State ex rel. Util. Comm'n v. Cooper, Att'y Gen. , 368 N.C. 216 ( 2015 )

IN THE SUPREME COURT OF NORTH CAROLINA
No. 347A14
(Filed 21 August 2015)
STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION; AQUA
NORTH CAROLINA, INC., Applicant; and PUBLIC STAFF – NORTH CAROLINA
UTILITIES COMMISSION, Intervenor
v.
ATTORNEY GENERAL ROY COOPER, Intervenor
On direct appeal as of right pursuant to N.C.G.S. §§ 7A-29(b) and 62-90(d)
from a final order of the North Carolina Utilities Commission entered on 2 May 2014
in Docket No. W-218, Sub 363. Heard in the Supreme Court on 16 March 2015.
Sanford Law Office, PLLC, by Jo Anne Sanford; Bennink Law Office, by Robert
H. Bennink, Jr.; Law Office of Charlotte Mitchell, by Charlotte Mitchell; and
Allegra Collins Law, by Allegra Collins, for applicant-appellee Aqua North
Carolina, Inc.
Antoinette R. Wike, Chief Counsel, and William E. Grantmyre, Staff Attorney,
for intervenor-appellee Public Staff – North Carolina Utilities Commission.
Stuart Saunders, Assistant Attorney General, Kevin Anderson, Senior Deputy
Attorney General, and Jennifer T. Harrod, Special Deputy Attorney General,
for intervenor-appellant Roy Cooper, Attorney General.
JACKSON, Justice.
In this case we consider whether the North Carolina Utilities Commission (the
Commission) properly concluded that it is in the public interest to allow Aqua North
Carolina (Aqua) to utilize a rate adjustment mechanism of the type described in
section 62-133.12 of the North Carolina General Statutes. We conclude that the
STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.
Opinion of the Court
Commission’s determination was based upon sufficient findings of fact and was
supported by competent, material, and substantial evidence in view of the entire
record. See N.C.G.S. § 62-94 (2013). Accordingly, we affirm.
Aqua is a public utility that provides water and sewer utility service to
customers in North Carolina. On 2 August 2013, Aqua filed an application with the
Commission seeking authority to increase its rates for water and sewer service in
North Carolina. As part of its application, Aqua also requested authority to
implement a rate adjustment mechanism pursuant to section 62-133.12, which states
in pertinent part:
The Commission may approve a rate adjustment
mechanism in a general rate proceeding . . . to allow a
water or sewer public utility to recover through a system
improvement charge the incremental depreciation expense
and capital costs associated with the utility’s reasonable
and prudently incurred investment in eligible water and
sewer system improvements. The Commission shall
approve a rate adjustment mechanism authorized by this
section only upon a finding that the mechanism is in the
public interest. The frequency and manner of rate
adjustments under the mechanism shall be as prescribed
by the Commission.
Id. § 62-133.12(a) (2013).
On 19 August 2013, the Commission entered an order declaring this
proceeding to be a general rate case and suspending the proposed new rates for up to
270 days. The Commission scheduled six hearings across the state to receive public
witness testimony. The Commission also scheduled an evidentiary hearing for 27
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January 2014. The Attorney General of North Carolina and the Public Staff of the
Commission intervened as allowed by law. See id. §§ 62-15, -20 (2013).
Subsequently, Aqua and the Public Staff entered into a Stipulation that
resolved all the issues in the case between the two parties. At the time, the
Commission had not adopted final rules establishing the appropriate procedures for
implementing a rate adjustment mechanism. Nevertheless, the Stipulating Parties
agreed that “this docket is the appropriate forum for a decision by the Commission
on [Aqua’s] request to implement a [rate adjustment] mechanism based on a finding
that the [mechanism] is in the public interest.” The Attorney General did not join in
the Stipulation.
During the hearings before the Commission, fifty-four Aqua customers
testified, and the parties presented testimony from several witnesses. Thirty
customers expressed service-related concerns, which primarily focused on problems
with water quality, such as receiving water that appeared discolored, contained
sediment, caused damage to appliances, and stained laundry items. Customers also
raised other concerns, including billing issues, low water pressure, and sulfur or
chlorine odors. Customers “almost unanimously” opposed any rate increase.
At the evidentiary hearing, Aqua offered evidence supporting the conclusion
that use of a rate adjustment mechanism is in the public interest. Aqua’s President
and Chief Operating Officer, Thomas J. Roberts, asserted that the mechanism would
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allow Aqua to adjust its rates to recover money invested in “necessary, reasonable,
approved and completed projects,” with the cumulative rate adjustment limited to
five percent of the total annual service revenues approved by the Commission in the
current general rate case. Roberts stated that, as a result of these rate adjustments,
Aqua would be able to fund “earlier and more robust investment in infrastructure”
and recover its investments “on a more timely basis.” In addition, Roberts noted that
the mechanism would allow for “incremental adjustments” to rates, “rather than the
sharp rate changes that are characteristic of general rate cases.”
Roberts acknowledged that some customers have difficulties with discolored,
sediment-laden water, and he stated that these problems are caused by naturally
occurring iron and manganese present in ground water. Roberts testified that,
although many customers do not find such water acceptable, it complies with
environmental regulations and does not create any health risks. Roberts asserted
that Aqua could employ a number of methods to improve water quality, and he stated
that use of a rate adjustment mechanism would provide funding “to accelerate the
investment needed to address these concerns.”
In addition to discussing customers’ concerns about water quality, Roberts
stated that other aspects of Aqua’s system need improvements. Roberts testified that
an internal analysis had revealed that portions of Aqua’s water main infrastructure
are seriously outdated and need replacement. Roberts also stated that Aqua needs
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to fund replacement of motors, pumps, and other equipment, as well as implement
measures to improve how the system copes with significant rain events. Ultimately,
Roberts asserted that use of a rate adjustment mechanism would facilitate
improvements to infrastructure and result in “fewer water quality related
complaints, enhanced water pressure, and decreased main breaks.”
Aqua witness Robert A. Kopas, Regional Controller for Aqua Ohio, Inc.,
provides financial supervision and guidance to Aqua North Carolina. He testified
that Aqua had presented to the Commission a “three-year plan” listing possible future
projects that could be eligible for recovery through a rate adjustment mechanism.
Kopas explained that Aqua did not submit this document to seek Commission
approval of any of the specific projects listed; instead, it was submitted to support the
company’s contention that use of a rate adjustment mechanism is in the public
interest. Kopas asserted that before Aqua could recover any money through the
mechanism, the company would have to construct an eligible improvement, place the
improvement into service, and propose the improvement for inclusion in a rate
adjustment, after which the Commission and the Public Staff would determine the
project’s eligibility and the reasonableness of the associated costs.
Aqua witness Pauline M. Ahern, a principal with AUS Consultants, testified
that a rate adjustment mechanism would partially mitigate regulatory lag, “which
occurs during the time between the incurrence of a utility capital expenditure or
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expense and the time when the utility can begin to earn a return on . . . the capital
investment or recovery of the expense incurred.” Ahern stated that the mechanism
“will improve the capital attractiveness of [Aqua], improve its service quality and
reliability, and provide for more moderate, gradual rate increases.”
The Public Staff presented testimony from David C. Furr, Director of the Public
Staff’s Water and Sewer Division. Furr testified that he had reviewed the three-year
plan filed by Aqua in order to evaluate whether the listed projects might be eligible
for recovery through a rate adjustment mechanism. Furr stated that Aqua’s three-
year plan did not contain enough detail for him to determine whether the projects
would be eligible, and although the Public Staff had requested additional
information, Aqua’s response remained “materially inadequate.” In contrast, Roberts
testified that Aqua believed it had provided sufficient detail and that the company
was “willing to give all the detail that the Public Staff and the Commission would
want.”
The Commission entered an order in Aqua’s general rate case on 2 May 2014.
The Commission noted that the water quality concerns raised by some Aqua
customers were related to high concentrations of naturally occurring iron and
manganese in the source supply of water. The Commission found that iron and
manganese are “subjects of Department of Environment and Natural Resources
(DENR) secondary – not primary – water quality standards, and thus do not
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represent health issues.” Nevertheless, the Commission concluded that “[a]dditional
attention is required to address the issues which arise from elevated levels of
naturally occurring iron and manganese in the source water supply in certain Aqua
systems.”
In addition, the Commission found that enactment of section 62-133.12 “was
intended to encourage and accelerate investment in needed water and sewer
infrastructure” by “alleviat[ing] the effects of regulatory lag by allowing for earlier
recovery of some portion” of “depreciation expense and capital costs.” The
Commission determined that if a rate adjustment mechanism were authorized here,
“Aqua would be incentivized and encouraged to accelerate its investment in water
and sewer infrastructure improvements to comply with applicable water quality and
effluent standards, including secondary water quality standards.” Specifically, the
Commission explained that the mechanism “will be available to fund projects to
address problematic systemic secondary water quality issues should the Commission
direct [Aqua] to undertake them in individual subdivision service areas.” The
Commission found that such additional investment in infrastructure would lead to
“better water quality” and “improved system reliability.” As a result, the Commission
found that Aqua’s request to implement a rate adjustment mechanism is in the public
interest and therefore approved the company’s request.
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At the same time, the Commission ordered Aqua and the Public Staff “to
develop and implement a plan to identify and respond to [significant] secondary water
quality concerns” in particular service areas. The Commission required Aqua and
the Public Staff, “[a]t a minimum,” to file written reports on the first of June and the
first of December every year while the rate adjustment mechanism is in effect. These
written reports must describe any secondary water quality concerns affecting Aqua’s
customers. If a particular concern affects at least ten percent of the customers in an
individual subdivision or at least twenty-five billing customers, additional
information must be provided. In such cases the reports must recommend whether
Aqua should be required to undertake corrective action with respect to specific water
quality concerns.
The Commission noted that final rules implementing the rate adjustment
mechanism had not been approved. The Commission concluded that it should adopt
alternative procedures, which were set forth in appendices to its order, to enable Aqua
to make the requisite filings and qualify for implementation of charges pursuant to
the rate adjustment mechanism without having to file an additional general rate case
application once final rules were adopted. 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.
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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
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
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(6) Arbitrary or capricious.
Id. § 62-94(b). 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.” 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.’ ” Id. at 460, 500 S.E.2d at 700 (alteration in
original) (quoting State ex rel. Utils. Comm’n v. S. Coach Co., 19 N.C. App. 597, 601,
199 S.E.2d 731, 733 (1973), cert. denied, 284 N.C. 623, 201 S.E.2d 693 (1974)). “It
means such relevant evidence as a reasonable mind might accept as adequate to
support a conclusion.” Id. (quoting Consol. Edison Co. of New York v. NLRB, 305 U.S.
197, 229, 59 S. Ct. 206, 217, 83 L. Ed. 126, 140 (1938)). 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 finding that Aqua’s
request to use a rate adjustment mechanism is in the public interest is not based
upon sufficient findings, reasoning, and conclusions, and is not supported by
substantial evidence. In addition, the Attorney General contends both that the
Commission had no proper basis for this finding and that the Commission’s
conclusion that the mechanism would incentivize Aqua to invest in infrastructure
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and improve its service quality “is, at most, speculative” because the order did not
impose any “concrete obligation, commitment, or anything else.” We disagree.
“The Utilities Commission, not this Court, is the finder of fact in this
proceeding. Findings of fact made by the Commission are prima facie just and
reasonable on appeal.” State ex rel. Utils. Comm’n v. Eddleman, 320 N.C. 344, 382-
83, 358 S.E.2d 339, 363 (1987) (citations omitted). “[T]he Commission’s findings, if
supported by competent, material, and substantial evidence in view of the record as
a whole, are binding upon this Court.” State ex rel. Utils. Comm’n v. Pub. Staff, 317
N.C. 26, 45, 343 S.E.2d 898, 910 (1986) (citing State ex rel. Utils. Comm’n v. Carolina
Tel. & Tel. Co., 267 N.C. 257, 148 S.E.2d 100 (1966)). As a result, if there is
substantial evidence to support the Commission’s determination, this Court will not
substitute its judgment for that of the Commission. Id. at 46-47, 343 S.E.2d at 910-
11.
By enacting section 62-133.12, the General Assembly authorized the use of a
rate adjustment mechanism upon a “finding” by the Commission “that the
mechanism is in the public interest.” N.C.G.S. § 62-133.12(a). As previously stated,
the Commission found that allowing Aqua to use a rate adjustment mechanism is in
the public interest. In making this determination, the Commission initially found
that the legislative intent behind section 62-133.12 was to provide a mechanism to
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incentivize quicker investments in water and sewer infrastructure by allowing for
faster recovery of some portion of invested costs.
The Commission explained that, because of the time involved in preparing and
processing general rate cases, the long periods of construction required for major
projects, and the Commission’s use of historical test years in setting rates, a
regulatory lag period occurs between when a utility invests in improvements and
when it begins to recover the capital costs of those improvements. The Commission
noted that Roberts had testified that implementing a rate adjustment mechanism
would allow Aqua to recover invested funds more quickly and therefore enable Aqua
to invest more capital in this state. Similarly, the Commission observed that Ahern
had testified that use of the mechanism would result in “[p]artial mitigation of
[regulatory] lag” and lead to water quality improvements that otherwise would be
delayed. After considering their testimony and the arguments raised by the Attorney
General, the Commission concluded that implementing the mechanism “will promote
adequate, reliable, and economical utility service for Aqua’s customers” by
“incentiviz[ing] Aqua to increase and accelerate infrastructure improvements.”
These findings are supported by the testimony of Roberts and Ahern.
The Commission discussed the “secondary water quality issues” raised by
Aqua’s customers and found that, as stated by Roberts, these problems result from
high concentrations of iron and manganese found naturally in sources of groundwater
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within Aqua’s system. The Commission determined that in the past, water utilities
may have given lower priority to correcting secondary water quality issues because
these companies first spend their limited budgets on primary water quality
improvements. The Commission found that use of a rate adjustment mechanism
would benefit customers further because accelerated funding will be available for
projects undertaken at the Commission’s direction to improve secondary water
quality. The Commission then ordered Aqua and the Public Staff to file written
reports addressing secondary water quality concerns twice each year while the
mechanism is in effect and required that these filings detail particular water quality
problems and make recommendations on whether Aqua should be ordered to pursue
corrective action. Rather than solely relying upon a commitment by Aqua or the
Public Staff, the Commission affirmatively imposed obligations to ensure that Aqua
would use the rate adjustment mechanism only to make meaningful improvements
to its system.
The Commission further noted that pursuant to the alternative procedures it
had adopted in its order, approval of the mechanism would not result in automatic
surcharges for customers. The Commission explained that these procedures require
Aqua to obtain Commission approval for any additional charges, and the approval
process will involve review by the Public Staff and the Commission to determine
whether Aqua’s investments and costs are reasonable and prudent. Furthermore,
the Commission explained that Aqua could use the mechanism to recover only those
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costs that are invested in “eligible system improvements” that are “completed and
placed in service prior to the Company requesting approval.”
The Commission acknowledged that witness Furr had testified that Aqua’s
initial three-year plan was “materially deficient,” but noted that Roberts had testified
that Aqua “is willing to provide all information required by the Public Staff.” In
addition, the Commission found that, because this case involves a new process, “one
party . . . may believe the level of detail provided is sufficient; whereas, another party
may not.” The Commission also directed Aqua to provide enough information to allow
the Public Staff to “conduct its investigation and review of [Aqua’s] initial three-year
plan,” “have productive discussions with [Aqua] regarding the specific projects
included in the plan,” and “conclude whether the projects included in [the] three-year
plan meet the criteria established in [section] 62-133.12” to “be considered for
recovery through the [rate adjustment] mechanism.”
Ultimately, the Commission found that
Aqua would be incentivized and encouraged to accelerate
its investment in water and sewer infrastructure
improvements to comply with applicable water quality and
effluent standards, including secondary water quality
standards, if authorized to utilize a [rate adjustment]
mechanism to recover some of its investment in a more
timely manner and alleviate the effects of regulatory lag.
Such accelerated investment to address aging
infrastructure and water quality issues would benefit
customers through improved system reliability and better
water quality. The [rate adjustment] mechanism would
further benefit customers because it will be available to
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fund projects to address problematic systemic secondary
water quality issues should the Commission direct the
Company to undertake them in individual subdivision
service areas, even though such projects may not be
specifically required by federal and/or state standards and
might not be of high system priority absent the direction of
the Commission. The [rate adjustment] mechanism does
not affect or take away the Commission’s authority to
disallow recovery for projects and investments found to be
unreasonable and imprudent.
The Commission thoroughly explained how Aqua’s use of a rate adjustment
mechanism would benefit Aqua’s customers, and the Commission took meaningful
steps to ensure that problems with water quality are addressed and that customers
are charged only after Aqua has made improvements to the quality and reliability of
its service. We hold that the Commission provided sufficient findings, reasoning, and
conclusions to support its ultimate finding that the mechanism is in the public
interest, and that the Commission’s determination is supported by substantial
evidence in view of the record as a whole. Accordingly, the Commission’s order is
affirmed.
AFFIRMED.
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