The opinion
IN THE SUPREME COURT OF NORTH CAROLINA
No. 268A12-2
Filed 19 December 2014
STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION; DUKE
ENERGY CAROLINAS, LLC, Applicant; PUBLIC STAFF – NORTH CAROLINA
UTILITIES COMMISSION, Intervenor
v.
ATTORNEY GENERAL ROY COOPER, N.C. WASTE AWARENESS AND
REDUCTION NETWORK, N.C. JUSTICE CENTER, and N.C. HOUSING
COALITION, Intervenors
On direct appeal as of right pursuant to N.C.G.S. §§ 7A-29(b) and 62-90(d)
from a final order of the North Carolina Utilities Commission on remand from this
Court entered on 23 October 2013 in Docket No. E-7, Sub 989. Heard in the
Supreme Court on 8 September 2014.
K&L Gates LLP, by Kiran H. Mehta; Heather Shirley Smith, Deputy General
Counsel, and Charles A. Castle, Associate General Counsel, Duke Energy
Carolinas, LLC; and Williams Mullen, by Christopher G. Browning, Jr., for
applicant-appellee Duke Energy Carolinas, LLC.
Antoinette R. Wike, Chief Counsel, and William E. Grantmyre and David T.
Drooz, Staff Attorneys, for intervenor-appellee Public Staff – North Carolina
Utilities Commission.
Kevin Anderson, Senior Deputy Attorney General; Phillip K. Woods, Special
Deputy Attorney General; Michael T. Henry, Assistant Attorney General; and
John F. Maddrey, Solicitor General; for intervenor-appellant Roy Cooper,
Attorney General.
Law Offices of F. Bryan Brice, Jr., by Matthew D. Quinn, for NC WARN; and
John D. Runkle for NC WARN, N.C. Justice Center, and N.C. Housing
Coalition, intervenor-appellants.
JACKSON, Justice.
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.
Opinion of the Court
In this case we consider whether the order of the North Carolina Utilities
Commission (“the Commission”) authorizing a 10.5% return on equity (“ROE”) for
Duke Energy Carolinas (“Duke”) contained sufficient findings of fact to demonstrate
that the order was supported by competent, material, and substantial evidence in
view of the entire record. See N.C.G.S. § 62-94 (2013). Because we conclude that
the Commission made sufficient findings of fact regarding the impact of changing
economic conditions upon customers, we affirm. See id. § 62-94(b).
On 1 July 2011, Duke filed an application with the Commission requesting
authority to increase its North Carolina retail electric service rates to produce an
additional $646,057,000, yielding a net increase of 15.2% in overall base revenues.
The application requested that rates be established using an ROE of 11.5%. The
ROE represents the return that a utility is allowed to earn on the equity-financed
portion of its capital investment by charging rates to its customers. As a result, the
ROE approved by the Commission affects profits for shareholders and costs to
consumers. State ex rel. Utils. Comm’n v. Cooper (“Cooper II”), 367 N.C. 430, 432,
758 S.E.2d 635, 636 (2014) (citations omitted). “The ROE is one of the components
used in determining a company’s overall rate of return.” Id. (citation omitted).
The proceedings before the Commission are set forth in our opinion in State
ex rel. Utilities Commission v. Cooper (“Cooper I”), 366 N.C. 484, 739 S.E.2d 541
(2013). In pertinent part, we explained that
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Opinion of the Court
[t]he Commission entered an order on 28 July 2011,
declaring this matter to be a general rate case and
suspending the proposed rate increase pending further
investigation. . . . The Attorney General of North
Carolina and the Public Staff–North Carolina Utilities
Commission intervened in this matter as allowed by law.
On 28 November 2011, the Public Staff and Duke
filed an Agreement and Stipulation of Settlement with
the Commission that “provide[d] for a net increase of
$309,033,000” for annual revenues and an allowed “ROE
of 10.5%.” The Settlement addressed all issues between
Duke and the Public Staff, but was contested by some of
the other parties, including the Attorney General.
Id. at 486, 739 S.E.2d at 542-43. Subsequently, the Commission conducted six
hearings to receive testimony from public witnesses and an evidentiary hearing for
receiving expert testimony. Id. On 27 January 2012, the Commission entered an
order (the “Rate Order”) approving the revenue increase and ROE contained in the
Stipulation. 366 N.C. at 488, 739 S.E.2d at 544. The Attorney General appealed.
Upon review, we concluded that the Rate Order was not supported by
sufficient findings of fact demonstrating that the Commission exercised
independent judgment in approving the Stipulation’s provisions. Id. at 493, 739
S.E.2d at 547. We explained that
it does not appear that the Commission weighed any of
the testimony presented at the evidentiary hearing.
Instead, it appears that the Commission merely recited
the witnesses’ testimony before reaching an ROE
conclusion in its order. Notably absent from the
Commission’s order is any discussion of why one witness’s
testimony was more credible than another’s or which
methodology was afforded the greatest weight.
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Opinion of the Court
Id. We further noted that the Rate Order did not include sufficient findings of fact
regarding the impact of changing economic conditions upon customers. 366 N.C. at
494, 739 S.E.2d at 547. As a result, we reversed the Rate Order and remanded the
case “with instructions to make an independent [ROE] determination . . . based
upon . . . findings of fact that weigh all the available evidence.” Id. at 496, 739
S.E.2d at 548.
On 23 October 2013, the Commission entered an order (the “Remand Order”)
making supplemental findings of fact, summarizing public witness testimony,
reviewing expert testimony, explaining the weight given to the evidence, and
“reaffirm[ing]” the Rate Order. The Commission concluded that the ROE
authorized in the Rate Order was “justified and supported” by the evidence and was
reasonable in light of the Stipulation as a whole. The Attorney General appealed
the Remand Order to this Court as of right pursuant to N.C.G.S. §§ 7A-29(b) and
62-90.
Subsection 62-79(a) of the North Carolina General Statutes “sets forth the
standard for Commission orders against which they will be analyzed upon appeal.”
State ex rel. Utils. Comm’n v. Carolina Util. Customers Ass’n (“CUCA I”), 348 N.C.
452, 461, 500 S.E.2d 693, 700 (1998). Subsection 62-79(a) provides:
(a) All final orders and decisions of the Commission
shall be sufficient in detail to enable the court on appeal
to determine the controverted questions presented in the
proceedings and shall include:
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Opinion of the Court
(1) Findings and conclusions and the reasons or bases
therefor upon all the material issues of fact, law, or
discretion presented in the record, and
(2) The appropriate rule, order, sanction, relief or
statement of denial thereof.
N.C.G.S. § 62-79(a) (2013). When reviewing an order of the Commission, this Court
may, inter alia,
reverse or modify the decision if the substantial rights of
the appellants have been prejudiced because the
Commission’s findings, inferences, conclusions or
decisions are:
(1) In violation of constitutional provisions, or
(2) In excess of statutory authority or jurisdiction of
the Commission, or
(3) Made upon unlawful proceedings, or
(4) Affected by other errors of law, or
(5) Unsupported by competent, material and
substantial evidence in view of the entire record as
submitted, or
(6) Arbitrary or capricious.
Id. § 62-94(b) (2013). Pursuant to subsection 62-94(b) this Court must determine
whether the Commission’s findings of fact are supported by competent, material,
and substantial evidence in light of the entire record. Id.; CUCA I, 348 N.C. at 460,
500 S.E.2d at 699 (citation omitted). “Substantial evidence [is] defined as more
than a scintilla or a permissible inference. It means such relevant evidence as a
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Opinion of the Court
reasonable mind might accept as adequate to support a conclusion.” CUCA I, 348
N.C. at 460, 500 S.E.2d at 700 (alteration in original) (citations and quotation
marks omitted). The Commission must include all necessary findings of fact, and
failure to do so constitutes an error of law. Id. (citation omitted).
In his appeal,1 the Attorney General argues that the Commission did not
reach its own independent conclusions because the Remand Order “once again
analyzes and critiques the expert testimony . . . in just such a way so as to reach—to
the exact tenth of a percent—the precise compromise ROE contained in the
Stipulation.” The Attorney General asserts that the Commission supported the
Remand Order by “cherry picking” through the available evidence, evidence from
other cases, and orders entered in other jurisdictions. We disagree.
In CUCA I we explained that the Commission is required to reach an
independent conclusion on a fair ROE. 348 N.C. at 461-62, 500 S.E.2d at 700-01.
The Commission must consider all the evidence before it along with any stipulation
entered into by some of the parties and any other relevant facts. Id. at 466, 500
1 We note that NC WARN, the North Carolina Justice Center, and the North
Carolina Housing Coalition did not file a notice of appeal with the Commission, although
they filed a brief with this Court. Pursuant to section 62-90 of the North Carolina General
Statutes, a party may appeal a final order of the Commission “if the party . . . shall file with
the Commission notice of appeal and exceptions which shall set forth specifically the
ground or grounds on which the aggrieved party considers said decisions or order to be
unlawful, unjust, unreasonable or unwarranted.” N.C.G.S. § 62-90(a) (2013). Because NC
WARN, the North Carolina Justice Center, and the North Carolina Housing Coalition did
not file a notice of appeal with the Commission, we are without jurisdiction to consider their
arguments.
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S.E.2d at 703. But the requirement that the Commission reach an independent
conclusion does not preclude the Commission from adopting an ROE recommended
by a particular party or witness. As we explained in CUCA I,
[t]he Commission may even adopt the recommendations
or provisions of the nonunanimous stipulation as long as
the Commission sets forth its reasoning and makes “its
own independent conclusion” supported by substantial
evidence on the record that the proposal is just and
reasonable to all parties in light of all the evidence
presented.
Id.
In Cooper I we reversed the Rate Order because we were unable to conclude
from the record that the Commission had considered all the evidence in addition to
the Stipulation. See 366 N.C. at 493, 739 S.E.2d at 547. Specifically, we noted that
the Rate Order did not weigh the evidence, but “merely recited the witnesses’
testimony before reaching an ROE conclusion.” Id. But in the Remand Order, the
Commission revisited the evidence related to ROE and explained the weight given
to each witness’s testimony.
The Commission first reviewed the discounted cash flow (“DCF”) analysis
presented by Duke witness Robert Hevert. See 366 N.C. at 486-87, 739 S.E.2d at
543. The Commission explained that Hevert performed this analysis using several
proxy groups and arrived at estimated ROE ranges of: (1) 10.42% to 10.84% for a
proxy group he had selected; (2) 10.24% to 10.74% for a proxy group selected by
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Public Staff witness Johnson; (3) 10.31% to 10.57% for one proxy group selected by
CUCA witness O’Donnell; and (4) 10.27% to 10.58% for a second proxy group
selected by O’Donnell. The Commission observed that the average midpoint of
these ranges was exactly the stipulated 10.5%. Ultimately, the Commission
“credit[ed]” Hevert’s DCF analysis and found “that the resulting value provides
substantial support for its determination that 10.5% is the appropriate [ROE].”
The Commission noted that Public Staff witness Ben Johnson had examined
ROE through a comparable earnings method and a market approach. The
Commission gave “substantial weight” to Johnson’s comparable earnings method,
which resulted in an ROE range of 9.75% to 10.75%, and determined that Johnson’s
analysis provided “ample support” for the Commission’s conclusion that 10.5% was
an appropriate ROE. Nevertheless, the Commission explained that Johnson had
acknowledged that his market approach “does not focus on short-term securities
markets at all; so the recent drop in interest rates and the drop in the opportunity
to reach capital that is being signaled by security markets is simply not a part of
that analysis.” The Commission further explained that Hevert testified that
Johnson’s market analysis resulted in an “unreasonably low” ROE. The
Commission determined that Johnson’s market analysis was unpersuasive.
The Commission gave “minimal weight” to CUCA witness Kevin O’Donnell’s
testimony recommending an ROE of 9.5%. The Commission concluded that
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Opinion of the Court
O’Donnell inappropriately relied upon the assumed rate of return for Duke’s
pension expense, “ignor[ing] the crucial distinction between expected returns, which
underlie pension expense, and required returns, which underlie the appropriate
rate of return on equity.”
In conducting its analysis, the Commission was required to consider the
Stipulation together with all the other evidence and was permitted to adopt the
ROE contained therein. CUCA I, 348 N.C. at 466, 500 S.E.2d at 703. We hold that
the Remand Order contains sufficient findings of fact explaining the weight given to
the evidence and demonstrating that the Commission reached its own independent
conclusion on ROE.
Next, the Attorney General argues that the Commission determined that it
“need not follow” this Court’s decision in Cooper I. Specifically, the Attorney
General contends that the Commission did not make sufficient findings of fact
regarding the impact of changing economic conditions upon customers. We
disagree.
Pursuant to subdivision 62-133(b)(4) of the North Carolina General Statutes,
the Commission must fix a rate of return that
will enable the public utility by sound management to
produce a fair return for its shareholders, considering
changing economic conditions and other factors, . . . to
maintain its facilities and services in accordance with the
reasonable requirements of its customers in the territory
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covered by its franchise, and to compete in the market for
capital funds on terms that are reasonable and that are
fair to its customers and to its existing investors.
N.C.G.S. § 62-133(b)(4) (2013). In Cooper I we observed that this provision, along
with Chapter 62 as a whole, requires the Commission to treat consumer interests
fairly, not indirectly or as “mere afterthoughts.” 366 N.C. at 495, 739 S.E.2d at 548.
But although the Commission must make findings of fact regarding the impact of
changing economic conditions upon consumers, “we did not state in Cooper I that
the Commission must ‘quantify’ the influence of this factor upon the final ROE
determination.” State ex rel. Utils. Comm’n v. Cooper (“Cooper III”), 367 N.C. 444,
450, 761 S.E.2d 640, 644 (2014) (citations omitted).
Here the Commission’s order contains several findings of fact that address
this factor:
53. Economic conditions in North Carolina during
the last several years have caused high levels of
unemployment and other economic stress on [Duke’s]
customers.
54. The rate increase approved in this case, which
includes, among the many authorized adjustments, the
approved return on equity and capital structure, will be
difficult for some of [Duke’s] customers to pay, in
particular [Duke’s] low-income customers. . . .
55. Continuous safe, adequate, and reliable electric
service by [Duke] is essential to the well-being of the
people, businesses, institutions, and economy of North
Carolina.
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56. The return on equity approved by the
Commission appropriately balances the benefits received
by all of [Duke’s] customers from [Duke’s] provision of
safe, adequate, and reliable electric service in support of
the well-being of the people, businesses, institutions, and
economy of North Carolina with the difficulties that a
portion of [Duke’s] customers experience in paying their
bills in the current economic environment.
Furthermore, the Commission found that the Stipulation was “designed to
mitigate the impact of the rate increase in several ways.” First, the Commission
explained that pursuant to the Stipulation, Duke’s rates would increase by 7.21%
across-the-board for all customer classes, which amounted to less than half the
revenue increase that Duke originally sought. The Commission determined that an
across-the-board increase, as provided in the Stipulation, resulted in a smaller
increase for residential customers than an alternative rate design considered by the
Commission. The Commission concluded that this approach was responsive to the
concerns of public witnesses regarding the ability of residential customers to pay for
a rate increase.
Second, the Commission noted that the Stipulation required Duke to defer
recovery of costs associated with construction work in progress at Duke’s Cliffside
Unit 6. The Commission found that this requirement “provid[es] $51 million of
relief in present rates to respond to the present economic straits.” (Emphasis
omitted.)
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Finally, the Commission explained that the Stipulation required Duke to pay
$11 million for energy assistance for low-income customers. As stated in the
Stipulation, this contribution would come from Duke’s shareholders and would be
used exclusively to provide energy assistance to Duke’s North Carolina retail
customers.
These findings of fact not only demonstrate that the Commission considered
the impact of changing economic conditions upon customers, but also specify how
this factor influenced the Commission’s decision to authorize a 10.5% ROE as
agreed to in the Stipulation. These findings are supported by the evidence before
the Commission, including public witness testimony, expert testimony, and the
Stipulation itself. Therefore, we hold that the Commission made sufficient findings
regarding the impact of changing economic conditions upon customers and that
these findings are supported by competent, material, and substantial evidence in
view of the entire record.
Accordingly, the order of the Commission is affirmed.
AFFIRMED.
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