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

State: north-carolina

Issuer: North Carolina Supreme Court

Document:

IN THE SUPREME COURT OF NORTH CAROLINA 
No. 424A13   
FILED 20 AUGUST 2014 
STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION; DUKE 
ENERGY PROGRESS, INC., Applicant; and PUBLIC STAFF – NORTH 
CAROLINA UTILITIES COMMISSION, Intervenor 
 
 
v. 
ATTORNEY GENERAL ROY COOPER and THE NORTH CAROLINA WASTE 
AWARENESS AND REDUCTION NETWORK, Intervenors 
 
On direct appeal as of right pursuant to N.C.G.S. §§ 62-90(d) and 7A-29(b) 
from a final order of the North Carolina Utilities Commission entered on 30 May 
2013 in Docket No. E-2, Sub 1023.  Heard in the Supreme Court on 5 May 2014. 
 
K&L Gates LLP, by Kiran H. Mehta; Heather Shirley Smith, Deputy General 
Counsel, and Charles A. Castle, Associate General Counsel, Duke Energy 
Progress, Inc.; and Williams Mullen, by Christopher G. Browning, Jr., for 
applicant-appellee Duke Energy Progress, Inc. 
 
Antoinette R. Wike, Chief Counsel, and William E. Grantmyre and Lucy E. 
Edmondson, Staff Attorneys, for intervenor-appellee Public Staff – North 
Carolina Utilities Commission. 
 
Kevin Anderson, Senior Deputy Attorney General; Phillip K. Woods and 
William V. Conley, Special Deputy Attorneys General; and Margaret A. Force, 
Assistant Attorney General, for intervenor-appellant Roy Cooper, Attorney 
General. 
 
John D. Runkle for North Carolina Waste Awareness and Reduction Network, 
intervenor-appellant. 
 
JACKSON, Justice. 
 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
-2- 
In this case we consider whether the order of the North Carolina Utilities 
Commission (“the Commission”) authorizing a 10.2% return on equity (“ROE”) for 
Duke Energy Progress (“DEP”) contained sufficient findings of fact to demonstrate 
that it was supported by competent, material, and substantial evidence in view of 
the entire record.  See N.C.G.S. § 62-94 (2013).  Because we conclude that the 
Commission made sufficient findings of fact regarding the impact of changing 
economic conditions upon customers, we affirm.  See id. § 62-94(b). 
On 12 October 2012, DEP filed an application with the Commission 
requesting authority to increase its North Carolina retail electric service rates to 
produce an additional $359,000,000, yielding a net increase of 11% in overall base 
revenues.  The application requested that rates be established using an ROE of 
11.25%.  The ROE represents the return that a utility is allowed to earn on its 
capital investment by charging rates to its customers.  As a result, the ROE 
approved by the Commission affects profits for shareholders and costs to consumers.  
State ex rel. Utils. Comm’n v. Cooper (“Cooper II”), ___ N.C. ___, ___, 758 S.E.2d 635, 
636 (2014) (citations omitted).  The ROE is one of the components used in 
determining a company’s overall rate of return.  Id. at ___, 758 S.E.2d at 636 
(citation omitted). 
On 5 November 2012, the Commission entered an order declaring this 
proceeding a general rate case and suspending the proposed new rates for up to 270 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
-3- 
days.  The Commission scheduled five hearings across the State to receive public 
witness testimony.  The Commission also scheduled an evidentiary hearing for 18 
March 2013 to receive expert witness testimony.  The Attorney General of North 
Carolina and the Public Staff of the Commission intervened as allowed by law.  See 
N.C.G.S. §§ 62-15, -20 (2013).  
On 28 February 2013, DEP and the Public Staff filed an Agreement and 
Stipulation of Settlement with the Commission.  The Stipulation provided for a net 
increase of $178,712,000 in annual revenues and an ROE of 10.2%.  Among the 
parties contesting the Stipulation was the Attorney General.   
By the time the evidentiary hearing began on 18 March 2013, the 
Commission already had heard testimony from 127 public witnesses.  Many of these 
customers opposed the proposed rate increase, testifying about unemployment and 
poverty in their communities.  Other customers expressed their view that DEP 
should be required to discontinue fossil fuel and nuclear generation in favor of 
energy efficiency and renewable energy, even if doing so would result in higher 
costs.   
The Commission also heard from expert witnesses, who testified about the 
appropriate ROE and explained how current economic conditions affect consumers.  
Specifically, DEP presented the testimony of Robert B. Hevert, Managing Partner of 
Sussex Economic Advisers, LLC.  Hevert recommended an ROE of 11.25%, which 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
-4- 
was above the midpoint of his recommended range of 10.50% to 11.50%.  Hevert 
primarily used the Constant Growth Discounted Cash Flow model to compute his 
recommended ROE and considered the Capital Asset Pricing Model as a check on 
his results.  Hevert also considered the effect of current economic conditions upon 
North Carolina customers.  He testified that although North Carolina’s 
unemployment rate was worse than the national average, the State’s GDP growth 
and expected household income growth also were higher than the national average.  
Hevert noted that North Carolina’s average residential electric prices were 
approximately 12.31% below the national average.  He concluded that “the regional 
economic conditions in North Carolina were substantially similar to the United 
States, such that there is no direct effect of those conditions on the Company’s cost 
of equity.”  As a result, Hevert determined that his ROE analysis did not need to be 
adjusted to account for the impact of changing economic conditions upon utility 
customers in this State.   
The Public Staff presented the testimony of Ben Johnson, Consulting 
Economist and President of Ben Johnson Associates, Inc.  Johnson estimated an 
ROE range utilizing two approaches:  first, a comparable earnings approach, which 
arrived at a range of 9.75% to 10.75%; and second, a market approach, which 
arrived at a range of 7.72% to 8.95%.  Johnson also addressed the prolonged period 
of economic weakness that began in 2007.  Johnson stated that improvement in the 
economy has been both weak and slow, with firms still reluctant to either invest or 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
-5- 
expand.  Nevertheless, Johnson concluded that the proposed ROE of 10.2% agreed 
upon in the Stipulation was reasonable and consistent with the public interest.   
Other interested parties also presented evidence to the Commission.  The 
Carolina Utility Customers Association, Inc. (“CUCA”), a coalition of industrial 
energy customers, presented the testimony of Kevin O’Donnell, President of Nova 
Energy 3 Consultants, Inc., who recommended a specific ROE of 9.25%.  In addition, 
the Commercial Group, an ad hoc group of Duke’s commercial energy customers, 
presented the testimony of Steve Chriss, Senior Manager for Energy Regulatory 
Analysis for Wal-Mart Stores, Inc., and Wayne Rosa, Energy and Maintenance 
Manager for Food Lion, LLC.  Chriss and Rosa did not recommend a specific ROE, 
but noted that Hevert’s recommendation of 11.25% exceeded the range of recently 
authorized ROEs across the country.   
The Attorney General did not present any ROE evidence.   
On 30 May 2013, the Commission entered an order granting a $178,712,000 
annual retail revenue increase and approving an ROE of 10.2% as agreed to in the 
Stipulation.  In support of its conclusions, the Commission summarized the 
testimony of Hevert, Johnson, O’Donnell, Chriss, and Rosa.  The Commission also 
recognized that it must consider whether the ROE is reasonable and fair to 
customers stating:  
[T]he Commission is required to consider the economic 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
-6- 
effects of its ROE decision on a public utility’s customers 
pursuant to G.S. 62-133(b)(4).  In particular, G.S. 62-
133(b)(4) states, in pertinent part, that in fixing rates the 
Commission must fix a rate of return on the utility’s 
investment that “will enable the public utility by sound 
management to produce a fair return for its shareholders, 
considering changing economic conditions and other 
factors, including, but not limited to . . . to compete in the 
market for capital funds on terms that are reasonable and 
that are fair to its customers and to its existing investors.”  
One of the “terms” on which a public utility competes in 
the market for capital funds is the utility’s authorized 
ROE.  Thus, the Commission must consider whether that 
term is reasonable and fair to the utility’s customers. 
 (Second alteration in original.)  The Commission concluded that the 10.2% ROE set 
forth in the Stipulation is “just and reasonable to all parties in light of all the 
evidence presented.”  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.    The North Carolina 
Waste Awareness and Reduction Network filed a separate appeal supporting the 
Attorney General’s position.   
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 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
-7- 
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 
 
(6) Arbitrary or capricious. 
Id. § 62-94(b) (2013).  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.  Id.; 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.  It means such relevant evidence as a 
reasonable mind might accept as adequate to support a conclusion.”  CUCA I, 348 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
-8- 
N.C. at 460, 500 S.E.2d at 700 (alteration in original) (citations and quotation 
marks omitted).  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 order is legally deficient 
because it is not supported by competent, material, and substantial evidence and 
does not include sufficient findings, reasoning, and conclusions.  Specifically, the 
Attorney General contends that the Commission failed to make findings of fact 
showing in “meaningful detail” that it considered the impact of changing economic 
conditions upon customers when determining ROE.  The Attorney General asserts 
that the Commission must “quantify” the extent to which it adjusted the final ROE 
to account for consumer interests.  We disagree. 
Pursuant to subdivision 62-133(b)(4) of the North Carolina General Statutes, 
the Commission must fix a rate of return that  
will enable the public utility by sound management to 
produce a fair return for its shareholders, considering 
changing economic conditions and other factors, . . . to 
maintain its facilities and services in accordance with the 
reasonable requirements of its customers in the territory 
covered by its franchise, and to compete in the market for 
capital funds on terms that are reasonable and that are 
fair to its customers and to its existing investors. 
N.C.G.S. § 62-133(b)(4).  Recently, we observed that this provision, along with 
Chapter 62 as a whole, requires the Commission to treat consumer interests fairly, 
not indirectly or as “mere afterthoughts.”  State ex rel. Utils. Comm’n v. Cooper 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
-9- 
(“Cooper I”), 366 N.C. 484, 495, 739 S.E.2d 541, 548 (2013).  In Cooper I the 
Commission’s order stated: 
Duke witness Hevert and Public Staff witness Johnson 
testified that it is not necessary to consider the impact of 
changing economic conditions on consumers in the context 
of an ROE economic analysis, other than in a broader 
macroeconomic sense, when analyzing changing market 
conditions 
for 
the 
purpose 
of 
making 
ROE 
recommendations.  However, the Commission is required 
to consider the economic effects of its ROE decision on a 
public utility’s customers pursuant to G.S. 62-133(b)(4).  
In particular, G.S. 62-133(b)(4) states, in pertinent part, 
that in fixing rates the Commission must fix a rate of 
return on the utility’s investment that “will enable the 
public utility by sound management to produce a fair 
return 
for 
its 
shareholders, 
considering 
changing 
economic conditions and other factors, including, but not 
limited to . . . to compete in the market for capital funds 
on terms that are reasonable and that are fair to its 
customers and to its existing investors.”  One of the 
“terms” on which a public utility competes in the market 
for capital funds is the utility’s authorized ROE.  Thus, 
the Commission must consider whether that term is 
reasonable and fair to the utility’s customers.  Public Staff 
witness Johnson testified in depth concerning the 
economic downturn, including the unemployment rate.  In 
addition, the Commission received extensive testimony 
from public witnesses concerning the impact of current 
economic conditions on Duke’s customers.  Therefore, the 
Commission 
has 
ample 
evidence 
to 
consider 
in 
determining whether the proposed ROE of 10.5% is fair to 
Duke’s customers.   
(Ellipsis in original.)  We explained that “the Commission must consider all 
evidence presented by interested parties, which necessarily includes customers . . . .  
[I]n retail electric service rate cases the Commission must make findings of fact 
regarding the impact of changing economic conditions on customers when 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
-10- 
determining the proper ROE for a public utility.”  Id.  We concluded that the order 
did not contain sufficient findings addressing the impact of changing economic 
conditions upon customers.  366 N.C.at 494, 739 S.E.2d at 547.  But contrary to the 
Attorney General’s suggestion, we did not state in Cooper I that the Commission 
must “quantify” the influence of this factor upon the final ROE determination.  See 
id.; State ex rel. Utils. Comm’n v. Pub. Staff, 323 N.C. 481, 498, 374 S.E.2d 361, 370 
(1988) (“Given th[e] subjectivity ordinarily inherent in the determination of a proper 
rate of return on common equity, there are inevitably pertinent factors which are 
properly taken into account but which cannot be quantified with the kind of 
specificity here demanded by [the appellant].”). 
Here the Commission’s order contains several findings of fact that address 
this factor: 
16.  Changing economic conditions in North 
Carolina during the last several years have caused high 
levels of unemployment, home foreclosures and other 
economic stress on DEP’s customers. 
 
17.  The rate increase approved in this case, which 
includes the approved ROE and capital structure, will be 
difficult for some of DEP’s customers to pay, in particular 
DEP’s low-income customers.   
 
18.  Continuous safe, adequate and reliable electric 
service by DEP is essential to the support of businesses, 
jobs, hospitals, government services, and the maintenance 
of a healthy environment. 
 
19.  The ROE and capital structure approved by the 
Commission appropriately balances the benefits received 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
-11- 
by DEP’s customers from DEP’s provision of safe, 
adequate and reliable electric service in support of 
businesses, jobs, hospitals, government services, and the 
maintenance 
of 
a 
healthy 
environment 
with 
the 
difficulties that some of DEP’s customers will experience 
in paying DEP’s increased rates. 
 
20.  The 10.2% ROE and the 53% equity financing 
approved by the Commission in this case are as low as 
reasonably possible.  They appropriately balance DEP’s 
need to obtain equity financing and maintain a strong 
credit rating with its customers’ need to pay the lowest 
possible rates.   
 
21.  The difficulties that DEP’s low-income 
customers will experience in paying DEP’s increased rates 
will be mitigated to some extent by the $20 million that 
DEP will contribute to assistance for low-income 
customers and job training. 
The Commission also stated that it gave “great weight” to Hevert’s testimony that, 
although North Carolina’s unemployment rate was higher than the national 
average, the State enjoyed lower average electric rates, higher expected household 
income growth, and superior GDP growth as compared to the nation as a whole.  
The Commission noted that Johnson testified that improvement in the economy has 
been slow and that the state of the economy affects both investors and consumers.  
The Commission explained that in addition to submitting recommended ROE 
ranges, Johnson concluded that a 10.2% ROE was reasonable and consistent with 
the public interest in combination with other provisions in the Stipulation.  
Furthermore, the Commission found that 58 of the 127 public witnesses who 
testified at the hearings stated that “the rate increase was not affordable to many 
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
-12- 
customers,” including the elderly, the unemployed or underemployed, the poor, and 
persons with disabilities.  Nevertheless, the Commission explained that “[a]nother 
significant group of customers” wanted DEP to invest more in renewable energy, 
even if doing so would increase consumer costs.   
In addition, the Commission found that specific provisions in the Stipulation 
serve customer interests.  The Commission noted that the Stipulation required DEP 
to exclude from its rate base for one year the construction work in progress invested 
in the company’s new Sutton power plant, thereby “making it easier for ratepayers 
to pay their electric bills in the current economic environment.”  The capital 
structure contained in the Stipulation allowed for less equity than DEP’s actual 
capital structure during the test year, and the Commission observed that this 
adjustment lowered the rate paid by ratepayers, but increased the risk to debt 
holders and lowered the return for investors.  Finally, the Commission noted that 
the distribution of $20,000,000 for assistance to low-income consumers and for job 
training benefited those ratepayers with the least ability to pay.  These findings of 
fact not only demonstrate that the Commission considered the impact of changing 
economic conditions upon customers, but also specify how this factor affected the 
Commission’s final order.  Therefore, we hold that the Commission made sufficient 
findings regarding the impact of changing economic conditions upon customers and 
that these findings are supported by competent, material, and substantial evidence 
in view of the entire record.   
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN. 
 
Opinion of the Court 
 
 
-13- 
Accordingly, the order of the Commission is affirmed. 
AFFIRMED.