State ex rel. Utilities Commission v. Duke Power Co., 72

• Decision Date: 01 July 1974
• Docket Number: No. 72,72
• Citation: 206 S.E.2d 269,285 N.C. 377
• Court: North Carolina Supreme Court
• Parties: , 6 P.U.R.4th 390 STATE of North Carolina ex rel. UTILITIES COMMISSION et al. v. DUKE POWER COMPANY.

Page 269

206 S.E.2d 269

285 N.C. 377, 6 P.U.R.4th 390

STATE of North Carolina ex rel. UTILITIES COMMISSION et al. v. DUKE POWER COMPANY.

No. 72.

Supreme Court of North Carolina.

July 1, 1974.

Robert Morgan, Atty. Gen., I Beverly Lake, Jr., Duputy Atty. Gen., and Robert P. Gruber, Asst. Atty. Gen., Raleigh, for the using and Consuming Public.

Edward B. Hipp, Commission Atty., and John R. Molm, Associate Commission Atty., Raleigh, for N.C. Utilities Commission.

William H. Grigg, Steve C. Griffith, Jr., Clarence W. Walker, John M. Murchison, Jr., Charlotte, for Duke Power Co.

Byrd, Byrd, Ervin & Blanton, Morganton, for Great Lakes Carbon Corp.

Claude V. Jones, City Atty., Durham, for the City of Durham, Intervenor.

LAKE, Justice.

The steps to be taken by the Utilities Commission in fixing rates to be charged by any public utility for its services are set forth in G.S. § 62--133(b), which provides:

'(b) In fixing such rates, the Commission shall:

'(1) Ascertain the fair value of the public utility's property used and useful in providing the service rendered to the public within this State, considering the reasonable original cost of the property less that portion of the cost which has been consumed by previous use recovered by depreciation expense, the replacement cost of the property, and any other factors relevant to the present fair value of the property. Replacement cost may be determined by trending such reasonable depreciated cost to current cost levels, or by any other reasonable method.

'(2) Estimate such public utility's revenue under the present and proposed rates.

'(3) Ascertain such public utility's reasonable operating expenses, including actual investment currently consumed through reasonable actual depreciation.

'(4) Fix such rate of return on the fair value of the property as will enable the public utility by sound management to produce a fair profit for its stockholders, considering changing economic conditions and other factors, as they then exist, to maintain its facilities and services in accordance with the reasonable requirements of its customers in the territory covered by its franchise, and to compete in the market for capital funds on terms which are reasonable and which are fair to its customers and to its existing investors.

'(5) Fix such rates to be charged by the public utility as will earn in addition to reasonable operating expenses ascertained pursuant to paragraph (3) of this subsection the rate of return fixed pursuant to paragraph (4) on the fair value of the public utility's property ascertained pursuant to paragraph (1).'

Thus, the legislative mandate is that the Commission shall fix rates which will enable a well managed utility to earn a 'fair rate of return' on the 'fair value' of its properties 'used and useful' in rendering its service. These factors are to be determined as of the end of the test period. G.S. § 62--133(c). This concept of a 'fair return on fair value' originated as a constitutional limitation over 75 years ago in Smyth v. Ames, 169 U.S. 466, 18 S.Ct. 418, 42 L.Ed. 819. That is, it began as a statement of the minimum below which the Legislature might not go in fixing public utility rates. Immediately thereafter, the Legislature incorporated this standard into the original version of G.S. § 62--133(b). With relatively minor amendments, insofar as the present appeal is concerned, the original standard has survived and appears in the present statute. The origin of this statute supports the inference that the Legislature intended for the Commission to fix rates as low as may be reasonably consistent with the requirements of the Due Process Clause of the Fourteenth Amendment to the Constitution of the United States, those of the State Constitution, Art. I, § 19, being the same in this respect.

After some forty years of struggling, with indifferent success, to give clear meaning to the concept of 'a fair return on the fair value,' the Supreme Court of the United States abandoned it as a test of due process of law in public utility rate making. Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 600--605, 64 S.Ct. 281, 88 L.Ed. 333. Nevertheless, by virtue of the above statute, it remains as the standard to be applied by the Commission in fixing rates and by this Court in determining appeals from the Commission's order.

In Utilities Commission v. State and Utilities Commission v. Telegraph Co., 239 N.C. 333, 344, 80 S.E.2d 133, Justice Barnhill, later Chief Justice, said, 'This statute has been characterized as an 'old, rambling, and misty statutory declaration of the matters to be taken into account by the commission * * *.' 12 N.C.Law Review 298.' Since that time it has frequently been characterized in somewhat less complimentary terms. However, as Justice Barnhill there said, 'Be that as it may, it is the law in this State and will continue to be the law until amended, revised, or repealed by the Legislature.'

Duke contends that, in its order now before us, the Commission did not comply with the mandate of subparagraph (1) of this statute in fixing the fair value of its properties used and useful in rendering electric power service to the public in North Carolina in that its finding of 'fair value' is not supported by substantial evidence. It must be so supported. G.S. § 62--65. We turn first to this contention.

Preliminarily, the Commission found that the reasonable original cost, depreciated, of the properties, as of the end of the test period, was $865,006,125, that the 'replacement cost' was $1,199,093,357, that the proper allowance for working capital was $62,416,389. Duke does not challenge these preliminary findings. The finding as to 'replacement cost' was derived by the Commission from the testimony of Duke's expert witness, Mr. Gillett, by applying to his trended cost calculations, computed on the basis of all of the company's properties, including those in South Carolina, the allocation factors set forth in evidence introduced by witnesses for the Commission staff. The appropriateness of the allocation factors is not questioned by Duke. Thus, Duke does not question the correctness of a Commission's preliminary finding as to the 'replacement cost' of the properties used by Duke in retail service to the people of North Carolina.

Having made these preliminary findings, the Commission then found, or concluded, that the 'fair value' of the properties allocated to North Carolina should be derived by giving five-sevenths (71.4%) weighting to original cost (i.e., net investment) and two-sevenths (28.6%) weighting to replacement cost. So doing, and adding to the result the working capital allowance which it had found proper, the Commission found the fair value of the properties (was $1,022,876,009). This figure, called the 'rate base,' is the amount on which the Commission then undertook to allow Duke to earn a fair return.

Duke contends that there is in the record no evidence to support the Commission's finding of the 'rate base' because there is no evidence in the record to support the Commission's selection of the two weighting factors, five-sevenths and two-sevenths, respectively. Our careful study of this voluminous record, and of the well prepared brief filed by Duke, discloses no expert testimony whatever as to the weight which should be given by the Commission to original cost and to replacement cost in carrying out the statutory mandate to 'consider' these indicators of 'fair value.' If such evidence by necessary in order to enable the Commission to give appropriate weight to these two indicators, which we think is clearly not the meaning of the statute, the absence of such evidence in the record does not benefit Duke, for the burden is upon Duke to establish the reasonableness of the rate increases it has proposed. G.S. § 62--75; G.S. § 62--134(c); Utilities Commission v. Railway Co., 267 N.C. 317, 148 S.E.2d 210.

It is the clear intent of G.S. § 62--133(b)(1) that the Commission, in 'considering' the indicators of 'fair value' which, themselves, are supported by competent and substantial evidence, shall use its own expert judgment as to the credibility of the evidence in the record and as to the weight to be given to it. Utilities Commission v. Telephone Co., 281 N.C. 318, 358, 360, 189 S.E.2d 705; Utilities Commission v. Telephone Co., 266 N.C. 450, 454, 146 S.E.2d 487; Utilities Commission v. Public Service Co., 257 N.C. 233, 237, 125 S.E.2d 457; Utilities Commission v. State and Utilities Commission v. Telegraph Co., supra, 239 N.C. at pp. 344, 349, 80 S.E.2d 133. While the Commission may not brush one of the prescribed indicators aside by giving it 'minimal consideration,' Utilities Commission v. Gas Co., 254 N.C. 536, 119 S.E.2d 469, it has not so treated its finding of 'replacement cost' in this instance, having given that indicator a weighting of 28.6 per cent, thereby placing 'fair value' at approximately $95,500,000 above original cost, depreciated. An addition of over $95,000,000 to the rate base is not 'minimal.'

A reviewing court may not properly disturb an order of the Commission merely because it would have given a different weight to each of the indicators of 'fair value.' Utilities Commission v. Telephone Co., 281 N.C. 318, 339, 360, 189 S.E.2d 705; Utilities Commission v. Gas Co., 254 N.C. 536, 550, 119 S.E.2d 469. It is the prerogative of the Commission to determine the credibility of evidence before it, even though such evidence be uncontradicted by another witness. Utilities Commission v. Telephone Co., 281 N.C. 318, 360, 189 S.E.2d 705. Obviously, it is not the meaning of G.S. § 62--133(b)(1) that, in the absence of expert opinion testimony as to the weight to be given the respective indicators of 'fair value,' the Commission must give them equal weight and find 'fair value' by the mere striking of an arithmetic average of the indicators. Utilities Commission v. Telephone Co., 281 N.C....