State ex rel. Utilities Commission v. Duke Power Co.

• Decision Date: 27 January 1982
• Docket Number: No. 49,49
• Citation: 287 S.E.2d 786,305 N.C. 1
• Court: North Carolina Supreme Court
• Parties: STATE of North Carolina ex rel. UTILITIES COMMISSION; North Carolina Textile Manufacturers Association, Inc.; the City of Durham; Carolina Action; Kudzu Alliance; Great Lakes Carbon Corporation; and Rufus L. Edmisten, Attorney General v. DUKE POWER COMPANY.

Page 786

287 S.E.2d 786

305 N.C. 1

STATE of North Carolina ex rel. UTILITIES COMMISSION; North Carolina Textile Manufacturers Association, Inc.; the City of Durham; Carolina Action; Kudzu Alliance; Great Lakes Carbon Corporation; and Rufus L. Edmisten, Attorney General v. DUKE POWER COMPANY.

No. 49.

Supreme Court of North Carolina.

Jan. 27, 1982.

Steve C. Griffith, Jr., Clarence W. Walker and Stephen K. Rhyne, Charlotte, for defendant-appellant Duke Power Co.

Paul L. Lassiter, Raleigh, for plaintiff-appellee North Carolina Utilities Commission Public Staff.

Byrd, Byrd, Ervin, Blanton & Whisnant, P. A. by Robert B. Byrd, Morganton, for plaintiff-appellee Great Lakes Carbon Corp.

Thomas R. Eller, Jr., Raleigh, for plaintiff-appellee, North Carolina Textile Mfrs. Assn, Inc.

M. Travis Payne, Raleigh, for plaintiff-appellee Kudzu Alliance.

W. I. Thornton, Jr., Durham, for plaintiff-appellee City of Durham.

MEYER, Justice.

On 29 February 1980 Duke filed an application with the Commission to adjust and increase its rates and charges for electric service to its retail customers in North Carolina by an average of approximately 9.61% or $91,572,000. In the application, Duke proposed to make the rate adjustments effective 30 March 1980. In an order dated 21 March 1980, the Commission determined, inter alia, that the application constituted a general rate case (G.S. § 62-137), suspended the proposed adjustments for a period of up [305 N.C. 4] to 270 days (G.S. § 62-134), and ordered public hearings on the proposed rates and publication of notices of such hearings. The Commission set the test period as the twelve month period ending 31 December 1979. After interventions, the matter was heard by the Commission in public hearings in various areas of the State through June and July, 1980.

On 7 October 1980, the Commission issued its Final Order which disallowed $34,122,000 of the increase requested by Duke and allowed $57,450,000 thereby reducing the increase from the requested 9.61% to 6.03% or 63% of the amount requested. The increase was allowed for service rendered on and after 3 October 1980. In its Final Order the Commission, inter alia, (1) increased Duke's accumulated depreciation account, thereby reducing the rate base, by the amount of $3,879,000 as an offset to a pro forma adjustment in that same amount made by Duke in its test year depreciation expense and (2) fixed the rate of return on common equity at 14.1%. One commissioner dissented from the Final Order on the ground that there was no evidence to support the Commission's determination as to the fair rate of return on equity.

Duke appealed and the Court of Appeals allowed Duke's motion for accelerated hearing and decision of appeal by order dated 13 January 1981. In an opinion filed 5 May 1981, the Court of Appeals concluded that "[i]t is reasonably certain that the final disposition of this appeal will be determined by the Supreme Court [and] [w]e, therefore, will not attempt to recapitulate the evidence or set out a detailed statement of [our] reasoning ...." The Court of Appeals then held that the Commission's adjustment to Duke's accumulated depreciation account does not contravene G.S. § 62-133(b)(1) and (c), and that the Commission's determination of a 14.1% fair rate of return on common equity is supported by competent evidence and that the Commission adequately stated the reasons for its determination.

Duke's exceptions before the Court of Appeals and before this Court relate solely to two components of the Commission's rate determination. Duke contends that the Commission erred, first, by understating Duke's rate base by improperly deducting therefrom $3,879,000 in accumulated depreciation contrary to G.S. § 62-133(b)(1); and second, by failing to state and explain its reasons for failing to follow Duke's uncontradicted evidence that 15.0% was the minimum fair rate of return on its common equity. We do not find that the Commission erred in either respect.

I. STANDARD OF JUDICIAL REVIEW

Before proceeding to address the substantive issues of this case, we must first determine the appropriate standard of judicial review of the Commission's rate determination order.

Duke's appeal to this Court of the decision of the Court of Appeals is as of right pursuant to G.S. § 7A-30(3). See also G.S. § 62-96. Duke's appeal to the Court of Appeals was pursuant to G.S. § 7A-29. See also G.S. § 62-90. G.S. § 62-94(b) specifies the standard of judicial review by the Court of Appeals.

That section provides, inter alia, that the reviewing court may (1) affirm, (2) reverse, (3) declare null and void, (4) modify, or (5) remand for further proceedings, decisions of the Commission. The Court's power to affirm or remand is not specifically circumscribed by the statute. However, the power of the Court to reverse or modify and, a fortiori, to declare null and void, is substantially circumscribed to situations in which the court must find (a) that appellant's substantial rights, (b) have been prejudiced, (c) by Commission findings, inferences, conclusions or decisions which are

(1) in violation of constitutional provisions; or

(2) in excess of statutory authority or jurisdiction of the Commission, or

(3) made upon unlawful proceedings, or

(4) affected by other errors of law, or

(5) unsupported by competent, material and substantial evidence in view of the entire record as submitted, or

(6) arbitrary or capricious.

Utilities Comm. v. Oil Co., 302 N.C. 14, 19-20, 273 S.E.2d 232, 235 (1981).

Subsection (c) of G.S. § 62-94 requires the reviewing Court, in making the foregoing determinations, to "review the whole record." In order to determine whether the decision of the Court of Appeals is proper, this Court must determine which of the listed criteria the Court of Appeals should have addressed and whether that court addressed those criteria in its review of the proceedings and order of the Commission. The criteria to be employed is in turn determined by the issues presented to the Court of Appeals, for it is the nature of the contended error that dictates the criteria.

As to the issue concerning depreciation, Duke presented in its brief to the Court of Appeals the following issue:

1. Did the Commission's action in reducing the original cost of Duke's property in service at the end of the test period by an amount of depreciation which did not represent a portion of original cost "consumed by previous use recovered by depreciation expense" contravene G.S. §§ 62-133(b)(1) and (c)?

The Court of Appeals answered that issue as follows:

With regard to the first question presented in the appellant's brief, in our opinion, the Commission was correct in reducing Duke's rate base by increasing its depreciation reserve by $3,879,000 due to the fact that Duke had made similar adjustments to its depreciation and amortization expenses for the test year without making corresponding adjustments to its accumulated depreciation account. The adjustments did not contravene N.C.Gen.Stat. § 62-133(b)(1) and (c). Moreover, we believe that without such adjustments, Duke's rates would have been artificially high, thereby allowing it to earn more than a fair rate of return.

It is apparent that both Duke and the Court of Appeals treated the issue as a contention that the action of the Commission, in making the adjustment to accumulated depreciation, was "affected by error of law." The Court of Appeals applied the correct criteria for review as it held that the adjustment to accumulated depreciation "did not contravene N.C.Gen.Stat. § 62-133(b)(1) and (c)." Having determined that the Court of Appeals applied the correct standard of review on the depreciation issue, this Court must consider whether the Court of Appeals erred in affirming the action of the Commission.

As to the issue concerning the rate of return on equity fixed by the Commission, Duke presented in its brief to the Court of Appeals the following issue:

2. Is the Commission's determination that 14.1% is a fair rate of return on equity unsupported by substantial evidence and arbitrary and capricious when (i) the Commission rejected, without setting out any justification, uncontradicted evidence that 15.0% is the minimum fair rate of return on equity and (ii) the method by which the Commission established the rate of return on equity cannot be determined from the Commission's order?

The Court of Appeals answered that issue as follows:

With regard to the second question presented in appellant's brief, in our opinion, the Commission's determination that 14.1% is a fair rate of return on common equity is fully supported by the record and was not arbitrary and capricious. In its order, the Commission made findings supported by competent evidence and adequately stated the reasons for its determination that 14.1% should be the rate of return on Duke's common equity.

We conclude from the issue presented and the conclusion reached by the Court of Appeals on the issue of the rate of return on equity that both Duke and the Court of Appeals treated the issue as a contention that the Commission's decision in fixing the rate of return at 14.1% was "arbitrary or capricious" or "unsupported by competent, material and substantial evidence in view of the entire record as submitted." It is obvious to this Court that the Court of Appeals applied the correct criteria for review as it held that the Commission's determination of 14.1% rate of return "is fully supported by the record and was not arbitrary and capricious" and that the Commission "made findings supported by competent evidence and adequately stated the reasons for its determination ...." Having determined that the Court of Appeals applied the correct standard of review on the rate of return issue, this Court must consider whether the Court of Appeals erred in holding that the Commission's decision was not arbitrary or capricious and was in fact supported by the record.

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