Appendix — Nantahala Power & Light Co. v. Thornburg

—

Supreme Court, U.S.

SH-TITERS” | FILED

No. 85- ' JAN 10 1988

| JOSEPH F. SPANIOL, JR.

, CLERK

IN THE

Supreme Court of the Unite States

OCTOBER TERM, 1985

—<

NANTAHALA POWER AND LIGHT COMPANY, TAPOCO, INC.,

and ALUMINUM COMPANY OF AMERICA,

Appellants,

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

Of Counsel: (202) 429-4000

RONALD D. JONES Counsel for Appellants

DAVID R. POE

M. REAMY 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 Court... la

APPENDIX B

Opinion of The North Carolina Court of Appeals l3a

APPENDIX C

Opinion of The North Carolina Utilities Commis-

Sh, es DE GTO «ba cree soa eacaees 23a

APPENDIX D

Opinion of The North Carolina Utilities Commis-

Sk, Gee Aout 1a TOES 6 oc ck ke ie eee ccs 12Sa

APPENDIX E

Excerpts From The Federal Power Act, 16 U.S.C.

ee PIR oa ec eine a aes bea e Leek 127a

APPENDIX F

Excerpts From The North Carolina Public Utilities

Act, N.C. Gen. Stat. §§ 62-1, ef seq. .......... 137a

APPENDIX G

PR We PEE 5k 5 oc a ee eda oes haere eS l4la

APPENDIX H

Supplement To Rule 28.1 Statement ............. ila

APPENDIX A

Opinion of the North Carolina Supreme Court

la

STATE OF NORTH CAROLINA EX REL. UTILITIES COMMISSION;

RUFUS L. EDMISTEN, ATTORNEY GENERAL; PUBLIC

STAFF; HENRY J. TRUETT; SWAIN COUNTY BOARD OF

COUNTY COMMISSIONERS; CHEROKEE, GRAHAM AND

JACKSON COUNTIES; TOWNS OF ANDREWS, BRYSON CITY,

DILLSBORO, ROBBINSVILLE, AND SYLVA; AND THE TRIBAL

COUNCIL OF THE EASTERN BAND OF CHEROKEE INDIANS;

DEROL CRISP v. NANTAHALA POWER AND LIGHT COM-

PANY; ALUMINUM COMPANY OF AMERICA; AND TAPOCO,

INC.

No. 111A84

(Filed 13 August 1985)

i

On appeal by respondents from the decision of the Court of

Appeals reported at 66 N.C. App. 546, 311 S.E. 2d 619 (1984),

affirming orders entered 8 June 1982, 12 August 1982, and |

September 1982 by the North Carolina Utilities Commission in

Docket No. E-13, Sub 35. Heard in the Supreme Court 10

September 1984.

This litigation began on 31 December 1980 when Nantahala

Power and Light Company (Nantahala) applied to the North

Carolina Utilities Commission for authority to adjust and

increase its retail electric rates and charges and to place into

effect a revised Purchased Power Cost Adjustment Clause

applicable to all retail electric rates. The rates and charges

proposed by Nantahala were based on a test period ending 31

December 1979 and were proposed to become effective for

service rendered on and after | February 1981. On 16 July 1981

the Commission joined Aluminum Company of America (Al-

coa) and Tapoco, Inc. as parties to the proceeding. Adjudica-

tory hearings in this general rate case began in September 1981,

and on 8 June 1982 the Commission entered an order increas-

ing rates to some extent and requiring a refund of monies that

2a

Nantahala had overcharged its retail ratepayers. Alcoa was

ordered to make the refunds to the extent that Nantahala is

unable to do so. Respondents appealed, and the Court of

Appeals affirme?. Respondents appealed to this Court pur-

suant to N.C.G.S. 7A-30(3).

i

Rufus L. Edmisten, Attorney General, by Richard L.

Griffin, Assistant Attorney General, for the Using and Con-

suming Public.

Robert Gruber, Executive Director, The Public Staff, by

James D. Little, Staff Attorney, for the Using and Consuming

Public.

Joseph A. Pachnowski, for the County of Swain and the

Town of Bryson City.

Crisp, Davis, Schwentker & Page, by William T. Crisp and

Robert B. Schwentker, for Henry J. Truett, Counties of Chero-

kee, Graham, Swain, Jackson, Towns of Andrews, Dillsboro,

Robbinsville, Bryson City, Sylva, and the Tribal Council of the

Eastern Band of the Cherokee Indians.

Western North Carolina Legal Services, Indian Law Unit, by

Larry Nestler, for Derol Crisp.

Hunton & Williams, by Edward S. Finley, Jr., for Nantahala

Power and Light Company.

LeBoeuf, Lamb, Leiby & MacRae, by Ronald D. Jones and

David R. Poe, for Aluminum Company of America and

Tapoco, Inc.

MARTIN, Justice.

A number of questions of law at issue in this case have been

resolved by this Court’s recent opinion in State ex rel. Utilities

3a

Commission vy. Nantahala Power and Light Company,

N.C. ___, ___—S..E. 2d ____ (No. 227A83, filed 3 July 1985)

(Nantahala Sub 29 (Remanded)). We therefore refer to that

opinion for an explanation of the following holdings which

app!y equally to the instant case: (1) Tapoco and Alcoa are

North Carolina public utilities subject to the Commission’s

regulatory authority and jurisdiction;' (2) utilization of a

roll-in theory does not violate the Federal Power Act or the

Supremacy clause or the commerce clause of the Constitution

of the United States; (3) application of a roll-in methodology

such as is used in this case does not impermissibly impair

Nantahala’s ability to earn a proper rate of return on its

investment and does not amount to a confiscation of its

properties; (4) prior federal and state regulation of Nantahala,

Tapoco, and Alcoa and various transactions and the power

supply agreements affecting Nantahala’s power supply do not

l We reject Tapoco’s argument that the Commission erroneously

involuntarily joined Tapoco as a party to these proceedings. Rule 19 of the

North Carolina Rules of Civil Procedure provides in part:

“Rule 19 Necessary joinder of parties

“(a) Necessary joinder. Subject to the provisions of Rule 23, those

who are united in interest must be joined as plaintiffs or defendants;

but if the consent of anyone who should have been joined as plaintiff

cannot be obtained he may be made a defendant, the reason therefor

being stated in the complaint; provided, however, in all cases of joint

contracts, a claim may be asserted against all or any number of the

persons making such contracts.

“(b) Joinder of parties not united in interest. The court may determine

any claim before it when it can do so without prejudice to the rights of

any party or to the rights of others not before the court; buf when a

complete determination of such claim cannot be made without the

presence of other parties, the court shall order such other parties

summoned to appear in the action.” (Emphasis added.)

See Strickland v. Hughes, 273 N.C. 481, 160 S.E. 2d 313 (1968) (decided

under former N.C.G.S. 1-73); Moore v. Massengill, 227 N.C. 244, 41 S.E. 2d

655 (1947) (same). See generally W. Shuford N.C. Civil Practice and

Procedure § 19-4 (1981). The decision whether to order joinder of proper

parties rests within the sound discretion of the Utilities Commission in its

authority as an adjudicatory body. N.C. Gen. Stat. § 62-60 (1982). Tapoco

has failed to establish that the Commission abused its discretion in ordering

Tapoco joined as a party in the instant proceedings.

4a

prohibit or preempt the Commission from piercing the cor-

porate veil between Alcoa and Nantahala; (5) the Commission

acted within its regulatory authority in imposing an obligation

upon Alcoa to pay any part of the refund obligation arising

from reduction in retail rates that Nantahala is financially

unable to make, and this obligation does not amount to a

confiscation of Alcoa’s property.

With the aforesaid issues already 1esolved as a matter of law,

we now turn to those issues peculiar to this proceeding. We

begin with Alcoa’s and Nantahala’s contentions that certain of

the Commission’s findings of fact are not supported by evi-

dence of record. It is well established that an appellate court

will not disturb the findings of fact of tne Utilities Commission

as long as, upon an examination of the whole record, they are

supported by competent, material, and substantial evidence.

N.C. Gen. Stat. § 62-94 (1982); State ex rel. Utilities Commis-

sion v. Public Staff, 309 N.C. 195, 306 S.E. 2d 435 (1983);

State ex rel. Utilities Comm. v. Southern Bell, 307 N.C. 541,

299 S.E. 2d 763 (1983).

Preliminarily, we address Alcoa’s contention that although

the Commission stated in its 13 March 1981 ruling that it

would determine whether roll-in is appropriate in Sub 35

independently and irrespective of whether such a determination

is required in Docket No. E-13, Sub 29, certain parts of the

Commission’s 8 June 1982 order clearly show that the Com-

mission in effect merely adopted its Sub 29 (Remanded) order

for the purpose of determining the outcome of this proceeding

instead of making independent findings and conclusions.

Alcoa points out, for example, that the June 8 order refers to a

“witness Popovich” who testified during the Sub 29 proceed-

ings but not during the proceedings in the instant case. In

addition, Alcoa contends that findings of fact 4, 5, 6, 17, and

20 of the June 8 order are so similar to findings of fact 4, 5, 6,

19, and 21 of the Sub 2“ (Remanded) order that it is clear that

the two orders are “essentially identical.”

We might be impressed by the agility of Alcoa’s legal

stratagems but for its occasional opacity. It is true that witness

Sa

Popovich testified during proceedings in Sub 29; however, in

the “Response on Behalf of Aluminum: Company of America

and Tapoco, Inc. to Motion to Join Alcoa and Tapoco as

Parties” filed in Sub 35 on 6 February 1981, we find the

statement that “Tapoco and Alcoa hereby incorporate by

reference the testimonies and briefs filed with this Commission

in Docket No. E-13, Sub 29.”* As Alcoa presented the Com-

mission with the opportunity to consider witness Popovich’s

testimony in the instant case, it is curious that Alcoa is now

trying to argue that the Commission erroneously did so.

Further, the fact that five of the findings of fact in the two

proceedings are similarly worded does not indicate that the

Commission did not consider evidence presented before it in

the proceedings in the instant case. The issues addressed in the

findings to which Alcoa refers us arose in both the Sub 29

(Remanded) and the Sub 35 cases, and because the Commis-

sion resolved them consistently, it is not particularly strange

that its findings are similarly worded.’ There is no error with

respect to this aspect of the Commission’s order in the present

case, and we hold that Alcoa’s rights to due process were not

violated by the manner in which the Commission proceeded.

We now address Alcoa’s contention that several of the

Commission’s findings of fact are unsupported by evidence of

record and that the roll-in theory the Commission used in the

present case was inappropriate because based on the erroneous

findings of fact. Alcoa alleges that the following six points

were u0t supported by evidence of record:

(1) that testimony of witness Popovich was properly

before the Commission in this proceeding;

(2) that Tapoco does not wheel power Alcoa purchases

from the Tennessee Valley Authority (TVA) to serve Alcoa

in Tennessee:

2 In the instant case Nantahala, too, incorporates by reference part ot

its brief to this Court in the Sub 29 (Remanded) appeal.

3 We note that the New Fontana Agreement and the 1971 Apportion-

ment Agreement were still in effect during the test period in which rates were

based in the instant case.

6a

(3) the Commission’s decisions to include in the roll-in

calculations power Nantahala purchased from TVA to

serve Nantahala’s North Carolina load but to exclude

power Alcoa purchased from TVA to serve Alcoa’s

Tennessze load;

(4) the Commission’s calculation of “hidden benefits”

to Alcoa arising out of the Original Fontana Agreement,

the New Fontana Agreement, and the Apportionment

Agreement;

(5) the Commission’s determination of the appropri-

ateness of piercing the corporate veil between Alcoa and

Nantahala;

(6) that the Nantahala and Tapoco facilities are inte-

grated and coordinated with .".e another and therefore

rolling their costs together was appropriate.

We have discussed and disposed of the first contention earlier

in this opinion. The fifth point is governed by our conclusions

to the contrary in Nantahala Sub 29 (Remanded). Thus, we

now turn to the remaining contentions.

Because it concerns the question of whether a roll-in is

appropriate to any extent, we address the fourth point first.

Alcoa argues that the record does not support the Commis-

sion’s finding that Alcoa received concealed benetits and

therefore it is inappropriate to use any form of . oll-in to rectify

past inequities. The basis of Alcoa’s argument is that “[t]he

calculation of ‘hidden benefits’ that the Commission used to

justify the imposition of rolled-in rate making in the first place

(see R pp 183-208), was repudiated by the only witness to offer

testimony as to the existence of hidden benefits.” Upon an

examination of the transcript, we do not find the direct

repudiation alleged by Alcoa. In addition, there is ample

evidence in the form of exhibits justifying the Commission’s

determination that Alcoa was the recipient of hidden benefits.

We cannot agree with this assignment of error.

Alcoa also contends that evidence placed before the Com-

mission during the proceedings in this case contradicted evi-

7a

dence which was before the Commission in the Sub 29

(Remanded) case concerning the physical integration of the

Tapoco-Nantahala system. Therefore, the Commission’s deter-

mination that the system is physically integrated is erroneous,

and because this factual predicate to the use of roll-in has not

been established, the use of any roll-in methodology was also

e-ror. We again disagree. Although respondents did introduce

additional evidence concerning this issue during proceedings in

the instant case, we find that the record amply supports the

Commission’s findings that (a) Nantahala has not been de-

signed, developed, or operated as a stand-alone electric system,

(b) the Nantahala and Tapoco electric facilities constitute a

Single integrated electric system, and (c) the two corporate

affiliates should be treated as a single utility system for rate

making purposes in view of their historical development,

actual operating conditions, and the fact that Nantahala’s

customer cost responsibility cannot be accurately determined

using a “stand-alone” model. The Commission properly deter-

mined that a roll-in methodology for rate making in this case

was appropriate. The assignment of error is meritless.

We also reject Nantahala’s contention that the Commission’s

8 June 1982 order is deficient as a matter of law because

although it sets retail electric rates prospectively and antici-

pates that Nantahala may not be able financially to pay

refunds anticipated because of rate reductions, it does not

require Alcoa as Nantahala’s parem to pay refunds which

Nantahala is unable to make. To the contrary, the Commis-

sion’s finding of fact 20 states in part that “to the extent

Nantahala is financially unable to make the revenue refunds

required in this Order, Alcoa shall refund all or any portion of

the aforementioned revenue refunds that Nantahala is finan-

cially unable to make.” Earlier findings of fact in the order

specify that refunds are required for rate reductions provided

for in this rate case. At the end of the order the Commission

further states: “IT IS, THEREFORE, ORDERED as follows: . . .

7. That, to the extent Nantahala is financially unable to make

revenue refunds required under Ordering Paragraph No. 3

8a

above, Alcoa shall refund all or any portion of the aforemen-

tioned revenue refunds that Nantahala is financially unable to

make.” Nantahala’s assignment of error is meritless.

We now turn to the issue of whether Tapoco wheels to Alcoa

power which Alcoa owns. In its 8 June 1982 order the Com-

mission found as a fact that Tapoco does not wheel certain

power which Alcoa buys directly from TVA for Alcoa’s sole

use for its industrial plant operations in Tennessee. The Com-

mission further reasoned that, assuming for purposes of argu-

ment that Tapoco did wheel this power, such power was not

integrated within the combined Tapoco-Nantahala system. For

both of these reasons the Commission declined to “roll-in” the

costs associated with this purchased power when determining

Nantahala’s retail rate base. The Commission also concurred

with the intervenors’ contention that “should the separate $52

million of Alcoa purchases directly from TVA be rolled into

the total power purchases of the Nantahala-Tapoco unified

system, those purchases should be allocated entirely to Alcoa.”

Alcoa argues that the Commission’s findings were erroneous

because all of the evidence shows that Tapoco does in fact

wheel the power Alcoa purchases from TVA and therefore,

because this power traversed the Tapoco Nantahala system, its

costs should have been rolled into the Commission’s calcula-

tions.

As the Commission noted, “wheeling” is a term used to

denote the transmission of one utility’s power over another

utility’s system. See Town of Norwood v. Fed. Energy Reg.

Com’n, 587 F.2d 1306, 1307 n. 2 (1978); Utah Power and Light

Company v. Morton, 504 F. 2d 728 (1974); Idaho Power

Company v. Federal Power Commission, 346 F. 2d 956, 957 n.

1 (1965). Although evidence in the record conflicts as to

whether Tapoco wheels power to Alcoa, the Commission’s

determination that Tapoco does not wheel is supported by

competent, material, and substantial evidence and therefore we

do not disturb it. A key exhibit in this regard is a contract

identified by Alcoa’s witness H. J. Vander Veen as the FERC

Rate Schedule which governs the alleged wheeling agreement.

9a

This contract which became effective in 1968 and continues

until | March 2005, states in part:

It is desirable to reduce to writing the arrangement be-

tween Tapoco, Inc. (Tapoco) and Aluminum Company of

America (Alcoa) under which power delivered to Alcoa

(from Tapoco and other sources) is transformed and

switched at the high voltage substation facilities of

Tapoco, located adjacent to the Alcoa, Tennessee works

of Alcoa. Accordingly it is proposed that we agree as

follows:

(a) At the substation facilities mentioned above,

Tapoco will perform such necessary transformation and

switching of power delivered to Alcoa as Alcoa shall

direct...

The language in these paragraphs indicates that the contract

governs merely the transformation and switching of Alcoa’s

power at substations adjacent to Alcoa plants. This substation

facilities contract does not concern or address the transmission

of power over Tapoco lines denoted by the term “wheeling.”

We find the Commission’s determination that Tapoco does not

wheel Alcoa’s power to be supported by material and substan-

tial evidence of record and therefore do not disturb it.

We note, however, that the Commission properly determined

that even if Tapoco does, arguendo, wheel power which Alcoa

purchases from TVA for use at Alcoa’s Tennessee plants, the

costs associated with such purchases should not be considered

as a component of the roll-in methodology. As the Commission

observed, no showing was made that this power was integrated

within the Tapoco-Nantahala system with respect to the public

load served by these utilities. As this Court stated in Nantahala

Sub 29 (Remanded), slip op. at 87, S.E. 2d at _

“the Commission accepted that the non-utility direct industrial

purchases that Alcoa makes from TVA are not properly con-

sidered a utility function of eithe: Tapoco, Nantahala or the

combined utility system of both and so are not properly

includable in the cost of service allocation.” We agree with the

10a

Commission’s reasoning on this point and find it to be equally

applicable to the present case. Therefore costs associated with

such purchases were also properly excluded in the roll-in

calculations performed by the Commission in the instant case.

We now turn to other findings that respondents contend are

not supported by evidence of record. Both Alcoa and Nanta-

hala allege that the commission made several mathematical

errors when using the roll-in technique. Specifically, they argue

that the Commission’s attributions of capacity to Nantahala

and Tapoco individually were erroneous and therefore the

roll-in methodology using such figures resulted in erroneous

computations. The basis for these alleged errors is the fact that

instead of adopting the roll-in methodology proposed by re-

spondents’ witnesses, a methodology which would have deter-

mined the utilities’ capacities based on return entitlements set

forth in the New Fontana Agreement, the Commission

adopted the intervenors’ methodology. Under the latter, Nanta-

hala’s costs were determined by a consideration of actual

combined system capabilities, not by the way in which Nanta-

hala and Tapoco share in the New. Fontana Agreement entitle-

ments (as determined by the 1971 Apportionment Agreement).

We hold that the Commission did not err in using the roll-in

methodology proposed by the intervenors; therefore the Com-

mission did not err by using the capacity assignments which it

did. As we stated in Nantahala Sub 29 (Remanded), slip op. at

93-, a Oe. ae oN

The roll-in technique chosen by the Commission is fully

supported by substantial evidence of record and is a

determination which essentially rests within the discretion

of the Commissic in the exercise of its rate making

function. As the United States Supreme Court has ob-

served in reviewing a similar regulatory question, “judg-

ment and discretion control both the separation of

property and the allocation of costs when it is sought to

reduce to its component parts a [utility] business which

functions as an integrated whole.” Colorado Interstate

Gas Co. v. FPC, 324 U.S. at 591, 89 L.Ed. at 1217.

lla

The Commission did not abuse its discretion in adopting the

roll-in methodology which it did, and within this methodology

its calculations of capacity were not erroneous. Therefore we

reject respondents’ arguments concerning these issues.

Alcoa goes on to argue that the Commission ignored certain

evidence placed before it with respect to an alternative roll-in

methodology proposed by John C. Romano, an engineer with

the Public Staff.* There is no evidence that the Commission

ignored this study when deciding which roll-in methodology

would be appropriate in this proceeding. As we held earlier, the

Commission did not abuse its discretion in employing the

particular methodology which it did. We hold that all parties

received a full and fair hearing during the proceedings in this

case. Respondents’ assignment of error is meritless.

The foregoing issues are determinative of this appeal. We

hold that there is no merit to any of respondents’ assignments

of error. Therefore we affirm the decision of the Court of

Appeals.

Affirmed.

4 It is Nantahala’s position that the Commission properly rejected

Romano’s proposed roll-in because of flaws in its methodology.

APPENDIX B

Opinion of the North Carolina Court of Appeals

STATE OF NORTH CAROLINA, ex rel. Utilities Commission;

RUFUS L. EDMISTEN, ATTORNEY GENERAL; PUBLIC

STAFF; HENRY J. TRUETT; SWAIN COUNTY BOARD OF

COUNTY COMMISSIONERS; CHEROKEE, GRAHAM AND

JACKSON COUNTIES; TOWNS OF ANDREWS, BRYSON CITY,

DILLSBORO, ROBBINSVILLE, and SYLVA; and THE TRIBAL

COUNCIL OF THE EASTERN BAND OF CHERCKEE INDIANS;

DEROL CRISP v. NANTAHALA PCWER AND LIGHT COM-

PANY; ALUMINUM COMPANY OF AMERICA; and TAPOCO,

INC.

No. 8210UC1289

(Filed 21 February 1984)

7

APPEAL by respondents from order of North Carolina

Utilities Commission entered 8 June 1982. Heard in the Court

of Appeals 24 October 1983.

This is an appeal from an order of the North Carolina

Utilities Commission reducing rates and requiring a refund by

Nantahala Power and Light Company and Alcoa. This case is

similar in many ways to another rate case which has been in the

appellate courts of this state. See Utilities Comm. v. Edmisten,

Attorney General, 40 N.C. App. 109, 252 S.E. 2d 516 (1979),

aff'd in part and rev’d in part, 299 N.C. 432, 263 S.E. 2d 583

(1980) and State ex rel. Util. Comm’n v. Nantahaia Power, 65

N.C. App. 198, 309 S.E. 2d 473 (1983). We refer to those cases

for a more detailed statement of facts. We note that the New

Fontana Agreement (NFA) and the 1971 Apportionment

Agreement expired by their own terms on 31 December 1982.

Nantahala has now negotiated, independently of Alcoa and

Tapoco, an interconnection agreément with TVA. See Notice of

Decision and Order In the Matter of Nantahala Power and

Light Company, Docket No. E-13, Sub. 44, State of North

Carolina Utilities Commission.

l4a

Nantahala filed on 31 December 1980 an application to

increase its rates for retail electrical services effective 1 Febru-

ary 1981. On 16 July 1981 Alcoa and Tapoco were joined as

parties to the proceedings. After a panel had taken evidence,

the Commission entered an order in which it found that

Nantahala, Tapoco, and Alcoa are public utilities under Chap-

ter 62 of the Generai Statutes. The Commission also found

that the NFA and the 1971 Apportionment Agreement resulted

in substantial benefits to Alcoa to the signiticant detriment of

the customers of Nantahala and the Nantahala and Tapoco

systems should be treated as one entity in setting retail rates for

Nantahala. The Commission found that Nantahala’s rates

were excessive and ordered a refund to its North Carolina retail

customers. Alcoa was ordered to make the refunds to the

extent Nantahala is financially unable to do so.

Respondents appealed.

+

Attorney General Edmisten, by Assistant Attorney General

Richard L. Griffin, and Executive Director of The Public Staff

Robert Fischback, by Staff Attorney Thomas K. Austin, for

the Using and Consuming Public.

Crisp, Davis, Schwentker and Page, by William T. Crisp and

Robert B. Schwentker, for Henry J. Truett; the Counties of

Cherokee, Graham, Swain, Jackson; Towns of Andrews, Dills-

boro, Robbinsville, Bryson City, Sylva; and the Tribal Council

of the Eastern Band of the Cherokee Indians.

Joseph A. Pachnowski for the County of Swain and the

Town of Bryson City.

Western North Carolina Legal Services, Indian Law Unit, by

Larry Nestler, for Derol Crisp.

LeBoeuf, Lamb, Leiby and MacRae, by Ronald D. Jones

and David R. Poe, for Aluminum Company of America and

Tapoco, Inc.

1Sa

Hunton and Williams, by Robert C. Howison, Jr., James E.

Tucker, and Edward S. Finley, Jr., for Nantahala Power and

Light Company.

WEBB, Judge.

Appellants contend (1) the Utilities Commission is pre-

empted by Federal Energy Regulatory Commission regulations

from setting rates that ignore the NFA and the 1971 Appor-

tionment Agreement; (2) the Commission has unconstitu-

tionally burdened interstate commerce; (3) the Commission has

intruded into the exclusive and preemptive jurisdiction of the

FERC under the Federal Power Act; (4) the Commission did

not base its findings that Nantahala and Tapoco constitute a

single integrated system and should be treated as one entity

with respect to determining rates to applicant’s retail customers

on evidence in the record but treated these matters as findings

by the Supreme Court; (5) the Utilities Commission has disre-

garded the determination by the FERC in Nantahala Power

and Light Co., 19 FERC [CCH] par. 61, 152 (May 14, 1982)

and 20 FERC [CCH] par. 61, 430 (September 30, 1982) that the

power exchange agreements are reasonable; (6) that the Com-

mission was in error in finding concealed benefits to Tapoco

and Alcoa in the power exchange agreements; (7) that the

roll-in is fatally flawed because it does not allocate 100% of

the demand factors for Nantahala and Tapoco; and (8) that

Alcoa and Tapoco are not North Caroiina public utilities. We

overrule all these assignments of error on the basis of our

opinion reported at 45 N.C. App. 198, 309 S.E. 2d 473 (1983).

Nantahala argues that the Commission has erroneously as-

sumed that our Supreme Court directed in its opinion that the

Commission set rates through the implementation of a roll-in.

Nantahala contends that as a result the Commission treated

certain statements in the Supreme Court’s opinion as findings

of fact and did not consider some of the evidence. Nantahala

says that the Commission did not consider uncontradicted

l6a

evidence that or an hour to hour basis, which is the only way it

can be considered, that Nantahala’s generation is poorly suited

to meet its load. It argues that the Commission ignored

evidence as to the distinction between primary and secondary

energy, which evidence shows that under the NFA and the 1971

Apportionment Agreement, Nantahala fares better than Ta-

poco and Alcoa. Nantahala also argues that the Commission

ignored evidence that Nantahala and Tapoco are not an inte-

grated company but quoted from our Supreme Court’s opinion

that they are, and accepted our Supreme Court’s conclusion as

an established fact.

Nantahala argues that the Commission did not properly

analyze the NFA and the 1971 Apportionment Agreement and

if it had it would have concluded the power exchange agree-

ments are fair and the roll-in used is not fair. It contends that

the Commission assumed that Nantahala traded its generation

for something of less value, which assumption is not correct.

Nantahala argues that the value of its generation as a stand-

alone system is not as valuable as the Commission assumed. It

does not generate enough power at the right time to serve its

customers and not enough reserve for maintenance allowance

was assigned to it by the Commission. Nantahala argues that

the only way the Commission could assign so small a reserve is

by considering it a part of the TVA system which cannot be

done without the NFA and the 1971 Apportionment Agree-

ment which the Comniission refused to recognize in setting

rates.

Nantahala argues furt: er that the Commission erroneously

assumed that its generation is of the same value to its cus-

tomers that it is to TVA. This is not correct because TVA can

utilize all the energy when generated by Nantahala while

Nantahala’s customers cannot do so. For this reason, in a

bargain with TVA, Naatahala has to take less energy than it

gives in order to secure firm energy which is useful to its

customers. Both Nantahala and Tapoco received less energy

than they gave, but this does not prove Nantahala was short-

changed in the bargain. It simply proves that neither could

}7a

bargain with TVA to get the same amount of energy they

generated. No analysis was made to determine whether Tapoco

had benefitted at the expense of Nantahala in the power

exchange agreements, and if such an analysis had been made, it

would be found that there was no such benefit.

Nantahala argues that the Commission is wrong in its

finding that the NFA is unfair to Nantahala. The evidence is

that Nantahala received sufficient energy under it to meet its

needs for the first ten years of its existence. It says the evidence

shows that the 1963 Agreement was negotiated in conjunction

with a sales contract under which Nantahala sold energy to

Tapoco. The Commission voided this sales contract and the

parties then renegotiated the apportionment agreement. It does

not mean the 1971 Agreement is unfair because the 1963

Agreement contained terms more favorable to Nantahala.

Nantahala makes a persuasive argument which we might

accept if our function were the same as the Utilities Commis-

sion. It is not our function to find the facts or to dictate to the

Utilities Commission the weight to be given material facts. The

evidence in this case as to the unfairness of the NFA and the

1971 Apportionment Agreement to the customers of Nantahala

was similar to the evidence adduced in the case previously

decided. See Nantahala Power, 65 N.C. App. at 209-10, 309

S.E.2d at 482-83. The Commission’s findings of fact were

similar in both cases. We believe the evidence was sufficient to

support these findings of fact and we cannot disturb the weight

given to the facts found.

The appellants argue that the Commission has set rates that

will not allow Nantahala to recover its costs, has required a

refund in excess of the net worth of Nantahala and that this

confiscates the assets of Nantahala and Alcoa in violation of

the Fourteenth Amendment to the Constitution of the United

States and Article I, § 19 of the North Carolina Constitution.

They also argue that this vio:ates G.S. 62-133 which requires

that a public utility be given an adequate rate of return. In

light of our holding that the Utilities Commission set a reason-

able rate of return we overrule these assignments of error.

18a

Alcoa and Tapoco contend that the cause should be re-

manded to the Utilities Commission to consider the evidence.

Ve believe that the Commission has made findings of fact

based on the evidence which supports its order. This assign-

ment of error is overruled.

Alcoa and Tapoco contend they were denied a fair hearing

because the same panel of the Utilities Commission conducted

the hearing that conducted the hearing in the previous case.

Prior to the hearing, Nantahala made a motion that none of

the Commissioners who heard the case in the previous docket

be assigned to this case. This motion was denied. Alcoa and

Tapoco argue that since the panel’s findings of fact and order

in this docket is almost identical to its findings of fact and

order in the previous docket, although the evidence is dif-

ferent, this shows the bias of the panel. We do not believe we

should hold that because the panel made very similar findings

of fact and conclusions of law in both cases that this shows

they were biased. We believe the evidence in this case supports

the findings of fact. We presume the panel based its findings

on the evidence. We do not believe the members of the panel

had to be disqualified because they had heard a previous case

involving the same parties and issues.

Alcoa and Tapoco argue that the Commission could not

pierce the corporate veil of Alcoa and Tapoco. Although the

Commission recited, “that it should pierce the corporate veil”

we do not believe this was done. It did not disregard the

corporate entity of either Alcoa or Tapoco. It did treat Nanta-

hala and Tapoco as being one integrated utility for the purpose

of setting rates and it did require Alcoa to be responsible for a

part of the refund. We do not believe it was necessary to pierce

the corporate veil of either Tapoco or Alcoa to do this.

Alcoa and Tapoco argue that the finding that Nantahala and

Tapoco are one integrated utility is not supported by the

evidence. They argue that the Utilities Commission readopted

its order in the previous docket although the evidence was

substantially different. There was evidence in the record that

the two companies traded all their power to TVA and received

19a

One entitlement in return which they divided between them.

Although there is contrary evidence in the record, we believe

this was substantial evidence which supports the finding of the

Commission.

Tapoco and Nantahala argue thai the allocation of costs by

the Commission is without rational basis in the record. They

say this is so because the Commission should have held that

Tapoco wheels power bought by Alcoa from the TVA and this

power should have been included in the power of the combined

system. They argue that the Commission based its determina-

tion not to include this power on three additional grounds none

of which are valid. They are (1) the Alcoa-TVA purchases are

far greater than other sources of power transmitted by the

combined system; (2) the Alcoa-TVA purchases are not suited

to the public load; and (3) to include the TVA purchases by

Alcoa would “warp and twist” the cost allocation methodology

resulting in a cost increase to Nantahala. They say that it is

irrelevant whether Alcoa’s TVA purchases are large or small,

that Nantahala’s TVA purchases are not suited to Alcoa’s

Tennessee operations, and yet they are included, and the fact

that a factor would increase the cost to Nantahala should not

keep it from being used.

In a previous opinion we held that the Commission was not

required to include Alcoa’s TVA purchases in the roll-in. See

Nantahala Power, 65 N.C. App. at 212, 309 S.E. 2d at 484.

The evidence in that case and in this case shows that Alcoa

purchases large amounts of power from TVA in addition to the

power it receives from Tapoco. This power is transmitted to

Alcoa on Tapoco’s lines. Whether or not Tapoco wheels this

power we believe it is power purchased by Alcoa outside the

unified system and the Commission was not required to con-

sider it in setting a rate.

In finding that the NFA and 1971 Agreement resulted in

concealed benefits to Tapoco and Alcoa at the expense of

Nantahala, the Commission relied or evidence which it ana-

lyzed very similarly to its analysis in .e previous case decided

by this Court. See Jd. at 209-10, 309 S.E. 2d at 482-83. It

20a

found that under the Apportionment Agreement Nantahala

was deprived of 66,000,000 kwh average energy production

annually which went to Tapoco. It found that Nantahala had a

demand generating capacity of 81,800 kw but was limited by

the agreement to 54,300 kw which requires Nantahala to pay

an unnecessary demand charge because of this 27,500 kw loss.

It found that Nantahala received no compensation under the

apportionment agreement for the value of its upstream storage

capacity to Tapoco or for its relinquishment to TVA of the

right to control stream flow. It also found that under the 1971

Apportionment Agreement Nantahala did not receive the bene-

fits it should have received as being part of an integrated

system. The Commission found that the NFA was unfair to

Nantahala in that it was structured to meet Alcoa’s need for a

certain amount of stable energy and not Nantahala’s need for

peaking capacity.

Tapoco and Alcoa argue that in this case they have offered

evidence which refutes this analysis of the evidence. They say

that the conclusion that Nantahala was deprived of 66,000,000

kwh per year was based on a 1960 Ebasco study which is

contradicted by more recent evidence. They also say that the

evidence shows that although Nantahala’s aggregated annual

generation may exceed its sales, much of the energy is gener-

ated at a time when it cannot be used by Nantahala’s cus-

tomers. As to what the Commission found was a 27,500 kw

loss of demand capacity to Nantahala they say that if this

calculation is correct there is no evidence that because Nanta-

hala received less than its generation capacity this gave a

benefit to Tapoco. As a matter of fact, Tapoco received

proportionately less under the agreement for its capacity than

did Nantahala.

As to the upstream storage of water by Nantahala, Tapoco

and Alcoa argue that the Federal Power Act does not permit

upstream licensees to assess a downstream governmental plant

for downstream benefits. Tapoco and Alcoa argue that the

NFA was not structured to meet Alcoa’s needs any more than

Nantahala’s needs. Nantahala received firm power under the

NFA which is what it needs to serve its customers.

2la

Tapoco and Alcoa make persuasive arguments which we

might accept if our function was that of the Utilities Commis-

sion. We believe the Utilities Commission has analyzed the

evidence and made findings of fact that are supported by the

evidence as to the concealed benefits which flow from Nanta-

hala to Tapoco and Alcoa under the NFA and the 1971

Apportionment Agreement.

Tapoco argues that it should be dismissed from the case. It

says no order has been entered affecting it and it is not a

proper party. It argues that it is incurring substantial legal fees

which it should not be required to do. We believe Tapoco is a

proper party to this proceeding. Nantahala and Tapoco have

been held to be one utility for ratemaking purposes in this case.

We hold that Tapoco should remain a party and bound by any

order entered in this proceeding.

Affirmed.

Judges ARNOLD and BRASWELL concur.

APPENDIX C

Opinion of the North Carolina Utilities Commission,

dated June 8, 1982

STATE OF NORTH CAROLINA

UTILITIES COMMISSION

RALEIGH

DOCKET NO. E-13, SUB 35

BEFORE THE NORTH CAROLINA UTILITIES COMMISSION

aos

In the Matter of

Application of Nantahala Power and Light Company for

Authority to Adjust and Increase its Electric Rates

and Charges

aoa

ORDER INCREASING RATES AND

REQUIRING REFUND

HEARD IN:

Swain County Courthouse, Bryson City, North Caro-

lina, on September 16, 1981, and The Commission

Hearing Room, Dobbs Building, 430 North Salisbury

Street, Raleigh, North Carolina 27602, on February 23,

24, 25, and 26, 1982, and March 2, 3, 4, 5, 9, 10, 11, and

12, 1982

BEFORE:

‘Commissioner Sarah Lindsay Tate, Presiding; and

Commissioners A. Hartwell Campbell and Douglas P.

Leary

24a

APPEARANCES:

For Nantahala Power and Light Company:

Robert C. Howison, Jr., James E. Tucker, and William

Matthews, ilunton & Williams, Suite 400, Branch Bank-

ing and Trust Building, PO. Box 109, Raleigh, North

Carolina 27602

For Aluminum Company of America and Tapoco, inc.:

Ronald D. Jones, David R. Poe. and Dennis P. Harka-

wik, LeBoeuf, Lamb, Leiby & MacRae, 140 Broadway,

New York, New York 10005

For Cherokee, Graham, Jackson, and Swain counties,

North Carolina; the towns of Andrews, Bryson City,

Dillsboro, Robbinsville, and Sylva, North Carolina; The

Tribal Council of the Eastern Band of Cherokee Indians;

and Henry J. Truett:

William T. Crisp and Robert B. Schwentker, Crisp,

Davis, Schwentker and Page, P.O. Box 751, Raleigh,

North Carolina 27602

For the Using and Consuming Public:

Richard L. Griffin, Assistant Attorney General, P.O.

Box 629, Raleigh, North Carolina 27602

Thomas K. Austin and Karen Long, Staff Attorneys,

Public Staff—North Carolina Utilities Commission, P.O.

Box 991, Raleigh, North Carolina 27602

BY THE PANEL: On December 31, 1980 Nantahala Power

and Light Company (Applicant, the Company, or Nantahala)

filed an application with the Commission seeking to increase

its rates and charges for retail electric service in North Carolina

effective February 1, 1981. The proposed increase in rates and

charges was designed to produce approximately $2,147,853 of

additional revenues for Nantahala’s North Carolina retail

operations based upon the test year level of operations. On

January 18, 1981, the Commission issued an Order designating

this proceeding to be a general rate case, pursuant to G.S.

25a

62-137, and suspending Nantahala’s application for a period of

270 days, pursuant to G.S. 62-134.

On January 16, 1981, the Puti'c Staff and the Attorney

General moved to dismiss the application, or, in the subordi-

nate alternative, to defer hearing the case and to join Nanta-

hala’s parent company, Aluminum Company of America

(Alcoa), and Nantahala’s affiliate, Tapoco, Inc. (Tapoco), as

parties to the proceeding. The Public Staff and the Attorney

General argued that Nantahala’s application was deficient in

that it did not include “roll-in” data which, in the view of the

moving parties, was required by the Supreme Court’s decision

in State ex. rel. Utilities Commission v. Edmisten, 299 N.C.

432 (1980). Answers were filed by Nantahala, Alcoa, and

Tapoco on February 6, 1981. On March 13, 1981, the Commis-

sion issued an Order entitled “Ruling on Motions and Schedul-

ing Hearings,” in which it denied the motions to dismiss or join

additional parties but ordered Nantahala to submit data and

testimony in this docket on the issue of utilizing a rolled-in cost

of service treating Nantahala and Tapoco as a single system for

rate-making purposes. In that Order, the Commission stated:

“Upon analysis of the Supreme Court’s decision, the

current status of Docket No. E-13, Subs 29 and 35, and

the contentions of the parties, the Commission concludes

that a roll-in determination is required in Docket No.

E-13, Sub 35 independently and irrespective of whether

such a determination is required in Docket No. E-13, Sub

29. Because the test period in Docket No. E-13, Sub 29

was for the year ending December 31, 1975, and the test

period in the current case is for the year ending December

31, 1979, and because Docket No. E-13, Sub 29 involves a

rate base determined on fair value, and the current case

involves a rate base to be determined on original cost, the

Commission believes the factual and legal framework of

the two cases is such that a roll-in determination in the

remanded case is not necessarily dispositive of whether a

roll-in determination is required in the current case.

Whether a roll-in is beneficial is a question of fact that

26a

may vary as the facts of each case change, and thus it

would not appear that a finding in the remand case will

necessarily determine that outcome in the new case. Ac-

cordingly, the Commission concludes that Nantahala’s

application is defective for failure to include rol!-in data,

and that if the Commission were to proceed to hearing in

this case without requiring Nantahala to file roll-in infor-

mation, it would be violating the Supreme Court’s man-

date which controls both the remanded case and the new

case.”

On March 23, 1981, all of the Intervenors in this docket at

that time filed their Motion to Reconsider the Joinder of Alcoa

and Tapoco as Parties and Exceptions to Rulings on Motions

and Scheduled Hearings.

On April 16, 1981, the Public Staff filed a Renewal of

Motion to Dismiss, Alternative Motion to Continue Hearing

and Extend the Time to File Testimony.

On April 13, 1981, Exceptions were filed by Nantahala to

Portions of Rulings on Motions and Scheduled Hearings.

On April 14, 1981, Nantahala filed its Response to Renewal

of Motion to Dismiss; Alternative Motion to Continue Hearing

and Extend the Time to File Testimony.

On April 29, 1981, the Commission issued an Order Resche-

duling Hearings to Begin on September 15, and Extending

Time for Filing Testimony and Giving Notice.

On May 19, 1981, the Commission issued an Order changing

the hearing dates to begin in Bryson City on Wednesday,

September 16, 1981, for the purpose of receiving testimony

from public witnesses. The hearing was held in Bryson City as

scheduled and public witnesses were heard.

On July 13, 1981, the Commission issued an Order referring

the hearing in this docket to this panel of Commissioners.

On July 16, 1981, the Commission issued an Order Joining

Alcoa and Tapoco as Parties to these proceedings. Also on

July 16, 1981, Nantahala filed a notice of undertaking pur-

suant to G.S. 62-135 of suspended rates. Nantahala also filed a

27a

Petition to Delay the Effective Date of Commission Order of

March 13, 1981, Tolling or Suspending of Time Periods.

On July 21, 1981, an Errata Order was issued to show the

correct date for the hearings to begin. On July 22, 1981,

Response of Intervenors to the Notice and Petition filed by

Nantahala on July 16, 1981, was filed and motion was made to

require Tapoco and Alcoa to join in Nantahala’s undertaking

as signatory parties or guarantors.

On July 28, 1981, Order Allowing Rates to be Collected

Pursuant to G.S. 62-135 was issued by the Commission.

On July 31, 1981, Petition to Intervene was filed by Derol

Crisp and allowed by Commission Order of August 12, 1981.

On July 31, 1981, and on August 3, 1981, Errata Orders

were issued by the Commission to correct several errors in the

Order issued on July 28, 1981, allowing rates to be coliected

pursuant to G.S. 62-135.

On July 31, 1981, Tapoco and Alcoa filed Statements of

Exceptions, Request for Reconsideration, and Request for

Clarification of the Commission Order joining them as parties

to this proceeding, and Order was issued on September 4,

1981, denying the Motions.

On August 12, 1981, Nantahala filed Undertaking to Re-

fund.

Motion to Cancel or Limit Scope of Hearing was filed with

the Commission on August 20, 1981, by Nantahala, and an

Order Limiting Scope of Hearings of September 18, 1981, was

issued by the Commission on August 31, 1981.

On September 4, 1981, Tapoco and Alcoa filed a Motion for

Scheduling Additional Hearings and for Permission to File

Testimony.

On September 4, 1981, Nantahala filed a Motion Regarding

Membership of Hearing Panel, and Order Overruling Motion

for Different Panel was issued September 15, 1981.

On September 8, 1981, Nantahala filed a Motion for Contin-

uance of hearing in this proceeding. By Order of September 15,

1981, Nantahala’s Motion for Continuance of the hearings

scheduled to begin September 22, 1981, save that being held on

28a

September 16, 1981, in Bryson City, was allowed and continu-

ance granted to February 23, 1982. The Order further extended

the 270-day period for a period of 154 days upon Nantahala’s

waiver of its right to object to such extension.

Or September 9, 1981, Intervenors to this proceeding filed

Response to Nantahala’s Motion to Chalienge the Panel.

On September 11, 1981, Intervenors filed Response to (1)

Tapoco’s and Alcoa’s Motion to Bifurcate Hearings and (2)

Nantahala’s Motion for Continuance which had been filed on

September 2, 1981. By Order of September 16, 198i, the

Motion by Alcoa and Tapoco to bifurcate the hearings into

two phases was denied.

On September 18, 1981, Petitions to Intervene were filed by

the town of bryson City and the county of Swain and allowed

by Commission Order of October 5, 1981.

On September 23, 1981, Nantahala filed Exceptions to the

Order Overruling Motion for Different Panel.

On October 5, 1981, Exceptions were filed by Tapoco and

Alcoa to the Order Overruling Motion for Different Panel.

On December 17, 1981, the Commission issued its Order

Fixing Time for Alcoa and Tapoco to File Testimony on or

before January 22, 1982.

On December 18, 1981, Alcoa and Tapoco filed Motion for

Clarification; Motion to Suspend Schedule; Reservation of

Federal Rights, and a Supplement to said Motions was filed on

December 22, 1981. Intervenors filed their Response to said

Motion on January 4, 1982. By Order issued on January 21,

1982, the Commission denied the Motion for Clarification

except as set out therein; denied the Respondent’s Motion for

Continuance and ordered that the Panel tak¢ judicial notice of

the Commission Orders in Docket No. E-13, Sub 29, including

the September 2, 1981, Order and the Final Order when issued.

On January 6, 1982, Nantahala filed Reservations of Federal

Rights.

On January 7, 1982, Alcoa and Tapoco filed Motion to

Compel Response to Data Request, to which Intervenors filed

their response on January 20, 1982.

29a

On January 22, 1982, Tapoco filed Motion to Dismiss,

Alternative Motion for a Bill of Particulars, and Statement on

Nonfiling to which Intervenors filed their Response on January

29, 1982. On February 8, 1982, Order was issued by the

Commission denying Motion to Dismiss and Motion for Bill of

Particulars.

On January 29, 1982, Alcoa filed Statement of Position and

Reservation of Rights.

On February 11, 1982, the Intervenors filed a Motion to

Strike the Testimony and Exhibits of witnesses Little and Toof.

On February 19, 1982, the Complainants in Docket No.

E-13, Sub 36, filed for leave to withdraw their complaint

against Nantahala, Alcoa, and Tapoco. This Complaint had

been filed with the Commission on January 16, 1981, and had

been consolidated for hearing with Docket No. E-13, Sub 35,

by Order issued on September 4, 1981. Defendants had twice

moved for dismissal of this action. On February 22, 1982, an

Order allowing withdrawal of the compiaint was issued. On

February 24, 1982, this Order was modified to the extent that

the complaint was dismissed with prejudice.

The proceeding first came on for hearing in Bryson City,

North Carolina, on September 16, 1981, at which time the

following public witnesses testified in support of the Inter-

venors: Virginia Gribble, Marie Leatherwood, Charles S.

Slagle, Derol Crisp (an Intervenor), Frank Young, Barbara

Eberly, Alfred Lindsey, Eugene McMonigle, Pauline Styles,

Ray Wright, Robert Fouts, Tom Underwood, Jeanne Shannon,

Spencer Clark, Victor E. Shannon, Howard Patton, Harold L.

Gershenoff, Elizabeth Dewees, Veronica Nicholas, Vance

Fouts, James Coggins, Nell R. Rogers, Edward J. Skelley,

Ruth Littlejohn, William G. Davis, Gladys Griffin, Helen

Kirkland, Lucy Riley, Emaline Cucumber, Stacy Saunooke,

Fred W. Bumgarner, Mary Alice Greer, Karl Nicholas, Sue

Cypher, H. P. Browning, Helen Jacobs, Rose Greer, Katy

Brady, James B. Childress, Ramona Eddy, Gene Stamey, Ted

Farmer, Carrol E. White, Dale Nations, and Mary Lou Byrd.

Witnesses Crisp, Wright, Leatherwood, and V. Nicholas identi-

30a

fied several exhibits some of which were admitted into evi-

dence. Witness Veronica Nicholas, a County Commissioner of

Jackson County, testified again in Raleigh at the renewal of the

proceedings and again identified exhibits which were admitted

into evidence.

The resumed proceedings came on for hearing as scheduled

on February 23, 1982. Previously, on January 22, 1982, Tapoco

had filed a motion to dismiss wherein, in the alternative,

Tapoco said that if the motion were not granted, Tapoco would

not file testimony in the proceeding. On February 8, 1982, an

Order issued which denied Tapoco’s motion. Tapoco did not

pretile testimony and upon the coming on of the case for

hearing, counsel for Alcoa announced that Tapoco would not

participate in the hearing. However, during the course of the

hearing, counsel for Alcoa announced that he was also ap-

pearing in behalf of Tapoco for certain purposes and made

motions in behalf of Tapoco.

On the afternoon of February 23 and continuing through

February 24-26, March 2-5, and March 9-i2, 1982, the Com-

mission held hearings as to which witnesses listed below testi-

fied (due to scheduling problems witnesses did not testify in the

order listed below). The subject of their testimonies is summa-

rized as follows:

For Nantahala: (1) N. Edward Tucker, Jr., Vice President of

Rates and Research of Nantahala, an electrical engineer who

testified as to certain adjustments to the 1979 book revenue

and expenses, the 1979 book and the proposed rate of return,

the proposed Purchased Power Adjustment, the methodology

used for allocating revenues, expenses and rate base, the results

of allocation studies, and the design of the proposed retail rate

schedules; (2) William M. Jontz, President of Nantahala, an

electrical engineer, who testified as to Nantahala’s service

areas, the customer growth in usage of electrical energy in-

crease in original cost of electric plant in service since the last

rate increase, the increase :n operation and maintenance ex-

penses, the need for rate increase, and Nantahala’s ability to

obtain debt financing and additional capital; (3) Stuart G.

3la

McDaniel, Senior Vice President of Associated Utility Service,

Inc., who testified as to rate base, operating revenues and

expenses, Overall rate of return on present and proposed rates

for Nantahala as a stand alone company, and on a rolled-in

basis with Tapoco, Inc.; (4) Herbert J. Vander Veen, a principal

in the Washington Utility Group of Ernst & Whinney, who

testified as to a rolled-in cost of service for a single unified

Nantahala-Tapoco public utility system which would supply

the full electrical requirements for the Alcoa smelting and

fabricating load in eastern Tennessee and the public load in the

five-county service area in western North Carolina and the

reasons why he did not think any type of roll-in was appropri-

ate; and (5) Joseph F. Brennan, President of Associated Utility

Services, Inc., who testified as to the fair rate of return which

Nantahala should be afforded an opportunity to earn on its

rates for retail electric service in North Carolina.

For the several intervenors: (1) Curtis Toms, Jr., Supervisor

Accounting Division—Communications Section, Public Staff,

who testified as to the revenues, expenses, and investment of

Nantahala, of Nantahala on a total company roiled-in basis, of

Tapoco on a total company rolled-in basis, and of Nantahala

and Tapoco on a rolled-in basis as if the two companies were

one entity; (2) Dr. Robert Weiss, economist in the Economic

Research Division of the Public Staff, who testified as to a

proper overall fair rate of return for Nantahala to earn on its

North Carolina retail operations and a proper capital structure

with regard to common equity, long-term debt, and preferred

stock; (3) David A. Springs, head of the power supply planning

and power systems planning section of Southern Engineering

Company of Georgia, who testified as to his review and

analysis of materials filed in the proceeding and in other

proceedings, including various contrasts between and among

Nantahala, Tapoco, Alcoa, and TVA, as to a recommendation

for appropriate capacity and energy allocation factors under a

rolled-in allocation of cost responsibility of the Nantahala-

Tapoco system, as to a recommendation for separation of

utility costs and revenues from nonutility costs and revenues,

32a

and in opposition to some of the testimony of witnesses for

Nantahala, Tapoco, or Alcoa; and (4) J. Bertram Solomon,

electric rate consultant with Southern Engineering Company of

Georgia, who testified as to the results of the Intervenor’s

combined Nantahala-Tapoco allocation cost-of-service study.

For Nantahala: Joseph F. Brennan, who had previously

testified, testified in opposition to the capital structure of Dr.

Weiss which had included preferred stock.

For Alcoa: (1) John C. Romano, Utilities Engineer, Electric

Division, Public Staff, who identified his prefiled testimony

- and exhibits which had been withdrawn prior to commence-

ment of the hearing; (2) Bruce Barstow, Vice President for

Public Relations and Advertising of Alcoa, who testified as to

Alcoa’s position with regard to its wholly owned subsidiary,

Nantahala; (3) George J. Myers, Power Manager of Alcoa’s

Tennessee operations and President of Tapoco, who testified as

to Tapoco’s physical plant and operations and to the scope of

regulation of federal agencies having jurisdiction over Tapoco;

(4) Dr. David I. Toof, manager in the Washington Utility

Group of Ernst & Whinney, who testified as to the concerns

expressed by the North Carolina Utilities Commission that

Nantahala’s relationship with Alcoa has had an adverse impact

on Nantahala’s ratepayers, including how a revenue require-

ment model was defined and developed, based on specific

assumptions which were used to produce alternative scenarios

involving Nantahala’s operations; (5) John M. Little, partner

in Ernst & Whinney and member of the Washington Utility

Group, who testified as to the Supreme Court’s concern that

Nantahala’s relationship with Alcoa has had an adverse impact

on Nantahala’s ratepayers and explained the results of studies

conducted by himself and Dr. Toof which analyzed the impact

that Alcoa has had on Nantahala and its ratepayers from 1940

to 1980; (6) Dr. William J. Leininger, employee of Ernst &

Whinney and co-director of the Washington Utility Group,

who testified as to how Nantahala’s New Fontana Agreement

entitlements fit its load, to show the rate advantage to Nanta-

hala’s customers compared to other retail rates in North

33a

Carolina and Tennessee and to show that Alcoa’s total power

cost is greater than the total power cost to Nantahala where

total power cost equals the sum of the generation plus pur-

chased power; (7) B. S. Cockrell, employed by Alcoa as

Operating Manager-Power, who testified as to the development

of Alcoa’s Tennessee operations and as to Nantahala’s and

Tapoco’s, and as to why, in his opinion, Tapoco came out

second best in the New Fontana arrangements and that Alcoa

is subsidizing Nantahala’s ratepayers; and (8) Herbert J. Van-

der Veen, who had previously testified, testified in opposition

for applying a roll-in methodology for ratemaking and in

rebuttal to the testimony of intervenor witness Springs.

For Nantahala: (1) Herbert J. Edwards, Jr., Senior Vice

President, Ebasco Business Consulting Company, who testified

in rebuttal to Intervenor’s witnesses Springs’ and Soloman’s

allocation methodology; (2) Jeff M. Makholm, a Staff Econo-

metrician employed by Associated Utility Services, Inc., who

testified in rebuttal to Intervenor’s witness Weiss’ statistical

analysis and to review his analysis and conclusions concerning

the relationship between common equity ratio and total capita-

lization for electric utilities; and (3) N. Edward Tucker, who

had previously testified, testified as to Nantahala’s operations

under the Fontana, New Fontana, and 1971 Apportionment

Agreements and in opposition to Intervenor witness Springs’

allocation methodology.

In addition to the testimony of the witnesses, virtually every

witness sponsored one or more supporting exhibits.

Upon the close of testimony by witnesses for the Inter-

venors, Tapoco made an appearance in the case. Alcoa and

Tapoco moved for dismissal of that portion of the case relating

to the roll-in methodology. The motion was disallowed.

Following the close of the hearings, the parties were re-

quested to file briefs and proposed Findings of Fact and

Conclusions of Law within 30 days of filing of the last

transcript of testimony. The parties did file briefs and proposed

orders in apt time.

34a

Upon consideration of the testimony and exhibits presented

at the hearing and the entire record in this docket, the Com-

mission makes the following

FINDINGS OF FACT

1. Nantahala is a duly organized public utility company

under the laws of North Carolina, subject to the jurisdiction of

this Commission, and is holding a franchise to furnish electric

power in the western part of the state of North Carolina under

rates and service regulated by this Commission as provided in

Chapter 62 of the General Statutes.

2. Tapoco is a duly organized public utility and is domesti-

cated as such under the laws of North Carolina. It is subject to

the jurisdiction of this Commission with respect to its retail

rates and electric service as provided in Chapter 62 of the

General Statutes.

3. Both Nantahala and Tapoco are wholly owned subsidi-

aries of Alcoa. Alcoa is a public utility pursuant to G.S.

62-3(23)c and is subject to the jurisdiction of this Commission

with respect to retail ratemaking.

4. The Nantahala and Tapoco electric facilities constitute a

single, integrated electric system and are operated as such by,

and as a coordinated part of, the Tennessee Valley Authority

(TVA) system.

5. For purposes of setting the Applicant’s rates in this

proceeding, the Nantahala and Tapoco systems should be

treated as one entity with respect to all matters affecting the

determination of the Applicant’s reasonable cost of service

applicable to its North Carolina retail operations.

6. The New Fontana Agreement (NFA), executed by TVA,

Alcoa, Nantahala, and Tapoco, and the resultant 1971 Appor-

tionment Agreement between Tapoco and Nantahala have

resulted in substantial benefits to Alcoa to the significant

detriment of the customers of Nantahala.

35a

7. The methodology employed by the Intervenors in making

cost-of-service allocations is the most appropriate fo: use in

this proceeding. Consequently, each finding of fact appearing

in this Order which deals with the proper level of rate base,

revenues, and expenses has been determined based upon said

methodology.

8. Nantahala-Tapoco’s originai cost of electric plant is

$21,955,280, consisting of electric plant in service of

$50,161,648; construction work in progress of $371,262; re-

duced by the accumulated provision for depreciation of

$25,539,709; accumulated deferred income _ taxes of

$2,973,551; and accumulated deferred investment tax credit

(pre-1971) of $64,379. |

9. The reasonable allowance for working capital is

$1,035,212, consisting of cash working capital of $625,057,

materials and supplies of $497,389, FERC license expense of

$48,076, unamortized maintenance of $56,607, less customer

deposits of $191,917.

10. Nantahala-Tapoco’s original allocated cost rate base is

$22,990,492. This amount consists of net original cost of

electric plant of $21,955,280, plus a reasonable allowance for

working capital of $1,035,212.

11. The approximate gross revenues from electric operations

for the test year, after accounting and pro forma adjustments,

under rates approved by Commission Order of june 14, 1977,

are $17,882,589 and after giving effect to the Company pro-

posed increase is $20,030,442 ($17,882,589 + $2,147,853).

12. The approximate level of test year operating expenses

under rates approved by Commission Order of June 14, 1977,

after accounting and pro forma adjustments, including taxes

and interest on customer deposits, is $13,976,104 which in-

cludes an amount of $1,547,242 for actual investment currently

consumed through reasonable actual depreciation after annual-

ization to year-end levels.

36a

13. The reasonable capital structure to be employed as a

basis for setting rates in this proceeding is composed as

follows:

LMR ccatec ae ees bee cree 49.3%

RNY 3. ous eo parbeeees eee Res 50.7%

Total 100.0%

14. The proper cost for debt and preferred stock is 8.46%.

The reasonable rate of return Nantahala should be allowed to

earn On common equity is 16.5%. Using a weighted average

for the cost of debt and common equity, with reference to the

reasonable capital structure heretofore determined, yields an

overall fair rate of return of 12.54% to be applied to the

Company’s original cost rate base. Such rate of return will

enable Nantahala, by sound management, to produce a fair

return for its shareholder, to maintain its facilities and service

in accordance with the reasonable requirements of its cus-

tomers, and to compete in the market for capital funds on

terms which are reasonable and fair to the customers and to its

existing investor.

15. The approximate annual level of revenues which Nanta-

hala should be authorized to collect through rates charged for

its sales of service, based upon the findings of fact set forth

hereinabove, is $15,735,791.

16. The rates and charges of Nantahala, based upon the

adjusted test year level of operations, under rates approved by

Commission Order of June 14, 1977, are excessive to the extent

that said rates produce a level of revenue which is $2,146,798

($17,882,589 - $15,735,791) greater than the Applicant’s reve-

nue requirement (cost of service). Thus, Nantahala should be

required .o reduce said rates and charges in a manner so a’ to

achieve an annual gross revenue reduction of approximately

$2,146,798, based upon the adjusted test year level of opera-

tions.

17. Nantahala should be required to refund to its North

Carolina retail customers all revenue collected since September

3/a

3, 198., under the rates approved by Commission Order issued

June 14, 1977, and proposed rates put into effect August 1,

1981, to the extent that said rates produced revenue in excess

of the rates approved herein. Said refund shall include reve-

nues collected under the Company’s base rate structure as well

as through operation of the Purchased Power Adjustment

Formula plus interest computed and compounded at the legal

annual rate.

i8. The Applicant should base all residential customer’s

billings on monthly meter readings.

19. The Applicant’s Purchased Power Adjustment Clause

should be formulated so as to permit the Applicant to recover

from its North Carolina retail customers 26.56% of the total

demand-related purchased power costs and 26.06% of the total

energy-ralated purchased power costs attributable to Nanta-

hala/Tapoco in the future. Appiicant should also refund recov-

eries it has made from its North Carolina retail customers via

its Purchased Power Adjustment Clause to the extent such

recoveries exceeded 26.56% of the total demand-related pur-

chased power cost and 26.06% of the total energy-related

purchased power cost attributable to Nantahala/Tapoco

during the test period. The Applicant should also list the

Purchased Power Adjustment as a separate item on each

billing.

20. Alcoa has so dominated certain transactions and agree-

ments affecting its wholly owned subsidiary Nantahala that

Nantahala has been left but an empty shell, unable to act in its

own self interest, let alone in the interest of its public utility

customers in North Carolina. Therefore, this Commission is

compelled to find that, to the extent Nantahala is fitancially

unable to make the revenue refunds required in this Order,

Alcoa shall refund ail or any portion of the aforementioned

revenue refunds that Nantahala is financially unable to make.

21. Nantahala’s proposed rate design and service rules are

reasonable and appropriate as modified herein.

38a

EVIDENCE AND CONCLUSIONS FOR FINDING OF FACT NO. 1

The evidence for this finding is contained in the verified

application and in the record as a whole. This finding is

essentially procedural and jurisdictional in nature and is not

contested.

EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT

Nos. 2 AND 3

The Commission Order of October 3, 1980, in this docket

declared Tapoco and Alcoa to be public utilities in North

Carolina and subject to the jurisdiction of the Commission.

That Order, with its findings and conclusions and discussion of

the evidence in support thereof, is attached hereto as Exhibit A

and is incorporated into this Order by reference. The Commis-

sion concludes that Tapoco is a public utility and is subject to

the jurisdiction of this Commission with respect to its retail

rates and electric service. The Commission also concludes that

Alcoa is a public utility pursuant to G.S. 62-3(23)c and is

subject to the jurisdiction of this Commission with respect to

retail ratemaking.

EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT

Nos. 4 AND 5

In its opinion, Utilities Commission v. Edmisten, Attorney

General, 299 NC 432, the Supreme Court stated, at page 435.

“The transmission facilities of Nantahala and Tapoco are

integrated and interconnected into a single system . .

And at pages 442 and 443, the Supreme Court further

concluded that the Nantahala-Tapoco electrical system is a

single system:

“In light of the foregoing, we cannot agree with the

Commission that the evidence is insufficient to warrant

the treatment of Nantahala and TYapoco as a single system

for rate making purposes. The ‘roll-in’ device, or tech-

nique, for rate making computation seems especially

39a

appropriate in a case such as this where one physically

integrated system interconnected in such a way that all

power available to the system can be used to enhance its

overall reliabiuty and supply its requirements as a whole,

is presided over by two corporate entities (See, e.g.,

Central Kansas Power Co. v. State Corporation Commis-

sion, 221 Kan. 505, 561 P. 2d 779 (1977)). This is espe-

cially true when both corporate entities are wholly owned

by a parent corporation which benefits from the power

generated by the system. This device does nothing more

than recognize that the two corporate entities ought, for

rate making accounting purposes, be treated as the one

electrical power producing and distribution system which,

in fact, they are. If the then unlawful preferences are

indeed accorded to Alcoa to the detriment of Nantahala’s

customers because of the separate corporate structures

apd the intercorporate apportionment agreements, this

ratemaking device would seem to eliminate them. 3

These conclusions by the Supreme Court based on evidence

adduced in Docket No. E-13, Sub 29, that Nantahala and

Tapoco constitute a single, integrated electric system and

should be treated as one system for rate-making purposes,

have been carefully considered by the Commission in light of

the evidence presented in this docket. Notwithstanding the

assertions of witnesses for the respondents that the Court’s

decision was based on the “misconception” that Nantahala and

Tapoco are a single, unified system, the evidence presented in

this proceeding strongly reinforces the Supreme Court’s deter-

mination in this regard. The evidence is overwhelming and

undisputed that Nantahala and Tapoco are both wholly owned

by one corporate parent, Alcoa. The facilities of Nantahala

and Tapoco are located in contiguous areas in western North

Carolina. The Nantahala and Tapoco electric facilities are

physically interconnected with each other, and both companies

are interconnected with TVA; power can be dispatched and

transmitted from the facilities of one to the facilities of the

other. The original Fontana and the New Fontana Agreements

40a

treat the facilities of Nantahala and Tapoco without dis-

crimination and make them an integrated part of, and subject

them to coordination by, the TVA system. By the terms of these

agreemer'!s TVA receives the output of all of the hydro re-

sources of both Nantahala and Tapoco, except for three small

projects of Nantahala. By terms of these agreements Tapoco

and Nantahala also turn over to TVA control of production

stream flow. Accordingly, TVA determines for Tapoco and

Nantahala, as a single entity, both electric generation and

stream flow and operates them as a coordinated system as a

part of TVA’s own system. In turn, Tapoco and Nantahala

jointly receive back from TVA certain entitlements of power

which they divide between themselves by the 1971 Nantahala-

Tapoco Apportionment Agreement.

Intervenors’ witness Springs testified that it is a “false and

arbitrary assumption that NP&L and Tapoco operate as iso-

lated systems when in fact they do not.” (Tr. Vol. 14, p. 28)

When witness Springs was asked whether the Nantahala and

Tapoco facilities should each be operated as a separate and

independent system, he replied: “No, by coordinating them as

One system with TVA, the outputs of the generating resources

are maximized.” (Tr. Vol. 14, p. 41) Witness Springs also

testified that, from an engineering standpoint, the Nantahala

and Tapoco facilities should be operated as one utility.

The Commission concludes that the Nantahala and Tapoco

electric facilities constitute a single, integrated electric system

and are operated as such by, and as a coordinated part of, the

TVA system.

The Commission also concludes that, for purposes of setting

Nantahala’s rates in this proceeding, the Nantahala and Ta-

poco systems should be treated as one entity with respect to all

matters affecting the determination of Nantahala’s reasonable

cost of service applicable to its North Carolina retail opera-

tions. Elsewhere in this Order the Commission has made

findings and conclusions determining that a roll-in of Tapoco

together with Nantahala for rate-making purposes will result in

a significant reduction in the cost of providing public utility

4la

electric service to the customers of the combined Nantahala-

Tapoco system. The Commission incorporates those findings

and conclusions herein.

Finally, the roll-in calculations adopted herein accord no

preference to either the North Carolina public load or to the

Alcoa load in Tennessee. The rate base, revenues, and expenses

of Tapoco and Nantahala are rolled together for cost alloca-

tion purposes of the unified public utility system and not to

create a preference for either Alcoa or Nantahala as to energy

production or the New Fontana Agreement entitlement. The

roll-in is a method of cost allocation and not a technique for

assigning preferences for energy use.

It is unnecessary, at this juncture, for the Commission to

decide the possible future issue of whether or not Alcoa, as the

public load grows, will be entitled to a lesser share of the

energy output of the combined Nantahala-Tapoco system. It is

currently sufficient that the Commission apply the roll-in to

the facts in this record. By virtue of that methodology, a lesser

quantum of higher cost Nantahala energy has been averaged

with a higher quantum of lower cost Tapoco energy. As a

result, the average cost of roll-in energy is lower than the cost

of Nantahala-only energy, and the Nantahala customers are

entitled to the benefits of this lower cost.

EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT

Nos. 6 AND 7

The Commission, as previously discussed, has determined

for purposes of this proceeding that the Nantahala and Tapoco

systems should be treated as one entity. The Commission must

now determine the proper allocation methodology to be used

in apportioning the combined revenues, expenses, and invest-

ment of the Nantahala-Tapoco system between that applicable

to said system’s North Carolina retail operations and that

applicable to said system's operations over which this Commis-

sion has no jurisdiction.

Generally speaking, the allocation methodology that Nanta-

hala and Alcoa would have the Commission adopt for use

42a

herein is based in all material respects upon demand and

energy entitlements as described and set forth in the 1962 New

Fontana Agreement and the 1971 Tapoco-Nantahala Appor-

tionment Agreement. The Commission will first address the

impropriety of basing cost allocations on demand and energy

entitlements as contained in the 1962 New Fontana Agreement

and the 1971 Tapoco-Nantahala Apportionmer:: Agreement as

proposed by Nantahala and Alcoa.

There are a number of inequities to Nantahala that arise out

of both the New Fontana Agreement (NFA) and the 1971

Tapoco-Nantahala Apportionment Agreement (Apportion-

ment Agreement) that result in Alcoa’s receiving concealed

benefits. Because the inequities of the NFA are more subtle and

difficult to express than are those of the Apportionment

Agreement, the 1971 Apportionment Agreement will be dis-

cussed first.

A. Concealed Benefits of the 1971 Apportionment

Agreement

(1) Quantity of Nantahala’s Energy Generation

According to the 1960 Ebasco Study, Nantahala’s annual

primary energy generation was 360,090,000 kWh and the

average annual energy generation for the period 1924-1959 was

439,000,000 kWh; generation for the .est year was 593,986,000

kWh. The Ebasco study showed:

“(a) The primary energy capability under the most ad-

verse water conditions of record. This quantity was

found to be 360 million kilowatt hours per year.

“(b) The average energy that could be generated annually

by these hydroelectric plants. This quantity was

found to be 439 million kilowatt hours per year.”

The difference of 79,000,000 kKWh between the primary

energy capability and the average annual energy is considered

as Interrupuble energy. When the three small Nantahala plants

not included in the NFA return entitlement from TVA are

43a

deducted, annual average energy reduces to 426,000,000 kWh

and the 79,000,000 kWh interruptible energy is reduced to

66,000,000 kWh. By the same token, primary energy capability

under the most adverse water conditions is reduced to

351,800,000 kWh.

Based upon these establishec and known facts, in 1963, after

the NFA was executed, Alcoa entered into a written agreement

with Nantahala wherein Nantahala was apportioned a certain

share of the NFA return entitlements. This agreement appor-

tioned to Nantahala 360,000,000 kWh minimum production

plus actual production in excess of 360,000,000 kWh; that is,

an average of 426,000,000 kWh annually (360,000,000 kWh +

66,000,000 kWh), using this language:

“2. Nantahala should be entitled each month to an

amount of energy which when added to its generation at

plants not operated under ihe above mentioned agreement

of December 27, 1962, shall be the equivalent either to its

total actual generation during that month or to the one-

twelfth of its annual primary generating capability which-

ever shall be the greater. The annual primary generating

capability of Nantahala as used in the foregoing sentence

is agreed to be 360 million kilowatt hours.”

By this agreement, Nantahala received annually the average

of 426,000,000 kWh, of which 360,000,000 kWh was guaran-

teed as a minimum.

Despite these facts, when Mr. Popovich, an Alcoa employee,

devised the 1971 Apportionment Agreement, he credited Nan-

tahala with only 360,000.000 kWh annually which he defined

as 351,276,000 kWh primary (40.1 MW x 8,760 hrs. in a year)

plus fuel replacement of 8,760,000 kWh (1 MW x 8,760 hrs.)

which he defined as dump energy. In comparison to the 1963

Apportionment Agreement with Alcoa, Nantahala was de-

prived of 66,000,000 k Wh average energy production annually.

The detriment to Nantahala constitutes a benefit to Tapoco

that is passed on to Alcoa.

44a

(2) Size of Nantahala’s Dependable Generating Capacity

As one aspect of the 1971 Apportionment Agreement, Nan-

tahala has a limitation placed upon its.dependable generating

capacity of 54,200 kW with the result that any month it has to

provide a customer demand in excess of 54,300 kW, it must pay

a monthly demand charge to TVA for all demand over that

limitation. If the limitation were at Nantahala’s actual depend-

able generating capacity of 81,800 kW, a monthly demand

charge would be saved for 27,500 kW; i.e., the difference

between 81,800 kW and 54,300 kW (when customer demand

equalled or exceeded the 81,800 kW level).

Demand charges imposed on Nantahala for use of capacity

between its assigned capacity of 54,300 kW and its actual

dependable capacity of 81,800 kW would represent an expense

to Nantahala and, thus, a savings to its New Fontana Agree-

ment sister Tapoco, since the capacity constraints for the TVA

return entitlements are jointly shared by them under the New

Fontana Agreement. Tapoco’s savings are passed on to Alcoa

sO as to become Alcoa savings; i.e., a concealed benefit to

Alcoa.

The record clearly and convincingly establishes that Nanta-

hala’s correct capacity is in fact 81,800 kW and that, by being

assigned a demand limitation of only 54,300 kW, Nantahala

suffers significant monthly financial loss.

The 1960 Ebasco Study, undertaken for Nantahala by inde-

pendent experts, computed Nantahala’s dependable generating

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. The Ebasco Study compu, a-

tion is confirmed in an old memorandum of W. T. Walker,

Nantahala’s president, wherein he notes that in 1965 another

independent source had analyzed Nantahala’s allowed capacity

under the original Fontana Agreement to be only 35,172 kW.

Not only was this allowed capacity under the original Fontana

Agreement regarded as unrealistic, but a capacity much higher

than 54,300 kW was thought to be proper. The Walker memo-

randum states:

45a

“. . . He thought his allocated capacity to be unreason-

able for a company with 84.3 Mw of co-ordinated capac-

ity under adverse water conditions, so he allocated 74.9

Mw to Nantahala. . .”

The Walker memorandum continues on the same page by

even noting that “George Popovich’s proposed allocation to

Nantahala. . .” for capacity would be 75,000 kW.

Based upon these established facts, after the NFA was

executed, Alcoa entered a written agreement with Nantahala in

the year 1963 wherein Nantahala was allowed to use capacity

without limitation. This agreement, mentioned in the previous

section, thereby permitted Nantahala to use actual capacity to

the limits assigned by the 1960 Ebasco Study.

Intervenors’ witness Springs testified that after adjustment

for reserves, the allowable capacity of 84,300 kW, under most

adverse water conditions, should be 81,800 kW.

Despite these impressive studies and facts, when witness

Popovich accomplished his study for the 1971 Apportionment

Agreement, while accepting the most adverse water capacity

factor of 84,300 kW, he deducted 27,500 kW for the “largest

unit out” te reach an assigned capacity of 54,300 kW. This

deduction is for the Nantahala facility which forms upwards of

50% of the entire Nantahala generation system of 11 dams.

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

designed. Nantahala’s two largest facilities are Thorpe (pre-

viously Glenville), completed in 1941 with 21,600 kW capacity,

and Nantahala, completed in 1942 with 43,200 kW capacity.

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 Depart-

ment and expressly argued and avowed that they were part of

the Alcoa system. In Intervenors Ex. DAS-7, at pp. 5-6 of 11,

it is recorded that Alcoa said of these two Nantahala plants:

4éa

“At the present time, Alcoa receives power from three

dams located on tributary waters of the Tennessee River

at Calderwood, Tennessee and Tapoco, North Carolina,

(Cheoah and Santeetlah developments). . .

“To improve the present power situation and to supply a

portion of the 200,000 additional kW required for na-

tional defense purposes, applicant proposes to build two

new developments, also on tributaries of the Tennessee

River, at Glenville and Nantahala, North Carolina. . .

The estimated total addition to the Alcoa power system is

51,500 Kw, part of which will be produced at the new

developments and part from additional water released for

us downstream.” (emphasis added). (Apparently, the two

new projects were finally designed for their actual greater

combined capacity, 64,800 kW.)

Furthermore, for the past 40 years, both Nantahala and

Tapoco have been operated as an integral part of the TVA

electric system pursuant to the provisions of the Fontana and

New Fontana Agreements. Moreover, when Alcoa negotiated

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. In this

regard, offered as evidence is a memorandum of Alcoa’s

meetings with TVA respecting negotiations for the NFA whe-

rein the TVA proposals were based on integration into and

coordination with the TVA system.

With -Nantahala and Tapoco being thus integrated into and

coordinated with the TVA system, it is not appropriate to

determine Nantahala’s actual dependable generating 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.” Due to the favorable operating

47a

characteristics being, for instance, low operating speeds, rug-

gedly constructed equipment, and restarting capability without

auxiliary power, the reserve requirements of a hydro system are

very low. Intervenors’ Ex. DAS-17, being a portion of the 1980

contract of the Southern Company Services Intercompany

Interchange, at page 6 of 6, shows that a 3% hydro reserve is

proper.

Using a 3% reserve in place of the “largest unit out” reserve,

in this case upwards of 50%, would establish a capacity under

most adverse water conditions of 81,800 kW as opposed to the

1971 Apportionment Agreements calculation of 54,300 kW.

This is what Intervenors’ witness Springs testified the calcula-

tion should be.

Significant cost is shifted to Nantahala by the unfair and

unwarranted limitation of its dependable generating capacity

to 54,300 kW. Conversely, that expense, in the form of demand

charges paid to TVA, is a concealed benefit to Alcoa.

3. Nantahala’s Upstream Storage Benefits to Tapoco

Nantahala’s projects are upstream of Tapoco’s projects,

except 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, Nantahala’s

storage has a value to Tapoco. It is granted that TVA’s Fontana

project now lies between the Nantahala and Tapoco projects.

However, that does not diminish the value of Nantahala’s

stored water to Tapoco since, when Nantahala releases water,

that water, or its equivalent, can be released by Fontana so as

to flow through to Tapoco.

On January 10, 1941, before Fontana was constructed and

even before the Fontana Agreement, Nantahala applied to the

War Department for a certificate to build the Glenville (now

Thorpe) and Nantahala projects, noting that they should be

upstream of the Calderwood and Cheoah dams. That applica-

tion, in part, makes this statement about the upstream bene-

fits:

48a

“". . It is contemplated that they will store water during

the winter months, and will be used in the dry season to

produce additional power and also to make available

additional water for the developments downstream. . .”

A 1956 study estimated the upstream storage benefits of the

two major Nantahala projects to Tapoco’s downstream facili-

ties. As shown by Intervenors’ Ex. DAS-9, the Nantahala and

Thorpe projects yield a continuous relative contribution to

Tapoco’s Calderwood and Cheoah projects of 4.3 MW (sum of

1.5 MW and .8 MW for Calderwood and 1.3 MW and .7 MW

for Cheoah). This is the equivalent of 37,668,000 kWh an-

nually as Nantahala’s upstream storage benefit to Tapoco

(4,300 x 8,760 hours).

Despite the presence of Nantahala’s upstream storage bene-

fits to Tapoco, when witness Popovich devised the 1971 Ap-

portionment Agreement, Nantahala received no credit for this

benefit. Of course, the benefit accrued to Tapoco who passed

the concealed benefit on to Alcoa.

4. TVA’s Right to Control Nantahala’s Properties

By the 1941 Fontana Agreement, Nantahala, at the instance

of Alcoa, gave to TVA the right to control the storage and flow

of water from its several hydroelectric projects. Respecting the

value of this right, the Fontana Agreement, at page 3, in part,

states:

“Whereas, the most efficient and economical operation of

the hydroelectric plants on the Tennessee River and the

Little Tennessee River and their tributaries requires the

closely coordinated operation of the system of Authority

(sic, TVA) with Company’s (sic, Nantahala & Tapoco)

plants, and such coordinated operation will make possible

substantial benefits and economies; and

“Whereas, operation under the provisions of this agree-

ment will aid in the control of floods, the promotion of

navigation, and the conservation of stored water; and

”

49a

Unquestionably, Nantahala’s giving up of rights constituted

a loss of considerable value for which loss Nantahala has been

entitled to compensation. Under the terms of the New Fontana

Agreement, the right to control the storage and flow of water

for Nantahala’s facilities was again passed to TVA.

With the 1963 Apportionment Agreement between Alcoa

and Nantahala, Alcoa agreed to continue to pay to Nantahala

monies for Nantahala’s loss of those operational rights. More-

over, the agreement clearly stated that TVA was continuing to

pay value for those rights, which value is reflected in the TVA

return entitlement of the New Fontana Agreement. The 1963

Alcoa-Nantahala Apportionment Agreement at pages 1-2, in

part, states:

“Whereas, the agreement dated August 14, 1941, known

as the ‘Fontana Agreement’ has been superseded in cer-

tain respects by a new agreement dated December 27,

1962; and

“Whereas, heretofore Nantahala has received certain pay-

ments which represented payments to Nantahala from

operating its properties in accordance with the terms of

the Fontana Agreement; and

“Whereas, the above-mentioned agreement of December

17, 1962, (sic, NFA) was entered with the understanding

among Nantahala, Alcoa and Tapoco, Inc. (a) that the

benefits accruing to Nantahala thereunder would include

’ the right to continue to receive payments equal in amount

to the above-mentioned payments. . .”

* * * * * *

“Now, therefore, it is agreed that during the term of the

above-mentioned agreement of December 27, 1962:

“1. Alcoa shall pay Nantahala in monthly installments

the sum of $89,200 per annum which amount shall be in

addition to the amounis otherwise paid by Alcoa to

Nantahala for energy under such power purchase contract

as shall be in effect from time to time.”

50a

In the year 1963, in Docket No. E-13, Sub 13, to which the

Commission takes judicial notice, the North Carolina Utilities

Commission found the following facts concerning the TVA

return entitlement as including a reimbursement to Nantahala.

At page 8, the Commission stated:

“ . . The Evidence offered by Nantahala further dis-

closed that Nantahala operates under a working agree-

ment between its parent, Alcoa, and TVA (the Fontana

Agreement), wherein TVA exercises control of water re-

lease in the Nantahala generating system. For this privi-

lege, TVA delivers to Alcoa approximately 25,600,090

kWh at 100 percent load factor (compensation power) for

the credit of Nantahala. . .”

At page 10, the Commission further stated:

“7. Alcoa pays Nantahala for TVA’s control of the release

of water in Nantahala’s generating system at the rate of

3.5 mills per KWh, based on 25,600,000 KWh annually.

This payment is below the rate paid by Alcoa to Nanta-

hala for firm power.”

Despite the fact that the NFA includes in the TVA return

entitlement a reimbursement by TVA for the right to operate

Nantahala’s projects for which Alcoa previously paid $89,200

annually to Nantahala, when witness Popovich devised the

1971 Apportionment Agreement, he gave no credit to Nanta-

hala for that entitlement.

Under the terms of the 1971 Apportionment Agreement,

Nantahala receives neither an energy credit or a monetary

payment for the right given up. Naturally since the TVA

payment for the operational rights, which is paid with energy

in the NFA rate entitlement, did not got to Nantahala, it inured

to the benefit of Tapoco. In turn, Tapoco passes this concealed

benefit to Alcoa. (It should be noted at 3.5 mills has, for many

years, constituted far less than the present value of electric

energy).

Sla

5. Nantahala’s Upstream Storage Benefits to TVA

Another failure of the 1971 Apportionment Agreement re-

specting Nantahala’s participation is that the Popovich for-

mula does not consider the proper value to Nantahala of the

fact that the Nantahala, Tapoco, and TVA systems are inter-

connected. Interconnection is of considerable value to TVA

completely aside from the fact that Nantahala’s rate base

includes 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 usuai benefits of an intercon-

nected and coordinated system.

Intervenors’ Ex. DAS-23 consists of many pages of Alcoa

memoranda reflecting the path of negotiation between Alcoa

and TVA for the New Fontana Agreement. While there are

several references to the matter of interconnection, the Com-

mission refers only to a few which illustrate that interconnec-

tion has considerable value. At page 28 of 85, one

memorandum says:

‘

*. . . Copies of our studies were given to TVA and they

showed that the new TVA proposal could be supplied

from our present system without any apparent considera-

tion given to gains that TVA will realize from integration

and the peaking capacity on our system.

“As mentioned above, TVA will check our studies on their

own computer and if these studies are confirmed, we will

have immediate discussions in an effort to determine what

studies should be made to properly determine the benefits

of integration, use of our peaking, etc. .

Again, on page 30 of 85, Intervenors’ Ex. DAS-23, an Alcoa

memorandum states:

“II. We do not believe present TVA proposal equitable

because:

“a. Our system will alone produce the TVA proposal .

We argued, however, that TVA could realize advantages of

———.

integration, peaking, etc., and still provide their proposal

to us from our system.”

Again, on page 34 of 85 of Intervenors’ Ex. DAS-23,

another Alcoa memorandum states:

“There is a strong feeling among the Engineering Depart-

ment, particularly Messers Gnuse, Tompkins, Eagleton,

Popovich and others, that the value to TVA of integrated

operation is much greater in 1960 than it was in 194] at

the time the contract was negotiated. They have argued

that because of this, TVA should be willing to renegotiate

the entire Fontana Agreement recognizing the present

inequities. . .”

Of course, during further negotiations, Alcoa was able to

derive considerable gain from TVA for the integrated systems

factor. The Commission has previously mentioned certain

benefits of a coordinated, integrated operation, such as the

need for smaller reserves and, in this case, that TVA actually

controls production of generation and storage waters.

However, the Commission has not yet mentioned the benefit

to TVA of Nantahala’s projects that are upstream of TVA’s

Fontana Project. In an integrated system such benefit is

maximized. Since the Fontana Project is located below Nanta-

hala’s projects and above the Tapoco projects, other than

Santeetlah, the Fontana Project receives the benefit of the

storage capability of the Nantahala projects. Indeed, the TVA

Tennessee River system receives the benefit of the storage of all

of these projects located on the Little Tennessee River system.

This is especially true since, under the New Fontana Agree-

ment, TVA has control of ail these reservoirs on the Little

Tennessee River system, except the three small projects of

Nantahala which are not included. Intervenors’ Ex. DAS-9

shows the results of a study of downstream storage benefits.

According to this study, the Nantahala and Thorpe units alone

added 12,400 kW of continuous primary power to the TVA

system. This is equal to 108,624,000 kWh per year (12,400 x

8,760 hours). The Commission has already considered that the

53a

upstream Nantahala and Thorpe projects yield a continuous

relative contribution to Tapoco’s Calderwood and Cheoah

projects of 4,300 kW, which is 37,668,000 kWh annually. This

benefit to Tapoco should be deducted from Nantahala’s total

upsiream storage benefit of 108,624,000 kWh in order to

obtain Nantahala’s upstream storage benefit to TVA. After

deduction, Nantahala’s annual upstream storage benefit to

TVA is calculated to be 70,956,000 kWh.

Examination of the NFA reveals that the parties cancelled

Out their respective upstream storage benefits when that bar-

gain was struck. Since Nantahala provided benefits down-

stream to both TVA and Tapoco, and TVA provided benefits

dowr.stream to Tapoco, it was Tapoco which gained by that

mutual cancellation. Certainly, Nantahala lost the benefit of

the value of 70,956,000 kWh annually. Surely, Nantahala

should receive in a joint agreement with TVA the benefit of

that integrated upstream storage.

When the 1971 Apportionment Agreement was entered into

between Tapoco and Nantahala, Tapoco should have been

willing for Nantahala to have an additional 70,956,000 kWh

annually assigned to it as the value of integrated storage, but

when Mr. Popovich devised the apportionment formula Nanta-

hala got no such benefit. As a consequence, to Tapoco’s

benefit, Nantahala was deprived of one value of the intercon-

nection with the TVA system. This concealed benefit flowing

from Nantahala to Tapoco is, of course, passed on by Tapoco

to Alcoa.

6. Summary of Detriments to Nantahala from the 1971

Apportionment Agreement

By the 1971 Apportionment Agreement, Nantahala was

given no credit for the following:

1. Average production in ex- |

cess Of primary production (as

compared to the 1963 Alcoa-

Nantahala Apportionment Agree-

8 Pere Terre ee 66,000 kWh annually

Ee

S4a

2. Upstream storage benefits to

Tae oe oe 37,668,000 kWh annually

3. TVA rights to operate Nanta-

hala properties .......eeccees 25,600,000 kWh annually

E Whi 646062 eee 70,956,000 kWh annually

200,224,000 kWh annually

In addition, Nantahala received no credit for its dependable

generating capacity of 27,500 kW over the 54,300 kW assigned

to it, for which Nantahala must pay demand charges to TVA

when monthly demand exceeds assigned capacity.

The North Carolina Supreme Court, in Utilities Commission

v. Edmisten, supra, at pages 440-441, when considering just

the failure of Nantahala to receive benefit for its average

production, stated:

“

. . Suffice it to say that the assertion that Nantahala’s

public is fairly served by a contract requiring Nantahala

to purchase additional power regardless of the adequacy

of its own generation assaults the common sense of this

Court. . .” (emphasis added).

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 ratepayers, the gravity of

which far exceeds even that envisioned by the Supreme Court.

B. Concealed Benefits of the 1962 New Fontana Agreement

(1) NFA Entitlements Structured to Meet Alcoa Load

The concealed benefits flowing from Nantahala to Alcoa by

virtue of the New Fontana Agreement are entirely different

from those previously discussed which flow from the 1971

Tapoco-Nantahala Apportionment Agreement. The basic in-

equity to Nantahala arising out of the NFA is that the energy

entitlement returned to Nantahala and Tapoco from TVA is

5Sa

structured to meet Alcoa’s steady demand for a certain amount

of electricity for purposes of aluminum production rather than

the more variable demand for a public service load. Conse-

quently, the NFA returns an average of 218,300 kW demand at

a high load factor with minimal peaking deviation, which load

factor is principally designed to service Alcoa’s pot-lines and

other production electrical requirements. Even the interrupti-

ble and curtailable energy entitlement returned to Tapoco-Nan-

tahala is in increments of wattage that conform to the demands

of a pot-line so that, if power is interrupted or curtailed, Alcoa

can respond by cutting out a particular pot-line.

Nantahala, on the other hand, has a fluctuating demand for

energy which has peaks and valleys. This is typical of a public

service load. Nantahala’s electrical requirement is for assured,

but constantly, variable amounts. Nantahala needs peaking

capacity and its generation projects possess peaking capacity;

yet the NFA traded away that peaking capacity to TVA. The

Intervenors contend that it would be ridiculous, as a result of

enlightened, arm’s-length bargaining, to turn over Nantahala’s

peaking capacity to TVA and then, at such time as its service

load requires peaking capacity, to buy that same capacity back

from TVA at a very high price. The Commission agrees that the

detriment resulting to Nantahala from the design of the NFA

flows to Alcoa as a benefit.

Intervenors’ witness Springs testified as to the details of

Alcoa’s concealed benefits derived under the NFA. He showed

that Alcoa reaped benefits through the improvement of the

availability of Tapoco’s secondary energy production to an

average curtailment rate of only 8%.

He also showed that the Tapoco generation statistics reflect

coordination with the Fontana Project and other forms of

integration with TVA. Certainly the mode of operation is

inconsistent with the isolated system model utilized as the basis

for the 1971 Apportionment Study. As stated in a memoran-

dum by George Popovich contemporaneously with the negotia-

tion of the NFA:

56a

“It is my opinion that, to Alcoa, the present proposal (sic,

NFA) represents an improvement over the existing Fon-

tana Agreement. In dry years this improvement could be

substantial. . .”

Alcoa was in direct control of the negotiations and, unlike

the Nantahala ratepayers, has had every ability to protect its

own interest during the negotiations. Alcoa cannot now be

heard to claim that it is dissatisfied with the NFA.

(2) NFA Entitlements Not Intended to Meet Pubtic Load

One reason the NFA may have been designed so exclusively

to meet Alcoa’s needs, to Nantahala’s detriment, was that

when the NFA negotiations were underway, the parties contem-

plated the sale of Nantahala’s distribution system to Duke

power Company. By the sale to Duke, Nantahala would have

been left with its generation but would have been without a

public service load. Nantahala would then have taken its NFA

entitlement and delivered it all to Alcoa. Accordingly, the

power Nantahala would have gotten under the NFA would

have been satisfactory for delivery to Alcoa irrespective of

quantity and design.

A sale of Nantahala’s distribution system to Duke has been

approved by the North Carolina Utilities Commission, and the

approval Order, in turn, had been approved by the Superior

Court. It was not until the year 1963 that the Supreme Court

stopped the sale, which date was after the New Fontana

Agreement had been executed. See Utilities Commission v.

Membership Corp., 260 N.C. 59, 131 SE 2d 865 (1963). Prior

to the Supreme Court’s action, Alcoa personnel had believed

that the sale to Duke was to be approved. Thus, in an Alcoa

memorandum dated May 27, 1960, it is recorded:

“. . . They (sic TVA) asked us the status of the sale of

Nantahala To Duke. We told them that the matter was at

a standstill at the present time but we were continuing our

efforts to complete the transaction and we expected that

the sale would take place perhaps within the next year

”

.

S7a

In a memorandum of August 23, 1960, it is stated:

“One final note, the entire TYA 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 contract becomes effective, they would increase

the power available to us under the purchase contract to

whatever amount is necessary for us to handle the Nanta-

hala peak. This would be done on a temporary basis and

would be reduced concurrent with the transfer of the

Nantahala properties to Duke.”

In another memorandum of November 6, 1962, which is the

final memorandum after completion « £ all negotiations for the

NFA, the following is written:

. . In my opinion it will be preferable for us to sell the

Mission Plant to TVA whenever we transfer the Nantahala

properties to Duke. . .”

These memoranda ciearly establish that during the entire

2 1/2 year period over which the NFA was negotiated between

TVA and Alcoa, both parties contemplated that Nantahala’s

entire public service load would be sold to Duke. Based on this

assumption, the entire TVA return entitlement to Alcoa was

structured in such a manner as to meet Alcoa’s load require-

ments for aluminum production. In no manner was the NFA

structured to meet Nantahala’s needs. The Commission sup-

ports this obvious conclusion even further by noting that on

January 1, 1963, five days after the signing of the NFA, Alcoa

and Nantahala executed an agreement between themselves to

reflect “understandings” made between the affiliated compa-

nies at the time of the signing of ine NFA. In this agreement, tt

was Stated:

“Whereas, the above-mentioned agreement of December

27, 1962, was entered into with the understanding among

Nantahala, Alcoa and Tapoco, Inc. (a) that the benefits

accruing to Nantahala thereunder would include the mght

to continue to receive payments equal in amount to the

S8a

above-mentioned payments and, in addition, the right

each month to an amount of energy which, together with

its generation at plants not under said agreement, would

be equivalent to its total actual generation but in no event

less than one-twelfth of its annual primary generating

capability, and (b) that certain obligations and benefits

thereunder would be performed and enjoyed as herein set

forth...”

The significance of this latter agreement is that since the

NFA was obviously structured to Alcoa’s need rather than to

Nantahala’s, Aicoa and Nantahala agreea that Nantahala

could obtain certain power entitlements from the TVA return

and, additionally, receive other monetary benefits from Alcoa.

Also, Intervenors’ expert witness Springs testified, in part, as

follows:

“Throughout the negotiations, TVA and Alcoa had every

reason to assume that NP&L’s distribution would soon be

sold otf to Duke Power Company. NP&L did not even

have a representative at any of the negotiating sessions.

Alcoa secured the benefits of being integrated with TVA, |

including the benefit of storage releases from Fontana

which are vital to the operating of Tapoco’s facilities .

The 1963 Apportionment Contract shows in its face that

the New Fontana Agreement was never intended as a

20-year power supply for NP&L public load. It appears

that NP&L’s officers and consultants were primarily con-

cerned with the effect of the Agreement on the ongoing

rate case and transfer cases before the NCUC and not

with the interest of NP&l. ratepayers over the 20-vear

eriod of Agreement.” (emphasis added).

(3) Summary of Ineguities to Nantahala from the NFA

To summarize the foregoing inequities to Nantahala which

result from the New Fontana Agreement, it can be stated that

the TVA return entitlement was entirely designed to meet

Alcoa’s aluminum production needs and was not suitable for

|

59a

Nantahala’s public service needs. Nantahala needed peaking

capacity and had peaking capacity from its own generating

stations, yet Nantahala gave up that capacity with the result

that it must buy high cost power from TVA to meet its peaking

responsibilities. The extra costs thus incurred by Nantahala

inure to the benefit of Alcoa. For instance, by the 1963

Alcoa-Nantahala Apportionment Agreement, even Alcoa rec-

ognized, in fact, the unfairness to Nantahala produced by the

NFA and agreed to pay an annual cash settlement of $89,200,

to Nantahala to offset some of the inequities.

C. Dominance of Alcoa over Nantahala and Tapoco

The Commission notes that while Nantahala’s facilities were

obligated as provided under the Original Fontana Agreement,

it was not even permitted to be a signatory thereto. Even

though it was signatory to the New Fontana Agreement, it did

not participate in the negotiations of that agreement. More-

over, Nantahala’s employment contract wiih its president,

William M. Jontz, in effect from 1976 to 1981, provides, in

pertinent part:

“2. Section 2. Duties and Responsibilities. Employee is

hereby employed by Nantanhala as Chief Executive Officer

of Nantahala and shall act in such capacities pursuant to

the supervision and direction of the Board of Directors of

Nantahala (hereinafter sometimes referred to as the

‘Board’). Major general objectives of such employment

during the term hereof are for the Employee to:

“(a) Manage Nantahala as a public electric utility,

within the restraints of regulatory controls, so as to

achieve a profitability consistent with other public

‘electric utilities in North Carolina.

“(b) Develop plans for the possible sale or other

disposition of Nantahala and execute such plans

should the Board of Directors of Nantahala so

direct.

“(c) Accomplish (a) and (b) above so that there is

little or no adverse impact on the operations and

60a

assets of Nantahala’s parent company, Aluminum

Company of America, and its subsidiaries in North

Carolina, including, but not limited to, the genera-

tion and transmission of electric power by Tapoco,

Inc. and Yadkin, Inc. and the operations cf the

Badin Works of Aluminum Company of America.”

* * * * * *

“Section 3. Compensation. For the performance on his

duties and responsibilities, Employee shall receive the

following compensation:

“(1) Base Salary. . . .(NOTE: this subparagraph is

not further here quoted, but it provided for probable

annual achievement awards.)

“(b) Achievement Award. To be determined an-

nually by the three-member Aluminum Company of

America group among the Board of Directors of

Nantahala and to be based on the performance of

Employee in reference ‘o the major general objec-

tives set forth in Section 2 hereof. The probable

annual achievement awards for the respective con-

tract years are set forth above.

* * * * * *

“Section 6. Nondisclosure. . . . Nor shall Employee in

any manner, directly or indirectly, aid or be a party to any

act, the effect of which would tend to divert, diminish or

prejudice the good will or business of Nantahala or of

Nantahala’s parent company, Aluminum Company of

America and its subsidiaries in North Carolina, Tapoco,

Inc. and Yadkin, Inc.”

Alcoa’s dominance over Nantahala is obviously and fre-

quently documented in the results of various arrangements it

has caused Nantahala and Tapoco to enter into. Such domi-

nance has caused detriment to Nantahala and has resulted in

the passing of concealed benefits to Alcoa. Other indications

of dominance of Nantahala by Alcoa are that its facilities are

6la

integrated and interconnected into Tapoco’s so as to form a

single system; the majority of Nantahala’s Directors are em-

ployees of Alcoa; an Alcoa Vice President has the proxy for

selecting the board membership; under the President’s new

employment contract he receives incentive awards at the in-

Stance of a committee of directors, which committee would

include only Alcoa employees since the other directors are

subordinate to the president and would be excluded; the

decision to negotiate alone with TVA for a new agreement to

replace the expiring New Fontana Agreement was forced upon

Nantahala by the Alcca-Tapoco decision to exclude Nanta-

hala’s interes: from its negotiations with TVA; and Alcoa

controls accounting policies.

Alcoa’s dominance over Tapoco is more blatant than its

dominance over Nantahala. Tapoco’s headquarters are at

Alcoa, Tennessee; its president is a salaried employee of Alcoa

serving Alcoa as its Alcoa, Tennessee, power supply manager;

its vice presidents are Alcoa employees; it serves only its

owner; it sells all of its NFA entitlements to Alcoa for a

nominal 4 1/2% profit; each corporate director is an Alcoa

employee; Alcoa provides all Tapoco financing; and Alcoa

controls the ultimate operation and accounting policies even to

the extent of physically keeping Tapoco’s financial records and

books at Alcoa’s Pittsburg headquarters.

Based upon the foregoing and upon careful consideration of

the entire evidence of record, the Commission concludes that it

should reject the Companies’ proposed cost allocation method-

ology in that said m@thodology in all material respects is based

upon the 1962 New Fontana Agreement and the 1971 Tapoco-

Nanrtahala Apportionment Agreement.

Before going forward with a specific discussion of the

Intervenors’ allocation methodology, it is appropriate to ex-

amine two questions which were vigorously contended as

between Alcoa and Tapoco on the one hand and the Inter-

venors on the other hand. First, does Nantahala-Tapoco wheel

power for Alcoa? And second, are Alcoa’s separate purchases

of power directly from TVA part of the capacity requirements

of the Nantahala-Tapoco integrated system?

62a

D. Does Nantahala-Tapoco Wheel Power for Alcoa?

During the test year Alcoa purchased directly from TVA

2,140,410,000 kWh, an average demand of approximately

245 MW, for its Tennessee operations at a cost of $52,155,136,

which it claims should be considered as a part of the capacity

requirements of the Nantahala-Tapoco single, unified public

utility system. Alcoa and Nantahala contend that 245 MW of

power should become part of the capacity requirements of the

Nantahala-Tapoco system because the power was allegedly

wheeled by Tapoco from TVA to Alcoa. The Intervenors

dispute this contention on the grounds that there is no wheeling

in fact and, if so, that the 245 MW of power is not integrated

with the other power carried by the Nantahala-Tapoco unified

public utility system.

Wheeling has a particular definition. In Town of Norwood

v. FERC, (1978), the Court defined “wheeling” as an industry

term which denotes the use of one utility’s transmission facill-

ties to transmit from another utility. In Jdaho Power v. FPC,

(1965), the Court defined “wheeling” as the transmission of

One company’s power Over another company’s system.

Alcoa-Nantahala witness Vander Veen identified a letter

contract between Aicoa and Tapoco as the FERC schedule

which governs the alleged wheeling arrangement. However,

that letter contract does not mention either “wheeling” or

“transmission” to support the Companies’ position. Instead,

the contract states:

“At the substation facilities mentioned above, Tapoco will

perform such necessary transformation and switching of

power delivered to Aicoa as Alcoa shall direct.”

Under the New Fontana Agreement, TVA maintains and

operates the substation in question for which Alcoa pays TVA.

Article V, section 6, provides:

“In consideration for the provision, operation, and main-

tenance by TVA of the Alcoa Switching Station and

related facilities, Company will pay TVA a monthly facili-

ties rental of $2,500.

63a

Moreover, by the terms of the New Fontana Agreement,

TVA can use the Company’s transmission facilities for furnish-

ing power to others including the Company. Article III, section

2c), in part, provides:

a . Company and TVA may from time to time mu-

tually agree for TVA to use Company’s transmission

facilities for the transmission to others of power gener-

ated at Company’s plants and other power which TVA

may wish to transmit.”

When viewing the FERC Rate Schedule in light of these

provisions of the New Fontana Agreement, it seems clear that

Tapoco’s contact with the Alcoa purchases from TVA is mini-

mal; i.e., transferring and switching, and does not rise to a

usual wheeling transaction. This view is greatly emphasized

when considering that Alcoa is an industrial customer of TVA

for an amount of power that is twice as great as is Tapoco’s

NFA entitlement.

Moreover, Tapoco is completely out of the financial arrange-

ments between TVA and Alcoa as to the purchased power.

Tapoco does not even reflect these Alcoa purchases from TVA

on its FERC Form 1. And, too, Tapoco sells all of its power;

i.e., its NFA return entitlement from TVA, to Alcoa.

The record reflects that during the test year 1979, Alcoa

bought $52,155,136 in electric power directly from TVA, which

Alcoa used solely for iis industrial plant operations in Tennes-

see. The record establishes without dispute that neither Nanta-

hala nor Tapoco generated, bought, sold, acquired, or had any

right to use that electricity. Alcoa retained 100% control over

such power at all times. Where Nantahala and Tapoco, as

public utilities, do not generate, acquire, buy, sell, or have the

right to control the use of electric power, no such ungenerated,

unacquired, unbought, unsold, and uncontrolled power should

be a part of the capacity requirements of the Nantahala-

Tapoco public utility system.

Additionally, Tapoco failed to report on its Form 1 to FERC

that it wheeled $52 million of power to Alcoa. One reason for

this failure is that TVA bills Alcoa directly for the power.

64a

Tapoco does not become involved with the purchased power,

either financially or through line losses.

E. Are Alcoa’s Separate Purchases of Power Directly from

TVA Part of the capacity requirements of the Nantahala-

Tapoco Integrated System?

Assuming arguendo the Companies’ contentions regarding

wheeling are correct, there is no showing that the power is at

all integrated with the combined system. The further issue is

whether the separate power purchased by Alcoa directly from

TVA has become available to the Nantahala-Tapoco system to

meet its public service load. If Tapoco had any contact at all

with the separate Alcoa power purchases directly from TVA, at

most the Tapoco activities are limited to Transforming and

Switching, which activities do not rise to the level of transmis-

sion as required for wheeling. However, if it is assumed, again

for purposes of argument, that Tapoco did wheel the separate

Alcoa power purchased directly from TVA, such power should

not be treated as a part of the Nantahala-Tapoco unified

system power because the power never entered into the Nanta-

hala-Tapoco unified system. Even though the TVA power

enters Tapoco’s substation at Alcoa, Tennessee, such power

does not traverse the Nantahala-Tapoco electrical system. In-

stead, at most, that power is released by TVA at the Alcoa

substation where it is transformed and immediately switched

over to the Alcoa service lines. Such power could never be

available to serve any portion of the public service load. Most

fundamentally, its identity as Alcoa power is never lost since

Alcoa never releases control of the use of that power in its

capacity as ultimate consumer of that power from TVA.

Therefore, based upon the foregoing and other evidence of

record, the Commission concludes that it would oe completely

erroneous to find either (1) that the Alcoa purchases from TVA

are wheeled by Tapoco to Alcoa or (2) that such power, if

wheeled, enters into and becomes a part of the capacity

requirements of the Nantahala-Tapoco unified public utility

system.

|

65a

Allocation of the costs of the Nantahala-Tapoco unified

system invoives several aspects; namely, (a) allocation of the

$52 million of separate Alcoa purchases directly from TVA and

(b) allocation of the Nantahala-Tapoco integrated system. The

Commission will treat these two items separately.

F. Allocation of the Separate $52 Million o, Alcoa Pur-

chases Directly From TVA

The Intervenors contend, and the Commission concurs, that

should the separate $52 million of Alcoa purcivases directly

from TVA be rolled into the total power purchases of the

Nantahala-Tapoco unified system, those purchases should be

allocated entirely to Alcoa.

To illustrate the necessity of the allocation entirely to Alcoa,

let us suppose that Tapoco purchased the power in question

under a contract identical to the Alcoa-TVA contract. In such

an instance there is no way in which that contract can be

turned from a specific requirements contract into a general

requirements contract. Alcoa purchased a continuous supply

of 245,000 kW which constitutes 2,146,200,000 kWh annually.

This continuous stream of power is upwards of four times

larger that Nantahala’s needs and larger than Nantahala’s and

Tapoco’s combined NFA entitlements plus Nantahala’s pur-

chases from TVA.

Such a large quantity of continuous power is not suitable for

a public utility load which needs variable amounts of energy,

but rather is suitable only for a specific customer having stable

needs. Thus, even if the contract were considered to be a

Tapoco contract, the contract is so tailored to a specific

customer that the costs associated with it would have to be

specifically assigned to the customer.

In this case, in order to escape a specific or pass-through

assignment of costs of the TVA purchases to Alcoa, the

contract would have to be modified to be a Tapoco purchase

contract with modified terms providing for power amenable to

the public utility operation. Neither of those facts has or will

happen. For purposes of this case, the Companies are bound to

66a

the existing contract to which Tapoco is not a party and which

is an Alcoa specific requirement rather than a general require-

ments contract.

Alcoa is not a small industrial company which would have

only a marginal effect on Nantahala but rather a massive

company with worldwide operations. The Alcoa, Tennessee,

aluminum reduction facilities, as late as 1952, when the book

An American Enterprise ‘was written, were the largest in the

world. Furthermore, the Alcoa, Tennessee, aluminum reduc-

tion plant is merely one of many for Alcoa.

Alcoa is a gigantic energy-consuming entity nationwide and

its impact on western North Carolina is likewise enormous. If

the Alcoa, Tennessee, load that is purchased directly from TVA

were to be assigned as a function of the Nantahala-Tapoco

system, the impact of that load on the system would be so

enormous as to warp and twist the costing technique of the

entire system. Indeed, if the Nantahala-Tapoco system tried

independently to service the Alcoa-Tennessee load, it would

have to double the size of its system. Yet no effort has been

made by the Nantahala-Tapoco system to do that. Neither

Nantahala nor Tapoco has built a generating facility in over 20

years. Alcoa is entirely dependent upon T VA for its suppiemen-

tal load.

G. Allocation of the Nantahala-Tapoco Integrated System

(1) Allocation Proposed by the Companies

Although the Commission has previously rejected the Com-

panies’ use of demand and energy entitlements contained in the

1962 NFA and the 1971 Apportionment Agreement as a kasis

for the derivation of demand and energy cost allocations, the

Commission believes that the manner in which the Companies

employed the data contained in said agreements is worthy of

further comment.

The NFA return entitlement from TVA is an annual average

of 218,300 kW of which Nantahala is assigned 41,300 kW

leaving the balance, less line losses, for Tapoco. While 90 MW

67a

of the entitlement is curtailable for as long as five months

annually, total energy curtailed is limited to 1,260,000,000 kWh

during the entire 20-year term of the agreement. Of course, if

power is curtailed in one year it will have to be made up in the

other years in order for TVA to supply an annual average of

218,300 kW over the 20-year term. Despite this, for allocation

of demand costs to Tapoco when computing the system peak,

Company witness Vander Veen did not include any portion of

the 90 MW curtailment entitlement for determining the peak

demand upon the system. Witness Vander Veen testified:

s

Consequently, for demand cost allocation pur-

poses, I used only firm power available to meet system

peak, thus removing the amount of capacity that can be

curtailed and interrupted from the capacity available to

serve system peak load . .

The upshot of this technique is to render the 90 MW

valueless for meeting the system demand at any time, even

during years when there is no curtailment and, indeed, when

there may be additional makeup demand.

Witness Vander Veen also took out of the Tapoco demand

allocation 1/6th (i.e., 15 MW) of the 90 MW interruptible

power returned by TVA under the NFA. A total of 105 MW

was thus taken out of Tapoco’s demand allocation for both the

curtailable and the interruptible power.

The effect on Nantahala of witness Vander Veen’s technique

would be to dramatically increase Nantahala’s proportionate

share of the demand charges. A carefu! analysis of witness

Vander Veen’s allocation calculation shows the following: His

system peak is 465.2 MW, as to which there is improperly

included 245 MW representing Alcoa’s TVA purchases. If

245 MW were deducted from the system peak of 465.2 MW, a

Nantahala-Tapoco system peak of 220.2 MW is obtained, of

which witness Vander Veen calculates Nantahala’s share to be

132.2 MW while Tapoco’s share is only 88 MW. Thus Nanta-

hala would receive a considerably higher demand allocation

than Tapoco even though Tapoco takes three times as much

power as Nantahala under the NFA.

68a

Witness Vander Veen arrived at his allocations based upon

the premise that the NFA and the 197i Apportionment Agree-

ment were negotiated in the best interest of Nantahala’s public

service load. Nothing could be further from the truth.

The NFA was structured to meet Alcoa’s load requirements.

Nantahala was not even present during negotiations. In es-

sence, the NFA is a trade-off of certain firm power and

secondary power which is available less than 50% of the time,

for lesser amounts of firm and secondary power that are

curtailable and interruptible but available more than 50% of

the time, since any power available more than 50% of the time

is usable by Alcoa in its aluminum smeltering operations. The

tradeoff result is a considerable improvement in the value of

Tapoco’s energy usable for Alcoa’s aluminum production. The

tradeoff has no value to the public load. Alcoa (Tapoco)

should, therefore, take full cost responsibility for the demand-

related costs associated with the capacity traded off.

The Vander Veen demand allocation technique would result

in a gross inequity to Nantahala and to public load customers.

A proper allocation technique should not be inequitable either

to Nantahala or to Tapoco. With the terms of the NFA having

been structured to meet Alcoa’s industrial needs and not

Nantahala’s public service needs, it is improper to allocate

demand and energy costs based upon the TVA return entitle-

ments.

The Intervenors have not established how much better Nan-

tahala would havc fared if the NFA had been negotiated for a

TVA return entitlement suitable for Nantahala’s public service

load, nor have they attempted to do so. Such proof is unneces-

sary. It is too hypothetical to speculate as to what quantum and

type of return entitlement Nantahala should have negotiated

for and as io what TVA would have been willing to agree upon.

Nantahala was not designed as, and is not in reality, a separate

utility system but, rather, is part of an integrated Alcoa system

with Tapoco.

Any regulatory reformation of the NFA to properly award

to Nantahala its just entitlements should not be attempted at

69a

this late state of the case, and particularly with an alternative

solution available. The roll-in cost of service approach for

Nantahala and Tapoco avoids the need for complete identifica-

tion of inequities and is nicely suited as a proper alternative to

reformation of contracts. The Supreme Court, in Utilities

Commission v. Edmisten, supra, at p. 443, called for use of the

roll-in in this case, if beneficial to the public, with this

language:

“

. This device does nothing more than recognize that

the two corporate entities ought, for rate making account-

ing purposes, be treated as the one electrical power

producing and distribution system which, in fact, they

are. If then unlawful preferences are indeed accorded to

Alcoa to the detriment of Nantahala’s customers because

of the separate corporate structures and the inter-cor-

porate apportionment agreements, this rate making device

would seem to eliminate them. . . The case is 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 this method of rate

making were used and whether Nantahala’s customers

would benefit thereby.”

The combination of the NFA and the 1971 Apportionment

Agreement forces Nantahala to purchase additional power

irrespective of its production capacity. We reiterate what the

Supreme Court said in Utilities Commission vy. Edmisten,

supra, at page 440:

ee

. Suffice it to say that the assertion that Nantahala’s

public is fairly served by a contract requiring Nantahala

to purchase additional power regardless of the adequacy

of its own generation assaults the common sense of this

court. Nantahala’s customers should not be denied the

benefit of their utility’s fairly regular harvests of abun-

dant energy.”

The Commission also points out again that the purpose of

the roll-in method of ratemaking is to cancel or at least to

70a

true-up, concealed benefits. See, Utilities Commission v. Ed-

misten, Supra, at pages 437-443.

(2) Allocation Proposed by the Intervenors

The Intervenors contend that the following data represents

the capabilities and needs of the Nantahala-Tapoco unified

system, and that such data is appropriate for use in the

allocation of demand-related costs.

A. Dependable capacity of Nantahala

I ae cs a Gb ao ee ee ne 85.4 MW

B. Dependable capacity of Tapoco genera-

NE sat cc cee Aaa ee bake beeen 302.8 MW

Ce a as nn ey es eee 388.2 MW

OMe 8. eS Pe es ree 11.3 MW

E. Net firm generation available to meet

the Nantahala-Tapoco load (C - D)... 376.9 MW

fF. Purchase power by Nantahala from

AEE nok oe ade CRRA ES RE eer 75.4 MW

G. Losses on F above (assumed 5%) .... 3.8 MW

H. Net firm power supply available to

meet the System capacity requirements

of Nantahala-Tapoco (E + F + G).. 456.1 MW

Nantahala’s peak load during the test year was 131,140 kW

which figure represents its maximum need during the year. The

131,140 kW maximum demand consists of 121,152 kW N.C.

retail demand plus 9,988 kW N.C. wholesale demand. Nanta-

hala’s demand responsibility for costing purposes can be calcu-

lated by dividing the total Nantahala-Tapoco systern demand

responsibility into Nantahala’s N.C. retail demand responsibil-

ity. Thus, dividing 456,100 kW into 121,152 kW produces a

Nantahala demand allocation of 26.56% of the sysiem’s de-

mand responsibility. Using this allocation factor, 26.56% of the

Nantahala-Tapeco unified system demand costs should be

assigned to Nantahala’s retail customers.

———EeeVOO

=_

la

The Intervenors contend that the following data represent

the average energy generated by the combined system including

Nantahala’s purchases, and that such data is appropriat for

use in the allocation of energy-related costs.

A. Average energy generated by Nantahala

(New Fontana Agreement Apportion-

UNE SPUD oo o's ska es ne cee wees 391,500 MWh

B. Average energy generated by Tapoco

(New Fontana Agreement Apportion-

I ND cdo os es ence eee esaees 1,373,600 MWh

C. Total average energy generated by Nan-

tahala-Tapoco (A + B)............. 1,765,100 MWh

D. Nantahala’s Purchase Power from

WO Cade ven reste tenes whee eaces 178,921 MWh

E. Losses on D above (assumed 5%) .... 8,946 MWh

F. Net energy supply available to meet sys-

tem energy requirements of Nantahala-

po ee ee Oe | ena 1,952,967 MWh

Nantahala’s energy requirement during 1975 was 551,476

MWh, consisting of 508,973 MWh N.C. retail plus 42,503

MWh N.C. wholesale energy. Nantahala’s energy responsibility

for costing purposes can be calculated by dividing the total!

Nantahala-Tapoco system energy responsibility into Nanta-

hala’s N.C. retail energy responsibility. Thus, dividing

1,952,967 MWh into 508,973 MWh produces a Nantahala

energy responsibility of 26.06%. Using this allocation factor,

26.06% of the Nantahala-Tapoco unified energy costs should

be assigned to Nantahala’s retail customers.

The demand allocation factor of 26.56% and the energy

allocation ‘factor of 26.06% were used by Intervenors’ expert

witness Solomon in allocating the Nantahala-Tapoco total

system demand-related costs and energy-related cosis to Nanta-

hala’s North Carolina retail operations.

The Commission, after having very carefully considered the

entire evidence of record with respect to the assignment of

costs, including cost allocation techniques and/or methodolo-

gies, concludes that the methods and procedures employed by

the Intervenors with respect hereto are reasonable and that said

methods and procedures should be adopted for use herein.

EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT

Nos. 8, 9 AND 10

The Commission has previously concluded that the rolled-in

methodology is appropriate for setting rates in this proceeding;

therefore, in discussing the differences in rate base, revenues

and expenses between the Company and the Intervenors in this

and later sections of the Order, these differences will be based

on the rolled-in methodology. The amounts for “Nantahala

Only,” (i.e., the Company’s position) will be shown; however,

there will be no further discussion of the differences between

the parties arising solely from use of the rolled-in methodology.

The evidence for this finding of fact is found in the testi-

mony and exhibits of Conipany witnesses McDaniel and

Tucker, Public Staff witness Toms, and the proposed orders of

the respective parties. The following chart summarizes the total

Company amounts which the Company and Intervenors con-

tend are proper 'evels of the original cost of Nantahala-

Tapoco’s electric plant to be used in this proceeding:

Public Staff

Nantahala Nantahala- and

Item Only Tapoco Intervenors Difference

Electric plant in

i A $58,933,481 $111,263,599 $111,051,218 $ (212,381)

Construction

work in progress 330,283 713,370 713,37 —

Materials and

SUDDICS... 6.0.65 559,073 788,573 745,635 (42,938)

Cash working

re 440,612 945,89] 914,116 (31,775)

FERC license

CECI bo xs 0s 92,757 92,757 92,757 —

Unamortized

maintenance..... 214,580 214,580

Accumulated

provision for

depreciation..... (31,237,983) (57,950,684) (57,950,684) _

Accumulated

deferred income

SR aceon so (4,208,177) (4,254,380) (11,173,974) (6,919,594)

Accumulated

deferred

investment tax

| ee (62,077) (89,429) (89,429) —

Customer

| — (91,917) 91,917) (191,917) -

Net original cost

of electric plant — $24,656,052 — $51,317,780 $44,325,672 $(6,992, 108)

As can be seen from the above chart, the Company and

Public Staff agreed on the amounts for construction work in

progress, FERC license expense, the accumulated provision for

depreciation, accumulated deferred investment tax credits, and

customer deposits. Therefore, the Commission concludes that

the amounts shown for these items are reasonable and require

no further discussion, except to state the N.C. Retail amounts.

The N.C. Retail portion of these amounts are $371,262 for

construction work in progress, $48,076 for FERC license

expense, $25,539,709 for accumulated depreciation, $64,370

for accumulated investment tax credits, and $191,917 for

customer deposits.

The total difference in the original cost of electric plant in

service totals $6,992,108, and results from the different

amounts proposed by the Company and Public Staff in regard

to electric plant in service, materials and supplies, cash work-

ing capital, unamortized maintenance, and accumulated de-

ferred income taxes.

The first item of difference concerns electric plant in service

and results from Public Staff witness Toms’ removal of

$212,381 of land from electric plant in service. Witness Toms

testified that the land should be classified as plant held for

future use because the Company had not begun construction

of either the 12.9 miles of transmission line, or the substation

74a

in accordance with the Company’s original plans. Under cross-

examination, witness Toms agreed that in the fixing of rates,

the Commission should ascertain the reasonable original cost

of the public utilities property used and useful, or to be used

and useful within a reasonable time after the end of the test

period in accordance with G.S. 62-133(b)(1). He testified

further, however, that his contention was that there were only

two ways that property could be included in rate base. One,

that it was electric plant in service, and two, that it was

construction work in progress. Finally, witness Toms testified

that he knew for a fact that the land was not being used in

providing electric service and that construction was not ongo-

ing. -

After carefully considering the evidence, the Commission

concludes that witness Toms’ recommended adjustment to

decrease electric plant in service by $212,381 is proper. Since

the evidence shows that Nantahala has not begun the construc-

tion intended for the land and also that the land is not being

used in providing electric service, this item should be excluded

from electric plant in service, in compliance with G.S. 62-

133(b)(1). Therefore, the electric plant in service amount of

$111,051,218, or $50,161,648 on a N.C. Retail basis as pro-

posed by Public Staff witness Toms, is the proper amount for

use in this proceeding.

The second item of difference concerns Public Staff witness

Toms’ adjustment to decrease materials and suplies by $42,938.

Witness Toms testified that he revised the Company’s adjust-

ment to reflect materials and supplies at replacement cost

because his review of the average balance in materials and

supplies maintained by the Company for the year ended 1980

and the five-month period ended May 31, 1981, disclosed that

the materials and supplies balance maintained by the Company

had not exceeded the end-of-period level. He testified further

under cross-examination that his analysis of the average bal-

ances maintained by the Company subsequent to the test

period also showed that the Company’s actual end-of-period

level had not been maintained.

Based upon the evidence presented, the Commission con-

cludes that Public Staff witness Toms’ adjustment to reduce

75a

materials and supplies by $42,938 is reasonable. Since the

average balance in materials and supplies actually maintained

by the Company subsequent to the test year was less than the

amount proposed by the Company and also less than the

Company’s end-of-period level, the Commission considers that

amount included by witness Toms to be more than reasonable.

Therefore, the Commission concludes that the proper amount

of materials and supplies to be used in this proceeding 1s

$745,635, or $497,389, on a N.C. Retail basis.

The third area of difference is the cash working capital.

Since the Commission has found elsewhere that the proper

amount of other operation and maintenance expense of

$6,188,583 is reasonable, the Commission also concludes that

the cash working capital allowance which is computed in part

by taking 1/8 of operation and maintenance expense is reason-

able. Therefore, the Commission concludes that the appropri-

ate cash working capital allowance for use in this proceeding is

$625,057 on an N.C. Retail basis.

The fourth item of difference is unamortized maintenance.

Public Staff witness Toms added $214,580 of unamortized

extraordinary maintenance, net of tax savings, to rate base.

Witness Toms testified that the extraordinary maintenance was

the result of maintenance and repairs on Tennessee Creek and

Mission dams as required by the FERC. He further testified

that the Company was charging the maintenance expense

directly to operation and that he had proposed that this

maintenance expense be deferred and amortized to operations

over a 10-year period because the Company did not consider

the maintenance to be recurring in nature and because main-

tenance expense in this magnitude had not been previously

experienced by the Company. In regard to the tax savings,

witness Toms testified that he had reduced the total unamor-

tized amount by the tax savings that have already been real-

ized. He testified further that the tax savings adjustment was

necessary so that the ratepayer would pay a return only on the

net expense incurred by the Company. In regard to the portion

of the adjustment charged to expenses, witness Toms testified

76a

that his adjustment to amortize this maintenance over a 10-

year period was necessary in order to normalize the impact of

this extraordinary maintenance for rate-making purposes.

Finally, he testified that ratepayers should not be required to

pay rates to cover extraordinary maintenance if the Company

will not be incurring this level of maintenance on an annual

basis.

Company witness McDaniel did not make an adjustment to

either rate base or operating expenses in recognition of the

extraordinary maintenance. On cross-examination Company

witness McDaniel testified that he was aware of the fact that

the maintenance expenditures had been made in 1979, but that

he had concluded that nc adjustment was necessary after

reviewing his adjusted level of operation and maintenance

expenses. However, during later cross-examination, witness

McDaniel did accept subject to check that the actual figures for

maintenance to reservoirs, dams, and waterways were $40,115

for the year 1977, $91,508 during 1978, $104,000 during !980,

and $356,000 during the test year ended December 1979.

Based upon the evidence presented by the witnesses, the

Commission concludes that Public Staff witness Toms’ adjust-

ment to include unamortized maintenance expense in rate base

net of tax savings in the amount of $214,580, or $56,607 on an

N.C. Retail basis, to be proper. Accordingly, the Commission

concludes also that witness Toms’ adjustment to amortize the

maintenance expense incurred at Tennessee Creek and Mission

dams over a 10-year period is proper. Rates should be set to

cover a normalized level of maintenance expense. The inclu-

sion of the unamortized portion of this maintenance expense in

rate base net of taxes, with the amortized portion included in

operating expenses, is fair and equitable to both the Company

and its ratepayers.

The fifth and final item of difference concerns accuniulated

deferred income taxes. Public Staff witness Toms proposed an

adjustment to increase accumulated deferred income taxes in

the amount of $6,919,594, relative to Tapoco, Inc. Witness

Toms testified that the adjustment was necessary because of

77a

Company witness McDaniel’s $15,042,596 adjustment to the

accumulated vrovision for depreciation. He testified further

that Company witness McDaniel had restated the accumulated

provision for depreciation under the assumption that Tapoco

had used appropriate depreciation rates the whole time. He

testified further that this had not happened and that Tapoco

had used higher depreciation rates than are appropriate for

rate-making purposes, and consequently, had collected from

Alcoa rates to cover this higher level of depreciation exrense.

He also testified that the higher level of revenues was partially

offset due to the Company’s receipt of less revenues to cover

income taxes resulting from these revenues and that the net

difference between the two amounts represented cost-free capi-

tal which Tapoco had used for general corporate purposes.

Under cross-examination, Company witness McDaniel ad-

mitted that, since depreciation expense is a recoverable expense

under the agreement between Alcoa and Tapoco, Alcoa had

paid in through the rates to Tapoco approximately $15 million

more in revenues than it would have paid had the depreciation

rates been set at a lower level. He testified further that if a per

books adjustment was made to reduce the depreciation reserve

and to credit depreciation expense this would mean that ac-

counting wise Alcoa would be entitled to a credit of $15

million. He testified that Tapoco only had revenues of approxi-

mately $7 million and that, if the entry were made and credit

were given, Tapoco would have no operating revenues for a

period of approximately two years. Thus, the only way Tapoco

could operate would be for Alcoa to make contributions to its

capital for a period of two years. Finally, he testified that in

order to avoid that situation the end result of recording the

entries was a charge to the reserve for depreciation and a credit

to propriety capital.

Based upon the evidence presented by the witnesses, the

Commission concludes that Public Staff witness Toms’ adjust-

ment to increase accumulated deferred income taxes by

$6,919,594 is correct. Tapoco has in fact received excess reve-

nues and they should be treated as cost-free capital. The

Commission is not persuaded by the testimony of Company

78a

witness McDaniel. Witness McDaniel has not recognized the

fact that, if depreciation expense changes, tax expense must

change also. Public Staff witness Toms has recognized that

change. Therefore, the Commission concludes ‘that the proper

level of accumulated deferred income taxes for use in this

proceeding is $11,173,974, or $2,973,551 on an N.C. Retail

basis.

In summary, the Commission concludes that the proper level

of investment in electric plant in service for use in this proceed-

ing is $22,990,492 on an N.C. Retail basis, and is made up of

the following:

Item Amount

Electric plant im ServiC€ ... 2... 6ss004; $50,161,648

Construction work in progress........ 71,262

.Materials and supplies ............... 497,389

Cash working capital ................ 625,057

FERC hcense CRGNOE .. 5 45a0 wens: 48,076

Unamortized maintenance............ 56,607

Accumulated provision for depreciation (25,539,709)

Accumulated deferred income taxes ... (2,973,551)

Accumulated deferred investment

tax cregal... 4055 eee (64,370)

Customer Gepeeils ....6..35 c0eeseaenaes (191,917)

Net original cost of electric plant...... $22,990,492

EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT

Nos. 11 AND 12

With respect to the test year level of operating revenue and

operating revenue deductions, the differences between the

parties arise, in all material respects, as a result of the use of

ditferent allocation techniques and as a result of Intervenor

witness Solomon’s having excluded certain revenue and reve-

nue-related expense adjustments of Company witness Vander

Veen from the total combined Nantahala-Tapoco system opera-

tions.

79a

The Commission has previously adopted the allocation tech-

niques employed by the Intervenors for use herein. The reve-

nue and revenue-related expense adjustments of witness Vander

Veen that were excluded from witness Solomon’s total system

cost-of-service determination relate to non-Fontana agreement

power purchased from TVA to serve the Alcoa load. As a result

of the methodology employed in the assignment of allocation

of costs proposed by Intervenor witnesses Springs and Solo-

mon and that adopted by the Commission, neither inclusion

nor exclusion of said revenue and expense adjustments would

have any effect upon the combined system’s North Carolina

operations.

While Intervenors’ witness Solomon testified as to the reve-

nue and expense items under the rolled-in methodology, his

studies were based on a 10.71% overall rate of return. How-

ever, the Commission allows an overall rate of return of

12.54% which requires that witness Solomon’s testimony,

which the Commission otherwise accepts after adjustment for

additional items of costs relating to contributions to the Al-

ternative Energy Corporation and meter reading expense, be

modified. The Commission concludes, based upon the entire

evidence of record, that the test year level o: operating revenue

of $17,882,589 and operating revenue deductions including

taxes and interest on customer deposits of $13,976,104 are

proper for use herein.

The operating revenues of $17,882,589 under rates approved

by the Conimission Order of June 14, 1977, are those from

N.C. Retail operations only. The adjusted test year level of

operating expenses of $13,976,104 are also related solely to the

combined systems N.C. Retail operations.

The Commission notes that the Intervenors’ study was made

based upon rates in effect at the time of the filing of the

application for a rate increase rather than upon the current

rates which were placed in effect August 1, 1981.

The evidence for these findings of fact are found in the

testimony and exhibits of Company witnesses McDaniel and

Tucker, Public Staff witnesses Toms, Springs, and Solomon,

80a

and the proposed orders of the respective parties. The follow-

ing chart summarizes the total Company gross revenues in-

cluded in the parties’ respective proposed orders:

Prior to

Exclusion

Alcoa’s TVA

Nantahala Nantahala- Purchases

Only Tapoco Intervenors

Sale of electricity ... $18,796,963 $81,086,674 $81,086,674

Other operating

VOVONUES ......... 171,526 1,978,185 1,978,185

Total $18,968,489 $83,064,859 $83,064,859

As the chart shows, combined revenues for Nantahala-

Tapoco are in agreement with the revenues proposed by the

Intervenors on a total Company basis. Since the Commission

has previously reiected the Company’s Nantahala stand-alone

position under Evidence and Conclusions for Findings of Fact

Nos. 4 and 5, the Commission concludes that the proper level

of operating revenues to be used in this proceeding is

$83,064,859 on a total Company basis, or $17,882,589 on an

N.C. Retail basis; summarized as follows:

Item Amount

ene WE WIGS oo cnc ccvesobeeswaeus $17,712,315

Other operating revenues ............00+. 170,274

Total operating revenues............... $17,882,589

The following chart sets forth the amounts of operating

revenue deductions proposed by the Company and the Public

Staff and Intervenors:

Prior to Exclusion

Alcoa’s TVA

Purchases

Nantahala Nantahala- Public Staff

Item Only Tapoco and Intervenors

Purchased power ........... $7,289,861 $59,444,997 $59,444,997

Other operation &

MMIMENENCE . 0.5... c eee 6,253,134 11,858,638 11,604,438

Depreciation & amortization 1,599,361 2,532,691 2,532,691

Taxes—Other than income... 1,611,981 3,751,710 3,744,875

8la

Income taxes—

a Eee errr rere 8i,503 125,496 160,270

PON sa wks bc aeauees 377,934 1,291,454 1,542,058

RP MNO, 664 oa spo eae cess — — —

Deferred in prior years .... (89,795) (95,574) (95,574)

Investment tax credit...... 223,922 279,121 279,121

Amortization of invest-

ment tax credit......... 5 (60,324) (74,264) 264) _

Total $17,287,577 $79,114,269 $79,138,612

As the chart shows, the Company and the Public Staff were

in agreement On the amounts of purchased power, depreciation

and amortization, income taxes deferred in prior years, the

investment tax credit, and the amortization of the investment

tax credit. Therefore, the Commission concludes that these

amounts are reasonable and require no further discussion,

except to siate the N.C. Retail portion of each of these items.

The N.C. Retail portion of purchased power is $1,907,827,

$1,547,242 for depreciation and amortization, $65,584 for

deferred taxes in prior years, $238,031 for normalization of the

investment tax credit, and $50,961 for the amortization of the

investment tax credit.

The items co sing the difference of $254,200 in operating

and maintenance expenses are as foilows:

Item Amount

Adjustment to amortize extraordinary

WIR cnc con eee aes $(242,735)

Adjustment to remove capitalized fringe

OMNI 5k. x's 5.6008 + Oe a ees (17,286)

Adjustment to interest on customer

CO nk cada een 5,821

Ls MRR VERSE EE oe ees $(254,200)

The first item of difference concerns Public Staff witness

Toms’ adjustment to amortize $242,735 of extraordinary re-

pairs and maintenance over a 10-year period. Since this item

was previously discussed and found to be proper, no further

discussion is required.

The second item of difference concerns Public Staff witness

Toms’ adjustment to remove $17,286 of capitalized fringe

benefits from the Company’s pro forma adjustments to fringe

benefits allocable to other operation and maintenance expense.

Witness Toms testified in his direct testimony that during 1980

the Company began capitalizing a portion of its fringe benefits

and that the Company did not recognize this fact in its pro

forma adjustment to fringe benefits. Under cross-examination,

witness Toms testified that the Company had charged 100% of

its adjustment to operating expense and that his adjustment

simply recognized the fact that the Company would be capita-

lizing a portion of fringe benefits in the future. Under cross-

examination from the Panel, witness Toms was asked questions

concerning the date the Company began capitalizing fringe

benefits and whether the capitalized portion of these fringe

benefits should have been added to plant in service. In re-

sponse witness Toms testified that the Company began capita-

lizing fringe benefits during 1980, subsequent to the test

period, and that his pro forma adjustment simply recognized a

known change in the treatment of these items. He testified

further that the capitalized fringe benefits should nos have

been added to plant in service. On this same question under

redirect examination, witness Toms agreed that capitalized

fringe benefits would show up as either plant in service or

construction in a future case with a test period that is past the

period the Company began capitalizing these items. Under

further redirect examination he also testified that his adjust-

ment did not indicate any error by the Company, but rather an

indication that the Company had changed certain accounting

policy. Finally, he testified that this change in policy had

absolutely no effect on plant in service at the end of the test

year.

Based upon the evidence presented by the witnesses, the

Commission concludes that the adjustment made by witness

Toms to remove $17,286 of fringe benefits is proper. Since the

Company will be capitalizing a portion of fringe benefits

prospectively, the cost of service should reflect the new ac-

counting treatment accorded this item of cost.

83a

The third and final item of difference concerns interest on

custonier deposits. Public Staff witness Toms adjusted the per

bocks amount to reflect the Commission’s increase in the

interest rate which utilities must pay on customer deposits.

Witness Toms was not asked any questions during his cross-

examination concerning this item. Therefore, the Commission

concludes that the adjustment is proper. As discussed elsewhere

herein the Commission has included in the test year cost of

service $16,599 related to contributions to the Alternative

Energy Corporation and $85,998 related to additional meter

reading expense. Thus, in summary the Commission concludes

that the appropriate level of other operation and mainienance

expense for use herein is $6,188,583 on a N.C. Retail basis.

The next difference between the witnesses concerns taxes

other than income. This difference of $6,835 results from

Public Staff witness Toms’ adjustment to remove capitalized

fringe benefits associated with FICA and unemployment taxes

from the Company adjusted test year level of operations. Sin

This text is long and has been trimmed here. Open the source document for the complete record.