Appendix — Nantahala Power & Light Co. v. Thornburg
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85-568 , [supreme Court, U.S,
FIDED
SEP 3 0 1985
No. 85- _ | _JoSEPH F. SPANIOL, JR.
IN THE CLERK
Supreme Court of the United States
OCTOBER TERM, 1985
NANTAHALA POWER AND LIGHT COMPANY,
TAPOCO, INC., and
ALUMINUM COMPANY OF AMERICA,
Appellants,
v.
STATE OF NORTH CAROLINA ex rel.
UTILITIES COMMISSION; LACY H.
THORNBURG, Attorney General,
et al.,
Appellees.
On Appeal from the Supreme Court
of North Carolina
APPENDIX TO JURISDICTIONAL STATEMENT
Rex E. LEe*
DavID W. CARPENTER
SIDLEY & AUSTIN
1722 Eye St., N.W.
Washington, D.C. 20006
(202) 429-4000
Counsel for Appellants
Of Counsel:
RONALD D. JONES
DAVID R. POE
M. REAM Y ANCARROW
LEBoEUF LAMB, LEIBY & MACRAE
EDWARD S. FINLEY, JR.
WILLIAM D. JOHNSON
GRADY L. SHIELDS
HUNTON & WILLIAMS
*Counsel of Record
TABLE OF CONTENTS
PAGE
Appendix A—Opinion Of The North Carolina Supreme
DE -socusacddtetatanedvasees¥ede. la
Appendix B—Opinion Of The North Carolina Court of
Ps 6:04 5666606060606866050008-45 l4la
Appendix C—Opinion Of The North Carolina Utilities
Commission, dated September 2, 1981... 165a
Appendix D-—Opinion Of The North Carolina Utilities
Commission, dated January 28, 1982.... 236a
Append:« E—-Excerpts From The Federal Power Act, 16
Ss dae eed eee he 248a
Appendix F— Excerpts From The North Carolina Public
Utilities Act, N.C. Gen. Stat. §§62-1, e7
_ PPPTOVTTTITTTRTTTriTrerriei TT Tee 258a
Appendix G--Opinion Of FERC In Tapoco, Inc., Docket
Pe CORED 6.060 0cu0ceseeennsee 262a
Appendix H—Excerpts From Administrative Law Judge
Decision, Nantahala Power and Light
Company, Dockei No. ER76-528; Town of
Highlands, North Carolina v. Nantahala
Power and Light Company, Locket No.
EL B66 66.66600066684600 0000089 00% 267a
Appendix I-—Excerpts From FERC Opinion No. 139,
Nantahala Power and Light Company,
Docket No. ER76-828-000; Town of
Highlands, North Carolina v. Nantahala
Power and Light Company, Docket No.
EPP 0 6:0.6.606%6 008 508esnenens 283a
Appendix J
Appendix K
Appendix L
Appendix M
Excerpts From FERC Opinion No. 139-A,
Nantahala Power and Light Company,
Docket Nos. ER76-828-002,-003,-004,
-005; Town of Highlands, North Carolina
v. Nantahala Power and Light Company,
Docket Nos. EL78-18-002,-003,-004,
-O005 .
eee ree
Opinion Of The Eighth Circuit In Middle
South Energy, Inc. v. Arkansas Public
Service Commission, Nos. 84-2409, 84-
2410, and 84-2480 (filed Aug. 23, 1985).
Supplement To Rule 28.1 Statement....
Page
302a
314a
319a
345a
APPENDIX A
Opinion Of The North Carolina Supreme Court
2a
€14 IN THE SUPREME COURT (313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
STATE OF NORTH CAROLINA, ex reL. UTILITIES COMMISSION: RUFUS L.
EDMISTEN, Attorney GENERAL; PUBLIC STAFF: HENRY J. TRUETT:
TOWN OF BRYSON CITY; SWAIN COUNTY BOARD OF COUNTY COM
MISSIONERS; CHEROKEE, GRAHAM AND JACKSON COUNTIES, THE
TOWNS OF ANDREWS, DILLSBORO, ROBBINSVILLE, AND SYLVA: THE
TRIBAL COUNCIL OF THE EASTERN BAND OF CHEROKEE INDIANS:
MURIEL MANEY; anp DEROL CRISP v. NANTAHALA POWER AND
LIGHT COMPANY; ALUMINUM COMPANY OF AMERICA: anp TAPOCO.
INC.
No. 227A83
(Filed 3 July 1985)
1. Electricity § 3; Utilities Commission § 36— electric rates — affiliated utilities —
treatment as integrated system — authority of Utilities Commission
The Utilities Commission has the authority, in the first instance, to deter
mine for itseif the relevant criteria to apply to the factual question of whether
to treat Nantahala Power Company and Tapoco, Inc. as an integrated system
for rate making purposes, and its determination will not be disturbed on ap
peal where supported by substantial evidence.
2. Electricity § 3; Utilities Commission § 15— Tapoco as public utility
The Utilities Commission correctly determined that Tapoco, Inc. is a
public utility in North Carolina subject to its regulatory authority and jurisdic
tion.
3. Appeal and Error § 2— unanimous decision of Court of Appeals — scope of re-
view
Pursuant to Rule 16(a) of the Rules of Appellate Procedure, the scope of
review in the Supreme Court from an unanimous decision of the Court of Ap
peals is limited to consideration of the questions properly presented in the
new briefs required by Rule 14(dX1) and 15(gX2) to be filed in the Supreme
Court. Questions properly presented for review in the Court of Appeals but
not presented and discussed in the new briefs to the Supreme Court are
deemed abandoned under Rule 28(a).
4. Electricity § 3; Utilities Commission § 36— electric rates —roll-in methodology
for Nanteahala—no preemption by federal license
The Utilities Commission's order implementing a roll-in of the properties,
revenues and expenses of Tapoco with those of Nantahala for the purpose of
setting Nantahala's retail rates in no way contravened the terms and condi
tions of Tapoco’s federal license to operate hydroelectric plants in North Caro
lina and Tennessee, and the Commission was not, therefore, preempted from
implementing the roll-in by virtue of Part I of the Federal Power Act and the
Supremacy Clause, Art. VI, cl. 2, of the U.S. Constitution.
5. Electricity § 3; Utilities Commission § 36— electric rates — affiliated utilities —
treatment as integrated system — sufficient evidence
There was plenary evidence in the record to support a determination by
the Utilities Commission that Nantahala and Tapoco constitute a single, in-
3a
N.C.] IN THE SUPREME COURT 615
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
tegrated electric system and should be treated as such for the purposes of
calculating Nantahala’s retail rate base and costs of service.
6. Electricity § 3; Utilities Commission § 15— Alcoa as public utility
The evidence supported a determination by the Utilities Commission that
Alcoa, the owner of all of the outstanding stock of Nantahala Power Company,
is a North Carolina public utility under G.S. 62-3(23)e by virtue of the effect
Alcoa's “affiliation” with Nantahala has had upon Nantahala’s rates.
7. Electricity § 3; Utilities Commission § 36— electric rates —roll-in methodology
for Nantahala—no preemption by Federal Power Act and Supremacy Clause
The Utilities Commission was not preempted from implementing a roll-in
methodology for determining Nantahala's rates by virtue of the Supremacy
Clause, Art. VI, cl. 2, of the U.S. Constitution and the Federal Energy
Regulatory Commission's exclusive jurisdiction under Part II of the Federal
Power Act over certain wholesale power transactions and agreements between
and among Nantahala, Tapoco, Aleoa and TVA. The “filed rate” doctrine did
not require the Utilities Commission, in determining the proper costs to Nan
tahala's retail customers for the service provided to them, to use demand and
energy factors based upon the proportion of entitlements allocated to Nan
tahala alone under such agreements. Nor did the Utilities Commission's order
conflict with specific FERC actions taken with respect to such agreements.
8. Electricity § 3; Utilities Commission § 21— jurisdiction over intrastate and in-
terstate rates
The Federal Energy Regulatory Commission is prohibited from regulating
intrastate retail rates charged to ultimate consumers, and the states are pro
hibited from regulating interstate wholesale rates charged to local distributing
companies
9. Electricity § 3; Utilities Commission § 21— wholesale intrastate electric rates
—no authority by Utilities Commission
The N.C. Utilities Commission was preempted from directly or indirectly
regulating the wholesale rate structure created by certain interstate power
agreements between and among Nantahala, Tapoco, Alcoa and TVA or inquir
ing into the reasonableness of those FERC-filed wholesale rate schedules when
it acted in fixing Nantahala’s retail rates.
10. Utilities Commission § 38— electric rates — operating expenses considered
When the provisions of G.S. 62-133(bM1), (b3) and (c) are read in pari
materia, the only operating expenses which the Utilities Commission may con
sider in setting intrastate rates for North Carolina public utilities are those in
curred in the provision of service to the utility's North Carolina consumers
Accordingly, jurisdiction cost allocation is a necessary step in any general rate
case involving a public utility or utility system whose separate companies are
operated as a single enterprise serving both jurisdictional (intrastate retail)
and non-jurisdictional consumers.
4a
616 IN THE SUPREME COURT (313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
11. Utilities Commission § 24— fixing “reasonable and just” rates — balancing of
shareholder and consumer interests
The fixing of “reasonable and just” rates involves a balancing of
shareholder and consumer interests. The Utilities Commission must therefore
set rates which will protect both the right of the public utility to earn a fair
rate of return for its shareholders and ensure its financial integrity while also
protecting the right of the utility's intrastate customers to pay a retail rate
which reasonably and fairly reflects the cost of service rendered on their
behalf.
12. Utilities Commission § 38— operating expenses — questions ef fact
The fundamental question as to whether certain expenditures are to be in
cluded in the operating expenses a utility is entitled to collect from its
customers is .e¢ of fact to be ascertained by the regulatory authority.
13. Electricity § 3; Utilities Commission § 36— electric rates— power costs paid to
affiliate
Ordinarily, the Utilities Commission may, in a proper case, refuse to allow
a utility to include in its reasonable operating expenses the full price it actual
ly paid for power as a result of its contractual power supply arrangements,
especially where the operating expense is one incurred through a contract be
tween or including the utility company and its affiliated companies. In such
cases, the burden of persuasion on the issue of reasonableness always rests
with the utility, and charges arising out of intercompany relationships between
affiliated companies should be scrutinized with care and may be properly re
fused or disallowed in the absence of a showing of their reasonableness.
14. Electricity § 3; Utilities Commission § 36— electric rates — transactions with af-
filiated companies — filed rate doctrine
The Utilities Commission's otherwise plenary authority to investigate
transactions between a public utility and its affiliated companies, and to
disallow operating expenses found to be imprudently incurred or allocated
under such agreements, is limited by prior federal approval of the rate or
price in question under the “filed rate” doctrine. Thus, neither the state public
service commission nor the courts car. unilaterally establish a different rate for
wholesale electric power sold in interstate commerce because they are of the
opinion that an FERC-filed or approved rate is unfair or unreasonable.
15. Electricity § 3; Utilities Commission § 36— Nantahala’s retail rates — interstate
power supply arrangements — benefits to Alcoa—costs to be borne by Alcoa
Insofar as the Utilities Commission determined that Alcoa, as corporate
parent and private industrial customer of Nantahala Power Company, had
benefited at the expense of Nantahala's public load from interstate corporate
and power supply arrangements it imposed upon its subsidiaries, it was within
its regulatory authority to decide that the costs associated with those benefits
would not be borne by Nantahala’s public consumers in the form of higher
retail rates but would be borne by Nantahala’s customer and sole shareholder,
Alcoa.
Ja
N.C.] IN THE SUPREME COURT 617
16.
17.
18.
19.
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
Electricity § 3; Utilities Commission § 36— electric rates— demand and energy
factors—failure to use entitlements under interstate agreements —filed rate
doctrine
The “filed rate” doctrine did not require the Utilities Commission, in
determining the proper costs to Nantahala’s retail customers for the service
provided to them, to use demand and energy factors based upon the propor-
tion of entitlements allocated to Nantahala alone under certain interstate
wholesale power agreements between and among Nantahala, Tapoco, Alcoa
and TVA.
Electricity § 3; Utilities Commission § 36— Alcoa's dominance of Nantahala —
roll-in methodology — effect of FERC actions
The Federal Energy Regulatory Commission's analysis of the corporate
structure of Alcoa, Nantahala and Tapoco and various intercorporate power
transactions and agreements, and its finding that the evidence before it did
not support the conclusion that Aleoa had used the separate corporate iden-
tities of Nantahala and Tapoco to frustrate the purposes of the Federal Power
Act, did not preemrt the N.C. Utilities Commission from determining that the
evidence before it supported the conclusion that Alcoa had dominated Nan-
tahala in such a manner as to require relief for Nantahala's retail customers
under N.C. law. Nor did the Federal Energy Regulatory Commission's having
declined to order a roll-in of Nantahala and Tapoco for rate making purposes
preempt the Utilities Commission from implementing such a rate making
methodology under its discretionary authority in setting intrastate retail rates.
Electricity § 3; Utilities Commission § 36— electric rates —roll-in methodology
—no undue burden on interstate commerce
The Utilities Commission's adoption of a roll-in of the properties. revenues
and expenses of Tapoco with those of Nantahala for the purpose of setting
Nantahala’s retail rates did not afford N.C. customers a “first call on the
energy output of the combined system and the economic benefits of Tapoco’'s
lower-cost production so as to place an undue burden on interstate commerce
in violation of the Commerce Clause, Art. I, § 8, cl. 3, of the U.S. Constitution.
Electricity § 3; Utilities Commission § 36— electric rates —roll-in methodology
—no confiscation of Nantahala’s properties
The Utilities Commission's implementation of a roll-in methodology for
setting Nantahala's retail rates, with its resulting reduction in retail rates and
refund obligation to Nantahala’s retail customers, does not impermissibly im
pair Nantahala’s ability to earn a proper rate of return on its investment and
does not amount to a confiscati..n of its properties in violation of the due proc
ess clause of the Fourteenth An:endment to the U.S. Constitution and Art. I,
§ 19 of the N.C. Constitution.
Electricity § 3; Utilities Commissio. § 36-- requiring refund to Nantahala’s
customers by Alcoa— authority of Uti'ties Commission
The Utilities Commission acted within its regulatory and rate making
authority in imposing the obligation upon )}‘antahala’s parent Alcoa to pay any
portion of a refund obligation to Nantahala’s retail customers which Nantahala
is financially unable to pay. Once the Utilities Commission determined that
6a
618 IN THE SUPREME COURT [313
Alcoa was a statutory public utility under G.S. 62-3(23)c, it could rely upon the
doctrine of “piercing the corporate veil” between Nantahala and its parent,
Alcoa, to hold Alcoa financially responsible for Nantahala's refund obligation
to the extent its affiliation had adversely affected Nantahala’s rates as
necessary or incident to the proper discharge of its regulatory duties under
G.S. 62-30.
21. Electricity § 3; Utilities Commission § 36— electric rates— piercing the cor-
porate veil—fraud not required
The Utilities Commission was not required to find fraud in order to pierce
the corporate veil between Nantahala and its parent, Alcoa.
22. Electricity § 3; Utilities Commission § 36— Nantahala's retail rates — piercing
the corporate veil— effect of prior actions by regulatory agencies
Prior investigation and regulation of the activities of Alcoa and Nantahala
by state and federal regulatory agencies did not prohibit or preempt the N.C.
Utilities Commission from piercing the corporate veil between Alcoa and its
wholly-owned subsidiary Nantahala to hold Alcoa financially responsible for
Nantahala’s refund obligation to its retail customers.
23. Electricity § 3; Utilities Commission § 36— refund to Nantahala's customers —
responsibility of Alcoa
There was no merit to Alcoa's contention that it could not be required to
pay refunds based upon Nantahala's overcollections prior to 30 October 1980,
the date on which the Utilities Commission found Alcoa to be a public utility.
24. Electrie: y § 3; Utilities Commission § 36— refund to Nantahala's customers —
responsibility of Alcoa—no confiscation of Alcoa's property
The Utilities Commission's imposition of an obligation upon Alcoa to pay
any portion of a refund obligation to Nantahala’s retail customers which Nan
tahala is financially unable to pay does not amount to a confiscation of Alcoa's
property.
25. Electricity § 3; Utilities Commission § 21— period of refund of excessive rates
—no retroactive rate making
When, upon appellate review and further action by the Utilities Commis-
sion, rates approved for Nantahala by the Utilities Commission in 1977 were
determined to be excessive, the Utilities Commission properly ordered Nan
tahala to refund all excessive rates collected since the 1977 order, not just
overcollections which were subject to an undertaking for refund after 6 March
1979 when the Court of Appeals vacated the 1977 order. Furthermore, the
Commission's refund order did not amount to retroactive rate making since
the rates ultimately fixed and the refund were not colleciible for past service
but for service in the locked-in docket period.
26. Electricity § 3; Utilities Commission § 21— amount of refund to utility's
customers
The Utilities Commission properly ordered Nantahala to refund excess
revenue measured by raies determined by a roll-in methodology in this pro-
ceeding rather than by what would have been collected under Nantahala's
prier rate schedule.
Ja
N.C.] IN THE SUPREME COURT 619
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
27. Electricity § 3; Utilities Commission § 56— electric rates—order based on in-
dependent findings
In this rate case in which the Utilities Commission implemented a roll-in
methodology for determining Nantahala's rates and held Nantahalas parent
corporation Alcoa financially responsible for refunds to Nantahala's customers,
all parties received a full and fair hearing at all stages of the original and
remanded proceedings, and the Commission's order was, in all respects, based
upon fully independent and well substantiated findings of fact and conclusions
of law and not on observations n.ade by the N.C. Supreme Court in remanding
the proceeding to the Commission
Justice VAUGHN did not participate in the consideration or decision of this
case
APPEAL by respondents pursuant to N.C.G.S. § 7A-30(3) from
the decision of the Court of Appeals, reported at 65 N.C. App.
198, 309 S.E. 2d 473 (1983), affirming the order of the North Caro
lina Utilities Commission entered 2 September 1981, Docket No.
E-13, Sub 29 (Remanded) reducing retail electric utility rates and
requiring a refund by respondents Nantahala Power and Light
Company (“Nantahala”) and its parent corporation, Aluminum
Company of America (“Alcoa”) to Nantahala’s retail ratepavers
for the four-year period of 1977-1981. Heard in the Supreme Court
12 April 1984.
This matter was initiated by Nantahala on 3 November 1976
by the filing of an application with the North Carolina Utilities
Commission (“Commission”) by Nantahala to establish new rates
so as to increase its charges to North Carolina retail customers
by $1,830,791. The Commission declared the matter to be a
general rate case pursuant to N.C.G.S. § 62-137 and ordered an in
vestigation and hearing. Various parties representing the in
terests of Nantahala’s retail ratepayers intervened and moved
that Aleoa and its wholly-owned subsidiary, Tapoco, Ince.
(“Tapoco”) be joined as parties and that the rate base of Nan
tahala be computed on a “rolled-in” basis to include the proper
ties, revenues and expenses of Tapoco, as if the two were
operating as one utility for the purpose of fixing and establishing
a reasonable level of retail rates for Nantahala. These motions
were disallowed by the Commission.
On 14 June 1977 the Commission issued an order in Docket
No. E-13, Sub 29, permitting Nantahala to put into effect revised
rates so as to produce $1,598,918 in additional gross revenues.
Sa
620 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
The erder was not stayed and Nantahala implemented the ap-
proved rates at that time. The Court of Appeals reversed, held
Tapoco to be a North Carolina public utility, vacated the order
authorizing the rate increase and remanded the case to the Com-
mission for the purpose of making Tapoco a party and considering
“whether the people of North Carolina woule benefit by the use
o* the roll-in method of rate making involving Nantahala an‘
Tapoco.” Utilities Comm. v. Edmisten, Attorney General, 40 N.C.
App. 109, 120, 252 S.E. 2d 516, 522 (1979).
Nantahala sought and obtained from this Court a stay of the
Court of Appeals’ decision pending further review. Upon Nan-
tahala’s appeal from the Court of Appeals, this Court affirmed in
part, reversed in part, and remanded the matter to the Commis-
sion for further hearings. Utilities Comm. v. Edmisten, Attorney
General, 299 N.C. 432, 263 S.E. 2d 583 (1980) (“Edmisten’’).
In Edmisten we assumed, without deciding, that Tapoco was
a North Carolina public utility subject to the regulatory authority
of the Commission, found that there was ample evidence to sup
port a finding that Nantahala and Tapoco operate as a single
unified public utility system, held that the Commission erred in
giving only minimal consideration to the evidence suggesting the
propriety of roll-in, and indicated that the roll-in device or meth-
odoogy for rate making computation “seems especially appropri
ate in a case such as this where one physically integratud system,
interconnected in suck a way that all power available to the
system can be used to enhance its overall reliability and supply
its requirements as a whole, is presided over by two corporate en
tities.” 299 N.C. at 442, 263 S.E. 2d at 591. In addition, this Ccurt
held that Alcoa and Tapoco could be brought in as parties, with a
de novo right to contest the Commission's jurisdiction; permitted
the increased rates to remain in effect, conditioned upon Nan
tahala’s guarantee that it would refund to its customers any ex
cess charges, should the increased rates originally approved by
the Commission ultimately be determined to be excessive; and
remanded the matter to the Commission with directions to “ob
tain and consider information and data showing what Nantahala's
cost of service to its customers would be if this [roi!-in] method of
rate making were used and whether Nantahala’s customers would
benefit thereby.” 299 N.C. at 443, 263 S.E. 2d at 591. Thereafter,
Nantahala executed an Underiaking to Refund, agreeing to re-
9a
N.C.] IN THE SUPREME COURT 621
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
fund any overcollections to its customers should the rates ap-
proved by the order of 14 June 1977 be determined excessive.
Upon remand to the Commission and after de novo pro-
ceedings, Alcoa and Tapoco were held to be North Carolina public
utilities and both were made parties respondent to the pro-
ceeding. Prior to the remanded rate hearings, the intervenors
moved that Alcoa and Tapoco be required to join the execution of
Nantahala’s undertaking, or, in the alternative, to guarantee Nan-
tahala’s ability to make the refund. The Commission deferred its
ruling on this motion until a later date.
The case was heard before a panel of the Commission during
the months of March, April and May of 1981, and both the in-
tervenors and the respondents presented evidence concerning the
propriety of a roll-ia, for accounting purposes, of Nantahala’s and
Tapoco’s accounting data in setting Nantahala’s retail rates. The
panei determined that Nantahala’s retail customers would benefit
by a roll-in methodology treating Nantahala and Tapoco as a un.
fied system and adopted the roll-in cost allocation formula pro-
posed by the intervenors. On 2 September 1981 the panel ordered
a reduction in Nantahala’s rates from the level previously ap-
proved by the Commission's order of 14 June 1977, in the ainount
of $2,035,000 annually and, in addition, modified certain purchased”
power adjustment costs. The panel, consistent with the rate re-
duction, also ordered Nantahala to refund the excess rates it had
been collecting under the 1977 order from its retail customers and
directed that Alcoa would be responsible for refunding such por-
tions of the total refund obligation as Nantahala itself is financial.
ly unable to refund.
’
The respondent companies appealed to the Full Commission.
After additional hearings, the Commission affirmed and adopted
the panel's order in all respects on 28 January 1982. On 16 Au-
gust 1982, the Commission, after requesting and rejecting several
refund plans submitted by Nantahala and Alcoa, ordered the two
companies to commence making refunds by monthly installments
in October 1982. The Commission left it to the companies to deter-
mine the proportion of the refund obligation each would pay, with
the provision that any division of financial responsibility not af-
fect Nantahala’s ability to continue service to its customers.
10a
622 IN THE SUPREME COURT [313
Stace ex rel. Utilities Comm. v. Nantahala Power & Light Co.
ne Commission's order was st=yed pending appeal to the
Court of Appeals. Thereafter, all relevant orders of the Commis-
sion were affirmed by the Court of Appeals in State ex rel Utili-
ties Comm. v. Nantahala Power & Light Co., 65 N.C. App. 198,
309 S.E. 2d 475 (1983). The respondents anpeal pursuant to former
N.C.G.S. § 7A-30(3), which permitted an appeal of right of any
generci rate case from the Court of Appeals to this Court in cases
decided prior to 1 July 1983. See 1983 N.C. Session Laws, Ch. 526,
Sec. 10.
Hunton & Williams, by Robert C. Howison, Jr., and Edward
S. Finley, Jr., Attorneys for defendant-appellant Nantabala Power
and Light Company.
LeBoeuf, Lamb, Leiby & MacRae, by Ronald D. Jones and
David R. Poe, Attorneys for respondent-appellants Aluminum
Company of America and Tapoco, Inc.
Rufus L. Edmisten, Attorney General, by Richard L. Griffin,
Assistant Attorney General, Attorney for Using and Consuming
Public.
Robert Gruber, Executive Director, by James D. Little, Staff
Attorney, The Public Staff, Attorneys for Using and Consuming
Public.
Crisp, Davis, Schwentker & Page, by William T. Crisp and
Robert W. Schwentker, Attorneys for Henry J. Truett; Counties
of Cherokee, Graham, Swain, Jackson; Towns of Andrews, Dills-
boro, Robbinsville, Pryson City, Sylva; and the Tribal Council of
the Eastern Band of the Cherokee Indians.
Joseph A. Pachnowski, Attorney for the County of Swain and
the Town of Bryson City.
¥’estern North Carolina Legal Services, by Larry Nestler,
Attorney for Derol Crisp. e
McKeever, Edwards, Davis & Hays, by Fred H. Moody, .r.,
Attorney for County of Swain.
Charles L. Lewis, Assistant Attorney General, Attorney for
State of Tennessee and Tennessee Department of Economic and
Community Development, Amici Curiae.
lla
N.C.] IN THE SUPREME COURT
B.
D.
B.
623
State ex rel. Utilities Comm. v. Nantahaia Power & Light Co.
Mayer & Magie, by Roderic G. Mage, and Spiegel & McDuar-
mid, by James N. Horwood, Cynthia S. Bogorad, and P. Daniel
Bruner, Atiorneys for the Town of Highlands, Amicus Curiae.
MEYER, Justice.
TABLE OF CONTENTS
Preliminary Matters
Procedural Background
Historical Development of the Unified Nan
System
Factual Predicates of the Roll-In
1. Public Utility Status of Tapoco
2. Nantahala and Tapoco as a Unified System
3. Public Utility Status of Alcoa
tahala Tapoco
Mechanics of the Roll-In in the Allocation of System Costs
I]
Federa! Preemption
1. Federal Power Act; “Filed Rate” Doctrine
2. Federal Regulatory Actions
Interference with Interstate Commerce
Rate Reduction and Refund Obligation
1. Nantahala's Constitutional Challenges
a. Reduced Rates as Confiscatory
b. Refund Obligation as Confiscatory
2. Alcoa's Challenges; Liahility
a. Statutory Powers of the Commission
b. Legal and Factual Basis for Alcoa's Refund Liability
c. Preemptive Effect of Federal Regulation
12a
624 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
d. Refund Required
1. Temporal Extent
2. Confiscation
3. Nantahala’s Non-Constitutional Challenges
a. Temporal Extent of Refund Obligation
b. Measure of Refund Obligation
D. Indepetident Findings of the Commission
ITI
Conclusion and Holding
This appeal raises substantial questions under the federal
constitution and the North Carolina statutory provisions govern-
ing intrastate electric power rates charged by a public utility to
its retail customers. The most important question presented is
whether the North Carolina Utilities Commission is preempted
from implementing a roll-in methodology for setting Nantahala's
retail rates by virtue of the Supremacy Clause of the United
States Constitution, art. VI, cl. 2 and the Federal Energy
Regulatory Commission's (“FERC”) exclusive jurisdiction over
certain interstate wholesale power transactions and agreements’
between and among, Nantahala, Tapoco, Alcoa and the Tennes<ce
Valley Authority (“TVA”). For the reasons set forth more fully
below, we find no statutory or constitutional infirmity in the
order of the North Carolina Utilities Commission issued in Docket
No. E-13, Sub 29 (Remanded), and therefore affirm the decision of
the Court of Appeals upholding the retail rate reduction and re-
fund obligation to Nantahala’s public utility customers.
In Part I of this opinion we will undertake to review (a) the
procedural history of this case, (b) the historical development of
Nantahala and Tapoco as a single, unified hydroelectric gen-
erating and distribution system, (c) the factual predicate to the
Commission's dec.sion to implement a roll-in rate making method-
1. Part Il of the Federal Power Act, 16 U.S.C. §§ 824-824k extends federal
regulatory power to the transmission and sale of electric energy at wholesale in in
terstate coinmerce, while reserving to the various states the authority to regulate
intrastate transmission and sale of electric energy at retail.
l3a
N.C.] IN THE SUPREME COURT 625
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
ology, and (d) the m*chanics of the roll-in ir the allocation of costs
for the fied system. In the course of this review, we shall ad
dress such factual and legal issues raised by the companies as are
relevant to the Commission action under discussion. In Part II,
we will address the major constitutional and statutory challenges
to the Commission's order lodged by the respondent companies.
Briefly stated, these challenges concern (a) federal preemption; (b)
interference with interstate commerce; (c) the measure, extent
and liability for the rate reduction and refund obligation; and (d)
the independence of the factual findings of the Commission.
I.
A.
This appeal represents the culmination of a process hegun in
1976, with Nantahala’s application for permission to increase its
retail rates and a revision of its purchased power adjustment
clause (PPAC) applicable to those rates. The initial order entered
by the Commission on 14 June 1977 in Docket No. E-13, Sub 29,
approving certain annual increases in Nantahala’s rates and a
PPAC adjustment was ultimately reversed on appeal by this
Court in Edmisten, 299 N.C. 432, 263 S.E. 2d 583. The basis for
reversal was the Commission's failure as a matter of law to give
more than minimal consideration to material facts of record con
cerning the propriety of treating Nantahala and its affiliate
Tapoco, both wholly owned subsidiaries of Alcoa, as a single
unified electric utility and rolling together their properties and
costs for purposes of determini..g just and reasonable retail elec
tric rates for Nantahala’s North Carolina customers. 299 N.C. at
437, 263 S.E. 2d at 587-88. The case was remanded with directions
to the Commission to obtain and consider information and data
showing what Nantahala’s cost of service to its customers would
be if the roll-in method of rate making were used and whether
Nantahala’s customers would benefit thereby. Jd. at 443, 263 S.E.
2d at 591.
Upon remand, the Commission, in preliminary hearing, deter
mined that it had jurisdiction over Nantahala’s parent corpora
tion, Alcoa and its affiliate, Tapoco, and joined them as parties in
Docket No. E-13, Sub 29 (Remanded). A panel of the Full Commis
sion then held hearings and received evidence from both the
..cervening customers of Nantahala and from the respondent com-
l4a
626 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
panies on the question of roll-in. In addition to the evidence
received during Nantahala’s initial rate increase hearings in 1977
regarding Nant hala’s costs and the relevant test year (1975)
data, both parties presented additional testimony and data con-
cerning Nantahala’s rolled-in costs of service to its retail cus-
tomers. Tl:e companies presented one allocation methodology for
apportioning the combined revenues, expenses and investment of
the rolled-in system between the system's North Carolina retail
operations and non-jurisdic.ional Tennessee industrial operations,
and the intervenors presented another.
Briefly stated, the basic dispute between the intervenors and
the companies as te which jurisdictional cost allocation methodolo-
gy to use involves the question of whether the rolled-in power
costs are to be allocated to Nantahala’s retail customers on the
basis of its actual contribution and use of hydroelectric generation
and capacity in the unified system or upon the proportion of
return power entitlements it receives under the wholesale agree-
ments between and among the companies themseives and the
Tennessee Valley Authority (“TVA”). The intervenors contend
that the former allocation formula is just and appropriate for
setting Nantahala’s retail rates. The companies maintain that the
latter is mandated under the federal and state division of, respec-
tively, wholesale and retail rate making authority, because the
contracts at issue are federally filed and approved wholesale
rates which must be given effect by state public service commis-
sions in setting retail rates.
The wholesale power coordination and exchange agreements
primarily at issue are (1) the New Fontana Agreement (“NFA”), a
1962 power exchange agreement among the three companies and
TVA, whereby Nantahala and Tapoco subject all of their large
plant electrical generation ‘. TVA control and turn over that gen-
eration directly to TVA, in exchange for annual return power en-
titlements for the two subsidiaries to divide amongst themselves;
and (2) the 1971 Nantahala-Tapoco Apportionment Agreement, a
contrac: between the two subsidiaries, whereby the demand and
energy return power entitlements received under the NFA are
divided between them, with Nantahala receiving no more than a
fixed amount of power and energy, and Tapoco receiving the re-
lSa
N.C.] IN THE SUPREME COURT 627
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
mainder. These, and ciher contractual arrangements affecting
Nantahala's costs of service will be discussed more fully below.
The Commission, in view of the evidence presented by all the
parties upon remand, found and concluded that (1) Nantahala and
Tapoco are North Carolina public utilities subject to its rate mak-
ing jurisdiction; (2) Alcoa, by virtue of its parental domination of
Nantahala, was itself a statutory North Carolina public utility
pursuant to N.C.G.S. § 62-3(23)c; (3) the Nantahala-Tapoco electric
generation and distribution system constitutes a single, in-
tegrated electric system, operated as such and coordinated with
the TVA system; (4) use of an appropriately performed roll-in of
Nantahala and Tapoco would be beneficial to Nantahala’s custom
ers because its allocated cost of power under the combined
system is less than the cost of power for Nantahaia as a stand-
alone system, such that a roll-in will result in a significant reduc-
tion in the cost of providing public utility electric service to the
single system's retail customers; (5) significant detriments and in
equities to Nantakala arise out of both the NFA and the 1971 Ap
portionment Agreement, which result in concealed benefits
flowing to Alcoa through its subsidiary Tapoco, and render use of
the companies’ cost allocation formula based on the demand and
energy entitlements under those contracts inappropriate for
determining the costs fairly attributable to the North Carolina
public load in the combined system; (6) the cost allocation methods
and procedures proposed by the intervenors, based upon the
generational capabilities and needs of Nantahala, are proper for
use in the allocation of its demand and energy related costs and
should be adopted for use in setting Nantahala’s retail rates in
the subject proceeding; and (7) Alcoa had so dominated Nantahala
in certain contracts and transactions involving Nantahala, Tapoco
and others that Nantahala had been left “but an empty shell,
2. In practice, the NFA and its predecessor, the ori ‘inal Fontana Agreement
(“OFA”), operated as “sales” to TVA of electric power for resale under Part 11 of
the Federal Power Act, 16 U.S.C. §§ 824-824k, by Alcoa's subsidiary public utilities
(Nantahala and Tapoco), with TVA making payments in kind to the Alcoa “system
as a whole. In turn, TVA's “payments” of return power have been divided amongst
the system members as they themselves have designated. The various agreements
are, accordingly, treated as tariffs or rate schedules by FERC aad are subject to
regulation under Part II of the Act to assure that the terms and conditions are just
and reasonable and not unduly discriminatory, despite the fact that no dollars ac
tually change hands as rate payments.
LL
l6a
628 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
unable to act in its own self-interest, let alone in the interest of
its public utility customers in North Carolina,” so as to render
Alcoa responsible for such portions of any refund obligation
placed upon Nantahala as Nantahala itself is unable to make.
The Commission adopted the intervenors’ roll-in method-
ology, which resulted in lowered rates and required » refund ob-
ligation to be placed upon Nantahala and Alcoa. Essentially, the
roll-in method adopted treats Nantahala and Tapoco as a single in-
tegrated system for accounting purposes. That is, (a) the assets,
properties, plants and working capital requirements of the two
companies were joined in one unified rate base; (b) the joint
revenues and expenses of the single system were totalled; and (c)
the combined system was assigned the rate of return previously
approved by the Commission for Nantahala alone in the Sub 29
proceeding. From these three elements, the combined system
revenue requirement (expenses + rate base x rate of return)
was derived.
The combined system cost of service was then allocated be-
tween the public load customers in North Carolina and the in-
dustrial load customer (Alcoa) in Tennessee, using generally
accepted jurisdictional allocation factors commonly employed by
the Commission in setting North Carolina retail rates for other
companies, such as Duke Power or Carolina Power & Light, which
operate in more than one state. Rates for Nantahala’s public load
customers could be reduced because the cost of service per kwh
for the combined Nantahala-Tapoco system is less than for Nan-
tahala treated as a stand-alone electric system.
In its final order entered 28 January 1982, the Commission
overruled the ex.eptions taken by the companies to the panel's
order implementing roll-in and made suppiementary conclusions
of law on certain “federal questions” arising by virtue of the
panel's rejection of the companies’ proposed jurisdictional cost
allocation methodology. The Commission rejected, inter alia, the
companies’ arguments (1) that the panel's order is precluded by
exclusive federal licensing of interstate hydroelectric power
facilities under Part I of the Federal Power Act, 16 U.S.C.
§§ 791a-823a; (2) that the order intrudes upon the authority
vested in FERC by Part II of the Federal Power Act, 16 U.S.C.
§§ 824-824k, by failing to accept the costs of filed rates under the
i Nl a
17a
N.C.] IN THE SUPREME COURT 629
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
NFA and the 1971 Apportionment Agreement; and (3) that the
order imposes an impermissible burden on interstate commerce.
The companies, in their individual briefs, challenge the Com-
mission's order on a number of state and federal grounds.
Tapoco's sole contention relates to its “involuntary joinder” as a
party on the grounds that the Commission is without statutory
authority to affect Tapoco’s rates and service to its Tennessee
customer, Alcoa, and is preempted from doing so by virtue of the
fact that Tapoco’s four hydroelectric plants are licensed by, and
under the exclusive regulatory jurisdiction of, FERC under Part I
of the Federal Power Act, 16 U.S.C. §§ 791a-823a. Nantahala’s and
Alcoa's objections may be broken down into four categories: (1)
challenges to the order implementing the roll-in arising under the
Supremacy Clause of the United States Constitution, art. VI, cl. 2
and Part II of the Federal Power Act, 16 U.S.C. §§ 824-824k; (2)
claims that the order contravenes the Commerce Clause of the
United States Constitution, art. I, sec. 8, cl. 3, by placing an im-
permissible burden on interstate commerce; (3) challenges to the
constitutionality, measure and extent of the rate reduction and re-
fund obligation as well as to the Commission's jurisdiction to hold
Atecoa liable for its subsidiary’s refund obligation; and (4) chal-
lenges to the order issued on remand based upon the alleged
failure of the Commission to make independent findings of fact as
to the propriety of the roll-in methodology for determining Nan-
tahala’s rates and its jurisdiction over Nantahala’s parent Alcoa.
In our earlier decision reversing the Commission's 1977 ap-
proval of the rate increase requested by Nantahala in Docket No.
E-13, Sub 29, we briefly reviewed the history of the three com-
panies and the basic contracts affecting Nantahala’s costs of serv-
ice. Edmisten, 299 N.C. at 434-39, 263 S.E. 2d at 586-89. That
review was undertaken with an eye toward (1) elucidating the ma-
terial facts of record accorded only minima: consideration by the
Commission in assessing the factors bearing upon the determina-
tion of reasonable retail rates for Nantahala and (2) delineating
the legal significance of evidence indicating that Nantahala had
structured its economic affairs and physical operations so as to af.
ford an unfair preference to its parent corporation to the detri-
ment of its North Carolina public utility customers. /d. The
complex factual predicate of the Commission's order implement-
ing roll-in and the rather intricate corporate and contractual rela-
18a
630 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
tionships between and among the companies and TVA renders a
more extended treatment of the subject necessary in order to
place the issues raised by the parties to the present appeal in
their proper perspective.’
B.
As we noted in Edmisten, the factual background of the case
is not generally disputed by the parties. In the early part of the
century, Alcoa came to the sparsely populated southwestern
North Carolina mountains to tap the resources of the mountain
streams fer low-cost electric power to operate an aluminum reduc-
tion plant in neighboring Alcoa, Tennessee. As its source of hy-
droelectric power, Alcoa acquired the Tallassee Power Company
(“Tallassee”) (later Caroiina Aluminum Company and now Yadkin,
Inc.), an electric generating company incorporated in North Caro-
lina and granted the power of eminent domain by legislative act
in 1905.‘ Tallassee owned several undeveloped and developed
hydroelectric sites along the Little Tennessee River in North Car-
olina, including two hydroelectric generating facilities at Santeet-
lah and Cheoah. Tallassee, under the name Carolina Aluminum,
was recognized as a North Carolina public utility as early as 1934
in Manufacturing Co. v. Aluminum Co., 207 N.C. 52, 175 S.E. 698
(1934).
By the 1920's, Alcoa, through its subsidiaries, had acquired a
substantial number of hydroelectric sites along the Little Ten-
nessee River: Santeetlah, Cheoah, Nantahala, Glenville (now
Thorpe), Needmore, Fontana and several smaller sites in North
Carolina and Chilhowee and Calderwood in Tennessee. Develop-
ment of the sites was primarily for the purpose of producing and
transmitting electricity to the Alcoa, Tennessee aluminum reduc-
tion plant, which requires enormous amounts of low-cost electrici-
ty.
3. For the purposes of this historical review, we have relied upon the entire
record before the Commission in the Sub 29 (Remanded) proceeding. In addition, in
an effort to present a complete picture of the regulatory history of the companies
involved, we have, where necessary, taken judicial notice of various prior opinions
of this Court, as well as certain prior decisions and orders of the Federal Power
Commission and its successor, the Federal Energy Regulatory Commission.
4. See Chapter 122 of the private laws enacted by the General Assembly of
North Carolina at its regular session in the year 1905.
19a
N.C.] IN THE SUPREME COURT 631
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
In 1929 Alcoa created and incorporated Nantahala as another
of its wholly owned subsidiaries in North Carolina. Nantahala is a
North Carolina public utility with the right of eminent domain,
serving a six county franchised territory in the western part of
the State. Nantahala’s customer mix consists of residential, com
mercial, industrial and wholesale customers. In time, Tallassee
sold its undeveloped North Carolina sites to Nantahala, including
the Fontana site later developed by TVA. By 1939, Nantahala
owned sites for power development in six western counties of
North Carolina.
Between 1929 and 1941, Nantahala undertook token public
service through several small, run-of-the-river hydroelectric
generating plants acquired from municipalities in its service area
and completed acquisition of several sites from Tallassee. In 1941
Nantahala obtained a certificate from the Department of War to
develop the large-scale Nantahala and Glenville (now Thorpe)
projects on the upper reaches of the Little Tennessee watershed.
Nantahala’s stated justification for the development of these size
able projects was the huge electric need of Alcoa's aluminum
smelting works in Tennessee, which were then producing alumi
num to sell to the federal government for war materials. In its ap
plication, Nantahala repeatedly referred to the developments as
part of “the Alcoa power system” or “the system.”
Prior to 1941, both Nantahala and TVA were interested in
developing the massive Fontana site on the Little Tennessee Riv
er in North Carolina. Nantahala proposed to construct a large hy
droelectric project with storage capacity. The proposed project,
known as the Fontana project, was to generate electricity both
for aluminum production and for use by the public. Following a
determination by FERC’s predecessor, the Federal Power Com
mission (“FPC") that a license was required from that agency
under Part I of the Federal Power Act before Nantahala could
construct, thereby subjecting the proposed project and Nantahala
to a limited-term license under Section 6 of the Act and to the
agency's ongoing jurisdiction, Nantahala abandoned its proposal.
See Nantahala Power and Light Co., 2 F.P.C. 833 (1940), petition
for discontinuance denied, 2 F.P.C. 388 (1941).. TVA, which had al
5. Nantahala, upon learning that the project would not be exempt under
federal law and that at most, the FPC would grant a 50-year license permitting
20a
632 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
ready obtained some acreage in the reservoir site, eventually
prevailed upon Alcoa to have the Fontana site transferred to
TVA for development. At that time, Alcoa was already purchas-
ing some of the power requirements for its Tennessee aluminum
production facilities from TVA. The conveyance was part of the
first power coordination and exchange agreement of relevance
between Alcoa and TVA, entered into in 1941, which had become
known over the years as the Original Fontana Agreement
(“OFA”).
The 1941 Agreement is a twenty-year (but annually renew-
able thereafter) contract between Alcoa and TVA, pursuant to
which Aleoa agreed to cause Nantahala (not a party to the agree-
recapture, withdrew its declaration of intention. As to the companies’ regard for
the public's interests in this project, the Federal Power Commission stated:
Notwithstanding the public interest, Alcoa, through its subsidiary, in effect
demonstrated that in its national defense effort it was unwilling to accept the
reasonable limitations on unearned increment in the value of its power project pro
vided by Congress in the Federal Power Act.
The Fontana situation is not the only instance in which Alcoa and its sub-
sidiaries have shown complete unwillingness to accept provisions of Federal law,
regardless of the consequences to the national defense or to the public which they
serve....
Neither the Federal Power Act nor the licenses issued thereunder contain pro-
visions onerous to the operation of a project utilizing the waters of streams subject
to Federal control. The provisions of the Act and the license are, in fact, designed
wholly to protect the public interest in the use of waters which belong to the Na-
tion. Many other persons and corporations, both public utilities and industrial
concerns, have sought and acceptec licenses. The refusal of Alcoa's subsidiary to
construct the Fontana project, when required to obtain a license, indicates that not
even the urgent demands of national defense can alter its apparent determination
never willingly to submit any of its hydro projects to the duly enacted re-
quirements of Federal law... .
Their attempted withdrawal is inconsistent with their contention regarding
their interest in national defense and with their planned 25-year program of con
struction.
In our opinion Alcoa and the company have not dealt frankly in this matter,
but have in the past undertaken and are now attempting to evade the plain provi-
sions of the law. (Emphasis added.)
Nantahala Power and Light Company, 2 F.P.C. 388, 390-91 (1941). Ax inciden-
tal effect of the subsequent conveyance to TVA of the Fontana site was the
removal or elimination of the FPC’s licensing authority over the Fontana project.
See 1€ U.S.C. § 83ly-1. However, as is evident from the various agreements, the
conveyance did not sever Alcoa's link with the project.
2la
N.C.] IN THE SUPREME COURT 633
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
ment) to transfer the Fontana Dam site to TVA. The property so
transferred was valued at approximately $3.5 million.” The
transfer was effectuated by Alcoa's repurchase of the Fontana
site from Nantahala for $1.9 million, or approximately $128 per
acre. Nantahala had purchased the property from Tallassee at a
cost of $112 per acre in 1929.
Under the terms of the OFA, the Fontana project, when com-
pleted by TVA, was to be operated together with other TVA
generating plants owned by Alcoa's subsidiaries. The agreement
refers to Alcoa as the “Company,” and the “Company's plants” as
including Nantahala’s generating plants as well as the other
plants now owned by Tapoco. The agreement called for the Alcoa
system companies to convey the output from their generating
plants to TVA in return for power and energy entitlements. The
level and amount of power entitlements were dependent upon the
level of generation which TVA controlled. In exchange for
the companies’ relinquishment of their control over stream flow
and production from their plants (then operating or under con-
struction) at: Santeetlah, Cheoah, Calderwood, Nantahala and
Glenville (Thorpe), TVA provided compensation power of 11,000
kw to the Alcoa system. Alcoa purchased Nantahala’s portion of
this compensation power for an annual payment of $89,200.
Although the OFA did not itself specify how the entitlements
returned to the Alcoa system by TVA were to be divided among
the system’s member companies, the companies apparently would
receive back as much or as little capacity and energy as each
generated proportionately through its individually owned pro)-
ects. In October 1954 Nantahala and Alcoa entered into a contract
which called for Nantahala, when it had excess power, to make
the excess available for Alcoa's use at its Tennessee facilities, and
conversely, called for Alcoa to provide the power for Nantahala to
meet its public load when Nantahala alone could not meet its
public service obligation. See Tapoco, Inc., Initial Decision, 30
F.E.R.C. § 63,050, at p. 65,273-74 (1985). Throughout the period of
these contracts, Nantahala’s capacity and energy production were
far in excess of the demands of its then existing public service
load. Nantahaia’s excess entitlements under OFA were then sold
to Alcoa at “dump” prices. See Utilities Commission v. Member-
5. Edmisten, 299 N.C. at 435, 263 S.E. 2d at 586
a
634 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
ship Corp., 260 N.C. 59, 131 S.E. 2d 865 (1963). There is no indica-
tion that the 1954 Aleoa-Nantahala contract was ever filed with
the FPC as a tariff or rate schedule under Part II of the Federal
Power Act. See 30 F.E.R.C. 9 63,050 at p. 65,275.
Moreover, when the OFA was signed in 1941, none of the
Alcoa system plants subject to it had a license irom the FPC
under Part I of the Federal Power Act. The agreement itself was
never filed with the FPC as a tariff or rate schedule during the
twenty years that it remained in effect. As a consequence, the
FPC never ruled upon the lawfulness or the agreement as a rate
schedule while it was in effect. 30 F.E.R.C. 4 63,050 at p. 65,274.
In fact, it would appear from the contemporaneous decisions
of the FPC that the federal agency only considered the operative
terms of the OFA in an effort to determine whether it had licens-
ing jurisdiction over three of the Alcoa system plants’ which
were subject to it— Calderwood, Santeetlah and Cheoah. At the
time of the OFA’s execution, Calderwood was owned by Alcoa
subsidiary, the Knoxville Power Company (later Tapoco), and
Santeetlah and Cheoah were owned by Alcoa subsidiary, the Car-
olina Aluminum Company. In 1941, the FPC instituted pro-
ceedings directing Alcoa and its subsidiaries to show cause why
they should not be required to apply for licenses under Part I of
the Federal Power Act for the continued operation and mainte
nance of the three plants. Jn re Aluminum Co. of America, 13
F PC. 14 (1954). Ultimate resolution of the matter was delayed by
the pressures of the wer emergency until March 1954. By that
time, the respondent companies argued that the three plants
were exempt from “PC jurisdiction because they were operated
by TVA under the OFA.
The only actual discussion of the OFA comes in the FPC's
discussion and rejection of the companies arguments in avoidance
of the agency's jurisdiction.
The Projects are Operated by Respondents.— Under date of
August 14, 194i, Alcoa and TVA entered into an agreement
7. All references in the opinion to “the Alcoa system” or the “Alcoa power
system” or like phrases, refer exclusively to the subsidiary operating utilities which
provide or provided the generation and transraissioa of electricity to their parent
company Alcoa.
N.C.] IN THE SUPREME COURT 635
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
(the Fontana Agreement) by the terms of which Alcoa trans
ferred to the United States its interest, and those of its
wholly-owned subsidiary, in the lands from the then proposed
Fontana project and agreed upon a pian for “the coordinated
operation of power facilities” of the Alcoa system and the
r'VA system.
The Fontana Agreement provides for the coordinated
operation of power facilities of the two systems under the
direction of TVA. Respondents contend that under this ar
rangement TVA “operates” the Calderwood, Cheoah, and
Santeetlah projects within the meaning of the exemption pro
vision of the last paragraph of Section 26(a) of the TVA Act
(16 U.S.C. 831-Y-1). (Footnotes omitted.)
13 FPC at 21. The FPC went on to reject the excmption
arguments advanced ‘sy Alcoa ard its subsidiaries, finding that
the Fontana Agreement “does not undertake to place the opera
tion of Respondents’ projects in TVA,” but merely coordinates
such operations as the companies themselves actually perform
with the power facilities ir the TVA system, “for the mutual
benefit of Alcoa and TVA.” Jd. at 22. Consequently. the operating
companies were ordered to file license applications under the
Fede-al Power Act for the continued operation and maintenance
of the three plants. Jd. at 32. Thus, the OFA was not presented to
the FPC by Alcoa and its subsidiaries for the purpose of affirma
tive regulation, but as part of an effort to preclude such federal
oversight over the system's plants and power transactions.
During the period of the OFA’s duration, a number of signifi
cant events occurred within the Alcoa system. As we have seer,
in March 1954, thirteen years after the signing of the OFA, the
FPC rejected the arguments of the Alcoa system and ruled that
Cheoah and Santeetlah, among other plants subject to the OFA,
requireu . ‘1cense under the Federal Power Act. /n re Aluminum
Company of America, 13 F.P.C. 14." In October of that year (1954),
8. Nantahaia'’s hydroelectric generating piants subject to the various Fontana
agreements were not required by the FPC to be licensed by that agency unti! tne
mid-1960's. See Nantahala Power and Light Co., 36 F.P.C. i119 (1966), re hearing
denied. 36 F.P.C. 581 (1966), aff'd on review, Nantahala Power and Light ¢
FPC. 384 F. 2d 200 (4th Cir. 1967), cert. denied, 390 U.S. 945, 18 L.Ed. 2d 1134
(1968)
24a
636 IN THE SUPREME C9URT [313
Stat’ ex rel. Utilities Comm. v. Nantahala Power & Light Co.
the wholly-owned subsidiary of Alcoa which was originally incor-
porated in Tennessee as the Knoxville Power Company, under-
went a change of name to Tapoco, Inc. Within two weeks of its
name change, Tapoco was domesticated as a North Carolina cor-
poration.
As of October 1954, Tapoco owned two hydroelectric sites
along the Little Tennessee River at Calderwood and Chilhowee in
Tennessee. Tapoco, as well as acting as the power supplier to
Alcoa's Tennessee aluminum sme!ting and fabricating facility, had
at that tirne a pvblie ser,.ce load in Tennessee.
Another noteworthy event of October 1954 was the filing of a
joint application by Tapoco and its affiliate, Carolina Aluminum
Company to the #!* for a license to operate the “Tallassee pro-
ject” along the Little Tennessee River in North Carolina and Ten-
nessee. The project entailed the continued operation of the
Checah and Santeetlah plants in North Carolina, and another ex.
isting plant in Tennessee at Calderwood (also subject to the OFA’
and the constructicn of another hydroelectric generetion plant at
Chilhowee, Tennessee. The FPC’s licensing order of March 1955
indicates that in their joint application, the companies stated that
the energy from the Tallassee project, “is and will continue to be
delivered to the Tennessee Valley Authority, which in turn deliv.
ers an equivalent amount of energy to the Aluminum Company of
America at Alcoa, Tennessee, pursuant to the provisions of the
Fontana agreement and the supplemental agreement thereto,
dated August 14, 1941 and October 13, 1954, respectively.”
Tapoco, Inc. and Carolina Aluminum Co., 14 FPC 610, 612 (1955).
The licensing order continued by noting that the joint applicatien
states that after the exchange of energy between TVA and the
Aleoa system pursuant to the Fontana agreement, “/ajll the
energy is used for aluminum production except for a small portion
used for lighting in operators’ villages.” Jd. at 612-13. (Emphasis
added.) By June 1955, Tapoco had become the sole licensee of the
four plants. See Carolina Aluminum Co. and Tapoco, Inc., 14
F.P.C. 828 (1955); Carolina Aluminum Co., Tapoco, Inc. & Nan
tahala Power and Light Co., 14 F.P.C. 829 (1955). Thereafter,
Carolina Aluminum changed its name to its present name of Yad-
kin, Inc. The company now operates only the hydro facilities, not
at issue here, which serve Alcoa's North Carolina, Badin works.
25%
N.C.] IN THE SUPREME COURT 637
State ex rei. Utilities Comm. v. Nantahala Power & Light Co.
Conspicuous in its absence from the 1955 licensing orue: is
any reference to the fact that TVA return power entitlements
were also used to service Tapoco’s public utility load in Ten-
nessee and Nantahala’s public utility load which, by the early
1950's, had increased to 10,000 customers, both residential and
industrial, in a six-county area in North Carolina. See Utilities
Commission v. Mead Corp., 238 N.C. 451, 78 S.E. 2d 290 (1953). In
addition, the licensing order fails to refer to the FPC’s own
earlier recognition that under the Fontana exchange and coor-
dination agreements with TVA, Nantahala's larger plants were
being operated together with Tapoco’s plants as part of what the
FPC termed “ ‘the coordinated operation of power facilities’ of the
Aleoa system and the TVA system.” Jn re Aluminum Company of
America, 13 F.P.C. at 21.
At about the same time that the federal license application
was under consideration, Tapoco, Carolina Aluminum Company
and Nantahala jointly filed for a certificate of public convenience
and necessity with the North Carolina Utilities Commission in
February 1955, to permit Tapoco to acquire, operate and control
certain public utility properties belonging to Nantahala and Caro-
lina Aluminum Company, including the Cheoah and Santeetlah
plants and certain transmission lines. In the order granting the
certificate, the Commission directed that Tapoco supply to Nan-
tahala the power to satisfy Nantahala’s public service load in the
two villages of Santeetlah and Tapoco in Graham County. At that
time, the twa villages had a total population of about 300 people.
This certificate is still in effect and Tapoco has never appeared
before the Commission to abandon it, or have its terms modified.
At the present time, the Village of Tapoco is still in existenve and
under the terms of the certificate and al'ocations made pursuant
to the Fontana agreements, Tapoco still supplies power to Nan
tahala, which in turn serves the Village of Tapoco.
In the same month that Tapoco received its certificate of
public convenience and necessity from the North Carolina Utili-
ties Commission, it received from the State of Tennessee a cer
tificate of public convenience and necessity to construct and
operat. the Chilhowee facility. Later in that year (1955), Tapeco
contracted to sell its electric distribution system for the City of
Alcoa, Tennessee to that municipality. The “City of Alcoa Resolu-
tien” which authorized the purchase indicates that the City
26a
638 IN THE SUPREME COURT (313
Stete ex rel. Utilities Comm. v. Nantahala Power & Light Co.
planned to look to TVA to supply it with the electric power
previously supplied by Tapoco. Thus, Tapoco freed itse!: of its
Tennessee public load and from that point onwar4, none of the
power made available by TVA through the Fontana agreement
had to be used to satisfy a Tennessee public load. As a result,
Tapoco’s share of the TVA return power could be devoted almost
exclusively to Alcoa’s aluminum production facilities. Notwith-
standing the substantial generating capacity of Tapoco’'s facilities,
which is three to four times as great as Nantahala’s, Alcoa has
historically needed to purchase additional power from TVA to
supplement the combined output of its subsidiary power com-
panies. To illustrate, during the test year 1975, Tapoco sold
1,365,499,000 kwh to Alcoa, yet, Alzoa purchased an additional
1,784,833,000 kwh frora TVA.
During the period from 1950-1955, Nantahala expanded its
facilities to provide additional power to Alcva to enable it to meet
the nation’s increased aluminum needs during the Korean War.
The major components of Nantahala’s East Fork project, the
Cedar Cliff, Bear Creek and Tennessee Creek dams and reser-
voirs were completed between 1952 and 1955. That year, 1935,
marked the last year in which Nantahala added hycroelectric
generating facilities subject to the coordination and exchange
agreement with TVA. No additional generating capacity has been
added to the Nantahala system whatsoever since 1957, despite
clear indications that Nantahala’s public service load was grow-
ing.
In this regard, we note that in 1941, Nantahala’s public serv-
ice load was only 25,984,275 kwh. By 1955, this load had increased
“to 115,735,461 kwh and by 1960, it stood at 172,451,768 kwh.
Utilities Commission v. Membership Corporation, 260 N.C. 59, 66,
131 S.E. 2d 865, 870. During this same period, from 1941-1950, the
relative volume of Naniahala’s out-of-state sales to its parent
Alcoa consistently outstripped its intrastate public service sales.
For example, in 1943, approximately 95 percent of Nantahala’s
electric generation was sold to Alcoa (320,776,268 kwh), with its
public service load receiving the remaining 5 percent (16,493,930
kwh). Id.
This i ibalance of power consumption between Nantahala's
parent and its public load, coupled with Nantahala’s assigned role
,7
ala
N.C.] IN THE SUPREME COURT 639
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
in “the coordinated operation of power facilities of the Alcoa
system and the. TVA system,” was observed to adversely affect
Nantahala’s intrastate rates as early as 1953. In an early Nan
tahala commercial rate case, Utilities Commission v. Mead Corp.,
938 N.©. 451, 78 S.E. 2d 290, Nantahala had sought to increase its
rates to all industrial customers other than Alcoa, thus placing
the burden of the increase upon the particular group of custom
ers. The undisputed facts were to the effect that Nantahala had
been selling more than 80% of its total generation of electric
pewer to Alcoa at a price which was less than the cost of produc
ing and distributing it. The evidence further showed that Nan
tshala derived the greater part of its revenue from customers
other t’1:an Alcoa, who consumed only 18% of its power and who
were charged approximately twice as much per kilowatt hour as
Aleoa was charged. Additionally, it appeared the Nantahala had
been earning a return of approximately 6.5% from the revenue
collected from its non-Aleoa customers; whereas inclusion of tne
service and rate paid by Alcoa showed the company to be operat
ing at a loss.
Nantahala sought to justify the differential in rates charged
its parent and its public customers by asserting that the vast por
tion of its generation suid to Alcoa was — sec¢ v" power, while
‘ts other commercial customers were suppliea with “primary or
denena. ule power. The Commission approved the increase, find
ing no unlawful discrimination in this rate structure. On appeal to
the Superior Court, the order of the Commission was reversed.
This Court, in affirming the judgment of the Superior Court, stat
ed that Alcoa was not entitled to a return on its investment in
Nantahala in the form of a prefereutial rate to the extent it would
work to the disadvantage of its subsidiary'’s other customers 238
N.C. at 464, 78 S.E. 2d at 300. After noting that the question of
“primary” and “secondary” power “was to a large extent the
mere application of different labels to that which is essentially
the same.” id. at 465, 78 S.E. 2d at 300, the Court held that the
actual differences in service and expense “were in no way com
parable to the difference in rates which was so glaring as to com
pel the inference that it was unreasonable and therefcre
unlawfui.” /d.
9. Ch In re Aluminum Company of America, 13 F.P.C. at 21
28a
640 IN THE SUPREME COURT (313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
Justice Barnhill, in a separate concurrence, commented upon
one telling aspect of Nantahala’s unique posture as a public utility
whose largest customer was its parent-aluminum producer:
Corporations must operate on 4 profit motive basis. Not so
with petitioner. Financed as it is, it can afford — indeed it pro-
poses—to operate at an apparent loss. By so doing it can
evade the payment of its fair portion of State and Federal
taxes.
938 N.C. at 467, 78 S.E. 2d at 301 (Barnhill, J., concurring).
Beginning in 1960, Alcoa and TVA began re-negotiation of
the operational terms of the Original Fontana Agreement which
were due to expire at the end of 1962. At the same time, Nan-
tahala and Duke Power Company (“Duke”) were engaged in sepa-
rate negotiations to sell the assets constituting Nantahala’s
distribution system to Duke, with Nantahala retaining its major
generating facilities and transmission lines. The sale would have
enabled Nantahala to abandon its North Carolina public service
load and to sell all of its generation (or the entitlements
therefrom) to Alcoa, just as Tapoco had done. The 1961 Nantaha-
la-Duke sale proposal received initial approval by both the North
Carolina Utilities Commission and the Superior Court prior to the
negotiation of the final provisions of the NFA in 1962. See
Utilities Commission v. Membership Corporation, 260 N.C. 59, 131
S.E. 2d 865.
The New Fontana Agreement (“NFA”), dated 27 Decemher
1962, modified and partially superseded the OFA. In essence,
however, the NFA contained the same mechanics of power coor-
dination and exchange as the original Fontana Agreement, except
that the amount of power TVA was to make available to the
Alcoa system under the NFA was fixed in advance by the agree-
ment without regard to water conditions, rather than being calcu-
lated on the basis of amount actually generated by the Alcoa
system's plants. As it did under the OFA, Alcoa again warranted
that it wes backing up or securing the performance of its sub
sidiaries in carrying out the coordination and exchange agree-
ments with TVA.
In contrast to the OFA, which was negotiated and executed
by Alcoa and TVA alone, Nantahala and Tapoco were signatory
29a
N.C.] IN THE SUPREME COURT 641
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
parties to the NFA, although Nantahala was not a participant in
the negotiations. Nantahala’'s failure to participate is not surpris-
ing in view of the Companys pc. ding attempt to sell its distribu-
tion system to Duke, and so divest itself of its North Carolina
public ioad. Later in 1963, this Court reversed the Commission's
approval of the sale and ordered the case remanded for further
consideration because the Commission had failed to make findings
of fact with respect to essential aspects of the case and applied
too lenient a standard for approval of abandonment of a public
service franchise. Utilities Commission v. Membership Corpora-
tion, 260 N.C. at 68-69, 131 S.E. 2d at 871-72. The Court's discus
sion of Nantahala’s stated reasons for abandoning its public load
indicates the company's awareness that its generating capacity
would be insufficient to meet its anticipated future requirements.
In the wake of the decision, the attempt to sell Nantahala’s distri
bution system to Duke was abandoned.
Under the NFA (still in effect during the test year 1975),
TVA dispatched the operations of Tapoco’s four plants and eight
of Nantahala’s largest plants, and received all of the electrical
output of these plants. In return, the NFA provided that Nan
tahala and Tapoco together would receive an annual average of
218,300 kw, part of which was subject to some curtailment and in
terruption, to be divided between the companies as they saw fit.
The NFA also provided that it was to remain in effect for
twenty years—until the end of December 1982. When the agree-
ment took effect in January 1963 it was not on file with the FPC
as a tariff or rate schedule and therefore was not examined at its
inception for its lawfulness. See 30 F.E.R.C. 9 63,050 at = 65,276.
It was not until 1966 that the NFA was filed with the r PC as a
tariff or rate schedule under Part II of the Federal Power Act, in
response to that agency's request that, the companies do so. Both
Tapoco and Nantahala (concurring in Tapoco’s filing) stated that
the filing was “under protest” —that is, undertaken subject to the
right to contest the FPC’s authority to regulate the operations
under the NFA. Moreover, its terms were not formally scruti
nized by the federal authorities until after three of Nantahala's
wholesale customers filed a complaint raising the matter in 1978.
See Nantahala Power and Light Co. v. FERC, 727 F. 2d 1342 (4th
Cir. 1984).
30a
642 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
The NFA, like the OFA, failed to specify how the power
made available to the Alcoa system by TVA was to be divided
among the members of the system. On the same day that the
NFA became effective, 1 January 1963, Aleoa and Nantahala
entered into a subordinate allocation agreement establishing Nan-
tahala’s share of the return power entitlements.
The 1963 Alcoa-Nantahala Apportionment Agreement provid-
ed that Nantahala was to receive, as its share of NFA en-
titlements each month, a variable of the larger of one-twelfth of
its annual primary energy capability of 360 million kwh or its ac-
tual generation. A 1960 Ebasco Study, undertaken for Nantahala
by independent experts, had established the average annual
generation of Nantahala’s plants subject to the NFA at 424
million kwh annually. Thus, under the 1963 Agreement, Nantahala
was guaranteed its primary generation and was to benefit from
additional generation. Moreover, the agreement provided that
Alcoa was to pay Nantahala the sum of $89,200 annually as com-
pensation for allowing TVA to operate Nantahala’s projects.
Significantly, the 1963 Agreement fixed no capacity or demand
limitation upon Nantahala’s use of the energy returned. However,
unlike the 1954 Alcoa-Nantahala contract which was subordinate
to the OFA, the 1963 contract did not impose an obligation upon
Alcoa to satisfy any deficiency when Nantahala did not have suffi-
cient power to meet its public load. It appears that the 1963
allocation agreement was never filed with the FPC. See 30
F.E.R.C. 9 63,050 at p. €5,277; Nantahala Power and Light Co., Ini-
tial Decision, 15 F.E.R.C. 9 63,014, at p. 65,035 (1981).
Between 1963 and 1971 the North Carolina public load,
although growing, still remained below Nantahala’s primary
generation and Nantahala did not need all of its entitlements of
360 million kwh; Alcoa utilized the remainder under its separate
agreement with Nantahala. However, by 1971, Nantahala’s public
load had grown to the point where the utility no longer had ex-
cess energy under the NFA to sell to its parent Alcoa. Moreover,
by 1971, Nantahala recognized the need to obtain a supplemental
source of power to meet the anticipated needs of its public serv-
‘ee load in North Carolina. TVA, to whom Nantahala was already
interconnected, was chosen as the source of this supplemental
power; however, TVA required a formal agreement between Nan-
tahala and Tapoco apportioning their NFA entitlements before it
3la
N.C.] IN THE SUPREME COURT 643
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
would negotiate a supplemental power contract with Nantahala.
Accordingly, in 1971 Alcoa conducted an apportionment study to
measure the energy and capacity contributions of Nantahala and
Tapoco. Pursuant to the study made by Alcoa's power consultant,
George Popovich, Nantahala executed an apportionment agree-
ment with Tapoco and then entered into an additional purchase
contract with TVA.
The 1971 Nantahala-Tapoco Apportionment Agreement (the
“1971 Apportionment Agreement”) called for Nantahala to fix a
limitation on its share of energy from TVA at 360 million kwh an-
nually (ie., only its primary energy capability). Tapoco was to
receive the remainder of the power made available by TVA under
the NFA. The 1971 Agreement contained no provision for Nan
tahala to receive the $89,200 previously provided for under the
1963 Alcoa-Nantahala allocation agreement in compensation for
Nantahala allowing TVA to control its facilities.
Simultaneously with the execution of this 1971 Apportion
ment Agreement, Nantahala entered into a contract with TVA to
purchase additional power from that agency. By this agreement,
in addition to paying TVA's charge for all energy consumed in ex
cess of 360 million kwh per year, Nantahala was required to pay a
charge for the demand of its system above 54,300 kw at any in
stant. This latter figure represents the capacity limitation assign
ed to Nantahala under the 1971 Apportionment Agreement with
Tapoco.
The 1971 Apportionment Agreement was not filed with the
FPC as a tariff or rate schedule for almost ten years, until 1980.
See 30 F.E.R.C. 9 65,030 at p. 65,277; 15 F.E.R.C. 9 63,014 at p.
65.035. As had been true of the NFA itself, at the time the agree
ment became operational, and for the bulk of its life, its terms
were not scrutinized by the federal authorities for their lawful
ness.
10. We find it noteworthy, as did the Administrative Law Judge in the most
recent Nantahala case before the F.E.R.C., that 1982 marked the first time in the
forty years since the Alcoa TVA coordination and exchange agreements had begun,
that the Alcoa system had given notice to the F.E.R.C. that it was planning to ter
minate one of these agreements as well as a separate contract between members of
the system and seeking approval in advance for the new agreements which were to
supersede the expiring contracts. 30 F.E.R.C. § 63,050, at p. 65,280.
32a
644 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
Since the inception of the 1971 Apportionment Agreement,
Nantahala has not had available to it for sale, through its portion
of return power entitlements, enough electricity to meet its
North Carolina public service load. During the 1975 test year,
Nantahala generated about 560 million kwh. Despite the fact that
its public service load was only slightly in excess of 450 million
kwh, Nantahala was constrained to purchase an additional
81,265,370 kwh of electricity from TVA at a cost of $1,500,000,
due to the allocational limitations of the NFA and 1971 Apportion-
ment Agreement. 1971 also marked the final year in which Alcoa
purchased power from Nantahala, looking instead to Tapoco and
TVA to fulfill its energy requirements.
The intervcnor’'s evidence shows that subsequent to that
time, Nantanala could have used on its system all of the capabili-
ties it contributed to the TVA system under the NFA and failed
to receive back in entitlements of comparable worth. The quantity
of power Nantahala purchases from TVA is determined by the
magnitude of the shortfall resulting when the hour-by-hour load
on the Nantahala system exceeds the level of TVA return en-
titlements set under the NFA and apportioned to Nantahala
under the 1971 Apportionment Agreement. Since 1971, when the
annual level of Nantahala’s load first exceeded its entitlements,
the purchased power costs have become a major operating ex-
pense for Nantahala.'’ Thus, Nantahala’s contractual arrange-
ments with its affiliates and TVA have dramatically influenced
Nantahala’s costs in providing service to its public load.
C.
There is apparently no dispute between the parties as to the
Commission's authority to i aplement a roll-in of Nantahala’s and
Tapoco’s properties and financial data for rate making purposes
without regard to the separave corporate entities of these
utilities, once it has properly determined that these corporate af-
filiates in fact constitute a single, unified “utility enterprise” or
system. The propriety of the separation or rolling-in of properties
11. The “fuel” for Nantahala’s hydroelectric generating units is water with no
fuel cost. The fuel used by TVA to produce the power it sells to Nantahala is a mix
of relatively costly nuclear and fossil fuel. TVA's generation mix contains only a
modest increment of hydroelectric generation.
33a
N.C.] IN THE SUPREME COURT 645
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
of affiliated corporations for rate making purposes, being merely
a step in the determination of costs properly allocable to the
various classes of service rendered by a utility, is widely
recognized as dependent upon the particular characteristics of the
system or systems in question, and upon the facts and cir-
cumstances of each case. See, e.g., Colorado Inte’ state Gas Co. v.
FPC, 324 U.S. 581, 89 L.Ed. 1206 (1944); Central Kansas Power
Co. v. State Corporation Commission, 221 Kan. 505, 561 P. 2d 779
(1977); Georgia Power Co., 52 F.P.C. 1343 (1974). See generally,
Annot., 16 A.L.R. 4th 454 (1982).
Moreover, as “ERC itself has expressly recognized, “the
yuestion of whether to treat various entities as an integrated
system for rate making purposes is not a purely factual question,
but also rests on criteria which each rate making authority may
deem relevart.” Nantahala Power and Light Co., Opinion No.
199-A, 20 F.E.R.C. 9 61,430, p. 61,869 (1982). Accordingly, in the
parallel FERC wholesale rate case in which Nantahala’s wholesale
customers advocated the implementation of a roll-in, FERC, while
adverting to the fact that the North Carolina Utilities Commis-
sion had, “based on a similar record, reached a different conclu-
sion concerning rolled-in costing,” id., declined to order a roll-in
for determining Nantahala’s wholesale costs of service. The
Fourth Circuit Court of Appeals, in affirming FERC’s determina
tion, stated that “[a] decision to order roll-in is essentially a mat-
ter of Commission discretion” which would not be overturned on
appeal where supported by substantial evidence. Nantahala
Power and Light Co. v. FERC, 727 F. 2d 1342, 1346 (1984).
[1] Therefore, it is “lear that the North Carolina Utilities Com-
mission has the aut rity, in the first instance, to determine for
itself the relevant criteria to apply to the factual question of
whether to treat Nantahala and Tapoco as an integrated system
for rate making purposes and its determination will not be
disturbed on appeal where supported by substantial evidence.
The companies do not contend that the Commission decision is un-
supported by substantial evidence; they merely argue that the
Commission ignored evidence” tending to show that Nantahala
and Tapoco are separate electric utility companies.
12. We will address this point more fully in Part II, D infra.
34a
646 IN THE SUPREME COURT [313
& Light Co.
State ex rel. Utilities Comm. v. Nantahala Power
The Commission's decision of whether to implement a roll-in
is based upon a factual predicate consisting of three basic proposi-
tions: (1) Tapoco is a Norch Carclina public utility, subject to the
Commission's rate making authority; (2) Nantahala’s and Tapoco's
hydroelectric facilicies constitute a unified, single system, Op-
erating under conditions rendering a roll-in appropriate; and (3)
Alcoa is a statutory North Carolina public utility, subject to the
imposition of a refund obligation in the exercise of the Commis-
sion’s general rate making jurisdiction. In the record before us,
we find plenary evidence in support of the Commission's deter-
mination that Nantahala and Tapoco constitute a single, in
tegrated electric system and should be treated as such for the
purposes of calculating Nartahala’s retail rate base and costs of
service.
Upon remand, the Commission held a separate de novo hear-
ing on the question of its jurisdiction with respect to Tapoco and
Alcoa. Based upon the testimony and exhibits presented at the de
novo hearing and matters judicially noticed, the Commission, in
an order entered 3 October 1980, found and concluded that both
Tapoco and Alcoa were subject to its regulatory authority under
Chapter 62 of the North Carolina General Statutes.
1.
[2] With respect to Tapoco, the Commission made certain find-
ings of fact regarding its development and acquisition of
hydroelectric facilities clothed with public service obligations in
North Carolina, most notably, the facilities at Santeetlah and
Cheoah. Specifically, the Commission found that Tapoco is a
domesticated North Carolina corporation organized to produce
and sell electricity; that Tapoco’s articles of incorporation provide
that one of ‘ts purposes is to provide power to the public and
those articles authorize Tapoco to exercise the power of eminent
domain; that Tapoco has a North Carolina certificate of conveni-
ence and necessity to operate the Cheoah and Santeetle’
facilities, obtained when it purchased these facilities and certain
transmission lines (owned by Nantahala) from its public utility af-
filiates, Carolina Aluminum Company and Nantahala; that this
certificate is subject to the condition that Tapoco provide Nan-
tahala with the power needed to serve the Villages of Tapoco and
Santeetlah; that Tapoco’s certificate of convenience and necessity
45a
N.C.} IN THE SUPREME COURT 647
State ex rel. Utilities Comm. v. Nantahala Power & Light Co
is still active, Tapoco never having petitioned to have its cer
tificate abandoned; that Tapoco has the responsibility to make
available a tap point on its station service transformer at the
Cheoah power house for Nantahalass use in providing electricity
for serving its customers in the Village of Tapoco; and that Nan
tehala is presently providing service to the Village of Tapoco and
charging its customers there for the electricity provided on the
basis of rates approved by the Commission. The Commission also
made findings with respect to the electricity Tapoco delivers to
TVA and Alcoa by virtue of the various intra- and intercorporate
agreements discussed above
The Commission then based its conclusion that Tapoco is a
public utility in North Carolina and subject to its jurisdiction on
three grounds:
>
.
2. It is a public utility for rate-making purposes within
4 It is a public utility by virtue of having obtained a
certificate of public convenience and necessity some twenty
N.C.G:S. 8 62 123)a pro es per ¢ r f; ws
, r r r | |
- : I pile t S( v ‘ f k ( ] ‘ nN
nis State or ndaer ws ne ate or countr “ ere
owning or operatil n nis State equipn ( é
’ > ; - ; ) -
1. Producing, genera g ransm ng, delivering or irnishing ¢€
piped gas, steam or any otne! ke agency tor the prod y ‘
power to or tor the pubi'c Ior compens:
14. N.C.G.8. 62 123)b provides
3) b. The ern public utilit ha ‘ king S6
perso! pr dur ng generat ng ’ foorr hing any fF thes reg n¢ ‘
another person for distributior for the ib for mpe
uN C.G.S. 62-421) provides
Person means a corporaucen individual, partnership, company, associa!
any combination 0! individuals or organizations doing Dusiness as
> wf re [ se ’
includes any trustee, receiver, assignees, lessee, OF
thereof
36a
648 IN THE SUPREME COURT (313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
five years ago, and having operated under that certificate
since that time.’®
Although Tapoco assigned error to the Commission's finding
that it is a North Carolina public utility and argued in its brief to
the Court of Appeals that the portions of the Commission's order
which declare Tapoco to be a “public utility” under North
Carolina law should be vacated and reversed, in its new brief to
this Court, Tapoco does not challenge the Court of Appeals’ affir
mation of the Commission's determination that Tapoco is a
Statutory public utility. Rather, Tapoco presents a single and
somewhat confused argument that the Commission “abused its
regulatory authority by asserting jurisdiction over Tapoco when
it did not and could not regulate Tapoco's rates and service.”
Tapoco first argues to this Court, as it did to the Court of
Appeals, that the Commission could not “divert” power from the
Tennessee industrial load (Alcoa) served by Tapoco's four
hydroelectric projects because these projects were licensed by
FERC in 1955 to serve that load exclusively and the Commission
is without authority to impose a state law limitation on the terms
and conditions of Tapoco’s federal license. Tapoco relies on First
Iowa Hydro-Electric Cooperative v. FPC, 328 US. 152, 90 L.Ed.
1143, reh'g denied, 328 U.S. 879, 90 L.Ee. 1647 (1946) and Town of
Springfield v. Vermont Environmental Board, 521 F. Supp. 243 (D.
Vt. 1981) to support its “diversion” argument.
15. N.C.G.S. 62-110 provides:
No public utility shall hereafter begin the construction or operation of any
public utility plant or system or acquire ownership or control thereof, either
directly or indirectly, without first obtaining from the Commission a certificate
that public convenience and necessity requires, or will require, such construc
tion, acquisition, or operation: Provided, that this section shall not apply to
construction into territory contiguous to that already occupied and not receiv
ing similar service from another public utility, nor to construction in the or
dinary conduct of business.
In Utilities Commission v. Telegraph Co., 267 N.C. 257, 148 S.E. 2d 100 (1966),
we observed that it would be both arbitrary and in excess of the Statutory
authority of the Commission to grant a certificate of public convenience and
necessity to conduct a business which is not a public utility. None of the
respondent companies contends that the Commission acted in excess of its
statutory authority in granting Tapoco its certificate of convenience and
vecessity in 1955.
37a
N.C.] IN THE SUPREME COURT 649
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
The other portion of Tapoco’s argument to this Court,
however, was not presented to either the Commission or the
Court of Appeals and was not made the basis of Tapoco’s
assignments of error. That argument, presented now for the first
time in this appeal, is that Tapoco has been “misjoined” and
should be dismissed as a party to this proceeding because the
Commission did not grant relief with regard to Tapoco’s rates in
the Sub 29 (Remanded) proceeding. Accordingly, Tapoco now con-
tends that it was “misjoined” as a party respondent and that
under Rule 21 of the North Carolina Rules of Civil Procedure it
should be “dismissed forthwith from the instant proceeding,” and
be awarded the costs of this appeal.
[3] We first note that pursuant to Rule 16(a) of the North Caro-
lina Rules of Appellate Procedure, the scope of our review from a
unanimous decision of the Court of Appeals is limited to con-
sideration of the questions properly presented in the new briefs
required by Rule 14(dX1) and 15(gX2) to be filed in this Court. Rule
16(a) further provides that a party who was an appellant in the
Court of Appeals, and is either an appellant or an appellee in the
Supreme Court, may present in his brief any question which he
has properly presented for review to the Court of Appeals.
However, questions properly presented for review in the Court of
Appeals but not presented and discussed in the new briefs to this
Court are deemed abandoned under Rule 28(a). Therefore, Tapoco
is deemed to have abandoned and waived further review of the
question of its public utility status under North Carolina Law."
A corollary to the rule that this Court’s scope of review is
limited to questions properly presented to the Court of Appeals is
the rule that a party may not present for the first time in its
brief to this Court, a question raising issues of law not set out in
the assignments of exvor contained in the record on appeal. App.
R. 10. Consequently, the question of “misjoinder” under Rule 21
of the Rules of Civil Procedure, appearing as it has for the first
time in Tapoco's new brief filed in this Court, has not been prop-
16. We have, however, under Rule 2 of the Rules of Appellate Procedure,
reviewed the Commission's findings and conclusions in the course of our review of
the questions properly preserved, find them to be supported by substantial evi-
dence and affirm the Commission's determination as to Tapoco’s public utility
status on each of the three grounds specified in its orders entered | the Sub 29
(Remanded) proceedings.
SE OO eee ee a i a ee
38a
650 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahaila Power & Light Co.
erly presented for review and we need not address it in the
course of our discussion.
[4] The only questions that Tapoco has correctly preserved for
further review are, therefore, whether the Commission is pre-
empted from implementing a roll-in methodology for setting
Nantahala’s retail rates by virtue of the fact that Tapoco’s four
hydroelectric plants are under federal license and whether the
Commission's order places an indirect burden on interstate com-
merce by diverting the economic benefits of Tapoco’s inexpensive
hydroelectric power from its Tennessee industrial customer,
Alcoa, to Nantahala’s North Carolina public service customers. In-
asmuch as Tapoco has merely joined in the brief of Alcoa on the
latter point, we will discuss the Commerce Clause issues adverted
to by Tapoco in the section of this opinion addressing Alcoa's con-
stitutional argument. With respect to Tapoco’s licensing argu-
ment, we have little trouble in concluding that the Commission's
order has in no way contravened the terms and conditions of
Tapoco's federal license.
Under Part I of the Federal Power Act, 16 U.S.C. §§ 791a-
823a, the Federal Power Commission (and now the FERC) has ex-
clusive jurisdiction to license the construction and operation of
hydroelectric projects on ravigable rivers within the United
States, and to fix the terms and conditions of any such license.
Tapoco’s argument that the issuance of its 1955 federal license to
construct and operate the four plants of the “Tallassee Project”
preempts the Commission from implementing a roll-in is based
upon Tapoco’s assertion that the plants were licensed by the FPC
for “the express purpose of supplying power to Alcoa's Tennessee
Operations.” We find nothing in the licensing order to indicate
that the FPC intended to reserve all of the hydroelectric produc-
tion from (or economic benefit of) the four Tapoco dams for
Alcoa's exclusive use. In its brief, Tapoco places great reliance
upon the underscored language contained in a portion of the 1955
licensing order:
[T]he energy being developed by the constructed develop-
ments of the project and the energy to be developed by the
proposed development is and will continue to be delivered to
the Tennessee Valley Authority, which in turn delivers an
equivalent amount of energy to the Aluminum Company of
39a
N.C. | IN THE SUPREME COURT 651
State ex rel. Utilities Comm. v. Nantahala Power & Light Co
America at Alcoa, Tennessee. All the energy is used for
aluminum production except for a small portion used for
lighting in operators’ villages
[T]he project is best adapted to a comprehensive plan for the im
provement and utilization of waterpower development, and for
other beneficial public uses, including recreational purposes.
Deleted from the quoted portion of the licensing order,
however, is the revealing opening phrase: “According to the joint
application. . . .” It is therefore obvious that the language relied
upon by Tapoco, rather than constituting an edict by the FPC
that all of the energy produced by the developments comprising
the “Tallassee Project,” now solely owned by Tapoco, be dedi
cated to the permanent and exclusive use of Alcoa's private in
dustrial operations, merely contains a restatement by the FPC of
the assertions made by Tapoco and Carolina Aluminum Company
in their joint licensing applicatioy. The order itself contains no ex
press or implied directive from the FPC that the energy produced
by these hydro projects be reserved for the sole and exclusive
use of Alcoa in its Tennessee aluminum plants, either in the sec
tion containing FPC's findings of fact or in its decretal para
graphs. -
Moreover, 16 U.S.C. § 802(b) requires that, prior to the is
suance of a hydroelectric license, a licensee must submit evidence
of compliance with state law “with respect to the right to engage
in the business of developing, transmitting, and distributing
power... .” Cf. N.C.G.S. § 62-3(23)a(1). At the time of application,
on 25 October 1954, Carolina Aluminum was a North Carolina
public utility carrying a public service load in this state and
Tapoco was a Tennessee public utility carrying a public service
load in that state. On 23 February 1955, before the license was
granted by the FPC, Tapoco, which had earlier domesticated in
North Carolina, was issued a certificate of convenience and
necessity by the North Carolina Utilities Commission to own and
operate the Santeetlah and Cheoah facilities. That certificate ex
pressly noted that Tapoco had an obligation to serve the public
with electric energy from the projects. When the federal license
was issued, it also noted that Tapoco had an obligation to serve
the public with electric energy from the projects.
40a
652 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
In the 1955 licensing order, the FPC found as a fact that
Tapoco and Carolina Aluminum each had submitted satisfactory
evidence of compliance with the requirements of all applicable
laws for its respective State insofar as necessary to effect the
purposes of a joint license for the project, to the extent of
the ownership and operation of the project by each applicant. The
evidence submitted by joint applicant Carolina Aluminum includ-
ed its compliance with North Carolina requirements. When, short-
ly thereafter, the FPC authorized transfer of Cheoah and
Santeetlah from Carolina Aluminum and to Tapoco only, it noted
that Tapoco had “submitted evidence of compliance with the re-
quirements of all applicable state laws of Tennessee and North
Carolina... .” 14 F.P.C. at 828.
On the basis of the foregoing, in its final order filed 28
January 1982 the Commission concluded, and we agree, that “[t]o
the extent that the federal licenses for Tapoco’s dams speak
toward dedication of the electric energy, such dedication would of
necessity include the using and consuming public of North
Carolina.” We therefore reject Tapoco’s argument as to the
preemptive effect of the federal license on the Commission's
authority to implement a roll-in methodology in determining Nan-
tahala's retail rates.'’ In any event, as will be discussed infra, the
roll-in itself does not effectuate a diversion of Tapoco’s actual
energy production to the North Carolina public load; it merely ac-
complishes for bookkeeping purposes what is an accomplished fact
in the organization and operation of the two companies: the alloca-
tion of the combined costs of production for the unified
Nantahala-Tapoco system as between the jurisdictional North
Carolina retail public load and the nonjurisdictional Alcoa in-
dustrial load.
17. We note in passirg that the Administrative Law Judge presiding over the
latest Nantahala whulesczie rate case came ‘o the identical conclusion regarding the
intent and effect of the 1955 PFC licensing order. 30 F.E.R.C. 9 63,050, at p.
65,290-91. After observing that the FPC had apparently been given insufficient in-
formation about the features and consequences of the Alcoa system's coordination
and exchange agreements with TVA, and the fact that Nantahala’s steadily increas-
ing public load was also serviced under the Original Fontana Agreement, the ALJ
concluded that under these circumstances, “with the licensing order silent on such
critical points, there is no reasonable basis to conclude that the Commission [FPC]
intended to reserve for Alcoa's use alone all of the Tapoco power.” /d. at 65,291.
Sa —
— -
4la
N.C.] IN THE SUPREME COURT 653
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
2.
[5] The Commission also made findings of fact, amply supported
by the evidence of record, as to the existence of a single, unified
hydroelectric venerating and transmission system consisting of
the combined facilities of Nantahala and Tapoco and wholly
owned by Alcoa. The evidence in support of these findings may
be summarized as follows:
Nantahala and Tapoco are both wholiy owned subsidiaries of
a single corporate parent, Alcoa. Nearly all of the facilities of
Nantahala and Tapoco are situated on the Little Tennessee River
and its tributaries. The two power companies are located in con-
tiguous areas in western North Carolina, with portions of
Tapoco’s physical plant intruding into Nantahala’s service area.
The Nantahala and Tapoco electric facilities are physically inter-
connected with each other, with one generation and one distribu-
tion connection at Tapoco’s Santeetlah facility; power can be
dispatched and transmitted from the facilities of one to the
facilities of the other. Standing between the two companies’ Little
Tennessee generation sites is the Fontana project; Nantahala's
hydro developments are all located upstream of the Fontana dam,
while Tapoco’s are all downstream, thus poised to receive the
downstream benefits of the Fontana project. Nantahala’s eleven
developments are smaller and relatively more expensive than
Tapoco’s four larger developments. The combined resources of
the two provide relatively low-cost power and energy under the
coordination and exchange agreements with TVA.
The Original and New Fontana Agreements treat the
facilities of Nantahala and Tapoco without discrimination and
make them an integrated part of, and subject them as a unit to
coordination by TVA. By the terms of these agreements, TVA
receives the output of all of the hydro resources of both Nan-
tahala and Tapoco, except for three small plants of Nantahala. In
addition, the agreements call for Tapoco and Nantahala to turn
over to TVA control of production and stream flow. Accordingly,
TVA determines for Tapoco and Nantahala, as a single entity,
both electric generation and stream flow and operates them as an
integrated system and a coordinate part of TVA’s own system. In
turn, Tapoco and Nantahala jointly receive back from TVA cer-
tain entitlements of power which they divide between themselves
42a
654 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
by the 1971 Apportionment Agreement. Coordination was regard-
ed as an efficient and economical method to maximize production
of electricity from the various plants and to enhance the overall
reliability of the pool of power available to the combined system.
It is evident from the terms of the Fontana agreements that
Alcoa and TVA intended the Fontana project, once it was com-
pleted, to be operated together with other TVA generating plants
in coordination with certain plants of the combined Nantahala-
Tapoco system.
The intervenors’ expert engineering witness, David A.
Springs, testified at the remanded hearings that it is a “false and
arbitrary assumption that NP&L [Nantahala] and Tapoco operate
as isolated systems when in fact they do not.” When witness
Springs was asked whether the Nantahala and Tapoco facilities
should be operated as a separate and independent system, he re-
plied: “No, by coordinating them as one with TVA, the outputs of
the generating resources are maximized.” Springs added that,
from an engineering standpoint, the Nantahala and Tapoco facili-
ties should be operated as one utility. With regard to the question
of whether Nantahala was designed to operate as part of an in-
tegrated system as opposed to operating as a stand-alone com-
pany, Springs stated, “NP&L could not have been designed the
way it was to ever operate as an isolated system.”
Not only was Nantahala designed to operate as an integral
part of a larger utility enterprise, but its projects were developed
and put into service in accordance with Alcoa's aluminum produc-
tion needs rather than scheduled in accordance with the size of its
public load. The greater portion of Nantahala’s capacity, the Glen-
ville (Thorpe) and Nantahala projects, were added in the early
1940's before there was a significant public load in need of their
output. Conversely, since the mid-1950's no significant capacity
has been added to the Nantahala system, despite clear signs that
its public load would place increasingly greater demands upon its
facilities. This pattern of development reflects the increased elec-
tric power demands of Alcoa on the combined system during the
Second World War and Korean War, and its generally decreased
and levelized demand in the post-war period.
Springs also testified to the propriety of using a roll-in meth-
odology in determining the appropriate rate base and allocation of
43a
N.C.] IN THE SUPREME COURT 65:
wy
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
cost responsibility for the customers served by Nantahala’s
facilities. Springs’ conclusion, adopted by the Commission, that a
roll-in is mandated in the case of Nantahala and Tapoco, is based
upon his analysis of actual company cost responsibilities under
the current and historical operating and contractual conditions ty
ing the Nantahala and Tapoco facilities into a single, unified elec
tric system. As Springs explained, cost-of-service rate making is
simply a function of rationally assigning to various classes of
customers cost responsibility for the facilities available for and
used in their service. In cases where facilities are jointly used by
two or more groups of customers under circumstances where, for
example, a stand-alone method of costing fails to identify
appropriate customer loads or where actual customer cost re
sponsibility is distorted by unreasonable power pool agreements a
roll-in methodology is appropriate for rate making purposes.’
In the case of Nantahala, Springs testified that actual cus-
tomer cost responsibility for the facilities available for that serv-
ice cannot be accurately computed on the basis of the percentage
of return power entitlements it receives from TVA separate and
apart from the total pool of power available to Nantahala and
Tapoco as a combined system, because these entitlements reflect
neither the generating facilities actually available for Nantahala's
retail service, nor the actual use of those generating facilities by
those customers. As the intervenors’ witness explained:
A cost-of-service study, whether it be rolled-in or single com
pany, is simply a means of assigning to customer groups the
appropriate cost responsibility for the demands the custom-
ers place upon the resources of the utility . .. a rolled-in
cost-of-service approach [is appropriate] for NP&L and
Tapoco, because it is impossible to separate out the func
tional relationship between the generating resources operat-
ed by these companies and the load they each serve.
In a normal utility operation, the ownership of gener
ating resources by particular operating companies reflects
the identification of resources to customer loads. In the nor
mal course of development, a utility company will develop
the resources in the geographic area, which the customers
18. See, e.g., Georgia Power Co., 52 F.P.C. 1343.
44a
656 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
would look to in order to serve their loads. Usually, com-
panies will integrate their resources into a combined system,
such as the Southerr Company system, and experts might
legitimately disagree as to whether it is more appropriate
to measure customer demands for service on an individual
company basis or a system-wide basis. This is because
system-wide needs and the needs of customers of individual
companies both impact [sic] the development, planning and
operation of power supply resources. However, in the case of
NP&L and Tapoco, I find no significant pattern of power sup-
ply development, planning or overation on any basis other
than a combined basis. (Emphasis added.)
In short, it is apparent that the evidence of record over-
whelmingly supports the Commission's finding and conclusion
that “ine Nantahala and Tapoco electric facilities constitute a
single, integrated electric system and are operated as such by,
and as a coordicated part of, the TVA system,” and its further
conclusion that, ‘for purposes of setting Nantahala’s rates in this
proceeding, the Nantahala and Tapoco systems should be treated
a3 one entity with respect to all matters affecting the determina-
tion of Nantahala’s reasonable cost of service applicable to its
North Carolina retail operations.”
3.
[6] Finally, with respect to Alcoa’s status as a North Carolina
public utility, the Commission correctly noted that despite the
fact that Alcoa would not be a statutory public utility under the
definitions contained in N.C.G.S. § 69-3(23)a and (23)b, it is a public
utility under the definition contained in N.C.G.S. § 62-3(23)c, which
provides:
The term “public utility” shall include all persons affiliated
through stock ownership with a public utility doing business
in this State as parent corporation or subsidiary corporation
as defined in G.S. 55-2 to such an extent that the Commission
shall find that such affiliation has an éffect on the rates or
serviee of such public utility.
N.C.G.S. § 55-2(9), in turn, provides as follows:
“Parent corporation” means a corporation which is a domi-
nant shareholder, as herein defined. A corporation through
45a
N.C.] IN THE SUPREME COURT 657
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
which, by virtue of its shareholdings alone, a parent corpora
tion has power to exercise the control which makes the latter
a parent corporation is itself a parent corporation. A parent
corporation wit respect to which another corporation is a
parent corporation is a “subsidiary corporation.”
Finally, N.C.G.S. § 55-2(6) states:
“Dominant shareholder” means a shareholder of a particular
corporation, domestic or foreign, who by virtue of his share-
holdings has legal power, either directly or indirectly or
through anotner corporation or series of other corporations,
domestic or foreign, to elect a majority of the directors of the
said particular corporation.
Applying these statutory definitions to the respondent cor
porations, the Commission concluded that (1) Alcoa, as the owner
of all of the outstanding stock of Nantahala, a North Carolina
public utility as defined by N.C.G.S. § 62-3(23)a, is a parent cor
poration of Nantahala within the meaning of N.C.G.S. § 62-3(23)c,
and is itself a public utility under that section, and (2) that Alcoa's
affiliation with Nantahala has had an effect on Nantahala's rates,
as evidenced by the terms and results of the New Fontana and
1971 Apportionment Agreements.
We have reviewed the record with regard to these matters
and find that the evidence fully supports the Commission's deter-
mination that Aleoa is a North Carolina public utility under
N.C.G.S. § 62-3(23)c, by virtue of the effect Alcoa's “affiliation”
with Nantahala has had upon Nantahala’s rates. The historical
and current operating conditions tying Tapoco and Nantahala
together clearly show that Nantahala is part of a single utility
enterprise, created by Alcoa as part of a plan to secure for itself,
through the separate corporate entities of its public utility sub
sidiaries, the large quantities of low-cost power it requires for its
aluminum smelting and fabricating operations. Alcoa's unified
development of the Little Tennessee River through its subsidiary
power companies resulted in the assigning of the system's least
expensive utility resources to its exclusive service, through
Tapoco, while relegating the relatively expensive portion of those
resources to the system's public service load through Nantahala.
This development, in turn, has had an enormous impact on the
rates Nantahala charged to its retail customers.
46a
658 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
Indeed, nearly every major document charting Nantahala’s
development contains self-referential language describing Nan-
tahala and (later) Tapoco’s projects as parts of “the Alcoa power
system,” that is, the Alcoa power generating and distribution
system. For example, in its 1940 application to the Department of
War for a national deiense certificate of necessity to build its
largest hydroelectric facilities, Nantahala stated that the justifica-
tion for its intended developments at Glenville (Thorpe), Nan-
tahala and Fontana were the enormous electric needs of Alcoa.
The application described “the system” which these developments
were to be added to as follows:
At the present time, Alcoa receives power from three dams
located on tributary waters of the Tennessee River at Calder.
wood, Tennessee, and Tapoco, North Carolina (Cheoah and
Santeetlah developments)... .
. . . The new developments will be upstream from the pres-
ent developments. It is contemplated that they will store
water during winter months, and will be used in the dry sea-
son to produce additional power and also to make available
additional water for the developments downstream. The esti-
mated total addition to the Aicoa power system is 51,500
k.w., part of which will be produced at the new developments
and part from additional water released for use downstream.
The Glenville project will have installed generating capacity
of 21,500 k.w. and will add 17,500 k.w. to the system. This
power will be used as soon as available for the Alcoa pot line
scheduled for January 1941.
The Nantahala project will have installed generating capacity
of 42,200 k.w. and will add an estimated 34,000 k.w. to the
system. It will be completed about August, 1942 and will
thereafter supply power for one of two Alcoa pot lines
planned for January, 1942. (Emphasis added.)
Similarly, both the Original and New Fontana Agreements, by
which Alcoa caused its subsidiaries’ hydroelectric facilities to be
coordinated in operation with the TVA system, contain references
to Alcoa as the “Company” and to the “Company plants” as
facilities owned by Nantahala and Tapoco. Article III of the New
Fontana Agreement, entitled “Operation of Company's Hydroelec-
tric System,” states in part:
47a
N.C.] IN THE SUPREME COURT 6!
J
ve)
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
1. Definitions
For purposes of this agreement, “Company s plants’ or “Com
pany'’s hydroelectric plants’ shall mean the following
hydroelectric generating plants (and associated diversion
dams) which are owned by Nantahala and Tapcco.
» * 2
(There follows a list of eight of Nantahala’s plants and four of
Tapoco’s plants.!
The words “transmission facilities of Company,” “Company's
transmission facilities,’ and words of similar import shail
mean the transmission facilities of Tapoco [and] Nantahala.
In like manner, Article II of the New Fontana Agreement
describes the division of rights, benefits and obligations under
that contract in‘ terms of a single, integrated system, with Alcoa
ultimately guaranteeing the performance of all obligations of the
system members thereunder.
Wherever this agreement provides an obligation or right on
the part of Company to generate, sell, or transmit electric
power and energy or an obligation or right on the part of
Company to own or operate facilities for the generation, sale
or transmission of electric power or energy, such obligation
or right shall be performed and discharged or enjoyed as the
case may be by Nantahala or Tapoco. However, Alcoa war
rants and represents to TVA that it will secure the per
formance of all of the obligations of Company under this
agreement
Of course, Alcoa's involvement in the development, design
and operation of tne hydroelectric resources of Nantahala and
Tapoco is by no means limited to the role of guarantor described
above. Perhaps the most succinct and telling account of this role
and its purpose is found in the historical study of “the Alcoa
story,” published in 1952, and entitled Alcoa: An American Enter-
prise. The book, written by Charles C. Carr, who was for many
years Director of Public Relations for the company, is 4 self-
professed objective account of Alcoa's history as gleaned from
a=——_-_—_
ee eee
48a
660 IN THE SUPREME COURT [313
Aleoa records and files.'* In the chapter concerning “Water
Power,” the author explained that in the aluminum business,
which requires vast amounts of electricity to produce the metal,
electricity is a commodity; an essential part of the cost of every
pound of metal along with labor, raw materials, capital invest-
ment and the wearing out of equipment.
As early as 1893, Alcoa selected water power as the one
source of cheap electric energy best suited to aluminum produc-
tion. Actuated by the search for low-cost hydroelectric power
from its earliest days, Alcoa formed a number of water and power
companies in various parts of this country and Canada. When
these proved insufficient for Alcoa's growing needs, “Alcoa looked
elsewhere for power and located it, about 1909, in the mountains
of Tennessee-North Carolina.” Carr, Alcoa: An Americen Enter-
prise, at 93. As (arr observed, “(t]he story of Alcoa's power proj-
ects in North Carolina would make a chapter by itself.” Jd. at 95.
Spurred on by necessity, Mr. Davis and his associates
started to acquire riparian properties along the Little Ten-
nessee River and its tributaries in 1910. Studies and plans
that contemplated the unified development of the entire
river and its tributaries above Chilhowee, Tennessee, were
undertaken. The assurance of adequate power from that
ewift-flowing mountain river and its tributaries, to be
developed as needed, gave Mr. Davis the vision of what is to-
day this country’s largest aluminum plant, at Alcoa, Ten-
nessee. On March 6, 1914, the first pot lines of an aluminum
reduction works started operating at this location.
The Tallassee Power Company in North Carolina was ac-
quired in 1914 and operated under that name until 1931 when
it was changed to the Carolina Aluminum Company. The Nan-
tahala Power & Light Company was organized as a public
utility on July 23, 1929, to develop as needed the power sites
which had been owned by the Carolina Aluminum Company
19. See Carr, Alcoa: An American Enterprise, “A Note of Explanation,” at
y-vi (1952). Aiuminum Company of America holds the copyright to this publication
in its name and portions of the book 1 2levant to this discussion are included as an
exhibit in the record before the Commission and on appeal. The intervenors’
witness Devid A. Springs refers to the book in his testimony and the Commission
referred to the book in its order.
49a
N.C.] IN THE SUPREME COURT 661
State ex rel. Utilities Comm. v. Nantahala Power @ Light Co.
on the upper reaches of the Little Tennessee and its
tributaries, the Nantahala and Tuckasegee Rivers.
The Nantahala Power & Light Company, a wholly-owned
Alcoa subsidiary, is essentially a utility company serving
many western North Carolina communities with electricity to
light their homes and to run their motors for commercial,
farm and household use. Its long time President was the late
J.E.S. Thorpe, an Alcoa veteran of thirty years’ service and
well-known utility operator in the Southeast. Mr. Thorpe,
who had served as head of Nantahala Power & Light Com-
pany for twenty-one years at the time of his death in 1950,
was recently honored in a lasting manner by the Directors of
Alcoa The name of a mountain power development, original-
ly known as the Glenville project, was changed to the Thorpe
De velopment.
Although its first duty is to serve the communities tn ifs
territories, Nantahala Power & Light Company has in tts do-
main such large hydro projects as Glenvile and Nantahala,
which augment the supply of power in the North Carolina
mountains available for aluminum-making.
* * .
Harnessing the swift-flowing Little Tennessee and its
tributaries in their rush through the Great Smokey Moun-
tains is a saga in which many Alcoa veterans have played a
part... . (Emphasis added.)
Id. at 93-95.
Finally the author discusses what he considers to be the un-
usual degree of cooperation achieved between “Government
(TVA) and “private industry” (Alcoa) in developing the “foun-
tainhead of the power projects on the Little Tennessee,” the Fon-
tana project. According to Carr, Alcoa had purchased nearly all
the necessary land in the Fontana basin for development pur-
poses, had found it necessary to become a purchaser of TVA
power to supplement its own sources and then, in 1941, “to the
surprise of many people who could see ‘no good in TVA, Alcoa
gave to the Governmental authority, without monetary fee, its
site at Fontana, where most of the necessary land had ‘een ac-
quired, parcel by parcel, over many years.” Id. at 97. With this
SO0a
662 IN THE SUPREME COURT (313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
grant, went roadway relocations and engineering data Alcoa had
assembled for the construction of the great dam and power pro)
ect at the Fontana, North Carolina site.
In return, TVA agreed to build Fontana, the great storage
reservoir which would regulate the flow of water at Alcoa's
hydro projects and Cheoah and Calderwood, as well as at
TVA's downstream projects. Alcoa was influenced in its deci
sion by the Water Power Act of 1920 [predecessor to the
Federal Power Act], which would have required the Company
to obtain from the Federal Power Commission a license to
build Fontana. This license would have given the Govern
ment the right to “recapture” the project after fifty years.
A second part of the Fontana agreement gave TVA the
right to control the impounding and release of water to all of
Alcoa's hydroelectric developments on the Little Tennessee
and to use this generating capacity as an integral part of the
TVA power system. In return for this, Alcoa received from
TVA approximately the number of kilowatt hours generated
at Alcoa plants during a calendar year, and in addition 11,000
KW of primary power without cost. The first part of the
Alcoa-TVA agreement, wherein the Fontana project regu-
lates the flow of water at Cheoah and Calderwood, is im
perpetuity. The second part, recited in this paragraph, can be
cancelled by either party on three years’ notice after Jan-
uary 1, 1952.
* * *
This agreement made possible the integrated operation
of the water powers of Alcoa and TVA, including the Fon-
tana project. Its result was the maximum production of elec-
tric energy from the available water power, not only on the
Little Tennessee River but also throughout the entire Ten-
nessee Valley, which is served by the great Tennessee River
and all its tributaries. (Emphasis added.)
Id. at 97-99.
Although Nantahala and Tapoco were operating under the
New Fontana Agreement and the 1971 Apportionment Agree-
ment during the test year relevant to this proceeding, these
agreements were negotiated in the context of the prior Fontana
*
Sla
N.C.] IN THE SUPREME COURT 663
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
and apportionment agreements and the operating corditions
established thereby. As we have seen, under the OFA, Alcoa
(Tapoco) received the benefit of downstream storage derived from
TV A's construction of the Fontana project, with no further capital
investment by Alcoa. TVA released in perpetuity its right to
claim downstream benefits against Alcoa in exchange for the
transfer of title to the Fontana site. Alcoa caused Nantahala, a
public utility with the power of eminent domain, to transfer its ti-
tle to the Fontana site and its rights to develop that project to
TVA, despite the fact that Nantahala was not permitted to be a
signatory party of the OFA. Nantahala was not positioned to
receive any portion of the downstream storage benefits because it
owns no facilities downstream of the Fontana Dam, while Tapoco,
and through it Alcoa, was positioned to receive all the down-
stream benefits because all of Tapoco’s projects are downstream
of the Fontana site. In addition, Alcoa gave up to TVA a large
portion of the dependable capacity from the hydro projects owned
by Nantahala and Tapoco.
The New Fontana Agreement, essentially an amendment to
the OFA, was signed at the end of 1962, after approximately two
years of negotiations between TVA and Alcoa. The 1962 Agree-
ment essentially expanded the coordination of the two systems by
fixing the availability of capacity and energy returned from TVA
without regard to stream flow conditions. However, in the bar-
gain, dependable hydro capacity was traded away in exchange for
improvements in the availability of energy for aluminum produc-
tion. This produced a significant increase in the degree of
availability of secondary energy to Alcoa. This energy, subject to
prolonged periods of interruption, is unsuited to the needs of a
public load, which requires peaking capacity to meet fluctuating
customer demands. As it had done with the OFA, Alcoa, now
through its employee George Popovich, represented its own in-
terests and those of Tapoco and Nantahala in the negotiations
with TVA over the NFA's terms and conditions. Nantahala itself
had no direct participation in the negotiations. Significantly, the
Alcoa negotiation paper, entitled “NOTES ON MEETING WITH TVA
_MARCH 2, 1962,” refers to the pending transfer case and rate
case then before the Commission as the “Nantahala problems.”
It is evident that prior to this Court's action in Utilities Com-
mission v. Membership Corp., 260 N.C. 59, 131 S.E. 2d 865, Alcoa
S2a
664 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
personnel had believed that the sale to Duke was to be approved.
Thus, an Alcoa memorandum entitled “RE: FONTANA AGREE-
MENT’ dated 23 August 1960, concludes as follows:
One final note, the entire T'VA proposal is based upon the
sale of the Nantahala Power Company. TVA proposed that if
the sale was not complete at the time this new proposed con-
tract becon.es effective, they would increase the power avail-
able to us under the purchase contract to whatever amount is
necessary for us to handle the Nantahala loads. . . . This
would be done on a temporary basis and would be reduced
concurrent with the transfer of the Nantahala properties to
Duke. (Emphasis added.)
The final Aleoa memorandum after completion of all negotia-
tions for the NFA, dated 6 November 1962, reflects the continu-
ing intention on the part of Alcoa to accompiish the transfer of
Nantahala’s distribution system and public service load to Duke.
However, no revisions were thereafter made to the NFA or to the
purchase and apportionment agreements subordinate to it to take
into account the growing public load serviced by Nantahala. In ad-
dition, the Commission found that the NFA’s structure rendered
it necessary for Nantahala to enter into the subordinate 1963 Ap-
portionment Agreement with Alcoa, five days after the signing of
the NFA, in order to secure Nantahala’s participation in the TVA
return entitlements. This was done by means of a monetary sup-
plement from Alcoa to Nantahala and a guarantee of a certain
share of power entitlements from the TVA return.
The Commission concluded that the foregoing evidence clear-
ly demonstrates that the NFA was tailored to meet Alcoa's alumi-
num production needs without consideration of Nantahala’s public
service needs and that this arrangement had a considerable im-
pact on Nantahala’s rates.
By the time the 1971 Apportionment Agreement was signed,
the interconnected power supply structure had long been in place,
and Nantahala found itself without sufficient power to service its
public load, which had been growing at an annual rate of approx-
imately 8.5 percent. Having added no additional generating capac-
ity, since 1957, and having failed to enter into other power supply
contracts tailored to its public load requirements, Nantahala
found itself in the position of having to make supplemental pur-
S3a
N.C.] IN THE SUPREME COURT 665
tahala Power & Light Co.
chases of power from TVA and passing those additional costs
along to its public customers in the form of increased rates.
Again, it was an Alcoa employee, George Popovich, who con-
ducted the 1971 apportionment study and devised the appor-
tionment formula that was incorporated into the 1971 Agreement
between Tapoco and Nantahala. Moreover, during the course of
the negotiations “between” Nantahala and Tapoco over the divi-
sion of return power entitlements, Popovich apparently represent-
ed the interests of both Nantahala and Tapoco at the “bargaining
table.” When questioned as to his role, Popovich conceded that he
wore “both their hats” during these negotiations adding merely
that in view of Nantahala’s public utility responsibilities, “I think
my Nantahala hat was bigger than my Tapoco hat.” At this point,
we note only that in its examination of the results of these con-
tractual arrangements upon Nantahala’s retail costs of service,
the Commission came to precisely the opposite conclusion.
The net effect of Alcoa's “affiliation” with Nantahala is evi-
denced by a pattern of operation of Nantahala’s power supply
resources under the various Fontana and apportionment agree-
ments largely inconsistent with and ultimately detrimental to, its
ability to render service at just and reasonable rates to its retail
customers. Further, as the Commission itself concluded, “Nan-
tahala was not designed as, and is not in reality, a separate utility
system but, rather, is a part of an integrated Alcoa system with
Tapoco.”
Moreover, Alcoa's involvement in the development of Nan-
tahala’s and Tapoco’s North Carolina hydro resources does not
stop with these contractual arrangements. Rather, as this Court
noted in Edmisten, Alcoa’s role also extends to “the ultimate
operating and accounting policies of both utilities. The chief ex-
ecutive officers of both Nantahala and Tapoco report directly to
an Alcoa vice president. Members of the board of directors of
both utilities are employees of Alcoa.” 299 N.C. at 435, 263 S.E. 2d
at 586. Indeed, Nantahala’s president, William M. Jontz, had his
original employment conversations with Alcoa officials in Pitts-
burgh, Pennsylvania. Although his employment as president of
S4a
666 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
Nantahala began on 1 June 1976, he did not meet with the Nan-
tahala Board of Directors until the latter part of July 1976.”
Similarly, the president of Tapoco is a direct employee of
Alcoa serving in the dual status of power manager of Alcoa's Ten-
nessee operations and president of the utility company. His sole
office is located at Alcoa’s south main plant at Alcoa, Tennessee.
Furthermore, Alcoa owns 100 percent of the capital stock of Nan
tahala and Tapoco. The assistant controller of Alcoa, Robert D.
Buchanan, testified that he has the “general responsibility for the
financial accounting for Alcoa and its subsidiaries, and as such
ha[s] responsibility for the books and records and financial policies
of Tapoco and Nantahala.”
The foregoing evidence manifestly demonstrates the substan-
tial and detrimental impact Alcoa's “affiliation” has had upon
Nantahala’s rates and service to its North Carolina public utility
customers, and fully supports the Commission's conclusion that
Alcoa is a North Carolina public utility under the provisions of
N.C.G.S. § 62-3(23)e.
In summary, the evidence of record gathered at the remand-
ed hearings before the Commission in this general rate case es-
tablishes beyond question three basic propositions: (1) Tapoco is a
North Carolina public utility; (2) the hydroelectric facilities of
Nantahala and Tapoco constitute a unified, single system, operat-
ing under conditions rendering a roll-in rate making methodology
appropriate; and (3) Alcoa is a statutory North Carolina public
utility to the extent that its affiliation with Nantahala has af-
fected Nantahala's rates.
20. Significantly, Nantahala’s employment contract with its president describes
the “major general objectives” of such employment to include both the company's
management and the development of plans “for the possible sale or other disposi-
tion” of Nantahala, said goals to be accomplished “so that there is little or no
adverse impact on the operations and assets of Nantahala's parent company [Alcoa]
and its subsidiaries in North Carolina, including, but not limited to, . . . Tapoco,
Inc. and Yadkin, Inc. . . .” Under the section governing base salary, the contr ct
provides for achievement awards based upon the president's performance with
respect to these objectives, “To be determined annually by the three-member
{Alcoa] group among the Board of Directors of Nantahala. . . .” Finally, under pro
visions entitled “Nondisclosure,” the president is not to engage in any act which
would, inter alia, tend to prejudice the business of “Nantahala or of Nantahala's
parent company [Alcoa] and its subsidiaries . . . Tapoco, Inc. and Yadkin, Inc.
Sa
N.C.] IN THE SUPREME COURT 667
WN
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
D.
The Commission, after finding that Nantahala and Tapoco are
a single, integrated electric system, joined the assets, properties,
plants and working capital requirements of both companies into a
unified rate base, totaled joint revenues and operating expenses,
and assigned the combined system the rate of return approved
for Nantahala alone in the 1977 proceedings. From these ele-
ments, a combined system revenue requirement was derived.
These aspects of the Commission's order are not challenged by
the companies. However, the controversy between the interve-
nors and the companies over the proper cost allocation methodolo-
gy to be used in apportioning the combined revenues, expenses
and investment of the unified system between the retail custom-
ers in North Carolina and the non-jurisdictional Alcoa industrial
load in Tennessee lies at the heart of this appeal.
Generally speaking, the allocation methodology proposed by
the companies through their expert witness Herbert J. Vander
Veen assigns customer cost by utilizing the entitlements of the
New Fontana Agreement and the 1971 Apportionment Agree
ment; whereas the allocation methodology proposed by the in-
tervenors through their expert witness David Springs, and
adopted by the Commission, is grounded upon the assignment of
cost responsibility to the public load and to Alcoa on the basis of
which load actually used the capability available from the gener.
ating facilities of the combined system. The jurisdictional alloca
tion factors utilized by the Commission are generally accepted
factors commonly employed by the Commission in setting intra.
state retail rates for other public utilities serving in more than
one jurisdiction. The unique problem posed by this case lies in the
fact that Nantahala’s available power supply was contractually
reshaped by the quantity and design of the entitlements returned
by TVA under the NFA and allocated to Nantahala under the
1971 Apportionment Agreement. In effect, the companies treated
Nantahala as part of a unified system when dealing with Nan-
tahala’s contribution to the pool of power turned over to TVA and
with respect to TVA’s dispatch of Nantahala’s facilities, but not
when determining Nantahala's share of the entitlements returned
to the Alcoa system. Thus, Nantahala’s share was computed as if
Nantahala were a stand-alone company. In the process, Nantahala
S6a
668 IN THE SUPREME COURT {313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
received little or no value in return for certain contributions it
made to the integrated system.
The Commission, in rejecting the companies’ proposed alloca-
tion methodology, reasoned that it would be unjust to Nantahala’s
retail rate payers to allocate demand and energy related costs on
the basis of TVA return entitlements because the terms of the
NFA had been structured to meet Alcoa's industrial needs and
not Nantahala’s public service needs. Moreover, the combination
of the NFA and the 1971 Apportionment Agreement forced Nan-
tahala to purchase costly additional power irrespective of its pro-
duction capacity. The companies argue that the Commission was
constrained by the doctrine of federal preemption to utilize the
NFA demand and energy entitlements in determining Nantahala’s
demand and energy related costs because the NFA and 1971 Ap-
portionment Agreement are FERC-filed wholesale rate schedules,
the reasonableness of which may not be reinvestigated by state
public service commissions, and the economic results uf which
must be accepted in setiing retail rates. Additionally, they argue
that the manner in which the Commission allocated the rolled-in
costs places an impermissible burden upon interstate commerce
by affording North Carolina customers a “first call” on both the
energy output of the combined system and the economic benefits
of Tapoco's lower-cost production. A proper understanding of our
conclusion in Part II, A and B, infra, that the Commission is
neither preempted by the Federal Power Act and Supremacy
Clause, nor forbidden by the Commerce Clause of the United
States Constitution from implementing the rolled-in rate making
methodology developed in this case necessitates a brief review of
the Commission's findings with respect to the power supply
agreements at issue.
Initially, it must be pointed out that the Commission's discus-
sien of the NFA and 1971 Apportionment Agreement occurred in
the context of addressing the impropriety of basing cost alloca-
tions on demand and energy entitlements as contained therein.
The Commission was not concerned with the reasonableness of
the power exchange agreements and associated system costs per
se, but with the question of which load should be held responsible
for which portion of these costs in its rates. Put another way, it is
evident that the Commission's in-depth examination of the terms
of these contracts was undertaken as part of its process in choos-
ee
S7a
N.C.] IN THE SUPREME COURT 669
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
ing between the competing jurisdictional cost allocation methodol-
ogies presented by the parties and not in an effort to either
referm the contracts or to alter the actual flow of return power
thereunder.
In some twenty pages of its rate reduction order, the Com-
mission exposed and “fleshed out” the extensive network of
detriments and inequities to Nantahala and its customers embed-
ded in the terms of the NFA and 1971 Apportionment Agree-
ment. In essence, the Commission found that a disproportionate
amount of the capacity and energy resources of the combined
Nantahala-Tapoco system, perfectly usable by the load character-
istics of the Nantahala public load, were traded away to reform
the TVA return entitlements to fit the needs and characteristics
of an aluminum smelting and fabrication operation. Because Nan-
tahala is structured, operated and treated as an integral unit of
the combined system, rather than as a stand-alone company, the
detriments it incurs under the integrated system's power supply
contracts result in concealed benefits flowing to Tapoco, and
ultimately to its parent and customer, Alcoa. While “costs”
charged to the combined system under these contracts might be
considered objectively fair and reasonable from the wholesale
perspective, the public customers of Nantahala were found to
have fared badly when that utility was artificially separated out
of the unified system for allocation purposes, and then forced to
bear the added responsibility for costs of purchased power from
TVA.
The Commission found a number of specific inequities in
terms of cost responsibility to Nantahala and concealed benefits
to Alcoa arising out of both the NFA and 1971 Apportionment
Agreement, and divided its treatment of these agreements into
separate discussions. Another portion of the order analyzes the
manner in which the companies employed the data contained in
the agreements in developing their cost allocation methodology.
Finally, the order discusses the mechanics of the allocation
adopted by the Commission from the proposal! of the intervenors
and utilized in fixing Nantahala's rates. We will use the subject
headings corresponding to those portions of the order in our sum-
mary of the discussion contained therein.
58a
670 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
Concealed Benefits of the Apportionment Agreement
(1) Quantity of Nantahala’s Production.
In 1962, Alcoa power consultant George Po; *h determined
that under the NFA, Nantahala should be appwrtioned annual
energy entitlements guaranteed at minimum, to return to Nan-
tahala an amount equivalent to its primary energy capability of
360 million kwh plus its actual production in excess of that
amount, which was 79 million kwh of average energy; 66 million
kwh when Nantahala’s non-Fontana generation is taken out. Popo.
vich’s 1962 figures were derived from an independent engineering
study made by Ebasco in 1960 for Nantahala, and accepted by
Alcoa as the basis for Nantahala’s entitlements under the 1963
Alcoa-Nantahala Apportionment Agreement. By that agreement,
Nantahala received annually an average of 426 million kwh, of
which 360 million kwh was guaranteed as a minimum. The 426
million kwh of return power was approximately the same amount
as Nantahala contributed to TVA under the NFA. Yet despite
these facts, when Popovich devised the 1971 Apportionment
Agreement, Nantahala received only 360 million kwh annually.
Thus, Nantahala was deprived of an average of 66 million kwh an-
nually. The Commission concluded that this detriment to Nan-
tahala constitutes a benefit to Tapoco that is passed on to Alcoa.
(2) Quantity of Nantahala’s Peaking Capacity.
The 1960 Ebasco Study computed Nantahala’s plant capacity,
under the most adverse water conditions, at 85,400 kw. After
deducting the three small plants excluded from the NFA, that
capacity is 84,300 kw. Alcoa's acceptance of these computations is
reflected in a number of internal documents cited by the Commis-
sion in its order. As was true of the energy entitlements, this
study formed the basis of Nantahala’s capacity entitlements in
the 1963 Alcoa-Nantahala Agreement. Under it, Nantahala was
permitted to use capacity without a pre-set limitation. Therefore,
Nantahala was able to use actual capacity to the limits assigned
by the 1960 Ebasco Study in meeting its customer demands. How-
ever, when Popovich conducted his study for the 1971 Appor-
tionment Agreement, while accepting the most adverse water
(dependable) capacity factor of 84,300 kw, he deducted 27,500 kw
for the “largest unit out” to reach an assured capacity of 54,300
S9a
N.C.] IN THE SUPREME COURT 671
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
kw. This deduction is for the Nantahala facility which forms up
wards of 50 per cent of the entire Nantahala generation system of
11 dams. Thus, under the 1971 Apportionment Agreement, Nan
tahala was assigned a peaking capacity of 54,300 kw. The result of
this limitation is that any time Nantahala has to provide a
customer demand in excess of 54,300 kw, it must pay a monthly
demand charge to TVA for all power over that limitation. If the
limitation were set at Nantahala’s capacity level determined by
the “loss of load probability” method, the monthly demand charge
would be only the amount between 81,800 kw and the excess cus
tomer demand over and above that amount. The Commission con
cluded that demand costs thereby imposed on Nantahala for use
of capacity between its assigned capacity of 54,300 kw and its as
sured capacity of 81,800 kw, would represent an expense to Nan
tahala and thus a savings to “its New Fontana Agreement sister,
Tapoco,” since the capacity constraints for the TVA return enti
tlerments are jointly shared by them under the NFA.
The difference in amount between the capacity assigned to
Nantahala under the 1971 Apportionment Agreement and what
the Commission has determined its assured capacity to be results
from the different methodologies employed by the companies and
the intervenors in determining Nantahala’s assured capacity. The
intervenors’ witness Springs testified that the proper reserve
margin for Nantahala should be the margin used by TVA, which
is “the loss of load probability” method. Use of this method would
recognize that Nantahala is operated as part of the coordinated
Alcoa-TVA system rather than as a stand-alone utility, and would
result in a reserve requirement of about 3 per cent. Using a 3 per
cent reserve in place of the “largest unit out” reserve, which, in
this case is upwards of 50 per cent, would establish a capacity
under the most adverse water conditions of 81,800 kw as opposed
to Popovich’s calculation of 54,300 kw.
The Commission concluded that significant cost is shifted to
Nantahala by the unfair and unwarranted limitation of its capaci
ty to 54,300 kw; conversely, that expense, in the form of demand
charges paid to TVA, is a concealed benefit to Alcoa. The basis
for the Commission's conclusion that the capacity limitation as
signed to Nantahala under the 1971 Apportionment Agreement
was unwarranted lies in the Commission's rejection of the “larg:
672
60a
IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
est unit out” adjustment to actual capacity for reserves in com-
puting Nantahala’s assured capacity. The order states as follows:
the
If Nantahala were a separate and independent system, a
deduction of the “largest unit out” might be appropriate to
determine assured capacity. However, Nantahala is not and
never has been a separate electric system-—it was not so de-
signed. Nantahala's two largest facilities are Thorpe (previ-
ously Glenville), . . . and Nantahala, ... . The Thorpe and
Nantahala facilities comprise about 65% of Nantahala's entire
system. At the time of their construction, Alcoa obtained a
certificate of necessity from the War Department and ex-
pressly argued and avowed that they were part of the Alcoa
system... .
Furthermore, for the past 40 years, both Nantahala and
Tapoco have heen operated as an integral part of the TVA
electric system pursuant to the provisions of the Fontana
and New Fontana Agreements. Moreover, when Alcoa negott-
ated these agreements with TVA, it did not bargain for
return power from TVA as if Nantahala was an independent
power system but rather the attributes of the Alcoa system
were melded together, with the TVA system for evaluation
purposes. . .
With Nantahala and Tapoco being thus integrated into
and coordinated with the TVA system, it is not appropriate
to determine Nantahala’s assured capacity by configuring
Nantahala as a single independent and isolated system and to
use the “largest unit out” methodology. Instead, Nantahala
should be treated as part of the TVA system and the reserve
margin used by TVA should be applied. TVA does not use a
reserve of “largest unit out” but rather uses “the loss of load
probability method.” (Emphasis added.)
(3) Nantahala’s Upstream Benefits.
Nantahala’s projects are upstream of Tapoco’s projects, with
exception of Santeetlah. As a consequence, water that is
stored by Nantahala can be released to flow downstream and be
used by Tapoco for production of electricity. Therefore, Nan-
tahala’s storage has a value to Tapoco which is undiminished by
the fact that TVA’s Fontana Project now lies between Nantahala
6la
N.C.] IN THE SUPREME COURT 673
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
and Tapoco. A 1956 TVA study estimated the upstream storage
benefits of the two major Nantahala projects to be a continuous
relative contribution of 4,300 kw to Tapoco’s downstream Calder
wood and Cheoah projects. This is an equivalent of 37,668,000 kwh
annually as an upstream benefit from Nantahala to Tapoco. How
ever, under the 1971 Apportionment Agreement, Nantahala re
ceived no credit for this benefit to Tapoco, which was in turn
passed on to Alcoa.
(4) Nantahala’s Entitlement for Operating Its Properties
in Accordance with the Fontana Agreement.
By the 1941 Fontana Agreement, Nantahala, at the instance
of Aleoa, gave to TVA the right, in perpetuity, to control the
storage and flow of water from its several hydroelectric projects.
The Commission found that Nantahala’s giving up of rights un-
questionably constituted a loss of considerable value for which
Nantahala was entitled to compensation. With the 1963 Alcoa-
Nantahala Apportionment Agreement, Alcoa agreed to continue
to pay to Nantahala monies for Nantahala’s loss of those opera-
tiona) rights. Moreover, the agreement clearly showed that TVA
was continuing to pay value for those rights, which value is
reflected in the TVA return entitlement of the New Fontana
Agreement. This fact was also reflected in the Commission's own
earlier findings with respect to the TVA return entitlement in
the year 1963 in Docket No. E-13, Sub 13. Yet despite the fact
that the NFA includes in the TVA return entitlement a reim-
bursement by TVA for the right to operate Nantahala’s projects,
for which Alcoa previously paid $89,200 annually to Nantahala, no
credit was given to Nantahala for that entitlement under the 1971
Apportionment Agreement. In other words, Nantahala receives
neither an energy credit nor a monetary payment for the right
given up. The Commission concluded that since the TVA payment
for the operational rights, which is paid with energy in the NFA
rate entitlement, did not go to Nantahala, it inured to the benefit
of Tapoco, which, in turn passed this benefit to Alcoa.
(5) Nantahala’s Value to the TVA Interconnected System.
The Commission found that another failure of the 1971 Ap-
portionment Agreement regarding Nantahala’s participation is
that the Popovich apportionment formula does not consider the
674 IN THE SUPREME COURT [313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
proper value to TVA of the fact that Nantahala, Tapoco and the
TVA systems are interconnected.
Interconnection is of considerable value to TVA com-
pletely aside from the fact that Nantahala’s rate base in-
cludes in it certain assets devoted to the interconnection,
which assets are entitled to earn a rate of return. Because
Nantahala is not an isolated system, it should be receiving
the usual benefits that accrue from coordinated operation.
Yet. Nantahala does not receive the usual benefits of an in-
terconnected and coordinated system.
Relying on Alcoa documents reflecting the path of its negotiations
with TVA over the New Fontana Agreement, the Commission
found that the integrated systems factor was recognized by Alcoa
to be of great value to TVA, a recognition that Alcoa was able to
capitalize on later in arriving at the final terms of the agreement.
As indicated, some of the values oi integration are the need for
smaller reserves and the fact that TVA actually controls produc-
tion of generation and storage waters. However, one of the larger
benefits is the value in integration of Nantahala’s projects that
are upstream of TVA's Fontana Project. The Commission noted
that in an integrated system such value is maximized; Nantahala’s
yrojects contributed upstream benefits not only to Tapoco's down-
stream projects, but also to TVA’s downstream Fontana Project.
in fact, the entire TVA Tennessee River system receives the
benefit of the storage of all of these projects located on the Little
Tennescee River. This is especially su given TVA’s control of all
of the Nantahala and Tapoco reservoirs under the terms of the
Fontana Agreement. Based upon the results of a TVA study of
combined downstream storage benefits, the Commission deter-
mined that Nantahala’s annual upstream benefit to TVA is
70,956,000 kwh.
However, when the NFA bargain was struck, the TVA and
the Alcoa systems agreed to cancel out their respective upstream
benefits. The Commission observed that since Nantahala provid-
ed benefits upstream to both Tapoco and TVA, and TVA provided
benefits upstream to Tapoco, it was Tapoco that gained by the
mutual cancellation, to the detriment to Nantahala of the value of
70,956,000 kwh annually. The Commission further concluded that
Nantahala should have received back an equivalent amount of
63a
oy
N.C. ] IN THE SUPREME COURT 67!
State ex rel. Utilities Comm. v. Nantahala Power & Light Co
energy under the 1971 Apportionment Agreement from Tapoco.
Because Nantahala received no such benefit under the Popovich
apportionment formula, the Commission concluded that to
Tapoco's benefit, Nantahala was deprived of one value of the :
terconnection with the TVA system. This concealed benefit ‘low
ing from Nantahala to Tapoco, is of course, passed or by ‘lapoco
to Alcoa.
In summarizing its discussion of the detriments to Nantahala
from the 1971 Apportionment Agreement, the Commission to
talled the aunual kilowatt hours which Nantahala contributed in
average production to the system and for which no credit was
received in return and determined that Nantahala was deprived
of a total value of 200,224,000 kwh annually. In addition to which,
Nantahala received no credit for its peaking capacity over the
54.300 kw which was assigned to it, as a result of which Nan
tahala must pay additional demand charges to TVA when monthly
demand exceeds assigned capacity. After quoting a portion of this
court's opinion in Edmisten regarding the terms of the 1971 Ap
portionment Agreement, the Commission concluded:
Now that considerably more of the various detriments to
Nantahala have been exposed and fleshed out, it is apparent
that the 1971 Apportionment Agreement works an extensive
injustice on Nantahala and its public rate payers, the gravity
of which far exceeds e.-n that envisioned by the Supreme
Court.
Concealed Benefits of the New Fontana Agreement
The Cominission found the concealed benefits flowing from
Nantahala to A.!eoa by virtue of the NFA to be entirely different
‘in pature from those which flow from Nantahala to Tapoco, and
ultiriately to Alcoa from the 1971 Apportionment Agreement.
The basic inequity to Nantahala arising out of the NFA is that
the energy entitlement returned to Nantahala and Tapoco from
TVA is structured to meet Alcoa's demand for a certain amount
of stable electricity for purposes of aluminum production rather
than a demand for a public load. Consequently, the NFA returns
to the system an average of 218,300 kw of energy at a high load
factor with minimal peaking deviation, which is principally de
signed to service Alcoa's pot-lines and other production electrical
64a
676 IN THE SUPREME COURT (313
State ex rel. Utilities Comm. v. Nantahala Power & Light Co.
requirements. Even the interruptible and curtailable energy enti
tlement returned to Nantahala-Tapoco is in increments of wattage
that conform to the demands of a pot-line so that, if power is in
terrupted or curtailed, Aleoa can respond by cutting out a par
ticular pot-line.
Nantahala. on the other hand, has a fluctuating demand for
energy which has peaks and valleys. Its electrical requirement is
for assured, but constantly variable amounts of energy. Nantahala
needs peaking capacity and its generation projects possess peak
ing capacity, yet the NFA traded away that peaking capacity to
TVA. The Commission agreed with the intervenors thi ne
trade-off of Nantahala’s own peaking capacity, at a time when
Nantahala's load required such peaking capacity, thus forcing the
utility to purchase capacity back at a higher price from TVA, was
not the result of “enlightened, arm's-length bargaining” and that
the detriment resulting to Nantahala from the design of the NFA
entitlements flows to Alcoa as a benefit.
In fact, the intervenors’ evidence demonstrated that Alcoa
reaped enormous benefits through the trade in the improvement
of the availability of Tapoco’s secondary energy production from a
level of 42 per cent average curtailment to an average curtail
ment rate of only 8 per cent. In addition, Tapoco’s generation
statistics reflect the benefits of coordination with the Fontana
Project and other forms of integration with TVA. These figures
are inconsistent with the isolated system model utilized as a basis
for the 1971 Apportionment Study. Again, it was evident that the
two opera
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