Opinion ID: 1224268
Heading Depth: 1
Heading Rank: 4

Heading: The Determination of a Fair Rate of Return

Text: The Commission determined that the fair rate of return upon the fair value of Vepco's property used and useful in rendering retail electric service in North Carolina is 6.89 per cent. It is clear from the Commission's order that the Commission made this determination by the same process of calculation which we found to be an error of law in Utilities Commission v. Duke Power Co., supra. Having concluded that a fair rate of return to Vepco upon the equity component of its actual capital structure is 12 per cent (higher than the return believed to be fair by expert witnesses for the Commission staff and for the Attorney General and lower than the return believed to be fair by expert witnesses for Vepco), the Commission multiplied the equity component of Vepco's actual capital structure (its common equity capital plus its retained earnings) by 12 per cent and determined that the return of $2,515,500 was a fair dollar return thereon. Adding this to the amounts required to pay interest on the debt component of Vepco's actual capital structure and dividends on the preferred stock component, the Commission computed that $5,260,406 was a fair dollar return to Vepco on its entire capital invested in its electric power system. The Commission then made the mathematically correct computation that the dollar return of $2,515,500 is a rate of return of 8.61 per cent on the common equity component of the actual capital structure plus the fair value increment (the excess of fair value over original cost depreciated). When taken in conjunction with the interest requirement on Vepco's debt capital and the dividend requirement on its preferred stock capital, this equated to a rate of return of 6.89 per cent on the fair value of the properties, which rate of return the Commission found to be fair. As we noted in Utilities Commission v. Duke Power Co., supra, in this computation the total dollar return which Vepco is to be permitted to earn has not been increased at all by reason of the fair value increment. It is exactly the same as the Commission would have allowed had the fair value of the properties been exactly the same as Vepco's actual net investment therein. For the reasons stated in Utilities Commission v. Duke Power Co., supra, this is not in accord with the mandate of G.S. § 62-133(b), as construed by us in Utilities Commission v. Telephone Co., 281 N.C. 318, 189 S.E.2d 705. Consequently, this proceeding must be remanded to the Commission for compliance with that mandate. Here, as in Utilities Commission v. Duke Power Co., supra, our decision is not to be deemed a direction to the Commission to revise its order so as to permit Vepco to make an additional increase of its rates sufficient to yield additional net income, after taxes, equal to 12 per cent of the fair value increment. Here, as in that case, it is for the Commission, not for this Court, to determine what is a fair rate of return.. For the reasons stated in Utilities Commission v. Duke Power Co., supra, the Commission may, in its own expert judgment, find that a fair rate of return on Vepco's equity capital, including the fair value increment, is less than 12 per cent (the rate of return it found fair without taking the fair value increment into account). How much less, if any, is for the Commission, not for this Court, to determine. In the record before us, Dr. Phillips, Vepco's expert witness on fair rate of return, testified that when the fair value increment, as computed by Mr. Reilly (substantially larger than that found by the Commission) was added to the equity component of the actual capital structure of Vepco, the fair rate of return on the equity component would be less than that which he had computed on the basis of the actual capital structure. Just as Mr. Reilly did concerning his weighting of the indicators of fair value, Dr. Phillips testified that the determination of fair rate of return on equity capital is a matter of subjective judgment. The Commission is, of course, not obliged to adopt as its own Dr. Phillips' opinion as to the precise effect of the fair value increment upon the fair rate of return, notwithstanding his having been the only witness to testify on that subject. This is especially true in view of his patently erroneous testimony on cross-examination: I am saying here that with a fair value rate base, this company requires a higher rate of return than it would on an original cost rate base. (Emphasis added.) As observed by us in Utilities Commission v. Duke Power Co., supra, the Commission may, upon the remand here ordered, conduct a further hearing at which expert testimony may be sought upon the question of what is the effect of the fair value increment which has now been actually found by the Commission upon the rate of return which it should find to be fair.