N. Carolina Supreme Court Reverses State PSC Approval of Duke Power Electric Rate Settlement Finding Insufficient Review of 10.5% Profit and Customer Impact

The North Carolina Supreme Court on April 12, 2013 issued an opinion nullifying a Duke Power rate settlement approved by that state's Public Service Commission (PSC).  Duke Power in its initial rate case filing had asked for an increase of $646,057,000, to cover anticipated future costs of operation and maintenance and an profit allowance of 11.5%, representing an allowed return on investors' equity (ROE).  The PSC's Public Staff expert witness testified that the ROE should be 9.25%.  A non unanimous settlement agreement was eventually reached between the utility and the PSC's Public Staff for a rate increase of $309,033,000 -- less than half what the utility asked for, but still an annual rate increase of 7.21% faced by consumers.  The settlement amount was based in part on an agreed-upon ROE (profit) of 10.5%.  The estimated difference between the recommended ROE of 9.25% and the agreed-upon ROE of 10.5% in the settlement was approximately $100,000,000.

In its opinion, a resounding victory for consumers, the Court reversed the PSC order approving the settlement deal, and remanded the case to the PSC for further proceedings.  The Court faulted the PSC approval of the settlement because it lacked any independent determination of ROE when not all parties had settled the issue: 

Without sufficient findings of fact as to these issues, we cannot say that the Commission ―ma[de] ‗its own independent conclusion‘ . . . that the propos[ed] [ROE] [wa]s just and reasonable to all parties in light of all the evidence presented.* * * *  Instead, it appears that ―the Commission adopted wholesale, without analysis or deduction, the 10.5% stipulated ROE, ―as opposed to considering it as one piece of evidence to be weighed in making an otherwise independent determination.* * * *  Accordingly, the Commission‘s order must be reversed and this case remanded to the Commission so that it can make an independent determination regarding the proper ROE based upon appropriate findings of fact that balance all the available evidence.

In addition, the Court chastened the Commission in its focus on investor interests in setting the ROE. Citing the North Carolina statutes, the Court made clear that there must be consideration not only of investor interests, but also the impact of changing economic conditions on customers:

Given the legislature‘s goal of balancing customer and investor interests, the customer-focused purpose of Chapter 62, and this Court‘s recognition that the Commission must consider all evidence presented by interested parties, which necessarily includes customers, it is apparent that customer interests cannot be measured only indirectly or treated as mere afterthoughts and that Chapter 62‘s ROE provisions cannot be read in isolation as only protecting public utilities and their shareholders. Instead, it is clear that the Commission must take customer interests into account when making an ROE determination. Therefore, we hold that in retail electric service rate cases the Commission must make findings of fact regarding the impact of changing economic conditions on customers when determining the proper ROE for a public utility.

The North Carolina Attorney General's Utilities Section participated as an active party in the case.  The office, which is empowered to seek judicial review of the state PSC's decisions, is an independent utility consumer advocate and member of NASUCA, The AARP Foundation filed a brief amicus curiae with the North Carolina Supreme Court urging the Court to reverse the PSC order that had approved the rate case settlement.

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