IN THE SUPREME COURT OF NORTH CAROLINA
No. 268A12
FILED 12 APRIL 2013
STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION; DUKE
ENERGY CAROLINAS, LLC, Applicant; PUBLIC STAFF-NORTH CAROLINA
UTILITIES COMMISSION, Intervenor
v.
ATTORNEY GENERAL ROY COOPER and THE CITY OF DURHAM, NORTH
CAROLINA, Intervenors
On direct appeal as of right by intervenor Roy Cooper, Attorney General,
pursuant to N.C.G.S. §§ 7A-29(b) and 62-90(d) from a final order of the North
Carolina Utilities Commission issued on 27 January 2012 in Docket No. E-7,
Sub 989. Heard in the Supreme Court on 13 November 2012.
K&L Gates LLP, by Kiran H. Mehta; Heather Shirley Smith, Deputy General
Counsel, and Kendrick Fentress, Associate General Counsel, Duke Energy
Carolinas, LLC; and Law Office of Robert W. Kaylor, by Robert W. Kaylor, for
applicant-appellee Duke Energy Carolinas, LLC.
Robert P. Gruber, Executive Director, by Antoinette R. Wike, Chief Counsel,
and William E. Grantmyre, Staff Attorney, for intervenor-appellee Public
Staff-North Carolina Utilities Commission.
John F. Maddrey, Solicitor General; Phillip K. Woods, Special Deputy
Attorney General; Margaret A. Force, Assistant Attorney General; and Kevin
Anderson, Senior Deputy Attorney General, for intervenor-appellant Roy
Cooper, Attorney General.
AARP Foundation Litigation, by Julie Nepveu, pro hac vice; and M. Jason
Williams, P.A., by M. Jason Williams, for AARP, amicus curiae.
JACKSON, Justice.
STATE EX REL. UTILS. COMM’N V. ATT’Y GEN.
Opinion of the Court
In this case we consider whether the order by the North Carolina Utilities
Commission (“the Commission”) approving a 10.5% return on equity1 (“ROE”) for
Duke Energy Carolinas, LLC (“Duke”) contained sufficient findings of fact to
demonstrate that it was supported by competent, material, and substantial
evidence in view of the entire record. Because we conclude that the Commission
failed to make the necessary findings of fact to support its ROE determination, we
reverse the Commission’s order and remand this case to the Commission so that it
may enter sufficient findings of fact.
On 1 July 2011, Duke filed an application with the Commission requesting
authority to increase its North Carolina retail electric service rates to produce
additional annual revenues of $646,057,000, an increase of approximately 15.2%
over then current revenues. The application requested that rates be established
using an ROE of 11.5%. The Commission entered an order on 28 July 2011,
declaring this matter to be a general rate case and suspending the proposed rate
increase pending further investigation. The Commission scheduled six public
hearings to receive public witness testimony in multiple locations throughout
Duke’s service territory. The Commission also scheduled an evidentiary hearing for
1 ROE is the return that a utility is allowed to earn on its capital investment, which
is realized through rates collected from its customers. The ROE affects profits to the
utility’s shareholders and has a significant impact on what customers ultimately pay the
utility. The higher the ROE, the higher the resulting rates that customers will pay to the
utility. See State ex rel. Utils. Comm’n v. Carolina Util. Customers Ass’n, 323 N.C. 238, 245,
372 S.E.2d 692, 696 (1988).
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Opinion of the Court
29 November 2011. The Attorney General of North Carolina and the Public Staff–
North Carolina Utilities Commission intervened in this matter as allowed by law.
On 28 November 2011, the Public Staff and Duke filed an Agreement and
Stipulation of Settlement with the Commission that “provide[d] for a net increase of
$309,033,000” for annual revenues and an allowed “ROE of 10.5%.” The Settlement
addressed all issues between Duke and the Public Staff, but was contested by some
of the other parties, including the Attorney General.
By the time the evidentiary hearing began on 29 November 2011, the
Commission already had heard testimony from a total of 236 public witnesses.
Many of these customers opposed the proposed rate increase and discussed the
hardship that it would impose on the average residential customer in light of
current economic conditions. At the evidentiary hearing the Commission heard
more live testimony and also received prefiled testimony regarding the proposed
ROE.
Specifically, Duke presented the testimony of Robert Hevert, President of
Concentric Energy Advisors, Inc., a company that provides financial and economic
advisory services to energy and utility clients across North America. Hevert
initially recommended an ROE range of 11% to 11.75% and a specific ROE of 11.5%;
however, in his rebuttal testimony Hevert lowered his recommended range to
10.75% to 11.5% and decreased his recommended ROE to 11.25%. Hevert testified
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Opinion of the Court
that his analysis was based upon market data and the ROE requirements of
investors. In particular, Hevert stated that he factored into his analysis the effect
of macroeconomic conditions in the capital markets. Hevert’s analysis primarily
used discounted cash flow2 (“DCF”) modeling, but also factored Duke-specific risks
into the equation to produce a final recommended range and particular ROE.
Hevert verified that when determining a reasonable ROE, he did not specifically
consider factors such as the unemployment or poverty rates in Duke’s service area,
the impact of his recommendation on the company’s fixed income customers or on
cities and counties as ratepayers, or its effect on job creation in the region. Hevert
further stated that although he reviewed “other witnesses testimony,” he did not
review any correspondence, petitions, or comments filed by customers. Hevert also
testified that he was unfamiliar with the specific statutory requirements for
establishing a fair and reasonable ROE in North Carolina and did not know
whether the Commission was required to consider the effect of economic conditions
on consumers when setting an ROE.
The Public Staff presented the testimony of Ben Johnson, Ph.D., President of
Ben Johnson Associates, Inc., a consulting firm that specializes in public utility
regulation. Johnson recommended an ROE range of 8.68% to 9.79% and a specific
2 DCF modeling is an econometric method for estimating ROE whereby “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.” State ex rel. Utils. Comm’n v. Pub.
Staff-N.C. Utils. Comm’n, 322 N.C. 689, 693-94, 370 S.E.2d 567, 570 (1988).
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Opinion of the Court
ROE of 9.25%. Johnson based his ROE analysis upon two approaches. First,
Johnson followed the comparable earnings approach, which “estimate[s] the long-
run cost of equity as being equivalent to the level of returns being earned, on
average, by firms throughout the economy” and then adjusts for risk differences
between such firms. Second, Johnson followed a market analysis approach, which
included a DCF analysis along with other econometric analyses. Johnson’s
testimony focused on the potential effect of a rate increase on Duke’s investors and
did not include any analysis of economic conditions in Duke’s service area and their
impact on customers. Although Johnson included an overview of general economic
trends in his prefiled direct testimony, Johnson explained that his calculations did
not consider the economic impact on Duke’s customers when he determined ROE,
adding that such considerations are “beyond the scope of [his] work” and are within
the purview of other participants in the process. Johnson stated that “[t]he focus of
[his] testimony was more on how investors are dealing with economic conditions and
less so on how customers are dealing with those same economic conditions.”
Johnson elaborated that he “was not doing a specific calculation of whether, say, a
five percent rate increase is more acceptable than seven and what the impact might
be.” Nonetheless, Johnson agreed that the impact of economic conditions on
customers is an appropriate analysis that should be undertaken by the Commission.
The Carolina Utility Customers Association, Inc. (“CUCA”), a coalition of
industrial energy customers, presented the testimony of Kevin O’Donnell, President
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Opinion of the Court
of Nova Energy Consultants, Inc., who recommended a specific ROE of 9.5%.
O’Donnell recommended an ROE range of 8.75% to 9.75% based upon a DCF
analysis and an ROE range of 8.5% to 9.5% based upon the comparable earnings
approach. O’Donnell’s testimony contained no analysis of economic conditions in
Duke’s service area and their impact on customers.
The Commercial Group, an ad hoc group of Duke’s commercial energy
customers, presented the testimony of Steve Chriss, Senior Manager for Energy
Regulatory Analysis for Wal-Mart Stores, Inc., and Wayne Rosa, Energy and
Maintenance Manager for Food Lion, LLC. Chriss and Rosa declined to recommend
an ROE range or specific ROE, but did testify that the 11.5% ROE that Duke
initially requested exceeded both Duke’s currently authorized return and recently
authorized returns across the country which averaged 10.32%. Chriss and Rosa did
testify that rate increases directly affect retailers and their customers and that a
rate increase “is a serious concern” given current economic conditions. Chriss and
Rosa did not discuss the fairness of the proposed ROE given the impact of changing
economic conditions on customers, but requested that the Commission “consider
these impacts thoroughly and carefully in ensuring that any increase in [Duke’s]
rates is only the minimum amount necessary.”
The Attorney General did not present any ROE evidence.
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STATE EX REL. UTILS. COMM’N V. ATT’Y GEN.
Opinion of the Court
On 27 January 2012, the Commission issued an order, granting a
$309,033,000 annual retail revenue increase for Duke and approving an ROE of
10.5%—the same revenue increase and ROE agreed to in the Stipulation. In
support of these conclusions, the Commission summarized—but did not weigh—the
testimony of Hevert, Johnson, O’Donnell, and Chriss. The Commission also
acknowledged that it was required to consider whether the ROE is reasonable and
fair to customers, stating:
[T]he Commission is required to consider the economic
effects of its ROE decision on a public utility’s customers
pursuant to G.S. 62-133(b)(4). In particular, G.S. 62-
133(b)(4) states, in pertinent part, that in fixing rates the
Commission must fix a rate of return on the utility’s
investment that “will enable the public utility by sound
management to produce a fair return for its shareholders,
considering changing economic conditions and other
factors, including, but not limited to...to compete in the
market for capital funds on terms that are reasonable and
that are fair to its customers and to its existing investors.”
One of the “terms” on which a public utility competes in
the market for capital funds is the utility’s authorized
ROE. Thus, the Commission must consider whether that
term is reasonable and fair to the utility’s customers.
But the Commission cited only the following evidence regarding this factor:
Public Staff witness Johnson testified in depth concerning
the economic downturn, including the unemployment
rate. In addition, the Commission received extensive
testimony from public witnesses concerning the impact of
current economic conditions on Duke’s customers.
Therefore, the Commission has ample evidence to
consider in determining whether the proposed ROE of
10.5% is fair to Duke’s customers.
Ultimately, the Commission concluded that the 10.5% ROE set forth in the
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Opinion of the Court
Stipulation is “just and reasonable to all parties in light of all the evidence
presented.” The Commission noted that, while an ROE of 10.5% had not specifically
been recommended by any particular expert witness, it fell within the “range”
between the Public Staff’s initial position of 9.25% and Duke’s requested ROE of
11.25%. The Commission further noted that the 10.5% ROE was within the range
of ROEs recommended by the witnesses. The Attorney General appealed the
Commission’s order to this Court as of right pursuant to subsection 7A-29(b) of the
North Carolina General Statutes.
Subsection 62-79(a) of the North Carolina General Statutes “sets forth the
standard for Commission orders against which they will be analyzed upon appeal.”
State ex rel. Utils. Comm’n v. Carolina Util. Customers Ass’n (CUCA I), 348 N.C.
452, 461, 500 S.E.2d 693, 700 (1998). Subsection 62-79(a) provides:
(a) All final orders and decisions of the Commission
shall be sufficient in detail to enable the court on appeal
to determine the controverted questions presented in the
proceedings and shall include:
(1) Findings and conclusions and the reasons for
bases therefor upon all the material issues of fact,
law, or discretion presented in the record, and
(2) The appropriate rule, order, sanction, relief or
statement of denial thereof.
N.C.G.S. § 62-79(a) (2011). “The purpose of the required detail as to findings,
conclusions and reasons as mandated by this subsection is to provide the appellate
court with sufficient information with which to determine under the scope of review
the questions at issue in the proceedings.” CUCA I, 348 N.C. at 461, 500 S.E.2d at
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700.
This Court previously has recognized that “[t]he decision of the Commission
will be upheld on appeal unless it is assailable on one of the statutory grounds
enumerated in [N.C.G.S. §] 62-94(b).” Id. at 459, 500 S.E.2d at 699 (citation
omitted). Subsection 62-94(b) provides:
(b) So far as necessary to the decision and where
presented, the court shall decide all relevant questions of
law, interpret constitutional and statutory provisions, and
determine the meaning and applicability of the terms of
any Commission action. The court may affirm or reverse
the decision of the Commission, declare the same null and
void, or remand the case for further proceedings; or it may
reverse or modify the decision if the substantial rights of
the appellants have been prejudiced because the
Commission’s findings, inferences, conclusions or
decisions 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.
N.C.G.S. § 62-94(b) (2011). This Court has summarized its role pursuant to
subsection 62-94(b) as follows:
This Court’s role under section 62-94(b) is not to
determine whether there is evidence to support a position
the Commission did not adopt. Instead, the test upon
appeal is whether the Commission’s findings of fact are
supported by competent, material and substantial
evidence in view of the entire record. Substantial
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STATE EX REL. UTILS. COMM’N V. ATT’Y GEN.
Opinion of the Court
evidence [is] defined as more than a scintilla or a
permissible inference. It means such relevant evidence as
a reasonable mind might accept as adequate to support a
conclusion. The Commission’s knowledge, however
expert, cannot be considered by this Court unless the facts
and findings thereof embraced within that knowledge are
in the record. Failure to include all necessary findings of
fact is an error of law and a basis for remand under
section 62-94(b)(4) because it frustrates appellate review.
CUCA I, 348 N.C. at 460, 500 S.E.2d at 699-700 (alteration in original) (citations
and internal quotation marks omitted).
In the case sub judice the Attorney General argues that the Commission’s
order was legally deficient because it was not supported by competent, material,
and substantial evidence, and did not include sufficient conclusions and reasoning.
Specifically, the Attorney General contends that by merely adopting the ROE
contained in the nonunanimous Stipulation, the Commission failed to undertake an
independent analysis and reach its own conclusion regarding the ROE. In addition,
the Attorney General contends that the Commission failed to consider changing
economic conditions and their impact on consumers in determining the ROE.
“What constitutes a fair rate of return on common equity is a conclusion of
law that must be predicated on adequate factual findings.” Id. at 462, 500 S.E.2d at
701. This Court previously has set forth the procedure that the Commission must
follow when making an ROE determination:
In finding essential, ultimate facts, the Commission must
consider and make its determination based upon all
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Opinion of the Court
factors particularized in section 62-133, including “all
other material facts of record” that will enable the
Commission to determine what are reasonable and just
rates. The Commission must then arrive at its “own
independent conclusion” as to the fair value of the
applicant’s investment, the rate base, and what rate of
return on the rate base will constitute a rate that is just
and reasonable both to the utility company and to the
public.
Id. In reaching this conclusion, the Commission may consider partial, as well as
unanimous stipulations. “[A] stipulation entered into by less than all of the parties
as to any facts or issues in a contested case proceeding under chapter 62 should be
accorded full consideration and weighed by the Commission with all other evidence
presented by any of the parties in the proceeding.” Id. at 466, 500 S.E.2d at 703.
Specifically,
[t]he Commission must consider the nonunanimous
stipulation along with all the evidence presented and any
other facts the Commission finds relevant to the fair and
just determination of the proceeding. The Commission
may even adopt the recommendations or provisions of the
nonunanimous stipulation as long as the Commission sets
forth its reasoning and makes “its own independent
conclusion” supported by substantial evidence on the
record that the proposal is just and reasonable to all
parties in light of all the evidence presented.
Id. Nonetheless, “only those stipulations that are entered into by all of the parties
before the Commission may form the basis of informal disposition of a contested
proceeding under section 62-69(a), id., and such is not the case here.
Two cases previously decided by this Court provide useful guidance on the
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Opinion of the Court
application of these principles. In CUCA I this Court concluded that “the
Commission failed to adduce ‘its own independent conclusion’ as to the appropriate
rate of return on equity.” Id. at 467, 500 S.E.2d at 703. In its order, the
Commission approved the same ROE that was contained in a nonunanimous
stipulation without weighing all the available testimony. Id. This Court noted
that:
The stipulated 11.4% rate should have been considered
and analyzed by the Commission along with all the
evidence regarding proper rate of return, including the
testimony of Mr. O’Donnell on behalf of CUCA that
10.55% was the appropriate return on equity. The only
other evidence supporting the 11.4% rate was the rebuttal
testimony of Mr. Lurie in defense of the stipulation that
the stipulated rate was “just and reasonable.”
Id. at 466-67, 500 S.E.2d at 703. This Court then determined that “[i]n light of the
facts that Mr. Lurie’s initial recommendation was 13.34% and that no other
evidence supported the 11.4% rate, it is clear that the Commission adopted
wholesale, without analysis or deduction, the 11.4% rate from the partial
stipulation, as opposed to considering it as one piece of evidence to be weighed in
making an otherwise independent determination.” Id. at 467, 500 S.E.2d at 703.
In contrast, two years later this Court concluded that the Utilities
Commission “adduced its own independent conclusion as to the appropriate rate of
return on equity” and held that “this conclusion [was] fully supported by substantial
evidence in view of the entire record.” State ex rel. Utils. Comm’n v. Carolina Util.
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Customers Ass’n (CUCA II), 351 N.C. 223, 235, 524 S.E.2d 10, 19 (2000). This Court
noted that “[a] thorough review of the record . . . reveal[ed] that the Commission’s
11.4% rate of return on common equity conclusion c[ame] from the direct testimony
and exhibits of Public Staff witness Hinton.” Id. at 233, 524 S.E.2d at 17. This
Court then determined that the Commission “independently analyz[ed] the
testimony of [the applicant company’s] witness Andrews, CUCA witness O’Donnell,
and Public Staff witness Hinton before reaching its conclusion that 11.4% was the
appropriate cost of common equity.” Id. Specifically, this Court noted that “the
Commission accepted Public Staff witness Hinton’s recommendation of 11.4% based
on the credibility and objectivity of his PSNC-specific DCF analysis” “[a]fter
weighing the conflicting evidence of the expert witnesses.” Id. at 235, 524 S.E.2d at
19 (emphasis added).
Here although the 10.5% ROE contained in the nonunanimous Stipulation
fell within the range of ROEs recommended by the witnesses at the evidentiary
hearing, in contrast to CUCA II, none of the witnesses specifically recommended an
ROE of 10.5% based upon their calculations. Johnson did testify that the stipulated
ROE “was not unreasonable”; however, he also recommended a different ROE of
9.25%. In addition, in contrast to CUCA II, it does not appear that the Commission
weighed any of the testimony presented at the evidentiary hearing. Instead, it
appears that the Commission merely recited the witnesses’ testimony before
reaching an ROE conclusion in its order. Notably absent from the Commission’s
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order is any discussion of why one witness’s testimony was more credible than
another’s or which methodology was afforded the greatest weight. See CUCA II,
351 N.C. at 233-35, 524 S.E.2d at 17-19.
Without sufficient findings of fact as to these issues, we cannot say that the
Commission “ma[de] ‘its own independent conclusion’ . . . that the propos[ed] [ROE]
[wa]s just and reasonable to all parties in light of all the evidence presented.”
CUCA I, 348 N.C. at 466, 500 S.E.2d at 703. Instead, it appears that “the
Commission adopted wholesale, without analysis or deduction,” the 10.5%
stipulated ROE, “as opposed to considering it as one piece of evidence to be weighed
in making an otherwise independent determination.” Id. at 467, 500 S.E.2d at 703.
Accordingly, the Commission’s order must be reversed and this case remanded to
the Commission so that it can make an independent determination regarding the
proper ROE based upon appropriate findings of fact that balance all the available
evidence.
As guidance on remand, we further note that in making its ROE
determination the Commission failed to make findings of fact regarding the impact
of changing economic conditions on customers. “In fixing the rates to be charged by
a public utility for its service, the Commission must . . . comply with the
requirements of [Chapter 62 of the North Carolina General Statutes], more
specifically, [N.C.]G.S. [§] 62-133.” Id. at 457, 500 S.E.2d at 698 (quotation marks
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omitted). Section 62-133 states that the Commission must, inter alia:
(4) Fix such rate of return on the cost of the property
ascertained pursuant to subdivision (1) of this
subsection as will enable the public utility by sound
management to produce a fair return for its
shareholders, considering changing economic
conditions and other factors, including, but not limited
to, the inclusion of construction work in progress in the
utility’s property under sub-subdivision b. of
subdivision (1) of this subsection, 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 that are
reasonable and that are fair to its customers and to its
existing investors.
N.C.G.S. § 62-133(b)(4) (2011) (emphases added). “In finding essential, ultimate
facts, the Commission must consider and make its determination based upon all
factors particularized in section 62-133, including ‘all other material facts of record’
that will enable the Commission to determine what are reasonable and just rates.”
CUCA I, 348 N.C. at 462, 500 S.E.2d at 701 (emphasis added).
The Attorney General argues that section 62-133, in conjunction with
Chapter 62 as a whole, mandates that the Commission consider the impact of
changing economic conditions on customers when determining ROE. We agree.
“The primary rule of construction of a statute is to ascertain the intent of the
legislature and to carry out such intention to the fullest extent.” Burgess v. Your
House of Raleigh, Inc., 326 N.C. 205, 209, 388 S.E.2d 134, 137 (1990). This Court
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previously has recognized that the legislature’s “twin goals” in enacting section 62-
133 were to “assur[e] sufficient shareholder investment in utilities while
simultaneously maintaining the lowest possible cost to the using public for quality
service.” CUCA I, 348 N.C. at 458, 500 S.E.2d at 698. In addition, this Court has
stated that “[t]he primary purpose of Chapter 62 of the General Statutes is not to
guarantee to the stockholders of a public utility constant growth in the value of and
in the dividend yield from their investment, but is to assure the public of adequate
service at a reasonable charge.” State ex rel. Utils. Comm’n v. Gen. Tel. Co. of the
Se., 285 N.C. 671, 680, 208 S.E.2d 681, 687 (1974). Moreover, this Court has
explained that “[i]n its delegation of rate-making authority to the Commission, the
legislature has established an elaborate procedural, hearing, and appeals process
that contemplates the full consideration of all evidence put forth by each of the
parties certified via the statute to have an interest in the outcome of contested
proceedings.” CUCA I, 348 N.C. at 463, 500 S.E.2d at 701 (emphasis added). “Once
such considerations are afforded to all parties in a contested case, the Commission
is required to embody its findings in an order sufficiently detailing the reasons for
its determinations on all material and controverted issues of fact, law or discretion
presented in the record.” Id. (emphasis added) (citing N.C.G.S. § 62-94(b)).
It is undisputed that section 62-133 dictates that the Commission consider
“changing economic conditions” when making an ROE determination. See N.C.G.S.
§ 62-133(b)(4). Although subdivision 62-133(b)(4) does not specifically reference
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“impact on customers,” subsection 62-133(a) does emphasize that fairness to
customers is a critical consideration in rate cases by including a directive that “the
Commission shall fix such rates as shall be fair both to the public utilities and to the
consumer.” Id. § 62-133(a) (2011) (emphasis added). This is consistent with this
Court’s recognition of the customer-driven focus of Chapter 62 as a whole. See Gen.
Tel. Co., 285 N.C. at 680, 208 S.E.2d at 687. This Court previously has recognized
that Chapter 62 “is a single, integrated plan. Its several provisions must be
construed together so as to accomplish its primary purpose.” Id. at 680, 208 S.E.2d
at 687. Given the legislature’s goal of balancing customer and investor interests,
the customer-focused purpose of Chapter 62, and this Court’s recognition that the
Commission must consider all evidence presented by interested parties, which
necessarily includes customers, it is apparent that customer interests cannot be
measured only indirectly or treated as mere afterthoughts and that Chapter 62’s
ROE provisions cannot be read in isolation as only protecting public utilities and
their shareholders. Instead, it is clear that the Commission must take customer
interests into account when making an ROE determination. Therefore, we hold
that in retail electric service rate cases the Commission must make findings of fact
regarding the impact of changing economic conditions on customers when
determining the proper ROE for a public utility.
For the foregoing reasons, we reverse the Commission’s order and remand
this case to the Commission with instructions to make an independent
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determination regarding the proper ROE based upon appropriate findings of fact
that weigh all the available evidence.
REVERSED AND REMANDED.
Justice BEASLEY did not participate in the consideration or decision of this
case.
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