State ex rel. Utilities Com'n v. Public Staff-North Carolina Utilities Com'n

• Decision Date: 28 July 1988
• Docket Number: No. 108A87,STAFF-NORTH,108A87
• Court: North Carolina Supreme Court
• Parties: STATE of North Carolina ex rel. UTILITIES COMMISSION; and Duke Power Company v. PUBLICCAROLINA UTILITIES COMMISSION (Appellant); and Lacy H. Thornburg, Attorney General; City of Durham; and Wells Eddleman (Cross-Appellants).

Page 567

370 S.E.2d 567

322 N.C. 689

STATE of North Carolina ex rel. UTILITIES COMMISSION; and Duke Power Company v. PUBLIC STAFF-NORTH CAROLINA UTILITIES COMMISSION (Appellant) and Lacy H. Thornburg, Attorney General; City of Durham; and Wells Eddleman (Cross-Appellants).

No. 108A87.

Supreme Court of North Carolina.

July 28, 1988.

James D. Little, Staff Atty., Raleigh, for Public Staff Legal Div., North Carolina Utilities Com'n, appellant.

Lacy H. Thornburg, Atty. Gen. by Jo Anne Sanford, Sp. Deputy Atty. Gen., and Karen E. Long, Asst. Atty. Gen., Raleigh, for Atty. Gen. Lacy H. Thornburg and City of Durham, cross-appellants.

Wells Eddleman, Durham, intervenor pro se and cross-appellant.

Steve C. Griffith, Jr., Sr. Vice President and Gen. Counsel, and Ronald L. Gibson, Asst. Gen. Counsel, Duke Power Co.; Kennedy, Covington, Lobdell & Hickman by Clarence W. Walker and Myles E. Standish, Charlotte, for Duke Power Co., appellee-applicant.

Richard E. Jones, Vice President and Gen. Counsel, Raleigh, for Carolina Power & Light Co. amicus curiae.

EXUM, Chief Justice.

On 27 March 1986, Duke Power Company ("Duke") filed an application with the North Carolina Utilities Commission ("Commission") seeking authority to increase annual electric revenues for its North Carolina retail customers by 14.7%, or $289,316,000. On 14 April 1986, the Commission declared Duke's application to be a general rate case, established the test period, and scheduled public hearings. Thereafter, the Attorney General, North Carolina Industrial Energy Consumers, the Commission's Public Staff, Carolina Utility Customers Association and Wells Eddleman intervened. On 31 October 1986 the Commission, Chairman Wells and Commissioner Cook dissenting in part, issued its Order Granting Partial Rate Increase, from which these appeals are taken, and which authorized Duke to increase its revenues for North Carolina retail customers by $133,080,000.

On intervenors' appeals the questions presented are whether the Commission erred in: (1) reaffirming its decision to allow Duke to recover, in rates charged to its customers, costs expended on its abandoned Perkins and Cherokee nuclear power stations; (2) deciding that 13.4% is a fair rate of return on Duke's common equity; (3) adopting Duke's actual capital structure as it existed on 31 July 1986 as a proper capital structure for rate-making purposes; and (4) failing to reduce Duke's equity capital for rate-making purposes by deducting from it Duke's investment in certain of its wholly owned, nonregulated subsidiaries. We hold that the Commission's conclusion regarding the appropriate rate of return on common equity is not supported by adequate factual findings, and we remand for further proceedings on this question. We affirm the Commission's decision on all other questions presented.

I.

The Attorney General, the City of Durham, and Wells Eddleman contend the Commission erred in reaffirming its earlier decisions to allow Duke to recover from its ratepayers costs incurred in its now cancelled Cherokee and Perkins nuclear power station projects. Duke responds that our earlier decision, State ex rel. Utilities Comm. v. Eddleman, 320 N.C. 344, 358 S.E.2d 339 (1987), means this matter is res judicata and appellants are therefore barred from pressing this contention in the instant case. We agree with Duke and decline to address the merits of appellants' argument.

In Eddleman we considered whether the Commission improperly allowed Duke to recover costs incurred in the construction of its abandoned Cherokee and Perkins nuclear power stations. Duke began constructing these stations in the mid-1970's in order to accommodate then predicted increases in electricity consumption. When consumption increases were not commensurate with these predictions, Duke's Board of Directors terminated construction of both plants. Duke sought, nevertheless, to recover in its rates costs, amortized over periods of years, incurred in the construction of these abandoned plants. The Commission, as it had done in the past without challenge on appeal, decided to permit this procedure. The Attorney General, the City of Durham, and Wells Eddleman appealed to this Court, contending for various reasons that the Commission's decision was legally impermissible. The Court, one Justice not participating, affirmed the Commission's decision by an evenly divided vote. Concerning the effect of our decision we declared, "following the uniform practice of this Court, the decision of the Utilities Commission is affirmed, not as precedent but as the decision in this case." Id. at 380, 358 S.E.2d at 362.

The doctrine of res judicata treats a final judgment as the full measure of relief to be accorded between the same parties on the same "claim" or "cause of action." C. Wright, Federal Practice and Procedure, § 4402 (1969). "The essential elements of res judicata are: (1) a final judgment on the merits in an earlier suit, (2) an identity of the cause of action in both the earlier and the later suit, and (3) an identity of parties or their privies in the two suits." Hogan v. Cone Mills Corporation, 315 N.C. 127, 135, 337 S.E.2d 477, 482 (1985).

Applying the law enunciated in Hogan to the facts of the present case, we conclude, as a result of our Eddleman decision, that appellants are barred by the doctrine of res judicata from reasserting their claim that the Commission's treatment of the costs of the abandoned Perkins and Cherokee power stations is legally impermissible. Here and in Eddleman the parties and the claims are identical: the Attorney General, the City of Durham, and Wells Eddleman contend that the Commission erred in allowing Duke to include in its rates, on an amortized basis, costs incurred in the construction of its abandoned power plants. A final judgment on the merits of this claim was reached in Eddleman. Although our evenly divided decision had no precedential value, it operated, nevertheless, as the final decision in the case on this claim as to these parties.

Appellants contend that because the Court in Eddleman was evenly divided there was no final judgment on the merits of their claim. This argument stands at odds with our decision in Seay v. Insurance Company, 213 N.C. 660, 197 S.E. 151 (1938). In Seay we held that when a judgment is affirmed on appeal because of an evenly divided Court, the lower decision becomes the law of the case and is determinative of the rights of the parties with regard to the fully litigated claim. Id. at 661, 197 S.E. at 152. Seay involved a claim by an insurance agent to recover commissions he contended the defendant company owed him. In the initial action the superior court reversed a judgment of nonsuit entered against the agent in municipal court. Defendant appealed, and this Court affirmed the superior court by an evenly divided vote. The agent brought a subsequent suit on the same claim against the insurance company's successor in interest, and again a judgment of nonsuit was entered against him. This Court reversed, holding that our earlier decision to reverse the judgment of nonsuit was determinative of the rights of the parties in any subsequent action on the same contract. Id. at 661, 197 S.E. at 152.

Seay controls the present case on the res judicata point. While our decision in Eddleman to affirm the Commission has no precedential value, it does finally determine the rights of the parties in that litigation on the abandoned plant cost issue. Since those parties and that issue are the same as in the instant case, those parties may not here relitigate that issue.

II.

The Public Staff argues the Commission's conclusion that 13.4% is a fair rate of return on Duke's common equity is not supported by adequate findings of material facts. We agree and remand for further proceedings on this issue consistent with this opinion.

We note at the outset that the Commission has labeled its determination that 13.4% is a fair rate of return on common equity a "finding." This, of course, does not make it so. What constitutes a fair rate of return on equity, as the Commission in other parts of its order recognizes, is ultimately a matter of judgment. Matters of judgment are not factual; they are conclusory and based ultimately on various factual considerations. Facts are things in space and time that can be objectively ascertained by one or more of the five senses or or by mathematical calculation. Facts, in turn, provide the bases for conclusions. State ex rel. Utilities Comm. v. Eddleman, 320 N.C. at 351, 358 S.E.2d at 346. What constitutes a fair rate of return on common equity is a conclusion of law which must, in turn, be predicated on adequate factual findings.

All parties relied principally on what is known as "discount flow methodology" ("DCF") to determine the appropriate common equity rate of return. 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. C.F. Phillips, Jr., The Regulation of Public Utilities 356-57 (1984). While the use of DCF methodology presents some difficulties, especially in determining investor expectations, the parties in the present case agreed that a Duke-specific DCF is the best method for determining Duke's rate of return on common equity.

Duke witness Dr. Charles E. Olson performed a Duke-specific DCF study which, standing alone, suggested a return requirement of 11.9% to 12.4%. He "checked" the results of his study by performing a DCF study on a group of electric utilities comparable in risk to Duke. This study suggested a return requirement of 12.5% to 13.0%. Dr. Olson performed another check--a "risk premium study"--which suggested a return requirement of 13.75%. He acknowledged that the risk premium method is not as accurate as the DCF method. Dr. Olson's ultimate recommendation was for a 13.5% to 14.0% return on common...