State ex rel. North Carolina Utilities Commission v. Piedmont Natural Gas Co., 250

• Decision Date: 03 May 1961
• Docket Number: No. 250,250
• Citation: 254 N.C. 536,119 S.E.2d 469
• Court: North Carolina Supreme Court
• Parties: , 38 P.U.R.3d 469 STATE of North Carolina ex rel. NORTH CAROLINA UTILITIES COMMISSION, v. PIEDMONT NATURAL GAS COMPANY, Inc.

Page 469

119 S.E.2d 469

254 N.C. 536, 38 P.U.R.3d 469

STATE of North Carolina ex rel. NORTH CAROLINA UTILITIES COMMISSION, v. PIEDMONT NATURAL GAS COMPANY, Inc.

No. 250

Supreme Court of North Carolina.

May 3, 1961

Winborne, Winborne & Winborne, Raleigh, for North Carolina Ass'n of Launderers and Cleaners, Inc., appellant.

Thomas Wade Bruton, Atty. Gen., F. Kent Burns, Asst. Atty. Gen., for North Carolina Utilities Commission, appellant.

McLendon, Brim, Holderness & Brooks, Greensboro, for defendant, appellee.

HIGGINS, Justice.

The right of the State to regulate utility rates springs from the monopolistic character of the business authorized by its franchise. However, the management, operation, and control of the utility are primarily its own business. The purpose of regulation is to protect the public interest and see to it that adequate service is provided at reasonable rates. In return for the franchise, the utility gives up its right to make private rate contracts with its customers, and submits to the regulation of its rates. In exercising regulatory power, the Commission, acting for the State, must be fair both to the producer and to the consumer.

In fixing a rate the Commission must ascertain the value of the property used in providing service. 'Necessarily, what is a 'just and reasonable' rate which will produce a fair return on the investment depends on (1) the value of the investment --usually referred to * * * as the Rate Base--which earns the return; (2) the gross income * * * from authorized operations; (3) * * * operating expenses * * * must include amount of capital * * * currently consumed in rendering the service; and (4) what rate constitutes a just and reasonable rate of return on the predetermined Rate Base.' Utilities Com. v. State, 239 N.C. 333, 80 S.E.2d 133, 140; Utilities Com. v. City of Greensboro, 244 N.C. 247, 93 S.E.2d 151; Smyth v. Ames, 169 U.S. 466, 18 S.Ct. 418, 42 L.Ed. 819; G.S. § 62-124. 'When these essential ultimate facts are established by findings of the Commission, the amount of additional gross revenue required to produce the desired net return becomes a mere matter of calculation.' Utilities Com. v. State, supra.

The Commission found $18,400,000 to be the fair value of Piedmont's property in carrying on its business in North Carolina. Piedmont contends the finding is not supported by competent, material and substantial evidence. It argues the Commission set out to have Piedmont absorb Transco's rate increase. To accomplish this result the Commission accepted $1,104,000 (shown by the test period) as the net return. Likewise, it fixed six per cent as the proper rate of return. To justify both figures required a rate base of $18,400,000. As so fixed, the base is a quotient or a forced figure and is not supported by evidence. Piedmont further argues not only the figures but the concurring opinion of Commissioner Worthington and the dissenting opinion of Chairman Westcott support this view. Judge Campbell, in his order of remand, stated: 'It would not be proper for the Commission to arrive at the fair value rate base by capitalizing earnings under the existing rates at the determined rate of return or by any such arbitrary calculations whereby rate base is a mathematical product or quotient from other determinations, instead of making, as the law requires, a true finding of the fair value of the property based upon evidence of value independent of other determinations necessary in the proceeding.'

Piedmont claims, and Judge Campbell found, that the rate base of $18,400,000 was the result of calculation, using the company's net profit for the test period, and six per cent as a fair return. These calculations fixed the base rate as stated above. If we disregard the foregoing claims, nevertheless errors of law appear in the Commission's determination. These erors are sufficient to require that the proceeding go back for further consideration and findings. The order reveals the Commission disregarded altogether the evidence of replacement cost in arriving at fair value. Mr. Gannon, specialist in the field of utility accounting since 1937, using authoritative studies by which original cost may be translated into present value, actually fixed the value of Piedmont's property at 32 million dollars. His calculations were based on studies of Piedmont's cost record, as compared with nine other utility companies engaged in like activity in the Southeastern United States. In evaluating this testimony, the Commission said: 'Even when performed by qualified engineers and based on actual inspection of the physical properties of the utility trended original cost studies have been accorded very little weight by the regulatory Commissions throughout the country.' (Quoting Southwestern Bell Telephone Co., 77 P.U.R. 33 (Mo.); Re New Jersey Bell Telephone Co., 72 P.U.R. 49; Re Narragansett Electric Co., 21 P.U.R. 3rd 113 (R.I.); Re Montana-Dakota Utilities Co., 28 P.U.R. 3rd 355 (Montana); Re Central Illinois Elec. & Gas Co., 6 P.U.R. 3rd 108).

'In this case Mr. Gannon freely admitted that he was not a qualified engineer, * *. In short, his was a mere mathematical computation which he could have prepared in his office in New York. * * * Under these circumstances the probative force of the evidence of trended original cost which was admitted in this case is minimal, but we have not excluded it from consideration.'

In the case last cited by the Commission in support of its ruling, Central Illinois Electric and Gas Co., 6 P.U.R. 3rd 108 (Ill. 1954) the Illinois Commission stated: 'Evidence of current or reproduction costs and of the observed condition or depreciation of the company's electric, gas and water utility plants was presented by E. H. Gannon (here Piedmont's witness) and L. N. Boisen of Stone & Webster Service Corporation * * * Gannon testified that the current or reproduction cost was determined by trending original costs by accounts and year of installation by the application of the Handy-Whitman Index. * * While the evidence concerning trended original cost and also concerning the observed depreciation may be open to challenge in some minor respects (emphasis added) such evidence does reflect a decrease in the purchasing power of the dollar and the change in economic conditions and is pertinent to a determination of reproduction cost. Such trended cost must be considered and given appropriate weight in arriving at the fair value of the company's utility plants.'

The Commission also cited In Re Montana-Dakota Utilities Co., 28 P.U.R. 3rd 355 (Mont.1959) as authority for rejecting the trended original cost as evidence of...