Court Opinion

ID: 9565353
Source: CourtListenerOpinion
Date Created: 2023-08-21 19:19:31.322842+00
Date Added: 2024-06-11T09:19:34.597657
License: Public Domain

Justice Lake
dissenting.
On January 25, 1974, Carolina Power and Light Company (CP&L) had pending before the Utilities Commission a gen*354eral rate case in which it sought a substantial increase in its basic schedules of rates for electric service. On that date, CP&L filed a new application, out of which this appeal arises, seeking Commission approval of its addition to each of its basic rate schedules of a fossil fuel adjustment clause (the fuel clause). The Commission, without notice or hearing, permitted this to be done on an interim basis, consolidated the two proceedings for the purpose of hearing and, several months later, conducted such consolidated hearing.
After such hearing, the Commission re-separated the two proceedings for the purpose of decision and entered separate orders therein. In the first matter (dealing with basic rate schedules), the Commission issued an order allowing the requested rate increases, thus fixing CP&L’s basic rate schedules at levels which the Commission deemed adequate to enable CP&L to earn a fair rate of return on the fair value of its properties used and useful in rendering electric service (the rate base). That order is not before us on this appeal. Consequently, for purposes of this appeal, it must be assumed that those basic rate schedules, there approved, would enable CP&L to earn a fair rate of return under conditions prevailing at the time of that order. G.S. 62-132.
Substantially simultaneously (a few days earlier), the Commission entered, in the fuel clause proceeding, the order before us on this appeal permitting CP&L to add to each basic rate schedule a fuel clause.
The final order so permitting the fuel clause to be inserted in the basic rate schedules affirmed the interim fuel clause increases already made but did not further increase the basic rates of CP&L instantaneously. Thus, for the then immediate present, it left the basic rates approved in the order first above mentioned in effect, these, by hypothesis, permitting CP&L to earn a fair return on its rate base under then prevailing conditions.
What the fuel clause did was to give CP&L permission, in advance and without further hearing, to increase those basic rates, month after month ad infinitum, in each subsequent month in which CP&L’s cost of fuel per Kwh exceeded a Commission determined base cost of fuel per Kwh, which it has done every month since the order was issued, the amount *355of such excess, and so of the resulting rate incrase, varying month by month.
The basic economic fallacy in using the automatic fuel clause technique to increase, month after month, the rate per Kwh charged the consumers of electric power lies in the unwarranted assumption (asserted by CP&L and accepted by the Commission) that, since each month’s rate increase, per Kwh, equals the utility’s additional cost of fuel per Kwh, the utility’s rate of return on its rate base remains constant and, by hypothesis, fair. The legal fallacy in this method of granting rate increases is that it is not within the Commission’s statutory authority, the only authority the Commission has.
By hypothesis, the basic rate schedules of CP&L, as fixed by the Commission’s order first above mentioned, as of the date fixed, were sufficient to yield a fair rate of return on the utility’s rate base, and no more. G.S. 62-132. This condition will continue indefinitely, so long as the utility’s total expenses per Kwh, its total Kwh sales and its cost of capital (a fair rate of return) all remain constant. This condition will also continue indefinitely so long as all of these remain constant except one item of expense (e.g., fuel) and variations therein are precisely balanced by variations in the rate per Kwh charged the consumers of electric power. The theory of the fuel clause is that this latter situation is a reality. That is the economic fallacy in the fuel clause method of rate making.
The whole thrust of CP&L’s evidence in support of its application for substantial increases in its basic rate schedules (now before us in another appeal on an unrelated question in Case No. 47, Fall Term 1976) is that it has sustained and for a long time to come anticipates a steady and substantial growth in the demands upon it for electric power and, therefore, must build extensive additions to its utility plant, expecially its generating facilities. Thus, as of the time the fuel clause was put into its rate schedules, its Kwh sales were not, and were not expected to remain, constant, or even relatively so. Obviously, as Kwh sales increase, so does the total expenditure for fuel, but the fuel clause increases the rate per Kwh sold only in the amount that fuel cost per Kwh increases, so an increase in generation of power does not, per se, cause a fuel clause rate increase. However, the record shows, by testimony of CP&L’s president, that fuel cost is only 57 % of “operating *356and maintenance” expense. That is, almost an equal portion of “operating and maintenance” expense is composed of other items, including salaries and wages, and materials and supplies other than fuel. While common experience, known as of the date the fuel clause was approved, would lead to the expectation that wage levels would also rise and the then expected addition to the utility plant of huge new nuclear generating facilities would necessitate some additions to operating personnel, nothing in the record before us shows or suggests that the company’s expenditures, in months following the approval of the fuel clause, for wages, salaries, and materials and supplies other than fuel would not decline per Kwh sold, or that these expenses have not actually declined per Kwh sold.
Depreciation expense is separate and apart from the “operating and maintenance” expense of which fuel cost is 57%. So is tax expense. Thus, CP&L’s expense for fuel is far less than half of its total expenses, both in gross and per Kwh.
The record shows CP&L, at the time these orders were issued, contemplated (and it has since made and still contemplates) huge investments of capital for the construction of additional nuclear generating plants. The fuel clause reflects the effect of nuclear generation upon the cost of fuel per Kwh, but it ignores all other effects of CP&L’s progressive switching from fossil fuel generation to nuclear generation upon CP&L’s total expenses per Kwh. Obviously, this switch to nuclear generation means much more property to be taxed and depreciated and many more dollars in the annual or monthly charge to depreciation expense. But, these new plants will increase tremendously the kilowatt hours sold. Otherwise, there would be no point in building them for they are not intended to be immediate replacements of existing plants. Will the depreciation expense per Kwh be constant in future months? Has it been during the life of the fuel clause? That is highly improbable. Will it be, or has it been, greater or less than the depreciation expense per Kwh taken into account by the Commission in its order setting the basic rate schedules? No one can tell from the record before us. Will nuclear plants depreciate at the same rate per year or per month as steam plants? The record before us does not answer this question.
A well managed electric utility, such as CP&L, steadily improves its efficiency and generates and sells more and more Kwh per employee and per employee hour. Thus, wage rates *357and total dollar expense for wages may go up while wage costs per Kwh declines. Even greatly increased executive salaries may be less per Kwh sold. Depreciation charges may rise spectacularly in total dollars while depreciation charges per Kwh sold decline. So it is with property tax expense, maintenance expense, and expense for materials and supplies other than fuel.
The fuel clause approved by the Commission permits CP&L to raise its rates, month after month, by looking solely at the rising cost of fuel per Kwh and utterly ignoring what has happened to the substantially larger (in the aggregate) expenses per Kwh for depreciation, taxes, wages, salaries, and materials and supplies other than fuel.
In the present context total dollar variations and variations percent are not useful data. What is needed is a computation of wage and salary expense, depreciation expense, tax expense and miscellaneous expense per Kwh sold, so as to reduce these expense items and the fuel expense item to a common denominator. Then, and only then, can the Commission, or the reviewing court, determine whether an increase in fuel cost per Kwh has been offset, in whole or in part, by decreases in other costs per Kwh. If such offset has occurred, in whole or in part, the fuel clause increase produces an increase in the utility’s rate of return, which, by hypothesis, is made adequate by the basic rate schedules.
This total picture has not been shown in the present record and, obviously, the fuel clause does not require it to be developed and taken into account before month by month rate increases are made on account of an increase in fuel cost per Kwh. No one can determine from the present record, and no one can determine from data required to trigger future rate increases under the fuel clause, whether in any given month there has been a decline in wage expense per Kwh sold, or in depreciation expense per Kwh sold, to offset, in whole or in part, the increase in fuel expense. It is entirely possible, for aught that appears in the record before us or aught that the fuel clause requires to be taken into account in any month, that wage, salary, depreciation, tax, maintenance, materials and supplies expenses per Kwh sold may, in the aggregate, have declined even more than fuel expense per Kwh sold has risen.
My dissent is not on the ground that CP&L, month after month, during the life of the fuel clause pursuant to the Com*358mission’s order, has not needed a rate increase in the amount computed pursuant to the fuel clause. It may be that, were the missing data, above mentioned, shown, an even greater rate increase would be or would have been appropriate. My dissent is on the ground that the evidence in this record' does not show, and the data required to trigger a rate increase under the fuel clause will not show, such need for a rate increase in any month for the reason that it is utterly impossible for the Commission, or this Court, to determine from this record, or from such data as is required under the fuel clause, whether the month by month increase in CP&L’s expense for fuel per Kwh sold has been offset, in whole or in 'part, by a decrease in other expenses per Kwh sold.
If, in any given month of the life of the fuel clause there has been such offsetting decrease, in whole or in part, in other items of expense, then the increase in electric service rates in that month, pursuant to the fuel clause, necessarily raised CP&L’s rate of return above that found proper by the Commission when it fixed the basic rate schedules, from which determination no appeal was taken by CP&L. Such rate increase would, in my view, be clearly in excess of the Commission’s statutory authority. The Commission has no other authority and this Court can, of course, give the Commission no authority. Utilities Commission v. Merchandising Co., 288 N.C. 715, 722, 220 S.E. 2d 304 (1975); Electric Service v. City of Rocky Mount, 285 N.C. 135, 203 S.E. 2d 838 (1974); Utilities Commission v. Telephone Co., 281 N.C. 318, 336, 189 S.E. 2d 705 (1972); Utilities Commission v. R. R., 268 N.C. 242, 245, 150 S.E. 2d 386 (1966); Utilities Commission v. Motor Lines, 240 N.C. 166, 81 S.E. 2d 404 (1954).
What the Commission has done is this: (1) It fixed basic rate schedules which, as of that date, were sufficient to yield to a well managed utility a fair rate of return on the fair value of its properties used and useful in supplying electric services; (2) it has said to CP&L, “From now on into the indefinite future, without further hearing, you may raise these rates in any month in which your fuel expense per Kwh sold is greater than it is now, irrespective of what happens to all your other expenses per Kwh sold.” This second part of its order (actually two separate orders) is, in my view, a clear violation of the statutes prescribing the manner in which rate increases may be authorized.
*359Clearly, the fuel clause proceeding was a general rate case, for the fuel clause applies to every rate schedule the company has. G.S. 62-137; Utilities Commission v. Area Development, Inc., 257 N.C. 560, 567, 126 S.E. 2d 325 (1962); Utilities Commission v. Light Co., and Utilities Commission v. Carolinas Committee, 250 N.C. 421, 430, 109 S.E. 2d 253 (1959). The fuel clause authorizes, prospectively, an indefinite series of general rate increases month after month, with no hearing, no finding of need and no evidence whatever as to anything but one single item of expense.
It may well be that rate making by formula is preferable, more efficient and fairer both to the utility and to the public, than is the long, laborious, expensive, inexact and dilatory procedure prescribed by Chapter 62 of the General Statutes. If so, both fairness and efficiency would surely require that the formula include determination of the other items of utility expense by Kwh — depreciation, maintenance, wages and salary, materials and supplies, taxes and miscellaneous — along with fuel expense. It would seem entirely feasible to determine all these expenses per Kwh, month by month, by relatively simple, speedy, inexpensive and reasonably accurate accounting techniques, leaving the rate base and the fair rate of return thereon for much less frequent determination by the Commission in the now customary way prescribed in G.S. 62-133. Obviously, there is no constitutional barrier to this type of short-term rate change when the utility whose rates are being fixed does not object thereto. Accuracy in computation and application of expense data to the month in which service is rendered could be had by deferring the billing of the customer until a few days after the end of the month in which the service is rendered. Such a rate making formula may well furnish more protection to the rate-paying public than does a friendly, drowsy watch dog bound by the red tape of an obscure statute.
This, however, is for the Legislature. Defects in the existing statute causing long, tedious, expensive and inexact proceedings do not authorize the Commission, or a reviewing court, to rewrite or ignore the statutory requirements for making general changes in utility rates. The words of Justice Barnhill, later Chief Justice, speaking for this Court concerning the predecessor to the present G.S. 62-133 in Utilities Commission v. State *360and Utilities Commission v. Telegraph Co., 239 N.C. 333, 344, 80 S.E. 2d 133 (1954), are presently appropriate. He said:
“This statute has been characterized as an ‘old, rambling and misty statutory declaration of the matters to be taken into account by the commission . . .’ 12 N.C. L. (Review) 298. Be that as it may, it is the law in this State and will continue to be the law until amended, revised, or repealed by the Legislature. We have no intention to shut our eyes to its provisions or to circumvent the clear import of its language.”
The statutes, in my view, clearly forbid general rate making by expense formula (even one which takes into account all elements of expense). When the Commission oversteps its authority it is the duty of the reviewing court to set aside its order, even though the order may seem to reach a result reasonable per se. G.S. 62-94 (b) (2).
Each major electric utility serving North Carolina has collected from its customers within the past three years many millions of dollars pursuant to its fuel clause, all such clauses being structured as is that applied by CP&L. In my opinion, these collections have been unlawfully made. To require them now to be refunded would very likely be a severe financial jolt to the respective companies. They have, however, had the use of these huge sums, for periods up to nearly three years, without interest, in a time of unprecedentedly high interest rates and it is not the fault of the rate-payers or of the Attorney General that these unlawful collections have snowballed into such huge amounts.
Immediately, upon the issuance of each of the orders of the Commission initiating the fuel clauses, the then Attorney General, on behalf of the consumers of power, sought judicial determination of their lawfulness, pointing out the danger to the utility in delayed judicial review. The Court of Appeals, upon the respective motions of the utilities involved, refused to consider the merits of the orders, saying the appeals were premature. See: Morgan, Attorney General v. Virginia Electric and Power Co., 22 N.C. App. 300, 206 S.E. 2d 338 (1974); Morgan, Attorney General v. Duke Power Co., 22 N.C. App. 497, 206 S.E. 2d 507 (1974). In those cases this Court denied certiorari and dismissed appeals to it. 285 N.C. 758 (1974). The dismissal of the then appeal in the present matter does not appear to *361have been reported in the reports of the Court of Appeals. This Court, having denied certiorari in the Vepco and Duke cases, certiorari was denied in the present matter.
G.S. 62-134 (e) has no application to this case, it having been enacted subsequent to the order of the Commission to which this appeal relates. G.S. 62-133 (b) prescribes in detail the procedure which the Commission must follow in fixing rates in a general rate case such as this. The Commission quite obviously did not even purport to follow this statute in the matter of the month by month fuel clause increases. Its order approving the fuel clause is, therefore, clearly in excess of its authority and, consequently, is a nullity conferring upon CP&L no right whatever to collect any rate in excess of those prescribed in its basic rate schedules approved by the Commission. It is true that the fuel clause was finally approved by the Commission following a hearing in which the fuel clause matter was consolidated with a previously pending application for an increase in basic rate schedules. Assuming that hearing and findings made upon the evidence received thereat were adequate to support the Commission’s order as to those basic rate schedules, which reflected the then level of fuel expense per Kwh, the order authorizing further, month by month, general rate increases, pursuant to the fuel clause, in what was then the future, was not in accord with G.S. 62-133 (b) since those further general rate increases were to take effect, and did take effect, with no further hearing such as G.S. 62-133 (b) requires.