# State ex rel. Utils. Comm'n v. Stein

> Supreme Court of North Carolina · December 11, 2020

URL: https://www.frixlaw.com/law-library/cases/10485120

## Case

- **Court:** Supreme Court of North Carolina
- **Decided:** December 11, 2020
- **Precedential status:** Published
- **Opinion:** Opinion
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

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- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10485120

## How later opinions describe it (automated extraction)

- stating that “[e]xpert discretion is the lifeblood of the administrative process”

## Opinion text

IN THE SUPREME COURT OF NORTH CAROLINA

Nos. 271A18 and 401A18

Filed 11 December 2020
STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION; DUKE
ENERGY PROGRESS, LLC, Applicant; and DUKE ENERGY CAROLINAS, LLC,
Applicant
v.
ATTORNEY GENERAL JOSHUA H. STEIN; PUBLIC STAFF – NORTH
CAROLINA UTILITIES COMMISSION; NORTH CAROLINA JUSTICE CENTER,
NORTH CAROLINA HOUSING COALITION, NATURAL RESOURCES
DEFENSE COUNCIL, SOUTHERN ALLIANCE FOR CLEAN ENERGY, and
NORTH CAROLINA SUSTAINABLE ENERGY ASSOCIATION; and SIERRA
CLUB, Intervenors

Consolidated appeals as of right pursuant to N.C.G.S. § 62-90 and N.C.G.S.

§ 7A-29(b) from final orders of the North Carolina Utilities Commission entered on

23 February 2018 in Docket Nos. E-2, Sub 1131, 1142, 1103, and 1153, and on 22

June 2018 in Docket Nos. E-7, Sub 1146, 819, 1152, and 1110. Heard in the Supreme

Court on 11 March 2020.

Troutman Sanders LLP, by Kiran H. Mehta, Molly McIntosh Jagannathan,
and Christopher G. Browning, Jr., for Duke Energy Carolinas, LLC, and Duke
Energy Progress, LLC.

Attorney General Joshua H. Stein, by Assistant Attorney General Margaret A.
Force, Solicitor General Matthew W. Sawchak, Deputy Solicitor General James
W. Doggett, Solicitor General Fellow Matt Burke, and Special Deputy Attorneys
General Jennifer T. Harrod and Teresa L. Townsend.

Lewis & Roberts, PLLC, by Matthew D. Quinn, and Bridget M. Lee and Dorothy
E. Jaffee, for appellant Sierra Club.

Southern Environmental Law Center, by Gudrun Thompson and David Neal,
for North Carolina Justice Center, North Carolina Housing Coalition, Natural
Resources Defense Council, and Southern Alliance for Clean Energy, and North
STATE EX REL. UTILS. COMM’N V. STEIN

Opinion of the Court

Carolina Sustainable Energy Association, by Benjamin W. Smith and Peter H.
Ledford, intervenor-appellants.

Public Staff – NCUC, by Chief Counsel David T. Drooz and Staff Attorneys
Chris Ayers, Layla Cummings, Megan Jost, and Nadia Luhr, intervenor-
appellant.

North Carolina Department of Justice, Environmental Division, by Special
Deputy Attorney General Marc Bernstein and Senior Deputy Attorney General
Daniel S. Hirschman, for North Carolina Department of Environmental
Quality, amicus curiae.

ERVIN, Justice.

These cases arise from appeals taken from orders entered by the North

Carolina Utilities Commission addressing applications filed by Duke Energy

Progress, LLC, and Duke Energy Carolinas, LLC, both of which are wholly owned

subsidiaries of Duke Energy Corporation, by various intervenors representing the

utilities’ consumers that focus upon the lawfulness of the Commission’s decisions

concerning the extent to which the utilities are entitled to reflect costs associated with

the storage, disposal, and removal of ash resulting from the production of electricity

in coal-fired electric generating units in the cost of service used to establish the

utilities’ North Carolina retail rates. Among other things, various intervenors assert

that the Commission erred by allowing the deferral of certain coal ash remediation

costs and the inclusion of those costs in the cost of service used to establish the

utilities’ North Carolina retail rates, that the Commission erred by allowing the

utilities to earn a return upon the unamortized balance of the deferred coal ash

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STATE EX REL. UTILS. COMM’N V. STEIN

Opinion of the Court

remediation costs, and that the Commission erred by approving an increased Basic

Facilities Charge for Duke Energy Carolinas’ North Carolina retail residential

customers. After careful consideration of the parties’ challenges to the Commission’s

orders, we conclude that the challenged orders should be affirmed, in part, and

reversed and remanded, in part.

I. Factual Background

A. Substantive Facts

In the early part of the twentieth century, when the utilities began providing

electric service in North Carolina, they used coal as the primary means of generating

electric power. The burning of coal produces by-products known as coal combustion

residuals, which include fly ash, bottom ash, boiler slag, and flue gas desulfurization

material.1 At present, Duke Energy Progress owns eight coal-fired electric generating

facilities and nineteen unlined coal ash basins, while Duke Energy Carolinas owns

eight coal-fired electric generating facilities and seventeen unlined coal ash basins.

In the early years during which the utilities operated coal-fired electric

generating facilities, coal ash was either emitted through generating facility

smokestacks or stored in on-site landfills. In the 1950s, the utilities began to store

coal ash in unlined basins located at generating facility sites. As part of this process,

1 The term “coal ash” is used throughout the remainder of this opinion to refer to coal

combustion residuals and the by-products resulting from the combustion of coal in electric
generating facilities.

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STATE EX REL. UTILS. COMM’N V. STEIN

Opinion of the Court

the utilities mixed coal ash with water to form a “sluice,” which would be piped from

the generating facility to these unlined basins. The practices that the utilities

employed in disposing of coal ash during this time were consistent with

contemporaneous standard industry practices and with the concept of least cost

planning as currently embodied in state law. See N.C.G.S. § 62-2(a)(3a) (2019).

The harmful effects of coal ash on human and environmental health were not

fully understood at the time that the utilities began to dispose of it in unlined basins.

Over time, however, pollutants emanating from the unlined coal ash basins began to

contaminate nearby groundwater. In the 1970s, concerns developed about the

manner in which coal ash was handled and stored. For that reason, the United States

Environmental Protection Agency began to regulate unlined coal ash basins in

accordance with the Clean Water Act and initiated a permitting program known as

the National Pollutant Discharge Elimination System, pursuant to which the EPA

delegated authority to the states to issue permits allowing the discharge of a specific

amount of pollutants into nearby water sources, subject to certain terms and

conditions, and authorizing the processing, incineration, placement in a landfill, or

other beneficial uses of contaminated sludge. See 33 U.S.C. § 1251 et seq. (1972). In

1979, the North Carolina Department of Environmental Quality2 adopted

Groundwater Classification and Standards (2L Rules) requiring the taking of

2 The Department of Environmental Quality was known as the Department of
Environmental and Natural Resources in the 1970s.

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STATE EX REL. UTILS. COMM’N V. STEIN

Opinion of the Court

preventative and corrective measures relating to groundwater contamination

associated with coal ash. See 15A N.C. Admin. Code 02L §§ .0100–.0515.

In the aftermath of a 2008 incident, during which more than five million cubic

yards of coal ash spilled into the Emory River from the Tennessee Valley Authority’s

Kingston Fossil Plant, the effect of storing coal ash in unlined basins upon human

and environmental health became a focus of additional attention at the EPA and in

the electric power industry. On 17 April 2015, the EPA promulgated the Hazardous

and Solid Waste Management System—Disposal of Coal Combustion Residuals from

Electric Utilities (CCR Rule), see 80 Fed. Reg. 21301 (April 17, 2015), which

established a “maximum contaminant level” for certain contaminants, prohibited

“[a]n increase in the concentration of that substance in the ground water where the

existing concentration of that substance exceeds” a prescribed maximum level, and

required that groundwater monitoring be undertaken at existing coal ash basins by

no later than 17 October 2017, with reporting of the results to begin by no later than

31 January 2018. 40 C.F.R. § 257.3–4; § 257.90(b), (e) (2019).

On 2 February 2014, a stormwater pipe that ran beneath an unlined coal ash

basin located at Duke Energy Carolinas’ Dan River generating facility burst,

resulting in the emission of approximately 27,000 million gallons of wastewater and

between 30,000 and 39,000 tons of coal ash into the Dan River, affecting river

conditions for up to sixty miles below the discharge site. The utilities entered pleas

of guilty in federal court to nine criminal violations of the Clean Water Act relating

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Opinion of the Court

to the Dan River facility and four additional power plants. In accordance with their

plea agreements, the utilities agreed to pay a $68 million fine and were placed on

probation for a five-year period pursuant to 18 U.S.C. § 3561(c)(2).

On 20 September 2014, the General Assembly enacted the North Carolina Coal

Ash Management Act, N.C. Sess. L. 2014-122, which was subsequently amended in

the Mountain Energy Act, N.C. Sess. L. 2015-110, and the Drinking Water

Protection/Coal Ash Cleanup Act, N.C. Sess. L. 2016-95. CAMA, as amended,

required a comprehensive assessment of groundwater and surface water discharges

at coal ash basins, the taking of corrective action to address such discharges, and the

closure of all of the utilities’ unlined coal ash basins by no later than 2029 in

accordance with a statutorily prescribed timeline. N.C.G.S. §§ 130A-309.211–.214

(2019). The utilities began closing their unlined coal ash basins pursuant to the

requirements of the CCR Rule and CAMA in 2015.

B. Procedural History

At the beginning of the closure process, the utilities estimated that their

collective coal ash cleanup costs would exceed $4.5 billion. On 21 December 2015,

Duke submitted a letter to the Commission outlining the manner in which the

utilities intended to account for ongoing and anticipated coal ash management and

basin closure costs. In this letter, Duke explained that the utilities planned to create

an Asset Retirement Obligation, which is an account associated with the retirement

of a tangible long-lived asset, on their balance sheets in accordance with their

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Opinion of the Court

understanding of Financial Accounting Standards Board (FASB) Accounting

Standards Codification for Asset Retirement Environmental Obligations (ASC) 410-

20, Federal Energy Regulatory Commission (FERC) General Instruction No. 25, and

Generally Accepted Accounting Principles (GAAP). According to Duke, the creation

of these Asset Retirement Obligations was triggered by the fact that the CCR Rule

and CAMA required the closure of the utilities’ unlined coal ash basins. Although

Duke initially estimated that these Asset Retirement Obligations would involve

approximately $2.13 billion for Duke Energy Progress and $1.84 billion for Duke

Energy Carolinas, it noted that the utilities’ actual compliance costs might be

“materially different from these estimates based on the timing and requirements of

the final regulations.”

In accordance with fundamental principles of double-entry accounting, the

utilities planned to record their coal ash management and ash basin closure costs as

both a liability and an asset. In the event that these costs were associated with

generating facilities that were still in active service, the costs, inclusive of associated

depreciation expense, would be placed in the relevant property, plant and equipment

account. In the event that these costs were associated with a retired facility, they

would be placed in a regulatory asset account. After noting that “[t]he Commission

ha[d],” in prior matters, “issued orders allowing the [utilities] to defer all impacts of

establishing an [Asset Retirement Obligation] until these costs [could] be considered

in future rate making decisions,” Duke stated that, since “actual costs incurred to

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STATE EX REL. UTILS. COMM’N V. STEIN

Opinion of the Court

comply with the federal and state regulations regarding closure of ash basins are

being deferred,” “all associated coal ash [Asset Retirement Obligation] deferrals [are

being excluded] for earnings surveillance reporting,” and that the utilities “are

funding these expenditures with its debt and equity capitalization” and “are recording

a debt and equity return (carrying charge) on the aforementioned net asset for

regulatory purposes” given that “GAAP requires the equity return to be deferred . . .

until rate recovery has begun.” Finally, Duke pointed out that this letter had been

sent for purely informational purposes and expressed the intention of “bring[ing] this

matter before the Commission for ultimate disposition” after “sufficient clarity in

North Carolina regarding the closure of ash basins”3 had been obtained.

On 28 March 2016, the Commission determined that there was “good cause to

establish formal dockets for [the utilities] in this matter” and “place[d] a copy of

Duke’s letter in each” of these dockets. Although it took no further action at that

time, the Commission noted that its “inaction should not be construed as agreement

or disagreement with the substance of Duke’s analysis or the conclusions [that] Duke

[had] reache[d]” and that it “reserve[d] the right, once a record [had been] established,

to agree or disagree in whole or in part” with Duke’s proposed accounting practices.

3 Subsequently, Duke explained that “the [utilities] did not file a deferral request at

[this] time due to significant [unresolved] litigation and reconsiderations related to CAMA,
the now-defunct Coal Ash Management Commission, and numerous other outstanding
issues.”

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STATE EX REL. UTILS. COMM’N V. STEIN

Opinion of the Court

On 30 December 2016, the utilities filed a joint petition seeking the entry of an

accounting order “authorizing the [utilities] to defer in a regulatory asset account

(until the [their] next base rate cases) certain costs incurred in connection with

compliance with federal and state environmental requirements” relating to coal ash

management and coal ash basin closures. More specifically, Duke “request[ed] that

the Commission allow [the utilities] to establish a regulatory asset account for the

deferral of all non-capital costs as well as the depreciation expense and cost of capital

at the weighted average cost of capital for all capital costs related to activities

required under [the CCR Rule and CAMA]” and deferral of “a cost of capital on the

deferred costs at the weighted average cost of capital” for costs incurred from 1

January 2015 until the approval of new rates in the utilities’ next general rate cases.

As of 30 September 2016, Duke Energy Progress had recorded an Asset

Retirement Obligation of $2.4 billion and Duke Energy Carolinas had recorded an

Asset Retirement Obligation of $2.1 billion, while acknowledging that its actual

compliance costs might be “materially different” based upon the timing and

requirements of the final environmental regulations. In addition, Duke pointed out

that Duke Energy Progress had already incurred $291.9 million in coal ash

management and coal ash basin closure costs and that Duke Energy Carolinas had

already recorded $434.4 million in such costs, with these costs including monies

associated with engineering and regulatory compliance, mobilization for and the

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STATE EX REL. UTILS. COMM’N V. STEIN

Opinion of the Court

commencement of the closure process, the construction of rail infrastructure for coal

ash excavation, dewatering activities, ash excavation, and plant closure.

Duke asserted that “noteworthy circumstances” justified the entry of the

proposed accounting order and alleged that, “absent approval of this request, [both

utilities’] return on equity for [their] North Carolina retail operations [was] expected

to be well below the return last authorized by the Commission.” More specifically,

Duke alleged that the authorized return on equity that had been established in the

utilities’ last general rate cases was 10.2 percent and that, in the absence of the

requested accounting order, Duke Energy Progress’ earned return on equity would

fall to 7.47 percent and that Duke Energy Carolinas’ earned return on equity would

fall to 7.61 percent. After emphasizing that the utilities were not seeking a rate

change at that time, Duke stated that each utility intended to file a general rate case

application within the next twelve months and pointed out that none of the fines,

penalties, or costs associated with the Dan River spill had been included in the costs

that either utility had deferred to date or would be included in the costs upon which

any future general rate increase request would be predicated.

Duke asserted that “[c]losing ash basins is part of the life cycle of the [utilities’]

coal plants,” that “compliance with state and federal regulatory requirements is part

of the normal operation of a utility,” and that “[c]osts related to the operation of a

power plant, including decommissioning costs, are typically paid for by customers.”

In light of the “extraordinary and unprecedented” “magnitude, scope, duration and

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STATE EX REL. UTILS. COMM’N V. STEIN

Opinion of the Court

complexity of compliance,” the utilities requested the Commission to enter the

requested accounting order “so that all complexities may be adequately reviewed by

the Commission and stakeholders at an appropriate time.” Duke claimed that

“[a]pproval of this deferral request [would] benefit the [utilities] and the customers

by helping to assure investor confidence in” both utilities and ensuring that “needed

capital [would be available] on reasonable terms.” Unless the Commission approved

its request, Duke argued that “the [utilities] may have to write off billions of dollars

of costs for accounting purposes, which . . . would severely impair the [utilities’]

financial stability and ability to attract capital on reasonable terms.”

Various parties4 submitted comments in response to Duke’s filing. The

Attorney General argued that the public interest would not be served by deciding the

issues raised by Duke’s filing outside the context of a general rate case. The Public

Staff asserted that the relevant costs “generally satisfy the criteria for deferral for

regulatory accounting (but not necessarily ratemaking) purposes” and reserved the

right to litigate the amount of deferred costs used to set the utilities’ rates in future

general rate cases, the method that would be used to include the relevant costs in

North Carolina retail rates, the length of any applicable amortization period, and the

4 The parties submitting comments in response to Duke’s filing included the North

Carolina Waste Awareness and Reduction Network, Inc.; Appalachian State University; the
Cities of Concord and Kings Mountain; the Carolina Utility Customers Association, Inc.; the
Attorney General; and the Public Staff. The utilities and the Sierra Club submitted reply
comments.

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Opinion of the Court

extent to which an equitable sharing of these costs between the ratepayers and

shareholders should be implemented. Other parties contended that costs should be

fully analyzed and categorized before the amount of deferred costs to be included in

North Carolina retail rates was established.

1. General Rate Case Applications

a. Duke Energy Progress

On 1 June 2017, Duke Energy Progress filed an application requesting

authorization to adjust and increase its North Carolina retail rates and the entry of

an accounting order approving the establishment of certain regulatory assets and

liabilities. In its application, Duke Energy Progress sought additional annual North

Carolina retail revenues of approximately $477.5 million,5 resulting in an overall

increase of approximately 14.9 percent. Duke Energy Progress requested that rates

be established based upon coal ash basin closure costs of approximately $66 million

per year for a period of five years and ongoing coal ash-related compliance costs of

approximately $129 million per year. In addition, Duke Energy Progress sought the

establishment of “a regulatory asset [and] liability for coal ash basin closure costs

over or under the amount established in this proceeding and for those costs incurred

between the cut-off date for this rate case and the effective date of new rates.” A

5 In subsequently filed supplemental testimony and exhibits, Duke Energy Progress

reduced its proposed rate increase to $425.6 million.

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Opinion of the Court

number of entities intervened in the proceeding initiated by the filing of Duke Energy

Progress’ application.6

On 20 June 2017, the Commission entered an order in which it: (1) declared

that the application filed by Duke Energy Progress had initiated a general rate case

pursuant to N.C.G.S. § 62-137; (2) suspended the proposed rates for a period of up to

270 days pursuant to N.C.G.S. § 62-134; and (3) established the applicable test year

as the twelve-month period ending 31 December 2016. On 10 July 2017, the

Commission entered an additional order consolidating the utilities’ request to defer

environmental compliance costs in Docket No. E-2 Sub 1103, and Duke Energy

Progress’ request to defer incremental storm damage expenses in Docket No. E-2,

Sub 1131, with Duke Energy Progress’ general rate proceeding. On 12 July 2017, the

Commission entered an order requiring Duke Energy Progress to provide public

notice of the filing of its application and the schedule of public hearings to be held in

6 The Public Staff intervened as a matter of right pursuant to N.C.G.S. § 62-15(d) and

Commission Rule R1-19, while the Attorney General’s intervention was recognized pursuant
to N.C.G.S. § 62-20. The Commission allowed additional intervention petitions filed by the
Carolina Utility Customers Association, Inc.; the Carolinas Industrial Group for Fair Utility
Rates II; the North Carolina Waste Awareness and Reduction Network, Inc.; the North
Carolina Sustainable Energy Association; the Fayetteville Public Works Commission; the
Commercial Group; the North Carolina Electric Membership Corporation; the
Environmental Defense Fund; the Kroger Company; the Sierra Club; Haywood Electric
Membership Corporation; the United States Department of Defense and All Other Federal
Executive Agencies; the Rate-Paying Neighbors of Duke Energy Progress, LLC’s Coal Ash
Sites; the North Carolina Farm Bureau Federation, Inc.; the North Carolina Justice Center,
the North Carolina Housing Coalition, the Natural Resources Defense Council, and the
Southern Alliance for Clean Energy, jointly (collectively, the Justice Center, et al.); and the
North Carolina League of Municipalities.

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Opinion of the Court

connection with that proceeding. A number of hearings were held before the

Commission between 12 September to 7 December 2017, at which interested

members of the public were allowed to testify and the parties were given the

opportunity to present the testimony of various expert witnesses.

b. Duke Energy Carolinas

On 25 August 2017, Duke Energy Carolinas filed an application requesting

authorization to increase its North Carolina retail rates and the entry of an

accounting order authorizing the establishment of certain regulatory assets and

liabilities. In its application, Duke Energy Progress sought additional annual North

Carolina retail revenues of approximately $611 million,7 which resulted in an overall

increase of approximately 12.8 percent, and the approval of an increase in the

residential Basic Facilities Charge from $11.80 to $17.79 per month. Duke Energy

Carolinas also requested that rates be established based upon coal ash basin closure

costs of approximately $135 million per year for a period of five years and ongoing

coal ash-related compliance costs of approximately $201 million per year. In addition,

Duke Energy Carolinas sought the establishment of a “regulatory asset [and] liability

for coal ash basin closure costs over or under the amount established in this

proceeding and for those costs incurred between the cut-off date for this rate case and

7 Subsequently, Duke Energy Carolinas filed supplemental testimony and exhibits

changing its proposed rate increase to an annual amount of approximately $701 million.

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Opinion of the Court

the effective date of new rates.” A number of other entities intervened in the

proceeding resulting from the filing of Duke Energy Carolinas’ application.8

On 19 September 2017, the Commission entered an order in which it: (1)

declared that Duke Energy Carolina’s application had initiated a general rate case

pursuant to N.C.G.S. § 62-137; (2) suspended the proposed rates for a period of up to

270 days pursuant to N.C.G.S. § 62-134; and (3) established that the applicable test

year would be the twelve-month period ending 31 December 2016. On 13 October

2017, the Commission entered an order requiring Duke Energy Carolinas to provide

public notice of the filing of its application and the times, dates, and locations at which

hearings for the receipt of public witness testimony would be held. A number of

hearings were held before the Commission between 16 January to 22 March 2018, at

which interested members of the public were allowed to testify and the parties were

given the opportunity to present the testimony of various expert witnesses.

8 Once again, the Public Staff intervened as a matter of right pursuant to N.C.G.S.

§ 62-15(d), while the Attorney General’s intervention was recognized pursuant to N.C.G.S.
§ 62-20. The Commission allowed additional intervention petitions filed by the North
Carolina Sustainable Energy Association; the Environmental Defense Fund; the North
Carolina Waste Awareness and Reduction Network; the Carolina Utility Customers
Association, Inc.; the Carolinas Industrial Group for Fair Utility Rates III; the Rate-Paying
Neighbors of Duke Energy Carolinas, LLC’s Coal Ash Sites; the North Carolina Farm Bureau
Federation, Inc.; the Sierra Club; the Kroger Company; the North Carolina League of
Municipalities; Appalachian State University; Piedmont Electric Membership Corporation;
Rutherford Electric Membership Corporation; Haywood Electric Membership Corporation;
Blue Ridge Electric Membership Corporation; the Commercial Group; Apple, Inc., Facebook,
Inc., and Google, Inc., jointly; the Cities of Concord and Kings Mountain; the City of Durham;
and the North Carolina Justice Center, the North Carolina Housing Coalition, the Natural
Resources Defense Council, and the Southern Alliance for Clean Energy (collectively, the
Justice Center, et al.).

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2. The Commission’s Orders

a. Duke Energy Progress

On 23 February 2018, the Commission entered an order allowing Duke Energy

Progress to include $232.39 million in net additional coal ash-related costs, less a $30

million mismanagement penalty, to be amortized to North Carolina retail rates over

a five-year period in its North Carolina retail cost of service and authorizing Duke

Energy Progress to recover a return on the unamortized balance of these costs. In its

order, the Commission found as fact that:

51. [Duke Energy Progress] expects to incur
substantial costs related to [coal ash] in future years. It is
just and reasonable to allow deferral of those costs, with a
return at the overall cost of capital approved in this [o]rder
during the deferral period. Ratemaking treatment of such
costs will be addressed in future rate cases.

....

53. Since its last rate case, [Duke Energy
Progress] has become subject to new legal requirements
relating to its management of coal ash. These new legal
requirements mandate the closure of the 19 coal ash basins
at [Duke Energy Progress’] coal-fired power plants. Since
its last rate case, [Duke Energy Progress] has incurred
significant costs to comply with these new legal
requirements.

54. On a North Carolina retail jurisdiction basis,
the actual coal ash basin closure costs [that Duke Energy
Progress] has incurred (netted against the amount already
included in [Duke Energy Progress’] rates following its last
rate case) during the period from January 1, 2015, through
August 31, 2017, amount to $241,890,000. [Duke Energy
Progress] is entitled to recover these coal ash basin closure

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Opinion of the Court

costs, less a disallowance of $9.5 million, for a total amount
of $232,390,000. . . . The actual coal ash basin closure costs
incurred by [Duke Energy Progress], less the $9.5 million,
are known and measurable, reasonable and prudent, and
used and useful in the provision of service to [Duke Energy
Progress’] customers. [Duke Energy Progress] is entitled
to recover these costs through rates. Further, [Duke
Energy Progress] proposes that these costs be amortized
over a five-year period and that it earn a return on the
unamortized balance. Under normal circumstances, the
five-year amortization period proposed by [Duke Energy
Progress] is appropriate and reasonable, and absent any
management penalty should be approved, and under
normal circumstances [Duke Energy Progress] is entitled
to earn a return on the unamortized balance.

55. Under the present facts, a mismanagement
penalty in the approximate sum of $30 million is
appropriate with respect to [Duke Energy Progress’] [coal
ash] remediation expenses accounted for in the earlier
established asset retirement obligation . . . with respect to
costs incurred through the end of the test year, as adjusted.
Through its use of available ratemaking mechanisms, the
Commission is effectively implementing an estimated $30
million penalty by amortizing the $232,390,000 over five
years with a return on the unamortized balance and then
reducing the resulting annual revenue requirement by $6
million for each of the five years.

56. [Duke Energy Progress] further proposes that
it recover on an ongoing basis $129,115,000 in annual coal
ash basin closure costs, subject to true-up in future rate
cases. The amount sought by [Duke Energy Progress] is
based upon its actual test year (2016) spend. [Duke Energy
Progress’] proposal to recover these ongoing costs as a
portion of the rates approved in this [o]rder is not
approved. Rather, [Duke Energy Progress] is authorized to
record its September 1, 2017, and future [coal ash] costs in
a deferral account until its next general rate case.

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Opinion of the Court

In discussing the evidentiary support for these findings of fact, the Commission

noted that cost deferral “is a recognized practice that allows recovery of expenditures

that might otherwise constitute impermissible retroactive ratemaking,” that the

regulations requiring Duke Energy Progress to remediate the environmental risks

associated with its unlined coal ash basis “were not in effect ten or fifteen years ago,”

that these regulations “[have] arisen in 2014 and 2015,” and that Duke Energy

Progress “is taking appropriate actions to comply” with all such requirements.

The Commission determined that it “[could not] agree with the ultimate

positions of any party” with respect to the manner in which coal ash-related costs

should be included in the cost of service used to establish Duke Energy Progress’

North Carolina retail rates. In rejecting a proposal advanced by Public Staff witness

Jay Lucas, who suggested that $88,000 in legal expenses associated with litigation

relating to alleged coal ash-related environmental violations and $6.7 million in

groundwater extraction and treatment costs, most of which related to the utility’s

Sutton facility, should be excluded from the company’s North Carolina retail cost of

service, citing State ex rel. Utilities Commission v. Public Staff, 317 N.C. 26, 343

S.E.2d 898 (1986) (Glendale Water) (holding that legal fees incurred as a result of the

utility’s failure to provide adequate service “could have been avoided” and should

have been excluded from the utility’s operating expenses for ratemaking purposes),

the Commission noted that, in this instance, unlike the situation at issue in Glendale

Water, there had been no finding or admission that any violation had occurred. In

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Opinion of the Court

addition, the Commission pointed to the testimony of Duke Energy Progress witness

James Wells that not all 2L Rule exceedances result in NPDES permit violations and

that DEQ had never issued a notice of violation directed toward Duke Energy

Progress based upon groundwater testing results. Instead, the Commission noted

that Mr. Wells had testified that “the 2L [R]ules’ correct[ive] action provisions are

designed around the idea that older facilities, built before liners were a regulatory

obligation, were likely to have associated groundwater impacts, that such impacts

were not the result of regulatory noncompliance, and that they should be addressed

in a measured process.” According to Mr. Wells, the utility’s use of unlined coal ash

basins was “consistent with the industry standard” and “considered by the EPA to be

the best available control technology” at the time that the facilities in question were

constructed. The Commission added that, even though Duke Energy Progress had

agreed to incur certain groundwater extraction and treatment costs pursuant to a

settlement agreement with DEQ, that agreement “merely accelerated work that

would have been required under CAMA” given that, unlike the 2L Rules, “CAMA’s

groundwater assessment and corrective action provisions are triggered by

exceedances—not violations—of the 2L [Rules].”

The Commission stated that it was not persuaded by the Public Staff’s

contention that Duke Energy Progress should have “tak[en] steps that were not in

accord with steps most of the industry was following,” such as lining ash ponds or

creating dry coal ash basins, while “disregarding responsibility of paying for that

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Opinion of the Court

which [the Public Staff]—in 20/20 hindsight—wish[ed that Duke Energy Progress]

had done” or by the arguments advanced by several intervenors that Duke Energy

Progress “should have done more than just comply with the current environmental

regulations” given the testimony of Attorney General witness Dan Wittliff that “the

definition of industry standards is compliance with the law.” In addition, the

Commission determined that the actions suggested by the Public Staff would have

“cost money which would have been charged to customers” or exposed Duke Energy

Progress “to credible claims of ‘gold-plating,’ and therefore cost disallowance, which

would have prevented [Duke Energy Progress] from moving forward with these

suggested improvements in the first place.” In the Commission’s view, the extent to

which “seeps” constituted a violation of the law or required the issuance of an NPDES

permit remained unresolved by DEQ.

The Commission rejected the Public Staff’s contention that the Commission

should disallow $109.8 million relating to the costs of off-site transportation and

disposal of coal ash from the Sutton and Asheville plants on the theory that the coal

ash in question should have been placed in on-site facilities given that acting in such

a fashion would not have been feasible given the basin closure deadlines imposed by

CAMA. In the Commission’s view, “once CAMA became law, prudent planning

required [Duke Energy Progress] to meet ‘real world’ difficulties as and when they

arose, to ensure that the legislatively fixed . . . deadline would be met,” and, “[h]ad

[Duke Energy Progress] not arranged for off-site disposal, it would have been

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Opinion of the Court

required” to undertake transportation measures which would have involved an

“unreasonable task,” with one exception.9

The Commission stated that the Public Staff’s proposed “equitable sharing”

arrangement, pursuant to which Duke Energy Progress’ coal ash basin closure costs

would be amortized to rates over a twenty-six year period without the inclusion of

any return on the unamortized balance, resulting in a fifty-fifty sharing of those costs

between the ratepayers and the shareholders, rested upon “[Duke Energy Progress’]

alleged past failures . . . to prevent environmental contamination from its coal ash

basins” and “an asserted [Commission] ‘history of approval of sharing of extremely

large costs that do not result in any new generation of electricity for customers.’ ”

However, the Commission determined that the Public Staff had “provid[ed]

insufficient justification” for its proposal, that it lacked “[a] ‘determining principle’ or

prudency standard,” and that, if “the Commission [were] to adopt it, the Commission

very well could be found to be acting arbitrarily and capriciously, and subject itself to

reversal.”

In addition, the Commission determined that the Public Staff’s argument that

the Commission had the authority to institute its equitable sharing proposal rested

upon an “overly broad” view of the Commission’s authority that lacked support in the

9 Duke Energy Progress “essentially agreed” that an adjustment in the amount of $9.5

million relating to the increased coal ash moving expenses at its Asheville plant associated
with a contract involving Waste Management, Inc., should be made.

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Opinion of the Court

applicable legal authorities. In rejecting the Public Staff’s argument that the

applicable legal support for its equitable sharing proposal could be found in this

Court’s decision in State ex rel. Utilities Commission v. Thornburg, 325 N.C. 463, 476–

81, 385 S.E.2d 451, 458–61 (1989) (Thornburg I) (affirming a Commission decision

that nuclear plant abandonment costs constituted a utility “expense” for purposes of

N.C.G.S. § 62-133(b)(3) and N.C.G.S. § 133(c) and that a decision to allow the

amortization of these abandonment costs without a return upon the unamortized

balance was permitted by N.C.G.S. § 62-133(d)), the Commission noted that the

present case involved “ ‘reasonable and prudent’ and ‘used and useful’ expenditures

by [Duke Energy Progress]” rather than “ ‘abandoned plant’ or cancellation costs.”

Instead, the Commission relied upon this Court’s decision in State ex rel. Utilities

Commission v. Thornburg, 325 N.C. 484, 486, 385 S.E.2d 463, 464 (1989) (Thornburg

II) (reversing a Commission decision providing for an equitable sharing between

customers and shareholders of approximately $570 million in construction costs

associated with a new unit even though some portion of the relevant costs had been

incurred in connection with the construction of certain abandoned facilities), and

determined that the adoption of the Public Staff’s equitable sharing proposal would

be “unfairly punitive.”

The Commission concluded that its determination that the relevant coal ash

disposal costs were “used and useful” and “prudent and reasonable” was consistent

with its own earlier decision in Docket No. E-22, Sub 532, which addressed costs that

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Opinion of the Court

had been incurred for the “identical purpose” and rested upon a determination that

such costs were “used and useful.” In rejecting the Public Staff’s argument that Duke

Energy Progress should have put the relevant costs into rate base rather than

“cho[osing]” to defer these costs and attempt to have them amortized to rates, the

Commission determined that Duke Energy Progress had treated these costs as

“[w]orking [c]apital” and that “no party [had] taken the position that [this] inclusion

. . . was inappropriate.” Similarly, in rejecting the Attorney General’s assertion that

Duke Energy Progress had “failed to request in advance permission to create a

deferred account,” the Commission found that Duke Energy Progress “had no choice

in the matter” in light of the applicable regulatory accounting rules, that “it is not

necessary that something be classified as ‘plant’ in order to be properly included in

rate base,” and that, instead, “the issue is the source of the funds,” citing Utilities

Commission v. Virginia Electric & Power Co., 285 N.C. 398, 206 S.E.2d 283 (1974)

(VEPCO). In view of the fact that the relevant funds had been provided by investors,

the Commission held that the funds were “used and useful” even though they did not

result in “plant in service,” so that Duke Energy Progress was “entitled to earn a

return on those funds over the period in which the costs are amortized.” In addition,

the Commission held that, even if the costs in question did not relate to “used and

useful” property, “the Commission would nevertheless approve [Duke Energy

Progress’] cost recovery proposal in all respects, and would exercise its discretion to

achieve that result” pursuant to N.C.G.S. § 62-133(c) and N.C.G.S. § 62-133(d).

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Opinion of the Court

The Commission further determined that the “disallowance methodologies”

proposed by the intervenors “fail[ed] to comply with the Commission’s prudence

framework,” in which a utility’s costs “are presumed reasonable and prudent unless

challenged” and any prudence-related challenges “must (1) identify specific and

discrete instances of imprudence; (2) demonstrate the existence of prudent

alternatives; and (3) quantify the effects by calculating imprudently incurred costs,”

citing its prior decisions in Docket No. E-2, Sub 537 and E-2, Sub 333. According to

the Commission, the proposed disallowances would be “unjust and unreasonable,”

with a decision to place the entire cost of coal ash disposal upon shareholders having

the ultimate effect of harming ratepayers given the increased capital costs that would

result from such an action. In the same vein, the Commission rejected the Sierra

Club’s contention that the coal ash disposal costs that Duke Energy Progress sought

to have included in the cost of service resulted from unlawful discharges and had to

be disallowed pursuant to N.C.G.S. § 62-133.13 (providing that a utility is not entitled

to have “costs resulting from an unlawful discharge to the surface waters of the State

from a coal combustion residuals surface impoundment” included in the cost of service

used to establish the utility’s rates) on the grounds that the relevant costs related to

“compl[iance] with the federal CCR [R]ule and CAMA.” The Commission also rejected

intervenor-proposed disallowances related to expenditures incurred to meet CAMA

deadlines on the grounds that “[t]he Commission is unable to recreate the past and

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Opinion of the Court

place a price tag on remediation costs that might have been incurred in anticipation

of environmental requirements.”

On the other hand, after determining that it was “unable to conclude that

[Duke Energy Progress] mismanagement [was] the primary cause of CAMA,” the

Commission concluded that it was also “unable to conclude that [the]

mismanagement to which [Duke Energy Progress] admitted in the federal criminal

court proceeding was not at least a contributing factor” to the incurrence of the

relevant coal ash disposal costs. In light of its “admi[ssion] to pervasive, system-wide

shortcomings such as improper communication among those responsible for oversight

of coal ash management,” the Commission concluded that Duke Energy Progress

“ha[d] placed its consumers at risk of inadequate or unreasonably expensive service”

by failing to “assur[e] safe operation of its coal-burning facilities so as not to render

the environment unsafe,” “result[ing] in cost increases greater than those necessary

to adequately maintain and operate its facilities.” As a result, the Commission

imposed a $30 million mismanagement penalty “arising primarily from [Duke Energy

Progress’] admissions of mismanagement in the federal criminal case.”

Commissioner ToNola D. Brown-Bland dissented from the Commission’s

decision “that [Duke Energy Progress] is entitled to full recovery of all coal ash

expenses subject to a one-time mismanagement penalty.” In Commissioner Brown-

Bland’s view, the imposition of a $30 million mismanagement penalty did “not

reasonably assure that the rates fixed for [Duke Energy Progress’] service are ‘fair to

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Opinion of the Court

both the public utilit[y] and to the consumer,’ and that the rate set by the Commission

and to be received by [Duke Energy Progress] is just and reasonable,” quoting

N.C.G.S. § 62-133(a) and citing N.C.G.S. § 62-131(a). According to Commissioner

Brown-Bland, when Duke Energy Progress was notified that NPDES permit

violations and unlawful groundwater exceedances had occurred in 2007, Duke Energy

Progress was placed “on notice” that its existing unlined coal ash basins “were not

compliant with the environmental regulations of the day,” that their contents were

leaching into the groundwater, and that Duke Energy Progress “had available to it a

number of specific alternative actions that represented reasonable optional pathways

to coal ash management compliance.” As a result, Commissioner Brown-Bland

determined that Duke Energy Progress’ decision to store additional coal ash in

unlined basins after 2007 was imprudent and resulted in a situation in which the

company was required to handle a considerable quantity of coal ash twice—once when

it was initially stored in an unlined basin and again when it was excavated and moved

to a lined facility. As a result, Commissioner Brown-Bland concluded that it was “not

fair to burden the consumers with rates that include costs attributable to [Duke

Energy Progress’] imprudence” in dewatering, excavating, and moving coal ash waste

that had been produced in or after 2007 and that the prudently incurred portion of

Duke Energy Progress’ coal ash costs should be amortized over a seven year period,

with the unamortized balance being included in rate base.

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Opinion of the Court

Similarly, Commissioner Daniel G. Clodfelter concurred, in part, and

dissented, in part. After stating that that he “[could not] concur” in the Commission’s

decision to impose a $30 million mismanagement penalty while simultaneously

allowing Duke Energy Progress to earn a return on the unamortized balance of the

relevant coal ash disposal costs, Commissioner Clodfelter described the

mismanagement penalty imposed by the Commission as lacking “any clear

connection between the amount selected for the penalty . . . and any particular

actions or omissions by [Duke Energy Progress].” Instead, Commissioner Clodfelter

would have disallowed certain costs which had, in his view, been imprudently

incurred at the Sutton, Asheville, H.V. Lee, and Cape Fear facilities and would have

placed certain costs incurred at the Mayo and Roxboro facilities into a regulatory

asset account for consideration in Duke Energy Progress’ next general rate case.

After noting that the record did not allow a determination as to “what portion, if any,

of [Duke Energy Progress’] future coal ash disposal expenditures may require an

increase in investor-provided working capital,” Commissioner Clodfelter concluded

that he could not “support the accrual of a rate of return on amounts recorded to the

regulatory asset account for future coal ash disposal costs.”

On 2 April 2018, the Public Staff filed a motion seeking clarification “with

respect to whether the unamortized balance of deferred coal ash costs is ‘entitled’ to

a return as a matter of law, or is ‘eligible’ for a return as a matter of Commission

discretion.” More specifically, the Public Staff sought clarification concerning: (1)

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Opinion of the Court

the Commission’s conclusion that Duke Energy Progress’ coal ash compliance costs

constituted investor-funded working capital for purposes of this Court’s decision in

VEPCO; (2) the Commission’s conclusion that Duke Energy Progress was “entitled to

earn a return on those funds over the period in which the costs are amortized”; and

(3) the Commission’s statement that “costs placed in an [Asset Retirement

Obligation] account are eligible for deferral and amortization and for earning on the

unamortized balance” and that, “even if the remediation costs are [Asset Retirement

Obligation] expenditures, they are eligible for ratemaking treatment as though they

are used and useful assets.” On 17 April 2018, the Commission entered an order

stating that:

[The Public Staff’s concern] is a misinterpretation of the
Commission’s order when viewed in the context of the
entirety of the order. The holding of the order is that but
for a management penalty, the Commission in its
discretion would have allowed amortization of historical
deferred [coal ash] costs over five years with full return on
the unamortized balance, but to implement the penalty,
the return is to be reduced by $30 million. Relying on this
logic, the Commission could have imposed a different
penalty that could have reduced the return further or
eliminated it altogether. As such the holding belies the
Public Staff’s reading of the order to be that the deferred
[coal ash] costs are to be included in rate base with a return
to be paid as a matter of law. The holding is not based on
a determination that [Duke Energy Progress] is authorized
to earn a return on the deferred balance of the [coal ash]
historical remediation costs as a matter of law.
Consequently, even if use of the word “entitled” were
precedent setting, in a legislative ratemaking order, which
it is not . . . , as the holding is not dependent on the
interpretation of the word as the Public Staff reads it, the

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Opinion of the Court

Public Staff’s concerns are misplaced. In the context of the
order taken as a whole, the Commission does not use the
word “entitled” in contradistinction with the word “eligible”
as the Public Staff reads it, nor, as the Commission stated
in its February 23, 2018 order, does the Commission find it
necessary to resolve the dispute between [Duke Energy
Progress] and the Public Staff as to whether the deferred
[coal ash] costs at issue in this case “may” vs. “must” be
added to rate base as a matter of law and earn a return.
Such determination is not necessary in establishing rates
in this case.10

b. Duke Energy Carolinas

On 22 June 2018, the Commission entered an order allowing Duke Energy

Carolinas to include $545.7 million, less a $70 million mismanagement penalty, in

the cost of service used to establish its North Carolina retail rates; allowing Duke

Energy Carolinas to recover a return on the unamortized balance of the deferred coal

ash costs; and increasing its residential Basic Facilities Charge from $11.80 to $14.00

per month. In its order, the Commission found as fact that:

36. [Duke Energy Carolinas] shall increase the
monthly [Basic Facilities Charge] for the residential rate
class (Schedules RS, RT, RE, ES, and ESA) to $14.00. The
increase in the [Basic Facilities Charge] for the residential
rate class schedules is just and reasonable. The [Basic
Facilities Charge] for other rate schedules shall be left
unchanged from the current rates.

....

10 Commissioner Clodfelter dissented from the Commission’s clarification order on the

grounds that the portions of the rate order to which the Public Staff’s motion was directed
were the same portions of the order with which he expressed disagreement in his partial
dissent. For that reason, Commissioner Clodfelter would have allowed the Public Staff’s
clarification motion.

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Opinion of the Court

66. [Duke Energy Carolinas] expects to incur
substantial costs related to [coal ash] in future years. It is
just and reasonable to allow deferral of those costs, with a
return at the net-of-tax overall cost of capital approved in
this Order during the deferral period. Ratemaking
treatment of such costs will be addressed in future rate
cases.

....

69. Since its last rate case, [Duke Energy
Carolinas] has become subject to new legal requirements
relating to its management of coal ash. These new legal
requirements mandate the closure of the coal ash basins at
all of [Duke Energy Carolinas’] coal-fired power plants.
Since its last rate case, [Duke Energy Carolinas] has
incurred significant costs to comply with these new legal
requirements.

70. On a North Carolina retail jurisdiction basis,
the actual coal ash basin closure costs [Duke Energy
Carolinas] has incurred during the period from January 1,
2015, through December 31, 2017, amount to $545.7
million. [Duke Energy Carolinas] is eligible to recover
these coal ash basin closure costs. The actual coal ash
basin costs incurred by [Duke Energy Carolinas] are
known and measurable, reasonable and prudent, and, to
the extent capital in nature, used and useful in the
provision of service to the Company’s customers. Further,
[Duke Energy Carolinas] proposes that these costs be
amortized over a five-year period, and that it earn a return
on the unamortized balance. Under normal circumstances,
the five-year amortization period proposed by [Duke
Energy Carolinas] is appropriate and reasonable, and
absent any management penalty, should be approved, and
under normal circumstances the Commission within its
discretion would allow [Duke Energy Carolinas] to earn a
return on the unamortized balance.

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Opinion of the Court

71. Under the present facts, a management
penalty in the approximate sum of $70 million is
appropriate with respect to [Duke Energy Carolinas’] [coal
ash] remediation expenses accounted for in the earlier
established Asset Retirement Obligation . . . with respect
to costs incurred through the end of the test year, as
adjusted. Through its use of available ratemaking
mechanisms, the Commission is effectively implementing
an estimated $70 million penalty by amortizing the $545.7
million over five years with a return on the unamortized
balance and then reducing the resulting annual revenue
requirement by $14 million for each of the five years.

72. [Duke Energy Carolinas] further proposes
that it recover on an ongoing basis $201 million in annual
coal ash basin closure costs, subject to true-up in future
rate cases. The amount sought by [Duke Energy Carolinas]
is based upon its actual test year (2016) spend. [Duke
Energy Carolinas] proposal to recover these ongoing costs
as a portion of the rates approved in this [o]rder is not
appropriate. Rather, it is appropriate to allow [Duke
Energy Carolinas] to record its January 1, 2018, and future
[coal ash] costs in a deferral account until its next general
rate case.

In support of these findings, the Commission noted that an increase in the

residential Basic Facilities Charge from $11.80 to $14.00 would be “just and

reasonable and [would] strike[ ] the appropriate balance [by] providing rates that

more clearly reflect actual cost causation” given that “[t]he increase . . . minimizes

subsidization and provides more appropriate price signals to customers in the rate

class, while also moderating the impact of such increase on low-income customers to

the extent that they are high-usage customers such as those residing in poorly

insulated manufactured homes.” The Commission further stated that a failure to

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Opinion of the Court

“properly recover customer-related cost via a fixed monthly charge provides an

inappropriate price signal to customers and fails to adequately reflect cost causation”

and that “shifting customer-related cost to kWh energy rate further exacerbates these

concerns.” The Commission determined that Duke Energy Carolinas’ proposal to

increase the residential Basic Facilities Charge to $17.79, which reflects

approximately fifty percent of the difference between the current rate and the

purported $23.78 customer-related cost identified in Duke Energy Carolinas’ cost of

service study lacked sufficient support in the utility’s cost-of-service study and that,

while the evidence “would support a higher charge” than $14.00 per month, “cost

causation analyses are inherently subjective,” so that “selecting a charge within the

range advocated [by the parties] based on differing cost causation models [would be]

appropriate.” After acknowledging the effect that this increase would have upon

customers, “especially low-income households,” the Commission noted that Duke

Energy Carolinas used “other means to address the financial needs of low-income

customers which are more effective than biasing the rate design.” The Commission

left the basic facilities charges applicable to non-residential rate schedules

“unchanged” on the grounds that non-residential rate schedules “are more complex”

and “allow[ ] for the minimization of cost-subsidization issues” while “ensuring

greater consistency with cost causation and allocation principles” and that “a greater

amount of fixed costs in the residential rate schedule, as opposed to non-residential

rate schedules, presently are recovered through variable energy rates, which is

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Opinion of the Court

inconsistent with basic cost allocation principles that fixed costs should be recovered

through fixed charges, whereas variable costs should be recovered through variable

charges.”

The Commission further noted that Duke Energy Carolina’s request to defer

the costs associated with the remediation of conditions at the existing unlined coal

ash basins “was generally unopposed” and had the support of the Public Staff. The

Commission also concluded “that deferral in a regulatory asset for previously

incurred coal ash environmental costs [was] consistent with the Commission’s criteria

for deferrals and [was] reasonable” in light of the fact that the costs “were

extraordinary when incurred,” “were not being recovered in rates in effect at the time

incurred,” and would be difficult to quantify until a later time, when the costs were

better understood.

In the Commission’s view, N.C.G.S. § 62-133 “requires the Commission to

determine the utility’s rate base,” which is defined as “the reasonable original cost of

the public utility’s property used and useful . . . less that portion of the cost . . .

recovered by depreciation expense,” “its reasonable operating expenses,” “and a fair

rate of return on the [utility’s] capital investment” before multiplying the rate base

by the rate of return and adding the operating expenses to produce the utility’s

“revenue requirement,” quoting Thornburg I, 325 N.C. at 467 n.2, 385 S.E.2d at 453.

The Commission held that, once a utility has demonstrated that “the costs it seeks to

recover are (1) ‘known and measurable’; (2) ‘reasonable and prudent’; and (3) where

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Opinion of the Court

included in rate base ‘used and useful’ in the provision of service to customers,”

quoting Jonathan A. Lesser & Leonardo R. Giacchino, Fundamentals of Utility

Regulation 39, 41–43 (Pub. Utils. Reports, Inc., ed., 2007) (Lesser & Giacchino), “the

utility should have the opportunity to recover the costs so incurred” in order to avoid

“an unconstitutional taking.”

The Commission stated that the “seminal treatment of ‘reasonable and

prudent’ costs” was set forth in its 1988 order in Docket Nos. E-2, Sub 537 and E-2,

Sub 333, in which it determined that “the standard for judging prudence is ‘whether

management decisions were made in a reasonable manner and at an appropriate time

on the basis of what was reasonably known or reasonably should have been known at

the time,” with this determination to “be based on a contemporaneous view of the

action or decision under question,” so that “[p]erfection . . . [was] not [ ] required,” and

with “[h]indsight analysis—the judging of events based on subsequent

developments— . . . not [being] permitted.” In the Commission’s view, “[a] decision

cannot be imprudent if it represents the only feasible way to accomplish a necessary

goal,” so that, “if expenditures . . . support and provide service to customers, the costs

are ‘used and useful,’ ” citing our decisions in Thornburg II and State ex rel. Utilities

Commission v. Carolina Water Service, 335 N.C. 493, 439 S.E.2d 127 (1994) (Carolina

Water).

In rejecting the Attorney General’s contention that Duke Energy Carolinas

“bore the burden of quantifying the disallowances [that] the [Attorney General]

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Opinion of the Court

deems appropriate” given the utility’s alleged “fail[ure] to act appropriately before

2015,” the Commission stated that a utility need not “disprove [i]ntervenor

allegations unsupported by evidence” and that, on the contrary, “the [Attorney

General] must quantify what the costs of the actions not taken should have been.”

The Commission further concluded that “most of the costs being challenged are

questioned on the theory that [Duke Energy Carolinas] is in breach of a standard

classified as a ‘duty to exercise due care,’ ” a standard that is more appropriately

utilized in the tort context and which environmental regulators and courts of general

jurisdiction are better positioned than the Commission to apply. The standard

typically employed by the Commission in resolving cost recovery challenges “has

elements qualitatively and quantitatively distinct and more rigorous than a tort

standard of due care,” with the “[t]he expert witnesses sponsored [by the intervenors]

in this case” having “failed to show what [Duke Energy Carolinas] should have done

differently,” “when it should have acted,” or “what the cost of such alternative conduct

should have been.” In the Commission’s view, “[a]ttempts to identify years-old

hypothetical past costs” would be a “fruitless endeavor” that created an

“insurmountable obstacle” to acceptance of the intervenors’ positions, particularly

given the lack of “statutory or regulatory standards and guidelines to follow” in

determining which actions should have been taken. In view of the fact that

“[i]ntervenors may not rest merely on arguments and theories” and “must adduce

actual evidence challenging some aspect of [Duke Energy Carolinas’] cost recovery

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Opinion of the Court

case,” the Commission determined that the intervenors had failed to successfully

challenge the reasonableness of Duke’s coal ash costs.

In addition, the Commission concluded that Duke Energy Carolinas had “met

its burden—both the prima facie burden of production and the ultimate burden of

persuasion”—of demonstrating that its coal ash costs should be included in the cost

of service for ratemaking purposes and that it should be allowed to earn a return

upon these costs. In reaching this conclusion, the Commission placed substantial

reliance upon the testimony of Duke Energy Carolinas witness Jon Kerin, who

asserted that Duke Energy Carolinas’ historic coal ash management practices

“generally comported with industry practices and then-applicable regulations.” After

noting that Mr. Wittliff had admitted that the costs that Duke Energy Carolinas had

incurred in complying with the CCR Rule were prudent, the Commission rejected the

Attorney General’s contention that Duke Energy Carolinas should not be permitted

to include the costs associated with CAMA compliance—a statute which, in the

Attorney General’s view, required “a more aggressive coal ash basin closure schedule

for certain of [Duke Energy Carolinas’] basins than would have been set under the

CCR Rule alone”—given that Mr. Wittliff “did not identify any specific costs that

could have been lower or should be disallowed” and did not “know quantitatively”

which costs would have eventually been required by the CCR Rule and CAMA in the

absence of mismanagement “because [he] didn’t do that kind of analysis.”

Furthermore, the Commission determined that there was “no evidence” that Duke

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Opinion of the Court

Energy Carolinas’ mismanagement was the “direct cause of CAMA”; that, even if it

was, “such direct causation alone is not sufficient legal basis for disallowing otherwise

recoverable costs” given that CAMA “operates within the context of [N.C.G.S. §] 62-

133”; and that, “had [the General Assembly] intended to disavow the routine cost

recovery standard, it can be expected that the legislature would have had to do so

explicitly.”

The Commission rejected the Public Staff’s equitable sharing proposal, which

was similar to the proposal that it had advocated in the Duke Energy Progress case

with the exception of the use of a twenty-seven, rather than a twenty-six year

amortization period, for essentially the same reasons that it had cited in rejecting the

Public Staff’s equitable sharing proposal in that case. According to the Commission,

the record contained “[n]o persuasive evidence” that any of the allegedly imprudent

actions or inactions “caused discrete expenditures” by Duke Energy Carolinas and

that “identification of an imprudent action or inaction is not by itself sufficient;

rather, there must be a demonstration of the economic impact.”

The Commission further noted that, because the relevant coal ash costs had

been covered by investor-supplied, rather than ratepayer-supplied, funds, such funds

are, “under principles of equity, law and fairness,” “eligible for a return” because to

hold otherwise would “deprive[ ]” “the investor supplying these funds . . . of the time

value of money,” “inadequately compensate [the investor] resulting in an increased

risk, and “ultimately increase[e] [Duke Energy Carolinas’] cost of capital.” The

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Commission held that the extent to which certain costs would, “had they not been

accounted for in an [Asset Retirement Obligation] and deferred,” have “been

operating or other expenses” did not matter given that, once they had been capitalized

and deferred, those costs “los[t] for ratemaking purposes the attributes of . . .

‘expenses’ deemed recoverable through [rates] then in effect that do not qualify for a

return.” Moreover, the Commission further determined that many of the relevant

costs were, “[u]nder any analysis, . . . not expenses but capital items”; that, “[h]ad

[Duke Energy Carolinas] not sought establishment of an [Asset Retirement

Obligation] and deferral, it is incorrect that they would not have been added” to rate

base; and that the Public Staff was “unable” “to support its position that deferred

[Asset Retirement Obligation] costs are ‘expenses.’ ” The Commission stated that it

was “unnecessary to determine” whether the costs in question would have been

eligible for inclusion in rate base in light of ordinary ratemaking principles and

concluded that, “[i]n its discretion, as expressly authorized by [N.C.G.S. §] 62-133(d),”

it had the authority to allow Duke to earn a return on the unamortized balance of its

deferred coal ash costs.

As it had in the related Duke Energy Progress case, the Commission

determined that “both GAAP and FERC accounting guidance require the recognition

of a liability (the [Asset Retirement Obligation]) upon the requisite triggering event—

the legal obligation to retire the [Duke Energy Carolina’s] coal ash basins”—and that

“[r]ecognition of the liability carries with it recognition of a corresponding asset—the

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capitalized cost of settling the liability, which under both GAAP and FERC rules is

considered part of the property, plant and equipment for the assets that must be

retired.” In addition, the Commission concluded, in reliance upon this Court’s

decision in VEPCO, that the costs in question were properly included in rate base as

working capital. In view of the fact that the relevant costs were “intended to provide

utility service in the present or in the future through achieving their intended

purpose,” which was “environmental compliance,” “the retirement of the ash

impoundments,” and “the final storage location of the residuals from the generation

of electricity,” the Commission concluded that the costs associated with the coal ash

basins at issue in this case, including those that will close as a result of the CCR Rule

and CAMA (with the exception of the high priority sites), “will remain,” which means

that “they will remain used and useful, because they will still store coal ash, a

byproduct of electricity generation.”

The Commission disagreed with the Public Staff’s determination that $2.1

million in legal expenses associated with the defense of coal ash-related

environmental litigation and $1.5 million in groundwater extraction and treatment

costs associated with the Belews Creek facility should be disallowed based upon the

same reasoning that led the Commission to reach a similar conclusion in the Duke

Energy Progress case. The Commission rejected the Public Staff’s proposal that the

Commission disallow $98 million in compliance costs which the Public Staff

contended exceeded the cost of other reasonable alternatives on the grounds that the

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testimony of the Public Staff witnesses in support of these proposed disallowances

“missed or overlooked pertinent facts and real world conditions,” “lack[ed] . . .

credibility,” and failed to “effectively [ ] support their positions.”

The Commission determined that “[t]he vast majority of these costs would have

been incurred irrespective of management inefficiency in order to comply with [the

CCR Rule] requirements” and “would have been required irrespective of the harms

that constitute other alleged mismanagement.” The Commission noted that “[Duke

Energy Carolinas] undertook steps toward CCR remediation and incurred costs in

anticipation of impending closure” while hesitating “to spend substantial sums until

the requirements became clearer” and that, “[h]ad [Duke Energy Carolinas] acted in

compliance with assertions that it act more aggressively sooner, it would have cost

its consumers” more than the costs that resulted from the course of conduct in which

it actually engaged. For that reason, the Commission concluded that, “from a

ratemaking perspective,” “the question of when the remediation should have taken

place . . . is not determinative of whether the costs of the remediation should be

recovered through rates and to what extent.” In view of the fact that “establishing a

past cost in this case would be a near impossibility,” the Commission declined to

penalize Duke Energy Carolinas for its decision to wait until the adoption of the CCR

Rule before undertaking the coal ash basis closure process, particularly given that

“no attempt ha[d] been made by any party” to determine what the costs would have

been if remediation had been undertaken at an earlier time.

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Finally, in addressing Duke Energy Carolinas’ alleged violations of the 2L

Rules, the Commission determined that DEQ “does not agree that the existence of

exceedances without evidence that they are caused by coal ash contamination pose[s]

a risk to environment or human health so as to require immediate remediation.” For

that reason, the Commission concluded that Duke Energy Carolinas’ “failure to take

the costly actions” suggested by the intervenors “falls well short of mismanagement.”

On the other hand, the Commission determined that a mismanagement penalty in

the amount of $70 million was appropriate in this case for reasons similar to those

that underlay the imposition of a similar penalty in the Duke Energy Progress

proceeding.

Once again, Commissioners Brown-Bland and Clodfelter dissented, in part,

from the Commission’s decision. As an initial matter, Commissioner Clodfelter stated

that he would have disallowed “a substantial amount of [coal ash] costs” in

determining Duke Energy Carolinas’ cost of service for North Carolina retail

ratemaking purposes on the grounds that they had either been imprudently incurred

or had not, as the result of the utility’s negligence, been included in the cost of service

in prior general rate cases. Secondly, Commissioner Clodfelter would have refrained

from allowing Duke Energy Carolinas to earn a return on the unamortized balance

of the deferred coal ash costs on the grounds that the relevant statutory provisions

did not authorize the allowance of such a return and that “the record presented in

this case does not and cannot support allowance of a return as a matter of

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Commission discretion.” Finally, Commissioner Clodfelter opposed the proposed

increase in the residential Basic Facilities Charge on the grounds that there was “no

evidence in the record to support any such increase” and that the increase “unfairly

discriminates among different classes of customers.”

Similarly, Commissioner Brown-Bland expressed opposition to the approval of

the increased residential Basic Facilities Charge. Aside from her belief that the

record did not support the approved increase and that this increase was “unfairly and

discriminatorily upon only the residential class of customers,” Commissioner Brown-

Bland noted that the Commission had arbitrarily chosen “a random number between

the two ends offered” by the parties and that the approved residential Basic Facilities

Charge “just happen[ed] to be the same as the fixed residential [Basic Facilities

Charge] adopted in” the Duke Energy Progress order despite the fact that the two

utilities had different cost structures and the fact that Duke Energy Progress’ cost of

service exceeded that of Duke Energy Carolinas. Commissioner Brown-Bland echoed

Commissioner Clodfelter’s concerns regarding the Commission’s “fail[ure] to engage

in the exercise of determining waste coal ash removal costs directly (much less

indirectly) attributable to instances of imprudence on [Duke Energy Carolinas’] part,”

stating that the record “permit[ted] identification and disallowance of specific

discrete costs and/or cost increases caused by identifiable and known acts of

imprudence” and that the “better course of action” would have been for the

Commission to undertake the difficult task of determining which expenses were and

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were not prudently incurred instead of “avoid[ing] the exercise” altogether. According

to Commissioner Brown-Bland, the Commission’s approach resulted in an “arbitrary

monetary amount without rational basis” given that “a one-time management

penalty does not provide an adequate substitute for the exercise of the Commission’s”

statutory ratemaking authority.

3. Appellate Proceedings

The Attorney General and the Sierra Club noted an appeal to this Court from

the Commission’s orders in both cases, while the Justice Center, et. al., and the

Sustainable Energy Association (collectively, the environmental intervenors) noted

an appeal from the Commission’s order in the Duke Energy Carolinas proceeding.

The Public Staff noted a cross-appeal to this Court from both of the Commission’s

orders. At the request of all parties, the two cases were consolidated for purposes of

briefing and argument by order of this Court.

II. Substantive Legal Analysis

A. Standard of Review

In an appeal taken from an order entered by the Commission, “the rates fixed

or any . . . order made by the Commission under the provisions of [Chapter 62] shall

be prima facie just and reasonable.” N.C.G.S. § 62-94(e). A reviewing court is limited

to “decid[ing] all relevant questions of law, interpret[ing] constitutional and statutory

provisions, and determin[ing] the meaning and applicability of the terms of any

Commission action.” N.C.G.S. § 62-94(b). The reviewing court “may affirm or reverse

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the decision of the Commission, declare the same null and void, or remand the case

for further proceedings; or it may 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) [i]n violation of constitutional provisions,”

“(2) [i]n excess of statutory authority or jurisdiction of the Commission,” “(3) [m]ade

upon unlawful proceedings,” “(4) [a]ffected by other errors of law,” “(5) [u]nsupported

by competent, material and substantial evidence in view of the entire record as

submitted, or (6) [a]rbitrary or capricious,” id., with “due account [to] be taken of the

rule of prejudicial error.” N.C.G.S. § 62-94(c).

The Commission is responsible for determining the weight and credibility to

be afforded to the testimony of any witness, including any expert opinion testimony,

State ex rel. Utilities Commission v. Edmisten, 291 N.C. 575, 584, 232 S.E.2d 177, 182

(1977), with the Commission’s decision being entitled to great deference given that

its members possess an expertise in utility ratemaking that makes them uniquely

qualified to decide the issues that are presented for their consideration. See Motor

Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 48, 103 S. Ct. 2856,

2869, 771 L. Ed. 2d 443, 461 (1983) (stating that “[e]xpert discretion is the lifeblood

of the administrative process”). “Assuming adequate findings of fact, supported by

competent, substantial evidence,” “[t]he Commission’s determination, reached

pursuant to the mandate of [N.C.G.S. §] 62-133 and to the statutory procedural

requirements, may not be reversed” even if “we would have reached a different

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conclusion upon the evidence.” State ex rel. Utils. Comm’n v. Morgan, 277 N.C. 255,

266–67, 177 S.E.2d 405, 412–13 (1970). The Commission’s conclusions of law, on the

other hand, are reviewed de novo. State ex rel. Utils. Comm’n v. N.C. Waste

Awareness & Reduction Network, 255 N.C. App. 613, 615, 805 S.E.2d 712, 714 (2017),

aff’d per curiam, 371 N.C. 109, 812 S.E.2d 804 (2018).

B. Coal Ash Costs

The briefs submitted by the parties debate: (1) whether the coal ash costs at

issue in these proceedings are properly classified as property used and useful or as

operating expenses; (2) whether these costs were reasonably incurred; and (3)

whether the Commission’s decision to award a return on the unamortized balance of

the costs in both of these cases was lawful. We will address each of these issues turn.

1. Sufficiency of the Commission’s Factual Findings

The Public Staff, the Attorney General, the Sierra Club, and the utilities have

advanced a number of arguments for the purpose of challenging the lawfulness of the

Commission’s decisions regarding the amount of coal ash costs that should be

included in the cost of service used to establish the utilities’ North Carolina retail

rates. However, before we address the parties’ substantive arguments, we must

address the validity of the Public Staff’s contention that, in light of its failure to

properly classify the costs at issue in these cases, the Commission’s orders fail to

contain sufficient findings of fact to satisfy the requirements of N.C.G.S. § 62-79(a)

(providing that the Commission’s orders must “be sufficient in detail to enable the

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court on appeal to determine the controverted questions presented in the

proceedings” and “shall include” “[f]indings and conclusions and the reasons or bases

therefor upon all the material issues of fact, law, or discretion presented in the

record”).

In its brief, the Public Staff contends that the Commission made “inconsistent,”

“contradictory,” and “mutually exclusive” conclusions concerning whether the

utilities’ coal ash-related costs constituted property “used and useful” upon which a

return could be earned in accordance with N.C.G.S. § 62-133(b) or deferred operating

expenses upon which, in the Public Staff’s view, a return could be earned in the

Commission’s discretion pursuant to N.C.G.S. § 62-133(d). According to the Public

Staff, the Commission’s inconsistent reasoning “makes it impossible to know the true

basis for the decision to deny equitable sharing and allow a return on coal ash costs.”

In addition, the Public Staff contends that the Commission erroneously determined

in the Duke Energy Progress order that, even without a determination of the nature

of the relevant coal ash costs, a return could be earned upon them as a matter of law

or, in the alternative, in the exercise of the Commission’s discretion pursuant to

N.C.G.S. § 62-133(d) given that this decision did not constitute a proper “exercise of

discretion” and was nothing more than “a mechanism to circumvent judicial review.”

Moreover, the Public Staff argues that the Commission contradicted itself in the

clarification order that it entered in the Duke Energy Progress case, in which it stated

that its decision to allow a return upon the unamortized balance of the relevant coal

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ash costs rested upon an exercise of the Commission’s discretion pursuant to N.C.G.S.

§ 62-133(d), and had committed a similar error in the Duke Energy Carolinas order

by deciding to allow a return upon the unamortized balance of the deferred coal ash

costs on the grounds that, “to the extent” that the costs in question constituted capital

expenditures, they amounted to property that was “used and useful” for purposes of

N.C.G.S. § 62-133(b)(1) and that it had the authority to authorize the utility to earn

a return upon the remaining coal ash-related costs pursuant to N.C.G.S. § 62-133(d).

According to the Public Staff, treating the unamortized balance of the deferred coal

ash costs as both property used and useful and as reasonable operating expenses

constitutes “a direct violation of the ratemaking process,” quoting State ex rel.

Utilities Commission v. Public Staff, 333 N.C. 195, 202, 424 S.E.2d 133, 137 (1993)

(Carolina Trace). In response, the utilities argue that “this distinction is essentially

academic” and “is not material to the outcome of this appeal.”

The language in which the traditional ratemaking formula set forth in

N.C.G.S. § 62-133(b) is couched has led the parties to raise a number of issues

concerning how the coal ash costs at issue in these cases should be classified for

ratemaking purposes. The Commission resolved the classification issue in the Duke

Energy Progress case by deciding, in its discretion, that it had the authority to allow

the utility to earn a return upon the unamortized balance of the relevant coal ash

costs pursuant to either N.C.G.S. § 62-133(b)(1) or N.C.G.S. § 62-133(d) and by

deciding in the Duke Energy Carolinas case that, regardless of whether the relevant

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coal ash costs constituted property “used and useful or operating” expenses, it had

the authority to allow the company to earn a return upon the unamortized balance of

those costs pursuant to N.C.G.S. § 62-133(d). In view of the fact that “[t]he purpose

of the findings required by [N.C.G.S.] § 62-79(a) is to provide the reviewing court with

sufficient information to allow it to determine the controverted questions presented

in the proceedings,” State ex rel. Utilities Commission v. Conservation Council of

North Carolina, 312 N.C. 59, 62, 320 S.E.2d 679, 682 (1984), and the fact that we are

able discern the nature and extent of the Commission’s decision from its findings and

conclusion, we hold that the Commission’s findings in both orders are sufficiently

specific to satisfy the requirements of N.C.G.S. § 62-79(a).

2. Reasonableness of the Costs

The Attorney General11 argues that “utilities have the burden to show that

their costs were reasonably incurred,” citing N.C.G.S. §§ 62-75 and 134(c), and asserts

that, once another party has offered “affirmative evidence . . . that challenges the

reasonableness of [the utility’s] expenses,” quoting Conservation Council, 312 N.C. at

64, 320 S.E.2d at 683, “the utility must prove that its costs were reasonably incurred.”

As a precondition for the inclusion of any particular cost in the regulated cost of

service, the Attorney General contends that the utility must show that the costs in

11 The Sierra Club “adopts and incorporates by reference” the arguments advanced by

the Attorney General relevant to the reasonableness of the utilities’ coal ash-related costs, as
will be discussed in more detail below.

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question are “known and measurable” and “reasonable and prudent,” citing N.C.G.S.

§ 62-133(b)(1) and Thornburg I.

In the Attorney General’s view, the Commission erred by concluding that the

intervenors had failed to adequately challenge the reasonableness of the costs at issue

in these cases. According to the Attorney General, the intervenors presented

affirmative evidence demonstrating that the utilities had, for decades, unreasonably

placed coal ash in unlined basins, resulting in “nearly 6000 test results that showed

violations of 2L [R]ules.” The Attorney General argues that such violations “could

have been prevented” given that the utilities “[have known] for years how to stop

[their] ash from contaminating groundwater: putting the ash in lined landfills, as

opposed to unlined ponds,” and that, by failing to act upon the basis of such “insights,”

the utilities had incurred costs which “could have [been] avoided,” such as the cost of

excavating coal ash that “could have already [been] put in lined landfills years

earlier” and transporting such coal ash to off-site landfills.

In addition, the Attorney General asserts that the record contains evidence

tending to show that the utilities had failed to manage their unlined coal ash basins

in a reasonable manner so as to “eventually result[ ] in the spill at [the] Dan River

plant” and the enactment of CAMA, which was introduced a mere three months after

the Dan River spill and “singles out” the coal ash basins associated with the utilities’

coal-fired generating facilities for accelerated closure. According to the Attorney

General, the enactment of “CAMA caused [the utilities] to incur costs that [they]

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would not otherwise have incurred, such as the cost of complying with CAMA’s basin-

closure deadlines.” The Attorney General asserts that the Commission agreed that

Duke Energy Carolinas’ mismanagement of the coal ash basins at its Dan River plant

contributed to the enactment of CAMA before stating that it was unable to “precisely

‘identify and quantify’ how many of [the utilities’] costs were unreasonable,” with this

“inconclusiveness mean[ing] that [the utilities] did not meet [their] burden to show

that [the] costs were reasonable,” citing State ex rel. Utilities Commission v. Duke

Power Co., 285 N.C. 377, 389, 206 S.E.2d 269, 277–78 (1974) (Duke Power Co. I).

The Attorney General further contends that, although the evidence elicited by

the intervenors was “more than enough to require [the utilities] to prove that [they]

incurred [their] coal ash costs reasonably,” the Commission erroneously required the

intervenors to “identify specific and discrete instances of imprudence”; “identify

prudent alternatives to the [utilities’] actions”; and “quantify the precise economic

effect of the [utilities’] imprudence” before determining that the intervenors had

failed to satisfy this standard. In spite of the fact that the standard upon which the

Commission relied “flowed from this Court’s decision” in Thornburg II, the Attorney

General asserts that the costs in question in that case had been developed by an

independent auditor assigned to scrutinize the challenged utility costs with the

agreement of the utility and the Public Staff and had not been used to determine

whether other intervenors had adduced sufficient evidence to require the utility to

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affirmatively establish the reasonableness of the costs that it sought to have included

in the regulated cost of service.

The Attorney General argues that the Commission committed various errors

in determining that the utilities had managed their coal ash basins in a reasonable

manner. The Attorney General cites Glendale Water, 317 N.C. at 40–41, 343 S.E.2d

at 907–08, for the proposition that “breaking environmental laws is unreasonable,”

arguing that the Commission had improperly failed to acknowledge that the utilities

had committed thousands of documented “violations of the 2L [R]ules” based upon an

erroneous determination that an exceedance of limitations specified in the 2L Rules

does “not [constitute] proof of illegality” and that the “2L [R]ules are violated only

when a polluter fails to clean up contaminated groundwater.” In the Attorney

General’s view, an exceedance for the purpose of the 2L Rules, which he describes as

“strict liability regulations,” citing Rudd v. Electrolux Corp., 982 F. Supp. 355, 365

(M.D.N.C. 1997), results in a violation of 15A N.C. Admin. Code 2L.0103(d) (stating

that“[n]o person shall conduct . . . any activity which causes the concentration of any

substance” in groundwater to exceed the limitations set out in the 2L Rules).

The Attorney General asserts that the Commission’s conclusion that it

“lack[ed] authority to assess independently whether a utility has acted unreasonably

by breaking the law” given that the utilities had neither admitted to violating nor

had been found in violation of the 2L Rules constituted an “erroneous[ ] abdicat[ion]

[of] its dut[ies]” pursuant to N.C.G.S. §§ 62-133(b)(3), (c), citing State ex rel. Utilities

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Commission v. N.C. Power, 338 N.C. 412, 419–22, 450 S.E.2d 896, 900–02 (1994);

Carolina Water, 335 N.C. at 503, 439 S.E.2d at 132; State ex rel. Utilities Commission

v. Edmisten, 291 N.C. 451, 464, 232 S.E.2d 184, 191–92 (1977). According to the

Attorney General, the only reason that the utilities were not found to have violated

the 2L Rules was the enactment of CAMA, which resulted from the utilities’

mismanagement of their coal ash basins and obviated the necessity for the

environmental regulators to determine whether violations had occurred as long as

the utilities complied with CAMA and the applicable implementing regulations.

In the Attorney General’s view, the mismanagement penalties imposed upon

the utilities were not adequate “substitute[s]” for a disallowance of challenged coal

ash costs given that the Commission’s authority to sanction a utility for

mismanagement “is distinct from the Commission’s duty under [N.C.G.S. §] 62-

133(b)(3) to protect consumers by disallowing costs that are not reasonable.” On the

contrary, the Attorney General argues that “a utility’s misconduct can serve as a basis

both for penalizing the utility and for separately reducing rates on other statutory

grounds,” citing State ex rel. Utilities Commission v. General Telephone Co., 285 N.C.

671, 684, 208 S.E.2d 681, 698 (1974).12

12 The Attorney General also argues that the Commission’s mismanagement penalties

against both utilities were “illusory” given that they “simply reduced a return that [the
utilities] never should have received in the first place.”

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Similarly, the Public Staff argues that the Commission failed to adequately

consider certain environmental violations in determining the reasonableness and

prudence of the utilities’ costs for North Carolina retail ratemaking purposes. After

referencing the disallowances that it had proposed relating to groundwater extraction

and treatment costs at the Sutton and Belews Creek facilities, the Public Staff argues

that the Commission erred by failing to adequately consider the record evidence

concerning these and other environmental violations and by failing to make findings

and conclusions relating to that evidence in violation of N.C.G.S. § 62-79(a)(1). More

specifically, the Public Staff contends that the record contained ample evidence that

the utilities had committed environmental violations, with that evidence including:

(1) the testimony of certain Public Staff witnesses that the costs to remediate off-site

groundwater contamination at the Sutton and Belews Creek facilities would not have

been incurred “but for the environmental violations”; (2) the text of a settlement

agreement between DEQ and the utilities in which the latter agreed to remediate

“offsite groundwater impacts” at the Sutton facility “consistent with 15A [N.C.

Admin. Code §] 2L.106”; (3) groundwater monitoring data provided by Duke Energy

Progress; (4) testimony by Mr. Wells and Duke Energy Carolinas witness Julius A.

Wright that certain extraction and treatment costs were the direct result of

environmental violations; (5) a Notice of Violation issued to Duke Energy Progress by

DEQ asserting that the utility had committed environmental violations; (6) a DEQ

press release announcing that Duke Energy Progress was being held accountable for

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coal ash-related groundwater pollution by means of a settlement agreement; and (7)

the text of the Joint Factual Statement signed by Duke Energy Progress in the federal

criminal case “acknowledg[ing]” certain environmental impacts of the Sutton facility

on a nearby community. According to the Public Staff, the Commission failed to make

the required findings and conclusions concerning the extent to which environmental

violations had occurred on the grounds that such findings would be inappropriate “in

the absence of a guilty finding against the [utilities] or an admission of guilt by the

[utilities],” with the Commission’s decision to “simply defer[ ] to another state agency

on a matter that relates to an issue properly before the Commission,” citing Carolina

Trace and State ex rel. Utilities Commission v. Cooper, 366 N.C. 484, 489–91, 494–95,

739 S.E.2d 541, 545–48 (2013) (Cooper I), constituting a failure to comply with the

relevant ratemaking statutes.

The Public Staff contends that the Commission also erred by concluding that

CAMA would have required groundwater extraction and treatment at the Sutton and

Belews Creek facilities regardless of the extent to which environmental violations

had actually occurred at those locations. In the Public Staff’s view, exceedances of

the limitations set out in the 2L Rules become violations pursuant to 15A N.C. Admin.

Code § 02L.0106 only if their existence was the fault of the utility, with the utility

only being required to perform “corrective action” or “remediation” in the event that

the exceedance constitutes a violation. As a result, the Public Staff contends that, to

the extent that the utilities were required to extract and treat groundwater that was

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contaminated as the result of an exceedance, those costs would not have otherwise

been required pursuant to CAMA and should not be recouped in rates.

In response, the utilities argue that the correct legal standard for purposes of

determining the reasonableness and prudence of costs pursuant to N.C.G.S. § 62-

133(b) is the one that the Commission articulated in its 1988 order in Docket Nos. E-

2, Subs 333 and 537, and that this Court upheld in Thornburg II, which focuses upon

“whether management decisions were made in a reasonable manner and at an

appropriate time on the basis of what was reasonably known or reasonably should

have been known at the time.” In addition, the utilities assert that, “[e]ven if there

is evidence in the record” that rebuts the presumption that the coal ash costs at issue

in these cases had been reasonable and prudently incurred, they had elicited

“substantial” and “compelling” evidence demonstrating that: (1) they “had managed

[their respective] coal ash basins in the manner required by applicable regulations

and consistent with industry standards prior to the promulgation of the CCR Rule

and the enactment of CAMA”; (2) “the change in law wrought by the CCR Rule and

CAMA caused [them] to manage coal ash differently”; (3) “[they] prudently and at

reasonable cost conformed [their] practices to the new legal requirements”; and (4) no

intervenor had “specif[ied] how the Compan[ies] should have acted differently in

managing [their] coal ash, at which sites it should have taken those actions, and how

much those actions would have cost the [utilities].” In view of the fact that the

Commission found in their favor with respect to this issue, the utilities argue that

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the task of a reviewing court is “not to determine whether there is evidence to support

a position the Commission did not adopt” but, instead, to determine “whether there

is substantial evidence, in view of the entire record, to support the position that the

Commission did adopt,” quoting State ex rel. Utilities Commission v. Eddleman, 320

N.C. 344, 355, 358 S.E.2d 339, 347 (1987).

Similarly, the utilities argue that the Attorney General “did not and could not

allege that [they] had committed any act of imprudence related to the actual costs

being sought for recovery in the proceedings before the Commission given that Mr.

Wittliff, an expert witness testifying on behalf of the Attorney General, had stated

that the relevant costs had been reasonably and prudently incurred and had failed to

“identify any specific costs that could have been lower or should be disallowed.” The

utilities assert that the Attorney General’s contention that they should have installed

liners at their unlined coal ash basins before being required to do so “put [them] in

an impossible position” given that any such action “could have been called into

question” as “premature” prior to a complete understanding of the applicable

environmental requirements. In addition, the utilities contend that the Attorney

General’s claim that they had the burden of disproving the appropriateness of the

proposed cost disallowances constituted a “remarkable position” unsupported by any

legal authority. Finally, the utilities dispute the validity of the Attorney General’s

contention that, since imprudent action on the part of Duke Energy Carolinas “caused

the enactment of CAMA,” the cost of complying with CAMA should be excluded from

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the cost of service for ratemaking purposes on the grounds that “legislative intent can

only be determined from the legislation itself,” citing Electric Supply Co. of Durham

v. Swain Electrical Co., 328 N.C. 651, 657, 403 S.E.2d 291, 295 (1991), and Styres v.

Phillips, 277 N.C. 460, 472, 178 S.E.2d 583, 590 (1971), and that no such intent can

be discerned from an examination of the relevant statutory provisions.

According to the utilities, the Commission was free to reject the remaining

prudence challenges raised by the Public Staff as well. For instance, the utilities

contend that the Commission properly determined that a number of the Public Staff’s

disallowance recommendations were “infected by hindsight” and “unfeasible” and

that a settlement agreement with an environmental regulator was not tantamount

to an admission of liability. In the utilities’ view, the Commission addressed the

Public Staff’s evidence concerning alleged environmental violations without

“erroneously abdicat[ing] its duty to assess whether illegal conduct is unreasonable

and disallow costs related to illegal conduct.” In fact, the utilities assert that the

Commission “expressly rejected” the Public Staff’s proposed disallowances after

giving “careful[ ] consideration” to the relevant evidence.

In spite of the fact that North Carolina utilities have the burden of proving

that the costs upon which their rates are based are reasonable and prudent, the

reasonableness and prudence of those costs is “presumed” unless the Commission or

an intervenor adduces sufficient evidence to cast doubt upon their reasonableness or

prudence, at which point the burden to make an affirmative showing of the

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reasonableness of the costs in question shifts to the utility. State ex rel. Utils. Comm’n

v. Intervenor Residents of Bent Creek/Mt. Carmel Subdivisions, 305 N.C. 62, 76, 286

S.E.2d 770, 779 (1982) (Bent Creek). In order to satisfy this burden of production, an

intervenor must offer affirmative evidence tending to show that the expenses that the

utility seeks to recover “are exorbitant, unnecessary, wasteful, extravagant, or

incurred in abuse of discretion or in bad faith or that such expenses exceed either the

cost of the same or similar goods or services on the open market or the cost similar

utilities pay to their affiliated [utilities] for the same or similar goods or services.” Id.

at 76–77, 286 S.E.2d at 779. If a utility expense is “properly challenged,” “[t]he

Commission has the obligation to test the reasonableness of such expenses.” Id. at

76, 286 S.E.2d at 779. In addition, “[i]f there is an absence of data and information

from which either the propriety of incurring the expense or the reasonableness of the

cost can readily be determined, the Commission may require the utility to prove their

propriety and reasonableness by affirmative evidence.” Id. at 75, 286 S.E.2d at 778.

The essential thrust of the intervenors’ challenge to the validity of the

Commission’s determination with respect to the reasonableness of the utilities’ coal

ash costs varies from one party to the other. On the one hand, the Attorney General’s

“reasonableness” argument rests upon the existence of evidence tending to show that

the utilities should have begun to eliminate the use of unlined coal ash basins earlier

than they actually did. On the other hand, the Public Staff’s “reasonableness”

argument rests upon those portions of the record that depict specific instances of what

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the Public Staff contends to be environmental non-compliance. We do not find either

of these arguments persuasive given the state of the record and the findings and

conclusions contained in the Commission’s orders.

In addressing the Attorney General’s contention that the utilities

unreasonably polluted groundwater in violation of the 2L Rules by placing coal ash

in unlined basins, the Commission found the testimony of Mr. Wells to be instructive

in the Duke Energy Progress order. Mr. Wells testified that the utilities’ “ash basins

were built between 1956 and 1985” and that, “[a]t that time, unlined basins were the

primary technology for treating ash transport water throughout the country.” In

addition, Mr. Wells noted that “[i]nitially, ash basins were not regulated under

federal or state solid waste laws”; that “[u]tility surface impoundments eventually

became regulated as wastewater treatment units under the Clean Water Act after it

was significantly reorganized and expanded in 1972”; and that DEQ’s predecessor

promulgated the 2L Rules in 1984. According to Mr. Wells, “there was no obligation

in the 2L [R]ules to monitor groundwater quality,” with those rules only imposing an

obligation “to take corrective action once exceedances had been identified.” As a

result, according to Mr. Wells, Duke Energy Progress “was under no universal

obligation to monitor for groundwater impacts” associated with coal ash basins

pursuant to the 2L Rules. Mr. Wells testified that, in the mid-2000s, Duke Energy

Progress “began more comprehensively sampling groundwater resulting in the

identification of more exceedances” while DEQ “began systematically adding

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groundwater to NPDES permits as they were reissued or modified” starting around

2008. Based upon this and similar evidence, the Commission rejected the

intervenors’ assertions that the utilities should have begun the coal ash remediation

process prior to the adoption of the CCR Rule and the enactment of CAMA, a decision

that was well within the scope of its statutory authority in light of the record evidence.

Similarly, in rejecting the Attorney General’s argument that Duke Energy

Progress had failed to satisfy evolving industry standards and should have done more

than merely comply with the environmental regulations as they existed at the time,

the Commission noted that Mr. Wittliff, who presented testimony on behalf of the

Attorney General, had testified that “industry standard is compliance.” Although Mr.

Wittliff admitted that “there were a number of [utilities] that were doing exactly what

[Duke Energy Progress] did,” he also stated that “it was clear in the ‘80s that the

trend was towards lined ponds” and that, by 1988, forty percent of coal ash basins

had been lined even though that approach was not “a cheap solution” and could “be

fairly pricy.” Upon being pressed to identify “any other ways that [Duke Energy

Progress] did not comply with industry standards,” Mr. Wittliff reiterated his

emphasis upon the necessity for compliance with the requirements of its NPDES

permits and then stated that “that’s where I would leave it.” As a result, we hold that

the Commission’s determination that the Attorney General had failed to adduce

sufficient evidence to rebut the presumption that Duke Energy Progress’ coal ash

costs were reasonably and prudently incurred on the grounds that it should have

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begun using lined coal ash basins earlier than it did had adequate evidentiary

support.13

The Commission relied heavily on the testimony of Mr. Kerin in addressing a

similar issue in the Duke Energy Carolinas proceeding. Mr. Kerin testified that,

“[u]ntil recently, coal has been the historic ‘go-to’ fuel choice for base-load, least-cost

reliable service,” with the industry standard being the use of unlined basins for the

purpose of storing coal ash. Mr. Kerin stated that, “from 1974 to 2015, ash basins

were a lawful and effective way of meeting the wastewater treatment requirements

under the [Clean Water Act]” and “[had] been effective at treating wastewater to meet

NPDES permit limits.” For that reason, Mr. Kerin asserted that, “[i]n the absence of

any regulatory directive to do so, [Duke Energy Carolinas] reasonably did not pursue

and should not have pursued regulatory closure or retrofitting for any site that was

still generating ash and that maintained its NPDES permit.” At the time that the

CCR Rule was promulgated and CAMA was enacted, Duke Energy Carolinas began

preparing to comply with the new requirements.

13 The fact that the record contains evidence that it would have been advisable for a

utility to have taken specific action relating to a particular generating facility at an earlier
time than that action was actually taken does not require us to make a different decision
with respect to the “reasonableness” issue. Aside from the fact that evidence relating to a
specific generating facility has no logical relation to the reasonableness of costs incurred at
other facilities and would not, for that reason, support a finding that the utility’s coal ash
costs, considered in their entirety, were unreasonable, the ultimate question raised by such
evidence is simply whether the utility should have made a different policy-based decision
than the one that it actually made. As has been discussed in the text of this opinion, the
Commission adequately addressed this policy-related “reasonableness” issue in its order in
these cases.

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In rebutting Mr. Wittliff’s contention that the number of lined basins had been

increasing by 1988 and 1999, Mr. Kerin testified that Duke Energy Carolinas last

constructed a new coal ash basin in 1982. In addition, Mr. Kerin stated that, “while

[Mr. Wittliff had] cite[d] an increase in the percentage of basins that were lined from

17 to 28 percent between 1975 and 1995, that [figure] still represents a minority of

the new basins being constructed that were lined.” In response to Mr. Wittliff’s

suggestion that Duke Energy Carolinas should have built new lined impoundments

to store its coal ash, Mr. Kerin stated that this suggestion “ignores the fact that the

construction of new lined impoundments would have entailed significant expense to

[Duke Energy Carolinas], while not removing the need to maintain the existing

unlined impoundments.” In Mr. Kerin’s opinion, acting on the basis of Mr. Wittliff’s

suggestion “before [such measures] [were] consistent with industry standards”

“would have put [Duke Energy Carolinas] at risk of disallowance of those costs.” Mr.

Kerin also pointed to Mr. Wittliff’s testimony in the Duke Energy Progress case in

which he responded in the negative when asked if Duke Energy Progress had acted

imprudently when it began sluicing coal ash to unlined impoundments in view of the

fact that “[t]he law allowed them to do it, and the law continued to allow them to do

it, even though there was . . . concern.” As a result, the record contains ample

evidentiary support for the Commission’s determination in the Duke Energy

Carolinas proceeding that the intervenors had failed to elicit sufficient evidence to

satisfy the burden of production imposed upon them in Bent Creek.

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In spite of the fact that, as the Commission put it, the utilities’ actions

constituted “at least a contributing factor” to enactment of CAMA, we are unable to

hold that, as a matter of law, utility mismanagement constituted the “primary cause

of CAMA” or that “CAMA would not have been passed or that its requirements other

than accelerated deadlines would have been less onerous but for [the utilities’]

mismanagement.” As this Court has stated on many occasions, “the cardinal

principle of statutory construction is that the words of the statute must be given the

meaning which will carry out the intent of the Legislature” and that the legislative

“intent must be found from the language of the act, its legislative history and the

circumstances surrounding its adoption which throw light upon the evil sought to be

remedied.” Milk Commission v. Food Stores, 270 N.C. 323, 332–33, 154 S.E.2d 548,

555 (1967). CAMA simply does not contain any language from which we can

determine that the General Assembly’s decision to enact its provisions stemmed from

mismanagement on the part of either utility. Had the General Assembly wished to

make such a statement, it certainly could have done so. As a result, we are unable to

accept the Attorney’s General invitation to require the disallowance of all of the coal

ash-related costs at issue in these proceedings on the grounds that they necessarily

resulted from utility imprudence.

We reach a similar conclusion with respect to the more nuanced

“reasonableness” argument advanced in the Public Staff’s brief. As the record

reflects, Public Staff witness Jay Lucas testified in the Duke Energy Progress case,

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even though “some environmental violations are clearly due to [Duke Energy

Progress’] negligence or mismanagement, there are other actual and potential

environmental violations that are not easily characterized as either plainly

imprudent or plainly reasonable on [Duke Energy Progress’] part.” In Mr. Lucas’

view, any attempt to calculate the incurred costs associated with environmental

violations “could be extremely complex and somewhat speculative” given that doing

so would involve “a lot of estimations and assumptions over a long period of time,

leaving doubts about accuracy.” For this reason, the Public Staff concluded that,

despite the fact that “there is some degree of [Duke Energy Progress] culpability for

costs” “due to non-compliance with environmental violations,” for “most” of the costs

at issue in that case, such culpability “may fall short of imprudence.” In light of this

set of circumstances, the Public Staff advanced its equitable sharing proposal rather

than attempting to contest the reasonableness and prudence of most of the coal ash-

related costs that are at issue in these cases.

The “reasonableness” test enunciated by this Court in Bent Creek focuses upon

whether the challenged utility costs were “exorbitant, unnecessary, wasteful,

extravagant, or incurred in abuse of discretion or in bad faith or that such expenses

exceed either the cost of the same or similar goods or services on the open market or

the cost similar utilities pay to their affiliated [utilities] for the same or similar goods

or services.” Bent Creek, 305 N.C. at 76–77, 286 S.E.2d at 779. As a result, the

required legal analysis is clearly focused upon the extent to which specific costs that

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the utility seeks to utilize in establishing its North Carolina retail rates are excessive

rather than upon general policy questions of the sort that underlie the Attorney

General’s broad-based “reasonableness” argument. We have no hesitation in

recognizing that it would be difficult, if not impossible, to quantify, in even the most

general sense, the costs which the utilities would have incurred had they handled the

coal ash stored at their facilities in a manner that differed from what they actually

did or if specific alleged environmental violations had not occurred. As the testimony

of Mr. Lucas suggests, the Public Staff placed principal reliance upon its “equitable

sharing” proposal for this very reason. However, with the exception of the Public

Staff’s suggested disallowances relating to costs incurred at the Sutton and Belews

Creek facilities, we are compelled to agree with the Commission that the intervenors

failed to identify and quantify the specific costs that should have been disallowed as

unreasonable and imprudently incurred in these cases. In the absence of such

evidence, we cannot say that the Commission erred by holding that the intervenors

had failed to make a sufficient showing to require the utilities to demonstrate the

reasonableness and prudence of their coal ash-related costs in detail.

3. Return on the Unamortized Balance

The Public Staff argues that, in order for costs to be includable in rate base

and eligible to earn a return, those costs must be for “used and useful” property, which

“primarily means ‘utility plant’ that consists of long-lived physical assets used to

provide utility service” and is “largely funded by capital investment,” including “brick

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and mortar buildings, generators and turbines, poles, meters, and conductors such as

transmission, distribution, and service wires that carry electricity from generators to

customers.” Similarly, the Attorney General argues that the concept of “property”

involves “the rights in a valued resource such as land, chattel, or an intangible,” and

includes “[a]ny external thing over which the rights of possession, use, and enjoyment

are exercised,” quoting Property, BLACK’S LAW DICTIONARY 1410 (10th ed. 2014).

Although the Public Staff points out that working capital “has been judicially

accepted as an intangible form of ‘property’ ” that may be appropriately included in

rate base, citing VEPCO, 285 N.C. at 414–15, 206 S.E.2d at 295–96, the Attorney

General contends that working capital may only be included in rate base where it

“qualifies as used and useful,” so that all working capital does not necessarily qualify

for inclusion in rate base, citing Morgan, 277 N.C. at 273, 117 S.E.2d at 417;

Thornburg II, 325 N.C. at 486, 385 S.E.2d at 464; Carolina Water, 335 N.C. at 507,

439 S.E.2d at 135, given that “this Court has never recognized any exceptions to the

‘used and useful’ requirement” and that “there is no working-capital exception” or any

exception “for funds supplied by investors” to the definition of “rate base” embodied

in N.C.G.S. § 62-133(b)(1).

According to the Public Staff, property is “used and useful” if it is “in service

for the production or delivery of utility service,” citing Carolina Water, and is not

“excess or overbuilt for the needs of current customers” so as to be “greater than

necessary to provide service even if it is being used,” citing Carolina Trace. In the

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same vein, the Attorney General contends that property is not used and useful if it is

not used to provide current service or has been abandoned, citing Carolina Trace and

Carolina Water. On the other hand, the Public Staff contends that costs that are

properly categorized as operating expenses, rather than as property “used and

useful,” include “payments for goods or services that are consumed at or close to the

time payment is made,” “the depreciation of used and useful property at a rate

corresponding to its useful life,” and “income tax expense.” Among other things, the

Public Staff points out that operating expenses include “wages, salaries, fuel,

maintenance, advertising, research and charitable contributions” and “annual

charges for depreciation and operating taxes,” quoting Charles F. Phillips, Jr., The

Regulation of Public Utilities 177 (1993). On the basis of similar logic, the Attorney

General asserts that costs such as dewatering coal ash basins, treating contaminated

water from coal ash basins, excavating coal ash, and putting excavated coal ash in

landfills constitute operating expenses rather than the cost of property “used and

useful.” Although both of them agree that the utilities are entitled to earn a return

on the reasonable original cost of “used and useful” property, the Public Staff and the

Attorney General differ with respect to the issue of whether the Commission

possesses the authority to award a return on deferred operating expenses.

In arguing that the Commission has the statutory authority to allow a utility

to earn a return on the unamortized balance of costs that would ordinarily be

categorized as operating expenses, the Public Staff suggests that N.C.G.S. § 62-133(d)

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allows the Commission, in t

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10485120. Public record. Not legal advice.