Court Opinion

ID: 6709144
Source: CourtListenerOpinion
Date Created: 2022-07-20 22:33:51.100031+00
Date Added: 2024-06-11T09:05:34.428102
License: Public Domain

Justice Martin
dissenting in part.
I cannot agree with the approval by the majority of the Commission’s treatment regarding the capital structure of Duke with respect to including equity capital that Duke had invested in its wholly owned, nonregulated subsidiaries. To this extent, I dissent from the majority opinion.
*707I find that the Commission acted in excess of its statutory authority by including common stock investment in non-utility enterprises in determining the appropriate capital structure in this rate case. The majority argues that it must be assumed that when proceeds from capital are invested, the proceeds are derived from each source of the capital in the same ratio as each source bears to the other on Duke’s books. Therefore, the majority argues, if any reduction in the capital structure is made for rate-making purposes, the reduction would be in each source of the capital according to the ratio each source bears to the other and in such case a reduction would not affect any change in the rate of return allowed for each component of capital. However, it appears to me that this solution is too simplistic. The point is that such investments in nonregulated companies should not be included for the purpose of determining the equity capital ratio for rate-making purposes. The law does not permit, for rate-making purposes, a utility to earn a return on property not actually used or useful in producing electricity. N.C.G.S. § 62-133(b)(l), (4) (Cum. Supp. 1987).
Such non-utility and nonregulated subsidiaries owned by Duke should stand on their own feet. They should produce an equity return for Duke, and Duke’s ratepayers should not be forced to subsidize these enterprises by including Duke’s equity investments in them as a part of the electric utility capital structure. By removing these investments, the evidence shows that the equity portion of the capital structure would be reduced from 46.9 percent to 42.17 percent. The effect on rates would have lowered the company’s requested increase by some twelve million dollars. Thus, the evidence indicates that by including these investments as a part of the capital structure, the rate-payers are being saddled with an additional twelve million dollars.
Apparently the argument of Duke Power Company is that these investments represent current assets waiting to be reinvested in the electric plant. Even so, Duke’s witness, Mr. Stimart, testified on rebuttal that if the Commission were to remove the equity portion of Crescent Land and Timber Company and Mill-Power Supply Company, the equity portion of the capital structure would be reduced to some extent. The Commission, however, made no adjustment to Duke’s capital structure to remove the equity of any of the nonregulated subsidiaries. In so doing, it discussed only Church Street Capital Corporation. The Commission *708made no analysis as to why the equity investment in the other three major unregulated subsidiaries should not be removed. In this regard it is interesting to note that in 1985 this same Commission had removed from Duke’s capital structure equity invested in Mill-Power Supply Company and Crescent Land and Timber Company. In re Duke Power Company, 69 PUR 4th 375, 452 (NCUC 1985). This Court agreed with that adjustment in State ex rel. Utilities Comm. v. Eddleman, 320 N.C. 344, 358 S.E. 2d 339 (1987).
N.C.G.S. § 62-133(b)(4) compels the Commission to fix rates which reflect the return on the cost of property ascertained pursuant to subdivision (1) as will enable the public utility to produce a fair return for its shareholders. Subdivision (1) of the statute requires the Commission to fix rates by ascertaining the reasonable original cost of the utility’s property which is used and useful in providing service rendered to the public within this state. The Commission, by including in the capital structure the equity Duke had invested in nonregulated subsidiaries, violates these statutory requirements. Smyth v. Ames, 169 U.S. 466, 42 L.Ed. 819, modified on other grounds, 171 U.S. 361, 43 L.Ed. 1977 (1898). See Utilities Comm. v. Telephone Co., 281 N.C. 318, 189 S.E. 2d 705 (1972).
The exclusion of such equity investments in nonregulated subsidiaries when determining capital structure of the utility is common practice in most jurisdictions. 64 Am. Jur. 2d Public Utilities § 156 (1972); In re New York Telephone Company, 74 PUR 4th 590 (N.Y.P.S.C. 1986).
Further, the Commission apparently reversed its prior holding concerning Mill-Power Supply Company and Crescent Land and Timber Company without making any analysis or discussion in this present proceeding. Thus, it appears that this decision was arbitrary and capricious and unsupported by the evidence upon the whole record test. In the 1985 proceeding, the Commission removed $24,076,000 of the company’s equity investment in Crescent Land and Timber Company and Mill-Power Supply Company and assigned as one reason the fact that Duke had removed $21,000,000 of long-term debts supporting such nonregulated subsidiaries. In the present proceeding, we have a reversal without explanation, the Commission’s order being silent as to why it *709reversed its previous ruling. Thus, it appears that the ruling is arbitrary and capricious and unsupported by the evidence.
I find that the Commission erred as a matter of law by including Duke’s equity investments in the nonregulated subsidiaries as a part of its capital structure in calculating the rate of return. Therefore, I would vacate the Commission’s findings in this respect and upon remand have the Commission exclude Duke’s investments in its nonregulated subsidiaries from the rate structure.