State ex rel. Utilities Comm'n v. Stein
| Decision Date | 11 December 2020 |
| Docket Number | 401A18,Nos. 271A18,s. 271A18 |
| Citation | 851 S.E.2d 237,375 N.C. 870 |
| Parties | STATE of North Carolina EX REL. UTILITIES COMMISSION; Duke Energy Progress, LLC, Applicant; and Duke Energy Carolinas, LLC, Applicant v. Attorney General Joshua H. STEIN; Public Staff – North Carolina Utilities Commission; North Carolina Justice Center, North Carolina Housing Coalition, Natural Resources Defense Council, Southern Alliance for Clean Energy, and North Carolina Sustainable Energy Association; and Sierra Club, Intervenors |
| Court | North Carolina Supreme Court |
Troutman Sanders LLP, by Kiran H. Mehta, Molly McIntosh Jagannathan, Charlotte, and Christopher G. Browning, Jr., Raleigh, for Duke Energy Carolinas, LLC, and Duke Energy Progress, LLC.
Attorney General Joshua H. Stein, by Assistant Attorney General Margaret A. Force, Solicitor General Matthew W. Sawchak, Deputy Solicitor General James W. Doggett, Solicitor General Fellow Matt Burke, and Special Deputy Attorneys General Jennifer T. Harrod and Teresa L. Townsend.
Lewis & Roberts, PLLC, by Matthew D. Quinn, Raleigh, and Bridget M. Lee and Dorothy E. Jaffee, for appellant Sierra Club.
Southern Environmental Law Center, by Gudrun Thompson and David Neal, for North Carolina Justice Center, North Carolina Housing Coalition, Natural Resources Defense Council, and Southern Alliance for Clean Energy, and North Carolina Sustainable Energy Association, by Benjamin W. Smith and Peter H. Ledford, intervenor-appellants.
Public Staff – NCUC, by Chief Counsel David T. Drooz and Staff Attorneys Chris Ayers, Layla Cummings, Megan Jost, and Nadia Luhr, intervenor-appellant.
North Carolina Department of Justice, Environmental Division, by Special Deputy Attorney General Marc Bernstein and Senior Deputy Attorney General Daniel S. Hirschman, for North Carolina Department of Environmental Quality, amicus curiae.
These cases arise from appeals taken from orders entered by the North Carolina Utilities Commission addressing applications filed by Duke Energy Progress, LLC, and Duke Energy Carolinas, LLC, both of which are wholly owned subsidiaries of Duke Energy Corporation, by various intervenors representing the utilities’ consumers that focus upon the lawfulness of the Commission's decisions concerning the extent to which the utilities are entitled to reflect costs associated with the storage, disposal, and removal of ash resulting from the production of electricity in coal-fired electric generating units in the cost of service used to establish the utilities’ North Carolina retail rates. Among other things, various intervenors assert that the Commission erred by allowing the deferral of certain coal ash remediation costs and the inclusion of those costs in the cost of service used to establish the utilities’ North Carolina retail rates, that the Commission erred by allowing the utilities to earn a return upon the unamortized balance of the deferred coal ash remediation costs, and that the Commission erred by approving an increased Basic Facilities Charge for Duke Energy Carolinas’ North Carolina retail residential customers. After careful consideration of the parties’ challenges to the Commission's orders, we conclude that the challenged orders should be affirmed, in part, and reversed and remanded, in part.
In the early part of the twentieth century, when the utilities began providing electric service in North Carolina, they used coal as the primary means of generating electric power. The burning of coal produces by-products known as coal combustion residuals, which include fly ash, bottom ash, boiler slag, and flue gas desulfurization material.1 At present, Duke Energy Progress owns eight coal-fired electric generating facilities and nineteen unlined coal ash basins, while Duke Energy Carolinas owns eight coal-fired electric generating facilities and seventeen unlined coal ash basins.
In the early years during which the utilities operated coal-fired electric generating facilities, coal ash was either emitted through generating facility smokestacks or stored in on-site landfills. In the 1950s, the utilities began to store coal ash in unlined basins located at generating facility sites. As part of this process, the utilities mixed coal ash with water to form a "sluice," which would be piped from the generating facility to these unlined basins. The practices that the utilities employed in disposing of coal ash during this time were consistent with contemporaneous standard industry practices and with the concept of least cost planning as currently embodied in state law. See N.C.G.S. § 62-2(a)(3a) (2019).
The harmful effects of coal ash on human and environmental health were not fully understood at the time that the utilities began to dispose of it in unlined basins. Over time, however, pollutants emanating from the unlined coal ash basins began to contaminate nearby groundwater. In the 1970s, concerns developed about the manner in which coal ash was handled and stored. For that reason, the United States Environmental Protection Agency began to regulate unlined coal ash basins in accordance with the Clean Water Act and initiated a permitting program known as the National Pollutant Discharge Elimination System, pursuant to which the EPA delegated authority to the states to issue permits allowing the discharge of a specific amount of pollutants into nearby water sources, subject to certain terms and conditions, and authorizing the processing, incineration, placement in a landfill, or other beneficial uses of contaminated sludge. See 33 U.S.C. § 1251 et seq. (1972). In 1979, the North Carolina Department of Environmental Quality2 adopted Groundwater Classification and Standards (2L Rules) requiring the taking of preventative and corrective measures relating to groundwater contamination associated with coal ash. See 15A N.C. Admin. Code 02L §§ .0100–.0515.
In the aftermath of a 2008 incident, during which more than five million cubic yards of coal ash spilled into the Emory River from the Tennessee Valley Authority's Kingston Fossil Plant, the effect of storing coal ash in unlined basins upon human and environmental health became a focus of additional attention at the EPA and in the electric power industry. On 17 April 2015, the EPA promulgated the Hazardous and Solid Waste Management System—Disposal of Coal Combustion Residuals from Electric Utilities (CCR Rule), see 80 Fed. Reg. 21301 (April 17, 2015), which established a "maximum contaminant level" for certain contaminants, prohibited "[a]n increase in the concentration of that substance in the ground water where the existing concentration of that substance exceeds" a prescribed maximum level, and required that groundwater monitoring be undertaken at existing coal ash basins by no later than 17 October 2017, with reporting of the results to begin by no later than 31 January 2018. 40 C.F.R. § 257.3–4 ; § 257.90(b), (e) (2019).
On 2 February 2014, a stormwater pipe that ran beneath an unlined coal ash basin located at Duke Energy Carolinas’ Dan River generating facility burst, resulting in the emission of approximately 27,000 million gallons of wastewater and between 30,000 and 39,000 tons of coal ash into the Dan River, affecting river conditions for up to sixty miles below the discharge site. The utilities entered pleas of guilty in federal court to nine criminal violations of the Clean Water Act relating to the Dan River facility and four additional power plants. In accordance with their plea agreements, the utilities agreed to pay a $68 million fine and were placed on probation for a five-year period pursuant to 18 U.S.C. § 3561(c)(2).
On 20 September 2014, the General Assembly enacted the North Carolina Coal Ash Management Act, N.C. Sess. L. 2014-122, which was subsequently amended in the Mountain Energy Act, N.C. Sess. L. 2015-110, and the Drinking Water Protection/Coal Ash Cleanup Act, N.C. Sess. L. 2016-95. CAMA, as amended, required a comprehensive assessment of groundwater and surface water discharges at coal ash basins, the taking of corrective action to address such discharges, and the closure of all of the utilities’ unlined coal ash basins by no later than 2029 in accordance with a statutorily prescribed timeline. N.C.G.S. §§ 130A-309.211 –.214 (2019). The utilities began closing their unlined coal ash basins pursuant to the requirements of the CCR Rule and CAMA in 2015.
At the beginning of the closure process, the utilities estimated that their collective coal ash cleanup costs would exceed $4.5 billion. On 21 December 2015, Duke submitted a letter to the Commission outlining the manner in which the utilities intended to account for ongoing and anticipated coal ash management and basin closure costs. In this letter, Duke explained that the utilities planned to create an Asset Retirement Obligation, which is an account associated with the retirement of a tangible long-lived asset, on their balance sheets in accordance with their understanding of Financial Accounting Standards Board (FASB) Accounting Standards Codification for Asset Retirement Environmental Obligations (ASC) 410-20, Federal Energy Regulatory Commission (FERC) General Instruction No. 25, and Generally Accepted Accounting Principles (GAAP). According to Duke, the creation of these Asset Retirement Obligations was triggered by the fact that the CCR Rule and CAMA required the closure of the utilities’ unlined coal ash basins. Although Duke initially estimated that these Asset Retirement Obligations would involve approximately $2.13 billion for Duke Energy Progress and $1.84 billion for Duke Energy Carolinas, it noted that the utilities’ actual compliance costs might be "materially different from these estimates based on the timing and requirements of the final regulations."
In accordance with fundamental principles of double-entry accounting, the utilities planned to record their coal ash management and ash basin...
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