A pair of energy companies can be reimbursed for certain costs but not for environmental compliance costs associated with North Carolina law nor litigation costs incurred in defense against various lawsuits, the South Carolina Supreme Court has ruled, affirming orders from the Public Service Commission (PSC).
Duke Energy Carolinas and Duke Energy Progress (collectively, Duke) each own one coal-fired power plant in South Carolina as well as seven coal-fired power plants in North Carolina, for a total of 16 plants.
In November 2018, the companies filed separate applications for ratemaking with the PSC. In both applications, Duke requested the ability to increase rates so as to compensate for expenditures related to coal ash remediation in North and South Carolina, litigation expenses related to defending itself in various coal ash lawsuits, carrying costs on certain deferred accounting expenses, and construction costs incurred in pursuing a nuclear project.
The remediation costs were triggered by the Coal Ash Management Act (CAMA), a new law enacted in North Carolina following a pipe failure at Duke’s Dan River facility, resulting in the unpermitted discharge of approximately 27 million gallons of coal ash wastewater and 39,000 tons of coal ash.
CAMA imposed several new requirements on the continued operation of coal-fired power plants in North Carolina, including the closure of all existing coal ash ponds in the state and a prohibition on the continued use of wet ash handling.
PSC granted Duke just under 50 percent of the coal ash remediation expenses requested, permitting the costs associated with consent decrees following the Dan River accident as well as compliance related to federal regulations. It disallowed costs solely attributable to CAMA. Expenses associated with the nuclear project were allowed, as were some of the carrying costs, but the PSC denied recovery entirely for the litigation expenses.
Duke appealed both orders directly to the Supreme Court. In a decision authored by Acting Chief Justice John W. Kittredge, the court affirmed the consolidated PSC orders in full.
“The PSC’s orders in these two cases are exemplary in that they clearly set forth in detail the arguments and evidence presented by both sides, and then equally clearly articulated reasons for selecting one side’s arguments or evidence over the other,” Kittredge wrote. “Many of the issues on appeal involve judgment calls based on factual determinations, and given our deferential standard of review, we cannot say the PSC’s decisions are unsupported or irrational. Moreover, after careful review, we respectfully reject Duke’s effort to recast the PSC’s factual findings as legal errors. We therefore affirm the PSC’s comprehensive orders.”
No benefit to S.C. ratepayers
Kittredge first tackled the coal ash expenses. Witnesses for Duke explained that the requested costs were the result of recent changes to the law, while testimony from the South Carolina Office of Regulatory Staff (ORS) stated that South Carolina customers should be exempt from all incremental cost differences that were directly attributable to North Carolina state law.
On appeal, Duke argued that disallowing costs related to CAMA was an error because the costs were reasonably and prudently incurred in the delivery of power generation services to South Carolina customers, but the court disagreed.
“There is no evidence of any direct benefit to South Carolinians that stems from coal ash remediation costs required by North Carolina’s CAMA scheme,” Kittredge wrote. “CAMA … is a post hoc environmental remediation scheme intended by the North Carolina General Assembly to ensure the cleanliness, safety and beauty of North Carolina’s environment and the health of North Carolina’s citizens. Duke’s reliance on the power-generation and cost-sharing arrangement conflates the benefits of joint electricity production with the benefits of cleaning up a previously-legal, unlined coal ash pond or landfill.
“The environmental cleanup costs are wholly unrelated to the current production of power for which South Carolina ratepayers must pay. Had CAMA never been passed, South Carolina’s ratepayers would have enjoyed the same benefits and low-cost electricity that they received after CAMA’s passage.”
Nor was the court persuaded that the PSC’s decisions were arbitrary and capricious.
“The PSC made a factual determination that Duke’s South Carolina customers did not benefit from the North Carolina-specific CAMA law,” he wrote. “Because there is evidence to support this finding, we may not rely on contrary evidence and (assuming we were inclined to do so) substitute our view of the facts for the PSC.”
Duke’s contention that the PSC’s decision was clearly erroneous and unsupported by the evidence in the record also failed.
“It is clear from the level of detail set forth in the PSC’s orders that it thoroughly and thoughtfully weighed the testimony and evidence prior to reaching its decisions,” Kittredge said.
Duke requested nearly $1 million in legal fees related to coal ash litigation expenses for ongoing insurance litigation and defending itself in an unspecified number of state enforcement actions. The PSC denied the entire request, finding it significant that Duke made no attempt to calculate the number of hours billed or total amount sought for each case. Duke also sought to require customers to pay the costs of defending lawsuits filed by the state of North Carolina.
While Duke argued that it was entitled to a presumption of the reasonableness of its litigation expenses, that its coal ash litigation expenses were related to the normal and prudent operations of an enterprise like Duke and that if the litigation was successful, it would benefit ratepayers, Kittredge agreed with the PSC that Duke failed to provide sufficient evidence to substantiate its expenses.
“Duke did not break down its litigation costs case-by-case or even in a summary fashion that would be easily understood by the fact finder,” he wrote. “It may have been technically possible for the PSC or ORS to sort through the 1,500-page spreadsheet and parse the data themselves. However, we decline to impose a requirement that they do so, particularly since Duke had the burden of proof.”
Further, none of Duke’s witnesses explained the lengthy spreadsheets, the actions within or how those actions benefitted Duke’s ratepayers (if at all), Kittredge said.
As for the denial of an expense request for carrying costs for deferred accounts, he again affirmed the PSC.
“This issue presents a quintessential policy determination to which there is no one right answer,” he wrote. “The PSC was faced with a policy decision and made a choice. There is certainly evidence in the record to support its conclusion, and we therefore decline to reverse the PSC’s decision, particularly given that the PSC generally approaches the question of the propriety of carrying costs on deferred accounts on a case-by-case basis to better consider the individual impact on the utility and the ratepayers.”
Finally, Kittredge affirmed the PSC’s allowance of $125 million over the course of 12 years to recover some of the costs incurred for DEC’s nuclear project.
Justice John Cannon Few filed a separate opinion, concurring and dissenting. While he agreed with the majority regarding the litigation costs, carrying costs and costs associated with the nuclear project, he reached the opposite conclusion regarding the environmental compliance costs not allowed by the PSC.
“In my opinion, disallowing the cost of complying with another state’s environmental laws simply because the requirements of that law were imposed by the other state’s legislature is arbitrary and, therefore, erroneous,” Few wrote.
Wallace K. Lightsey of the Wyche Law Firm in Greenville, who represented SCORS, said he was “delighted” with the decision.
“This was a complicated case—the record on appeal had well over 6,000 pages—but to me, the basic issue was simple: should South Carolina customers have to pay for costs that were required to be incurred solely because of a North Carolina law?” Lightsey said. “We felt it was very intuitive that the answer was no.”
Robert E. Stepp of Robinson Gray Stepp & Laffitte in Columbia represented Duke. Stepp did not respond to a request for comment.
The 44-page decision is Duke Energy Carolinas, LLC v. South Carolina Office of Regulatory Staff (Lawyers Weekly No. 010-063-21). The full text of the opinion is available online at sclawyersweekly.com.