IN THE SUPREME COURT OF NORTH CAROLINA
No. 424A13
FILED 20 AUGUST 2014
STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION; DUKE
ENERGY PROGRESS, INC., Applicant; and PUBLIC STAFF – NORTH
CAROLINA UTILITIES COMMISSION, Intervenor
v.
ATTORNEY GENERAL ROY COOPER and THE NORTH CAROLINA WASTE
AWARENESS AND REDUCTION NETWORK, Intervenors
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 on 30 May
2013 in Docket No. E-2, Sub 1023. Heard in the Supreme Court on 5 May 2014.
K&L Gates LLP, by Kiran H. Mehta; Heather Shirley Smith, Deputy General
Counsel, and Charles A. Castle, Associate General Counsel, Duke Energy
Progress, Inc.; and Williams Mullen, by Christopher G. Browning, Jr., for
applicant-appellee Duke Energy Progress, Inc.
Antoinette R. Wike, Chief Counsel, and William E. Grantmyre and Lucy E.
Edmondson, Staff Attorneys, for intervenor-appellee Public Staff – North
Carolina Utilities Commission.
Kevin Anderson, Senior Deputy Attorney General; Phillip K. Woods and
William V. Conley, Special Deputy Attorneys General; and Margaret A. Force,
Assistant Attorney General, for intervenor-appellant Roy Cooper, Attorney
General.
John D. Runkle for North Carolina Waste Awareness and Reduction Network,
intervenor-appellant.
JACKSON, Justice.
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.
Opinion of the Court
In this case we consider whether the order of the North Carolina Utilities
Commission (“the Commission”) authorizing a 10.2% return on equity (“ROE”) for
Duke Energy Progress (“DEP”) contained sufficient findings of fact to demonstrate
that it was supported by competent, material, and substantial evidence in view of
the entire record. See N.C.G.S. § 62-94 (2013). Because we conclude that the
Commission made sufficient findings of fact regarding the impact of changing
economic conditions upon customers, we affirm. See id. § 62-94(b).
On 12 October 2012, DEP filed an application with the Commission
requesting authority to increase its North Carolina retail electric service rates to
produce an additional $359,000,000, yielding a net increase of 11% in overall base
revenues. The application requested that rates be established using an ROE of
11.25%. The ROE represents the return that a utility is allowed to earn on its
capital investment by charging rates to its customers. As a result, the ROE
approved by the Commission affects profits for shareholders and costs to consumers.
State ex rel. Utils. Comm’n v. Cooper (“Cooper II”), ___ N.C. ___, ___, 758 S.E.2d 635,
636 (2014) (citations omitted). The ROE is one of the components used in
determining a company’s overall rate of return. Id. at ___, 758 S.E.2d at 636
(citation omitted).
On 5 November 2012, the Commission entered an order declaring this
proceeding a general rate case and suspending the proposed new rates for up to 270
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Opinion of the Court
days. The Commission scheduled five hearings across the State to receive public
witness testimony. The Commission also scheduled an evidentiary hearing for 18
March 2013 to receive expert witness testimony. The Attorney General of North
Carolina and the Public Staff of the Commission intervened as allowed by law. See
N.C.G.S. §§ 62-15, -20 (2013).
On 28 February 2013, DEP and the Public Staff filed an Agreement and
Stipulation of Settlement with the Commission. The Stipulation provided for a net
increase of $178,712,000 in annual revenues and an ROE of 10.2%. Among the
parties contesting the Stipulation was the Attorney General.
By the time the evidentiary hearing began on 18 March 2013, the
Commission already had heard testimony from 127 public witnesses. Many of these
customers opposed the proposed rate increase, testifying about unemployment and
poverty in their communities. Other customers expressed their view that DEP
should be required to discontinue fossil fuel and nuclear generation in favor of
energy efficiency and renewable energy, even if doing so would result in higher
costs.
The Commission also heard from expert witnesses, who testified about the
appropriate ROE and explained how current economic conditions affect consumers.
Specifically, DEP presented the testimony of Robert B. Hevert, Managing Partner of
Sussex Economic Advisers, LLC. Hevert recommended an ROE of 11.25%, which
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Opinion of the Court
was above the midpoint of his recommended range of 10.50% to 11.50%. Hevert
primarily used the Constant Growth Discounted Cash Flow model to compute his
recommended ROE and considered the Capital Asset Pricing Model as a check on
his results. Hevert also considered the effect of current economic conditions upon
North Carolina customers. He testified that although North Carolina’s
unemployment rate was worse than the national average, the State’s GDP growth
and expected household income growth also were higher than the national average.
Hevert noted that North Carolina’s average residential electric prices were
approximately 12.31% below the national average. He concluded that “the regional
economic conditions in North Carolina were substantially similar to the United
States, such that there is no direct effect of those conditions on the Company’s cost
of equity.” As a result, Hevert determined that his ROE analysis did not need to be
adjusted to account for the impact of changing economic conditions upon utility
customers in this State.
The Public Staff presented the testimony of Ben Johnson, Consulting
Economist and President of Ben Johnson Associates, Inc. Johnson estimated an
ROE range utilizing two approaches: first, a comparable earnings approach, which
arrived at a range of 9.75% to 10.75%; and second, a market approach, which
arrived at a range of 7.72% to 8.95%. Johnson also addressed the prolonged period
of economic weakness that began in 2007. Johnson stated that improvement in the
economy has been both weak and slow, with firms still reluctant to either invest or
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STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.
Opinion of the Court
expand. Nevertheless, Johnson concluded that the proposed ROE of 10.2% agreed
upon in the Stipulation was reasonable and consistent with the public interest.
Other interested parties also presented evidence to the Commission. The
Carolina Utility Customers Association, Inc. (“CUCA”), a coalition of industrial
energy customers, presented the testimony of Kevin O’Donnell, President of Nova
Energy 3 Consultants, Inc., who recommended a specific ROE of 9.25%. In addition,
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 did not recommend a specific ROE,
but noted that Hevert’s recommendation of 11.25% exceeded the range of recently
authorized ROEs across the country.
The Attorney General did not present any ROE evidence.
On 30 May 2013, the Commission entered an order granting a $178,712,000
annual retail revenue increase and approving an ROE of 10.2% as agreed to in the
Stipulation. In support of its conclusions, the Commission summarized the
testimony of Hevert, Johnson, O’Donnell, Chriss, and Rosa. The Commission also
recognized that it must consider whether the ROE is reasonable and fair to
customers stating:
[T]he Commission is required to consider the economic
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STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.
Opinion of the Court
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.
(Second alteration in original.) The Commission concluded that the 10.2% ROE set
forth in the Stipulation is “just and reasonable to all parties in light of all the
evidence presented.” The Attorney General appealed the Commission’s order to this
Court as of right pursuant to N.C.G.S. §§ 7A-29(b) and 62-90. The North Carolina
Waste Awareness and Reduction Network filed a separate appeal supporting the
Attorney General’s position.
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 or bases
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STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.
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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) (2013). When reviewing an order of the Commission, this Court
may, inter alia,
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.
Id. § 62-94(b) (2013). Pursuant to subsection 62-94(b) this Court must determine
whether the Commission’s findings of fact are supported by competent, material,
and substantial evidence in view of the entire record. Id.; CUCA I, 348 N.C. at 460,
500 S.E.2d at 699 (citation omitted). “Substantial 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.” CUCA I, 348
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N.C. at 460, 500 S.E.2d at 700 (alteration in original) (citations and quotation
marks omitted). The Commission must include all necessary findings of fact, and
failure to do so constitutes an error of law. Id. (citation omitted).
The Attorney General argues that the Commission’s order is legally deficient
because it is not supported by competent, material, and substantial evidence and
does not include sufficient findings, reasoning, and conclusions. Specifically, the
Attorney General contends that the Commission failed to make findings of fact
showing in “meaningful detail” that it considered the impact of changing economic
conditions upon customers when determining ROE. The Attorney General asserts
that the Commission must “quantify” the extent to which it adjusted the final ROE
to account for consumer interests. We disagree.
Pursuant to subdivision 62-133(b)(4) of the North Carolina General Statutes,
the Commission must fix a rate of return that
will enable the public utility by sound management to
produce a fair return for its shareholders, considering
changing economic conditions and other factors, . . . 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). Recently, we observed that this provision, along with
Chapter 62 as a whole, requires the Commission to treat consumer interests fairly,
not indirectly or as “mere afterthoughts.” State ex rel. Utils. Comm’n v. Cooper
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STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.
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(“Cooper I”), 366 N.C. 484, 495, 739 S.E.2d 541, 548 (2013). In Cooper I the
Commission’s order stated:
Duke witness Hevert and Public Staff witness Johnson
testified that it is not necessary to consider the impact of
changing economic conditions on consumers in the context
of an ROE economic analysis, other than in a broader
macroeconomic sense, when analyzing changing market
conditions for the purpose of making ROE
recommendations. However, the 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. 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.
(Ellipsis in original.) We explained that “the Commission must consider all
evidence presented by interested parties, which necessarily includes customers . . . .
[I]n retail electric service rate cases the Commission must make findings of fact
regarding the impact of changing economic conditions on customers when
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determining the proper ROE for a public utility.” Id. We concluded that the order
did not contain sufficient findings addressing the impact of changing economic
conditions upon customers. 366 N.C.at 494, 739 S.E.2d at 547. But contrary to the
Attorney General’s suggestion, we did not state in Cooper I that the Commission
must “quantify” the influence of this factor upon the final ROE determination. See
id.; State ex rel. Utils. Comm’n v. Pub. Staff, 323 N.C. 481, 498, 374 S.E.2d 361, 370
(1988) (“Given th[e] subjectivity ordinarily inherent in the determination of a proper
rate of return on common equity, there are inevitably pertinent factors which are
properly taken into account but which cannot be quantified with the kind of
specificity here demanded by [the appellant].”).
Here the Commission’s order contains several findings of fact that address
this factor:
16. Changing economic conditions in North
Carolina during the last several years have caused high
levels of unemployment, home foreclosures and other
economic stress on DEP’s customers.
17. The rate increase approved in this case, which
includes the approved ROE and capital structure, will be
difficult for some of DEP’s customers to pay, in particular
DEP’s low-income customers.
18. Continuous safe, adequate and reliable electric
service by DEP is essential to the support of businesses,
jobs, hospitals, government services, and the maintenance
of a healthy environment.
19. The ROE and capital structure approved by the
Commission appropriately balances the benefits received
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STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.
Opinion of the Court
by DEP’s customers from DEP’s provision of safe,
adequate and reliable electric service in support of
businesses, jobs, hospitals, government services, and the
maintenance of a healthy environment with the
difficulties that some of DEP’s customers will experience
in paying DEP’s increased rates.
20. The 10.2% ROE and the 53% equity financing
approved by the Commission in this case are as low as
reasonably possible. They appropriately balance DEP’s
need to obtain equity financing and maintain a strong
credit rating with its customers’ need to pay the lowest
possible rates.
21. The difficulties that DEP’s low-income
customers will experience in paying DEP’s increased rates
will be mitigated to some extent by the $20 million that
DEP will contribute to assistance for low-income
customers and job training.
The Commission also stated that it gave “great weight” to Hevert’s testimony that,
although North Carolina’s unemployment rate was higher than the national
average, the State enjoyed lower average electric rates, higher expected household
income growth, and superior GDP growth as compared to the nation as a whole.
The Commission noted that Johnson testified that improvement in the economy has
been slow and that the state of the economy affects both investors and consumers.
The Commission explained that in addition to submitting recommended ROE
ranges, Johnson concluded that a 10.2% ROE was reasonable and consistent with
the public interest in combination with other provisions in the Stipulation.
Furthermore, the Commission found that 58 of the 127 public witnesses who
testified at the hearings stated that “the rate increase was not affordable to many
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customers,” including the elderly, the unemployed or underemployed, the poor, and
persons with disabilities. Nevertheless, the Commission explained that “[a]nother
significant group of customers” wanted DEP to invest more in renewable energy,
even if doing so would increase consumer costs.
In addition, the Commission found that specific provisions in the Stipulation
serve customer interests. The Commission noted that the Stipulation required DEP
to exclude from its rate base for one year the construction work in progress invested
in the company’s new Sutton power plant, thereby “making it easier for ratepayers
to pay their electric bills in the current economic environment.” The capital
structure contained in the Stipulation allowed for less equity than DEP’s actual
capital structure during the test year, and the Commission observed that this
adjustment lowered the rate paid by ratepayers, but increased the risk to debt
holders and lowered the return for investors. Finally, the Commission noted that
the distribution of $20,000,000 for assistance to low-income consumers and for job
training benefited those ratepayers with the least ability to pay. These findings of
fact not only demonstrate that the Commission considered the impact of changing
economic conditions upon customers, but also specify how this factor affected the
Commission’s final order. Therefore, we hold that the Commission made sufficient
findings regarding the impact of changing economic conditions upon customers and
that these findings are supported by competent, material, and substantial evidence
in view of the entire record.
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Opinion of the Court
Accordingly, the order of the Commission is affirmed.
AFFIRMED.
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