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 
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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 
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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 
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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 
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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 
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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 threeyear 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 
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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. 
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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. 
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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
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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 
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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 
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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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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.