               IN THE SUPREME COURT OF NORTH CAROLINA

                                    No. 347A14
                              (Filed 21 August 2015)

STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION; AQUA
NORTH CAROLINA, INC., Applicant; and PUBLIC STAFF – NORTH CAROLINA
UTILITIES COMMISSION, Intervenor
             v.
ATTORNEY GENERAL ROY COOPER, Intervenor



      On direct appeal as of right pursuant to N.C.G.S. §§ 7A-29(b) and 62-90(d)

from a final order of the North Carolina Utilities Commission entered on 2 May 2014

in Docket No. W-218, Sub 363. Heard in the Supreme Court on 16 March 2015.


      Sanford Law Office, PLLC, by Jo Anne Sanford; Bennink Law Office, by Robert
      H. Bennink, Jr.; Law Office of Charlotte Mitchell, by Charlotte Mitchell; and
      Allegra Collins Law, by Allegra Collins, for applicant-appellee Aqua North
      Carolina, Inc.

      Antoinette R. Wike, Chief Counsel, and William E. Grantmyre, Staff Attorney,
      for intervenor-appellee Public Staff – North Carolina Utilities Commission.

      Stuart Saunders, Assistant Attorney General, Kevin Anderson, Senior Deputy
      Attorney General, and Jennifer T. Harrod, Special Deputy Attorney General,
      for intervenor-appellant Roy Cooper, Attorney General.


      JACKSON, Justice.


      In this case we consider whether the North Carolina Utilities Commission (the

Commission) properly concluded that it is in the public interest to allow Aqua North

Carolina (Aqua) to utilize a rate adjustment mechanism of the type described in

section 62-133.12 of the North Carolina General Statutes. We conclude that the
                 STATE EX REL. UTILS. COMM’N V. COOPER, ATT’Y GEN.

                                  Opinion of the Court



Commission’s determination was based upon sufficient findings of fact and was

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

record. See N.C.G.S. § 62-94 (2013). Accordingly, we affirm.


      Aqua is a public utility that provides water and sewer utility service to

customers in North Carolina. On 2 August 2013, Aqua filed an application with the

Commission seeking authority to increase its rates for water and sewer service in

North Carolina.      As part of its application, Aqua also requested authority to

implement a rate adjustment mechanism pursuant to section 62-133.12, which states

in pertinent part:

             The Commission may approve a rate adjustment
             mechanism in a general rate proceeding . . . to allow a
             water or sewer public utility to recover through a system
             improvement charge the incremental depreciation expense
             and capital costs associated with the utility’s reasonable
             and prudently incurred investment in eligible water and
             sewer system improvements.         The Commission shall
             approve a rate adjustment mechanism authorized by this
             section only upon a finding that the mechanism is in the
             public interest. The frequency and manner of rate
             adjustments under the mechanism shall be as prescribed
             by the Commission.

Id. § 62-133.12(a) (2013).


      On 19 August 2013, the Commission entered an order declaring this

proceeding to be a general rate case and suspending the proposed new rates for up to

270 days. The Commission scheduled six hearings across the state to receive public

witness testimony. The Commission also scheduled an evidentiary hearing for 27

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January 2014. The Attorney General of North Carolina and the Public Staff of the

Commission intervened as allowed by law. See id. §§ 62-15, -20 (2013).


      Subsequently, Aqua and the Public Staff entered into a Stipulation that

resolved all the issues in the case between the two parties.       At the time, the

Commission had not adopted final rules establishing the appropriate procedures for

implementing a rate adjustment mechanism. Nevertheless, the Stipulating Parties

agreed that “this docket is the appropriate forum for a decision by the Commission

on [Aqua’s] request to implement a [rate adjustment] mechanism based on a finding

that the [mechanism] is in the public interest.” The Attorney General did not join in

the Stipulation.


      During the hearings before the Commission, fifty-four Aqua customers

testified, and the parties presented testimony from several witnesses.        Thirty

customers expressed service-related concerns, which primarily focused on problems

with water quality, such as receiving water that appeared discolored, contained

sediment, caused damage to appliances, and stained laundry items. Customers also

raised other concerns, including billing issues, low water pressure, and sulfur or

chlorine odors. Customers “almost unanimously” opposed any rate increase.


      At the evidentiary hearing, Aqua offered evidence supporting the conclusion

that use of a rate adjustment mechanism is in the public interest. Aqua’s President

and Chief Operating Officer, Thomas J. Roberts, asserted that the mechanism would

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allow Aqua to adjust its rates to recover money invested in “necessary, reasonable,

approved and completed projects,” with the cumulative rate adjustment limited to

five percent of the total annual service revenues approved by the Commission in the

current general rate case. Roberts stated that, as a result of these rate adjustments,

Aqua would be able to fund “earlier and more robust investment in infrastructure”

and recover its investments “on a more timely basis.” In addition, Roberts noted that

the mechanism would allow for “incremental adjustments” to rates, “rather than the

sharp rate changes that are characteristic of general rate cases.”


      Roberts acknowledged that some customers have difficulties with discolored,

sediment-laden water, and he stated that these problems are caused by naturally

occurring iron and manganese present in ground water.         Roberts testified that,

although many customers do not find such water acceptable, it complies with

environmental regulations and does not create any health risks. Roberts asserted

that Aqua could employ a number of methods to improve water quality, and he stated

that use of a rate adjustment mechanism would provide funding “to accelerate the

investment needed to address these concerns.”


      In addition to discussing customers’ concerns about water quality, Roberts

stated that other aspects of Aqua’s system need improvements. Roberts testified that

an internal analysis had revealed that portions of Aqua’s water main infrastructure

are seriously outdated and need replacement. Roberts also stated that Aqua needs


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to fund replacement of motors, pumps, and other equipment, as well as implement

measures to improve how the system copes with significant rain events. Ultimately,

Roberts asserted that use of a rate adjustment mechanism would facilitate

improvements to infrastructure and result in “fewer water quality related

complaints, enhanced water pressure, and decreased main breaks.”


      Aqua witness Robert A. Kopas, Regional Controller for Aqua Ohio, Inc.,

provides financial supervision and guidance to Aqua North Carolina. He testified

that Aqua had presented to the Commission a “three-year plan” listing possible future

projects that could be eligible for recovery through a rate adjustment mechanism.

Kopas explained that Aqua did not submit this document to seek Commission

approval of any of the specific projects listed; instead, it was submitted to support the

company’s contention that use of a rate adjustment mechanism is in the public

interest. Kopas asserted that before Aqua could recover any money through the

mechanism, the company would have to construct an eligible improvement, place the

improvement into service, and propose the improvement for inclusion in a rate

adjustment, after which the Commission and the Public Staff would determine the

project’s eligibility and the reasonableness of the associated costs.


      Aqua witness Pauline M. Ahern, a principal with AUS Consultants, testified

that a rate adjustment mechanism would partially mitigate regulatory lag, “which

occurs during the time between the incurrence of a utility capital expenditure or


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expense and the time when the utility can begin to earn a return on . . . the capital

investment or recovery of the expense incurred.” Ahern stated that the mechanism

“will improve the capital attractiveness of [Aqua], improve its service quality and

reliability, and provide for more moderate, gradual rate increases.”


      The Public Staff presented testimony from David C. Furr, Director of the Public

Staff’s Water and Sewer Division. Furr testified that he had reviewed the three-year

plan filed by Aqua in order to evaluate whether the listed projects might be eligible

for recovery through a rate adjustment mechanism. Furr stated that Aqua’s three-

year plan did not contain enough detail for him to determine whether the projects

would be eligible, and although the Public Staff had requested additional

information, Aqua’s response remained “materially inadequate.” In contrast, Roberts

testified that Aqua believed it had provided sufficient detail and that the company

was “willing to give all the detail that the Public Staff and the Commission would

want.”


      The Commission entered an order in Aqua’s general rate case on 2 May 2014.

The Commission noted that the water quality concerns raised by some Aqua

customers were related to high concentrations of naturally occurring iron and

manganese in the source supply of water. The Commission found that iron and

manganese are “subjects of Department of Environment and Natural Resources

(DENR) secondary – not primary – water quality standards, and thus do not


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represent health issues.” Nevertheless, the Commission concluded that “[a]dditional

attention is required to address the issues which arise from elevated levels of

naturally occurring iron and manganese in the source water supply in certain Aqua

systems.”


      In addition, the Commission found that enactment of section 62-133.12 “was

intended to encourage and accelerate investment in needed water and sewer

infrastructure” by “alleviat[ing] the effects of regulatory lag by allowing for earlier

recovery of some portion” of “depreciation expense and capital costs.”             The

Commission determined that if a rate adjustment mechanism were authorized here,

“Aqua would be incentivized and encouraged to accelerate its investment in water

and sewer infrastructure improvements to comply with applicable water quality and

effluent standards, including secondary water quality standards.” Specifically, the

Commission explained that the mechanism “will be available to fund projects to

address problematic systemic secondary water quality issues should the Commission

direct [Aqua] to undertake them in individual subdivision service areas.”          The

Commission found that such additional investment in infrastructure would lead to

“better water quality” and “improved system reliability.” As a result, the Commission

found that Aqua’s request to implement a rate adjustment mechanism is in the public

interest and therefore approved the company’s request.




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      At the same time, the Commission ordered Aqua and the Public Staff “to

develop and implement a plan to identify and respond to [significant] secondary water

quality concerns” in particular service areas. The Commission required Aqua and

the Public Staff, “[a]t a minimum,” to file written reports on the first of June and the

first of December every year while the rate adjustment mechanism is in effect. These

written reports must describe any secondary water quality concerns affecting Aqua’s

customers. If a particular concern affects at least ten percent of the customers in an

individual subdivision or at least twenty-five billing customers, additional

information must be provided. In such cases the reports must recommend whether

Aqua should be required to undertake corrective action with respect to specific water

quality concerns.


      The Commission noted that final rules implementing the rate adjustment

mechanism had not been approved. The Commission concluded that it should adopt

alternative procedures, which were set forth in appendices to its order, to enable Aqua

to make the requisite filings and qualify for implementation of charges pursuant to

the rate adjustment mechanism without having to file an additional general rate case

application once final rules were adopted.        The Attorney General appealed the

Commission’s order to this Court as of right pursuant to N.C.G.S. §§ 7A-29(b) and 62-

90.




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      Subsection 62-79(a) of the North Carolina General Statutes “sets forth the

standard for Commission orders against which they will be analyzed upon appeal.”

State ex rel. Utils. Comm’n v. Carolina Util. Customers Ass’n (CUCA I), 348 N.C. 452,

461, 500 S.E.2d 693, 700 (1998). Subsection 62-79(a) provides:

                (a) All final orders and decisions of the Commission
             shall be sufficient in detail to enable the court on appeal to
             determine the controverted questions presented in the
             proceedings and shall include:

                   (1) Findings and conclusions and the reasons or bases
                       therefor upon all the material issues of fact, law, or
                       discretion presented in the record, and

                   (2) The appropriate rule, order, sanction, relief or
                       statement of denial thereof.


N.C.G.S. § 62-79(a) (2013). When reviewing an order of the Commission, this Court

may, inter alia,

             reverse or modify the decision if the substantial rights of
             the appellants have been prejudiced because the
             Commission’s findings, inferences, conclusions or decisions
             are:

                   (1) In violation of constitutional provisions, or

                   (2) In excess of statutory authority or jurisdiction of the
                       Commission, or

                   (3) Made upon unlawful proceedings, or

                   (4) Affected by other errors of law, or

                   (5) Unsupported     by    competent,    material    and
                       substantial evidence in view of the entire record as
                       submitted, or

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                 (6) Arbitrary or capricious.

Id. § 62-94(b). Pursuant to subsection 62-94(b) this Court must determine “whether

the Commission’s findings of fact are supported by competent, material and

substantial evidence in view of the entire record.” CUCA I, 348 N.C. at 460, 500

S.E.2d at 699 (citation omitted). “Substantial evidence [is] defined as ‘more than a

scintilla or a permissible inference.’ ” Id. at 460, 500 S.E.2d at 700 (alteration in

original) (quoting State ex rel. Utils. Comm’n v. S. Coach Co., 19 N.C. App. 597, 601,

199 S.E.2d 731, 733 (1973), cert. denied, 284 N.C. 623, 201 S.E.2d 693 (1974)). “It

means such relevant evidence as a reasonable mind might accept as adequate to

support a conclusion.” Id. (quoting Consol. Edison Co. of New York v. NLRB, 305 U.S.

197, 229, 59 S. Ct. 206, 217, 83 L. Ed. 126, 140 (1938)). The Commission must include

all necessary findings of fact, and failure to do so constitutes an error of law. Id.

(citation omitted).


      The Attorney General argues that the Commission’s finding that Aqua’s

request to use a rate adjustment mechanism is in the public interest is not based

upon sufficient findings, reasoning, and conclusions, and is not supported by

substantial evidence. In addition, the Attorney General contends both that the

Commission had no proper basis for this finding and that the Commission’s

conclusion that the mechanism would incentivize Aqua to invest in infrastructure




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and improve its service quality “is, at most, speculative” because the order did not

impose any “concrete obligation, commitment, or anything else.” We disagree.


       “The Utilities Commission, not this Court, is the finder of fact in this

proceeding. Findings of fact made by the Commission are prima facie just and

reasonable on appeal.” State ex rel. Utils. Comm’n v. Eddleman, 320 N.C. 344, 382-

83, 358 S.E.2d 339, 363 (1987) (citations omitted). “[T]he Commission’s findings, if

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

a whole, are binding upon this Court.” State ex rel. Utils. Comm’n v. Pub. Staff, 317

N.C. 26, 45, 343 S.E.2d 898, 910 (1986) (citing State ex rel. Utils. Comm’n v. Carolina

Tel. & Tel. Co., 267 N.C. 257, 148 S.E.2d 100 (1966)).        As a result, if there is

substantial evidence to support the Commission’s determination, this Court will not

substitute its judgment for that of the Commission. Id. at 46-47, 343 S.E.2d at 910-

11.


      By enacting section 62-133.12, the General Assembly authorized the use of a

rate adjustment mechanism upon a “finding” by the Commission “that the

mechanism is in the public interest.” N.C.G.S. § 62-133.12(a). As previously stated,

the Commission found that allowing Aqua to use a rate adjustment mechanism is in

the public interest. In making this determination, the Commission initially found

that the legislative intent behind section 62-133.12 was to provide a mechanism to




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incentivize quicker investments in water and sewer infrastructure by allowing for

faster recovery of some portion of invested costs.


      The Commission explained that, because of the time involved in preparing and

processing general rate cases, the long periods of construction required for major

projects, and the Commission’s use of historical test years in setting rates, a

regulatory lag period occurs between when a utility invests in improvements and

when it begins to recover the capital costs of those improvements. The Commission

noted that Roberts had testified that implementing a rate adjustment mechanism

would allow Aqua to recover invested funds more quickly and therefore enable Aqua

to invest more capital in this state. Similarly, the Commission observed that Ahern

had testified that use of the mechanism would result in “[p]artial mitigation of

[regulatory] lag” and lead to water quality improvements that otherwise would be

delayed. After considering their testimony and the arguments raised by the Attorney

General, the Commission concluded that implementing the mechanism “will promote

adequate, reliable, and economical utility service for Aqua’s customers” by

“incentiviz[ing] Aqua to increase and accelerate infrastructure improvements.”

These findings are supported by the testimony of Roberts and Ahern.


      The Commission discussed the “secondary water quality issues” raised by

Aqua’s customers and found that, as stated by Roberts, these problems result from

high concentrations of iron and manganese found naturally in sources of groundwater


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within Aqua’s system. The Commission determined that in the past, water utilities

may have given lower priority to correcting secondary water quality issues because

these companies first spend their limited budgets on primary water quality

improvements. The Commission found that use of a rate adjustment mechanism

would benefit customers further because accelerated funding will be available for

projects undertaken at the Commission’s direction to improve secondary water

quality. The Commission then ordered Aqua and the Public Staff to file written

reports addressing secondary water quality concerns twice each year while the

mechanism is in effect and required that these filings detail particular water quality

problems and make recommendations on whether Aqua should be ordered to pursue

corrective action. Rather than solely relying upon a commitment by Aqua or the

Public Staff, the Commission affirmatively imposed obligations to ensure that Aqua

would use the rate adjustment mechanism only to make meaningful improvements

to its system.


      The Commission further noted that pursuant to the alternative procedures it

had adopted in its order, approval of the mechanism would not result in automatic

surcharges for customers. The Commission explained that these procedures require

Aqua to obtain Commission approval for any additional charges, and the approval

process will involve review by the Public Staff and the Commission to determine

whether Aqua’s investments and costs are reasonable and prudent. Furthermore,

the Commission explained that Aqua could use the mechanism to recover only those

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costs that are invested in “eligible system improvements” that are “completed and

placed in service prior to the Company requesting approval.”


      The Commission acknowledged that witness Furr had testified that Aqua’s

initial three-year plan was “materially deficient,” but noted that Roberts had testified

that Aqua “is willing to provide all information required by the Public Staff.” In

addition, the Commission found that, because this case involves a new process, “one

party . . . may believe the level of detail provided is sufficient; whereas, another party

may not.” The Commission also directed Aqua to provide enough information to allow

the Public Staff to “conduct its investigation and review of [Aqua’s] initial three-year

plan,” “have productive discussions with [Aqua] regarding the specific projects

included in the plan,” and “conclude whether the projects included in [the] three-year

plan meet the criteria established in [section] 62-133.12” to “be considered for

recovery through the [rate adjustment] mechanism.”


      Ultimately, the Commission found that

             Aqua would be incentivized and encouraged to accelerate
             its investment in water and sewer infrastructure
             improvements to comply with applicable water quality and
             effluent standards, including secondary water quality
             standards, if authorized to utilize a [rate adjustment]
             mechanism to recover some of its investment in a more
             timely manner and alleviate the effects of regulatory lag.
             Such accelerated investment to address aging
             infrastructure and water quality issues would benefit
             customers through improved system reliability and better
             water quality. The [rate adjustment] mechanism would
             further benefit customers because it will be available to

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             fund projects to address problematic systemic secondary
             water quality issues should the Commission direct the
             Company to undertake them in individual subdivision
             service areas, even though such projects may not be
             specifically required by federal and/or state standards and
             might not be of high system priority absent the direction of
             the Commission. The [rate adjustment] mechanism does
             not affect or take away the Commission’s authority to
             disallow recovery for projects and investments found to be
             unreasonable and imprudent.

The Commission thoroughly explained how Aqua’s use of a rate adjustment

mechanism would benefit Aqua’s customers, and the Commission took meaningful

steps to ensure that problems with water quality are addressed and that customers

are charged only after Aqua has made improvements to the quality and reliability of

its service. We hold that the Commission provided sufficient findings, reasoning, and

conclusions to support its ultimate finding that the mechanism is in the public

interest, and that the Commission’s determination is supported by substantial

evidence in view of the record as a whole. Accordingly, the Commission’s order is

affirmed.


      AFFIRMED.




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