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The North Carolina Utilities Commission Re: Duke Energy Progress Rate Hike
The North Carolina Utilities Commission Re: Duke Energy Progress Rate Hike
UTILITIES COMMISSION
RALEIGH
HEARD: Tuesday, September 12, 2017, at 7:00 p.m., Richmond County Courthouse,
Courtroom A, 105 W. Franklin Street, Rockingham, North Carolina
Monday, September 25, 2017, at 7:00 p.m., Commission Hearing Room
2115, Dobbs Building, 430 North Salisbury Street, Raleigh, North Carolina
APPEARANCES:
For Duke Energy Progress, LLC:
Lawrence B. Somers
Deputy General Counsel
410 South Wilmington Street, NCRH 20
Raleigh, North Carolina 27602
John T. Burnett
Deputy General Counsel
Duke Energy Florida
299 1st Avenue N, DEF-151
St. Petersburg, Florida 33701
1 Commissioner Bryan E. Beatty’s term ended before the Commission issued its decision in this
proceeding.
2
Mary Lynne Grigg
Joan Dinsmore
McGuireWoods, LLP
434 Fayetteville Street, Suite 2600
Raleigh, North Carolina 27601
Robert W. Kaylor
Law Office of Robert W. Kaylor, P.A.
353 East Six Forks Road, Suite 260
Raleigh, North Carolina 27609
Kiran H. Mehta
Troutman Sanders, LLP
301 South College Street, Suite 3400
Charlotte, North Carolina 28202
Brandon F. Marzo
Troutman Sanders, LLP
600 Peachtree Street, NE, Suite 5200
Atlanta, Georgia 30308
3
For Carolina Utility Customers Association, Inc. (CUCA):
Robert F. Page
Crisp & Page, PLLC
4010 Barrett Drive, Suite 205
Raleigh, North Carolina 27609
For North Carolina Waste Awareness and Reduction Network, Inc. (NC WARN):
John D. Runkle
2121 Damascus Church Road
Chapel Hill, North Carolina 27516
Ralph McDonald
Warren K. Hicks
Bailey & Dixon, LLP
Post Office Box 1351
Raleigh, North Carolina 27602
James P. West
West Law Offices, P.C.
434 Fayetteville Street, Suite 2325
Raleigh, North Carolina 27601
Glenn C. Raynor
Young Moore and Henderson, P.A.
Post Office Box 31627
Raleigh, North Carolina 27622
Alan R. Jenkins
Jenkins at Law, LLC
2950 Yellowtail Avenue
Marathon, Florida 33050
For North Carolina Electric Membership Corporation (NCEMC):
Daniel Whittle
Environmental Defense Fund
4000 Westchase Boulevard, Suite 510,
Raleigh, North Carolina 27607
Ben M. Royster
Royster and Royster, PLLC
851 Marshall Street
Mount Airy, North Carolina 27030
Kurt J. Boehm
Jody Kyler Cohn
Boehm, Kurtz & Lowry
36 East 7th Street, Suite 1510
Cincinnati, Ohio 45202
Ralph McDonald
Warren K. Hicks
Bailey & Dixon, LLP
Post Office Box 1351
Raleigh, North Carolina 27602
2
For Sierra Club:
Bridget M. Lee
Dorothy E. Jaffe
Sierra Club
50 F. Street, NW, Floor 8
Washington, DC 20001
For the United States Department of Defense and All Other Federal Executive
Agencies (DoD/FEA):
Paul A. Raaf
Office of the Forscom SJA
4700 Knox Street
Fort Bragg, North Carolina 28310
For Rate-Paying Neighbors of Duke Energy Progress, LLC’s Coal Ash Sites (Rate-
Paying Neighbors):
3
For North Carolina Farm Bureau Federation, Inc. (NCFB):
For North Carolina Justice Center (NC Justice Center), North Carolina Housing
Coalition (NC Housing Coalition), Natural Resources Defense Council (NRDC),
and Southern Alliance for Clean Energy (SACE) (collectively, NC Justice Center):
Karen M. Kemerait
Deborah K. Ross
Smith Moore Leatherwood, LLP
434 Fayetteville Street, Suite 2800
Raleigh, North Carolina 27601
4
Julius A. Wright, Managing Partner, J.A. Wright & Associates, LLC; Kimberly D. McGee,
Rates and Regulatory Strategy Manager, DEP and Duke Energy Carolinas, LLC (DEC);
Joseph A. Miller, Jr., Vice President of Central Services, DEBS; Robert M. Simpson, III,
Director of Grid Improvement Plan Integration for Duke Energy’s Regulated Utilities
Operations, DEP; and Steven B. Wheeler, Director, Pricing and Regulatory Solutions
Director, DEBS.
Petitions to intervene were filed by CUCA on May 9, 2017; CIGFUR and NC WARN
on May 12, 2017; NCSEA on May 23, 2017; Fayetteville PWC on June 6, 2017;
Commercial Group on June 23, 2017; Charah, LLC, on June 27, 2017, which was
withdrawn on July 28, 2017, NCEMC on July 5, 2017; EDF on July 6, 2017; Kroger on
July 17, 2017; Piedmont Electric Membership Corporation (Piedmont EMC) on July 18,
2017; Haywood EMC on July 27, 2017; the Sierra Club on July 31, 2017; DoD/FEA on
August 11, 2017; Rate-Paying Neighbors on August 23, 2017; NCFB on September 6,
2017; the Towns of Sharpsburg, Stantonsburg, Lucama, and Black Creek (Quad Towns)
on September 7, 2017; NC Justice Center on September 15, 2017; NCLM on October 3,
2017; and John Everett on December 7, 2017. Notice of Intervention was filed by the
Attorney General on June 6, 2017.
On August 10, 2017, and October 5, 2017, the Commission entered Orders
denying the petitions to intervene of Piedmont EMC and the Quad Towns, respectively,
but allowing each to participate as an amicus curiae on the issue of DEP’s coal
combustion residual (CCR) costs.4 By Order dated December 20, 2017, the Commission
denied John Everett’s Motion to Intervene as being untimely.
On June 20, 2017, the Commission issued its Order Establishing General Rate
Case and Suspending Rates. On June 22, 2017, the Commission issued its Order
Scheduling Investigation and Hearings, Establishing Intervention and Testimony Due
Dates and Discovery Guidelines, and Requiring Public Notice.
On July 10, 2017, the Commission issued an Order consolidating Docket No. E-2,
Sub 1142 with Docket No. E-2, Sub 1131 (DEP’s request to defer incremental storm
4 The terms “CCR” and “coal ash” are used interchangeably in this Order.
5
damage expenses) and Docket Nos. E-2, Sub 1103 and E-7, Sub 1110 (DEP and DEC’s
requests to defer environmental compliance costs regarding CCRs), allowing those
persons who had been granted intervention in those dockets to fully participate in this
proceeding. In addition, on August 29, 2017, the Commission issued an Order
consolidating DEP’s request to implement a job retention rider filed in Docket No. E-2,
Sub 1153 with this general rate proceeding.
On July 12, 2017, the Commission issued its Order Revising Procedural Schedule
and Requiring Public Notice, revising the dates for the filing of intervenor and rebuttal
testimony and exhibits, as well as the date for the beginning of the hearing to take expert
testimony.
On September 15, 2017, the Company filed the supplemental direct testimony and
exhibits of Company witness Bateman.
On September 22, 2017, Kroger filed the direct testimony and exhibits of Justin
Beiber, Senior Consultant, Energy Strategies, LLC. On October 18, 2017, EDF filed the
direct testimony of Paul J. Alvarez, President, Wired Group. On October 19, 2017,
DoD/FEA filed the direct testimony and exhibits of Constance T. Cannady, Executive
Consultant, NewGen Strategies and Solutions, LLC, and Joseph A. Mancinelli, General
Manager, NewGen Strategies and Solutions, LLC. On October 20, 2017, the Public Staff
filed the direct testimony and exhibits of Jack L. Floyd, Utilities Engineer, Public Staff
Electric Division, Jay B. Lucas, Utilities Engineer, Public Staff Electric Division, James S.
McLawhorn, Director, Public Staff Electric Division, Dustin R. Metz, Utilities Engineer,
Public Staff Electric Division, Tommy C. Williamson, Jr., Utilities Engineer, Public Staff
Electric Division, Scott J. Saillor, Utilities Engineer, Public Staff Electric Division, Michael
C. Maness, Director, Public Staff Accounting Division, Darlene P. Peedin, Manager,
Electric Section, Public Staff Accounting Division, David C. Parcell, Principal and Senior
Economist, Technical Associates, Inc., Roxie McCullar, Consultant, William Dunkel and
Associates, Vance F. Moore, President, Garrett and Moore, Inc., and L. Bernard Garrett,
Secretary/Treasurer, Garrett and Moore, Inc.; CUCA filed the direct testimony and
exhibits of Kevin W. O’Donnell, President, Nova Energy Consultants, Inc.; Fayetteville
PWC filed the direct testimony and exhibits of Nancy Heller Hughes, Director, NewGen
Strategies and Solutions, LLC; CIGFUR filed the direct testimony and exhibits of Nicholas
Phillips, Jr., public utility regulation consultant and a Managing Principal of Brubaker &
Associates, Inc.; NC Justice Center filed the direct testimony and exhibits of Jonathan
Wallach, Vice President, Resource Insight, Inc., and Satana Deberry, Executive Director,
NC Housing Coalition; NCSEA filed the direct testimony and exhibits of Michael Murray,
President, Mission:data Coalition, Justin R. Barnes, Director of Research, EQ Research,
LLC, and Carolina Golin, Southeast Regulatory Director, Vote Solar; Sierra Club filed the
direct testimony and exhibits of Ezra D. Hausman, consultant, Ezra Hausman Consulting,
and Mark Quarles, principle scientist and owner, Global Environmental, LLC; NCLM filed
the direct testimony of Bill Saffo, Mayor of Wilmington, North Carolina; the Attorney
General filed the direct testimony and exhibits of Richard A. Polich and Dan J. Wittliff,
Managing Directors, GDS Associates, Inc.; and Commercial Group filed the direct
testimony and exhibits of Steve W. Chriss, Director, Energy and Strategy Analysis, Wal-
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Mart Stores, Inc., and Wayne Rosa, Energy and Maintenance Manager, Food Lion, LLC.
On October 20, 2017, the Commission issued an Order granting the motion of NC Justice
Center to extend to October 23, 2017, the deadline to file the direct testimony of witness,
John Howat. On October 23, 2017, NC Justice Center filed the direct testimony and
exhibits of John Howat, Senior Policy Analyst, National Consumer Law Center.
On October 24, 2017, DEP noticed the depositions of AGO witness Dan J. Wittliff
and Public Staff witness Jay B. Lucas.
On October 25, 2017, the Public Staff filed Appendix A to the direct testimony and
exhibits of Roxie McCullar.
On October 27, 2017, DEP filed a Motion to Strike Direct Testimony of Michael
Murray, President of Mission:data Coalition, filed on behalf of NCSEA. NCSEA filed a
response in opposition to DEP’s Motion to Strike on October 30, 2017. On November 3,
2017, the Commission issued an Order Granting in Part and Denying in Part DEP’s
Motion to Strike parts of witness Murray’s direct testimony.
On November 6, 2017, DEP filed the rebuttal testimony and exhibits of Company
witnesses Fountain; Bateman; De May; Doss; Fallon; Gillespie; Hager; Hevert; Hunsicker;
Kerin; McGee; Miller; Simpson; Wright; Donald L. Schneider, Jr., General Manager of
Advanced Metering Infrastructure Program Management, DEBS; Michael Delowery, Vice
President of Project Management and Construction, DEBS; Thomas Silinski, Vice
President of Total Rewards and Human Resource Operations, DEBS; and James Wells,
Vice President of Environmental Health and Safety - Coal Combustion Products, DEBS.
On the same day, DEP filed the rebuttal testimony and exhibits of external expert
witnesses John J. Spanos, Senior Vice President, Gannet Fleming Valuation and Rate
Consultants, LLC; and Jeffrey T. Kopp, Manager of Business Consulting Department –
Business and Technology Services Division, Burns and McDonnell Engineering
Company, Inc. On November 8, 2017, DEP filed the supplemental rebuttal testimony of
Company witness Hunsicker.
On November 15, 2017, the Public Staff filed the supplemental testimony of Jay B.
Lucas. Also on November 15, 2017, NCLM filed a Motion to excuse its witness, Mayor
Bill Saffo, and to accept his pre-filed testimony.
On November 16, 2017, the Commission issued its Order on Hearing Procedure
and Availability of Witnesses.
On November 17, 2017, the Commission issued an Order granting the motion of
DEP and the Public Staff’ to reschedule the expert witness hearing that was scheduled
to begin Monday, November 20, 2017, to Monday, November 27, 2017, at 1:30 p.m.
On the same date, the Commission issued an Order granting NCLM’s motion to
excuse witness Saffo from attending the expert witness hearing.
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On November 17, 2017, DEP filed the second supplemental rebuttal testimony and
exhibits of Company witness Bateman.
On November 20, 2017, DEP and the Public Staff filed a Preliminary Notice of
Partial Settlement, notifying the Commission that they had reached a preliminary partial
settlement in principle as to certain issues in this docket.
Also on November 20, 2017, the Public Staff filed the supplemental testimony and
exhibits of witnesses Garrett and Moore.
On November 21, 2017, the Commission issued an Order directing that the
Intervenors would be permitted to supplement their pre-filed direct testimony with
testimony in response to the proposed settlement of DEP and the Public Staff, that the
intervenors’ witnesses would be subject to cross-examination on their settlement
testimony, and that DEP would be allowed to offer rebuttal testimony in response to the
intervenors’ settlement testimony.
On November 22, 2017, DEP and the Public Staff filed an Agreement and
Stipulation of Partial Settlement (Stipulation) that resolved all issues between DEP and
the Public Staff, with the exception of: (1) cost recovery of DEP’s CCR costs, recovery
amortization period and return during the amortization period, allocation issues
associated with CCR costs, ongoing costs to be included in rates, and whether certain
CCR costs are recoverable under G.S. 62-133.2; (2) the amount of DEP’s requested
deferred storm costs to be recovered, and the amortization period of any such recovery;
and (3) with respect to DEP’s proposed Job Retention Rider (JRR), whether companies
involved in the transportation or preservation of raw material or a finished product should
qualify, and how, or if, the JRR should be funded after the expiration of the initial year’s
$3.5 million shareholder contribution.
In support of the Stipulation, on November 22, 2017, the Public Staff filed the
settlement testimony and exhibits of witnesses Peedin, McLawhorn, Maness, and Parcell.
DEP filed the settlement testimony and exhibits of Company witnesses Fountain,
Bateman, Hevert, De May, and Wheeler on November 27, 2017.
On November 28, 2017, the Public Staff filed Revised Settlement Exhibit 1 and
Peedin Revised Exhibit 1.
On December 4, 2017, the Public Staff filed the corrected supplemental testimony
and exhibits of witnesses Garrett and Moore. On the same date, the Public Staff filed
Second Revised Peedin Exhibit 1, Schedules 1, 1-1, 3-1, and 3-1(n), and Second Revised
Settlement Exhibit 1.
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The public hearings were held as scheduled. The following public witnesses
appeared and testified:
Rockingham: Tom Clark, Lois Jones, Keely Wood, Debbie Hall, Tavares Bostic,
Kent McGill, Margaret Wolfe-Roberts, Karen Tucker, Kim McCall,
Emily Zucchino, Cary Rodgers, John Merrell.
Raleigh: Robert Finch, Sr., Karen Mallam, Tom Clark, Dewey Botts,
Harvey Richmond, Patricia M. Walker, Linda Lyons Bakalyan,
Robert Gilbert, Ann Busche on behalf of Rama H. Darbha,
Martha Girolami, Amanda Robertson, Margaret Toman,
Robert Rodriguez, Karen Bearden, Mac Legerton, Dave Carlson,
Helen Tart, John Wagner, Irene Cygan, Meredith Bain,
Sharon C. Goodson, Jim Seabolt, Lisabeth Svendsgaard,
Lynn Marie Sullivan, Laura Michelle Gaines, Elizabeth Adams,
Sharon Paterson, Morgan Malone, Fran Lynch, Sharon Jones,
Margaux Escutin, Walter Von Schonfeld, Bill Garrity,
Deborah Graham, Mark Daughtridge, Rachel Karasik, Kelly Garvy,
Jocelyn Tsai, Beth Henry, Suzanne MacDonough, Allison Keenan.
Asheville: Bill Whalen, Dave Hollister, Dan Gilbert, Cathi Culver, Judy Mattox,
Kelly Williams, Stephanie Biziewski, Brad Rouse, Xavier Boatright
on behalf of Jeri Cruz-Segarra, Ken Brame, Hartwell Carson,
Kendall Hall, Marston Blow, Samantha Wilds, Cathy Scott,
Judith Kaufman, Steve Carter, Cathy Holt, Jim McGlinn,
James Smith, Michael Kohnle, Jamie Friedrick, Lissa Pedersen,
Michael Whitmire, Matthew Livsey, Michael Huttman on behalf of
Dee Williams, Benjamin Brill, Beth Jezek, Viola Williams,
Cari Watson, Sam Mac Arthur, Anne Craig, Carolyn Anderson,
Richard Fireman, Sandra Rountree, Carol Stangler, Jeffrey Secrest,
Gabrielle White, Elizabeth Laubach, Steven Norris, Audrey Yatras,
Xavier Boatright, Patrick Taylor, Katherine Houghton.
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Linda Susan Porter, Connette Bradley, Roberta Buckles,
Elizabeth Murray, Esther Murphy, Isabelle Sheppard, Bill Garrity,
Paul Greiner, Pauline Richardson.
This matter came on for the expert witness hearing on November 27, 2017. DEP
presented the testimony of Company witnesses Fountain, Bateman, Hevert, De May,
Simpson, Hunsicker, Miller, McGee, Doss, Wheeler, Hager, Fallon, Spanos, Kopp,
Schneider, Wright, Wells, and Kerin. The Public Staff presented the testimony of
witnesses McLawhorn, Peedin, Moore, Garrett, Maness, Lucas, and Floyd. The Attorney
General presented the testimony of witnesses Polich and Wittliff. Sierra Club presented
the testimony of witness Quarles. NC Justice Center presented the testimony of
witnesses Deberry, Howat, and Wallach. NCSEA presented the testimony of witnesses
Murray and Barnes. CUCA presented the testimony of witness O'Donnell. Parties waived
cross-examination of Company witnesses Gillespie, DeLowery, and Silinski; Kroger
witness Beiber; EDF witness Alvarez; DoD/FEA witnesses Cannady and Mancinelli;
Public Staff witnesses Metz, Williamson, Saillor, Parcell, and McCullar; Fayetteville PWC
witness Hughes; CIGFUR witness Phillips; NCSEA witness Golin; Sierra Club witness
Hausman; NCLM witness Saffo; Commercial Group witnesses Chriss and Rosa; and NC
Justice Center witness Howat. The pre-filed testimony of each of these witnesses was
copied into the record as if given orally from the stand and their exhibits entered into
evidence.
On December 6, 2017, the Public Staff filed Late-Filed Exhibit 1 of witness Floyd
in response to the Commission’s request during the expert witness hearing. On the same
date, DEP filed Late-Filed Exhibits 1 - 5 in response to Commission questions or requests
made during the expert witness hearing.
On December 21, 2017, NC Justice Center witness John Howat filed Late-Filed
Exhibit JH-9 in response to a request by Chairman Finley during the expert witness
hearing.
On December 22, 2017, the Public Staff filed a Motion to Add Maness Late-Filed
Exhibit: Difference Between Public Staff and DEP on Coal Ash – After Other Issues
(Maness Late-Filed Exhibit) to the Record regarding updates to testimony dealing with
DEP’s request to recover its costs for coal ash remediation and resulting changes to the
Public Staff’s and DEP’s positions on coal ash costs as a result of the Stipulation. The
Commission issued an Order Accepting Maness Late-Filed Exhibit on January 2, 2018.
On the same day, the Commission issued an Order to Strike certain portions of NCSEA
witness Murray’s summary of his pre-filed direct testimony.
On January 11, 2018, the AGO filed a Late-Filed Exhibit in response to the
Commission’s request during the expert witness hearing.
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On January 12, 2018, proposed orders were filed by DEP and the Public Staff.
Partial proposed orders were filed by NCSEA and NCLM. Post-hearing briefs were filed
by DEP, AGO, NCSEA, DoD/FEA, Sierra Club, CIGFUR, CUCA, EDF, Fayetteville PWC,
NC Justice Center, Commercial Group, Kroger, NCLM, Quad Towns, and NC WARN.
On January 22, 2018, DEP and the NC Justice Center filed a Partial Settlement
Agreement.
Jurisdiction
1. DEP is duly organized as a public utility operating under the laws of the
State of North Carolina and is subject to the jurisdiction of the Commission. The Company
is engaged in the business of generating, transmitting, distributing, and selling electric
power to the public in a broad area in eastern North Carolina and an area in western
North Carolina in and around the City of Asheville. DEP is a wholly-owned subsidiary of
Duke Energy Corporation, and its office and principal place of business are located in
Raleigh, North Carolina.
2. The Commission has jurisdiction over the rates and charges, rate
schedules, classifications, and practices of public utilities operating in North Carolina,
including DEP, under Chapter 62 of the General Statutes of North Carolina.
3. DEP is lawfully before the Commission based upon its Application for a
general increase in its retail rates pursuant to G.S. 62-133 and 62-134 and Commission
Rule R1-17.
4. The appropriate test period for use in this proceeding is the 12 months
ended December 31, 2016, adjusted for certain known changes in revenue, expenses,
and rate base through October 31, 2017.
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The Application
5. By its Application and initial direct testimony and exhibits, DEP originally
sought a net increase of approximately $477.5 million, or 14.9%, in its annual electric
sales revenues from its North Carolina retail electric operations, including a rate of return
on common equity of 10.75%. On September 15, 2017, DEP filed supplemental testimony
and exhibits that detailed a $57.958 million reduction in its original request, thereby
reducing the total Company proposed increase to approximately $419.5 million. On
November 17, 2017, DEP filed further supplemental testimony and exhibits detailing
additional adjustments to its Application that changed its proposed annual revenue
increase to $425.6 million.
The Stipulation
7. On November 20, 2017, DEP and the Public Staff (Stipulating Parties)
jointly filed a Preliminary Notice of Partial Settlement. On November 22, 2017, the
Stipulating Parties filed the Stipulation. On November 27, 2017, DEP entered into
settlement agreements with Kroger and Commercial Group that are consistent with the
language of the Stipulation. On January 22, 2018, DEP and NC Justice Center entered
into a Partial Settlement Agreement. As used herein, “Stipulation” includes the
agreements entered into by and between DEP and the Public Staff, DEP and Kroger,
DEP and Commercial Group, and DEP and NC Justice Center.
9. The Stipulation resolves only some of the disputed issues between the
Stipulating Parties. The Stipulating Parties did not reach an agreement regarding cost
recovery of the Company's CCR costs, the recovery amortization period and return during
the amortization period, allocation issues associated with CCR costs, the amount of
ongoing CCR costs to be included in rates, or whether certain CCR costs are recoverable
under G.S. 62-133.2. They also did not agree on the amount of the Company's requested
deferred storm costs to be recovered, the amortization period of any such recovery, or
the amount of the adjustment to normalize storm expenses on an ongoing basis. Although
the Stipulating Parties agreed that the Company's proposed JRR generally complies with
the Commission's guidelines adopted in Docket No. E-100, Sub 73, they disagreed on
(a) whether companies involved in the transportation or preservation of a raw material or
a finished product (e.g., pipeline customers) should qualify; and (b) how, or if, the JRR
should be funded after the expiration of the initial year's $3.5 million shareholder
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contribution. These issues were left for resolution by the Commission and are addressed
later in this Order.
10. The Stipulation provides for certain accounting adjustments which are set
out in detail in Exhibit 1 to the Stipulation. The Stipulating Parties agreed that settlement
on those issues will not be used as a rationale for future arguments on contested issues
brought before the Commission. For the present case the accounting adjustments
outlined in Exhibit 1 to the Stipulation are just and reasonable to all parties in light of all
the evidence presented.
11. The Stipulation provides that the Company will amortize the Harris Nuclear
Power Plant Combined Construction and Operating License Application (COLA) costs
over an eight-year period. This provision of the Stipulation is just and reasonable to all
parties in light of all the evidence presented.
12. The Stipulating Parties have agreed that the Company’s depreciation rates
will be set based on the rates set forth in the Company’s most recent depreciation study,
subject to the following inputs: (1) a 10% contingency; (2) a 10-year remaining life for the
meters that are being retired pursuant to the Company’s Advanced Metering
Infrastructure (AMI) program; (3) a 70-year R2 curve for Account 356; (4) a negative 10%
net salvage for Account 366; (5) a 17-year life for new AMI meters; and (6) a 20-year
amortization period for Accounts 391 and 397. This provision of the Stipulation is just and
reasonable to all parties in light of all the evidence presented.
13. As set forth in Section III.T. of the Stipulation, the Company agreed to the
Public Staff’s adjustment to end-of-life nuclear materials and supplies reserve expense,
reduced as described in the rebuttal testimony of Company witness Gillespie. The
Company also agreed to take appropriate action to manage materials and supplies
(nuclear and non-nuclear) to the current practices and procedures utilized by DEC. This
provision of the Stipulation is just and reasonable to all parties considering all the
evidence presented.
14. The Company’s request to establish a regulatory asset at the time of the
Asheville plant’s retirement for the remaining net book value, and to defer to this
regulatory asset any costs related to obsolete inventory, net of salvage, at the time of
retirement is just and reasonable to all parties in light of the evidence presented.
15. The Stipulation provides that the appropriate level of excess deferred
income taxes (EDIT) to be refunded to customers is $42.577 million annually for the four
years following the effective date of the rates approved herein.
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Capital Structure, Cost of Capital, and Overall Rate of Return
16. The Stipulating Parties agree that the revenue increase approved in this
Order is intended to provide DEP, through sound management, the opportunity to earn
an overall rate of return of 7.09%. This overall rate of return is derived from applying an
embedded cost of debt of 4.05% and a rate of return on equity of 9.9% to a capital
structure consisting of 48% long-term debt and 52% members’ equity. The Stipulation is
material evidence entitled to appropriate weight in determining DEP’s overall rate of
return, cost of debt, rate of return on equity, and capital structure.
17. A 9.9% rate of return on equity for DEP is just and reasonable in this general
rate case.
18. A 52% equity and 48% debt ratio is a reasonable capital structure for DEP
in this case.
19. A 4.05% cost of debt for DEP is reasonable for the purposes of this case.
20. The rate increase approved in this case, which includes the approved rate
of return on equity and capital structure, will be difficult for some of DEP’s customers to
pay, in particular the Company’s low-income customers.
21. Continuous safe, adequate, and reliable electric service by DEP is essential
to the support of businesses, jobs, hospitals, government services, and the maintenance
of a healthy environment.
22. The rate of return on equity and capital structure approved by the
Commission appropriately balances the benefits received by DEP’s customers from
DEP’s provision of safe, adequate, and reliable electric service in support of businesses,
jobs, hospitals, government services, and the maintenance of a healthy environment with
the difficulties that some of DEP’s customers will experience in paying the Company’s
increased rates.
23. The 9.9% rate of return on equity and the 52% equity financing approved
by the Commission in this case result in a cost of capital that is as low as reasonably
possible. They appropriately balance DEP’s need to obtain equity financing and maintain
a strong credit rating with its customers’ need to pay the lowest possible rates.
24. The authorized levels of overall rate of return and rate of return on equity
set forth above are supported by competent, material, and substantial record evidence,
are consistent with the requirements of G.S. 62-133, and are fair to DEP’s customers
generally and in light of the impact of changing economic conditions.
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Base Fuel Factor and Coal Inventory
25. The North Carolina retail base fuel expense for this proceeding is
$807,561,119, and the following base fuel and fuel-related cost factors are just and
reasonable to all parties in light of all the evidence presented for purposes of this
proceeding (amounts are cents per kilowatt-hour (kWh), excluding regulatory fee):
1.993 for residential customers; 2.088 for SGS customers; 2.431 for MGS customers;
2.253 for LGS customers; and 0.596 for Lighting customers. Billed fuel rates shall be
adjusted to reflect changes to DEP’s fuel rates approved by the Commission in Docket
No. E-2, Sub 1146 that were effective on December 1, 2017.
26. As set forth in Paragraph III.R. of the Stipulation, DEP shall reduce the
amount of coal inventory included in working capital. An increment rider shall be
established, effective on the same date as the new base rates approved in this Order and
continuing until inventory levels reach a 35-day supply, to allow the Company to recover
the additional costs of carrying coal inventory in excess of a 35-day supply (priced at
$76.11 per ton). This rider shall terminate the earlier of: (a) January 30, 2020, or (b) the
last day of the month in which the Company’s actual coal inventory levels return to a
35-day supply on a sustained basis, as defined in the Stipulation. The reduction to coal
inventory included in working capital and the establishment of the increment rider, as set
forth in the Stipulation, is just and reasonable to all parties in light of all the evidence
presented.
27. Paragraph IV.I. of the Stipulation provides that the overall quality of electric
service provided by the Company is adequate. This provision of the Stipulation is just and
reasonable.
Power/Forward Workshop
29. Paragraph IV.A. of the Stipulation provides for a technical workshop hosted
by DEP during the second quarter of 2018 regarding the Company’s NC Power/Forward
grid investments. This provision of the Stipulation is just and reasonable.
Lead-Lag Study
30. The Stipulation provides that DEP shall prepare and file a new lead-lag
study in its next general rate case. This provision of the Stipulation is just and reasonable.
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Cost of Service Allocation Methodology
31. The Stipulation provides for use of the Summer Coincident Peak (SCP)
methodology for cost allocation between jurisdictions and among customer classes in this
case. For purposes of this proceeding, the Company may continue to use the SCP
methodology for allocation between jurisdictions and among customer classes under the
provisions of the Stipulation. The provisions of the Stipulation regarding cost of service
allocation methodology are just and reasonable to all parties in light of all the evidence
presented.
32. The Company shall file annual cost of service studies based on both the
SCP and summer/winter coincident peak and average (SWPA) methodologies.
Rate Design
33. For purposes of apportioning and assigning the approved increase in base
non-fuel and base fuel revenues between the North Carolina customer classes in this
proceeding, the apportionment and rate design principles presented by DEP witness
Wheeler in his direct testimony, subject to the modification set out in Paragraph IV.F. of
the Stipulation, are just, reasonable, appropriate, and nondiscriminatory.
34. The Company shall implement the rate design proposed by witness
Wheeler, as well as the specific modifications set out in Paragraph IV.F. of the Stipulation.
Acceptance of Stipulation
35. The Stipulation will provide DEP and its retail ratepayers just and
reasonable rates when combined with the rate effects of the Commission’s decisions
regarding the contested issues in this proceeding.
36. The provisions of the Stipulation are just and reasonable to all parties to
this proceeding and serve the public interest. Therefore, the Stipulation should be
approved in its entirety.
Storm Costs
37. In Docket No. E-2, Sub 1131 (Sub 1131), DEP filed a petition to establish a
regulatory asset and defer until its next general rate case its 2016 incremental storm
expenses, which included costs for Winter Storm Jonas, February 2016 Ice Event, Winter
Storm Petros, June and July 2016 thunderstorms, Tropical Storm Hermine, and Hurricane
Matthew. The Company sought to defer only those storm costs in excess of the
$12.7 million approved in the Company’s last general rate proceeding. The Company
requested total O&M expenses of $80.152 million.
38. In this proceeding, DEP included a pro forma adjustment to the test year to
normalize for storm costs to an average level of costs the Company has experienced over
16
the last ten years. This pro forma adjustment also removed any storm costs from the
10-year average calculation that were included in the Company’s 2016 deferral request,
and instead included an amortization of the deferred costs over a 3-year period.
39. The Company should not recover the costs of the June and July 2016
thunderstorms as a part of its 2016 incremental storm expenses deferral. The June and
July 2016 thunderstorms amounted to $1.720 million in O&M expenses.
40. The normal range of variation of storm costs experienced by the Company
in recent years encompasses $27.4 million, and this amount should be deducted from the
2016 incremental storm costs requested by the Company.
41. It is appropriate for the Company to defer and amortize $51.032 million
($80.152 million total requested O&M expense minus $1.720 million for the June and July
thunderstorms minus $27.4 million normal storm expense) of its North Carolina retail
storm costs incurred in the test year. The $51.032 million deferral should be amortized
over a period of five years, beginning in October 2016.
42. It is not appropriate for the Company to defer and amortize the depreciation
expense, return on capital expenditures, and carrying costs on deferred costs that it has
incurred as a result of storm damage in 2016.
43. The appropriate North Carolina retail normalized annual level of storm costs
to be included in the Company’s rates in this case is $11.018 million.
44. The Company’s proposed JRR is intended to allow the Company to prevent
the loss of North Carolina jobs and the customer’s related load.
45. Because gas pipelines are fixed investments that are not easily relocated,
extending the benefits of a JRR to gas pipeline companies would not prevent the loss of
North Carolina jobs. Companies involved in the “transportation or preservation of a raw
material of a finished product” should not be eligible to participate in a JRR.
46. The Job Retention Tariff (JRT) Guidelines state that this tariff is intended to
be temporary and establish a maximum effective time of five years or a cap of five years.
However, under the current economic circumstances, a shorter period of time, possibly
one or two years, may achieve the intended result. Thus, a one-year pilot with the option
of a renewal for a second year is a preferable time frame for the current JRR.
47. The JRR proposed by the Company, as modified by the Stipulation and this
Order, is not unduly discriminatory and is in the public interest.
48. Ratepayers, the Company, and its shareholders all benefit from the
retention of North Carolina jobs and the load related to those jobs.
17
49. The Company’s recovery of the JRR revenue credits should be reduced by
$3.5 million each year the JRR is in effect, if more than one year, to recognize the benefit
to shareholders of the JRR.
50. In Docket Nos. E-2, Sub 1103 and E-7, Sub 1110, DEP and DEC jointly
filed a request that the Commission issue an order authorizing them to defer in a
regulatory asset account certain costs incurred in connection with compliance with federal
and state environmental requirements regarding coal combustion residuals (CCRs). By
Order dated July 10, 2017, the Commission consolidated the DEP request with the
present general rate case. DEP and the Public Staff supported the deferral in their
testimony in this docket. The deferral request is reasonable and appropriate.
51. DEP expects to incur substantial costs related to CCRs 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 Order during the deferral period. Ratemaking treatment of such
costs will be addressed in future rate cases.
53. Since its last rate case, DEP 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 the Company’s coal-fired power plants. Since its last
rate case, DEP 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 DEP has incurred (netted against the amount already included in the
Company’s rates following its last rate case) during the period from January 1, 2015,
through August 31, 2017, amount to $241,890,000. DEP is entitled to recover these coal
ash basin closure costs, less a disallowance of $9.5 million, for a total amount of
$232,390,000.5 The actual coal ash basin closure costs incurred by DEP, less the
$9.5 million, are known and measurable, reasonable and prudent, and used and useful
in the provision of service to the Company’s customers. DEP is entitled to recover these
costs through rates. Further, DEP 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 the Company is appropriate
5 This amount is used in this Order as a placeholder and is subject to a final adjustment using the
energy allocation factor adopted by the Commission and to be provided by DEP and the Public Staff.
18
and reasonable, and absent any management penalty should be approved, and under
normal circumstances the Company 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 DEP’s CCR remediation expenses accounted
for in the earlier established asset retirement obligation (ARO) 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.
57. G.S. 62-133.2(a1)(9) allows electric public utilities to recover the net gains
or losses resulting from the sales by the electric public utility of by-products produced in
the generation process to be recovered through the fuel adjustment clause.
58. The beneficial reuse of CCRs, in and of itself and absent an actual sale,
does not constitute the sale of a by-product under G.S. 62-133.2(a1)(9).
59. The contract between DEBS on behalf of DEP and Charah, Inc., for the
excavation, transportation, and placement of ash from the Sutton Plant to the Brickhaven
facility is a contract for services and not for the sale of a by-product under
G.S. 62-133.2(a1)(9).
60. DEP’s recovery of the CCR costs approved in this proceeding should not
be through provisional rates.
61. It is reasonable and appropriate to allocate all system-level CCR costs using
a comprehensive allocation factor that allocates the costs to the entire DEP system.
19
Insurance Litigation
65. If meritorious concerns are raised by any party to this docket, or by the
Commission, regarding the reasonableness of DEP’s efforts to obtain an appropriate
amount of recovery in the Insurance Case, it is appropriate to require DEP to bear the
burden of proving that it exercised reasonable care and made reasonable efforts to obtain
the maximum recovery in the Insurance Case.
66. DEP’s request to defer to a regulatory asset account the cost of existing
AMR meters replaced by AMI meters should be approved.
67. The Company is authorized to receive a specific amount of revenue for each
of the several deferred costs approved by this Order. If DEP receives revenue for any
deferred cost for a longer period of time than the amortization period approved by the
Commission for that deferred cost, the Company should continue to record all revenue
received for that deferred cost in the specific regulatory asset account established for that
deferred cost until the Company’s next general rate case.
68. The effects of the Federal Tax Cuts and Jobs Act of 2017 should be
addressed in the separate proceeding that the Commission has initiated for that purpose,
Docket No. M-100, Sub 148.
Revenue Requirement
69. After giving effect to the approved Stipulation and the Commission’s
decision on contested issues, the annual revenue requirement for DEP will allow the
20
Company a reasonable opportunity to earn the rate of return on its rate base that the
Commission has found just and reasonable.
70. DEP should recalculate and file the annual revenue requirement with the
Commission within 10 days of the issuance of this Order, consistent with the findings and
conclusions of this Order. The Company should work with the Public Staff to verify the
accuracy of the filing. DEP should file schedules summarizing the gross revenue and the
rate of return that the Company should have the opportunity to achieve based on the
Commission’s findings and determinations in this proceeding.
71. The appropriate revenue requirement for the first four years should be
reduced by the EDIT Rider decrement of $42.577 million.
72. The base non-fuel and base fuel revenues approved herein are just and
reasonable to the customers of DEP, to DEP, and to all parties to this proceeding, and
serve the public interest.
The evidence supporting these findings of fact and conclusions is contained in the
Stipulation, DEP’s verified Application and Form E-1, the testimony of DEP witness
Fountain, and the entire record in this proceeding.
On June 1, 2017, DEP filed its Application and initial direct testimony and exhibits,
seeking a net increase of approximately $477.5 million, or 14.9%, in its annual electric
sales revenues from its North Carolina retail electric operations. In its rebuttal testimony
filed on November 6, 2017, DEP reduced its requested increase to $419.5 million. In its
Second Supplemental Testimony filed on November 17, 2017, the Company modified its
requested increase to $425.6 million (a base rate increase of $461.1 million reduced by
a five-year annual Excess Deferred Income Taxes Rider of $(35.5 million)). The
Company’s requested increase was reduced in the Stipulation filed on November 22,
2017, to a requested increase of $306.0 million (a base rate increase of $348.5 million
reduced by a four-year annual Excess Deferred Income Taxes Rider of $(42.5 million)).
DEP submitted evidence in this case with respect to revenue, expenses, and rate base,
using a test period consisting of the 12 months ended June 30, 2016, updated for certain
known and actual changes.
21
Company witness Fountain testified that major generating plant additions and
plant-related expenses account for the majority of the total additional requested annual
revenue requirement. (Tr. Vol. 6, p. 33.) The remainder of the requested rate adjustment
is to recover costs related to environmental requirements associated with the mandated
closure of ash basins, expenses to respond to significant storms, costs for renewable
purchased power investment, deferred nuclear development costs, and investments
necessary for computer information systems and other ongoing operational costs. (Id.)
Witness Fountain also provided an overview of the CCR basin closure costs the
Company is seeking to recover in this case, as well as the Company’s proposed recovery
of severe storm costs. (Id. at 39-44.) The Company’s base rate request also includes
development costs for the nuclear development work completed for the Harris nuclear
site. (Id. at 40.) Additionally, DEP is seeking to include costs to implement a new
Customer Information System (CIS). (Id. at 40, 44-45.) These annual costs are partially
offset by the return of a deferred tax liability to customers. (Id.)
Witness Fountain explained that under DEP's proposed rate adjustment customers
would still be paying lower rates today than they were in 1991 on an inflation-adjusted
basis, and customers will continue to pay rates below the national average and
competitive with other utilities in the region. (Id. at 46.) He pointed out that customers’
bills have also declined from those approved in 2013 due, in part, to the Company
prudently managing fuel costs and jointly dispatching the generation fleet to save
$183 million. (Id. at 45.)
22
of energy user and budget, and EE programs currently save its customers in the Carolinas
over 1.7 billion kWh annually, or over $170 million, which is about four percent of total
retail sales. (Id. at 50.) Combined, its DSM and EE programs offset capacity requirements
by the equivalent of over four power plants. (Id.) Witness Fountain also described how
the Company’s Energy Neighbor Fund helps low-income individuals and families cover
home energy bills. (Id. at 51.) Over the life of the program it has provided approximately
$32 million to customers. (Id.) He explained that the Company also allows customers to
spread out the impacts of seasonal fluctuations into 12 equal monthly payments.
Payments can also be made in many different ways to minimize missed payments. (Id. at
51-52.)
The evidence supporting these findings of fact and conclusions is contained in the
Stipulation, the testimony of DEP witnesses Fountain, Bateman, Hevert, De May, and
Wheeler, and the testimony of Public Staff witnesses McLawhorn, Peedin, Maness, and
Parcell.
The Public Staff and DEC filed a Preliminary Notice of Partial Settlement on
November 20, 2017, and on November 22, 2017, they filed the Stipulation. The Stipulation
was based on the same test period used by the Company in its Application, with updates.
Witness Fountain explained that the Stipulation resolves all revenue requirement
issues between the Company and the Public Staff, except issues related to CCR cost
recovery and issues related to recovery of the costs the Company incurred in restoring
service and rebuilding the grid following numerous storms in 2016, including winter storm
Jonas and Hurricane Matthew. (Tr. Vol. 6, pp. 88, 94-95.) In addition, although the
Stipulating Parties reached agreement on most of the issues involving the Company’s
proposed JRR, there are remaining issues regarding the JRR that the Public Staff and
DEP were unable to resolve. (Id. at 95.)
1. Capital Cost and Structure - The Stipulating Parties have agreed to a rate
of return on equity of 9.90%, based upon a capital structure containing 52%
equity and 48% debt, as described by witnesses Hevert and De May, and
a cost of debt of 4.05%. The resulting weighted average rate of return is
7.09%.
23
2. Updated Plant and Accumulated Depreciation – Plant and accumulated
depreciation shall be calculated through October 31, 2017.
4. Asheville CWIP - The Company shall update its post-test year additions to
include Asheville construction work in progress through October 31, 2017.
10. Customer Connect Expenses – The Company accepts the Public Staff’s
adjustment, but shall be authorized to establish a regulatory asset to defer
and amortize expenses associated with its Customer Connect project. The
Company shall be allowed to accrue a return on the regulatory asset in the
same manner that Construction Work in Progress (CWIP) balances accrue
Allowance for Funds Used During Construction (AFUDC). AFUDC shall end
and a 15-year amortization shall begin on the date the DEP Core Meter-to-
Cash release (Releases 5-8) of the project goes into service or January 1,
2022, whichever is sooner.
12. Coal Inventory – The Stipulating Parties agree that for purposes of
settlement, the Company may set carrying costs included in base rates
assuming a 35-day coal inventory at 100% capacity factor (full load burn),
24
and that a Coal Inventory rider should be allowed to manage the transition,
and that the rider will terminate upon the sooner of the Company reaching
a 35-day coal inventory on a sustained basis or two years from approval by
the Commission. The Company will conduct an analysis in consultation with
the Public Staff demonstrating the appropriate coal inventory level given
market and generation changes since the Company’s last rate case. The
analysis shall be completed by December 31, 2018.
13. Mayo Zero Liquid Discharge and Sutton combustion turbine projects – The
Company will make an adjustment to rate base with depreciation expense
and other cost of capital effects to reflect the resolution reached in the
Stipulation. The adjustment will be permanent for ratemaking and regulatory
accounting purposes, and will result in a decrease to the revenue
requirement from the Company’s filed request. The Company agrees to
these adjustments in an effort to reach a settlement on all non-CCR and
storm related issues and does not admit and explicitly rejects any
imprudence on behalf of the Company regarding the management of the
two projects.
14. Nuclear Materials and Supplies - The Company accepts the Public Staff’s
adjustment to end-of-life nuclear materials and supplies reserve expense,
as refined in the testimony of Company witness Gillespie, and agrees that
it will take appropriate action to conform its practices and procedures to
manage its Materials and Supplies inventory (nuclear and non-nuclear) to
the current practices and procedures utilized by Duke Energy Carolinas,
LLC, with the goal to ensure that proper levels of inventory are on hand.
DEP shall complete this action within 24 months after the entry of the
Commission rate case order.
15. Duke-Piedmont Merger Costs - The Company accepts the Public Staff’s
recommended adjustment to remove the Duke-Piedmont merger costs to
achieve.
25
17. Other Cost of Service and Rate Design Matters -- The Stipulating Parties
have also agreed upon rate design and cost of service study parameters as
proposed by Company witnesses Wheeler and Hager and Public Staff
witness Floyd.
18. Excess Deferred Tax Liability – The Stipulating Parties have agreed to the
return of an excess deferred tax liability to customers over the next four
years through a rider.
19. Basic Customer Charge - The Company and Public Staff have agreed upon
a Basic Customer Charge for Schedule RES of $14.00 per month, and
further agree upon a Basic Customer Charge for Schedules R-TOUD and
R-TOU of $16.85 per month.
Id. at 88-92.
Witness Fountain testified that the Stipulation was reached after extensive
discovery conducted by the Public Staff and other intervenors. He testified that the
Stipulation represents a balanced settlement by the parties, and is in the public interest.
DEP witnesses Bateman, Hevert, De May, and Wheeler also testified in support of
the Stipulation. Witness De May testified that the Stipulation will support the Company’s
ability to achieve its financial objectives. Witness Hevert stated that the stipulated rate of
return on equity, although lower than he had recommended, was nevertheless
reasonable, particularly in light of the Company’s low cost of debt. Witness Wheeler
testified concerning the effects of the partial settlement on DEP’s proposed JRR, and
witness Bateman presented exhibits showing the monetary effect of the various issues
addressed in the Stipulation.
Public Staff witnesses McLawhorn, Peedin, Maness, and Parcell also supported
the Stipulation. Witness McLawhorn stated that the principal benefits of the Stipulation
are a significant reduction in the Company’s proposed revenue increase in this
proceeding and the avoidance of protracted litigation by the Stipulating Parties before the
Commission and, possibly, the appellate courts. Witness Peedin presented schedules
showing the financial impact of each concession made by the Company or the Public
Staff, as well as the amount of the rate increase that would result if the Commission
agrees with the Company on all the unresolved items, or, alternatively, agrees with the
Public Staff on all of these items. Witness Maness testified on the impact of the Stipulation
on the unresolved CCR issues, and witness Parcell stated that the Stipulation reflects the
result of good faith “give-and-take” and compromise-related negotiations among the
parties.
On January 22, 2018, DEP and NC Justice Center filed a Partial Settlement
Agreement. In summary, the Partial Settlement Agreement states that DEP will contribute
$2.5 million to the Helping Home Fund for low-income energy assistance, and NC Justice
26
Center will withdraw its claim that the Commission should order DEP to fund energy
assistance for low-income ratepayers.
As the Stipulation has not been adopted by all of the parties to this docket, its
acceptance by the Commission is governed by the standards set out by the North
Carolina Supreme Court in State ex rel. Utils. Comm’n v. Carolina Util. Customers Ass’n,
Inc., 348 N.C. 452, 500 S.E.2d 693 (1998) (CUCA I), and State ex rel. Utils. Comm’n v.
Carolina Util. Customers Ass’n, Inc., 351 N.C. 223, 524 S.E.2d 10 (2000) (CUCA II). In
CUCA I, the Supreme Court held that
[A] stipulation entered into by less than all of the parties as to any facts or
issues in a contested case proceeding under Chapter 62 should be
accorded full consideration and weighed by the Commission with all other
evidence presented by any of the parties in the proceeding. The
Commission must consider the nonunanimous stipulation along with all the
evidence presented and any other facts the Commission finds relevant to
the fair and just determination of the proceeding. The Commission may
even adopt the recommendations or provisions of the nonunanimous
stipulation as long as the Commission sets forth its reasoning and makes
“its own independent conclusion” supported by substantial evidence on the
record that the proposal is just and reasonable to all parties in light of all the
evidence presented.
However, as the Court made clear in CUCA II, the fact that fewer than all of the
parties have adopted a settlement does not permit a court to subject the Commission’s
Order adopting the provisions of a non-unanimous stipulation to a “heightened standard”
of review. CUCA II, 351 N.C. at 231, 524 S.E.2d at 16. Rather, the Court held that
Commission approval of the provisions of a non-unanimous stipulation “requires only that
the Commission ma[k]e an independent determination supported by substantial evidence
on the record [and] satisf[y] the requirements of chapter 62 by independently considering
and analyzing all the evidence and any other facts relevant to a determination that the
proposal is just and reasonable to all parties.” Id. at 231-32, 524 S.E.2d at 16. The
Commission gives substantial weight to the testimony of the Company and Public Staff
witnesses regarding the Stipulation, and finds and concludes that the Stipulation is the
product of the “give-and-take” of the settlement negotiations between DEP and the Public
Staff, as well as between DEP and Kroger, DEP and Commercial Group, and DEP and
NC Justice Center, in an effort to appropriately balance the Company’s need for rate relief
with the impact of such rate relief on customers.
Based on the foregoing, the Commission finds and concludes that the Stipulation
is material evidence to be given appropriate weight in this proceeding.
27
EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT NOS. 10-15
The evidence supporting these findings of fact is found in the verified Application
and Form E-1 of DEP, the testimony and exhibits of the Company witnesses, the
testimony and exhibits of the Public Staff witnesses, the testimony and exhibits of the
intervenors, the Stipulation, and the entire record in this proceeding.
The Stipulation resolved many, but not all, of the issues in dispute between the
parties. Among other matters, the parties agreed on many accounting adjustments,
including: (1) amortization of the costs of the Harris COLA over an eight-year period; (2)
the establishment of a regulatory asset to defer and amortize expenses associated with
the Company’s Customer Connect project; (3) disallowance of certain costs related to the
Mayo Zero Liquid Discharge and Sutton combustion turbine projects; and (4) basing the
Company’s depreciation rates on the rates set forth in the Company’s most recent
depreciation study, subject to application of certain inputs. DEP witness Bateman
presented exhibits showing the monetary effect of the various issues (accounting
adjustments and otherwise) addressed in the Stipulation. Public Staff witness Peedin
presented schedules showing the financial impact of each concession made by the
Company or the Public Staff, as well as the amount of the rate increase that would result
if the Commission agrees with the Company on all the unresolved items, or, alternatively,
agrees with the Public Staff on all these items. The accounting adjustments that are not
specifically addressed in other findings and conclusions of this Order are discussed in
more detail below.
DEP witness Bateman testified that as part of settlement, the Stipulating Parties
agreed to update both plant additions and accumulated depreciation through
October 31, 2017. As part of this adjustment, for purposes of settlement, DEP and the
Public Staff agreed to remove the Company’s adjustments to accumulated depreciation
that were contained in its adjustments NC-0800 and NC-1100. The Company also agreed
to update its post-test year additions to plant to include Asheville CWIP through
October 31, 2017.
DEP witness Bateman testified that as part of the settlement, the Stipulating
Parties agreed to update revenues to reflect changes in number of customers and, for the
residential class, changes in weather-normalized usage per customer through October
31, 2017. The Stipulation also provides that the Company shall annualize revenues and
include the effects of inflation through October 31, 2017.
The Stipulation requires the Company to update its labor costs through
September 30, 2017.
28
Adjust for lost industrial revenues due to Hurricane Matthew
In her rebuttal testimony, witness Bateman testified that the Company does not
oppose Public Staff’ witness Williamson’s recommendation to include the impact of lost
industrial revenue due to Hurricane Matthew. However, the Company does oppose the
calculation proposed by witness Williamson. In its initial adjustment regarding lost
revenue due to Hurricane Matthew, the Company stated that it did not include industrial
class customers in the estimate because “using customer averages would not be reliable
due to significant usage differences among customers” for this class. Witness Williamson
used average daily usage for the industrial class in his calculation. Because of the impact
that a handful of extremely high usage customers can have on this average calculation,
the Company looked at the detailed hourly customer data for industrial customers on the
Real Time Pricing rate schedule. Using this approach, the Company was able to
determine that 21 of these high usage customers did not lose power as a result of the
storm. Therefore, as she explained in her rebuttal testimony, witness Bateman
recalculated witness Williamson’s adjustment to exclude these customers from the
average daily usage calculation. As part of settlement, the parties agreed to accept the
Public Staff’s adjustment with the modification proposed in witness Bateman’s rebuttal
testimony.
In its initial filing, the Company removed 40.24% of the corporate aviation costs. In
its adjustment, the Public Staff removed 75.55% of the costs. For the purposes of
settlement, the parties agreed to an adjustment that removes 50% of the costs.
In its Application, the Company removed 50% of the compensation of the four
Duke Energy executives with the highest level of compensation allocated to DEP in the
Test Period. Witness Bateman explained that while the Company believes these costs
are reasonable, prudent, and appropriate to recover from customers, DEP has, for
purposes of this case, made an adjustment to this item.
29
should be excluded because it provides a direct benefit to shareholders only, rather than
to customers. (Id. at 70.) Witness Peedin also asserts that executive compensation and
benefits should be excluded because these executives’ duties are closely linked to
shareholder interests. (Id.) DoD/FEA witness Cannady also recommended removal of
non-qualified pension expense. (Tr. Vol. 17, p. 183.) Witness Cannady, while
acknowledging that the Commission has historically allowed non-qualified pension
expense, advocates its exclusion in this case because of her belief that customers should
not be responsible for benefits available only to management and executive employees
at the higher end of the pay scale. (Id. at 183-84.)
In his rebuttal testimony, Company witness Silinski testified that these proposed
adjustments are inappropriate and should be rejected by the Commission. Witness
Silinski explains that witnesses Peedin and Cannady erroneously assume a divergence
of interests between shareholders and customers that does not, in fact, exist. (Tr. Vol. 13,
p. 56.) To the contrary, employee compensation and incentives tied to metrics such as
EPS and TSR directly benefit customers, because those metrics reflect how employees’
contributions translate into overall financial performance. (Id.) EPS, for example, is a
direct measure of the Company’s performance, and that performance is reflective of how
certain goals – safety, individual performance, team performance, and customer
satisfaction (all of which are components of incentive pay) – are met in a cost-effective
way. (Id.) Divorcing employee performance from such an important measure of a
rate-regulated company’s overall health is unreasonable and counterproductive. (Id.)
Additionally, witness Silinski explained that witness Peedin’s proposed adjustment to
disallow incentive recovery would wipe out recovery of compensation for employees who
are directly focused on and responsible for vital customer service functions, such as
engineers, distribution instrument and control technicians, transmission substation
technicians, distribution line technicians, customer care associates, system operators,
and nuclear plant control operators. (Id. at 59-63.) Disallowing a portion of the
compensation for these employees sends a signal to the Company that these costs
provide no value to the customer and should, therefore, be eliminated. (Id. at 64.) Finally,
in order to attract a well-qualified and well-led workforce, the Company must compete in
the marketplace to obtain the services of these employees. (Id. at 57.) The recommended
adjustments would render the Company’s compensation uncompetitive with the market,
which would result in the inability to attract and retain the talent the Company needs to
run a safe and reliable electric system. (Id.) Witness Silinski pointed out that no witness
in this proceeding challenges the reasonableness of the level of compensation expenses
reflected in the rate-making test period for the Company. (Id.) Nor has anyone challenged
that the compensation and benefit programs are necessary and critical in their entirety for
attracting, engaging, retaining, and directing the efforts of employees with the skills and
experience necessary to safely, efficiently, and effectively provide electric services to
DEP customers. (Id.) Accordingly, for the Commission to abrogate these incentives and
benefits would be a severe detriment to customers and would result in disallowance of a
prudently incurred cost. (Id.)
The Stipulation provides that “[t]he Company accepts the Public Staff’s proposed
adjustment to executive compensation to remove 50% of the compensation for the five
30
Duke Energy executives with the highest amounts of compensation, and to remove 50%
of the benefits associated with those five executives.” (Stipulation Paragraph III.F.)
As part of settlement, the parties agreed to accept the Public Staff’s adjustment
with a modification to limit the incentives removed. This agreement is reflected in
Section III.Q. of the Stipulation, which provides that the Company’s employee incentives
should be adjusted to remove the cost of the STIP Plan based on the Company’s EPS
for employees who qualify for the Company’s LTIP.
In its Application, the Company requested that its capital investment in the Sutton
In his rebuttal testimony, Company witness Delowery testified that the Company
believes that it appropriately and prudently managed the construction and associated
costs of the project and notes that the project was delivered on time and below the
estimated budget. (Id. at 363-364.) Witness Delowery further stated that Company
believes it was prudent in its actions to return the equipment to GE when it discovered
the issues and, therefore, should not be penalized for safety/operational decisions.
Additionally, witness Delowery testified that the actual cost of the removal of the
equipment, disassembly, inspection, leasing of replacement engines, and reassembly
totaled $4.6 million, not $6.4 million. (Id. at 363.)
As part of Stipulation, the parties agreed to reduce rate base by $2.788 million
(NC retail), along with other depreciation expense and cost of capital effects. Witness
Bateman explained that while DEP believes these costs were prudently incurred, for the
purposes of settlement, the Company has agreed to the adjustment. The Stipulation
provides that this adjustment shall be permanent for ratemaking and regulatory
accounting purposes.
In its Application, the Company requested that its approximately $147 million
capital investment in the Mayo Unit 1 Zero Liquid Discharge (ZLD) treatment system for
flue gas desulfurization wastewater for environmental compliance and operational
flexibility be included in rate base. In his testimony, Public Staff witness Lucas testified
that the project experienced construction delays and cost overruns and, therefore, $34.3
million, the difference between the final project costs and DEP’s estimate at the outset of
the project, should be excluded from rate base. (Tr. Vol. 18, p. 229.)
31
In his rebuttal testimony, Company witness Delowery testified that the Company
appropriately managed the construction of the project, that all costs for the project were
prudently incurred, and, therefore, that the Public Staff’s recommendation should be
rejected by the Commission. (Tr. Vol. 7, p. 348-350.) In support, witness Delowery
testified that the Company followed its extensive bidding processes and evaluation criteria
to procure the selected contractors and a contracting strategy that appropriately managed
risks and costs, based on what the Company knew or should have known at the time,
which were prudent actions. (Id. at 348-49.) He further stated that, excluding the power
agency share, the final project costs was only 4% higher than the Company’s cost
estimate range at project approval. (Id. at 355.)
As part of settlement, the parties agreed to reduce rate base by $10.393 million
(NC retail), along with depreciation expense and other cost of capital effects. Witness
Bateman explained that while DEP believes these costs were prudently incurred, for the
purposes of settlement, the Company has agreed to the adjustment. The Stipulation
provides that this adjustment shall be permanent for ratemaking and regulatory
accounting purposes.
Vegetation Management
In its Application, the Company did not include any adjustment to its test period
vegetation management expenses. Company witness Simpson testified that “[v]egetation
management is a critical component of the Company’s power delivery operations and the
continued effort to drive performance for customers’ benefit.” (Tr. Vol. 9, pp. 29-30.)
Witness Simpson explained that in addition to routine circuit maintenance, the Company’s
vegetation management program includes herbicide spraying, removal of hazard trees
outside the area normally maintained on a distribution line, certain unplanned work due
to recommendation by reliability engineers or customer requests, and a formal review
process following vegetation-related outages. (Id. at 30.)
The Company thereafter modified its request to increase test period vegetation
management expense by $1.48 million. (Updated Bateman Exhibit 1 – Hearing, p. 3,
line 37.) This adjustment included the impact of the cycle change recommended by
witness Peedin and the increase in contract rates supported by witness Simpson.
32
The Stipulation provides that the Public Staff withdraws its recommended
adjustment to the Company’s test period vegetation management expenses. The
Company also withdraws its recommended adjustment to the test period vegetation
management expenses included in the second supplemental testimony of witness
Bateman filed November 17, 2017. The effect of this is that the Stipulating Parties agree
with the Company’s original position filed in this case.
Outside Services
Witness Peedin testified that during 2016, the test year in this case, the Public Staff
reviewed costs for outside services associated with expenses that were indirectly charged
to DEP by Duke Energy Business Services (DEBS) as well as those incurred by the
Company directly. Witness Peedin stated that the Public Staff’s investigation revealed
charges that were related to legal services for coal ash and groundwater issues related
to coal ash. She recommended removing these expenses from O&M in the test period.
Witness Peedin noted that the Public Staff also found certain expenses that were
allocated to DEP that should have been directly assigned to other jurisdictions that she
recommended be removed. In the Stipulation, the Company agreed that $80,000 of costs
associated with outside services should be removed, as recommended by the Public Staff
and reflected on Settlement Exhibit 1. This amount does not include costs incurred for
certain legal services related to coal ash, which are included in the Unresolved Issues, as
described in the Stipulation.
On September 29, 2016, in Docket Nos. E-7, Sub 1100, E-2, Sub 1095, and G-9,
Sub 682, the Commission issued its Order Approving Merger Subject to Regulatory
Conditions and Code of Conduct (Merger Order), which approved the merger between
Duke Energy and Piedmont Natural Gas Company (Piedmont).
During the test year in this case, DEP has included in operating expenses
approximately $3.8 million on a North Carolina retail basis that it identified as systems
and transition costs to achieve merger savings. DEP has not requested recovery of these
costs in rate base, but instead has chosen to include them in O&M expenses. Witness
Peedin explained that the Public Staff believes that the Company is not permitted to
recover these costs in this manner by the Merger Order. (Tr. Vol. 18, p. 74.)
In her rebuttal testimony, witness Bateman explained that the Company opposed
this adjustment. (Tr. Vol. 6, p. 162.) She noted that the costs that witness Peedin has
removed are operating expenses, not capital costs. (Id. at 162-63.) According to witness
Bateman, the Merger Order does not specifically address cost recovery for operating
expenses associated with achieving merger savings. (Id. at 163.) Witness Bateman
explained that operating expenses are different from capital costs, and the Company
cannot simply capitalize and depreciate operating expenses like witness Peedin
suggests. (Id.)
33
Notwithstanding their differing positions on the costs to achieve the Duke Energy/
Piedmont merger, in the spirit of settlement and in the context of the Stipulation as a
whole, the Company and the Public Staff have resolved these issues. Accordingly, the
Stipulation provides that the Company accepts the Public Staff’s proposed adjustment to
remove costs to achieve the Duke Energy/Piedmont merger
DEBS is the company that provides services to various affiliated entities of Duke
Energy Corporation. (Tr. Vol. 18, p. 74.) As discussed above, during the test year Duke
Energy acquired Piedmont, and the Commission approved the merger on
September 29, 2016. (Id.) According to Public Staff witness Peedin, this change, along
with updates related to other affiliated entities, has caused the DEP allocation factors to
decrease. (Id.) As part of settlement, the parties agreed to accept the Public Staff’s
adjustment with a modification to include an annualized amount of DEBS costs related to
Piedmont in the calculation. (Id.)
With respect to lobbying expenses, witness Peedin noted that the Company made
an adjustment to remove some lobbying expenses from the test year. (Id. at 75.) She
further adjusted O&M expenses to remove what she characterized as additional lobbying
costs, including O&M expenses that she believed were associated with stakeholder
engagement, state government affairs, and federal affairs that were recorded above the
line. (Id.) In her rebuttal testimony, witness Bateman explained why the Company
opposed this adjustment and disagreed with witness Peedin’s characterization of these
expenses. (Tr. Vol. 6, p. 166.) Witness Bateman testified that in 2016, the Company
engaged a third-party consulting company to perform a detailed time study for the
purpose of determining the percentage of time certain individuals spent on lobbying
activities per the federal definition in Title 29, Section 367.4264 of the Code of Federal
Regulations. (Id.) A report with the results of the study was delivered to the Company in
August 2016, and the Company booked journal entries to ensure that the 2016 labor costs
were aligned with the results of the independent study. (Id. at 167.) The results are that
in the test period, the company booked below the line 66% of the expenses for federal
affairs, 75% of the expenses state government affairs, and 10% of the expenses for
stakeholder engagement. Witness Bateman concluded that no further adjustments were
necessary or justified. (Id.)
34
adjustments to lobbying and Board of Directors’ expenses. Both parties presented
evidence to support their respective positions in direct and rebuttal testimony; however,
no party provided clarity regarding the settled position. As previously discussed, the
Stipulation is recognized as a series of give-and-take positions by the party.
Sponsorship Expenses
The Stipulation provides that the Company’s sponsorships and donations expense
should be reduced by the amount paid to the U.S. Chamber of Commerce.
Harris COLA
In 2006, DEP selected a site at the Shearon Harris Nuclear Power Plant in Wake
County, North Carolina to evaluate the possibility of nuclear expansion to serve North
Carolina and South Carolina customers. As Company witness Fallon explained, new
nuclear generation has a long lead time to license and construct. (Tr. Vol. 12, p. 39.) As
such, actions must be taken in advance of construction to ensure a nuclear option is
available when needed by customers. From 2005 through early 2013, the Company
undertook the activities necessary to develop a COLA for the Harris Nuclear Project
(HNP).
In 2013, the Company determined that additional nuclear units were no longer
needed within the planning horizon of the IRP. As witness Fallon explained, the Company
determined that proceeding with the HNP was no longer necessary and no longer in the
best interest of customers. (Id.) As a result, the Company filed, and the Commission
approved in Docket No. E-2, Sub 1035, a petition seeking an accounting order to defer
and amortize the capital costs incurred relating to the HNP. DEP incurred approximately
$70.3 million in HNP costs. (Tr. Vol. 12, p. 25.) Company witness Fallon explained that
the North Carolina allocable share of the development costs is approximately $45.3
million.
The Company proposed a five-year amortization period in this rate case to recover
the cost expended on the HNP. Public Staff witness Peedin recommended modifying the
amortization period from five years to eight years. The Stipulating Parties have agreed to
the recovery of the HNP costs over an eight-year amortization period as recommended
by Public Staff witness Peedin.
DoD/FEA witness Cannady recommended that the Commission disallow all HNP
costs that the Company incurred after 2011 as being imprudent. (Tr. Vol. 17, p. 175.)
Witness Cannady based her conclusion on: (1) a reduction in spending on internal labor
and other direct costs from 2011 to 2013, (2) a statement of then CEO Jim Rogers that
the decision to build new nuclear depended on gas prices, carbon assumptions, and
growing demand, which she then attempted to demonstrate were not supportive of new
nuclear at the time, and (3) the results of a third-party IRP analysis performed for DEP in
2012 that supports a conclusion that DEP should have stopped the project in 2011.
35
According to witness Cannady, the Company reduced internal labor costs and
overall COLA-related activity after 2011. Witness Cannady argued that this evidenced
that the Company no longer viewed pursuit of the COLA after 2011 as prudent. (Tr.
Vol. 17, p. 178.) Based on the DEP response to DoD/FEA Data Request No. 1, Item 1-
16, the internal labor and other direct costs averaged $4 million annually from March 2008
through December 2011, and only $1.1 million from January 2012 through May 2013.
(Id.) Witness Cannady contends that if the Company remained convinced that continued
pursuit of the COLA after 2011 was prudent, it would have addressed issues surrounding
the AP1000, emergency preparedness, outstanding Nuclear Regulatory Commission
(NRC) requests for information, and other environmental concerns expressed by the U.S.
Army Corps of Engineers. (Id.)
In response, witness Fallon explained in his rebuttal that direct cost and labor cost
and/or the varying spending levels are not indicators of how aggressively DEP is pursuing
the project. Instead, these costs are driven by a variety of factors, including nuclear review
schedule. Witness Fallon highlighted that DEP pursued the COLA in a deliberate and
methodical fashion, with appropriate cost levels for labor and direct costs throughout the
project. (Tr. Vol. 12, p. 52.) In regard to the NRC schedule, witness Fallon explained that
DEP expended significant effort responding to the Requests for Additional Information
(RAIs) over the 2008-2011-time period. (Id. at 53.) Over time, as DEP answered the RAIs,
the workload and spending decreased. By the end of 2011 and the start of 2012, DEP
had very few outstanding RAIs, and the NRC’s primary focus was on approving the
AP1000 DCD and issuing Combined Licenses (COLs) to the Vogtle and V.C. Summer
projects. (Id.) During that same time, other factors, such as the review of the Waste
Confidence Rule, also impacted the level of activity. Witness Fallon further pointed out
that witness Cannady’s analysis distorts the average by comparing full year spend for the
period against less than five months of spend in 2013 when the Harris COLA was
suspended. (Id. at 54.) He went on further to explain that the data request response relied
upon by witness Cannady for her analysis demonstrates that there have been significant
swings in labor cost and direct cost throughout the course of the HNP. (Id.) In addition,
where labor cost declined from 2011 to 2012, overall spending on the project was almost
the same in 2011 and 2012. (Id. at 54-55.)
Witness Cannady also argued that a 2012 statement of Duke Energy CEO Rogers
further established the imprudence of moving forward with the Harris COLA. (Id. at 179.)
The statement refers to decisions on nuclear being strongly related to a price on carbon
and the cost of natural gas. Witness Cannady contends that the Company should have
reevaluated nuclear energy based upon changes to natural gas and carbon. (Id. at 179-
80.) Witness Cannady argued further that DEP’S IRP showed in 2012 that there would
not be enough additional demand to justify a nuclear plant until at least the 2030-35
timeframe. (Id. at 180-81.)
36
needs in the future and over a long-term planning horizon. (Tr. Vol. 12, p. 58.) Although
witness Cannady utilized historical natural gas prices to justify her conclusions, the
Company does not make future resource decisions based on near-term historical natural
gas prices. (Id. at 58.) The Company appropriately relied upon the IRP. In addition,
potential carbon legislation, regulation, and litigation were major concerns for the industry
in the 2012-2013 timeframe, with many coal-fired plants being shut down across the
country to comply with environmental regulations. The Clean Power Plan was not
proposed until June 2014, well after the HNP was suspended. Finally, DEP witness Fallon
testified that the Company’s decision to hire an independent consultant to perform a long-
term needs assessment, which was not completed until February 2013, was a prudent
and reasonable decision to ensure that DEP was appropriately planning its system for
future customer needs and that suspending the Harris COLA review would not harm
customers based on the current projected needs.
Based on the discussion above and the evidence in the record, the Commission
disagrees with DoD/FEA’s position that the Commission should disallow all costs
associated with the Harris COLA that the Company incurred after 2011 as being
imprudent. The Commission agrees with Company witness Fallon that the Company
appropriately relied on its IRP conclusions to make the determinations of what types of
resources were needed and when. The Commission further agrees with DEP witness
Fallon that major changes and concerns (specifically environmental regulations) were
being contemplated in the utility industry in the 2012-2013 timeframe that would affect
future decisions. Further, the Commission finds that DEP was prudent and reasonable
with its decision to hire an independent consultant to perform a long-term needs
assessment to review the ramifications of the Harris COLA review and future system
planning needs. For the reasons discussed above, the Commission finds and concludes
that DOD/FEA’s recommendation to disallow the Harris COLA costs should be rejected.
With respect to other intervenors, NC WARN contends in its post-hearing Brief that
DEP should be limited on recovering costs associated with the HNP. NC WARN states
that the Commission should find that none of the costs associated with the
predevelopment and COLA preparation for the HNP should be borne by ratepayers. NC
WARN notes that recovery of the costs associated with the Harris COLA was included in
the Stipulation between the Company and the Public Staff, with amortization of the costs
over eight years. NC WARN states in its Brief that the final determination as to what is
just and reasonable to be included in rates is up to the Commission, not the settling
parties. NC WARN further discusses the setting or “fixing” of rates by the Commission.
NC WARN stated that G.S. 62-133(b) states that the Commission must:
Ascertain the reasonable original cost of the public utility's property used
and useful, or to be used and useful within a reasonable time after the test
period, in providing the service rendered to the public within the State, less
that portion of the cost that has been consumed by previous use recovered
by depreciation expense. In addition, construction work in progress may be
included in the cost of the public utility's property under any of the following
circumstances:
37
a. To the extent the Commission considers inclusion in the public interest
and necessary to the financial stability of the utility in question, reasonable
and prudent expenditures for construction work in progress may be
included, subject to the provisions of subdivision (4a) of this subsection.
NC WARN recounts the history of DEP’s filings with the NRC and the Commission,
beginning in 2008 and including DEP’s petition filed on August 15, 2013, for an accounting
order to defer in a regulatory asset account certain costs incurred with regard to the Harris
COLA. NC WARN states that in the period between 2008 and 2013, DEP incurred costs
of approximately $69 million on the project, and that the North Carolina jurisdictional
allocation of this amount is approximately $45 million. (Tr. Vol. 12, page 48) NC WARN
notes that DEP seeks recovery of the entire amount of funds spent on the licensing of the
HNP.
Further, NC WARN opines that prior to Senate Bill 3, Session Law 2007-397, it
could be argued that development costs for any project should be borne by the utility, and
not the ratepayers, unless the plant comes online and is used and useful. Additionally,
NC WARN states that in Senate Bill 3 the General Assembly made an exception to the
general rule, and specifically for nuclear plants, as the costs of development and
construction are disproportionate to those of other generating facilities and the timeline
for development and construction, including NRC review of the COLA, is measured in
decades rather than years. According to NC WARN, Section 7 of Senate Bill 3,
G.S. 62-110.7, allows recovery for the project development costs for a nuclear facility
under certain conditions. Moreover, NC WARN states that G.S. 62-110.7 did not become
effective until January 1, 2008, pursuant to Section 16 of the bill, and that no costs
incurred for nuclear plant construction prior that date should be recoverable under any
legal theory. NC WARN states that DEP witness Fallon testified that by the end of 2007
DEP had spent $13 million on the HNP, and he confirmed that this amount is the North
Carolina jurisdictional share. (Tr. Vol. 12, p. 67).
NC WARN states that DEP did not apply to the Commission for a certificate of
public convenience and necessity (CPCN) pursuant to G.S. 62-110.1 and opines that this
step is crucial for cost recovery under G.S. 62.110(b). Without the CPCN, none of the
costs spent are reasonable, according to NC WARN. Finally, NC WARN states that even
when a CPCN is issued and construction has begun, and subsequently a plant is
cancelled, the Commission is required to make a finding as to whether the plant is no
longer in the public interest. NC WARN cites G.S. 62-1109(e), which states that:
[o]nce the Commission grants a certificate, no public utility shall cancel
construction of a generating unit or facility without approval from the
Commission based upon a finding that the construction is no longer in the
public interest.
NC WARN states that the prudency of the costs incurred was the principal issue
in the 1988 Harris Order discussed by DEP witness Wright. (Tr. Vol. 21, p. 32) NC WARN
states that the Commission conducted a prudency audit of costs associated with major
equipment purchases and construction for the multiple cancelled units, and that unlike
the present case, the first round of Harris construction was made pursuant to a CPCN,
38
and that the one unit currently operating was credibly found to be used and useful. State
ex rel. Utilities Commission v. Thornburg, 325 N.C. 484, 385 S.E.2d 463 (1989)
(Thornburg II).
In conclusion, NC WARN asserts that the Commission should find that none of the
costs associated with the predevelopment and COLA preparation for the Harris nuclear
expansion project should be borne by ratepayers.
The Commission disagrees with NC WARN on this issue as it does not believe
that the utility should have to bear the entire amount of costs associated with
predevelopment and COLA preparation for the HNP since the facility was originally
planned to be for the benefit of DEP’s customers and subsequently was cancelled due to
the HNP no longer being the best option. The Commission is of the opinion that just and
reasonable rates result by the utilization of the eight-year amortization period agreed to
in the Stipulation. By amortizing, or spreading the costs, over eight years, the ratepayers
are not bearing the entire cost in rates today. The Commission further concludes that the
costs of development of a generation plant for the use of a utility’s customers should be
recoverable if deemed prudent by the Commission. The Commission deems the costs
related to the Harris COLA prudent, given the facts and circumstances discussed in the
record. Therefore, NC WARN’s position is not accepted.
For all of the reasons cited above and considering all of the evidence presented,
the Commission finds that the costs of the Harris Site Development should be recovered
consistent with the Stipulation, as the Commission concludes that this provision of the
Stipulation is just and reasonable.
Customer Connect Program
DEP witness Fountain testified that DEP has extracted all of the value it can obtain
from its current customer information system (CIS), which is over 30 years old. He stated
that customers expect more and quicker access to information about their account and
that replacing the present CIS will be more cost-effective than attempting to upgrade it.
DEP witness Hunsicker testified that the CIS manages DEP’s billing, accounts
receivable, and rates, and that it is the central repository for customer information. She
explained that the current CIS was designed to communicate with the meter located at
the premise, and not as a customer information storage or retrieval tool. Thus, the current
CIS has limitations in accessing customer account history and other information, and in
opening, closing, or transferring customer accounts, especially between DEP and DEC.
Another limitation is that the current CIS does not record a bill credit. Thus, bill credits for
net metering customers must be manually recorded. Witness Hunsicker further testified
that investments to modify and upgrade the current CIS would not be practical or
sustainable. She stated that a new CIS will provide numerous benefits, including quicker
and simplified procedures for accessing customer information and serving customer’s
needs; improvements in bill formats; easier integration of new rate structures; and
flexibility in implementing Advanced Metering Infrastructure (AMI) meters.
Witness Hunsicker testified that DEP will begin analysis and design of the new
CIS, called Customer Connect Program (CCP), in January 2018, and that it plans to have
39
the new CCP in service in 2021. The total cost will be approximately $155 million. DEP is
requesting that the anticipated costs to be incurred from 2018 through 2020, $10.6 million
per year, be included in its new rates.
In supplemental testimony filed on September 15, 2017, DEP witness Laura
Bateman adjusted the annual revenue requirement for the CCP to reflect a reduction of
$146,000.
Public Staff witness Floyd testified that the Public Staff does not agree that the
costs of analysis and design of DEP’s new CCP should be included in DEP’s current
rates. He stated that such costs do not meet the “used and useful” utility plant test in
G.S. 62-133(b)(1), and, therefore, the Commission should disallow the costs.
DoD/FEA witness Cannady testified that the CCP costs should not be recovered
by DEP in this rate case because: (1) they are not known and measurable, and (2) the
CCP is a component of smart grid and should be evaluated for reasonableness and
prudency at the same time as AMI and other smart grid projects.
In rebuttal testimony, witness Hunsicker responded to the Public Staff’s position
that the costs of the CCP should be disallowed because it will not be used and useful until
it is fully operational in the summer of 2021. She testified that DEP is requesting rate
recovery of the O&M needed to build the CCP, or, in the alternative, a deferral of the O&M
so that it can be recovered in a future rate case. She further testified that DEP will employ
a phased approach that will result in some of the CCP functions being available and
beneficial to customers in 2018. These include the “360 degree view” feature that will use
customer contacts with DEP over social media, voice mail, and web sites to improve
DEP’s ability to communicate with its customers.
In addition, witness Hunsicker disagreed with DoD/FEA witness Cannaday’s
position that the costs of the CCP are not known or measureable at this stage. She stated
that DEP has entered into fixed price contracts for a significant portion of the CCP,
including software, system integrator professional services, and training.
In its post-hearing Brief, EDF contends that the Commission should not grant
DEP’s request to recover costs for its CCP because: (1) the CCP will not be used and
useful within a reasonable time after the test period, (2) even if some portion of the CCP
were available within a reasonable time after the test period, the limited functionality is
not worth the amount DEP seeks to recover, and (3) DEP has failed to manage the CCP
project efficiently to maximize customer benefits arising from access to energy usage
data.
With regard to whether the CCP will be used and useful, EDF states that DEP’s
planned in-service date of 2021 is merely a target date and DEP can offer no assurances
that the CCP will actually be in service in 2021.
With respect to limited functionality, EDF contends that DEP offered no evidence
regarding the precise new services customers would receive from the CCP, how much
customers would benefit from these new services, or whether the same services could
be provided manually. Moreover, EDF maintains that DEP has the burden of proof to
identify and establish the precise new services the CCP will perform, when the new
40
services will be available, and how the new services will benefit customers, and that DEP
failed to meet its burden of proof on these issues.
With regard to EDF’s assertion that DEP has failed to manage the CCP project
efficiently, EDF states that DEP has failed to efficiently manage the project by failing to
analyze how Green Button Connect could be used to maximize the benefits customers
would receive from enhanced access to energy usage data.
In the Stipulation, DEP and the Public Staff agreed that the CCP will be removed
from DEP’s revenue requirement. However, DEP will be authorized to establish a
regulatory asset to defer and amortize the CCP costs. The regulatory asset account will
accrue AFUDC until the DEP Core Meter-to-Cash release (Releases 5-8) of the CCP
project goes into service or January 1, 2022, whichever is sooner. At that point, the costs
will be amortized over 15 years. In addition, DEP will be required to file reports regarding
the development of the CCP each year on December 31 for the next five years or until
the CCP is fully implemented, whichever is later.
The Commission finds and concludes that the Stipulating Parties’ agreement with
regard to the CCP is a just and reasonable path forward to allow DEP to develop its CCP,
and to defer the costs of the program until there is a used and useful component of the
CCP implemented, that being the Core Meter-to-Cash component. This resolves the most
substantial concern expressed regarding the CCP. In addition, the other substantial
concern – that the costs of the CCP are not known or measurable at this stage – is
resolved by placing the costs in a deferred account, thereby making the costs subject to
review in a subsequent proceeding. As a result, the Stipulating Parties’ agreement with
regard to the CCP should be accepted.
Customer Usage Data
In his direct testimony, NC Justice Center witness Howat testified that questions
regarding the effectiveness of existing regulatory consumer protections and credit and
collection practices can only be answered through data-driven analysis of trends in
customer arrearages, service disconnections, and related indicators of the magnitude of
utility payment troubles. Witness Howat further testified that monthly reporting of such
data is crucial for ongoing assessments of the state of home energy security among
DEP’s residential customers and for evaluating the effectiveness of programs and policies
intended to protect that security. (Tr. Vol. 13, pp. 258-59.) Witness Howat recommended
that DEP collect and make publicly available, on a monthly basis and in readily accessible
spreadsheet format, numerous data points by zip code. Further, he contended that many
utilities in the United States regularly report such information, including those in Ohio,
Illinois, Pennsylvania, and Iowa. (Tr. Vol. 13, pp. 260-64.)
41
Commission’s requirements for customer data collection and retention, (2) DEP would be
required to collect more customer information than it presently collects and stores, and
(3) witness Howat’s recommendation would create privacy concerns regarding sharing of
customer data. She further noted that DEP does not currently obtain data, such as income
level, that would enable it to distinguish between low-income and middle- or upper-income
customers.
In its post-hearing Brief, NC Justice Center states that according to DEP the
Company’s existing CIS “does not enable ready access to account histories that can be
important in non-pay situations” (Tr. Vol. 9, pp. 191-92), but that DEP’s new CCP will be
fully integrated into DEP’s other systems and will include the ability to interface with new
smart meters and automate complex billing functions. (Tr. Vol. 9, pp. 144-45.)
NC Justice Center urges the Commission to require that DEP, upon installation of its new
CCP, develop and implement a data collection and reporting protocol to regularly collect
and report data related to customer energy usage and demographics, consistent with the
recommendations of witness Howat, and that the Commission Staff should conduct a
public technical session with DEP and interested stakeholders during the design phase
of the data collection and reporting protocol in order to ensure that resulting reports are
of benefit to all parties.
NC Justice Center further states that the National Association of Regulatory Utility
Commissioners (NARUC) and the National Association of State Utility Commission
Advocates (NASUCA) have adopted resolutions calling for the collection and reporting of
precisely the types of information recommended by witness Howat, and notes that DEP
witness Hunsicker stated that DEP does not disagree with the goals cited by NARUC and
NASUCA. (Tr. Vol. 9, pp. 209-10, 212-13.)
The Commission appreciates the recommendation of NC Justice Center that DEP
be required to regularly collect and report data related to customer energy usage and
demographics once DEP’s CCP is operational. However, the Commission is not
persuaded that this is the time or the proceeding in which to impose such requirements
on DEP. The Commission is addressing issues regarding access to customer usage data
in Docket No. E-100, Sub 147. In addition, DEP has not initiated a full deployment of AMI,
which could be another resource for collection and reporting of the data that NC Justice
Center seeks to require DEP to collect and report. The parties and Commission will know
more about the availability of such data, and the cost of collecting and reporting it, once
the CCP and AMI are implemented. As a result, the Commission declines to adopt NC
Justice Center’s proposal at this time.
Deprecation Rates
Company witness Doss introduced Doss Exhibit 4, the Depreciation Study which
was prepared by Gannett Fleming Valuation and Rate Consultants, LLC. (Tr. Vol. 10,
p. 3.) As explained by witness Doss, the Depreciation Study included updates to
estimates of final plant decommissioning costs for steam, hydraulic, and other production
plants, as well as updated forecasted generation plant retirement dates. (Id. at 17.) In
addition, witness Doss introduced Doss Exhibit 5, the Decommissioning Cost Estimate
Study prepared by Burns and McDonnell, an external engineering firm. This report
42
included estimates for final decommissioning costs at steam, hydraulic, and other
production plants.
As witness Doss explained, the depreciation rates for various fossil and hydro
plants were also updated due to changes in the probable retirement dates. The probable
retirement dates were updated primarily to align dates with current licenses, industry
standards, or operational plans due to aging technology, assumptions for future
environmental regulations, or new planned generation. (Tr. Vol. 7, p. 72.) The
Depreciation Study also incorporates generation assets placed in service since the last
study. Finally, the average service life and net salvage assumptions were updated for
various distribution, transmission, and general plant assets. (Tr. Vol. 10, p. 88.)
The Stipulating Parties have agreed that the Company’s depreciation rates will be
set based on the rates set forth in the Company’s most recent depreciation study, subject
to the following inputs: (1) a 10% contingency; (2) a 10-year remaining life for the meters
that are being retired pursuant to the Company’s AMI program; (3) a 70-year R2 curve
(70-R2) for Account 356; (4) a negative 10% net salvage for Account 366; (5) a 17-year
life for new AMI meters; and (6) a 20-year amortization period for Accounts 391 and 397.
The record in this case supports the utilization of the Company’s most recent Depreciation
Study as the basis for setting depreciation rates as amended by the Stipulation. A
discussion of the specific issues related to depreciation, as addressed by the various
witnesses, is presented below.
Contingency
43
shown that it is reasonable to expect to incur these costs. (Tr. Vol. 12, p. 179.) Although
DEP and the Public Staff held opposing views on this issue, both parties have stipulated
regarding this issue. Similarly, Fayetteville PWC witness Hughes argued for a 10%
contingency factor to be applied to direct costs to cover unknowns. (Tr. Vol. 7,
pp. 206-07.) Witness Hughes’ recommendation is based on the fact that the 10%
contingency factor is equal to the contingency factor used in the 2010 Depreciation Study
to develop rates in DEP’s last rate case. (Tr. Vol. 7, pp. 207-08; Tr. Vol. 12, p. 179.) As
explained by witness Kopp, the prior Decommissioning Study also included a 20%
contingency. (Tr. Vol. 12, p. 180.)
As the result of a settlement in the last case, the contingency was reduced. (Id.)
However, witness Kopp explained that a 20% contingency is reasonable and appropriate
for the decommissioning cost estimates, stating, “[T]he Company’s experience with actual
demolition costs in total on five recent projects has exceeded the BMcD estimate in total
for these five projects.” (Id.) Although witness Kopp cautioned that a 10% contingency
could put risk on future ratepayers, the issue was stipulated utilizing a 10% contingency.
(Id.)
In light of all of the evidence, the Commission finds and concludes that the
contingency factor agreed to by the Stipulating Parties is reasonable and appropriate for
use in this case.
DEP proposed a 65-year R2.5 curve for Account 356, Overhead Conductors and
Devices. (Tr. Vol. 7, p. 285.) Company witness Spanos explained that most estimates in
the industry for Account 356 have service lives of 65 years or less, as opposed to
Fayetteville PWC and Public Staff estimates of 70 years or longer. (Tr. Vol. 12, pp. 146-
47.) Public Staff witness McCullar recommended an R2-70 curve for Account 356.
(Tr. Vol. 7, pp. 281-82.) Witness McCullar based this view on more recent life experience
bands of 1977-2016. (Id. at 285.) Public Staff witness McCullar stated that DEP proposed
an increase in life from 60 years to 70 years in its June 28, 2013 Depreciation Study.
(Tr. Vol. 7, p. 286.) Witness McCullar also stated that “[t]he Public Staff’ proposed
70-year R2 curve shape is a better fit to the actual observed life data” upon which DEP
based its proposal for this account. (Tr. Vol. 7, pp. 286-87.) The Public Staff and the
Company have agreed as Stipulating Parties to a 70-R2 curve for Account 356.
The only other witness making a recommendation on Account 356 was Fayetteville
PWC witness Hughes. Witness Hughes recommended an R2-72 survivor curve for
Account 356. (Tr. Vol. 7, p. 201.) Witness Hughes asserted that the R2-72 survivor curve
provides a better fit to the actuarial data than DEP’s R2.5-65 curve. (Id.) According to
witness Hughes, “[t]he SSD for the R2-72 curve is equal to 0.68, which is much lower
(better) than the 2.76 SSD for DEP’s proposed R2.5-65 survivor curve.” (Tr. Vol. 7,
p. 201.)
44
Witness Spanos, however, explained that witness Hughes’ analysis of mass
property service lives is over-simplistic and lacks reasonable judgment. As explained by
witness Spanos, service lives are estimated for mass property accounts using established
survivor curves, which provide an estimate of both an average service life and a
dispersion of lives around the average. (Tr. Vol. 12, p. 137.) The process for estimating
service lives is based on informed judgment that incorporates a number of factors,
including statistical analysis of historical data. (Tr. Vol. 12, p. 145.) Witness Spanos also
testified that other factors considered should include the mortality characteristic of the
property studied and Company-specific information. (Tr. Vol. 12, p. 145.) Witness Spanos
testified that these factors support his estimate over that of witness Hughes, as his
estimate forecasts that the overall level of retirements for accounts will tend to increase
with age:
All three experts in this proceeding utilized the retirement rate method for their
statistical analyses. According to witness Spanos, witness Hughes incorrectly
overemphasized the tail of the data by putting unnecessary emphasis on the final 20% of
the life of the asset. (Tr. Vol. 12, pp. 142-43, 192-97.) As witness Spanos explained,
witness Hughes’ analysis lacked the judgment that is also required in properly
determining the appropriate survivor curve. (Tr. Vol. 12, p. 194.) Witness Spanos testified
that it is not appropriate to focus on the tail of the curve because the data points for these
older ages can also be erratic and not indicative of the mortality characteristics for the
account, and that the overreliance on mathematical matching without the accompanying
judgment was pervasive throughout witness Hughes’ analysis of mass property accounts.
As witness Spanos went on to explain, there are authoritative texts that support the
concept that information in the middle years of the curve is where the emphasis should
be placed. (Tr. Vol. 12, p. 142-43.) This analysis is based on the probable error involved
in fitting a smooth survivor curve to an observed life table with varying percentages
surviving:
45
greater numbers of retirements and also it covers the period of most
likely the normal operation of the property.
(Id.)
As discussed previously, both witness McCullar and witness Spanos utilized the
same statistical method and came to different conclusions than did witness Hughes for
Account 356.
In light of all of the evidence, the Commission finds and concludes that utilization
of the R2-70 curve proposed by the Stipulating Parties is reasonable.
Public Staff witness McCullar quoted as follows from the NARUC publication Public
Utilities Depreciation Practices, p. 18 (1996):
(Id.)
The Depreciation Study filed by DEP in this case supported a future net salvage
value of negative 15% for the Mass Property Distribution Account 366, Underground
Conduit. As explained by witness Spanos, the DEP’s Depreciation Study utilized the
traditional method of calculating net salvage which is relied upon by the vast majority of
regulatory commissions in the United States. (Tr. Vol. 12, pp. 98-99, 111.) The traditional
method meets the requirements of FERC Uniform System of Accounts and has been
used for several decades in North Carolina. (Id.). The Company method is also endorsed
widely by authoritative depreciation texts and is accepted in the industry. (Id.; Tr. Vol. 12,
p. 124.)
46
Witness Spanos stated that DEP considered multiple factors in estimating the
future net salvage percent:
Public Staff witness McCullar proposed a negative 5% net salvage value for
Account 366. Witness McCullar testified that for some accounts the annual accrual
amount that would be accrued for estimated net salvage is several times the annual
amount the DEP actually incurs for net salvage. (Tr. Vol. 7, p. 278.) Witness McCullar
also considered historical net salvage data included in the 2016 Depreciation Study as
well as the inflation rate included in DEP’s proposed net salvage values. (Tr. Vol. 7,
pp. 279-80.) Company witness Spanos testified the Public Staff’s method does not
allocate the service value of depreciable property in a systematic and rational manner.
Moreover, DEP witness Spanos expressed concerns that the Public Staff’s
proposal is effectively to allocate only an amount equal to the net salvage costs that have
been incurred in the past. “It does not incorporate the future net salvage costs for assets
that are currently in service and, therefore, does not allocate the service value of
depreciable property over its service life.” (Tr. Vol. 12, p. 110.) Witness McCullar’s
approach is also not supported by various authoritative texts on depreciation, addressing
the issue of whether net salvage should be accrued during the life of the related plant.
(Tr. Vol. 12, pp. 121-23.)
Ultimately, the Public Staff and the Company agreed to a negative 10% net
salvage value for Account 366, which is consistent with the currently approved net
salvage value for Account 366. In light of all of the evidence, the Commission finds and
concludes that a negative 10% net salvage value proposed by the Stipulating Parties is
reasonable based on the evidence presented in this case.
DEP proposed in this case to move several general plant accounts to amortization
accounting. (Tr. Vol. 7, p. 288.) General plant amortization accounting is used for general
plant accounts that include a large number of units with relatively low unit cost.
47
Amortization accounting is used because the cost of tracking retirements for every single
asset typically exceeds the benefit of doing so. (Tr. Vol. 12, p. 152.) Witness McCullar
also noted that “[t]he use of amortization accounting for these smaller value general plant
accounts is used to minimize the accounting expense involved in keeping the detailed
records used in depreciation accounting.” (Tr. Vol. 7, pp. 288-89.) No party presented
testimony opposing the Company’s move to amortization accounting. (Tr. Vol. 12, p. 153.)
Opposing testimony was only presented regarding the appropriate amortization periods
for certain accounts, as well as the reserve adjustment for amortization accounting. (See,
e.g., Tr. Vol. 7, p. 289; Tr. Vol. 12, p. 153.)
For Account 397, the Company is proposing a 10-year life for amortization
accounting. Public Staff witness McCullar argued that the amortization period proposed
by the Company for Account 397, Communication Equipment, among others, is not based
on the service life estimates previously used for the asset under depreciation accounting.
(Tr. Vol. 7, p. 290.) Witness McCullar further argues that there is no historical data to back
up the Company’s recommendation. (Id. at 291.) Witness McCullar recommended a
20-year life for Account 397 based on the 15- to 20-year range and the actual DEP
experience that indicates a 25- to 29-year life. (Id.) In addition, witness McCullar
recommended a 20-year life for Account 391, Office Furniture and Equipment, as
opposed to the Company’s 15-year recommended amortization period. (Id. at 292.)
Fayetteville PWC witness Hughes did not oppose the use of amortization
accounting, nor challenge the amortization periods requested by the Company, but
instead challenged the Company’s proposal to use a 5-year amortization period to
48
recover the cost of assets that are retired because they are older than the amortization
period for each account. (Tr. Vol. 7, pp. 214-16.) Witness Hughes recommended a
10-year amortization period for these items. (Tr. Vol. 12, pp. 154, 214-16.)
In response to witness Hughes, witness Spanos explains that the 5-year period to
amortize the unrecovered reserve is appropriate. (Tr. Vol. 12, p. 154.) Because the
unrecovered reserve is associated with existing assets, it is more reasonable to align the
recovery of these costs with the remaining lives of the assets currently in service, rather
than the proposed amortization periods as witness Hughes suggested. (Id.) The
remaining lives of Accounts 391 (which has two subaccounts) and 397 are 6.8, 4.8 and
5.1 years. (Tr. Vol. 12, p. 154.) Therefore, the remaining lives for these accounts are
closer to the Company’s 5-year amortization period than the 10-year period proposed by
witness Hughes. (Id.)
The Stipulating Parties have agreed as part of the settlement to the 20-year
amortization period for Accounts 391 and 397. In light of all of the evidence, the
Commission finds and concludes that a 20-year amortization period for Accounts 391 and
397 proposed by the Stipulating Parties is reasonable in this case. The Commission
further finds that witness Hughes’ proposal to adjust the unrecovered reserve is not
appropriate and should not be adopted.
49
management should be responsible for determining the estimated retirement years for
generation units and not the depreciation analyst (Tr. Vol. 7, p. 190), her testimony fails
to acknowledge that witness Spanos and his team from Gannett Fleming visited several
plant locations, including Blewett and Roxboro. (Dep. Study, p. III-2.) Gannett Fleming
also conducted interviews with management to go over current Company policies and
outlook for the plants. As witness Miller explained, Central services/engineering group
specifically provided input to Gannet Fleming on generating retirement dates.
Fayetteville PWC witness Hughes testified that she believed DEP’s proposal to
divide Account 343 into subaccounts and impose an interim net salvage for a non-rotable
parts subaccount of negative five percent (-5%), DEP’s proposed survivor curves for
Accounts 352 through 356, and DEP’s practice of allowing the remaining useful lives of
its generating units to be set in its depreciation rate studies rather than in its integrated
resource planning are all inherently unreasonable and should be rejected in favor of the
recommendations set forth in her testimony. The Commission disagrees with the
recommendation by Fayetteville PWC witness Hughes, as deprecation studies delve into
the details of the accounts and are the proper forum for useful lives to be set or reset. The
Commission agrees, however, that the IRP is a tool that should be reviewed and utilized
when performing the deprecation study and determining useful lives of assets. Based on
the foregoing discussion, Fayetteville PWC’s position is not accepted. Rather, the record
supports a determination that the 2017 Depreciation Study performed by Gannet Fleming
contains the most up-to-date and accurate estimated life spans for the Company’s plants
and should be relied upon in this case for setting depreciation rates.
DEP proposed negative five percent (-5%) interim net salvage value for Account
343, Prime Movers. (Tr. Vol. 7, p. 209.) DEP proposed to segregate Account 343 into two
subaccounts for combined cycle plants in this case. (Id.) One of the segregated accounts
will include “rotable parts,” which have a relatively short service life and a high positive
salvage. This is because these components, such as turbine blades and transition
components of combustion turbines, are replaced at regular intervals and refurbished.
(Id.)
Fayetteville PWC witness Hughes testified that she characterizes the division as
experimental because (i) there is no such division in the Code of Federal Regulation’s
Account 343 for rotable and non-rotable parts, and (ii) DEP’s proposal deviates from
DEP’s existing Commission-approved accounting practice of recording Account 343
items on a consolidated basis. Witness Hughes stated her concern that DEP has no
actual data to support its proposed negative five percent (-5%) interim net salvage for the
proposed non-rotable parts subaccount. Company witness Spanos testified to as much
stating that “At this time, there is not. One of the reasons for the new subaccounts is so
that net salvage can be tracked separately for the two subaccounts.” (Tr. Vol. 12, p. 135)
In addition, witness Hughes testified that she does not recommend any changes
to the proposed net salvage rate for Account 343.1, Prime Movers – Rotable Parts. (Tr.
50
Vol. 7, p. 211.) However, she proposed interim net salvage of zero percent for non-rotable
parts as compared to the Company’s negative 5% “until there is sufficient data to track
the net salvage for the subaccounts separately.” (Tr. Vol. 7, p. 209.) In witness Hughes’
opinion, there is insufficient data to track the net salvage for the subaccounts separately.
(Tr. Vol. 7, pp. 211-12.) Although witness Spanos acknowledged that no historical data
exists that can be used to estimate the net salvage specific to non-rotable parts (Tr. Vol.
7, p. 212; Tr. Vol. 12, p. 135), his testimony made clear that assigning a value of 0% to
this subaccount is also inappropriate.
The overall historical data, which is shown on page VII-39 of the Depreciation
Study, indicates an overall positive level of net salvage, but that is only part of the
analysis. (Tr. Vol. 12, pp. 135-36.) The data also consistently shows a cost of removal
associated with the retirements in the past ten years. As witness Spanos explained,
almost all of the gross salvage is associated with the rotable parts, and, therefore, there
should be a negative net salvage estimate for non-rotable parts. (Id.) He stated that
witness Hughes’ recommendation does not make sense: “[T]here is typically a cost to
remove components from a power plant, and for this reason there should be some
negative net salvage.” (Id.) In addition, witness Spanos presented a utility example that
supported assigning a negative value to non-rotable parts. (Id. at 136.)
The Commission finds that witness Hughes’ proposal to assign a interim net
salvage value of zero percent for non-rotable parts for Account 343, Prime Movers, should
not be adopted at this time. The Commission finds Company witness Spanos’ argument
has merit in that there is typically some cost associated with the removal of power plants.
Additionally, the Commission finds Company witness Spanos’ utility example supportive
of assigning a negative value to non-rotable parts. Furthermore, the record supports
assigning a negative value to this subaccount, and the amount proposed by witness
Spanos is reasonable in light of the evidence presented and should be approved.
3. Requirement of Workpapers
Witness Hughes states that the Company “should be required in future rate cases
to develop and provide workpapers to support the calculation of the projected total interim
retirements.” (Tr. Vol. 7, p. 205.) Witness Spanos disagrees:
51
resulting calculated amounts are used in workpapers that have
already been provided through discovery.
The Commission agrees that if the calculations are indeed iterative, as stated by
the Company’s deprecation witness Spanos, there would be no real workpapers to
provide. Iterative calculations are numerous and cannot be produced effectively on
spreadsheets, as they are calculations that are performed by the computer behind the
scenes. Based on the aforementioned reasons and all of the evidence in the record, the
Commission, therefore, finds and concludes that witness Hughes’ recommendation to
develop and provide workpapers to support the calculation of the projected total interim
retirements in future rate cases should be rejected.
4. CIGFUR Recommendation
CIGFUR witness Phillips also incorrectly asserts that depreciation rates have
changed due to changes to life spans as a result of environmental regulation. As witness
Spanos points out, that is incorrect as there are a variety of reasons that depreciation
rates change over time as evidenced by the comprehensive Depreciation Study filed in
this case. The depreciation study includes all of the Company's assets, and changes in
depreciation rates occur for many reasons, including updated historical data, updated
service life and net salvage estimates, and additions to generating facilities. The current
depreciation study is based on the available information regarding the Company's assets,
and the depreciation rates therefore need to be updated to reflect current circumstances.
(Tr. Vol. 12, p. 156.)
In the Stipulation the parties agreed that the Company's depreciation rates should
be based on the rates set forth in the Company's most recent Depreciation Study, subject
52
to application of the following inputs: (1) a 10% contingency; (2) a 10-year remaining life
for the meters that are being retired pursuant to the Company's AMI program; (3) 70-R2
for Account 356; (4) a negative 10% future net salvage for Account 366; (5) a 17-year life
for new AMI meters; and (6) a 20-year amortization period for Accounts 391 and 397. The
Commission finds and concludes that in light of all of the evidence presented in this case,
that the agreed upon methods and procedures are appropriate for use in this proceeding.
DEP requested that the Commission adjust the reserve and annual amortization
expense based on a review of current reserve requirements. The original Company
proposal included an accrual and uses the 20% factor which was used in the 2013 Rate
Case. (Tr. Vol. 6, p. 121.) Witness Bateman provided initial testimony in support of the
adjustment. (Id.) Materials and supplies (M&S) inventory are often unique and specific to
individual plants and have minimal value, if any, to other plants. The accrual amount was
determined by dividing the projected inventory balance at the end-of-life (EOL) of each
unit by the number of years remaining in the unit’s life.
The Company has accepted the Public Staff’s adjustment to the end-of-life nuclear
M&S reserve expense, reduced as described in the rebuttal testimony of Company
witness Gillespie. Per the Stipulation, the Company agreed to take appropriate action to
manage its M&S inventory to the current practices and procedures utilized by DEC, with
the goal to ensure that proper levels of inventory are on hand within 24-months after the
entry of the Commission’s rate case order.
Public Staff witness Metz testified that the Commission should adopt a $12.4
million adjustment to DEP’s M&S inventory at its nuclear generation sites. (Tr. Vol. 7,
pp. 308-13.) Witness Metz reviewed DEP’s recorded nuclear plant M&S inventory and
performed a field audit of the Harris Nuclear Plant. Witness Metz discovered categories
of inventory items that existed in a “hold” status for over four years, which results in excess
or unusable inventory. The “hold” categories include: Repair Hold, QA Hold, and
Engineering Change Hold. The QA Hold category includes two subcategories: Quality
Hold and Quality Pending. Witness Metz described these “hold” categories as reasonable
and commonly used in the industry. Witness Metz recommended that the Commission
exclude QA and Repair Hold that has been held for greater than four years (total
$12.4 million). According to witness Metz, hold times exceeding four years indicates that
the Company may never resolve the issues, which results in the Company never using
the associated inventory. (Id. at 313.) Witness Metz did not include the Engineering
Change Hold category costs in the adjustment, explaining that delays may occur for
certain projects due to the need to balance and minimize the overall outage schedule.
(Id.)
Witness Cannady testified that the Commission should not increase the
Company’s annual accrual for EOL nuclear M&S inventory. (Tr. Vol. 17, p. 163.) Witness
Cannady argues that DEP failed to demonstrate that the M&S inventory levels are
necessary to provide service up to the EOL of each nuclear facility: the Company provided
53
no documentation supporting that (1) the test year EOL levels are reasonable or (2) that
the levels must be met through annual accruals to an EOL reserve. (Tr. Vol. 17, p. 176.)
Witness Cannady also questions the 20% transferability and salvage value factor used in
the DEP accrual calculation. (Tr. Vol. 17, p. 136.) Accordingly, witness Cannady
recommends that the Commission not grant additional accrual of $7.435 million, resulting
in a $4.7 million increase in operating income.
As set forth in Section III.T. of the Stipulation, the Stipulating Parties agreed to
include an adjustment to the nuclear M&S reserve and annual amortization expense. The
Company agreed to take appropriate action to manage M&S (nuclear and non-nuclear)
to the current practices and procedures utilized by the Company. The Company stated it
will update the Commission within 24-months after the entry of the Commission’s rate
case order regarding the updated procedures and practices. Accordingly, the
Commission finds and concludes that the recommended adjustment is just and
reasonable to all parties considering all the evidence presented.
Asheville Plant
54
and permission to defer to this regulatory asset any costs related to obsolete inventory,
net of salvage, at the time of retirement. (Application at 11.)
The Company’s request was not contested by any of the intervenors. Therefore,
the Commission finds and concludes that the Company’s request to establish a regulatory
asset related to the retirement of the Asheville coal plant is just and reasonable to all
parties in light of the evidence presented. The Commission finds that the Company’s
request is appropriate and will mitigate the impact on customers. The Commission further
concludes that the Company may establish a regulatory asset at the time of the Asheville
coal plant’s retirement for the remaining net book value and may defer to this regulatory
asset any costs related to obsolete inventory, net of salvage, at the time of retirement.
EDIT Refund
In the Stipulation, the parties agreed that the EDIT liability should be returned to
customers through a levelized rider that will expire at the end of a four-year period.
After careful consideration of all of the evidence in this proceeding, including the
Stipulation, the Commission finds and concludes that the stipulated adjustment related to
EDIT, as discussed above, is just and reasonable to all parties. The Commission further
concludes that that appropriate level of EDIT to be refunded to customers is
$42.577 million annually for the four years following the effective date of the rates
approved in this docket.
55
EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT NOS. 16-24
The evidence supporting these findings of fact and conclusions is contained in the
verified Application and Form E-1 of the Company, the testimony and exhibits of the public
witnesses, the testimony and exhibits of the expert witnesses, and the entire record of
this proceeding.
In its Application the Company requested approval for its rates to be set using a
rate of return on equity of 10.75%. The Stipulation provides for a rate of return on equity
of 9.9%, which is a decrease from the 10.2% level authorized by the Commission in the
Company’s last rate case. For the reasons set forth herein, the Commission finds that a
rate of return on equity of 9.9% is just and reasonable.
Rate of return on equity, also referred to as the cost of equity capital, is often one
of the most contentious issues to be addressed in a rate case, even in a case such as
this one in which a Stipulation between the utility and the consumer advocate has been
reached. In the absence of a settlement agreed to by all parties, the Commission must
still exercise its independent judgment and arrive at its own independent conclusion as to
all matters at issue, including the rate of return on equity. See, e.g., CUCA I, 348 N.C. at
466, 500 S.E.2d at 707. In order to reach an appropriate independent conclusion
regarding the rate of return on equity, the Commission should evaluate the available
evidence, particularly that presented by conflicting expert witnesses. State ex rel. Utils.
Comm’n v. Attorney Gen. Roy Cooper, 366 N.C. 484, 739 S.E.2d 541, 546-47 (2013)
(Cooper I). In this case, the evidence relating to the Company’s cost of equity capital was
presented by Company witness Hevert, Public Staff witness Parcell, Commercial Group
witnesses Chriss and Rosa, AGO witness Polich, CIGFUR witness Phillips, and CUCA
witness O’Donnell. No rate of return on equity expert evidence was presented by any
other party.
In addition to its evaluation of the expert evidence, the Commission must also
make findings of fact regarding the impact of changing economic conditions on customers
when determining the proper rate of return on equity for a public utility. Cooper I, 366 N.C.
484, 739 S.E.2d at 548. This was a factor newly announced by the Supreme Court in its
Cooper I decision and not previously required by the Commission, the Court of Appeals,
or the Supreme Court as an element to be considered in connection with the
Commission’s determination of an appropriate rate of return on equity. The Commission’s
discussion of the evidence with respect to the findings required by Cooper I is set out in
detail in this Order.
Cooper I was the result of the Supreme Court’s reversal and remand of the
Commission’s approval of the agreement regarding the rate of return on equity in a
stipulation between the Public Staff and DEC in DEC’s 2011 Rate Case. The Commission
has had occasion to apply both prongs of Cooper I in subsequent orders, specifically the
following:
56
which was affirmed by the Supreme Court in State ex rel. Utils. Comm’n v.
Cooper, 367 N.C. 444, 761 S.E.2d 640 (2014) (Cooper III)6;
Order Granting General Rate Increase in DEC’s 2013 Rate Case, Docket
No. E-7, Sub 1026 (September 24, 2013) (2013 DEC Rate Order), which
was affirmed by the Supreme Court in State ex rel. Utils. Comm’n v. Cooper,
367 N.C. 741, 767 S.E.2d 305 (2015) (Cooper V); and
In order to give full context to the Commission’s decision herein and to elucidate
its view of the requirements of the General Statutes as they relate to rate of return on
equity, as interpreted by the Supreme Court in Cooper I, the Commission deems it
important to provide in this Order an overview of the general principles governing this
subject.
First, there are, as the Commission noted in the 2013 DEP Rate Order,
constitutional constraints upon the Commission’s rate of return on equity decisions
established by the United States Supreme Court decisions in Bluefield Waterworks &
Improvement Co., v. Pub. Serv. Comm’n of W. Va., 262 U.S. 679 (1923) (Bluefield), and
Fed. Power Comm’n v. Hope Natural Gas Co., 320 U.S. 591 (1944) (Hope):
To fix rates that do not allow a utility to recover its costs, including the cost of equity
capital, would be an unconstitutional taking. In assessing the impact of changing
economic conditions on customers in setting an ROE, the Commission must still
provide the public utility with the opportunity, by sound management, to
(1) produce a fair profit for its shareholders, in view of current economic conditions,
(2) maintain its facilities and service, and (3) compete in the marketplace for
capital. State ex rel. Utilities Commission v. General Telephone Co. of the
Southeast, 281 N.C. 318, 370, 189 S.E.2d 705, 757 (1972). As the Supreme Court
6 An intervening Cooper case, State ex rel. Utils. Comm’n v. Cooper, 367 N.C. 430, 758 S.E.2d
635 (2014) (Cooper II), arose from the 2012 Rate Case by Dominion North Carolina Power (DNCP) and
resulted in a remand to the Commission, inasmuch as the Commission’s Order in that case predated
Cooper I.
57
held in that case, these factors constitute “the test of a fair rate of return declared”
in Bluefield and Hope. Id.
Second, the rate of return on equity is, in fact, a cost. The return that equity
investors require represents the cost to the utility of equity capital. In his dissenting opinion
in Missouri ex rel. Southwestern Bell Tel. Co. v. Missouri Pub. Serv. Comm’n, 262 U.S.
276 (1923), Justice Brandeis remarked upon the lack of any functional distinction between
the rate of return on equity (which he referred to as a “capital charge”) and other items
ordinarily viewed as business costs, including operating expenses, depreciation, and
taxes:
Each is a part of the current cost of supplying the service; and each should be met
from current income. When the capital charges are for interest on the floating debt
paid at the current rate, this is readily seen. But it is no less true of a legal obligation
to pay interest on long-term bonds … and it is also true of the economic obligation
to pay dividends on stock, preferred or common.
Id. at 306 (Brandeis, J. dissenting) (emphasis added). Similarly, the United States
Supreme Court observed in Hope, “From the investor or company point of view it is
important that there be enough revenue not only for operating expenses but also for the
capital costs of the business … [which] include service on the debt and dividends on the
stock.” Hope, 320 U.S. 591, 603.
Leading academic commentators also define rate of return on equity as the cost
of equity capital. Professor Charles Phillips, for example, states that “the term ‘cost of
capital’ may be defined as the annual percentage that a utility must receive to maintain
its credit, to pay a return to the owners of the enterprise, and to ensure the attraction of
capital in amounts adequate to meet future needs.” Phillips, Charles F., Jr., The
Regulation of Public Utilities (Public Utilities Reports, Inc. 1993), at 388. Professor Roger
Morin approaches the matter from the economist’s viewpoint:
While utilities enjoy varying degrees of monopoly in the sale of public utility
services, they must compete with everyone else in the free open market for the
input factors of production, whether it be labor, materials, machines, or capital. The
prices of these inputs are set in the competitive marketplace by supply and
demand, and it is these input prices which are incorporated in the cost of service
computation. This is just as true for capital as for any other factor of production.
Since utilities must go to the open capital market and sell their securities in
competition with every other issuer, there is obviously a market price to pay for the
capital they require, for example, the interest on capital debt, or the expected return
on equity.
* * *
58
[T]he cost of capital to the utility is synonymous with the investor’s return,
and the cost of capital is the earnings which must be generated by the investment
of that capital in order to pay its price, that is, in order to meet the investor’s
required rate of return.
Morin, Roger A., Utilities’ Cost of Capital (Public Utilities Reports, Inc. 1984), at 19-21
(emphasis added). Professor Morin adds: “The important point is that the prices of debt
capital and equity capital are set by supply and demand, and both are influenced by the
relationship between the risk and return expected for those securities and the risks
expected from the overall menu of available securities.” Id. at 20 (emphasis added).
Third, the Commission is and must always be mindful of the North Carolina
Supreme Court’s command that the Commission’s task is to set rates as low as possible
consistent with the dictates of the United States and North Carolina Constitutions. State
ex rel. Utils. Comm’n v. Pub. Staff-N. Carolina Utils. Comm’n, 323 N.C. 481, 490, 374
S.E.2d 361, 370 (1988). Further, and echoing the discussion above concerning the fact
that rate of return on equity represents the cost of equity capital, the Commission must
execute the Supreme Court’s command “irrespective of economic conditions in which
ratepayers find themselves.” (2013 DEP Rate Order, at 37.) The Commission noted in
that order:
59
Id. Indeed, in Cooper I the Supreme Court emphasized “changing economic conditions”
and their impact upon customers. 366 N.C. 484, 739 S.E.2d at 548.
Fourth, while there is no specific and discrete numerical basis for quantifying the
impact of economic conditions on customers, the impact on customers of changing
economic conditions is embedded in the rate of return on equity expert witnesses'
analyses. The Commission noted this in the 2013 DEP Rate Order: “This impact is
essentially inherent in the ranges presented by the return on equity expert witnesses,
whose testimony plainly recognized economic conditions – through the use of
econometric models – as a factor to be considered in setting rates of return.” 2013 DEP
Rate Order, at 38.
Fifth, under long-standing decisions of the North Carolina Supreme Court, the
Commission’s subjective judgment is a necessary part of determining the authorized rate
of return on equity. State ex rel. Utils. Comm’n v. Pub. Staff, 323 NC 481, 490,
374 S.E.2d 361, 369. As the Commission also noted in the 2013 DEP Rate Order:
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risk. These three economic criteria are interrelated and have
been used widely for many years by regulatory commissions
throughout the country in determining the rate of return
allowed public utilities.
Charles F. Phillips, Jr., The Regulation of Public Utilities, 3d ed. 1993, pp.
381-82. (notes omitted)
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of specificity here demanded by [the appellant].” Cooper III, 367 N.C. at 450, quoting State
ex rel. Utils. Comm’n v. Pub. Staff-North Carolina Utils. Comm’n, 323 NC 481, 490 (1988).
Finally, the Supreme Court discussed with approval the Commission’s reference
to and reliance upon expert witness testimony that used econometric models that the
Commission had noted “inherently” contained the effects of changing economic
circumstances upon customers, and also discussed with approval the Commission’s
reference to and reliance upon expert witness testimony correlating the North Carolina
economy with the national economy. See, e.g., Cooper V, 367 N.C. at 747; Cooper III,
367 N.C. at 451.
For his DCF calculation dividend yield, witness Hevert used the average daily
closing prices for the 30-trading days, 90-trading days, and 180-trading days as of
March 31, 2017. He then calculated the DCF results using each of the following growth
terms:
Witness Hevert testified that for each proxy company he calculated the mean,
mean high, and mean low results. For the mean result, he combined the average of the
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EPS growth rate estimates reported by Value Line, Zacks, and First Call with the subject
company’s dividend yield for each proxy company and then calculated the average result
for those estimates. His constant growth DCF results ranged from 8.07% to 9.82%.7
He testified with regard to his constant growth DCF that regardless of the method
employed, an authorized rate of return on equity that is well below returns authorized for
other utilities (1) runs counter to the Hope and Bluefield “comparable risk” standard,
(2) would place DEP at a competitive disadvantage, and (3) makes it difficult for DEP to
compete for capital at reasonable terms.
DEP witness Hevert testified that the Multi-Stage DCF model, which is an
extension of the constant growth form, enables the analyst to specify growth rates over
three distinct stages (i.e., time periods). As with the constant growth form of the DCF
model, the Multi-Stage form defines the cost of equity as the discount rate that sets the
current price equal to the discounted value of future cash flows. He testified in the first
two stages, “cash flows” are defined as projected dividends. In the third stage, “cash
flows” equal both dividends and the expected price at which the stock will be sold at the
end of the period (i.e., the “terminal price”). He calculated the terminal price based on the
Gordon model, which defines the price as the expected dividend divided by the difference
between the cost of equity (i.e., the discount rate) and the long-term expected growth
rate.
Witness Hevert testified that his Multi-Stage DCF long-term growth rate was 5.50%
based on the real GDP growth rate of 3.22% from 1929 through 2016 and an inflation rate
of 2.21%. He testified that the GDP growth rate is calculated as the compound growth
rate in companies. Witness Hevert testified that his Multi-Stage DCF analysis produces a
range of results from 8.72% to 9.28%.
Witness Hevert testified that for his CAPM analysis risk free rate, he used the
current 30-day average yield on 30-year Treasury bonds of 3.06% and the near-term
projected 30-year Treasury yield of 3.52%. For the market risk premium, he calculated
the market capitalization weighted average total return based on the constant growth DCF
model for each of the S&P 500 companies using data from Bloomberg and Value Line.
He then subtracted the current 30-year Treasury yield from that amount to arrive at the
market DCF-derived forward looking market risk premium estimate. Witness Hevert used
the beta coefficients reported by Bloomberg and Value Line. He testified that his CAPM
analysis suggested a rate of return on equity range of 9.15% to 11.49%.
Witness Hevert testified that for his risk premium analysis, he estimated the cost
of equity as the sum of the equity risk premium and the yield on a particular class of
bonds. He testified that the equity risk premium is typically estimated using a variety of
7Table 13 in the rebuttal testimony of witness Hevert contains updated analytical results for his
DCF, CAPM, and Bond Yield Risk Premium analyses. However, in summarizing his rebuttal testimony,
witness Hevert testified that “[n]one of their [opposing witnesses] arguments caused me to revise my
conclusions or recommendations.”
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approaches, some of which incorporate ex-ante, or forward-looking, estimates of the cost
of equity, and others that consider historical, or ex-post, estimates. An alternative
approach is to use actual authorized returns for electric utilities to estimate the equity risk
premium.
Witness Hevert testified that he first defined the risk premium as the difference
between the authorized rate of return on equity and the then-prevailing level of long-term
30-year Treasury yield. He then gathered data for 1,508 electric utility rate proceedings
between January 1980 and March 31, 2017. In addition to the authorized rate of return
on equity, he also calculated the average period between the filing of the case and the
date of the final order (the “lag period”). In order to reflect the prevailing level of interest
rates during the pendency of the proceedings, he calculated the average 30-year
Treasury yield over the average lag period of approximately 200 days. He testified that to
analyze the relationship between interest rates and the equity risk premium, he used
regression analyses. Witness Hevert testified that based upon the regression coefficients,
the implied rate of return on equity in his risk premium analysis is between 10.00% and
10.32%.
Witness Hevert testified that the regional economic conditions in North Carolina
were substantially similar to the United States, such that there is no direct effect of those
conditions on the Company’s cost of equity.
Public Staff witness Parcell performed three rate of return on equity analyses using
the constant growth discounted cash flow (DCF), the capital asset pricing model (CAPM),
and comparable earnings (CE).
Witness Parcell testified that investors do not always use one single indicator of
growth. Witness Parcell’s analysis using these five dividend growth indicators materially
differed from DEP witness Hevert’s sole use of analysts’ predictions of earnings per share
growth to determine DCF dividend growth.
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Witness Parcell performed his DCF analysis on his proxy group of 11 companies,
where using only the high mean growth rate the cost of capital was 8.4%, and the Hevert
proxy group of 18 companies, where using only the highest mean growth rate the cost of
capital was 9.3%. He recommended a DCF rate of return on equity of 8.85% for DEP as
the mid-point of the two highest mean growth rates.
Witness Parcell testified that the constant growth DCF model currently produced
cost of equity results that are lower than has been the case in recent years. This is, in
part, a reflection of the decline in capital costs (e.g., in terms of interest rates). He believed
that the constant growth DCF model remains relevant and informative. It was also his
personal experience that of all available cost equity models, this model is used the most
by cost of capital witnesses. Nevertheless, in order to be conservative, he focused only
on the highest of the DCF results in making his recommendations.
Witness Parcell testified that he did not perform a multi-stage DCF, as he did not
believe that the results of a properly-constructed multi-stage DCF would materially differ
from the results of his constant-growth DCF.
Public Staff witness Parcell performed a CAPM analysis, which describes the
relationship between a security’s investment risk and its market rate of return. For his risk-
free rate, he used the three-month average yield for 20-year Treasury bonds. For the
beta, which indicates the security’s variability of return relative to the return variability of
the over-all capital market, he used the most recent Value Line beta for each company in
his proxy group. He calculated the risk premium by comparing the annual returns on
equity of the S&P 500 with the actual yields of the 20-year Treasury bonds, by comparing
the total returns (i.e., dividends/interest plus gains/losses) for the S&P 500 group as well
as long-term government bonds, using both the arithmetic and geometric means. These
analyses revealed the average expected risk premium to be 5.8%. His CAPM results
collectively indicated a rate of return on equity of 6.1% to 6.7% for the Parcell and Hevert
proxy groups.
However, witness Parcell did not directly consider his CAPM results. He testified
that he has conducted CAPM studies in his cost of equity analyses for many years. He
stated that it is apparent that the CAPM results are currently significantly less than the
DCF and comparable earnings result. There are two reasons for the lower CAPM results.
First, risk premiums are lower currently than was the case in prior years. This is the result
of lower equity returns that have been experienced beginning with the Great Recession
and continuing over the past several years. This is also reflective of a decline in investor
expectations of equity returns and risk premiums. Second, the level of interest rates on
Treasury bonds (i.e., the risk free rate) has been lower in recent years. This is partially
the result of the actions of the Federal Reserve System to stimulate the economy. This
also impacts investor expectation of returns in a negative fashion.
Witness Parcell testified that, initially, investors may have believed that the decline
in Treasury yields was a temporary factor that would soon be replaced by a rise in interest
rates. However, this has not been the case, as interest rates have remained low and
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continue to decline for the past six-plus years. As a result, he believes that it cannot be
maintained that low interest rates (and low CAPM results) are temporary and do not reflect
investor expectations.
Witness Parcell explained his comparable earnings analysis. He testified that the
cost of capital is an opportunity cost: the prospective return available to investors from
alternative investments of similar risk. He testified that the established legal standards
are consistent with the opportunity cost principle. The two Supreme Court cases most
frequently cited (Bluefield and Hope) hold that the return to the equity owners must be
sufficient:
Witness Parcell further testified that the comparable earnings method normally
examines the experienced and/or projected return on book common equity. The logic for
examining returns on book equity follows from the use of original cost rate base regulation
for public utilities, which uses a utility’s book common equity to determine the cost of
capital. This cost of capital is, in turn, used as the fair rate of return, which is then applied
(multiplied) to the book value of rate base to establish the dollar level of capital costs to
be recovered by the utility. This technique is thus consistent with the rate base rate of
return methodology used to set utility rates. Witness Parcel applied the comparable
earnings methodology by examining realized rate of returns on equity for the Hevert and
Parcell groups of proxy companies, as well as unregulated companies, and evaluated
investor acceptance of these returns by reference to the resulting market-to-book ratios.
Witness Parcell used the experienced rates of return on equity of the two proxy groups of
utilities for the years 2002–2008 (the most recent business cycle) and 2009-2016 (the
current business cycle) and projected ROE’s for 2017, 2018, and 2020–2022 (the time
periods estimated by Value Line). He testified that his results indicate that historic rates
of return on equity of 9.4% to 11.0% have been adequate to produce market to book
ratios of 141% to 159% for the groups of utilities. Furthermore, projected rates of return
on equity for 2017, 2018, and 2020–2022 are within a range of 9.8% to 10.6% for the
utility groups. These relate to market to book ratios of 176% or greater. He also noted
66
that the rates of return on equity and market to book ratios of his proxy group, which all
range over $20 billion in market value exceed those of witness Hevert’s proxy group,
which are not selected based upon size.
Witness Parcell testified in support of the 9.9% rate of return on equity in the
Stipulation. Witness Parcell explained that the Stipulation allows an overall rate of return
of 7.09% based on a 9.9% rate of return on equity and a capital structure of 52% equity
and 48% long-term debt. Witness Parcell explained that the stipulated rate of return on
equity is identical to the Commission’s recent decisions in Dominion North Carolina
Power’s (DNCP) rate case, Docket No. E-22, Sub 532 (DNCP Rate Order). The overall
rate of return in the Stipulation is lower than the Company requested. Witness Parcell
also explained that the 9.9% rate of return on equity falls within the range of his
comparable earnings analysis.
Public Staff witness Parcell testified that in his experience, settlements are
generally the result of good faith “give-and-take” and compromise-related negotiations
among the parties of utility rate proceedings, involving the utility and other parties. He
testified that it was also his understanding that settlements, as well as the individual
components of the settlements, are often achieved by the respective parties’ agreements
to accept otherwise unacceptable individual aspects of individual issues in order to focus
on other issues. He testified it was his understanding that the proposed Stipulation is
“global,” except to the “Coal Ash” and storm cost issues in this proceeding.
Witness Parcell testified that it remains his position that should this be a fully
litigated proceeding, he would continue to recommend a capital structure with 50%
common equity and 50% long-term debt, a rate of return on equity of 9.20% (approximate
mid-point of his range of 8.85% to 9.50%), and a cost of debt of 4.05%. However, given
the benefits associated with entering a settlement, it was his view that the cost of capital
components of the Stipulation are a reasonable resolution of otherwise contentious
issues.
Witness Parcell testified that each of the three cost of capital components - capital
structure, rate of return on equity, and debt cost - can be considered as reasonable within
the context of the Stipulation. He testified that DEP and the Public Staff, in their respective
67
testimonies, proposed fundamentally different views on a number of issues, such as
current market conditions and related current costs of common equity, as well as the
appropriate capital structure. The Stipulation represents a compromise, or middle ground
between their respective positions. He also testified that the cost of capital components
of the Stipulation are reasonable within a broad negotiation and resolution of most of the
issues in this proceeding.
With respect to the rate of return on equity component of the Stipulation, witness
Parcell testified that DEP requested a rate of return on equity of 10.75%, which witness
Parcell stated in his direct testimony was well above industry norms in recent years. He
proposed a 9.2% rate of return on equity (i.e., approximate mid-point of a rate of return
on equity range of 8.85% to 9.50%, which was derived from his DCF model results of
8.85% and his comparable earnings results of 9.50%). Public Staff witness Parcell
testified that while he continues to believe his specific 9.2% rate of return on equity
recommendation is appropriate at this time, the upper end of his comparable earnings
range of 9.0% to 10.0% contains the 9.9% Stipulation rate of return on equity level. He
also stated that a 9.9% rate of return on equity is 0.70% above his 9.2% recommendation
and is 0.85% below DEP’s 10.75% rate of return on equity request. As a result, the 9.9%
rate of return on equity in the Stipulation is a “compromise” between DEP’s and the Public
Staff’s respective proposals. The 9.9% rate of return on equity also reflects a reduction
from the 10.2% authorized in DEP’s last rate proceeding.
Witness Parcell testified that he had employed the comparable earnings method
in virtually all of his cost of capital analyses going back to 1972. He testified the
comparable earnings analysis is based on the opportunity cost principal and is consistent
with and derived from the Bluefield and Hope decisions of the U.S. Supreme Court, which
are recognized as the primary standards for the establishment of a fair rate of return for
a regulated public utility. The comparable earnings method is also consistent with the
concept of rate base regulation for utilities, which employs the book value of both rate
base and the capital financing rate base. He testified that his comparable earnings
analyses considers the recent historic and prospective rates of return on equity for the
groups of proxy utilities companies utilized by himself and DEP witness Hevert. He
testified that his conclusion of 9.0% to 10.0% reflects the actual rates of return on equity
of the proxy companies, as well as the market-to-book ratios of these companies. Witness
Parcell further testified that in the recent DNCP rate proceeding, Docket No. E-22, Sub
532, Order dated December 22, 2016, DNCP and the Public Staff agreed to a settlement
with a common equity ratio of 51.75% (versus the requested actual common equity ratio
of 53.92%) and a rate of return on equity of 9.9% (versus the 10.5% requested). The
Commission approved the cost of capital components of that proposed settlement.
Witness Parcell testified that the equity ratio and rate of return on equity in the proposed
Stipulation in the current DEP proceeding are consistent with those of the DNCP
proceeding.
DEP witness Hevert also testified in support of the Stipulation on the agreed-upon
rate of return on equity, capital structure, and overall rate of return contained in the
Stipulation. Witness Hevert testified that although the stipulated rate of return on equity
is below the lower bound of his recommended range of 10.25%, he recognized the
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Stipulation represents negotiations among DEP and the Public Staff regarding otherwise
contested issues. He testified that the Company has determined that the terms of the
Stipulation, in particular the stipulated rate of return on equity and equity ratio, would be
viewed by the rating agencies as constructive and equitable, and that he understands
and respects that determination.
Witness Hevert testified that although the stipulated rate of return on equity falls
below his recommended range, the low end of which is 10.25%, it is within the range of
the analytical results presented in his direct and rebuttal testimonies. He testified that
capital market conditions continue to evolve and as a consequence, the models used to
estimate the cost of equity produce a wide range of estimates. Witness Hevert testified
that he recognizes the benefits associated with DEP’s decision to enter into the
Stipulation and as such, it is his view that the 9.90% stipulated rate of return on equity is
a reasonable resolution of an otherwise contentious issue.
Witness Hevert testified that he considered the stipulated rate of return on equity
in the context of authorized returns for other vertically integrated electric utilities. He
testified that from January 2014 through November 2017, the average authorized rate of
return on equity for vertically-integrated electric utilities was 9.85%, only five basis points
from the stipulated rate of return on equity. Of the 75 cases decided during that period,
31 included authorized returns of 9.90% or higher.
Witness Hevert testified that given DEP’s need to access external capital and the
weight rating agencies place on the nature of the regulatory environment, he believes it
is important to consider the extent to which the jurisdictions that recently have authorized
rates of return on equity for electric utilities are viewed as having constructive regulatory
environments. Witness Hevert testified North Carolina generally is considered to have a
constructive regulatory environment. He testified that Regulatory Research Associates
(RRA), which is a widely referenced source of rate case data, provides an assessment of
the extent to which regulatory jurisdictions are constructive from investors’ perspectives,
or not. As RRA explains, less constructive environments are associated with higher levels
of risk:
RRA maintains three principal rating categories, Above Average, Average,
and Below Average, with Above Average indicating a relatively more
constructive, lower-risk regulatory environment from an investor viewpoint,
and Below Average indicating a less constructive, higher-risk regulatory
climate from an investor viewpoint, Within the three principal rating
categories, the numbers 1, 2, and 3 indicate relative position. The
designation 1 indicates a strong (more constructive) rating; 2, a mid-range
rating; and 3, a weaker (less constructive) rating. We endeavor to maintain
an approximate equal number of ratings above the average and below the
average.8
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Within RRA’s ranking system, North Carolina is rated “Average/1,” which witness
Hevert testified falls in the top one-third of the 53 regulatory commissions ranked by RRA.
Witness Hevert testified that the stipulated rate of return on equity falls 13 to 14 basis
points below the mean and median authorized rate of return on equity, respectively, for
jurisdictions that are comparable to North Carolina’s constructive regulatory environment,
and 37 basis points above the median return authorized in less supportive jurisdictions.
Taken from that perspective, the stipulated rate of return on equity is a reasonable, if not
somewhat conservative measure of DEP’s cost of equity.
Witness Hevert further testified that since January 2014, there have been 65 cases
reported by RRA for vertically-integrated electric utilities in which an overall rate of return
was specified. Over those 65 cases, the median rate of return was 7.45%, 36 basis points
above the 7.09% rate of return contained in the Stipulation. He testified that from a slightly
different perspective, 50 of the 65 cases had overall rates of return greater than 7.09%.
He testified that the low overall rate of return contained in the Stipulation is brought about
by DEP’s rather low cost of debt.
AGO witness Polich testified that capital costs for utilities have been declining, not
increasing, since DEP’s last rate case order dated May 30, 2013, where the Commission
approved an rate of return on equity of 10.2%. He testified that market data indicates a
substantially lower rate of return on equity is sufficient. He cited DEP’s most recent long-
term debt issuance, which had an interest rate of 3.608%, adding that his recommended
specific rate of return on equity of 8.48% would provide an implied 488 basis point
premium over the coupon rate in DEP’s September 2017 first mortgage bonds. He
performed a two-step DCF and CAPM to reach his rate of return on equity
recommendations.
Witness Polich’s two-step DCF utilized the weighted average of two-thirds for
short-term analysts five-year forecasted growth rate and one-third for the long-term
growth rate of projected long-term US economic growth rate in gross domestic product
published by the Energy Information Administration (EIA), the Social Security
Administration, and IHS Global Insights. The results of his two-step DCF were the mean
of the ROEs for the proxy group of 8.25%, and the median rate of return on equity of
8.48%. He testified he used the same proxy group as witness Hevert.
Witness Polich testified that one of the reasons that his analysis is so different than
witness Hevert’s multi-stage DCF is because witness Hevert uses a long-term growth rate
of 5.5%, which is significantly higher than the projected economic long-term growth in
U.S. Gross Domestic Product (GDP) from multiple reliable resources. For example, the
EIA projects GDP to only grow at 4.14% through 2050. The Congressional Budget Office
(CBO) projects Nominal GDP to grow at 3.97% through 2047 and a real GDP growth of
1.93%. He testified that the appropriate long-term GDP growth rate should be 4.22%,
which is 128 basis points less than witness Hevert’s figure. Witness Polich testified that
witness Hevert’s reliance on the exaggerated five-year growth rate significantly inflates
his growth estimate and rate of return on equity calculations and does not reasonably
reflect the need to use a longer-term growth rate in the two-step DCF model. Witness
Polich testified that it is not reasonable to expect the regulated proxy group utilities to
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experience very long-term average dividend growth rates of 5.5% when the overall U.S.
economy is only expected to grow at 4.22% over the same term.
For witness Polich’s CAPM risk-free rate, he used the last ten-year average yield
on 30-year Treasury bonds of 3.15% and the average last twenty-year average yield of
4.32%. For the risk premium, witness Polich used the forward-looking market risk
premium of 5.75% recommended by KPMG Advisory N.V., Equity Risk Premium –
Research Summary, July 13, 2017, and the 6.16% average risk premium over the last
ten years calculated by Dr. Aswarth Damordaran, Professor of Corporate Finance and
Valuation at the Stern School of Business at New York University.
Witness Polich used the same proxy group for his CAPM as his two-step DCF. For
the proxy group beta, he used the mean of 0.708 and median of 0.675. His CAPM rate of
return on equity analysis results were low mean rate of return on equity of 7.22%,
weighted median rate of return on equity of 7.56%, and high mean rate of return on equity
of 8.68%.
CUCA witness O’Donnell testified that the most useful methodology to produce
realistic rate of return on equity results relative to prevailing capital markets, when applied
appropriately, is the DCF. To check the reasonableness of his DCF analysis and to gauge
the proper rate of return on equity to recommend within the DCF range, he also performed
a Comparable Earnings analysis and the CAPM. Witness O’Donnell utilized a proxy group
similar to DEP witness Hevert’s except witness O’Donnell eliminated Avista Corp due to
the pending takeover and SCANA Corp due to the controversy regarding the termination
of construction at the Summer Nuclear Plant.
Witness O’Donnell calculated his DCF dividend growth rate using the historical
retention of earnings, the historical 10-year and 5-year compound annual earnings per
share, dividends per share, and book value per share as reported by Value Line, the
Value Line forecasted compound annual rate of change for earnings share, dividends per
share, and book value per share, and the forecasted rate of change for earnings per share
that industry analysts supplied to Charles Schwab and Company. Witness O’Donnell’s
DCF growth rate was 4.75% to 5.75%, and his calculated DCF range was 7.75% to 8.75%
CUCA witness O’Donnell in his comparable earnings analysis included the earned
returns on equity for his proxy group and Duke Energy Corporation over the period 2015
through 2022, balancing historical and forecasted returns. The past and forecasted
earned returns for the proxy group were 9.25% to 10.25%, and the past and forecasted
earned returns for Duke Energy Corporation were 7.5% to 8.5%. His recommended rate
of return on equity based upon his comparable earnings analysis was the range of 8.75%
to 9.75%.
Witness O’Donnell testified that for his CAPM, he used for the risk-free rate and
the current 30-year Treasury bond yields of 2.9%. He expected the current interest rate
environment to remain relatively stable for many years to come, citing statements by
Federal Reserve Chairperson Janice Yellen. “Yellen Says Forces Holding Down Rates
May Be Long Lasting,” Barrons, June 16, 2016. The beta he used was his proxy group
was 0.72 and the beta for Duke Energy Corporation was 0.60.
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For his risk premium analysis, witness O’Donnell used the long-term geometric
and arithmetic returns for both large company equities and fixed income Long-Term
Government Bonds with the resulting risk premium ranging from 4.60% to 6.20%. He also
evaluated the predicted total market returns by a group of market experts, which ranged
from 4.5% to 8%. He concluded that his equity risk premium was in the range of 4% to
6% and his CAPM resulted in an ROE range of 4.6% to 7.5%.
Commercial Group witnesses Chriss and Rosa testified that the average of
111 reported electric utility rate case rates of return on equity authorized by commissions
to investor-owned utilities in 2014, 2015, 2016 and year-to-date 2017 was 9.65%.
Witnesses Chriss and Rosa further testified that for the group reported by SNL Financial
in Commercial Group Exhibit CR-3, the average rate of return on equity for vertically
integrated utilities authorized from 2014 through present is 9.79%. They further testified
that there is a continuing declining trend in authorized rates of return on equity for
vertically integrated utilities over this time period. The average rate of return on equity
authorized for vertically integrated utilities in 2014 was 9.92%; in 2015, 9.75%; in 2016,
9.77%; and so far in 2017, 9.70%.
Witnesses Chriss and Rosa testified that they know the rate of return on equity
decisions of other state regulatory commissions are not binding on the Commission. They
testified that each commission considers the specific circumstances in each case in its
determination of the proper rate of return on equity. Commercial Group provided the
information in its testimony to illustrate a national customer perspective on industry trends
in authorized rates of return on equity. Its witnesses testified that in addition to using
recent authorized rates of return on equity as a general gauge of reasonableness for the
various cost-of-equity analyses presented in this case, the Commission should consider
how its authorized rate of return on equity impacts North Carolina customers relative to
other jurisdictions.
CIGFUR witness Phillips did not perform cost of capital analyses. He testified that
DEP’s requested rate of return on equity of 10.75% is excessive and should be rejected.
He stated that DEP’s current authorized rate of return on equity is 10.2%, which was
authorized in the Commission’s 2013 DEP Rate Order issued on May 30, 2013. Witness
Phillips testified that costs of capital have declined since DEP’s last rate case. Every
quarter, Regulatory Research Associates, an affiliate of SNL Financial, updates its Major
Rate Case Decisions report that covers electric and natural gas utility rate case outcomes.
Specifically, this report tracks the authorized rates of return on equity resulting from utility
rate cases. The most recent report, updated through June 30, 2017, shows that the
national average authorized rate of return on equity for electric utilities in the first six
months of this year is 9.61%, nearly 60 basis points below DEP’s currently authorized
rate of return on equity. Witness Phillips concluded that DEP’s current approved rate of
return on equity, and definitely its requested rate of return on equity, are significantly
above the current market cost of equity. He recommended that the Commission authorize
a rate of return on equity that does not exceed the national average of 9.61%.
2. Discussion of Rate of Return Evidence and Conclusions
In a fully contested rate case such as, for example, the 2012 DNCP rate case,
there will almost inevitably be conflicting rate of return on equity expert testimony. Even
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in a partially settled case, the Commission may be faced with conflicting rate of return on
equity expert witnesses whose testimony, in accordance with CUCA I and Cooper I,
requires detailed consideration and, as necessary, evaluation by the Commission of
competing methodologies, opinions, and recommendations. These were the
circumstances in DEC’s 2011 rate case, Docket No. E-7, Sub 989, which resulted in the
Cooper I decision, as well as the DEP Sub 1023 Rate Case. In both of those cases rate
of return on equity expert testimony from CUCA witness O’Donnell provided an alternate
rate of return on equity analysis that pegged the utility’s cost of capital at an amount lower
than the settled rate of return on equity. The Supreme Court in Cooper I faulted the
Commission for not making explicit its evaluation of this testimony, and, thus, the
Commission in the 2013 DEP Rate Order made an express evaluation of witness
O’Donnell’s testimony in accordance with the Cooper I decision.
The Commission determines the appropriate rate of return on equity based upon
the evidence and particular circumstances of each case. However, the Commission
believes that the rate of return on equity trends and decisions by other regulatory
authorities deserve some weight, as (1) they provide a check or additional perspective on
the case-specific circumstances, and (2) the Company must compete with other regulated
utilities in the capital markets, meaning that a rate of return on equity significantly lower
than that approved for other utilities of comparable risk would undermine the Company’s
ability to raise necessary capital, while a rate of return on equity significantly higher than
other utilities of comparable risk would result in customers paying more than necessary.
In this connection, the analysis performed by Commercial Group witnesses Chriss and
Rosa, as modified by witness Hevert, is instructive. Witnesses Chriss and Rosa noted
that according to data from SNL Financial for 2014 through the 2017 hearing date,
authorized rates of return on equity across the country for vertically-integrated electric
utilities have been in the range of 9.20% to 10.55%. Witnesses Chriss and Rosa
calculated the mean authorized rate of return on equity for vertically-integrated utilities
like DEP to be 9.79%. Witness Hevert, in commenting upon and evaluating their
testimony in his Rebuttal Testimony, refined their analysis and presented his findings in
Exhibit RBH-R21 to add in jurisdictional rankings. Doing so results in a rate of return on
equity range from 9.70% to 10.55%, with a median of 10.14%. (Tr. Vol. 8, pp. 158-59.)
The Settlement rate of return on equity is, of course, within that range, and actually below
the median of that range. As witness Hevert’s settlement testimony notes, “since 2014,
the average authorized Return on Equity for vertically integrated electric utilities has been
9.85%, only five basis points from the Settlement rate of return on equity. Among
jurisdictions that, like North Carolina, are seen as having constructive regulatory
environments, the average authorized ROE [rate of return on equity] was 10.03%,
13 basis points above the 9.90% Settlement ROE [rate of return on equity].” (Id. at 330.)
Accordingly, the evidence presented concerning other authorized rates of return on
equity, when put into proper context, lends substantial support to the stipulated 9.9% rate
of return on equity level.
Finally, as the Supreme Court made clear in CUCA I and CUCA II, the Commission
should give consideration to the non-unanimous Stipulation as relevant evidence, along
with all evidence presented by other parties, in determining whether the Stipulation’s
provisions should be accepted. In this case, insofar as expert rate of return on equity
testimony is concerned, no expert witness presented credible or substantial evidence that
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the stipulated 9.9% rate of return on equity is not just or reasonable to all parties. Both
witnesses Hevert and Parcell supported DEP’s required rate of return on equity at that
level, in the context of the Stipulation as a whole, and witness Hevert was subjected to
extensive cross-examination. Thus, the Commission finds and concludes that the
Stipulation, along with the expert testimony of witnesses Hevert (risk premium analysis),
O’Donnell (comparable earnings), and Parcell (comparable earnings), are credible and
substantial evidence of the appropriate rate of return on equity and are entitled to
substantial weight in the Commission’s determination of this issue.
3. Evidence of Impact of Changing Economic Conditions on Customers
As noted above, utility rates must be set within the constitutional constraints made
clear by the United States Supreme Court in Bluefield and Hope. To fix rates that do not
allow a utility to recover its costs, including the cost of equity capital, would be an
unconstitutional taking. In assessing the impact of changing economic conditions on
customers in setting a return on equity, the Commission must nonetheless provide the
public utility with the opportunity, by sound management, to (1) produce a fair profit for its
shareholders, in view of current economic conditions, (2) maintain its facilities and
service, and (3) compete in the marketplace for capital. State ex rel. Utils. Comm’n v.
General Telephone Co. of the Southeast, 281 N.C. 318, 370, 189 S.E.2d 705 (1972). As
the Supreme Court held in that case, these factors constitute “the test of a fair rate of
return declared” in Bluefield and Hope. Id.
a. Discussion and Conclusions Regarding Evidence Introduced During the
Evidentiary Hearing
In this case, all parties had the opportunity to present the Commission with
evidence concerning changing economic conditions as they affect customers. The
testimony of witnesses Hevert and Parcell, which the Commission finds entitled to
substantial weight, addresses changing economic conditions at some length. Witness
Hevert provided detailed data concerning changing economic conditions in North Carolina
as well as nationally, and concluded that the North Carolina-specific conditions are “highly
correlated” with conditions in the broader nationwide economy. As such, witness Hevert
testified that changing economic conditions, both nationally and specific to North Carolina,
are reflected in his rate of return on equity estimates.
DEP witness Hevert testified extensively on economic conditions in North Carolina.
He testified that unemployment has fallen substantially in North Carolina and the U.S.
since late 2009 and early 2010, when the rates peaked at 10.00% and 11.30%,
respectively. By February 2017, the unemployment rate had fallen to one-half of those
peak levels: 4.70% nationally, and 5.10% in North Carolina. Since DEP’s last rate filing in
2012, the unemployment rate in North Carolina has fallen from 9.00% to 5.10%.
Witness Hevert testified that with respect to GDP there also has been a relatively
strong correlation between North Carolina and the national economy (approximately
67.00%). Since the financial crisis, the national rate of growth at times (during portions of
2010 and 2012) outpaced North Carolina. Since the third quarter of 2015, however, North
Carolina has consistently exceeded the national growth rate. He testified that as to
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median household income, the correlation between North Carolina and the U.S. is
relatively strong (nearly 86.00% from 2005 through 2015). Since 2009 (that is, the years
subsequent to the financial crisis), median household income in North Carolina has grown
at a faster annual rate than the national median income.
Witness Hevert testified as to the seasonally unadjusted unemployment rates in
the counties served by DEP. At the unemployment peak, which occurred in late 2009 into
early 2010, the unemployment rate in those counties reached 12.65% (1.65 percentage
points higher than the State-wide average); by February 2017 it had fallen to
approximately 5.60% (0.60 percentage points higher than the State-wide average). Since
DEP’s last rate filing in 2012, these counties’ unemployment rates have fallen by over
4.00 percentage points.
Witness Hevert testified that it was his opinion that, based on the indicators
discussed above, North Carolina and the counties contained within DEP’s service area
continue to steadily emerge from the economic downturn that prevailed during DEP’s
previous rate case, and that they have experienced significant economic improvement
during the last several years. He testified that this improvement is projected to continue.
Public Staff witness Parcell testified that he is aware of no clear numerical basis
for quantifying the impact of changing economic conditions on customers in determining
an appropriate rate of return on equity in setting rates for a public utility. He testified that
the impact of changing economic conditions nationwide is inherent in the methods and
data used in his study to determine the cost of equity for utilities that are comparable in
risk to DEP.
Witness Parcell testified that DEP provides service in 51 counties, and that the 18
North Carolina Department of Commerce classified Tier 1 counties had an August 2017
not-seasonally-adjusted combined unemployment rate of 5.8%, with a combined total of
17,317 persons unemployed, and a combined total labor force of 298,459 persons. The
20 Tier 2 counties had an August 2017 not-seasonally-adjusted combined unemployment
rate of 5.6%, with a combined total of 43,789 persons unemployed and a combined total
labor force of 781,690 persons. The 13 Tier 3 counties had an August 2017
not-seasonally-adjusted combined unemployment rate of 4.0%, with a combined total of
56,743 persons unemployed, each with a combined total labor force of 1.431 million
persons. The August 2017 not-seasonally-adjusted North Carolina unemployment rate
was 4.5%. He testified that all 51 counties experienced a drop in their
not-seasonally-adjusted unemployment rates between August 2016 and August 2017,
averaging a 0.9% decrease compared to the statewide decrease of 0.8%. Witness Parcell
further testified the North Carolina Department of Commerce in its September 2017 NC
Today stated that North Carolina industry employment had an increase of 70,500 over
the year, an increase in real taxable retail sales of $643.9 million over the year, an
increase in residential building permits of 3.4% over the year, and an increase in job
postings of 8.3% over the year. Witness Parcell testified that there are reasons to believe
that the economic conditions in the nation and in North Carolina will continue to improve,
which should provide a benefit for many DEP customers. He concluded by stating that
the Commission's duty to set rates as low as reasonably possible consistent with
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constitutional requirements without jeopardizing adequate and reliable service is the
same regardless of the customer's ability to pay.
b. Evidence Introduced During Public Hearings and Further Conclusions
The Commission’s review also includes consideration of the evidence presented
during the public hearings by public witnesses, almost all of whom presently are
customers of DEP. The hearings provided over 140 witnesses the opportunity to be heard
regarding their respective positions on DEP’s application to increase rates. The
Commission held five evening hearings throughout DEP’s North Carolina service territory
to receive public testimony. The testimony presented at the hearings illustrates in detail
the difficult economic conditions facing numerous North Carolina citizens. A
representative sample of the public witness testimony received on the topic is
summarized below.
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Craig, Anderson, Fireman, White, Norris, Houghton, Livsey, Mac Arthur, and Stangler
testified that DEP is spending too much money on gas-fired plants, and instead should
invest more on energy efficiency and renewable energy initiatives. Witness Huttman on
behalf of Williams testified that DEP’s requested rate increase would be bad for small
businesses and local economies.
At the public hearing in Snow Hill, witnesses Herring, Harroway, Taylor, Schachter,
Hinnant, Dantonio, Gurley, Poland, Gallimore, Wright, Battle, Liles, and Mullens testified
that those with a fixed or limited income cannot afford, and would be disparately affected
by DEP’s proposed rate increase. Witnesses Taylor, Shachter, and Battle testified that
DEP’s proposed increase to the basic customer charge should be denied because it
would discourage energy conservation, preclude customers from reducing electric usage
as a means of offsetting the increased rates, and disproportionately affect the customers
who use the least amount of energy. Witnesses Winstead, Wood, and Emerson testified
that DEP’s application for a rate increase is unjustified because current infrastructure can
support the mostly flat demand for energy for years to come, non-public utility rates have
decreased, and the price of fuel to generate electricity has decreased. Witness Bain
testified that costs related to power plants never used or useful to the consuming public
or abandoned prior to completion reflect DEP’s poor management practices, and,
therefore, should be excluded from recovery through the rate base.
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element of the formula must be analyzed to determine the utility’s cost of service and
revenue requirement. The Commission must make many subjective decisions with
respect to each element in the formula in establishing the rates it approves in a general
rate case. The Commission must approve accounting and pro forma adjustments to
comply with G.S.62-133(b)(3). The Commission must approve depreciation rates
pursuant to G.S.62-133(b)(1). The decisions the Commission makes in each of these
subjective areas have multiple and varied impacts on the decisions it makes elsewhere
in establishing rates, such as its decision on rate of return on equity.
Economic conditions existing during the test year, at the time of the public
hearings, and at the date of this Commission Order affect not only the ability of DEP’s
consumers to pay electric rates, but also the ability of DEP to earn the authorized rate of
return during the period rates will be in effect. Pursuant to G.S. 62-133, rates in North
Carolina are set based on a modified historic test period.9 A component of cost of service
as important as return on investment is test year revenues.10 The higher the level of test
year revenues the lower the need for a rate increase, all else remaining equal. Historically,
and in this case, test year revenues are established through resort to regression analysis,
using historic rates of revenue growth or decline to determine end of test year revenues.
DEP is in a significant construction mode – adding new gas-fired plants, retrofitting
nuclear units, and investing in transmission and distribution facilities. Much of this
investment is responsive to environmental regulatory requirements. New gas units will
replace older, less efficient, higher polluting coal units. These units do little to meet new
growth.
When costs and expenses grow at a faster pace than revenues during the period
when rates will be in effect, the utility will experience a decline in its realized rate of return
on investment to a level below its authorized rate of return. Differences exist between the
authorized return and the earned, or realized, return. Components of the cost of service
must be paid from the rates the utility charges before the equity investors are paid their
return on equity. Operating and administrative expenses must be paid, depreciation must
be funded, taxes must be paid, and the utility must pay interest on the debt it incurs. To
the extent revenues are insufficient to cover the entire cost of service, the shortfall
reduces the return to the equity investor, last in line to be paid. When this occurs, the
utility’s realized, or earned, return is less than the authorized return.
This phenomenon, caused by incurrence of higher costs prior to the
implementation of new rates to recover those higher costs, is commonly referred to as
regulatory lag. Just as the Commission confronts constitutional and statutory restrictions
in making discrete decrements to rate of return on equity to mitigate the impact of rates
on consumers, it also confronts statutory constraints on its ability to adjust test year
revenues to mitigate for regulatory lag. The Commission, in its expert experience and
judgment and based on evidence in the record, is aware of the effects of regulatory lag in
9 G.S. 62-133(c).
10 G.S. 62-133(b)(3).
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the existing economic environment. However, just as the Commission is constrained to
address difficult economic times on customers’ ability to pay for service by establishing a
lower rate of return on equity in isolation from the many subjective determinations that
must be made in a general rate case, it likewise does not address the effect of regulatory
lag on the Company by establishing a higher rate of return on equity. Instead, in setting
the rate of return, the Commission considers both of these negative impacts in its ultimate
decision fixing DEP’s rates. The Commission keeps all factors affected by current
economic conditions in mind in the many subjective decisions it makes in establishing
rates. In doing so in the case at hand, the Commission has accepted the stipulated 9.9%
rate of return on equity in the context of weighing and balancing numerous factors and
making many subjective decisions. When these decisions are viewed as a whole,
including the decision to establish the rate of return on equity at 9.9%, the Commission’s
overall decision fixing rates in this general rate case results in lower rates to consumers
in the existing economic environment.
Consumers pay rates, a charge in cents per kWh or per kW for the electricity they
consume. Investors are compensated by earning a return on the capital they invest in the
business. Consumers do not pay a rate of return on equity. Investors are paid in dollars.
In this case DEP filed rate schedules that would have produced annual revenues of
$3,560,767,000. This is the amount ratepayers would pay. These revenues, pursuant to
the Application, would have produced $625,570,000 in return on investment. Of this
amount $463,224,000 was the return that would have been paid to equity investors, the
“return on equity.” Pursuant to the Application the “rate of return on equity” financed
portion of the investment (as distinguished from the “return on equity”) would have been
10.75%.
All of the scores of adjustments the Commission approves reduce the revenues to
be recovered from ratepayers and the return to be paid to equity investors. Some
adjustments reduce the authorized rate of return on investment financed by equity
investors. The noted adjustments are made solely to reduce rates and provide rate
stability to consumers (and return to equity investors) to recognize the difficulty for
consumers to pay in the current economic environment. While the equity investor’s cost
was calculated by resort to a rate of return on equity of 9.9% instead of 10.75%, this is
only one approved adjustment that reduced ratepayer responsibility and equity investor
reward. Many other adjustments reduced the dollars the investors actually have the
opportunity to receive. Therefore, nearly all of these other adjustments reduce ratepayer
responsibility and equity investor returns in compliance with the Commission’s
responsibility to establish rates as low as reasonably permissible without transgressing
constitutional constraints.
For example, to the extent the Commission makes downward adjustments to rate
base, or disallows test year expenses, or increases test year revenues, or reduces the
equity capital structure component, the Commission reduces the rates consumers pay
during the future period when rates will be in effect. Because the utility’s investors’
compensation for the provision of service to consumers takes the form of return on
investment, downward adjustments to rate base or disallowances of test year expenses
or increases to test year revenues, or reduction in the equity capital structure component,
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reduce investors’ return on investment irrespective of its determination of rate of return
on equity.
The rate base, expenses, and revenue examples listed above are instances where
the Commission makes decisions in each general rate case, including the present case,
that influence the Commission’s determination on rate of return on equity and cost of
service and the revenue requirement. The Commission always endeavors to comply with
the North Carolina Supreme Court’s requirements that it “fix rates as low as may be
reasonably consistent” with U.S. Constitutional requirements irrespective of economic
conditions in which ratepayers find themselves. While compliance with these
requirements may have been implicit and, the Commission reasonably assumed, self-
evident as shown above, the Commission makes them explicit in this case to comply with
the Supreme Court requirements of Cooper I.
Based on the changing economic conditions and their effects on DEP’s customers,
the Commission recognizes the financial difficulty that the increase in DEP’s rates will
create for some of DEP’s customers, especially low-income customers. As shown by the
evidence, relatively small changes in the rate of return on equity have a substantial impact
on a utility’s base rates. Therefore, the Commission has carefully considered the
changing economic conditions and their effects on DEP’s customers in reaching its
decision regarding DEP’s approved rate of return on equity. The Commission also
recognizes that the Company is investing significant sums in generation, transmission
and distribution improvements to serve its customers, thus requiring the Company to
maintain its creditworthiness in order to compete for large sums of capital on reasonable
terms. The Commission must weigh the impact of changing economic conditions on
DEP’s customers against the benefits that those customers derive from the Company’s
ability to provide safe, adequate and reliable electric service. Safe, adequate and reliable
electric service is essential to the well-being of the people, businesses, institutions, and
economy of North Carolina.
The Commission finds and concludes that these investments by the Company
provide significant benefits to all of DEP’s customers. The Commission concludes that
the return on equity approved by the Commission in this proceeding appropriately
balances the benefits received by DEP’s customers from DEP’s provision of safe,
adequate, and reliable electric service in support of the well-being of the people,
businesses, institutions, and economy of North Carolina with the difficulties that some of
DEP’s customers will experience in paying DEP’s increased rates.
Finally, the Commission gives significant weight to the Stipulation and the benefits
that it provides to DEP’s customers, which the Commission is obliged to consider as an
independent piece of evidence under the Supreme Court’s holdings in CUCA I and
CUCA II.
The Commission in every case seeks to comply with the N.C. Supreme Court
mandate that the Commission establish rates as low as possible within Constitutional
limits. The scores of adjustments the Commission approves in this case comply with that
mandate. Nearly all of them reduced the requested return on equity and benefit
consumers’ ability to pay their bills in this economic environment.
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In this case DEP originally requested a retail revenue increase of $477 million, or
a 14.9% increase in annual revenues. The Commission has examined the Company’s
application and supporting testimony and exhibits and Form E-1 filings seeking to justify
this increase. The Public Staff and DEP reached a Stipulation that resulted in reducing
the retail revenue increase sought by the Company by approximately $73 million. The
Public Staff represents the using and consuming public, including those having difficulty
paying their bills. The Public Staff representatives attended all of the hearings held across
the state to receive customers’ testimony. The Public Staff has a staff of expert engineers,
economists, and accountants who investigate and audit the Company’s filings. The Public
Staff must recommend rates consumers should pay and the return on investment equity
investors should receive. The Public Staff considers all factors included in cost of service.
In recent years, the Public Staff and the utilities have entered into settlements resolving
the issues so as to avoid at least part of the substantial rate case expense customers
otherwise would pay. This process is favored by financial analysts and rating agencies
because it reduces delay and enhances predictability, thereby creating a constructive,
credit supportive, regulatory environment ultimately reflected favorably in investors’
required cost of capital. Intervenors who generally represent narrow segments or classes
of ratepayers seldom enter into these settlements, though often times they do not oppose
them.
As with all settlement agreements, each party to the Stipulation gained some
benefits that it deemed important and gave some concessions for those benefits. Based
on DEP’s Application and pre-filed testimony, it is apparent that the Stipulation ties the
9.9% rate of return on equity to substantial concessions the Company made.
Summary and Conclusions on the Rate of Return on Equity
The Commission has carefully evaluated the return on equity testimonies of DEP
witness Hevert, Public Staff witness Parcell, AGO witness Polich, CUCA witness
O’Donnell, Commercial Group witnesses Chriss and Rosa, and CIGFUR witness Phillips.
The Commission finds that the comparable earning analysis testimony of Public Staff
witness Parcell, the risk premium analysis testimony of DEP witness Parcell, the
comparable earnings testimony of CUCA witness O’Donnell, and the Stipulation are
credible, probative, and are entitled to substantial weight.
Public Staff witness Parcell conducted a comparable earnings analysis using both
his and witness Hevert’s proxy groups of electric utilities. His comparable earning
recommended rate of return on equity range was 9.0% to 10.0%. The Commission
approved rate of return on equity of 9.9% is in the upper portion of his range. As testified
by witness Parcell, the comparable earnings analysis is based on the opportunity cost
principal and is consistent with and derived from the Bluefield and Hope decisions of the
U.S. Supreme Court, which are recognized as the primary standards for the
establishment of a fair rate of return for a regulated public utility. The comparable earnings
method is also consistent with the concept of rate base regulation for utilities, which
employs the book value of both rate base and the capital financing rate base. Witness
Parcell testified that his comparable earnings analyses considers the recent historic and
prospective rates of return on equity for the groups of proxy utilities companies utilized by
himself and DEP witness Hevert. He testified that his comparable earnings analyses
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reflect the actual rates of return on equity of the proxy companies, as well as the market-
to-book ratios of these companies.
DEP competes against the Hevert and Parcell electric proxy group electric
companies and other electric utilities for investments in equity capital. Investors have
choices as to which electric utilities, or other companies, in which to invest. A Commission
approved rate of return on equity for DEP below the earned rates of return on equity of
other electric utilities could provide one basis for investors to invest in the equity of electric
utilities other than DEP.
DEP witness Hevert’s risk premium analysis is credible, probative, and entitled to
substantial weight. His risk premium was calculated as the difference between the
authorized rate of return on equity and the then-prevailing level of long-term 30-year
Treasury yield. He then gathered data for 1,508 electric utility rate proceedings between
January 1980 and March 31, 2017. The Commission approved rate of return on equity of
9.9% is 10 basis points below witness Hevert’s risk premium’s implied rate of return on
equity range of 10.0% to 10.32%.
The Commission also concludes that the comparable earnings analysis by CUCA
witness O’Donnell is credible, probative and entitled to substantial weight. Witness
O’Donnell testified that the comparable earnings for his and witness Hevert’s proxy group
of electric utilities produced earned returns of 9.25% to 10.25% over the period 2015
through 2022, balancing historical and forecasted returns. The Commission approved
9.9% rate of return on equity is well within that range.
In its post-hearing Brief, CUCA contends that DEP’s testimony directly contradicts
the testimony of its rate of return witness Hevert. CUCA states that witness Hevert’s cost
of equity recommendation is significantly higher than what DEP contends is its “market
return” for its decommissioning expenses and its pension costs. According to CUCA, if
DEP’s “market returns” matched Hevert’s 10.75% recommendation, then no additional
rate increase would be needed for these costs, and the Commission should not reward
DEP for inconsistent testimony.
In its post-hearing brief, the AGO contends that establishing an 8.48% rate of
return on equity is supported by stock market data showing what investors require under
current economic conditions, fairly balances the interests of investors and consumers,
reduces the revenue requirement by another $96.1 million per year, and is supported by
the results of the DCF analyses performed by the expert witnesses. (Tr., Vol. 13, p. 126.)
In addition, the AGO submits that DEP has not met its burden of proof that the 9.9% rate
of return on equity proposed in the Stipulation fixes a reasonable return given the low cost
of equity capital in current markets.
The AGO summarizes the DCF analyses of witnesses Polich, Hevert, O’Donnell
and Parcell. The AGO contends that witness Hevert’s analyses are generally flawed by
the use of methods and inputs that are “systematically biased upward in a manner that
significantly inflates his cost of equity conclusions” (Parcell Tr. Vol. 14, p. 79), and submits
that the reason that his DCF results are so much higher than those produced by the other
witnesses is that he used much higher long-term growth factors in his multi-stage DCF
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models. (Tr. Vol. 13, p. 95.) The AGO states that the utilities commission in Missouri came
to a similar conclusion that witness Hevert’s analyses overstated growth factors in 2015
when it examined similar analyses that he performed for Ameren Missouri (Tr.
Vol. 8, pp. 386-87), finding that his multi-stage DCF analysis was based on a nominal
long-term GDP growth rate outlook that was overly optimistic, and that by adjusting his
DCF analysis to reflect the level of consensus economists’ forward-looking real GDP
growth outlooks, his DCF study would have produced an 8.8% rate of return on equity
estimate instead of a 10.02% rate of return on equity. (Tr. Vol. 8, pp. 386-87.) Further, the
AGO states that the Missouri commission also found that witness Hevert’s CAPM analysis
used an unreasonably high estimate of projected market returns. (Tr. Vol. 8, p. 387.)
According to the AGO, witness Hevert gave little weight to the market data in his
DCF analysis because he contends that it would reduce the rate of return on equity in this
case too much from the rate of return on equity approved in DEP’s last rate case. (Tr.
Vol. 8, p. 171.) However, the AGO contends that the fact that the rate of return on equity
would drop considerably is not an appropriate consideration and relies incorrectly on the
assumption that the rate of return on equity in DEP’s existing rates is a starting point for
measuring how much the cost of capital has changed.
The AGO states that witnesses Polich, Parcell, and O’Donnell performed rate of
return on equity estimates using the CAPM and that their CAPM results are significantly
lower than the results of the DCF studies they performed. On the other hand, according
to the AGO witness Hevert’s CAPM produced even higher results at the top of his CAPM
range. The AGO witness states that the main factor that caused witness Hevert’s high
CAPM results is his over-estimate of the projected returns associated with equity capital
as compared to risk-free investments (i.e., the risk premium), and that he relies on
problematic DCF analyses to estimate projected equity returns. (Tr. Vo. 14, pp. 89-90.)
The AGO states that the flawed effect of his over-estimated projection of the risk premium
was also observed by the Missouri commission in its 2015 Order. (Tr. Vol. 8, p. 387.)
The AGO notes that another model used by witness Hevert is the Risk Bond Yield
Premium, using data about the rates of return on equity authorized by regulators in other
rate proceedings to estimate a rate of return on equity. The AGO states that the
authorized rates of return reflect policies and underlying data estimates of market
conditions that are not provided in the record in this case, and contends that it is not
appropriate for the Commission to determine DEP’s rate of return on equity based on
such evidence, citing Cooper II, 367 N.C. at 443, 758 S.E.2d at 643; State ex rel. Utilities
Comm’n v. Public Staff, 331 N.C. 215, 225, 415 S.E.2d 354, 361 (1992).
Moreover, the AGO states that witness Parcell also used a Comparable Earnings
(CE) study that compares the actual return expected on the original cost book value of
enterprises with similar risk, and evaluates investor acceptance of the returns as indicated
by the resulting market-to-book ratios. (Tr. Vol. 14, p. 74.) From his analysis he posits
that a 9.5% CE result (the midpoint of his range) is well above the actual earned rate of
return on equity for the regulated companies, (Id.), and is more than sufficient for the
company to attract new equity capital without dilution. (Tr. Vol. 14, p. 75.)
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The AGO maintains that a thoughtful review of the rate of return on equity is
important because even a seemingly small change to DEP’s authorized rate of return on
equity makes a difference of millions of dollars in DEP’s revenue requirement. Further,
the AGO states that North Carolina law requires the Commission to fix a rate of return
that is fair to the utility’s investors and its customers, citing G.S. 62-133(a), 62-133(b)(4);
Cooper I, 366 N.C. at 495, 739 S.E.2d at 548; Bluefield, and Hope. The AGO further notes
that the burden of proof in this case is upon DEP to show that its proposed rates are just
and reasonable, pursuant to G.S. 62-75 and 62-134(a), and that the Commission must
conduct an independent analysis of the evidence and reach its own conclusion when it
fixes the rate of return on equity. Cooper I, 366 N.C. at 494, 739 S.E.2d at 547.
Further, the AGO states that the Commission may consider the multiple items
addressed in the Stipulation, but that it is beyond the Commission’s authority to fix an
excessive rate of return on equity negotiated in exchange for other factors addressed in
the Stipulation. According to the AGO, North Carolina’s ratemaking statute requires the
Commission to “fix” the rate of return, taking into account specific considerations. See
G.S. 62-133(b)(4); Thornburg II, 325 N.C. at 490, 385 S.E.2d at 466 (“Section 62-133
provides a step-by-step procedure for the Commission to follow in fixing these rates.”).
Finally, the AGO posits that although North Carolina is doing well as a state in
terms of growth, North Carolina households have less ability on average to absorb
increases in the cost of living – such as utility rate hikes – because per capita income is
considerably lower than in other states, while the cost of living is not. (Tr. Vol. 13, p. 115.)
The AGO notes that North Carolina has recently enjoyed a stronger GDP growth rate
than the national average and that the cost of living index for North Carolina is slightly
lower (1.1%) than the national average, but that per capita income is well below the
national average (13.8% lower) and income has grown at a slower pace than the nation
as a whole. (Tr. Vol. 13, p. 113.) In addition, the AGO summarizes the testimony of public
witnesses regarding the impact of the proposed rate increase and their concerns.
Commercial Group, in its post-hearing Brief, notes that the Commission approved
a rate of return on equity of 10.2% for DEP in its last rate case in 2013 and that since then
average returns for electric utilities across the country have dropped to 9.63% as of 2017.
Commercial Group opines that although the Stipulation rate of return on equity would
result in DEP receiving an above-average rate of return on equity, the reduction in the
proposed rate of return on equity from 10.2% to 9.9% is a reasonable step in the right
direction, particularly when combined with a slight decrease in the equity ratio and cost
of debt that are provided in the Stipulation. Nevertheless, Commercial Group submits that
based on the rate of return on equity testimony of witnesses Chriss and Rosa the
Stipulation rate of return on equity of 9.90% should serve as an upper limit on rate of
return on equity with respect to a gradual approach of moving DEP’s rate of return on
equity more in line with that of utilities across the country. In conclusion, Commercial
Group recommends adoption of the Stipulation rate of return on equity of 9.90% and the
overall weighted cost of capital of 7.09%.
The Commission has carefully evaluated the DCF analysis recommendations of
witnesses Parcell, Hevert, Polich, and O’Donnell, and the Commission gives minimal
weight to these analyses. As shown on Commercial Group's Exhibit CR-3, the lowest
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Commission approved rate of return on equity for a vertically integrated electric company
for the period of 2014 through the hearing in 2017 was 9.2%. Witness Parcell’s specific
DCF result was 8.85%, witness Polich’s was 8.48%, and the mid-point of witness
O’Donnell’s was 8.25%. The average of Hevert’s constant growth DCF means was
8.92%, and the mid-point of the range of witness Hevert’s Multi-Stage DCF analysis was
9.0%. The Commission considers all of these DCF results to be outliers, being well below
the lowest vertically-integrated rate of return on equity of 9.2%. The Commission
determines that all of these DCF analyses in the current market produce unrealistic low
results.
The Commission gives no weight to any of the witnesses' CAPM analyses. The
analyses of witness Parcell with a mid-point of 6.4% is unrealistically low, and witness
Parcell agreed as much in his testimony. The CAPM analysis of witness O’Donnell
resulted in a CAPM rate of return on equity mid-point of 6.05%, which is an outlier well
below the 9.2% previously discussed. Witness Polich’s CAPM weighted median rate of
return on equity of 7.56% is also an outlier and unrealistically low. DEP Witness Hevert’s
CAPM range of 9.15% to 11.49% is also an outlier and upwardly biased due to his use of
the near-term projected 30-year Treasury interest rate of 3.52%, which witness Parcell
testified greatly exceeds the current level of long-term Treasury of about 2.8%. Witness
Hevert’s risk premium component of this CAPM uses a constant growth DCF for the S&P
500 companies using analysts projected earnings per share forecasts as the growth
component. Witness Hevert’s DCF dividend growth, component based solely on analysts’
earnings per share growth projections, without consideration of any historical results, is
upwardly biased and unreliable.
The rate of return on equity testimonies of Commercial Group witnesses Chriss
and Rosa focused on the commission-approved rates of return on equity authorized for
vertically-integrated electric utilities in 2014, 2015, 2016, and year-to-date 2017 listed in
Commercial Group Exhibit CR-3. The Commission gives weight to this testimony only as
a check on the Commission’s approved 9.9% rate of return on equity and to evaluate
outlier rate of return on equity recommendations. CIGFUR witness Phillips’ testimony
focused on the RRA report Major Rate Case Decisions. The 9.61% average authorized
rate of return on equity for electric utilities included both vertically-integrated electric
utilities and distribution-only electric utilities. Since DEP is a vertically-integrated electric
utility, the Commission gives witness Phillips’ rate of return on equity testimony limited
weight regarding authorized rates of return on equity for distribution-only electric utilities.
Rather, as noted above, recently authorized rates of return on equity for
vertically-integrated electric utilities since 2014 average 9.85%, and in jurisdictions with
constructive regulatory environments average 10.03%, and serve as a better check.
The 9.9% rate of return on equity approved in this proceeding for DEP is also
consistent with the 9.9% rate of return on equity the Commission approved for DNCP in
the Order dated December 22, 2016, in Docket No. E-22, Sub 532.
The Commission notes further that its approval of a rate of return on equity at the
level of 9.9% – or for that matter, at any level – is not a guarantee to the Company that it
will earn a rate of return on equity at that level. Rather, as North Carolina law requires,
setting the rate of return on equity at this level merely affords DEP the opportunity to
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achieve such a return. The Commission finds and concludes, based upon all the evidence
presented, that the rate of return on equity provided for herein will indeed afford the
Company the opportunity to earn a reasonable and sufficient return for its shareholders
while at the same time producing rates that are just and reasonable to its customers.
Capital Structure
DEP originally proposed using a capital structure of 53% members’ equity and
47% long-term debt. (Tr. Vol. 8, p. 24.) The Stipulation provides for a capital structure of
52% equity and 48% long-term debt. For the reasons set forth herein, the Commission
finds that a 52/48 capital structure as set out in the Stipulation is just and reasonable.
Witness De May testified that the Company’s “specific debt/equity ratio will vary
over time, depending on the timing and size of debt issuances, seasonality of earnings,
and dividend payments to the parent company.” (Tr. Vol. 8, p. 29.) As of the end of the
test year, the actual regulatory capital structure11 was 52.5% equity and 47.5% debt (Id.
at 44), and the 13-month average equity ratio was 53.5%. (Id.) This average equity ratio
was maintained by DEP through June 2017. (Id.) The 52/48 capital structure agreed to in
the Stipulation represents a compromise between the Company’s 53/47 position and the
Public Staff’s recommendation of a 50/50 capital structure. Both witness Parcell, for the
Public Staff, and witness De May, for the Company, supported the agreed upon 52/48
ratio. (Tr. Vol. 14, pp. 109-10 (Parcell) (52/48 ratio reflects a reasonable compromise, and
also “incorporate[s] a reduction” from the Company’s currently authorized 53/47 ratio); Tr.
Vol. 8, p. 54 (De May).) De May indicates that the “stipulated capital structure is
reasonable when viewed in the context of the overall Partial Settlement,” and it would be
positively viewed by the ratings agencies that set the Company’s credit ratings. (Id.)
Witness Hevert’s settlement testimony also supported the stipulated 52/48 capital
structure. (Id. at 330-31.)
CUCA witness O’Donnell and AGO witness Polich recommend that the
Commission reject the Company’s capital structure proposal and instead advocate a
50/50 hypothetical structure. Witness Polich provided no analysis to support his
recommendation. He merely asserts, without any cited evidence, that “[i]n the utility
industry, it is common to target the percentage of debt and equity at 50% each.” (Tr.
Vol. 13, p. 117.) As witnesses De May and Hevert demonstrate in their rebuttal testimony,
this assertion is simply wrong. (Tr. Vol. 8, p. 41 (De May); id. at 242; Ex. RBH-R19
(Hevert).) Further, witness Polich states that the reason the Commission should move to
an artificial 50/50 capital structure is “to lower rates.” (Tr. Vol. 13, p. 118.) But as witness
De May indicates, “[s]etting an artificial capital structure simply for the purpose of lowering
rates presents great risk.” (Tr. Vol. 8, p. 48.) In the 2013 DEC Rate Case, for example,
the AGO argued that a 50/50 capital structure should be implemented for utility, but, like
witness Polich in this case, provided “no probative or persuasive evidence suggesting
that a 50/50 capital structure is in fact appropriate.” (2013 DEC Rate Order, at 52.) The
Commission rejected the AGO’s argument because that argument did not “recognize the
11 Regulatory capital structure excludes short-term debt and losses on unregulated subsidiaries.
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pitfalls were the Commission to order in this case a capital structure at odds with the
structure supported by the testimony of the expert witnesses and in line with the
Company’s actual capital structure in recent years.” (Id. at 53.)
Those pitfalls are readily apparent. First, as witness De May stated, “a 50/50
capital structure would place pressure on … [the Company’s “A” level credit rating] by
affecting DEP’s credit metrics. It would also likely negatively impact the ratings agencies’
assessment of qualitative factors, in that movement away from the optimum 53/47 capital
structure will likely be viewed as a step away from a credit supportive regulatory
environment.” (Tr. Vol. 8, p. 47.)12 Second, as the Commission has already held in this
case in connection with its ROE discussion, the ratings agencies’ “assessment of
qualitative factors” is vitally important to the maintenance of the Company’s credit quality
and to the cost of capital:
12 Witness De May indicated in his Settlement Testimony that the slight move away from the 53/27
proposed capital structure represented by the Stipulation would likely still be viewed as credit supportive by
the ratings agencies. (Tr. Vol. 8, p. 54.) In any event, a 50/50 structure is a far cry from a 52/48 structure –
each percentage point of reduction in equity represents a $10 million reduction in revenue requirement,
which is certainly significant in evaluating the effect of further reduction on the Company’s credit metrics.
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consistent with precedent of the Federal Energy Regulatory Commission (FERC), so long
as three criteria are met: the operating subsidiary (1) issues its own debt without
guarantees, (2) has its own bond rating, and (3) has a capital structure within the range
of capital structures for comparable utilities. (Id.) Here all three criteria are met. DEP does
issue its own debt and is rated separately from its parent company, and the evidence
presented by witnesses De May and Hevert shows that its capital structure is generally
consistent with that of other operating companies, especially vertically-integrated
companies. (Id. at 41 (De May); Id. at 316 (Hevert).)
In its post-hearing Brief, the AGO states that over $100 million is added to DEP’s
annual revenue requirement unnecessarily under the rate of return on equity and capital
structure factors agreed to in the Stipulation. The AGO submits that DEP has not met its
burden of proof that the 52% equity/48% debt capital structure is required, or that a 50/50
equity/debt structure uses too much debt leverage. The AGO contends that establishing
a 50% equity/50% debt capital structure is sufficiently conservative, fairly balances the
interests of investors and consumers, and reduces the revenue requirement by over
$10.5 million per year. Further, the AGO states that DEP has not shown that a 50/50
equity/debt capital structure is overly-leveraged for a utility, or that it would harm DEP’s
financial integrity or its ability to access capital markets as needed. The AGO contends
that DEP’s high credit rating indicates that a 50/50 capital structure can be adopted
without compromising DEP’s financial integrity and that the proposed 52% equity capital
structure exceeds the actual test period capital structure, which was 51.2% equity
(including the current maturities of debt and refinancing). (Tr. Vol. 8, p. 48.) Moreover,
according to the AGO and a table that it presents, a 50/50 capital structure is similar to
the capital structures used for comparable investments and exceeds the average equity
ratio for the other electric utilities that were used in the proxy groups to show comparable
investments. In addition, the AGO lists the average equity ratios authorized in regulatory
commission determinations over the past five years and states that the proposed 52%
equity capital component exceeds those averages. The AGO also notes that the
proposed 50/50 ratio maintains considerably more equity in the ratio than is presently
maintained by DEP’s parent company, Duke Energy, and that Duke Energy previously
maintained an equity ratio comparable to the subsidiary, but more recently its equity ratio
has declined to 46.1% at the end of 2016 and 45.3% as of June 3, 2017. (Tr. Vol. 8,
pp. 394-96; Tr. Vol. 14, p 48.)
In conclusion, the AGO states that taking these factors into consideration, a 50%
equity ratio is sufficiently conservative for DEP to access credit markets at reasonable
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rates and is fairer to consumers because it reduces the revenue requirement
substantially.
In addition to its analysis of the witnesses' testimony as set out above, the
Commission also gives weight to the Stipulation and the benefits that it provides to DEP’s
customers, which the Commission is required to consider as an independent piece of
evidence under the Supreme Court’s holdings in CUCA I and CUCA II. As with all
settlement agreements, each party to the Stipulation gained some benefits that it deemed
important and gave some concessions for those benefits. Based on DEP’s application
and pre-filed testimony, it is apparent that the Stipulation ties the 52%/48% capital
structure to concessions the Company made to reduce its revenue requirement and
alleviate the impact of the rate increase on customers.
As in the case of rate of return on equity, the Commission recognizes the financial
difficulty that the increase in DEP’s rates will create for some of DEP’s customers,
especially low-income customers. The Commission must weigh this impact against the
benefits that DEP’s customers derive from DEP’s ability to provide safe, adequate, and
reliable electric service. Safe, adequate, and reliable electric service is essential to
support the well-being of the people, businesses, institutions, and economy of North
Carolina. The improvements to the Company’s system are expensive, but provide
tangible benefits to all of the Company’s customers. The Commission concludes that the
52/48 capital structure approved by the Commission in this case appropriately balances
the benefits received by customers with the costs to be borne by customers, including
higher rates which some customers will find difficult to pay.
Accordingly, the Commission finds and concludes that the recommended capital
structure of 52% common equity and 48% long-term debt is just and reasonable to all
parties in light of all the evidence presented.
Cost of Debt
In its Application, the Company proposed a long-term debt cost of 4.17%. The
Stipulation provides for a 4.05% cost of debt. The Commission finds for the reasons set
forth herein that a 4.05% cost of debt is just and reasonable.
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In her pre-filed direct testimony, Company witness Bateman testified that the
Company’s revenue requirement was determined using an embedded cost of long-term
debt of 4.17%.
Public Staff witness Parcell in his direct testimony supported the embedded cost
of debt of 4.05%, as included in the Stipulation. He testified that the recent decline in
interest rates was considered in the Stipulation, including the long-term debt First
Mortgage Bonds Taxable issued by DEP on September 8, 2017. Witness Parcell
explained that the 4.05% debt rate is low by historic standards and lower than the
embedded cost of debt as of the end of the test year. The Stipulation’s 4.05% debt cost
gives customers the benefit of reductions in DEP’s lower cost of debt after the end of the
test year.
No intervenor offered any evidence for a debt cost below 4.05%. The Commission,
therefore, finds and concludes that the use of a debt cost of 4.05% is just and reasonable
to all parties in light of all the evidence presented.
The evidence supporting this finding of fact and conclusions is contained in the
Stipulation, the verified Application and Form E-1 of DEP, the testimony and exhibits of
the witnesses, and the entire record in this proceeding.
In her direct testimony, Company witness McGee provides support for the fuel
component of proposed base rates for all customer classes and the fuel pro forma
adjustments to the test year operating expenses contained in Bateman Exhibit 1. (Tr.
Vol. 10, p. 101.) Witness McGee testified that the Company proposes to use the following
base fuel factors by customer class (excluding gross receipts tax and regulatory fees):
(Id.) She explained that these proposed factors are equal to the total prospective fuel and
fuel-related cost factors approved in Docket No. E-2, Sub 1107 and implemented
December 1, 2016. (Id.) These factors represent the fuel-related amounts that DEP was
collecting from its North Carolina retail customers through its approved rates at the time
of preparation of the Company’s Application in this docket. (Id.) Witness McGee stated
that DEP’s intent in using the fuel-related factors that were in effect at the time that the
Company’s Application was prepared as a component of its proposed new rates was to
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make it clear that the Company is requesting a rate increase that relates to non-fuel
revenues only. (Id.) She clarified that there will be no change in customers’ bills as a result
of including these fuel cost factors in the proposed base rates. (Id. at 103.) The Company
will continue to bill customers the fuel rates authorized by the Commission in its annual
fuel proceedings. (Id.)
As shown on McGee Exhibit 1, the Company’s North Carolina retail adjusted fuel
and fuel-related costs expense for the test period was $807,561,119. (Id. at 102.)
According to witness McGee, this amount was calculated using the base fuel cost factors
identified above and North Carolina retail test period actual sales by customer class as
adjusted for weather and customer growth. (Id.) She testified that these amounts were
used in the Company’s pro forma adjustment calculations and are incorporated in the
operating expenses shown on Bateman Exhibit 1. (Id.)
DoD/FEA witness Mancinelli is the only intervenor witness to challenge witness
McGee’s testimony on issues other than beneficial reuse of coal ash. Witness Mancinelli
contended that the Company has distorted cost of service results by class as a result of
improperly aligning allocated fuel expense with fuel clause revenues from base fuel factors
approved in Docket No. E-2, Sub 1107. (Tr. Vol. 17, pp. 147-51.) Witness Mancinelli
maintains that class rate adjustments should be based on cost of service results without
added subsidizations associated with base fuel factors. (Id.)
In her rebuttal testimony, Company witness McGee testified that the Company
does not agree with witness Mancinelli’s position that the Company’s reported net income
and return on rate base on a customer basis are skewed due to subsidies associated with
fuel revenues. (Tr. Vol. 10, p. 155.) The Company assigned fuel revenue to each
customer class based on the fuel rates approved in the annual fuel adjustment
proceeding, Docket No. E-2, Sub 1107. (Id.) She explained that to negate the fuel impact
in this case, the pro forma adjustment to fuel expense was based on the same customer
class allocation methodology approved in that docket. (Id. at pp. 155-56.) Witness McGee
demonstrated that as a result, the net income impact for each rate class is zero. (Id. at
156.) She added that if witness Mancinelli disagrees with the use of the equal percentage
methodology approved in the Company’s annual fuel proceeding, the more appropriate
forum to raise this issue is in the annual fuel adjustment docket. (Id.)
Section IV.C. of the Stipulation sets forth the Stipulating Parties’ agreed upon total
of the approved base fuel and fuel related cost factors, by customer class, as set forth in
the following table (amounts are ¢/kWh excluding, regulatory fee):
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These values are consistent with those recommended by witness McGee and
approved in Docket No. E-2, Sub 1107. The Stipulation also notes that billed fuel rates
shall be adjusted to reflect changes to fuel rates approved by the Commission in Docket
No. E-2, Sub 1146, effective December 1, 2017.
The evidence supporting this finding of fact and conclusions is contained in the
Stipulation, the verified Application and Form E-1, the testimony and exhibits of the
witnesses, and the entire record in this proceeding.
In his rebuttal testimony, Company witness Miller explained that the Company
actually contemplated requesting an increase in the full load burn inventory target to
enable the Company to respond to un-forecasted increases in coal generation demand,
given the increased volatility in coal generation due to factors such as fluctuating natural
gas prices and weather-driven demand. (Tr. Vol. 10, p. 37.) However, the Company
determined that it was prudent to continue to operate under the current 40-day full load
burn inventory target and made a pro forma adjustment reducing its actual coal inventory
at the end of the Test Period to reflect a targeted 40-day, 100% full load burn. (Id.)
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Witness Miller testified that adopting witness Metz’s recommendation of 30-day
coal inventory based on a 70% full load burn could lead to negative supply, delivery, and
operational impacts. (Id. at 36.) He testified further that this recommendation fails to
contemplate the factors that impact a reliable fuel supply, including volatility in coal
generation demand, delivery and/or supply risks, and generation performance. (Id. at 38.)
In particular, he noted that witness Metz’s recommendation assumes there will be ample
amounts of coal available during higher demand periods and does not contemplate the
increased demand from other utilities during the same period of increased demand being
experienced by the Company. (Id.) According to witness Miller, if DEP is unable to
dispatch cost-competitive coal generation during peak demand due to unreliable
inventory levels, it will have to seek alternatives such as dispatching higher cost
generation, paying higher prices for fuel, or purchase power. (Id. at 45.) As such, having
unreliable coal inventory levels could result in unfavorable impacts on customers. (Id.)
Witness Miller stated that while the Company acknowledges that it does not
consistently achieve and maintain a 40-day full load burn inventory level, as a number of
factors cause actual inventory to fluctuate over time, DEP does not agree that it has
demonstrated it is “fully capable of operating its plants with 30 days or less of coal
inventory” as witness Metz suggests. (Id. at 44.) Witness Miller explained that a 30-day,
70% capacity factor equates to a 21-day full load burn at 100% during periods of peak
demand. (Id. at 40-41.) Given typical transit time from mine to plant during times of
increased demand, inventory could be depleted to unreliable levels for coal generation.
(Id. at 41.) Witness Miller concluded that the Company does not believe that the proposed
30-day, 70% capacity factor inventory target is prudent and would negatively impact the
Company’s ability to continue providing reliable, cost-effective generation for its
customers. (Id. at 45.)
In the Stipulation, the Public Staff and DEP agreed that for purposes of settlement,
the Company may set carrying costs included in base rates assuming a 35-day coal
inventory at 100% capacity factor (full load burn), and that a coal inventory rider should
be allowed to manage the transition. More specifically, the Stipulating Parties propose
that this increment rider shall be effective on the same date as new base rates approved
in this proceeding and continuing until inventory levels reach a 35-day supply to allow the
Company to recover the additional costs of carrying coal inventory in excess of a 35-day
supply (priced at $76.11 per ton). The rider will terminate the earlier of (a) January 30,
2020 or (b) the last day of the month in which the Company’s actual coal inventory levels
return to a 35-day supply on a sustained basis.13 The Stipulation provides that for this
purpose, three consecutive months of total coal inventory of 37 days or below will
constitute a sustained basis. The Company will adjust this rider annually, concurrently
with DEP’s DSM/EE Rider, REPS Rider, JAAR Rider, and Fuel Adjustment Rider, and
any over- or under-collection of costs experienced as a result of this rider shall be trued
up in that annual rider filing. For purposes of the coal inventory rider, the Stipulating
13 The Stipulation provides that the Company reserves the right to request an extension of the
January 30, 2020 date.
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Parties agree that interest on any under- or over-collection shall be set at the Company’s
net-of-tax overall rate of return, as approved by the Commission in this proceeding.
Finally, the Company agreed to conduct an analysis in consultation with the Public Staff
demonstrating the appropriate coal inventory level given market and generation changes
since the Company’s last rate case (Docket No. E-2, Sub 1023), with such analysis to be
completed by December 31, 2018.
No intervenor took issue with this provision of the Stipulation. The Commission
finds and concludes that the reduction to coal inventory included in working capital and
the establishment of the increment rider to allow the Company to recover the additional
costs of carrying coal inventory in excess of a 35-day supply, as provided in the
Stipulation, is just and reasonable to all parties in light of all the evidence presented.
The evidence supporting these findings of fact and conclusions is contained in the
Stipulation, DEP’s verified Application and Form E-1, the testimony of DEP witnesses
Fountain and Simpson, and the testimony of Public Staff witness Williamson.
Company witness Fountain testified that a key area of focus for the Company is
customer satisfaction, which the Company measures via a proprietary relationship study.
He stated that this study shows that North Carolina residential customer satisfaction
scores have risen 10 points since 2013. Witness Fountain also testified that the Company
conducts a transaction study to measure satisfaction with how the Company responds to
customer service requests. As part of this study, a third-party research supplier conducts
interviews with customers. The analysis of these interviews and surveys are used by the
Company to implement improvements. Witness Fountain also outlined the efforts of the
Company to address language, cultural, and disability barriers in its customer service
centers.
Company witness Simpson described metrics the Company uses to measure the
effectiveness of its transmission and distribution operations. He provided an overview of
the transmission and distribution metrics used to measure the Company’s reliability and
reduce customer outages. The Company uses the System Average Interruption Duration
Index (SAIDI), which indicates how often the average customer has a sustained outage,
and the System Average Interruption Frequency Index (SAIFI), which indicates the total
duration of an outage for the average customer. Witness Simpson stated that the
Company’s SAIFI performance is showing a modest improvement, while the Company’s
SAIDI performance is worsening.
Public Staff witness Williamson noted that the Consumer Services Division of the
Public Staff had engaged in approximately 4,854 direct contacts with Company customers
during the test year, with the majority of contacts related to payment arrangements and
only 3% related to service quality issues. Witness Williamson also addressed the service
quality issues related to the SAIDI and SAIFI metrics, noting that the metrics show that
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while the Company’s outages are decreasing in frequency, the outages that do occur are
longer in duration.
The Company and Public Staff agreed in the Stipulation that the overall quality of
electric service provided by the Company is adequate.
DEP proposed several changes to its Service Regulations. Most of the revisions
involve relatively small increases or decreases in charges imposed by DEP for various
services, such as disconnections and reconnections. Public Staff witness Williamson
testified that the Public Staff does not oppose these changes to the Service Regulations.
Witness Williamson further testified that DEP has implemented three changes to
its vegetation management plan (VMP): (1) a new flyer on “Hazard Tree Assessment”
that allows customers to identify hazard trees, (2) a “Customer Communication Log” that
requires contractors to document their communications with customers, and (3) an
extension of its non-urban distribution management cycle from six to seven years. With
regard to the third point, witness Williamson noted that the Public Staff recommended a
$4 million reduction in DEP’s revenue requirement due to this lengthened management
cycle. He further stated that DEP proposes to continue its urban distribution maintenance
cycle at three years, and its transmission maintenance cycle at six years.
In the Stipulation, Sec. III.F., the Public Staff agreed to withdraw its recommended
$4 million reduction in DEP’s revenue requirement due to the lengthened vegetation
management cycle for non-urban distribution.
The Commission gives significant weight to the testimony of Public Staff witness
Williamson with regard to the amendments to DEP’s Service Regulations and vegetation
management plan. Moreover, no other parties filed testimony regarding these matters.
Therefore, the Commission finds and concludes that the amendments to DEP’s Service
Regulations and vegetation management plan are reasonable, serve the public interest,
and should be approved.
The evidence supporting this finding of fact and conclusions is contained in the
Stipulation, the testimony of DEP witnesses Fountain and Simpson, Public Staff witness
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Floyd, CUCA witness O’Donnell, EDF witness Alvarez, and NCSEA witness Golin, and
the entire record in this proceeding.
Company witness Fountain testified regarding the $13 billion grid modernization
plan for DEP and DEC over the next decade in North Carolina, which has been named
Power/Forward Carolinas (Power/Forward). He testified that the purpose of this plan is to
improve the performance and capacity of the grid, making it smarter and more resilient
and providing customers greater benefit.
Company witness Simpson testified that DEP provides service to over a million
customers in North Carolina, where the Company has more than 56,000 miles of lines
and nearly 500 substations. (Tr. Vol. 9, p. 21.) He indicated that in the last four years, the
Company has spent $1.7 billion dollars maintaining and upgrading that system:
$1.2 billion has gone to investments in distribution, while $500 million has been invested
in its transmission system. (Id.) Distribution investments include connecting new
customers, lighting installations, capacity additions, and infrastructure maintenance and
upgrades, while the Company’s transmission investments include addressing capacity
and compliance projects, as well as replacement of wood poles, obsolete substations,
and line equipment. (Id.) Witness Simpson also discussed the need for the Company’s
customary rate of spend in calendar years 2017 through 2021 to invest in maintenance
of the grid and to ready it for new customers. (Id. at 22.)
Witness Simpson explained that despite these investments, DEP’s system has
been challenged by more severe weather and equipment failures that have manifested
themselves in worsening reliability across DEP’s grid. (Id. at 21.) Reliability metrics show
that the frequency of outages has increased from 1.2 average interruptions in 2014 to
approximately 1.3 in 2016. (Id.) The average duration of interruptions has increased
approximately 45% since 2013. (Id.) Witness Simpson also noted that the number of
events “has gone up 25% in the past four years.” (Id. at 103-04.) He projected that in the
next ten years, the grid will be challenged by more frequent and severe weather events.
At the same time, the grid is aging, with approximately 30% of the Company’s
infrastructure passing the end of its design life in the next ten years. (Id. at 22.) Witness
Simpson indicated that this older equipment, despite being well-maintained, is one of the
top drivers for the worsening reliability metrics, as it is more likely to fail when stressed by
inclement weather and is more time-consuming to repair. (Id. at 22.)
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Witness Simpson testified that the Power/Forward initiative will transform the
Company’s 20th century grid to a state-of-the-art, more reliable and resilient 21st century
grid which will benefit customers and the state as a whole. It is a holistic, ten-year
program, consisting of targeted undergrounding, hardening and resiliency investments,
installation of self-optimizing grid, advanced metering infrastructure, communication
network upgrades, and deployment of advanced enterprise systems. (Id. at 109-10.)
Public Staff witness Floyd reiterated that the Power/Forward initiative is not a part
of this rate case. (Tr. Vol. 19, pp. 124-25.) However, he further states that should the
Company seek recovery of the $18.2 million it has already spent on Power/Forward, it
should only be permitted to recover the costs if DEP can demonstrate that the investment
was cost-beneficial to customers. (Id. at 126.) Witness Floyd also believes additional
reporting is needed to allow the Commission to better understand Power/Forward and to
quantify its benefits. Witness Floyd recommended that the Commission require DEP to
include in its smart grid technology plan filings, required by Commission Rule R8-60.1,
more detailed information. (Id. at 126-27.)
CUCA witness O’Donnell testified that in his opinion, witness Simpson’s testimony
is lacking a financial cost/benefit study analysis providing evidence demonstrating that
the system improvements contemplated as part of the Power/Forward initiative are
worthwhile investments. (Tr. Vol. 15, p. 134.) He argued that if DEP cannot provide
evidence that service is improving and its grid investment plan is cost-effective, the
Commission should question the Company’s plan to increase rates to pay for the
proposed grid investments. (Id.) O’Donnell requested that the Commission open a docket
to investigate the need for DEP’s proposed grid investments and examine whether the
plan is needed for reliability purposes; whether it is cost-effective; how are other states
handling grid modernization; and how will the rate increases expected under DEP’s plan
affect the state’s economy. (Id. at 140.) EDF witness Alvarez also recommended that the
Commission establish a distinct proceeding to address and resolve the issues presented
by the Company’s grid modernization investment proposal. (Tr. Vol. 7, p. 173.) Witness
Alvarez noted that, unlike many other states, the Commission has not yet used a rigorous
review and stakeholder participation process in its current Smart Grid Technology Plan
cases to ensure that utilities get the full “bang for the buck” by maximizing all the available
benefits of grid modernization spending. (Tr. Vol. 7, p. 139).
NCSEA witness Golin also recommended a formal and separate process, either
through legislative investigation or through Commission docket, to appraise the
Power/Forward proposal and include input of all relevant stakeholders to ensure that
investments are in the best interest of ratepayers. (Tr. Vol. 13, p. 49.) She also claims
that the plan has been developed without engaging any of the best practices of grid
modernization, including clear and measurable goals, robust cost/benefit analyses,
involving stakeholders, or integrated distribution planning. (Id.)
In response, witness Simpson disagreed with the contention that the Company has
not demonstrated that Power/Forward investments will benefit North Carolina customers.
He explained that the Company, through experts, quantified the benefits of
Power/Forward to the economy of North Carolina and the businesses in its service area,
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and the study anticipates lower operational costs to the Company over time as a result of
the core reliability improvements. (Tr. Vol. 9, p. 62.) In this study by Ernst & Young,
included as Simpson Rebuttal Exhibit 1, it is estimated that by 2028 North Carolina
businesses will benefit by $1.7 to $2.8 billion per year from reduced outage-related costs
and increased profit opportunities. (Id.) Net economic benefits from direct capital
investments in the state total between $240 million and $1.4 billion. (Id.) In total, this
economic analysis shows that approximately 19,000 jobs will be supported or created
statewide through higher levels of economic activity associated with improved reliability
and the spending associated with the plan. (Id.) In addition, DEP anticipates ongoing
annual cost savings over time resulting from reduced spend on vegetation management,
outage restoration activity, and major storm event restoration. (Id. at 62-63.)
In its post-hearing Brief, the AGO notes that DEP witness Simpson provided a
break-down of the planned $13 billion expenditure on grid modernization, as follows:
Targeted underground transmission lines $4.9 billion
Distribution H&R $3.5 billion
Transmission $2.2 billion
Self-optimizing grid $1.2 billion
Advanced Metering Infrastructure $ 549 million
Enterprise systems upgrades $103 million
(Tr. Vol. 9, p. 69.)
The AGO states that it fully supports and applauds DEP’s commitment to planning
for efficient and effective utility service for its customers, but that the issue is whether DEP
has done the necessary work to determine whether this particular approach is a
reasonable and prudent way to attack the problem of reliability and security of the grid.
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The AGO cites the testimony of Public Staff witness Floyd that “additional reporting is
needed to allow the Commission to better understand Power/Forward Carolinas and to
quantify its benefits. The extent of the planned investment and the potential impact on
customer rates requires additional reporting, in order to assist the Commission and Public
Staff in understanding Power/Forward Carolinas and evaluating its cost-effectiveness.”
(Tr. Vol. 19, p. 127.)
Further, the AGO states that NCSEA witness Golin raised similar concerns, noting
that DEP has not performed a cost-benefit or business case analysis. (Tr. Vol. 13, pp. 27,
40; DEP Response to NCSEA DR 5-14/ Golin Direct Exhibit CG-3/Off. Exh. 13, p. 15.)
The AGO submits that prior to spending billions of dollars on grid modernization efforts,
DEP should be required to demonstrate to the Commission that the money will be spent
on appropriate programs. Without taking a position on whether the Commission should
open a separate docket, the AGO urges the Commission to enter an order requiring DEP
to provide the Commission and the public the information outlined in the testimony of
witnesses Floyd and Golin.
In its post-hearing Brief, EDF submits that the Commission should initiate a
separate docket for stakeholder input and Commission consideration of DEP’s and other
utilities’ grid modernization plans. EDF states that a review process would allow the
Commission to optimize grid modernization investments and maximize the benefits
customers receive. Further, EDF states that customers pay for 100% of the utilities’ grid
modernization spending, so the customers should have a say in the
investments/capabilities and receive 100% of the available benefits. In addition, EDF
states that DEP ultimately provided a cost-benefit analysis for its Power/Forward
proposal, but that the analysis was not provided in sufficient time to allow the parties to
study and discuss it. Moreover, EDF opines that DEP’s analysis included only operational
benefits and did not include benefits from integrating renewable resources or increased
opportunities for energy efficiency and peak demand reductions. EDF states that the
testimony of witness Alvarez, which EDF summarized in its Brief, supports EDF’s
recommendations.
Paragraph IV.A. of the Stipulation provides that DEP will host a technical workshop
during the second quarter of 2018 regarding the Company’s Power/Forward planned grid
investments. The Stipulation further provides that Public Staff involvement in the
workshop in any capacity does not preclude it from investigating or making
recommendations regarding any element of the Company’s Power/Forward program in a
future rate case or pursuant to any applicable statutes or Commission rules. Further, the
Commission is not precluded from considering or reviewing any aspect of the
Power/Forward program in separate dockets as it determines appropriate, nor does it
preclude the Public Staff’s participation in such dockets. The Commission notes that the
Company is not seeking recovery of investments relating to Power/Forward in this rate
case. Ultimately, the burden of proof is on the Company to support the prudence of
investments in grid modernization if and when it seeks cost recovery of such investment.
That burden of proof is not required in the current proceeding. Based on the full record in
this docket, the Commission concludes, however, that the Company has not yet provided
compelling evidence that the proposed grid investment plan will result in meaningful
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benefits to ratepayers despite its cost. The Commission acknowledges the potential rate
impacts of implementing Power/Forward. CUCA witness O’Donnell testified that he
calculated the impact on rates to range from an 8.94% increase for the Company’s
industrial customers to a 48.74% increase for the Company’s residential customers. (Tr.
Vol. 15, p. 131.) Existing dockets (such as Integrated Resource Planning and Smart Grid
Technology Plans) as well as future general rate case proceedings provide opportunities
for the Commission to consider evidence evaluating the prudency and reasonableness of
Power/Forward costs.
In its post-hearing Brief, EDF submitted that the Commission should initiate a
separate docket for stakeholder input and Commission consideration of DEP’s and other
utilities’ grid modernization plans. The Commission will not open a separate docket for
grid modernization planning and/or revisions to existing Commission rules at this time.
Rather, the Commission will reconsider such proposals pending the effectiveness of the
technical workshop, the outcome on this issue in DEC’s general rate case proceeding
(Docket No. E-7, Sub 1146), Integrated Resource Planning, and Smart Grid Technology
Plans to evaluate grid investment plans.
The evidence supporting this finding of fact and conclusions is contained in DEP's
Form E-1, the testimony of Public Staff witness Peedin, the rebuttal testimony of
Company witness Doss, and the Stipulation.
As part of its filing in this case, the Company submitted a lead-lag study that was
performed in 2011 using fiscal year 2010 data. (Tr. Vol. 10, p. 91; Doss Ex. 3.) Public
Staff witness Peedin commented that the Public Staff believes that a fully updated
lead-lag study should have been completed for this case and recommended that the
Commission direct the Company to prepare and file a lead-lag study in its next rate case.
(Tr. Vol. 18, p. 81.) In his rebuttal testimony, DEP witness Doss stated that the Company
agrees with Public Staff witness Peedin’s recommendation and testified that DEP will
prepare and file an updated lead-lag study as part of its next rate case application. (Tr.
Vol. 10, p. 91.)
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EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT NOS. 31-32
The evidence supporting these findings of fact and conclusions is contained in the
Stipulation, DEP’s verified Application and Form E-1, the testimony and exhibits of the
witnesses, and the entire record in this proceeding.
Company witness Hager’s direct testimony describes and supports the Company’s
Summer Coincident Peak (SCP) cost of service study. Witness Hager recommended the
use of the SCP as a fair allocation of the costs to the appropriate jurisdiction and customer
class. As articulated by witness Hager, the cost responsibility of each jurisdiction and
customer class should be determined on its respective demand in relation to the total
demand placed on the system.
The Company’s summer peak occurred on Tuesday, July 26, 2016, at the hour
ending at 5:00 p.m. The Company’s system peak occurred on Tuesday, January 19, 2016
in the hour ending at 8:00 a.m. Witness Hager noted that although in 16 of the last 25
years the coincident peak for the system occurred in June through August, the majority
of peaks in the past eight years has occurred in the winter. Even though the Company’s
peak occurred in the winter and the majority of the recent peaks have occurred in the
winter, witness Hager asserted that the production and transmission demand-related
costs allocated in this case were incurred on the basis of integrated resource planning
that was based on a summer peak and that they should be allocated based on the
summer peak.
The Public Staff historically has supported the use of the Summer/Winter Peak and
Average (SWPA) cost of service allocation methodology. As noted in witness Floyd’s
testimony, the SWPA methodology recognizes that a portion of plant costs is incurred to
meet the energy costs throughout the year, and not just at the time of the peak. However,
under the particular circumstances of this case, Public Staff witness Floyd did not object
to the Company’s use of the SCP methodology for determining the cost of service due to
the small difference in the per books calculation between SCP and SWPA. Based on the
testimony of witness O’Donnell, CUCA also supports use of the SCP methodology.
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demonstrates that DEP’s system is dual peaking. (Id. at 134.) Therefore, witness
Mancinelli argued that the 2-CP methodology is the fairest and most sustainable
allocation method because it recognizes the benefit to customer classes that contribute
to the summer and winter peaks. (Id. at 137.)
In the Stipulation, the Public Staff agreed not to oppose the Company’s use of SCP
for the purpose of settlement in this case only, with the exception of the allocation of coal
ash costs. In its settlement agreement with the Company in this proceeding, Kroger stated
that it did not oppose the settlement between the Company and the Public Staff on cost
of service allocation methodology. Paragraph V.B. of the Stipulation provides that neither
the Stipulation nor any of its terms shall be admissible in any court or Commission except
to implement its terms and that the Stipulation shall not be cited as precedent by any
Stipulating Party with regard to any issue, including cost of service allocation
methodology, in any other proceeding or docket. Paragraph V.C. of the Stipulation
provides that no Stipulating Party has waived any right to assert any position in any future
proceeding or docket.
CUCA, in its post-hearing Brief, states that DEP’s use of the SCP allocation
methodology is appropriate for use in DEP’s cost of service study in the present case
because DEP has historically been a summer peaking system.
In its post-hearing Brief, CIGFUR states that it supports the Company’s proposal
to use a single coincident peak demand allocation methodology for its cost of service
study, but rather than the Company’s proposed SCP, CIGFUR supports the use of the
WCP, which, according to CIFGUR, more appropriately reflects the Company’s actual
planning peak in accordance with accepted cost allocation principles. CIGFUR states that
DEP bears the burden of showing that the use of the SCP is the most appropriate cost
allocation method “[b]ased on the evidence in this proceeding.” See Order Granting
General Rate Increase, Docket No. E-22, Sub 479, at p. 23 (Dec. 21, 2012). CIGFUR
contends that while historically DEP based its projected need for resources on the need
to meet summer afternoon peak demand projections, the significant growth of solar
facilities, which assist with meeting summer afternoon peak demands on the system, but
do little to accommodate demand on cold winter mornings, and the associated impact on
summer versus winter reserves, have led DEP to experience a dominant winter peak for
six out of the last eight years. CIGFUR notes that the Company now uses the winter peak
for system planning, including calculation of reserve margin, and determining its need for
additional generation facilities. (Tr. Vol. 7, p. 65.) Further, according to CIGFUR, DEP is
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forecasted to remain winter-peaking through 2032, which marks the end of the planning
horizon.
CIGFUR contends that even though it is undisputed that the Company is winter-
peaking and plans its generating capacity accordingly, the Company, through witness
Hager, proposes to allocate production and transmission demand-related costs on the
SCP on the premise that the costs being allocated in this case were incurred on the basis
of summer planning (Tr. Vol. 10, p. 292; Tr. Vol 11, p. 137), and that for the following
reasons the Company’s argument is without merit:
(1) The Company’s use of the SCP method is inconsistent with the NARUC
Cost of Service manual. (Tr. Vol. 17, p. 137.)
(2) The Company does not cite any precedent within this State for its novel
proposal to employ a 1 CP cost of service study based on its historical peak
rather than its current planning peak.
(3) The Company’s cost of service study choice has significant negative
impacts on the LGS class. (Tr. Vol. 11, pp. 135-36.) CIGFUR includes a
table that it contends demonstrates that the LGS class’s rate of return is
below North Carolina retail under the SCP methodology, but at or above
North Carolina retail under the WCP and 2 CP methodologies.
(4) After rate design, the Company’s choice to allocate production and
transmission demand-related costs on the SCP results in lower rates for
residential consumers, but at the expense of large load customers.
(5) Although the Company has been winter peaking since 2013 and will be
winter-peaking for the foreseeable future, it has not identified when it will
shift its cost of service study to recognize the winter peak. (Tr. Vol 11,
pp. 20-21.)
(6) The winter peak is the capacity planning basis of DEP’s system and
therefore the cost causation for its production plant.
CIGFUR states that if the Commission is reluctant to approve the WCP cost study
because of the recentness of the transition from summer to winter planning, a second
option is the use of the 2 CP cost of service study, which is discussed by witnesses
Phillips (Tr. Vol. 7, p. 66), and Mancinelli. As witness Mancinelli noted, “[a]lthough the
actual system peak hour occurs during the winter, the magnitude of the winter peak is
very close to the magnitude of the summer peak.” (Tr. Vol. 17, p. 138.)
The Commission recognizes that cost causation is the primary driver and support
for choosing an appropriate cost allocation methodology. The Commission also
understands that there is an element of subjectivity in this choice. The Commission finds
and concludes that the SCP is the appropriate cost allocation methodology, for the
purposes of this proceeding, subject to the provisions of the Stipulation. The Commission
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gives substantial weight to the testimony of Company witness Hager’s assertion that the
production and transmission demand-related costs allocated in this case were incurred
on the basis of integrated resource planning that was based on a summer peak and that
they should be allocated based on the summer peak. The Commission notes that the
difference between the SCP and WCP in the test year was minimal (1%) and that the
Company has committed to monitoring the system peak information for consideration in
future cost of service studies. Further, the Commission finds that the recent convergence
of SCP and WCP experienced by the Company is adequately accounted for in the
stipulated rate design.
Although the Public Staff has traditionally supported SWPA cost allocation, it is not
unreasonable for the Stipulating Parties to have agreed to the use of SCP for this
proceeding. Based on DEP’s Late-Filed Exhibit 5 and the Public Staff’s Late-Filed
Exhibit 1, the Commission determines that the difference in retail revenue requirements
for the SCP methodology compared to the SWPA methodology is insignificant. The
Commission acknowledges the Public Staff’s position on cost allocation, but views its
position relative to the Stipulation as just and reasonable to the using and consuming
public that the Public Staff represents. Therefore, based upon consideration of the
Stipulation in its entirety, the Commission gives the Stipulation substantial weight in
resolving the cost allocation issue. However, the Commission’s acceptance of the SCP
methodology in this proceeding shall not be precedent for and may not be cited as such
in future proceedings.
Although the Commission has approved the use of the SCP cost of service
allocation methodology for the purposes of this case, the Company shall continue to file
annual cost of service studies based on both the SCP and SWPA cost of service
allocation methodologies.
The evidence supporting these findings of fact and conclusions is contained in the
Stipulation, DEP’s verified Application and Form E-1, the testimony and exhibits of the
witnesses, and the entire record in this proceeding.
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the difference between on-peak and off-peak marginal energy costs and by reducing the
emphasis on summer pricing in the energy rates. As a result, the rates designed by
witness Wheeler narrow the difference between on-peak and off-peak charges for TOU
rates.
In Section IV.F.3 of the Stipulation, the Stipulating Parties agreed to implement the
rate design proposed by Company witness Wheeler, subject to the following
modifications:
a. The Stipulating Parties agree that the Company may increase its Basic
Customer Charge for Schedule RES to $14.00 per month. The Stipulating
Parties further agree that the Company may increase its Basic Customer
Charges for Schedules R-TOUD and R-TOU to $16.85 per month.
b. The Stipulating Parties agree that the Company will maintain the current
differential between the on- and off-peak energy rates in all of its
time-of-use rate schedules when assigning the revenue requirement
approved in this proceeding.
c. The Stipulating Parties agree that the rates set forth in the minimum bill
provisions of the MGS class schedules shall be set at the class approved
unit energy and demand cost as proposed by the Company, but shall also
be adjusted to reflect all riders applicable to service under the schedule.
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Several intervenors provided testimony on various rate design issues in this
proceeding, as discussed below. Having considered the testimony and exhibits of all of
the witnesses and the entire record in this proceeding, the Commission makes its findings
and conclusions on each of these issues as set forth below.
As explained above, DEP has requested that the BCC for all of its rate classes be
increased to varying degrees to better recover customer-related costs identified in the
unit cost study. (Tr. Vol. 10, pp. 199-211.) Specifically, the Company proposed changing
the BCC for Schedule RES from $11.13 to $19.50 to reflect approximately 50% of the
difference between the current rate of $11.13 and the customer-related cost of $27.82
identified in the unit cost study. (Id. at 220.) The Stipulation provides for a BCC of $14.00
for Schedule RES and $16.85 for Schedules R-TOUD and R-TOU. (Stipulation IV.F.3.a.)
The Stipulating Parties also agreed to the increases in the BCCs requested by the
Company for the remaining rate classes.
NCSEA witness Barnes testified that the Company’s proposed fixed customer
charge increases are “extreme” and recommended that the current customer charges be
maintained, or, alternatively, that the customer charges only be increased by the
percentage increase in the overall revenue requirements adopted for each class. (Tr. Vol.
16, p. 49.) Specifically, NCSEA witness Barnes testified that the increased Residential
BCC proposed by the Company was higher than other utilities and is, therefore,
inappropriate. (Id. at 49-52.) Witness Barnes also argues that the proposed increases are
inconsistent with the ratemaking principle of gradualism. (Id. at 52-53.)
Witness Barnes, as well as NC Justice Center witness Wallach, also assert that
an increase in the customer charge dilutes customer incentives for distributed generation
and energy efficiency. (Tr. Vol. 16, pp. 53-55; Tr. Vol. 17, p. 206.) The Commission gives
significant weight to witness Wheeler’s rebuttal testimony in response to this argument.
Witness Wheeler explained that “[f]ailing 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.” (Tr. Vol. 10, p. 222.) In addition, he testified that
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shifting fixed customer-related cost to the volumetric energy rate exacerbates this
concern and over-compensates energy efficiency and distributed generation for the cost
avoided by their actions. (Id.) Further, the Commission determines that existing energy
efficiency programs are effective, and it is not persuaded that it needs to further support
energy efficiency by refusing to approve an appropriate increase in the BCC.
Witness Wallach explained the intent behind basic customer charges as follows:
basic customer charges are intended to recognize that each customer contributes equally
to certain distribution costs regardless of that customer’s energy usage. The fixed
customer charge should, therefore, be set to recover the cost to connect the customer to
the distribution system – more or less. These customer-related connection costs are
limited to plant and maintenance costs for a service drop and meter, along with meter
reading, billing, and other customer-service expenses. (Tr. Vol. 17, pp. 213-14.) In
response to a NC Justice Center et al. data request, DEP re-ran its cost-of-service study
without the minimum system analysis, excluding pole, conduit, conductor, and line
transformer costs as demand-related rather than customer-related. As a result of
excluding those costs attributable to the minimum system analysis, the Company’s
estimate of customer-related costs was only $8.54. (Tr. Vol. 11, pp. 58-59, Hager; Tr. Vol.
17, pp. 203, 215, Wallach); NCJC Hager/Wheeler Cross Ex. 1 (Ex. Vol. 20, p. 123.))
Witness Wallach testified that DEP’s modified cost-of-service study shows that a sizeable
portion of demand-related distribution plant costs are inappropriately being recovered
through the current basic customer charge. The amount in excess of $8.54 represents
usage-driven costs that should be recovered in the volumetric energy rate, so that each
residential customer contributes to recovery of these costs in direct proportion to his
usage. (Tr. Vol. 17, pp. 215-16.)
Although a utility’s cost-of-service study serves as the foundation for its rate
design, this Commission has recognized that the two are distinct. See, e.g., Order
Granting Partial Increase In Rates and Charges, Docket No. E-2, Sub 526, at pp. 29-30
(Aug. 27, 1987) (approving use of minimum system for cost allocation, but not for rate
design); Order Granting General Rate Increase, Docket No. E-2, Sub 1023 (May 30,
2013), at p. 32 (Sub 1023 Order) (“the Commission regards any increase in the BCC as
a rate design issue, not an ROE [rate of return on equity] issue.”) DEP witnesses Hager
and Wheeler, although at times conflating cost-of-service study issues with rate design
issues, also acknowledged that rate design requires consideration of issues beyond cost
of service. According to witness Wheeler, “[the] cost of service [study] provides [the rate
designer] customer-related, demand-related, and energy-related costs. In efficient rate
design, we try to separately distinguish those costs . . . and try to have rates that would
recover those costs appropriately based on cost causation.” (Tr. Vol. 11, p. 62.) Witness
Hager acknowledged that there is “not always a pure translation from cost of service
studies to rates.” (Tr. Vol. 10, p. 328.) Witness Floyd also recognized that rate design,
and specifically, setting the BCC, requires consideration of other factors besides cost of
service: “It is up to the rate designer to take into account all these other issues that are
outside of cost of service in coming up with where that basic customer charge should
land.” (Tr. Vol. 19, p. 160.)
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Witness Wallach agreed that rates should be based on principles of cost causation;
however, he testified that DEP’s use of the minimum system technique in its cost of
service study inappropriately classifies a portion of distribution plant costs as customer-
related. (Tr. Vol. 17, p. 201.) As witness Wallach explained, “it is not appropriate to rely
on the results of minimum system analyses to estimate per customer minimum plant
costs, since such analyses typically overstate the true minimum cost per customer for
distribution plant.” (Tr. Vol. 17, p. 200.) This is because some portion of distribution plant
costs are driven by usage, yet the minimum system technique incorrectly classifies those
demand-related costs as customer-related costs, resulting in an inflated estimate of the
per-customer minimum plant cost. (Tr. Vol. 17, p. 214.)
The Commission rejected in prior orders use of the minimum system technique to
design the basic customer charge for the very reasons cited by witnesses Barnes and
Wallach in this case. In Docket No. E-2, Sub 526, a general rate case filed by DEP’s
predecessor utility Carolina Power & Light (CP&L), the Commission approved the use of
the minimum system technique for purposes of allocating costs to the various customer
classes, but explicitly rejected its use for purposes of setting the BCC. The Commission
explained its decision as follows:
Order Granting Partial Increase In Rates and Charges, Docket No. E-2, Sub 526, at
pp. 29-30 (Aug. 27, 1987) (emphasis added).
Witness Deberry also opposed the increased residential BCC, testifying that it will
affect already cost-burdened residents who struggle to afford housing costs. (Tr. Vol. 13,
p. 214.) Witness Deberry explained that over half of all cost-burdened households are
renters without the ability to make investments in energy efficiency. (Id. at 216.) She
further explained that the increased BCC would reduce incentives from bill savings for
landlords to include utility programs in their property management, and, thus, the costs of
an increased BCC would be passed on to customers least able to afford it. (Id. at 219.)
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Similarly, witness Howat testified that increasing fixed customer charges causes
disproportionate impacts to low-volume, low-income customers and discourages energy
efficiency. (Tr. Vol. 13, p. 239.) Witness Howat testified that low-income households, and
particularly low-income households of color, are at a heightened risk of loss of home
energy service, and the increased threat of disconnection posed by the Company’s rate
increase proposes a threat to the health and safety of these customers and the larger
community. (Id. at 247-49.)
Witness Wheeler also notes that the Company has carefully examined its costs
and identified customer-related costs in order to determine the proposed BCCs, and that
other utilities' costs and rates are not relevant to the determination of DEP’s rates. (Tr.
Vol. 10, p. 222.) Witness Wheeler rebutted witnesses Barnes’ and Wallach’s argument
that the BCC discourages distributed generation and energy efficiency. (Id.) Witness
Wheeler stated that failing 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. Further, he noted that the current residential “energy-only” rate design is
already less efficient than ideal because it recovers demand-related cost via a volumetric
charge. Shifting customer-related cost to the kWh energy rate further exacerbates this
concern and over-compensates energy efficiency and distributed generation for the cost
avoided by their actions. (Id.) DEP witness Wheeler also testified that the Company is
mindful of the impact of the rate increase on its low-income customers, and that it has not
requested a residential BCC that reflects the fully justified customer-related cost for that
reason. (Tr. Vol. 10, pp. 221-23.) Witness Wheeler makes clear, however, that contrary
to the assertions of witnesses Howat and Deberry, he believes that biasing rate design is
not the most effective way to address the financial needs of these customers, and that
rate design must be based on cost causation principles. (Id. at 223.) Instead, there are
Company, state, and federal programs which are designed to aid low-income customers.
(Id.) For example, the Company offers the Neighborhood Energy Saver Program and
various payment plans to assist low-income customers. (Id.) DEP also promotes the
Energy Neighbor Fund, which raises funds for local aid agencies to assist low-income
customers. (Id.)
At the hearing, witness Wheeler testified on redirect that the BCC increase that the
Company has requested, through the Stipulation, would equate to 9 cents per day. (Tr.
Vol. 11, p. 149.) He also testified on redirect that even though some of DEP’s customers
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cannot afford an extra dime a day for their BCC, it is still appropriate to increase the BCC
because it sends the appropriate price signal to customers about the true cost of
electricity. (Id. at 150.) He explained that understating the customer charge shifts to other
customers the costs they have to pay, inflates the energy price, and overcompensates
customers for energy efficiency and distributed generation resource installation. (Id.)
NC Justice Center, in its post-hearing Brief, reviews the statutes and case law
underlying the requirement of just and reasonable rates. NC Justice Center submits that
the $14.00 BCC agreed upon in the Stipulation is unjust and unreasonable. It maintains
that the $14.00 BCC would exceed the minimum cost to connect a customer to DEP’s
distribution system and would be a disincentive to energy efficiency. NC Justice Center
cites the testimony of witness Wallach explaining the intent behind the BCC, and states
that DEP did not present sufficient evidence to support an increase to $14.00, noting that
DEP relied on the minimum system technique, a technique that NC Justice Center
contends the Commission has rejected at least twice as the basis for setting the BCC. It
notes that DEP witnesses Hager and Wheeler, as well as Public Staff witness Floyd,
acknowledged that rate design requires consideration of issues beyond cost of service.
NC Justice Center states that witness Wallach testified that DEP’s use of the
minimum system technique in its cost of service study inappropriately classifies a portion
of distribution plant costs as customer-related. (Tr. Vol. 17, p. 201.) Further, it cites the
Commission’s 1987 Order in a general rate case filed by DEP’s predecessor, CP&L, and
states that the Commission explicitly rejected use of the minimum system technique for
purposes of setting the BCC. (Order Granting Partial Increase In Rates and Charges,
Docket No. E-2, Sub 526, at pp. 29-30 (Aug. 27, 1987)).
In addition, NC Justice Center states that in CP&L’s next general rate case the
Commission again explicitly rejected the minimum system technique for setting the BCC.
Order Granting Partial Increase In Rates and Charges, Docket No. E-2, Sub 537, at
pp. 130-31 (Aug. 5, 1988)
Moreover, NC Justice Center contends that DEP’s own analysis demonstrates the
flaws inherent in using the minimum system technique to establish the BCC, and that it
demonstrates that the BCC should not only not be increased, but that it should actually
be reduced from its current level. In response to an NC Justice Center data request, DEP
re-ran its cost-of-service study without the minimum system analysis, excluding pole,
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conduit, conductor, and line transformer costs as demand-related rather than customer-
related. As a result of excluding those costs attributable to the minimum system analysis,
the Company’s estimate of customer-related costs was only $8.54, not $27.82. (Tr.
Vol. 11, p. 58-59 (Hager); Tr. Vol. 17, pp. 203, 215 (Wallach.) NCJC Hager/Wheeler Cross
Ex. 1, (Ex. Vol. 20, p. 123.) NC Justice Center argued, as witness Wallach testified, that
DEP's modified cost-of-service study shows that a sizeable portion of demand-related
distribution plant costs are being inappropriately recovered through the current BCC. The
amount in excess of $8.54 represents usage-driven costs that should be recovered in the
volumetric energy rate, so that each residential customer contributes to recovery of these
costs in direct proportion to his usage.
NC Justice Center also contends that increasing the BCC to $14.00, as proposed
in the Stipulation, would likewise be unjust and unreasonable. Summarizing DEP’s and
the Public Staff’s testimony in support of the Stipulation, NC Justice Center maintains that
there was no attempt to explain why a $14.00 BCC is just and reasonable. On the other
hand, according to NC Justice Center, witness Wallach testified that the reduced increase
in the BCC under the Stipulation does not address his concerns.
Further, NC Justice Center submits that any increase in the residential BCC would
disproportionately impact low-usage customers, discourage the efficient use of electricity,
in contravention of state law and policy, and shift costs away from higher-volume
electricity users within the residential class to lower-volume users in the class. (Tr.
Vol. 13, pp. 278-89.) It states that some cross-subsidization is inherent and unavoidable
in average-cost ratemaking, as recognized by witnesses for various parties, e.g., DEP
witness Wheeler (Tr. Vol. 12, pp. 21-22), but that rates should be designed to minimize
cross-subsidization to the extent possible, as a matter of sound public policy, and also
consistent with the prohibition on undue discrimination in ratemaking.
NC Justice Center further points to witness Deberry’s testimony about the difficulty
low-income North Carolinians have in securing affordable housing, and to witness
Howat’s testimony that the proposed increase in the BCC would be unfair to low-volume
customers in DEP’s service territory. Also, witness Howat testified that the best available
data demonstrates that on average, low-volume users - those who would be most hurt by
increases in the basic customer charge - are disproportionately households headed by
low-income, African-American, and senior-citizen residents. (Tr. Vol. 13, pp. 241-45.) In
addition, NC Justice Center summarizes the public witness testimony regarding the
hardship of increases in fixed charges to low-income households, fixed-income
households, and senior citizens. NC Justice Center states that these are considerations
that the Commission must take into account in this case, citing the statement that “[i]n
establishing fair rates to consumers the Commission takes into account the economic
conditions in which the consumers find themselves.” Order on Remand, Docket No. E-7,
Sub 989, at p. 23 (Oct. 23, 2013); and G.S.62-133(a). It also opines that it is in large part
because of the disproportionate harm to those subsisting on low- and fixed-incomes that
the National Association of State Utility Customer Advocates (NASUCA) is opposed to
increases in mandatory, fixed charges, and cites NASUCA Resolution 2015-1 (NC Justice
Center Floyd Cross Exhibit 1, Ex. Vol. 19, p. 286), which states that imposing a “high
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customer charge … unjustly shifts costs and disproportionately harms low-income,
elderly, and minority ratepayers, in addition to low-users of gas and electric utility service
in general.”
NC Justice Center cites three decisions in which it submits that the public utility
commissions in Maryland, New Mexico, and Michigan, employing the just and reasonable
standard, take into consideration how increases in fixed customer charges would affect
low-income customers. It asserts that DEP presented no evidence about the effect of an
increase in fixed charges on the ability of its most vulnerable customers to maintain
essential electrical service. Further, NC Justice Center contends that DEP has not done
anything to mitigate its proposed increase in the BCC with additional investments in low-
income energy efficiency. It states that after reviewing the amount of DEP’s current
budget for low-income energy efficiency programs, witness Howat recommended that the
Company increase its budget for programs targeted to low-income households from $1.9
million to $11.5 million, an amount more commensurate with the revenue received by
DEP from income-eligible households in its service territory (Tr. Vol. 13, pp. 254-58), or
follow the recommendation of public witness Goodson that DEP make an annual
shareholder contribution to the Helping Home Fund.
In its post-hearing Brief, the AGO contends that DEP’s proposal to increase the
monthly basic customer charge for residential customers by 26%, from $11.16 per month
to $14.00 per month, should be denied because it will discourage consumers from making
investments in energy efficient products and home improvements, and from taking other
careful measures to budget their consumption, contrary to statutory public policy goals
favoring energy efficiency and energy conservation. Moreover, according to the AGO, the
increased BCC will shift costs to small users such as low-income and elderly consumers
who live in small apartments, as they are charged the same unavoidable BCC as other
residential consumers who live in spacious high-consumption residences.
In addition, the AGO contends that energy efficiency and energy conservation are
encouraged by a rate design that sets the unavoidable BCC as low as possible and
recovers most of the cost of service in the usage charge, and that the effect of the
Company’s proposal runs contrary to several statutorily declared North Carolina public
policies relating to public utilities regulation that favor the encouragement of energy
efficiency, energy conservation, and well-planned utility resource development, including:
(3a) To assure that resources necessary to meet future growth through the
provision of adequate, reliable utility service include use of the entire
spectrum of demand-side options, including but not limited to conservation,
load management and efficiency programs, as additional sources of energy
supply and/or energy demand reductions. To that end, to require energy
planning and fixing of rates in a manner to result in the least cost mix of
generation and demand-reduction measures which is achievable, including
consideration of appropriate rewards to utilities for efficiency and
conservation which decrease utility bills;
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(4) To provide just and reasonable rates and charges for public utility
services without unjust discrimination, undue preferences or advantages, or
unfair or destructive competitive practices and consistent with long-term
management and conservation of energy resources by avoiding wasteful,
uneconomic and inefficient uses of energy;
***
***
d. Provide improved air quality and other benefits to energy consumers and
citizens of the State.
Further, the AGO states that witness Wallach, an expert who has consulted on
electric utility industry matters for over 30 years, estimated that consumption would
increase by 2% over the next several years if DEP’s initial proposal to charge $19.50 per
month is allowed. (Tr. Vol. 17, pp. 209-10, 216.) The AGO states that the smaller increase
proposed in the Stipulation is not as discouraging, but still reduces the incentive to
conserve and lengthens the time for recoupment of investments by consumers in more
energy-efficient home improvements and appliances – particularly given that the 26%
increase in the charge is proposed so soon after a 65% increase to the BCC took effect
in 2013. (Tr. Vol. 17, pp. 209-210.) In addition, the AGO states that witness Wallach
evaluated the cost studies used by DEP and recommended decreasing the BCC to $8.54.
(Tr. Vol. 17, p. 215.)
The AGO stated that questions posed by the Commission during the expert
witness hearing raised several additional considerations. First, the cost studies that are
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used to allocate costs among different customer classes are not well suited to determine
rate design issues (Tr. Vol. 17, pp. 221-222), and data used to allocate costs over many
customers may distort results when applied on a per-customer basis. (Id.) Furthermore,
the design of rates carries important ramifications for policies such as the incentives that
encourage energy efficiency, conservation, load shifting, etc.
The Commission concludes that the stipulated BCC increases, including a BCC of
$14.00 for Schedule RES and $16.85 for Schedules R-TOUD and R-TOU, are just and
reasonable and strike an appropriate balance that provides rates that more clearly reflect
actual cost causation and, thus, minimize subsidization and provide proper price signals
to customers in the rate class, while also moderating the impact of such increase on low-
usage customers.
NCSEA witness Barnes testified that it is impossible to say that customers will
benefit from the Company’s proposed AMI deployment because the Company has not
provided any detail regarding the rate options that will be offered. (Tr. Vol. 16, pp. 75-78.)
Similarly, EDF witness Alvarez also criticized the lack of detail in the Company’s
Application regarding time varying rate offerings that the Company plans to implement in
conjunction with AMI. (Tr. Vol. 7, p. 161.) Company witness Wheeler responded that “[i]t
would be premature to offer a specific rate design before the infrastructure to support the
design is available.” (Tr. Vol. 10, p. 227.) Public Staff witness Floyd agreed that the
Company’s proposal to develop new rate designs after AMI deployment was a
“reasonable approach” and testified that the Public Staff is willing to work with the
Company to develop these future rate designs. (Tr. Vol. 19, pp. 103-04.)
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yet, he testified that it is important to evaluate each rate design in conjunction with other
demand response options that seek to shift customer consumption. (Id.) For example,
witness Wheeler explained that residential appliance control is an effective tool to reduce
air conditioning load during system peak conditions which would potentially be the same
load shifted by a residential critical peak pricing or peak time rebate program. (Id.) He
explained that all customer options need to be evaluated to achieve the most dependable
load response at the lowest cost to ratepayers. (Id.)
TOU
In its Application, the Company also proposed adjusting TOU rates to reduce the
difference between on-peak and off-peak rates. (Tr. Vol. 10, p. 228.) Witness Wheeler
explained that this change reflects the ongoing trend of a declining differential between
on-peak and off-peak marginal energy cost. (Id.) Public Staff witness Floyd recommended
deferring this change and maintaining the current differentials between on-peak,
shoulder, and off-peak energy rates. (Tr. Vol. 19, p. 107.) Witness Floyd argues that
narrowing the difference diminishes the price signal and thereby discourages switching
of consumption away from the peak periods. (Id. at 106.) Additionally, he believes it may
cause confusion when new and enhanced rate designs are introduced after AMI
deployment. (Id.)
NCLM notes that in the Stipulation it is agreed that DEP will host a workshop on
Power/Forward during the second quarter of 2018 and will report the results of the
workshop to the Public Staff and the Commission. NCLM states that it appreciates DEP’s
plan to host an initial workshop, but notes that the Stipulation does not address when the
Power/Forward grid investments and AMI technology will provide additional means for
customers who actively manage their use of electricity to save on their power bills. NCLM
recommends that the Commission require DEP not only to hold a technical workshop on
its Power/Forward grid investments, but also to include customers and the Public Staff in
a series of meetings about customer benefits of Power/Forward and AMI, and order DEP
to develop proposals for the new and innovative time-of-use rate designs and prepayment
options, and provide that information to customers as expeditiously as possible.
The Company agreed with the Public Staff in the Stipulation to maintain the current
differential between on- and off- peak energy rates in all TOU rate schedules. (Stipulation
IV.F.3.b.) The Commission hereby finds that maintaining the existing differentials among
on-peak, shoulder, and off-peak energy rates is just and reasonable in light of the
evidence provided. The Commission concludes that changing the differential between on-
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and off- peak rates should be deferred until significant rate design changes associated
with the Company’s AMI deployment are made.
SGS-TOU
In his rebuttal testimony, witness Wheeler asserts that witness Bieber’s SGS-TOU
rate design should be rejected because it fails to properly consider marginal cost, has a
disparate impact on customers served under the schedule, and encourages migration
away from a TOU design thereby discouraging load shifting. (Tr. Vol. 10, p. 233.) The
current SGS-TOU demand rates exceed marginal cost. (Id. at 231.) Therefore,
significantly increasing these rates close to embedded unit cost is inappropriate. (Id.)
Instead, DEP increased both demand and energy rates by the same percentage to better
recognize both the rate class embedded unit cost and marginal cost. (Id.) Moreover,
witness Wheeler explained that by increasing revenues under Schedule SGS-TOU by
10% more than the MGS Class under the proposed rates that the schedules will move
toward rate parity for the two primary MGS class tariff options, without causing an
economic hardship for SGS-TOU participants. (Id. at 233.) Additionally, witness Wheeler
testified that little rate migration is anticipated under the Company’s current rate design,
but that witness Bieber’s proposal changes the load factor where SGS-TOU would be
beneficial from 30% to 36%, thereby encouraging customers to switch to Schedule MGS
to realize a lower bill. (Id. at 232.) If witness Bieber’s design is accepted, a migration
adjustment would be required to give the Company an opportunity to realize its full
revenue requirement. (Id.)
In its post-hearing Brief, Commercial Group contends that the various class cost
of service studies (CCOSS) show that the Medium General Service (MGS) class provides
above-average returns to DEP, as it did under the different CCOSS methods following
the 2013 rate case (Tr. Vol. 11 p. 33), and, thus, the MGS class is subsidizing other
ratepayer classes. DEP proposed to allocate any revenue increase to rate classes on the
basis of rate base, and then adjust the increase each class receives in order to produce
a 25% reduction in each class’s variance from the overall average rate of return. (Tr.
Vol. 7, p. 98 (Chriss/Rosa, citing Bateman Direct at 10.)) Commercial Group states that it
does not take issue with this gradual approach to class revenue allocation, except if the
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Commission grants the proposed JRR. In such event, the Commission should set LGS
rates at cost in order to avoid a double subsidy by MGS customers. (Tr. Vol. 7, p.100
(Chriss/Rosa)) Otherwise, according to Commercial Group, MGS ratepayers would be
forced to pay one subsidy to the LGS and other ratepayer classes and another subsidy
to LGS industrial customers under the JRR, which would be both unjust and
unreasonable. Commercial Group also notes that in the Stipulation and in its settlement
with DEP the MGS class subsidy burden was recognized by providing that the SGS-TOU
rate schedule (which falls within the MGS class) should receive the same overall revenue
increase percentage as does the MGS rate schedule. Further, to ensure a more equitable
impact for the MGS class, Commercial Group and DEP agreed that the revenue increase
applicable under Schedules MGS and SGS-TOU should strive to achieve approximately
the same percentage increase in revenues under each schedule. Commercial Group
maintains that the Commission should adopt this reasonable resolution.
In its post-hearing Brief, Kroger notes that on November 27, 2017, Kroger and DEP
agreed to a partial Settlement Agreement in which Kroger and DEP agreed that the
revenue increase applicable under Schedules MGS and SGS-TOU should strive to
achieve approximately the same percentage increase in revenues under each schedule,
and that an identical provision is also contained in the Settlement Agreement signed by
DEP and Commercial Group. Kroger states that witness Bieber explained that there is no
evidence in the record to support a rate spread in which SGS-TOU receives a higher rate
increase than the MGS class in general, and, therefore, the Settlement Agreement signed
by Kroger and DEP will result in rates for MGS and SGS-TOU that are fair, just and
reasonable.
Pursuant to the Stipulation, the Kroger Settlement, and the Commercial Group
Settlement, the Stipulating Parties, Kroger, and the Commercial Group agreed to the
Company’s proposed SGS-TOU rate design, with the condition that “[t]o ensure a more
equitable impact on the MGS class, the revenue increase applicable under Schedules
MGS and SGS-TOU should strive to achieve approximately the same percentage
increase in revenues under each schedule.” (Stipulation IV.F.3.d.)
In light of the parties’ testimony and the Kroger Settlement, which the Commission
accepts in its entirety and upon which the Commission places great weight, the
Commission finds and concludes that the Company’s proposed SGS-TOU rate schedule,
as modified by the Stipulation, is just and reasonable. The Commission finds that DEP’s
proposed SGS-TOU rate schedule recognizes marginal costs and will provide parity
between the two primary MGS rate schedules. Accordingly, the Commission approves
the Company’s proposed SGS-TOU rate schedule, as agreed by Kroger.
LGS-TOU
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17, pp. 67-70.) According to witness O’Donnell, customers with a higher usage per a
given level of kW demand have rate increases of approximately 13%, while lower-usage
customers have rate increases of approximately 11%. (Tr. Vol. 15, p. 216.) He instead
recommends that the Commission approve a more gradual change in load factor variance
among the LGS-TOU rate class because it will help higher load factor large manufacturers
absorb this proposed rate increase and may, in some cases, be the difference in retaining
jobs in the DEP service territory. (Id.) Witness Phillips specifically recommends that no
increase be applied to the energy component and that the Company recover the revenue
requirement increase for the SGS-TOU rate class through increases in the customer and
demand charges. (Tr. Vol. 7, p. 70.)
Witness Wheeler explained that the Company’s proposed LGS-TOU rate recovers
the requested revenue requirement in a manner that is equitable to current customers,
minimizes disparity in the percent impact on customer bills, and doesn’t unduly incent
customers to migrate to an alternative schedule to gain a lower bill. (Tr. Vol. 10, p. 234.)
Witness Wheeler explained that witness O’Donnell’s criticism of LGS-TOU ignores the
fact that nearly all customers served under the schedule already have higher than
average load factors. (Id. at 235.) He further explained that Wheeler Exhibit No. 3 includes
lower load factor customers for illustrative purposes, but that such customers rarely
receive service under Schedule LGS-TOU since Schedule LGS offers a lower bill. (Id.)
Thus, if the lower load factor calculations are excluded, the increase on all LGS-TOU
customers at a given demand is roughly the same. (Id.) Witness Wheeler also testified
that witness Phillips’ recommendation should be rejected because it fails to properly
consider marginal cost, has a disparate impact on customers served under the schedule,
and encourages migration away from a TOU design thereby discouraging load shifting.
(Id. at 238.)
The Commission finds and concludes the Company’s proposed LGS-TOU rate
design is just and reasonable in light of the evidence presented. The Commission,
therefore, rejects the recommendation of witness Phillips on the grounds that his proposal
is unmerited given the fact that the increase for all LGS-TOU customers will be roughly
the same, and that his proposal is likely to result in rate migration away from a TOU design
that would result in discouraging load shifting.
Commercial Group witnesses Chriss and Rosa argue that under the Standby
Service (SS) Rider, the Standby Service Contract Demand should be set as the maximum
increased demand the Company is requested to serve whenever the customer’s
generation is not operating, which may be less than the generator nameplate rating. (Tr.
Vol. 7, p. 106.) For Rider SS customers with less than 60% planning capacity factor, the
Contract Demand is the nameplate capacity of the self-generator. (Tr. Vol. 10, p. 238.)
For greater than 60% planning capacity factor, the contract demand is the maximum
increased demand of the SS customer when the generation is not operating. (Id. at 238-
39.)
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Witnesses Chriss and Rosa testify that the manner in which the Standby Service
Contract Demand is determined under the SS Rider is inequitable because it allows one
group of customer generators to determine their standby needs, which may be less than
the nameplate capacity of the generator, and request that amount of service from the
Company, while the other group of customer generators must pay for standby service for
the nameplate capacity of their generator regardless of whether that service is actually
needed. (Tr. Vol. 7, p. 105.) Witnesses Chriss and Rosa argue that this is unfair to
customers who use solar and wind generation, and it creates a barrier to renewable
energy opportunities. (Id.)
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following agreement: DEP agrees that it shall work with interested commercial and
industrial customers to investigate the issues concerning Rider SS that were raised in the
direct testimony Commercial Group filed in the docket. (DEP/CG Settlement, Para. 3)
Commercial Group urges the Commission to approve this agreement in order to give the
parties more time to work on this complicated rate design issue.
The Company and Commercial Group settled this issue and all other issues
between them, and agreed that DEP “shall work with interested commercial and industrial
customers to investigate the issues concerning Rider SS that were raised in the direct
testimony the Commercial Group filed in the Docket.” (Id.)
In light of the parties’ testimony and the Commercial Group Settlement, which the
Commission accepts in its entirety and upon which the Commission places great weight,
the Commission finds and concludes that the Company’s proposal for maintaining the
currently approved approach of setting the Standby Service Contract Demand under the
SS Rider is just and reasonable to all parties and should therefore be continued. Because
the Company must be ready at any time to instantly provide 100% of the energy needs
of customers operating generation with less than a 60% planning capacity factor, it is
appropriate to set a generation reserve charge based on the nameplate capacity of these
customers’ generators. Accordingly, the Commission approves the Company’s proposed
SS Rider, as agreed by Commercial Group.
Street Lighting
NCLM witness Saffo testified regarding a potential convergence of factors that will
create a “perfect storm” that will dramatically and adversely affect municipal budgets in
the near future. The factors cited by witness Saffo include: (1) continued rapid growth of
cities as more people seeking jobs move to them from rural areas and from other parts of
the country, (2) increased demands for infrastructure and municipal services for this
growing population, and (3) the substantial increase in rates for electricity that DEP is
requesting. As a result, witness Saffo encouraged the Commission to require DEP to
deploy technological capabilities and new time-of-use rate designs as expeditiously as
possible to incentivize customers to alter their energy usage so that they may more
efficiently consume electricity by shifting consumption to off-peak hours. Further, he
stated that based on the mutual benefits to municipal customers, public authority
customers and to DEP from technological innovation, DEP and the municipal and
authority customers should collaborate to facilitate such innovation.
Further, NCLM witness Saffo testified that the City of Wilmington has benefited
from LED technology. However, he testified that despite the fact that LED street lighting
systems are becoming more economically feasible, many municipalities cannot take
advantage of the benefits of LED lighting due to the cost of converting to LED fixtures.
(Pre-Filed Direct Testimony of Bill Saffo, p. 15.) Witness Saffo recommended that DEP
provide financial incentives to municipalities to utilize LED lighting. (Id.)
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DEP witness Wheeler, during cross-examination, noted that DEP had done quite
a bit to help street lighting and bring the rates down to the extent DEP could within the
context of a revenue requirement. For example, the area lighting and street lighting
schedules were merged into a common lighting group as a way to minimize the impact
on street lighting in this case. Further, witness Wheeler noted that the proposed increase
is roughly half of what it would have been if the classes had not been merged.
Witness Wheeler explained that the Company collaborates with NCLM. He noted
that the Company meets every six months with the municipalities to discuss their needs
relative to lighting issues. When asked if there are any plans to implement some
innovative LED lighting incentives or other ways of looking at rates in the future, witness
Wheeler responded that the Company had made some changes since the last rate case.
He stated that additional LED streetlights as well as LED floodlights were added.
According to witness Wheeler, the Company is continuing to advance its portfolio of LED
products. He stated, “The main thing I work with is pricing of those new products and
features you’re interested in. I’ve got to be able to offer you the product you want for the
price you want. Right now, that’s somewhat difficult with some technologies we have out
there. But we are working to try to drive the prices down.” (Tr. Vol. 10, p. 302.) Witness
Wheeler noted that the Company hopes to offer additional products that would be of
interest to the municipalities next year.
NCLM states in its Brief and partial proposed order that there are numerous public
benefits associated with LED technology, including increased energy efficiency, lower
maintenance costs, and improved lighting. Further, NCLM stated that many municipalities
in North Carolina have begun to transition to LED technology in order to realize these
public benefits. NCLM further noted that Commission Rule R8-47 (Requirements of
Minimum Standard Offerings of Lighting Luminaries) explicitly recognizes these benefits
and provides that “[u]tilities are urged to investigate new, more efficient lighting systems
as they are developed and, where such systems are efficient and economical to the
customer, request approval of newer systems as standard tariff items.” NCLM requested
that the Commission order DEP to provide greater incentives for LED street lighting
conversions consistent with Commission Rule R8-47.
In addition, NCLM states that many municipalities are not able to take advantage
of the benefits of LED lighting due to the cost of converting their own lighting to LED
fixtures. NCLM states that municipalities could achieve large cost savings through LED
lighting, and DEP should provide financial incentives to municipalities that utilize LED
lighting. Thus, NCLM requests that the Commission order DEP to provide greater
incentives for LED street lighting conversions consistent with Commission Rule R8-47.
Further, NCLM states that in DEP’s proposed rates and the Stipulation, the
proposed rate of return for the ALS and SLS customer class exceeds the rate of return
for all other classes. (Settlement Support Testimony of Laura A. Bateman, Tr. Vol. 6,
Updated Bateman Exhibit 2 – Partial Settlement, p. 1, Spread of Proposed Increases to
Customer Classes.) NCLM notes that Public Staff witness Floyd testified that the Public
Staff seeks to “maintain a +/- 10% ‘band of reasonableness’ for RORs, relative to the
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overall jurisdictional ROR such that to the extent possible, the class ROR stays within this
band of reasonableness following assignment of the proposed revenue increase and
move each customer class toward parity with the overall jurisdictional rate of return and
avoid the potential for rate shock.” (Tr. Vol. 19, p. 99.) While the overall rate of return in
the partial settlement is 7.09%, the rate of return for the street lighting class in the
proposed settlement is 13.92% (13.82% with the EDIT Rider). (Agreement and Stipulation
of Partial Settlement, Docket No. E-2, Subs 1142, 1131, 1103, 1153, November 22, 2017,
at p. 5)
NCLM states that street lighting is typically the greatest portion of a municipality’s
budget for electricity, and that municipalities and the municipal taxpayers should not suffer
disproportionately in this rate case because DEP has proposed a disproportionately high
rate of return for street lighting. The NCLM respectfully requests that the Commission
order DEP to adjust its street lighting rates to bring the rate of return for this customer
class into the band of reasonableness and move this customer class toward parity with
the overall jurisdictional rate of return. The NCLM submits that the overall rate of return
for the ALS, SLS customer class should be about 7.09%.
The evidence supporting these findings of fact and conclusions is contained in the
Application and Form E-1 of DEP, the testimony and exhibits of the DEP and Public Staff
witnesses, the Stipulation, and the entire record in this proceeding.
As fully discussed above, the provisions of the Stipulation are the product of the
give-and-take of settlement negotiations between DEP and the Public Staff. Comparing
the Stipulation to DEP's Application, and considering the direct testimony of the Public
Staff’s witnesses, the Commission notes that the Stipulation results in numerous
downward adjustments to the costs sought to be recovered by DEP. Further, the
Commission observes that there are provisions of the Stipulation that are more important
to DEP, and, likewise, there are provisions that are more important to the Public Staff.
For example, the Public Staff was intent on reducing the cost recovery for DEP's Zero
Liquid Discharge project at the Mayo plant and for the Sutton combustion turbine project.
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Further, the Public Staff was resistant to the substantial increase in the residential basic
customer charge proposed by DEP. Likewise, DEP was intent on maintaining the
depreciation rates set in its Depreciation Study. Nonetheless, working from different
starting points and different perspectives, the Stipulating Parties were able to find
common ground and achieve a balanced settlement.
In addition, the Commission notes that the Partial Settlement Agreement between
DEP and NC Justice Center provides customer benefits that are beyond what the
Commission has the authority to require of DEP. The Partial Settlement Agreement
provides that DEP will contribute $2.5 million to the Helping Home Fund for low-income
energy assistance.
The result is that the Stipulation strikes a fair balance between the interests of DEP
and its customers. As discussed above, the Commission has fully evaluated the provisions
of the Stipulation and concludes, in the exercise of its independent judgment, that the
provisions of the Stipulation are just and reasonable to all parties to this proceeding in light
of the evidence presented, and serve the public interest. The provisions of the Stipulation
strike the appropriate balance between the interests of DEP’s customers in receiving safe,
adequate, and reliable electric service at the lowest reasonably possible rates, and the
interests of DEP in maintaining the Company’s financial strength at a level that enables the
Company to attract sufficient capital. Further, the Commission finds and concludes that the
revenue requirement, rate design, and the rates that will result from the Stipulation, subject
to the Commission’s decisions set out below on the contested issues, will provide just and
reasonable rates for DEP and its retail customers.
Therefore, the Commission approves the Stipulation in its entirety. In addition, the
Commission finds and concludes that the Stipulation is entitled to substantial weight and
consideration in the Commission's decision in this docket. Further, the Commission
concludes that the three settlement agreements entered into by DEP with Commercial
Group, Kroger, and NC Justice Center are in the public interest and should be approved in
their entirety.
The evidence supporting these findings of fact and conclusions is contained in the
record of Docket No. E-2, Sub 1131, in the testimony of Company witness Bateman, and
Public Staff witnesses Maness and Peedin, and the Stipulation.
In the Company’s last rate case, Docket No. E-2, Sub 1023 (Sub 1023), the
Commission approved $12.7 million as the reasonable annual storm costs included in
rates. During 2016, DEP incurred extraordinary incremental expenses in connection with
restoration and rebuilding efforts due to Hurricane Matthew and several other major
storms. DEP estimated the total incremental costs charged to operation and maintenance
(O&M) expense to repair and restore its system following the storms was approximately
$80.2 million. In addition, the Company stated that it had incurred approximately $49.4
million in capital investments as part of its restoration efforts.
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On December 16, 2016, in Docket No. E-2, Sub 1131, DEP filed a Petition for
Accounting Order to Defer Incremental Storm Damage Expenses. In this petition the
Company requested an accounting order to defer incremental storm costs incurred during
2016. In its petition, DEP requested that the Commission issue an Order allowing DEP to
establish, net of the $12.7million14 of storm cost expense already included in DEP’s base
rates, a regulatory asset and defer until its next rate case the incremental O&M storm
expenses, the depreciation expense and carrying costs at DEP’s weighted average cost
of capital on the incremental capital cost, as well as the carrying costs on the deferred
costs incurred in connection with these storms.
In its request, DEP discussed each of the storms, many of them named storms,
that plagued its system in 2016. DEP provided such details as the number of customers
affected, length of time service was interrupted, and staffing requirements by the
Company. With the exception of the June and July thunderstorms, DEP characterized
each of these storms as major, or significant. The June and July thunderstorms were
stated by DEP to be unusual for the Carolinas. Further, DEP discussed its work alongside
many city, county, and state government agencies during a number of these storms.
The Commission issued requests for comments in the Sub 1131 docket. In the
Public Staff’s initial comments, filed on March 15, 2017, it recommended:
3. That no return on the deferred asset be allowed during the deferral period;
5. That the amortization period be extended from the three years proposed by
In its reply comments, the Company contended that the limitations the Public Staff
seeks to impose would deny the Company the ability to recover the costs incurred in
14The $12.7 million figure was derived from an average of the Company’s annual storm expenses
over the 10-year period prior to DEP’s last rate case in 2012. This is the amount of normalized storm costs
allowed by the Commission in DEP’s last general rate case in Docket No. E-2, Sub 1023.
15The $27.4 million figure is derived from an average of the Company’s annual storm expenses
over the 10-year period prior to the present rate case.
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excess of the amount of storm-related expense found by the Commission to be normal in
the Company’s last general rate case. The Company noted that it had established (and
the Public Staff did not disagree) that, absent an approval of its request, it is expected to
earn below the return last authorized by the Commission. DEP argued that the limits
imposed by the Public Staff would force the Company to face earnings degradation
arising from these incremental storm costs, and these effects could impair the Company’s
financial stability and ability to attract capital on reasonable terms for the benefit of
customers.
Additionally, in its reply comments, DEP suggests that the Commission authorize
the Company to amortize the deferral over a shorter-time horizon and offered three years
as a suggested period of time. DEP further stated in its comments that while the Company
agrees with the Public Staff that the requested deferral is a large amount when compared
to other storm deferrals, the deferral’s overall effect on rates does not warrant a 10-year
amortization period. DEP commented that despite the size of the recommended deferral,
the increase in rates paid by customers is not so burdensome as to require an
amortization period over the longest span of time used by the Commission.
In an Order issued on July 20, 2017, the Commission consolidated Sub 1131 with
the current pending rate case proceeding. As noted in the Stipulation, the Stipulating
Parties were unable to agree on the amount of the Company’s requested deferred storm
costs to be recovered and the amortization period of any such recovery.
DEP witness Bateman stated in her testimony that DEP had made a pro forma
adjustment to normalize storm costs to an average level of costs that DEP has
experienced over the last 10 years. She testified that the pro forma removed any storm
costs from the 10-year average calculation that were included in the Company’s 2016
storm deferral request and instead includes an amortization of the deferred costs over a
three-year period.
Company witness Bateman testified that DEP’s 2016 storm costs amounted to $80
million of incremental operating expense and $49 million of capital expenditures, on a
North Carolina retail basis. (Tr. Vol. 6, pp. 124-25, 203-04.) She stated that the Company
proposed to recover all of the incremental operating expenses (except for the
$12.7 million that had already been included in rates), depreciation and return on the
capital expenditures, and a return on the deferred costs, through amortization over a
three-year period. (Id.)
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Public Staff witness Maness testified that a utility should not be entitled to defer
and amortize all its storm costs above the average figure approved in its previous general
rate case. (Tr. Vol. 18, pp. 321-22.) Recovery of storm costs after the fact, through deferral
and amortization, should be limited to costs that are extraordinary. Witness Maness noted
that storm costs naturally fluctuate from year to year, and the costs incurred in a given
year should not be considered extraordinary unless they are outside the normal range of
variation. In this case, he pointed out, the evidence showed that over the period from
2002 to 2015, DEP’s storm costs had varied “from one annual amount as low as
$1.8 million to one as high as $27.2 million.” Moreover, during five different years within
this fourteen-year period, DEP had incurred storm costs ranging between $22.9 million
and $27.4 million. Consequently, witness Maness testified that the normal range of storm
cost variation in DEP’s service area extends at least as high as $27.4 million, and only
costs in excess of this level should be considered extraordinary and eligible for deferral.
Witness Maness further testified that “[h]istorically, the Commission has amortized
storm damage expenses over spans of time ranging from 40 months to ten years.” (Tr.
Vol. 18, p. 322.) Because the Company’s storm losses in this case were so unusually
large, he contended, the Commission should consider an amortization period at the
longest end of the range – that is, a 10-year period.
As shown in Public Staff Peedin’s Revised Exhibit No. 2-1(b), Line 3, witness
Peedin calculated a total deferral amount of $52,752,000 for 2016 storm costs, with an
amortization period of ten years beginning in October 2016, using the procedure
recommended by witness Maness.
Witness Peedin further testified that the amount of North Carolina retail normalized
annual level of storm costs to be included in the Company’s rates is $11.018 million. The
calculation is provided on Peedin Revised Exhibit No. 3-1(o). In her testimony, she stated
that she adjusted the Company’s level of storm expenses (which had been included as a
pro forma adjustment) by reflecting a normalized level of storm expense based on the
average annual storm expense (excluding base labor costs) incurred by DEP over a ten-
year period, adjusted for inflation. (Tr. Vol. 18, pp. 77-78.)
The Commission agrees with the Public Staff that DEP is seeking to defer and
amortize a larger proportion of its storm costs than the Commission has historically
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allowed. The Commission’s precedents do not require that ratepayers bear the entire cost
of repairing the damage to a utility’s system resulting from a major storm. Instead,
deferrals of storm costs are limited to those costs that are beyond the normal range of
fluctuation of storm costs from year (in this case, costs in excess of $27.4 million). In
recent general rate cases, the Commission has also included in the utility’s rates a storm
cost allowance based on the average amount the company has incurred over a period of
years (the storm cost allowance approved in Sub 1023 was $12.7 million per year). Costs
may exceed an average, or normal, amount used to set rates in a general rate case;
however, as long as those excess costs are within a normal range of variation, they should
be presumed to be recovered through the utility’s rates in effect at that time (given the
fact that many expenses fluctuate from year to year).
The Commission is concerned about the asymmetry of risk that would exist if the
Company were allowed to defer all costs in excess of the $12.7 million used to set storm
expenses in the most recent general rate case. Evidence presented in this case showed
that in several recent years there were few major storms, and the Company’s total storm
costs were below $12.7 million; however, ratepayers received no credit for the difference
between actual costs and the $12.7 million. In contrast, in those years when extremely
severe storms such as Hurricane Matthew occur, there is no upper limit to the costs that
may be placed upon ratepayers.
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For all these reasons, the Commission finds and concludes that approval of the
full amount of the Company’s proposed storm cost deferral would be unjustified. The
appropriate amount to be allowed deferral treatment is $51.032 million, which is the
Company’s requested amount of $80.152 million, minus the June and July thunderstorm
disallowance of $1.720, minus the $24.7 million normal storm range expense. With regard
to the amortization period, however, the Commission agrees with DEP that the deferral
in question does not warrant amortization over the longest period of time, 10 years, which
has historically been utilized by the Commission. The Commission, however, believes
that the deferral warrants more than a three-year amortization period as suggested by
DEP. The Commission takes judicial notice that the amortization of five years (60 months)
has been the prevailing amortization period for storm deferrals. Hurricane Isabel storm
costs were authorized to be amortized over five years in Docket No. E-2, Sub 843, and
Hurricane Hugo storm costs were amortized over a five year period in Docket No. E-7,
Sub 460. The Commission takes particular note of the Hurricane Hugo deferral, as this
deferral was quite large at $62.4 million. Therefore, the Commission finds and concludes
that there is good cause to require that DEP amortize the deferred storm damages O&M
expenses over a five-year period. Further, the Commission concludes that since the most
severe storm affecting the Company’s service area in 2016 by far was Hurricane Matthew,
which occurred in October, the amortization period should commence in October 2016.
This follows the Commission’s historic precedent of beginning amortization at the time
when the costs, or bulk of the costs, are incurred. Further, the Commission concludes
that if DEP continues to recover the deferred costs for a longer period of time than the
amortization period approved by the Commission that does not mean that DEP is then
entitled to convert those deferred costs into deferred revenue. Rather, the Company
should continue to record all amounts recovered as deferred costs in the specific
regulatory asset account established for those deferred costs until the Company’s next
general rate case.
Regarding the capital costs, the Commission views storm capital costs as
significantly different from incremental O&M storm costs. Unlike the incremental O&M
costs, DEP’s capital costs will become a part of DEP’s rate base, and will become a part
of DEP’s future depreciation expenses. Based on these factors, and recognizing that cost
deferral is an exception to the traditional ratemaking principles applied by the
Commission, the Commission finds and concludes that there is not good cause to allow
DEP to defer the incremental capital costs of Hurricane Matthew. Therefore, the
Commission believes that it is appropriate and reasonable to continue its historical
practice of not allowing deferral and amortization of capital costs or carrying costs on the
deferral. Finally, the Commission finds and concludes that the appropriate North Carolina
retail normalized annual level of storm costs to be included in the DEP’s rates in this case
is $11.018 million, as the Commission finds it to be just and reasonable.
The evidence supporting these findings of fact and conclusions is found in DEP’s
verified Application, DEP’s Petition for an Order Approving a Job Retention Rider (JRR),
filed on August 14, 2017, in Docket No. E-2, Sub 1153 (Petition), the testimony of
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Company witness Wheeler, the testimony of Public Staff witness McLawhorn, the
testimony of other witnesses, the exhibits of witness Wheeler, and the entire record in this
proceeding. The Commission takes judicial notice of the Company’s Initial and Reply
Comments filed in Docket No. E-100, Sub 73 where the Company outlined the conditions
that led to the loss of industrial jobs and where the Commission issued establishing
guidelines on December 8, 2015. (JRT Order)
In its Petition, DEP requests approval of its JRR, a five-year pilot program for
industrial customers that is designed to curtail further loss of industrial jobs in DEP’s
service territory. (Petition, at 1.)
Witness Wheeler also explained the eligibility requirements for the proposed JRR.
In order to be eligible for the proposed JRR, the customer must do all of the following: (1)
use electric power as a principal motive power for the manufacture of a finished product,
the extraction, fabrication or processing of a raw material, or the transportation or
preservation of a raw material or a finished product; (2) perform an energy audit within six
months, or verify an energy audit has been performed within the past 36 months; (3) verify
the customer is considering the ability to shift production from its facility, is considering a
need to reduce employment at its facility due in part to the cost of electricity, intends to
reduce production due in part to the impact of the cost of electricity, or the customer’s
load is otherwise at risk. (Id. at 245–46.) Furthermore, in order to qualify for JRR, industrial
customers must show that they (i) have or are considering the ability to shift production
from their facilities to facilities in other states or countries; (ii) are considering a need to
reduce the employment level at their facilities due in whole or in part to the impact of
electricity cost; (iii) intend to reduce or are presently evaluating reduction of production
levels or load due in whole or in part to the impact of electricity cost; or (iv) have load that
is otherwise at risk of loss. (Petition at 5.) Additionally, eligible customers must have an
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aggregate electrical load of 3,000 kW or greater, in addition to other conditions described
in the Petition and proposed JRR. (Id. at 246.)
In its Petition, the Company did not seek recovery of the revenue reduction
resulting from implementation of the JRR at this time, but instead requested deferral
accounting with interest on the amount in excess of the $3.5 million that the Company will
absorb on a one-time basis. (Petition, at 3.) The Company stated the annual revenue
impact of the JRR would be $24.8 million.
CIGFUR witness Phillips also testified in support of the Company’s proposed JRR.
Witness Phillips testified that the Company’s proposed JRR follows the Guidelines for Job
Retention Tariffs issued by this Commission on December 8, 2015 in Docket E-100, Sub
73, that the proposed JRR is in the public interest, and recommended that the
Commission approve it. (Tr. Vol. 7, p. 74.) In CIGFUR’s Post-Hearing Brief, CIGFUR
proposed one adjustment to the proposed JRR to exempt rider participants from funding
cost recovery. (Br. pp. 4-5)
While the Public Staff is supportive of the JRR and believes that it is in the public
interest, witness McLawhorn expressed several concerns regarding the proposed rider.
(Tr. Vol. 18, p. 29.) He argues that there are no specific criteria designated for use by the
Public Staff to evaluate customer employment and financial records to aid in evaluating
an applicant’s justification for seeking the JRR thus depriving the Public Staff of the ability
to verify the truthfulness of the information. (Id. at 34.) He also opposed the Company’s
request for deferral accounting of the revenue loss and the Company’s proposal for
sharing the discount between the Company’s shareholders and ratepayers. (Id. at 36.)
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other manufacturing facilities in that pipelines are fixed investments that are not easily
relocated, and unlike other industrial manufacturers, pipelines do not produce a finished
product. He recommended this disputed phrase be eliminated from the eligibility criteria
of the JRR.
Lastly, Public Staff witness McLawhorn testified that not only customers, but
shareholders, benefit from the retention of industrial jobs and the load associated with the
jobs. Therefore, a fair sharing of the revenue impact of the JRR would require the
Company to contribute $3.5 million on an annual rather than one-time basis. In response
to Commissioner Clodfelter’s question, Public Staff witness McLawhorn stated the Public
Staff did not calculate its proposed annual shareholder contribution amount of $3.5
million, but rather used the amount proposed by the Company on a one-time basis. (Tr.
Vol. 18, p. 121.) Witness McLawhorn also testified that the Commission has the authority
to set the amount recovered in the JRR, and can set the recovery at an amount composed
of the revenue impact less the $3.5 million shareholder contribution. (Tr. Vol. 18, p. 125.)
Despite these concerns, the Public Staff generally supports the Company’s
proposed JRR, concluding that the rate reduction it provides for industrial customers
would “assist them in maintaining jobs and load in North Carolina.” (Tr. Vol. 18, p. 30.)
Witness McLawhorn also testified that the proposed JRR is not unduly discriminatory
because it is designed to reach the largest industrial customers, who impact other
commercial and residential customer classes. (Id. at 29.) He further states that the
proposed JRR “provides for a balancing of benefits and costs between those customers
eligible for [JRR] and those that will bear the reduction in revenue that result from
implementation of the rider.” (Id.) Lastly, he recommended that the impact of the rate
discount be recovered from all ratepayers, including the customers eligible for the rate
discount.
Commercial Group witnesses Chriss and Rosa testified in opposition to the DEP’s
proposed JRR. Witnesses Chriss and Rosa state that the proposed JRR fails to comply
with Commission guidelines by limiting applicability to a subset of industrial customers
and the rigor of verifying customer attestations is unclear. (Tr. Vol. 7, p. 108.) They further
request that if the JRR is approved that it be extended to non-industrials that also provide
jobs and have aggregate loads of 3,000 kW or greater. (Id. at 109.)
In its post-hearing Brief, Commercial Group notes that after DEP and the Public
Staff entered into a Stipulation, Commercial Group negotiated and reached a settlement
with DEP that resolved additional issues, but left outstanding and unresolved the
Commercial Group’s concerns regarding the JRR. Commercial Group submits that the
JRR would violate G.S. 62-140(a) because it would unjustly discriminate among
customers having an aggregate load of at least 3 MW based solely on whether the
customer is an industrial customer. Commercial Group contends that this is a return to
the Standard Industrial Classification (SIC) code distinctions that the Commission found
discriminatory and rejected in prior proceedings. Commercial Group states that the
Commission stated its concern in its final Order in DEC’s 2011 rate case, Docket E-7 Sub
989, regarding the reasonableness and fairness of maintaining a rate differential based
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largely on labels such as the SIC codes. Commercial Group quotes G.S. 62-140(a), and
states that the legal standard is not whether a public utility can subject a customer to an
unreasonable prejudice or disadvantage if doing so would be an advantage to other
customers or the utility. Rather, the legal standard is that the public utility cannot grant
any unreasonable preference or subject any person to any unreasonable prejudice or
disadvantage. Further, Commercial Group contends that industrial customers are not a
separate class of service because both industrial and commercial customers are
members of the same MGS and LGS classes, and that many non-industrial ratepayers in
these classes have an aggregate load of at least 3 MW. (Tr. Vol. 7, p. 108.) According to
Commercial Group, where the JRR’s only distinguishing characteristic is industrial status,
the JRR remains as unlawful and unduly discriminatory as the preference for OPT
industrial customers in the last two DEC rate cases, and the proposed Industrial
Economic Recovery rider that the Commission previously rejected, and, therefore, the
JRR as proposed should be rejected as well.
In addition, Commercial Group states that the proposed JRR definitions and
parameters that DEP selected provide only an illusion of being reasonable criteria for
determining which customers should receive a rate subsidy. As an example, Commercial
Group contends that the applicant could simply state that it has at some time in the past
thought about obtaining the ability to move a portion of its operations out of state, but the
applicant need not presently have such ability, presently plan to move operations out of
state, nor be in such financial condition that jobs would be lost but for a JRR subsidy.
Commercial Group further notes that the applicant does not need to maintain existing
levels of employment, but instead chooses a level of employment that it states it will
maintain, even if the level is lower than its present level. Moreover, Commercial Group
submits that the JRR eligibility criteria are so broad that they include gas pipelines, even
though DEP states that it has no current pipeline customers. (Tr., Vol. 11, at p. 33)
Commercial Group notes that DEP witness Hevert gave convincing testimony that
economic conditions in North Carolina have improved substantially since DEP’s last rate
case in 2013, and since the Commission adopted job retention guidelines in 2015. The
unemployment rate in North Carolina and DEP’s service territory has fallen substantially
during these periods. (Tr. Vol. 8, pp. 123-32.) Further, the correlation between the drop
in unemployment in North Carolina and more broadly across the United States has been
very high. (Id. at 64) Moreover, DEP industrial customers already receive competitive
rates that are below the national average and below the average in the Atlantic South
region. (Wheeler, Tr. Vol. 11, p. 42) In addition, according to Commercial Group, the
CCOSS DEP offered shows that LGS industrial customers already receive a 3% discount
from not currently paying the full cost DEP incurs to serve those customers. (Tr. Vol. 7,
p. 99; and Exh. CR-5, row 5)
Commercial Group also questions whether there will be a means to assess the
effectiveness of the JRR. Commercial Group cites the testimony of Public Staff witness
McLawhorn regarding the report that DEP will be required to file, and states that the report
will not provide any reliable, independently verifiable information to determine the success
or failure of the JRR. Based on the uncertainty of verifiable results from the JRR,
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Commercial Groups recommends that the Commission require DEP to bear 50% of the
JRR costs, with any remaining cost to be recovered from ratepayers on a percentage of
bill basis.
Finally, Commercial Group contends that there is a third subsidy paid by high load
factor MGS ratepayers because JRR costs would be imposed on a per-kwh basis instead
of on a percentage of bill basis. Commercial Group states that this pancaking of subsidies
one upon the other is patently unfair, and that the only rationale DEP provided for billing
JRR cost on a per-kwh basis is that it seems to be easier for DEP to charge it that way.
(Tr. Vol. 11, at 47:8-12).
Witness Wheeler further testified that deferral accounting was requested because
the timing and magnitude of the revenue reduction is unclear. (Tr. Vol. 10, p. 249.) “The
use of deferral accounting allows the Company to assess the true impact of the rider and
seek recovery at a later date when revenues are more certain.” (Id.) Witness Wheeler
also explained that the Public Staff’s recommendation that the Company’s shareholders
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absorb $3.5 million not only once, but in every year of the JRR should be rejected because
it would deprive the Company of a reasonable opportunity to recover its just and
reasonable costs. (Id. at 250.)
Lastly, witness Wheeler responded to the other witnesses’ testimony that JRR
should be expanded to customer classes other than just industrials. Witness Wheeler
testified that sales to the industrial class in North Carolina have continued to be “flat to
declining.” (Tr. Vol. 10, p. 244; Wheeler Rebuttal Ex. 1.) In contrast, during this same
period, sales to the commercial and public authority/military customer classes have
continued to show growth. (Tr. Vol. 10, p. 252; Wheeler Rebuttal Ex. 1.) Therefore,
witness Wheeler testified that DEP does not believe that it would be appropriate to expand
JRR to other customer groups at this time. (Tr. Vol. 10, p. 252.) Witness Wheeler
explained that the “JRR will assist in retaining jobs in industrial businesses in North
Carolina and will help to minimize the transfer of cost from the industrial class to other
rate classes due to plant closures.” (Id. at 253.)
In the Stipulation, the Company and the Public Staff agreed that “the Company’s
proposed Job Retention Rider generally complies with the Commission’s guidelines
adopted in Docket No. E-100, Sub 73, but two issues remain to be decided upon by the
Commission: (1) whether companies involved in the transportation or preservation of a
raw material or a finished product (e.g., pipeline customers) should qualify; and (2) how
or if the Job Retention Rider should be funded after the expiration of the initial year’s $3.5
million shareholder contribution.” (Stipulation p. 4 - Paragraph II(c).)
Except for the two unresolved issues stated above, the Stipulating Parties have
agreed to the proposed JRR as described by witness Wheeler in his rebuttal testimony,
and further agreed that JRR revenue credits shall be recovered through a JRR Recovery
Rider (JRRR) from all retail customers concurrent with JRR implementation, which is
anticipated to occur approximately six months following the Commission’s decision.
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(Stipulation p. 15.) The Stipulation provides that JRR and JRRR revenues shall be
reported to the Commission annually and the JRRR shall be reviewed and will be subject
to adjustment annually coincident with the December fuel adjustment to match anticipated
recovery revenues and true-up any past over-or under-recovery. (Stipulation pp. 15-16.)
Additionally, due to the uncertain date of implementation, compliance tariffs shall be filed
prior to implementation of the JRR Recovery Rider and customers shall be notified by bill
insert or message upon implementation. (Id. at 16.)
Commercial Group, in its post-hearing Brief, submits that the JRR would violate
G.S. 62-140(a) because it would unjustly discriminate among customers having an
aggregate load of at least 3 MW based solely on whether the customer is an industrial
customer. Commercial Group contends that this is a return to the SIC code distinctions
that the Commission found discriminatory and rejected in prior proceedings.
The Commission finds and concludes that the Company’s proposed JRR as
modified by this Order is just and reasonable to all parties based on all of the evidence
presented. The Commission finds that the continued loss of industrial jobs in DEP’s
service area would have a detrimental effect on the State. The Commission views the
Company’s proposed JRR as an effort to retain industrial jobs in North Carolina and
concludes that implementation of the rider is in the public interest. As with other economic
development tariffs previously approved by this Commission, approval of the JRR is
based in part on an evaluation of the expected economic benefits resulting from the tariff.
The Commission has considered the economic impact of the continuing decline of the
North Carolina industrial base as well as the impact of the recovery rider on non-
participating ratepayers, and concludes that the JRR strikes the appropriate balance
between the two. The Commission concludes that by limiting the availability of the JRR
to industrial customers, the Company has minimized the effect on non-participants while
assisting the group of customers that are most in need of assistance. To further minimize
the impact to non-participants and to achieve the goal of the JRR in the most cost-
effective manner, the Commission shall limit the JRR to a one-year pilot, with the option
of renewal for one additional year upon a showing that the JRR is achieving the intended
objectives. Requiring the Company to show the Commission the effectiveness of the JRR
in the rider proceeding removes many, if not all, concerns expressed by the Commercial
Group and the Department of Defense regarding measurement and verification. This
reduction in the number of years for the pilot to one-year with the opportunity for a second
year allows the Commission and the parties to assess the health of industrial sector as a
whole after one year on the JRR and if an additional year would be in the public interest.
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In addition to the reduction of the pilot to one year, with the opportunity for a second year,
the Commission determines that additional changes to the JRR are necessary for proper
measurement and verification. First, the Company shall require the Customer to maintain
an employment level of 90 percent of the its employees, with the number of employees
determined by an average of its employment level over the twelve months prior to the
filing of the Application and Agreement for the Job Retention Rider. The application shall
state the specific number of employees and verify that this number represents 90 percent
of the monthly average over the past twelve months. Second, the Customer shall submit
in writing to DEP no later than March 1, and quarterly thereafter, a report verifying the
employment level at the Customer’s facility(s) receiving the Job Retention Rider credits.
Third, if the Customer does not maintain the stated employee level, the Customer shall
be removed from the tariff pursuant to the language in the proposed application and shall
be required to refund the amount of benefits received under the JRR. DEP shall change
the application language accordingly. The Commission has considered the arguments for
expanding the JRR made by DoD/FEA witness Mancinelli and Commercial Group
witnesses Chriss and Rosa, and concludes that expanding the JRR to other customer
classes would place too large a burden on non-participants and would be unreasonable.
Furthermore, the Commission concludes that limiting the availability of the JRR to
only industrial customers is not unreasonably discriminatory. Rather, it is based on a
reasonable difference between customer classes, and the discount offered to participants
under the JRR as compared to the amount of rider recovery on non-participants bears a
reasonable proportion to the difference between the customer classes. See State ex rel.
Utils. Comm’n v. Carolina Util. Customers Ass’n, 348 N.C. 452, 468, 500 S.E.2d 693, 704
(1998). Based on the evidence presented, the Commission finds that industrial
customers’ sales have been flat or declining since the recession, while residential and
commercial sales are growing. Furthermore, a $0.00323 per kWh reduction in rates for
participating industrials as compared to an increase in rates for the average retail
customer of approximately $0.00051 per kWh per month under the JRR is proportionate
to differences between these customer classes and reasonable given the economic and
rate benefits of retaining industrial customers on DEP’s system.
The Commission concludes that the JRR, with the modifications established in this
Order, is in accordance with the requirements and guidelines the Commission previously
established. In the JRT Order, the Commission directed utilities to “craft eligibility
requirements that are narrowly tailored to meet the intended goals of maintaining jobs in
the most economically efficient manner.” Although the disputed phrase that allows for the
eligibility for pipeline companies was included in the JRT Order as a possible example of
eligibility criteria, the Commission is not persuaded that the eligibility criteria proposed by
the Company is sufficiently narrow to ensure that the JRR will maintain jobs in the most
efficient manner. Pipelines, which cannot relocate, are sufficiently different from other
industrial customers and should be excluded from eligibility in the JRR. The disputed
phrase “or the transportation or preservation of a raw material of a finished product”
should be removed from the eligibility criteria. Further, due to the fact that DEP indicated
that no pipeline customer is currently eligible for the JRR and that the Commission is
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limiting the JRR to one year with a possible extension of one year, it is unlikely that any
pipeline customer would be affected by this decision.
Commercial Group states that it does not take issue with the Commission’s gradual
approach to class revenue allocation, except if the Commission grants the proposed JRR.
In that event, according to Commercial Group, the Commission should set LGS rates at
cost in order to avoid a double subsidy by MGS customers. The Commission does not
agree with Commercial Group’s position. The approval of the JRR does not eviscerate
the principle of gradualism in reaching rate of return equilibrium among the customer
classes. Further, the rate designs approved herein and the approval of the JRR will result
in just and reasonable rates.
Finally, the Commission notes the proposed JRR is a limited-term pilot, which will
allow the Commission and the Company to follow the customers on the tariff and to
consider whether the tariff meets its objectives of job retention and the related economic
benefits. If it does not, then the JRR will not be continued beyond its one-year term.
Except as modified by this order, the Commission finds that it is reasonable for DEP to
implement JRR and JRRR as proposed in the Stipulation and Wheeler Settlement
Exhibit 1.
The Company, as well as ratepayers, benefit from the retention of industrial jobs,
and the load related to the retention of the industrial jobs. In addition to the testimony in
this case, this fact is further justified by the Company’s indication in Docket No. E-100,
Sub 73 that it was considering funding all or a portion of a JRT and provided comments
on the necessary requirements for measurement and verification under the scenario of a
fully Company-funded JRT. To achieve just and reasonable rates, if the pilot program is
extended to a second year, it is appropriate for the Company to contribute to the JRR at
the same level as year one. Therefore, the Company’s recovery should be reduced by
the amount of $3.5 million if the Commission determines in the rider proceeding that the
JRR pilot program should be extended to a second year.
The Commission, therefore, concludes that the proposed JRR, as modified by this
Order, is in the public interest, is not discriminatory and is consistent with the
Commission’s holding that “approval of a JRT is a matter of sound ratemaking policy to
address the undisputed decline in industrial sales in North Carolina.” (See Order Adopting
Guidelines for Job Retention Tariffs in Docket No. E-100, Sub 73, at 22.) If the JRR is
extended an additional year and at the end of the second year the Company determines
there is still a need for the JRR, nothing in this order prevents the Company for filing for
a new JRR based upon the economic circumstances at that time.
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EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT NOS. 50-52
In Docket No. E-2, Sub 1103, DEP requested to defer its costs of complying with
the Coal Ash Management Act (CAMA) and the EPA’s Coal Combustion Residual Rule
(CCR Rule, collectively CAMA), and notified the Commission that it had established an
Asset Retirement Obligation (ARO) in the amount of approximately $2.5 billion to reflect
its estimated costs of CAMA compliance.
In its March 15, 2017 comments in Docket No. E-2, Sub 1103, the Public Staff
supported the deferral request, provided that ratemaking treatment for the deferred
amount would be determined in the next base rate case:
In this particular case, the Public Staff believes that the non-capital costs
and depreciation expense related to compliance with state and federal
requirements cited in the Companies’ petition generally satisfy the criteria
for deferral for regulatory accounting (but not necessarily ratemaking)
purposes. First, they are adequately extraordinary in both type of
expenditure and in magnitude to justify consideration for deferral. Second,
the effect of not deferring the expenses on the Companies’ respective
earned returns on common equity would be significant.
Comments were also filed by CUCA, the AGO, Appalachian State University, the
Cities of Concord and Kings Mountain, and Sierra Club.
In the present docket, Public Staff witness Maness testified that based on the
magnitude and unique nature of the CCR costs, as well as other reasons stated in the
Public Staff’s comments filed in Docket No. E-2, Sub 1103, the Public Staff continues to
believe that prudently incurred CCR expenditures should be allowed to be deferred for
regulatory accounting purposes.
138
In its post-hearing Brief, the AGO contends that DEP’s request to recover its
deferred CCR costs involves single-issue ratemaking because DEP seeks to recover coal
ash costs going back to the beginning of 2015, without a review of the other rate elements
that were in effect that might offset the need for the cost recovery. Citing State ex rel.
Utilities Commission v. Edmisten, 291 N.C. 451, 470, 232 S.E.2d 184, 195 (1977), the
AGO contends that the North Carolina Supreme Court has long recognized the inequities
of single-issue ratemaking: “Such rate making throws the burden of such past expense
upon different customers who use the service for different purposes than did the
customers for whose service the expense was incurred.” Moreover, the AGO asserts that
utility rates are established under statutory authority to recover the utility’s cost of service
and reflect a fair return, and the rates are presumed to be sufficient for the utility to recover
all costs of serving its customers, and that a utility does not have a vested right to collect
its unanticipated expenses, and that to “cast upon subsequent users the expense of
serving prior users is discrimination forbidden by G.S. 62-140.” Id., 291 N.C. at 470-71,
232 S.E.2d at 196.
Further, the AGO maintains that the Commission’s discretion to defer costs for
later recovery should be prospective from the time of the request, or at least close in time
to the deferral request, not retroactive back two or three years, as DEP seeks in this case.
The AGO contends that Commission Rule R7-27(a)(2)c [sic Rule R8-27(a)(2)c] requires
electric utilities to apply to the Commission in order to use deferral accounting, and that,
similarly, FERC Account 182.3, referenced in Rule R7-27(a)(2)c, provides for deferral
accounting by the creation of a regulatory asset based on the ratemaking action of a
regulatory agency, not based on unilateral action taken by the utility. In addition, the AGO
contends that DEP failed to request authorization to defer the coal ash costs before they
were incurred – delaying the filing of its petition for deferral until December 30, 2016,
while seeking deferral of costs incurred back two years to January 1, 2015, so that they
would be recoverable in a rate case expected to be filed in 2017. See Duke Energy
Progress, LLC and Duke Energy Carolinas, LLC Petition for An Accounting Order, In the
Matter of Joint Petition of DEP Energy Progress, LLC and DEP Energy Carolinas, LLC
for an Accounting Order to Defer Environmental Compliance Costs, filed December 30,
2016, in Docket Nos. E-2, Sub 1103, and E-7, Sub 1110 (Petition to Defer Coal Ash
Costs)
The AGO cites the Commission’s Order Granting Motion for Reconsideration and
Allowing Deferral of Costs issued August 12, 2003 in Docket No. E-2 Sub 826 (2003 ARO
Order), and states that the Commission authorized DEP’s predecessor, CP&L, to place
certain ARO costs in a deferred account, but gave the following cautionary instruction
relating to the creation of and accounting for new AROs:
139
context of a general rate case or other appropriate proceeding prior to
implementation.
Thus, according to the AGO, the Commission has directed that prior approval
should be obtained in a general rate case for deferred accounting authorization under the
circumstances presented in this case, and that DEP’s unilateral decision to change how
it accounts for CCR costs violated Commission rules and specific directions expressed in
prior orders concerning AROs.
Having reviewed the comments filed in Docket No. E-2, Sub 1103, and the
evidence regarding the ratemaking treatment for coal ash costs in the present rate case,
the Commission determines that the deferral request is reasonable and appropriate.
Company witness Bateman indicated that CAMA increased the estimated closure costs
for the CCR basins which triggered asset retirement obligation accounting as stated
elsewhere in more detail in this Order. As noted by Public Staff witness Maness, the costs
for which DEP sought deferral meet the Commission’s criteria for deferral for regulatory
accounting purposes. Witness Maness further testified that the unique nature of the costs
and the complexity of the issues justified a limited delay in determining the beginning date
of any amortization of deferred expenses. Approval of deferral accounting does not
prevent any party from taking issue with the merits or mechanisms for recovery of the
deferred costs in the present rate case.
140
Several intervenors made the same contention that the AGO made in its post-
hearing Brief that the Commission should not approve a return on DEP’s deferred CCR
costs. One basis cited by the AGO for denying a return is the AGO’s contention that DEP’s
CCR expenditures do not result in used and useful utility plant. The Commission fully
addresses the issue later in this Order, and concludes that DEP’s CCR expenditures do
result in property that is used and useful.
The AGO argues that DEP’s request to recover the deferred coal ash costs going
back to the beginning of 2015 involves single-issue ratemaking because the costs are
being reviewed without review of other rate elements that were in effect that might offset
the need for cost recovery. The AGO further argues that DEP’s request for recovery of
“coal ash costs from the past two and a half years seeks impermissible prospective
ratemaking (also called retroactive ratemaking in some cases).” (AGO Br. p. 41) The
Commission finds that the AGO’s arguments are misplaced. The Company requested
deferral accounting and specifically requested the Commission determine the costs within
a rate case to avoid the issues of single-issue ratemaking and retroactive ratemaking.
Single-issue ratemaking is not an issue in the present case because the costs are not
being determined outside of a rate case, but rather are being determined in a rate case,
a proceeding in which other rate elements are reviewed. As for the retroactive ratemaking
argument, the Public Staff has determined that deferral is appropriate in the present case
and the Commission agrees. A cost deferral is a recognized practice that allows recovery
of expenditures that might otherwise constitute impermissible retroactive ratemaking. The
AGO cites to a 2003 Commission Order to support its contention that DEP should have
received prior approval in a rate case; however, the language cited states a general rate
case or “other appropriate proceeding,” such as a request for deferral. The Commission
agrees with the Public Staff that DEP properly made the deferral request, which the
Commission consolidated into the general rate case. The AGO argues that DEP began
incurring costs in early 2015 and that the Commission should deny the deferral because
DEP should have requested the deferral earlier. The Commission is not persuaded. The
Commission does not find that the timing of the request for deferral warrants denial of the
request. See Order Granting General Rate Increase, In the Matter of Petition of Virginia
Electric and Power Company d/b/a Dominion North Carolina Power for an Adjustment of
Rates, Docket No. E-22, Sub 479 (Dec. 21, 2012). The Commission finds that the AGO’s
intergenerational equity argument is unpersuasive. The Commission takes judicial notice
that DEP’s electricity rates are low compared to the national average. This result is due
to DEP’s historic use of coal generation. The regulations requiring action to clean up the
CCRs were not in effect ten or fifteen years ago. Rather, DEP’s obligation has arisen in
2014 and 2015 and DEP is taking appropriate actions to comply.
141
EVIDENCE AND CONCLUSIONS FOR FINDINGS OF FACT NOS. 53-56
The evidence supporting these findings of fact and conclusions is contained in the
Application, Form E-1, the testimony of the public witnesses, and the testimony and
exhibits of the following expert witnesses: DEP witnesses Fountain, Bateman, Kerin,
Wells and Wright; Public Staff witnesses Lucas, Garrett and Moore, Peedin and Maness;
AGO witness Wittliff; CUCA witness O’Donnell; and Sierra Club witness Quarles.
The public witness testimony and expert witness testimony and exhibits regarding
DEP’s coal combustion residuals (CCR) costs is voluminous. The Commission has
carefully considered all of the evidence, and the record as a whole. However, the
Commission has not attempted to recount every statement of every witnesses. Rather,
the following is a complete summary of the evidence.
Likewise, the Commission has read and fully considered the parties' post-hearing
briefs. However, the Commission has not in this Order expressly addressed every
contention advanced or authority cited in the briefs.
Based upon the evidence addressed below and in the exercise of its expert
judgment and discretion, the Commission determines that a management penalty of
approximately $30 million should be assessed for DEP’s mismanagement of its CCR
activities undertaken through the end of the test year as extended for reasons set forth
hereafter.
DEP has relied upon coal-fired power plants throughout its history, and depends
upon coal-fired generation today. Coal ash, also known as coal combustion residuals,
or CCRs, is a by-product of coal-fired generation. Since the 1950s, standard industry
practice at least in the Southeast, has been to deposit coal ash in coal ash basins, and
such basins were constructed and were and are used at all of the Company’s coal-fired
generating units.
The United States Environmental Protection Agency (EPA) has studied CCRs
and their proper management and handling since the 1980s and began moving forward
on comprehensive regulation of CCRs approximately ten years ago. In 2010, the EPA
issued proposed rules regarding CCRs. EPA’s final rule – the Coal Combustion
Residuals Rule (CCR Rule) – was promulgated on April 17, 2015. North Carolina also
enacted specific statutory requirements for coal ash management in its Coal Ash
Management Act (CAMA), which became effective in 2014 and was amended in 2016.
The CCR Rule and CAMA introduced new requirements for the management of coal
ash. DEP must comply with these new requirements, which mandate closure of the
Company’s coal ash basins. Mandated closure triggers Generally Accepted Accounting
Principles (GAAP) provisions relating to the retirement of long- lived tangible assets, and
specifically triggers the requirement that the Company account for compliance costs
through Asset Retirement Obligation (ARO) accounting. The Company, as required by
GAAP, established an ARO with respect to its coal ash basins, and, in accordance with
the Commission’s Orders in Docket No. E-2, Sub 826, deferred the impacts of its GAAP-
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mandated ARO accounting. The Company seeks recovery of the coal ash basin closure
costs incurred to date in connection with CCR Rule and/or CAMA compliance, along
with such costs it anticipates will be incurred annually on an ongoing basis. The
Company’s proposal has three component parts:
First, DEP seeks recovery of the actual coal ash basin closure costs it incurred
from January 1, 2015 through August 31, 2017. On a North Carolina retail
jurisdiction basis, these costs (netted against the amount already included in
the Company’s rates following its last rate case) amount to $241.9 million.16 The
Company proposes further that, rather than recovering 100% of these already
incurred costs immediately, it recover them over a five-year amortization period,
and it seeks a return on the unamortized balance.
Second, DEP seeks to recover on an ongoing basis $129.1 million per year in
annual coal ash basin closure spend. This amount is based upon DEP’s
calculation of the NC retail jurisdiction portion of the test year (2016) coal ash
basin closure expense incurred by the Company.
For cost recovery, a utility must show that the costs it seeks to recover are (1)
“known and measurable”; (2) “reasonable and prudent”; and (3) “used and useful” in
the provision of service to customers. Once shown, and, assuming no penalty for
mismanagement, the utility is entitled to recover the costs so incurred.
The arguments raised by Intervenors in this docket challenge the inclusion of the
Company’s coal ash basin closure costs in rates because the costs are not “reasonable
and prudent” and “used and useful,” or on a theory that cost recovery should be shared
by both the shareholders and ratepayers.
16 This amount excludes any fines, penalties and other unrecoverable costs incurred by the Company.
(Tr. Vol. 6, p. 122.)
143
Summary of the Evidence
In his direct testimony, Company witness Fountain testified that the Company is
requesting recovery of coal ash basin closure compliance costs incurred in the period
from January 1, 2015 through August 31, 2017. He stated that the Company is seeking
recovery of these costs over a five-year period in order to mitigate the associated
customer rate impacts. (Tr. Vol. 6, p. 41.) Witness Fountain clarified that this case
excludes any fines or penalties incurred by DEP related to coal ash basin closure or
management. (Id. at 40 n.2, 224.) Witness Fountain also testified on direct that, based
on actual coal ash expenses incurred during the 2016 test year, DEP is seeking
recovery of ongoing coal ash basin closure compliance spend of $129.1 million per
year, with any difference from future spend being deferred until a future base rate case.
He stated that including this revenue requirement will provide a measure of
predictability to customers of future coal ash expense rate drivers. (Id. at 41-42.)
Adjustment No. 18, as updated, is the actual coal ash basin closure costs
incurred by the Company from January 1, 2015 through August 31, 2017. On a North
Carolina retail jurisdiction basis, these costs (netted against the amount already
included in the Company’s rates following its last rate case) amount to $241.9 million.
(See Maness Late-Filed Ex. submitted by the Public Staff on December 22, 2017 and
accepted by the Commission on January 2, 2018.) Witness Bateman explained that her
adjustment No. 18 amortizes the deferred coal ash costs over a 5-year period, and
includes a return on the unamortized balance.
Adjustment 19 represents the amount in ongoing annual coal ash basin closure
expense (sometimes referred to in this Order as “run rate” or “ongoing compliance
costs”). The number is based upon actual test year (2016) spend, and witness Bateman
testified that the Company expects to incur actual ongoing compliance costs that
exceed this level. (Tr. Vol. 6, pp. 144-45.) As set out in Maness Late-Filed Exhibit, the
final and updated amount requested by the Company is $129.1 million.
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2. Company Direct Case: Coal Ash Overview
Witness Kerin testified that since the 1920s, DEP has disposed of CCRs in
compliance with then current regulations and industry practices. Until the 1950s, CCRs
were either emitted through, in the case of fly ash, smokestacks or, in the case of bottom
ash, manually removed from boilers and stored in landfills. Since that time, the industry
transitioned to a water sluice to remove coal ash from boilers, and to clean the
electrostatic precipitators, preventing coal ash from being emitted through the
smokestacks. This effluent, as well as FGD blowdown, was then diverted to coal ash
basins, of which DEP has 19 in the Carolinas. In other words, in many cases, coal ash
basins were actually created or relied upon to effectuate prior environmental
regulations. In the mid-1970s, the enactment of the Clean Air Act and its subsequent
amendment in the 1990s required electric utilities to capture more CCRs through the
use of electrostatic precipitators (ESP) or bag houses and FGD blowdown. (Tr. Vol. 16,
108-09.)
Witness Kerin provided a detailed history of coal ash regulation. He testified that
the Clean Water Act of 1972 and the subsequent creation of the National Pollutant
Discharge Elimination System (NPDES) permitting system, made wet coal ash handling
and coal ash basins the primary lawful and effective way to meet CCR needs and
environmental requirements from 1974 until 2015.
Witness Kerin testified that the Company has begun the process of closing, or
submitting plans to close, its coal ash basins in accordance with the program with the
most limiting requirements. Witness Kerin also testified that coal-powered electric
generation has since ceased at five of the eight coal-fired DEP generating facilities with
coal ash basins, including the Cape Fear, H.F. Lee, Robinson, Sutton, and
Weatherspoon plants. (Id. at 107-08.)
Witness Kerin testified that in addition to the CCR Rule and CAMA, DEP is also
subject to other CCR-related obligations that result from state environmental regulatory
oversight under existing rules and regulations. For DEP, in South Carolina, there is one
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Consent Agreement with the South Carolina Department of Health and Environment
(DHEC) applicable to ash management at the Robinson plant. The Robinson Consent
Agreement, DHEC 15-23-HW, between Duke Energy Progress, Inc. (now Duke Energy
Progress, LLC) and DHEC, requires coal ash excavation of a 1960 lay-of-land coal ash
storage area located south of the coal ash basin. This Consent Agreement also includes
provisions to initiate permitting of an on-site lined CCR landfill to store the excavated
coal ash. (Tr. Vol. 16, p. 133.)
Witness Kerin noted that there is duplication and interaction between federal
rule, state law and agency action and that many of the actions Duke Energy will take
will serve multiple compliance purposes. He explained that actions and draft rules
applicable to many utilities, not just Duke Energy, were being developed prior to 2014,
and that the Company now confronts another wave in the evolution of environmental
regulation pertaining to coal ash. He stated that in response to these new requirements
addressing CCR disposal activities, the Company is adding dry fly ash, bottom ash, and
FGD blowdown handling systems to operating coal-fired plants that are not already so
equipped. He also stated that the Company is modifying all active and decommissioned
plants to divert storm water and low-volume wastewater away from the basins. He
testified that, accordingly, the Company is requesting recovery of the incremental
compliance costs related to coal ash pond closures incurred starting in 2015 through
August 31, 2017, and recovery of ongoing compliance costs. He testified that both these
incurred and ongoing compliance costs are reasonable, prudent, and cost effective
given the individual facts and circumstances at each power plant and coal ash basin
site at issue. He testified further that each of the Company’s historical and ongoing CCR
compliance costs are reasonable, prudent, and cost effective given the individual facts
and circumstances at each power plant and coal ash basin site at issue. (Id. at 106.)
Witness Kerin explained that the requirements under CAMA, as amended, the
CCR Rule, and the consent agreements (the “CCR Compliance Requirements”) affect
how the coal-fired power plants operate, and that they effectively require the coal ash
basins to be retired. He stated that in regard to coal ash basin operation, modifications
to the power plants are required to direct storm water flow away from the coal ash
basins, and to cease bottom ash and fly ash sluice flow to the basins. As the coal ash
basins are closed, other process streams, such as low-volume wastewater, coal pile
run-off, and FGD blowdown flows, as examples, must also be directed away from the
coal ash basins to facilitate dewatering and closure. (Id. at 136.)
Witness Kerin stated that coal ash removal has been initiated at several DEP
stations, including the Asheville Plant, and the Sutton Plant. He stated that
excavation plans were developed to systematically prepare for executing this work,
including the identification of any necessary permits and approvals. These excavation
plans were submitted to the applicable state regulatory body, DHEC or DEQ, prior to
beginning coal ash excavations. As the CCR Rule and CAMA lead to coal ash basin
closure, preparations are required to transition the coal-fired generating sites for this
outcome. Operating coal-fired power plants in the Carolinas requires plant modifications
to fully transition to dry ash handling in order to cease sluice flow to the coal ash basins.
146
All coal-fired power plants, even those retired, require some level of modification to
cease all flows to the basins, such as storm water or low volume waste water, and may
require construction of a new retention pond. These modification activities are planned
and are now being executed. (Id. at 136- 37.)
Witness Kerin described the closure plans and site analysis and removal plans
developed by DEP to physically close the coal ash basins, noting that these plans are
technically informed by the structural stability of the impoundments, the potential for
adverse impacts from external events such as 100-year floods, the groundwater and/or
surface water impacts identified in the Comprehensive Site Assessments, and the
groundwater corrective actions required in the Corrective Action Plans. Coal ash basins
can be closed by excavation, with the coal ash permanently stored in a CCR landfill or
used in a beneficial way such as a structural fill or for cementitious purposes. Coal ash
basins can also be closed by capping the CCRs in place. (Id. at 137.)
Witness Kerin also stated that the Company’s CAMA closure plans will meet the
national standards set forth by the CCR Rule as well as the more specific requirements
determined by DEQ under the CAMA regulatory process. He explained that the state-
mandated closure plans are reviewed and approved by DHEC in South Carolina and
DEQ in North Carolina. During this review and approval process, these state regulatory
agencies could impose additional restrictions, limitations, requirements, and/or actions
to close the coal ash basins. Other specific compliance plans will be developed and
implemented to meet the various requirements and timelines of CAMA and the CCR
Rule, such as the fugitive dust control plans which were required under Section 257.80
of the CCR Rule by October 19, 2015. As a second example, run-on and run-off control
system plans were developed and implemented by October 19, 2016, for CCR landfills
pursuant to Section 257.81 of the CCR Rule. Compliance plans will continue to be
developed and implemented as required by the CCR Rule and CAMA. (Id. at 137-38.)
Company witness Kerin explained that, in his opinion, DEP’s historical handling
of CCRs was reasonable, prudent, and consistent with industry standards over time.
He stated that, in his opinion, this demonstrates that nothing that DEP has done
historically is causing the Company to incur any unjustified costs today to comply with
post-2015 CCR regulations. (Id. at 143.) Company witness Kerin explained that, in the
preamble to the CCR Rule, EPA details that in 2012 alone, over 470 coal- fired electric
generating facilities burned over 800 million tons of coal, generating approximately 110
147
million tons of CCRs in 47 states and Puerto Rico. In 2012, approximately 40% of the
CCRs generated were beneficially used, with the remaining 60% disposed in CCR
surface impoundments; of that 60 percent, approximately 80% was stored in on-site
basins and landfills. Across the United States, CCR disposal currently occurs at over
310 active on-site landfills, averaging over 120 acres in size with an average depth of
40 feet, and at over 375 active on-site surface impoundments. Witness Kerin testified
that the Company is re-using (selling) and storing CCRs in the same manner and at
approximately the same percentages as the coal-fired utility industry’s national
averages.
Witness Kerin also maintained that DEP’S CCR storage and handling practices
are consistent with the practices of other Duke Energy affiliates and Duke Energy peer
utilities. He explained that the Company’s CCR storage and handling practices are
consistent across the Duke Energy fleet, including coal generation located in Florida
and in the Midwest. Duke Energy, as it currently exists today, has been formed over the
years through the mergers of several utilities with independently operated coal fired
generation. He testified that the historical and current CCR handling and use of CCR
basins is consistent across these legacy companies that make up Duke Energy
Corporation today, and consistent with the industry. (Tr. Vol. 16, p. 119.)
Company witness Wright noted that coal ash use and disposal have been
studied by the EPA since the mid-1980s. After several studies and some limited
regulatory standards, on May 22, 2000, the EPA determined the need to regulate coal
combustion wastes under Subtitle D of the Resource Conservation and Recovery Act
(RCRA). He noted that these types of expenses have been routinely recovered as a
cost of service and included in rate cases, including the reasonable costs associated
with operating, maintaining and upgrading environmental equipment. The cost recovery
for these rate-based environmental costs also usually included a return. (Tr. Vol. 13,
361-62.)
148
Harriman, Tennessee, the EPA published in the Federal Register proposed new coal
ash disposal regulations for CCRs. The proposed regulations specifically referenced
the TVA incident as a major reason for the proposed rule, and EPA discussed several
other coal ash incidents that led to the promulgation of the rule. Witness Wright noted
that, because the EPA’s proposed rule’s publication date precedes the February 2,
2014 coal ash release accident at the Dan River Steam Station (“Dan River”), the Dan
River accident was not mentioned in the EPA’s proposed rule as a reason for
establishing the rule. He also noted that EPA’s finalized CCR Rule, signed on
December 19, 2014, and published in the Federal Register (FR) on April 17, 2015,
referenced the Dan River accident, without indicating that the accident modified the
proposed rule. (Tr. Vol. 13, pp. 362-63.)
He further explained that in August 2014, after the EPA’s proposed coal ash
regulations were published but prior to their finalization, the State of North Carolina
adopted CAMA. He noted that while the EPA’s and the CAMA rules are “largely
duplicative,” the Company must ensure that its coal ash disposal methods meet the
standards established in both regulations as well as any other state agency
requirements. (Tr. Vol. 13, pp. 363-64.)
Witness Wright testified that, in his opinion, recoverable costs, as they relate to
electric utility expenditures in North Carolina, are costs that are reasonable and that are
prudently incurred in the provision of safe, reliable electric service to a utility’s
customers. He stated that G.S. 62-133(b) embodies this principle. He stated that
because environmental compliance costs are a necessary cost of providing electric
service, these types of costs – and a return on those costs if deferred over time – are
recoverable in rates. He also stated that environmental compliance costs are similar to
other costs that a utility might spend in producing and delivering power. He explained
that the Company incurs costs in compliance with environmental laws and regulations,
similar to other costs necessary for the generation of electric power, and that these coal
ash disposal costs are like nuclear decommissioning costs or coal plant retirement
costs that have long been deemed recoverable for utilities across the country, including
DEP. (Id. at 354.)
Witness Wright noted that the Commission has allowed the recovery of costs
related to environmental expenditures. Citing to witness Kerin’s lengthy discussion of
the numerous investments the Company has made over time in compliance with
historical coal ash and other environmental regulations, he stated that in his experience
these types of costs, including the reasonable costs associated with operating,
maintaining and upgrading environmental equipment, plus a return, have been routinely
recovered as a cost of service through general rate cases, whether as capital or
ongoing operation and maintenance expense or some combination thereof. (Id. at 358-
60.)
Witness Wright testified further that utilities are not allowed to recover
environmental fines or penalties, or costs incurred from the actions causing such
penalties. He stated his understanding that none have been requested in this case.
149
However, according to witness Wright, it is important to make sure that the costs
underlying or directly causing such fines or penalties be separated from prudently
incurred, ongoing costs. For example, if a generating plant received a fine, then by no
means should that fine be recoverable. But the fact that a fine was given does not mean
that the ongoing, prudently- incurred costs necessary to produce generation should be
disallowed. (Id. at 361.)
He further explained why, in his view, the new federal coal ash standards did not
result from the Dan River spill. He noted that the final rule only mentions the Dan River
accident, and that there is no evidence in the final rule that the Dan River accident
changed or modified the EPA’s proposed rule. He testified that both the proposed rule
and the final rule addressed the need for imposing corrective action at inactive facilities,
and stated that in promulgating the CCR Rule, the EPA cited hundreds of potential risks
or incidents with ash ponds similar to Dan River that, in part, led to the adoption of the
Rule. Based on this analysis along with the timing of the CCR Rule, he opined that the
Dan River accident did not change the CCR regulations, although it probably added
support for the EPA’s proposals. (Id. at 363-65.)
Witness Wright also testified that, in terms of timing, the new state CAMA coal
ash standards did result from the Dan River spill, but, in his view, in terms of the
substance of the standards adopted, there is not necessarily a connection. He opined
that the Dan River spill helped prompt the North Carolina General Assembly to examine
the North Carolina and national coal ash disposal policies and regulations, and that out
of that legislative investigation came CAMA. He noted that some four years prior to Dan
River, the EPA had proposed and was close to finalizing its new CCR regulations,
which, in his opinion, helped inform the state’s legislative leaders regarding the
language contained in CAMA. He noted that the proposed CCR regulation also strongly
encouraged the states to adopt at least the federal minimum criteria in their solid waste
management plans. Therefore, he concluded, the North Carolina Legislature and/or the
State’s DEQ would likely have taken steps to adopt some coal ash regulations shortly
after the CCR Rule was finalized in 2015 simply because of the CCR Rule’s
encouragement to do so. He concluded that the timing of CAMA was certainly
influenced by the Dan River accident, but also stated his belief that, even without the
Dan River accident, the state would likely have adopted some new coal ash disposal
standards in the 2015 timeframe simply in response to the CCR rules, as it did just a
few years prior to adopting CAMA, when it adopted coal-fired generating facility
environmental standards in the Clean Smokestacks Act that were stricter than the
federal standards at the time. He stated that, regardless, the Company must comply
with both the federal and state coal ash disposal standards. (Id. at 366-67.)
In his direct testimony, Company witness Wright testified that in his opinion the
coal ash disposal costs that DEP seeks to recover in this case are “used and useful”
utility cost. (Tr. Vol. 13, p. 375.) He explained that DEP’s coal ash disposal sites have
always been used and useful as part of the coal-fired generation production process.
He noted that G.S. 62-133(b)(1) provides that, in setting utility rates, the Commission
must “ascertain the reasonable original cost of the public utility’s property used and
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useful, or to be used and useful within a reasonable time after the test period, in
providing the service rendered to the public within the state, minus accumulated
depreciation, and plus the reasonable cost of the investment in construction work in
progress.” (Id.) He testified that, therefore, to be included in rate base, the cost must
be both reasonable and incurred for property that is used and useful in providing service
to customers. He stated that the Company has historically spent dollars in order to
comply with the coal ash disposal regulations in effect at the time, and these
dollars were a necessary expenditure related to used and useful utility costs made in
the provision of electric service at the time. (Id. at 375-76.) The Company was, and
continues to be, in his view, obligated to meet the needs of its customers. This
obligation to serve requires the disposal of coal ash subject to the disposal standards
at the time, thereby rendering the disposal sites for this coal ash, for which costs DEP
seeks recovery in this case, “used and useful” in providing electric service. (Id. at 376.)
He stated that this conclusion is supported by the Commission’s conclusions in the
2016 Dominion rate case, where the Commission determined that because current
CCR repositories are and have served their purpose of storing CCRs for many years,
they have been used and useful for ratepayers, and that such storage facilities will
continue to be used and useful until the CCRs are moved to a permanent repository,
or they are capped and closed. (Id. at 376-78.)
Company witness Wright also noted that the Commission addressed this exact
coal ash disposal cost issue in its December 22, 2016 Order in Dominion’s recent rate
case, Docket No. E- 22, Sub 532. He noted that in that order the Commission and Public
Staff concluded that Dominion’s historical response to coal ash disposal was consistent
with industry practice at the time and that these costs were reasonable and prudent.
Second, they found that Dominion’s test year coal ash disposal expenses incurred in
compliance with the newer coal ash disposal regulations were likewise reasonable and
prudent. A third important point decided by the Commission in the Dominion case, he
maintained, was that the prior coal ash disposal assets were used and useful. Finally,
similar to what DEP is requesting in this rate case, the Dominion order also allows
Dominion to establish an ARO to defer additional coal ash disposal cost and for the
recovery of those costs to be adjudicated in a future proceeding. (Id. at 378-79.)
AGO witness Wittliff testified that DEP’s actions and inactions were largely
responsible for the stringent conditions of CAMA, which he said accelerated
remediation and closures and narrowed the field of removal and closure options. (Tr.
Vol. 15, p. 24.) He claimed that the Company’s actions also led to inadequate
operations and a failure to meet industry standards in how its coal ash basins complied
with permits, which he argued resulted in CCR remediation and closure costs that
exceeded what would have occurred absent the Company’s actions. He also contended
that if DEP had prudently managed its CCRs and associated impoundments, it would
have been allowed to implement less expensive remediation and closure options over
a longer period of time under the CCR Rule. He opined that DEP imprudently managed
its facilities and that such mismanagement is causally linked to costs that should be
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disallowed in this case. He asserted that due to CAMA’s identification of Sutton and
Asheville as high priority sites, and the resulting acceleration of closure at those sites,
approximately 72%, or about $224 million of the total ARO expenditures by DEP in 2015
and 2016 were for these two sites, part of which was for the transportation by rail and
by truck of a significant portion of those sites’ CCRs offsite. (Id. at 24-58, 60-62.)
CUCA witness O’Donnell purported to compare the DEP coal ash ARO to what
he termed similar coal ash AROs of utilities across the United States. He concluded
that the Company’s ARO coal ash costs are the highest in the nation, and contended
that the only discernable difference between DEP and the other utilities in his
comparison was CAMA, which he asserted was prompted by the Dan River spill. He
stated that DEP did not provide a similar financial analysis for this case. (Tr. Vol. 15,
pp. 230-31.) Witness O’Donnell opined that DEP should only recover costs to comply
with the CCR Rule, not any costs under CAMA that exceed CCR Rule compliance
costs, based on his contention that Duke Energy caused CAMA. (Tr. Vol. 16, p. 18.)
Sierra Club witness Quarles evaluated the methods DEP has proposed to close
existing coal ash ponds at the Mayo and Roxboro plants and opined as to environmental
conditions that may be associated with capping those ponds in place. He asserted that
continued storage of coal ash at Roxboro and Mayo poses significant environmental
risks. He stated that the unlined basins at these plants were constructed over natural
bodies of water, between 60 and 90 feet of the coal ash stored in the basins there is
submerged in groundwater, and groundwater flows into those basins from
topographically higher elevations and will come into contact with submerged coal ash.
He also stated that there are documented impacts to groundwater at these basins and
that a cap will not prevent lateral inflow of groundwater from adjacent areas. He
concluded that closure in place at these basins would allow continued contamination of
downgradient groundwater and violate the technical standards of the CCR Rule, and
that removal of coal ash from the Company’s coal ash basins would reduce the
concentrations and extent of this contamination. (Tr. Vol. 13, pp. 132-73, 175- 77.) On
cross-examination, witness Quarles conceded that excavation and moving the coal ash
at Mayo and Roxboro to lined landfills would increase the cost for closure. (Id. at 180.)
Also, he agreed that with learning, advancement, and improved capability, changes and
advancements can follow. (Id. at 190.) He admitted that his evaluation was conducted
from a distance rather than by interaction with the Company. (Id. at 193-94.) He agreed
that boron is a naturally occurring element in the soils in locations like Mayo and
Roxboro. (Id. at 194.) Witness Quarles agreed that the CCR Rule was not the first time
that the EPA discovered that utilities nationwide were using unlined wet coal ash basins,
and that while the EPA was studying the issue at least as early as the 1980s, it took
action to regulate coal ash basins only a few years ago. (Id. at 200-01.) He also
recognized that utilities have been permitted to dispose of coal ash in unlined basins.
(Id. at 190-99, 204.)
In its post-hearing Brief, the AGO contends that ratepayers should not be forced
to cover costs caused by DEP’s years of failure in managing coal ash basins. The AGO
argues that Commission needs to consider whether the costs incurred are reasonable
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and prudent. When making this determination, the AGO states that the Commission
must ask whether the utility acted prudently over time as coal ash was generated and
stored or if prior mismanagement or negligence by the utility has impacted the work that
needs to be done now. The Commission must also determine whether DEP’s current
actions to cleanup are reasonable and prudent.
The AGO states that coal has been utilized for many decades and beginning in
approximately 1950, DEP, like many utilities, used unlined earthen impoundments to
deposit its CCRs. The AGO indicates that the use of coal grew significantly over the
years with over 60 million tons of coal ash produced annually in the United States in the
1970’s and by 1988, it was predicted that in 2000, the annual coal waste could reach
120 million tons of coal ash. The AGO cites to the 1988 EPA report to Congress which
pointed out that in North Carolina, solid waste regulations exclude surface
impoundments and defer to state water laws for regulatory authority. Therefore, DEP
was bound by the regulatory requirements of its NPDES permits. The AGO points to
the 1988 report to posit that the lining of the surface impoundments was becoming a
more common practice and indicated that DEP still only has one lined impoundment to
date.
The AGO states that DEP failed to keep pace with industry standards. First, the
AGO argues that DEP had a lackadaisical response to 2L standards, passed in 1979.
In testimony, DEP indicated that there was no obligation to monitor groundwater quality
under the 2L regulations; the obligation to take corrective action arises after
exceedances have been identified. The AGO identified that the groundwater monitoring
requirements were not immediately added to all of the Company’s NPDES permits by
DEQ, and the Company indicated that it was under no obligation to monitor for
groundwater impacts and only voluntarily did so as required by site specific conditions.
The AGO argues that the Company, except at a few sites, did not voluntarily monitor
groundwater until the requirement was put into the NPDES permit.
Second, the AGO cites to the failure at the Roxboro plant from 1966 to 1990 at
the Hyco Reservoir, which the EPA cited as a proven damage case used in support
2015 CCR rule. Third, the AGO states that in 1996 DEP entered into standstill
agreements with two insurance carriers recognizing potential legal exposure from its
CCR ponds. Fourth, the AGO outlines the seeps that DEP allowed to occur at its basins,
including the seeps to which DEP pled guilty to in federal court, the 200 seeps that were
identified in permit modification applications filed in 2014, and seeps found in dam
safety inspections in the late 1990’s and early 2000’s. Fifth, the AGO cites to a
November 2004 Sutton Report that was prepared because the 1984 lined coal ash pond
was running out of capacity. The report indicated that the 1984 pond is currently
estimated to be non-operational due to reaching capacity limits by June 2006. The AGO
argues that DEP knew that the ponds were creating an environmental hazard and
chose to ignore them. Next, the AGO states that after the TVA coal ash dam [dike]
failure, EPA came and inspected DEP’s ponds with negative findings, specifically
finding that 75% of DEP’s ponds were rated as poor. Duke, upon questioning at the
time, indicated that poor also applies to further critical studies or investigation that are
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needed to identify safety deficiencies. The AGO identifies that DEP pled guilty in federal
court and even though DEP is not to receive any NOVs as part of the criminal plea,
DEP has received three NOVs at its Asheville plant.
Next, the AGO argues that these failures by DEP led to the passage of CAMA
and the CCR rule, which in turn led to increased costs. Specifically, Kerin’s testimony
suggests that approximately 72% of the current expenditures are for the accelerated
schedules, and Garrett and Moore testified to specific disallowances of Sutton and
Asheville.
The AGO reiterates that DEP has not met its burden of showing costs are
reasonable and prudent, but rather these new costs are attributable to unlawful and
imprudent behavior. Lastly, the AGO argues that the Clean Smokestacks Act dealt with
operating plants and here most plants are retired so no supports exist under that Act.
The AGO contends that DEP is not entitled to special cost recovery. DEP was
recovering these costs in depreciation expense through amortization for retired plants.
The AGO cites to the Burns & McDonnell 2012 dismantlement studies indicating lower
estimated closure costs, based upon dewatering and capping in place. The AGO states
that now that recovery for closure costs is much greater, DEP seeks a special accounting
method. The AGO argues that imposing these coal ash costs on current ratepayers
raises intergenerational fairness given DEP’s failure to take action earlier. The AGO
highlights that the Commission has previously dealt with the intergenerational issue
when it considered whether to allow the recovery of manufactured gas plant clean-up
costs based upon new environmental requirements. The AGO states that the
Commission allowed recovery of the clean-up costs; however, the amount was
amortized over a period of years, and no carrying costs were allowed on the unamortized
balance.
In addition, the AGO submits that DEP should not receive “carrying costs” during
amortization of the deferred CCR costs by placing the unamortized balance in rate base
because the deferred CCR costs are special operating expenses. According to the AGO,
operating expenses are recoverable without return pursuant to G.S. 62-133(b)(3) and
State ex rel. Utilities Commission v. Thornburg (Thornburg I), 325 N.C. 463, 475, 385
S.E.2d 451, 458. Further, the AGO submits that the unamortized balance of the CCR
deferred costs are similar to those considered in State ex rel. Utilities Comm. v. Carolina
Water, 335 N.C. 493, 507, 439 S.E.2d 127, 135 (1994) (Carolina Water), where the
Supreme Court considered whether the Commission erred when it treated utility plant that
was not in service at the end of the test year – and would not be returned to service – as
“an extraordinary property retirement,” allowed amortization of the unrecoverable costs
over ten years, and included the unamortized portion in rate base. The Court concluded
that the costs were for plant that was not used or useful and, thus, the unamortized costs
should not have been included in rate base. As the Supreme Court explained: “Including
[these] costs in rate base allows the company to earn a return on its investment at the
expense of the ratepayers.” Id. at 508, 439 S.E.2d at 135 (citations omitted).
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Finally, the AGO notes that a similar issue was considered by the Commission in
the 2016 DNCP general rate case relating to rate base treatment of the unamortized
balance during CCR cost recovery, wherein the Commission distinguished the
circumstances in Carolina Water. The AGO contends that the Commission’s decision in
the DNCP case should not set the standard for the present case because the
determination was allowed under the circumstances presented in that case without
precedential effect regarding the treatment of CCR costs in future proceedings.
In its post-hearing Brief, CUCA contends that DEP’s request for 100% CAMA
compliance cost recovery is not appropriate. CUCA submits that DEP’s costs are
overstated and that many are the result of DEP’s negligence, which is most clearly
highlighted in DEP’s guilty plea in the federal criminal environmental proceeding. CUCA
supports an equitable sharing of the CCR cleanup costs due to the fact that CAMA costs
are much higher than the CCR Rule compliance costs. CUCA states that a 25% recovery
is equitable. CUCA argues that this case is different than the DNCP rate case. DEP is
different than Dominion in the used and useful analysis in that Dominion never had a coal
ash spill, did not plead guilty to Clean Water Act violations, did not pay $102 million for
mismanagement, and did not admit that CAMA was passed due to the Dan River spill.
Further, CUCA contends that the CCR Rule is a self-implementing rule which has not
been triggered by any citizen suits, and that in the absence of a regulatory directive to do
so, DEP should not have pursued regulatory closure of operating sites.
Sierra Club, in its post-hearing Brief, argues that closure of DEP’s coal ash ponds
is necessary to address unlawful discharges to surface waters and therefore closure costs
are not recoverable, citing G.S. 62-133.13. Further, Sierra Club contends that all of the
CCR basins are unlawfully discharging pollutants into surface waters and the only way to
stop these unlawful discharges is to close the pond and eliminate the source, the coal
ash. Therefore, the costs of pond closure results from the unlawful discharges and are
not recoverable.
In addition, Sierra Club submits that DEP has failed to meet its burden of
demonstrating that its proposed rates are just and reasonable in that no evidence exists
to prove that storage of coal ash in unlined, leaking ponds for decades was a reasonable
and prudent way for DEP to manage its CCRs. According to Sierra Club, the only
evidence provided was Kerin’s bold assertion that historical handling of CCRs was
reasonable, prudent and consistent with industry standards over time. Sierra Club cites
to the Commission’s ratemaking decision regarding MGP clean-up asserting that when
determining ratepayer responsibility, the prudency of the Company’s initial operation of
each site should be considered. In that case, the Commission found prudent operation.
In contrast, the Sierra Club states that the record shows a history of mismanagement with
respect to coal ash basins, citing seeps at almost all of its ash ponds as being unlawful
discharges that violate the federal Clean Water Act and Section 143-215.1 of the North
Carolina General Statutes, and the terms of DEP’s NPDES permits. Sierra Club maintains
that the operation of a system meant to treat wastewater in a manner that allows the
release of untreated wastewater and repeated violations of the law cannot be considered
prudent, and that DEP provided no evidence on whether its prior CCR management
practices have resulted in unjustified costs.
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Moreover, Sierra Club argues that DEP’s closure plans for its Mayo and Roxboro
ash basins do not comply with the CCR Rule or protect against continued discharges,
and, therefore, DEP’s proposed run rate should be rejected.
Sierra Club also contends that capping in place the Mayo and Roxboro CCR
basins will not protect against continued leaching of coal ash constituents into
groundwater or into surface waters through migration. Therefore, it submits that DEP’s
closure plans violate the CCR Rule. Sierra Club notes that there are two federal lawsuits
pending on this issue, and that a closure plan that does not protect against future
contamination cannot be considered prudent. DEP’s run rate is based upon the
assumption that ash ponds at Mayo and Roxboro will be capped in place. Therefore it is
not reasonable to approve an ongoing run rate for future cleanup when the full scope of
those costs is not understood. Therefore, according to Sierra Club DEP’s request for a
run rate based upon the assumption that the ash ponds at Mayo and Roxboro will be
capped in place should be rejected.
In its post-hearing Brief, NC WARN contends that DEP should be severely limited
on coal ash cost recovery. NC WARN asserts that none of the costs associated with coal
ash mitigation and cleanup should be borne by ratepayers, and that DEP should not make
profits on selling coal ash from its existing coal ash basins as part of a permanent disposal
scheme.
In its post-hearing Brief, Fayetteville PWC suggests that the Commission impose
a provisional deferral of costs in an amount equal to DEP’s insurance coverage for such
remediation liabilities, which costs may not be recovered from ratepayers unless or until
DEP either recovers offsetting insurance proceeds or demonstrates that DEP’s own
actions or omissions did not result in a denial of insurance coverage or a reduced
settlement for its coal ash remediation costs. Fayetteville PWC also requests that the
Commission adopt the coal ash remediation costs disallowances and deferral
recommended by the Public Staff and order the sharing of coal ash remediation costs
between DEP’s shareholders and ratepayers in the manner recommended by Public
Staff.
In its post-hearing Brief, CIGFUR argues that DEP should not be allowed an equity
component in the calculation of its deferred coal ash remediation carrying costs and that
the appropriate amortization period is ten to fifteen years as opposed to five. CIGFUR
states that the total cost to defer is $260.3 million and that the carrying charges associated
with the incurred coal ash costs since 2015 are $9.4 million, $1.9 million is associated
with the cost of debt and $7.5 million is associated with the cost of equity. CIGFUR further
states that amortizing over 5 years results in annual amortization expense of $52.1
million, plus a $14.4 million net tax return, for a total requested revenue requirement of
$66.5 million for deferred coal ash pond closure costs. CIGFUR argues that the carrying
costs should not include the equity component and that the deferral should be financed
at the lowest option, which is the cost of debt. Allowing the equity component increases
the amount charged to DEP’s ratepayers and is inappropriate for such a significant
expense that fails to enhance reliable service. CIGFUR submits that the CCR costs were
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incurred over many decades and the stored coal ash is no longer used and useful in the
provision of electric service.
With respect to the run rate, CIGFUR argues that DEP should not recover the run
rate of $129.1 million and that DEP should defer ongoing costs for future recovery in its
next rate case. CIGFUR opposes any carrying costs on the deferred amounts because
the deferred amounts are not capital costs and that it is more appropriate to allow a $1
for $1 recovery and no more.
In its post-hearing Brief, Quad Towns states that the Commission must determine
whether the initial operation of each site was prudent, as discussed in the Commission’s
MGP case. Quad Towns contends that most intervenors argued that DEP’s demonstrated
and criminally negligent failure to prudently and reasonably manage its CCR
impoundments was the driving force for the enactment of CAMA, which increased the
costs. Thus, these costs were not prudently incurred because if DEP had prudently
managed its sites, these costs would have been avoided.
Further, Quad Towns notes that DEP argues that additional safeguarding in the
past would have been deemed gold-plating and any such costs would have been deemed
imprudently incurred. According to Quad Towns, given the fact that DEP had 485 NPDES
permit violations, over 200 documented seeps and 2,857 2L violations, it is hard to
assume that additional safeguards would have been gold-plating.
In addition, Quad Towns argues that costs arising out of mismanagement of a long-
lived asset are not appropriate for deferral accounting, and notes that Section A13 of
FASB states that obligations resulting from improper operations do not represent costs
that are an integral part of the asset. The section goes on to state some spillage is
acceptable, but the obligation to clean up after a catastrophic accident does not result
from the normal operation of the facility. Because such costs are not appropriate for
deferral, the costs should be borne by shareholders. Quad Towns states that it interprets
the section language broader than the given example of a catastrophic accident.
Quad Towns also argues that the Commission cannot police the utilities' day to
day operations to ensure that it is prudently managing its facilities in a safe and
environmentally appropriate manner, and that the only way that the Commission can
protect ratepayers from exorbitant rate increases due to mismanagement of utility
operations is to disallow those costs that are attributable to the mismanagement.
Quad Towns supports a 75% disallowance of the historic costs based upon CUCA
witness O’Donnell’s testimony, and the same result but different analysis of AGO witness
Witliff. It notes that witness Witliff testified that specifically looking at the Sutton and
Asheville sites designated as high priority by CAMA, DEP spent approximately 72% more
due solely to the accelerated timeline and DEP choosing to move the coal ash offsite. As
further support, DEP’s 2012 dismantlement study, after the 2010 CCR Rule was
proposed, concluded that a $10 million depreciation expense would suffice to address
end-of-life costs. Therefore, costs above $10 million earmarked in 2012 are attributable
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to the more costly CAMA closure requirements. Further, Quad Towns supports the
specific Garrett and Moore disallowances.
For future costs, Quad Towns supports the Public Staff’s 50/50 sharing proposal,
and states that cost sharing is appropriate because: (1) DEP failed to prevent
environmental contamination from its impoundments in violation of state and federal law,
and (2) there is a history of approval for sharing extremely large costs that do not result
in new generation of electricity for customers, such as the MGP case.
Moreover, Quad Towns argues that DEP saying its actions were in accordance
with industry practice is incompatible with DEP’s admissions in federal court to criminal
actions that DEP “failed to exercise the degree of care that someone with ordinary
prudence would have exercised in the same circumstance with respect to…”
management of various aspects of its coal ash impoundments, and acted negligently in
failing to prevent unauthorized discharges and to follow the conditions of its permits.
Further, Quad Towns argues that the Commission should disallow any recovery of
CCR costs through the fuel adjustment clause, based on the fact that no cost was
assigned to coal ash in the Charah contract with DEP. Rather the contract supports
payment for coal ash remediation. Further, according to Quad Towns the evidence tends
to show that Charah purchased the Brickhaven mine for the singular purpose of disposing
of CCRs. Therefore, there was not an independent need for fill dirt.
Lastly, Quad Towns requests that the Commission specify the amount of
disallowance. For example, if the Commission chooses to disallow a certain amount of
CCR costs through amortization, if the Commission can clearly specify the amount of
disallowance first and then explain that the disallowance is being achieved by the
extended amortization, it will assist in avoiding future litigation over language in Quad
Towns’ wholesale purchase power agreements. Quad Towns states that if the
Commission disallows 50% of DEP’s request, Quad Town’s customers will save
approximately $309,902.50.
Public Staff witnesses Garrett and Moore testified that they investigated the
prudence and reasonableness of costs incurred by DEP with respect to its coal ash
management. In addition, they reviewed the approach taken by DEP to determine the
least cost method of achieving compliance with the laws and regulations governing coal
ash management. In conducting their investigation, witnesses Garrett and Moore
reviewed the closure plans and coal ash-related costs incurred for all of DEP’s coal-fired
facilities, conducted extensive discovery, participated in numerous meetings, and visited
several of the DEP facilities in question. (Tr. Vol. 18, pp. 133-34.)
Witnesses Garrett and Moore did not take exception with DEP witness Kerin’s
general characterization of the applicable federal and state regulations addressing the
management and closure of coal ash basins in North Carolina and South Carolina. They
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did, however, identify several decisions made by DEP that were not required by law or
where lower-cost compliance options were available. Witnesses Garrett and Moore did
not take exception with DEP’s selected closure method for the coal ash basins at the
Robinson Plant in South Carolina, which is subject to a consent agreement entered into
between DEP and the South Carolina Department of Health and Environmental Control
(DHEC). (Tr. Vol. 18, p 139.)
With regard to DEP’s Mayo and Roxboro plants, witnesses Garrett and Moore
noted that DEQ issued final classifications for these facilities as Intermediate Risk in
May 2016, and that DEP is in the process of establishing the permanent replacement
water supplies required under G.S. 130A-309.211(c)(1) and performing the applicable
dam safety repair work at these sites. Upon completion of these tasks within the
timeframe provided, the impoundments at these facilities will be reclassified as low-risk
pursuant to G.S. 130A-309.213(d)(1). They explained that CAMA requires, at a
minimum, that the impoundment be dewatered and closed either by excavation or by
placement of a cap system that is designed to minimize infiltration and erosion.
Witnesses Garrett and Moore noted that this approach is generally the most cost-
effective means for closure of a CCR unit. They also testified that CAMA (S.L. 2016-95)
does not require the submission of proposed closure plans for low- and intermediate
risk impoundments until December 31, 2019, so DEP has not submitted a Site Analysis
and Removal Plan (SARP) to DEQ for any facilities other than Sutton and Asheville at
this time. Therefore, a prudence review of the Mayo and Roxboro closure plans would
be premature, so witnesses Garrett and Moore took no exception in the present case to
DEP’s current proposed closure method for the coal ash basins located at Mayo and
Roxboro. (Tr. Vol. 18, pp. 139-41.)
In addition, Public Staff witnesses Garrett and Moore did not take exception to
DEP’s closure method for the CCR units located at Cape Fear and H. F. Lee. DEP has
selected the Cape Fear and H. F. Lee Stations as two of the three beneficiation sites
pursuant to G.S. 130A-309.216, which required Duke Energy to identify three sites
located within the state with coal ash stored in the impoundments suitable for processing
for cementitious purposes. Upon selection of the sites, Duke Energy was required to
enter into a binding agreement for the installation and operation of coal ash beneficiation
projects at each site capable of annually processing 300,000 tons of coal ash to
specifications appropriate for cementitious products, with all processed coal ash to be
removed from the impoundments located at the sites. (Tr. Vol. 18, pp. 141-43)
Witnesses Garrett and Moore also noted that the timeframe proposed by DEP for
beneficiation of the Intermediate Risk sites extends beyond the closure timeframe called
for in Section 3.(a) of S.L. 2016- 95 for sites deemed Intermediate Risk, and that G.S.
130A-309.215 provides a variance option for closure deadlines that are found to be in
the public interest. (Id.)
Public Staff witnesses Garrett and Moore testified that they did not take exception
to DEP’s closure method for the CCR units located at Weatherspoon, where DEP has
selected the excavation of CCR and beneficial use option, with contracts in place for the
delivery of the coal ash material to facilities in South Carolina for use in the concrete
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industry. They noted that this option appears to offer a lower cost than other closure
options for the site, and believe that DEP should have sought to establish
Weatherspoon as one of the three beneficiation sites as required by G.S. 130A-
309.216. This would have allowed the DEC Buck Station, which was instead selected
as the third beneficiation site, to utilize significantly lower cost closure options instead
of cementitious beneficiation. Witnesses Garrett and Moore testified that DEP indicated
in response to data requests that it could only obtain guaranteed commitments for
230,000 tons of coal ash per year, as opposed to the 300,000 required by statute. They
indicated that the potential cost savings associated with selecting Buck for closure
options other than beneficiation would have justified making additional efforts to identify
additional sites for beneficial reuse of coal ash of the additional 70,000 tons of coal ash
from Weatherspoon. (Tr. Vol. 18, pp. 143-44.)
With regard to DEP’s selected closure actions at the Sutton Plant, witnesses
Garrett and Moore took exception with DEP’s decision to excavate and transport coal
ash off-site to the Brickhaven structural fill facility in Chatham County. They contended
that had DEP expeditiously pursued an on-site industrial landfill at the time it began
working on the structural fill facility, it could have disposed of all of the coal ash on-site
without incurring the added expense associated with the off-site transfer and disposal.
(Tr. Vol. 18, pp. 153-55.)
Witnesses Garrett and Moore disputed DEP’s position that the moratorium on
CCR landfills, which was enacted on September 20, 2014, in Section 5.(a) of S.L. 2014-
122, and expired on August 1, 2015, had any impact on DEP’s ability to construct an
on-site greenfield landfill at Sutton in a timely fashion. They evaluated the timeframe for
which DEP would have had to construct the landfill and determined that based
on DEP’s assumptions regarding landfill permitting and construction timeframes, along
with the excavation and placement rates estimated by DEP in its analysis of the facility,
DEP could have handled all of the coal ash on-site without having to incur the significant
costs associated with off-site transportation costs and construction of rail handling
equipment. (Tr. Vol. 18, pp. 145-48.)
Witnesses Garrett and Moore also took exception with DEP’s inclusion of costs
associated with two specific liner components, called the “Secondary Geocomposite
Layer” and “Secondary 60-mil HDPE 9 Textured Geomembrane Material” that were
included in DEP’s current on-site landfill construction contract. They testified that these
secondary layers exceed what is required under federal and state regulations.
Therefore, witnesses Garrett and Moore recommended that the costs associated with
these secondary liner layers be disallowed. (Tr. Vol. 18, p. 154.)
As a result of DEP’s unnecessary actions to transport coal ash off-site from the
Sutton facility and to install landfill liner components that exceeded regulatory
requirements, witnesses Garrett and Moore recommended a total disallowance at the
Sutton facility of $80.5 million from DEP’s coal ash expenditures during this recovery
period. (Public Staff Garrett and Moore Exhibit 7)
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Witnesses Garrett and Moore summarized the coal ash closure approach taken
by DEP at its Asheville facility. They testified that DEP had been excavating coal ash
from the 1982 Ash Basin since 2007 in order to provide structural fill material for the
Asheville Regional Airport, transporting this material by truck. Following passage of
CAMA in 2014, which deemed Asheville a High-Priority site subject to an August 2019
closure date, DEP continued to excavate coal ash and transport it off-site while the
potential for an on-site landfill was evaluated. However, passage of the Mountain Energy
Act of 2015 (S.L. 2015-110, hereinafter the “MEA”) amended the required completion
date for closing the two coal ash basins to August 1, 2022, to allow time for the
construction of a combined cycle plant on the site, and retirement of the existing coal-
fired generating station. (Tr. Vol. 18, pp. 155-56.)
In their direct testimony, witnesses Garrett and Moore took exception with DEP’s
decision not to pursue an on-site industrial landfill at the Asheville site, on the basis that
DEP could have avoided incurring significant off-site transportation costs. Witnesses
Garrett and Moore noted that while the design and construction of an on-site industrial
landfill at the Asheville facility would have been technically challenging, they believed
that it could be done at a lower cost than transporting the remaining coal ash materials
off- site. Witnesses Garrett and Moore also testified that the coal ash processing costs
expended at the Asheville facility relative to the amount of coal ash that had been
removed off-site were unreasonable. (Tr. Vol. 18, pp. 156-60.)
Following the filing of rebuttal testimony by DEP witness Kerin and updated
discovery responses from DEP, witnesses Garrett and Moore revised their testimony to
indicate that while they no longer took exception with the quantities of coal ash that had
been removed from the 1982 Basin at Asheville to accommodate construction of the
combined cycle facility, they took exception to (a) the schedule on which DEP removed
the coal ash, which resulted in the unnecessary double-handling of some coal ash on
site; (b) DEP’s decision to transport excavated coal ash to the Waste Management
landfill in Homer, Georgia, rather than transporting all of the excavated coal ash to a
DEP- or DEC-owned facility, such as the DEC-owned Cliffside landfill; and (c) the per-
ton/mile rates paid by DEP to Charah to transport the material from the Asheville site to
Cliffside. Witnesses Garrett and Moore instead contended that a reasonable calculation
for coal ash transporting costs should be based on the per-ton/mile rates calculated from
the Waste Management Contract, but utilizing the shorter transporting distance and
lower tipping or placement fee associated with the Cliffside landfill. In total, their
proposed disallowance related to the Asheville facility totaled $29.3 million. (Tr. Vol. 18,
pp. 173-76.)
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6. Public Staff Witnesses Lucas’ and Maness’ Equitable Sharing And Coal Ash
Adjustments Testimony
Witness Lucas listed three conceptual options for regulatory treatment of coal
ash costs. The first option is to allow full recovery of coal-ash related costs on the
grounds that the costs have been reasonably incurred to comply with CAMA and the
CCR Rule. This is essentially the approach recommended by DEP, minus costs listed
in its federal criminal plea agreement as being non-recoverable in rate proceedings.
The second option is to disallow recovery of costs to comply with CAMA on the grounds
that CAMA is the direct consequence of imprudent Duke Energy environmental
violations. This is essentially the approach recommended by CUCA and the Attorney
General witnesses. The third option is to disallow the costs incurred to defend and
remedy environmental violations, except to the extent that CAMA requirements
increased the cost of remediation. Under this approach, which the Public Staff
advocates, disallowances would be based on the costs to remediate environmental
violations rather than the costs flowing from CAMA compliance. (Tr. Vol. 18, pp. 270-
71)
(1) DEP litigation costs and settlement payments in cases where there are
environmental violations;
(2) costs to remedy environmental violations where the costs exceed what
CAMA would have required in the absence of environmental violations;
(3) costs required to be excluded under the probation conditions of the federal
plea agreement;
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(4) the recommended disallowances from Garrett and Moore to the extent
there is no double disallowance for the same item; and
For the category of costs to remedy environmental violations where the costs
exceed what CAMA would have required in the absence of environmental violations,
witness Lucas identified, to date, $6,693,390 (NC retail) incurred from January 1, 2015,
to August 31, 2017, for extraction wells and treatment of groundwater pursuant to the
settlement agreement between DEQ and DEP in the Sutton penalty assessment case.
He took the position that these costs would not have been incurred but for unlawful
contamination of groundwater by DEP coal ash basins, and that these costs are over
and above the lowest reasonable costs of CAMA compliance in the absence of
violations. He noted that there could be additional costs in this category in the future.
(Tr. Vol. 18, pp. 278-80)
The final category for disallowance is based on an “equitable sharing” of all coal
ash-related costs not otherwise disallowed. Witness Lucas referred to witness Maness’
testimony for a description of how the equitable sharing should be implemented and the
reasons for it. Witness Lucas further opined that “[a]n equitable sharing is particularly
appropriate in light of the extent of the Company’s failure to prevent environmental
contamination from its coal ash impoundments, in violation of state and federal laws.” In
this regard, he noted the nature and extent of coal ash environmental problems
addressed in the federal criminal plea agreement, violations of NPDES permits, dam
safety deficiencies, and numerous groundwater exceedances. He added that the sheer
number of legal actions against DEP for coal ash environmental violations is suggestive
of the extent of the problem. Witness Lucas asserted that DEP non-compliance with
NPDES permits and state groundwater rules would in probability have led to
environmental cleanup costs even if CAMA and the CCR Rule had not been adopted,
and that the costs of impoundment closures under CAMA and the CCR Rule overlap
what would otherwise have been coal ash cleanup costs under existing state and federal
environmental laws and regulations. Based on DEP’s culpability for environmental
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violations, witness Lucas testified that an equitable sharing would be appropriate,
whereas it would be unreasonable and unjust to burden ratepayers with all the coal ash-
related costs when ratepayers were not culpable for the environmental violations. (Tr.
Vol. 18, pp. 282-85)
Public Staff Witness Maness proposed seven adjustments with respect to coal
ash costs. (Tr. Vol. 18, pp. 298-99.) His adjustments for implementing witnesses Garrett
and Moore’s recommendations, allocation factors, addition of return on deferred coal
ash expenditures from September 2017 through January 2018, and use of a mid-month
cash flow convention are covered elsewhere in this Order. Witness Maness noted that
the Public Staff did not oppose the Company’s request in Docket No. E-2, Sub 1103, to
defer coal ash costs that had been recorded as AROs into a regulatory asset for
regulatory accounting purposes. He recommended that coal ash costs incurred from
January 2015 through August 2017 be allowed as a deferral and that the costs be
amortized over a 28-year period. He revised the amortization period to 26 years in his
supplemental testimony, based on the cost of capital in the Stipulation between DEP
and the Public Staff. (Tr. 18, pp. 336) He also proposed that there be no return allowed
on the unamortized balance of the deferred costs. The purpose of the 26-year
amortization period in conjunction with no return on the unamortized balance is to create
a 50%-50% sharing of the deferred coal ash costs between ratepayers and
shareholders.
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not expected to go into effect until February 1, 2018. Therefore, in order to capture all
of the costs, including return, related to the January 2015 - August 2017 underlying coal
ash costs, he added the return accumulated on the principal amount through January
2018. (Tr. Vol. 18, p. 307)
For the “equitable sharing” adjustment, witness Maness provided the substantive
support for the recommendation, in addition to the support provided by witness Lucas.
(Tr. Vol. 18, pp. 308-16) He testified that the five-year amortization period proposed by
DEP was too short for the magnitude and nature of the Company’s coal ash costs. (Tr.
Vol. 18, p. 308) He advocated a 26-year amortization period, with no return on the
unamortized balance, because the result would create an equal sharing of responsibility
for coal ash costs between ratepayers and shareholders. He recommended the 50%-
50% equitable sharing for all the January 2015 through August 2017 coal ash costs
deferred by the Company, except for costs that were the subject of disallowance
recommendations as noted in the preceding paragraph.
17 This amount excludes any fines, penalties and other unrecoverable costs incurred by the Company. (Tr.
Vol. 6, p. 122.)
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In terms of legal support for his recommendation, witness Maness noted that in
State ex rel. Utilities Com. v. Thornburg, 325 N.C. 463, 385 S.E.2d 451 (1989), the
North Carolina Supreme Court upheld the equitable sharing of nuclear abandonment
costs through an amortization over a period of years with no return on the unamortized
balance. A similar result was ordered for environmental costs incurred by Public Service
Company of North Carolina, in connection with cleanup of manufactured gas plants, in
Docket No. G-5, Sub 327 (1984). (Tr. Vol. 18, pp. 310-13)
Witness Maness sought to distinguish the 2016 DNCP rate case, where the
Public Staff did not propose an equitable sharing of coal ash costs and reached a
settlement with that utility. (Tr. Vol. 18, pp. 315-16) He stated that the magnitude of costs
is one reason for the different recommendation, and the paid to date system costs for
coal ash in the DNCP case were only about 19% of the paid-to-date system costs for
DEP. He further pointed out that the stipulation in the DNCP case made clear that the
amortization of future CCR expenditures would be decided on a case-by-case basis.
Finally, witness Maness recommended that DEP be allowed to defer coal ash
management costs incurred after August 31, 2017, into an ongoing regulatory
asset/liability. He recommended that DEP be allowed to accrue a return on coal ash
costs accumulated in the regulatory asset post-August 2017. The return would be the
Company’s net of tax rate of return, net of associated accumulated deferred income
taxes. Any disallowances, and any equitable sharing through amortization with no
return, would be determined in the next DEP general rate case for the coal ash costs
deferred to the regulatory asset. Witness Maness opposed the Company’s proposal of
a “run rate” of approximately $129 million for ongoing rate recovery of estimated future
coal ash costs. He testified that the run rate could make future equitable sharing of the
costs of coal ash much harder to achieve. He conveyed advice of counsel that any
attempt to achieve equitable sharing in the run rate by reducing it to recover only part of
the coal ash expenses would be open to legal challenge. (Tr. Vol. 18, pp. 316-18)
Kerin
First, he disagreed with their conclusion that DEP could have built an on-site
landfill at the Sutton site in place of the arrangement that DEP has with Charah, Inc., to
transport CCRs to the Brickhaven Mine when DEP first started moving coal ash from
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the site, and with the associated $80.5 million suggested disallowance. Witness Kerin
explained that DEP would have been unable practically and in compliance with CAMA
to build an onsite landfill at Sutton under the timeframes witnesses Garrett and Moore
suggested. He also maintained that, in his view, the lack of any limitation on the
moratorium with regard to the Asheville and Sutton existing basins in the statute
indicated the General Assembly’s intent that DEP was prohibited from constructing a
CCR landfill within the areas formerly used for storage coal ash. He also discussed
additional regulatory limitations that existed in 2014 and 2015 regarding the construction
of CCR landfills in the footprint of existing CCR surface water impoundments. Witness
Kerin also explained how witnesses Garrett and Moore made incorrect assumptions
concerning the Company’s ability to permit and construct a CCR landfill using a “perfect
world” scenario without considering the inherent uncertainty of any type of landfill,
especially a CCR landfill, particularly during the regulatory and political environment that
existed in 2014. He identified reasons DEP should not have started permitting the design
for an on-site landfill at Sutton in June of 2014 as witnesses Garrett and Moore suggest.
(Tr. Vol. 20, pp. 32-41, 56.)
Finally, with regard to Sutton, witness Kerin explained why the two landfill liner
components that witnesses Garrett and Moore excluded from their hypothetical cost
calculation are required for this location and were prudent to include in the new landfill
design. (Id. at 50-51.) Witness Kerin testified that the unique location of the newly
constructed Sutton landfill, being immediately adjacent to the existing coal ash surface
impoundments, required use of the liners to effectively monitor the new landfill. The
additional liners are necessary for the new CCR landfill design to be able to distinctly
monitor the landfill’s performance separate and apart from any influence that the
adjacent older coal ash basins may be having, both now and in the future. Otherwise, it
would be difficult to discern if the new landfill liner system was operating properly (or
leaking), or whether groundwater monitoring wells around the landfill were actually
detecting an effect from the adjacent coal ash basins.
Witness Kerin also disagreed with Garrett and Moore’s conclusion that DEP could
have built an on-site landfill at Asheville site rather than contract with Waste
Management, Inc. to transport CCRs to an off-site location and the associated $45.6
million suggested disallowance. He testified that the issues that affected the Company’s
decisions with regard to Sutton, discussed above, also applied to the Asheville site and
would similarly have made an on-site landfill option infeasible. He explained that in
addition, while the Company had previously—as early as 2007— researched CCR
landfill construction at Asheville, CAMA and the Mountain Energy Act of 2015 changed
the technical feasibility of an on-site CCR landfill, giving the short time period to replace
the coal-fired generation by 2020, and close both coal ash basins by 2022. (Tr. Vol. 20,
pp. 33, 42-44, 56-57.) He also disagreed with the quantity of coal ash excavated and
transported off site that Garrett and Moore used in its analysis of Asheville, which does
not account for over 500,000 tons of coal ash. He testified that the price per ton for coal
ash disposal that DEP paid at the Asheville site, reflected in the all-in blended contract
rate DEP had for the initial scope of work, was reasonable, and that with the benefit of
experience the Company was able to negotiate a more favorable all-in rate in December
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2016. Witness Kerin therefore recommended that, if the Commission does find the initial
all-in rate to be excessive, a disallowance of approximately $9.5 million could be justified
in lieu of the O&M disallowance of approximately $14 million (which witness Kerin
calculated after adjusting for the proper coal ash amount). Witness Kerin noted that
witnesses Garrett and Moore received information from DEP in response to multiple
questions that asked for coal ash quantities at different times and in different ways. He
explained each of the variations in coal ash amounts contained in witnesses Garrett and
Moore’s Exhibit 5. (Tr. Vol. 20, pp. 44-46, 57.)
Witness Kerin addressed the concerns that Garrett and Moore raised with respect
to potential for costs to be imprudent in the future if these certain conditions arise. First,
witness Kerin testified that potential fulfillment costs related to the Brickhaven and Colon
mines are common practice for contracts that require a contractor to develop some large
infrastructure to perform a needed service, and that the fulfillment fee was negotiated to
fairly and reasonably in acknowledgement of Charah’s risk exposure. Second, witness
Kerin noted with regard to future water treatment costs that DEP has increasingly
accurate cost estimates for each site as its plans develop, on balance water treatment
costs are decreasing, and DEP does not object to the Commission and interested
stakeholders tracking these costs as they develop. Third, witness Kerin stated that DEP
will seek variances to any deadlines, as applicable, where doing so would be in the best
interest of customers, and noted that he reads G.S. 130A-309.215 to mean that DEQ’s
variance authority applies equally to the closure provisions for H.F. Lee, Cape Fear, and
Weatherspoon as to other sites. Finally, witness Kerin noted that DEP is in the later
stages of contract negotiation for the sale of processed coal ash and expects to have
an executed agreement by March 2018, and the first beneficiation unit that witnesses
Garrett and Moore are concerned about will come online in late 2019. (Tr. Vol. 20, pp.
33, 47-50, 57.) Also with regard to beneficiation, he explained that DEP identified the
Buck, H.F. Lee, and Cape Fear sites for beneficiation as providing the best economic
value for customers while complying with CAMA, and that the Company entered into an
agreement for Weatherspoon as well but the cement companies could not take enough
coal ash to qualify that site under CAMA. (Id. at 51-52.)
Witness Kerin also testified that CUCA witness O’Donnell’s analysis and
recommendation of a 75% disallowance of the Company’s coal ash costs relies on
multiple analytical flaws that are fatal to his conclusion. Specifically, witness Kerin
disagreed with witness O’Donnell’s conclusion that the national comparison of CCR
assets retirement obligation, or ARO, amounts shows that the Company’s ARO is
overstated by 75%, and enumerated 22 factors that he states witness O’Donnell does
not appear to have considered, which witness Kerin explained must be accounted for in
order to seriously attempt this type of analysis. Witness Kerin recommended that the
Commission consider the reasonableness of the Company’s ARO amount on its own
merits, based on the facts of this case, and without regard to witness O'Donnell’s
proposal. (Tr. Vol. 20, pp. 52-55, 58.)
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Wright
Witness Wright first disagreed with Public Staff witness Lucas’ recommendation
to disallow 50% of the Company’s remaining coal ash costs after accounting for certain
other disallowances that he and Public Staff witnesses Garrett and Moore recommend.
Witness Wright stated that this recommendation does not align with the appropriate
regulatory standard for denial of cost recovery, including recovery of environmental
compliance costs, which he explained is a finding that specifically identified costs are
imprudent or unreasonable. He noted that witness Lucas did not find the Company
imprudent for most of the coal ash-related cost, nor did witness Lucas find the
Company’s costs to be unreasonable. Instead, witness Wright explained, witness Lucas
asked the Commission to disallow these costs apparently based on the theory that the
Company acted poorly in its historical coal ash disposal methods and on speculation of
past or future environmental compliance issues. Witness Wright stated that it is not
proper for the Commission to deny cost recovery based on speculation of future findings
of violation, or to impose a sharing of costs based upon an undefined culpability
standard. (Tr. Vol. 20, pp. 128-29, 131-35, 170-71.)
Witness Wright also explained that the proposed sharing of cost is also
inconsistent with Commission precedent and with the Public Staff’s own position on the
recovery of coal ash disposal cost in Dominion’s 2016 base rate case. In that case, he
recalled, Dominion requested a recovery of CCR Rule compliance costs up to and
through 2016. He explained that those expenditures included closure and related costs
for the Chesapeake Energy Center, even though a court found past violations of the
Clean Water Act at this location. He stated that the Commission concluded that the
recovery of these costs, as provided in the stipulation entered into in that case by the
Public Staff and Dominion, was just and reasonable. He stated his opinion that the CCR
cost recovery methodology applied in the Dominion case was correct and should be
applied in the same way for DEP. (Tr. Vol. 20, pp. 135-37, 141-42, 171-72.)
Witness Wright also testified that the Public Staff’s suggestion that the
Commission’s treatment of abandoned nuclear plants supports its proposed cost
sharing proposal is not appropriate, because abandoned nuclear plant costs are not
comparable to CCR costs. He explained that the Commission has found abandoned
nuclear cost not to be used and useful, and thus not eligible for rate-based treatment. In
contrast, he noted, the coal plants associated with these costs and the related coal ash
disposal facilities have been used and useful in providing low-cost, reliable power to
North Carolina customers for more than 70 years, and will continue to be used and
useful. He stated that this is consistent with the recent Dominion case, where the
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Commission found that CCR repositories were and continue to be used and useful, were
therefore not abandoned, and were therefore eligible for recovery through amortization
and a return on the unamortized balance, similar to other types of used and useful
property. (Tr. Vol. 20, pp. 137-38, 142-44, 172.)
Witness Wright also testified that the 28 (26)-year amortization period proposed
by the Public Staff is not justified either by their cost sharing theory, or by defining these
costs as being extremely large. He explained that adoption of this proposal would
undermine the basic cost of recovery principles embodied in North Carolina utility
regulation and would subject utilities to an unknowable and ill-defined cost recovery
standard. He explained further that it could also result in a perception of the state’s
utilities as riskier, leading to higher cost of capital and cost of service. (Tr. Vol. 20, pp.
140-41, 144-45, 173-74.)
Witness Wright disagreed with witnesses that claimed that Duke Energy
substantially caused the CCR Rule and CAMA and that, therefore, all costs incurred to
comply with these requirements should be disallowed. He referenced his direct
testimony that while the timing of CAMA may have been influenced by the Dan River
accident, he cannot conclude that the North Carolina legislature would have adopted a
different substantive law without Dan River. He noted in addition that there are
numerous examples of North Carolina lawmakers and regulators adopting
environmental policies, not only specific to this state, but stricter than national or
neighboring states' policies. He also noted that state-specific actions to address CCRs
have been adopted in a number of jurisdictions. Based on all these factors, he opined
that North Carolina likely would have adopted a state-specific CCR regulation
regardless of the Dan River accident. (Tr. Vol. 20, pp. 145-50, 174.)
Witness Wright also expressed his opinion that CAMA was not intended to be a
punitive law. He noted that CAMA does not contain any punitive limitation on cost
recovery except for the provision for certain spills to surface water. He also noted that
attempts to further restrict coal ash disposal cost recovery under this law have been
tried three times, but in all three cases, amendments or laws to disallow cost recovery
were defeated. He stated that the General Assembly has shown that it will, when it wants
to, adopt specific cost recovery restrictions with other state environmental laws, as
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exemplified by the Clean Smokestacks Act. In contrast, he explained, the legislature’s
affirmative decision not to disallow prudently-incurred costs related to CAMA, and not to
adopt subsequent proposals to disallow such costs, indicates that CAMA was not meant
to be punitive with regard to cost recovery, but rather intended to leave cost recovery
determinations to this Commission’s oversight and sound regulatory policy. (Tr. Vol. 20,
pp. 151-53, 174 -75.)
With regard to coal ash litigation costs, witness Wright reiterated that DEP has
excluded from its recovery request all fines, penalties, and fees related to the Dan River
accident. (Tr. Vol. 20, 164-65.) He also opined, however, that witness Lucas’ apparent
position that all of the Company’s costs to defend lawsuits should be disallowed
recovery, regardless of whether the Company is ultimately found liable or not, is not
supported by precedent or sound regulatory policy. First, the Glendale Water case does
not support this theory. In addition, he noted that the Commission has recognized that
settlements and litigation defense costs, when reasonable and prudent, are recoverable
costs, and that the Commission and the Public Staff have also recognized that
settlements are beneficial. He concluded that the Public Staff’s apparent position in this
case, that, if DEP did not commit violations, it should not settle, is inconsistent, not only
with public policy but also with the positions it has previously taken with regard to
settlements. With respect to potential settlements of coal ash disposal methods at the
Mayo and Roxboro facilities, he noted that this position also leaves the Company in an
untenable position, since witness Lucas testifies both that DEP should spend whatever
amount is required in order to never have a groundwater issue, and that, if in the course
of any settlement as to Mayo and Roxboro, DEP agreed to a coal ash remediation
methodology and costs beyond the minimum required by law, those costs should be
disallowed, even if that methodology would be more likely to prevent future groundwater
issues. (Tr. Vol. 20, pp. 153-61, 175-77.)
Witness Wright also addressed witness Lucas’ argument that North Carolina’s 2L
rule imposes strict liability, such that the Company must take any action, regardless of
either cost or industry practices, to avoid or cure a violation of this rule, and his
contention that, because water extraction and treatment required under the CCR Rule
and CAMA have a curative effect on past alleged 2L violations, the cost of those
activities, $6.7 million in this case, are not recoverable. Witness Wright testified that
there is no evidence that the 2L rule was intended as strict liability and that, regardless,
the standard for cost recovery is reasonableness and prudency, not strict liability. He
stated that adoption of the Public Staff’s position would effectively require that, with any
alleged or potential violation, the utility would be expected to immediately undertake
remediation, regardless of the expense, and potentially even nonstandard, experimental
environmental compliance projects that could not only be costly, but ineffective. (Tr. Vol.
20, pp. 161-62, 177.)
While witness Wright agreed with witness Lucas that DEP could, in theory, have
undertaken coal ash disposal projects above and beyond any legal requirements or
industry standards, he noted that those costs would have been subject to high scrutiny,
and the Company likely would have been accused of gold-plating. More generally, he
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explained that it is not appropriate to apply the benefit of hindsight to judge whether
expenditures that DEP made under the circumstances known at the time were
reasonable. (Tr. Vol. 20, pp. 163-64, 177-78.)
For similar reasons, witness Wright also disagreed with the Public Staff’s
recommendation of provisional cost recovery for coal ash expenditures prudently
incurred from January 2015 through August 2017, based on the argument that the
appropriateness of such recovery may depend on the outcome of legal determinations.
He noted first that this would appear to be retroactive ratemaking. He also stated that
the standard is that the utility makes the best possible decisions on expenditures based
on the information available at the time, and determinations of the reasonableness and
prudency of these costs should not depend on future outcomes of legal proceedings but
what was known or knowable at the time. (Tr. Vol. 20, pp. 165-66, 178.)
Witness Wright testified further that the Commission should reject AGO witness
Wittliff’s recommendation that DEP only be allowed to recover costs required to comply
with the CCR Rule, and not any costs related to CAMA. He noted that witness Wittliff
neither quantified the disallowance he recommends, nor offered any regulatory policy
or logical support for his position, and stated that his proposals are unsupported by good
regulatory policy, precedent, or logic. (Tr. Vol. 20, pp. 167-68, 178-79.)
Finally, witness Wright opined that the Commission should reject CUCA witness
O'Donnell’s recommendation that 75% of the Company’s environmental compliance
costs should be disallowed based on a comparison of the alleged national asset
retirement obligations, or ARO, amounts relating to CCRs. He stated further that the
Commission should reject any disallowance, especially one as substantial as the
amount witness O’Donnell recommends, that is not based on facts and evidence that
have been proven and verified as mathematically correct and substantially significant,
and that to do otherwise would constitute poor regulatory policy and would be arbitrary.
(Id. at 168-69, 179.)
Witness Wright testified in response to questions by counsel for the Public Staff
that the fact that DEP has an exceedance or even a violation is not indicative or
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necessarily tied to the recoverability of costs DEP is seeking in this case. He explained
that if DEP has a violation and admitted wrongdoing, or an adjudicated proceeding
determined there was wrongdoing, then those costs or fines should not be recovered.
He testified that that is different from DEP’s having to now comply with new standards;
in terms of costs associated with new obligations, he considers those long-term
compliance costs. (Id. at 209-11.) In response to cross-examination regarding this case
as compared to the 2016 Dominion case, witness Wright clarified that he believes the
run rate that DEP has proposed in this case is reasonable. (Id. at 212-13.) Witness
Wright also clarified that references to the Dan River spill in the final CCR Rule indicate
that the EPA cited that event as evidence that the rule was needed, not as a factor that
changed the substance of the rule itself. He testified further that references to Dan River
in the initial version of CAMA support his position that Dan River influenced the timing
but not the substance of that law. (Tr. Vol. 21, pp. 14-17.) He also noted that, while the
CCR Rule does not require mandatory excavation, based on his discussions with
witness Kerin, witness Wright believes that site studies and engineering analysis that
would have been done in support of CCR led to the same closure methodologies that
CAMA requires. (Id. at 18-19.) Finally, witness Wright clarified that the Public Staff’s
position, that DEP should have spent any amount required to prevent any groundwater
contamination years ago and risk disallowance of those costs, but also that DEP should
not be able to recover the costs it has now prudently incurred to comply with new laws
and regulations, is inconsistent. (Id. at 33-35.)
Wells
Company witness Wells testified that DEP’s compliance record with respect to
NPDES permits has been exemplary. He stated that the Company has consistently
complied with the terms of its NPDES permits over the years, and that, of well over
70,000 data points, it has had fewer than 200 permit violations, which is less than one
half of 1% at all seven of its facilities in the last 10 years. Specifically with regard to
Asheville, Cape Fear, H.F. Lee, Sutton, Roxboro, and Weatherspoon plants, witness
Wells noted that DEP has had no more than 20 NPDES permit exceedances during this
time frame. He stated that, when compliance issues have arisen at individual plants,
DEP has addressed those issues with regulators. (Id. at 62-63, 88-89.)
Witness Wells continued that, in his direct testimony and original Exhibit 5,
witness Lucas asserted that DEP has 2,172 NPDES permit violations over the past 10
years. He noted that witness Lucas included in that total groundwater data associated
with reported monitored exceedances of groundwater quality standards. Witness Wells
emphasized, however, that groundwater data are not permit violations. Rather, he
explained, these permits require the Company to monitor groundwater in compliance
with a monitoring plan and report the data to the DEQ. He explained that a monitored
exceedance of a groundwater standard is not a permit violation, and DEQ has never
issued DEP a notice of violation identifying groundwater data as the basis of a permit
exceedance. He concluded that the Public Staff has conflated these two concepts. (Id.
at 64-66, 74-76, 89.)
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Witness Wells explained further that exceedances of groundwater standards and
the existence of seeps in the vicinity of the Company’s coal ash basins do not indicate
mismanagement or poor compliance programs. He stated that the existence of
groundwater exceedances at or beyond the compliance boundaries at DEP sites is
rather a function of where these sites are on the timeline of groundwater assessment
and corrective action under modern laws that have changed the way unlined basins are
viewed. He testified that the Company’s decision to use unlined basins to treat coal ash
transport water was reasonable and consistent with the approach employed across the
power industry at the time that the basins were built. He noted that each DEP site had
been properly and legally operating an unlined basin for at least a decade before the
adoption of any regulatory requirements related to groundwater corrective action. He
noted further that as requirements changed over time, DEP has taken every action
required by DEQ’s groundwater rules, and later by the CAMA and the CCR Rule, to
address groundwater impacts as they have been identified. (Id. at 66, 76-77, 91-92.)
For similar reasons, witness Wells also disagreed with the Public Staff’s
suggestion that any exceedance or violation of water quality regulations, no matter how
minor or how long ago, leads to the denial of cost recovery for any activity that acts to
“cure” the impacts of the violation. In addition to reiterating that not all exceedances of
the 2L standards amount to a violation that requires corrective action under the 2L rules,
witness Wells stated that even when an exceedance requires corrective action, the
groundwater rules do not treat the exceedance the same way as, for example, the Clean
Water Act treats an exceedance of an NPDES permit limit. When the latter is violated,
he explained, the permittee is immediately subject to an NOV and penalty, and must
ensure the next discharge complies with the permit limit or risks a new NOV and
escalating penalty. He stated that in those circumstances, it would be reasonable to say
that allowing the violation to continue without addressing it is mismanagement. He
contrasted this with groundwater standards, under which an exceedance does not
immediately result in an NOV and penalty. Instead, he explained the owner/operator
must report the exceedance and work with the DEQ to determine whether it was due to
permitted activity, assess the extent of the exceedance, and undertake corrective action.
Any newly measured exceedances do not require a further site assessment and do not
result in additional or escalating penalties, but are actually expected as additional
assessment prior to corrective action is conducted. He testified that the 2L rules’
correction action provisions are deliberately 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. He
concluded that compliance with this process is not mismanagement and should not be
held against DEP with respect to cost recovery. (Tr. Vol. 21, pp. 79-80.)
Witness Wells noted at the hearing that, after he filed his rebuttal testimony,
witness Lucas filed supplemental testimony that acknowledged the distinction between
exceedances and violations. Witness Wells noted that, in his supplemental testimony,
witness Lucas admitted that most of the instances of what he had called NPDES permit
violations in his original Exhibit 5 are not NPDES permit violations, and submitted a
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Revised Exhibit 5 that removes groundwater exceedances from the total number of
NPDES permit violations. Witness Wells stated that this change reduced the total
number of witness Lucas’ alleged permit violations to 458, a reduction of about 79%.
(Id. at 89-90.)
Witness Wells continued that, of the remaining 458 allegations, 199 are listed as
occurring at the Mayo plant, which the Company acted quickly to address by installing
the Zero Liquid Discharge system. He noted that the other 255 alleged violations listed
in witness Lucas’ revised Exhibit 5 are new alleged failure to monitor events. As with the
original Lucas Exhibit 5, he explained, this number of failure to monitor violations is
inaccurate and significantly overstated. He stated that the vast majority of these alleged
violations were reviewed by DEQ staff at the time of the events and determined not to
be violations. He also stated that the documents relied on by witness Lucas clearly
indicate where DEQ made that determination that no action was warranted, but that
witness Lucas did not fully incorporate that information into his evaluation. He concluded
that removing the Mayo specific events from witness Lucas’ corrected 458 number
leaves only four permit exceedance violations for the other six DEP sites in the last 10
years, according to witness Lucas’ revised exhibit. (Id. at 90.)
Witness Wells noted further that after he filed his rebuttal testimony, witness
Lucas revised his Exhibit 6 to also distinguish between groundwater exceedances and
groundwater violations. Witness Wells explained that only exceedances beyond the
compliance boundary and above background concentrations required further action,
and that DEQ is currently in the process of finalizing background levels for the DEP
basins. Witness Wells pointed out that witness Lucas appeared to have removed
background wells and invalid samples from his original Exhibit 6, and that the Revised
Exhibit 6 reduced the number of alleged violations for 12 of the 23 parameters, reducing
the total approximately 65%. He pointed out also, however, that these changes still do
not take into account consideration of the fact that CAMA requires comprehensive site
assessments of groundwater, which increased the number of monitoring wells and the
number of samples to accurately characterize the site. (Id. at 21.)
In his rebuttal, witness Wells disagreed with witness Lucas’ apparent contention
that DEP should have moved well ahead of accepted science, regulatory requirements,
and industry practice and should have begun taking measures to prevent any and all
groundwater quality issues without regard to the cost of those measures or whether
sufficient and proven technology existed at the time to address the conditions at the site.
He opposed the suggestion that DEP only engaged in comprehensive groundwater
monitoring and remediation when forced to do so by CAMA and other developments.
He explained that the Company began monitoring groundwater at Sutton in 1984,
Roxboro in 1987, Weatherspoon in 1990, and the remaining sites in or around 2006. He
noted that, in 2011, DEQ prescribed a process to be undertaken by DEQ and utilities
upon the identification of a groundwater exceedance near a coal ash pond, which
included performance of an assessment to determine the cause of the exceedance and,
as necessary, develop a Corrective Action Plan consistent with North Carolina
groundwater rules. He stated that under that process, only after a utility failed to
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undertake corrective action when directed to do so would DEQ consider pursuing
enforcement. He stated that at all times DEP has cooperated with the department in this
corrective action process and continues to do so to this day. (Tr. Vol. 21, pp. 67-73, 92-
93.)
Witness Wells also testified that North Carolina’s groundwater laws were not
intended, as witness Lucas contends, to be punitive. He explained that, for historical
sites such as those at issue in this case, this state's groundwater regulations and the
DEQ’s practices and policies are focused on environmental protection rather than
culpability, that the required corrective action is based upon science and not an
assessment of wrongdoing. He stated that, in evaluating Corrective Action Plans, DEQ
considers numerous factors, including the extent of any threat to human health, impact
on the environment, available technology, potential for natural degradation of the
contaminants, and cost and benefits of restoration. He cited the example that the
groundwater exceedances at the Sutton site were not the result of mismanagement. He
stated that the extraction and treatment costs witness Lucas recommends for
disallowance relate to work that DEP agreed to accelerate and would be required in the
normal course as a part of the groundwater corrective action under the CCR Rule and
CAMA. (Id. at 73-74, 93-94.)
At the hearing, in response to questions from counsel for the Sierra Club, witness
Wells characterized the 2L rule as a process that is set up to establish groundwater
standards around the basins, that recognizes that there is potential for impact to
groundwater beneath the basins, and that established compliance boundaries 500 feet
from the waste boundaries. He explained that the 2L rule structure is that upon detection
of a contaminant above a standard or above background at the compliance boundary,
one proceeds to the next step, assessment and, depending on the assessment, proceed
to corrective action. He noted that the rule is not, particularly with historical, lawfully
designed sites, intended to be punitive. He stated that noncompliance arises if the
company fails to take action upon detection, fails to follow the process set forth in 2L.
He testified that the policy statement contained at Section 2L.0103 is consistent with
that purpose. (Tr. Vol. 21, pp. 102-04.) In response to further questioning, witness Wells
clarified that groundwater corrective action plans are conducted in parallel with basin
closures, and that the groundwater corrective action plans will consider the various
methods of closure to understand those impacts to groundwater. He also noted that,
regardless of the closure method that DEP selects, groundwater can always be
addressed separately from the closure method. (Id. at 110.)
In his rebuttal, witness Wells also disagreed with witness Lucas that the amount
of litigation regarding the Company’s coal ash basins suggests that the Company was
imprudent in managing coal ash. He opined that the amount of litigation has been driven
by nongovernmental organizations that have been pressing for complete excavation of
coal ash from all basins across the Southeast. He stated that DEP has appropriately
been opposed to this, arguing instead that final closure methods should be dictated by
site-specific characteristics based upon science, regulatory policy, and the best interest
of our customers. He noted that DEP has resolved such litigation where CAMA made
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the suit moot and where science and engineering supported closure by excavation, and
that the Company continues to vigorously litigate cases where other closure methods
are more or equally protective of the environment at less cost. (Id. at 77-78, 94.)
Witness Wells’ rebuttal also addressed seeps. He explained that all earthen
impoundments seep, and that DEQ’s dam safety regulations acknowledge this. He
stated that EPA first directed permitting authorities to address seeps in 2010, and at that
time, the Company engaged DEQ to determine the appropriate approach to address
seeps and began including them in permit applications. He noted that DEQ did not
consider seeps to have a significant environmental impact. He also noted that EPA and
DEQ did not appear to agree on the appropriate approach to address seeps. He stated
that, absent the CCR Rule or CAMA, the existence of seeps in a basin would not on its
own automatically trigger basin closure and should not, therefore, impact the Company’s
ability to recover its CCR environmental compliance costs. He testified that, although
closing basins would be one way to address seeps, it would be the most drastic of
several possible remedies, and both EPA and DEQ have stated that seeps can be
addressed by permitting or rerouting, among other options. (Id. at 81-85, 95.)
Finally, witness Wells disagreed with witness Lucas’ suggestion that DEP caused
the creation and adoption of the CCR Rule. He testified that the environmental
regulatory regime is an ever-evolving body of law, and the EPA engaged in more than
two decades of studies before it finally issued a proposed CCR Rule in 2010. Through
this process, he noted, the EPA identified 150 cases in over 20 states involving over 25
utilities and government facilities that involved groundwater damage with at least a
potential link to coal ash, but determined that immediately closing basins, which would
require shutting down operating coal plants, would be more harmful than taking a
measured approach. (Id. at 85-87, 95-96.)
At the hearing, in response to questioning by counsel for the AGO and Public
Staff, witness Wells explained that previous reports, analyses, and communications
regarding how the Company’s coal ash basins will be managed indicate that prior to
CAMA and CCR Rule the regulatory approach and understanding of groundwater
associated with coal ash basins was maturing. For example, he stated that a 2004 report
analyzing long term coal ash strategy for the Sutton plant specifically appeared to have
been evaluating alternatives for that location given the evolving regulatory scrutiny of
coal ash basins and how the Company would manage that and any environmental
impacts going forward. Similarly with respect to a 2014 executive order from the
governor of North Carolina, which stated that the issue of coal ash storage had not been
adequately addressed in the state for decades, he testified to his belief that this
statement was not a reflect of any mismanagement or acts or omissions on Duke’s part,
but of an understanding of the maturity and evolving views of coal ash management
throughout the country, and of a recognition that historical designs and management
practices needed updating. He also testified that the Company’s guilty plea in the federal
criminal action was not a reflection of mismanagement of coal ash by the Company as
a whole. He acknowledged that the Company took responsibility for the allegations,
cooperated with government, and based on the facts at that time at those sites, agreed
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the Company did not meet its own standards. (See Tr. Vol. 21, pp. 123-25, 145-46.)
Witness Wells also noted that the full context of the depositions with DEQ personnel
demonstrates the normal cooperative process between the agency and the Company,
in which DEQ has final authority. (Id. at 136-39.) In response to questioning from the
Commission, witness Wells confirmed that DEP began voluntary monitoring of
groundwater in 2006 at facilities where monitoring was not already required. He
explained further that the Company was a member of the industry group (Utility Solid
Waste Advisory Group) that worked with EPA to address emerging issues, and that as
part of that group it agreed to implement groundwater monitoring at these sites and
share the results with the EPA. He agreed that the Company considered it reasonable
to begin the monitoring at that time even though it was not required, as part of the
continued evolution and maturation of the understanding in the industry of
environmental impacts of the basins. (Tr. Vol. 22, pp. 30-32.)
Commission Determinations
The Commission has reviewed with care the evidence on the issue of CCR
remediation cost recovery and the arguments and contentions of the parties. The
Commission cannot agree with the ultimate positions of any party. The Commission
rejects full recovery advocated by DEP, extensive disallowances advocated by others
and the “equitable sharing” concept advocated by the Public Staff.
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through witness Lucas: first, $88,000 of legal expense associated with two litigation
matters regarding alleged environmental violations, one brought by private parties and
one brought by NC DEQ, and, second, approximately $6.7 million in groundwater
extraction and treatment costs resulting from a settlement in the DEQ case, which
witness Lucas attributes to past violations by the Company of North Carolina’s
groundwater standards (the “2L Standards”). Third, Public Staff witnesses Garrett and
Moore recommended a disallowance totaling $109.8 million relating to the cost of off-
site transportation and disposal of coal ash from the Sutton and Asheville Plants, on the
grounds that prudence dictated that the coal ash be disposed of in on-site facilities to
be constructed rather than being hauled off-site.
The Public Staff, through witness Lucas, asserts that the rationale for
disallowance of the litigation expense and groundwater costs is that these costs flow
from “violations” of the law. (Tr. Vol. 18, p. 275.) Witness Lucas cites the Glendale Water
case (State ex rel. Utils. Comm’n v. Public Staff, 317 N.C. 26, 343 S.E.2d 898 (1986))
for the proposition that the legal expense should be excluded. (Id.) In that case, the
North Carolina Supreme Court held that legal expense associated with a penalty
proceeding in which the utility had been found to have violated the law should be
excluded. (Id.) Although he does not say so explicitly, the same rationale would apply
to witness Lucas’s exclusion of the groundwater extraction and treatment costs incurred
in a settlement context.
The distinction between the Public Staff recommended adjustment and Glendale
Water is that there is no finding in the litigation brought against the Company, or
admission by the Company in that litigation, that any “violation” actually occurred.
Witness Lucas’s testimony that the legal expense and the groundwater treatment cost
resulted from any “violation” is based on the “size of the settlements.” (Tr. Vol. 18, p.
386.) The settlements referenced by witness Lucas amount in total to $7.25 million –
$1.25 million to settle the private litigation, and $6 million to settle the DEQ litigation.18
Witness Lucas elaborated: “I made my [disallowance] decision on just the large amount
– the millions of dollars of settlements [that] were paid by the Company, and I don’t
believe that the Company would have made those large settlement sums unless it
believed it did have some fault.” (Id. at 386-37.)
The Commission determines that the facts in this case and Glendale Water are
distinguishable. Disputed matters are settled frequently, for many reasons other than
settling parties’ underlying view of the merits of the dispute. In this case, for example,
the Company and the Public Staff have entered into a Partial Settlement which includes
18 Witness Lucas acknowledges that the settlement amount is not included in the Company’s cost of
service, and that the Company is not seeking to recover it in rates. (Tr. Vol. 18, p. 277.)
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an ROE of 9.9% (versus the Public Staff’s recommendation of 9.2%), and a capital
structure of 52% equity and 48% debt (versus the Public Staff’s recommendation of
50/50). This proposed settlement results in millions of dollars paid by customers over
and above the Public Staff’s pre-settlement position, but that does not mean that the
Public Staff has disavowed its pre-settlement position.
The Commission determines that entering into a settlement does not equate to
an admission of guilt or wrongdoing. The North Carolina Rules of Evidence prohibit
parties from using the existence of a settlement as evidence of liability. 19 The Public
Staff has defended as good regulatory policy the encouraging of reasonable and prudent
settlements. In 2016, NC WARN filed a Petition for Rulemaking seeking to require
settlements between the Public Staff and utilities to be made open to the public. (Tr. Vol.
20, p. 157); See also In the Matter of Rulemaking Proceeding to Consider Proposed
Rule Establishing Procedures for Settlements and Stipulated Agreements, Order
Declining to Adopt Proposed Settlement Rules, Docket No. M-100, Sub 145 (Mar.1,
2017) (“Settlements Order”). The Public Staff opposed NC WARN’s petition, arguing
that public policy favors settlements:
Further, the Public Staff cited to North Carolina case law “touting the benefits of
settlements” in business litigation. (Tr. Vol. 20, p. 158; Settlements Order at 3 (citing
Knight Pub. Co., Inc. v. Chase Manhattan Bank, N.A., 131 N.C. App. 257, 262 (1998)
(Knight)). The Public Staff relied on the principle articulated in Knight that North Carolina
“law favors the avoidance of litigation,” and a compromise made in good faith “will be
sustained as not only based upon sufficient consideration but upon the highest
consideration of public policy as well.” (Tr. Vol. 20, p. 158 (quoting Knight, 131 N.C. App.
at 262 (emphasis added) (internal quotations omitted)). The Commission determines
that it should not approve a disincentive to settle pending or future lawsuits.
19 N.C. R. Evid. 408 (“Evidence of (1) furnishing or offering or promising to furnish, or (2) accepting or
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These considerations likewise apply to the groundwater treatment costs witness
Lucas seeks to disallow, which are the subject of the settlement agreement between
DEQ and the Company (DEQ Settlement Agreement). (See Public Staff Wright Rebuttal
Cross- Examination Ex. 7.)20 The DEQ Settlement Agreement references in its recitals
a DEQ “Policy for Compliance Evaluations” promulgated in 2011. It appears from the
recitals and their description of that Policy that questions as to whether violations of the
state’s groundwater standards have occurred. (See DEQ Settlement Agreement, at 3,
4-5.) The recitals also indicate, with the passage of CAMA, that the Company would be
required to close its coal ash basins, and that CAMA “dictate[d], in detail a procedure
for assessing, monitoring and, where appropriate, remediating groundwater quality in
areas around coal ash impoundments in North Carolina ….” (Id. at 3-4.) Further, in the
recitals the DEQ acknowledged that the CAMA requirements were “designed to
address, and will address, the assessment and corrective action” associated with
alleged groundwater contamination. Because CAMA would require the Company to
implement certain action, the Commission determines that it was reasonable for the
parties to settle irrespective of whether the Company had committed violations of 2L
Standards. Had the Company continued to litigate the matter in this circumstance, its
actions may have been deemed by the Public Staff and this Commission to be
imprudent, with a disallowance of the legal costs incurred in connection with continued
litigation disallowed.
Witness Wells argued that DEP’s compliance record with respect to NPDES
permits has been exemplary. He stated that the Company has consistently complied
with the terms of its NPDES permits over the years, and that, of well over 70,000 data
points, it has had fewer than 200 permit violations, which is less than one half of 1% at
all seven of its facilities in the last 10 years. Specifically with regard to Asheville, Cape
However, they do not apply to DEP’s representations in the federal district criminal court proceeding
20
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Fear, H.F. Lee, Sutton, Roxboro, and Weatherspoon plants, witness Wells noted that
DEP has had no more than 20 NPDES permit exceedances during this time frame. 21 He
stated that, when compliance issues have arisen at individual plants, DEP has
addressed those issues with regulators. (Id. at 62-63, 88-89.) Witness Wells argued
further that impacts to the groundwater surrounding coal ash basins are an expected
result of using unlined basins and are not the result of any mismanagement. At the time
they were built – between 1956 and 1985 – unlined basins were consistent with the
industry standard and considered by the EPA to be the best available control
technology. (Tr. Vol. 21, p. 67.) In 1984, when the predecessor to DEQ promulgated the
corrective action provisions of the 2L Standards, it acknowledged that the groundwater
surrounding many existing permitted facilities was likely to exhibit some exceedances
of the 2L Standards through no fault of the facility owner. (Id.) As stated above, the
Commission deems this testimony instructive.
Witness Wells also disagreed with the Public Staff’s suggestion that any
exceedance or violation of water quality regulations, no matter how minor or how long
ago, leads to the denial of cost recovery for any activity that acts to “cure” the impacts
of the violation. In addition to reiterating that not all exceedances of the 2L standards
amount to a violation that requires corrective action under the 2L rules, witness Wells
stated that even when an exceedance requires corrective action, the groundwater rules
do not treat the exceedance the same way as, for example, the Clean Water Act treats
an exceedance of an NPDES permit limit. When the latter is violated, he explained, the
permittee is immediately subject to an NOV and penalty, and must ensure the next
discharge complies with the permit limit or risks a new NOV and escalating penalty. He
stated that, in those circumstances, it would be reasonable to say that allowing the
violation to continue without addressing it is mismanagement.
21 In reviewing witness Lucas’ revised Exhibit 5, witness Wells concluded that if one were to remove
the Mayo-specific events, Lucas’ exhibit only indicates 4 permit exceedance violations for the other six DEP
sites in the last 10 years.
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Witness Wells further argued, persuasively in the Commission’s view, that the
groundwater extraction and treatment activity that DEP performed pursuant to the DEQ
Settlement Agreement merely accelerated work that would have been required under
CAMA in any event. (Id. at 76.) Although CAMA borrows heavily from the 2L Rules,
including by incorporating the substance of its corrective action requirements, one key
difference between the two laws is that CAMA’s groundwater assessment and corrective
action provisions are triggered by exceedances – not violations – of the 2L groundwater
standards. In other words, unlike the 2L Rules, CAMA requires utilities to perform
groundwater assessment and corrective action for all identified exceedances of the 2L
groundwater22 standards regardless of whether the exceedance amounts to a violation
of the applicable groundwater standard.
The Commission determines that there is insufficient evidence that the Company
would have had to have engaged in any groundwater extraction and treatment activities
absent the obligations imposed upon it by CAMA and/or the CCR Rule.
The Commission determines that the limitations of witness Lucas’s approach are
demonstrated by his inability to answer with any specificity on cross-examination: “From
1920 until 2014, with respect to … [the] Company’s ash basins in this state, what should
we have done differently and when should … [it] have done it?” (Tr. Vol. 19, p. 35.) His
response essentially was that “Somewhere along the line the Company should have
taken some kind of action to not contaminate groundwater.” (Id. at 36.) But the kinds of
actions he appears to have favored – such as lining ash ponds when this was contrary
to standard practice, or creating dry coal ash basins when for the most part the
Company’s industry peers were sluicing coal ash into wet basin impoundments, would
(a) have cost money which would have been charged to customers, or (b) would have
left the Company open to credible claims of “gold-plating,” and therefore cost
disallowance, which would have prevented the Company from moving forward with
these suggested improvements in the first place. Witness Lucas and the Public Staff
fault the Company for not taking steps that were not in accord with steps most of the
industry was following, but at the same time disregarding responsibility of paying for that
which they – in 20/20 hindsight – wish the Company had done.
22 Id.; see also N.C. Gen. Stat. § 130A-309.211. When preparing a corrective action plan, CAMA does
not require the utility to describe any 2L violation and instead required only a “description of all
exceedances of the groundwater quality standards, including any exceedances that the owner asserts
are the result of natural background conditions.” N.C. Gen. Stat. § 130A-309.211(b)(1)a (emphasis
added).
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prudently incurred to comply with the Company’s obligations under CAMA and the CCR
Rule. The Commission determines that they therefore would be recoverable in rates, as
would be the $88,000 in legal fees that witness Lucas also proposed excluding as
settlement agreement expenditures were it permissible to view them as standard
allowable expenditures but for DEP‘s admissions in the federal criminal court action
where DEP pled guilty to mismanagement and the timing with compliance with CAMA.
The AGO, Sierra Club, and other intervenors make similar arguments that DEP
has failed to keep pace with industry standards and therefore DEP should not be allowed
to recover current environmental compliance costs in rates. The Intervenors argue that
DEP should have done more than just comply with the current environmental regulations
at the time. However, AGO witness Wittliff testified that the definition of industry
standards is compliance with law.23 (Tr. Vol. 15, p. 100.) Based upon the evidence
presented in this case, with the exception of the federal criminal case to which DEP pled
guilty, DEP has not been found liable for violations of the law. As stated above, the
Commission will not use settlement agreements to find liability. The AGO asserts that
this Commission should consider all of the seeps located at its ash basin sites and deny
of recovery of CCR costs. However, as stated in the criminal case which covered
engineered seeps, DEQ and DEP have been in long-standing negotiations as to
whether seeps are a violation of law and since 2014 whether seeps should be covered
by the NPDES permit. (Wittliff Ex. 5, pp.78, 95.)(Wittliff Ex. 5.2, p. 44.) According to
statements made in the criminal case, DEQ has currently not made a determination on
this issue.(Wittliff Ex. 5.2, p. 44.) The Commission finds witness Wells’ testimony
persuasive that any past violations by DEP do not give support to the amounts of cost
disallowances advocated by the Intervenors and the Public Staff in this case.
Lastly, although the record is not crystal clear as to whether DEP is seeking
bottled water costs, or the amount of any bottled water costs, and no party has asked
for a specific disallowance for the cost of bottled water, the Commission finds that DEP
shall remove from its request any costs for bottled water, if any, that it may have agreed
to provide pursuant to any lawsuit.
Garrett and Moore: Off-Site Transportation and Disposal of Coal Ash and
Related Costs
The Public Staff, through witnesses Garrett and Moore, asserts that the Company
acted imprudently in arranging for off-site handling of CCRs from the Sutton and
Asheville Plants, and contends that disposal should have occurred at to-be-constructed
on-site landfills, thereby saving primarily on the cost of off-site transportation. Garrett
23 Upon redirect, when asked how DEP’s management of ash ponds were different from industry
standards, AGO witness Wittliff responded, “Well, I think there were a number of companies that were doing
exactly what Duke did.” (Tr. Vol. 15, pp.112-13.) When asked as to whether there were any other ways
besides compliance that DEP did not comply with industry standards, he responded, “I don’t know … do
you have a specific thing in mind that you’re wanting?” (Tr. Vol. 15, 114.) He went on to testify that the
“standard, is compliance.” (Tr. Vol. 15, 114.)
184
and Moore also expressed concern with respect to the costs the Company agreed to
pay with respect to Asheville Plant coal ash, contending that it was excessive. The
Public Staff recommends that a $80.5 million disallowance be applied with regard to
Sutton Plant coal ash (Tr. Vol. 18, p. 180), and that a $29.3 million disallowance be
applied with regard to Asheville Plant coal ash (id. at 182), for a total recommended
disallowance of $109.8 million. The Commission rejects these discrete adjustments but
takes these allegations into account in its mismanagement adjustments. Company
witness Kerin indicates that he does not disagree that an on-site landfill was the best
solution for the Sutton Plant – indeed, at Sutton, the Company built an on-site landfill,
which became operational in July 2017, and is placing coal ash in that landfill today. (Tr.
Vol. 20, p. 65.) The issue with respect to an on-site landfill at both sites is feasibility in
light of the basin closure deadlines imposed by CAMA, and in the case of the Asheville
Plant, modified by the Mountain Energy Act of 2015 (“MEA”), which requires the
Company to construct a new combined cycle power plant and facilitate the shut-down
of the existing Asheville coal-fired plant by January 31, 2020. (Id. at 43.)
The CAMA and, in the case of the Asheville Plant, MEA, deadlines would provide
the overarching framework by which prudency must be assessed, were the Commission
to ignore the contributing factors leading to CAMA and were the Commission to ignore
DEP’s admitted mismanagement with respect to CCR activities in its criminal court
pleas, because an alternative proposed action would have to be feasible in order to truly
be an alternative. 1988 DEP Rate Order, at 15. Witness Kerin’s rebuttal testimony shows
that Garrett and Moore’s proposed alternative – on-site disposal – was not feasible in
the time frames available to the Company, particularly, as Kerin testified, “missing the
required CAMA date was not an option ….” (Id. at 39.)
The Commission finds merit in DEP’s assertions that the Garrett and Moore
timeline for Sutton “was a ‘perfect world’ scenario without due consideration of the
inherent uncertainty of permitting any type of landfill, especially a CCR landfill,
particularly during the regulatory and political environment of 2014.” (Id. at 37.)
Perfection is not the standard. As an example of imperfection, Kerin points to the
unexpected “environmental justice” review imposed by DEQ (Id. at 65-67), that caused
a six-month delay in the issuance of the Sutton on-site landfill permit. Also, within weeks
of the permit’s final issuance, Hurricane Matthew blew through the area, impacting
landfill construction. The Commission, however, agrees with Garrett and Moore and
disagrees with witness Kerin that the moratorium prevented DEP from constructing a
new CCR repository in the footprint of a preexisting repository once it had been
excavated. DEP’s reading of the provisions of the statute is strained and out of accord
with a common sense interpretation. (Id. at 67-68.) However, DEP may have acted in
response to its erroneous and overly cautious interpretation in light of the compressed
time frame under which it operated.
DEP also confronted two limitations dealing with NCDEQ standards addressing
dewatering and closure by removal of CCRs from surface impoundments. The standards
address remediation of discharges or releases of contaminants into soil and groundwater
to cleanup levels to meet the State’s 2L groundwater standards.
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To fully excavate CCRs for repurposing, bulk dewatering is necessary as well as
interstitial dewatering from submerged ash. DEQ completed applicable regulatory
requirements in 2015. For Sutton, the requirements were specifically detailed in the
amended and approved NPDES permit in December 2015. As these dewatering
requirements were not defined by DEQ in 2014 or 2015, a viable option for converting the
existing CCR impoundment at Sutton to a new landfill did not exist then.
The Commission determines that similar considerations come into play when
assessing the prudence of the Company’s decision to transport Asheville Plant CCRs
offsite once CAMA became law. (Id. at 42.) The MEA, while extending the closure
deadline to August 1, 2022, required construction of a new combined cycle plant. (Id. at
43.) The new plant must be built on the site of one of the Asheville Plant’s basins. This
meant that that basin had to be emptied of coal ash. That, along with the need for an
extensive construction laydown area necessary to allow efficient construction of the new
plant, left no space at the Asheville Plant site in which to build an on-site landfill. As
witness Kerin put it, the MEA “effectively made construction of a new on-site CCR landfill
technically infeasible given the short time period to replace the coal-fired generation by
2020, and close the coal ash basins by 2022.” (Id. at 43.)
In the 1988 DEP Rate Order, this Commission stressed the importance of
carefully examining the Company’s explanations of the decisions it made, as of the time
they were made, and emphasized that the credibility of the decision-makers, particularly
in juxtaposition to after-the-fact analyses, presented by Intervenor-retained consultants.
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See, e.g., 1988 DEP Rate Order, at 29. The Commission does not question the bona
fides or expertise of Garrett and Moore; indeed, witness Kerin notes (and appreciates)
that they “conducted a thorough and principled analysis” of the Company’s CAMA/CCR
Rule compliance costs, and that he agreed with “the majority of their conclusions.” (Tr.
Vol. 20, p. 56.) The Commission determines, however, that witness Kerin has “lived”
this project since its inception (Id. at 32), and relies upon his testimony regarding the
decisions made, and determines that the Garret and Moore adjustments, other than to
the extent addressed indirectly in the Commission’s management penalty, will not be
adopted.
Witnesses Garrett and Moore also asserted that that DEP exclusively should
have utilized the Cliffside landfill in lieu of the Homer, Georgia landfill due to closer
proximity and the lower cost of the Cliffside landfill. (Tr. Vol. 18, pp. 182-83.) However,
in live testimony at the hearing, witnesses Garrett and Moore accepted that moving the
required coal ash from Asheville to Cliffside, as they testified should have been done,
would have amounted to 30,162 truckloads, 3,619,440 miles of driving, equal to about
145 trips around the earth. (Id. at 198-99.) They also agreed that for a six-month period
of time this would require moving 4,292 tons of coal ash per day, by 232 trucks per day,
which means one truck leaving the site every two minutes. (Id. at 199.)
Witness Kerin, noting that Garrett and Moore had not accounted for over 500,000
tons of coal in their analysis, demonstrated the infeasibility of their approach. He
indicated on cross-examination by counsel for the Public Staff that the Company was
already sending 195,000 tons of coal ash to Cliffside at that time, and that the additional
558,000 tons proposed by witnesses Garrett and Moore would have resulted in about
40,000 loads, “or loading a truck every minute and a half, loading, moving, scales,
washing, getting it through the site and getting it on the highway. Virtually impossible at
that site, if you have ever been to the Asheville site where the ’82 basin is, to move that
many trucks through that site and out of that basin in a minute and half per truck.” (Tr.
Vol. 20, p. 113.) The Commission agrees with DEP that infeasible options do not support
a finding of discrete adjustments for imprudence. 1988 DEP Rate Order, at 15. The
Commission determines that witness Kerin’s testimony demonstrates that the
Company’s actions and real-time decisions regarding the Ashville site were in fact
reasonable and prudent in the context of the requirement of CAMA and the MEA, and
that the costs, in the context of analysis the witnesses undertook, were in fact prudently
incurred. As such, no discrete disallowance is approved with the exception of the
increased contracted disposal costs with Waste Management, Inc. of $9.5 million. The
Company essentially agreed that this adjustment for contractual coal ash moving
expense was appropriate and the Commission agrees.
The Commission finds that the costs are known and measurable, when viewed
in isolation and without regard to the broader context of DEP’s admission of criminal
negligence in the management of its CCR activities, and the cost increases arising from
the CAMA schedule, the costs, with noted exceptions, were reasonably and prudently
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incurred, and are used and useful in the provision of service to customers. But for the
Company’s admissions of mismanagement and the extent such conceded
mismanagement was a contributing factor resulting in the enactment of CAMA, they
should be recoverable from customers.
But for the management penalty discussed below, the Commission deems the
Company’s proposal, which submits that the amortization period should be five years,
would be reasonable and appropriate. The five-year period suggested by the Company
is identical to the period over which Dominion’s already-incurred coal ash basin closure
costs were amortized in the 2016 DNCP Rate Case. It further had the virtue, when
originally proposed, of being identical to the five-year period over which the Company
proposed to return to customers excess deferred taxes resulting from the change in
North Carolina’s income tax rate (see Tr. Vol. 6, p. 129), although that time period was
later reduced as part of the Partial Settlement with the Public Staff to four years. While
the amount of the excess deferred tax regulatory liability (approximately $150 million;
see Peedin Revised Exhibit 2, Schedule 1, Line 1) is less than the coal ash basin closure
cost deferred balance that the Company seeks recovery of in this case (approximately
$242 million), both are substantial. It would be reasonable to use similar amortization
periods for both the deferred tax regulatory liability returned to customers (with a return)
and the coal ash basin closure regulatory asset collected from customers (also with a
return).
Witnesses Lucas and Maness, for the Public Staff, propose a 50% disallowance
of the Company’s already-incurred coal ash basin closure costs through what Maness
terms a 50/50 “equitable sharing” arrangement between shareholders and customers.
(Tr. Vol. 18, p. 309.) He implements this sharing concept with two steps. First, he
removes the unamortized coal ash basin closure costs from rate base, thereby
eliminating any return on that unamortized balance. (Id.) The second step is to choose
an amortization period that will result in the desired level of “sharing.” (Id. at 10.) As the
Public Staff’s desired level is 50/50, mathematically that results in a 26-year amortization
period at the rate of return the Company and the Public Staff agreed, subject to the
Commission’s approval, was appropriate in this case. (Id. at 344-45.) As witness
Maness acknowledged, with a different rate of return, “the number of years might be
different to reach the 50 percent mark.” (Tr. Vol. 19, p. 59.)
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The Commission agrees with DEP that this adjustment is not based on an
applicable standard. The Public Staff chose this number, then adjusted the mechanism
to achieve that level of disallowance. The Public Staff provides insufficient justification
for the 50/50 as opposed to a 60/40, or 80/20. Witness Mannes indicates merely that it
“was the judgment of the Public Staff … that 50 percent was a reasonable percentage.”
(Id.)
Ultimately, the Public Staff, through Witness Maness, indicates that it is “up to
the Commission’s discretion to determine what [the] sharing should be.” (Tr. Vol. 19, p.
69.) Even if the equitable sharing mechanism were without legal impediments, the
Commission chooses in the exercise of its discretion not to adopt this recommendation
but instead on an alternative remedy addressed below. The Public Staff bases its
proposal on two principles: first, the Company’s alleged past failures, as detailed in the
testimony of Public Staff witness Lucas, to prevent environmental contamination from
its coal ash basins, and, second, an asserted “history of approval of sharing of extremely
large costs that do not result in any new generation of electricity for customers.” (Tr. Vol.
18, p. 309.)
As to the first asserted predicate, the parties dispute the existence of failures.
The Commission addresses Wells’ testimony, above, but whether or not the Company
were guilty of some sort of violation appears not to be material to the Public Staff’s 50/50
sharing proposal. Witness Maness admitted, in response to questions from the
Chairman, that all of these alleged acts or failures to act occurred in the past. (Tr. Vol.
19, pp. 60-61.) Witness Maness’s response to the Chairman’s questions leads to the
true heart of the matter – the Public Staff’s position, simply stated, is that it does not
matter if the Company’s actions in incurring the CCR Rule and CAMA compliance costs
were prudent – the Public Staff’s 50/50 equitable sharing proposal would still apply. As
Maness testified, “[E]ven if you left out specific acts or omissions of the Company and
assumed everything was prudent, aboveboard” (Tr. Vol. 19, p. 61), the Public Staff
would (at least “likely”) still recommend the 50/50 equitable sharing proposal. (Id.)
Accordingly, the real rationale for the Public Staff’s proposal appears to be witness
Maness’s second predicate: the proposition that the Commission has a “history of
approval of sharing of extremely large costs that do not result in any new generation of
electricity for customers.” (Tr. Vol. 18, p. 309.)
189
new generation for which cost recovery is routinely allowed. (Id.) This is yet another
example of the arbitrariness inherent in the Public Staff’s sharing proposal. While the
Commission in the past has made decisions to avoid “rate shock,” that equitable
principle does not apply here in the context of the recommended cost disallowances.
On another level, it appears that witness Maness is saying that this rationale for
the sharing proposal is grounded in the Public Staff’s view of the discretion available to
the Commission. He states first that pursuant to G.S. 62-133(b)(1), and with the
exception of construction work in progress under certain circumstances, “the only costs
that the Commission is required to include in rate base are … the ‘reasonable original
cost of the public utility’s property used and useful, or to be used and useful within a
reasonable time after the test period ….’” (Tr. Vol. 18, p. 310.) He indicates that he is
advised by counsel that “beyond these requirements what is and what is not in rate base
is fully within the Commission’s discretion to decide, as long as the rates set thereby are
fair and reasonable to both the utility and the consumers.” (Id.) The Commission
determines that the Public Staff’s view of the Commission’s discretion is overly broad,
however, and not supported with the cited Supreme Court precedent. Likewise, to the
extent the Public Staff is correct in its arguments that the Commission has the discretion
to accept the Public Staff’s equitable sharing remedy, the Commission declines to do so
in favor of an alternative remedy addressed below.
As expressed through witness Maness’s testimony, the Public Staff looks to the
Commission’s Order Granting Partial Increase in Rates and Charges in Docket No. E-
2, Sub 526 (Aug. 27, 1987) (the 1987 DEP Rate Order) and its affirmance by the
Supreme Court in Thornburg I, 325 N.C. 463, 385 S.E.2d 451 (1989) as precedent for
its 50/50 equitable sharing concept. The Commission determines that the more
compelling precedents are the 1988 DEP Rate Order and the Commission’s Order
Denying Motions for Reconsideration in the 1988 DEP Rate Case (Docket No. E-2, Sub
537) (1988 DEP Reconsideration Order), and the Supreme Court’s reversal in part of
those Orders in Thornburg II, 325 N.C. 484, 385 S.E.2d 463 (1989). The principal issue
in the 1987 DEP Rate Case/Thornburg I was whether the Company could recover in
rates any portion of the costs associated with the abandoned Units 2, 3, and 4 of the
Shearon Harris nuclear plant. The Commission had previously decided that the
Company could amortize the unrecovered costs associated with these abandoned units
over a ten-year period, but that “no ratemaking treatment should be allowed which would
have the effect of allowing … [the Company] to earn a return on the unamortized
balance.” 1987 DEP Rate Order, at 61. Over the objections of the AGO, the Commission
decided to continue to follow that process in the 1987 case – it allowed amortization of
abandonment costs over a ten-year period as an operating expense under
G.S. 62-133(b)(3) and 62-133(c), but no return authorized on the unamortized balance.
The North Carolina Supreme Court, in a passage extensively quoted in witness
Maness’s testimony (see Tr. Vol. 18, pp. 311-12), affirmed the Commission’s decision,
holding that G.S. 62-133(b)(3) and 62-133(c) were elastic enough to include
abandonment costs as utility “expense,” and that G.S.. 62-133(d), which allows the
Commission to factor in “all other material facts of record that will enable it to determine
what are just and reasonable rates,” also provided support for the Commission’s
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decision. The Court further held that as a matter of policy a return of, but not a return
on, the abandonment costs was appropriate. Thornburg I, 325 N.C. at 476-81, 385
S.E.2d at 458-61.
In Thornburg I, the Court held specifically that the Commission’s recovery but no
return decision was “within the Commission’s discretion” and would not be disturbed. Id.
at 481. That decision effected a “sharing” between the Company’s shareholders, on the
one hand, and its customers, on the other – shareholders received a return of the costs,
but no return on the costs. It is based upon this holding that the Public Staff, through
witness Maness’s testimony, contends that “reasonable rates can include a sharing
between ratepayers and investors with regard to plant cancellation costs” (Tr. Vol. 18,
p. 311), and that the Commission possesses discretion to implement this sharing.
There are, however, significant distinctions between the 1987 DEP Rate
Case/Thornburg I and the present case. First and foremost, this case does not involve
“abandoned plant” or cancellation costs. Rather, it involves “reasonable and prudent”
and “used and useful” expenditures by the Company, similar to the Commission’s
determination in the 2016 DNCP Rate Order. As such, the authority the Public Staff
relies upon to support its “equitable sharing” concept does not support the exercise of
discretion as the Public Staff maintains. This can be seen when examining other prior
orders of this Commission and the correct Thornburg case: the 1988 DEP Rate Order,
the 1988 DEP Reconsideration Order, and Thornburg II.
In the 1988 DEP Rate Case, the principal issue for decision was the
reasonableness and prudence of the costs of constructing and placing into service Unit
1 of the Shearon Harris nuclear plant. The Commission found that for the most part,
Harris Unit 1 costs were reasonable and prudent, and that part of the 1988 DEP Rate
Order was upheld by the Supreme Court. 325 N.C. at 489, 385 S.E.2d at 465-66 (finding
“no error” in that part of the Commission’s Order). However, a part – $570 million- worth
– of the costs the Commission considered were incurred in connection with facilities to
be shared with Units 2, 3, and 4, units that the Company had abandoned. The
Commission found that while these costs were prudently incurred, they should be
shared between the Company’s customers and its shareholders. The Commission
found that approximately $180 million of those costs were properly classified as
“abandonment” costs and should be borne by shareholders. 1988 DEP Rate Order, at
112-14. The remaining $390 million were left in rate base.
Responding to the Public Staff’s request that the Commission reconsider this
decision and remove the entire $570 million from rate base on the grounds that all of it
related to abandoned plant, the Commission reaffirmed its decision in the 1988 DEP
Reconsideration Order and provided additional explanation for its ruling. It stated (1988
DEP Reconsideration Order, at 2-3) that the Public Staff’s request that the full $570
million for the common facilities be treated as abandonment costs was based upon a
“misunderstanding” of the 1988 DEP Rate Order and the Commission’s objective in
splitting this $570 million item into $390 million of rate base and $180 million of
cancellation costs. The Commission did not (it says in the 1988 DEP Reconsideration
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Order) intend to treat the “excess common facilities” as abandoned plant; rather, it
effected an “equitable sharing” (emphasis added) of the $570 million between
customers and shareholders. The Commission reiterated that the Company’s choice of
the cluster design – which engendered the shared facilities – was reasonable and
prudent, and that, except as specifically indicated in the 1988 DEP Rate Order, the costs
of the Shearon Harris plant were “reasonable and prudently incurred.” Thus, the
Commission found, the $570 million at issue was also reasonably and prudently
incurred.
Nevertheless, the Commission held (Id. at 4-5) that it was appropriate to share
the $570 million at issue, and it indicated that it arrived at the allocation (essentially one-
third to cancellation costs and two-thirds to rate base) on its own and adopted it “for
reasons of fairness and equity.” It held that it continued “to believe that a reasonable
and equitable apportionment of the burden and risks associated with … [the Company’s]
prudent investment in common facilities is appropriate.” It stated further that its
assignment of $180 million as the value of the Company’s prudent investment in
common facilities to be treated as cancellation costs for ratemaking purposes was an
appropriate exercise of its “regulatory discretion.”
The North Carolina Supreme Court disagreed. The Court held that the
Commission did not possess the discretionary power to effectuate its “equitable sharing”
decision. Rather, the facilities were either “used and useful,” and therefore in rate base,
or they were not. The Court looked to the Commission’s finding that the facilities in
question were “excess common facilities,” and held that “excess” facilities were not
“used and useful” as a matter of law. 325 N.C. at 495, 385 S.E.2d at 469. Accordingly,
looking to the correct Commission and Supreme Court precedent, these determinations
are insufficient support for the Public Staff’s “equitable sharing” concept.
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Expenditures on Manufactured Gas Plant Claims: Recent Developments Regarding
Insurance Coverage and Rate Relief, Nicholas Fels, William Skinner and Saul Goodman,
p. 44 (August 1, 1996). The Commission finds that the Commission’s decision in Docket
No. G-5, Sub 327, Public Service Co. of North Carolina, 156 PUR 4th 384 (October 7,
1994), is distinguishable from the CCR remediation costs at issue in this case and
moreover not precedent the Commission chooses to follow to provide for sharing in the
present case.
The issue that remains is whether the already-incurred costs expended by the
Company in connection with its CCR Rule/CAMA compliance obligations are “used and
useful” and “prudent and reasonable.” DEP argues that the Commission has already
decided this issue, in the 2016 DNCP Rate Order, where it held that costs expended for
the identical purpose were “used and useful.” 2016 DNCP Rate Order, at 60-62, and that
were the Commission to decide differently in this case, the Commission would be acting
arbitrarily and capriciously. DEP cites Gregory v. County of Harnett, 128 N.C. App. 161,
164-65, 493 S.E.2d 786, at 788 (1997) (County Commission, which approved a zoning
application restricting mobile home development three days after rejecting an almost
identical application, acted arbitrarily and capriciously). 24 The Commission disagrees.
While the Commission’s Order here is consistent with the logic of its DNCP Order, it
disagrees with DEP that it is bound to follow it. The Commission expressly stated that its
CCR determinations in the DNCP Order were non-precedential. Moreover, this is a
ratemaking decision in which the Commission exercises its legislative authority.25 Its past
decisions are neither binding, res judicata26 nor stare decisis.27
In its cross-examination questions (see, e.g., Tr. Vol. 14, pp. 236-37), the Public
Staff suggests that if the Company truly thought the coal ash basin closure costs were
“used and useful” it should have put them directly into rate base as opposed to deferred
into a regulatory asset via ARO accounting. Witness Maness stated such in his
responses to the Chairman’s questions, indicating that he had struggled with the issue
but had not “found anything direct yet” in the accounting literature. (Tr. Vol. 19, p. 66.)
The accounting issue, as far as witness Maness is concerned, is how the Company’s
coal ash basin closure costs could be classified as “plant,” and therefore eligible to be
24 While certain Intervenors argue that Dominion’s situation is different from the Company’s in that
Dominion had not committed environmental “violations,” this purported distinction is of no moment.
Dominion in fact has been the subject of regulatory scrutiny with respect to its Chesapeake Plant, and
has been the target of lawsuits brought by environmental advocacy organizations in connection therewith.
(Tr. Vol. 20, pp. 135-37, 171-72, 189.)
25State ex rel. Utils. Comm’n v. Edmisten, 294 N.C. 598, 242 S.E. 2d (1978) (ratemaking activities of
the Utilities Commission are a legislative function).
26 Id. (only specific questions actually heard and finally determined by the Utilities Commission in its
judicial character are res judicata).
27 State ex. Rel., Utils. Comm’n v. Carolina Utility Customers Ass’n, Inc., 348 N.C. 452, 500 S.E. 2d
693 (1998) (Utilities Commission orders in rate cases are not within the doctrine of stare decisis).
193
included in rate base, when they are actually accounted for in an ARO, which deals with
retirement costs. (Id.) witness Maness also indicates that the Company “chose[] not to
propose to include these type of costs … as utility plant and service.” (Id. at 67.)
The Commission disagrees with the Public Staff’s characterization. First, the
Company did put coal ash basin closure costs directly into rate base. See Bateman
Supplemental Ex. 1, p. 54. The costs were included in the Working Capital section of
rate base (Id. at 53), and no party has taken the position that their inclusion therein was
inappropriate.28
The AGO makes a related argument in its post-hearing Brief. The AGO argues
that DEP failed to request in advance permission to create a deferred account. Contrary
to witness Maness’s indication that the Company had any “choice” in the matter, and
the AGO’s argument, upon the passage of CAMA and the promulgation of the CCR
Rule, the Company was required by GAAP to establish an ARO. The accounting
guidance (ASC 410-20-15-2) states that it applies to “Legal obligations associated with
the retirement of a tangible long-lived asset,” and “legal obligation” is defined (ASC 410-
20-20) as an “obligation that a party is required to settle as a result of an existing or
enacted law ….” (Emphasis added). Once it became clear that the new laws and
regulations governing coal ash would require closure of the Company’s existing coal
ash basins, GAAP required that an ARO be established, and the Company had no
choice in the matter. As the Public Staff and the Commission have noted previously,
“Statements of the FASB are officially recognized by the Securities and Exchange
Commission (SEC) as authoritative with regard to GAAP in the United States, and the
requirements included in those Statements are essentially mandatory for any publicly
traded entity.” See Order Granting in Part and Denying in Part Request for Deferral
Accounting, Docket E-2, Sub 826 (April 4, 2003), at 13. Moreover, DEP notified the
Commission of its establishment of the ARO.
Like any other business, a public utility must at all times have on hand a
reasonable amount of materials and supplies and a reasonable amount
of funds for the payment of its expenses of operation. While Chapter 62
of the General Statutes makes no reference to working capital, as such,
the utility’s own funds reasonably invested in such materials and supplies
and its cash funds reasonably so held for payment of operating expenses,
28 While witness Maness removed the Company’s coal ash basin closure costs from Working Capital
section of rate base, he did so not because of any quarrel with their inclusion therein, but in order to give
effect to the Public Staff’s 50/50 “equitable sharing” proposal. (See Tr. Vol. 18, p. 309.)
194
as they become payable, fall within the meaning of the term “property
used and useful in providing the service” … and are a proper addition to
the rate base on which the utility must be permitted to earn a fair rate of
return.
Conversely, the utility is not entitled to include in its rate base funds which
it has not provided but which it has been permitted to collect from its
customers for the purpose of paying expenses at some future time and
which it actually uses as working capital in the meantime.
285 N.C. at 414-15, 206 S.E.2d at 295-96. As the Company appropriately accounted for
coal ash basin closure costs in the working capital section of rate base, and as these
funds were investor-furnished, not customer- furnished, VEPCO holds that they are
“used and useful” within the meaning of G.S. 62-133(b)(1) in the provision of service. As
such, the Company is entitled to earn a return on those funds over the period in which
the costs are amortized.29
A concrete illustration highlights this issue more clearly. Take, for example, the
new coal ash landfill that the Company constructed at the Sutton plant. The landfill “went
into service in July … [2017], and … [the Company is] placing ash in the landfill today.”
(Tr. Vol. 20, p. 65.) The Public Staff, through its consultants Garrett and Moore, has no
quarrel with the construction of the landfill or its cost, except for the liner chosen, and
agrees that the funds expended in constructing this landfill were reasonable and
prudent. The Public Staff maintains however that the landfill should have been
constructed sooner and so has proposed a disallowance of the cost of off-site
transportation and disposal of coal ash from the Sutton plant. The landfill is “used and
29 Even if for some reason some portion of the Company’s already-incurred coal ash basin closure
costs might not be classified as “used and useful,” that does not mean that they are not recoverable or
that the Company may not earn a return on them. In Dominion’s 2012 Rate Case, the utility sought to
recover over a three-year amortization period the unrecovered costs associated with one of early-retired
coal-fired plants (North Branch), with DNCP earning a return on the unamortized balance. The Public
Staff agreed that the costs of the retired plant, although not placed into rate base, should be recovered
over an amortization period, and that DNCP should earn a return on the unamortized balance, but
advocated for a ten-year rather than three-year, amortization period. The Public Staff argued that, as was
the case in Thornburg I, the Commission had authority to treat these unrecovered costs in this fashion
within the discretionary authority granted the Commission through G.S. 62-133(c) and 62-133(d). See
Order Granting General Rate Increase, Docket No. E-22, Sub 479 (Dec. 21, 2012), at 36. The
Commission agreed, and implemented the Public Staff’s suggestion. Id. at 37. Accordingly, the
Commission, in the event that it is later determined that some portion of the Company’s already-incurred
coal ash basin closure expense is not “used and useful” within the meaning of G.S. 62-133(b)(1), may
nevertheless allow that portion of those costs to be amortized in the same manner as the portion of “used
and useful” costs, with the Company earning a return on the unamortized balance. For the reasons stated
herein, were the “used and useful” decision the Commission has reached be found to be in error, the
Commission would nevertheless approve the Company’s cost recovery proposal in all respects, and
would exercise its discretion to achieve that result.
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useful.” It consists of liners, for example, that are capital items with service lives in
excess of one year. It stores coal ash which itself is a byproduct of electricity generation,
and is required to be stored in a landfill by the CCR Rule and/or CAMA. Yet the Public
Staff is also saying that because the costs of construction are accounted for in an ARO
– as required by GAAP, to which the Company is subject – they are somehow not “used
and useful.” The Commission rejects this label-driven classification.
Witness Maness testified that whether the CCR remediation costs were used and
useful was not a determinative factor in justifying its equitable sharing remedy. (Tr. Vol.
19, pp. 64-67) He testified that where capital costs such as constructing lined
repositories or caps over existing repositories are accounted for as an ARO, accounting
conventions for ARO’s control. As such, in addition to its determinations above, the
Commission determines that the debate between the parties on this issue is not one the
Commission is required to resolve. Costs placed in an ARO account are eligible for
deferral and amortization and for earning on the unamortized balance. As such, even if
the remediation costs are ARO expenditures, they are eligible for ratemaking treatment
as though they are used and useful assets.
The disallowance methodologies proposed by the AG, CUCA, and the Public
Staff discussed above fail because they fail to comply with the Commission’s prudence
framework, established in the 1988 DEP Rate Order and upheld by the Supreme Court
in Thornburg II. They avoid the detailed analysis that an appropriate framework requires.
Public Staff witness Lucas, for example, noted that the Public Staff advocates “equitable
sharing” because of the difficulties and complicating factors attendant upon detailed cost
analysis (Tr. Vol. 18, pp. 59-61), and he reiterated his contention on cross-examination,
noting that “There is nothing wrong with a simple solution.” (Tr. Vol. 19, p. 22.) However,
the Commission’s prudence framework requires a detailed and cost-specific analysis to
the extent the Commission resolves the CCR disputes on the basis of discrete prudence
assessments alone. The Company’s costs are presumed reasonable and prudent
unless challenged, and the challenges presented 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. 1988 DEP Rate Order, at
15. The methodologies proposed do not do that, and the Commission determines not to
accept them.
Company witness De May, asked his view on the likely reaction of the investment
community to a Commission decision accepting the Public Staff’s 50/50 “equitable
196
sharing” proposal, expressed concern. He indicated, first, that “coal ash, to the financial
community, doesn’t look a whole lot different … to the other environmental regulations
that have come to this industry over the many decades.” (Tr. Vol. 8, p. 434.) He
continued:
Just looking at the rating agency reports and the analysts’ reports, you
could see that everyone is just sitting, waiting to see what the impact …
[of] coal ash recovery will be to our company. And I think there is an
expectation, as one analyst from Guggenheim [put it] … that recovering
environmentally-related investments coupled with … our track record on
getting environmental cost recovery, as well as precedent in doing so by
this Commission [that] gives the [financial] community some confidence
that we are going to get through this just like we have gotten through the
Clean Air Act and through all of the clean smokestack legislation. All of
these things have come to our industry, and come to our company, and
we have dealt with them. This is no different.
(Id. at 434-35.) De May concluded, however: “[I]f the Public Staff position on coal ash
were to be imposed upon our company, I think you would be looking at a totally new day
in the way investors look at our company ….” (Id. at 435.)
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Thornburg I the AGO’s argument that no abandoned plant/cancellation costs be charged
to customers, observed that the AGO’s position:
[T]hough initially placing the entire cost upon the shareholders, may
actually in the long term be less favorable to the ratepayers …. As one
commentator has noted:
The Commission has considered this evidence and these arguments when framing its
resolution in this matter. The Commission has further considered the AGO’s arguments
regarding DEP’s criminal convictions when assessing its management penalty.
Sierra Club witness Quarles testified that continued storage of coal ash at Roxboro
and Mayo poses significant environmental risks, and concluded that closure in place at
these basins would allow continued contamination of downgradient groundwater and
violate the technical standards of the CCR Rule. Witness Quarles further testified that
removal of coal ash from DEP’s CCR basins would reduce the concentrations and extent
of this contamination. (Tr. Vol. 13, pp. 132-73; 175-77.) However, he admitted on
cross- examination by Public Staff counsel that excavation and moving the ash at Mayo
and Roxboro to lined landfills would increase the cost for closure. (Id. at 180.) Further,
witness Quarles made no effort to quantify the economic impact of his recommendations.
The Commission is not persuaded by the evidence presented by witness Quarles that the
Commission is in a position at this time to determine whether DEP’s closure plans at
Roxboro and Mayo are reasonable and prudent. As a result, the Commission declines at
this time to direct DEP to pursue any particular closure plans at Roxboro and Mayo.
The Sierra Club further asserts that all of the coal ash closure costs are the result
of unlawful discharges and are not recoverable pursuant to G.S. 62-133.13. The
Commission rejects the Sierra Club’s reading of G.S. 133.13. The costs being incurred
are not resulting from an unlawful discharge as defined by the statute, which is a
discharge that results in a violation of State or federal surface water quality standards.
Rather, DEP is incurring the costs to comply with the federal CCR rule and CAMA.
NC WARN has argued that DEP should not make a profit from selling coal ash
from its existing basins. There is no evidence in the record that DEP is profiting from the
sale of coal ash. Rather, any sale of coal ash merely reduced the remediation costs that
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DEP otherwise incurred and any payments made for its beneficial reuse offset those
remediation costs.
The costs DEP has incurred through the end of the test year as adjusted in coal
ash remediation tasks have been substantial, and the Company will continue on an
annual basis to incur a substantial level of costs through approximately 2028. The vast
majority of these costs would have been incurred irrespective of management inefficiency
in order to comply with EPA CCR requirements. When DEP initially constructed coal ash
impoundments and transported CCRs to them many decades ago, it did so in accord with
the prevailing industry practices at the time, especially in this part of the country. In part
and over time this was in response to environmental regulations requiring the removal of
pollutants such as CCRs from the coal plant smokestacks to reduce air pollution.
Over time, the EPA and other environmental regulators have scrutinized the impact
of CCRs in unlined repositories on surface and ground water and have assessed the
extent to which harmful constituents in CCRs exceed those naturally occurring in the
environment and their impact on human health. One long-lasting debate before EPA
addressed the extent to which CCRs should be classified as hazardous waste under
RCRA, a debate only recently resolved. Had EPA classified CCRs as a hazardous waste,
economic reuse in all likelihood would have become an impossibility.
Another area of scrutiny has been the appropriate need for and method of
remediation with respect to closing and potentially moving CCRs from unlined
impoundments.
Many of the criticisms of DEP’s CCR remediation practices raised in this case,
before the federal district court in the criminal proceeding and before other courts and
administrative agencies, address issues such as seeps from impoundment dikes, failure
to adequately maintain risers, improper maintenance of dikes, lax reporting, exceedances
and NPDES violations with respect to surface water discharges. The primary and ultimate
remediation however is dewatering and excavation of and transportation from existing
unlined impoundments and construction of new lined impoundments or, for older
discontinued impoundments that qualify, caps preventing rainwater intrusion. This is
where the vast majority of the billions of dollars of CCR remediation costs must be spent.
This ultimate remediation step is necessary to prevent leachate from infiltrating
groundwater from the bottom of unlined basins, but would have been required irrespective
of the harms that constitute other alleged mismanagement. In addition, this remediation
process cures other less pervasive environmental and health threats.
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Intervenors fault DEP for failure to undertake this remediation process years earlier
before being required to do so.30 Had DEP acted in compliance with these assertions, it
would have incurred costs its consumers would have been responsible for then. So from
a ratemaking perspective, this Commission’s concern, the question of when the
remediation should have taken place, now or in the future or twenty years ago, is not
determinative of whether the costs of the remediation should be recovered through rates
and to what extent. Intervenors are unable to show when DEP should have acted
differently in the past or what the increased costs would have been then. 31 Indeed,
whenever undertaken, the costs would have been site specific, and establishing a past
cost in this case would be a near impossibility. As DEP would have been required to
undertake the remediation at issue in 2015 through 2017, irrespective of other improper
actions of which it has been accused and for which it pled guilty to and was sentenced
for in the criminal proceeding, any disallowance in this case must be made within the
context of these facts.
30 The Public Staff, however, was unable to classify DEP’s actions or inactions as imprudence.
Public Staff witness Lucas testified:
The Public Staff is not saying that DEP’s environmental noncompliance problems
are the result of imprudence, because my review did not examine what Duke Energy knew
or should have known about coal ash contamination at the time the ash basins were
constructed. (Tr. Vol. 18, p. 340)
31 Public Staff witness Lucas was asked what DEP should have done differently and when it should
… I can’t say exactly what year or exactly what technologies … I can’t go back and
tell you exactly what would have happened - - what you should have done at a certain time.
I’m not sure what good it would have done for somebody to tell you, oh, 40 years ago you
should have put in a clay liner at Asheville and Sutton, put in a concrete liner at the H.F.
Lee plant. I mean, you just can’t go back and do that kind of assessment. (Tr. Vol. 19, pp.
35-36)
AGO witness Wittliff was asked when in his opinion DEP was imprudent with respect to leachate
within the impoundment leaking through the bottom into the groundwater. He responded with respect to
Sutton:
I’d have to - - I’m not sure, but I think it was 2010 or so. I don’t want to be quoted
on that, but I could dig through here, if you’d like. (Tr. Vol. 15, pp. 99-100)
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utilities incurred costs prematurely to comply, these costs could have been called into
question when the U.S. Supreme Court stayed the Clean Power Plan.
The first issue is that the 1983 ash pond was constructed during a period
when it was not required to provide a non-permeable liner, and was
constructed with the native sandy soils. This pond has been functionally full
since 1983, but is still permitted, and is occasionally used when there are
issues requiring the 1984 ash pond to be temporarily dry. The current
environmental atmosphere is that these ponds will eventually have to [sic]
emptied and placed in a lined containment to eliminate the leaching of the
ash products into the groundwater system. This is an issue that is not
currently being pressed, but it is anticipated that with the tighter
environmental conditions it will soon become an emergent issue. This issue
is aggravated by the fact that a test monitoring well located 300 ' from [sic]
edge of the 1983 ash pond has shown high levels of arsenic during the past
two quarterly tests. This may or may not be related to the unlined ash pond.
A recent study by an independent firm indicated this concern may be less
than originally thought. It could be mitigated by adding monitoring wells to
the NPDES permit, but could still pose an issue in the future. There is also
a county well water source approximately 1200 ' from the test well that is
monitored by the county.
Elsewhere in the report under the “Do Nothing” alternative, the author stated:
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In 2018, it is less than clear as to what the author refers to as the “current
environmental atmosphere” or “current ash pond regulations,” but the author’s
speculation as to if and when unlined impoundments might have to be dewatered and
excavated was off the mark. The EPA’s CCR rule was passed in 2015 and the NC CAMA
was passed in 2014 with deadlines a number of years beyond that. DEP did not choose
the alternative recommendation in the report, creation of an industrial park, nor did it
excavate the unlined 1983 impoundment. The report contains no recommendation to
excavate the 1983 impoundment solely for environmental remediation. The Commission
is unable today to say how in the past the 1983 impoundment would have been excavated
and how the excavated CCRs would be placed in a lined impoundment, what the cost
would have been and what cost recovery treatment would have been appropriate. Indeed,
the 1983 impoundment today is being excavated pursuant to express EPA and DEQ
guidelines, and the parties to this case vigorously contest how compliance with these
requirements should be accomplished and what the cost should be.
The purpose of the report was to determine the best course based upon the fact
that the 1984 lined ash pond was reaching capacity and would be non-operational by
June 2006. It is important to note that the author was indicating that the 1984 ash pond
would be non-operational under the NPDES permit due to capacity constraints as
opposed to environmental concerns.
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uncertainty over the timing of the granting of regulatory permits for replacement
impoundments. Except as addressed generically elsewhere, the Commission is reluctant
to second-guess, with minor exception, specific DEP decisions on its attempts to comply
with these requirements in a 20/20 hindsight fashion. Likewise, the Commission is
reluctant, except in limited fashion, to penalize DEP for good faith efforts to comply with
state statutes irrespective of the factors motivating the General Assembly to impose them.
Conversely, the Commission is unable to find DEP faultless in the dilemma it has
faced. Much testimony addresses the issue of whether DEP’s mismanagement of CCRs
“caused” the General Assembly to enact CAMA. DEP argues that other nearby states
enacted CCR remediation statutes in addition to EPA’s CCR rules, and that the Dan River
spill affected the timing but not the substance of CAMA’s requirements. The Commission
is unable to conclude that DEP mismanagement is the primary cause of CAMA.
Nevertheless, the provisions of CAMA directly address remediation of DEP CCR
repositories and impose accelerated deadlines with respect to them. The Commission
therefore is unable to conclude that DEP mismanagement to which it admitted in the
federal criminal court proceeding was not at least a contributing factor. Even DEP witness
Wright’s testimony suggests as much. While DEP presents persuasive evidence that its
alleged mismanagement has not been supported and was not the cause of CAMA, this
evidence is difficult to reconcile with its admissions and guilty pleas before the federal
district court in the criminal proceeding. DEP represented that it mismanaged its CCR
activities.
32 Witnesses Garrett and Moore supplemented their testimony to correct the quantity of CCRs
located at the Sutton plant as of January 1, 2015, and adjusted the contingency time from nine months to
four months given the projected completion date of excavation of March 2019 rather than October 2015.
(Tr. Vol. 18, pp. 171-72, 192.)
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were without impact on the CAMA provisions that have resulted in increased costs that
are at issue in this case. More fundamentally, in its admissions and pleas of guilty before
the federal district court, DEP has outlined acts of criminal negligence through
management misfeasance. In so doing, the Commission determines that, irrespective of
CAMA, DEP has placed its consumers at risk of inadequate or unreasonably expensive
service.
Fortunately, Dan River was a plant where coal generation had been discontinued
at the time of the 2014 spill. Risers in disrepair, inadequate oversight of impoundment
dikes and seeps have not resulted in catastrophic failures causing plants to be taken
offline or service disruptions, but DEP’s irresponsible management of its impoundments
over a discrete period of time placed its customers at risk of inadequate service and has
resulted in cost increases greater than those necessary to adequately maintain and
operate its facilities.
A major difficulty the Commission confronts in this case is the identification and
quantification of the appropriate CCR remediation adjustment to incurred costs. The
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record does not contain evidence appropriately quantifying the cost DEP incurred with
respect to discrete remediation activities.33 The Public Staff’s witnesses' encountered
difficulty in quantifying and supporting the costs for the alleged Sutton and Asheville
transportation disallowances and other less specific ones motivates the Commission to
resist imposition of discrete cost disallowances. The Commission deems disallowance of
the totality of costs, as some parties advocate, unjustified. The Commission deems full
recovery, as DEP advocates, unjustified. The Commission deems the Public Staff’s 50/50
equitable sharing disallowance unfairly punitive and of questionable legal sustainability.
The Commission deems requirements that more costs be imposed than DEQ might
require without cost recovery unjustified. Moreover, the Commission deems it inadvisable
to approve or suggest future disallowances with respect to CCR remediation expenditures
as far away as 2028 and beyond. In sum, the Commission cannot agree with any of the
parties in this case and must fashion and quantify a remedy different from any of those
advocated before it.
The Commission operates under a legislative mandate that requires it to fix rates
that will allow a utility “by sound management” to pay all of its reasonable operating costs,
including maintenance, depreciation, and taxes, and earn a fair return on its investment.
G.S. 62-133(b)(4). State ex rel. Utils. Comm’n v. General Telephone Co., 285 N.C. 671,
208 S.E.2d 681 (1974). If the Commission finds that a utility has not been soundly
managed, it may penalize a utility by authorizing less than a "fair return." Id.34 The
Commission must quantify the penalty by making a finding of what return would have
been allowed if there were sound management. Id. The North Carolina Supreme Court
has stated that “[t]he size of the penalty is left to the judgment of the commission, but
must be based upon substantial evidence, and the penalty must not result in a
confiscatory rate of return.” Id. General Telephone addressed a rate of return on rate base
penalty for mismanagement resulting in inadequate service. In this case, DEP’s
33
AGO witness Wittliff was asked whether he offered any opinion on what he thought the
Company’s appropriate amount of recovery under the CCR rule should be. He responded:
… I would explain that I’d love to have been able to come up with some extremely
precise numbers and explain it all to you where it all made crystal clear sense and you
could hang your hat on it and that’s the number, we can pin that down. The problem is, is
that this is, as we’ve already - - everyone seems to have observed, is it’s an extremely
complex case with a lot of moving parts, and it’s not as easy to - - to make that sort of
definitive statement. (Tr. Vol. 15, pp. 77-78)
Further, AGO witness Wittliff was asked why other than for CAMA compliance he
performed no dollar-for-dollar analysis. He responded: “[b]ut we just couldn’t get comfortable with
making a data that we would want to bring to you and say this is the number.” (Tr. Vol. 15, pp. 85-
86)
34 See also State ex rel. Utils. Comm’n v. Morgan, 277 N.C. 255, 177 S.E.2d 405 (1970) (holding
“that it is not reasonable to construe [the statute] to require the Commission to shut its eyes to ‘poor’ and
‘substandard’ service resulting from a company’s willful, or negligent, failure to maintain its properties [] and
it is obvious that consistently poor service, attributable to defective or inadequate or poorly designed
equipment or construction justifies a subtraction …”
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mismanagement takes the form of admitted inadequate oversight of its CCR activities that
placed service to its consumers at risk and, at least indirectly, increased costs.
With respect to CCR remediation costs to be incurred during the period rates
approved in this case will be in effect, the Commission determines that the “run rate” or
the “ongoing compliance costs” mechanism advocated by DEP will not be approved. By
requesting the creation of an ARO, in addition to the run rate, DEP concedes that treating
CCR expenditures as a recurring test year expense is inadequate. Future annual costs,
the evidence shows, are predicted to vary substantially from year to year. Instead, CCR
remediation costs incurred by DEP during the period rates approved in this case will be
in effect shall be booked to an ARO that shall accrue carrying costs at the approved
overall cost of capital approved in this case (the net of tax rate of return, net of associated
accumulated deferred income taxes). The Commission will address the appropriate
amortization period in DEP’s next general rate case, and, unless future imprudence is
established, will permit earning a full return on the unamortized balance. While this
ratemaking treatment will, in limited fashion, diminish the quality of DEP’s earnings, over
time, assuming reasonable and prudent CCR management practices, it permits
appropriate recovery.
The evidence supporting these findings of fact and conclusions can be found in
the testimony of Company witnesses Fountain, Bateman, McGee and Kerin, and the
testimony of Public Staff witness Lucas.
In his direct testimony, DEP witness Fountain stated that although costs related to
beneficial reuse are included in DEP's base rate case, the Company believes that certain
amounts are more appropriately recovered through the fuel clause. (Tr. Vol. 6, p. 39 n.1.)
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Witness Bateman testified that of the $260.3 million expected deferred balance,
$15.1 million, $13.8 million of spend and $1.3 million of return, is related to 2017 beneficial
reuse projected costs. As noted by witness Fountain, witness Bateman stated that these
amounts are included in the Company’s request, but DEP believes that these costs are
more appropriately recovered through the annual fuel rider. Witness Bateman explained
that if the Commission approves the fuel rider treatment requested by the Company, DEP
will remove $15.1 million from the deferred balance in this adjustment. (Tr. Vol. 6, pp.
122-23.)
In her direct testimony, Company witness McGee testified that the beneficial reuse
of CCR constitutes a sale of a by-product produced in the generation process, and,
therefore, associated gains or losses on the sale should be included in the fuel adjustment
clause under G.S. 62-133.2 (a1)(9). (Tr. Vol. 10, p. 104.) According to witness McGee, a
sale has occurred when the title to a by-product is transferred to a third party, and the by-
product, having value to the third party, will be beneficially reused. (Tr. Vol. 10, pp. 104-
05.) In this particular case, the amounts for which the Company is requesting recovery
represent a net loss on the sale of CCR that is to be used as structural fill, which is a
beneficial reuse. She testified that the particular transaction, as further discussed in
witness Kerin’s testimony, involves the sale of CCR produced at DEP’s Sutton coal plant,
and therefore the input to the by-product is the coal that has been burned at Sutton to
produce generation. Thus, she contended that such coal burned has been and continues
to be a “fuel or fuel-related cost” under the fuel clause statute as described above.
Witness McGee testified that a sale of a by-product is different than disposal of a by-
product in that the disposal of a by-product may involve some movement of the by-product
and/or transfer of title, but there is no reuse or alternative use of the by-product. According
to witness McGee, for transactions that the Company considers to be a sale, the by-
product’s intrinsic value is recognized in the reuse of the by-product. (Tr. Vol. 10, p. 105.)
Finally, witness McGee cited certain statements of the Commission in a 2016
Commission Report to the North Carolina General Assembly35 (Commission Report)
regarding incremental cost incentives related to CCRs, filed in Docket No. E-100, Sub
146, as supportive of the Company’s position that beneficial reuse constitutes a sale
under the fuel adjustment clause. (Tr. Vol. 10, pp. 105-06.)
Company witness Kerin testified that DEP is now selling excavated ash for reuse
in the Brickhaven mine reclamation project, a large scale, fully-lined, beneficial reuse
project in Moncure, North Carolina. (Tr. Vol. 16, p. 116.) He testified that he agreed with
Company witness McGee that the certain beneficial reuse costs are more appropriately
recovered through fuel clause proceedings. According to witness Kerin, coal has been
used as the fuel to produce power at DEP’s Sutton plant. A by-product of that process is
35 Report of the North Carolina Utilities Commission to the Joint Legislative Commission on
Governmental Operations, the Joint Legislative Transportation Oversight Committee, and the
Environmental Review Commission Regarding The Incremental Cost Incentives Related To Coal
Combustion Residuals Surface Impoundments For Investor-Owned Public Utilities In North Carolina,
January 15, 2016.
207
CCR. As a means to handle that by-product, CCR is sold to the Brickhaven mine to be
used as structural fill, which is a beneficial reuse. (Tr. Vol. 16, p. 117.)
Public Staff witness Lucas testified that the costs relating to the disposal of CCR
at Brickhaven, to the extent they are reasonable and prudent, should be recovered in
base rates and not through the fuel adjustment clause because the costs did not result
from the sale of CCR. (T Vol. 18, p. 230.) Witness Lucas provided background regarding
the Charah transaction at issue. He testified that Brickhaven is a former clay mine
consisting of 333.55 acres located in Chatham County, North Carolina. By Special
Warranty Deed recorded on November 13, 2014, Green Meadow, LLC, a wholly owned
subsidiary of Charah, purchased Brickhaven from General Shale Brick, Inc. On June 5,
2015, Green Meadow, LLC, and Charah received a permit from DEQ to construct and
operate Brickhaven as a “Solid Waste Management Facility, Structural Fill, Mine
Reclamation”. (Tr. Vol. 18, p. 231.) Charah is a Kentucky-based company, and according
to its website, it “is the largest privately-held provider of coal combustion product (CCP)
management for the coal-fired power generation industry in the U.S.”36 In its Limited
Petition to Intervene in this case, Charah stated that it is a contractor of DEP and is
engaged in the remediation of CCR from one or more DEP facilities. (Tr. Vol. 18, p. 19.)
Witness Lucas explained that in July of 2014, Duke Energy Business Services,
LLC (DEBS), on behalf of DEC and DEP, issued a bidding event for the excavation,
transportation, and off-site storage of the full volume of CCR at four sites: Riverbend, Dan
River, and Sutton in North Carolina and W.S. Lee in South Carolina. On October 3, 2014,
DEBS opened a bidding event for the Phase 1 work activity (excavate, transport, and
place off-site) ash at Dan River, Sutton, and W.S. Lee. Bids were solicited from three
bidders, including Charah. Bids were received on October 9, 2014 (six days later). DEBS
selected Charah to provide the services at the Sutton Plant. (Tr. Vol. 18, p. 232.) The
purchase of CCR at the plants was not included in the scope of activities for the bidding
events; both bidding events requested fixed price proposals to excavate, transport, and
store coal combustion residuals from the plants. (Tr. Vol. 18, p. 233.)
Witness Lucas described the contractual arrangement between DEBS and Charah
regarding the removal of CCR from the Sutton Plant. He stated that DEBS, as agent for
DEP and DEC, and Charah entered into Master Contract 8323 (Master Contract) dated
November 12, 2014, for the Phase 1 Excavation Work at the Riverbend and Sutton Plants.
Charah is referred to as the “Seller” or “Contractor” in the Master Contract. Charah is not
referred to as a “Buyer”. The Master Contract defined the type and scope of work, terms
and conditions, pricing, and invoicing. The Master Contract contemplated the issuance of
subsequent Purchase Orders as written authorization to proceed with the scope of work
identified in the Purchase Order. The Sutton Phase 1 Work Scope was set forth in Exhibit
D-2 of the Master Contract. It included the installation of haul roads, engineering the
development of a rail loading system, erosion and sedimentation control, and dewatering,
ash pond excavation, transportation, unloading, and placement. The Seller’s (i.e.,
36 http://charah.com
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Charah’s) Pricing Schedule was set forth as Exhibit E. The Pricing Schedule included
both fixed pricing and per ton pricing. Witness Lucas testified that the fixed pricing was
for mobilization, site preparation, erosion, and sedimentation control work. The per ton
pricing was for excavation, loading and transportation, unloading, development,
placement, home and field office overhead, and profit. (Tr. Vol. 18, pp. 233-34.) DEBS
and Charah entered into Purchase Orders authorizing Charah to transport CCRs from
Sutton by truck to Brickhaven and then to construct and transport CCRs by rail to
Brickhaven. Purchase Order 1107196 constituted the vast majority of the excavation,
transportation, and disposal work for Sutton, and 20 change orders were executed for this
Purchase Order. (Tr. Vol. 18, pp. 234-35.)
Witness Lucas testified that nothing in the bid documents, contracts, purchase
orders, or change orders for the Sutton Plant produced in discovery assign any value to
the CCR to “net” against the cost of the services provided by Charah. (Tr. Vol. 18, pp.
235-36.) When asked to provide all documents that show how the Company or Charah
calculated the “net value” or discount value of CCR when setting the cost of services
provided by Charah, the Company responded that it had no responsive documents. In
addition, when asked how much Charah paid the Company for the Sutton CCR, the
Company responded that “there is not a defined price in the operative documents for the
Sutton ash.” (Tr. Vol. 18, p. 236.)
Witness Lucas testified that DEP and Charah knew how to assign a value to CCR
in a sale, as demonstrated by the Master By Product Marketing, Sales, and Storage
Agreement (Agreement) entered into by DEC, DEP, and Charah in December of 2013,
and associated Work Orders, which obligated Charah to purchase CCR from DEP or
DEC, as applicable, at a price as set forth in the Work Orders. This Agreement formed
the basis for the sale of CCR at the Belews Creek and Marshall plants via Work Orders
entered into by DEC and Charah on January 1, 2014. (Tr. Vol.18, p. 236.)
Witness Lucas asserted that the specific provisions relating to the services and
pricing in the Master Contract, Purchase Orders, and change orders for Sutton all support
the conclusion that the arrangement was one for Charah to provide ash disposal services
to DEP, not for a sale of DEP’s CCR to Charah. Although one of the general provisions
of the Master Contract stated that the services to be performed by Charah constituted
payment by Charah for the CCRs, DEP has admitted that there was no defined price for
the CCRs and no documentation showing that the parties assigned any value at all to the
CCRs. (Tr. Vol. 18, pp 236-37.) As a result, witness Lucas concluded that the specific
provisions of both the Master Contract and Purchase Orders overwhelmingly point to a
contract for services, not a sale.
Witness Lucas also addressed the findings in the Commission Report cited by
Company witness McGee as support for DEP’s position. He testified that the findings in
the Commission Report do not support DEP’s conclusion that the costs of the beneficial
reuse of CCR are recoverable through the fuel clause. The General Assembly in the
legislation directed the Commission to specifically address in its report “possible revisions
to the current policy on allowed incremental cost recoupment that would promote
209
reprocessing and other technologies that allow the reuse of coal combustion residuals
stored in surface impoundments for concrete and other beneficial end uses”. The
Commission’s Report examined the statutory framework for cost recovery and concluded
that current policies and practices are adequate to encourage reuse of CCRs for concrete
and other beneficial end uses. However, as recognized by the Commission in the Report,
recovery through the fuel clause presupposes that there is a sale. On page 13 of the
Report, the Commission stated, “Customers’ rates are adjusted annually to include profits
or losses associated with efforts to sell CCRs for beneficial reuse.” On page 14 of the
Report, the Commission recognized that “sales of CCRs typically result in immediate net
costs to ratepayers.” The Commission did not conclude in its Report that the costs of
processing CCRs for beneficial use, without a sale, are recoverable in the fuel clause.
(Tr. Vol. 18, pp. 237-38.)
Finally, witness Lucas addressed the fact that the Commission has allowed the
Company to recover net gains or losses from the sale of CCRs through the Company’s
annual fuel rider. Witness Lucas stated that if there is an actual sale of CCRs, cost
recovery through the fuel clause may be appropriate, if the costs are reasonably and
prudently incurred. Where, however, there is a contract for services not involving a sale
of CCRs, costs arising from that contract should not be recoverable through the fuel
clause. Witness Lucas concluded that the true purpose of moving CCRs from Sutton to
Brickhaven is environmental remediation and the disposal of CCRs, and not the sale of a
byproduct. (Tr. Vol. 18, pp. 238-39.)
Witness McGee identified two provisions of the Master Contract in support of her
position. First, per Section 3 of Exhibit B to the Master Contract (Exhibit B), the Company
transferred title to, risk of loss of, and responsibility for the CCRs to Charah once the
CCRs is loaded in to truck or railcar at Sutton for transportation to Brickhaven. According
to witness McGee, this provision indicates that the CCRs had value to the parties that
had to be transferred through title. Further, the fact that Charah agreed to accept the
transfer of title and risk of loss at the point that the CCRs was loaded onto its trucks or
rail cars for delivery is strong evidence that the CCRs had transferable value. (Tr. Vol. 10,
p. 112.)
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Witness McGee also cited Section 4.2 of Exhibit B in support of the Company’s
position, which provides in pertinent part that, “payment of the Service Fee by Duke
Energy to Contractor . . . together with any Ash that is transferred by Duke Energy, to
Contractor under the applicable Purchase Order, constitutes payment in full, by Duke
Energy to Contractor for any and all of contractor’s costs to perform the Services...."
Witness McGee asserted that this section clearly acknowledges that the CCRs serve as
partial consideration for the services rendered by Charah. She stated that it was therefore
understood and accepted by both parties that the service fee charged by Charah for its
services was offset by the value of the CCRs to Charah, thereby constituting a sale. (Tr.
Vol. 10, p. 112.)
Witness McGee also took issue with witness Lucas’ characterization of the
arrangement as a “disposal”. She stated that the CCRs at Sutton were not thrown away
or placed in a landfill, but replaced the topsoil that would have been used as structural fill
in the reclamation of the Brickhaven mine. Further, she noted that the EPA definition of
beneficial reuse is “the reusing of a material in a manner that makes it a valuable
commodity, such as use in a manufacturing process or as a structural fill.” Based on the
EPA definition, witness McGee maintained that the use of the Sutton CCRs as structural
fill for the Brickhaven mine indicates that the CCRs were a valuable commodity. (Tr. Vol.
10, p. 113.)
Witness McGee also cited Section 2.1 of Exhibit B, which states, “[t]he Parties
desire that Contractor excavate certain quantities of Ash from the Ash Ponds or Onsite
Storage, transport such Ash off the Station property for resale to Contractor for beneficial
reuse in the production of construction products, as an engineered structural fill and/or
for closure of a mine reclamation projects, etc. . . .” (emphasis added). She asserted that
both parties clearly contemplated and agreed upon the use of the CCRs, which is
expressed in the contract. Accordingly, the purpose of this transaction was the sale of
CCRs produced at the Company’s Sutton coal plant to Charah for beneficial reuse at
Brickhaven. (Tr. Vol. 10, pp. 113-14.)
Finally, witness McGee testified that the Company has included the gain/loss of
CCRs in the fuel adjustment clause in the past. Specifically, she noted that the losses on
the sale of CCRs from the Asheville plant to the Asheville Airport as structural fill have
been included in the fuel adjustment clause since 2008. (Tr. Vol. 10, p. 114) She noted
that the Master Contract had the same language as that used for the CCRs from the
Asheville Plant, and that the sale of the CCRs was implied since both parties agreed that
both the value of the CCRs and the additional funds paid by Duke would constitute full
payment for the work as outlined in the associated purchase order. (Tr. Vol. 10, p. 115.)
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10, p. 133.) A series of exhibits were introduced (Public Staff [PS] McGee Cross-
Examination Exhibits 1-5), which were Company responses to Public Staff data requests.
(Tr. Vol. 10, pp. 134-43.) In these data requests, the Public Staff asked the Company to
describe in detail and provide documentation in support of its assertion that the
transaction between Charah and the Company constitutes a sale of CCRs. When asked
to cite the specific language in the contracts and amendments between DEP and Charah
that support the Company’s assertion, the Company cited Sections 4.1 and 4.2 of Exhibit
B of the Master Contract. (Tr. Vol. 10, Public Staff McGee Cross-Examination Exhibit 2.)
When asked, “How much did Charah pay the Company for the Sutton coal ash?,” the
Company responded that “there is not a defined price in the operative documents for the
Sutton ash.” Further, when asked to provide all documents that show how the Company
or Charah calculated the “net value” of or discount value of coal ash when setting the cost
of services provided by Charah, the Company responded that it did not have any
responsive documents. (Public Staff McGee Cross-Examination Exhibit 4.)
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pricing for items such as site preparation, excavation, loading and transportation,
unloading, development, home or field office overhead and profit, but no pricing for
Charah’s purchase of the CCRs. (Confidential T 10, pp 153-54) This was the pricing
applicable for sending the ash to Brickhaven, as noted in Footnote 1 on page E-2.
(Confidential Tr. Vol. 10, p. 154.) The Master Contract also had alternative pricing in the
event the CCRs could not be transported to Brickhaven and instead had to be transported
to the Anson County Landfill. (Confidential Tr. Vol. 10, p. 154) Witness McGee testified
that if this alternative had been used, the costs associated with the Master Contract would
not be recoverable under the fuel adjustment clause. (Confidential Tr. Vol. 10, p. 154.)
All four Master Contracts include as Exhibit B the “Duke Energy Standard Terms
and Conditions for Ash Services as Agreed upon By Seller and Duke Energy”, and contain
the same or substantially similar language in Sections 3, 4.1, and 4.2. This is the language
the Company cites in support its claim that the costs associated with the Master Contract
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should be recoverable under the fuel adjustment clause. (Confidential Tr. 10, pp. 164-65)
In response to a request by the Commission, the contract between Charah and Progress
Energy, Inc., dated June 18, 2007, for the excavation, transportation, and resale of ash
from the Asheville Plant to the Asheville Regional Airport Authority (Asheville Contract)
was filed by DEP as Confidential Late Filed Exhibit 3. Section 5.1 of the Asheville Contract
provided that the work performed by Charah constituted payment for the CCRs.
In its post-hearing Brief, NC WARN contends that the use of CCRs at Brickhaven
is not a “beneficial use,” citing the ruling of a Superior Court revoking state permits
allowing CCRs to be used as mine reclamation in areas not already mined or otherwise
excavated.
DEP seeks to recover certain CCR costs related to the excavation and movement
of CCRs from the Sutton Plant in Wilmington, North Carolina to the Brickhaven facility in
Chatham County, North Carolina, through the fuel adjustment clause on the grounds that
the beneficial reuse of CCRs constitutes a sale of a by-product produced in the generation
process. The fuel adjustment statute, G.S. 62-133.2, allows electric public utilities to
recover through an annual rider certain fuel and fuel-related costs. G.S. 62-133.2(a1)(9)
provides:
Cost of fuel and fuel-related costs shall be adjusted for any net gains or losses
resulting from any sales by the electric public utility of by-products produced in the
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generation process to the extent the costs of the inputs leading to that by-product
are costs of fuel or fuel-related costs.
This is the first case in which the Commission has been squarely presented with
this issue. The Company contends that the fact that the Commission approved recovery
of costs through the fuel adjustment clause related to a similar contractual arrangement
between Charah and DEP to remove CCRs from the Asheville Plant and transport it to
the Asheville Airport demonstrates that the costs related to the Master Contract are also
similarly recoverable. The Commission disagrees. Nothing regarding the Asheville
contractual arrangement was specifically presented by the Company, the Public Staff, or
any other party in the Company’s relevant fuel filings, and, therefore, the present issue
was not specifically considered by the Commission. Consequently, the fuel factors
approved by the Commission that included the Asheville transaction costs do not
constitute specific approval of the transaction as a “sale of a by-product” and do not
preclude the Commission from considering this issue now.
In addition, the findings of the Commission Report cited by witness McGee do not
support a finding that the costs associated with beneficial reuse, without a sale, are
recoverable through the fuel adjustment clause. The General Assembly directed the
Commission to specifically address in its Report “possible revisions to the current policy
on allowed incremental cost recoupment that would promote reprocessing and other
technologies that allow the reuse of coal combustion residuals stored in surface
impoundments for concrete and other beneficial end uses.” The Commission Report
examined the statutory framework for cost recovery and concluded that current policies
and practices are adequate to encourage reuse of CCRs for concrete and other beneficial
end uses. However, as noted by Public Staff witness Lucas and as recognized by the
Commission in the Report, recovery through the fuel clause presupposes that there is a
sale. On page 13 of the Report, the Commission stated, “Customers’ rates are adjusted
annually to include profits or losses associated with efforts to sell CCRs for beneficial re-
use.” On page 14 of the Report, the Commission recognized that “sales of CCRs typically
result in immediate net costs to ratepayers.” The Commission did not conclude in its report
that the costs of processing CCRs for beneficial use, without a sale, are recoverable in
the fuel clause.
Finally, the record in this case does not support a finding that the costs associated
with the Master Contract resulted from a “sale” of CCRs. The Company admitted both in
data responses and during the expert witness hearing that nothing in the Master Contract
or its associated documents included pricing or discounts to account for a sale of the
CCRs. Further, nothing in the bid documents, contracts, purchase orders, or change
orders relating to the Master Contract assign any value to the CCRs to “net” against the
cost of the services provided by Charah. Moreover, the evidence shows that DEP and
Charah knew how to assign a value to CCRs in a true sale. Public Staff witness Lucas
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testified, and the Company did not challenge, that pursuant to a Master By Product
Marketing, Sales, and Storage Agreement (Agreement) entered into by DEC, DEP, and
Charah in December of 2013, and associated Work Orders, Charah was obligated to
purchase CCRs from DEP or DEC, as applicable, at a price as set forth in the Work
Orders. This Agreement formed the basis for the sale of CCRs at the Belews Creek and
Marshall plants via Work Orders entered into by DEC and Charah on January 1, 2014.
The Company relies on the existence of three provisions in Exhibit B of the Master
Contract in support of its contention that a sale of CCRs occurred. Company witness
McGee states in her testimony that per Section 3 of the Master Contract, the Company
transferred title to, risk of loss of, and responsibility for the CCRs to Charah once the
CCRs wre loaded in to truck or railcar at Sutton, indicating the CCRs had value. However,
on cross-examination, she agreed that this language could be interpreted to mean the
transfer of liability for the CCRs. This interpretation – that transfer of title relates to the
transfer of liability - is supported by the language in the second sentence of Section 3,
which states that the Contractor is not assuming any responsibility for any liabilities arising
out of or relating to the creations, existence, storage, or handling of the ash prior to the
time title to the ash passes to Contractor. In addition, the Scope of Work Clarification
provided to the bidders of the Sutton project and attached to PS Kerin Cross-Examination
Exhibit 2, page 2, states, under paragraph 6, “Once the ash is loaded into the transport
vehicle, liability of shall transfer to the bidder, and shall remain with the bidder unless it is
transfer (sic) to the owner of the final ash storage location.” (emphasis added) The
Commission finds and concludes that Section 3 of the Master Contract does not support
a finding that the Sutton CCRs had value. On the contrary, the balance of this evidence
supports the conclusion that possession of the CCRs represented a liability, not an asset.
The Company also cites Sections 4.1 and 4.2 of Exhibit B of the Master Contract,
which in essence state that the services performed by Charah constitute payment for the
CCRs. The Commission is not persuaded that inclusion of these provisions demonstrate
that a sale of CCRs occurred. These provisions are part of the Duke Energy Standard
Terms and Conditions for Ash Reclamation and Placement that have been included in
other contracts for CCR services, regardless of the type of service and disposal method.
PS McGee Confidential Cross-Examination Exhibit 7, the master contract for the Phase
1 Excavation Work at Dan River and W. S. Lee, contain the same provisions and pricing
schedules similar to the Master Contract, and witness McGee admitted that the costs
incurred under that contract should not be recoverable under the fuel clause, as the CCRs
were landfilled. The Commission finds that these provisions are boilerplate that do not
support the conclusion that a sale of the Sutton CCRs occurred.
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As noted at the beginning of this discussion, DEP witness Bateman testified that
of the $260.3 million expected deferred CCR cost balance, $15.1 million -- $13.8 million
of spend and $1.3 million of return -- is related to 2017 Charah projected costs. Witness
Bateman explained that if the Commission approves the fuel rider treatment requested
by the Company, DEP will remove $15.1 million from the deferred balance in this
adjustment. (Tr. Vol. 6, pp. 122-23.) The Commission having denied the recovery of the
$15.1 million Charah costs in fuel rates, the recovery of this $15.1 million is left in DEP’s
$260.3 million deferred CCR balance for consideration of recovery in DEP’s base rates.
The evidence supporting this finding of fact and conclusion can be found in the
Application, Form E-1, the testimony of Company witness Wright, and the testimony of
Public Staff witnesses Lucas and Maness.
Public Staff witness Maness stated that CCR costs prudently incurred from
January 2015 through August 2017 (i.e., costs not subject to Public Staff recommended
disallowances apart from equitable sharing) should be allowed provisional cost recovery.
(T Vol. 19, p. 303) He explained that the reasonableness of some of those costs may
depend on the outcome of legal proceedings or other legal determinations, as described
by witness Lucas. (Id.) Witness Lucas described how past actions of DEP may be
determined to be violations in the future with respect to both ongoing review by DEQ and
pending litigation. These circumstances affect the ability of the Public Staff and other
parties to recommend disallowances for specific costs because an environmental
violation must be established before there is any decision on whether to disallow the cost
of remedying the violation.
In particular, witness Lucas noted that DEQ is still in the process of deciding which
unauthorized seeps will be allowed under renewed NPDES permits and which will require
some other action by DEP. (Tr. Vol. 18, pp. 253-54.) He stated in testimony prefiled in
October 2017 that DEQ and DEP expected to reach consensus on provisional
background threshold values for constituents of interest, meaning that the number of
groundwater exceedances that are actual violations would not be known until then.
(Tr. Vol. 18, pp. 254, 256.) He further stated that monitoring data to determine compliance
with, and violations of, the CCR Rule standards would not be available until January 2018.
(Tr. Vol. 18, p. 254.) In supplemental testimony, witness Lucas was able to update the
groundwater violations of the 2L regulation. (Tr. Vol. 18, p. 290; Revised Lucas Exhibit 6)
In addition, the Public Staff noted that there are pending lawsuits against DEP regarding
the Mayo and Roxboro plants that allege violations of environmental laws. (Tr. Vol. 18,
pp. 260-62.) The outcome of these lawsuits will affect how much DEP must spend for
corrective action, and whether associated litigation costs should be deemed reasonable.
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be retroactive ratemaking. He also stated that the standard is that the utility makes the
best possible decisions on expenditures based on the information available at the time,
and determinations of the reasonableness and prudency of these costs should not
depend on future outcomes of legal proceedings but what was known or knowable at the
time. (Tr. Vol. 20, pp. 165-66, 178.)
With respect to pending determinations by EPA and DEQ, the Commission is not
inclined to delay its work in order to wait for these agencies to complete their work. As a
result, on balance the Commission finds and concludes that it will not order that the CCR
cost recovery in this docket is provisional.
The evidence supporting these findings of fact and conclusions can be found in
the Application, Form E-1, the testimony of Company witnesses Kerin and Bateman, and
the testimony of Public Staff witness Maness.
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costs to the entire DEP system because the coal plants associated with the costs are
being or were operated to serve the entire DEP system. (Tr. Vol. 18, pp. 305-06.)
In rebuttal, Company witness Bateman testified that in general she agreed with
witness Maness that the costs of a system should be borne by all of the users of the
system. However, she stated that the Company had identified very specific cost
categories, groundwater wells used specifically for CAMA purposes and permanent water
supplies provided to North Carolina customers pursuant to North Carolina law, and that
they should be treated as an exception to this general rule, due to their nature as being
unique to North Carolina. She stated that this unique treatment would be consistent with
other examples where the Commission had allowed direct assignment to North Carolina,
including the incremental costs associated with the North Carolina Renewable Energy
and Energy Efficiency Standard (REPS) and the costs to comply with the North Carolina
Clean Smokestacks Act. (Tr. Vol. 6, pp. 142-43.)
After consideration of this issue, the Commission finds and concludes that the
adjustment recommended by Public Staff witness Maness to allocate all system-level
CCR costs by a comprehensive allocation factor produces a more reasonable and
appropriate outcome than the proposal by the Company to allocate a portion of these
costs in a manner that does not allocate them to the South Carolina retail jurisdiction.
Although the costs in question were required pursuant to North Carolina law, the costs
are inherently related to the burning of coal to provide electricity to the entire DEP system,
including the South Carolina retail jurisdiction. The fact that these particular costs are
associated with plants that are geographically located in North Carolina is no more
relevant with regard to the proper allocation of these costs than it is to the proper
allocation of other costs, such as fuel expense and other variable O&M expenses, which
are allocated to the entire DEP system.
Further, the Commission concludes that these CAMA compliance costs are
distinguishable from the examples of REPS and Clean Smokestacks costs cited by the
Company. With regard to REPS costs, it is important to note that those costs are by their
very nature in excess of the normal level of costs that would otherwise need to be incurred
to provide an equivalent amount of energy to the Company’s customers. Thus, it is
appropriate that the Commission allocates the REPS costs to North Carolina customers.
With regard to Clean Smokestacks costs, the Commission notes that those costs were
closely related to a rate freeze that was instituted by the General Assembly for North
Carolina retail purposes. However, the legislature could not require a similar freeze to be
established with regard to South Carolina retail customers.
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because the CCR costs are being incurred because CCRs were produced by the burning
of coal to produce energy over the years and, like the cost of coal, should be allocated by
energy, and not peak demand. Therefore, according to the Public Staff the energy
allocation factor should be used to determine the North Carolina retail portion of these
costs. (Tr. Vol. 18, p. 306.)
In rebuttal, DEP witness Hager testified that the costs in question are associated
with compliance with federal and state environmental requirements related to closing
CCR basins. She stated that residual end of life costs typically and logically follow the
cost of the plant, which is allocated based on demand, and that end of life costs (removal
costs) and salvage values are factored into depreciation rates, which are allocated based
on demand, as they were in the most recent DEP general rate case. Additionally, witness
Hager testified that use of the demand-related factor is consistent with end-of-life nuclear
fuel costs in nuclear decommissioning costs. (Tr. Vol. 10, pp. 289-90.)
At the hearing, witness Maness was asked several questions by the Commission
and by counsel for DEC regarding his recommendation, particularly how it compared to
the allocation methods used for spent nuclear fuel storage. In summary, witness Maness
responded that the allocation methods used for nuclear fuel could differ based on the
stage of life the fuel is in. When the fuel itself is consumed, it is allocated according to
energy. He stated that when it is in a state of interim storage, it may be allocated by
different factors, but the portion of interim storage costs embedded in nuclear
decommissioning expense is allocated by demand; and the costs paid for permanent
storage, to date have largely been allocated on an energy basis. (Tr. Vol. 19, pp. 81-82.)
In its post-hearing Brief, CIGFUR maintains that DEP’s proposal to allocate CCR
costs based on demand is appropriate. CIGFUR states that CCR, unlike coal, has no
energy potential, is not a fuel, and its cost is not recoverable through the fuel clause.
(Tr. Vol. 18, p. 363-65. (Maness)) Further, CIGFUR notes that the environmental liability
DEP is now tasked with managing is an environmental compliance cost that did not exist
when the coal was burned, but arose only much more recently, and that applying a
demand factor is consistent with the treatment of end-of-life nuclear fuel costs and nuclear
decommissioning costs. (Id. at 289-90.)
In its post-hearing brief, NCSEA argues that costs associated with coal ash
remediation are appropriately classified as energy-related costs.
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plant or energy. However, CCR is a residual of the burning of coal in order to produce
electricity. For every kWh of electricity that is produced by coal-fired generation, there are
CCRs produced that must be properly handled and stored. Thus, the quantity of CCRs
and the cost of storing them are energy driven. As a result, the Commission finds and
concludes that the appropriate and reasonable course of action is to allocate the CCR
costs by the energy allocation factor.
The evidence supporting these findings of fact and conclusions is contained in the
testimony of DEP witness Fountain and DEP’s Late-Filed Exhibit 1.
At the request of the Commission, on December 6, 2017, DEP filed its Late-Filed
Exhibit 1. In summary, DEP’s exhibit responds to the Commission’s inquiries regarding
the pending lawsuit, Duke Energy Carolinas, LLC, et al. v. AG Insurance SA/NV, et al.,
Case No. 17-CVS-5594, Superior Court (Business Court), Mecklenburg County, State of
North Carolina (Insurance Case), in which DEP seeks insurance recovery for certain CCR
related costs. DEP states that any net insurance recoveries from the Insurance Case will
be used to reduce the CCR costs paid by DEP’s customers. DEP further states that the
Insurance Case seeks recovery under 19 excess-level third-party liability insurance
policies issued to DEP’s predecessor, Carolina Power & Light Company, between 1971
and 1986. DEP states that each policy will make a pay-out only after a “self-insured
retention” – similar to a deductible – is satisfied, which deductibles range from $100,000
to $500,000 per policy. In addition, DEP states that the value and recoverability of the
insurance proceeds is hotly disputed, and that each insurer in the Insurance Case takes
the position that DEP is entitled to no recovery. Moreover, DEP states that “[i]t is possible
that net recovery on behalf of the DEP ratepayers could amount to as much as $300
million dollars over time as future costs are incurred taking into account all of the DEP
policies sued upon.” DEP Late-Filed Exhibit 1, at p. 2.
Several parties questioned whether DEP has sufficient direct interest in the
Insurance Case to motivate DEP to make a reasonable effort at recovering the maximum
amount possible to off-set its customers’ CCR costs. For example, in its post-hearing Brief
Fayetteville PWC recommended that the Commission place three conditions on DEP’s
recovery of insurance proceeds: (1) DEP will be entitled to the immediate collection from
the deferred account of an amount equal to the insurance proceeds that DEP secures for
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coal ash remediation from the Mecklenburg Case, provided that the offsetting insurance
proceeds are credited to DEP’s ratepayers; (2) if DEP fails to recover all or any of the
insurance proceeds, DEP’s CCR cost recovery should be reduced by the amount not
recovered, unless DEP satisfies the Commission that it was not at fault in failing to get
full insurance recovery; and (3) DEP would not be allowed to accrue a carrying charge on
its deferred costs commensurate with any amount of insurance proceeds that it does not
recover.
The AGO posits that ratepayers should not bail out DEP from its failure to pursue
insurance coverage. Currently, DEP is seeking insurance coverage and has indicated
that the total amount of recovery of policies sued upon “may total approximately”
between $172 million to $200 million per occurrence. The Company further states that
the net recovery on behalf of ratepayers could amount to as much as $300 million. The
Company has agreed to use the insurance proceeds to offset the amounts it is otherwise
seeking to recover; however, the AGO argues that DEP is disinterested in the outcome.
The AGO contends currently there is no downside to DEP if it loses the insurance cases
because DEP does not view itself as a stakeholder in the outcome. Further, the AGO
contends that DEP might have not filed its claims in time and that the statute of limitations
might have run. The AGO requests that if recovery is allowed that the Commission
should earmark $300 million as being recovered in damages from the insurance case.
The AGO further requests that the Commission should not allow a rate of return on the
portion of the coal ash costs that may be recovered via the insurance case.
The Commission is not persuaded that it should adopt Fayetteville’s PWC’s first
recommendation. It appears that the suggestion that DEP be allowed “immediate
collection” from the deferred account would not require any Commission review of the
deferred CCR costs for prudency or reasonableness. Thus, for example, if DEP settled
the litigation for $200 million, it would immediately collect $200 million from the deferred
account and be required to immediately credit ratepayers for $200 million. However, if
$100 million of DEP’s $200 million deferred CCR costs was not prudently or reasonably
incurred, then $100 million of the insurance proceeds would go for CCR costs that should
be disallowed.
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be unfair. Rather, the Commission concludes that if DEP exercises reasonable care in
representing its ratepayers’ interests in the Insurance Case, then DEP should be entitled
to receive its full authorized carrying charges on the deferred account. As stated above,
if there is a meritorious issue raised about DEP’s representation of the interests of its
ratepayers in the Insurance Case, DEP shall bear the burden of proving that it took
reasonable and prudent steps to obtain the maximum recovery. If DEP fails to meet this
burden, the Commission can deny DEP carrying costs on that amount of insurance
proceeds that were not recovered as a result of DEP’s lack of reasonable and prudent
efforts.
Finally, the Commission concludes that DEP should be required to place all
insurance proceeds received or recovered by DEP in the Insurance Case in a regulatory
liability account and hold such proceeds until the Commission enters an order directing
DEP as to the appropriate disbursement of the proceeds. In addition, the regulatory
liability account shall accrue a carrying charge at the overall rate of return authorized for
DEP in this Order.
The evidence supporting this finding of fact and conclusion is contained in the
testimony of DEP witnesses Bateman and Simpson, and Public Staff witness Maness.
DEP witness Simpson testified that pending a management review and approval
by the Duke Energy Board of Directors later this year, DEP plans to begin a full
deployment of AMI meters in 2018. He also noted the testimony of witness Bateman
regarding DEP’s request to establish a regulatory asset in which to record and defer the
cost of existing AMR meters that are replaced by AMI meters.
Public Staff witness Maness testified that the Public Staff does not oppose the
establishment of a regulatory asset to track the remaining depreciation of replaced
meters. Further, he recommended that the replaced meters be depreciated using their
estimated remaining useful life of 18.3 years, rather than over three years, as
recommended by DEP.
The Commission finds and concludes that DEP should be allowed to establish a
regulatory asset account and defer to that account the cost of existing AMR meters
replaced by AMI meters. However, the approval granted herein is without prejudice to the
right of any person to contest the recovery of the amount of the regulatory asset in future
rates, and is without prejudice to the Commission’s authority to deny or reduce such
recovery if the Commission concludes that DEP has not complied with the Commission’s
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rules or other requirements.
The evidence supporting this finding of fact and these conclusions is contained in
the testimony of DEP witness Bateman.
With regard to DEP's CCR costs from 2018 forward, DEP witness Bateman
testified that DEP is requesting to establish a regulatory asset/liability account and defer
to this account the portion in annual rates that is more than DEP’s actual costs, or the
amount in annual rates that is less than DEP's actual costs. In essence, the asset/liability
account would be a tool used to true-up the difference in DEP’s next general rate case.
The Commission agrees with DEP’s recommended approach, not only for CCR
costs, but also for all cost deferral accounts. A deferred cost is not the same as the other
cost of service expenses recovered in the Company’s non-fuel base rates. A deferred
cost is an exception to the general principle that the Company's current cost of service
expenses should be recovered as part of the Company's current revenues. When the
Commission approves a typical cost of service, such as salaries and depreciation
expense, there is a reasonable expectation that the expense will continue at essentially
the same level until the Company’s next general rate case, at which time it will be reset.
On the other hand, when the Commission approves a deferred cost the Commission
identifies a specific amount that has already been incurred by the Company, or, in the
case of CCR costs, is estimated to be incurred by the Company. In addition, the
Commission sets the recovery of the amount over a specific period of time. Further, the
Company is directed to record the recovery of the specific amount in a regulatory asset
account, rather than a general revenue account. If DEP continues to recover that deferred
cost for a longer period of time than the amortization period approved by the Commission
that does not mean that DEP is then entitled to convert those deferred costs into general
revenue and record them in its general revenue accounts. Rather, the Company should
continue to record all amounts recovered as deferred costs in the specific regulatory asset
account established for those deferred costs until the Company’s next general rate case.
In the post-hearing briefs of CUCA and other intervenors, the parties contended
that the Commission should adjust DEP’s rates to incorporate the effect of the federal
income tax decrease included in the Federal Tax Cuts and Jobs Act of 2017 (FTCJA).
CUCA estimates that the annual monetary value in the tax reduction is approximately
$116.9 million as stated in its comments in Docket No. M-100, Sub 148.
The AGO, in its post-hearing Brief, notes that the Commission has opened a
rulemaking proceeding to consider the rate adjustments that public utilities should make
to reflect the impact of the tax cut effectuated by the Federal Tax Cuts and Jobs Act
(FTCJA). The AGO states that it will participate in the rulemaking and asks the
Commission to take appropriate action in this case to order that rates established in this
docket will be billed and collected on a provisional basis and that an appropriate deferral
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will occur, as directed in the FTCJA Order initiating the proceeding, pending final
disposition of the rulemaking in order to reflect the benefit of the tax cut in rates.
In its post-hearing Brief, EDF contends that the Commission should require DEP
to reflect the federal income tax reduction effectuated by the FTCJA in its new rates. In
support of its position, EDF states that a similar event occurred when Congress passed
the Tax Reform Act of 1986, which cut the federal income tax rate from 46% to 34%. The
Commission opened Docket No. M-100, Sub 113 to investigate how to reflect the federal
income tax reduction in rates. In the appeals that followed, the Supreme Court of North
Carolina upheld the Commission’s authority to reduce utilities’ rates to reflect the federal
income tax change, either through a general rate case or through a rulemaking. State ex
rel. Utilities Com. v. Nantahala Power & Light Co., 326 N.C. 190, 388 S.E.2d 118 (1990).
EDF acknowledges that on January 3, 2018, the Commission opened Docket No. M-100,
Sub 148 to address the FTCJA issues.
In its post-hearing Brief, Kroger notes that on December 22, 2017, the FTCJA was
signed into law, lowering the Federal corporate income tax rate from 35% to 21%. Kroger
states that the Commission noted in its Order initiating proceedings in Docket No. M-100,
Sub 148, that the reduction in the corporate income tax rate will have an immediate and
favorable impact on the cost of providing services to utility customers, including the
customers of DEP. Kroger contends that income taxes are a cost of service for
ratemaking, and that when tax expense goes down so too should rates. Kroger urges the
Commission to recognize the impact of the new tax rate in this proceeding by lowering
customer rates commensurate with DEP’s reduced tax expense.
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Unresolved Issues. The resulting proposed revenue requirement by the Public Staff is
$99,726,000.
As discussed in the body of this Order, the Commission approves the Stipulation
in its entirety and makes its individual rulings on the unresolved issues as discussed. Due
to the intricate and complex nature of some of the issues, the Commission requests that
DEP recalculate the required annual revenue requirement as consistent with all of the
Commission’s findings and rulings herein within 10 days of the issuance of this Order.
The Commission further orders that DEP work with the Public Staff to verify the accuracy
of the recalculations. Once the Commission receives this filing, the Commission will work
promptly to verify the calculations and will issue an Order with final revenue requirement
numbers.
In addition, the Commission requests that DEP and the Public Staff provide the
Commission with the demand and energy allocation factors that they, respectively, deem
appropriate for allocating the CAMA costs to the North Carolina retail jurisdiction.
The evidence supporting this finding of fact and conclusion is contained in the
Application, the testimony and exhibits of all the witnesses, the Stipulation, and the entire
record in this proceeding.
Pursuant to G.S. 62-133(a), the Commission is required to set rates that are “fair
both to the public utilities and to the consumer.” In order to strike this balance between the
utility and its customers, the Commission must consider, among other factors, (1) the
utility’s reasonable and prudent cost of property used and useful in providing adequate,
safe and reliable service to ratepayers, and (2) a rate of return on the utility’s rate base that
is both fair to ratepayers and provides an opportunity for the utility through sound
management to attract sufficient capital to maintain its financial strength. See
G.S. 62-133(b). DEP’s continued operation as a safe, adequate, and reliable source of
electric service for its customers is vitally important to DEP’s individual customers, as well
as to the communities and businesses served by DEP. DEP presented credible and
substantial evidence of its need for increased capital investment to, among other things,
maintain and increase the reliability of its system and comply with environmental
requirements.
In its Application and testimony, DEP stated that since 2013 it has been adding
new gas-fueled generation, along with adding new utility-scale solar facilities, to replace
older, less-efficient coal-fired generation. In addition, DEP noted that it began construction
on its Asheville Combined Cycle Plant, and has almost completed construction of its new
Sutton Blackstart Combustion Turbine. According to DEP, approximately $253 million of
its initially requested $477.5 million revenue increase was intended to recover the costs
associated with these plant additions and upgrades. In addition, DEP stated that it has
started complying with recently adopted federal and state rules regarding the handling of
CCRs and closure of CCR basins, and that $66 million of the requested $477.5 million
226
increase was intended to recover ash basin closure compliance costs incurred since
January 1, 2015. Further, DEP stated that it was requesting to recover $129 million toward
ongoing ash basin closure compliance costs, with any difference from the requested
amount and actual costs to be deferred until a future general rate case. DEP stated that
the remaining $29 million of the requested rate increase was intended to recover costs
related to tax rate changes, major storm restoration costs, nuclear development costs,
and an updated Customer Information System.
These are representative examples of the capital investments that have been
made and are planned to be made by DEP in order to continue providing safe, reliable
and efficient electric service to its customers.
In addition, the rate increase approved herein is mitigated to some extent by the
Partial Settlement Agreement entered into between DEP and the NC Justice Center,
wherein DEP agrees to contribute $2.5 million to the Helping Home Fund for low-income
energy assistance.
Based on all of the evidence, the Commission finds and concludes that the
revenue requirement, rate design and the rates that will result from this Order strike the
appropriate balance between the interests of DEP's customers in receiving safe, reliable
and efficient electric service at the lowest possible rates, and the interests of DEP in
maintaining the Company's financial strength at a level that enables the Company to
attract sufficient capital. As a result, the Commission concludes that the revenue
requirement and the rates that will result from that revenue requirement established as a
result of this Order are just and reasonable under the requirements of G.S. 62-30, et seq.
1. That the Stipulation filed by DEP and the Public Staff is hereby approved in
its entirety.
2. That DEP is entitled to recover the actual coal ash basin closure costs DEP
has incurred (netted against the amount already included in the Company’s rates
following its last rate case) during the period from January 1, 2015 through August 31,
2017, less a disallowance of $9.5 million, for a total amount to $232,390,000, to be
adjusted based on the allocation factors to be provided by DEP and the Public Staff
pursuant to Ordering Paragraph No. 5. These costs shall be amortized over a five-year
period, with a return on the unamortized balance and then reducing the resulting annual
revenue requirement by $6 million for each of the five years.
3. That DEP is authorized to record its September 1, 2017 and future CCR
costs in a deferral account until its next general rate case. This deferral account will
accrue a return at the overall rate of return approved in this Order.
4. That the appropriate revenue requirement for the first four years shall be
reduced by the EDIT Rider decrement of $42.577 million.
227
5. That DEP shall recalculate and file the annual revenue requirement with the
Commission within 10 days of the issuance of this Order, consistent with the findings and
conclusions of this Order and the Stipulation. The Company shall work with the Public
Staff to verify the accuracy of the filing. DEP shall file schedules (North Carolina Retail
Operations – Statement of Rate Base and Rate of Return, Statement of Operating
Income, and Statement of Capitalization and Related Costs) summarizing the gross
revenue and the rate of return that the Company should have the opportunity to achieve
based on the Commission’s findings and determinations in this proceeding. In addition,
DEP and the Public Staff shall provide the Commission with the demand and energy
allocation factors that they, respectively, deem appropriate for allocating the CAMA costs
to the North Carolina retail jurisdiction.
6. That DEP is hereby authorized to adjust its rates and charges in accordance
with the Stipulation and findings in this Order effective for service rendered on and after
the following day after the Commission issues an Order accepting the calculations
required by Ordering Paragraph No. 5.
7. That the Commission shall issue an Order approving the final revenue
requirement numbers once received from DEP and verified by the Public Staff as soon
as practicable.
8. That the three settlement agreements entered into by DEP with Commercial
Group, Kroger, and NC Justice Center are in the public interest and should be approved in
their entirety.
10. That DEP shall place all insurance proceeds received or recovered by DEP
in the Insurance Case in a regulatory liability account and hold such proceeds until the
Commission enters an order directing DEP regarding the appropriate disbursement of the
proceeds. The regulatory liability account shall accrue a carrying charge at the overall
rate of return authorized for DEP in this Order.
11. That the approved base fuel and fuel-related cost factors are as follows
(amounts are cents per kWh, excluding regulatory fee): 1.993 for residential customers;
2.088 for SGS customers; 2.431 for MGS customers; 2.253 for LGS customers; and 0.596
for Lighting customers.
12. That the Company shall implement an increment rider, effective on the
same date as its new base rates, and expiring at the earlier of (a) January 30, 2020, or
228
(b) the last day of the month in which the Company’s actual coal inventory levels return
to a 35-day supply for three consecutive months of total coal inventory of 37 days or less,
to allow the Company to recover the additional costs of carrying coal inventory in excess
of a 35-day supply (priced at $76.11 per ton). The interest on any under- or over-collection
shall be set at the Company’s net-of-tax overall rate of return. The Company shall adjust
the rider annually, concurrently with its DSM/EE, REPS, JAAR and Fuel Adjustment
riders.
13. That on or before December 31, 2018, the Company and the Public Staff
shall complete an analysis showing the appropriate coal inventory level given market and
generation changes since the Company’s rate case in Docket No. E-2, Sub 1023.
14. That the Company shall conduct a workshop on its Power/Forward grid
investments in the second quarter of 2018.
15. That the aspects of rate design agreed upon in the Stipulation are approved
and shall be implemented.
16. That DEP shall not be allowed to defer the costs of the June and July 2016
thunderstorms amounting to $1.720 million in O&M expenses.
17. That DEP shall be, and is hereby, allowed to defer incremental O&M costs
of 2016 storms in the total amount of $51.032 million.
18. That DEP is authorized to record the incremental storm cost amortization
expense over a five-year period beginning with the month of October 2016.
19. That DEP's request for deferral of the depreciation expense and carrying
costs related to the 2016 storms at its weighted average cost of capital on the capital
investments, and the carrying costs at its weighted average cost of capital on the deferred
costs, shall be, and is hereby, denied.
20. That DEP shall within 30 days of the date of this Order make a $2.5 million
contribution from shareholder funds to the Helping Home Fund to be used for low-income
energy assistance in DEP’s North Carolina service territory.
21. That DEP is allowed to collect in rates a North Carolina retail normalized
annual level of storm costs in the amount of $11.018 million.
22. That the Commission’s approval in this Order of deferral accounting and
other accounting procedures is without prejudice to the right of any party to take issue
with the amount of or the accounting treatment accorded these costs in any future
regulatory proceeding.
23. That the Company's proposal for a JRR, as modified by this Order, and the
JRRR are hereby approved for a one-year pilot with an option to renew it for a second
year if the Company provides evidence that the JRR is achieving its intended purpose.
229
24. That the JRR and JRRR revenues shall be reported to the Commission
annually, if the JRR is in effect more than one year, and the JRRR shall be reviewed and
will be subject to adjustment annually coincident with DEP’s December fuel adjustment
to match anticipated recovery revenues and true-up any past over-or under-recovery.
25. That due to the uncertain date of implementation, compliance tariffs shall
be filed prior to implementation of the JRRR and customers shall be notified by bill insert
or message upon implementation.
26. That within 30 days of this Order, but no later than 10 business days prior
to the effective date of the new rates, DEP shall file for Commission approval five copies
of all rate schedules designed to comply with this Order, accompanied by calculations
showing the revenues that will be produced by the rates for each schedule. This filing
shall include a schedule comparing the revenue that was produced by the filed schedules
during the test period with the revenue that will be produced under the proposed
settlement schedules, and a schedule illustrating the rates of return by class based on
the revenues produced by the rates for each schedule.
27. That DEP shall submit a proposed customer notice to the Commission for
review and approval, and upon approval of the notice by the Commission, shall give
appropriate notice of the approved rate increase by mailing the notice to each of its North
Carolina retail customers during the billing cycle following the effective date of the new
rates.
28. That the Company shall file annual cost of service studies based on both
the SCP and SWPA methodologies.
29. That DEP shall be, and is hereby, authorized to establish a regulatory asset
to defer and amortize the costs of its Customer Connect Program (CCP). The regulatory
asset account shall accrue AFUDC until the DEP Core Meter-to-Cash release (Releases
5-8) of the CCP project goes into service, or January 1, 2022, whichever is sooner. At
that point, the costs will be amortized over 15 years.
30. That DEP shall file reports regarding the development, spending and
accomplishments of the CCP each year on December 31 for the next five years, or until
the CCP is fully implemented, whichever occurs later. Further, DEP and the Public Staff
shall develop a format for the annual CCP report and file the format with the Commission
within 90 days of the date of this Order.
31. That DEP shall be, and is hereby, authorized to defer to a regulatory asset
account the cost of existing AMR meters replaced by AMI meters. However, the approval
granted herein is without prejudice to the right of any person to contest the recovery of
the amount of the regulatory asset in future rates, and is without prejudice to the
Commission’s authority to deny or reduce such recovery if the Commission concludes
that DEP has not complied with the Commission’s rules or other requirements.
230
32. That if DEP receives revenue for any deferred cost for a longer period of
time than the amortization period approved by the Commission for that deferred cost, the
Company shall continue to record all revenue received for that deferred cost in the specific
regulatory asset account established for that deferred cost until the Company’s next
general rate case.
231
DOCKET NO. E-2, SUB 1131
DOCKET NO. E-2, SUB 1142
DOCKET NO. E-2, SUB 1103
DOCKET NO. E-2, SUB 1153
I dissent from the majority opinion with respect to the Findings of Fact 35, 54 and
55 and discussion leading to the determination that the Company is entitled to full
recovery of all coal ash expenses subject to a one-time mismanagement penalty. I
acknowledge that the penalty imposed represents an attempt to hold the Company
accountable for its admitted mismanagement and oversight of its coal ash handling and
disposal operations. However, this approach, without further analysis, does not
reasonably assure that the rates fixed for the Company’s service are “fair to both the
public utilit[y] and to the consumer,” and that the rate set by the Commission and to be
received by the Company is just and reasonable. G.S. 62-133 and 131. It is not fair to
burden the consumers with rates that include costs attributable to the Company’s
imprudence nor is it fair to the Company to disallow recovery of reasonable costs
necessary to the provision of adequate, efficient and reasonable service.
1 Violations of statutes which have the purpose of protecting the public from harm to life or safety
constitute negligence per se. See Bell v Page, 271 N.C. 396, 156 S.E.2d 711 (1967); Hampton v. Spindale,
210 N.C. 546, 187 S.E. 775 (1936).
2
The gold plating argument is a convenient one and may have been more convincing if the
Company had presented a plan to improve its coal ash management safety and compliance practices to
the Commission and had shared what it learned from the Sutton report as will be discussed herein.
2
The evidence of record generally shows that around the 1920s when the Company
began providing electric service in our state, it did so by generating electricity through the
combustion of coal. The generation process created the byproduct of coal ash. At the
time, neither the use of fossil fuel in power generation nor the ash byproduct were known
to be particularly harmful to human well-being or the environment. Nevertheless, the ash
resulting from the generation process was substantial and the Company as part of its
provision of service undertook the obligation to properly manage it. It is presumed that
during this time period, the rates approved by the Commission and paid by ratepayers
were adequate to compensate the Company for its costs for its proper management of
the coal ash byproduct. The part of the ash that did not fly into the atmosphere through
smokestacks was collected by the Company from the bottom of boilers and placed in on-
site storage areas. Before there were ash basins or landfills, the bottom ash would have
been placed in a lay of the land area. This could have created a pile on-site or just filled
in a low area.
Neither the creation nor management of the ash in this manner was negligent
based on the then current knowledge and foreseeability of the risks at that time. In
choosing fossil fuel generation, the Company complied with the state’s policy of providing
service at the least cost and the consumers benefitted from this choice at least in the form
of low electric rates for decades down to the present. Storing the dry ash on-site was not
negligent as the scientific and healthcare communities had not determined that such
disposal could pose a substantial risk of harm to people or the environment and the
environmental risks of harm or injury from coal ash management practices were not then
foreseeable by the Company. This method of storage also complied with the state’s least
cost policy from which consumers benefitted in the form of low electric rates.
In the 1950s, the Company, in alignment with the power industry at the time,
created unlined basins and ponds to serve as repositories for coal ash sluiced out of
boilers using water. The Company’s repositories were created on-site with the generation
plants from the mid-1950s through 1985. When this practice began in the 1950s, unlined
basins were the primary technology for treating and handling coal ash throughout the
country. There were no governmental regulations requiring that the ash repositories be
lined for safety or health reasons and the scientific and healthcare communities still had
not formed a certain opinion as to the risk of harm posed by unlined ash basins and ponds.
The evidence before the Commission does not establish that the Company knew or
reasonably foresaw that its coal ash handling practices were problematic or harmful to
human life or the environment. Neither our state nor our nation was particularly
environmentally aware or concerned with the harmful implications of coal ash
management practices before around the time the United States Environmental
Protection Agency (EPA) was established in 1970. Thus, it remained true that neither the
ash created up through this time nor the Company’s early coal ash management
activities, including treatment of wet ash in unlined repositories, was imprudent. Fossil
fuel generation and wet coal ash treatment in unlined basins and ponds was also
3
compliant with the state policy that electric service be provided for the least cost and
consumers continued to benefit in the form of low electric rates. Again, it is presumed that
during this time period, the rates paid by ratepayers were adequate to compensate the
Company for its costs for its proper handling and disposal of the coal ash.
By 1972, the EPA had begun to regulate unlined coal ash basins under the Clean
Water Act and set groundwater standards for industry and water quality standards for
contaminants in surface waters. The federal regulation of ash basins was clear indication
to power generators like the Company that coal ash was being examined as posing a
threat to ground and surface water. By 1979, the State of North Carolina’s environmental
regulator (today known as DEQ) implemented what is known as the 2L water regulations.
Since 1983, these rules required persons including the Company to take actions both to
prevent and correct groundwater contamination. By 1988, as reported publicly by the EPA
in its report to Congress on wastes from power plant combustion of coal, 40% of
generating units built after 1975 used lined ash disposal facilities. The EPA began
regulating coal combustion waste under the Resource Conservation and Recovery Act in
2000. In 2008, a huge spill of over 5 million cubic yards of coal ash occurred at the
Tennessee Valley Authority Kingston Fossil Plant, which resulted in ash being released
into the Emory River. That spill caused both the industry and the EPA to focus more on,
among other related issues, understanding the threat posed by unlined coal ash basins
to surface and ground water. By 2010, the EPA had developed and issued proposed rules
regarding Coal Combustion Residuals (CCR Rules) and had begun the process of
receiving comments from interested parties, including power producers.
Thus, the evidence shows the Company had known for about 30 years prior to
enactment of the North Carolina Coal Ash Management Act (CAMA) that the state’s 2L
water regulations required it to prevent and to correct exactly the kind of pollution which
the Company admitted through its guilty plea it negligently allowed to occur from at least
2010 through 2014. The TVA incident combined with the regulatory response and the
participation of the industry, including the Company, in the EPA rulemaking process
informed or should have informed the Company, by 2010 and well before the 2014
enactment of CAMA, of the gravity of the situation surrounding the proper management
of coal ash, which was continuing to mount as coal continued to be used in the generation
process to meet customer demand for electric power. With knowledge of the foregoing
regulatory efforts and requirements as well as the spill incident, the Company certainly
had a clear obligation, by 2010 if not sooner, in the exercise of due care to monitor its
repositories and take action upon any evidence that the repositories were not containing
the coal ash in the intended and required manner. That is to say, that between the TVA
spill in 2008 and 2010, by keeping abreast of EPA activities related to the spill including
developing the CCR Rules, and through its knowledge of the state requirements making
it unlawful to exceed established groundwater contamination levels, the Company knew
the concerns and risks associated with coal ash contamination. It is reasonable to infer
from the evidence that the Company was aware that it ran the risk of its unlined ash
4
containment repositories failing to contain and that such failure would likely result in
unlawful water contamination. It is against the weight of the evidence to infer that the
Company was unaware of these risks.
In fact, the evidence further establishes that well prior to the notable and historical
TVA spill and the 2014 release of ash into the Dan River from Duke Energy Carolinas’
Dan River Steam Station, DEP had actual knowledge that its own ash basins at the Sutton
and Asheville plants were not serving their essential purpose of effectively treating and
containing ash—at least not at the level that was reasonably expected or required by the
Company’s duty to exercise due care in coal ash management activities. The National
Pollution Discharge Elimination System (NPDES) permitting system, adopted in 1972 with
permitting authority granted to North Carolina in 1974, implements standards under the
federal Clean Water Act for preventing pollutants from being discharged into surface
waters. Similarly, North Carolina’s 2L standards were adopted in 1979 to set limits on
harmful groundwater pollutants and to require corrective action when pollution occurs.
First the evidence is that there were a number of NPDES permit violations and unlawful
groundwater exceedances at DEP coal-fired plant sites, including the Sutton and
Asheville plants, going back at least 10 years, i.e, as far back 2007. The Company knew
of the 2007 violations and exceedances when they were noticed by DEQ in 2007. Indeed,
DEP witness Wells testified that since 2010 DEP has been attempting to persuade DEQ
to issue NPDES permits authorizing DEP’s seeps, but DEQ has thus far chosen not to
permit them.
Aside from whatever the status of the evolution of ash regulation may have been,
upon learning that seeps and exceedances were attributable to its unlined ash ponds and
basins, the Company’s duty of ordinary care required it to take timely steps to manage its
ash i.e., by properly maintaining its water treatment equipment or by removing ash from
unlined ponds and placing it in properly lined repositories. Not taking such steps to arrest
the seeps and exceedances for more than seven years while waiting for DEQ to act on
the Company’s request to approve and permit the seeps was not reasonable. It was a
breach of the Company’s duty of care and imprudent.
5
The 1983 pond was unlined and viewed by the Company’s engineers not to meet current
ash management compliance requirements. In addition, the study examined and
addressed another unlined disposal site on the Sutton property that was used when the
plant first went in service, but that had not been studied to determine the extent of any
issues it posed and “ha[d] not been high on the EPA’s radar.”4
The first issue is that the 1983 ash pond was constructed during a period
when it was not required to provide a non-permeable liner, and was
constructed with the native sandy soils. This pond has been functionally full
since 1983, but is still permitted, and is occasionally used when there are
issues requiring the 1984 pond to be temporarily dry. The current
environmental atmosphere is that these ponds will eventually have to [sic]
emptied and placed in a lined containment to eliminate the leaching of the
4 Although this site contained as much or more ash as the 1983 pond, which was functionally full,
and had once been designated a Superfund site, it appears from the report that the Company had not
cleaned it up or taken any action to remediate apparently because the environmental regulators had not
pushed it to do so. Again, regulator inaction or leniency does not relieve an actor like the Company from its
ordinary duty of care to prevent or stop a harmful situation it created in the performance of its business
activities.
6
ash products into the ground water system. This is an issue that is not
currently being pressed, but it is anticipated that with the tighter
environmental conditions it will soon become an emergent issue. This issue
is aggravated by the fact that a test monitoring well located 300’ from edge
of the 1983 ash pond has shown high levels of arsenic during the past two
quarterly tests. This may or may not be related to the unlined ash pond. A
recent study by an independent firm indicated this concern may be less than
originally thought. It could be mitigated by adding monitoring wells to the
NPDES permit, but could still pose an issue in the future. [All italics added.]
Sutton Report, p. 2. The language in the quoted passage reveals that the company
engineers knew at the time of the report that the days when unlined ash ponds were
allowed were in the past; that unlined ponds allowed leaching of ash products into ground
water and that the purpose of a non-permeable liner was to “eliminate” such leaching;
that the 1983 pond could possibly be leaching arsenic; and that even if the arsenic
situation were mitigated, it could still pose an issue in the future, making mitigation an
insufficient remedy. Thus, the Company and its engineers knew in 2004 that its unlined
ash ponds posed a risk of coal ash contaminants leaching into ground water and that one
way to stop and effectively remedy that risk or any actual leaching was to place the
contents of unlined ponds into lined containment facilities.
The fact that the engineers were not certain at the time of the internal publication
of their report whether the 1983 pond was leaching arsenic does not negate their actual
knowledge that the pond might have been leaching and could pose a future issue
regardless. While the report shows that Company engineers attempted to redress the
capacity problems with temporary solutions based on maintaining existing discharge
permits and were willing to consider adding additional monitoring wells to perhaps
mitigate leaching issues, taken as a whole it nonetheless also indicates that these
solutions were viewed only as short term fixes. The report demonstrates that the
engineers recognized and recommended that the situation called for a long-term
permanent solution to meet the already then current requirement to contain leachate and
prevent and remediate water contamination. Having an active discharge permit for a non-
compliant containment does not equate with compliance with ash pond or coal
combustion residuals regulations.5
5 In the Sutton report, the Company engineers were addressing two distinct problems: 1)
maintaining pond discharge permits in order to keep the Sutton plant operating and 2) developing and
making ash containment facilities that would comply with ash management regulations. An active discharge
permit for a non-compliant ash pond was a measure the engineers recognized as affording the Company
time to remedy non-compliance with a permanent solution like a new lined pond or an industrial park that
would accommodate all of the Sutton ash as ground fill.
7
Additional statements from the 2004 report also show that the Company knew its
unlined containment ponds were non-compliant with the then current regulations. As part
of the discussion of the alternative of doing nothing to address the containment issues at
Sutton, the report states, “It is assumed that the North Carolina Division of Water Quality
(NCDWQ) [as part of its ‘increased emphasis on ash ponds and their [e]ffects on the
surrounding area and groundwater’] will require the 1983 ash pond to be emptied and
lined to comply with current ash pond regulations.” (Emphasis added.) Translation: At the
time the report was written in 2004, the 1983 ash pond did not comply with the current
ash pond regulations.
In discussion of other various new pond alternatives, the report states, “The new
ash pond would be constructed with the current liner requirements including an
impermeable liner with leak detection and monitoring system.” This is further evidence
the Company knew that to make its unlined repositories compliant with the regulations of
2004, impermeable liners would need to be installed to assure adequate containment of
ash waste. Regarding new ponds or alternatives that would allow the 1983 and 1984
ponds to extend capacity for a few years and/or to combine capacity extension with
beneficial use projects, the report points out that such solutions would not alleviate the
need to line the 1983 ash pond or to have to remediate the pre-ash pond disposal site by
2019. The same was noted in the report with respect to an alternative that called for ash
from the 1984 pond to be shipped to other non-plant site locations. In contrast, the report
noted three other alternatives, including the industrial park alternative recommended by
the engineers, would accommodate all the ash from the two ponds and the pre-ash pond
disposal site and eliminate the need to line the 1983 pond and to remediate the pre-ash
pond disposal site. The report leaves no doubt that Company engineers knew and
advised the Company in 2004 that the old unlined pond was non-compliant, that in any
scenario where the pond remained in use, the Company could not escape the
requirement to line the pond with a non-permeable liner, and that the Company would in
a short time be faced with stricter enforcement of compliance standards by the
environmental regulators.
In sum, the 2004 Sutton report is evidence that the Company’s own in-house and
outside contract engineers put the Company on notice that its unlined (not lined with a
non-permeable liner) ash ponds were not compliant with the environmental regulations of
the day; that the unlined ponds were subject to leaching of their contents and that ash
from at least one unlined Company pond might already be leaching into the groundwater;
and that the Company had available to it a number of specific alternative actions that
represented reasonable optional pathways to coal ash management compliance. Having
this knowledge in 2004 but failing to take timely and appropriate action to bring its unlined
ponds into compliance to stop and/or prevent leaching of contaminants into groundwater
was at a minimum, whether held accountable by federal and state regulators or not, a
breach of the Company’s duty to exercise due care in its ash management activities. This
failure was both negligent and imprudent.
8
Because as discussed above, the greater weight of the evidence supports a finding
that the Company was negligent and imprudent in its coal ash management by failing to
act in a timely and appropriate manner based on information contained in the Sutton
report, as well as its NPDES permit and 2L violations, the Commission, in setting just and
reasonable rates in the public interest, must examine the coal ash management costs
that the Company seeks to recover in the case at hand to determine whether the costs
are a result of the Company’s imprudence. If the evidence supports a finding that specific
costs were incurred by the Company due to the Company’s own imprudence, then those
costs would have been imprudently incurred. It would be unfair and not in the public
interest for the Commission to set rates that are based upon allowing the Company to
recover costs attributable to the Company’s imprudence. Such rates would not be just
and reasonable. On the other hand, if the evidence is insufficient to establish that
particular coal ash management costs resulted from the Company’s imprudence and
those costs were otherwise prudently incurred to comply with current legal requirements,
to disallow recovery of those prudent costs would be unfair and not in the public interest
of maintaining adequate, reliable and economical electrical service at just and reasonable
rates.
The coal ash management costs incurred to date by the Company to comply with
the state CAMA legislation and the federal CCR Rule enacted and promulgated
respectively in 2014 and 2015 to specify the way coal ash must be handled and stored
going forward pertain to ash previously accumulated and treated in unlined basins and
ponds. As discussed above, the creation or production of the ash was not unlawful or
negligent and ratepayers have enjoyed the benefits of a least cost electric generation
process which yielded coal ash as a waste byproduct. The Company’s imprudence or
negligence in the manner it handled or managed the ash byproduct did nothing to change
the existence of the tons of accumulated ash or to require the present need to have this
ash properly managed and in accordance with applicable law. With or without the
Company’s admitted negligence or its imprudence as supported by other evidence
discussed hereinabove, the Company would be required to do whatever is reasonably
necessary not only to comply with current applicable law but also to manage all existing
and stored ash with due care to avoid the unreasonable risk of harm to persons, property
and the environment. The heightened standards for coal ash management mandated by
the changes in federal and state law under the CCR Rule and CAMA, as with any
governmental action, are beyond the control of the Company. The Company has no
choice but to comply with such new requirements, notwithstanding the Company’s
compliance with the prior law, and is expected to so comply as part of its ongoing
certificated franchise to provide electric service. If twenty years from now the standards
for ash management were to change yet again, the Company at that time would still have
no choice but to comply and the costs incurred to take reasonable compliance actions
relative to the very same ash being moved and stored today would then be appropriate
to be recovered from ratepayers in electric service rates.
9
To state it another way, even in the case at hand where the evidence establishes
that the Company was imprudent in its handling of coal ash, the Company’s imprudence
did not cause or change the fact that all of the coal ash at issue exists today and would
be subject to new environmental and safety requirements. Moreover, with or without
passage of CAMA, the Company would still be legally required to prudently manage its
existing as well as its hereafter created ash. Based on current federal law, the technology
known today and as logically follows from information and discussion in the Sutton report,
such prudent handling would without a doubt require utilizing all three compliance
mechanisms of making beneficial use of accumulated ash, using cap in place techniques,
where appropriate and legally permissible, and moving of some substantial amount of
stored coal ash from unlined to lined facilities.6 CAMA did not change the accepted
methods for proper management of coal ash; rather it incorporated those known methods
into law. As the Company has known at least since the 2004 Sutton report and well before
CAMA, it was going to have to remove ash from non-compliant unlined repositories. The
removed ash would have to be put to beneficial use or placed in an acceptably lined
facility and monitored for containment unless and until it was determined that the ash no
longer posed a threat of harm. Therefore, in this case and going forward, the Company
is fairly entitled to recover all the costs it has incurred to cap in place where appropriate
under current law and to engineer and construct new lined containment facilities as well
as to dewater, excavate and re-store pre-2007 ash production from unlined facilities into
lined repositories.
However, as to ash first placed in unlined repositories beginning in 2007 and after,
the Company is fairly entitled to recover costs that would be reasonable to implement on-
site lined repositories or costs necessary to cap such ash in place. Dewatering,
excavation and the “re-placement” costs of putting this ash that was produced in or after
2007 in new repositories (whether on or off-site) are not recoverable. If the Company had
acted prudently by developing and implementing plans for compliant storage of ash within
a reasonable time following completion of the Sutton report in November of 2004,
evidence in the record establishes that it could have completed compliant on-site landfill
repositories within 18 months. As Company witness Wells duly noted there can be
unexpected delays in the permitting and construction process. Therefore, allowing the
Company at least 24 months (from December 2004 to January 2007) to construct and
deploy compliant ash repositories is reasonable and would mean that by 2007, all ash
produced during or after 2007 should have and could have been managed through direct
one-time placement into lined repositories; there should never have been any need to
dewater, excavate and “re-place” the 2007 and post 2007 ash. Thus, the Company’s
reasonable costs for ash first produced in 2007 and after are only those costs for
engineering and constructing the necessary lined facilities and for the ongoing costs of
6The five ash basins at Cape Fear are not subject to the CCR Rule given certain exclusions in the
Rule. Three of the basins at H.F. Lee are excluded from the federal CCR Rule as well.
10
storing and monitoring of the ash once in the new compliant repositories. This ash should
have gone from production and collection directly into compliant repositories without
needing to be handled a second time and placed into a second repository. The rates
previously collected from the ratepayers presumably would have paid for this initial ash
handling just as they paid for the ash when it was first placed in the non-compliant unlined
basins and ponds. It follows that dewatering and excavation costs for the tons of ash
created from 2007 and after would not have been incurred except for the Company’s ash
mismanagement and negligence, resulting in the need to handle the ash a second time.7
The engineering, construction and continued storage and monitoring costs are allowable
for recovery because these costs were not created by the Company’s imprudence, would
have been incurred as proper ash management costs without regard to the Company’s
failure to act sooner to place the ash in an appropriately lined facility as required by due
care and current regulation, and have not been previously paid for by the ratepayers. 8
7 While it may be that the total coal ash management costs sought to be recovered may have been
less had the Company not negligently delayed converting to lined ash ponds after the Sutton report was
completed, the evidence in the record is that it is nearly impossible and probably highly speculative to
determine how much less given the passage of time and a number of other complexities and unknowns.
Nevertheless all existing ash is subject to the legal requirement that it be properly stored under the
provisions of the CCR Rule and CAMA. The heightened handling and storage standards imposed by law
and regulation are for the public benefit and are in the public interest. In balancing the interests of
consumers and the utility, I find that rates including the reasonable cost of proper containment of ash but
excluding dewatering and moving costs associated with ash created in or after 2007 and further excluding
transportation costs (as will be discussed in the following paragraph) is just and reasonable. Such rates
fairly balance the consumer’s and the utility’s interests considering the benefits received and the costs
reasonably incurred to properly store and manage ash in accordance with new lawfully imposed standards.
8 The Company and the Public Staff would be charged with assuring that the ratepayers are not
charged twice for the same handling and management costs with respect to the ash produced during or
after 2007.
11
its coal ash management obligations and negligently failed to take action to move all ash
to on-site lined repositories at the Sutton and Asheville plants when it knew the ash
contaminants were not being adequately contained within the repositories and that
unlawful and/or violative discharges and exceedances from the repositories that could
impact both surface and groundwater were occurring. Looking at the situation as it existed
in 2004, the Company should not have been paralyzed and unable to take reasonable
actions to move toward compliant containment of accumulated ash and ash being
produced at the time by the fact that environmental regulators had not yet created the
specific guidance such as that later found in the CCR Rule and CAMA legislation.
As previously discussed, the Company acted imprudently not to have taken steps
after learning of the information in the Sutton report in 2004 and not being prepared to
move all pre-2007 ash from unlined repositories at least starting by 2007. Moreover, in
2007, the Company had knowledge that some of its unlined facilities were experiencing
exceedances and that the Company was knowingly incorporating the use of unpermitted
seeps into its coal ash management practices. If the Company had acted prudently to be
in a position to have begun dewatering, excavating and moving pre-2007 ash into lined
on-site plant landfills by 2007, it would have been “CAMA compliant” at least with respect
to its active basins and ponds before the enactment of CAMA.9 As explained by Public
Staff witnesses Garrett and Moore, on-site remediation is generally the most cost-
effective closure method and would certainly not be as costly as securing other locations
and transporting off-site to those locations. (Tr. Vol. 18, p. 140.) Timely development and
use of compliant on-site landfills beginning around 2007 would have completely
eliminated the need for the transportation and hauling costs (for both pre-2007 ash and
2007 and after ash) that the Company found necessary to meet compliance timelines
contained in CAMA.10 In my view it is not necessary to determine whether the Public
Staff’s witnesses are correct that compliance with CAMA did not necessitate
transportation or hauling of ash or that the hauling costs should have been less in order
to determine from the greater weight of the evidence in the record that the transportation
costs (not to be conflated with dewatering and excavation costs as discussed above) were
9Costs related to inactive basins are not part of the costs sought in this case and I am not
addressing what would have been reasonable for management of inactive repositories during the 2004 to
2007 timeframe.
10 There is disputed testimony in the record on whether an on-site landfill could have been
constructed at the Asheville plant due to the provisions of the Mountain Energy Act of 2015. If the Company
had acted prudently by 2007 to create a compliant on-site landfill at the Asheville plant, the landfill would
have been completed prior to enactment of the MEA. The new units contemplated by the MEA would have
been planned around the newly constructed basin—not the other way around.
12
caused by the Company’s imprudence, i.e., mismanagement and negligence, 11 in
delaying action to correct the issues identified in 2004.
Having determined which costs should be recoverable in rates and which should
not, I would allow the recoverable portion to be amortized over seven years (as an
unusual or extraordinary expense), with the unamortized balance included in rate base.
11 CAMA left the choices and decisions of how best to achieve compliance in a timely manner to
the plant/basin owner. I do not take issue with the Company’s decision to transport and store ash off-site
for compliance purposes, as generally the Commission should avoid substituting its judgment for the
Company’s business judgment. It is accepted that the Company had several possible workable options to
choose from in deciding how best to comply with CAMA and that the Company chose the option[s] it found
most appropriate considering a host of information available and pertinent to it at the time. I do not believe
the Company chose to haul ash over public roads, creating greater risk of exposure to liability, on the hope
of receiving some level of return on any additional expense incurred to do so.
13
DOCKET NO. E-2, SUB 1131
DOCKET NO. E-2, SUB 1142
DOCKET NO. E-2, SUB 1103
DOCKET NO. E-2, SUB 1153
With respect to those matters addressed by the partial joint stipulation negotiated
between the Company and the Public Staff, I am in substantial agreement with the
majority’s disposition of those items. I write separately with respect to the topics
addressed by the partial joint stipulation for two reasons. First, there is one matter as to
which I would reach a different result than the stipulating parties and the Commission
majority. Second, because the partial stipulation deals with some topics only in a
conditional, preliminary, or contingent manner, or because they are resolved by the
stipulating parties for purposes of settlement of this case only and without prejudice to
positions that may be asserted in future cases, I wish to offer my own individual views as
a supplement to the majority’s analysis, in the hope that such insight may be useful to the
parties in future cases.
As the Commission majority notes, for the allocation of demand-related costs, the
historical position of the Public Staff has been to support the use of the Summer/Winter
Peak and Average (SWPA) methodology. This position has been favored by the
Commission itself in prior general rate cases. See, e.g., Order Granting General Rate
Increase, Docket No. E-2, Sub 1023 (May 30, 2013); Order Assessing Rate of Return
Penalty and Granting Partial Increase in Rates, Docket No. E-2, Sub 444
(September 24, 1982). In the partial stipulation in this case, as in the Company’s prior
2013 general rate case, the Public Staff has agreed – for purposes of settlement of this
case only – not to object to the use of the Summer Coincident Peak (SCP) methodology
for allocation of demand-related costs. The stated rationale for this acquiescence is that
the Public Staff has concluded that, in the present case, the two different methodologies
do not yield materially different results. (Tr. Vol. 19, p. 97; Public Staff Floyd’s Late-Filed
Ex. 1.) One might well ask why this fact is not instead a good rationale for insisting on the
historic preference for the SWPA methodology. The answer lies, of course, in the fact that
other stipulating parties and several of the intervenors do not support the SWPA
methodology. Neither, though, do they all concur in the use of the SCP methodology, with
some parties advocating for the use of a Winter Coincident Peak (WCP) method or even
consideration of a dual Summer-Winter Coincident Peak method. In the resulting
negotiations, it appears that the SCP method provided a point of agreement among the
greatest number of the parties. Underlying the parties’ differences are divergent views
about the implications of two factors -- the Company’s transition from summer planning
to winter planning for resource development purposes and the developing evidence of a
shift in the Company’s peak loading from summer to winter. These trends appear likely
to continue, and the Company, the Public Staff, and other parties may benefit from more
explicit direction and guidance from the Commission as to its preferred methodology for
allocation of demand-related costs. I would hope that the rationale for supporting one
methodology over another can receive more attention in the Company’s next general rate
case. To that end, I would modify ordering paragraph 28 of the Commission’s order to
require that the Company, in its annual cost of service filings, include an allocation based
on the WCP method, as well as the SWPA and the SCP methods.
The second topic concerns the methodology for apportioning distribution system
costs among different customer classes, a subject that indirectly enters into rate design
as one of the considerations in setting the basic or fixed customer charge component of
billing. Several intervenor parties presented testimony highly critical of the Company’s
method of implementing its minimum system methodology for apportioning distribution
system costs, calling into question, among other things, differences in the outcome of the
Company’s application of that method and the outcomes achieved by other integrated,
investor-owned electric utility companies employing the same method. The testimony of
witness Barnes was particularly focused on this discrepancy. (Tr. Vol. 16, pp. 57-67.) The
Company’s rebuttal testimony did not respond in detail to these criticisms.
In evaluating the Company’s use of the minimum system method for allocating
distribution related costs, I believe it is also important to recognize that the Company’s
substantial projected investments in its Power/Forward Carolinas grid modernization
program means that distribution system cost allocation among customer classes will take
on heightened importance in future rate cases. If the Company is using a suboptimal
methodology for allocating these costs or is incorrectly applying an otherwise acceptable
methodology, the follow-on implications for rate design could be very significant in the
future. For this reason, as in the case of the methodology for allocating demand-related
costs, I again believe that the Commission, the Public Staff, and all other interested
parties would benefit from a more focused and explicit evaluation of optional methods for
distribution system cost allocation and an assessment of the extent to which any single
allocation methodology is being consistently applied by the utilities using it.
2
and O’Donnell. The Commission majority has for now reserved judgment on whether to
initiate a separate docket on the Company’s grid modernization plans; I anticipate that
question will be before the Commission again after the technical workshop.
The point just made is one part of the reason I would refuse to accept Paragraph
IV.F.3.a. of the partial joint stipulation, and would instead decline to authorize any
increase in the per customer fixed charge at this time. The case for exercising caution in
increasing the fixed portion of customer charges is well set out in Resolution 2015-1
adopted by the National Association of State Utility Customer Advocates (NASUCA), and
I will not repeat here the considerations identified and expressed in NASUCA’s resolution.
(Ex. Vol. 19, pp. 286-289.) Certain additional factors counsel the same caution in this
case. Until there is greater clarity as to how the Company’s planned grid modernization
investments will affect distribution system costs, it would be premature, I think, to assess
how, if at all, the fixed customer charge should be changed. Leading me to the same
conclusion, Company witness Wheeler testified that it is his expectation that
implementation of the Company’s proposed AMI metering system, when combined with
the greater flexibility and data management capabilities of the Company’s new customer
information and billing system, will open opportunities for new and more creative rate
designs. (Tr. Vol. 10, pp. 225-228.) In my view, these opportunities should include, among
others, ways to address internal subsidization within the residential rate class between
low- and high-usage customers, a better method for recovering distribution related costs
from net metered customers, and ways to provide additional relief and support for
customers who have difficulty paying their bills.
As for this last group of customers, I note that while the partial stipulation between
the Company and the North Carolina Justice Center provides for an additional
contribution of $2.5 million by the Company to the Helping Home Fund (Fund) for low-
income customers. While this is commendable and something I support, mechanisms
such as the Fund are imperfect and are not the most desirable means for addressing the
impact of electricity cost increases on low-income customers. Innovative rate designs
made possible by the Company’s deployment of AMI and new customer information and
billing systems could be of wider and more sustained benefit to this particular customer
group. They could present opportunities for the Company to consider programs similar to
the Percentage of Payment Plan and the Residential Service Low Income rate offered by
the Company’s Duke Energy Ohio affiliate. Again, given the expectation that these
developments may or will affect the setting of the per customer fixed charge, I would
support deferring any decision to allow a change to the basic customer charge at this time.
The Company’s request to recover costs incurred since 2015 associated with
permanent disposal of coal combustion residuals located in nineteen active or inactive
3
surface impoundments at the Company’s eight coal-fired plants in North and South
Carolina, and to include ongoing and future costs of disposal in its present retail rates,
presents a host of difficult questions, many of which have been only infrequently
addressed, if at all, in prior rate cases.1 The Commission has in past cases addressed
the recovery in rates for utility investments in abandoned or cancelled generating plants.
See, e.g., State ex rel. Utilities Comm’n. v. Thornburg, 325 N.C. 463, 385 S.E.2d 451
(1989) (Thornburg I); State ex rel. Utilities Comm’n. v. Thornburg, 325 N.C. 484, 385
S.E.2d 463 (1989) (Thornburg II). However, the matters at issue in this case differ from
such investments in that they involve present and future expenditures incurred and to be
incurred to dispose of wastes produced over many years from the generation and sale of
electricity to several different generations of customers. As far as I am aware, the
Commission’s only published decision involving similar facts occurred in connection with
a request by Public Service Company of North Carolina (PSNC) to recover costs incurred
to remediate environmental contamination at several decommissioned manufactured gas
plants owned and formerly operated by it. See Order Granting Partial Rate Increase,
Docket No. G-5, Sub 327 (October 7, 1994) (1994 PSNC Order). Even this precedent, at
least so far as the published opinion discloses, did not address many of the most ardently
contested issues in the current case. To mention only one prominent difference, there is
no indication in the 1994 PSNC Order that the PSNC’s history of management of the
manufactured gas plants and associated environmental compliance involved any
instances of criminal misconduct. In part because the facts of this case do not neatly
conform to any prior precedent, I have chosen to write separately from the majority to set
out my own views as to the appropriate disposition of the issues in this case.
First, I believe the majority correctly determines that the costs incurred to
comply with the EPA’s Coal Combustion Residuals Rule (CCR Rule) and with
North Carolina’s Coal Ash Management Act (CAMA) should be recovered on a
system basis and not solely from North Carolina retail ratepayers.
Second, for the reasons stated in the majority’s opinion, I agree that allowed
costs should be allocated among retail customer classes based on an energy
usage factor and not based on a demand factor, as requested by the Company
and some of the intervenors.
1 Although I was not a member of the Commission and thus did not participate in the 2016
consideration of Dominion North Carolina Power’s request, in Docket No. E-22, Sub 532, to recover similar
waste disposal costs, for reasons set out in the majority opinion, I agree that the ruling in that case rests on
materially different facts and considerations and, therefore, is not precedent for this case.
4
wastes from its L.V. Sutton plant at Charah, Inc.’s Brickhaven facility in Chatham
County may not be recovered under G.S. 62-133.2(a1)(9) for the simple reason
that no “sale” of the waste by the Company occurred.
Following the precedent of the 1994 PSNC Order, I believe the Commission should
consider both whether the Company’s expenditures to comply with current law were
reasonable and prudent as to the elements and the amount of the expenditures, and also
whether the Company’s history of design, construction, operation, and maintenance of
the waste impoundments were reasonable and prudent. The Company’s position appears
to be that the first of these inquiries is dispositive in itself. I do not agree. It is worth noting
that the Commission observed, in the 1994 PSNC Order, that PSNC had handled the
wastes and byproducts from the gas manufacturing process in accord with laws
applicable at the time. See 1994 PSNC Order, at p. 20. That fact, however, did not lead
the Commission to conclude that it was therefore unnecessary to undertake a review of
the reasonableness of PSNC’s operation of the plants before they were finally closed.
Left unresolved by the 1994 PSNC Order, at least so far as the order itself
discloses, is the matter of reconciling the outcome of the two determinations if the results
diverge. Consider that if the Commission were to conclude that both the fact and the
amount of the current expenditures for ash disposal are reasonable and prudent and that
the Company’s historical handling of the coal combustion wastes also was reasonable
and prudent, the need to resolve conflicting determinations does not arise. Likewise, if
the Commission were to conclude that the historical operation of the waste impoundments
was reasonable and prudent but that some or all of the proposed current expenditures for
closure and permanent disposal of the combustion residuals were not reasonable and
prudent, either in fact or in amount, then the Commission would disallow some items or
amounts and allow others, but would not look further.
The more difficult case is the one which I believe arises on the evidentiary record
as it stands. With limited exceptions as to specific items challenged by the Public Staff,
none of the objecting intervenors has questioned the reasonableness of the items of
5
expenditure or the amounts of those expenditures that the Company proposes to recover
on account of its efforts to comply with current law relating to the disposal of coal ash
wastes. However, using several different theories, emphasizing various different pieces
of evidence, and proposing several different remedies, the Public Staff, the Attorney
General’s Office (AGO), and all of the objecting intervenors have challenged the
reasonableness and prudence of the Company’s historical management of coal
combustion wastes. In so doing, they have presented the Commission with the task of
deciding from the record how, to what extent, and in what amounts the Company’s history
of waste management affected or impacted, if at all, its current and expected future
expenditures for permanent disposal of the coal combustion residuals. This is not a simple
determination, and it will occupy much of my remaining discussion.
2 Some of the impoundments also were used to treat wastewater streams originating from plant
processes other than coal combustion.
6
characterization of the costs at issue is, I believe, an important first step in determining
how those costs should be allowed and recovered.
On the questions thus framed, the state of the evidentiary record leaves something
to be desired. The Company presented no witness with first-hand knowledge or
experience regarding its waste ash management policies, decision-making, or operating
practices prior to 2014. Company witness Kerin provided clear and comprehensive
testimony concerning the Company’s decision-making and activities with respect to coal
combustion residuals after his assignment to the issue in 2014, but he came to his task
with no prior experience relating to the issue. Company witness Wells gave informative
and knowledgeable testimony concerning the Company’s history of environmental
compliance, but only for the period after 2009. Company witness Wright had no prior
education, training, or experience with the management of coal combustion residuals,
and his testimony largely consisted of opinions on matters of interpretation of law and
legal inference, which are in any event the province of the Commission itself and not
subjects for witness testimony.
From the Public Staff and intervenors, only AGO witness Wittliff had first-hand
knowledge and experience of ash waste handling practices during the time period prior
to 2000 and extending back to earlier decades. His experience, while certainly relevant
and highly important in evaluating the Company’s conduct, was based only on a review
of Company records and documents produced in discovery and did not involve a
first-hand inspection of any of the waste impoundments or contemporaneous knowledge
of the Company’s historical activities. Even so, I find witness Wittliff’s overarching
opinions and conclusions to be entitled to substantial weight, especially in the absence of
contrary testimony from any other witnesses with more direct knowledge.
7
industry standards and practices. I find this testimony, especially coming from witnesses
with no experience of the matter and which merely restates the ultimate issue to be
decided, to be unacceptable. In large part, I am compelled to do so because the
conclusory statements of the witnesses simply cannot be reconciled with the Company’s
admission in the federal criminal cases that it had been criminally negligent over a period
of at least several years with respect to the matters charged, meaning that it failed to
exercise the degree of care in the management of the waste impoundments that a
reasonably prudent person would have exercised. As the Company’s counsel explained
in his address to the District Court: “I want to talk for a second about the kinds of crimes
that the company has acknowledged and pleaded guilty to. These are crimes of
negligence. These are negligence-based crimes.” (Err. Ex. Vol. 15, p. 61.)
A second approach would be to conclude that the Company has failed to carry its
burden of proof as to the reasonableness and prudence of its historical coal waste
management policies and practices. In its post-hearing briefing, the Company points out
that under the prevailing procedural and evidentiary standards, the Company’s
expenditures should be presumed to be reasonable and prudent until an objecting party
steps forward with evidence suggesting to the contrary, at which point the Company bears
the burden of proof to substantiate the reasonableness of the expenditures. The
Company argues that no party other than the Public Staff satisfied the initial prong of this
procedure, and that the Public Staff did so only with respect to the discrete items of
expenditure recommended for disallowance by witnesses Garrett and Moore and by
witness Lucas. I believe that the precedents cited by the Company are inadequate to
carry the weight of the burden such precedents place upon them. When the matter under
review involves the reasonableness and prudence of a known and discrete expenditure
made at a definite point in time, it is appropriate to require that parties challenging that
expenditure come forward with some evidence that reasonable alternatives were
available and to quantify the amount of the alleged error. See State ex rel. Utils. Comm’n
v. Conservation Council of North Carolina, 320 S.E.2d 679, 312 N.C. 59 (1984). In this
case, the challenges made by the Public Staff, the AGO, and the intervenors, except in
the case of specific items of expenditure challenged by the Public Staff, do not involve
discrete, known items of expense but are instead matters of omission, inaction,
inattention, neglect and delay. From the very nature of the errors asserted by the objecting
parties, it is not possible to reconstruct hypothetical histories and then, today, after many
years, reconstruct the costs that might have been incurred under those alternative
histories. I would find that there was ample evidence presented by several of the
intervenors, by the AGO, and by the Public Staff, to put at issue the reasonableness and
prudence of the Company’s historical coal waste management policies and practices and
thereby require the Company to carry its burden of proof on that subject.
The consequences of adopting the second approach and denying the Company
all cost recovery for failure to carry its burden of proof would have severe financial
consequences for the Company and would, as the majority points out, likely lead to the
Company’s having to pay even higher costs to secure equity and debt financing for future
operations and investments, a result that would significantly harm ratepayers. It would, I
believe, fail the fundamental test set out in G.S. 62-133(a), requiring that the
8
Commission’s determination of rates be fair and reasonable not only to objecting parties
and ratepayers, but also to the Company.
Complete disallowance of all coal ash disposal cost recovery on the ground that
the Company has failed to carry its burden of proof also flies in the face of common sense.
Had the Company’s management of coal combustion wastes resulted in no exceedances
of the state’s 2L groundwater standards, no violations of any NPDES permits, no criminal
prosecutions, and no civil or administrative lawsuits, the record taken as a whole shows
that the Company would eventually have been required to undertake many or even most
of the ash disposal activities now required of it by the CCR Rule and CAMA. As evidence
for this, I refer to the Company’s 2004 study and report concerning options for long-term
management of combustion residuals at its L.V. Sutton plant, which I consider to be one
of the more important documents admitted into evidence in this case. (Ex. Vol. 22, pp.
165-211.) The 2004 study was authored before the Kingston, Tennessee, ash spill in
2008, before the promulgation of the initial drafts of the CCR Rule, before the
administrative actions commenced by the North Carolina Department of Environmental
Quality (DEQ) against the Company in 2013, before the 2014 spill at Duke Energy
Carolinas, LLC’s Dan River plant, before the adoption of the final CCR Rule, and before
the adoption of CAMA. As the study discloses, even in 2004, when the regulatory regime
was defined by the Clean Water Act and NPDES permits issued pursuant to that statute,
by Part D of the Resource Conservation and Recovery Act, and by state regulations
implementing those two statutes and imposing the 2L groundwater standards, the
Company had developed the view that eventual closure of the existing impoundments
would be required either by dewatering the impoundments and capping the ash in place,
or by excavation of the ponds and disposal of the combustion wastes in dry landfills. As
subsequent events proved out, the Company’s assessment in 2004 turned out to be
absolutely correct.
The third approach, and the only one I would find proper under the circumstances
of this case, is to grapple with the available evidence, most of it documentary, in order to
form a best judgment as to whether the Company’s history of management of coal wastes
is so flawed as to render its present expenditures for permanent disposal of those wastes
unreasonable and, if so, how to quantify the effects of the past on the present. On the
record as it stands, I believe the only way to undertake these two tasks is to consider the
evidence on a plant-by-plant basis, and I attempt to do so in later sections of my opinion.
First, though, a short discussion about the standard of care I believe should be applied in
assessing the Company’s actions and omissions.
Company witnesses and opposing Public Staff and intervenor witnesses alike
concurred that regulatory standards and customary industry practices for handling and
disposal of coal ash wastes have evolved over an extended period of years. (See, e.g.,
Ex. Vol. 16, p. 211; Tr. Vol. 16, pp. 109-135.) The question the Commission must consider
is whether the Company acted reasonably in response to, and in light of, those evolving
standards. This is made more difficult by the long period of development of scientific and
9
environmental understanding and regulatory interest in coal combustion waste between
the time of the Company’s general rate case in 1987 and its next-but-this rate case in
2013. However, I believe that the record taken as a whole clearly reflects that, during that
twenty-six year period, both “best practices” and regulatory requirements with respect to
ash wastes advanced in a direction that converges toward the present mandates
embodied in CAMA and the CCR Rule.
When environmental regulations prohibited discharge of fly ash from stacks, two
methods of handling that ash developed. One, which had long been used with respect to
bottom ash (including by the Company itself) was dry handling, which involved manual
removal of the collected ash followed by dry disposal in either a lined or unlined landfill,
land application, or dry stacking of the wastes. The second method involved using water
to flush the accumulated ash, bottom ash and fly ash, and other combustion by-products,
from the generating plant. The resulting ash laden wastewater was sluiced to detention
ponds where the ash was allowed to precipitate and settle out, thereby permitting
discharge or reuse of the treated wastewater. After enactment of the Clean Water Act in
1972, the regulatory regime applicable to wet handling of coal combustion residuals was
primarily intended to address treatment of the wastewater before discharge and not the
ultimate disposal of the waste ash itself. Hence the impoundments themselves should be
considered – as they are and were treated under the Clean Water Act - as wastewater
treatment facilities, not as permanent facilities for disposal of the waste combustion residuals.
The record establishes that the different environmental risks associated with wet
handling of ash and the resulting accumulation of precipitated ash in the wastewater
treatment basins, as compared with dry handling followed by permanent disposal of the
ash in landfills, were well understood as far back as the time of the enactment of the
Clean Water Act. When left in standing water, unprotected from rainfall or storm water
runoff from surrounding areas, in impoundments that were not hydrostatically isolated
from groundwater, there is now and was then a risk that constituents in the waste ash
would migrate into groundwater or seep to the surface outside the impounded area.
These are fact of elementary chemistry, hydraulics, and hydrology; they were not
something awaiting discovery in some new scientific breakthrough.3
At all points after the time the emission of waste fly ash from smokestacks was
prohibited, the Company had a choice between dry and wet methods of handling
3 In 1979, a researcher at the Los Alamos Scientific Laboratory submitted a report at the
Environmental Technology Training Conference in Arizona, titled “The Disposal and Reclamation of
Southwestern Coal and Uranium Wastes,” which contained the summary conclusion that “[t]here is growing
awareness that the discarded wastes from coal combustion are a serious potential source of surface and
ground water contamination.” (Ex. Vol. 22, p. 224.) The author of the report cited to a number of other
contemporaneous papers and reports on the subject. Although no Company witness testified to personal
knowledge of this report, it is indicative of the general state of knowledge at the time. The applicable
standard is, in any event, not what the Company actually knew, but what it reasonably could and should
have known. See 78 North Carolina Utilities Commission Orders and Decisions 238, pp. 251-252 (August
5, 1988).
10
combustion wastes.4 Although the applicable regulatory regime permitted the Company
to choose between these two methods, that fact does not mean that their environmental
and regulatory risk profiles were the same, nor does it absolve the Company from its
obligation to implement its chosen method in a reasonable and prudent manner in light of
the specific risks inherent in that method. The knowledge that is to be charged to the
Company during the last four decades of the twentieth century, and the first two decades
of this one, is not knowledge of what actions legislatures and regulators might take at
some future point. Instead, the knowledge that the Company is charged with is knowledge
of the different environmental consequences of dry management of ash in landfills or
mineshafts versus wet management in wastewater treatment ponds, and these
differences are matters of basic chemistry and hydrology. The Company’s inability to
predict regulatory and legislative developments does not mean it was unable to
understand and foresee the environmental consequences of improper design,
construction, operation, repair, and maintenance of the surface impoundments it chose
to use for treatment wastewater laden with coal ash wastes.
b. The Permittee shall at all times properly operate and maintain all
facilities and systems of treatment and control (and related
4 In its 1988 report to Congress on the question of whether coal combustion wastes should be
regulated as a hazardous waste under Subpart C of the Resource Conservation and Recovery Act, the
EPA notes that, by that date, the most common method of disposal of waste ash throughout the United
States was in dry landfills. While surface impoundments were also very common, their use was
concentrated in the southeastern United States where, the EPA noted that access to sufficient, affordable
water can make surface impoundments a realistic, economic option. (Tr. Vol. 16, pp. 220-225; Ex. Vol. 21,
pp. 513-516.)
11
appurtenances) which are installed or used by the Permittee to
achieve compliance with the conditions of this permit…
(Ex. Vol. 17, p. 378; see also 40 C.F.R. § 122.41.) The Company, having chosen a
method for waste handling that was known to have a potential risk of contamination of
groundwater and surface water, I conclude that the degree of care expected of the
Company in its management of the wastes should have been commensurate with that
risk. Put differently, the standard of care expected of a reasonable and prudent utility is
not now, and was not in the past, the absolute minimum necessary to avoid criminal
prosecution or sanctions for violation of civil law; it was instead to take such actions as
could or should reasonably have been taken at the time to minimize the risk that
contaminants from coal ash waste would enter groundwater or surface waters.
I would find from the record taken as a whole that the Company’s history of
managing wastes from burning coal to produce electricity contains significant and
non-trivial evidence of inattention, inaction, and neglect in maintaining the wastewater
treatment impoundments where the wastes were allowed to accumulate over a period of
years, and that the Company was slow to take up and apply evolving best practices as
they developed over time. From the very nature of unlined surface impoundments and
the way water-borne contaminants enter groundwater and then migrate to surface water,
any improper siting or construction of an impoundment or lax and inconsistent
maintenance will have consequences that may become readily apparent only over an
extended period of time. The parties focused their evidentiary presentations largely on
events that occurred in the two most recent decades, most especially centering on the
events that formed the predicate for the Company’s federal criminal prosecution and the
several civil administrative enforcement actions and private party lawsuits that were
initiated during the same time period. The federal criminal charges against the Company
use the formulation “… from at least [a recited date] …,” leaving open the precise date
the charged misconduct may in fact have begun. I find it plausible to infer from the
character of the alleged criminal violations and from the nature of the surface
impoundments themselves, as noted, that the Company’s actions, inaction, and
omissions did not suddenly start at some date in 2010, 2011, or 2012, or another
subsequent date certain, but were instead a continuation of prior operating practices.
12
imprudent at the time those decisions were made. To the question of whether the
Company managed those impoundments with the degree of care, attention, and skill I
think was required at the time, I would answer that the record contains sufficient evidence
to conclude that it did not do so, even under the regulatory regime in place prior to the
CCR Rule and CAMA, as evidenced by the fact that the federal criminal prosecution and
the various civil administrative actions were all grounded on the regulatory regime
predating the enactment of those two regulations. That is not, however, the end of the
inquiry. As the majority notes, and I agree, the overriding difficulty confronting the
Commission is how to quantify the extent to which the Company’s past conduct translates
into present costs incurred. As I have already pointed out, precision in doing this would
require the impossible construction and evaluation of several different alternative histories
and realities. Neither Public Staff witness Lucas nor the AGO witness Wittliff, the two
principal witnesses whose testimony extensively and persuasively attacked and
challenged the Company’s claim that its historical management of coal ash wastes had
been reasonable and prudent, was able to provide any general or overall quantification
of the financial consequences of the Company’s mismanagement.
I would conclude that the general evidence in the record concerning the
Company’s waste handling policies and practices is not adequate to support an
across-the-board denial of all cost recovery, but neither is it sufficient to resolve all
questions of reasonableness and prudence in the Company’s favor. I do believe,
however, that such general evidence is informative and instructive in deciding the weight
that should be given to specific evidence going to the reasonableness of particular items
of cost recovery in the Company’s application. Although my general conclusions support
and undergird the following discussion, I base my final determinations primarily on factors
specific to the individual coal-fired generating plants in the Company’s portfolio. As
Company witness Kerin acknowledged in his testimony, every waste impoundment is
different with respect to important matters such as topography, hydrology, engineering,
surrounding environment, and operating history. (See, e.g., Ex. Vol. 17, pp. 127-129;
Tr. Vol. 17, pp. 62-63.)
The evidence is most extensive for the two impoundments at the L.V. Sutton plant,
one constructed in 1971 and the second constructed in 1984. In 2014, these two
impoundments contained an estimated 3,540,000 tons and 2,780,000 tons, respectively,
of combustion residuals. (Ex. Vol. 17, p. 79.) By January 1, 2017, this amount had been
reduced to approximately 2,600,000 tons remaining in the 1971 impoundment and
approximately 2,800,000 tons remaining in the 1984 impoundment. (Ex. Vol. 16, p. 210.)
13
L.V. Sutton plant.5 The amount in contention among the parties is the disallowance of
$80,513,871 recommended by Public Staff witnesses Garrett and Moore. [BEGIN
CONFIDENTIAL] [END CONFIDENTIAL]
The Company contends that these expenses were necessary if the Company was
to meet the CAMA-imposed deadline for permanent closure of the two impoundments. I
would conclude that had the Company acted reasonably and prudently, it could have
avoided the costs of offsite shipment and disposal to the Brickhaven site. Accordingly, I
would deny cost recovery of the amount expended to prepare, transport, and then pay for
permanent offsite disposal of any of the Sutton combustion residuals.
In reaching this conclusion, I rely in part on the testimony by Public Staff witnesses
Garrett and Moore, who concluded that had the Company commenced construction of an
onsite landfill on the same start date as it commenced transport of ash to the Brickhaven
disposal site, it would have avoided the offsite disposal costs altogether. (Tr. Vol. 18,
pp. 153-155.) The Company disputes witnesses Garrett and Moore’s conclusion, noting
that delays in receiving the necessary permit to construct an onsite landfill at the Sutton
plant rendered it impossible for the Company to meet the CAMA-mandated deadline for
closure of the impoundments and permanent disposal of the waste material in them.
(Tr. Vol. 20, pp. 32-41, 56; Ex. Vol. 20, pp. 234-240.) The parties differ sharply on whether
the Company can or should be able to avail itself of options provided in CAMA and in the
federal criminal plea agreement to extend the compliance deadline to accommodate these
delays. I find it unnecessary to resolve that disagreement for a more fundamental reason.
The evidence shows that by 2004, the Company recognized that the 1984
impoundment at the Sutton plant was nearing capacity and the end of its useful life, and
that there were significant environmental concerns involving the 1971 impoundment.
Accordingly, it undertook a study to identify options for a long-range strategy for
combustion wastes at the Sutton plant. That study resulted in a report issued in
November, 2004, containing a detailed analysis of both the then-current situation of the
impoundments and disposal sites, in addition to alternatives for future management of
ash. (Ex. Vol. 22, pp. 165-211.) According to the report, the objective was to identify a
solution that would not only allow capacity for storage and treatment of coal combustion
residuals from future electric generation but would also utilize all of the ash previously
deposited in the two existing impoundments. (Id. at p. 168.) To repeat for emphasis, the
study considered not only management of future combustion residuals, but also a long-
term permanent solution for the waste ash in the existing impoundments.
5This amount, as with the amounts subsequently stated for the other plants, were provided by the
Company on a system-wide basis and do not reflect the North Carolina retail allocation. They also do not
include actual expenditures in 2017 through October 31, 2017.
14
This report considered both capacity constraints affecting the existing
impoundments and known environmental concerns relating to the unlined 1983
impoundment.6 Discussing these concerns, the report stated:
….
The plant lab personnel, plant management, the East Region engineers,
and the environmental section are concerned with the ability to maintain the
[NPDES] discharge permit limits of the ash pond associated with the
continued running of the Sutton plant, as well as pond volume concerns.
(Id. at pp. 169-170.) According to the report, the Sutton plant needed an alternative
solution for ash management in place by June, 2006. The target date was explained thus:
“The 1984 ash pond is currently estimated to be non-operational due to Total Suspended
Solids (TSS) limit exceedance which will cause a violation of the NPDES permit. The ash
pond is expected to be un-operational by June, 2006.” (Id. at p. 168.)
Unlike the majority, I find no ambiguity or uncertainty in the report about the need
for immediate action, and that the identified need was not simply to add capacity for future
waste handling. In the environmental analysis section of the report, the study team observed:
6 This impoundment is referred to in the report as the “1983 ash pond.” In the Company’s exhibits,
this impoundment is not identified as such, but there is instead a reference to a 1971 impoundment. (Ex.
Vol. 16, p. 210.) In the 2004 study, it appears that the reference to the unlined 1983 ash pond is meant to
refer to the original 1971 impoundment and that the two are one and the same. (Ex. Vol. 22, p. 169.)
15
the facility up to questions and further scrutiny. This risk was taken into
account in the ranking of the alternatives.
The recommended, preferred alternative identified in the study was one of the
beneficial reuse options, noting that it would constitute “...a proactive approach that will
positively impact the environmental position of the Sutton plant, and allow the company
to benefit from the creation of a revenue generating project that will create a positive
public image in dealing with an environmental issue associated with fossil plant electricity
production.” (Id. at p. 188.) While no witness was able to testify as to exactly what was
done with the 2004 report and its recommendations, it appears from the record that none
of the long-term solutions considered in the report had been implemented by 2014. (See
Ex. Vol. 17, pp. 131-133 (closure plan for 1971 and 1984 impoundments)) I would
conclude that had the Company taken timely action in 2004 when it had concluded that
action was both necessary and appropriate, or even at any other time thereafter up until
2014, the delays and time constraints cited by the Company as its rationale for transport
and off-site disposal of the waste from the Sutton impoundments could have been
avoided. Accordingly, I would disallow as unreasonable and imprudent recovery of those
costs identified by witnesses Garrett and Moore as the costs for transport and disposal of
waste ash from the Sutton impoundments to the Brickhaven site.7
In addition to disallowance of the costs for transport and offsite disposal, I would
also disallow the amount of $6,693,390 identified by Public Staff witness Lucas
representing costs for extraction wells and treatment of groundwater relating to offsite
contamination originating from the Sutton impoundments. (Tr. Vol. 18, p. 279.) As is
recited in the Company’s settlement agreement with DEQ, these costs are for accelerated
groundwater remediation going beyond the requirements under CAMA for closure of the
Sutton impoundments. (Ex. Vol. 21, pp. 586-598.) The 2004 report concerning a long-
term management strategy for ash wastes at Sutton noted that by that date contaminants
often found in coal ash had been identified in at least one groundwater well near the 1983
impoundment, but the report drew no conclusions about the source or extent of possible
7 I do not agree with witness Garrett and Moore’s recommended disallowance of [BEGIN
CONFIDENTIAL] [END CONFIDENTIAL] for installation of liner material that they contend was in excess
of applicable regulatory requirements. (Tr. Vol. 18, p. 154.) In light of the history of offsite groundwater and
surface water contamination associated with the Sutton plant, I would not penalize the Company for taking
additional steps to help ensure that contaminants from landfilled wastes did not leach to groundwater after
permanent disposal of the waste material.
16
groundwater contamination. In discussing the “do nothing” option, the authors of the
report noted:
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.
(Ex. Vol. 22, p. 184.) Instead of taking timely action when it knew that action was required,
the Company waited another decade, until action was forced by DEQ’s issuance of a
Notice of Violation based on exceedance of the state’s 2L groundwater standards. By that
time, evidence of groundwater contamination existed not only on the plant site itself but
at the property boundary and offsite beyond. I would find that the Company’s failure to
act in response to the recommendations of the 2004 report unreasonably and imprudently
increased the risk of additional groundwater contamination and of migration of
contaminants to and beyond the property boundary, and that its inaction is directly linked
to the groundwater remediation costs incurred as part of its settlement of the 2014 Notice
of Violation issued by DEQ.
B. Asheville Plant
The two impoundments at the Asheville plant, known as the 1964 ash pond and
the 1982 ash pond, contained as of August, 2014, an estimated 2,200,000 tons and
800,000 tons of coal ash, respectively. (Ex. Vol. 17, p. 79.) By January 1, 2017, the
Company estimated that the 1982 impoundment contained no remaining combustion
residuals, and the 1964 impoundment contained 2,900,000 tons of ash, the difference in
these figures largely resulting from the Company’s temporary transfer of ash from the
1982 impoundment to the 1964 impoundment in order to facilitate construction of its new
combined cycle gas generating plant within the footprint of the 1982 impoundment.
(Ex. Vol. 16, pp. 209-214.)
The action that formed the basis for the Company’s plea to one count of violating
its NPDES permit for the Asheville plant is summarized in the following statement of
counsel at the hearing before Judge Howard:
17
issue is not resolved in this plea. What the company did in this plea is it
acknowledged it should not have had specific engineering structures that
take seeps, pull them together and then put them into a water of the United
States, unless it was part of the permit.
(Ex. Vol. 14, p. 382.) Translating “specific engineering structures” into simpler English –
the unpermitted discharge was an intentional action, not simply the result of inattention
or neglect. Although I would find that this admission by the Company is some evidence
supporting the imposition of a penalty for mismanagement, I would not find that it affected
the reasonableness of the costs the Company has actually incurred in order to
permanently dispose of the waste in the two Asheville impoundments.
Several parties argued that “but for” the Company’s criminal prosecution, which
was based in part on the unpermitted discharges from the Asheville impoundments, the
Company might have been able to dewater, cap the waste ash, and thereby close the
impoundments in place, avoiding the higher costs of CAMA’s mandate that the
impoundments be excavated and the ash removed to a dry landfill. Drawing conclusions
about “might-have-beens” is inherently difficult and is especially so when the
“might-have-been” relates to legislative actions. With respect to the two Asheville
impoundments, that task is rendered even more complicated because of the enactment
of S.L. 2015-110 (Mountain Energy Act of 2015), which required the accelerated closure
and decommissioning of the remaining coal-burning generation units at the Asheville
plant. To replace those coal-burning units, the Company’s only reasonable option was to
excavate the 1982 impoundment and construct a new gas-fired combined cycle plant
within the footprint of the impoundment. Excavation, in other words, was independently
driven, at least in part, by the need to comply with the Mountain Energy Act of 2015.
The Company’s Roxboro coal plant has two ash impoundments, known as the
East Basin, constructed in 1966, and the West Basin, constructed in 1973. As of
January 1, 2017, the total combined estimated amount of combustion residuals in these
two basins was approximately 19.7 million tons. (Ex. Vol. 16, p. 209.) The Mayo plant has
a single impoundment, constructed in 1983, which holds an estimated 6.6 million tons of
18
combustion residuals. (Id.) These two plants are still in operation and the three
impoundments are still receiving ash and combustion residuals from the burning of coal
to generate electricity for current customers.
To date, the Company has expended a total of $14,867,363 to prepare and submit
to DEQ a plan for closure of the Mayo impoundment, including preparation of engineering
plans and cost estimates. (Ex. Vol. 16, p. 268.) For the Roxboro plant, the Company has
expended and seeks recovery of $20,370,325 for the same activities. The closure plans
for all three impoundments call for leaving the combustion residuals in place, installing a
cap over the waste material, and taking other steps to guard against migration of ash from
the capped impoundments. The Company is not now seeking recovery of any costs for
implementation of its proposed closure plans.
In this case, Sierra Club witness Quarles testified, based on his expertise and prior
experience with coal waste issues8 and his analysis of the site conditions, topography,
hydrology, and operation of the two impoundments at the Roxboro plant and the one unit
at the Mayo plant, that the closure plans proposed by the Company for those units would
not meet the requirements of the CCR Rule or of CAMA, and would not protect against
future migration of contaminants from the ash into groundwater and, ultimately,
surrounding surface waters. (Tr. Vol. 13, pp. 132-73, 175-77.) Witness Quarles’ opinion,
which was left essentially unrebutted by any Company witness, places in doubt the
appropriate treatment of the preparatory and planning expenditures incurred by the
Company for which it seeks recovery in this case.
One option would be to allow the Company’s current request for cost recovery
subject to later adjustment or offset against actual final closure costs as determined in a
future general rate case. This option is unsatisfactory since it would involve improper
retroactive ratemaking – costs approved for recovery in this case might be disallowed and
ordered disgorged in a later case. A second option would be to accept witness Quarles’
opinion, which is that the Company is proposing an unworkable and, therefore,
unreasonable and imprudent closure plan, and, as a result, disallow the costs in their
entirety in this case. I likewise find this option unacceptable since it would preempt a
decision that is properly to be made by DEQ and not by the Commission. The sufficiency
of the Company’s closure plans for these three impoundments is a matter that should first
be decided by DEQ, after which the Commission can review the record and make a
determination of the reasonableness and prudence of the costs the Company has
incurred and will incur. I would therefore conclude that the most appropriate treatment of
the costs incurred to date with respect to the three impoundments at the Roxboro and
Mayo plants would be to allow the Company to defer those costs to a regulatory asset
account for possible later recovery in a future general rate case, after closure plans have
8 Witness Quarles’ testimony is entitled to substantial weight. He was involved in the development
of a monitoring program to determine the lateral extent of contamination from the 2008 Kingston,
Tennessee ash spill and thereafter has been involved with investigations at more than 70 coal ash disposal
sites in the United States. (Tr. Vol. 13, p. 131.)
19
been approved by DEQ, and upon presentation of a more fully developed record
concerning the history of ash management policies and practices at the two plants.
The Company’s H.F. Lee plant in Wayne County was decommissioned in 2012. At
that time, there was one active wastewater impoundment at the plant site – the so-called
1982 basin, which was constructed in 1978, containing as of January 1, 2017, an
estimated 4.5 million tons of combustion residuals. (Ex. Vol. 16, p. 210.) In addition, there
were four inactive or abandoned impoundments as follows: (a) the 1950 basin, last used
in 1963; (b) the 1955 basin, last used in 1969; (c) the 1962 basin, last used in 1973; and
(d) the so-called “polishing pond,” which opened in 1982 and was last used in 2012.9
Collectively, these four impoundments contained an estimated 1.709 million tons of
combustion residuals as of January 1, 2017. (Id.) In this case, the Company seeks to
recover $20,759,183 in expenditures made in 2015 and 2016 for preparation of closure
plans, engineering for implementation of the plans, and for expenses relating to
dewatering the ash in the active impoundment. As far as the record discloses, these costs
are not further broken down between the four inactive impoundments and the remaining
active 1982 basin.
The inactive impoundments at the Lee plant are, together with those of similar
vintage at the Cape Fear plant, the oldest among the Company’s total of nineteen
impoundments. Three of the four were constructed before the Clean Water Act became
effective, and active use of the impoundments ceased before the practice of lined
impoundments became widespread. None of the four are subject to the CCR Rule,
although their closure is mandated by CAMA. (Id.) The 1950, 1955, and 1962
impoundments were inactive and were no longer in use by the time of the Company’s
1987 general rate case. (For shorter reference, I will call these the “pre-1973
impoundments,” since they were all inactive by 1973.) The record does not disclose
whether any allowance for costs of closure of the pre-1973 impoundments and permanent
disposal of the waste ash was made in that rate case.
No party has contested that the items of expenditure or the amounts of the
expenditures made by the Company with respect to the impoundments at the Lee plant
are reasonable and prudent. The difficulty I find with the Company’s request for cost
recovery centers on the inactive impoundments, and more particularly on the fact that the
pre-1973 impoundments were last used for wastewater treatment and removal of
combustion residuals between thirty and thirty-five years before the enactment of CAMA.
The impoundments themselves, whose purpose was to treat ash laden wastewater before
the treated wastewater could then be discharged into surface waters or recycled for other
purposes at the plant, have served no such purpose for the same period of time. The
waste products that now must be removed from the footprint of the impoundments and
9The exact status and history of the “polishing pond” is not detailed in the record. It is estimated to
contain only approximately 9,000 tons of wastes and, therefore, does not appear to materially affect the
Company’s total expenditures.
20
permanently disposed are the residuals from coal burned to generate electricity for a very
different group of customers than the Company’s current ratepayers.
Based on these factors, I find the principle supporting the Court’s decision in State
ex rel. Utils. Comm’n v. Edmisten, 291 N.C. 451, 232 S.E.2d 184 (1977), to be an apt one
for this case – that the costs of service should be borne by those who were customers
during the period the service was rendered. Id., 291 N.C. at 470-71, 232 S.E.2d at 195.
The facts in Edmisten differ from those in this case in several respects, and Edmisten
presents a simpler illustration of the general principle stated. The question that I believe
implicates Edmisten in this case can be formulated in the following way. Permanent
disposal of waste products from the generation of electricity is an expense directly
associated with the generation of that electricity and should, therefore, be treated as an
ordinary expense of operation. However, perfect identity between the time period during
which electricity is generated and the time the resulting waste products are permanently
disposed is not reasonable or even possible. The water used to flush the waste products
from the plant must first be treated to remove the combustion wastes, and some
accumulation or storage of that waste must occur in order to permit the most efficient and
cost-effective permanent disposal of the waste. While an impoundment is still receiving
new wastes and is used for treatment of wastewater, removal of accumulated wastes in
the impoundment may be impractical and costly. Because some delay between the
generation of coal combustion wastes and their final, permanent disposal is not
unreasonable, the question then is when does the delay between (a) the production of
waste in the course of generating electricity to serve one group of customers and (b) the
final disposal of that waste accompanied by a request that then-current customers
shoulder the costs of disposal become so great that it offends the principle articulated in
Edmisten?
In the case of impoundments that were still actively receiving combustion residuals
and treating wastewater when the Lee plant and several others were retired in 2012, it is
reasonable for present ratepayers to be assigned costs associated with the final,
permanent disposal of the wastes remaining in those impoundments at the time of their
decommissioning. However, I would find that this is not so in the case of the pre-1973
impoundments. This distinction in treatment is supported, I believe, by the essentially
undisputed evidence in the record as to the manner in which the pre-1973 impoundments
were “decommissioned” at the time.
Company witness Kerin testified that when use of the inactive impoundments
ceased, no steps were taken to dewater the ash remaining in the impoundments, although
over time the impoundments dewatered naturally. (Tr. Vol. 17, pp.116-117.) He also
testified that “…at a retired site, the first thing you want to do is start removing the water.
That improves the factors of safety of the dam. It also, if you would have seep issues, that
will eliminate the seeps.” (Tr. Vol. 16, pp. 173-174.) Nor was anything done to protect the
ash from rainwater or from storm water runoff from surrounding areas, such as by capping
the accumulated ash in place or engineering storm water diversions. None of the ash was
excavated and placed in dry stacks, piles, or landfills, and no groundwater monitoring or
leachate collection system was installed to detect and prevent migration of contaminants
21
from the ash into groundwater and nearby surface water. (Tr. Vol. 17, pp. 117-118.)
Witness Kerin testified that from the time use of the impoundments ceased, no actions
were taken other than performing inspections of the dams. (Id. at pp. 118-119.) 10
In his direct testimony, witness Kerin attempted to avoid the matter of the inactive
impoundments by testifying as follows: “In the absence of any regulatory directive to do
so, the Company 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.” (Tr. Vol. 16, p. 115 (emphasis added)) In other words, final disposition
of the waste ash accumulated in any impoundment, even an inactive one, could await
decommissioning of the generating plant itself. I find this position wholly unpersuasive. It
is equivalent to claiming that it would be reasonable and prudent to leave hazardous
sludges left from equipment cleaning solvents to be stored in leaking metal containers on
an open and unprotected part of the power plant site for as many decades as the plant
thereafter continued in operation, without any regard to what might become of them in the
meantime.
In short, the pre-1973 impoundments at the H.F. Lee plant were not so much
“closed” as they were abandoned, along with the combustion residuals left in them. 11
I would conclude that the Company’s failure to take any steps to ensure that the ash in
the pre-1973 impoundments remained in place and that contaminants did not enter
groundwater or surface water at any time until it was forced to take action by the
enactment of CAMA in 2014 was unreasonable and imprudent, and that the extended
10 Interestingly, when the Lee plant was retired in 2012, the Company commissioned a study of the
activities required for decommissioning and the costs associated therewith. This study pre-dated adoption
of the CCR Rule and the enactment of CAMA, but was intended to be responsive to the regulatory regime
in place at the time under the Clean Water Act and applicable state groundwater protection regulations. For
the impoundments at the Lee plant, the study indicated the “[e]xisting ash ponds will be pumped dry, filled
with inert debris, capped with 40 mil geo-membrane, geo-net drainage, 18 inches of soil, and vegetated
cover.” (Ex. Vol. 20, p. 180.) The same activity was indicated for the impoundments at the Cape Fear,
Weatherspoon, and L.V. Sutton plants. While there is no evidence to indicate whether CAMA would have
addressed the inactive impoundments at the Lee plant differently had they been sooner closed in the
manner recommended in the 2012 study, it is reasonable to ask whether the result under CAMA might have
been different had the Company taken action to permanently close the impoundments and secure the ash
in them within a reasonably prompt period of time after use of the impoundments was discontinued.
11 The 1988 EPA Report to Congress indicates that as of 1983, North Carolina had in place
regulations governing closure of surface impoundments. (p. 4-4) The record in this case does not further
detail what those regulations provided. The EPA report does illustrate, generically, two methods of surface
impoundment closure – removal of the wastes and dewatering the wastes and covering them with a soil
cover. (Tr. Vol. 16, pp. 220-225; Ex. Vol. 21, pp. 513-516.) Whatever the state of the regulations at the time,
the undisputed evidence from the Company’s own witness is that nothing at all was done when use of the
pre-1973 impoundments ceased.
22
delay in taking any action to dispose of the ash on a permanent basis violates the principle
of Edmisten.12
The Company’s Cape Fear plant near Moncure was decommissioned in 2012, at
the same time the H.F. Lee, Weatherspoon, and the coal units at the L.V. Sutton plants
also were retired. At that time there was one impoundment constructed in 1985 that was
still receiving some waste. The Company estimated that the volume in this 1985
impoundment as of January 1, 2017, was approximately 2.8 million tons. Also at the plant
site were four other impoundments whose use had ceased by not later than 1985, as
12 I do not believe this result is inconsistent with the Commission’s 1994 PSNC Order due to
significant factual differences between the cases. The manufactured gas plants owned by PSNC were
acquired from other owners who had operated them for many years before PSNC purchased them. Three
of the six plants were jointly owned with other parties. As far as the 1994 PSNC Order discloses, there was
no evidence or finding that when the plants were finally closed in the 1950s, PSNC in any way failed to take
steps that were reasonably and prudently known and possible at the time, based on the state of PSNC’s
knowledge and understanding at that time. I also find it significant that, whereas the Commission found that
PSNC had handled by-products from the manufacturing process consistent with applicable laws at the time,
in this case the Company’s federal criminal admissions, the DEQ administrative and civil actions, and
private party civil litigation all relate to actions or omissions under the Clean Water Act, which was in effect
at the time two out of the five Lee impoundments were last in use. (Ex. Vol. 16, p. 210.)
13 Kerin Direct Exhibit 5 reports estimated tonnages of ash as of January 1, 2017, and might be
thought more appropriate to base an allocation on the tonnages shown on Public Staff Kerin Cross Exhibit
3, which contains estimates as of August, 2014, when activities commenced to close the impoundments
and permanently dispose of the ash wastes. However, the August, 2014 tonnages shown on Public Staff
Kerin Cross Exhibit 3 for the closed impoundments are significantly less than the estimated tonnages as of
January 1, 2017, notwithstanding the fact that the four inactive impoundments had not been receiving any
new combustion residuals after August, 2014. (The totals for the one “active” impoundment are the same
on both exhibits.) As indicated in the footnotes to the two exhibits, estimated quantities were subject to
change based on detailed site examination and analysis. For that reason, I have concluded that Kerin Direct
Exhibit 5 provides a more accurate basis for the proposed allocation. (Ex. Vol. 16, p. 210.)
23
follows: (a) the 1956 impoundment, whose use ceased in 1963; (b) the 1963
impoundment, no longer used after 1978; (c) the 1970 impoundment, discontinued in
1978; and (d) the 1978 impoundment, which no longer received waste after 1985. Taken
together, these four discontinued impoundments contained an estimated 2.9 million tons
of combustion residuals as of January 1, 2017. None of these impoundments are subject
to the CCR Rule, and the Company’s expenditures are mandated solely by the
requirements of CAMA.
The 1978 impoundment was the subject of Count 5 of the federal criminal
prosecution, centering on the Company’s failure to take timely and reasonable action to
maintain and repair the riser and skimmer, allowing leakage in violation of the Company’s
NPDES permit. The facts are extensively reviewed in the Joint Factual Statement.
(Ex. Vol. 21, pp. 142-150.) They demonstrate that the Company was slow to respond or
non-responsive entirely to repeated evidence of problems with the riser and skimmer and
knowledge that these problems were resulting in leakage from the impoundment. Not until
2013 did the Company begin to dewater the 1978 and 1985 impoundments. This was
approximately 28 years after the 1978 impoundment had been retired, a delay that should
be considered in light of witness Kerin’s testimony, already noted, that the first thing that
should be done when an impoundment is retired is to dewater the basin, thereby reducing
the hydrostatic pressure that can cause or increase the likelihood of groundwater intrusion
or surface seeps.
For the reasons discussed earlier concerning the pre-1973 impoundments at the
H.F. Lee plant, I would disallow any cost recovery for removal and final disposal of the
coal combustion residuals in the four pre-1985 impoundments at the Cape Fear plant. As
was the case with the cost figures for the Lee impoundments, the Company did not
provide a breakdown of its total request for cost recovery by individual impoundment.
Using the same source of data and the same method of allocating the total costs as in
the case of the H.F. Lee plant, I would disallow 50.87% of the total amount of cost for
24
which the Company seeks recovery in this case in account of the impoundments at the
Cape Fear Plant.14
F. Robinson Plant
G. Weatherspoon Plant
As in the case of the Robinson plant, the parties’ evidentiary presentations gave
small attention to the Company’s Weatherspoon plant, which was retired in 2011 and, at
the time of its decommissioning, had one active ash impoundment constructed in 1955
and containing, as of January 1, 2017, combustion residuals estimated at either
2.5 million tons (Ex. Vol. 16, p. 210.), or 1,700,000 tons as of August, 2014. (Ex. Vol. 17,
p. 79.) In this case, the Company seeks recovery of $9,120,342 incurred in connection
with preliminary preparation of a closure plan and engineering for implementation of the
plan involving excavation and offsite disposal of the ash remaining in the decommissioned
impoundment. The Company has selected beneficial reuse as its preferred method for
permanent disposal of the waste ash from the Weatherspoon impoundment.
14 The discrepancies in tonnages between Kerin Direct Ex. 5 and Public Staff Kerin Cross Exhibit
3 that exist in the case of the H.F. Lee plant do not exist in the case of the Cape Fear plant. The small
difference in totals likely reflects rounding or different methods of estimation.
25
The objecting parties presented little or no evidence concerning the
reasonableness or prudence of the Company’s expenditures for which it seeks recovery
in this case, or concerning the Company’s history of management of combustion residuals
at the Weatherspoon plant. The Weatherspoon plant did not figure in the Company’s
federal criminal prosecution. Although the 2013 enforcement action commenced in Wake
County Superior Court by DEQ contain allegations that the applicable 2L standards for
certain groundwater contaminants (iron, thallium, and manganese) were exceeded in or
around the Weatherspoon plant at various monitoring sites on various dates, the
allegations of DEQ’s Complaint are tentative and, in some cases, state that it is uncertain
whether these exceedances are naturally occurring or whether corrective action will be
required. (Ex. Vol. 22, p. 267.) DEQ’s action was resolved by an order on motion for
summary judgment, consented to by the Company. (Ex. Vol. 22, pp. 328-407.)
Accordingly, I would find that there is insufficient evidence to disallow the costs for which
recovery is sought in this case as imprudently incurred and that cost recovery should be
allowed.
This proceeding may be the first, but it will not be the last in which recovery of costs
for permanent disposal of coal combustion wastes will be at issue. Two questions of
moment for future rate cases were litigated in the present case. On one of those questions
I am in substantial agreement with the Commission’s majority but not so with the other
question. Finally, I wish to set out my views about the mismanagement penalty ordered
by the Commission majority.
A. Insurance Recoveries
The first matter relates to potential insurance recoveries that may be used to offset
some portion of the costs the Company has incurred and will incur for permanent disposal
of the waste materials. I concur in the majority’s treatment of this issue and wish to set
forth my own view as to why that treatment is appropriate. As the evidence disclosed, the
Company’s entitlement to recover under its insurance policies is currently in litigation that
will not be finally resolved for a number of months or even some years. Accordingly, the
Company is not presently able to make any useful prediction or estimation of its likely
recoveries under the policies in litigation. The Company has proffered that any and all
proceeds from the insurance litigation, by judgment or settlement, will be applied, net of
costs of litigation, against its costs incurred to comply with CAMA and the CCR Rule. Of
course, it is the Company’s position that all of those costs are recoverable from
ratepayers, now and in the future, including an allowed rate of return. I find this proposal
highly unsatisfactory. Under it, the Company would retain full control over the litigation,
including the pace of the suit, the costs of the suit, the development of evidence through
discovery, the presentation of the case, and the determination whether to settle and, if
so, for what amounts. Yet because the Company seeks full recovery from ratepayers
today for all of the costs to which insurance coverage is potentially available, it lacks any
real incentive to prosecute the pending insurance litigation vigorously, to settle the case
26
for the highest amount that can reasonably be negotiated, or to control the costs of the
suit. The Company would retain control but would have no stake in the outcome.
It is, I believe, premature to decide in this case how any insurance recoveries
should be allocated between the Company’s ratepayers and its shareholders and, in
stating this view, I am in accord with the majority. Much depends on how the insurance
litigation develops, most particularly on which issues will turn out to be central to the
disposition of the litigation and what evidence is developed on those controlling issues.
For now, however, I believe that the cost recovery disallowances and cost deferrals that
I have advocated in this opinion would give the Company sufficient incentives to ensure
that the insurance litigation is prosecuted vigorously and cost effectively. If the Company
is able to prevail, either in whole or in part, the Commission will then have an opportunity
to assess whether and in what amount the Company should be able to offset the
insurance proceeds against items of cost that have been disallowed in rates or deferred
for recovery.
The second matter centers on the treatment of the Company’s ongoing and future
expenditures relating to waste ash disposal. As noted in the beginning, I concur with the
majority that these costs are appropriately treated by allowing the Company to establish
a regulatory asset account, with the amount of any eventual allowance or disallowance
to be determined in one or more future rate cases. I depart from the majority, however,
on the extent to which the Company may be allowed to accrue a rate of return on this
regulatory asset account.
The expenditures that will be recorded to this account are, in my view and as I
have already explained, operating expenses upon which a return is not ordinarily allowed.
The Company contends that a rate of return is appropriate nonetheless since the
expenses are being capitalized and will be funded from the Company’s working capital,
citing the decision in State ex rel. Utils. Comm’n v. Virginia Electric & Power Co., 285 N.C.
398, 206 S.E.2d 283 (1974) (VEPCO) for support of its position. The matter is not quite
so simple. The Court in VEPCO did not hold that all amounts classified as working capital
could be included in the utility’s rate base upon which it was entitled to earn a return, but
only those funds used as working capital that were provided by or belonged to investors.
After first endorsing inclusion in rate base of the Company’s own funds used as working
capital, the Court pointed out:
Conversely, the utility is not entitled to include in its rate base funds which
it has not provided but which it has been permitted to collect from its
customers for the purpose of paying expenses at some future time and
which it actually uses as working capital in the meantime. Such funds, so
supplied by the customers, are ‘used and useful in rendering the service’
and the utility, having lawfully collected them, is the owner thereof.
Nevertheless, such funds, so collected from the customers and used by the
27
utility as working capital, are not ‘the public utility’s property’ within the
meaning of G.S. 133(b)(1).
VEPCO, 285 N.C. at 415, 206 S.E.2d at 293. Importantly, the Court also observed that
the determination as to when working capital is sufficient such that no additional amount
is required to be included in rates is largely a subjective one. Id.
The record in the present case is unclear as to the extent to which the Company
will require an increase in investor-provided working capital beyond what is currently
available to fund ongoing expenditures for coal ash disposal. The Company has been
able to fund from the revenues provided by existing rates and from existing working capital
its coal ash expenditures in 2015 and 2016, and these amounts will be replenished as
allowed by the Commission’s order allowing amortization and recovery in rates of these
expenditures. Although the Company contends that in some future years its expenditures
for coal ash disposal will exceed its expenditures in the test year, it also acknowledges
that in other years its expenditures are projected to be less. (Tr. Vol. 6, pp. 144-145.) In
its application, the Company proposed to increase its pro forma cash working capital by
$129.1 million on account of future expenditures for coal ash disposal costs, and to
recover this amount from customers in rates. (Tr. Vol. 6, pp. 41-42.) This amount
represented the Company’s expenditures in the test year, which, as I noted already, it
has funded from its existing working capital under current rates. I would infer from this
requested number that the Company does not believe that it needs an increase in working
capital for those years in which its future expenditures are projected to exceed the test
year amount.
Because I am unable to determine from the record as it stands what portion, if any,
of the Company’s future coal ash disposal expenditures may require an increase in
investor-provided working capital, I am therefore unable to support the accrual of a rate
of return on amounts recorded to the regulatory asset account for future coal ash disposal
costs.
Finally, I write to explain my reasons for not joining the majority’s decision to
impose what it has called a penalty for mismanagement. The majority would allow all
costs sought for recovery by the Company for the period January 1, 2015, through
August 31, 2017, excepting only the $9.5 million excess disposal costs at the Asheville
Plant. Its proposed penalty consists of amortizing recovery of the allowed costs over a
five year period and including a return on the unamortized balance equal to the authorized
combined return on rate base but then reduced by the sum of $6 million per year. The
majority estimates that the value of this penalty is approximately $30 million. I cannot
concur that what the majority has ordered constitutes, in any real sense, a penalty.
28
on the unamortized balance, albeit at a reduced rate, to be a penalty in any meaningful
sense. In Thornburg I, the Supreme Court upheld the Commission’s allowance and
amortization of certain costs associated with a cancelled generating plant as “reasonable
operating expenses,” while denying any return on the unamortized balance of such
expenses. In the course of its discussion of the issue, the Court observed:
While this statute [referring to G.S. 62-133(b)] 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. Gen. Stat.
§ 62-133(b)(1), the statute permits recovery but no return on the reasonable
operating expenses ascertained pursuant to subdivision (3).
Id., 325 N.C. at 475, 385 S.E.2d at 458. Elaborating on this point later in the same opinion,
the Court stated:
15 As noted in the passage quoted from Thornburg I, other states have taken different approaches,
and that was also true in the series of decisions from the 1990s relating to manufactured gas plants.
However, the Commission’s decision not to allow a return on unamortized balances in the 1994 PSNC
Order was not unique. Similar decisions were made in some, but not all, other jurisdictions. E.g., Northern
States Power Company, Docket No. G-002/GR-86-160, 1987 Minn. PUC Lexis (Minn. Pub. Util. Comm’n,
Jan. 27, 1987); Chesapeake Utilities Corp., Docket No. 85-17, 1986 Del. PSC Lexis (Del. Pub. Serv.
Comm’n. March 25, 1986).
29
allow any return on the unamortized balance of those costs. Again, disallowance of a
return is not being justified by any finding that the Company had mismanaged its response
to the storms. Because I consider the costs of permanent disposal of coal ash wastes to
be an operating expense under G.S. §62-133(b)(3) I find these precedents particularly
compelling.
Third, and finally, I note that in past cases where the Commission has seen fit to
impose a penalty for mismanagement, there has been a forward-looking element to the
Commission’s action; that is, the penalty was not merely a response to the utility’s past
actions, but was also designed to provide an incentive for the utility to correct errors and
improve future service. In the present case the imposition of a generic penalty may do
little to provide any additional incentive for better service by the Company in the future.
As a result of the federal criminal plea agreement and the conditions of probation arising
therefrom, the adoption of the CCR Rule, the enactment and implementation of CAMA,
and the terms of the various settlement agreements embodied in judgments entered in
DEQ administrative proceedings and private party lawsuits, the Company is now subject
to a highly prescriptive and closely-monitored regime dictating the details of how it will
manage coal ash wastes from this point forward. In addition, and unlike those instances
where the Commission has imposed a penalty for poor service or mismanagement, the
Company has been subjected to steep and punitive criminal fines, civil penalties, and
costly administrative settlements all occasioned by its past actions.16
For all these reasons, I am unable to join the majority’s imposition of what it calls
a penalty for mismanagement. I would instead, and for the reasons previously set forth,
disallow from cost recovery and exclude from rates the following amounts:
16 Although I am being repetitive in doing so, I believe it is important to state once again that the
Company is not seeking in this case any recovery on account of any criminal or civil fines, penalties or
forfeitures, nor is it permitted to do so. This is a point that has often been overlooked by opponents of the
Company’s proposal for cost recovery.
30
1. [BEGIN CONFIDENTIAL] [END CONFIDENTIAL] in preparation,
transport, and offsite disposal costs incurred to remove wastes from
the two impoundments at the L.V. Sutton plant for disposal at the
Brickhaven site in Chatham County.
4. All costs with respect to the permanent disposal of ash wastes from
the three pre-1973 impoundments at the H.V. Lee Plant, which based
on the evidence provided, I would determine to be $7,867,730 on a
system-wide basis through December 31, 2016. This number would
be adjusted to calculate the North Carolina retail allocation. The
disallowance would extend to all costs from before and after
January 1, 2017, related to the pre-1973 impoundments.
5. All costs with respect to the permanent disposal of ash waste from
the four pre-1985 impoundments at the Cape Fear Plant, which in
this case and based on the evidence provided, I would determine to
be $8,265,810 on a system-wide basis through December 31, 2016.
This number would be adjusted to calculate the North Carolina retail
allocation. The disallowance would extend to all costs from before
and after January 1, 2017, related to the pre-1985 impoundments.
For all remaining costs incurred for the period January 1, 2015, through October
31, 2017, I would permit deferral and amortization over a period of five years, the period
requested by the Company, but with no return allowed on the unamortized balance, in
accord with prior Commission policy and practice and not as a penalty. Finally, I would
grant deferral accounting treatment for all future costs, except for those items disallowed
as noted above, but the deferral account would not accrue a rate of return.
31