Court Opinion

ID: 2763017
Source: CourtListenerOpinion
Date Created: 2014-12-19 17:06:57.206377+00
Date Added: 2024-06-11T11:26:11.158071
License: Public Domain

IN THE SUPREME COURT OF NORTH CAROLINA
                                 No. 268A12-2
                            Filed 19 December 2014

STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION; DUKE
ENERGY CAROLINAS, LLC, Applicant; PUBLIC STAFF – NORTH CAROLINA
UTILITIES COMMISSION, Intervenor
            v.
ATTORNEY GENERAL ROY COOPER, N.C. WASTE AWARENESS AND
REDUCTION NETWORK, N.C. JUSTICE CENTER, and N.C. HOUSING
COALITION, Intervenors

      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 on remand from this

Court entered on 23 October 2013 in Docket No. E-7, Sub 989.         Heard in the

Supreme Court on 8 September 2014.

      K&L Gates LLP, by Kiran H. Mehta; Heather Shirley Smith, Deputy General
      Counsel, and Charles A. Castle, Associate General Counsel, Duke Energy
      Carolinas, LLC; and Williams Mullen, by Christopher G. Browning, Jr., for
      applicant-appellee Duke Energy Carolinas, LLC.

      Antoinette R. Wike, Chief Counsel, and William E. Grantmyre and David T.
      Drooz, Staff Attorneys, for intervenor-appellee Public Staff – North Carolina
      Utilities Commission.

      Kevin Anderson, Senior Deputy Attorney General; Phillip K. Woods, Special
      Deputy Attorney General; Michael T. Henry, Assistant Attorney General; and
      John F. Maddrey, Solicitor General; for intervenor-appellant Roy Cooper,
      Attorney General.

      Law Offices of F. Bryan Brice, Jr., by Matthew D. Quinn, for NC WARN; and
      John D. Runkle for NC WARN, N.C. Justice Center, and N.C. Housing
      Coalition, intervenor-appellants.

      JACKSON, Justice.
                STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                  Opinion of the Court

      In this case we consider whether the order of the North Carolina Utilities

Commission (“the Commission”) authorizing a 10.5% return on equity (“ROE”) for

Duke Energy Carolinas (“Duke”) contained sufficient findings of fact to demonstrate

that the order 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 1 July 2011, Duke filed an application with the Commission requesting

authority to increase its North Carolina retail electric service rates to produce an

additional $646,057,000, yielding a net increase of 15.2% in overall base revenues.

The application requested that rates be established using an ROE of 11.5%. The

ROE represents the return that a utility is allowed to earn on the equity-financed

portion of 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”), 367 N.C. 430, 432,

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. (citation omitted).

      The proceedings before the Commission are set forth in our opinion in State

ex rel. Utilities Commission v. Cooper (“Cooper I”), 366 N.C. 484, 739 S.E.2d 541

(2013). In pertinent part, we explained that

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                 STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                     Opinion of the Court

              [t]he Commission entered an order on 28 July 2011,
              declaring this matter to be a general rate case and
              suspending the proposed rate increase pending further
              investigation. . . . The Attorney General of North
              Carolina and the Public Staff–North Carolina Utilities
              Commission intervened in this matter as allowed by law.

                     On 28 November 2011, the Public Staff and Duke
              filed an Agreement and Stipulation of Settlement with
              the Commission that “provide[d] for a net increase of
              $309,033,000” for annual revenues and an allowed “ROE
              of 10.5%.” The Settlement addressed all issues between
              Duke and the Public Staff, but was contested by some of
              the other parties, including the Attorney General.

Id. at 486, 739 S.E.2d at 542-43.        Subsequently, the Commission conducted six

hearings to receive testimony from public witnesses and an evidentiary hearing for

receiving expert testimony. Id. On 27 January 2012, the Commission entered an

order (the “Rate Order”) approving the revenue increase and ROE contained in the

Stipulation. 366 N.C. at 488, 739 S.E.2d at 544. The Attorney General appealed.

      Upon review, we concluded that the Rate Order was not supported by

sufficient   findings   of   fact   demonstrating     that   the   Commission   exercised

independent judgment in approving the Stipulation’s provisions. Id. at 493, 739

S.E.2d at 547. We explained that

              it does not appear that the Commission weighed any of
              the testimony presented at the evidentiary hearing.
              Instead, it appears that the Commission merely recited
              the witnesses’ testimony before reaching an ROE
              conclusion in its order.     Notably absent from the
              Commission’s order is any discussion of why one witness’s
              testimony was more credible than another’s or which
              methodology was afforded the greatest weight.

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                  STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                   Opinion of the Court

Id. We further noted that the Rate Order did not include sufficient findings of fact

regarding the impact of changing economic conditions upon customers. 366 N.C. at

494, 739 S.E.2d at 547. As a result, we reversed the Rate Order and remanded the

case “with instructions to make an independent [ROE] determination . . . based

upon . . . findings of fact that weigh all the available evidence.” Id. at 496, 739

S.E.2d at 548.

         On 23 October 2013, the Commission entered an order (the “Remand Order”)

making supplemental findings of fact, summarizing public witness testimony,

reviewing expert testimony, explaining the weight given to the evidence, and

“reaffirm[ing]” the Rate Order.        The Commission concluded that the ROE

authorized in the Rate Order was “justified and supported” by the evidence and was

reasonable in light of the Stipulation as a whole. The Attorney General appealed

the Remand Order to this Court as of right pursuant to N.C.G.S. §§ 7A-29(b) and

62-90.

         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:

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                   STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                     Opinion of the Court

                   (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

                   (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 light 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

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                  STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                      Opinion of the Court

reasonable mind might accept as adequate to support a conclusion.” CUCA I, 348
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).

       In his appeal,1 the Attorney General argues that the Commission did not

reach its own independent conclusions because the Remand Order “once again

analyzes and critiques the expert testimony . . . in just such a way so as to reach—to

the exact tenth of a percent—the precise compromise ROE contained in the

Stipulation.”   The Attorney General asserts that the Commission supported the

Remand Order by “cherry picking” through the available evidence, evidence from

other cases, and orders entered in other jurisdictions. We disagree.

       In CUCA I we explained that the Commission is required to reach an

independent conclusion on a fair ROE. 348 N.C. at 461-62, 500 S.E.2d at 700-01.

The Commission must consider all the evidence before it along with any stipulation

entered into by some of the parties and any other relevant facts. Id. at 466, 500

       1    We note that NC WARN, the North Carolina Justice Center, and the North
Carolina Housing Coalition did not file a notice of appeal with the Commission, although
they filed a brief with this Court. Pursuant to section 62-90 of the North Carolina General
Statutes, a party may appeal a final order of the Commission “if the party . . . shall file with
the Commission notice of appeal and exceptions which shall set forth specifically the
ground or grounds on which the aggrieved party considers said decisions or order to be
unlawful, unjust, unreasonable or unwarranted.” N.C.G.S. § 62-90(a) (2013). Because NC
WARN, the North Carolina Justice Center, and the North Carolina Housing Coalition did
not file a notice of appeal with the Commission, we are without jurisdiction to consider their
arguments.

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                STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                 Opinion of the Court

S.E.2d at 703. But the requirement that the Commission reach an independent

conclusion does not preclude the Commission from adopting an ROE recommended

by a particular party or witness. As we explained in CUCA I,

             [t]he 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.

      In Cooper I we reversed the Rate Order because we were unable to conclude

from the record that the Commission had considered all the evidence in addition to

the Stipulation. See 366 N.C. at 493, 739 S.E.2d at 547. Specifically, we noted that

the Rate Order did not weigh the evidence, but “merely recited the witnesses’

testimony before reaching an ROE conclusion.” Id. But in the Remand Order, the

Commission revisited the evidence related to ROE and explained the weight given

to each witness’s testimony.

      The Commission first reviewed the discounted cash flow (“DCF”) analysis

presented by Duke witness Robert Hevert. See 366 N.C. at 486-87, 739 S.E.2d at

543. The Commission explained that Hevert performed this analysis using several

proxy groups and arrived at estimated ROE ranges of: (1) 10.42% to 10.84% for a

proxy group he had selected; (2) 10.24% to 10.74% for a proxy group selected by

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                  STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                  Opinion of the Court

Public Staff witness Johnson; (3) 10.31% to 10.57% for one proxy group selected by

CUCA witness O’Donnell; and (4) 10.27% to 10.58% for a second proxy group

selected by O’Donnell.    The Commission observed that the average midpoint of

these ranges was exactly the stipulated 10.5%.           Ultimately, the Commission

“credit[ed]” Hevert’s DCF analysis and found “that the resulting value provides

substantial support for its determination that 10.5% is the appropriate [ROE].”

      The Commission noted that Public Staff witness Ben Johnson had examined

ROE through a comparable earnings method and a market approach.                   The

Commission gave “substantial weight” to Johnson’s comparable earnings method,

which resulted in an ROE range of 9.75% to 10.75%, and determined that Johnson’s

analysis provided “ample support” for the Commission’s conclusion that 10.5% was

an appropriate ROE. Nevertheless, the Commission explained that Johnson had

acknowledged that his market approach “does not focus on short-term securities

markets at all; so the recent drop in interest rates and the drop in the opportunity

to reach capital that is being signaled by security markets is simply not a part of

that analysis.”    The Commission further explained that Hevert testified that

Johnson’s market analysis resulted in an “unreasonably low” ROE.                  The

Commission determined that Johnson’s market analysis was unpersuasive.

      The Commission gave “minimal weight” to CUCA witness Kevin O’Donnell’s

testimony recommending an ROE of 9.5%.              The Commission concluded that

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                 STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                 Opinion of the Court

O’Donnell inappropriately relied upon the assumed rate of return for Duke’s

pension expense, “ignor[ing] the crucial distinction between expected returns, which

underlie pension expense, and required returns, which underlie the appropriate

rate of return on equity.”

      In conducting its analysis, the Commission was required to consider the

Stipulation together with all the other evidence and was permitted to adopt the

ROE contained therein. CUCA I, 348 N.C. at 466, 500 S.E.2d at 703. We hold that

the Remand Order contains sufficient findings of fact explaining the weight given to

the evidence and demonstrating that the Commission reached its own independent

conclusion on ROE.

      Next, the Attorney General argues that the Commission determined that it

“need not follow” this Court’s decision in Cooper I.      Specifically, the Attorney

General contends that the Commission did not make sufficient findings of fact

regarding the impact of changing economic conditions upon customers.            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

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                  STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                   Opinion of the Court

               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) (2013). In Cooper I 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.” 366 N.C. at 495, 739 S.E.2d at 548.

But although the Commission must make findings of fact regarding the impact of

changing economic conditions upon consumers, “we did not state in Cooper I that

the Commission must ‘quantify’ the influence of this factor upon the final ROE

determination.” State ex rel. Utils. Comm’n v. Cooper (“Cooper III”), 367 N.C. 444,

450, 761 S.E.2d 640, 644 (2014) (citations omitted).

       Here the Commission’s order contains several findings of fact that address

this factor:

                     53. Economic conditions in North Carolina during
               the last several years have caused high levels of
               unemployment and other economic stress on [Duke’s]
               customers.

                      54. The rate increase approved in this case, which
               includes, among the many authorized adjustments, the
               approved return on equity and capital structure, will be
               difficult for some of [Duke’s] customers to pay, in
               particular [Duke’s] low-income customers. . . .

                      55. Continuous safe, adequate, and reliable electric
               service by [Duke] is essential to the well-being of the
               people, businesses, institutions, and economy of North
               Carolina.

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                   STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                   Opinion of the Court

                     56.    The return on equity approved by the
             Commission appropriately balances the benefits received
             by all of [Duke’s] customers from [Duke’s] provision of
             safe, adequate, and reliable electric service in support of
             the well-being of the people, businesses, institutions, and
             economy of North Carolina with the difficulties that a
             portion of [Duke’s] customers experience in paying their
             bills in the current economic environment.

      Furthermore, the Commission found that the Stipulation was “designed to

mitigate the impact of the rate increase in several ways.” First, the Commission

explained that pursuant to the Stipulation, Duke’s rates would increase by 7.21%

across-the-board for all customer classes, which amounted to less than half the

revenue increase that Duke originally sought. The Commission determined that an

across-the-board increase, as provided in the Stipulation, resulted in a smaller

increase for residential customers than an alternative rate design considered by the

Commission. The Commission concluded that this approach was responsive to the

concerns of public witnesses regarding the ability of residential customers to pay for

a rate increase.

      Second, the Commission noted that the Stipulation required Duke to defer

recovery of costs associated with construction work in progress at Duke’s Cliffside

Unit 6. The Commission found that this requirement “provid[es] $51 million of

relief in present rates to respond to the present economic straits.”       (Emphasis

omitted.)

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                 STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                 Opinion of the Court

      Finally, the Commission explained that the Stipulation required Duke to pay

$11 million for energy assistance for low-income customers.      As stated in the

Stipulation, this contribution would come from Duke’s shareholders and would be

used exclusively to provide energy assistance to Duke’s North Carolina retail

customers.

      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 influenced the Commission’s decision to authorize a 10.5% ROE as

agreed to in the Stipulation. These findings are supported by the evidence before

the Commission, including public witness testimony, expert testimony, and the

Stipulation itself. 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.

      Accordingly, the order of the Commission is affirmed.

      AFFIRMED.

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