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

• Citation: 424 S.E.2d 133,333 N.C. 195
• Decision Date: 08 January 1993
• Docket Number: No. 385A91,STAFF--NORTH,385A91
• Court: United States State Supreme Court of North Carolina
• Parties: STATE of North Carolina EX REL. UTILITIES COMMISSION and Carolina Trace Corporation, Applicant-Appellee, v. PUBLICCAROLINA UTILITIES COMMISSION, Intervenor-Appellant.

Page 133

424 S.E.2d 133

333 N.C. 195

STATE of North Carolina EX REL. UTILITIES COMMISSION and Carolina Trace Corporation, Applicant-Appellee, v. PUBLIC STAFF--NORTH CAROLINA UTILITIES COMMISSION Intervenor-Appellant.

No. 385A91.

Supreme Court of North Carolina.

Jan. 8, 1993.

On direct appeal as of right pursuant to N.C.G.S. §§ 62-90(d) and 7A-29(b) from a final order of the North Carolina Utilities Commission entered 31 May 1991 in Docket No. W-436, Sub 4. Heard in the Supreme Court on 10 March 1992.

Hunton & Williams by Edward S. Finley, Jr., Raleigh, for applicant-appellee.

Public Staff Legal Div. by David T. Drooz, Staff Atty., Raleigh, for intervenor-appellant.

LAKE, Justice.

This is a public utility general rate case on direct appeal by the Public Staff of the North Carolina Utilities Commission from a final decision of the Commission awarding an increase in rates to be charged by Carolina Trace Corporation (CTC) to the consuming public which it serves. The assignments of error raised present important, fundamental principles of ratemaking law and policy under the limited authority delegated to our Utilities Commission by the General Assembly pursuant to the Public Utilities Act, Chapter 62 of the General Statutes.

The basic question presented is whether a public utility company may lawfully recover, through rates charged its customers, either its investment cost in or a profit on its property which is not presently used or useful in its service to its customers, under the standards and requirements specified in the substantive, controlling ratemaking section of the Act, N.C.G.S. § 62-133(b). Specifically, the issues raised include: (1) whether the investment cost of utility plant that is not "used and useful" in the public service may be treated in effect as "reasonable operating expenses" and recovered in part through amortization; (2) whether the unamortized portion of such plant may be recovered, along with a return or profit thereon, by including such portion in the company's rate base; and (3) the appropriate capacity allowance in the rate base of plant which is not presently in service to the public but is held for future use.

The record reflects that on 28 June 1990 CTC, a public utility that provides water and sewer services in the Carolina Trace subdivision in Lee County, North Carolina, filed application with the Utilities Commission for increase in its rates for both its water and sewer operations. The Commission declared this a general rate case and scheduled the matter for evidentiary hearing which commenced on 14 November 1990 before a hearing examiner, whose recommended order approving rates was issued on 21 March 1991. The Public Staff appealed the recommended order to the full Commission which then issued the final order approving increased rates on 31 May 1991. The Public Staff filed exceptions and notice of appeal of this final order on 28 June 1991.

The first two issues raised relate to a contract between CTC and the City of Sanford and CTC's construction pursuant thereto of a sewer connection between its original wastewater treatment plant and the City of Sanford's plant to supplement CTC's plant and system by use of Sanford's treatment capacity. This interconnection with Sanford was installed in 1983 at a net investment cost to CTC of $89,722. On 7 December 1989 CTC put a new wastewater treatment facility with a capacity of 325,000 gallons per day into operation. The old plant had a capacity of 150,000 gallons per day. After April of 1990 CTC treated all of its sewage at its new treatment plant and did not divert any sewage through the connection to Sanford. However, in its June 1990 application, CTC included the full cost of the connection in its rate base, contending this was still plant that was "used and useful" under the statute. The Public Staff contended this connection was at most plant held for future use and should be excluded from rate base. The Commission rejected both of these opposing contentions, with the hearing examiner holding the connection should be treated "as abandoned plant" and the Commission holding it should be treated as "extraordinary property retirement." Both held the cost should be amortized over a six-year period, with the unamortized balance included in rate base.

The third issue relates to how much of the cost of the new sewage treatment plant should be included in the rate base under the "used and useful" statutory standard. Although the CTC evidence showed that 281,160 gallons per day of capacity would meet the Division of Environmental Management design standards for existing customers, or 86.5% of the 325,000 gallons per day total capacity, CTC contended the entire cost of the new plant ($439,024) should be allowed in the rate base. The Public Staff contended that only 48% of the plant cost should go in the rate base because its evidence showed only 48% of the total capacity (155,000 gallons per day) was actually needed and used to serve existing customers. The hearing examiner added 15,344 gallons per day to the CTC evidence standard of 281,160 gallons by calculating a "reasonable capacity allowance of thirty-five percent" to conclude that 91.23% or $400,522 should go into rate base. The Commission in its final order found that a 281,160 gallon capacity was required to serve existing customers under design standards, and further found that a "capacity allowance" for future growth should be added. In determining the capacity allowance for future growth, the Commission concluded CTC had a 7% annual growth rate and that a two year planning horizon was reasonable. The Commission then calculated 39,362 gallons of margin should be added to the 281,160 deemed necessary and useful capacity for existing customers, resulting in an allowance of 98.62%, or $432,967 of the $439,024 total cost, into the rate base.

I.

In reviewing the propriety of the Commission's findings and conclusions, specifically its determination that an investment cost in physical plant that is not "used and useful" (and thus not includable in rate base) should be charged to expense and recovered through amortization as an "extraordinary property retirement," we consider whether the Commission's order is affected by errors of law and "whether there is substantial evidence, in view of the entire record, to support the position adopted." State ex rel. Utilities Commission v. Thornburg, 325 N.C. 484, 492, 385 S.E.2d 463, 467 (1989). With regard to the law "the Commission must ... comply with the requirements of [N.C.G.S. Chapter 62], more specifically, G.S. 62-133." Utilities Comm. v. Telephone Co., 281 N.C. 318, 336, 189 S.E.2d 705, 717 (1972). Upon such review, we find the classification of the physical plant here in question as "extraordinary property retirement" and subject to recovery through amortization, to be extraordinary indeed, as there is neither legal basis nor any fact or evidence to support it.

Turning first to the evidentiary record, CTC contended and offered testimony through its main witness that the connection was currently used and useful and that he expected it to be used in the near future. While the record as a whole shows abundant, substantial evidence that the sewer connection may be used and useful in the future, there is no evidence in the record that the connection has become obsolete, has lost its usefulness, or has otherwise reached a condition indicating it has been or should be classified as "retired plant." Both the record evidence and the detailed findings in the Commission's order itself expressly show the possible use or usefulness of this sewer connection in the future. The Commission's order in this regard held:

The Commission concludes that the cost of the connection to Sanford should not be included in plant in service. The new treatment plant was built with some additional capacity that is not required for today's customers, and it has an equalization chamber that should be capable of smoothing peak flows. The connection to Sanford has not been used since April of 1990. There is no contractual basis and no clear certainty that Sanford will accept wastewater from Carolina Trace for treatment in the future. It is not reasonable that the customers of Carolina Trace should pay higher rates for this interconnection just so their utility can have a backup system that other utilities are able to exist without. It is possible that the connection to Sanford will be useful to Carolina Trace in some future year as the subdivision grows and as the City of Sanford becomes more able to take outside wastewater, but for the present the interconnection between Sanford and Carolina Trace is not used and useful to the ratepayers.

There is no question, however, that the connection has been used and useful for utility service in the past. The connection was needed to supplement the capacity of the Company's then existing 150,000 gallons per day plant. The sewage for Carolina Trace could not have been treated in any other way. Although the Commission has found and concluded that the connection is no longer used and useful, the Commission is of the opinion that the connection should be treated as extraordinary property retirement and amortized over a six-year period, with the unamortized balance included in rate base. In this way the Company will be allowed to recover its investment in plant that at one time was used and useful to provide service. [Emphasis added.]

The Commission's conclusion that "the connection should be treated as extraordinary property retirement" is not supported by competent, material and substantial evidence in view of the entire record and, in fact, is inconsistent with its finding that "(i)t is possible that the connection to Sanford will be useful to Carolina Trace in some future year...."

With respect to the legal basis, the designation of unused but usable physical plant as "property retirement" and treating it...