Case Title: State ex rel. Utils. Comm'n v. Cooper

Citation: 

Docket Number: 347A14

State: north-carolina

Court: North Carolina Supreme Court

Date: 2015-08-21T00:00:00Z

Document:
IN THE SUPREME COURT OF NORTH CAROLINA 
No. 347A14   
(Filed 21 August 2015) 
 
STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION; AQUA 
NORTH CAROLINA, INC., Applicant; and PUBLIC STAFF – NORTH CAROLINA 
UTILITIES COMMISSION, Intervenor 
 
 
v. 
ATTORNEY GENERAL ROY COOPER, Intervenor 
 
On direct appeal as of right pursuant to N.C.G.S. §§ 7A-29(b) and 62-90(d)  
from a final order of the North Carolina Utilities Commission entered on 2 May 2014 
in Docket No. W-218, Sub 363.  Heard in the Supreme Court on 16 March 2015. 
 
Sanford Law Office, PLLC, by Jo Anne Sanford; Bennink Law Office, by Robert 
H. Bennink, Jr.; Law Office of Charlotte Mitchell, by Charlotte Mitchell; and 
Allegra Collins Law, by Allegra Collins, for applicant-appellee Aqua North 
Carolina, Inc. 
 
Antoinette R. Wike, Chief Counsel, and William E. Grantmyre, Staff Attorney, 
for intervenor-appellee Public Staff – North Carolina Utilities Commission. 
 
Stuart Saunders, Assistant Attorney General, Kevin Anderson, Senior Deputy 
Attorney General, and Jennifer T. Harrod, Special Deputy Attorney General, 
for intervenor-appellant Roy Cooper, Attorney General. 
 
JACKSON, Justice. 
 
In this case we consider whether the North Carolina Utilities Commission (the 
Commission) properly concluded that it is in the public interest to allow Aqua North 
Carolina (Aqua) to utilize a rate adjustment mechanism of the type described in 
section 62-133.12 of the North Carolina General Statutes.  We conclude that the 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
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Commission’s determination was based upon sufficient findings of fact and was 
supported by competent, material, and substantial evidence in view of the entire 
record.  See N.C.G.S. § 62-94 (2013).  Accordingly, we affirm.   
Aqua is a public utility that provides water and sewer utility service to 
customers in North Carolina.  On 2 August 2013, Aqua filed an application with the 
Commission seeking authority to increase its rates for water and sewer service in 
North Carolina.  As part of its application, Aqua also requested authority to 
implement a rate adjustment mechanism pursuant to section 62-133.12, which states 
in pertinent part:   
The Commission may approve a rate adjustment 
mechanism in a general rate proceeding . . . to allow a 
water or sewer public utility to recover through a system 
improvement charge the incremental depreciation expense 
and capital costs associated with the utility’s reasonable 
and prudently incurred investment in eligible water and 
sewer system improvements.  The Commission shall 
approve a rate adjustment mechanism authorized by this 
section only upon a finding that the mechanism is in the 
public interest.  The frequency and manner of rate 
adjustments under the mechanism shall be as prescribed 
by the Commission. 
Id. § 62-133.12(a) (2013).   
On 19 August 2013, the Commission entered an order declaring this 
proceeding to be a general rate case and suspending the proposed new rates for up to 
270 days.  The Commission scheduled six hearings across the state to receive public 
witness testimony.  The Commission also scheduled an evidentiary hearing for 27 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
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January 2014.  The Attorney General of North Carolina and the Public Staff of the 
Commission intervened as allowed by law.  See id. §§ 62-15, -20 (2013).   
Subsequently, Aqua and the Public Staff entered into a Stipulation that 
resolved all the issues in the case between the two parties.  At the time, the 
Commission had not adopted final rules establishing the appropriate procedures for 
implementing a rate adjustment mechanism.  Nevertheless, the Stipulating Parties 
agreed that “this docket is the appropriate forum for a decision by the Commission 
on [Aqua’s] request to implement a [rate adjustment] mechanism based on a finding 
that the [mechanism] is in the public interest.”  The Attorney General did not join in 
the Stipulation.   
During the hearings before the Commission, fifty-four Aqua customers 
testified, and the parties presented testimony from several witnesses.  Thirty 
customers expressed service-related concerns, which primarily focused on problems 
with water quality, such as receiving water that appeared discolored, contained 
sediment, caused damage to appliances, and stained laundry items.  Customers also 
raised other concerns, including billing issues, low water pressure, and sulfur or 
chlorine odors.  Customers “almost unanimously” opposed any rate increase.   
At the evidentiary hearing, Aqua offered evidence supporting the conclusion 
that use of a rate adjustment mechanism is in the public interest.  Aqua’s President 
and Chief Operating Officer, Thomas J. Roberts, asserted that the mechanism would 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
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allow Aqua to adjust its rates to recover money invested in “necessary, reasonable, 
approved and completed projects,” with the cumulative rate adjustment limited to 
five percent of the total annual service revenues approved by the Commission in the 
current general rate case.  Roberts stated that, as a result of these rate adjustments, 
Aqua would be able to fund “earlier and more robust investment in infrastructure” 
and recover its investments “on a more timely basis.”  In addition, Roberts noted that 
the mechanism would allow for “incremental adjustments” to rates, “rather than the 
sharp rate changes that are characteristic of general rate cases.”   
Roberts acknowledged that some customers have difficulties with discolored, 
sediment-laden water, and he stated that these problems are caused by naturally 
occurring iron and manganese present in ground water.  Roberts testified that, 
although many customers do not find such water acceptable, it complies with 
environmental regulations and does not create any health risks.  Roberts asserted 
that Aqua could employ a number of methods to improve water quality, and he stated 
that use of a rate adjustment mechanism would provide funding “to accelerate the 
investment needed to address these concerns.”   
In addition to discussing customers’ concerns about water quality, Roberts 
stated that other aspects of Aqua’s system need improvements.  Roberts testified that 
an internal analysis had revealed that portions of Aqua’s water main infrastructure 
are seriously outdated and need replacement.  Roberts also stated that Aqua needs 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
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to fund replacement of motors, pumps, and other equipment, as well as implement 
measures to improve how the system copes with significant rain events.  Ultimately, 
Roberts asserted that use of a rate adjustment mechanism would facilitate 
improvements to infrastructure and result in “fewer water quality related 
complaints, enhanced water pressure, and decreased main breaks.”   
Aqua witness Robert A. Kopas, Regional Controller for Aqua Ohio, Inc., 
provides financial supervision and guidance to Aqua North Carolina.  He testified 
that Aqua had presented to the Commission a “three-year plan” listing possible future 
projects that could be eligible for recovery through a rate adjustment mechanism.  
Kopas explained that Aqua did not submit this document to seek Commission 
approval of any of the specific projects listed; instead, it was submitted to support the 
company’s contention that use of a rate adjustment mechanism is in the public 
interest.  Kopas asserted that before Aqua could recover any money through the 
mechanism, the company would have to construct an eligible improvement, place the 
improvement into service, and propose the improvement for inclusion in a rate 
adjustment, after which the Commission and the Public Staff would determine the 
project’s eligibility and the reasonableness of the associated costs.   
Aqua witness Pauline M. Ahern, a principal with AUS Consultants, testified 
that a rate adjustment mechanism would partially mitigate regulatory lag, “which 
occurs during the time between the incurrence of a utility capital expenditure or 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
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expense and the time when the utility can begin to earn a return on . . . the capital 
investment or recovery of the expense incurred.”  Ahern stated that the mechanism 
“will improve the capital attractiveness of [Aqua], improve its service quality and 
reliability, and provide for more moderate, gradual rate increases.”   
The Public Staff presented testimony from David C. Furr, Director of the Public 
Staff’s Water and Sewer Division.  Furr testified that he had reviewed the three-year 
plan filed by Aqua in order to evaluate whether the listed projects might be eligible 
for recovery through a rate adjustment mechanism.  Furr stated that Aqua’s three-
year plan did not contain enough detail for him to determine whether the projects 
would be eligible, and although the Public Staff had requested additional 
information, Aqua’s response remained “materially inadequate.”  In contrast, Roberts 
testified that Aqua believed it had provided sufficient detail and that the company 
was “willing to give all the detail that the Public Staff and the Commission would 
want.”   
The Commission entered an order in Aqua’s general rate case on 2 May 2014.  
The Commission noted that the water quality concerns raised by some Aqua 
customers were related to high concentrations of naturally occurring iron and 
manganese in the source supply of water.  The Commission found that iron and 
manganese are “subjects of Department of Environment and Natural Resources 
(DENR) secondary – not primary – water quality standards, and thus do not 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
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represent health issues.”  Nevertheless, the Commission concluded that “[a]dditional 
attention is required to address the issues which arise from elevated levels of 
naturally occurring iron and manganese in the source water supply in certain Aqua 
systems.”   
In addition, the Commission found that enactment of section 62-133.12 “was 
intended to encourage and accelerate investment in needed water and sewer 
infrastructure” by “alleviat[ing] the effects of regulatory lag by allowing for earlier 
recovery of some portion” of “depreciation expense and capital costs.”  The 
Commission determined that if a rate adjustment mechanism were authorized here, 
“Aqua would be incentivized and encouraged to accelerate its investment in water 
and sewer infrastructure improvements to comply with applicable water quality and 
effluent standards, including secondary water quality standards.”  Specifically, the 
Commission explained that the mechanism “will be available to fund projects to 
address problematic systemic secondary water quality issues should the Commission 
direct [Aqua] to undertake them in individual subdivision service areas.”  The 
Commission found that such additional investment in infrastructure would lead to 
“better water quality” and “improved system reliability.”  As a result, the Commission 
found that Aqua’s request to implement a rate adjustment mechanism is in the public 
interest and therefore approved the company’s request.   
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
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At the same time, the Commission ordered Aqua and the Public Staff “to 
develop and implement a plan to identify and respond to [significant] secondary water 
quality concerns” in particular service areas.  The Commission required Aqua and 
the Public Staff, “[a]t a minimum,” to file written reports on the first of June and the 
first of December every year while the rate adjustment mechanism is in effect.  These 
written reports must describe any secondary water quality concerns affecting Aqua’s 
customers.  If a particular concern affects at least ten percent of the customers in an 
individual subdivision or at least twenty-five billing customers, additional 
information must be provided.  In such cases the reports must recommend whether 
Aqua should be required to undertake corrective action with respect to specific water 
quality concerns.   
The Commission noted that final rules implementing the rate adjustment 
mechanism had not been approved.  The Commission concluded that it should adopt 
alternative procedures, which were set forth in appendices to its order, to enable Aqua 
to make the requisite filings and qualify for implementation of charges pursuant to 
the rate adjustment mechanism without having to file an additional general rate case 
application once final rules were adopted.  The Attorney General appealed the 
Commission’s order to this Court as of right pursuant to N.C.G.S. §§ 7A-29(b) and 62-
90.   
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
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Subsection 62-79(a) of the North Carolina General Statutes “sets forth the 
standard for Commission orders against which they will be analyzed upon appeal.” 
State ex rel. Utils. Comm’n v. Carolina Util. Customers Ass’n (CUCA I), 348 N.C. 452, 
461, 500 S.E.2d 693, 700 (1998).  Subsection 62-79(a) provides:  
(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) (2013).  When reviewing an order of the Commission, this Court 
may, inter alia, 
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 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
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(6) Arbitrary or capricious. 
Id. § 62-94(b).  Pursuant to subsection 62-94(b) this Court must determine “whether 
the Commission’s findings of fact are supported by competent, material and 
substantial evidence in view of the entire record.”  CUCA I, 348 N.C. at 460, 500 
S.E.2d at 699 (citation omitted).  “Substantial evidence [is] defined as ‘more than a 
scintilla or a permissible inference.’ ”  Id. at 460, 500 S.E.2d at 700 (alteration in 
original) (quoting State ex rel. Utils. Comm’n v. S. Coach Co., 19 N.C. App. 597, 601, 
199 S.E.2d 731, 733 (1973), cert. denied, 284 N.C. 623, 201 S.E.2d 693 (1974)).  “It 
means such relevant evidence as a reasonable mind might accept as adequate to 
support a conclusion.”  Id. (quoting Consol. Edison Co. of New York v. NLRB, 305 U.S. 
197, 229, 59 S. Ct. 206, 217, 83 L. Ed. 126, 140 (1938)).  The Commission must include 
all necessary findings of fact, and failure to do so constitutes an error of law.  Id. 
(citation omitted). 
The Attorney General argues that the Commission’s finding that Aqua’s 
request to use a rate adjustment mechanism is in the public interest is not based 
upon sufficient findings, reasoning, and conclusions, and is not supported by 
substantial evidence.  In addition, the Attorney General contends both that the 
Commission had no proper basis for this finding and that the Commission’s 
conclusion that the mechanism would incentivize Aqua to invest in infrastructure 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
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and improve its service quality “is, at most, speculative” because the order did not 
impose any “concrete obligation, commitment, or anything else.”  We disagree.  
 “The Utilities Commission, not this Court, is the finder of fact in this 
proceeding.  Findings of fact made by the Commission are prima facie just and 
reasonable on appeal.”  State ex rel. Utils. Comm’n v. Eddleman, 320 N.C. 344, 382-
83, 358 S.E.2d 339, 363 (1987) (citations omitted).  “[T]he Commission’s findings, if 
supported by competent, material, and substantial evidence in view of the record as 
a whole, are binding upon this Court.”  State ex rel. Utils. Comm’n v. Pub. Staff, 317 
N.C. 26, 45, 343 S.E.2d 898, 910 (1986) (citing State ex rel. Utils. Comm’n v. Carolina 
Tel. & Tel. Co., 267 N.C. 257, 148 S.E.2d 100 (1966)).  As a result, if there is 
substantial evidence to support the Commission’s determination, this Court will not 
substitute its judgment for that of the Commission.  Id. at 46-47, 343 S.E.2d at 910-
11.   
By enacting section 62-133.12, the General Assembly authorized the use of a 
rate adjustment mechanism upon a “finding” by the Commission “that the 
mechanism is in the public interest.”  N.C.G.S. § 62-133.12(a).  As previously stated, 
the Commission found that allowing Aqua to use a rate adjustment mechanism is in 
the public interest.  In making this determination, the Commission initially found 
that the legislative intent behind section 62-133.12 was to provide a mechanism to 
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incentivize quicker investments in water and sewer infrastructure by allowing for 
faster recovery of some portion of invested costs.   
The Commission explained that, because of the time involved in preparing and 
processing general rate cases, the long periods of construction required for major 
projects, and the Commission’s use of historical test years in setting rates, a 
regulatory lag period occurs between when a utility invests in improvements and 
when it begins to recover the capital costs of those improvements.  The Commission 
noted that Roberts had testified that implementing a rate adjustment mechanism 
would allow Aqua to recover invested funds more quickly and therefore enable Aqua 
to invest more capital in this state.  Similarly, the Commission observed that Ahern 
had testified that use of the mechanism would result in “[p]artial mitigation of 
[regulatory] lag” and lead to water quality improvements that otherwise would be 
delayed.  After considering their testimony and the arguments raised by the Attorney 
General, the Commission concluded that implementing the mechanism “will promote 
adequate, reliable, and economical utility service for Aqua’s customers” by 
“incentiviz[ing] Aqua to increase and accelerate infrastructure improvements.”  
These findings are supported by the testimony of Roberts and Ahern.   
The Commission discussed the “secondary water quality issues” raised by 
Aqua’s customers and found that, as stated by Roberts, these problems result from 
high concentrations of iron and manganese found naturally in sources of groundwater 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
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within Aqua’s system.  The Commission determined that in the past, water utilities 
may have given lower priority to correcting secondary water quality issues because 
these companies first spend their limited budgets on primary water quality 
improvements.  The Commission found that use of a rate adjustment mechanism 
would benefit customers further because accelerated funding will be available for 
projects undertaken at the Commission’s direction to improve secondary water 
quality.  The Commission then ordered Aqua and the Public Staff to file written 
reports addressing secondary water quality concerns twice each year while the 
mechanism is in effect and required that these filings detail particular water quality 
problems and make recommendations on whether Aqua should be ordered to pursue 
corrective action.  Rather than solely relying upon a commitment by Aqua or the 
Public Staff, the Commission affirmatively imposed obligations to ensure that Aqua 
would use the rate adjustment mechanism only to make meaningful improvements 
to its system.   
The Commission further noted that pursuant to the alternative procedures it 
had adopted in its order, approval of the mechanism would not result in automatic 
surcharges for customers.  The Commission explained that these procedures require 
Aqua to obtain Commission approval for any additional charges, and the approval 
process will involve review by the Public Staff and the Commission to determine 
whether Aqua’s investments and costs are reasonable and prudent.  Furthermore, 
the Commission explained that Aqua could use the mechanism to recover only those 
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costs that are invested in “eligible system improvements” that are “completed and 
placed in service prior to the Company requesting approval.”   
The Commission acknowledged that witness Furr had testified that Aqua’s 
initial three-year plan was “materially deficient,” but noted that Roberts had testified 
that Aqua “is willing to provide all information required by the Public Staff.”  In 
addition, the Commission found that, because this case involves a new process, “one 
party . . . may believe the level of detail provided is sufficient; whereas, another party 
may not.”  The Commission also directed Aqua to provide enough information to allow 
the Public Staff to “conduct its investigation and review of [Aqua’s] initial three-year 
plan,” “have productive discussions with [Aqua] regarding the specific projects 
included in the plan,” and “conclude whether the projects included in [the] three-year 
plan meet the criteria established in [section] 62-133.12” to “be considered for 
recovery through the [rate adjustment] mechanism.”   
Ultimately, the Commission found that 
Aqua would be incentivized and encouraged to accelerate 
its investment in water and sewer infrastructure 
improvements to comply with applicable water quality and 
effluent standards, including secondary water quality 
standards, if authorized to utilize a [rate adjustment] 
mechanism to recover some of its investment in a more 
timely manner and alleviate the effects of regulatory lag.  
Such 
accelerated 
investment 
to 
address 
aging 
infrastructure and water quality issues would benefit 
customers through improved system reliability and better 
water quality.  The [rate adjustment] mechanism would 
further benefit customers because it will be available to 
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Opinion of the Court 
 
 
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fund projects to address problematic systemic secondary 
water quality issues should the Commission direct the 
Company to undertake them in individual subdivision 
service areas, even though such projects may not be 
specifically required by federal and/or state standards and 
might not be of high system priority absent the direction of 
the Commission.  The [rate adjustment] mechanism does 
not affect or take away the Commission’s authority to 
disallow recovery for projects and investments found to be 
unreasonable and imprudent.   
The Commission thoroughly explained how Aqua’s use of a rate adjustment 
mechanism would benefit Aqua’s customers, and the Commission took meaningful 
steps to ensure that problems with water quality are addressed and that customers 
are charged only after Aqua has made improvements to the quality and reliability of 
its service.  We hold that the Commission provided sufficient findings, reasoning, and 
conclusions to support its ultimate finding that the mechanism is in the public 
interest, and that the Commission’s determination is supported by substantial 
evidence in view of the record as a whole.  Accordingly, the Commission’s order is 
affirmed.   
AFFIRMED.