Court Opinion

ID: 2772731
Source: CourtListenerOpinion
Date Created: 2015-01-23 17:03:20.862123+00
Date Added: 2024-06-11T10:48:06.341212
License: Public Domain

IN THE SUPREME COURT OF NORTH CAROLINA

                                 No. 12A14
STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION, PUBLIC
STAFF – NORTH CAROLINA UTILITIES COMMISSION, and DUKE ENERGY
CAROLINAS, LLC
           v.
ATTORNEY GENERAL ROY COOPER and NORTH CAROLINA WASTE
AWARENESS AND REDUCTION NETWORK
                           Filed 23 January 2015

     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 24

September 2013 in Docket No. E-7, Sub 1026. Heard in the Supreme Court on 8

September 2014.

     Troutman Sanders 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, David T.
     Drooz, and Robert S. Gillam, 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; and John D. Runkle
     for NC WARN, intervenor-appellant.

     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 10.2% 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). In addition, we consider

whether the Commission’s use of the single coincident peak (“1CP”) cost-of-service

methodology unreasonably discriminated against residential customers and

whether the Commission inappropriately shifted certain expenses to ratepayers.

Because we conclude that the Commission made sufficient findings of fact regarding

the impact of changing economic conditions upon customers, that the use of 1CP

was supported by substantial evidence, and that no improper costs were included in

the Commission’s order, we affirm.

      On 4 February 2013, Duke filed an application with the Commission

requesting authority to adjust and increase its North Carolina retail electric service

rates to produce an additional $446,000,000, yielding a net increase of 9.7% 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

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, 367
N.C. 430, 432, 758 S.E.2d 635, 636 (2014) (citations omitted). “The ROE is one of

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

                                 Opinion of the Court

the components used in determining a company’s overall rate of return.”        Id.

(citation omitted).

      On 4 March 2013, the Commission entered an order declaring this proceeding

a general rate case and suspending the proposed new rates for up to 270 days. The

Commission scheduled five hearings across the state to receive public witness

testimony. The Commission also scheduled an evidentiary hearing for 8 July 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).   In addition, several parties filed petitions to intervene,

including the North Carolina Waste Awareness and Reduction Network (“NC

WARN”).

      On 17 June 2013, Duke and the Public Staff filed an Agreement and

Stipulation of Settlement with the Commission. The Stipulation produced a net

increase of $234,480,000 in annual revenues and an ROE of 10.2%. The Stipulation

provided for the use of the 1CP cost-of-service methodology. Among the parties

contesting the Stipulation were the Attorney General and NC WARN.

      During the hearings, the Commission received testimony from 131 public

witnesses, and the parties presented both expert testimony and documentary

evidence.   The evidence presented before the Commission will be discussed in

greater detail as necessary throughout this opinion.

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

                                  Opinion of the Court

      On 24 September 2013, the Commission entered an order granting a

$234,480,000 annual retail revenue increase, approving an ROE of 10.2%, and

authorizing the use of the 1CP cost-of-service methodology as agreed to in the

Stipulation. The Commission reviewed the evidence before it and stated that it

must consider whether the ROE is reasonable and fair to customers. See State ex

rel. Utils. Comm’n v. Cooper (“Cooper I”), 366 N.C. 484, 493, 739 S.E.2d 541, 547

(2013). The Commission concluded that the rate increase, ROE, and cost-of-service

methodology set forth in the Stipulation were “just and reasonable to the

Company’s customers and to all parties of record in light of all the evidence

presented.” The Attorney General and NC WARN appealed the Commission’s 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:

                (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.

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

                                     Opinion of the Court

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). 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
N.C. at 460, 500 S.E.2d at 700 (alteration in original) (citations and quotation

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

                                   Opinion of the Court

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” how it “quantified” the impact of changing economic

conditions upon customers when determining the proper ROE. 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) (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 with respect to 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

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

                                  Opinion of the Court

final ROE determination.” State ex rel. Utils. Comm’n v. Cooper, 367 N.C. 444, 450,

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

      The evidence before the Commission included expert testimony and

documentary evidence concerning ROE. Duke presented the testimony of Robert B.

Hevert, Managing Partner of Sussex Economic Advisers, LLC. Hevert testified in

support of the 10.2% ROE agreed to in the Stipulation. Although Hevert originally

had recommended an ROE of 11.25%, he testified that he respected Duke’s

determination that an ROE of 10.2% would be sufficient to raise necessary capital.

Hevert also discussed the effect of capital market conditions upon Duke’s North

Carolina customers. He testified that although North Carolina’s unemployment

rate was higher than the national average, the State’s GDP growth and expected

household income growth exceeded the national average. Hevert noted that North

Carolina’s average residential electric rates were approximately 12.46% below the

national average.      Hevert testified that his ROE analysis reflected changing

economic conditions.

      The Public Staff presented the testimony of Ben Johnson, Consulting

Economist and President of Ben Johnson Associates, Inc. Johnson also supported

the 10.2% ROE agreed to in the Stipulation. He explained that he had computed an

ROE range of 9.75% to 10.75% using the comparable earnings method and that an

ROE of 10.2% would fall just below the midpoint of that range. Johnson testified

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

                                   Opinion of the Court

that he took into consideration changing economic conditions and determined that

the Stipulation is “responsive” to those “difficult economic conditions.”

      The Commercial Group—representing some 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 original recommendation of 11.25% exceeded

the range of recently authorized ROEs across the country. They testified that the

10.2% ROE contained in the Stipulation “provides for significant movement on the

Commercial Group’s concerns regarding rate of return on equity.”

      Finally, the Attorney General introduced documentary evidence intended to

show that setting a lower ROE results in lower rates and a report comparing

average utility bills and average disposable income on a state-by-state basis.

      The Commission stated that it gave “substantial 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 with the nation as

a whole.   Similarly, the Commission stated that it gave “substantial weight” to

Johnson’s testimony that the recent financial crisis had resulted in a period of

“prolonged weakness.”     The Commission noted that both Hevert and Johnson

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

                                  Opinion of the Court

testified that economic conditions facing customers have improved since the

financial crisis. Furthermore, the Commission found that sixty-eight of the public

witnesses who testified at the hearings stated that “the rate increase was not

affordable to many customers,” including the elderly, the unemployed and

underemployed, the poor, and persons with disabilities.            Nevertheless, the

Commission explained that

             nine public witnesses testified that they understood
             [Duke’s] need to increase rates in an effort to retire older
             coal plants and replace them with natural gas generation.
             In addition, 22 public witnesses expressed the view that
             the Company should be required to discontinue its fossil
             fuel and nuclear generation in favor of energy efficiency
             and renewable resources.

      The Commission found that the Stipulation “result[ed] in lower rates to

consumers in the existing economic environment and provides consumers with

greater rate stability.” The Commission noted that the Stipulation provided for a

phase-in of the rate increase in which $30 million of the total annual revenue

increase would be deferred for two years. The Commission acknowledged that this

provision only mitigated the rate increase temporarily, but found that it would “help

ratepayers at a time when the impact of economic conditions is relatively severe.”

In addition, the Commission noted that in the Stipulation, Duke agreed not to seek

another increase in base rates for two years.        The Commission found that this

provision has “particular value to customers” because it would provide rate stability

during a period in which Duke is planning to make large capital investments.

                                          -9-
                STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                 Opinion of the Court

Finally, the Commission explained that the Stipulation requires Duke to contribute

$10 million for energy assistance for low-income customers.

      Ultimately, the Commission found:

                   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 [Duke’s] customers.

                   17. The rate increase approved in this case, which
            includes 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.

                   18. Continuous safe, adequate and reliable electric
            service by [Duke] is essential to the support of businesses,
            jobs, hospitals, government services, and the maintenance
            of a healthy environment.

                   19. The return on equity and capital structure
            approved by the Commission appropriately balances the
            benefits received by [Duke’s] customers from [Duke’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 [Duke’s] customers will
            experience in paying [Duke’s] increased rates.

                   20. The 10.2% return on equity and the 53% equity
            financing approved by the Commission in this case result
            in a cost of capital that is as low as reasonably possible.
            They appropriately balance [Duke’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 [Duke’s] low-income
            customers will experience in paying [Duke’s] increased
            rates will be mitigated to some extent by the $10 million

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

                                  Opinion of the Court

             of shareholder funds that [Duke] will contribute to assist
             low-income 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 10.2% 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.

      In the second issue before us, NC WARN argues that the Commission’s order

authorized preferential treatment of the industrial class to the detriment of the

residential class. NC WARN observes that the Commission approved use of the

1CP cost-of-service methodology for allocating costs and contends that this

methodology results in a greater rate increase for the residential class. NC WARN

asserts that this use of 1CP is unjustified and constitutes unreasonable

discrimination. We disagree.

      Section 62-140 prohibits unreasonable or unjust discrimination among

customer classes. CUCA I, 348 N.C. at 467, 500 S.E.2d at 704 (citation omitted).

The statute states in pertinent part:

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

                                  Opinion of the Court

                    No public utility shall, as to rates or services, make
             or grant any unreasonable preference or advantage to any
             person or subject any person to any unreasonable
             prejudice or disadvantage.         No public utility shall
             establish or maintain any unreasonable difference as to
             rates or services either as between localities or as between
             classes of service.

N.C.G.S. § 62-140(a) (2013). “The charging of different rates for services rendered

does not per se violate this statute.” CUCA I, 348 N.C. at 468, 500 S.E.2d at 704

(citation omitted). But any differences in rates between customer classes “must be

based on reasonable differences in conditions,” including such factors as quantity of

use, time of use, manner of service, and costs of rendering the various services. Id.

(citation omitted).

      The witnesses who testified before the Commission disagreed whether 1CP is

a fair cost-of-service methodology.    Phillip O. Stillman, Director of Regulatory

Strategy and Research for Duke Energy Business Services, LLC, supported the use

of 1CP. Stillman explained that 1CP allocates costs based upon how much demand

each customer class placed upon the system during the single hour in the test year

when total demand peaked. Stillman testified that Duke’s historical load profile

reflects a predominant summer peak and that using 1CP would allocate costs

correctly in light of the actual load characteristics of Duke’s system. Similarly,

Kroger presented the testimony of Kevin C. Higgins, Principal of Energy Strategies,

LLC, who explained that a utility’s resource planning is driven by its need to meet

its summer peak.      In addition, Nicholas Phillips, Jr., Managing Principal of

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

                                    Opinion of the Court

Brubaker & Associates, Inc., testified that use of the 1CP methodology would

allocate cost responsibility to customer classes properly and would minimize Duke’s

need for new generating capacity.

      In contrast, NC WARN presented the testimony of William B. Marcus,

Principal Economist for JBS Energy, Inc., who opposed the use of 1CP in this case.

Marcus testified that costs arise not only from Duke’s need to meet its peak

demand, but from factors that are related to the amount of energy produced over

the entire year, such as expenses for fuel handling, ash disposal, fuel transport, and

water and consumable chemicals. Based upon these other costs, Marcus stated that

1CP may allocate costs unfairly and allow industrial customers to pay less than

other customer classes.     Michael R. Johnson, Senior Analyst in Greenpeace’s

Climate and Energy Campaign, also opposed using 1CP and asserted that this

methodology contributes to environmental harm by encouraging the use of high

emissions energy sources. Both witnesses recommended including a component in

the cost-of-service methodology that accounts for the total energy consumed by each

customer class.

      The Commission stated that it gave “substantial weight” to Stillman’s

“undisputed testimony” that having sufficient generation and transmission

resources to meet its summer peak load requirements “is an essential planning

criterion of [Duke’s] system.” The Commission found that the use of 1CP would

                                           -13-
                   STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                   Opinion of the Court

allow all customer classes to share equitably in fixed costs relative to the demands

they place on the system during the summer peak. But the Commission explained

that the alternative methodologies recommended by NC WARN and Greenpeace

were not supported by substantial evidence and had not been “adequately applied

and analyzed with regard to the operating characteristics of the Company’s system.”

As a result, the Commission concluded that their experts’ testimony was entitled to

“little weight.”

       Ultimately, the record contained conflicting evidence regarding whether the

use of 1CP was reasonable and fair to Duke’s different customers. The Commission

considered all the evidence presented by the parties, explained the weight given to

the evidence, and concluded that the use of 1CP methodology here was “just and

reasonable” in light of the specific characteristics of Duke’s system. We are mindful

that “[i]t is not the function of this Court to determine whether there is evidence to

support a position the Commission did not adopt. . . .        The credibility of the

testimony and the weight to be accorded it are for the Commission,” rather than the

reviewing court, “to decide.” State ex rel. Utils. Comm’n v. Piedmont Natural Gas

Co., 346 N.C. 558, 569, 488 S.E.2d 591, 598 (1997) (citations omitted). We hold that

there is substantial evidence in the record to support the Commission’s finding that

the use of 1CP allocates costs “equitably.” NC WARN has not shown that the use of

1CP here results in unreasonable or unjust discrimination.

                                          -14-
                STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                  Opinion of the Court

      Finally, NC WARN argues that certain costs included in the Stipulation are

not reasonable operating expenses and should not be recovered from ratepayers.

We disagree.

      In fixing rates the Commission must ascertain a utility’s reasonable

operating expenses. N.C.G.S. § 62-133(b)(3), (5) (2013). The Commission must fix

rates that will allow the utility to recover its reasonable operating expenses and

receive a fair rate of return on the cost of the property used and useful in providing

the service rendered to the public. Id. § 62-133(b)(5); see also State ex rel. Utils.

Comm’n v. Thornburg, 325 N.C. 463, 467 n.2, 385 S.E.2d 451, 453 n.2 (1989). “The

findings of the Commission, when supported by competent evidence, are conclusive.”

State ex rel. Utils. Comm’n v. N.C. Power, 338 N.C. 412, 422, 450 S.E.2d 896, 901-02

(1994) (citation omitted), cert. denied, 516 U.S. 1092, 116 S. Ct. 813, 133 L. Ed. 2d
758 (1996).

      Before the Commission Marcus testified that Duke should not be allowed to

recover costs associated with stock-based compensation, advertising, dues,

donations, political contributions, sponsorships, survey research, and liability

insurance for directors and officers. In response to his concerns, Duke presented

witnesses Carol E. Shrum, Director of Rates and Regulatory Strategy for Duke;

Paul R. Newton, State President for Duke; and J. Danny Wiles, Director for

Regulated Accounting for Duke Energy Corporation. Shrum disagreed with Marcus

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

                                 Opinion of the Court

about advertising, some of the disputed dues, survey research, and liability

insurance for directors and officers, and testified that these costs constitute

reasonable operating expenses.      Similarly, Newton testified that stock-based

compensation is a proper and reasonable expense that is allowable in setting rates.

      Nevertheless, Shrum testified that the sponsorships, political contributions,

donations, and some additional dues challenged by Marcus had been removed from

Duke’s cost of service in the Stipulation and would not be recovered from Duke’s

North Carolina customers.    Both Newton and Wiles acknowledged that some of

these expenses were not reasonable operating expenses and had been included

because of errors by Duke. Wiles explained that “over 95%” of these errors already

had been identified by the Public Staff and removed from the Stipulation. With

respect to the remaining errors, Newton testified that they subsequently were

corrected. Similarly, Katherine A. Fernald, Assistant Director in the Accounting

Division of the Public Staff, testified that no unlawful expenses remained in the

Stipulation.

      In its order the Commission summarized the evidence concerning each

expense that Marcus alleged was improper. The Commission concluded that some

of these expenses were reasonable and could be recovered from ratepayers. But the

Commission was “quite disturbed” to find that political contributions, which may

not be recovered from ratepayers, were included in Duke’s original application. The

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

                                   Opinion of the Court

Commission ordered Duke “to conduct an internal root cause analysis” of this error

and to file a report by 31 December 2013. Nevertheless, based upon the evidence in

the record, the Commission concluded that “all inappropriately coded charges” had

been removed from the cost of service during the course of the proceeding. The

Commission found that “any charges remaining outside of those reconciled in the

Stipulation were subsequently addressed by the Company through additional

adjustments, or appropriately accounted for by the Company’s accounting system.”

We conclude that the Commission’s findings are supported by substantial evidence

in the record, including the testimony of witnesses for both Duke and the Public

Staff acknowledging that errors occurred and explaining that corrective steps were

taken to resolve the errors. NC WARN has not shown that the Commission allowed

Duke to recover any improper costs from ratepayers.

        Accordingly, the order of the Commission is affirmed.

        AFFIRMED.

        Justice ERVIN did not participate in the consideration or decision of this

case.

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