical earned returns
on equity ranging from 11.0% to 12.0%.  Overall, Hinton
recommended 11.4% as the appropriate point-specific cost of
common equity for PSNC.
The Commission’s ultimate conclusion approving an 11.4% rate
of return on equity meets the standards established by section
62-133 specifically and by chapter 62 as a whole.  The
Commission’s conclusion that Public Staff witness Hinton’s
testimony was the most credible and objective is fully supported
by competent, material, and substantial evidence in view of the
entire record.  The final order shows that the Commission
carefully reviewed the testimonies of PSNC witness Andrews and
CUCA witness O’Donnell before adopting Public Staff witness
Hinton’s recommended return on common equity.
The Commission concluded that PSNC witness Andrews skewed
his results toward a higher cost of common equity by including
only the four companies with the highest cost of common equity in
his DCF model and hybrid premium DCF-over-debt analysis. 
Andrews’ third approach, CAPM, was similarly flawed in that
Andrews calculated an equity risk premium over a ten-year period
rather than over a period dating back to the 1920s as recommended
by Ibbotson & Associates.
The Commission also concluded that CUCA witness O’Donnell
skewed his results.  O’Donnell created a downward bias in his DCF
model and comparable earnings approach by ignoring data in his
own exhibits and including certain companies with poor earnings
and growth records.  Additionally, O’Donnell’s recommended cost
of common equity would jeopardize PSNC’s ability to attract
capital by placing its current “A-” bond rating at considerable
risk for a possible downgrade.
In contrast, the Commission gave the greatest weight to
Public Staff witness Hinton’s testimony in determining the cost
of common equity.  Hinton’s DCF analysis included only companies
with sufficient dividend histories to calculate ten-year Value
Line growth rates.  Hinton also performed a comparable earnings
analysis that indicated a range of historical returns of 11.0% to
12.0%.  Overall, Hinton recommended a point-specific cost of
common equity of 11.4%, which would produce a level of interest
coverage consistent with an “A” bond rating.
After weighing the conflicting evidence of the expert
witnesses, the Commission accepted Public Staff witness Hinton’s
recommendation of 11.4% based on the credibility and objectivity
of his PSNC-specific DCF analysis.  Thus, the Commission adduced
its own independent conclusion as to the appropriate rate of
return on equity as required by N.C.G.S. § 62-133.  We hold that
this conclusion, being fully supported by substantial evidence in
view of the entire record, should not be disturbed on appeal.
III.  Capital Structure
CUCA next contends the Commission’s conclusion that PSNC’s
capital structure should include a short-term debt ratio of 4.02%
is not supported by substantial evidence.  We disagree.
The Commission must determine the appropriate capital
structure for PSNC in order to achieve an overall fair rate of
return.  “Capital structure” refers to PSNC’s percentages of debt
and equity relative to its total capital.  “The ratios [of
capital components] used for rate-making purposes are important
because of the relative expense to the utility of each form of
capital accumulation.”  Public Staff, 322 N.C. at 701, 370 S.E.2d
at 575.  Both long-term debt and common equity are more expensive
forms of capital for the ratepayers than short-term debt.  A
capital structure containing a higher ratio of a more expensive
form of capital will result in higher rates to provide the higher
return demanded by investors.  See id. at 701-02, 370 S.E.2d at
575.
In this proceeding, the Commission approved a capital
structure consisting of 51.91% common equity, 4.02% short-term
debt, and 44.07% long-term debt.  CUCA contends that the capital
structure should include a higher percentage of short-term debt
since PSNC’s use of short-term debt consistently exceeds its
balance of stored gas inventory.  However, the Commission has
historically relied upon a utility’s average stored gas inventory
as the measure of short-term debt to be included in the capital
structure.  See, e.g., In re Application of Public Serv. Co., 84
N.C.U.C. Report 159, 206 (1994); In re Application of Piedmont
Natural Gas Co., 79 N.C.U.C. Report 348, 371 (1989).  CUCA failed
to present any evidence supporting the unreasonableness of the
Commission’s reliance upon PSNC’s gas inventory as a measure of
short-term debt.  See State ex rel. Utils. Comm’n v. Thornburg,
316 N.C. 238, 242, 342 S.E.2d 28, 31 (1986) (explaining that the
attacking party bears the burden of proving the Commission’s
order unjust and unreasonable).  Further, the Commission’s
findings of fact and conclusions of law are supported by
competent, material, and substantial evidence in view of the
entire record.
In this case, the Commission considered the recommendations
of PSNC witness Mason and CUCA witness O’Donnell before giving
the greatest weight to the capital structure proposed by Public
Staff witness Hinton.  PSNC witness Mason indicated PSNC’s
willingness to accept the Public Staff’s recommended capital
structure.
Public Staff witness Hinton emphasized that “an important
goal with [PSNC’s] capital structure is to ensure that the debt
and equity ratios adopted in determining the overall rate of
return on rate base investment are no greater than those required
to allow [PSNC] to qualify for reasonable credit ratings and to
provide [PSNC] the ability to attract capital.”  Hinton
recommended a capital structure “based on 13 month averages of
recent data and an adjustment for cost free capital associated
with prior Transco [Transcontinental Pipe Line Corporation]
refunds.”  Hinton included in his proposed capital structure an
amount of short-term debt equal to the stored gas inventory
included in rate base.  Hinton noted that, by using the average
stored gas inventory as the measure of short-term debt, his
approach appropriately accounted for seasonal fluctuations in
PSNC’s inventory.
PSNC witness Mason testified that PSNC originally requested
a capital structure composed of 52.33% common equity, 3.66%
short-term debt, and 44.01% long-term debt.  Mason based his
recommendation on “PSNC’s projected average capital structure for
the thirteen months ended July 31, 1998.”  Like Public Staff
witness Hinton, Mason included in PSNC’s requested capital
structure a short-term debt ratio equal to the amount of PSNC’s
stored gas inventory.  Mason reiterated the Commission’s practice
of including an amount of short-term debt “reasonably
representative of and approximately equivalent to the level of
gas inventory included in rate base.”  In re Application of
Public Serv. Co., 84 N.C.U.C. Report at 206.
PSNC witness Mason testified on rebuttal that PSNC
periodically refinances with equity capital or issuance of long-
term debt any short-term debt in excess of its stored gas
inventory.  Mason also explained that PSNC expects to experience
a decline in its use of short-term debt as recent extraordinary
projects are completed.  Mason further testified that PSNC’s use
of short-term debt to finance deferred gas costs has
significantly decreased due to recent changes in gas pricing for
full-margin customers.  Finally, Mason emphasized that CUCA’s
recommended capital structure would jeopardize PSNC’s current
“A-” credit rating.  Under CUCA’s capital structure, PSNC’s
credit rating would drop to “BBB” and result in additional
interest costs of $4.5 million for a thirty-year bond offering.
CUCA witness O’Donnell recommended a capital structure
consisting of 48.81% common equity, 9.76% short-term debt, and
41.43% long-term debt.  O’Donnell designed his capital structure
“based upon a 13 month average capital structure which includes
the FULL amount of short-term debt which [PSNC] employed during
the most recent year.”  O’Donnell acknowledged the Commission’s
practice of using the stored gas inventory balance as the measure
of short-term debt.  However, O’Donnell asserted that PSNC’s
recent use of short-term debt has consistently exceeded its
investment in stored gas inventory.
CUCA witness O’Donnell proposed a new method for this
proceeding under which the Commission would adopt a capital
structure “that includes the daily average balance amount of
short-term debt for the most recent twelve month period.”  Such
an approach would recognize that PSNC consistently uses short-
term debt to finance corporate functions other than gas
inventory, such as construction work in progress (“CWIP”).  As an
alternative, O’Donnell proposed a capital structure composed of
50.15% common equity, 7.28% short-term debt, and 42.57% long-term
debt.  O’Donnell’s alternative capital structure includes an
amount of short-term debt equal to PSNC’s average short-term debt
for the most recent twelve month period less PSNC’s average CWIP
balance outstanding for the most recent twelve month period.
CUCA witness O’Donnell also addressed the effect of CUCA’s
capital structure on PSNC’s bond rating.  According to O’Donnell,
the Commission owes no duty to set rates that would guarantee a
specific bond rating.  Further, O’Donnell asserted that neither
PSNC witness Mason nor Public Staff witness Hinton offered any
specific evidence that CUCA’s capital structure would jeopardize
PSNC’s bond rating.  Finally, O’Donnell concluded that the
capital structure proposed by the Public Staff and accepted by
PSNC ignores PSNC’s financing activities and unjustifiably
charges higher rates by including only a small portion of PSNC’s
outstanding short-term debt.
The Commission’s ultimate conclusion adopting the capital
structure recommended by the Public Staff and accepted by PSNC is
fully supported by competent, material, and substantial evidence
in view of the entire record.  The Commission’s order
demonstrates that the Commission carefully reviewed the testimony
of PSNC witness Mason and CUCA witness O’Donnell before accepting
Public Staff witness Hinton’s recommended capital structure.
The Commission concluded that the capital structure proposed
by Public Staff witness Hinton was the most appropriate capital
structure for purposes of this general rate case.  The capital
structure adopted by the Commission consisted of 51.91% common
equity, 4.02% short-term debt, and 44.07% long-term debt. 
According to the Commission, “[t]hat capital structure reflects a
level of short-term debt that is approximately equal to the level
of gas inventory included in rate base.”
The Commission emphasized the persuasiveness of PSNC’s and
the Public Staff’s evidence and arguments.  The Commission
particularly underscored the evidence that CUCA’s proposed
capital structure would jeopardize PSNC’s “A-” bond rating.  The
Commission noted CUCA witness O’Donnell’s acknowledgment that his
recommended capital structure would result in a “BBB” bond
rating.  The Commission ultimately concluded that the Public
Staff’s recommended capital structure “should allow PSNC the
opportunity to maintain its current ‘A-’ bond rating so as to
enable it to attract capital on reasonable terms to fund its
expansion of natural gas service, which [PSNC] is being urged to
do.”
After a careful review of the record, we hold that the
Commission’s order satisfies the requirements of section 62-94
specifically and of chapter 62 as a whole.  Here, the Commission
did not merely summarize the arguments of the parties and then
reject those offered by appellants.  Instead, the Commission
considered and necessarily gave greater weight to PSNC’s and the
Public Staff’s evidence, which supported a short-term debt ratio
of 4.02%, than to CUCA’s evidence, which supported a short-term
debt ratio of 9.76%.  Therefore, we conclude that the
Commission’s order is supported by competent, material, and
substantial evidence in view of the entire record and that the
Commission evaluated the evidence and made an independent
determination.
IV.  Cost-of-service
CUCA next argues that the Commission’s conclusions regarding
cost-of-service are deficient in two respects:  (i) the
Commission’s adoption of the peak and average cost-of-service
allocation methodology is unsupported by competent, material, and
substantial evidence; and (ii) the Commission erred in failing to
adopt the imputed load factor methodology.  We disagree.
Cost-of-service to PSNC’s customer classes significantly
affects this general rate case for two reasons.  First, cost-of-
service factors into the mathematical computation required by
N.C.G.S. § 62-133 for determining the appropriate rate of return
for a particular customer class.  See Carolina Util. Customers
Ass’n, 348 N.C. at 467, 500 S.E.2d at 704.  Second, cost-of-
service impacts whether the rate design unjustly discriminates
between the various classes of customers.  See id. 
Before the Commission can design rates that are just and
reasonable for all customer classes, it must first determine the
cost-of-service for which each class of customers is responsible. 
See Carolina Util. Customers Ass’n, 348 N.C. at 471, 500 S.E.2d
at 705-06.  As the United States Supreme Court explained, “[t]he
outlays that exclusively pertain to a given class of [customers]
must be assigned to that class, and the other expenses must be
fairly apportioned.”  Northern Pac. Ry. Co. v. North Dakota ex
rel. McCue, 236 U.S. 585, 597, 59 L. Ed. 735, 742 (1915). 
Therefore, the Commission must allocate between the various
customer classes their fair share of the fixed costs.  See
Colorado Interstate Gas Co. v. Federal Power Comm’n, 324 U.S.
581, 588, 89 L. Ed. 1206, 1215 (1945).  However, “[a]llocation of
costs is not a matter for the slide-rule.  It involves judgment
on a myriad of facts.  It has no claim to an exact science.”  Id.
at 589, 89 L. Ed. at 1216.
The first step in allocating cost-of-service among customer
classes is selecting an appropriate allocation methodology.  In
Carolina Util. Customers Ass’n, 348 N.C. at 470-71, 500 S.E.2d at
705-06, this Court found insufficient the Commission’s findings
of fact regarding the allocation of cost-of-service.  The Court
rejected the Commission’s order on the basis that
the only determination made regarding the cost of
service calculation . . . fails to provide any
independent comparative thought, analysis or weighing
process on the part of the Commission itself in
measuring the disputed positions of the parties and
determining what it considers to be a fair allocation
of costs between the various customer classes and thus
a fair and nondiscriminatory rate design.  It also
fails to identify the method the Commission used for
analyzing the cost-of-service differentials and their
impact on the ultimate rate-of-return issue.
Id. at 471, 500 S.E.2d at 706.  Thus, this Court required the
Commission to independently identify and apply an appropriate
cost-of-service allocation methodology before designing a
nondiscriminatory rate structure.
In this case the Commission concluded that the peak and
average cost allocation methodology was the appropriate method
for allocating fixed gas costs between PSNC’s customer classes. 
Both PSNC witness Barkley and Public Staff witness Larsen
recommended the peak and average method.  However, CUCA witness
Schoenbeck preferred either the peak responsibility method or the
imputed load factor approach.
PSNC witness Barkley and Public Staff witness Larsen used
the peak and average method to allocate between customer classes
costs that could not be directly assigned.  Larsen explained that
the peak and average method allocates fixed costs on the basis of
50% peak day demand and 50% annual sales.  Barkley recommended
the peak and average method for allocating cost-of-service
because that method “recognizes that most customers receive
service most days of the year.”  Barkley contrasted his approach
with CUCA’s recommended peak responsibility method.  Barkley
testified that, under CUCA’s approach, many interruptible
customers will experience relatively little curtailment during
the winter season without paying the fixed costs attributable to
providing that service.  Further, both Barkley and Larsen
recognized that the Commission has traditionally employed the
peak and average allocation methodology.
CUCA witness Schoenbeck recommended either the peak
responsibility method or the imputed load factor approach.  Under
the peak responsibility method, customers who receive service on
the utility’s peak day are responsible for fixed costs while
interruptible customers who experience curtailment avoid the cost
incurred in providing service to them.  Schoenbeck preferred the
peak responsibility approach to the peak and average method based
on his opinion that the peak and average method distorts the cost
of serving each customer class.
According to Schoenbeck, “[t]he purpose of performing a
cost-of-service study is to ascertain the cost of serving
customers with different usage and size characteristics,
qualities of service . . . , and types of service.”  Schoenbeck
argued that PSNC and the Public Staff ignored the substantial
capacity that a utility must acquire in order to meet the peak
day demands of the utility’s firm customers.  The peak and
average method apportions costs based on “fairness,” not actual
cost determinations.  See In re Atlantic Seaboard Corp., 11
F.P.C. 43, 55 (1952) (developing the peak and average method to
more fairly allocate costs between demand and volumetric
services).  Overall, Schoenbeck recommended the peak
responsibility method as a more accurate determination of the
actual cost of serving each customer class.
CUCA witness Schoenbeck recommended the imputed load factor
approach as a second best alternative allocation methodology. 
Schoenbeck explained the application of this method:
[T]he demand-related allocation factor is derived using
the peak or contractual demands of all firm customer
classes plus an imputed load for the interruptible
customers.  The imputed interruptible load is
calculated using the annual throughput for this class
coupled with a load factor reflective of the quality of
service being provided these customers.  The lower the
quality of service--reflecting more interruptions--the
higher the load factor used in the calculation.
Schoenbeck further emphasized the costs associated with the full
expected peak demand that firm customer classes can impose on the
utility.  Schoenbeck argued that the imputed load factor approach
“directly determine[s] cost responsibility while at the same time
recognizing the lower quality of service provided to
interruptible customers.”
After fully considering each approach, the Commission
concluded that the peak and average method was the most
appropriate cost-of-service methodology.  The Commission rejected
CUCA’s peak responsibility method as “unfair in that it gives
interruptible customers a ‘free ride’ on the utility system that
provides them with natural gas service for the vast majority of
the year.”  The Commission also rejected the imputed load factor
method.  The Commission noted that while that approach does
allocate some fixed costs to interruptible customers, Schoenbeck
presented only a summary of his cost-of-service study using this
methodology.  As a result, neither the Commission nor the other
parties could adequately analyze the imputed load factor approach
recommended by CUCA.  As this Court has previously stated:
It is not the function of this Court to determine
whether there is evidence to support a position the
Commission did not adopt.  State ex rel. Utilities
Comm’n v. Eddleman, 320 N.C. 344, 355, 358 S.E.2d 339,
347 (1987). . . . The credibility of the testimony and
the weight to be accorded it are for the Commission to
decide, State ex rel. Utilities Comm’n v. City of
Durham, 282 N.C. 308, 322, 193 S.E.2d 95, 105 (1972),
and this Court presumes that the Commission gave proper
consideration to all competent evidence presented,
State ex rel. Utilities Comm’n v. Thornburg, 316 N.C.
238, 245, 342 S.E.2d 28, 33 (1986).  This Court may not
properly set aside the Commission’s recommendation
merely because different conclusions could have been
reached from the evidence.  State ex rel. Utilities
Comm’n v. General Tel. Co. of Southeast, 281 N.C. 318
354, 189 S.E.2d 705, 728 (1972).
State ex rel. Utils. Comm’n v. Piedmont Natural Gas Co., 346 N.C.
558, 569, 488 S.E.2d 591, 598 (1997).
The Commission ultimately concluded that the peak and
average method properly allocates fixed costs between annual use
and peak day utilization of the facilities.  Thus, the Commission
appropriately considered and analyzed the evidence presented by
all parties before giving greater weight to the Public Staff’s
proposed cost-of-service allocation methodology.  We hold that
the Commission’s order contains sufficient findings of fact to
justify its conclusions.  Further, the Commission’s findings of
fact are supported by competent, material, and substantial
evidence in view of the entire record.
V.  Rate Design
Once fixed costs have been allocated among the various
customer classes, the Commission must design a just and
reasonable rate structure that does not subject any customer
class to discrimination or “rate shock.”  Three basic components
must be ascertained in making that computation:
(1) the total rate base applicable to each customer
class; (2) the cost of service or operating expenses
applicable to each customer class; and (3) the revenues
collected from each customer class for the test period,
adjusted for any subsequent increase in rates.
Carolina Util. Customers Ass’n., 348 N.C. at 467, 500 S.E.2d at
704.  Unjust or unreasonable discrimination among customer
classes is prohibited by N.C.G.S. § 62-140, which provides in
relevant part:
  (a)  No public utility shall, as to rates or
services, make or grant any unreasonable preference or
advantage to any person or subject any person to any
unreasonable prejudice or disadvantage.  No public
utility shall establish or maintain any unreasonable
difference as to rates or services either as between
localities or as between classes of service.
N.C.G.S. § 62-140(a) (1999); see also Carolina Util. Customers
Ass’n, 348 N.C. at 467-68, 500 S.E.2d at 704.
The Commission may classify customers or charge different
rates based on reasonable differences in conditions so long as
the variance in charges bears a reasonable proportion to the
variance in conditions.  See Carolina Util. Customers Ass’n, 348
N.C. at 468, 500 S.E.2d at 704.  “A number of conditions or
factors should be considered in determining whether unreasonable
discrimination exists, including:  (1) quantity of use, (2) time
of use, (3) manner of service, and (4) costs of rendering the
various services.”  Id.
In the present case, CUCA contends that the discrimination
in the rates of return among PSNC’s several customer classes
approved by the Commission is not justified by adequate findings
supported by the whole record; therefore, by approving the
various rates of return, the Commission exceeded its statutory
authority.  Appellees counter that the evidence and findings
adequately justify that the approved rates do not unreasonably
discriminate among PSNC’s classes of customers.
This Court addressed the issue of discriminatory rate design
in Carolina Util. Customers Ass’n, 348 N.C. at 470-71, 500 S.E.2d
at 705-06.  In that case, this Court held that the Commission
failed to make sufficient findings of fact to justify its
approval of the proposed stipulated rate design.  See id. at 472,
500 S.E.2d at 706.  The Court identified, inter alia, the
relevant insufficiencies of the Commission’s order as follows:
[T]he findings do not establish the magnitude of the
differences among the rates of return provided by the
various customer classes.  As a result, this Court is
prevented from reviewing the manner in which the
Commission considered cost-related versus non-cost-
related factors in adopting the stipulated rate design. 
[Also,] the findings do not set forth the existing rate
differences with respect to the cost of serving the
several customer classes.  This prevents the Court from
analyzing the factual basis of the Commission’s
conclusion that no customer or class of customers will
suffer from “rate shock or unjust or discriminatory
rates.”
Id. at 471, 500 S.E.2d at 706.  The Commission will not satisfy
those requirements in this proceeding simply by setting out the
differences in rates of return and cost-of-service for the
various customer classes.  We hold that the Commission, in
designing a nondiscriminatory rate structure, must set forth
sufficient evidence, findings of fact, and conclusions of law to
permit adequate review by this Court.  The Commission satisfies
this standard by explaining its consideration of non-cost-related
factors and by setting forth the factual basis for its conclusion
that the approved rate structure does not result in
discrimination among customer classes.
The Commission’s order in this proceeding satisfies the
above standard.  First, the Commission considered a number of
other factors in addition to cost-of-service in designing a
nondiscriminatory rate structure.  Second, the Commission
considered the results of several cost-of-service studies before
adopting the Public Staff’s proposed rate design.
The Commission found that “[c]ost-of-service studies are
subjective and imprecise and are useful only as a guide along
with other factors in setting natural gas rates.”  As an example,
the Commission referred to the widely divergent results of the
cost-of-service studies presented in this proceeding by PSNC, the
Public Staff, and CUCA.  Further, Public Staff witness Davis
testified that cost-of-service studies overstate returns for
large industrial and commercial customers by failing to reflect
negotiated rate discounts.  The Commission declined to place a
great emphasis on the results of the studies since “[t]he rates
of return shown in a cost-of-service study do not necessarily
reflect the actual return the Company garners from each class.”
The Commission concluded that a number of other factors in
addition to cost-of-service must be considered in designing
rates.  The Commission stated:
The Commission agrees with witnesses Barkley and Davis
that it is appropriate to consider a number of factors
in addition to cost-of-service when designing rates. 
Such other factors include value of service, quantity
of natural gas used, the time of use, the manner of
use, the equipment which the Company must provide and
maintain in order to meet the requirements of its
customers, competitive conditions and consumption
characteristics.
The Commission’s order does not specifically address each of
these factors.  However, the order does set forth evidence,
findings of fact, and conclusions of law which demonstrate that
the Commission gave consideration to these factors and their
applicability to each customer class.
First, the Commission concluded that an attempt to equalize
returns among the classes would significantly impact Rate
Schedule 105 Residential -- Year Round customers.  The evidence
indicated that those customers would experience “rate shock” due
to their inability to switch fuels easily.  The Commission
emphasized that the “long-established expectations of these
customers at the time they bought their heating systems should be
taken into consideration in setting rates.”
Second, the Commission ultimately concluded that Public
Staff witness Davis properly considered all appropriate factors
in designing a nondiscriminatory rate structure.  Davis testified
that he considered the following factors:
(1) value of service, (2) the type of service, (3) the
quantity of use, (4) the time of use, (5) the manner of
service, (6) competitive conditions relating to
acquisition of new customers, (7) historical rate
design, (8) the revenue stability to the utility, and
(9) economic and political factors.
Davis emphasized that the value paid for natural gas service
cannot be significantly greater than a satisfactory alternative. 
Additionally, Davis considered the different needs of different
types of customers.  Type of service, quantity of use, time of
use, and manner of service required by the various customer
classes will affect the rate design.  For example, some
industrial customers require a more firm supply, while heat-
sensitive customers require more security of service during peak
winter days.
Davis also testified that his proposed rate structure would
enable PSNC to attract new customers and retain current
customers.  Davis further explained that his rate design is
consistent with historical rate design over the past several PSNC
general rate cases.  Finally, Davis designed rates intended to
facilitate economic growth in PSNC’s service territory.
After considering the non-cost-related factors emphasized by
Public Staff witness Davis, the Commission adopted the Public
Staff’s recommended rate design.  The Commission recognized that
the proposed rate structure “essentially places the entire
increase on residential and small general service customers,
while decreasing the revenue burden on large commercial and
industrial customers.”  However, the Commission found that such a
rate design would be consistent with the results of other recent
general rate cases.  Therefore, the Commission’s findings of fact
and conclusions of law demonstrate that the Commission
appropriately considered factors other than cost-of-service in
adopting a rate design that would be just and reasonable for all
customer classes.
The Commission’s order in this proceeding also sets forth
the factual basis for its conclusion that the approved rate
structure does not result in discrimination between customer
classes.  See Carolina Util. Customers Ass’n, 348 N.C. at 471,
500 S.E.2d at 706.  As discussed above in relation to cost-of-
service allocation, the Commission considered the results of
several cost-of-service studies before adopting the Public
Staff’s proposed rate design.  The Commission’s order included
two sets of data that delineate the existing rate structure and
the new rate structure proposed by the Public Staff.  The
following table reflects the existing rates of return for each of
PSNC’s customer classes:
Rate
Rate
Schedule
of
 Number 
     Customer Class
Return
105
Residential - Year Round
5.83%
110
Residential - Seasonal
5.03%
125
Small General Service
10.22%
145/175
Large Quantity General
17.17%
150/180
Large Quantity Interruptible
15.65%
   Overall
7.51%
The second table indicates the impact of the Public Staff’s
proposed rate design on customer class rates of return in this
proceeding:
Rate
Rate
Schedule
of
 Number 
     Customer Class
Return
105
Residential - Year Round
6.98%
110
Residential - Seasonal
7.29%
125
Small General Service
13.70%
145/175
Large Quantity General
14.78%
150/180
Large Quantity Interruptible
10.90%
   Overall
9.81%
The Commission noted that the Public Staff’s proposed
rate design, when analyzed according to the peak and average
allocation methodology discussed previously, yields class rates
of return that are closer to the overall rate than the Commission
has historically approved.  Although disparities still exist in
the rates of return between the various customer classes, “the
approved rates at least move in the direction of more nearly
equalizing the rates of return among all [PSNC] customer
classes.”  State ex rel. Utils. Comm’n v. Carolina Util.
Customers Ass’n, 323 N.C. 238, 251, 372 S.E.2d 692, 700 (1988). 
Based upon the narrowed range of rates established by the Public
Staff’s proposed rate design, the Commission concluded that no
customer or class of customers will suffer from “rate shock” or
discriminatory rates.  Since this Court has affirmed rate
structures with greater disparities among the classes, it follows
that the rate design approved here must not be unreasonably
discriminatory.  See State ex rel. Utils. Comm’n v. Public Staff,
323 N.C. 481, 505, 374 S.E.2d 361, 374 (1988).
After a careful review of the record, we hold that the
Commission’s order satisfies the minimal requirements we set out
in Carolina Util. Customers Ass’n, 348 N.C. at 470-71, 500 S.E.2d
at 705-06.  The Commission’s order contains findings sufficient
to justify its conclusion that the approved rates of return are
just and reasonable and do not unreasonably discriminate among
the various classes of PSNC customers.  Furthermore, the
Commission’s findings are supported by substantial evidence in
view of the whole record.
VI.  Rider D
Finally, CUCA contends that the Commission committed
prejudicial error by failing to address the discriminatory impact
of PSNC’s rider D on rate schedules 145 and 150.  We disagree.
In November 1997 the Commission approved PSNC’s
bifurcated full-margin pricing mechanism on a two-year
experimental basis.  “Full margin” generally refers to
transportation rates that are calculated by deducting the cost of
gas from established sales rates.  However, PSNC’s pricing system
reverses that method:  PSNC’s transportation customers pay
Commission-approved transportation rates under rate schedules 175
and 180, while sales customers who purchase natural gas under
rate schedules 145 and 150 pay established transportation rates
plus a “monthly commodity gas cost.”
In this proceeding, the Commission approved Rider D,
which defines “monthly commodity gas cost” as “the sum of the
Monthly Index Price, the 100% Load Factor equivalent of
Transcontinental Pipe Line Corporation’s Zone 3 to Zone 5 Maximum
FT Rate, fuel, Other Gas Supply Charges, and Gross Receipts
Taxes.”  CUCA contends that PSNC’s application of rider D to
large-volume sales customers who purchase natural gas under rate
schedules 145 and 150 unjustly discriminates against those
customers by forcing them to pay twice for interstate
transportation.  Appellees respond that the Commission adequately
addressed this issue in its final order.
As we discussed earlier, the Commission may classify
customers or charge different rates based on reasonable
differences in conditions so long as the variance in charges
bears a reasonable proportion to the variance in conditions.  See
Carolina Util. Customers Ass’n, 348 N.C. at 468, 500 S.E.2d at
704.  Additionally, this Court has consistently affirmed the
Commission’s approval of full-margin rates.  See id. at 472, 500
S.E.2d at 707; State ex rel. Utils. Comm’n v. Carolina Util.
Customers Ass’n, 328 N.C. 37, 46, 399 S.E.2d 98, 103 (1991);
Carolina Util. Customers Ass’n, 323 N.C. at 253-54, 372 S.E.2d at
701; State ex rel. Utils. Comm’n v. N.C. Textile Mfrs. Ass’n, 313
N.C. 215, 225, 328 S.E.2d 264, 270 (1985).
In our most recent general rate case, Carolina Util.
Customers Ass’n, 348 N.C. at 472-74, 500 S.E.2d at 707, we
reviewed our prior decisions concerning full-margin rates:
In Textile Mfrs., 313 N.C. 215, 328 S.E.2d
264, this Court stated: “We do not hold that
it is unjust and unreasonable as a matter of
law for a utility to earn the same profit
margin on transported gas that it earns on
its own retail sales of gas.”  Id. at 225,
328 S.E.2d at 270.  This principle was
reiterated in Utilities Comm’n v. CUCA, 323
N.C. 238, 372 S.E.2d 692, where we stated,
“on this record it was not unlawful to permit
the transportation rates to have the same
margins as the sales rates.”  Id. at 254, 372
S.E.2d at 701.  Finally, in Utilities Comm’n
v. CUCA, 328 N.C. 37, 399 S.E.2d 98, we
stated, “Both the Commission and this Court
have consistently rejected the notion that
cost of service should be the sole factor in
determining rates or rate designs, whether
the rates are for the sale of gas or the
transportation of gas.”  Id. at 46, 399
S.E.2d at 103.
After reviewing this line of cases, the Court held that full-
margin transportation rates are proper so long as they are
supported by competent, material, and substantial evidence in
view of the entire record as required by N.C.G.S. § 62-94.  See
Carolina Util. Customers Ass’n, 348 N.C. at 473, 500 S.E.2d at
707.
In this general rate proceeding, substantial evidence
supports the Commission’s approval of PSNC’s full-margin
transportation rates.  In its order, the Commission made the
following findings of fact regarding PSNC’s transportation rates:
74.  The Commission has consistently
calculated full-margin transportation rates
by subtracting the benchmark commodity cost
of gas, applicable gross receipts taxes, and
any temporary increments and/or decrements
from the sales rate schedule under which the
transportation customer would otherwise be
buying natural gas from PSNC.
75.  PSNC’s bifurcated benchmark, by
which large commercial and industrial
customers receive monthly market based rates,
does not affect the use of the full-margin
concept for transportation in this case.
76.  The Commission concludes that the
transportation rates for PSNC in this docket
should be based on the full-margin concept.
. . .
77.  The transportation rate design
proposed by the Public Staff is based on the
full-margin concept and is just and
reasonable.
Although the Commission did not specifically address CUCA’s
argument that PSNC’s rates double-charge sales customers for
interstate transportation, the Commission did thoroughly review
the record evidence supporting PSNC’s bifurcated full-margin
pricing method.  The order reveals that the Commission relied
upon the testimony of PSNC witness Barkley, Public Staff witness
Davis, and CUCA witness Schoenbeck for its findings of fact and
conclusions of law.
PSNC witness Barkley emphasized that PSNC’s bifurcated
rates are still “full margin” since the transportation and sales
rates differ only by the amount of the commodity cost of gas. 
Public Staff witness Davis underscored the neutrality of PSNC’s
full-margin rates since both transportation and sales rates
contain the same margin; the rates differ only by the cost of the
gas provided by PSNC to its sales customers.  Additionally, Davis
emphasized the Commission’s long history of using the full-margin
principle to calculate transportation rates.
In contrast CUCA witness Schoenbeck argued that PSNC’s
bifurcated method unjustifiably results in sales customers paying
twice for interstate transportation:  once as a component of the
monthly commodity cost of gas and again as a component of the
Commission-approved transportation rates.  However, the record
reveals Schoenbeck himself testified that PSNC’s system simply
reverses the typical full-margin calculation, resulting in sales
customers, rather than transportation customers, paying
duplicative charges for interstate transportation.
The Commission emphasized that “the services performed
by [PSNC] are substantially the same whether service is provided
under the sales rate or transportation rate, especially given the
customer’s option to select monthly which service is more
desirable.”  The Commission additionally noted that PSNC’s
mechanism for calculating the commodity cost of gas took effect
less than a year before this proceeding.  Thus, the Commission
was “reluctant to change an experimental program that has been in
effect only a short time and has not been shown to have an
adverse impact on the competitive market.”
The Commission ultimately concluded that “the Public
Staff’s proposed transportation rates based on the full-margin
concept are just and reasonable.”  We hold that the record
evidence, combined with the Commission’s analysis of prior cases
addressing the lawfulness of full-margin transportation rates, is
more than adequate to support the Commission’s approval of PSNC’s
bifurcated full-margin pricing mechanism.
In conclusion and for the reasons stated, we hold that
the Commission did not err in this proceeding. 
AFFIRMED.