State ex rel. Utilities Commission v. Public Staff-North Carolina Utilities Commission , 58 N.C. App. 453 ( 1982 )

MARTIN (Harry C.), Judge.

Whether purchased power or interchange power is properly to be considered in a fuel adjustment clause proceeding appears to be a question of first impression in North Carolina.

In the CP&L application, counsel for the Public Staff argued that as a matter of law CP&L should not be permitted to recover its purchase power expenses in this proceeding and that an increase in the base fuel cost of only 0.134 cents per KWH, including gross receipt taxes, should be approved. Counsel for CP&L argued that purchased power is a properly includable expense in a N.C.G.S. 62434(e) proceeding and that the full base fuel cost adjustment it had applied for, 0.196 cents per KWH, should be approved. The same principles are argued in the Vepco proceeding.

The Public Staff contends that the Commission is no longer basing the approved fuel clause rate on charges based solely on the increased or decreased cost of fuel, but rather is basing the rate on the total power production costs expressed in cents per KWH. It is argued that under the present Commission practice, the fuel clause rate can increase due to changes in heat rate, plant availability and capacity factors, even though the cost of fuel has remained constant or even decreased.¹

We review briefly the two major cases interpreting N.C.G.S. 62434(e). In Utilities Comm. v. Edmisten, Atty. General, 291 N.C. 451, 232 S.E. 2d 184 (1977), the Court first construed the statute and discussed its impact upon the Commission’s previous practices and procedures regarding fuel adjustment clauses. The Court held that the use of a historical test period to calculate fuel clause amounts is not to guarantee the utility an actual dollar-for-dollar recovery of prior expenses. To do so would be retroactive ratemaking. Instead, the use of prior actual operating experience in the context of a fuel clause proceeding is exactly like the ordinary use of a test period in a general rate case, i.e., recent actual operating experience is the best guide for what costs will be in the future period for which rates are to be set.

In Utilities Comm. v. Power Co., 48 N.C. App. 453, 269 S.E. 2d 657, disc. rev. denied, 301 N.C. 531 (1980), this Court reviewed the action of the Commission in fuel adjustment proceedings such as those at issue here. The Commission had heard evidence as to a wide range of management activities which had allegedly affected generating plant efficiency. It found that “Vepco’s fuel expenses are excessive and should be adjusted in these and future proceedings to remove unreasonable costs associated with poor system fossil-fired heat rate and low availability” of certain of its generating plants. Id. at 456, 269 S.E. 2d at 659. Based on findings of mismanagement, the Commission disallowed portions of the fuel adjustments requested.

These matters, in the Court’s opinion, properly belonged in a general rate proceeding under N.C.G.S. 62-133 and not in an expedited N.C.G.S. 62434(e) proceeding. This Court, through Judge Parker, held:

Insofar as the Commission in the present cases considered and passed upon the cost of fuel used by Vepco in the generation of electric power during the periods in question by considering the reasonableness of the prices paid by Vepco for such fuel, it acted within the scope of the statutorily prescribed procedure. Insofar as the Commission considered and based its determination upon such factors as Vepco’s heat rate and plant availability in these proceedings, it went beyond the scope of the procedure authorized by G.S. 62434(e).

Overall system efficiency ultimately depends upon management decisions made over a long period of time. These involve such questions as when and how often to replace expensive equipment, the number of maintenance employees to be kept on the payroll and the training to be given them, the amount and frequency of planned “down time” to be devoted to preventive maintenance, and the amount and cost of standby equipment required for such planned maintenance “down time.” In making these decisions management must also take into account such factors as the cost of capital and the availability of funds required to implement them and must balance the need for achieving maximum plant efficiency against the financial costs of achieving that goal.

Review of such management decisions by the Utilities Commission in a general rate case is not only entirely appropriate but even necessary, for poorly maintained equipment justifies a subtraction from both the original cost and the reproduction cost of existing plant before weighing these factors in ascertaining the present “fair value” rate base of the utility’s properties as required by G.S. 62-133 . . . and serious inadequacy of a utility company’s service, whether due to poor maintenance of its equipment or to other causes, is one of the facts which the Commission is required to take into account in determining what is a reasonable rate to be charged by the particular utility company for the service it proposes to render. . . .

We do not question that the efficiency with which a particular electrical utility company converts its fuel into electricity has a direct and significant bearing upon that company’s fuel cost. Obviously it does. Nor do we question the necessity for the Utilities Commission to take into account the efficiency of the company’s operations in fixing its rates in a general rate case as provided in G.S. 62-133. Obviously it should. We hold only that plant efficiency as it bears upon fuel cost is not a factor to be considered in the limited and expedited proceeding provided for by G.S. 62434(e). After all, the legislature enacted that section, not as a substitute for a general rate case, but to provide an expedited procedure by which the extremely volatile and uncontrollable prices of fossil-fuels could be quickly taken into account in a utility’s rates and charges.

48 N.C. App. at 460-62, 269 S.E. 2d at 661-62 (citations omitted).

A fuel adjustment clause, once authorized by the Commission as a part of the utility’s rate structure, allows the utility to pass on to the consumer any increase (or decrease) in the cost of fuel without any need for further consideration of compensatory decreases (or increases) in other operating expenses. As such, it is a radical departure from the usual practice of approval or disapproval of filed rates, in the context of a general rate case.

As stated in Power Co., the statute in clear and express terms provides a procedure by which a public utility may apply to the Commission for authority to increase its rate and charges based “solely upon the increased cost of fuel used in the generation of electric power.” Id. at 460, 269 S.E. 2d at 661 (emphasis omitted); N.C. Gen. Stat. § 62434(e) (Cum. Supp. 1981). The Commission has interpreted the statute to include as cost of fuel, the “cost of equivalent energy purchased.” Being a plain and unambiguous statute, agency interpretation is not required. Utilities Comm. v. Edmisten, Atty. General, supra. By so interpreting the statute, the Commission has in effect amended the substantive law by adding an additional factor to be considered in determining fuel adjustment proceedings. This it cannot do. Motsinger v. Perryman, 218 N.C. 15, 9 S.E. 2d 511 (1940); Carolinas-Virginias Assoc. v. Ingram, Comr. of Insurance, 39 N.C. App. 688, 251 S.E. 2d 910, disc. rev. denied, 297 N.C. 299 (1979). Had the legislature intended that the cost of purchased power be recoverable in a fuel adjustment proceeding, it should and would have so stated.

Although the interpretation by an agency responsible for the administration of a legislative act may be helpful to a court when called upon to construe legislative language and will be given due consideration by the courts, it is not controlling. Faizan v. Insurance Co., 254 N.C. 47, 118 S.E. 2d 303 (1961). The courts are the final interpreters of legislation. Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 28 L.Ed. 2d 136 (1971); Campbell v. Currie, Commissioner of Revenue, 251 N.C. 329, 111 S.E. 2d 319 (1959). The courts cannot discharge their duty to construe administrative statutes by the expedient of deferring to interpretations by the agency.

Even a casual reading of the statute discloses that proceedings thereunder are limited solely to increases and decreases in the cost of fuel. Fuel is entirely different from purchased or interchange power. Fuel is a necessary component required for the production of electric power. Electric power itself is the finished product of a utility, after fuel has been used in its production. If it were possible to extrapolate the cost of fuel from the cost of purchased or interchange power, the Commission would be required to rely upon the cost analysis and management decisions of the selling utility without the ability to test their accuracy and reasonableness. This is not a result intended by the legislature. Management decisions of petitioners (e.g., whether to use purchased power or the utilities’ own stockpile of fuel), efficiency of operation, plant availability and like matters, have no place in the consideration of a fuel adjustment proceeding. Utilities Comm. v. Power Co., supra. These matters are proper for consideration in a general rate proceeding. Id. Consideration of purchased power in a fuel adjustment proceeding would inextricably involve questions of management, motivation, efficiency of plant operations, plant heat rate and plant availability. This Court has ruled that these considerations are not permitted in a fuel adjustment proceeding. Id.

N.C.G.S. 62434(e) was properly adopted in 1975 by the General Assembly to allow then hard pressed utilities to compensate for rapidly increasing fuel prices. It was never intended to allow utilities to pass on to consumers the cost of power purchased from other utilities. The Commission states that it has allowed utilities to pass on to the consuming public the cost of purchased power in “nearly forty individual proceedings” under the cost of fuel adjustment statute — all apparently without express court approval regarding this issue. It is time for the Court to place its interpretation upon the statute. A question of law is never settled until it is settled correctly.

We now hold that the Commission was and is without authority to include or consider the cost of any portion of purchased power or interchange power in determining a fuel adjustment clause proceeding pursuant to N.C.G.S. 62434(e). By doing so in these proceedings, the Commission committed error.

The orders of the Commission are vacated and the causes are remanded to the Commission for further proceedings not inconsistent with this opinion.

Vacated and remanded.

Judge Whichard concurs. Judge Martin (Robert M.) dissents.

1 . The Public Staff argues that under the current fuel clause procedure employed by the Commission, which tracks total power production costs (as opposed to solely increases in the cost of fuel), there is no incentive on the utilities to operate their plants in an efficient or proper manner. There is, it contends, no requirement of justness or reasonableness which is evident in the ratemaking provisions of the Public Utilities Act, N.C.G.S. 62-130 to -133. Instead, the test employed by the Commission is essentially as follows: Any dollars actually spent for fuel by the utility, regardless of how poorly or efficiently, may be tracked through the fuel clause under N.C.G.S. 62434(e). Thus, the fuel clause operates in virtually an automatic fashion and the role of the Public Staff and other intervenors is reduced to simply determining whether the dollars alleged to have been spent by the utilities for fuel were in fact spent.