State ex rel. Utilities Commission v. Edmisten

• Decision Date: 17 April 1978
• Docket Number: No. 60,60
• Citation: 242 S.E.2d 862,294 N.C. 598
• Court: North Carolina Supreme Court
• Parties: STATE of North Carolina ex rel. UTILITIES COMMISSION and Piedmont Natural Gas Company, Inc. v. Rufus L. EDMISTEN, Attorney General. STATE of North Carolina ex rel. UTILITIES COMMISSION and Public Service Company of North Carolina, Inc. v. Rufus L. EDMISTEN, Attorney General. STATE of North Carolina ex rel. UTILITIES COMMISSION and North Carolina Natural Gas Corporation v. Rufus L. EDMISTEN, Attorney General.

Page 862

242 S.E.2d 862

294 N.C. 598

STATE of North Carolina ex rel. UTILITIES COMMISSION and Piedmont Natural Gas Company, Inc. v. Rufus L. EDMISTEN, Attorney General.

STATE of North Carolina ex rel. UTILITIES COMMISSION and Public Service Company of North Carolina, Inc. v. Rufus L. EDMISTEN, Attorney General.

STATE of North Carolina ex rel. UTILITIES COMMISSION and North Carolina Natural Gas Corporation v. Rufus L. EDMISTEN, Attorney General.

No. 60.

Supreme Court of North Carolina.

April 17, 1978.

Brooks, Pierce, McLendon, Humphrey & Leonard by Jerry W. Amos and James T. Williams, Jr., Greensboro, for Piedmont Natural Gas Company, Inc., appellee.

Boyce, Mitchell, Burns & Smith by F. Kent Burns and James M. Day, Raleigh, for Public Service Company of North Carolina, Inc., appellee.

McCoy, Weaver, Wiggins, Cleveland & Raper by Donald W. McCoy, Fayetteville, for North Carolina Natural Gas Corporation, appellee.

COPELAND, Justice.

The appellees initially contend that, because no appeal was taken from the Commission order establishing Rule R1-17(h), the Attorney General is bound by the principles of res judicata and may not now challenge the validity of that rule. For reasons which follow, we have determined that this contention is not well taken; thus, we have considered the Attorney General's arguments concerning the authority of the Commission to permit utilities to recover excess costs of exploration ventures through a tracking rate. It is our conclusion that these actions were within the power of the Commission; therefore, the decision of the Court of Appeals must be affirmed.

We first examine the appellees' contention that the Attorney General's failure to appeal the Commission order promulgating Rule R1-17(h) should foreclose any review of the lawfulness of the procedure approved in that order. We have earlier held that, "Only specific questions actually heard and finally determined by the Commission in its judicial character are res judicata, and then only as to the parties to the hearing." Utilities Commission v. Area Development, Inc., 257 N.C. 560, 570, 126 S.E.2d 325, 333 (1962) (emphasis added). It is argued that the actions of the Commission here were adjudicatory because G.S. 62-60 provides that, "For the purpose of conducting hearings, making decisions and issuing orders, and in formal investigations where a record is made of testimony under oath, the Commission shall be deemed to exercise functions judicial in nature and shall have all the powers and jurisdiction of a court of general jurisdiction as to all subjects over which the Commission has or may hereafter be given jurisdiction by law."

G.S. 62-23, however, states that, "In proceedings in which the Commission is exercising functions judicial in nature, it shall act in a judicial capacity as provided in G.S. 62-60. The Commission shall separate its administrative or executive functions, its rule making functions, and its functions judicial in nature to such extent as it deems practical and advisable in the public interest." The proceeding which led to the issuance of Rule R1-17(h) was denominated by the Commission at the outset to be a rule making investigation. Indeed, the effect of the order was the promulgation of a rule of general application to all natural gas utilities subject to the jurisdiction of the Commission. The rate making activities of the Commission are a legislative function. Utilities Commission v. General Telephone Company, 281 N.C. 318, 189 S.E.2d 705 (1972). Rule making is likewise an exercise of the delegated legislative authority of the Commission, under G.S. 62-30 and G.S. 62-31, to supervise and control the public utilities of this State and to make reasonable rules and regulations to accomplish that end. Actions of an administrative agency which involve the exercise of a legislative rather than a judicial function are not res judicata. 73 C.J.S. Public Utilities § 59, pp. 1138-1139. Exercises of the Commission's rule making power, therefore, are not governed by the principles of res judicata and are reviewable by this court in later appeals of closely related matters. See also, 2 K. Davis, Administrative Law Treatise, § 18.08 (1958).

The Attorney General argues that, in approving these rate surcharges to fund gas exploration and drilling ventures, the Utilities Commission exceeded its statutory authority by permitting the utility companies to obtain forced investment capital from their ratepayers under the guise of recovering operating expenses. It is his assertion that the costs of these programs properly should have been borne by financing out of retained earnings or other methods and recouped through the rate base in a general rate making proceeding.

This contention in substance attacks the validity of Rule R1-17(h), in which the Commission established procedures for participation by natural gas utilities in exploration and drilling programs and for applications for rate changes to recover costs and account for revenues associated with such programs. The rule directs the formation of a committee composed of representatives from the gas utilities, the Commission, and the utilities' wholesale municipal customers. This committee's function is to select exploration projects for presentation to the Commission for approval. Following such approval, the projects may be implemented by the utilities.

The rule further provides that:

"(6) On or before June 1 of each year, each natural gas utility shall file with this Commission a statement of all reasonable costs incurred and revenues received from Commission-approved exploration programs during the six months period ended the preceding March 31. On or before December 1 of each year, each natural gas utility shall file with this Commission a similar statement for the six months period ended the preceding September 30."

A utility may recover the costs of its Commission-approved projects for the previous six months reporting period by filing for an increase in its rates through a tracking charge. Such increases are limited, however, to the amount by which reasonable costs of the programs exceed revenues received from them. In the event revenues received should exceed reasonable costs, the utility must file to adjust its rates downward by an amount sufficient to amortize these excess revenues over the following six months period.

The Commission stated in its order issuing this rule, as well as in the rule itself, that, under the existing circumstances, exploration and development costs of new gas supply sources were ordinary and reasonable operating expenses of public utility gas distribution companies.

The Attorney General asserts that this rule contemplates a procedure which, in substance, merely collects risk capital from consumers and thereby shifts the enterprise risks of gas exploration from willing investors over to a captive consuming public. He strongly argues that this violates the basic tenets of free enterprise and assigns to the operating expense element of the rate making formula in G.S. 62-133 a function which it was not intended to bear, that of attraction of capital. We have earlier noted in a different context, however, that because a public utility is a legally regulated monopoly, "(M)any of the basic principles of the Free Enterprise System, which govern the operations of and the charges by industrial and commercial corporations and those of the corner grocery store, have no application to the regulation of the service or charges of a utility company." Utilities Commission v. General Telephone Company, supra, 281 N.C. at 335, 189 S.E.2d, at 716-717.

At the time of the promulgation of Rule R1-17(h), it was the declared policy of the State of North Carolina in G.S. 62-2 of the Public Utilities Act to, among other things, ". . . promote adequate, economical and efficient utility services to all of the citizens and residents of the State." Since the issuance of this rule, and prior to the approval of the rate increases challenged here, G.S. 62-2 was amended to recognize that the availability of adequate and reliable supplies of electricity and natural gas are a matter of State public policy. G.S. 62-131(b) requires every public utility to render adequate, efficient and reasonable service. In addition, under G.S. 62-32 and G.S. 62-42, the Utilities Commission is given the power and the duty to compel utility companies to render adequate service and to set reasonable rates for such service. Utilities Commission v. Morgan, 277 N.C. 255, 177 S.E.2d 405 (1970), aff'd on rehearing, 278 N.C. 235, 179 S.E.2d 419 (1971).

Following hearings on the proposed rule making, the Commission found as fact that: (1) an emergency gas shortage existed in North Carolina; (2) unless North Carolina gas utilities were able to obtain additional gas supplies, they would be unable to render adequate and efficient service to their customers; (3) without additional gas supplies, many industries in North Carolina would be unable to continue operations, resulting in layoffs and consequent losses of payrolls, production, sales and profits, which would produce adverse effects on the economy of the State; (4) unless additional gas supplies were found for North Carolina gas utilities, substantial increases in rates to gas customers in this State would be necessary in order to meet increases imposed by the utilities' sole pipeline supplier, as well as to cover the spreading of fixed costs over a smaller sales volume; (5) the most feasible method for increasing gas supplies to the State at lowest cost was through programs of exploration and development by each North Carolina gas utility; (6) the gas utilities were unable to fund exploration and drilling programs of sufficient size to obtain additional gas supplies for the State through traditional methods of debt and equity financing and retained earnings; and (7) prudent expenditures of funds for exploration purposes...