State ex rel. Utils. Comm'n v. Stein

• Court: Supreme Court of North Carolina
• Decided: December 11, 2020
• Docket: 401A18
• Status: Published

Opinion

IN THE SUPREME COURT OF NORTH CAROLINA

Nos. 271A18 and 401A18

Filed 11 December 2020 STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION; DUKE ENERGY PROGRESS, LLC, Applicant; and DUKE ENERGY CAROLINAS, LLC, Applicant v. ATTORNEY GENERAL JOSHUA H. STEIN; PUBLIC STAFF – NORTH CAROLINA UTILITIES COMMISSION; NORTH CAROLINA JUSTICE CENTER, NORTH CAROLINA HOUSING COALITION, NATURAL RESOURCES DEFENSE COUNCIL, SOUTHERN ALLIANCE FOR CLEAN ENERGY, and NORTH CAROLINA SUSTAINABLE ENERGY ASSOCIATION; and SIERRA CLUB, Intervenors

Consolidated appeals as of right pursuant to N.C.G.S. § 62-90 and N.C.G.S.

§ 7A-29(b) from final orders of the North Carolina Utilities Commission entered on

23 February 2018 in Docket Nos. E-2, Sub 1131, 1142, 1103, and 1153, and on 22

June 2018 in Docket Nos. E-7, Sub 1146, 819, 1152, and 1110. Heard in the Supreme

Court on 11 March 2020.

Troutman Sanders LLP, by Kiran H. Mehta, Molly McIntosh Jagannathan, and Christopher G. Browning, Jr., for Duke Energy Carolinas, LLC, and Duke Energy Progress, LLC.

Attorney General Joshua H. Stein, by Assistant Attorney General Margaret A. Force, Solicitor General Matthew W. Sawchak, Deputy Solicitor General James W. Doggett, Solicitor General Fellow Matt Burke, and Special Deputy Attorneys General Jennifer T. Harrod and Teresa L. Townsend.

Lewis & Roberts, PLLC, by Matthew D. Quinn, and Bridget M. Lee and Dorothy E. Jaffee, for appellant Sierra Club.

Southern Environmental Law Center, by Gudrun Thompson and David Neal, for North Carolina Justice Center, North Carolina Housing Coalition, Natural Resources Defense Council, and Southern Alliance for Clean Energy, and North STATE EX REL. UTILS. COMM’N V. STEIN

Opinion of the Court

Carolina Sustainable Energy Association, by Benjamin W. Smith and Peter H. Ledford, intervenor-appellants.

Public Staff – NCUC, by Chief Counsel David T. Drooz and Staff Attorneys Chris Ayers, Layla Cummings, Megan Jost, and Nadia Luhr, intervenor- appellant.

North Carolina Department of Justice, Environmental Division, by Special Deputy Attorney General Marc Bernstein and Senior Deputy Attorney General Daniel S. Hirschman, for North Carolina Department of Environmental Quality, amicus curiae.

ERVIN, Justice.

These cases arise from appeals taken from orders entered by the North

Carolina Utilities Commission addressing applications filed by Duke Energy

Progress, LLC, and Duke Energy Carolinas, LLC, both of which are wholly owned

subsidiaries of Duke Energy Corporation, by various intervenors representing the

utilities’ consumers that focus upon the lawfulness of the Commission’s decisions

concerning the extent to which the utilities are entitled to reflect costs associated with

the storage, disposal, and removal of ash resulting from the production of electricity

in coal-fired electric generating units in the cost of service used to establish the

utilities’ North Carolina retail rates. Among other things, various intervenors assert

that the Commission erred by allowing the deferral of certain coal ash remediation

costs and the inclusion of those costs in the cost of service used to establish the

utilities’ North Carolina retail rates, that the Commission erred by allowing the

utilities to earn a return upon the unamortized balance of the deferred coal ash

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remediation costs, and that the Commission erred by approving an increased Basic

Facilities Charge for Duke Energy Carolinas’ North Carolina retail residential

customers. After careful consideration of the parties’ challenges to the Commission’s

orders, we conclude that the challenged orders should be affirmed, in part, and

reversed and remanded, in part.

I. Factual Background

A. Substantive Facts

In the early part of the twentieth century, when the utilities began providing

electric service in North Carolina, they used coal as the primary means of generating

electric power. The burning of coal produces by-products known as coal combustion

residuals, which include fly ash, bottom ash, boiler slag, and flue gas desulfurization

material.1 At present, Duke Energy Progress owns eight coal-fired electric generating

facilities and nineteen unlined coal ash basins, while Duke Energy Carolinas owns

eight coal-fired electric generating facilities and seventeen unlined coal ash basins.

In the early years during which the utilities operated coal-fired electric

generating facilities, coal ash was either emitted through generating facility

smokestacks or stored in on-site landfills. In the 1950s, the utilities began to store

coal ash in unlined basins located at generating facility sites. As part of this process,

1 The term “coal ash” is used throughout the remainder of this opinion to refer to coal

combustion residuals and the by-products resulting from the combustion of coal in electric generating facilities.

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the utilities mixed coal ash with water to form a “sluice,” which would be piped from

the generating facility to these unlined basins. The practices that the utilities

employed in disposing of coal ash during this time were consistent with

contemporaneous standard industry practices and with the concept of least cost

planning as currently embodied in state law. See N.C.G.S. § 62-2(a)(3a) (2019).

The harmful effects of coal ash on human and environmental health were not

fully understood at the time that the utilities began to dispose of it in unlined basins.

Over time, however, pollutants emanating from the unlined coal ash basins began to

contaminate nearby groundwater. In the 1970s, concerns developed about the

manner in which coal ash was handled and stored. For that reason, the United States

Environmental Protection Agency began to regulate unlined coal ash basins in

accordance with the Clean Water Act and initiated a permitting program known as

the National Pollutant Discharge Elimination System, pursuant to which the EPA

delegated authority to the states to issue permits allowing the discharge of a specific

amount of pollutants into nearby water sources, subject to certain terms and

conditions, and authorizing the processing, incineration, placement in a landfill, or

other beneficial uses of contaminated sludge. See 33 U.S.C. § 1251 et seq. (1972). In

1979, the North Carolina Department of Environmental Quality2 adopted

Groundwater Classification and Standards (2L Rules) requiring the taking of

2 The Department of Environmental Quality was known as the Department of Environmental and Natural Resources in the 1970s.

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preventative and corrective measures relating to groundwater contamination

associated with coal ash. See 15A N.C. Admin. Code 02L §§ .0100–.0515.

In the aftermath of a 2008 incident, during which more than five million cubic

yards of coal ash spilled into the Emory River from the Tennessee Valley Authority’s

Kingston Fossil Plant, the effect of storing coal ash in unlined basins upon human

and environmental health became a focus of additional attention at the EPA and in

the electric power industry. On 17 April 2015, the EPA promulgated the Hazardous

and Solid Waste Management System—Disposal of Coal Combustion Residuals from

Electric Utilities (CCR Rule), see 80 Fed. Reg. 21301 (April 17, 2015), which

established a “maximum contaminant level” for certain contaminants, prohibited

“[a]n increase in the concentration of that substance in the ground water where the

existing concentration of that substance exceeds” a prescribed maximum level, and

required that groundwater monitoring be undertaken at existing coal ash basins by

no later than 17 October 2017, with reporting of the results to begin by no later than

31 January 2018. 40 C.F.R. § 257.3–4; § 257.90(b), (e) (2019).

On 2 February 2014, a stormwater pipe that ran beneath an unlined coal ash

basin located at Duke Energy Carolinas’ Dan River generating facility burst,

resulting in the emission of approximately 27,000 million gallons of wastewater and

between 30,000 and 39,000 tons of coal ash into the Dan River, affecting river

conditions for up to sixty miles below the discharge site. The utilities entered pleas

of guilty in federal court to nine criminal violations of the Clean Water Act relating

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to the Dan River facility and four additional power plants. In accordance with their

plea agreements, the utilities agreed to pay a $68 million fine and were placed on

probation for a five-year period pursuant to 18 U.S.C. § 3561(c)(2).

On 20 September 2014, the General Assembly enacted the North Carolina Coal

Ash Management Act, N.C. Sess. L. 2014-122, which was subsequently amended in

the Mountain Energy Act, N.C. Sess. L. 2015-110, and the Drinking Water

Protection/Coal Ash Cleanup Act, N.C. Sess. L. 2016-95. CAMA, as amended,

required a comprehensive assessment of groundwater and surface water discharges

at coal ash basins, the taking of corrective action to address such discharges, and the

closure of all of the utilities’ unlined coal ash basins by no later than 2029 in

accordance with a statutorily prescribed timeline. N.C.G.S. §§ 130A-309.211–.214

(2019). The utilities began closing their unlined coal ash basins pursuant to the

requirements of the CCR Rule and CAMA in 2015.

B. Procedural History

At the beginning of the closure process, the utilities estimated that their

collective coal ash cleanup costs would exceed $4.5 billion. On 21 December 2015,

Duke submitted a letter to the Commission outlining the manner in which the

utilities intended to account for ongoing and anticipated coal ash management and

basin closure costs. In this letter, Duke explained that the utilities planned to create

an Asset Retirement Obligation, which is an account associated with the retirement

of a tangible long-lived asset, on their balance sheets in accordance with their

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understanding of Financial Accounting Standards Board (FASB) Accounting

Standards Codification for Asset Retirement Environmental Obligations (ASC) 410-

20, Federal Energy Regulatory Commission (FERC) General Instruction No. 25, and

Generally Accepted Accounting Principles (GAAP). According to Duke, the creation

of these Asset Retirement Obligations was triggered by the fact that the CCR Rule

and CAMA required the closure of the utilities’ unlined coal ash basins. Although

Duke initially estimated that these Asset Retirement Obligations would involve

approximately $2.13 billion for Duke Energy Progress and $1.84 billion for Duke

Energy Carolinas, it noted that the utilities’ actual compliance costs might be

“materially different from these estimates based on the timing and requirements of

the final regulations.”

In accordance with fundamental principles of double-entry accounting, the

utilities planned to record their coal ash management and ash basin closure costs as

both a liability and an asset. In the event that these costs were associated with

generating facilities that were still in active service, the costs, inclusive of associated

depreciation expense, would be placed in the relevant property, plant and equipment

account. In the event that these costs were associated with a retired facility, they

would be placed in a regulatory asset account. After noting that “[t]he Commission

ha[d],” in prior matters, “issued orders allowing the [utilities] to defer all impacts of

establishing an [Asset Retirement Obligation] until these costs [could] be considered

in future rate making decisions,” Duke stated that, since “actual costs incurred to

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comply with the federal and state regulations regarding closure of ash basins are

being deferred,” “all associated coal ash [Asset Retirement Obligation] deferrals [are

being excluded] for earnings surveillance reporting,” and that the utilities “are

funding these expenditures with its debt and equity capitalization” and “are recording

a debt and equity return (carrying charge) on the aforementioned net asset for

regulatory purposes” given that “GAAP requires the equity return to be deferred . . .

until rate recovery has begun.” Finally, Duke pointed out that this letter had been

sent for purely informational purposes and expressed the intention of “bring[ing] this

matter before the Commission for ultimate disposition” after “sufficient clarity in

North Carolina regarding the closure of ash basins”3 had been obtained.

On 28 March 2016, the Commission determined that there was “good cause to

establish formal dockets for [the utilities] in this matter” and “place[d] a copy of

Duke’s letter in each” of these dockets. Although it took no further action at that

time, the Commission noted that its “inaction should not be construed as agreement

or disagreement with the substance of Duke’s analysis or the conclusions [that] Duke

[had] reache[d]” and that it “reserve[d] the right, once a record [had been] established,

to agree or disagree in whole or in part” with Duke’s proposed accounting practices.

3 Subsequently, Duke explained that “the [utilities] did not file a deferral request at

[this] time due to significant [unresolved] litigation and reconsiderations related to CAMA, the now-defunct Coal Ash Management Commission, and numerous other outstanding issues.”

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On 30 December 2016, the utilities filed a joint petition seeking the entry of an

accounting order “authorizing the [utilities] to defer in a regulatory asset account

(until the [their] next base rate cases) certain costs incurred in connection with

compliance with federal and state environmental requirements” relating to coal ash

management and coal ash basin closures. More specifically, Duke “request[ed] that

the Commission allow [the utilities] to establish a regulatory asset account for the

deferral of all non-capital costs as well as the depreciation expense and cost of capital

at the weighted average cost of capital for all capital costs related to activities

required under [the CCR Rule and CAMA]” and deferral of “a cost of capital on the

deferred costs at the weighted average cost of capital” for costs incurred from 1

January 2015 until the approval of new rates in the utilities’ next general rate cases.

As of 30 September 2016, Duke Energy Progress had recorded an Asset

Retirement Obligation of $2.4 billion and Duke Energy Carolinas had recorded an

Asset Retirement Obligation of $2.1 billion, while acknowledging that its actual

compliance costs might be “materially different” based upon the timing and

requirements of the final environmental regulations. In addition, Duke pointed out

that Duke Energy Progress had already incurred $291.9 million in coal ash

management and coal ash basin closure costs and that Duke Energy Carolinas had

already recorded $434.4 million in such costs, with these costs including monies

associated with engineering and regulatory compliance, mobilization for and the

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commencement of the closure process, the construction of rail infrastructure for coal

ash excavation, dewatering activities, ash excavation, and plant closure.

Duke asserted that “noteworthy circumstances” justified the entry of the

proposed accounting order and alleged that, “absent approval of this request, [both

utilities’] return on equity for [their] North Carolina retail operations [was] expected

to be well below the return last authorized by the Commission.” More specifically,

Duke alleged that the authorized return on equity that had been established in the

utilities’ last general rate cases was 10.2 percent and that, in the absence of the

requested accounting order, Duke Energy Progress’ earned return on equity would

fall to 7.47 percent and that Duke Energy Carolinas’ earned return on equity would

fall to 7.61 percent. After emphasizing that the utilities were not seeking a rate

change at that time, Duke stated that each utility intended to file a general rate case

application within the next twelve months and pointed out that none of the fines,

penalties, or costs associated with the Dan River spill had been included in the costs

that either utility had deferred to date or would be included in the costs upon which

any future general rate increase request would be predicated.

Duke asserted that “[c]losing ash basins is part of the life cycle of the [utilities’]

coal plants,” that “compliance with state and federal regulatory requirements is part

of the normal operation of a utility,” and that “[c]osts related to the operation of a

power plant, including decommissioning costs, are typically paid for by customers.”

In light of the “extraordinary and unprecedented” “magnitude, scope, duration and

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complexity of compliance,” the utilities requested the Commission to enter the

requested accounting order “so that all complexities may be adequately reviewed by

the Commission and stakeholders at an appropriate time.” Duke claimed that

“[a]pproval of this deferral request [would] benefit the [utilities] and the customers

by helping to assure investor confidence in” both utilities and ensuring that “needed

capital [would be available] on reasonable terms.” Unless the Commission approved

its request, Duke argued that “the [utilities] may have to write off billions of dollars

of costs for accounting purposes, which . . . would severely impair the [utilities’]

financial stability and ability to attract capital on reasonable terms.”

Various parties4 submitted comments in response to Duke’s filing. The

Attorney General argued that the public interest would not be served by deciding the

issues raised by Duke’s filing outside the context of a general rate case. The Public

Staff asserted that the relevant costs “generally satisfy the criteria for deferral for

regulatory accounting (but not necessarily ratemaking) purposes” and reserved the

right to litigate the amount of deferred costs used to set the utilities’ rates in future

general rate cases, the method that would be used to include the relevant costs in

North Carolina retail rates, the length of any applicable amortization period, and the

4 The parties submitting comments in response to Duke’s filing included the North

Carolina Waste Awareness and Reduction Network, Inc.; Appalachian State University; the Cities of Concord and Kings Mountain; the Carolina Utility Customers Association, Inc.; the Attorney General; and the Public Staff. The utilities and the Sierra Club submitted reply comments.

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extent to which an equitable sharing of these costs between the ratepayers and

shareholders should be implemented. Other parties contended that costs should be

fully analyzed and categorized before the amount of deferred costs to be included in

North Carolina retail rates was established.

1. General Rate Case Applications

a. Duke Energy Progress

On 1 June 2017, Duke Energy Progress filed an application requesting

authorization to adjust and increase its North Carolina retail rates and the entry of

an accounting order approving the establishment of certain regulatory assets and

liabilities. In its application, Duke Energy Progress sought additional annual North

Carolina retail revenues of approximately $477.5 million,5 resulting in an overall

increase of approximately 14.9 percent. Duke Energy Progress requested that rates

be established based upon coal ash basin closure costs of approximately $66 million

per year for a period of five years and ongoing coal ash-related compliance costs of

approximately $129 million per year. In addition, Duke Energy Progress sought the

establishment of “a regulatory asset [and] liability for coal ash basin closure costs

over or under the amount established in this proceeding and for those costs incurred

between the cut-off date for this rate case and the effective date of new rates.” A

5 In subsequently filed supplemental testimony and exhibits, Duke Energy Progress

reduced its proposed rate increase to $425.6 million.

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number of entities intervened in the proceeding initiated by the filing of Duke Energy

Progress’ application.6

On 20 June 2017, the Commission entered an order in which it: (1) declared

that the application filed by Duke Energy Progress had initiated a general rate case

pursuant to N.C.G.S. § 62-137; (2) suspended the proposed rates for a period of up to

270 days pursuant to N.C.G.S. § 62-134; and (3) established the applicable test year

as the twelve-month period ending 31 December 2016. On 10 July 2017, the

Commission entered an additional order consolidating the utilities’ request to defer

environmental compliance costs in Docket No. E-2 Sub 1103, and Duke Energy

Progress’ request to defer incremental storm damage expenses in Docket No. E-2,

Sub 1131, with Duke Energy Progress’ general rate proceeding. On 12 July 2017, the

Commission entered an order requiring Duke Energy Progress to provide public

notice of the filing of its application and the schedule of public hearings to be held in

6 The Public Staff intervened as a matter of right pursuant to N.C.G.S. § 62-15(d) and

Commission Rule R1-19, while the Attorney General’s intervention was recognized pursuant to N.C.G.S. § 62-20. The Commission allowed additional intervention petitions filed by the Carolina Utility Customers Association, Inc.; the Carolinas Industrial Group for Fair Utility Rates II; the North Carolina Waste Awareness and Reduction Network, Inc.; the North Carolina Sustainable Energy Association; the Fayetteville Public Works Commission; the Commercial Group; the North Carolina Electric Membership Corporation; the Environmental Defense Fund; the Kroger Company; the Sierra Club; Haywood Electric Membership Corporation; the United States Department of Defense and All Other Federal Executive Agencies; the Rate-Paying Neighbors of Duke Energy Progress, LLC’s Coal Ash Sites; the North Carolina Farm Bureau Federation, Inc.; the North Carolina Justice Center, the North Carolina Housing Coalition, the Natural Resources Defense Council, and the Southern Alliance for Clean Energy, jointly (collectively, the Justice Center, et al.); and the North Carolina League of Municipalities.

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connection with that proceeding. A number of hearings were held before the

Commission between 12 September to 7 December 2017, at which interested

members of the public were allowed to testify and the parties were given the

opportunity to present the testimony of various expert witnesses.

b. Duke Energy Carolinas

On 25 August 2017, Duke Energy Carolinas filed an application requesting

authorization to increase its North Carolina retail rates and the entry of an

accounting order authorizing the establishment of certain regulatory assets and

liabilities. In its application, Duke Energy Progress sought additional annual North

Carolina retail revenues of approximately $611 million,7 which resulted in an overall

increase of approximately 12.8 percent, and the approval of an increase in the

residential Basic Facilities Charge from $11.80 to $17.79 per month. Duke Energy

Carolinas also requested that rates be established based upon coal ash basin closure

costs of approximately $135 million per year for a period of five years and ongoing

coal ash-related compliance costs of approximately $201 million per year. In addition,

Duke Energy Carolinas sought the establishment of a “regulatory asset [and] liability

for coal ash basin closure costs over or under the amount established in this

proceeding and for those costs incurred between the cut-off date for this rate case and

7 Subsequently, Duke Energy Carolinas filed supplemental testimony and exhibits

changing its proposed rate increase to an annual amount of approximately $701 million.

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the effective date of new rates.” A number of other entities intervened in the

proceeding resulting from the filing of Duke Energy Carolinas’ application.8

On 19 September 2017, the Commission entered an order in which it: (1)

declared that Duke Energy Carolina’s application had initiated a general rate case

pursuant to N.C.G.S. § 62-137; (2) suspended the proposed rates for a period of up to

270 days pursuant to N.C.G.S. § 62-134; and (3) established that the applicable test

year would be the twelve-month period ending 31 December 2016. On 13 October

2017, the Commission entered an order requiring Duke Energy Carolinas to provide

public notice of the filing of its application and the times, dates, and locations at which

hearings for the receipt of public witness testimony would be held. A number of

hearings were held before the Commission between 16 January to 22 March 2018, at

which interested members of the public were allowed to testify and the parties were

given the opportunity to present the testimony of various expert witnesses.

8 Once again, the Public Staff intervened as a matter of right pursuant to N.C.G.S.

§ 62-15(d), while the Attorney General’s intervention was recognized pursuant to N.C.G.S. § 62-20. The Commission allowed additional intervention petitions filed by the North Carolina Sustainable Energy Association; the Environmental Defense Fund; the North Carolina Waste Awareness and Reduction Network; the Carolina Utility Customers Association, Inc.; the Carolinas Industrial Group for Fair Utility Rates III; the Rate-Paying Neighbors of Duke Energy Carolinas, LLC’s Coal Ash Sites; the North Carolina Farm Bureau Federation, Inc.; the Sierra Club; the Kroger Company; the North Carolina League of Municipalities; Appalachian State University; Piedmont Electric Membership Corporation; Rutherford Electric Membership Corporation; Haywood Electric Membership Corporation; Blue Ridge Electric Membership Corporation; the Commercial Group; Apple, Inc., Facebook, Inc., and Google, Inc., jointly; the Cities of Concord and Kings Mountain; the City of Durham; and the North Carolina Justice Center, the North Carolina Housing Coalition, the Natural Resources Defense Council, and the Southern Alliance for Clean Energy (collectively, the Justice Center, et al.).

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2. The Commission’s Orders

On 23 February 2018, the Commission entered an order allowing Duke Energy

Progress to include $232.39 million in net additional coal ash-related costs, less a $30

million mismanagement penalty, to be amortized to North Carolina retail rates over

a five-year period in its North Carolina retail cost of service and authorizing Duke

Energy Progress to recover a return on the unamortized balance of these costs. In its

order, the Commission found as fact that:

51. [Duke Energy Progress] expects to incur substantial costs related to [coal ash] in future years. It is just and reasonable to allow deferral of those costs, with a return at the overall cost of capital approved in this [o]rder during the deferral period. Ratemaking treatment of such costs will be addressed in future rate cases.

....

53. Since its last rate case, [Duke Energy Progress] has become subject to new legal requirements relating to its management of coal ash. These new legal requirements mandate the closure of the 19 coal ash basins at [Duke Energy Progress’] coal-fired power plants. Since its last rate case, [Duke Energy Progress] has incurred significant costs to comply with these new legal requirements.

54. On a North Carolina retail jurisdiction basis, the actual coal ash basin closure costs [that Duke Energy Progress] has incurred (netted against the amount already included in [Duke Energy Progress’] rates following its last rate case) during the period from January 1, 2015, through August 31, 2017, amount to $241,890,000. [Duke Energy Progress] is entitled to recover these coal ash basin closure

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costs, less a disallowance of $9.5 million, for a total amount of $232,390,000. . . . The actual coal ash basin closure costs incurred by [Duke Energy Progress], less the $9.5 million, are known and measurable, reasonable and prudent, and used and useful in the provision of service to [Duke Energy Progress’] customers. [Duke Energy Progress] is entitled to recover these costs through rates. Further, [Duke Energy Progress] proposes that these costs be amortized over a five-year period and that it earn a return on the unamortized balance. Under normal circumstances, the five-year amortization period proposed by [Duke Energy Progress] is appropriate and reasonable, and absent any management penalty should be approved, and under normal circumstances [Duke Energy Progress] is entitled to earn a return on the unamortized balance.

55. Under the present facts, a mismanagement penalty in the approximate sum of $30 million is appropriate with respect to [Duke Energy Progress’] [coal ash] remediation expenses accounted for in the earlier established asset retirement obligation . . . with respect to costs incurred through the end of the test year, as adjusted. Through its use of available ratemaking mechanisms, the Commission is effectively implementing an estimated $30 million penalty by amortizing the $232,390,000 over five years with a return on the unamortized balance and then reducing the resulting annual revenue requirement by $6 million for each of the five years.

56. [Duke Energy Progress] further proposes that it recover on an ongoing basis $129,115,000 in annual coal ash basin closure costs, subject to true-up in future rate cases. The amount sought by [Duke Energy Progress] is based upon its actual test year (2016) spend. [Duke Energy Progress’] proposal to recover these ongoing costs as a portion of the rates approved in this [o]rder is not approved. Rather, [Duke Energy Progress] is authorized to record its September 1, 2017, and future [coal ash] costs in a deferral account until its next general rate case.

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In discussing the evidentiary support for these findings of fact, the Commission

noted that cost deferral “is a recognized practice that allows recovery of expenditures

that might otherwise constitute impermissible retroactive ratemaking,” that the

regulations requiring Duke Energy Progress to remediate the environmental risks

associated with its unlined coal ash basis “were not in effect ten or fifteen years ago,”

that these regulations “[have] arisen in 2014 and 2015,” and that Duke Energy

Progress “is taking appropriate actions to comply” with all such requirements.

The Commission determined that it “[could not] agree with the ultimate

positions of any party” with respect to the manner in which coal ash-related costs

should be included in the cost of service used to establish Duke Energy Progress’

North Carolina retail rates. In rejecting a proposal advanced by Public Staff witness

Jay Lucas, who suggested that $88,000 in legal expenses associated with litigation

relating to alleged coal ash-related environmental violations and $6.7 million in

groundwater extraction and treatment costs, most of which related to the utility’s

Sutton facility, should be excluded from the company’s North Carolina retail cost of

service, citing State ex rel. Utilities Commission v. Public Staff, 317 N.C. 26, 343

S.E.2d 898 (1986) (Glendale Water) (holding that legal fees incurred as a result of the

utility’s failure to provide adequate service “could have been avoided” and should

have been excluded from the utility’s operating expenses for ratemaking purposes),

the Commission noted that, in this instance, unlike the situation at issue in Glendale

Water, there had been no finding or admission that any violation had occurred. In

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addition, the Commission pointed to the testimony of Duke Energy Progress witness

James Wells that not all 2L Rule exceedances result in NPDES permit violations and

that DEQ had never issued a notice of violation directed toward Duke Energy

Progress based upon groundwater testing results. Instead, the Commission noted

that Mr. Wells had testified that “the 2L [R]ules’ correct[ive] action provisions are

designed around the idea that older facilities, built before liners were a regulatory

obligation, were likely to have associated groundwater impacts, that such impacts

were not the result of regulatory noncompliance, and that they should be addressed

in a measured process.” According to Mr. Wells, the utility’s use of unlined coal ash

basins was “consistent with the industry standard” and “considered by the EPA to be

the best available control technology” at the time that the facilities in question were

constructed. The Commission added that, even though Duke Energy Progress had

agreed to incur certain groundwater extraction and treatment costs pursuant to a

settlement agreement with DEQ, that agreement “merely accelerated work that

would have been required under CAMA” given that, unlike the 2L Rules, “CAMA’s

groundwater assessment and corrective action provisions are triggered by

exceedances—not violations—of the 2L [Rules].”

The Commission stated that it was not persuaded by the Public Staff’s

contention that Duke Energy Progress should have “tak[en] steps that were not in

accord with steps most of the industry was following,” such as lining ash ponds or

creating dry coal ash basins, while “disregarding responsibility of paying for that

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which [the Public Staff]—in 20/20 hindsight—wish[ed that Duke Energy Progress]

had done” or by the arguments advanced by several intervenors that Duke Energy

Progress “should have done more than just comply with the current environmental

regulations” given the testimony of Attorney General witness Dan Wittliff that “the

definition of industry standards is compliance with the law.” In addition, the

Commission determined that the actions suggested by the Public Staff would have

“cost money which would have been charged to customers” or exposed Duke Energy

Progress “to credible claims of ‘gold-plating,’ and therefore cost disallowance, which

would have prevented [Duke Energy Progress] from moving forward with these

suggested improvements in the first place.” In the Commission’s view, the extent to

which “seeps” constituted a violation of the law or required the issuance of an NPDES

permit remained unresolved by DEQ.

The Commission rejected the Public Staff’s contention that the Commission

should disallow $109.8 million relating to the costs of off-site transportation and

disposal of coal ash from the Sutton and Asheville plants on the theory that the coal

ash in question should have been placed in on-site facilities given that acting in such

a fashion would not have been feasible given the basin closure deadlines imposed by

CAMA. In the Commission’s view, “once CAMA became law, prudent planning

required [Duke Energy Progress] to meet ‘real world’ difficulties as and when they

arose, to ensure that the legislatively fixed . . . deadline would be met,” and, “[h]ad

[Duke Energy Progress] not arranged for off-site disposal, it would have been

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required” to undertake transportation measures which would have involved an

“unreasonable task,” with one exception.9

The Commission stated that the Public Staff’s proposed “equitable sharing”

arrangement, pursuant to which Duke Energy Progress’ coal ash basin closure costs

would be amortized to rates over a twenty-six year period without the inclusion of

any return on the unamortized balance, resulting in a fifty-fifty sharing of those costs

between the ratepayers and the shareholders, rested upon “[Duke Energy Progress’]

alleged past failures . . . to prevent environmental contamination from its coal ash

basins” and “an asserted [Commission] ‘history of approval of sharing of extremely

large costs that do not result in any new generation of electricity for customers.’ ”

However, the Commission determined that the Public Staff had “provid[ed]

insufficient justification” for its proposal, that it lacked “[a] ‘determining principle’ or

prudency standard,” and that, if “the Commission [were] to adopt it, the Commission

very well could be found to be acting arbitrarily and capriciously, and subject itself to

reversal.”

In addition, the Commission determined that the Public Staff’s argument that

the Commission had the authority to institute its equitable sharing proposal rested

upon an “overly broad” view of the Commission’s authority that lacked support in the

9 Duke Energy Progress “essentially agreed” that an adjustment in the amount of $9.5

million relating to the increased coal ash moving expenses at its Asheville plant associated with a contract involving Waste Management, Inc., should be made.

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applicable legal authorities. In rejecting the Public Staff’s argument that the

applicable legal support for its equitable sharing proposal could be found in this

Court’s decision in State ex rel. Utilities Commission v. Thornburg, 325 N.C. 463, 476–

81, 385 S.E.2d 451, 458–61 (1989) (Thornburg I) (affirming a Commission decision

that nuclear plant abandonment costs constituted a utility “expense” for purposes of

N.C.G.S. § 62-133(b)(3) and N.C.G.S. § 133(c) and that a decision to allow the

amortization of these abandonment costs without a return upon the unamortized

balance was permitted by N.C.G.S. § 62-133(d)), the Commission noted that the

present case involved “ ‘reasonable and prudent’ and ‘used and useful’ expenditures

by [Duke Energy Progress]” rather than “ ‘abandoned plant’ or cancellation costs.”

Instead, the Commission relied upon this Court’s decision in State ex rel. Utilities

Commission v. Thornburg, 325 N.C. 484, 486, 385 S.E.2d 463, 464 (1989) (Thornburg

II) (reversing a Commission decision providing for an equitable sharing between

customers and shareholders of approximately $570 million in construction costs

associated with a new unit even though some portion of the relevant costs had been

incurred in connection with the construction of certain abandoned facilities), and

determined that the adoption of the Public Staff’s equitable sharing proposal would

be “unfairly punitive.”

The Commission concluded that its determination that the relevant coal ash

disposal costs were “used and useful” and “prudent and reasonable” was consistent

with its own earlier decision in Docket No. E-22, Sub 532, which addressed costs that

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had been incurred for the “identical purpose” and rested upon a determination that

such costs were “used and useful.” In rejecting the Public Staff’s argument that Duke

Energy Progress should have put the relevant costs into rate base rather than

“cho[osing]” to defer these costs and attempt to have them amortized to rates, the

Commission determined that Duke Energy Progress had treated these costs as

“[w]orking [c]apital” and that “no party [had] taken the position that [this] inclusion

. . . was inappropriate.” Similarly, in rejecting the Attorney General’s assertion that

Duke Energy Progress had “failed to request in advance permission to create a

deferred account,” the Commission found that Duke Energy Progress “had no choice

in the matter” in light of the applicable regulatory accounting rules, that “it is not

necessary that something be classified as ‘plant’ in order to be properly included in

rate base,” and that, instead, “the issue is the source of the funds,” citing Utilities

Commission v. Virginia Electric & Power Co., 285 N.C. 398, 206 S.E.2d 283 (1974)

(VEPCO). In view of the fact that the relevant funds had been provided by investors,

the Commission held that the funds were “used and useful” even though they did not

result in “plant in service,” so that Duke Energy Progress was “entitled to earn a

return on those funds over the period in which the costs are amortized.” In addition,

the Commission held that, even if the costs in question did not relate to “used and

useful” property, “the Commission would nevertheless approve [Duke Energy

Progress’] cost recovery proposal in all respects, and would exercise its discretion to

achieve that result” pursuant to N.C.G.S. § 62-133(c) and N.C.G.S. § 62-133(d).

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The Commission further determined that the “disallowance methodologies”

proposed by the intervenors “fail[ed] to comply with the Commission’s prudence

framework,” in which a utility’s costs “are presumed reasonable and prudent unless

challenged” and any prudence-related challenges “must (1) identify specific and

discrete instances of imprudence; (2) demonstrate the existence of prudent

alternatives; and (3) quantify the effects by calculating imprudently incurred costs,”

citing its prior decisions in Docket No. E-2, Sub 537 and E-2, Sub 333. According to

the Commission, the proposed disallowances would be “unjust and unreasonable,”

with a decision to place the entire cost of coal ash disposal upon shareholders having

the ultimate effect of harming ratepayers given the increased capital costs that would

result from such an action. In the same vein, the Commission rejected the Sierra

Club’s contention that the coal ash disposal costs that Duke Energy Progress sought

to have included in the cost of service resulted from unlawful discharges and had to

be disallowed pursuant to N.C.G.S. § 62-133.13 (providing that a utility is not entitled

to have “costs resulting from an unlawful discharge to the surface waters of the State

from a coal combustion residuals surface impoundment” included in the cost of service

used to establish the utility’s rates) on the grounds that the relevant costs related to

“compl[iance] with the federal CCR [R]ule and CAMA.” The Commission also rejected

intervenor-proposed disallowances related to expenditures incurred to meet CAMA

deadlines on the grounds that “[t]he Commission is unable to recreate the past and

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place a price tag on remediation costs that might have been incurred in anticipation

of environmental requirements.”

On the other hand, after determining that it was “unable to conclude that

[Duke Energy Progress] mismanagement [was] the primary cause of CAMA,” the

Commission concluded that it was also “unable to conclude that [the]

mismanagement to which [Duke Energy Progress] admitted in the federal criminal

court proceeding was not at least a contributing factor” to the incurrence of the

relevant coal ash disposal costs. In light of its “admi[ssion] to pervasive, system-wide

shortcomings such as improper communication among those responsible for oversight

of coal ash management,” the Commission concluded that Duke Energy Progress

“ha[d] placed its consumers at risk of inadequate or unreasonably expensive service”

by failing to “assur[e] safe operation of its coal-burning facilities so as not to render

the environment unsafe,” “result[ing] in cost increases greater than those necessary

to adequately maintain and operate its facilities.” As a result, the Commission

imposed a $30 million mismanagement penalty “arising primarily from [Duke Energy

Progress’] admissions of mismanagement in the federal criminal case.”

Commissioner ToNola D. Brown-Bland dissented from the Commission’s

decision “that [Duke Energy Progress] is entitled to full recovery of all coal ash

expenses subject to a one-time mismanagement penalty.” In Commissioner Brown-

Bland’s view, the imposition of a $30 million mismanagement penalty did “not

reasonably assure that the rates fixed for [Duke Energy Progress’] service are ‘fair to

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both the public utilit[y] and to the consumer,’ and that the rate set by the Commission

and to be received by [Duke Energy Progress] is just and reasonable,” quoting

N.C.G.S. § 62-133(a) and citing N.C.G.S. § 62-131(a). According to Commissioner

Brown-Bland, when Duke Energy Progress was notified that NPDES permit

violations and unlawful groundwater exceedances had occurred in 2007, Duke Energy

Progress was placed “on notice” that its existing unlined coal ash basins “were not

compliant with the environmental regulations of the day,” that their contents were

leaching into the groundwater, and that Duke Energy Progress “had available to it a

number of specific alternative actions that represented reasonable optional pathways

to coal ash management compliance.” As a result, Commissioner Brown-Bland

determined that Duke Energy Progress’ decision to store additional coal ash in

unlined basins after 2007 was imprudent and resulted in a situation in which the

company was required to handle a considerable quantity of coal ash twice—once when

it was initially stored in an unlined basin and again when it was excavated and moved

to a lined facility. As a result, Commissioner Brown-Bland concluded that it was “not

fair to burden the consumers with rates that include costs attributable to [Duke

Energy Progress’] imprudence” in dewatering, excavating, and moving coal ash waste

that had been produced in or after 2007 and that the prudently incurred portion of

Duke Energy Progress’ coal ash costs should be amortized over a seven year period,

with the unamortized balance being included in rate base.

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Similarly, Commissioner Daniel G. Clodfelter concurred, in part, and

dissented, in part. After stating that that he “[could not] concur” in the Commission’s

decision to impose a $30 million mismanagement penalty while simultaneously

allowing Duke Energy Progress to earn a return on the unamortized balance of the

relevant coal ash disposal costs, Commissioner Clodfelter described the

mismanagement penalty imposed by the Commission as lacking “any clear

connection between the amount selected for the penalty . . . and any particular

actions or omissions by [Duke Energy Progress].” Instead, Commissioner Clodfelter

would have disallowed certain costs which had, in his view, been imprudently

incurred at the Sutton, Asheville, H.V. Lee, and Cape Fear facilities and would have

placed certain costs incurred at the Mayo and Roxboro facilities into a regulatory

asset account for consideration in Duke Energy Progress’ next general rate case.

After noting that the record did not allow a determination as to “what portion, if any,

of [Duke Energy Progress’] future coal ash disposal expenditures may require an

increase in investor-provided working capital,” Commissioner Clodfelter concluded

that he could not “support the accrual of a rate of return on amounts recorded to the

regulatory asset account for future coal ash disposal costs.”

On 2 April 2018, the Public Staff filed a motion seeking clarification “with

respect to whether the unamortized balance of deferred coal ash costs is ‘entitled’ to

a return as a matter of law, or is ‘eligible’ for a return as a matter of Commission

discretion.” More specifically, the Public Staff sought clarification concerning: (1)

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the Commission’s conclusion that Duke Energy Progress’ coal ash compliance costs

constituted investor-funded working capital for purposes of this Court’s decision in

VEPCO; (2) the Commission’s conclusion that Duke Energy Progress was “entitled to

earn a return on those funds over the period in which the costs are amortized”; and

(3) the Commission’s statement that “costs placed in an [Asset Retirement

Obligation] account are eligible for deferral and amortization and for earning on the

unamortized balance” and that, “even if the remediation costs are [Asset Retirement

Obligation] expenditures, they are eligible for ratemaking treatment as though they

are used and useful assets.” On 17 April 2018, the Commission entered an order

stating that:

[The Public Staff’s concern] is a misinterpretation of the Commission’s order when viewed in the context of the entirety of the order. The holding of the order is that but for a management penalty, the Commission in its discretion would have allowed amortization of historical deferred [coal ash] costs over five years with full return on the unamortized balance, but to implement the penalty, the return is to be reduced by $30 million. Relying on this logic, the Commission could have imposed a different penalty that could have reduced the return further or eliminated it altogether. As such the holding belies the Public Staff’s reading of the order to be that the deferred [coal ash] costs are to be included in rate base with a return to be paid as a matter of law. The holding is not based on a determination that [Duke Energy Progress] is authorized to earn a return on the deferred balance of the [coal ash] historical remediation costs as a matter of law. Consequently, even if use of the word “entitled” were precedent setting, in a legislative ratemaking order, which it is not . . . , as the holding is not dependent on the interpretation of the word as the Public Staff reads it, the

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Public Staff’s concerns are misplaced. In the context of the order taken as a whole, the Commission does not use the word “entitled” in contradistinction with the word “eligible” as the Public Staff reads it, nor, as the Commission stated in its February 23, 2018 order, does the Commission find it necessary to resolve the dispute between [Duke Energy Progress] and the Public Staff as to whether the deferred [coal ash] costs at issue in this case “may” vs. “must” be added to rate base as a matter of law and earn a return. Such determination is not necessary in establishing rates in this case.10

On 22 June 2018, the Commission entered an order allowing Duke Energy

Carolinas to include $545.7 million, less a $70 million mismanagement penalty, in

the cost of service used to establish its North Carolina retail rates; allowing Duke

Energy Carolinas to recover a return on the unamortized balance of the deferred coal

ash costs; and increasing its residential Basic Facilities Charge from $11.80 to $14.00

per month. In its order, the Commission found as fact that:

36. [Duke Energy Carolinas] shall increase the monthly [Basic Facilities Charge] for the residential rate class (Schedules RS, RT, RE, ES, and ESA) to $14.00. The increase in the [Basic Facilities Charge] for the residential rate class schedules is just and reasonable. The [Basic Facilities Charge] for other rate schedules shall be left unchanged from the current rates.

10 Commissioner Clodfelter dissented from the Commission’s clarification order on the

grounds that the portions of the rate order to which the Public Staff’s motion was directed were the same portions of the order with which he expressed disagreement in his partial dissent. For that reason, Commissioner Clodfelter would have allowed the Public Staff’s clarification motion.

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66. [Duke Energy Carolinas] expects to incur substantial costs related to [coal ash] in future years. It is just and reasonable to allow deferral of those costs, with a return at the net-of-tax overall cost of capital approved in this Order during the deferral period. Ratemaking treatment of such costs will be addressed in future rate cases.

69. Since its last rate case, [Duke Energy Carolinas] has become subject to new legal requirements relating to its management of coal ash. These new legal requirements mandate the closure of the coal ash basins at all of [Duke Energy Carolinas’] coal-fired power plants. Since its last rate case, [Duke Energy Carolinas] has incurred significant costs to comply with these new legal requirements.

70. On a North Carolina retail jurisdiction basis, the actual coal ash basin closure costs [Duke Energy Carolinas] has incurred during the period from January 1, 2015, through December 31, 2017, amount to $545.7 million. [Duke Energy Carolinas] is eligible to recover these coal ash basin closure costs. The actual coal ash basin costs incurred by [Duke Energy Carolinas] are known and measurable, reasonable and prudent, and, to the extent capital in nature, used and useful in the provision of service to the Company’s customers. Further, [Duke Energy Carolinas] proposes that these costs be amortized over a five-year period, and that it earn a return on the unamortized balance. Under normal circumstances, the five-year amortization period proposed by [Duke Energy Carolinas] is appropriate and reasonable, and absent any management penalty, should be approved, and under normal circumstances the Commission within its discretion would allow [Duke Energy Carolinas] to earn a return on the unamortized balance.

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71. Under the present facts, a management penalty in the approximate sum of $70 million is appropriate with respect to [Duke Energy Carolinas’] [coal ash] remediation expenses accounted for in the earlier established Asset Retirement Obligation . . . with respect to costs incurred through the end of the test year, as adjusted. Through its use of available ratemaking mechanisms, the Commission is effectively implementing an estimated $70 million penalty by amortizing the $545.7 million over five years with a return on the unamortized balance and then reducing the resulting annual revenue requirement by $14 million for each of the five years.

72. [Duke Energy Carolinas] further proposes that it recover on an ongoing basis $201 million in annual coal ash basin closure costs, subject to true-up in future rate cases. The amount sought by [Duke Energy Carolinas] is based upon its actual test year (2016) spend. [Duke Energy Carolinas] proposal to recover these ongoing costs as a portion of the rates approved in this [o]rder is not appropriate. Rather, it is appropriate to allow [Duke Energy Carolinas] to record its January 1, 2018, and future [coal ash] costs in a deferral account until its next general rate case.

In support of these findings, the Commission noted that an increase in the

residential Basic Facilities Charge from $11.80 to $14.00 would be “just and

reasonable and [would] strike[ ] the appropriate balance [by] providing rates that

more clearly reflect actual cost causation” given that “[t]he increase . . . minimizes

subsidization and provides more appropriate price signals to customers in the rate

class, while also moderating the impact of such increase on low-income customers to

the extent that they are high-usage customers such as those residing in poorly

insulated manufactured homes.” The Commission further stated that a failure to

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“properly recover customer-related cost via a fixed monthly charge provides an

inappropriate price signal to customers and fails to adequately reflect cost causation”

and that “shifting customer-related cost to kWh energy rate further exacerbates these

concerns.” The Commission determined that Duke Energy Carolinas’ proposal to

increase the residential Basic Facilities Charge to $17.79, which reflects

approximately fifty percent of the difference between the current rate and the

purported $23.78 customer-related cost identified in Duke Energy Carolinas’ cost of

service study lacked sufficient support in the utility’s cost-of-service study and that,

while the evidence “would support a higher charge” than $14.00 per month, “cost

causation analyses are inherently subjective,” so that “selecting a charge within the

range advocated [by the parties] based on differing cost causation models [would be]

appropriate.” After acknowledging the effect that this increase would have upon

customers, “especially low-income households,” the Commission noted that Duke

Energy Carolinas used “other means to address the financial needs of low-income

customers which are more effective than biasing the rate design.” The Commission

left the basic facilities charges applicable to non-residential rate schedules

“unchanged” on the grounds that non-residential rate schedules “are more complex”

and “allow[ ] for the minimization of cost-subsidization issues” while “ensuring

greater consistency with cost causation and allocation principles” and that “a greater

amount of fixed costs in the residential rate schedule, as opposed to non-residential

rate schedules, presently are recovered through variable energy rates, which is

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inconsistent with basic cost allocation principles that fixed costs should be recovered

through fixed charges, whereas variable costs should be recovered through variable

charges.”

The Commission further noted that Duke Energy Carolina’s request to defer

the costs associated with the remediation of conditions at the existing unlined coal

ash basins “was generally unopposed” and had the support of the Public Staff. The

Commission also concluded “that deferral in a regulatory asset for previously

incurred coal ash environmental costs [was] consistent with the Commission’s criteria

for deferrals and [was] reasonable” in light of the fact that the costs “were

extraordinary when incurred,” “were not being recovered in rates in effect at the time

incurred,” and would be difficult to quantify until a later time, when the costs were

better understood.

In the Commission’s view, N.C.G.S. § 62-133 “requires the Commission to

determine the utility’s rate base,” which is defined as “the reasonable original cost of

the public utility’s property used and useful . . . less that portion of the cost . . .

recovered by depreciation expense,” “its reasonable operating expenses,” “and a fair

rate of return on the [utility’s] capital investment” before multiplying the rate base

by the rate of return and adding the operating expenses to produce the utility’s

“revenue requirement,” quoting Thornburg I, 325 N.C. at 467 n.2, 385 S.E.2d at 453.

The Commission held that, once a utility has demonstrated that “the costs it seeks to

recover are (1) ‘known and measurable’; (2) ‘reasonable and prudent’; and (3) where

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included in rate base ‘used and useful’ in the provision of service to customers,”

quoting Jonathan A. Lesser & Leonardo R. Giacchino, Fundamentals of Utility

Regulation 39, 41–43 (Pub. Utils. Reports, Inc., ed., 2007) (Lesser & Giacchino), “the

utility should have the opportunity to recover the costs so incurred” in order to avoid

“an unconstitutional taking.”

The Commission stated that the “seminal treatment of ‘reasonable and

prudent’ costs” was set forth in its 1988 order in Docket Nos. E-2, Sub 537 and E-2,

Sub 333, in which it determined that “the standard for judging prudence is ‘whether

management decisions were made in a reasonable manner and at an appropriate time

on the basis of what was reasonably known or reasonably should have been known at

the time,” with this determination to “be based on a contemporaneous view of the

action or decision under question,” so that “[p]erfection . . . [was] not [ ] required,” and

with “[h]indsight analysis—the judging of events based on subsequent

developments— . . . not [being] permitted.” In the Commission’s view, “[a] decision

cannot be imprudent if it represents the only feasible way to accomplish a necessary

goal,” so that, “if expenditures . . . support and provide service to customers, the costs

are ‘used and useful,’ ” citing our decisions in Thornburg II and State ex rel. Utilities

Commission v. Carolina Water Service, 335 N.C. 493, 439 S.E.2d 127 (1994) (Carolina

Water).

In rejecting the Attorney General’s contention that Duke Energy Carolinas

“bore the burden of quantifying the disallowances [that] the [Attorney General]

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deems appropriate” given the utility’s alleged “fail[ure] to act appropriately before

2015,” the Commission stated that a utility need not “disprove [i]ntervenor

allegations unsupported by evidence” and that, on the contrary, “the [Attorney

General] must quantify what the costs of the actions not taken should have been.”

The Commission further concluded that “most of the costs being challenged are

questioned on the theory that [Duke Energy Carolinas] is in breach of a standard

classified as a ‘duty to exercise due care,’ ” a standard that is more appropriately

utilized in the tort context and which environmental regulators and courts of general

jurisdiction are better positioned than the Commission to apply. The standard

typically employed by the Commission in resolving cost recovery challenges “has

elements qualitatively and quantitatively distinct and more rigorous than a tort

standard of due care,” with the “[t]he expert witnesses sponsored [by the intervenors]

in this case” having “failed to show what [Duke Energy Carolinas] should have done

differently,” “when it should have acted,” or “what the cost of such alternative conduct

should have been.” In the Commission’s view, “[a]ttempts to identify years-old

hypothetical past costs” would be a “fruitless endeavor” that created an

“insurmountable obstacle” to acceptance of the intervenors’ positions, particularly

given the lack of “statutory or regulatory standards and guidelines to follow” in

determining which actions should have been taken. In view of the fact that

“[i]ntervenors may not rest merely on arguments and theories” and “must adduce

actual evidence challenging some aspect of [Duke Energy Carolinas’] cost recovery

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case,” the Commission determined that the intervenors had failed to successfully

challenge the reasonableness of Duke’s coal ash costs.

In addition, the Commission concluded that Duke Energy Carolinas had “met

its burden—both the prima facie burden of production and the ultimate burden of

persuasion”—of demonstrating that its coal ash costs should be included in the cost

of service for ratemaking purposes and that it should be allowed to earn a return

upon these costs. In reaching this conclusion, the Commission placed substantial

reliance upon the testimony of Duke Energy Carolinas witness Jon Kerin, who

asserted that Duke Energy Carolinas’ historic coal ash management practices

“generally comported with industry practices and then-applicable regulations.” After

noting that Mr. Wittliff had admitted that the costs that Duke Energy Carolinas had

incurred in complying with the CCR Rule were prudent, the Commission rejected the

Attorney General’s contention that Duke Energy Carolinas should not be permitted

to include the costs associated with CAMA compliance—a statute which, in the

Attorney General’s view, required “a more aggressive coal ash basin closure schedule

for certain of [Duke Energy Carolinas’] basins than would have been set under the

CCR Rule alone”—given that Mr. Wittliff “did not identify any specific costs that

could have been lower or should be disallowed” and did not “know quantitatively”

which costs would have eventually been required by the CCR Rule and CAMA in the

absence of mismanagement “because [he] didn’t do that kind of analysis.”

Furthermore, the Commission determined that there was “no evidence” that Duke

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Energy Carolinas’ mismanagement was the “direct cause of CAMA”; that, even if it

was, “such direct causation alone is not sufficient legal basis for disallowing otherwise

recoverable costs” given that CAMA “operates within the context of [N.C.G.S. §] 62-

133”; and that, “had [the General Assembly] intended to disavow the routine cost

recovery standard, it can be expected that the legislature would have had to do so

explicitly.”

The Commission rejected the Public Staff’s equitable sharing proposal, which

was similar to the proposal that it had advocated in the Duke Energy Progress case

with the exception of the use of a twenty-seven, rather than a twenty-six year

amortization period, for essentially the same reasons that it had cited in rejecting the

Public Staff’s equitable sharing proposal in that case. According to the Commission,

the record contained “[n]o persuasive evidence” that any of the allegedly imprudent

actions or inactions “caused discrete expenditures” by Duke Energy Carolinas and

that “identification of an imprudent action or inaction is not by itself sufficient;

rather, there must be a demonstration of the economic impact.”

The Commission further noted that, because the relevant coal ash costs had

been covered by investor-supplied, rather than ratepayer-supplied, funds, such funds

are, “under principles of equity, law and fairness,” “eligible for a return” because to

hold otherwise would “deprive[ ]” “the investor supplying these funds . . . of the time

value of money,” “inadequately compensate [the investor] resulting in an increased

risk, and “ultimately increase[e] [Duke Energy Carolinas’] cost of capital.” The

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Commission held that the extent to which certain costs would, “had they not been

accounted for in an [Asset Retirement Obligation] and deferred,” have “been

operating or other expenses” did not matter given that, once they had been capitalized

and deferred, those costs “los[t] for ratemaking purposes the attributes of . . .

‘expenses’ deemed recoverable through [rates] then in effect that do not qualify for a

return.” Moreover, the Commission further determined that many of the relevant

costs were, “[u]nder any analysis, . . . not expenses but capital items”; that, “[h]ad

[Duke Energy Carolinas] not sought establishment of an [Asset Retirement

Obligation] and deferral, it is incorrect that they would not have been added” to rate

base; and that the Public Staff was “unable” “to support its position that deferred

[Asset Retirement Obligation] costs are ‘expenses.’ ” The Commission stated that it

was “unnecessary to determine” whether the costs in question would have been

eligible for inclusion in rate base in light of ordinary ratemaking principles and

concluded that, “[i]n its discretion, as expressly authorized by [N.C.G.S. §] 62-133(d),”

it had the authority to allow Duke to earn a return on the unamortized balance of its

deferred coal ash costs.

As it had in the related Duke Energy Progress case, the Commission

determined that “both GAAP and FERC accounting guidance require the recognition

of a liability (the [Asset Retirement Obligation]) upon the requisite triggering event—

the legal obligation to retire the [Duke Energy Carolina’s] coal ash basins”—and that

“[r]ecognition of the liability carries with it recognition of a corresponding asset—the

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capitalized cost of settling the liability, which under both GAAP and FERC rules is

considered part of the property, plant and equipment for the assets that must be

retired.” In addition, the Commission concluded, in reliance upon this Court’s

decision in VEPCO, that the costs in question were properly included in rate base as

working capital. In view of the fact that the relevant costs were “intended to provide

utility service in the present or in the future through achieving their intended

purpose,” which was “environmental compliance,” “the retirement of the ash

impoundments,” and “the final storage location of the residuals from the generation

of electricity,” the Commission concluded that the costs associated with the coal ash

basins at issue in this case, including those that will close as a result of the CCR Rule

and CAMA (with the exception of the high priority sites), “will remain,” which means

that “they will remain used and useful, because they will still store coal ash, a

byproduct of electricity generation.”

The Commission disagreed with the Public Staff’s determination that $2.1

million in legal expenses associated with the defense of coal ash-related

environmental litigation and $1.5 million in groundwater extraction and treatment

costs associated with the Belews Creek facility should be disallowed based upon the

same reasoning that led the Commission to reach a similar conclusion in the Duke

Energy Progress case. The Commission rejected the Public Staff’s proposal that the

Commission disallow $98 million in compliance costs which the Public Staff

contended exceeded the cost of other reasonable alternatives on the grounds that the

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testimony of the Public Staff witnesses in support of these proposed disallowances

“missed or overlooked pertinent facts and real world conditions,” “lack[ed] . . .

credibility,” and failed to “effectively [ ] support their positions.”

The Commission determined that “[t]he vast majority of these costs would have

been incurred irrespective of management inefficiency in order to comply with [the

CCR Rule] requirements” and “would have been required irrespective of the harms

that constitute other alleged mismanagement.” The Commission noted that “[Duke

Energy Carolinas] undertook steps toward CCR remediation and incurred costs in

anticipation of impending closure” while hesitating “to spend substantial sums until

the requirements became clearer” and that, “[h]ad [Duke Energy Carolinas] acted in

compliance with assertions that it act more aggressively sooner, it would have cost

its consumers” more than the costs that resulted from the course of conduct in which

it actually engaged. For that reason, the Commission concluded that, “from a

ratemaking perspective,” “the question of when the remediation should have taken

place . . . is not determinative of whether the costs of the remediation should be

recovered through rates and to what extent.” In view of the fact that “establishing a

past cost in this case would be a near impossibility,” the Commission declined to

penalize Duke Energy Carolinas for its decision to wait until the adoption of the CCR

Rule before undertaking the coal ash basis closure process, particularly given that

“no attempt ha[d] been made by any party” to determine what the costs would have

been if remediation had been undertaken at an earlier time.

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Finally, in addressing Duke Energy Carolinas’ alleged violations of the 2L

Rules, the Commission determined that DEQ “does not agree that the existence of

exceedances without evidence that they are caused by coal ash contamination pose[s]

a risk to environment or human health so as to require immediate remediation.” For

that reason, the Commission concluded that Duke Energy Carolinas’ “failure to take

the costly actions” suggested by the intervenors “falls well short of mismanagement.”

On the other hand, the Commission determined that a mismanagement penalty in

the amount of $70 million was appropriate in this case for reasons similar to those

that underlay the imposition of a similar penalty in the Duke Energy Progress

proceeding.

Once again, Commissioners Brown-Bland and Clodfelter dissented, in part,

from the Commission’s decision. As an initial matter, Commissioner Clodfelter stated

that he would have disallowed “a substantial amount of [coal ash] costs” in

determining Duke Energy Carolinas’ cost of service for North Carolina retail

ratemaking purposes on the grounds that they had either been imprudently incurred

or had not, as the result of the utility’s negligence, been included in the cost of service

in prior general rate cases. Secondly, Commissioner Clodfelter would have refrained

from allowing Duke Energy Carolinas to earn a return on the unamortized balance

of the deferred coal ash costs on the grounds that the relevant statutory provisions

did not authorize the allowance of such a return and that “the record presented in

this case does not and cannot support allowance of a return as a matter of

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Commission discretion.” Finally, Commissioner Clodfelter opposed the proposed

increase in the residential Basic Facilities Charge on the grounds that there was “no

evidence in the record to support any such increase” and that the increase “unfairly

discriminates among different classes of customers.”

Similarly, Commissioner Brown-Bland expressed opposition to the approval of

the increased residential Basic Facilities Charge. Aside from her belief that the

record did not support the approved increase and that this increase was “unfairly and

discriminatorily upon only the residential class of customers,” Commissioner Brown-

Bland noted that the Commission had arbitrarily chosen “a random number between

the two ends offered” by the parties and that the approved residential Basic Facilities

Charge “just happen[ed] to be the same as the fixed residential [Basic Facilities

Charge] adopted in” the Duke Energy Progress order despite the fact that the two

utilities had different cost structures and the fact that Duke Energy Progress’ cost of

service exceeded that of Duke Energy Carolinas. Commissioner Brown-Bland echoed

Commissioner Clodfelter’s concerns regarding the Commission’s “fail[ure] to engage

in the exercise of determining waste coal ash removal costs directly (much less

indirectly) attributable to instances of imprudence on [Duke Energy Carolinas’] part,”

stating that the record “permit[ted] identification and disallowance of specific

discrete costs and/or cost increases caused by identifiable and known acts of

imprudence” and that the “better course of action” would have been for the

Commission to undertake the difficult task of determining which expenses were and

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were not prudently incurred instead of “avoid[ing] the exercise” altogether. According

to Commissioner Brown-Bland, the Commission’s approach resulted in an “arbitrary

monetary amount without rational basis” given that “a one-time management

penalty does not provide an adequate substitute for the exercise of the Commission’s”

statutory ratemaking authority.

3. Appellate Proceedings

The Attorney General and the Sierra Club noted an appeal to this Court from

the Commission’s orders in both cases, while the Justice Center, et. al., and the

Sustainable Energy Association (collectively, the environmental intervenors) noted

an appeal from the Commission’s order in the Duke Energy Carolinas proceeding.

The Public Staff noted a cross-appeal to this Court from both of the Commission’s

orders. At the request of all parties, the two cases were consolidated for purposes of

briefing and argument by order of this Court.

II. Substantive Legal Analysis

A. Standard of Review

In an appeal taken from an order entered by the Commission, “the rates fixed

or any . . . order made by the Commission under the provisions of [Chapter 62] shall

be prima facie just and reasonable.” N.C.G.S. § 62-94(e). A reviewing court is limited

to “decid[ing] all relevant questions of law, interpret[ing] constitutional and statutory

provisions, and determin[ing] the meaning and applicability of the terms of any

Commission action.” N.C.G.S. § 62-94(b). The reviewing court “may affirm or reverse

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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) [i]n violation of constitutional provisions,”

“(2) [i]n excess of statutory authority or jurisdiction of the Commission,” “(3) [m]ade

upon unlawful proceedings,” “(4) [a]ffected by other errors of law,” “(5) [u]nsupported

by competent, material and substantial evidence in view of the entire record as

submitted, or (6) [a]rbitrary or capricious,” id., with “due account [to] be taken of the

rule of prejudicial error.” N.C.G.S. § 62-94(c).

The Commission is responsible for determining the weight and credibility to

be afforded to the testimony of any witness, including any expert opinion testimony,

State ex rel. Utilities Commission v. Edmisten, 291 N.C. 575, 584, 232 S.E.2d 177, 182

(1977), with the Commission’s decision being entitled to great deference given that

its members possess an expertise in utility ratemaking that makes them uniquely

qualified to decide the issues that are presented for their consideration. See Motor

Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 48, 103 S. Ct. 2856,

2869, 771 L. Ed. 2d 443, 461 (1983) (stating that “[e]xpert discretion is the lifeblood

of the administrative process”). “Assuming adequate findings of fact, supported by

competent, substantial evidence,” “[t]he Commission’s determination, reached

pursuant to the mandate of [N.C.G.S. §] 62-133 and to the statutory procedural

requirements, may not be reversed” even if “we would have reached a different

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conclusion upon the evidence.” State ex rel. Utils. Comm’n v. Morgan, 277 N.C. 255,

266–67, 177 S.E.2d 405, 412–13 (1970). The Commission’s conclusions of law, on the

other hand, are reviewed de novo. State ex rel. Utils. Comm’n v. N.C. Waste

Awareness & Reduction Network, 255 N.C. App. 613, 615, 805 S.E.2d 712, 714 (2017),

aff’d per curiam, 371 N.C. 109, 812 S.E.2d 804 (2018).

B. Coal Ash Costs

The briefs submitted by the parties debate: (1) whether the coal ash costs at

issue in these proceedings are properly classified as property used and useful or as

operating expenses; (2) whether these costs were reasonably incurred; and (3)

whether the Commission’s decision to award a return on the unamortized balance of

the costs in both of these cases was lawful. We will address each of these issues turn.

1. Sufficiency of the Commission’s Factual Findings

The Public Staff, the Attorney General, the Sierra Club, and the utilities have

advanced a number of arguments for the purpose of challenging the lawfulness of the

Commission’s decisions regarding the amount of coal ash costs that should be

included in the cost of service used to establish the utilities’ North Carolina retail

rates. However, before we address the parties’ substantive arguments, we must

address the validity of the Public Staff’s contention that, in light of its failure to

properly classify the costs at issue in these cases, the Commission’s orders fail to

contain sufficient findings of fact to satisfy the requirements of N.C.G.S. § 62-79(a)

(providing that the Commission’s orders must “be sufficient in detail to enable the

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court on appeal to determine the controverted questions presented in the

proceedings” and “shall include” “[f]indings and conclusions and the reasons or bases

therefor upon all the material issues of fact, law, or discretion presented in the

record”).

In its brief, the Public Staff contends that the Commission made “inconsistent,”

“contradictory,” and “mutually exclusive” conclusions concerning whether the

utilities’ coal ash-related costs constituted property “used and useful” upon which a

return could be earned in accordance with N.C.G.S. § 62-133(b) or deferred operating

expenses upon which, in the Public Staff’s view, a return could be earned in the

Commission’s discretion pursuant to N.C.G.S. § 62-133(d). According to the Public

Staff, the Commission’s inconsistent reasoning “makes it impossible to know the true

basis for the decision to deny equitable sharing and allow a return on coal ash costs.”

In addition, the Public Staff contends that the Commission erroneously determined

in the Duke Energy Progress order that, even without a determination of the nature

of the relevant coal ash costs, a return could be earned upon them as a matter of law

or, in the alternative, in the exercise of the Commission’s discretion pursuant to

N.C.G.S. § 62-133(d) given that this decision did not constitute a proper “exercise of

discretion” and was nothing more than “a mechanism to circumvent judicial review.”

Moreover, the Public Staff argues that the Commission contradicted itself in the

clarification order that it entered in the Duke Energy Progress case, in which it stated

that its decision to allow a return upon the unamortized balance of the relevant coal

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ash costs rested upon an exercise of the Commission’s discretion pursuant to N.C.G.S.

§ 62-133(d), and had committed a similar error in the Duke Energy Carolinas order

by deciding to allow a return upon the unamortized balance of the deferred coal ash

costs on the grounds that, “to the extent” that the costs in question constituted capital

expenditures, they amounted to property that was “used and useful” for purposes of

N.C.G.S. § 62-133(b)(1) and that it had the authority to authorize the utility to earn

a return upon the remaining coal ash-related costs pursuant to N.C.G.S. § 62-133(d).

According to the Public Staff, treating the unamortized balance of the deferred coal

ash costs as both property used and useful and as reasonable operating expenses

constitutes “a direct violation of the ratemaking process,” quoting State ex rel.

Utilities Commission v. Public Staff, 333 N.C. 195, 202, 424 S.E.2d 133, 137 (1993)

(Carolina Trace). In response, the utilities argue that “this distinction is essentially

academic” and “is not material to the outcome of this appeal.”

The language in which the traditional ratemaking formula set forth in

N.C.G.S. § 62-133(b) is couched has led the parties to raise a number of issues

concerning how the coal ash costs at issue in these cases should be classified for

ratemaking purposes. The Commission resolved the classification issue in the Duke

Energy Progress case by deciding, in its discretion, that it had the authority to allow

the utility to earn a return upon the unamortized balance of the relevant coal ash

costs pursuant to either N.C.G.S. § 62-133(b)(1) or N.C.G.S. § 62-133(d) and by

deciding in the Duke Energy Carolinas case that, regardless of whether the relevant

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coal ash costs constituted property “used and useful or operating” expenses, it had

the authority to allow the company to earn a return upon the unamortized balance of

those costs pursuant to N.C.G.S. § 62-133(d). In view of the fact that “[t]he purpose

of the findings required by [N.C.G.S.] § 62-79(a) is to provide the reviewing court with

sufficient information to allow it to determine the controverted questions presented

in the proceedings,” State ex rel. Utilities Commission v. Conservation Council of

North Carolina, 312 N.C. 59, 62, 320 S.E.2d 679, 682 (1984), and the fact that we are

able discern the nature and extent of the Commission’s decision from its findings and

conclusion, we hold that the Commission’s findings in both orders are sufficiently

specific to satisfy the requirements of N.C.G.S. § 62-79(a).

2. Reasonableness of the Costs

The Attorney General11 argues that “utilities have the burden to show that

their costs were reasonably incurred,” citing N.C.G.S. §§ 62-75 and 134(c), and asserts

that, once another party has offered “affirmative evidence . . . that challenges the

reasonableness of [the utility’s] expenses,” quoting Conservation Council, 312 N.C. at

64, 320 S.E.2d at 683, “the utility must prove that its costs were reasonably incurred.”

As a precondition for the inclusion of any particular cost in the regulated cost of

service, the Attorney General contends that the utility must show that the costs in

11 The Sierra Club “adopts and incorporates by reference” the arguments advanced by

the Attorney General relevant to the reasonableness of the utilities’ coal ash-related costs, as will be discussed in more detail below.

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question are “known and measurable” and “reasonable and prudent,” citing N.C.G.S.

§ 62-133(b)(1) and Thornburg I.

In the Attorney General’s view, the Commission erred by concluding that the

intervenors had failed to adequately challenge the reasonableness of the costs at issue

in these cases. According to the Attorney General, the intervenors presented

affirmative evidence demonstrating that the utilities had, for decades, unreasonably

placed coal ash in unlined basins, resulting in “nearly 6000 test results that showed

violations of 2L [R]ules.” The Attorney General argues that such violations “could

have been prevented” given that the utilities “[have known] for years how to stop

[their] ash from contaminating groundwater: putting the ash in lined landfills, as

opposed to unlined ponds,” and that, by failing to act upon the basis of such “insights,”

the utilities had incurred costs which “could have [been] avoided,” such as the cost of

excavating coal ash that “could have already [been] put in lined landfills years

earlier” and transporting such coal ash to off-site landfills.

In addition, the Attorney General asserts that the record contains evidence

tending to show that the utilities had failed to manage their unlined coal ash basins

in a reasonable manner so as to “eventually result[ ] in the spill at [the] Dan River

plant” and the enactment of CAMA, which was introduced a mere three months after

the Dan River spill and “singles out” the coal ash basins associated with the utilities’

coal-fired generating facilities for accelerated closure. According to the Attorney

General, the enactment of “CAMA caused [the utilities] to incur costs that [they]

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would not otherwise have incurred, such as the cost of complying with CAMA’s basin-

closure deadlines.” The Attorney General asserts that the Commission agreed that

Duke Energy Carolinas’ mismanagement of the coal ash basins at its Dan River plant

contributed to the enactment of CAMA before stating that it was unable to “precisely

‘identify and quantify’ how many of [the utilities’] costs were unreasonable,” with this

“inconclusiveness mean[ing] that [the utilities] did not meet [their] burden to show

that [the] costs were reasonable,” citing State ex rel. Utilities Commission v. Duke

Power Co., 285 N.C. 377, 389, 206 S.E.2d 269, 277–78 (1974) (Duke Power Co. I).

The Attorney General further contends that, although the evidence elicited by

the intervenors was “more than enough to require [the utilities] to prove that [they]

incurred [their] coal ash costs reasonably,” the Commission erroneously required the

intervenors to “identify specific and discrete instances of imprudence”; “identify

prudent alternatives to the [utilities’] actions”; and “quantify the precise economic

effect of the [utilities’] imprudence” before determining that the intervenors had

failed to satisfy this standard. In spite of the fact that the standard upon which the

Commission relied “flowed from this Court’s decision” in Thornburg II, the Attorney

General asserts that the costs in question in that case had been developed by an

independent auditor assigned to scrutinize the challenged utility costs with the

agreement of the utility and the Public Staff and had not been used to determine

whether other intervenors had adduced sufficient evidence to require the utility to

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affirmatively establish the reasonableness of the costs that it sought to have included

in the regulated cost of service.

The Attorney General argues that the Commission committed various errors

in determining that the utilities had managed their coal ash basins in a reasonable

manner. The Attorney General cites Glendale Water, 317 N.C. at 40–41, 343 S.E.2d

at 907–08, for the proposition that “breaking environmental laws is unreasonable,”

arguing that the Commission had improperly failed to acknowledge that the utilities

had committed thousands of documented “violations of the 2L [R]ules” based upon an

erroneous determination that an exceedance of limitations specified in the 2L Rules

does “not [constitute] proof of illegality” and that the “2L [R]ules are violated only

when a polluter fails to clean up contaminated groundwater.” In the Attorney

General’s view, an exceedance for the purpose of the 2L Rules, which he describes as

“strict liability regulations,” citing Rudd v. Electrolux Corp., 982 F. Supp. 355, 365

(M.D.N.C. 1997), results in a violation of 15A N.C. Admin. Code 2L.0103(d) (stating

that“[n]o person shall conduct . . . any activity which causes the concentration of any

substance” in groundwater to exceed the limitations set out in the 2L Rules).

The Attorney General asserts that the Commission’s conclusion that it

“lack[ed] authority to assess independently whether a utility has acted unreasonably

by breaking the law” given that the utilities had neither admitted to violating nor

had been found in violation of the 2L Rules constituted an “erroneous[ ] abdicat[ion]

[of] its dut[ies]” pursuant to N.C.G.S. §§ 62-133(b)(3), (c), citing State ex rel. Utilities

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Commission v. N.C. Power, 338 N.C. 412, 419–22, 450 S.E.2d 896, 900–02 (1994);

Carolina Water, 335 N.C. at 503, 439 S.E.2d at 132; State ex rel. Utilities Commission

v. Edmisten, 291 N.C. 451, 464, 232 S.E.2d 184, 191–92 (1977). According to the

Attorney General, the only reason that the utilities were not found to have violated

the 2L Rules was the enactment of CAMA, which resulted from the utilities’

mismanagement of their coal ash basins and obviated the necessity for the

environmental regulators to determine whether violations had occurred as long as

the utilities complied with CAMA and the applicable implementing regulations.

In the Attorney General’s view, the mismanagement penalties imposed upon

the utilities were not adequate “substitute[s]” for a disallowance of challenged coal

ash costs given that the Commission’s authority to sanction a utility for

mismanagement “is distinct from the Commission’s duty under [N.C.G.S. §] 62-

133(b)(3) to protect consumers by disallowing costs that are not reasonable.” On the

contrary, the Attorney General argues that “a utility’s misconduct can serve as a basis

both for penalizing the utility and for separately reducing rates on other statutory

grounds,” citing State ex rel. Utilities Commission v. General Telephone Co., 285 N.C.

671, 684, 208 S.E.2d 681, 698 (1974).12

12 The Attorney General also argues that the Commission’s mismanagement penalties

against both utilities were “illusory” given that they “simply reduced a return that [the utilities] never should have received in the first place.”

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Similarly, the Public Staff argues that the Commission failed to adequately

consider certain environmental violations in determining the reasonableness and

prudence of the utilities’ costs for North Carolina retail ratemaking purposes. After

referencing the disallowances that it had proposed relating to groundwater extraction

and treatment costs at the Sutton and Belews Creek facilities, the Public Staff argues

that the Commission erred by failing to adequately consider the record evidence

concerning these and other environmental violations and by failing to make findings

and conclusions relating to that evidence in violation of N.C.G.S. § 62-79(a)(1). More

specifically, the Public Staff contends that the record contained ample evidence that

the utilities had committed environmental violations, with that evidence including:

(1) the testimony of certain Public Staff witnesses that the costs to remediate off-site

groundwater contamination at the Sutton and Belews Creek facilities would not have

been incurred “but for the environmental violations”; (2) the text of a settlement

agreement between DEQ and the utilities in which the latter agreed to remediate

“offsite groundwater impacts” at the Sutton facility “consistent with 15A [N.C.

Admin. Code §] 2L.106”; (3) groundwater monitoring data provided by Duke Energy

Progress; (4) testimony by Mr. Wells and Duke Energy Carolinas witness Julius A.

Wright that certain extraction and treatment costs were the direct result of

environmental violations; (5) a Notice of Violation issued to Duke Energy Progress by

DEQ asserting that the utility had committed environmental violations; (6) a DEQ

press release announcing that Duke Energy Progress was being held accountable for

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coal ash-related groundwater pollution by means of a settlement agreement; and (7)

the text of the Joint Factual Statement signed by Duke Energy Progress in the federal

criminal case “acknowledg[ing]” certain environmental impacts of the Sutton facility

on a nearby community. According to the Public Staff, the Commission failed to make

the required findings and conclusions concerning the extent to which environmental

violations had occurred on the grounds that such findings would be inappropriate “in

the absence of a guilty finding against the [utilities] or an admission of guilt by the

[utilities],” with the Commission’s decision to “simply defer[ ] to another state agency

on a matter that relates to an issue properly before the Commission,” citing Carolina

Trace and State ex rel. Utilities Commission v. Cooper, 366 N.C. 484, 489–91, 494–95,

739 S.E.2d 541, 545–48 (2013) (Cooper I), constituting a failure to comply with the

relevant ratemaking statutes.

The Public Staff contends that the Commission also erred by concluding that

CAMA would have required groundwater extraction and treatment at the Sutton and

Belews Creek facilities regardless of the extent to which environmental violations

had actually occurred at those locations. In the Public Staff’s view, exceedances of

the limitations set out in the 2L Rules become violations pursuant to 15A N.C. Admin.

Code § 02L.0106 only if their existence was the fault of the utility, with the utility

only being required to perform “corrective action” or “remediation” in the event that

the exceedance constitutes a violation. As a result, the Public Staff contends that, to

the extent that the utilities were required to extract and treat groundwater that was

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contaminated as the result of an exceedance, those costs would not have otherwise

been required pursuant to CAMA and should not be recouped in rates.

In response, the utilities argue that the correct legal standard for purposes of

determining the reasonableness and prudence of costs pursuant to N.C.G.S. § 62-

133(b) is the one that the Commission articulated in its 1988 order in Docket Nos. E-

2, Subs 333 and 537, and that this Court upheld in Thornburg II, which focuses upon

“whether management decisions were made in a reasonable manner and at an

appropriate time on the basis of what was reasonably known or reasonably should

have been known at the time.” In addition, the utilities assert that, “[e]ven if there

is evidence in the record” that rebuts the presumption that the coal ash costs at issue

in these cases had been reasonable and prudently incurred, they had elicited

“substantial” and “compelling” evidence demonstrating that: (1) they “had managed

[their respective] coal ash basins in the manner required by applicable regulations

and consistent with industry standards prior to the promulgation of the CCR Rule

and the enactment of CAMA”; (2) “the change in law wrought by the CCR Rule and

CAMA caused [them] to manage coal ash differently”; (3) “[they] prudently and at

reasonable cost conformed [their] practices to the new legal requirements”; and (4) no

intervenor had “specif[ied] how the Compan[ies] should have acted differently in

managing [their] coal ash, at which sites it should have taken those actions, and how

much those actions would have cost the [utilities].” In view of the fact that the

Commission found in their favor with respect to this issue, the utilities argue that

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the task of a reviewing court is “not to determine whether there is evidence to support

a position the Commission did not adopt” but, instead, to determine “whether there

is substantial evidence, in view of the entire record, to support the position that the

Commission did adopt,” quoting State ex rel. Utilities Commission v. Eddleman, 320

N.C. 344, 355, 358 S.E.2d 339, 347 (1987).

Similarly, the utilities argue that the Attorney General “did not and could not

allege that [they] had committed any act of imprudence related to the actual costs

being sought for recovery in the proceedings before the Commission given that Mr.

Wittliff, an expert witness testifying on behalf of the Attorney General, had stated

that the relevant costs had been reasonably and prudently incurred and had failed to

“identify any specific costs that could have been lower or should be disallowed.” The

utilities assert that the Attorney General’s contention that they should have installed

liners at their unlined coal ash basins before being required to do so “put [them] in

an impossible position” given that any such action “could have been called into

question” as “premature” prior to a complete understanding of the applicable

environmental requirements. In addition, the utilities contend that the Attorney

General’s claim that they had the burden of disproving the appropriateness of the

proposed cost disallowances constituted a “remarkable position” unsupported by any

legal authority. Finally, the utilities dispute the validity of the Attorney General’s

contention that, since imprudent action on the part of Duke Energy Carolinas “caused

the enactment of CAMA,” the cost of complying with CAMA should be excluded from

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the cost of service for ratemaking purposes on the grounds that “legislative intent can

only be determined from the legislation itself,” citing Electric Supply Co. of Durham

v. Swain Electrical Co., 328 N.C. 651, 657, 403 S.E.2d 291, 295 (1991), and Styres v.

Phillips, 277 N.C. 460, 472, 178 S.E.2d 583, 590 (1971), and that no such intent can

be discerned from an examination of the relevant statutory provisions.

According to the utilities, the Commission was free to reject the remaining

prudence challenges raised by the Public Staff as well. For instance, the utilities

contend that the Commission properly determined that a number of the Public Staff’s

disallowance recommendations were “infected by hindsight” and “unfeasible” and

that a settlement agreement with an environmental regulator was not tantamount

to an admission of liability. In the utilities’ view, the Commission addressed the

Public Staff’s evidence concerning alleged environmental violations without

“erroneously abdicat[ing] its duty to assess whether illegal conduct is unreasonable

and disallow costs related to illegal conduct.” In fact, the utilities assert that the

Commission “expressly rejected” the Public Staff’s proposed disallowances after

giving “careful[ ] consideration” to the relevant evidence.

In spite of the fact that North Carolina utilities have the burden of proving

that the costs upon which their rates are based are reasonable and prudent, the

reasonableness and prudence of those costs is “presumed” unless the Commission or

an intervenor adduces sufficient evidence to cast doubt upon their reasonableness or

prudence, at which point the burden to make an affirmative showing of the

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reasonableness of the costs in question shifts to the utility. State ex rel. Utils. Comm’n

v. Intervenor Residents of Bent Creek/Mt. Carmel Subdivisions, 305 N.C. 62, 76, 286

S.E.2d 770, 779 (1982) (Bent Creek). In order to satisfy this burden of production, an

intervenor must offer affirmative evidence tending to show that the expenses that the

utility seeks to recover “are exorbitant, unnecessary, wasteful, extravagant, or

incurred in abuse of discretion or in bad faith or that such expenses exceed either the

cost of the same or similar goods or services on the open market or the cost similar

utilities pay to their affiliated [utilities] for the same or similar goods or services.” Id.

at 76–77, 286 S.E.2d at 779. If a utility expense is “properly challenged,” “[t]he

Commission has the obligation to test the reasonableness of such expenses.” Id. at

76, 286 S.E.2d at 779. In addition, “[i]f there is an absence of data and information

from which either the propriety of incurring the expense or the reasonableness of the

cost can readily be determined, the Commission may require the utility to prove their

propriety and reasonableness by affirmative evidence.” Id. at 75, 286 S.E.2d at 778.

The essential thrust of the intervenors’ challenge to the validity of the

Commission’s determination with respect to the reasonableness of the utilities’ coal

ash costs varies from one party to the other. On the one hand, the Attorney General’s

“reasonableness” argument rests upon the existence of evidence tending to show that

the utilities should have begun to eliminate the use of unlined coal ash basins earlier

than they actually did. On the other hand, the Public Staff’s “reasonableness”

argument rests upon those portions of the record that depict specific instances of what

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the Public Staff contends to be environmental non-compliance. We do not find either

of these arguments persuasive given the state of the record and the findings and

conclusions contained in the Commission’s orders.

In addressing the Attorney General’s contention that the utilities

unreasonably polluted groundwater in violation of the 2L Rules by placing coal ash

in unlined basins, the Commission found the testimony of Mr. Wells to be instructive

in the Duke Energy Progress order. Mr. Wells testified that the utilities’ “ash basins

were built between 1956 and 1985” and that, “[a]t that time, unlined basins were the

primary technology for treating ash transport water throughout the country.” In

addition, Mr. Wells noted that “[i]nitially, ash basins were not regulated under

federal or state solid waste laws”; that “[u]tility surface impoundments eventually

became regulated as wastewater treatment units under the Clean Water Act after it

was significantly reorganized and expanded in 1972”; and that DEQ’s predecessor

promulgated the 2L Rules in 1984. According to Mr. Wells, “there was no obligation

in the 2L [R]ules to monitor groundwater quality,” with those rules only imposing an

obligation “to take corrective action once exceedances had been identified.” As a

result, according to Mr. Wells, Duke Energy Progress “was under no universal

obligation to monitor for groundwater impacts” associated with coal ash basins

pursuant to the 2L Rules. Mr. Wells testified that, in the mid-2000s, Duke Energy

Progress “began more comprehensively sampling groundwater resulting in the

identification of more exceedances” while DEQ “began systematically adding

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groundwater to NPDES permits as they were reissued or modified” starting around

2008. Based upon this and similar evidence, the Commission rejected the

intervenors’ assertions that the utilities should have begun the coal ash remediation

process prior to the adoption of the CCR Rule and the enactment of CAMA, a decision

that was well within the scope of its statutory authority in light of the record evidence.

Similarly, in rejecting the Attorney General’s argument that Duke Energy

Progress had failed to satisfy evolving industry standards and should have done more

than merely comply with the environmental regulations as they existed at the time,

the Commission noted that Mr. Wittliff, who presented testimony on behalf of the

Attorney General, had testified that “industry standard is compliance.” Although Mr.

Wittliff admitted that “there were a number of [utilities] that were doing exactly what

[Duke Energy Progress] did,” he also stated that “it was clear in the ‘80s that the

trend was towards lined ponds” and that, by 1988, forty percent of coal ash basins

had been lined even though that approach was not “a cheap solution” and could “be

fairly pricy.” Upon being pressed to identify “any other ways that [Duke Energy

Progress] did not comply with industry standards,” Mr. Wittliff reiterated his

emphasis upon the necessity for compliance with the requirements of its NPDES

permits and then stated that “that’s where I would leave it.” As a result, we hold that

the Commission’s determination that the Attorney General had failed to adduce

sufficient evidence to rebut the presumption that Duke Energy Progress’ coal ash

costs were reasonably and prudently incurred on the grounds that it should have

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begun using lined coal ash basins earlier than it did had adequate evidentiary

support.13

The Commission relied heavily on the testimony of Mr. Kerin in addressing a

similar issue in the Duke Energy Carolinas proceeding. Mr. Kerin testified that,

“[u]ntil recently, coal has been the historic ‘go-to’ fuel choice for base-load, least-cost

reliable service,” with the industry standard being the use of unlined basins for the

purpose of storing coal ash. Mr. Kerin stated that, “from 1974 to 2015, ash basins

were a lawful and effective way of meeting the wastewater treatment requirements

under the [Clean Water Act]” and “[had] been effective at treating wastewater to meet

NPDES permit limits.” For that reason, Mr. Kerin asserted that, “[i]n the absence of

any regulatory directive to do so, [Duke Energy Carolinas] reasonably did not pursue

and should not have pursued regulatory closure or retrofitting for any site that was

still generating ash and that maintained its NPDES permit.” At the time that the

CCR Rule was promulgated and CAMA was enacted, Duke Energy Carolinas began

preparing to comply with the new requirements.

13 The fact that the record contains evidence that it would have been advisable for a

utility to have taken specific action relating to a particular generating facility at an earlier time than that action was actually taken does not require us to make a different decision with respect to the “reasonableness” issue. Aside from the fact that evidence relating to a specific generating facility has no logical relation to the reasonableness of costs incurred at other facilities and would not, for that reason, support a finding that the utility’s coal ash costs, considered in their entirety, were unreasonable, the ultimate question raised by such evidence is simply whether the utility should have made a different policy-based decision than the one that it actually made. As has been discussed in the text of this opinion, the Commission adequately addressed this policy-related “reasonableness” issue in its order in these cases.

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In rebutting Mr. Wittliff’s contention that the number of lined basins had been

increasing by 1988 and 1999, Mr. Kerin testified that Duke Energy Carolinas last

constructed a new coal ash basin in 1982. In addition, Mr. Kerin stated that, “while

[Mr. Wittliff had] cite[d] an increase in the percentage of basins that were lined from

17 to 28 percent between 1975 and 1995, that [figure] still represents a minority of

the new basins being constructed that were lined.” In response to Mr. Wittliff’s

suggestion that Duke Energy Carolinas should have built new lined impoundments

to store its coal ash, Mr. Kerin stated that this suggestion “ignores the fact that the

construction of new lined impoundments would have entailed significant expense to

[Duke Energy Carolinas], while not removing the need to maintain the existing

unlined impoundments.” In Mr. Kerin’s opinion, acting on the basis of Mr. Wittliff’s

suggestion “before [such measures] [were] consistent with industry standards”

“would have put [Duke Energy Carolinas] at risk of disallowance of those costs.” Mr.

Kerin also pointed to Mr. Wittliff’s testimony in the Duke Energy Progress case in

which he responded in the negative when asked if Duke Energy Progress had acted

imprudently when it began sluicing coal ash to unlined impoundments in view of the

fact that “[t]he law allowed them to do it, and the law continued to allow them to do

it, even though there was . . . concern.” As a result, the record contains ample

evidentiary support for the Commission’s determination in the Duke Energy

Carolinas proceeding that the intervenors had failed to elicit sufficient evidence to

satisfy the burden of production imposed upon them in Bent Creek.

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In spite of the fact that, as the Commission put it, the utilities’ actions

constituted “at least a contributing factor” to enactment of CAMA, we are unable to

hold that, as a matter of law, utility mismanagement constituted the “primary cause

of CAMA” or that “CAMA would not have been passed or that its requirements other

than accelerated deadlines would have been less onerous but for [the utilities’]

mismanagement.” As this Court has stated on many occasions, “the cardinal

principle of statutory construction is that the words of the statute must be given the

meaning which will carry out the intent of the Legislature” and that the legislative

“intent must be found from the language of the act, its legislative history and the

circumstances surrounding its adoption which throw light upon the evil sought to be

remedied.” Milk Commission v. Food Stores, 270 N.C. 323, 332–33, 154 S.E.2d 548,

555 (1967). CAMA simply does not contain any language from which we can

determine that the General Assembly’s decision to enact its provisions stemmed from

mismanagement on the part of either utility. Had the General Assembly wished to

make such a statement, it certainly could have done so. As a result, we are unable to

accept the Attorney’s General invitation to require the disallowance of all of the coal

ash-related costs at issue in these proceedings on the grounds that they necessarily

resulted from utility imprudence.

We reach a similar conclusion with respect to the more nuanced

“reasonableness” argument advanced in the Public Staff’s brief. As the record

reflects, Public Staff witness Jay Lucas testified in the Duke Energy Progress case,

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even though “some environmental violations are clearly due to [Duke Energy

Progress’] negligence or mismanagement, there are other actual and potential

environmental violations that are not easily characterized as either plainly

imprudent or plainly reasonable on [Duke Energy Progress’] part.” In Mr. Lucas’

view, any attempt to calculate the incurred costs associated with environmental

violations “could be extremely complex and somewhat speculative” given that doing

so would involve “a lot of estimations and assumptions over a long period of time,

leaving doubts about accuracy.” For this reason, the Public Staff concluded that,

despite the fact that “there is some degree of [Duke Energy Progress] culpability for

costs” “due to non-compliance with environmental violations,” for “most” of the costs

at issue in that case, such culpability “may fall short of imprudence.” In light of this

set of circumstances, the Public Staff advanced its equitable sharing proposal rather

than attempting to contest the reasonableness and prudence of most of the coal ash-

related costs that are at issue in these cases.

The “reasonableness” test enunciated by this Court in Bent Creek focuses upon

whether the challenged utility costs were “exorbitant, unnecessary, wasteful,

extravagant, or incurred in abuse of discretion or in bad faith or that such expenses

exceed either the cost of the same or similar goods or services on the open market or

the cost similar utilities pay to their affiliated [utilities] for the same or similar goods

or services.” Bent Creek, 305 N.C. at 76–77, 286 S.E.2d at 779. As a result, the

required legal analysis is clearly focused upon the extent to which specific costs that

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the utility seeks to utilize in establishing its North Carolina retail rates are excessive

rather than upon general policy questions of the sort that underlie the Attorney

General’s broad-based “reasonableness” argument. We have no hesitation in

recognizing that it would be difficult, if not impossible, to quantify, in even the most

general sense, the costs which the utilities would have incurred had they handled the

coal ash stored at their facilities in a manner that differed from what they actually

did or if specific alleged environmental violations had not occurred. As the testimony

of Mr. Lucas suggests, the Public Staff placed principal reliance upon its “equitable

sharing” proposal for this very reason. However, with the exception of the Public

Staff’s suggested disallowances relating to costs incurred at the Sutton and Belews

Creek facilities, we are compelled to agree with the Commission that the intervenors

failed to identify and quantify the specific costs that should have been disallowed as

unreasonable and imprudently incurred in these cases. In the absence of such

evidence, we cannot say that the Commission erred by holding that the intervenors

had failed to make a sufficient showing to require the utilities to demonstrate the

reasonableness and prudence of their coal ash-related costs in detail.

3. Return on the Unamortized Balance

The Public Staff argues that, in order for costs to be includable in rate base

and eligible to earn a return, those costs must be for “used and useful” property, which

“primarily means ‘utility plant’ that consists of long-lived physical assets used to

provide utility service” and is “largely funded by capital investment,” including “brick

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and mortar buildings, generators and turbines, poles, meters, and conductors such as

transmission, distribution, and service wires that carry electricity from generators to

customers.” Similarly, the Attorney General argues that the concept of “property”

involves “the rights in a valued resource such as land, chattel, or an intangible,” and

includes “[a]ny external thing over which the rights of possession, use, and enjoyment

are exercised,” quoting Property, BLACK’S LAW DICTIONARY 1410 (10th ed. 2014).

Although the Public Staff points out that working capital “has been judicially

accepted as an intangible form of ‘property’ ” that may be appropriately included in

rate base, citing VEPCO, 285 N.C. at 414–15, 206 S.E.2d at 295–96, the Attorney

General contends that working capital may only be included in rate base where it

“qualifies as used and useful,” so that all working capital does not necessarily qualify

for inclusion in rate base, citing Morgan, 277 N.C. at 273, 117 S.E.2d at 417;

Thornburg II, 325 N.C. at 486, 385 S.E.2d at 464; Carolina Water, 335 N.C. at 507,

439 S.E.2d at 135, given that “this Court has never recognized any exceptions to the

‘used and useful’ requirement” and that “there is no working-capital exception” or any

exception “for funds supplied by investors” to the definition of “rate base” embodied

in N.C.G.S. § 62-133(b)(1).

According to the Public Staff, property is “used and useful” if it is “in service

for the production or delivery of utility service,” citing Carolina Water, and is not

“excess or overbuilt for the needs of current customers” so as to be “greater than

necessary to provide service even if it is being used,” citing Carolina Trace. In the

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same vein, the Attorney General contends that property is not used and useful if it is

not used to provide current service or has been abandoned, citing Carolina Trace and

Carolina Water. On the other hand, the Public Staff contends that costs that are

properly categorized as operating expenses, rather than as property “used and

useful,” include “payments for goods or services that are consumed at or close to the

time payment is made,” “the depreciation of used and useful property at a rate

corresponding to its useful life,” and “income tax expense.” Among other things, the

Public Staff points out that operating expenses include “wages, salaries, fuel,

maintenance, advertising, research and charitable contributions” and “annual

charges for depreciation and operating taxes,” quoting Charles F. Phillips, Jr., The

Regulation of Public Utilities 177 (1993). On the basis of similar logic, the Attorney

General asserts that costs such as dewatering coal ash basins, treating contaminated

water from coal ash basins, excavating coal ash, and putting excavated coal ash in

landfills constitute operating expenses rather than the cost of property “used and

useful.” Although both of them agree that the utilities are entitled to earn a return

on the reasonable original cost of “used and useful” property, the Public Staff and the

Attorney General differ with respect to the issue of whether the Commission

possesses the authority to award a return on deferred operating expenses.

In arguing that the Commission has the statutory authority to allow a utility

to earn a return on the unamortized balance of costs that would ordinarily be

categorized as operating expenses, the Public Staff suggests that N.C.G.S. § 62-133(d)

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allows the Commission, in the exercise of its discretion, to allow utilities to earn a

return upon such costs, citing Thornburg I and State ex rel. Utilities Commission v.

Carolina Utility Customers Ass’n, 348 N.C. 452, 458–59, 500 S.E.2d 693, 698–99

(1998) (CUCA). In the Public Staff’s view, this Court’s decisions in Thornburg II,

Carolina Trace, and Carolina Water do not deprive the Commission of the right to

allow a utility to earn a return upon the unamortized balance of deferred operating

expenses given that “the extent of [N.C.G.S. §] 62-133(d) discretion does not appear

to have been an issue directly before the Court in those cases.” As a result, the Public

Staff contends that the discretion granted by N.C.G.S. § 62-133(d) provides a separate

basis for allowing a utility to earn a return on the unamortized balance of deferred

operating expenses as long as the Commission considers all relevant facts and

circumstances, including whether certain costs should be disallowed and as long as

the Commission’s order complies with the findings requirement enunciated in

N.C.G.S. § 62-79(a) and reflects “a logical sequence of evidence supporting findings

that in turn support conclusions.”

The Attorney General, on the other hand, argues that “North Carolina law

makes clear that the Commission has no discretion to give [a return on costs which

are] not used and useful for providing service to customers now or within a reasonable

time,” citing Carolina Trace, Carolina Water, and Thornburg II. After acknowledging

that N.C.G.S. § 62-133(d) “gives the Commission discretion on certain other issues,”

the Attorney General argues this “discretion . . . does not extend to the makeup of a

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utility’s rate base,” “is not a grant to roam at large in an unfenced field,” quoting State

ex rel. Utilities Commission v. Public Service Co., 257 N.C. 233, 237, 125 S.E.2d 457,

460 (1962), and “is not nearly as broad as the discretion the Commission purported

to exercise” in these cases.

According to both the Public Staff and the Attorney General, the Commission

failed to determine which coal ash-related costs were properly characterized as

property used and useful and which should be treated as deferred operating

expenses.14 In the Public Staff’s view, “[t]he record evidence shows that coal ash costs

at issue in this case are largely in the nature of operating expenses” given that they

consist of costs “associated with operating, maintaining, and upgrading

environmental equipment,” with the Commission, in the words of Commissioner

Clodfelter’s dissent, having “lump[ed] all tasks, all waste units, all time periods, and

all plants together and allow[ed] a return on the expenditures without further

qualification.” Although the Commission provided an example of a cost that was

properly considered capital in nature, consisting of the cost of the landfill constructed

by Duke Energy Progress at the Sutton facility, the Public Staff contends that this

“isolated example . . . does not support a universal conclusion that all [coal ash-

related] costs are capital costs” and argues that costs associated with inspections,

14 The Public Staff notes that, in the Duke Energy Progress order, the Commission

concluded that all closure costs were property “used and useful,” while it concluded in the Duke Energy Carolinas order that some closure costs related to property “used and useful” without specifying which costs fell into which category.

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maintenance, well sampling, coal ash processing, “[d]ewatering, excavation,

transport, and offsite disposal at another company’s facility are on their face

operational activities” rather than “investments in plant or facilities used or useful

to provide electric service to present and future customers.”15

Similarly, the Attorney General argues that the costs associated with the

closure of the unlined coal ash basins “mainly involve preparing closure plans for

coal-ash impoundments, treating contaminated groundwater, excavating coal ash,

transporting it to landfills, and disposing of it.” According to the Attorney General,

the Commission and the utilities both recognized that “a significant portion” of their

coal ash costs consisted of operating expenses. After failing to “explain its reasons

for concluding that [the utility’s] coal-ash costs are used and useful” in the Duke

Energy Progress order, the Attorney General contends that the Commission erred by

determining in the Duke Energy Carolinas order that the relevant costs were “used

and useful” given that those costs were associated with “property [which] might have

been used and useful for past service” rather than property that was “used and useful”

in providing current service. According to the Attorney General, nine of the utilities’

sixteen coal-fired electric generating facilities had been retired by the time that the

applications in these cases were filed, with “more than half” of the costs that the

15 The Public Staff also notes that, in the Duke Energy Progress proceeding, the utility

failed to “itemize the costs in any detail” and that “this lack of detail alone means there is not substantial evidence in the record for the Commission to decide that all the coal ash costs are ‘property used and useful.’ ”

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utilities sought to include in cost of service in these cases being related to retired

generating facilities. Moreover, the Attorney General contends that many of the costs

relating to facilities that continue to operate are used to store coal ash which was

created “years or decades ago” or to coal ash ponds that “have been closed for years.”

The Attorney General argues that the Commission’s orders reflect a

“confus[ion]” about the nature of the applicable legal standard and a failure to

distinguish between the legal principles applicable to the inclusion of operating

expenses, which must merely be reasonable, and costs associated with “used and

useful” property, which must satisfy a higher legal standard, in the cost of service

used to establish the utilities’ rates, citing Thornburg II, 325 N.C. at 493, 385 S.E.2d

at 468. In other words, the Attorney General argues that, even “reasonable” costs

may not be included in rate base if they were not expended to procure property “used

and useful” in providing current service. Id.

The Attorney General16 and the Public Staff17 both take issue with the

Commission’s determination that some or all of the relevant coal ash-related costs

constituted working capital. According to the Public Staff, Duke Energy Progress

16 According to the Attorney General, it is “[un]clear whether the Commission actually

concluded that [the utilities’] coal-ash costs were working capital.” 17 The Public Staff disputed the validity of the Commission’s determination that no

party challenged the inclusion of coal ash costs in “working capital” given that its equitable sharing proposal, “which depends on no return for unamortized coal ash costs,” is “legally incompatible” with treating the relevant costs as working capital and that Public Staff witness Michael A. Maness testified in the Duke Energy Carolinas proceeding that labeling the relevant costs in that manner did not convert them into working capital.

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witness Laura Bateman sponsored an exhibit that labeled certain costs as working

capital in reliance upon the testimony of Dr. Wright, who had previously stated that

the relevant costs constituted “used and useful” “utility plant.” The Public Staff

contends that the testimony of Dr. Wright and Ms. Bateman are contradictory given

that “utility plant” and “working capital” are two separate and distinct categories of

“used and useful” property. In addition, the Public Staff contends that the

Commission “shifted to a different legal conclusion” with respect to this issue in the

Duke Energy Carolinas order by determining that the relevant coal ash costs were

“just like ‘classic’ working capital” given that these funds “were furnished by [Duke

Energy Carolinas] and its investors.” According to the Public Staff, “classic working

capital is entitled to a return” pursuant to N.C.G.S. § 62-133(b)(1) while “expenses

that are ‘like’ working capital only in the sense that they may be paid from investor-

supplied funds” could only be eligible to earn a return in the exercise of the

Commission’s discretion pursuant to N.C.G.S. § 62-133(d). The Public Staff asserts

that “the nature of past coal ash expenditures is incompatible with the definition of

‘working capital’ ” in light of the fact that the monies in question do not represent

“funds needed to finance ongoing utility service” or “relate to the carrying cost for

funding of future utility operations.”

The Attorney General contends that the fact that the coal ash costs at issue in

these cases “have nothing to do with ‘the Compan[ies’] forward-looking obligation to

provide utility service’ ” compels the conclusion that “the Commission’s analysis of

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working capital here negates the statutory command that only used and useful assets

may be included in a utility’s rate base,” citing N.C.G.S. § 62-133(b)(1). Furthermore,

the Attorney General notes that any determination that some or all of the relevant

costs constitute working capital lacks sufficient evidentiary support given that “no

witness for [either utility] actually testified that its coal-ash expenditures were

funded by working capital”; that the Commission had relied upon Duke Energy

Progress’ placement of the relevant costs “in a working-capital section in [its] books”;

and that one of Duke Energy Carolinas’ own witnesses “testified directly that the

company does not believe that booking coal-ash costs in a working-capital account, by

itself, is enough to turn those costs into part of [Duke Energy Carolinas’] rate base.”

According to the Attorney General, the utilities “offered no evidence that [they]

needed to draw on working capital to fund [their] post-2014 coal-ash costs.”

The Public Staff and the Attorney General each contend that the Commission

erred by concluding that the accounting method utilized by the utilities in recording

their coal ash costs automatically “converted” those costs into amounts eligible for

inclusion in rate base. In the Public Staff’s view, “many of the expenditures made by

[the utilities] for coal ash compliance are fundamentally operating expenses” that are

not “transformed into property used and useful that must be allowed to earn a return

just because FERC and GAAP guidance” provides for capitalizing the costs in

question in an Asset Retirement Obligation. On the contrary, the Public Staff argues

that “the statutory classification of ‘property used and useful’ is independent of GAAP

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and FERC accounting guidance,” citing to a section of Commissioner Clodfelter’s

dissent in the Duke Energy Carolinas order in which Commissioner Clodfelter

expressed the opinion that the Commission had “conflated concepts of financial

statement presentation with the classification of costs for ratemaking purposes,” that

the language from ASC 410-20 upon which the Commission and the utilities had

relied was “irrelevant,” and that nothing in the FERC Uniform System of Accounts

“compel[s] inclusion of the capitalized amount of the [A]sset [R]etirement [O]bligation

in rate base; quite the contrary.”

The Public Staff contends that the fact that the costs at issue in these cases

had been deferred for accounting purposes did not convert the resulting asset that

was shown on the utilities’ books into property “used and useful” for ratemaking

purposes and that the Commission’s decision to the contrary conflicts with our

decision in Thornburg I.18 Instead, the Public Staff contends that “it is proper

ratemaking to treat deferred costs as a form of operating expense,” which could be

amortized in the future rather than “as rate base,” citing Thornburg I and the

Commission’s decision in Docket No. G-5, Sub 327. The Public Staff argues that

“many” of the costs at issue in this case “are costs of operating the sites in compliance

18 The Public Staff acknowledges that it never disputed the utilities’ contention that

Asset Retirement Obligation accounting was mandatory for its coal ash costs; instead, it simply took issue with their decision to “opt for special ratemaking treatment (deferral) after the [Asset Retirement Obligation] was created,” which the Public Staff described as a “depart[ure] from the method that has been approved by the FASB and FERC.”

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with environmental regulations” that “do[ ] not become ‘property used and useful’

simply because [the costs] ha[ve] been incurred for environmental compliance.”

Finally, the Public Staff argues that a capitalized expense remains an

operating expense for ratemaking purposes, with the fact that the capitalization

process changes the timing with which the costs in question are included in cost of

service for ratemaking purposes being irrelevant to the question of whether those

costs constitute “used and useful” property. According to the Public Staff, “nothing

in the law . . . requires a return on such costs to protect investors from being deprived

of the time value of money” despite the Commission’s numerous contrary conclusions.

For that reason, the Public Staff suggests that the Commission must determine if

there are “other material facts of record” that call for the denial of a return in order

to achieve just and reasonable rates, with the utilities’ environmental violations being

the sort of facts that the Commission should have considered in determining the level

of coal ash costs that should have been included in the utilities’ North Carolina retail

rates.

In the Attorney General’s view, ASC 410-20 merely “requires publicly traded

companies to record an [Asset Retirement Obligation] whenever they have a legal

obligation to incur costs to retire a long-lived asset and that obligation can be

quantified,” such as the coal ash costs at issue in these cases. The Attorney General

contends that “the existence of an [Asset Retirement Obligation] does not require a

finding that [the utilities’] coal-ash removal costs are ‘property used and useful . . . in

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providing the service to be rendered to the public’ ” and that, even if it did, such a

result would be “in conflict with the statutory language and structure of [N.C.G.S.

§] 62-133.”

According to the utilities, the Public Staff has provided an overly narrow

definition of “property,” with a more accurate definition sweeping in “all assets

necessary to provide electricity to the public” and including “cash that should be kept

on hand to pay the utility’s bills as they become due.” In the utilities’ view, the extent

to which property is “used and useful” “does not turn on whether the property

generates electricity”; instead, the critical factor is “whether it serves the public and

was paid by debt or equity investors” rather than “through rates that were set in

anticipation of normal operating expenses.”

Even though operating expenses are typically recovered through established

rates and are not statutorily entitled to a return, the utilities contend that the

Commission may, in its discretion, allow a return when “extraordinary expenses arise

that justify deferral accounting” in the next general rate case when those costs were

initially covered by shareholder funds, citing VEPCO. According to the utilities, “[a]

substantial difference exists between operating expenses that are built into rates and

are paid by customers,” which cannot receive a return given that “the utility does not

need to attract investor capital to fund those expenses,” as compared to

“extraordinary costs that must be advanced by debt and equity investors” and upon

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which a return could be authorized in the Commission’s discretion in order to avoid

a “competitive disadvantage in raising investment funds in the future.”

The utilities argue that “the modification of the coal ash basin system” at issue

in these cases “was paid for with shareholders’ funds” and that these funds

constituted working capital that was “necessary and appropriate for providing

electricity to customers” and was, for that reason, properly deemed “used and useful”

pursuant to VEPCO. According to the utilities, the cases upon which the Attorney

General relies relate to abandoned power plants while the present proceedings have

nothing to do with “excessive facilities tied to nuclear units that were never completed

and never used to generate[ ] electricity (e.g., Thornburg)” and “do[ ] not involve

abandoned utility plants and equipment that no longer result in costs to the utility

(e.g., Carolina Trace and Carolina Water).” On the contrary, the utilities argue that

these cases involve capital funds advanced by investors that “have a direct

relationship to power generation—the [utilities’] system[s] to address coal ash residue

resulting from electricity generation.”

As a separate matter, the utilities contend that “the vast majority” of the costs

at issue in these proceedings “stand as long-term assets” and “improvements to real

property,” including new or modified coal ash basins that are “directly related to . . .

power generation” and that “benefit the utility’s customers.” According to the

utilities, 18 C.F.R. § 101, Electric Plant Instruction No. 3, provides that many

construction costs constitute “capital costs because they are associated with the

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system being built,” including “contract work, labor, materials and supplies,

transportation of employees and equipment, general administration attributable to

the construction, engineering services, insurance, legal costs and environmental

studies.” The utilities contend that “much of [the] construction costs for the coal ash

basins” are contained within these categories, such as those relating to

“environmental, health and safety studies associated with the construction,

infrastructure costs, landfill construction, engineering closure plans, modification to

power plants to accommodate basin modifications, mobilization costs and installation

of water treatment systems.”

The utilities argue that their accounting practices ensure that the costs at

issue were “eligible for deferral and amortization and for earning on the unamortized

balance” and that, “even if the remediation costs are [Asset Retirement Obligation]

expenditures, they are eligible for ratemaking treatment as though they are used and

useful assets.” According to the utilities, the accounting and reporting requirements

prescribed by the FERC and the Securities and Exchange Commission require

utilities to record Asset Retirement Obligations “when a change in the law creates a

legal obligation to perform the retirement activities,” quoting 68 Fed. Reg. 19610,

19611 (April 21, 2003). In the event that a utility records an Asset Retirement

Obligation, that amount is treated as “electric utility plant” and is shown as both an

asset and a liability on the utility’s balance sheet, citing 68 Fed. Reg. at 19611. The

utilities contend that these principles allow them to “capitalize the asset retirement

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costs” given that those costs constitute an “integral part of the costs of the particular

asset that gives rise to the asset retirement obligations, rather than separate and

distinct assets,” quoting 68 Fed. Reg. at 19615. In view of the fact that the new

regulations governing the disposal of coal ash required them to close their existing

coal ash basins, the utilities claim that they were “required to follow the accounting

requirements relating to [Asset Retirement Obligations].” As a result, given that “the

expenditures at issue are no different from the costs to build the utility plant and . . .

stand as the ‘public utility’s property used and useful,’ ” quoting N.C.G.S. § 62-

133(b)(1), and the fact that the relevant costs constituted capitalized amounts funded

by the shareholders, the utilities contend that the Commission properly allowed them

to earn a return upon the unamortized balance of the deferred coal ash-related costs.

The “ultimate question for determination” in any utility case is what “a

reasonable rate to be charged by the particular utility company for the service it

proposes to render in the immediate future” would be in light of the statutory

procedures prescribed for the Commission in N.C.G.S. § 62-133. Morgan, 277 N.C. at

267, 177 S.E.2d at 413. As a general proposition, the procedures delineated in

N.C.G.S. § 62-133(b), in which a test period is established, the utility’s investment in

utility plant and working capital as of the end of the test period is determined, the

utility’s reasonable operating expenses during the test period are ascertained, and a

reasonable return upon the utility’s rate base is identified, provide a workable

framework that can be used to establish just and reasonable rates. The

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circumstances revealed by the record in these cases are, however, anything but

ordinary, with the coal ash-related costs that the utilities incurred between 1 January

2015 and 31 December 2017 not being readily susceptible to traditional ratemaking

analysis for a number of reasons.19 As a result, these cases compel us to definitively

determine the scope of the authority granted to the Commission pursuant to N.C.G.S.

§ 62-133(d), which the Commission used as the ultimate justification for its decision

to allow the utilities to earn a return upon the unamortized portion of the deferred

coal ash costs at issue in these cases.

This Court has, of course, discussed the manner in which N.C.G.S. § 62-133(d)

should be interpreted and applied in several prior cases, a number of which are

discussed in detail in the parties’ briefs. After carefully reviewing the relevant

decisions of this Court, we have been unable to find anything that precludes the

Commission from deferring certain extraordinary costs, amortizing them to rates,

and allowing the utility, in the exercise of the Commission’s discretion, to earn a

19 Although we need not examine this issue in any detail, we note that the costs at

issue in these cases do not appear to relate to a single test period as defined in N.C.G.S. § 62- 133(c) and seem to consist of a combination of both costs associated with the decommissioning and construction of new utility facilities includable in rate base pursuant to N.C.G.S. § 62- 133(b)(1) and costs that relate to the operation of those facilities that would ordinarily be treated as operating expenses pursuant to N.C.G.S. § 62-133(b)(3). While the Commission appears to have accepted the argument that these costs could be treated as working capital, the costs at issue in these cases, unlike the items traditionally treated as working capital, do not relate to a single test period. As a result, for all of these reasons, we have no hesitation in concluding that the costs in question do not readily fit within the confines of the traditional ratemaking principles enunciated in N.C.G.S. § 62-133.

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return upon the unamortized balance in reliance upon N.C.G.S. § 62-133(d) in

circumstances like those revealed by the present record.

Although the Attorney General contends that the approach adopted by the

Commission in these cases is precluded by our prior decisions in Thornburg II,

Carolina Trace, and Carolina Water, we agree with the Public Staff that the extent

to which the Commission had the discretion to act as it did in these cases was not

before the Court in any of those decisions. In Thornburg II, for example, we held that

certain deferred nuclear plant cancellation costs had to be removed from rate base

and treated in the same way that other abandoned plant costs had been treated, a

process that involved the amortization of the related costs without a return on the

unamortized balance. 325 N.C. at 497–98, 385 S.E.2d at 470–71. Thornburg II did

not, however, make any reference to the application and interpretation of N.C.G.S. §

62-133(d).

Similarly, in Carolina Trace, we held that “[t]here is no statutory authority

anywhere within Chapter 62 that permits the Commission to include in rate base any

completed plant (as opposed to construction work in progress) that is not ‘used and

useful’ within the meaning of this term as determined by our case law” (emphasis

added). 333 N.C. at 203, 424 S.E.2d at 137. However, the dispute between the parties

in Carolina Trace revolved around the application and interpretation of N.C.G.S.

§ 62-133(b)(1) rather than N.C.G.S. § 62-133(d).

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Finally, in Carolina Water, we stated that, “[i]f facilities are not used and

useful, they cannot be included in rate base,” 335 N.C. at 508, 439 S.E.2d at 135, and

that “[c]osts for abandoned property may be recovered as operating expenses through

amortization” even though “a return on the investment may not be recovered by

including the unamortized portion of the property in rate base.” (emphasis added).

Id. Once again, however, our decision in Carolina Water Service made no mention of

the Commission’s authority pursuant to N.C.G.G. § 62-133(d). As a result, given that

none of these decisions and others like them involved the interpretation or application

of N.C.G.S. § 62-133(d), they shed no light upon the extent of the Commission’s

authority pursuant to that specific statutory provision.

Our decisions interpreting and applying N.C.G.S. § 62-133(d) set out some of

the principles that underlie this portion of North Carolina’s statutory ratemaking

framework. The first occasion upon which we had an opportunity to interpret and

apply what is now N.C.G.S. § 62-133(d) came in Public Service Co., 257 N.C. 233, 125

S.E.2d 457, which was decided pursuant to former N.C.G.S. § 62-124. Former

N.C.G.S. § 62-124 (1960) stated that, “[i]n fixing any maximum rate or charge,” the

Commission “shall” consider “all other facts that will enable it to determine what are

reasonable and just rates.” In Public Service Co., we reversed a trial court judgment

that affirmed an order in which the Commission refused to allow a natural gas utility

to increase its rates in the face of a price increase by the utility’s sole supplier of

natural gas. In reaching this result, we stated that “[t]he Legislature properly

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understood that, at times, other facts may exist, bearing on value and rates, which

the Commission should take into account in addition to those specifically detailed in”

the ratemaking statute and that former N.C.G.S. § 62-124 “[gave] the Commission

the right to consider all other facts that will enable it to determine what are

reasonable and just rates” (emphasis in original), citing N.C.G.S. § 62-124. Id. at 237,

125 S.E.2d at 460. We did, however, caution the Commission that “[t]he right to

consider ‘all other facts’ is not a grant to roam at large in an unfenced field” and

determined that the “other facts” upon which the Commission was entitled to rely

had to “be established by evidence, be found by the Commission, and be set forth in

the record to the end the utility might have them reviewed by the courts.” Id.

Similarly, in State ex rel. Utilities Commission v. Edmisten, we recognized that,

“[w]hile the Commission is limited, particularly by [N.C.G.S. § 62-133(b)], to a

consideration of certain ultimate facts, it may consider many other evidentiary facts

relevant thereto which may not be specifically listed in this section” pursuant to

N.C.G.S. § 62-133(d). 291 N.C. 327, 345, 230 S.E.2d 651, 662 (1976). In upholding

the Commission’s authority to allow an electric utility to implement a temporary fuel

adjustment clause in the exercise of its discretion, we recognized that “[N.C.G.S. § 62-

133(d)] expressly empowers the Commission to ‘consider all other material facts of

record that will enable it to determine what are reasonable and just rates.’ ” Id.

(citing Morgan, 277 N.C. 255, 177 S.E.2d 405).

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Shortly thereafter, in State ex rel. Utilities Commission v. Edmisten, 299 N.C.

432, 437, 263 S.E.2d 583, 588 (1980), in reversing the Commission’s refusal to adopt

rolled-in rates for an electric utility, we recognized that, “[a]lthough it is not for an

appellate court to dictate to the Commission what weight it should give to material

facts before it” in accordance with N.C.G.S. § 62-133(d), “a summary disposition

which indicates that the Commission accorded only minimal consideration to

competent evidence constitutes error at law and is correctable on appeal,” citing

Utilities Commission v. Piedmont Natural Gas Co., 254 N.C. 536, 119 S.E. 2d 469

(1961) and N.C.G.S. § 62-94. In light of that basic principle, we held that the

Commission erred by failing to “consider whether a rate schedule computed as if” two

wholly owned subsidiaries of the same parent company were one utility “would be in

the best interests of the customers.” Id. at 438, 263 S.E.2d at 588.

A few years later, this Court stated in State ex rel. Utilities. Commission v.

Duke Power Co., that, in N.C.G.S. § 62-133(d), that “the legislature recognized and

understood that there would be other facts and circumstances of record which the

Commission might rightly consider in addition to those specifically detailed in

[N.C.G.S. § 62-133],” 305 N.C. 1, 26, 287 S.E.2d 786, 801 (1982) (Duke Power Co. II),

before indicating that “the ‘other material facts of record’ considered by the

Commission in fixing reasonable and just rates must be found and set forth in its

order so that the reviewing court may see what these elements are.” Id. at 27, 287

S.E.2d at 801. In the same vein, we opined in State ex rel. Utilities Commission v.

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Nantahala Power & Light Co., that “N.C.G.S. § 62-133(d) has been construed as a

device permitting the Commission to take action consistent with the overall command

of the general rate statutes, but not specifically mentioned in those portions of the

statute under consideration in a given case,” citing Duke Power Co. II and Utilities

Commission v. Public Staff, 58 N.C. App. 453, 293 S.E. 2d 888 (1982), modified and

aff’d, 309 N.C. 195, 306 S.E.2d 435 (1983), and that “the fixing of ‘reasonable and just’

rates involves a balancing of shareholder and consumer interests,” State ex rel.

Utilities Commission v. Nantahala Power & Light Co., 313 N.C. 614, 690–91, 332

S.E.2d 397, 442 (1985). As a result, we held that the Commission was entitled to

treat “the effect of the FERC-filed power supply contracts on Nantahala’s costs of

service” and “the entire historical development of the Nantahala-Tapoco electric

system and the intercorporate allocation of the costs and benefits associated

therewith” as material facts of record pursuant to N.C.G.S. § 62-133(d) in

determining the utility’s rates. Id. at 701, 332 S.E.2d at 448.

Finally, in Thornburg I, we cited N.C.G.S. § 62-133(d) in determining that the

Commission was entitled to allow a utility to include abandoned nuclear plant costs

in rates as an operating expense, 325 N.C. at 478, 385 S.E.2d at 459, noting that the

Commission’s decision was supported by N.C.G.S. § 62-133(d), which ensured that

“the Commission would not be bound by a strict interpretation of the operating

expense component” set forth in N.C.G.S. § 62-133(c). Id. Thus, this Court’s prior

decisions, while failing to delineate the exact contours of the Commission’s authority

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pursuant to N.C.G.S. § 62-133(d), have clearly indicated that N.C.G.S. § 62-133(d) is

available to the Commission for the purpose of dealing with unusual situations and

that the authority granted to the Commission pursuant to N.C.G.S. § 62-133(d) is not

limited by the more specifically stated ratemaking principles set out elsewhere in

N.C.G.S. § 62-133(b).20 Simply put, if the Commission’s authority pursuant to

N.C.G.S. § 62-133(d) could only be exercised in a manner that coincided with the

Commission’s authority as delineated in the other provisions of N.C.G.S. § 62-133,

the enactment of N.C.G.S. § 62-133(d) would have been a purposeless undertaking.

After carefully examining our reported decisions construing N.C.G.S. § 62-

133(d), we conclude that this statutory provision provides the Commission with an

opportunity to consider facts that, while not specifically relevant to the ordinary

ratemaking determinations required by N.C.G.S. § 62-133(b), should necessarily be

considered in establishing rates that are just and reasonable to both the utility and

the using and consuming public. For that reason, we reject the notion that the

traditional rules governing the inclusion of costs in a utility’s rate base pursuant to

N.C.G.S. § 62-133(b)(1) and in a utility’s operating expenses pursuant to N.C.G.S.

§ 62-133(b)(3) limit the scope of the Commission’s authority pursuant to N.C.G.S.

20 As we acknowledge in more detail below, the Commission’s authority to pursuant

to N.C.G.S. § 62-133(d) is not unlimited. Any attempt to restrain the Commission’s discretion pursuant to N.C.G.S. § 62-133(d) by confining its use to narrow deviations from the ordinary ratemaking processes set out in the remainder of N.C.G.S. § 62-133 strikes as unworkable given the difficulty of determining when such a departure would be sufficiently limited as to be permissible and when it would not.

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§ 62-133(d), with any such determination being fundamentally inconsistent with the

apparent legislative intent to use N.C.G.S. § 62-133(d) to provide a “safety valve”

available to the Commission when ordinary ratemaking standards prove inadequate.

However, as our earlier admonition that the predecessor to N.C.G.S. § 62-133(d) did

not allow the Commission to “roam at large in an unfenced field” clearly indicates,

N.C.G.S. § 62-133(d) does not give the Commission license to ignore the ordinary

ratemaking standards set out elsewhere in N.C.G.S. § 62-133 in cases in which the

use of those principles, without the necessity to consider “other facts,” allows for the

establishment of just and reasonable rates for the utility in question. Instead,

N.C.G.S. § 62-133(d) provides the Commission with limited authority to take a

holistic look at the cases that come before it in order to ensure that the limitations

inherent in the ordinary ratemaking standards enunciated in N.C.G.S. § 62-133 do

not preclude the Commission from carrying out its ultimate obligation to establish

rates that are just and reasonable in extraordinary instances in which the traditional

ratemaking standards set out in N.C.G.S. § 62-133 are insufficient. As a result,

consistently with the results reached in the decisions that we have summarized

above, we hold that the Commission may employ N.C.G.S. § 62-133(d) in situations

involving (1) unusual, extraordinary, or complex circumstances that are not

adequately addressed in the traditional ratemaking procedures set out in N.C.G.S.

§ 62-133; (2) in which the Commission reasonably concludes that these circumstances

justify a departure from the ordinary ratemaking standards set out in N.C.G.S. § 62-

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133; (3) determines that a consideration of these “other facts” is necessary to allow

the Commission to fix rates that are just and reasonable to both the utility and its

customers; and (4) makes sufficient findings of fact and conclusions of law supported

by substantial evidence in light of the whole record explaining why a divergence from

the usual ratemaking standards would be appropriate and why the approach that the

Commission has adopted would be just and reasonable to both utilities and their

customers.

An examination of the extensive record that is before us in these cases satisfies

us that the Commission did not, with a single exception set out in more detail below,

err in using its authority to consider “other facts” pursuant to N.C.G.S. § 62-133(d)

by allowing the amortization of deferred coal ash costs to rates and to allow the

utilities to earn a return on the unamortized balance. The Commission’s findings,

which have adequate evidentiary support, establish that the enactment of CAMA

forced the utilities to confront an “extraordinary and unprecedented” issue involving

the potential expenditure of billions of dollars in order to address a significant

environmental problem. In light of the “magnitude, scope, duration and complexity”

of the anticipated costs, the Commission determined that deferral of the necessary

compliance costs would be appropriate and that these costs, including a return on the

unamortized balance, should be amortized to rates over a period that the Commission

deemed to be reasonable. In view of the unusual nature and complexity of the costs

at issue in this proceeding and the circumstances under which they were incurred,

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the usual ratemaking standards set out in N.C.G.S. § 62-133 did not readily lend

themselves to a decision that resulted in the establishment of just and reasonable

rates for both the utilities and their customers. Finally, the Commission made

detailed findings and conclusions explaining the nature of the manner in which it

proposed to consider the relevant “other facts” and the reasons that it believed that

its decision was fair to both the utilities and their customers. As a result, we hold

that, in light of the specific facts and circumstances disclosed by the record developed

before the Commission in these cases and the detailed explanation that the

Commission gave for reaching its decision, the Commission did not err in approving

the basic ratemaking approach that was utilized in these proceedings

4. Equitable Sharing

The Public Staff contends that the Commission failed to address all of the

material facts relating to the reasonableness of the utilities’ coal ash costs for

purposes of N.C.G.S. § 62-133(d) before rejecting its “equitable sharing” proposal. As

part of this process, the Public Staff urged the Commission to adopt its equitable

sharing proposal in order to adequately address the utilities’ “culpability for extensive

environmental violations resulting from its coal ash management.” The Public Staff

argues that, even though the utilities’ culpability for environmental violations was a

material fact of record that the Commission should have addressed in the course of

deciding whether to adopt its equitable sharing proposal, the Commission failed to

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make findings and conclusions that adequately addressed its equitable sharing

proposal.

The Public Staff begins by noting that, while the Duke Energy Progress order

describes the Public Staff’s equitable sharing proposal as resting upon the utilities’

extensive “history of approval of sharing of extremely large costs that do not result in

any new generation of electricity for customers,” its “repeated references” to the

utilities’ environmental violations should have “le[ft] no doubt that [the existence of

these violations] was a material reason for [its] equitable sharing proposal.”

Similarly, the Public Staff contends that, in its Duke Energy Carolinas order, the

Commission erroneously concluded that the utilities’ alleged environmental

violations did not constitute part of the “real rationale for equitable sharing” and

“that environmental violations [could] only be relevant to prudence” even though a

finding of imprudence would have “justif[ied] a total disallowance of the associated

costs” pursuant to N.C.G.S. § 62-133(b).

In addition, the Public Staff asserts that the Commission evaluated its

equitable sharing proposal by considering “whether the costs were reasonable and

prudent,” “whether they were used and useful,” and “what outcome would be fair and

equitable.” According to the Public Staff, the use of this standard precluded the

implementation of an equitable sharing arrangement pursuant to N.C.G.S. § 62-

133(d) given that the approach adopted in the Commission’s order would appear to

make “full cost recovery with a return . . . mandatory as a matter of law (apart from

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mismanagement penalties) once costs have been determined to be prudent and ‘used

and useful.’ ”21 Although both orders “hint[ed]” at the possibility of adjusting rates

in its discretion pursuant to N.C.G.S. § 62-133(d), “other parts of the [o]rders

reject[ed] that possibility as a legal conclusion.”

In the Public Staff’s view, the Commission’s determination that the concept of

equitable sharing had no support in the decisions of this Court rested upon a

misinterpretation of Thornburg I and Thornburg II. More specifically, the Public

Staff asserts that the Commission misinterpreted Thornburg I to mean that

“equitable sharing applies only to costs that are not ‘used and useful’ and that

equitable sharing therefore does not apply to coal ash costs” in spite of the fact that

“[n]othing in Thornburg I or Thornburg II suggests that] N.C.G.S. § 62-133(d) limits

the type of ‘material facts’ or remedies that may be considered to achieve reasonable

and just rates.”

The Public Staff contends that our decision in Thornburg II “support[s]” the

idea of equitable sharing of excess plant costs which were not properly deemed to be

“used and useful.” According to the Public Staff, this Court did not reject the

Commission’s equitable sharing decision in Thornburg II on the grounds that the

Commission lacked the authority to implement such a proposal; instead, the Public

21 In the Public Staff’s view, the mismanagement penalties imposed in these cases

“remed[y] a different problem” —the acts which resulted in federal criminal plea—and are “no alternative” to the Public Staff’s equitable sharing proposal, which was based upon “separate and more extensive state law violations.”

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Staff contends that we rejected the specific equitable sharing arrangement that was

at issue in that case, which involved the inclusion of nuclear plant cancellation costs

in rate base on the grounds that such a regulatory treatment of those costs violated

N.C.G.S. § 62-133(b)(1). In other words, the Public Staff contends that “Thornburg

II does not stand for the proposition that the Commission lacks the discretionary

authority to effectuate an equitable sharing between ratepayers and shareholders”

and actually “upholds [the existence of] that authority,” a result “which is consistent

with N.C.G.S. § 62-133(d) and the Public Staff’s equitable sharing recommendation.”

The Public Staff contends that, contrary to the Commission’s conclusion that

allowing equitable sharing in these cases would result in an unconstitutional taking

of utility property, there are “instances where the utility is not allowed full cost

recovery or is required to share revenues with its ratepayers,” a result that is “within

the police power of the state,” citing State ex rel. Utilities Commission v. N.C. Natural

Gas Corp., 323 N.C. 630, 642–45, 375 S.E.2d 147, 154–56 (1989) and State ex rel.

Utilities Commission v. Carolina Water Service, 225 N.C. App. 120, 135–36, 738

S.E.2d 187, 197–98 (2013). According to the Public Staff, “[u]tility shareholders . . .

are not guaranteed a return on their money,” with “equitable sharing [serving to]

balance the interests of [the utilities] who bear some responsibility for coal ash costs

due to their years of non-compliance with groundwater and surface water

environmental regulations, against the interests of ratepayers who are being asked

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to pay a second time for disposal of coal ash after the [utilities’] initial disposal efforts

proved inadequate for environmental protection.”

According to the Public Staff, the Commission failed to make findings relating

to numerous environmental violations, including: (1) at least 2,857 groundwater

exceedances caused by Duke Energy Progress’ coal ash basins that the Public Staff

claimed to have resulted from violations of the applicable DEQ regulations; (2) the

existence of “unauthorized seeps that [Duke Energy Carolinas] has admitted and

3,091 groundwater violations confirmed by [Duke Energy Carolinas’] own

groundwater monitoring data”; (3) admissions to “nearly 200 distinct seeps” that the

Public Staff claims to constitute unpermitted discharges in violation of N.C.G.S. §

143-215.1; (4) the presence of “seventeen admittedly engineered toe drains” that were

not authorized by NPDES permits and that had been “deliberately constructed by

[Duke Energy Progress] to allow drainage from its ash basins without regulatory

approval and in violation of [N.C.G.S.] § 143.215.1”; (5) the presence of “twelve

engineered seeps at [Duke Energy Carolinas’] coal-fired plants for which [it] did not

yet have NPDES permits”; and (6) admissions by Duke Energy Carolinas that

unauthorized seeps had occurred at four of its coal-fired plants.

In response, the utilities argue that the Commission had properly rejected the

Public Staff’s equitable sharing proposal for two separate reasons. First, the utilities

aver that N.C.G.S. § 62-133(d) “does not give the Utilities Commission unbridled

discretion to reduce rates” and must be read “in light of the other subsections of the

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statute” which, collectively, provide the Commission with “a specific formula for

setting rates for a public utility,” citing N.C.G.S. §§ 62-133(b) and (c). According to

the utilities, the adoption of the position advanced by the Public Staff would

“eviscerate” the guiding standards set forth by N.C.G.S. §§ 62-133(b) and (c) so as to

“rais[e] grave constitutional concerns.” Moreover, the utilities argue that the

evidence upon which the Public Staff has relied in support of its equitable sharing

proposal “bear on the elements of the ratemaking formula or other specific provisions

of [the] Public Utilities Act,” with the facts upon which the Public Staff relies being

“not material.” Instead, the utilities contend that the Public Staff’s equitable sharing

proposal was “arbitrary” and “devoid of any determining principle,” citing Sanchez v.

Town of Beaufort, 211 N.C. App. 574, 580, 710 S.E.2d 350, 354 (2011), a conclusion

with which the Commission agreed in finding that the Public Staff’s proposal was

“standard-less” and “insufficient[ly] justif[ied].” The utilities point to the Public

Staff’s “dramatic departure” from the position that it took in Docket No. E-22, Sub

532, in which the Public Staff “stipulated that, because [the utility’s] expenditures

had been prudently incurred and were investor-funded, [the utility] should be entitled

to recover these costs through rates over a five-year period and also receive a rate of

return on the unamortized balance.”

According to the utilities, neither Thornburg I nor Thornburg II support the

Public Staff’s equitable sharing proposal. The utilities argue that, in Thornburg I,

this Court rejected an intervenor’s argument that operating expenses must have a

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nexus to property used and useful and that, as long as the expenses were

“reasonable,” the Commission has the authority to allow their inclusion in the cost of

service for ratemaking purposes. Although this Court upheld the Commission’s

decision in Thornburg I, that case involved an entirely different category of costs from

those at issue here. The utilities contend that, in Thornburg II, this Court held that

expenditures relating to “excessive” facilities “were not ‘used and useful’ and could

not be included in rate base,” with its decision in that case being susceptible to the

interpretation that the Commission is entitled to “abandon[ ] the precise directives of

[N.C.G.S. §] 62-133,” “which require a return on property used and useful.”

Secondly, the utilities contend that the Commission properly rejected the

Public Staff’s equitable sharing proposal on the grounds that the Commission did not

abuse its discretion by determining that a further downward adjustment in the

utilities’ rates would not be reasonable and appropriate. In the utilities’ view, the

Commission simply “declined in these cases to exercise whatever discretion the Public

Staff insists it possesses” to order an additional downward adjustment beyond the

mismanagement penalty and explained throughout “[v]irtually the entire[ty]” of both

order’s majority decisions “why the circumstances of these cases do not make a

further downward adjustment appropriate.”

As we have already noted, our prior decisions clearly indicate that N.C.G.S.

§ 62-133(d) “expressly empowers” the Commission to consider all material facts of

record in setting just and reasonable rates, Edmisten, 291 N.C. at 345, 230 S.E.2d at

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662, with the existence of this authority being coupled with a concomitant obligation

on the Commission’s part to consider all potentially relevant facts in formulating its

decision. See State ex rel. Utils. Comm’n v. General Tel. Co., 12 N.C. App. 598, 611,

184 S.E.2d 526, 534 (1971), modified, 281 N.C 318, 189 S.E.2d 705 (1972); Duke Power

Co. II, 305 N.C. at 18, 287 S.E.2d at 796–97; Edmisten, 299 N.C. at 438, 263 S.E.2d

at 588. After carefully reviewing the record, we are not persuaded that the

Commission fulfilled its duty to consider all of the material facts of record revealed

in the record in determining whether to adopt the ratemaking approach proposed by

the utilities and to reject the Public Staff’s equitable sharing proposal utilizing the

authority granted to it pursuant to N.C.G.S. § 62-133(d). More specifically, the Public

Staff expressly requested the Commission to consider evidence of environmental

violations in evaluating its equitable sharing proposal in accordance with N.C.G.S.

§ 62-133(d). However, the Commission declined to adopt the Public Staff’s equitable

sharing proposal on the grounds, at least in part, that it had no role in determining

whether the alleged environmental violations upon which the Public Staff’s proposal

rested had actually occurred. Instead, the Commission appears to have refused to

consider the alleged environmental violations upon which the Public Staff’s proposal

rested, at least in part, on the grounds that the Commission’s role was limited to

making cost of service-related determinations and did not extend to ascertaining

whether environmental violations had occurred, with the making of this

determination having been left, in the Commission’s view, to environmental

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regulators and courts of general jurisdiction unless a showing of management

imprudence had been made.

Although the Commission is not, of course, statutorily charged with making

definitive decisions concerning the extent, if any, to which the utilities committed

environmental violations, we do believe that it was required, for ratemaking

purposes, to evaluate the extent to which the utilities committed environmental

violations in determining the appropriate ratemaking treatment for the challenged

coal ash costs even if any such environmental violations did not result from

imprudent management. In other words, given that the Commission decided to

invoke its statutory authority to consider “other facts” in determining the rates that

should be established for the utilities, it was required to consider all material facts of

record in making that determination including, in these cases, facts pertaining to

alleged environmental violations such as non-compliance with NPDES permit

conditions, unauthorized discharges, and groundwater contamination from the coal

ash basins in violation of the 2L Rules and to incorporate its decision with respect to

the nature and extent of the utilities’ violations, if any, in determining the

appropriate ratemaking treatment for the challenged coal ash costs.22 Instead of

22 We agree with the Commission’s determination that the fact that the utilities entered into a settlement agreement with the Department of Water Quality does not, standing alone, constitute evidence that an environmental violation had occurred. See N.C. R. Evid. 408. Similarly, we agree with the Public Staff and the Commission that the existence of a settlement agreement which does not speak to the issue of liability does not constitute evidence of wrongdoing.

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conducting the required evaluation, the Commission appears to have determined that

it lacked the authority to comment upon the nature and extent of any environmental

violations that the utilities may or may not have committed. Moreover, even though

the utilities are correct in noting that the Public Staff’s equitable sharing proposal

was not consistent with or subject to the detailed standards set out in the ordinary

ratemaking procedures prescribed by N.C.G.S. § 62-133, the same is true of the

Commission’s decisions to allow the deferral of the relevant coal ash costs and the

amortization of the deferred costs, including a return on the unamortized balance, to

rates despite the fact that some percentage of those costs would not be eligible for

inclusion in rate base pursuant to N.C.G.S. § 62-133(b)(1). Although the Commission

remains free, at the conclusion of the proceedings on remand and after complying

with the limitations upon its authority pursuant to N.C.G.S. § 62-133(d) set forth

above, to reject the Public Staff’s equitable sharing proposal, it may only do so after

considering all of the potentially relevant facts and circumstances, see Duke Power II,

305 N.C. at 21, 287 S.E.2d at 798, and explaining the manner in which it has chosen

to exercise its discretion by making appropriate findings and conclusions that have

adequate evidentiary support.23 In the event that the Commission concludes, on

23 For this reason, the fact that the Commission may have had other criticisms of the

Public Staff’s “equitable sharing” proposal does not support a decision to affirm this portion of the Commission’s orders given the Commission’s failure to consider all relevant “material facts” as required by N.C.G.S. § 62-133(b)(1). In other words, the Commission is not entitled to consider the potential adverse impacts upon a utility’s capital costs in applying N.C.G.S. § 62-133(d) without also considering other all of the potentially relevant facts, such as

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remand, to adopt the Public Staff’s equitable sharing proposal, either as proposed or

in some modified form, it may adjust other portions of its order including those

relating to the proposed management penalty, in order to ensure that the utilities’

rates are “just and reasonable” as that term is used in the Public Utilities Act and

satisfy applicable constitutional standards, which set an absolute floor under and

ceiling upon the Commission’s authority. As a result, those portions of the

Commission’s orders rejecting the Public Staff’s equitable sharing proposal are

reversed and these cases are remanded to the Commission for further proceedings

consistent with this opinion, including consideration of the Public Staff’s equitable

sharing proposal.

5. Discharges to Surface Waters

In addition to adopting the arguments advanced by the Attorney General in

challenging the Commission’s decision with respect to the ratemaking treatment of

the utilities’ coal ash costs, the Sierra Club contends that the costs in question cannot

be included in the cost of service used for North Carolina retail ratemaking purposes

pursuant to N.C.G.S. § 62-133.13 given that those costs resulted from discharges to

the surface waters of North Carolina in violation of State or federal surface water

quality standards. According to the Sierra Club, the record contained “overwhelming

evidence” establishing that: (1) “seeps at [the utilities’] coal ash ponds discharged

whether the manner in which the utility managed and operated its coal ash facilities resulting in environmental violations.

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polluted wastewater into adjacent surface waters”; (2) that “discharges from

unauthorized seeps contained coal ash constituents at concentrations above water

quality standards”; and (3) that “dewatering and pond closure would abate the illegal

discharges,” so that the costs in question “are not recoverable from ratepayers.”

The Sierra Club urges this Court to reject the Commission’s determination that

N.C.G.S. § 62-133.13 did not apply to the costs at issue in these cases on the grounds

that those costs had been incurred to comply with federal and State law rather than

as the result of unlawful discharges as “unsupported by any evidence in the record,

let alone competent, material, and substantial evidence,” citing N.C.G.S. § 62-94(b)(5)

and CUCA, 348 N.C. 452, 460, 500 S.E.2d 693, 699 (1998), and as an “arbitrary and

capricious” decision, citing State ex rel. Utilities Commission v. NUI Corp., 154 N.C.

App. 258, 266, 572 S.E.2d 176, 181–82 (2002). In addition, the Sierra Club argues

that the utilities “did not present evidence that the closure of any of its ponds was

required by the CCR Rule” and that, “[i]rrespective of CAMA,” the closure costs had

been incurred in accordance with Special Orders on Consent addressing discharges

from unpermitted seeps and a Superior Court determination that the closure of the

utilities’ ponds would eliminate these seeps. The Sierra Club further asserts that a

determination to the contrary would have the effect of “nullify[ing] the applicability

of” N.C.G.S. § 62-133.13, given that “the legislature knew full well that all of [the

utilities’] ponds would be required to close” at the time that it enacted N.C.G.S. § 62-

133.2 as part of CAMA. In the Sierra Club’s view, the enactment of CAMA was a

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“direct response” to the utilities’ “failure to operate its coal ash ponds in a safe and

reasonable manner.”

In response, the utilities argue that N.C.G.S. § 62-133.13 has no application to

these cases given that it relates to unlawful discharges that “result[ed] in a violation

of state or federal surface water quality standards” that occurred on or after 1

January 2014. In essence, the utilities contend that, while such prohibitions ensured

that the costs relating to the Dan River spill were not included in the cost of service

used for ratemaking purposes, the General Assembly did not intend to preclude the

inclusion of the cost of abating the seeps associated with the utilities’ coal ash basins

in the costs upon which their rates were based. The utilities note that “the

Commission went to great lengths to identify expenditures resulting from seeps that

were alleged to have resulted in water quality issues” and that any such costs

“independent of the requirements of the CCR Rule and CAMA” had been “expressly

disallowed.” Accordingly, the utilities assert that, with the exception of the costs

reflected in these disallowances, “no seepage caused [the utilities] to incur any

‘unjustified costs to comply with current laws and regulations.’ ”

We agree with the Commission’s determination that N.C.G.S. § 62-133.13 does

not bar the inclusion of the costs at issue in these cases in the utilities’ cost of service

for North Carolina ratemaking purposes given that the relevant statutory provision

specifically defines “unlawful discharges” as “a discharge that results in a violation

of State or federal surface water quality standards” and that the Commission

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determined, on the basis of adequate evidentiary support, that the costs at issue in

these cases stemmed from the utilities’ compliance with the CCR Rule, CAMA, and

certain consent agreements requiring them to take corrective actions that were

consistent with one or both of those regulatory requirements. In addition, the

Commission determined in the Duke Energy Carolinas order that it “is a function of

basic science” that “there will be a natural flow from an unlined basin into

groundwater” as part of the “normal operation” of the basins so that, “except in

limited fashion,” “[Duke Energy Carolinas’] past coal ash management practices did

not cause it to incur in the [relevant timeframe] unjustified costs to comply with

current laws and regulations.” In its Duke Energy Carolinas order, the Commission

identified expenditures related to seeps and water quality issues associated with the

coal ash basins located at the Dan River, Riverbend, Allen, Marshall, and Cliffside

facilities and determined that the abatement of these seeps had been handled

through the judgment entered in the federal criminal case or consent orders entered

as the result of agreements between the utilities and DEQ. As a result, the

Commission properly determined that the costs to which the Sierra Club’s argument

is directed were “independent of the requirements of the CCR Rule and CAMA,” that

the Commission had expressly disallowed “any activities employed to resolve these

seeps,” and that N.C.G.S. § 62-133.13 does not preclude the inclusion of the relevant

coal ash costs in the cost of service used to establish the utilities’ North Carolina retail

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C. Basic Facilities Charge

The environmental intervenors contend that the Commission erred by

authorizing Duke Energy Carolinas to increase the Basic Facilities Charge for the

residential rate class from $11.80 to $14.00 while leaving the facilities charges

against other classes unchanged. Among other things, the environmental intervenors

argue that this component of the Commission’s order was not supported by

competent, material, and substantial evidence so as to be subject to reversal pursuant

to N.C.G.S. § 62-94(b)(5). According to the environmental intervenors, since no party

advocated the establishment of a $14.00 per month customer charge, that figure

constituted an arbitrary number that “most likely” was adopted because it was

identical to the figure incorporated into a joint stipulation that the Commission

approved in the Duke Energy Progress proceeding, so that the Commission’s decision

to utilize that figure reflected a failure to weigh the testimony of each witness

concerning the amount of the charge and to explain the weight that should be given

to that testimony, citing State ex rel. Utilities Commission v. Cooper, 367 N.C. 644,

649, 766 S.E.2d 827, 830 (2014) (Cooper II). The environmental intervenors claim

that, even though “each link in the chain of reasoning must appear in the order itself,”

quoting Eddleman, 320 N.C. at 352, 358 S.E.2d at 346, “[t]here is no such chain

linking evidence in the record to the Commission’s decision to set the [c]harge at

$14.00,” a fact that establishes that the Commission erroneously afforded “only

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minimal consideration to competent evidence,” quoting State ex rel. Utilities

Commission v. Thornburg, 314 N.C. 509, 511, 334 S.E.2d 772, 773 (1985).

In addition, the environmental intervenors argue that the Commission’s

decision to increase the residential Basic Facilities Charge contravened various

provisions of the Public Utilities Act, citing N.C.G.S. § 62-2(a)(3a), (4), (5); N.C.G.S.

§ 62-155(a) (stating that “[i]t is the policy of the State to conserve energy through

efficient utilization of all resources”); and State ex rel. Utilities Commission v.

Simpson, 295 N.C. 519, 524, 246 S.E.2d 753, 757 (1978). According to the

environmental intervenors, the Commission’s decision was “inconsisten[t]” with the

statutory “policy directives” contained in the Public Utilities Act, which state that

rates should “promote conservation,” “demand reduction,” and encourage efficiency,

and failed to “consider” intervenor testimony explaining that the residential Basic

Facilities Charge should remain unchanged in order to avoid “penaliz[ing] customers

who have taken steps to conserve energy.” The environmental intervenors argue that

the increased residential Basic Facilities Charge “unfairly impacts low-income and

minority ratepayers,” who “tend to use less electricity than the average household,”

citing Cooper I, 366 N.C. at 495, 739 S.E.2d at 548 and N.C.G.S. § 62-133(a), with the

Commission having treated these considerations as nothing more than “a mere

afterthought.” The environmental intervenors assert that the Commission’s finding

that the approval of a $14.00 residential Basic Facilities Charge would “moderat[e]

the impact of [the] increase on low-income customers to the extent that they are high-

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usage customers such as those residing in poorly insulated manufactured homes” was

merely “conclusory” and devoid of “evidentiary support in the record,” quoting

Commissioner Clodfelter’s dissent, and had been “refuted by the testimony of

[environmental intervenor witness John] Howat” “that low-income customers tend to

have lower-than-average electricity usage.”

The environmental intervenors take issue with the Commission’s decision to

utilize the Minimum System Methodology proposed by Duke Energy Carolinas in

determining the level at which the residential Basic Facilities Charge should be

established. According to the environmental intervenors, the Minimum System

Methodology approach “resulted in hypothetical grid cost estimates that do not

comport with [Duke Energy Carolinas’] actual, original costs of used and useful

property” given its assumption “ ‘that a minimum system . . . would have the same

number of poles, conductor feet, and transformers’ as installed in the real-world grid”

when, in fact, “the equipment imagined under [that methodology] would be capable

of serving more than the minimal demand of customers” and that “the customer-

related percentage of the distribution system [derived using the Minimum System

Methodology] is effectively driven by . . . non-existent facilities.” As a result, the

environmental intervenors argue that the Minimum System Methodology “turns

foundational ratemaking principles upside down”; “serves as a poor proxy for the

actual, used and useful distribution grid”; and “violate[s] [Duke Energy Carolinas’]

obligation to base rates on an ascertainment of the original costs of utility property

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that is used and useful in providing service to the public,” citing N.C.G.S. § 62-

133(b)(1). The environmental intervenors contend that the Commission has, in prior

decisions, rejected the use of the Minimum System Methodology, with its failure to

“acknowledge[e] or explain[ ] its prior, contrary decisions” demonstrating “lack of

careful consideration” and “reasoned judgment” and rendering its decision to adopt

that methodology in this case “arbitrary and capricious,” citing Thornburg, 314 N.C.

at 515, 334 S.E.2d at 776. The environmental intervenors argue that “there was not

even a scintilla of evidence to support” the Commission’s decision with respect to the

Basic Facilities Charge issue, particularly given that it ordered an overall revenue

reduction for Duke Energy Carolinas, citing Cooper II, 367 N.C. at 438, 758 S.E.2d at

640, pointing to the “common-sense principle that an adjustment to the Basic

Facilities Charge should bear some logical relationship to the overall change in rates.”

Finally, the environmental intervenors argue that the Commission’s order was

“unduly discriminatory” given that it approved an increase in the residential Basic

Facilities Charge while leaving similar rates for other customer classes unchanged,

citing N.C.G.S. § 62-140(a); State ex rel. Utilities Commission v. North Carolina

Textile Manufacturers Ass’n, 313 N.C. 215, 222, 328 S.E.2d 264, 269 (1985); and

CUCA, 348 N.C. at 468, 500 S.E.2d at 704. According to the environmental

intervenors, “[t]he Commission did not point to any competent, material and

substantial evidence of a difference in conditions between customer classes to support

its determination to increase the residential [c]harge while leaving the non-

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residential [c]harges the same” and only offered “murky generalizations and a vague

reference to evidence in the record” in support of this decision.

In response, the utilities argue that Commission’s decision to increase the

residential Basic Facilities Charge to $14.00 had the necessary evidentiary support

given that the figure adopted by the Commission was within the range recommended

by the various witnesses and the fact that the Commission “is not limited to specific

rates advocated by the parties and is,” instead, “allowed to fix a rate based on the

evidence presented, just as a jury in assessing an amount of damages is not limited

to only specific amounts demanded by a plaintiff or defendant,” citing Duke Power

Co. II, State ex rel. Utilities Commission v. Public Staff, 323 N.C. 481, 493, 374 S.E.2d

361, 367 (1988), and Legacy Data Access, Inc. v. Cadrillion, LLC, 889 F.3d 158, 168

(4th Cir. 2018). In the utilities’ view, the environmental intervenors seek to “box in

the Commission and take away any room for the Commission as a regulatory body to

use its expertise, discretion, or subjective judgment,” a result which is “simply not the

law in the State of North Carolina,” citing Duke Power Co. II, 305 N.C. at 7, 287

S.E.2d at 790. On the contrary, the utilities contend that “the Commission does not

have to provide an equation or create a graph on how it set the [Basic Facilities

Charge] for the residential rate classes at $14.00” and point out that, “[i]n Duke Power

Co. [II], this Court did not require that the Commission provide a direct link or detail”

as to the specific return on equity that it approved in that proceeding, citing id. at 30,

287 S.E.2d at 803.

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The utilities contend that the record contained “overwhelming evidence”

supporting the Commission’s decision to increase the residential Basic Facilities

Charge, with this evidence resting upon Duke Energy Carolinas’ cost of service study,

which indicated that the charge in question should be set at $23.78 even though Duke

Energy Carolinas only proposed to increase it to $17.79 in order “to moderate any

effect of the increase on low-usage customers.” In addition, the utilities point to the

fact that Duke Energy Carolinas witness Michael Pirro testified that an increase in

the residential Basic Facilities Charge was necessary because “it is important that

[Duke Energy Carolinas’] rates reflect cost causation to minimize subsidization of

customers within the rate class.”

The utilities deny that the validity of the Commission’s determination with

respect to the appropriate level of the residential Basic Facilities Charge is controlled

by this Court’s decision in Eddleman on the grounds that, in Eddleman, this Court

rejected an argument that the Commission’s mislabeling of findings and conclusions

did not constitute prejudicial error “so long as the order reflected a basic

understanding of how the decision-making process is supposed to work.” The utilities

argue that, in this case, there is “no issue about whether the Commission . . .

mislabel[ed] its findings of fact and conclusions of law.” Similarly, the utilities deny

that this case is controlled by Cooper II, in which this Court required the Commission

to demonstrate that it had actually weighed the evidence and exercised its

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independent judgment without adopting any requirement that the Commission

explain the weight to be given to the testimony of any specific witness.

The utilities acknowledge that the record contains considerable evidence

concerning the potential effect of the proposed increase in the residential Basic

Facilities Charge upon energy conservation and upon low-income households. On the

other hand, the utilities note that the Commission also heard extensive evidence

regarding “the need for the rates in the residential rate classes to more adequately

reflect cost causation” and point out that, “[a]s the administrative agency vested by

the General Assembly with ‘broad powers to regulate public utilities and to compel

their operation in accordance with the policy of the State,’ these are the kinds of policy

choices the Commission has been entrusted to make,” citing State ex rel. Utilities

Commission v. Public Staff, 123 N.C. App. 623, 625, 473 S.E.2d 661,663 (1996). For

that reason, the utilities contend that the Commission “must have room to exercise

its discretion and judgment,” quoting Eddleman, 320 N.C. at 379, 358 S.E.2d at 361,

and did so in this case, having fully considered the policy pronouncements set forth

in N.C.G.S. § 62-2(a), 3(a), (4), and (5) and N.C.G.S. § 62-155(a) and the evidence

presented by the environmental intervenors in the course of determining that the

importance of adopting residential rates that reflect the underlying cost of service

outweighed the concerns expressed by the environmental intervenors.

The utilities argue that the Commission “clearly considered the impact of any

increase . . . on low-income customers because it authorized a lesser increase” than

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the one that had been proposed by Duke Energy Carolinas “to moderate the impact

of such increases” upon the affected customers. The utilities claim that the

Commission simply “gave greater weight” to the evidence presented by Duke Energy

Carolinas’ witnesses than it did to the evidence supported by the environmental

intervenors. In addition, the utilities argue that the Commission’s decision to

decrease the overall revenue that Duke Energy Carolinas was entitled to collect from

customers was “primarily due to the impact of the Federal Tax Cuts and Jobs Act of

2017 lowering the corporate income tax rate,” a consideration that “ha[d] no effect on

the underlying cost to serve customers or the significant gap between that cost to

serve and the [Basic Facilities Charge] for the residential rate classes.”

The utilities also argue that the Minimum System Methodology “has served as

a foundation for establishing the flat monthly [Basic Facilities Charge] by electric

utilities since the early 1970s” and that “the Commission ha[d] never rejected the

use” of this methodology in supporting its Basic Facilities Charge decisions. On the

contrary, the Commission “simply did not award . . . the full amount of costs

designated as customer-related by the cost of service study using [the Minimum

System Methodology]” in previous orders given Duke Energy Carolinas’ failure to

request approval for a residential Basic Facilities Charge that mirrored the amount

shown to be appropriate in its cost of service study. In addition, the utilities argue

that the environmental intervenors had “completely miscast the nature of the

[Minimum System Methodology,]” deny that it “is . . . an appraisal mechanism or

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determinant of the costs or value of utility assets,” and contend that it “is a method

for allocating the actual distribution system costs into the portion of those costs that

are customer related . . . and the portion that are demand related” that did not violate

N.C.G.S. § 62-133(b)(1).

Finally, the utilities argue that the Commission’s decision to approve an

increase in the residential Basic Facilities Charge was not unduly discriminatory and

rested upon “reasonable differences between the residential and non-residential rate

classes,” citing N.C.G.S. § 62-140(a) (stating that “[n]o public utility shall, as to rates

or services, make or grant any unreasonable preference or advantage to any person

or subject any person to any unreasonable prejudice or disadvantage” and that “[n]o

public utility shall establish or maintain any unreasonable difference as to rates or

services either as between localities or as between classes of service”). According to

the utilities, N.C.G.S. § 62-140(a) does not prohibit mere “preferences, advantages,

prejudices, disadvantages, differences or discrimination in setting rates,” citing State

ex rel. Utilities Commission v. Bird Oil Co., 302 N.C. 14, 22, 273 S.E.2d 232, 237

(1981), with the real question being “not whether the differential is merely

discriminatory or preferential,” but rather “whether the differential is an

unreasonable or unjust discrimination.” The utilities note that this Court held in

State ex rel. Utilities Commission v. Nello L. Teer Co., 266 N.C. 366, 146 S.E.2d 511

(1966), that the charging of different rates for services rendered did not constitute a

per se violation of N.C.G.S. § 62-140 and stated in State ex rel. Utilities Commission

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v. Carolina Utilities Customers Ass’n, 351 N.C. 223, 524 S.E.2d 10 (2000), that

utilities may treat customers differently “so long as the variance in charges bears a

reasonable proportion to the variance in conditions,” quoting id. at 243, 524 S.E.2d at

24, based upon the quantity of use, the time of use, the manner of service, and the

cost of rendering the various services, citing id. at 244, 524 S.E.2d at 24, coupled with

a consideration of competitive conditions, the consumption characteristics of the

several classes, and the value of service to each class, citing North Carolina Textile

Manufacturers Ass’n, 313 N.C. at 222, 328 S.E.2d at 269. After noting that the burden

lies with the party seeking to challenge the validity of a Commission-approved rate,

citing id.; State ex rel. Utilities Commission v. Edmisten, 314 N.C. 122, 132, 333

S.E.2d 453, 460 (1985), vacated sub nom. Nantahala Power & Light Co. v. Thornburg,

477 U.S. 902, 106 S. Ct. 3268, 91 L. Ed. 2d 559 (1986), the utilities argue that the

environmental intervenors had failed to satisfy the applicable burden of proof given

the presence in the record of evidence demonstrating the existence of “material

differences” between the rate classes in this case and the “greater disparity between

the [Basic Facilities Charge] and the true cost of service in the residential rate

schedules as compared to the non-residential rate schedules.”

We do not find the environmental intervenors’ challenge to the lawfulness of

the Commission’s decision to authorize Duke Energy Carolinas to increase its

residential Basic Facilities Charge to $14.00 to be meritorious. Duke Energy

Carolinas witness Janice Hager testified that the Minimum System Methodology was

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“one of two [methodologies set out] in the [National Association of Regulatory Utility

Commissioners] Cost of Service manual for allocation of distribution costs,” both of

which “result in the assignment of distribution costs to customers.” Ms. Hager

emphasized that each of North Carolina’s three major electric utilities “have a long

history of using minimum system studies to identify the portion of distribution costs

that are customer related” and opined that the “theory” underlying the Minimum

System Methodology is “sound and consistent with cost causation which is the

bedrock of [cost of service] studies.” According to Ms. Hager, the Minimum System

Methodology “allowed [Duke Energy Carolinas] to classify the distribution system

into the portion that is customer-related (driven by number of customers) and the

portion that is demand-related (driven by customer peak demand levels)” based upon

the assumption that “[e]very customer requires some minimum amount of wires,

poles, transformers, etc. to receive service.”

Ms. Hager testified that Duke Energy Carolinas “develop[ed] its minimum

system study . . . to consider what distribution assets would be required if every

customer had only some minimum level of usage,” thereby allowing “the utility to

assess how much of its distribution system is installed simply to ensure that

electricity can be delivered to each customer, regardless of the customer’s frequency

of use.” Ms. Hager stated that, unless a minimal component of the utility’s

distribution system was treated as a customer-related cost, “low use customers could

avoid paying for the infrastructure necessary to provide service to them which is

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counter to cost causation principles.” In the event that these minimum system costs

were allocated on a demand, rather than a customer-related, basis, Ms. Hager

contended that “customers with higher usage [would be] subsidizing those with lower

usage.”

According to Mr. Pirro, “[t]he [proposed] base rate increase [was] allocated to

the rate classes on the basis of rate base,” an “allocation methodology [that]

distributes the increase equitably to the classes while maintaining each class’

deficiency or surplus contribution to return.” Mr. Pirro testified that, in designing

the proposed rates, Duke Energy Carolinas took into consideration “concern[s]

regarding the size of the increase and . . . the impact of the [increase] on its

customers” while “better reflect[ing] all customer-related costs” in order to reduce

“customer cross-subsidization.” According to Mr. Pirro, Duke Energy Carolinas’

“current rates significantly understate the current cost of service related to the

customer component of cost.”

In Mr. Pirro’s view, the proposed increase in Duke Energy Carolinas’

residential Basic Facilities Charge would “better recover customer-related cost

identified in the unit cost study for the residential rate class.” According to Mr. Pirro,

“[c]ustomer-related costs are unaffected by changes in customer consumption and

therefore should be paid by each participant, regardless of their consumption.” Mr.

Pirro asserted that “[r]esidential customer-related revenue not recovered in the Basic

Facilit[ies] Charge is shifted to energy rates causing high usage customers to

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subsidize rates of lower usage customers,” with a decision to leave these costs in the

energy charges serving to “overinflate” the savings resulting from the energy-related

component of the utility’s rates. Mr. Pirro disputed the validity of any assertion that

the proposed increase in the residential Basic Facilities Charge would discourage

appropriate energy efficiency efforts in light of the fact that a failure “to properly

recover customer-related cost via a fixed monthly charge provides an inappropriate

price signal to customers and fails to adequately reflect cost causation” and that

“[s]hifting customer-related cost to the [kilowatt-hour] energy rate [would] further

exacerbate[ ] this concern and over-compensate[ ] energy efficiency and distributed

generation for the cost avoided by their actions.”

Mr. Pirro testified that the “goal” that Duke Energy Carolinas sought to

achieve with its proposed rate design, which increased the residential Basic Facilities

Charge by “approximately 50 percent of the difference between the current rate . . .

and the customer-related cost . . . identified in the unit cost study,” was to “use cost

causation” along with “the concept of gradualism to effectively recover costs as they

are incurred,” with any decision to “defer[ ] a larger increase at this time merely

shift[ing] the need to increase the Basic Facilit[ies] Charge to a future rate case

proceeding.” In addition, Mr. Pirro stated that, while the utility was “mindful of the

impact of any rate increase on our customers, particularly low-income customers,” it

“applies cost causation principles to the extent possible” and believes that “[t]here are

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other means of addressing the financial needs of low-income customers which are

more effective than biasing the rate design.”

In light of the great deference that we owe to the Commission’s decisions with

respect to rate design issues, North Carolina Textile Mfrs. Ass’n, 313 N.C. at 222, 328

S.E.2d at 269, we hold that the record evidence is more than sufficient to support the

Commission’s decision to increase the residential Basic Facilities Charge from $11.80

to $14.00 in order to more accurately reflect cost-causation principles by removing a

certain level of fixed costs from energy-related charges and assigning them among

customers on a per customer rather than a per kilowatt hour basis. Although the

environmental intervenors challenge the Commission’s decision to approve the use of

the Minimum System Methodology for cost assignment purposes, the testimony of

Ms. Hager provides ample justification for the decision in question. In deciding to

approve the use of the Minimum System Methodology, the Commission “recognize[d]

that any approach to classifying costs has virtues and vices” while noting that it

“[was] not persuaded . . . that the minimum system analysis employed by [Duke

Energy Carolinas] [was] flawed in a way that preclude[d] the Commission from

accepting it as appropriate for cost allocation in this proceeding.” Similarly, while

the environmental intervenors urged the Commission to utilize a cost allocation

methodology that assigned no portion of the utility’s distribution system costs on a

per customer, rather than a demand or energy-related basis, the Commission was

well within the scope of its statutory authority in determining that a portion of the

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cost of its distribution system should be assigned on a per customer basis in light of

the existence of record evidence tending to show that no customer could receive

service in the absence of a minimal level of distribution facilities. The record also

reflects that the Commission gave further heed to the concerns expressed by the

environmental intervenors relating to the use of the Minimum System Methodology

by concluding that “a more focused and explicit evaluation of options for distribution

system cost allocation and an assessment of the extent to which any single allocation

methodology is being consistently applied by the utilities” should be conducted in

future general rate proceedings and directing the Public Staff “to facilitate

discussions with the electric utilities to evaluate and document a basis for continued

use of minimum system,” “to identify specific changes and recommendations as

appropriate,” and to “submit a report on its findings and recommendations to the

Commission” by the end of the first quarter of 2019.

At the end of the day, “[i]t is not this Court’s duty to evaluate the accuracy of

complex statistical models, conflicting methodologies, and the opposing expert

opinions drawn therefrom,” with this being, instead, “the duty of the Commission

which has special knowledge, experience and training best suited to make such

determinations.” State ex rel. Utils. Comm’n v. Carolina Utility Customers Ass’n, 323

N.C. 238, 251, 372 S.E.2d 692, 699–700 (1988). In the event that this Court was to

determine, as a matter of law, that the Commission is required to adopt a cost

allocation methodology that refrained from assigning a portion of the cost of Duke

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Energy Carolinas’ distribution system on a customer-related, rather than a demand

or energy-related basis, on the basis of the evidentiary record developed in this case,

we would be trespassing into territory that the General Assembly has assigned to the

Commission and depriving that body of its statutorily-required opportunity to use its

expertise in determining such technical issues as whether a portion of the cost of the

utility’s distribution system should be treated as customer-related or demand-related

costs and how best to assign those costs among the various components of individual

rate schedules at the conclusion of the ratemaking process. As a result of the fact

that the arguments for and against the use of the Minimum System Methodology “are

essentially fact based and are more properly made to the Commission than to this

Court,” id. at 251, 372 S.E.2d at 699, we find no error of law in the Commission’s

decision to use that approach in designing Duke Energy Carolinas’ residential Basic

Facilities Charge.

The environmental intervenors’ remaining challenges to the Commission’s

decision to approve an increase in the residential Basic Facilities Charge are equally

unavailing. Although the General Assembly has stated that “it is declared to be the

policy of the State of North Carolina” to “promote adequate, reliable, and economical

utility service, N.C.G.S. § 62-2(a)(3); to “avoid[ ] wasteful, uneconomic, and inefficient

use of energy,” N.C.G.S. § 62-2(a)(4); to “encourage and promote harmony between

public utilities, their users, and the environment,” N.C.G.S. § 62-2(5); and “to

conserve energy through efficient utilization of all resources,” N.C.G.S. § 62-155(a),

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the General Assembly has also stated that it is the policy of the State of North

Carolina to “[t]o provide just and reasonable rates and charges for public utility

services without unjust discrimination, undue preferences, or advantages,” N.C.G.S.

§ 62-2(4). An examination of the relevant statutory provisions, which are couched as

policy pronouncements rather than specific statutory mandates, demonstrates that

the Commission is required to attempt to further multiple, potentially conflicting,

policy goals in carrying out its work. In view of the fact that the Commission is

frequently called upon to choose between regulatory alternatives that further

differing policy objectives, the ultimate question is whether the Commission

appropriately balanced the competing regulatory policy goals that it is required to

further in exercising its regulatory discretion given the state of the evidentiary record

rather than whether its decision furthered a particular policy goal to the maximum

extent possible. Thus, the Commission would not have committed any error of law in

the event that it elected, based upon adequate evidentiary support, to place principal

emphasis upon the need to eliminate existing cross-subsidies among customers and

customer classes as compared to placing maximum price pressure upon energy use in

making any particular ratemaking decision.

In addition, the Commission did not commit any error of law by adopting a

specific dollar figure for Duke Energy Carolinas’ residential Basic Facilities Charge

that was not advocated for by any particular party to this proceeding. In this case,

the record reflects that the $14.00 per month figure to which the environmental

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intervenors object had the effect of moving the utility’s residential Basic Facilities

Charge what the Commission believed to a more cost-justified level in a gradual way

in an attempt to reduce the amount of cross-subsidization inherent in the existing

rate structure while mitigating the practical concerns that led the environmental

intervenors to object to Duke Energy Carolinas’ original proposal. The adoption of

such an approach is well within the confines of the Commission’s statutory authority.

Similarly, the fact that the exact dollar figure at which the Commission established

Duke Energy Carolinas’ residential Basic Facilities Charge was identical to the dollar

value set out in the stipulation between Duke Energy Progress and the Public Staff

does not show the existence of any legal defect in the Commission’s decision given

that the evidence would have supported a higher residential Basic Facilities Charge

than the Commission actually adopted and given that the figure chosen by the

Commission represented a gradual increase in the residential Basic Facilities Charge

toward a more cost-justified level in an effort to effectuate multiple regulatory goals,

including the avoidance of overly drastic changes in a utility’s rate structure at any

single point in time.

As the Commission’s decision to refrain from setting the utility’s residential

Basic Facilities Charge at the exact figure shown in the cost of service study suggests,

the Commission’s order demonstrates that it was well aware of the potential impact

of this rate change upon certain categories of residential customers, particularly low-

income customers. However, the determination that the benefits to be obtained as

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the result of the establishment of what it believed to be a more cost-justified rate

schedule outweigh other relevant considerations is a decision that the Commission,

in the exercise of its regulatory discretion, is entitled to make as long as its order

contains adequate findings and conclusions and as long as those findings and

conclusions have sufficient evidentiary support. In further recognition of the

concerns expressed by the environmental intervenors, the Commission also concluded

that there are “more effective” means of managing low-income customers’ needs and

“encourage[d] [Duke Energy Carolinas] . . . to identify low-income customers” who

were likely to have difficulty with the increased rates “in order to provide assistance.”

As a result, the record reflects that the Commission adequately considered the

interests of adversely affected customers in deciding to approve the establishment of

a $14.00 per month Basic Facilities Charge for Duke Energy Carolinas’ residential

The Commission also adequately addressed the environmental intervenors’

argument that its decision to increase the residential Basic Facilities Charge while

leaving the Basic Facilities Charges for other customer classes unchanged was

unduly discriminatory in violation of N.C.G.S. § 62-140. In response to this

contention, the Commission noted that the utility’s non-residential rate schedules

were more complex than its residential rate schedules, with this statement being

supported by evidence tending to show that many non-residential rate schedules

contain a “demand charge” that reflects the “kilo-watt . . . capacity the power

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company must maintain to meet the [maximum] demand or requirement of the

customer, though not used.” State ex rel. Utils. Comm’n v. Carolinas Committee for

Industrial Power Rates, etc., 257 N.C. 560, 562, 126 S.E.2d 325, 327 (1962). Aside

from making non-residential rate schedules more complex than residential rate

schedules, the Commission noted that the use of a demand charge may serve to align

non-residential rates more closely with cost-causation considerations than residential

rates. In addition, the Commission found that the same divergence between

appropriate cost-causation principles and the actual design of the utility’s residential

rates reflected in Duke Energy Carolinas’ existing residential Basic Facilities Charge

was not present in the utility’s non-residential rates given that those rates generally

included a demand, as well as a customer-related, component. As a result, for all of

these reasons, we hold that the Commission did not commit any error of law by

approving an increase in Duke Energy Carolinas’ residential Basic Facilities

Charge.24

III. Conclusion

Thus, for all of these reasons, we conclude that the Commission did not err by:

(1) allowing the inclusion of a large majority of the utilities’ coal ash costs in the cost

24 Although we affirm the Commission’s conclusions with respect to this issue in this

case, we note that the Commission’s rate design decisions do not have res judicata effect and may be revisited in future general rate proceedings. Duke Power Co. I, 285 N.C. at 395, 206 S.E.2d at 281; State ex rel. Utils. Comm’n v. Edmisten, 294 N.C. 598, 603, 242 S.E.2d 862, 866 (1978); Thornburg I, 325 N.C. at 469, 385 N.C. at 454.

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of service used for the purpose of establishing the utilities’ North Carolina retail

rates; (2) interpreting N.C.G.S. § 62-133(d) to authorize the Commission, in the

exercise of its discretion, to allow a return on the unamortized balance of the deferred

operating expenses; and (3) increasing Duke Energy Carolinas’ residential Basic

Facilities Charge from $11.80 to $14.00. On the other hand, we hold that the

Commission erred by rejecting the Public Staff’s equitable sharing proposal without

properly considering and making findings and conclusions concerning “all other

material facts” as required by N.C.G.S. § 62-133(d). As a result, we affirm the

Commission’s decisions, in part, and reverse and remand the Commissions’ decisions

for further proceedings not inconsistent with this decision, in part.

AFFIRMED, IN PART; REVERSED AND REMANDED, IN PART.

-123- Justice NEWBY concurring in part and dissenting in part.

I agree with most of the majority’s analysis. I disagree, however, with the

majority’s conclusion that the Commission erred by rejecting the Public Staff’s

equitable sharing proposal in both the Duke Energy Progress (DEP) rate case and

the Duke Energy Carolinas (DEC) rate case without, in the majority’s view, properly

considering and making findings and conclusions concerning “all other material facts”

pursuant to N.C.G.S. § 62-133(d), specifically including the alleged environmental

violations. To the contrary, the Utilities Commission considered all the evidence and

chose not to assess further penalties, other than the $100,000,000 that it had already

imposed, against the utilities in the respective orders. As such, the Utilities

Commission did not abuse its discretion when choosing to reject the Public Staff’s

proposal. Moreover, the majority’s approach seems to untether the Utilities

Commission from its statutorily delineated discretion to make these determinations,

which raises separation of powers concerns. Essentially, the majority seems to

promulgate an unbridled approach contrary to the statutorily defined discretion and

authority afforded to the Utilities Commission in its own, unique capacity. Therefore,

I concur with the majority’s opinion in part and dissent in part.

The Utilities Commission did not abuse its discretion in rejecting the Public

Staff’s equitable sharing proposal in both of its orders, the DEP Order as well as in

the DEC Order. Notably, the Utilities Commission’s discretionary determination is STATE EX REL. UTILS. COMM’N V. STEIN

Newby, J., concurring in part and dissenting in part

reviewed by this Court for an abuse of discretion. See State ex rel. Utils. Comm’n v.

Public Staff-North Carolina Utils. Comm’n, 123 N.C. App. 623, 627, 473 S.E.2d 661,

664 (1996) (“Exercise of discretionary powers of the Commission will not be reversed

by reviewing courts except upon a showing of ‘capricious, unreasonable, or arbitrary

action or disregard of law.’ ” (quoting State ex rel. North Carolina Utils. Comm’n v.

Carolina Coach Co., 261 N.C. 384, 391, 134 S.E.2d 689, 695 (1964))). Moreover, “the

weighing of the evidence and the exercise of judgment thereon within the scope of

[the Utilities Commission] authority are matters for the Commission.” Carolina

Coach Co., 261 N.C. at 391, 134 S.E.2d at 695 (citing State ex rel. Utils. Comm’n v.

Fredrickson Motor Express, 232 N.C. 180, 59 S.E.2d 582 (1950)). Simply put, a

reviewing court’s authority is limited. State ex rel. Utils. Comm’n v. Gen. Tel. Co. of

Se., 281 N.C. 318, 336–37, 189 S.E.2d 705, 717 (1972).

“Neither such finding of fact nor the Commission’s determination of what rates

are reasonable may be reversed or modified by a reviewing court merely because the

court would have reached a different finding or determination upon the evidence.” Id.

at 337, 189 S.E.2d at 717 (citing State ex rel. Utils. Comm’n v. Morgan, Att’y Gen., 277

N.C. 255, 177 S.E.2d 405 (1970); State ex rel. North Carolina Utils. Comm’n v.

Southern Railway Co., 267 N.C. 317, 148 S.E.2d 210 (1966); State ex rel. Utils.

Comm’n v. S. Ry. Co., 254 N.C. 73, 118 S.E.2d 21 (1961); State ex rel. Utils. Comm’n

v. Gulf-Atl. Towing Corp., 251 N.C. 105, 110 S.E.2d 886 (1959)). While the

Commission certainly must consider all statutory enumerated elements, “[t]he

Legislature has . . . designated the Commission to do the weighing of these elements,

and the reviewing court may not set aside the Commission’s determination of ‘fair

value’ merely because the court would have given the respective elements different

weights and would, therefore, have arrived at a different ‘fair value.’ ” Id. at 339, 189

S.E.2d at 719 (quoting Morgan, Att’y Gen., 277 N.C. at 267, 177 S.E.2d at 413; then

citing State ex rel. Utils. Comm’n v. State and Utils. Comm’n v. Tel. Co., 239 N.C. 333,

344, 349, 80 S.E.2d 133, 140–141, 144 (1954); and then citing State ex rel. North

Carolina Utils. Comm’n v. Westco Tel. Co., 266 N.C. 450, 457, 146 S.E.2d 487, 491–

92 (1966)).

Under the proper abuse of discretion standard of review, it cannot be said that

the Utilities Commission’s decision was so arbitrary that it could not be the result of

a reasoned decision. The Utilities Commission’s thorough orders demonstrate that it

knew and was well aware of the alleged environmental violations. While the Utilities

Commission need not and could not decide the merits of the alleged violations, it

certainly took the underlying facts into account. The evidence admitted and the

resulting orders show that the Utilities Commission properly considered all of the

allegations. The Commission even noted it was “unable to find DEP faultless in the

dilemma.” The Commission stated that these circumstances of mismanagement

resulted in its decision to impose $70,000,000 and $30,000,000 management penalties

in the two orders.

Specifically, in the DEP rate case, the Commission decided to allow

amortization of the deferred costs “over five years with a full return on the

unamortized balance,” but it did so after making a downward adjustment for a

management penalty. Moreover, in the DEC rate case, the Utilities Commission

explained that, other than adjusting for a management penalty, it would not be

appropriate for the Commission to exercise its discretion to make a further downward

adjustment. In doing so, the Commission explained its decision:

No witness argues that the Commission lacks the discretion to follow the precedent it established in [early rate cases,] where it addressed the issue of amortizing deferred ARO CCR remediation costs over five years and a return on the unamortized balance. No witness argues that the law forbids the Commission to authorize a return on the unamortized balance. The Commission chooses to exercise its discretion and authority under N.C.[G.S.] § 63- 133(d) and follow its precedent here—amortize the ARO costs over five years and authorize a return on the unamortized balance . . . . The Commission will not accept the Public Staff equitable sharing argument primarily because the Commission determines in its discretion that amortization of the deferred ARO costs over 25 years is inequitable . . . .

The Commission clearly explained that, despite recognizing the alleged fault

of the Utilities in their management of these situations, when considering rate

setting, rates that do not allow a utility to recoup reasonable costs jeopardizes the

financial strength of the utility, which results in higher rates for ratepayers over time

and diminished quality of services that the utility must provide. Thus, the

Commission’s decisions certainly were not without reason and explanation; it

therefore cannot be said that the Commission abused its discretion in allowing a

downward adjustment in imposing management penalties, just not to the extent and

in the way that the Public Staff requested. To the extent that the applicable statute

gave the Utilities Commission a degree of discretion, it understood that it possessed

the discretion and exercised the discretion appropriately, explaining its choice to do

so.

Neither the Public Staff nor the majority can point to a factor that was not

considered in either order. Instead, the Public Staff recommended that the Utilities

Commission disallow the Utilities from recovering 50% of the coal ash closure costs

in the DEP rate case, and 51% of costs in the DEC rate case. The Public Staff could

offer no explanation for selecting the 50% and 51% disallowances. Contrary to the

Public Staff’s inability to explain its recommended percentages for disallowances, the

Commission did explain why the Public Staff’s recommendation of a 51%

disallowance in the Duke Energy Carolinas rate case was arbitrary:

[T]he concept is standard-less, and, therefore, from the Commission’s view arbitrary for purposes of disallowing identifiable costs—there is no rationale that supports a substantially large 51% disallowance. The Public Staff chose a desirable equitable sharing ratio, then backed into the mechanism to achieve that level of disallowance, leaving the allocation subject to an arbitrary and capricious attack, particularly as it provides no explanation as to why the “equitable” split for DEP in the 2018 DEP Case was in its view 50-50, while the “equitable” split in this case is 51-49. As the Commission held in the 2018 DEP Case, the “Public Staff provides insufficient

justification for the 50/50 [split] as opposed to 60/40 or 80/20 . . . .” 2018 DEP Rate Order, p. 189.

Therefore, it does not appear that the Utilities Commission thought it lacked

the authority to weigh all factors presented, nor do the Commission’s orders show a

willful decision to ignore the Public Staff’s argument with regard to the

environmental concerns. To the contrary, after carefully considering the Public Staff’s

recommendations as a whole, the Utilities Commission rejected the Public Staff’s

recommendation since the Commission already imposed a downward adjustment in

the form of management penalties. Therefore, contrary to the majority’s conclusion,

these cases need not be remanded to the Utilities Commission because it did not

abuse its discretion.

Further, the majority’s approach in remanding the case to consider additional

factors broadens the statutorily delineated discretion that the Utilities Commission

has, thereby raising constitutional concerns about separation of powers. By statute,

the Utilities Commission does not have unbridled discretion. When the General

Assembly delegated some of its legislative authority to the Utilities Commission, the

legislature properly set forth “adequate guiding standards to govern the exercise of

the delegated powers.” Adams v. N.C. Dep’t of Nat. and Econ. Res., 295 N.C. 683, 697,

249 S.E.2d 402, 410 (1978). “In fixing rates to be charged by a public utility, the

Commission is exercising a function of the legislative branch of government.” Gen.

Tel. Co. of Southeast, 281 N.C. at 336, 189 S.E.2d at 717. The General Assembly,

however, limited the Utilities Commission’s discretion by setting forth specifically

enumerated factors to consider when fixing rates, stated in section 62-133 of the

General Statutes. The Commission must comply with the statutory requirements. Id.

at 336, 189 S.E.2d at 717.

In addition to the specifically enumerated factors set forth in section 62-133,

the statute also provides that “[t]he Commission shall consider all other material

facts of record that will enable it to determine what are reasonable and just rates.”

N.C.G.S. § 62-133(d) (2019). The Utilities Commission should set forth the factors

considered “so that the reviewing court may see what these elements are and

determine the authority of the Commission to consider them as ‘relevant to the

present fair value.’ The statute does not contemplate that the Commission may ‘roam

at large in an unfenced field’ in the selection of such ‘other facts.’ ” Gen. Tel. Co. of

Southeast, 281 N.C. at 340, 189 S.E.2d at 719 (quoting State ex rel. Utils. Comm’n v.

Pub. Serv. Co., 257 N.C. 233, 237, 125 S.E.2d 457, 460 (1962)). While the Commission

must consider the factors as enumerated in the statute, and failure to do so warrants

reversal, so long as it does so, determining the weight given to those factors when

reaching its conclusion is certainly within the Commission’s authority and is not the

role of a reviewing court. Id. at 358–59, 189 S.E.2d at 731.

Here the Commission held over a month of hearings and considered testimony

and thousands of pages of exhibits. While the General Assembly has instructed that

the Commission shall consider all material facts, this instruction must be read in the

context of the entire statute, part of which directs the Commission to follow a specific

formula when it sets rates for public utilities. See N.C.G.S. § 62-133(b), (c) (2019).

These statutory guiding principles enable the Utilities Commission to

constitutionally fulfill its role. The Public Staff’s position, which essentially asks the

Commission to deny a fair rate of return in its unbridled discretion, simply cannot be

adopted without the Utilities Commission roaming outside the clear statutory

requirements. Thus, allowing the Utilities Commission this type of unfettered

discretion implicates separation-of-powers principles, which require that the

legislature give specific, detailed guidelines to the Utilities Commission in exercising

its legislative function of setting rates. Notably, the Commission reasoned that

adopting unsupported percentages as set forth by the Public Staff would equate to

the Commission acting arbitrarily and capriciously, which the Commission cannot

do.1 Therefore, the Commission’s decision to reject the Public Staff’s recommendation

was within its statutorily defined discretion.2

1 Moreover, the Utilities Commission certainly knew and understood the decision it

made in Dominion, where it agreed to the Public Staff’s stipulation about Dominion’s ability to recover costs and receive a rate of return. In re Application of Va. Elec. & Power Co., d/b/a Dominion N.C. Power, for Adjustment of Rates and Charges Applicable to Elec. Util. Serv. in N.C., Order Approving Rate Increase and Cost Deferrals and Revising PJM Regulatory Conditions, Docket No. E-22, Sub 532 (December 22, 2016) (available through https://starw1.ncuc.net/NCUC/page/Orders/portal.aspx by searching docket number and date). If the Utilities Commission decides this case differently, the Commission could be charged with making an arbitrary and capricious decision, departing from a prior decision with very similar facts. The Commission reached its decision by thoroughly explaining its reliance on 2

Thornburg I and Thornburg II, both of which dealt at least in part with plants that were

Thus, I disagree with the majority’s conclusion that the Commission erred by

rejecting the Public Staff’s equitable sharing proposal without, in its view, properly

considering and making findings and conclusions concerning “all other material

facts.” Both orders should be affirmed. Therefore, I respectfully concur in part and

dissent in part.

never used at all. See State ex rel. Utils. Comm’n v. Thornburg, 325 N.C. 463, 385 S.E.2d 451 (1989) (Thornburg I); State ex rel. Utils. Comm’n v. Thornburg, 325 N.C. 484, 385 S.E.2d 463 (1989) (Thornburg II). This Court on appeal concluded that the Utilities Commission did not have the authority to effectuate any sort of “equitable sharing” position in its decision; either the plants and the relevant equipment were used and useful, and therefore should be included in rate base, or they were not. Therefore, the Utilities Commission here acted within the appropriate scope when determining that, after allowing a management penalty, that certain costs should be allowed based on the statutory criteria that control the Utilities Commission’s ability to act.

-2- Justice EARLS concurring in part and dissenting in part.

Starting for a moment with the basics of what this case involves, the law of

North Carolina tasks us with the duty to “decide all relevant questions of law,

interpret constitutional and statutory provisions, and determine the meaning and

applicability of the terms of any Commission action.” N.C.G.S. § 62-94(b) (2019). In

so doing, this 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.

Id. Further, we must take into account the policy of the State described by the

General Assembly in statute, as well as the purposes of the laws it writes. See, e.g.,

State ex rel. Utils. Com. v. Morgan, 277 N.C. 255, 266, 177 S.E.2d 405, 412 (1970)

(taking account of the “clear purpose of chapter 62 of the General Statutes” as well

as that chapter’s declaration of policy to reject an interpretation of N.C.G.S. § 62-

133(b) proposed by a utility). To that end, I observe that it is “the policy of the State

of North Carolina,” inter alia, to “provide fair regulation of public utilities in the STATE EX. REL. UTILS. COMM’N V. STEIN

Earls, J., concurring in part and dissenting in part

interest of the public” and to “encourage and promote harmony between public

utilities, their users and the environment.” N.C.G.S. § 62-2(a) (2019). “To these ends,

therefore, authority shall be vested in the North Carolina Utilities Commission to

regulate public utilities generally, their rates, [and their] services and operations . . .

in the manner and in accordance with the policies set forth in this Chapter.” Id. § 62-

2(b). The Commission is required to “fix such rates as shall be fair both to the public

utilities and to the consumer.” Id. § 62-133(a).

In this case the intervenors allege that the utilities have caused significant

harm to the environment through their operations. The majority has already

described some of the history of that harm, including the 2014 incident at Dan River

resulting in between 30,000 and 39,000 tons of coal ash being discharged into the

river, as well as the nine criminal violations to which the utilities pleaded guilty in

federal court. Against the backdrop of new legislation requiring the utilities to

address discharges at their coal ash basins, close all of their unlined coal ash basins,

and change their coal ash management practices, see N.C.G.S. § 130A-309.211–.214,

the utilities petitioned the Commission for permission to defer their compliance

expenses. The utilities noted that, if they were required instead to “write off billions

of dollars of costs for accounting purposes,” their investors would receive a return on

their investment of approximately 7.5% rather than the approximately 10.3% they

would otherwise receive. This is the context of the decision before us—whether to

affirm orders from the Commission which place the weight of coal ash cleanup costs

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on North Carolina energy customers so that investors in Duke Energy Progress and

Duke Energy Carolinas receive a higher return on their investment.

I concur in the majority’s conclusion that the orders entered by the North

Carolina Utilities Commission are sufficient to satisfy the requirements of N.C.G.S.

§ 62-79(a) (2019) because the orders are “sufficient in detail to enable the court on

appeal to determine the controverted questions presented.” See N.C.G.S. § 62-79(a).

Further, I concur in the majority’s conclusion that the decision to increase the Basic

Facilities Charge levied by Duke Energy Carolinas for some classes of customers is

supported by sufficient evidence in the record.

I also agree, in part, with the majority’s discussion of the Commission’s

conclusions with respect to cost recovery. The Commission ultimately found that the

coal ash expenditures made by Duke Energy Progress, LLC, and Duke Energy

Carolinas, LLC, were reasonable and prudent within the meaning of the statute so

as to permit cost recovery in rates. The intervenors argued that all of these costs

should have been disallowed because the utilities unreasonably decided to store coal

ash in unlined basins, and further mismanaged those basins, resulting in

environmental damage and increased cost to consumers. While the intervenors make

a strong policy argument, the majority was correct on the law to reject such a broad

claim. I write separately on this point, however, because I disagree with the majority’s

ultimate conclusion. In my view, the Commission erred by determining that the

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intervenors failed to produce evidence sufficient to trigger the utilities’ burdens of

persuasion that the costs were reasonable.

Further, I disagree with the majority’s analysis concerning the extent of the

Commission’s discretionary authority pursuant to N.C.G.S. § 62-133(d) (2019) to

allow the utilities to earn a return on the unamortized portion of their deferred coal

ash costs.1 While I agree with the majority’s ultimate determination that the

Commission did not appropriately utilize its discretion, which is expressed in the

majority’s remand for a more fulsome consideration of the Public Staff’s equitable

sharing proposal, I would hold that the Commission’s authority is limited by the

express terms of that statute and does not extend so far as the majority allows. As a

result, I respectfully dissent from that portion of the majority’s opinion.

Cost recovery

When the Commission is setting rates for a public utility, part of what it must

do is determine the utility’s “reasonable operating expenses.” N.C.G.S. § 62-133(b)(3).

When the Commission calculates the total amount of revenue that the utility will be

allowed to recover from consumers through rates, the reasonable operating expenses

are included in that figure. Id. § 62-133(b)(5). However, a utility may only recover

those operating expenses which are reasonable and prudent. See, e.g., State ex rel.

1 No part of the majority’s opinion suggests that the coal ash expenditures were properly included in rate base as property used and useful, and therefore entitled to a return. See N.C.G.S. § 62-133(b)(1), (4). While the majority does not discuss this aspect of the case in detail, I elaborate on the issue below.

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Utils. Comm’n v. Eddleman, 320 N.C. 344, 368, 358 S.E.2d 339, 355 (1987). While we

presume that a utility’s costs are reasonable, State ex rel. Utils. Comm’n v.

Conservation Council of N.C., 312 N.C. 59, 64, 320 S.E.2d 679, 683 (1984), the

presumption is overcome if a challenger produces affirmative evidence that the costs

“are exorbitant, unnecessary, wasteful, extravagant, or incurred in abuse of

discretion or in bad faith or that such expenses exceed either the cost of the same or

similar goods or services on the open market or the cost similar utilities pay to their

affiliated companies for the same or similar goods or services,” State ex rel. Utils.

Comm’n v. Intervenor Residents of Bent Creek/Mt. Carmel Subdivisions, 305 N.C. 62,

76–77, 286 S.E.2d 770, 779 (1982) (Bent Creek). If this happens, the utility must

satisfy its burden of persuasion to show that the costs are reasonable. Id. at 75–76,

286 S.E.2d at 778–79.

The majority holds that the Commission did not err when it determined that

the Attorney General and other intervenors did not produce evidence to overcome the

presumption of reasonableness for the utilities’ costs. This may be true on a broad

basis, in the sense that the intervenors did not produce evidence which would indicate

that all of the utilities’ costs were imprudent. As it relates to the utilities’ decisions

to utilize unlined coal ash basins in the first place, the intervenors largely produced

evidence suggesting that the utilities’ practices were shortsighted, motivated by near-

term profit, or insufficiently sensitive to environmental concerns. Certainly, history

has demonstrated that the utilities were insufficiently concerned with the

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environmental impacts of their actions, as evidenced by the extensive record of

groundwater seepage, coal ash spills, and other negative environmental effects of the

utilities’ practices. Further, the evidence demonstrated that, at least in some cases,

the utilities ignored the risk of environmental harm. For example, the record in the

Duke Energy Progress rate case includes a report, prepared in 2004, regarding a long-

term strategy for coal ash at the utility’s L.V. Sutton Steam Electric Plant. The report

identified problems at the plant, including (1) that an unlined coal ash basin was

nearing capacity and would be full within two years, (2) that a nearby test monitoring

well was showing high levels of arsenic, and (3) that environmental regulatory

pressure was increasing on coal ash storage practices. The report outlined a number

of long-term solutions, none of which had been implemented as of 2014. However, the

statutory definition of reasonable operating expenses does not relate to the general

reasonableness of the overall course of action but only to the reasonableness of the

costs incurred. See Bent Creek, 305 N.C. at 76-77, 286 S.E.2d at 779.

I conclude that the Commission did err in its reasonableness determination

because there was specific evidence produced that the particular costs incurred were

exorbitant. “For rate-making purposes, the reasonable operating expenses of the

utility must be determined by the Commission.” State ex rel. Utils. Comm’n v. N.C.

Textile Mfrs. Ass’n., 309 N.C. 238, 239, 306 S.E.2d 113, 114 (1983) (per curiam) (citing

N.C.G.S. § 62-133(b)). Where affirmative evidence is offered to challenge the

reasonableness of incurred expenses, “[t]he Commission has the obligation to test the

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reasonableness of such expenses.” Bent Creek, 305 N.C. at 76, 286 S.E.2d at 779.

While the majority blesses wholesale the Commission’s determinations that the

intervenors failed to come forward with sufficient evidence, a closer examination of

the record reveals that appropriate evidence was presented.

For example, consider the 2004 report in the record of the Duke Energy

Progress rate case pertaining to coal ash management strategies at the L.V. Sutton

Steam Electric Plant. The report noted that the plant was permitted for two coal ash

basins, one of which was full and the other of which would be full within two years.

The report also recognized that the basins “will eventually have to [be] emptied and

placed in a lined containment to eliminate the leaching of the ash products into the

ground water system.” As noted previously, the report presented a number of long-

term solutions for managing the facility’s coal ash. These included the following

options:

 doing nothing;

 increasing the capacity of the newer basin and building a new one in

seven years;

 building a new basin more immediately;

 stacking dry ash at the facility and building a vertical dike to increase

capacity at the plant;

 using the coal ash to build a golf course;

 using the coal ash to build a wildlife preserve and public park;

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 using the coal ash to build an industrial park;

 stacking the dry ash and processing it for sale in cement manufacturing;

 shipping the ash to a landfill or storage facility; and

 using new technology to expand the capacity of the existing coal ash

basins.

Significantly, the report also included a section labeled “Economic Analysis.”

That section stated the following for the “do nothing” approach:

The economic components of this alternative are all negative and are a direct result of not having any available space in the existing ash pond. The cost figures are derived from the loss of generation from the plant until 2012, at which time the ash would be shipped for the DOT project and allow the plant to continue operation at that time.

This alternative would not alleviate the potential emergent projects associated with the unlined 1983 ash pond, or the pre-ash pond disposal site, and the monitoring well issues. The economic evaluation for this alternative will reflect a negative impact based on the cost of these projects and the probability of their occurrence.

Out of the ten alternatives listed in the report, the “do nothing” approach was ranked

very near the bottom of the list in an “Economical Ranking.”

This is precisely the type of evidence that we identified in Bent Creek as

“affirmative evidence [that] is offered by a party to the proceeding that challenges the

reasonableness of expenses.” See Bent Creek, 305 N.C. 62, 76–77, 286 S.E.2d 770, 779

(1982). Faced with evidence that the utilities identified and ignored problems which

would lead to greater expenses in the future, the Commission was required to “test

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the reasonableness of such expenses” when they were presented by the utilities for

cost recovery. Id. at 76, 286 S.E.2d at 779.

The Commission did not take the approach required of it to determine whether

the expenses that the utilities sought to recover were reasonably incurred. A more

appropriate approach is demonstrated in the dissents of Commissioner Clodfelter in

both the Duke Energy Progress and Duke Energy Carolinas rate cases, where he

examined the evidence pertaining to each facility to determine whether the utilities

had incurred reasonable costs. As Commissioner Brown-Bland noted in her dissent

to the Duke Energy Progress order, the approach taken by the Commission, “without

further analysis, does not reasonably assure that the rates fixed for the Company’s

service are ‘fair to both the public utility[y] and to the consumer,’ and that the rate

set by the Commission and to be received by the Company is just and reasonable.”

The Commission and the majority of this Court, by failing to undertake a detailed

consideration of the costs proposed by the utilities, wrongly ignore the 2004 report

and other evidence suggesting that the costs proposed for recovery by the utilities

were not reasonably incurred.

The majority states that it agrees with the Commission’s determination that

the intervenors failed to quantify the specific effect of these improprieties. However,

neither the Commission nor the majority cite authority from this Court or the General

Statutes for such a requirement. Having been presented with evidence that the

utilities’ expenses were unreasonable, the Commission should have required the

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utilities to prove that they were entitled to cost recovery. Bent Creek, 305 N.C. at 76,

286 S.E.2d at 779. For that reason, I dissent from the majority’s conclusions that the

intervenors did not satisfy the burden of production.

Investment return

Property used and useful

While the Commission allowed a return on the unamortized balance of the

utilities’ coal ash expenditures, such a return was not permitted as a result of the

expenditures’ inclusion in the utilities’ rate base. See, e.g., N.C.G.S. § 62-133(b)(1)

(defining rate base to include the “original cost or the fair value under G.S. 62-133.1A

of the public utility’s property used and useful”); State ex rel. Utils. Comm’n v.

Thornburg, 325 N.C. 463, 475, 385 S.E.2d 451, 458 (1989) (Thornburg I) (explaining

that a utility may receive a return on property used and useful, but may not receive

a return on reasonable operating expenses). Upon review of the Commission’s orders

in this case, I am convinced that further clarification is needed on what, in an

ordinary ratemaking case, is properly included in rate base and reasonable operating

expenses, respectively.

When calculating the rates that a utility may charge the public, the

Commission must first determine the total revenues that the utility is entitled to

obtain through rates charged to customers. N.C.G.S. § 62-133(b). In other words, the

Commission has to figure out how much total money the utility gets from people who

are paying for (in this case) electricity. To do this, the Commission uses a formula

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that has been prescribed by the General Assembly through statute. We have

previously explained the formula:

This statute requires the Commission to determine the utility’s rate base (RB), its reasonable operating expenses (OE), and a fair rate of return on the company’s capital investment (RR). These three components are then combined according to a formula which can be expressed as follows:

(RB X RR) + OE = REVENUE REQUIREMENTS

Thornburg I, 325 N.C. at 467 n.2, 385 S.E.2d at 453 n.2. “[R]ate base,” we explained,

“is the reasonable cost of the utility’s property which is used and useful in providing

service to the public, minus accumulated depreciation, and plus the reasonable cost

of the investment in construction work in progress.” Id. So, when the Commission is

determining how much money a utility can charge to consumers, the first thing that

it must do is figure out how much “used and useful” property (otherwise known as

rate base) the utility has, and to multiply the value of that property by a fair rate of

return. This is what it means to say that a utility receives a rate of return on its

property used and useful. However, the utility does not receive a rate of return on its

reasonable operating expenses, which the statute distinguishes from property used

and useful. See N.C.G.S. § 62-133(b); accord Thornburg I, 325 N.C. at 475, 385 S.E.2d

at 458 (“While this statute makes clear that the rates to be charged by the public

utility allow a return on the cost of the utility’s property which is used and useful

within the meaning of N.C.G.S. § 62-133(b)(1), the statute permits recovery but no

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return on the reasonable operating expenses ascertained pursuant to subdivision

(3).”).

Our prior decisions have provided further clarity on what is and is not included

in rate base, and therefore on what the Commission may allow a return. In one case,

we considered whether the Commission erred in allowing a utility to include amounts

invested in plant facilities servicing abandoned power generation units. State ex rel.

Utils. Comm’n v. Thornburg, 325 N.C. 484, 486, 385 S.E.2d 463, 464 (1989)

(Thornburg II). There, the utility had built a facility with four nuclear generation

power units while it turned out that only one was necessary to meet the needs of its

customers. Id. at 487, 385 S.E.2d at 464. Determining that the Commission had erred

by including the costs of the abandoned power generation units in rate base and

allowing a return, we noted:

The statute sets out a two-part test for the Commission to use in deciding what goes into the rate base for all costs except costs of construction work in progress. The Commission must: (1) determine the reasonable original cost of the property and (2) determine if the property is “used and useful, or to be used and useful within a reasonable time after the test period.” If the costs in question do not meet both parts of the test, the costs may not be included in the rate base for ratemaking purposes.

Id. at 491, 385 S.E.2d at 466–67 (citations omitted). Because the amount that the

utility sought to include in rate base “was spent to build excess common facilities,” we

concluded that they could not be included in rate base. Id. at 495, 385 S.E.2d at 469.

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This was because “[i]f the facilities are excess, as a matter of law, they cannot be

considered ‘used and useful’ as that term is used in N.C.G.S. § 62-133(b)(1).” Id.

Similarly, we considered in another case whether a wastewater treatment

plant that “was not in service at the end of the test year and, in fact, would never

again be in service” was includable in rate base. State ex rel. Utils. Comm'n v.

Carolina Water Serv., 335 N.C. 493, 507, 439 S.E.2d 127, 135 (1994) (Carolina Water).

We stated, reviewing our prior decisions:

If facilities are not used and useful, they cannot be included in rate base. Including costs in rate base allows the company to earn a return on its investment at the expense of the ratepayers. We do not allow such a return for property that will not be used or useful within the near future. Costs for abandoned property may be recovered as operating expenses through amortization, but a return on the investment may not be recovered by including the unamortized portion of the property in rate base.

Id. at 508, 439 S.E.2d at 135 (citations omitted). We concluded that the wastewater

treatment plant was no longer used and useful and held that “no portion of its costs

may be included in rate base.” Id.

Where a pipeline built to serve a former customer was later used as a storage

facility, to the benefit of current customers, we have determined that the property

was used and useful and properly included in rate base. State ex rel. Utils. Comm’n

v. N.C. Textile Mfrs. Ass’n, 313 N.C. 215, 229–30, 328 S.E.2d 264, 273 (1985).

Moreover, where a generating unit “is needed to enable [a utility] to meet the load on

its system, and does not represent excess generating capacity,” Eddleman, 320 N.C.

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at 355, 358 S.E.2d at 347, the unit is appropriately included in rate base as property

used and useful, Id. at 362, 358 S.E.2d at 351–52.

In each case where we consider whether property is used and useful, the

delineating factor is whether that property is currently useful for the provision of

current service to customers. In Thornburg II, we concluded that excess common

facilities should be excluded from rate base because they were not being used to

provide service to customers. 325 N.C. at 495, 385 S.E.2d at 469. Similarly, in

Carolina Water, a wastewater treatment plant was not properly included in rate base

because it was no longer being used to provide service to customers and would not be

used in the future. 335 N.C. at 507–08, 439 S.E.2d at 135. By contrast, in Textile

Manufacturers Association, we determined that a pipeline was properly included in

rate base because it was being used as a storage facility, benefiting customers,

notwithstanding the fact that it was not being used to its full capacity. 313 N.C. at

229-30, 328 S.E.2d at 273. Finally, in Eddleman, we determined that a generating

unit that was being used as reserve capacity to handle the peak energy use of current

customers was properly included in rate base as property used and useful. 320 N.C.

at 355–60, 358 S.E. 2d at 347–50. Moreover, in each case, we considered whether

property could be included in rate base. See N.C.G.S. § 62-133(b)(1) (including “the

reasonable original cost or the fair value . . . of the public utility’s property used and

useful” in the calculation of rate base).

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The Commission seems to have confused this analysis. For example, the

Commission writes in its Duke Energy Carolinas order:

Costs are not recoverable simply because they are incurred by the utility. The utility must show that the costs it seeks to recover are (1) “known and measurable”; (2) “reasonable and prudent”; and (3) where included in rate base “used and useful” in the provision of service to customers. . . . But once it has shown that these metrics are met, the utility should have the opportunity to recover the costs so incurred. This is what North Carolina’s ratemaking statute requires. . ., and to do otherwise would amount to an unconstitutional taking.

Later, the Commission writes that “if the expenditures [of a utility] do support and

provide service to customers, the costs are ‘used and useful.’ ”

However, the Commission’s references to “costs” and “expenditures” are

broader than the General Assembly has prescribed, and broader than any case from

this Court has previously allowed. Only “the cost of the public utility’s property”

receives a rate of return under the statutory ratemaking formula. N.C.G.S. § 62-

133(b)(5). Similarly, our decisions on rate base have stated the figure includes “the

reasonable cost of the utility’s property which is used and useful in providing service

to the public.” Thornburg I, 325 N.C. at 467 n.2, 385 S.E.2d at 453 n.2; accord

Carolina Water, 335 N.C. at 508, 439 S.E.2d at 135 (“There is no statutory authority

for including in rate base costs from a completed plant that is no longer used and

useful within the meaning of this term as determined by our case law.”). As a result,

to the extent that the Commission determined that the utilities coal ash expenditures

were includable in rate base as property used and useful, it erred as a matter of law.

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Discretionary authority pursuant to N.C.G.S. § 62-133(d)

While the foregoing applies to the ordinary ratemaking case, the majority notes

that the rate cases below involved extraordinary and unusual circumstances,

triggering the Commission’s obligation to “consider all other material facts of record

that will enable it to determine what are reasonable and just rates.” See N.C.G.S. §

62-133(d). The majority sets out a new, four-part test to evaluate the Commission’s

use of discretion pursuant to that provision. The majority holds that the Commission

may utilize its authority under N.C.G.S. § 62-133(d) to “consider other material facts

of record” in its determination of “reasonable and just rates” when (1) the rate case

involves unusual, extraordinary, or complex circumstances not adequately addressed

by the remainder of the statute, (2) the Commission reasonably concludes that a

departure from the ordinary ratemaking process is justified, (3) the Commission

determines that it must consider “other facts” to produce reasonable and just rates,

and (4) the Commission makes sufficient factual findings and legal conclusions

supported by substantial record evidence on a review of the whole record which

explain (a) why the Commission is diverging from the usual ratemaking process and

(b) why its adopted approach is reasonable and just to the utility and consumers.

This is an admirable procedural rule which the Commission must now follow

before utilizing its discretionary authority under the statute. The rule helpfully states

the categories of information that the Commission must include in its order. However,

the majority’s new rule provides no guidance on the substantive limits of the

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Commission’s discretionary authority.2 It also provides the Commission with little

guidance as to when the Commission may appropriately use its discretionary

authority to adjust the traditional ratemaking process, providing only the undefined

standard of “unusual, extraordinary, or complex circumstances.” As I read our prior

decisions, the Commission’s authority pursuant to N.C.G.S. § 62-133(d) is informed

and limited by the remainder of that statute.

In State ex rel. Utilities Commission v. Duke Power Company, we held that the

Commission acted within its statutory power when, pursuant to N.C.G.S. § 62-133(d),

it reduced a utility’s rate base to offset accumulated depreciation expense, avoiding

“a windfall to [the utility] and a penalty to its customers.” 305 N.C. 1, 19, 287 S.E.2d

786, 797 (1982). This adjustment, we explained, was necessary to preserve “the

overall scheme of G.S. § 62-133.” Id. at 15, 287 S.E.2d at 794.

2 The majority’s analysis on this point highlights the extent to which the test could be

improved as a guiding tool. The majority, analyzing the Commission’s orders, notes only that the Commission appropriately identified the utilities’ rate cases as unusual and that it contained detailed findings of fact and conclusions of law. According to the majority’s test, such a finding triggers the use of the Commission’s discretionary authority under N.C.G.S. § 62-133(d). It does not, however, explain why the Commission’s particular use of its discretionary authority, here the decision to allow a rate of return on extraordinary operating costs, was appropriate. I also note that the majority’s conclusion that “the Commission did not err in approving the basic ratemaking approach that was utilized in these proceedings” directly conflicts with the majority’s later holding, that the Commission erred in rejecting the Public Staff’s equitable sharing proposal. The proposal included disallowing a return on the unamortized portion of the coal ash expenditures. Both of the Commission’s decisions (to allow a return and to reject the proposal) implicate the Commission’s authority under N.C.G.S. § 62-133(d).

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In Thornburg I, we blessed the Commission’s decision, pursuant to N.C.G.S. §

62-133(d), to liberally construe the statutory provision allowing cost recovery of

reasonable operating expenses to include abandonment losses. 325 N.C. at 476, 385

S.E.2d at 458. We noted that the Commission is permitted by that section of the

statute “to consider ‘all other material facts of record’ beyond those specifically set

forth in the statute,” and stated that this authority meant that “the Commission

would not be bound by a strict interpretation of” the other parts of the statute when

it utilized this discretion. Id. at 478, 385 S.E.2d at 459.

In State ex rel. Utilities Commission v. Carolina Power & Light Company, we

affirmed the Commission’s exercise of discretionary authority pursuant to N.C.G.S. §

62-133(d) because the exercise of that authority gave effect to the intent of the

legislature and was consistent with the explicit language of N.C.G.S. § 62-133(c). 320

N.C. 1, 13, 358 S.E.2d 35, 42 (1987).

In each of these cases, we affirmed the Commission’s use of its discretionary

authority under N.C.G.S. § 62-133(d) because doing so gave effect to the rest of the

ratemaking statute. In each case, the Commission’s exercise of discretion, while

departing slightly from the straightforward calculation prescribed by the remainder

of Section 62-133, nevertheless complemented the structure of that statute and was

necessary to avoid the “defeat of the overall scheme of G.S. § 62-133.” Duke Power

Co., 305 N.C. at 15, 287 S.E.2d at 794. This is consistent with our admonition that

“N.C.G.S. § 62-133(d) has been construed as a device permitting the Commission to

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take action consistent with the overall command of the general rate statutes, but not

specifically mentioned in those portions of the statute under consideration in a given

case.” State ex rel. Utils. Comm’n v. Nantahala Power & Light Co., 313 N.C. 614, 690–

91, 332 S.E.2d 397, 442 (1985) (emphasis added). As a result, it is incorrect for the

majority to state that the Commission’s authority pursuant to N.C.G.S. § 62-133(d)

is not limited by the rest of that statute. To the contrary, the Commission’s use of

N.C.G.S. § 62-133(d) must be consistent with the overall scheme of the ratemaking

structure set out by the General Assembly.

Having discussed the overreaching nature of the general grant of authority the

majority has given the Commission, I must emphasize that the specific outcome

reached by the Commission below is in direct contradiction of both the statute and

our prior decisions. Pursuant to the overall scheme of N.C.G.S. § 62-133, “the rates

to be charged by the public utility allow a return on the cost of the utility’s property

which is used and useful within the meaning of N.C.G.S. § 62-133(b)(1),” and “the

statute permits recovery but no return on the reasonable operating expenses

ascertained pursuant to subdivision (3).” Thornburg I, 325 N.C. at 475, 385 S.E.2d at

458. “Including costs in rate base allows the company to earn a return on its

investment at the expense of the ratepayers.” Carolina Water, 335 N.C. at 508, 439

S.E.2d at 135. By concluding that the Commission may depart from these

fundamental principles, the majority expands the discretionary authority permitted

under N.C.G.S. § 62-133(d) beyond any semblance of the legislative intent evidenced

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by the text. Where the ratemaking statute specifically limits application of a rate of

return to property used and useful, the Commission’s discretion to consider other

relevant facts cannot be interpreted so broadly as to achieve the opposite result. State

ex rel. Utils. Comm’n v. Gen. Tel. Co., 281 N.C. 318, 336, 189 S.E.2d 705, 717 (1972)

(“The Commission, however, does not have the full power of the Legislature but only

that portion conferred upon it in G.S. Chapter 62. In fixing the rates to be charged by

a public utility for its service, the Commission must, therefore, comply with the

requirements of that chapter, more specifically, G.S. 62-133.”).

Our decision in Carolina Water is particularly instructive. There, the

Commission treated an out-of-service wastewater treatment plant “as an

extraordinary property retirement,” determining “that the unrecoverable costs

should be amortized over ten years with the unamortized portion being included in

rate base.” 335 N.C. at 507, 439 S.E.2d at 135. Similarly, here, the Commission

permitted amortization over a period of time for a portion of the coal ash expenditures

and a return on the unamortized portion. Our conclusion in Carolina Water that the

unamortized portion of costs that did not represent used and useful property were

not entitled to a return should control the decision here.

As the Commission wrote in its DEC order, “[i]f the North Carolina General

Assembly had intended to give the Commission the authority to deny otherwise

recoverable environmental compliance costs due to some punitive theory of causation,

it could have said so—and it did not.” Just the same, if the General Assembly had

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intended to give the Commission the authority to allow a rate of return on expenses

rather than property, “it could have said so—and it did not.” “The legislature does not

operate in a vacuum,” in the Commission’s words. “Rather, it operates within the

context of N.C. Gen. Stat. § 62-133 . . . [h]ad it intended to disavow the routine cost

recovery standard, it can be expected that the legislature would have had to do so

As a final note, the majority remands this case to the Commission for

reconsideration of the Public Staff’s equitable sharing proposal. Because the proposal

is consistent with the overall structure of N.C.G.S. § 62-133, it would likely fall within

the limits of the Commission’s discretionary authority pursuant to subparagraph (d)

of that section, as described in our precedents. Further, the Public Staff’s proposal

more closely conforms to the General Assembly’s mandate that “the Commission shall

fix such rates as shall be fair both to the public utilities and to the consumer” than do

the results reached in the Commission’s orders that are being remanded now.

Returning to the basics of why this case matters, by constitutional mandate, it

is the “the policy of this State to conserve and protect its lands and waters for the

benefit of all its citizenry.” N.C. Const. art. XIV, § 5. Although the Constitution

provides particular prescriptions intended to achieve that goal, this provision

illustrates the state’s commitment to environmental protection and enshrines that

commitment in our most fundamental source of state law. While the Commission is

explicitly charged with “encouraging and promoting harmony between public

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utilities, their users and the environment,” N.C.G.S. § 62-2(a)(5), that statutory

mandate must also be read consistent with the state constitutional protections

designed to ensure the State protects its lands and waters.

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