State ex rel. Utilities Com'n v. The Public Staff-North Carolina Utilities Com'n, STAFF-NORTH

• Decision Date: 07 September 1983
• Docket Number: 530A82,Nos. 529PA82,STAFF-NORTH,s. 529PA82
• Citation: 306 S.E.2d 435,309 N.C. 195
• Court: North Carolina Supreme Court
• Parties: STATE of North Carolina ex rel. UTILITIES COMMISSION; Carolina Power and Light Company (Applicant); Champion International Corporation; and Rufus L. Edmisten, Attorney General v. THE PUBLICCAROLINA UTILITIES COMMISSION; and North Carolina Textile Manufacturers Association, Inc. STATE of North Carolina ex rel. UTILITIES COMMISSION; Carolina Power & Light Company (Applicant); Kudzu Alliance; and North Carolina Textile Manufacturers Association, Inc. v. THE PUBLICCAROLINA UTILITIES COMMISSION. STATE of North Carolina ex rel. UTILITIES COMMISSION; Virginia Electric and Power Company (Applicant); and North Carolina Textile Manufacturers Association, Inc. v. THE PUBLIC STAFF.

Page 435

306 S.E.2d 435

309 N.C. 195

STATE of North Carolina ex rel. UTILITIES COMMISSION;

Carolina Power and Light Company (Applicant);

Champion International Corporation; and Rufus L. Edmisten, Attorney General v. THE PUBLIC STAFF-NORTH CAROLINA UTILITIES COMMISSION; and North Carolina Textile Manufacturers Association, Inc.

STATE of North Carolina ex rel. UTILITIES COMMISSION;

Carolina Power & Light Company (Applicant); Kudzu

Alliance; and North Carolina Textile

Manufacturers Association, Inc. v. THE PUBLIC STAFF-NORTH CAROLINA UTILITIES COMMISSION.

STATE of North Carolina ex rel. UTILITIES COMMISSION;

Virginia Electric and Power Company (Applicant);

and North Carolina Textile Manufacturers

Association, Inc. v. THE PUBLIC STAFF.

Nos. 529PA82, 530A82.

Supreme Court of North Carolina.

Sept. 7, 1983.

Charles D. Barham, Jr., Richard E. Jones, Robert S. Gillam, and Bode, Bode & Call by John T. Bode, Raleigh, for CP & L (Nos. 529PA82 and 530A82).

Hunton & Williams by Robert C. Howison, Jr., Edward S. Finley, Jr., and Edgar M. Roach, Jr., and Guy T. Tripp III, Raleigh, for VEPCO (No. 530A82).

Karen E. Long and Gisele L. Rankin, Raleigh, for Public Staff (Nos. 529PA82 and 530A82).

MEYER, Justice.

The primary issue presented is whether G.S. § 62-134(e) as it existed at the time of the proceedings in question permitted a utility in a fuel clause proceeding to obtain any increase or adjustment in its rates and charges to recover any of its costs or expenses for purchased power. We hold that the statute as it then existed did not permit recovery for any portion of purchased power costs in a fuel clause proceeding and that the cost of purchased power, if recoverable, was recoverable only in the general rate cases. We hold that the Commission erred in CP & L Docket No. E-2, Sub 402, in allowing the recovery of the entire cost of purchased power and erred in CP & L Docket No. E-2, Sub 411, and in VEPCO Docket No. E-22, Sub 258, in allowing the recovery of the fuel component of purchased power costs. Because some portion of purchased power costs which the utilities were entitled to recover may not have been recovered in either a general rate case or a fuel clause proceeding, we find it necessary to remand this cause to the Utilities Commission for such a determination.

We note at the outset that the decision of this Court on the question presented will be of limited precedential value. G.S. § 62-134(e) was repealed on 17 June 1982. Thus, that statute will not be applicable in the future in adjusting fuel-related expenses. The same act which repealed G.S. § 62-134(e) enacted the new G.S. § 62-133.2 which provides an entirely new procedure for making fuel charge adjustments. We observe that the new G.S. § 62-133.2 procedure allows the Utilities Commission to permit an electric utility to charge as a rider to its rates the cost of fuel and the fuel component of purchased power used in providing its North Carolina customers with electricity as established in its previous general rate case. Having been enacted subsequent to the order of the Commission to which these appeals relate, the new G.S. § 62-133.2 has no application to these cases.

A review of the lengthy proceedings before the Utilities Commission in each of the cases before us is unnecessary. The issue presented in all three of the cases is so basic that the peculiar facts presented by the individual dockets are not determinative of the issue. For a review of the proceedings in the individual dockets the reader is referred to the opinion of the Court of Appeals in each case which is cited in the opening paragraphs of this opinion.

The proper treatment of purchased power costs can best be understood if one is cognizant of the characteristics and benefits of the interconnection between the various systems by which electric utilities are able to exchange and buy and sell electric power and energy with other electric utilities and the considerations which dictate or make advisable such exchanges, purchases or sales. We now examine very briefly that system and those considerations. Because the electric utility systems of our State are interconnected among themselves and with those of other states (and those in turn with others), electric power and energy can flow (or be exchanged) between systems over great distances across a vast power grid or network. These interconnections, and the interchange and exchange agreements that result, enhance reliability by allowing any particular interconnected utility to receive excess power from systems located anywhere on the grid. Such enhanced reliability obviates the need for the high reserve capacity that would otherwise be needed by the utility to meet its peak demand in times of highest usage or when generating units are out of service. By sharing reserves the interconnected systems not only enhance reliability but also reduce the need for capital expenditures necessary to fulfill their reserve needs if they were not interconnected. The ability to interchange and purchase and sell power among interconnected utilities also allows the utilities to schedule plant outages for necessary maintenance and repair at particular times when it might otherwise be impossible. It makes possible staggered construction of large new generating units among interconnected systems. Because it is less expense to build a few large units than many smaller ones and because the projected load of a particular utility would not justify the construction of a large economic unit, the utility could build the larger unit and sell the excess capacity to other interconnected utilities, or delay construction and depend on the other systems until demand justifies construction.

More pertinent to the issue before us is the simple fact that the interconnection of systems allows utilities to purchase power for purely economic reasons. That is, even though a utility might have the available capacity to serve all of its needs at a particular time, it can purchase power at that time at a lower cost than it can generate it with its own units. Such purchases are referred to as purchases made on an economic dispatch basis. Whether power will be purchased may depend solely on whether the power needed can be purchased at a lower cost than the purchasing utility's cost of bringing on line its next most efficient, least cost generating unit to serve the need. Such purchases may be made for only an hour, a few hours, or for longer periods. The decision to purchase power from another utility is made by system dispatchers and may be based on one or a combination of reasons and involves consideration of factors such as plant availability (including planned as well as unplanned outages), efficiency of plant operations, heat rate, fuel inventories, etc. Such factors necessarily involve intricate management decisions which deserve close scrutiny as to reasonableness and motivation. The proper exchange with, sale to, or purchase of power from another utility promotes adequate, reliable and economical utility service at just and reasonable rates in accordance with the declared public policy of this State. G.S. § 62-2.

No one could seriously advocate that the cost of interchange and purchased power should be altogether disallowed as a legitimate expense of the utilities. Indeed, the Public Staff of the Commission does not contend that rates set to reflect purchased power expenses should be disallowed, but merely asserts that consideration of such expenses are better left to a general rate case proceeding and that the repealed G.S. § 62-134(e) did not authorize consideration of these expenses in an expedited fuel charge proceeding. It is only the question of the proper forum for allocating the cost of interchanged and purchased power under the former G.S. § 62-134(e) that is before us.

We will now examine the contentions of the parties and the actual practice and procedure of the Commission in allocating the costs of interchange and purchased power. It is the position of the utility companies that all of the costs of purchased power (not just the fuel component) were recoverable in a fuel clause proceeding held pursuant to the now repealed G.S. § 62-134(e). It is the position of the Public Staff that none of the costs of purchased power was recoverable in a fuel clause proceeding but was recoverable only in a general rate case proceeding. Neither party's contentions reflect the actual procedure and practices of the Commission in allocating purchased power costs.

The cost of fuel to operate generating plants constitutes a large portion of an electric utility's operating expenses. With the advent of the 1973 Arab oil embargo and the resultant energy crisis, the utility companies experienced dramatic increases in both oil and coal prices. Not only did fuel costs escalate rapidly but they began to fluctuate rapidly. These fuel cost increases and fluctuations led to serious financial problems for the utilities and demanded attention. To protect the utilities and their customers, the Commission in early 1974 authorized a fossil fuel adjustment clause. Under this fuel adjustment clause the companies were permitted to adjust rates periodically to reflect the changes in the cost of fossil fuels. While fuel adjustment clauses had been used occasionally prior to 1974, the issue of their validity had not been addressed directly by this Court. ¹ We did address the issue and found such a clause to be valid in Utilities Comm. v. Edmisten, Attorney General, 291 N.C. 327, 230 S.E.2d 651 (1976).

The fuel clause adopted by the Commission in 1974 operated automatically on a monthly basis, with rate adjustments being implemented by the companies in accordance with a Commission approved formula without hearings. In 1975 the General Assembly adopted G.S. § 62-134(e) which required the Commission to hold a hearing on each proposed fuel adjustment and to rule on the proposed adjustment...