State ex rel. Utilities Com'n v. Public Staff-North Carolina Utilities Com'n
| Decision Date | 08 December 1988 |
| Docket Number | STAFF--NORTH,No. 124A87,124A87 |
| Citation | 374 S.E.2d 361,323 N.C. 481 |
| Court | North Carolina Supreme Court |
| Parties | STATE of North Carolina ex rel. UTILITIES COMMISSION and North Carolina Natural Gas Corporation v. PUBLICCAROLINA UTILITIES COMMISSION (Intervenor), and Cities of Wilson, Rocky Mount, Greenville and Monroe, North Carolina (Intervenors). |
McCoy, Weaver, Wiggins, Cleveland & Raper by Donald W. McCoy and Alfred E. Cleveland, Fayetteville, for North Carolina Natural Gas Corp., appellee.
David T. Drooz, and Gisele L. Rankin, Staff Attys., Public Staff Legal Div., Raleigh, for North Carolina Utilities Com'n, intervenor appellant and appellee.
Spiegel & McDiarmid by David R. Straus, Cynthia S. Bogorad and Barbara S. Esbin, Washington, D.C., Poyner & Spruill by J. Phil Carlton, Raleigh, for Cities of Wilson, Rocky Mount, Greenville and Monroe, North Carolina, intervenor appellants.
On this appeal from the Commission's final order granting partial increase in rates and charges to NCNG the questions presented are whether the Commission erred in concluding: (1) the approved rate of return on common equity for NCNG is supported by competent, material, and substantial evidence in view of the entire record; (2) the final order was sufficiently detailed and specific to comply with statutory law; (3) the approved rates established for the various classes of NCNG's customers do not unreasonably discriminate against Cities and are supported by competent, material and substantial evidence in view of the entire record. We hold the Commission did not err and affirm its final order.
On this appeal, Public Staff and Cities set forth three basic contentions. First, Public Staff argues the Commission's finding approving a 14.0% rate of return on common equity for NCNG is unsupported by competent, material and substantial evidence in view of the entire record. 1 Second, Public Staff urges the Commission erred in not making specific findings for the approved return on equity and in denying the Public Staff's motion for specific findings. 2 Last, Cities contend the Commission's conclusion that the RE-1 rate is not unduly discriminatory is not supported by the findings of fact; therefore, it is erroneous as a matter of law, arbitrary, and capricious. 3 We will address each of these arguments in turn.
NCNG provides natural gas to the public under a certificate of public convenience and necessity issued by the Commission. Wholesale natural gas service is provided to Cities, each of which is authorized under N.C.G.S. §§ 160A-311(4), -312 to own and operate a natural gas distribution service for its respective citizens. Cities take delivery of natural gas from NCNG at the "city gate" and distribute that gas through their municipally owned and operated distribution facilities to the residential, commercial, and industrial retail customers served by each city. The prices at which Cities sell gas to their customers is not subject to Commission regulation. NCNG also furnishes retail natural gas service in eastern North Carolina to residential, commercial and industrial customers.
NCNG has separate retail rate schedules for residential, commercial and small industrial, industrial process, and other commercial and industrial uses. 4 Industrial customers with alternate fuel capability may be served under a negotiated rate. 5 NCNG serves the bulk of Cities' wholesale gas customers' needs under Rate RE-1, applicable to gas ultimately resold by Cities to Cities' residential, commercial and certain industrial customers. The remaining gas destined for certain other of Cities' industrial customers with alternate fuel capability is sold under SM-1, a rate negotiated with Cities.
Procedurally, this case comes to this Court as follows:
On 27 March 1986 NCNG filed an application with the Commission for authority to increase its rates and charges by $6,145,662 annually. NCNG proposed to make the new rates effective on 26 April 1986.
The Commission entered an order on 22 April 1986 that declared the application to be a general rate case pursuant to N.C.G.S. § 62-137, suspended the proposed rate increase for a period up to 270 days from the proposed effective date, required public notice and scheduled public hearings, required testimony and exhibits of parties other than NCNG to be prefiled by 15 July 1986, and set the matter for hearing on the evidence of the parties beginning 4 August 1986. NCNG filed supplemental testimony and exhibits on 30 June 1986 which raised the Company's requested rate increase from $6,145,662 to $8,193,100.
The Carolina Utility Customers Association, Inc. (CUCA) and Aluminum Company of America (Alcoa) filed Petitions to Intervene on 25 April 1986 and 10 June 1986, respectively. On 10 July 1986 Cities filed a Petition to Intervene and a Motion for Limited Admission to Practice by David R. Straus and Gary J. Newell of the Washington, D.C. law firm of Spiegel and McDiarmid. The Commission allowed all petitions and the motion.
A hearing panel consisting of Commissioner A. Hartwell Campbell, presiding, and Commissioners Sarah Lindsay Tate and Ruth E. Cook heard the case in chief in Raleigh from 4 August through 7 August 1986. The hearing panel entered a "Recommended Order Granting Partial Increase in Rates and Charges" on 15 October 1986, with Commissioner Cook dissenting in part. The hearing panel found that 14.2% was a reasonable return on common equity for NCNG, and that NCNG's annual revenues should be increased by $6,100,577.
All parties duly filed exceptions to the hearing panel's recommended order. The Public Staff also moved the Commission to make specific findings with respect to the return on common equity allowed NCNG. The full Commission held oral arguments on the exceptions on 3 November 1986.
The Commission entered its "Final Order Granting Partial Increase in Rates and Charges" on 10 November 1986. The Commission found that 14.0% was a reasonable rate of return on common equity for NCNG, and that NCNG's annual revenues should be increased by $5,956,540. Chairman Robert O. Wells and Commissioner Ruth E. Cook filed dissenting opinions with respect to the rate of return issue.
NCNG filed revised tariffs and rate schedules that were designed to implement the Commission's 10 November 1986 final order. On 5 December 1986 the Commission entered an order approving the revised tariffs. Cities and Public Staff now appeal from the Commission's final order.
The Public Staff contends on this appeal that the Commission's finding 6 approving the 14.0% rate of return on common equity 7 is unsupported by competent, material and substantial evidence in view of the entire record and therefore violates N.C.G.S. § 62-94(b)(5). More specifically, Public Staff argues "the Company's rate of return testimony is so riddled with contradictions and conflicting inferences that it fails as substantial evidence...." In addition, Public Staff alleges the "Commission fail[ed] to indicate any valid basis in the evidence for awarding a higher return than Mr. Evans' 13.3%." Finally, Public Staff claims the Commission erred in ignoring other witnesses who testified regarding risks affecting NCNG's rate of return. NCNG responds that the Commission did properly exercise its discretion in setting the rate of return on common equity and its findings are supported by substantial evidence in view of the entire record.
In determining the appropriate rate of return on common equity the Commission relied on the direct testimony and exhibits of NCNG witnesses Wells and Butler, and Public Staff witness Evans. NCNG witness Wells testified that the company's immediate future is one of high risk. He explained that 70% of NCNG's gas sales and transportation volumes 8 in fiscal 1985 was delivered to industrial and large commercial customers that are able to use oil or propane as an alternate fuel. Wells claimed gas prices under NCNG's present rates are higher than the prices of oil and propane fuels available to most of these customers and the Company would lose the majority of its industrial load if lower priced spot market gas were not available. Wells pointed out that even with the lower priced gas, NCNG has already lost three large industrial users. Wells' ultimate recommendation was for a 16.5% return on common equity, but he qualified his recommendation with the belief that the unusual risks facing NCNG justified even a higher rate of return.
NCNG witness Butler determined his recommended required return on common equity by dividing an investor's anticipated earnings per share by the per share book value of the Company's common stock. 9 Butler emphasized that NCNG's return on equity should reflect the higher-than-average risks created by the Company's heavy reliance on sales to industrial customers who have the ability to switch to alternate fuels. Butler's original prefiled testimony recommended a return on equity of 17.9%. In oral testimony, however, Butler adjusted his computations to reflect what he called "the Company's increased common equity base" since his original filing. Butler's adjusted rate and ultimate recommendation was for a return on equity of 16.8%.
Public Staff witness Evans relied principally on a discounted cash flow method (DCF) to estimate the appropriate rate of return on common equity for NCNG. "According to this method the proper rate of return is determined by adding to the common stock's current yield a rate of increase which investors will expect to occur over time." State ex rel. Utilities Comm. v. Public Staff, 322 N.C. 689, 693-94, 370 S.E.2d 567, 570 (1988); See C.F. Phillips, Jr., The Regulation of Public Utilities 356-57 (1984). Evans performed a NCNG specific DCF study which produced a return requirement of 13.42%. In order to provide a "check" on this result he applied the DCF method to two groups of companies "selected to be similar in risk to NCNG." This...
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