State Ex Rel. Utilities Commission v. City of Durham , 282 N.C. 308 ( 1972 )

193 S.E.2d 95 (1972) 282 N.C. 308

STATE of North Carolina ex rel. UTILITIES COMMISSION and Public Service Company of North Carolina
v.
CITY OF DURHAM et al.

No. 61.

Supreme Court of North Carolina.

December 13, 1972.

Edward B. Hipp and Maurice W. Horne, Raleigh, for North Carolina Utilities Commission.

Mullen, Holland & Harrell, by J. Mack Holland, Jr., Gastonia, and Boyce, Mitchell, Burns & Smith, by F. Kent Burns, Raleigh, for Public Service Co. of North Carolina.

Claude V. Jones, Durham, for City of Durham.

Broughton, Broughton, McConnell & Boxley, by J. Melville Broughton, Jr., Raleigh, for Sanford Brick & Tile Co. et al.

LAKE, Justice.

The judgment of the Court of Appeals is that the order of the Utilities Commission be reversed rather than that the proceedings be remanded to the Commission for further action by it. Thus, its effect is a denial of all rate increases sought by Public Service and the dismissal of the proceedings. Since the rates in question were put into effect subject to the undertaking by Public Service to refund such portions thereof as might not be authorized by the final order, the result of the judgment of the Court of Appeals, if affirmed by us, would be that Public Service must now refund to its customers all of the amounts collected in approximately two years by reason of these rate increases. While Public Service could institute a new proceeding before the Commission, in such new proceeding the Commission could not grant to Public Service the right to retain or to collect retroactively any part of the increases here in question. This is true for two reasons: First, to do so would be contrary to the judgment, and second, the Commission may not fix rates retroactively so as to make them collectible for past service. G.S. § 62-136; Utilities Commission v. Morgan, Attorney General, 277 N. C. 255, 267, 177 S.E.2d 405.

The extreme brevity of the opinion of the Court of Appeals deprives us of the benefit of the reasoning upon which its judgment is based. It would appear that the Court of Appeals was inadvertent to the fact that there were two proceedings before the Commission, not one. In the first, Public Service sought increases in rates which would yield it additional revenue in the amount of $2,904,328 per year for the purpose of increasing the company's rate of return upon its properties. In the second, Public Service sought rate increases for the purpose not of increasing the company's return upon its properties but of recovering the additional cost to it of gas purchased from its supplier so as to avoid a reduction in such return.

The evidence is ample to show that Transco increased its rates to Public Service. The Commission found the net effect of the changes by Transco in its rates to Public Service was to increase the cost of gas to Public Service by $1,652,003 per year. There is no evidence in the record and no contention by the protestants to the contrary. It follows, necessarily, that if Public Service is not allowed to increase its own rates so as to pass this additional cost on to its customers, the return of Public Service upon its properties will be decreased by $1,652,003 per year, unless there is some offsetting reduction in its other expenses or some other offsetting increase in its revenues, neither of which is suggested in the record. Such a reduction in the return to Public Service upon its properties could be justified only by a finding by the Commission, supported by substantial evidence in the record, that the return earned by Public Service upon its properties, prior to the increases in the rates charged by Transco, was excessive and unreasonable. There has been no such finding by the Commission and we have found no evidence in the record which would have sustained such a finding.

The effect of the judgment of the Court of Appeals, if affirmed by this Court, would be to require Public Service to make a refund of more than $3,000,000 collected by it for the sole purpose of offsetting its additional operating costs due to the increases in the rates of Transco. We are confident that the Court of Appeals was inadvertent to this consequence of its judgment. The Court of Appeals sustained the protestants' Assignments of Error 1, 2 and 5. Nothing in these suggests that, had the increases in rates charged by Transco not occurred, the earnings of Public Service during the test period were excessive, so as to justify a reduction in its rates. Neither of the two dissenting commissioners disagreed with the majority of the Commission with respect to so much of the order as permitted Public Service to increase its rates to the extent necessary to offset the increase in the cost of gas to it.

Neither this Court nor the Court of Appeals is authorized to fix rates for a public utility. That is the function of the Utilities Commission. Neither this Court nor the Court of Appeals is authorized to substitute its judgment for that of the Commission or to reverse an order of the Commission setting rates except for one of the causes specified in G.S. § 62-94(b). None of those grounds for reversal of the Commission's order, insofar as it relates to rate increases designed only to offset the increased cost of gas to Public Service, appears in this record. To that extent, therefore, the judgment of the Court of Appeals is in excess of the statutory power of the court and must be vacated.

We turn now to the second aspect of the order of the Commission, which relates to the increases in the rates allowed for the purpose of enabling Public Service to receive a greater return upon its properties. For this purpose the Commission allowed increases in rates designed to yield additional revenues totaling $1,445,168 per year. To this portion of the order, Commissioners Wells and McDevitt dissented, and to it the protestants' assignments of error, sustained by the Court of Appeals, relate.

G.S. § 62-133(b) prescribes five steps to be taken by the Commission in a proceeding to fix rates for such purpose. These are: (1) Ascertain the fair value of the public utility's property used and useful in providing the service; (2) estimate the utility's revenue under the present and proposed rates; (3) ascertain the utility's reasonable operating expenses, including depreciation; (4) fix a fair rate of return on the fair value of such properties; and (5) fix the rates to be charged by the public utility which will enable it, in addition to paying such operating expenses, to earn such rate of return on the fair value of such properties.

Paragraph (d) of this statute further requires the Commission to consider "all other material facts of record that will enable it to determine what are reasonable and just rates."

For the purpose of making the required estimates of the public utility's revenues and operating expenses, the customary and a proper procedure is for the Commission to fix a test period of twelve months, ending, as close as practicable, before the opening of the hearing. As we said in Utilities Commission v. Morgan, Attorney General, 278 N.C. 235, 236-237, 179 S.E.2d 419, 420:

"The basic, underlying theory of using the company's operating experience in a test period, recently ended, in fixing rates to be charged by it for its service in the near future is this: Rates for service, in effect throughout the test period, will, in the near future, produce the same rate of return on the company's property, used in rendering such service, as was produced by them on such property in the test period, adjusted for known changes in conditions."

The actual experience of the company during the test period, both as to revenues produced by the previously established rates and as to operating expenses, is the basis for a reasonably accurate estimate of what may be anticipated in the near future if, but only if, appropriate pro forma adjustments are made for abnormalities which existed in the test period and for changes in conditions occurring during the test period and, therefore, not in operation throughout its entirety.

In the present record, the evidence is clear, abundant and uncontradicted that: (1) The weather during the heating season in the test period was abnormally cold; (2) with or without such cold weather, Public Service would have sold all the gas available to it from Transco and, therefore, the weather conditions did not affect the volume of gas purchased by it or the cost to it of such gas; (3) by reason of such cold weather, a greater than usual portion of its gas was sold by Public Service to its firm customers for heating purposes and a correspondingly smaller portion was sold by it to its interruptible industrial customers; (4) the rates charged by Public Service to firm customers are higher, per unit of gas, than the rates charged by it to interruptible industrial customers; and (5) as a result, during the test period, Public Service received more revenue than it would have received from the sale of the same volume of gas in a test period of normal weather.

Therefore, to use the actual experience of the company in the test period as a basis for estimating the probable revenues it will earn in the future under the same rates for service would result in an overestimate of such future revenues and be unfair to the company. Conversely, in a test period in which the weather during the heating season was abnormally warm, so that a smaller than customary volume of gas was used for heating purposes at the higher rates for firm service and a larger than customary volume of gas was sold to interruptible industrial users at the lower rates applicable to that service, would show less revenues than should reasonably be anticipated in the future. In the latter event, to fail to adjust the test period revenues upward would lead to higher rates for service than necessary to yield the return to the company contemplated by G.S. § 62-133(b) and would be unjust to the users of gas.

Of course, weather conditions fluctuate and there is no way in which the Commission, engaged in fixing rates, can determine whether the weather in future twelve month periods will be colder or warmer than that of the test period, or colder or warmer than the average in past years. Rate making is, of necessity, a matter of estimate and prediction since rates are set for the future. The statute does not require the Commission to make an adjustment for a slight variation between the weather of the test period and the weather of an average year. The maxim, de minimis non curat lex, is applicable to what might be called normal variations from the average. Where, however, as in the present record, the evidence is clear and undisputed that the heating season of the test period was abnormally cold (or abnormally warm), the Commission is clearly authorized, if not required, by G.S. § 62-133(b)(2) to make a reasonably appropriate adjustment for such abnormality in the test period experience.

In the present instance, expert witnesses, both for the company and for the Commission Staff, testified to the substantial abnormality of the temperature in the heating season of the test period. They were in substantial agreement. The protestants offered no evidence relating to this matter and elicited by cross examination no information disclosing error in the studies of these witnesses. The formulae used by these witnesses for computing the amount of adjustment in revenues to be made by reason of the abnormally cold weather appear to us unnecessarily complex. It would seem that a relatively simple and reasonably accurate computation could be made by determining from the company's records the number of days, or hours, in which service to the interruptible customers was interrupted and the volume of gas thus diverted to heating customers. Nothing in the record, however, indicates or suggests that the more complex formulae used by these witnesses resulted in a materially inaccurate computation of the gas so diverted and sold at the higher rate. The Commission elected to accept and use the determination of the amount of such diversion computed by its Staff Engineer. The credibility of testimony and the weight to be given it are for the Commission, not for the reviewing court, and its findings of fact, supported by competent, material and substantial evidence, are conclusive upon appeal. State ex rel. Utilities Commission v. General Telephone Co., 281 N.C. 318, 336, 189 S.E.2d 705; State ex rel. Utilities Commission v. Carolina Coach Co., 269 N. C. 717, 153 S.E.2d 461; State ex rel. Utilities Commission v. Carolina Telegraph Co., 267 N.C. 257, 148 S.E.2d 100; State ex rel. N. C. Utilities Commission v. Coach Co., 261 N.C. 384, 134 S.E.2d 689; State ex rel. Utilities Commission v. Champion Papers, Inc., 259 N.C. 449, 130 S.E.2d 890; State ex rel. Utilities Commission v. Gulf Atlantic Towing Corp., 251 N.C. 105, 110 S.E.2d 886.

The Commission's Finding of Fact No. 13, set forth above, is supported by substantial, competent evidence in the record and the Court of Appeals erred in sustaining the protestants' Assignment of Error No. 5, which is directed thereto.

As above noted, G.S. § 62-133(b)(1) requires the Commission, as the first step in fixing rates to be charged by a public utility, to ascertain the fair value of the properties used and useful in providing the service. The statute prescribes that, in the ascertainment of such fair value, the Commission shall consider the reasonable original cost, less depreciation, the replacement cost of the property and all other relevant factors. It further provides that the Commission may determine the replacement cost by trending original cost to current cost levels or by any other reasonable method.

In the present case, the Commission had before it evidence of the original cost of the properties, the accumulated reserve for depreciation, the result of trending original cost to current cost levels, the observed depreciation, including obsolescence and inadequacy, and the deduction to be made from current cost on account of depreciation if it be assumed that the actual depreciation has occurred at the same rate as that at which the reserve for depreciation has been accumulated, this being a somewhat larger amount than the observed depreciation according to the testimony of the company's expert witness. There is in the record no substantial conflict in the testimony concerning any of these items. The protestants offered no evidence as to any of them and the cross examination of the witnesses who testified thereto did not disclose any errors in their computations. The credibility of such testimony and the weight to be given to it are for the Commission. State ex rel. Utilities Commission v. General Telephone Co., supra, 281 N.C. at pp. 339, 358, 189 S.E.2d 705. It, not the reviewing court, is to make the determination of the fair value of the properties. Its determination, if supported by substantial evidence in the record, is conclusive on appeal. G.S. § 62-94(b); State ex rel. Utilities Commission v. General Telephone Co., supra, at pp. 336, 339, 189 S.E.2d 705.

The Commission found the fair value of the properties to be $79,272,908. The protestants' Assignment of Error No. 1, sustained by the Court of Appeals, is directed to this finding, it being the contention of the protestants that the Commission arbitrarily and capriciously added 20% to the net investment of the company in the properties.

The Commission did not make an express finding of the original cost of the properties, less depreciation. It did, however, in its Finding No. 6, find that the company's net operating income for return, appropriately adjusted, was $4,828,260 and that this resulted in a rate of return on net investment, i.e., original cost less depreciation, of 7.27%. A simple arithmetic computation shows that the Commission thus found the original cost of the properties, less depreciation, as of the end of the test period, was $66,413,480. This amount lies between two computations of net investment appearing in the testimony of the Commission's Staff Accountant and is somewhat less than the lowest figure for net investment in the testimony of the company's witnesses. Thus, the Commission's finding of net investment (original cost less depreciation, plus the allowance for working-capital) is supported by substantial evidence and, if somewhat on the low side, is not prejudicial to the protestants.

In its Finding of Fact No. 5, the Commission expressly found the fair value of the properties (including the allowance for working-capital) to be $79,272,908. Again, a simple arithmetic calculation discloses that the fair value thus found is slightly more than 19% above the original cost so found. It is a mathematical truism that there is a percentage relationship between any two numbers. Such relationship between the figure found as the fair value and the figure found as the original cost of the properties does not, per se, support the protestants' charge that the Commission arrived at its figure for fair value by arbitrarily adding to its figure for original cost a certain percentage thereof. We find nothing else in the record to support such charge.

The only evidence in the record concerning the replacement cost of the properties was the testimony and exhibits of the company's witness, Mr. Russell, who computed the replacement cost by trending the original cost to current cost levels and subtracting from the figure so computed his estimate of actual, observed depreciation, including obsolescence and inadequacy. His testimony was that, so computed, the replacement cost, depreciated, was $94,626,596 and that, had he subtracted for depreciation a percentage of the trended original cost equivalent to the ratio of the accumulated reserve for depreciation to original cost, the resulting figure for replacement cost would have been approximately $91,000,000. Thus, the amount found by the Commission to be the fair value of the properties was approximately midway between the net original cost, less depreciation, and Mr. Russell's lower figure for replacement cost, less depreciation, being slightly nearer the latter figure. We find in this no indication that the Commission, in reaching its conclusion as to the fair value of the properties, failed to observe the mandate of G.S. § 62-133(b)(1) that it take into consideration the original cost less depreciation, the replacement cost and other relevant factors disclosed in the record.

In State ex rel. Utilities Commission v. General Telephone Co., supra, at p. 358, 189 S.E.2d at p. 730, we said: "Quite obviously, `replacement cost' and `fair value' are not synonymous. It is equally clear that `fair value' is not an arithmetical average of original cost and replacement cost, less depreciation, nor is it to be `ascertained' by the application of any mathematical formula." As Chief Justice Denny, speaking for this Court, observed in State ex rel. N. C. Utilities Commission v. Westco Telephone Co., 266 N.C. 450, 146 S.E.2d 487, "Ordinarily the fair value of a utility's property is found to be less than the reconstruction cost of the property." Clearly, G.S. § 62-133(b)(1) contemplates that normally the Commission will so find.

Here, as in State ex rel. Utilities Commission v. General Telephone Co., 281 N.C. 318, 189 S.E.2d 705, the Commission failed to set forth its finding of replacement cost, depreciated. As we there said, this was error. In fairness to the Commission, we note that its order in the present case was entered prior to our decision in that case. As we there said, at p. 360, 189 S.E.2d 705, having made findings of the original cost less depreciation, and replacement cost less depreciation, the weight to be given those figures in reaching the ultimate finding of fair value is to be determined by the Commission, not by the reviewing court.

The protestants have not shown wherein they have been prejudiced by this technical error of the Commission. We, therefore, do not deem this error by the Commission sufficient ground for the sustaining of the protestants' Assignment of Error No. 1 and the reversal of the order. G.S. § 62-94(c) provides that, upon an appeal from an order of the Commission, "due account shall be taken of the rule of prejudicial error." Paragraph (b) of this section of the statute further provides that the reviewing court may reverse or modify the decision of the Commission "if the substantial rights of the appellants have been prejudiced" because the Commission's findings, inferences, conclusions or decisions are affected by errors of law. We conclude, therefore, that the Court of Appeals erred in sustaining the protestants' Assignment of Error No. 1 and in basing its reversal of the order thereon.

The protestants' Assignment of Error No. 2, also sustained by the Court of Appeals, relates to the Commission's finding that the rate of return earned by Public Service in the test period on the company's net investment in its properties was 7.27% and insufficient. Insofar as this assignment of error relates to the Commission's finding as to what rate of return was earned, its basis appears to be the Commission's determination that a pro forma adjustment in test period revenues should be made on account of abnormally cold weather. As hereinabove stated, we find no error in this. Insofar as this assignment of error relates to the sufficiency of the rate of return so found, the testimony of the company's expert witness supports the finding of the Commission and the testimony of the Commission's Staff Accountant is not in substantial conflict therewith. The protestants offered no evidence relating to the question of what rate of return would be fair.

G.S. § 62-133(b)(4) requires the Commission to fix such rate of return on the fair value of the properties as will enable the company by sound management to produce a "fair profit for its stockholders," to maintain its facilities and services and to compete in the market for capital funds on reasonable terms, fair to its customers and to its existing investors. Here, too, the finding of the Commission, if supported by substantial evidence, is conclusive upon appeal, even though the reviewing court might deem a lower rate of return adequate. We find in the record no basis for the sustaining of this assignment of error.

We, therefore, conclude that the Court of Appeals erred in reversing the order of the Commission, that its judgment must, therefore, be reversed and the matter remanded to it for the entry by it of a judgment overruling each of the protestants' assignments of error and affirming the order of the Commission.

Reversed and remanded.