{
  "id": 11911587,
  "name": "STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION; and CAROLINA WATER SERVICE, INC. OF NORTH CAROLINA, APPLICANT APPELLEES v. PUBLIC STAFF-NORTH CAROLINA UTILITIES COMMISSION, INTERVENOR APPELLANTS",
  "name_abbreviation": "State ex rel. Utilities Commission v. Public Staff",
  "decision_date": "1996-07-02",
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    "judges": [
      "Judges MARTIN, John C., and JOHN concur."
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    "parties": [
      "STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION; and CAROLINA WATER SERVICE, INC. OF NORTH CAROLINA, APPLICANT APPELLEES v. PUBLIC STAFF\u2014NORTH CAROLINA UTILITIES COMMISSION, INTERVENOR APPELLANTS"
    ],
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      {
        "text": "McGEE, Judge.\nThe only statutory grounds argued by Public Staff in its brief for reversing the decision to assign 100 percent of the gain from the sales of the two systems to CWS\u2019 shareholder are that the order was arbitrary and capricious and not supported by competent, material and substantial evidence. Further, Public Staff argues the Commission\u2019s announcement that in the future it would assign 100 percent of the gain or loss on the sale of utilities to the utility shareholders violated due process. However, as set forth below, this last issue is not properly before us. After reviewing the record, we affirm the order of the Commission.\nOn appeal, a rate decision, rule, regulation, finding, determination, or order made by the Commission is deemed prima facie just and reasonable. N.C. Gen. Stat. \u00a7 62-94(e). \u201c[J]udicial reversal of an order of the Utilities Commission is a serious matter for the reviewing court which can be properly addressed only by strict application of the [statutory] criteria which circumscribe judicial review.\u201d Utilities Comm. v. Oil Co., 302 N.C. 14, 20, 273 S.E.2d 232, 235 (1981). Appellate review of an order of the Commission is governed by subsections (b) and (c) of N.C. Gen. Stat. \u00a7 62-94. State ex rel. Utilities Comm. v. Southern Bell, 88 N.C. App. 153, 165, 363 S.E.2d 73, 80 (1987). \u201c[W]here the Commission\u2019s actions do not violate the Constitution or exceed statutory authority, appellate review is limited to errors of law, arbitrary action, or decisions unsupported by competent, material and substantial evidence.\u201d Utilities Comm. v. Springdale Estates Assoc., 46 N.C. App. 488, 494, 265 S.E.2d 647, 651 (1980). In determining whether to uphold the Commission\u2019s actions, the appellate court shall review the whole record. N.C. Gen. Stat. \u00a7 62-94(c). When applying the whole record test, the court may not replace the Commission\u2019s judgment with its own when there are two reasonably conflicting views of the evidence. See White v. N. C. Dept. of E.H.N.R., 117 N.C. App. 545, 547, 451 S.E.2d 376, 378, disc. review denied, 340 N.C. 263, 456 S.E.2d 839 (1995).\nPublic Staff argues the Commission incorrectly determined that it was in the best interest of the consuming public to implement a policy whereby 100 percent of the gains and losses on sale will be distributed to utility shareholders. Public Staff contends the better policy would be to allow ratepayers who share the risk of loss to also share in capital gains upon the sale of utilities. However, it is not and should not be this Court\u2019s role to determine the merits of policy positions adopted or rejected by the Commission. \u201c[The reviewing court\u2019s] statutory function is not to determine whether there is evidence to support a position the Commission did not adopt. We ask, instead, whether there is substantial evidence, in view of the entire record, to support the position the Commission did adopt.\u201d State ex rel. Utilities Comm. v. Eddleman, 320 N.C. 344, 355, 358 S.E.2d 339, 347 (1987). The General Assembly has given the Commission, not the courts, the authority to regulate the operations of public utilities. N.C. Gen. Stat. \u00a7 62-2. Therefore, if the findings and conclusions of the Commission are supported by competent, substantial and material evidence, this Court must affirm the decision even if we might have reached a different determination upon the evidence. Utilities Comm. v. Telephone Co., 281 N.C. 318, 336-37, 189 S.E.2d 705, 717 (1972).\nPublic Staff contends the Commission\u2019s order is not supported.by competent, substantial, and material evidence and is arbitrary and capricious. We disagree. When addressing a question of the sufficiency of the evidence, this Court has described the proper standard of review from a decision of the Commission as follows:\n[T]he Commission\u2019s order [is] to be affirmed if, upon consideration of the whole record as submitted, the facts found by the Commission are supported by competent, material and substantial evidence, taking into account any contradictory evidence or evidence from which conflicting inferences could be drawn. \u201cSubstantial evidence\u201d is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.\nSpringdale Estates, 46 N.C. App. at 490-91, 265 S.E.2d at 649 (citations omitted). Upon review of the whole record, we find it contains relevant evidence which \u201ca reasonable mind might accept as adequate\u201d to support the Commission\u2019s decision.\nTo support its decision, the Commission made, among others, the following findings and conclusions:\nEvents occurring since the Commission initially established its gain splitting policy in 1990 indicate that such policy, contrary to the public interest, serves as a disincentive to sell and may thereby discourage and impede beneficial sales to municipal and other government-owned entities. . . .\nCWS provided evidence that shows that action has been taken in response to the Commission\u2019s decision in past dockets to split the gain that is harmful to the public interest and that such developments exemplify why the Commission\u2019s gain splitting policy can be detrimental and should be revised. CWS states further that through written statements in the past Orders, upon which the Public Staff relies, certain members of the Commission have questioned the wisdom and appropriateness of the past decisions to equally split gains. Through these written statements, those Commissioners have suggested that the issue should be revisited and that the ramifications to the public good of the decision to split the gains should be taken into account. Based on those statements, CWS argues that the Public Staff\u2019s reliance on the past holdings equally splitting gains is inappropriate and not in the public interest.\nWith the benefit of hindsight, the Commission can now see that the policy to split gains or losses on sales of water and/or sewer systems has had a negative impact on the public good. For example, the proposed sale of the Beatties Ford system from CWS to CMUD in 1990 was renegotiated after this Commission ruled to split the gain. That resulted in the Charlotte-Mecklenburg taxpayers and ratepayers spending more on the acquisition of the Beatties Ford system than they would have spent if this Commission\u2019s ruling had been to flow the gain to stockholders only. Furthermore, the Farmwood \u201cB\u201d contract between CWS and CMUD contains a provision wherein the price to CMUD escalates in proportion to the portion of any gain that is flowed to CWS\u2019s remaining customers. In addition, all involved parties know that CWS chose not to sell its Riverbend utility system as a result of the Commission\u2019s ruling in Docket No. W-354, Sub. 88.\nThese facts, consequences of the Commission\u2019s decisions in the prior CWS and [Heater Utilities, Inc. (\u201cHeater\u201d)] dockets, suggest that the Commission\u2019s gain splitting policy is contrary to the public interest. A policy of gain splitting for sales of water and/or sewer systems may undermine the achievement of economies of scale and encourage inefficient operations. That result is clearly not in the public interest. Moreover, with respect to Beatties Ford, the sales price for Beatties Ford, paid from public funds, was artificially increased. The sales price for [the Genoa subdivision water system] was reduced to the detriment of CWS. The beneficial sale of [the Riverbend subdivision water system] to [the City of] New Bern fell through. None of those harmful consequences would have taken place but for the Commission\u2019s decision to split the gain. On balance, the marginal benefit to remaining ratepayers of the gain splitting policy is outweighed by the harmful consequences of such policy. . . . [T]he Commission should not impose economic barriers to the orderly transfer of water systems to municipal entities, as was inadvertently done in the Riverbend situation.\nIf economic incentives are removed so that this succession of ownership becomes inadvisable, customers are denied those benefits. If companies like CWS are prevented from retaining the gain on sale in North Carolina, a substantial incentive is removed for those companies to buy systems from developers or small, undercapitalized operators in the first instance. Likewise, a substantial incentive is removed to negotiate to sell systems to municipal or governmental entities. At a minimum, the sale price is artificially increased above the fair market based price to adjust for the payment of part of the gain to customers. The result is harm to consumers because the natural progression of transfer of ownership to the most efficient provider is disrupted. These harmful consequences are clearly not in the public interest. . . .\nThe detrimental effect of the Commission\u2019s gain splitting policy as it pertains to the sale of water and/or sewer systems is reflected in the transactions at issue in this case. The purchase price for the Farmwood \u201cB\u201d system increases by $58,000 if the Commission requires CWS to split 50% of the gain with the remaining [ratepayers.] This is an added taxpayer expense that is inconsistent with the public interest. It appears that this provision would not have been included in the CWS-CMUD contract except in response to the Commission\u2019s gain splitting policy.\nThese findings and conclusions support the Commission\u2019s decision that CWS should retain 100 percent of the gain on sale of the water systems, and we determine that the record contains substantial, material, competent evidence to support the findings.\nThe order states these findings were based on evidence \u201cfound in the applications and the testimony of [CWS] witness Daniel and Public Staff witnesses Rudder and Femald.\u201d Carl Daniel, vice president of CWS, testified that a policy of splitting the gain on sale acted as a disincentive for privately held utilities to sell facilities to municipalities. Daniel testified this adversely impacted consumers because additional public funds would have to be expended. If CWS did not sell its facilities, CMUD, whose charter requires it to provide service to Farmwood B and Chesney Glen, would be forced to incur the additional expense of completely duplicating the existing facilities. Customers would have to pay tap-on fees of several thousand dollars to fund these duplication costs. Daniel also testified customers benefit by transferring to a municipal utility because of better fire protection, lower homeowners insurance premiums, better system reliability, lower usage rates, and improved water taste. He further testified that a policy of allowing the shareholder to keep 100 percent of the gain on sale would encourage CWS. to continue to purchase smaller utility companies that may be having problems in serving their customers. Daniel also testified, and the record contains a copy of the contract, that CMUD\u2019s purchase price for the Farmwood B system would be $58,000 higher if the Commission allowed CWS to retain only 50 percent of the gain on sale as opposed to 100 percent.\nKatherine Fernald, water supervisor in the accounting division of Public Staff, testified on cross-examination that CWS negotiated a higher price with CMUD for its Beatties Ford facilities and that a deal to sell the Riverbend system to the City of New Bern fell through after the Commission announced its policy of splitting gains between the shareholder and ratepayers. Fernald testified the ratepayers within the Riverbend system wanted the system sold and preferred to have service provided by a municipality. She also testified that by selling facilities, CWS reduces its customer base and loses economies of scale.\nWe conclude that a reasonable mind would regard the testimony of Daniel and Fernald, along with the other materials contained in the record, to adequately support a conclusion that the best interests of the public would be served by allowing CWS to keep 100 percent of the gain on sale of the Farmwood B and Chesney Glen systems. The evidence showed a policy of equally splitting gains on sale would result in a higher purchase price for the Farmwood B system, causing a greater burden for Charlotte-Mecklenburg taxpayers. Also, the contract stated that if CWS was required to share more than 50 percent of the gain with the ratepayers, then the sale could be called off. The evidence also showed the beneficial transfers of privately held utilities to municipal systems had been hampered by a policy of splitting gain on sale. In this case, if CWS had refused to sell the facilities, CMUD would have been forced to duplicate the existing facilities at a high cost. Further, a policy of assigning 100 percent of the gain to the shareholder encourages CWS to make further investments in other smaller water systems, some of which may be undercapitalized or poorly run.\nWe also disagree with Public Staff\u2019s contention that the Commission\u2019s order was arbitrary and capricious.\nThe arbitrary and capricious standard is a difficult one to meet. Agency actions have been found to be arbitrary and capricious when such actions . . . \u201cindicate a lack of fair and careful consideration; [and] when they fail to indicate \u2018any course of reasoning and the exercise of judgment.\u2019 \u201d\nWhite, 117 N.C. App. at 547, 451 S.E.2d at 378 (citations omitted). Here, a review of the order and record shows the Commission gave fair and careful consideration to the issues before it, and that the Commission\u2019s final decision was the product of reasoning and the exercise of its judgment.\nWe agree with Public Staff that several of the Commission\u2019s findings and conclusions appear to be improperly based upon the Commission\u2019s knowledge of events and evidence outside of this record. See Utilities Commission v. Coach Co., 261 N.C. 384, 391,134 S.E.2d 689, 695 (1964) (\u201c[T]he Commission\u2019s knowledge, however expert, cannot be considered by us on appeal unless the facts embraced within that knowledge are in the record.\u201d). Also, the Public Staff\u2019s argument that the record needed additional evidence on certain issues is well taken. For example, although one could conclude that the higher renegotiated price for the Beatties Ford System and the failure to complete the Riverbend sale directly resulted from the Commission\u2019s gains splitting policy, the record contains no direct testimony or evidence that the policy was the sole cause of these changes nor any evidence concerning whether other circumstances may also have been involved. However, we find the evidence that is contained in the record to be sufficient to support the Commission\u2019s order that CWS retain all of the gain on sale of the Farmwood B and Chesney Glen systems.\nLastly, Public Staff assigns as error the Commission\u2019s statement that \u201c[I]n future proceedings, the Commission will follow a policy, absent overwhelming and compelling evidence to the contrary, of assigning 100% of the gain or loss on the sale of water and/or sewer utility systems to utility company shareholders.\u201d However, this issue is not properly before this Court and we need not decide it.\nPublic Staff argues the Commission violated due process by announcing this policy without holding a hearing before all interested parties. However, Public Staff cited no authority for this proposition and this argument is deemed abandoned. N.C.R. App. P. 28(b)(5). Further, an appellate court will not consider constitutional questions, such as a violation of due process, when they are \u201cnot necessary to the decision of the precise controversy presented in the litigation before it.\u201d Nicholson v. Education Assistance Authority, 275 N.C. 439, 447, 168 S.E.2d 401, 406 (1969). By its language, the policy pronouncement complained of by Public Staff applies to future cases before the Commission. It is prospective in nature and had no bearing upon this case. As such, the issue is not ripe for determination. Therefore, we decline to decide whether the Commission\u2019s new policy concerning the future assignment of gain or loss upon the sales of water and/or sewer utilities complies with due process.\nFor the reasons stated, the order of the Commission is affirmed.\nAffirmed.\nJudges MARTIN, John C., and JOHN concur.",
        "type": "majority",
        "author": "McGEE, Judge."
      }
    ],
    "attorneys": [
      "Hunton & Williams, by Edward S. Finley, Jr. and James L. Hunt, for applicant-appellee Carolina Water Service, Inc. of North Carolina.",
      "Public Staff, Robert P. Gruber, Executive Director, by Antoinette R. Wike, Chief Counsel, and Paul L. Lassiter, Staff Attorney, for intervenor-appellant Public Staff \u2014 North Carolina Utilities Commission."
    ],
    "corrections": "",
    "head_matter": "STATE OF NORTH CAROLINA ex rel. UTILITIES COMMISSION; and CAROLINA WATER SERVICE, INC. OF NORTH CAROLINA, APPLICANT APPELLEES v. PUBLIC STAFF\u2014NORTH CAROLINA UTILITIES COMMISSION, INTERVENOR APPELLANTS\nNo. COA95-27\n(Filed 2 July 1996)\nUtilities \u00a7 51 (NCI4th)\u2014 sale of private utility to municipal system \u2014 distribution of gain \u2014 issues regarding future policy not before Court\nFindings and conclusions supported the Utilities Commission\u2019s decision that a public utility should retain 100% of the gain on sale of two water systems, instead of splitting the gain between shareholder and customers, since evidence showed that a policy of equal splitting would result in a higher purchase price or might result in the sale being called off; beneficial transfers of privately held utilities to municipal systems had been hampered by a policy of splitting gain on sale; and assigning 100% of the gain to the shareholder would encourage the private utility to make further investments in other smaller water systems, some of which may be undercapitalized or poorly run. The issue of whether the Commission\u2019s new policy concerning the future assignment of gain or loss upon the sales of water and/or sewer utilities complied with due process was not before the Court of Appeals.\nAm Jur 2d, Public Utilities \u00a7\u00a7 9 et seq.\nAppeal by intervenor-appellant from orders entered 7 September 1994 and 14 November 1994 by the North Carolina Utilities Commission. Heard in the Court of Appeals 5 October 1995.\nApplicant-appellee Carolina Water Service, Inc. of North Carolina (CWS), a duly franchised public utility, owns numerous water and sewer systems in North Carolina. On 18 November 1993 and 16 February 1994 respectively, CWS filed applications with the North Carolina Utilities Commission (the Commission) to relinquish CWS\u2019 certificates of public convenience and necessity to provide water for the Farmwood B and Chesney Glen service areas and to transfer its utilities assets for these systems to the Charlotte-Mecklenburg Utility Department (CMUD). Additionally, CWS requested the Commission allow CWS\u2019 sole shareholder, Utilities, Inc., to keep 100 percent of the gain on the sale of the two systems. Intervenor-appellant Public Staff \u2014 North Carolina Utilities Commission (Public Staff) filed a motion for a hearing before the full Commission on CWS\u2019 applications.\nThe Commission consolidated the two applications and conducted a public hearing on 7 June 1994. All sides agreed the transfer of the two systems to CMUD would be in the best interests of the ratepayers within those systems because of increased service and lower rates. The sole contested issue was how the gain on sale of the systems would be distributed. Public Staff argued the gain should be equally divided between CWS\u2019 shareholder and CWS\u2019 remaining ratepayers in accordance with the policy for gain splitting previously adopted by the Commission. Public Staff contended CWS\u2019 remaining ratepayers should be entitled to share in any gain on the sales through a \u201cgains follows risk\u201d or \u201ceconomic benefit follows economic burden\u201d analysis because: (1) the remaining ratepayers had helped to maintain the systems through previous payment of their water bills, and (2) they also bore the risk of making up for any catastrophic losses to the systems\u2019 facilities through the rates they paid. CWS argued that a policy of splitting the gain on sale served as a disincentive for privately held utilities to sell their systems to municipal utilities, even though such sales would be beneficial to the ratepayers within the systems.\nThe Commission granted a motion by CWS, which Public Staff did not oppose, to sever the issue of transfer of the systems from the issue of treatment of gain on sale. Thereafter, the Commission entered an order approving the sales on 6 July 1994. On 7 September 1994 the Commission issued an order determining that 100 percent of the gain on sale of the two systems should be assigned to CWS\u2019 shareholder. Further, the Commission held that in the future, absent overwhelming and compelling evidence to the contrary, it would follow a policy of assigning 100 percent of the gain or loss on the sale of water and sewer systems to utility company shareholders.\nPublic Staff filed notice of appeal and a motion for reconsideration by the Commission. The Commission entered an order dated 14 November 1994 which denied Public Staffs motion for reconsideration and reaffirmed the 7 September 1994 order. Public Staff also filed a notice of appeal to the 14 November order. From the orders allowing CWS\u2019 shareholder to retain 100 percent of the gain on sale of the Farmwood B and Chesney Glen water systems and announcing the Commission\u2019s future policy regarding assignments of gain and loss, Public Staff appeals.\nHunton & Williams, by Edward S. Finley, Jr. and James L. Hunt, for applicant-appellee Carolina Water Service, Inc. of North Carolina.\nPublic Staff, Robert P. Gruber, Executive Director, by Antoinette R. Wike, Chief Counsel, and Paul L. Lassiter, Staff Attorney, for intervenor-appellant Public Staff \u2014 North Carolina Utilities Commission."
  },
  "file_name": "0043-01",
  "first_page_order": 77,
  "last_page_order": 85
}
