North Carolina Supreme Court Upholds Utility Cost Recovery for Coal Ash Remediation

Introduction

In the landmark case of State of North Carolina ex rel. Utilities Commission; Duke Energy Progress, LLC, Applicant; and Duke Energy Carolinas, LLC, Applicant v. Attorney General Joshua H. Stein; Public Staff - North Carolina Utilities Commission; North Carolina Justice Center, North Carolina Housing Coalition, Natural Resources Defense Council, Southern Alliance for Clean Energy, and North Carolina Sustainable Energy Association; and Sierra Club (851 S.E.2d 237), decided on December 11, 2020, the Supreme Court of North Carolina addressed the contentious issue of whether utilities could include costs associated with the storage, disposal, and removal of coal ash from coal-fired power plants in their rate base for the purpose of determining retail electricity rates. The plaintiffs, including Duke Energy Progress and Duke Energy Carolinas, sought to recover substantial remediation costs by deferring them to future rate cases. Opponents, including environmental groups and the Attorney General, argued that such cost recovery was improper and constituted unjust deferral of environmental remediation expenses to consumers.

Summary of the Judgment

The North Carolina Supreme Court affirmed the decisions of the North Carolina Utilities Commission (NCUC) in part while reversing and remanding other aspects. The Court upheld the Commission's approval for Duke Energy Progress and Duke Energy Carolinas to include a significant portion of coal ash-related remediation costs in their cost of service, thereby allowing these costs to be amortized over five years with a return on the unamortized balance. However, the Court reversed the Commission's rejection of the equitable sharing proposals put forth by the Public Staff, which sought a more balanced distribution of remediation costs between ratepayers and shareholders.

Analysis

Precedents Cited

The judgment references several key precedents, including STATE EX REL. UTILITIES COMMISSION v. THORNBURG I and II, State ex rel. Utilities Commission v. Carolina Water Service, and State ex rel. Utilities Commission v. Morgan. These cases established foundational principles for utility regulation in North Carolina, particularly regarding the inclusion of costs in the rate base and the scope of the Commission’s discretionary authority under N.C.G.S. § 62-133(d).

For instance, in Thornburg I, the Court addressed the treatment of nuclear plant abandonment costs, setting a precedent that non-used and non-useful property costs should not be included in the rate base. Carolina Water Service further clarified that costs associated with abandoned or out-of-service facilities are not recoverable through rates. These precedents influenced the Court's scrutiny of whether the costs associated with coal ash remediation were properly classified and whether the Commission acted within its statutory authority in allowing a return on unamortized costs.

Legal Reasoning

The Court's decision hinged on the interpretation of N.C.G.S. § 62-133(d), which grants the Commission discretionary authority to consider "all other material facts of record" to determine "reasonable and just rates." The majority concluded that the Commission appropriately utilized this discretion to allow cost deferrals and returns on unamortized balances, given the extraordinary and unprecedented nature of the coal ash remediation requirements under CAMA and the CCR Rule.

However, the Court found fault with the Commission’s rejection of the equitable sharing proposal. The Public Staff had advocated for a 50-50 cost-sharing mechanism between ratepayers and shareholders, arguing that the utilities bore significant responsibility for environmental violations. The Court determined that the Commission failed to adequately consider "all other material facts," particularly the extent of the utilities' environmental mismanagement, thereby necessitating a remand for further consideration.

The dissenting opinions emphasized that the Commission did not fully assess the evidence of mismanagement and environmental harm before rejecting the equitable sharing proposal, arguing that this oversight indicated an abuse of discretion inconsistent with statutory mandates.

Impact

This judgment has significant implications for the utility regulatory framework in North Carolina. By upholding the inclusion of environmental remediation costs in the rate base with a return on unamortized balances, the Court affirms the utilities' ability to recover substantial cleanup expenses through consumer rates. This decision may pave the way for similar cost recovery mechanisms in future cases, especially in contexts involving large-scale environmental remediation.

Conversely, the remand concerning the equitable sharing proposal underscores the Court's insistence on comprehensive consideration of utility culpability in environmental harm. Should the Commission adopt a more balanced cost-sharing approach, it could lead to more nuanced regulatory practices that equitably distribute remediation costs between ratepayers and utility shareholders, potentially mitigating the financial burden on consumers.

Complex Concepts Simplified

Coal Ash: By-product from burning coal in power plants, containing pollutants like fly ash and bottom ash, which can contaminate groundwater if not properly managed.

Rate Base: The value of property on which a utility is allowed to earn a return as part of determining electricity rates. Includes assets used in providing service.

Cost Deferral: A regulatory accounting method allowing utilities to delay the inclusion of certain costs in the rate base until a future rate case, spreading the cost over time.

Equitable Sharing: A proposed mechanism to divide environmental remediation costs between utility shareholders and ratepayers, aiming for fairness based on responsibility.

Conclusion

The North Carolina Supreme Court's decision in this case reaffirms the utility industry's capacity to include and recover significant environmental remediation costs through rate base adjustments, subject to the Commission's discretionary authority. However, the Court also emphasizes the necessity for the Commission to thoroughly consider all material facts, including evidence of environmental mismanagement, when approving cost-sharing arrangements. This dual outcome ensures that while utilities can sustainably manage and recover remediation expenses, there remains accountability for environmental stewardship, thereby balancing financial and ecological interests within the state's regulatory framework.