State ex rel. N.C. Utils. Comm'n v. Carolina Indus. Grp. for Fair Util. Rates II

Opinion of the Court fuel rider proceeding, to determine the appropriate cost allocation methodology of fuel rates in a rate case. Therefore, the Commission is acting within its authority by applying cost-causation principles to fuel costs and determining the appropriate cost allocation methodology within this general rate case.²⁰

(Cleaned up). In light of its decision to apply the cost causation principle, the Commission directed DEC "to discontinue use of the equal percentage fuel adjustment methodology [in] its next fuel rider proceeding."

The Commission also devoted space in both final orders to another issue involving the fuel rider. While the Public Staff opposed the Utilities' use of the equal percentage methodology, it supported the use of "voltage differentiated rates."

Voltage differentiation adjusts an allocation of fuel costs to reflect the reality that delivering electricity at high voltages is more efficient than delivering it at lower voltages. Put another way, less fuel is consumed in generating and delivering a single kilowatt hour of energy for an industrial customer taking its power at a high voltage than in doing the same for a low-voltage customer. By the time of the evidentiary hearings, DEP had already adopted voltage differentiation in its fuel rider proceedings, and the Public Staff proposed that DEP continue using the mechanism. DEC had not yet adopted voltage differentiation, but it agreed by stipulation with the Public Staff to use voltage differentiation in its 2024 fuel rider proceeding.

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Opinion of the Court The Commission did not issue any direction in the DEP Order regarding voltage differentiation. In contrast, the Commission approved the parties' voltage differentiation stipulation in the DEC Order.

On appeal to this Court, CIGFUR argues that the Commission erroneously

"rejected the equal-percentage approach and approved a voltage-differentiated method for recovering fuel and fuel-related costs."²¹According to CIGFUR, the Commission's decision in both cases rested on its incorrect assumption that the PBR Statute's cost causation principle extends to fuel rider proceedings. CIGFUR alleges that the Commission "gave 'substantial weight' to Public Staff witness Jay Lucas's testimony, in which he argued that [subsection (b) of the PBR Statute] required the Commission to adhere to the cost[ ]causation principle." CIGFUR urges us to "vacate the Commission's order and allow it to apply the correct legal standard."

"When an order or judgment appealed from was entered under a misapprehension of the applicable law, an appellate court may remand for application of the correct legal standards." N.C. Dep't of Env't & Nat. Res. v. Carroll,

358 N.C. 649, 664 (2004) (cleaned up). No such action is warranted here. Contrary to CIGFUR's assertions, the DEP and DEC Orders and the record evidence do not prove that the Commission based its decision to abandon the equal percentage methodology on the mistaken belief that the PBR Statute required it to

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Opinion of the Court apply the cost causation principle to fuel riders. As quoted above, the DEP Order indicates that "the Commission gave substantial weight to the testimony of the Public Staff regarding the [PBR Statute's] cost causation principle . . . , as well as their demonstration of the distortion that can be created by equal percentage fuel adjustments." At first glance, this statement might seem to indicate that the Commission was significantly influenced by Mr. Lucas's purported misstatement of the law. Yet Mr. Lucas's testimony on the cost causation principle went beyond mere legal considerations. Mr. Lucas also testified about the relative fairness and unfairness of the equal percentage methodology and the cost causation principle. In particular, he described the cost causation principle as more equitable because it ties fuel rates more closely to consumption, whereas the equal percentage methodology

"benefit[s] some customer classes at the expense of others."

Moreover, in its subsequent order denying CIGFUR's motion for reconsideration in the DEP case, the Commission expressly rejected CIGFUR's claim that any mischaracterization of the law by Mr. Lucas had significantly influenced its decision:

For CIGFUR to imply that the Commission relied solely on

Public Staff witness Lucas' testimony in which he

misstated the statutory language, or that the witness's

human error negates all the other evidence of record on

which the Commission's conclusion was based, is patently

inconsistent with the [DEP] Order and strains credulity.

The record as a whole includes ample evidence, including

from witness Lucas himself in his direct prefiled testimony, upon which the Commission based its decision and cited in

the [DEP] Order. Moreover, the [DEP] Order notes that the

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Opinion of the Court Commission afforded substantial weight to the testimony of the Public Staff regarding the cost causation principle set forth in N.C.G.S. § 62-133.16, as well as their demonstration of the distortion that can be created by equal percentage fuel adjustments. . . . The Commission never indicated that it gave that substantial weight to the witness's inaccurate recitations of the statutory language. CIGFUR's argument fares no better with respect to the DEC Order. As in the DEP case, the Commission gave substantial weight to testimony by Mr. Lucas.²² However, it emphasized his statements concerning the unfairness of the equal percentage methodology, especially his testimony that the equal percentage methodology distorts fuel rates by "shift[ing] fuel costs away from industrial customers and onto other customer classes." The Commission also deemed "credible"

his opinion that the equal percentage methodology should be discontinued because of its rate-distorting effects. The Commission did not state that the PBR Statute required it to apply the cost causation principle to fuel riders. On the contrary, it plainly indicated that the decision to do so was one that it had the discretion to make pursuant to N.C.G.S. § 62-133.2(f). It follows from what we have said so far that we see no merit in CIGFUR's contention that the Commission acted under a misapprehension of law.

CIGFUR further argues that the Commission's abandonment of the equal percentage methodology was arbitrary and capricious because it went against the

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Opinion of the Court evidence before the Commission. CIGFUR claims to have presented "unrebutted evidence" demonstrating that the Commission's methodological switch would increase—not decrease—interclass subsidies. CIGFUR asks us to vacate the orders because the Commission, when faced with evidence contradicting its conclusions, ignored that evidence and "failed to explain why its decision[s] w[ere] correct."

The "unrebutted evidence" in question consists of testimony by CIGFUR's expert witnesses. In the DEP case, CIGFUR's expert stated in his pre-filed testimony that the equal percentage methodology should be maintained because the fuel rider has grown over time to include expenses less directly tied to the cost of fuel and more appropriately termed "capital costs":

Many years ago, the fuel adjustment only involved

cost recovery for fuel costs. Over time other costs have been included which are basically capital costs. For example,

renewable costs, such as purchased power from solar or

other renewable energy facilities, are not fuel expenses.

The expert testified that, "[t]o the extent these costs are included in the annual fuel adjustment," DEP should continue to use the equal percentage methodology. He pointed out that DEP's large general service customers continue to subsidize other customer classes, a fact he viewed as "strong evidence that the [equal percentage] methodology results in just, reasonable rates, is not causing an undue cost shift over time, and should be continued." In other words, since on the whole DEP's industrial customers subsidize residential customers, it is only fair that residential customers should continue subsidizing industrial customers in the fuel cost allocation.

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Opinion of the Court CIGFUR's expert witness in the DEC case was similarly concerned about the

"capital costs" portion of the fuel rider, as well as the ongoing subsidization of residential customers by other customer classes. He went further than CIGFUR's witness in the DEP case by predicting that "recovery of capital costs through the fuel [rider] will likely increase in the future" due to measures adopted under the state's Carbon Plan. Categorizing these capital costs as capacity costs,²³he explained that they do not vary based on energy consumption:

Capacity costs associated with solar purchases and other

costs such as chemical costs and transmission costs are

now included in the fuel rider. These costs have no heat

content and are not fuel costs. There is no showing that

these costs vary by kilowatt-hour of electricity consumed. CIGFUR's expert argued that DEC should continue utilizing the equal percentage methodology so long as capacity costs make their way into the fuel rider,

"since those costs will continue to grow as DEC retires its coal generating capacity and replaces it with solar and other generating resources with zero or reduced carbon emissions."

Adverting to the existing interclass subsidy benefiting DEC's residential customers, CIGFUR's witness stated that eliminating the equal percentage

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Opinion of the Court methodology immediately would "exacerbate the worsening affordability challenges affecting industrial customers." He suggested that the Commission should "provide rate mitigation for industrial customers" by "continuing the current cost allocation methodology for fuel and fuel-related costs."

The record belies CIGFUR's assertion that the testimony of its expert witnesses went unrebutted. The rebuttal evidence in each case came in the form of testimony by Mr. Lucas.

On cross-examination in the DEP case, Mr. Lucas admitted that the fuel rider covered some "capital costs" that "are not incurred based on the cost of fuel to produce a kilowatt hour of energy," but he asserted that such capital costs made up only a

"small component" of the rider. Mr. Lucas also explained that the fuel costs DEP incurred in purchasing energy from renewable generation facilities were not fixed costs as CIGFUR maintained:

[O]ne thing about solar facilities, you can't just say, "We're going to pay you a capacity payment because it's a 5

megawatt solar facility." Its output is variable. It's not dependent on capacity. And this is true for all renewable energy facilities. The[y] are all paid for kilowatt hours. They get paid more during peak demand for those kilowatt hours, and that sort of acts like a capacity payment.

(Cleaned up).

Put differently, DEP did not make fixed capacity payments to renewable generation facilities that it then recouped in the fuel rider. Rather, DEP purchased power from these facilities on a per-unit basis, with that per-unit cost increasing

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Opinion of the Court during periods of peak demand. Hence, DEP's cost to procure power from renewable generators varied depending on customers' consumption. Mr. Lucas added:

[I]f a solar panel system is not putting out energy, [it is] not getting paid. It's not a fixed cost. It's not like if a solar panel system breaks for a whole year, [it can] come back in and say, "Well, I should get fixed cost anyway, because it cost me to run this solar panel system." If [it doesn't] make kilowatt hours, [it doesn't] get paid.

At the DEC evidentiary hearing, Mr. Lucas testified that, while the fuel rider covered some "capital costs," these were not fixed. When asked by CIGFUR's attorney whether it was "[his] testimony that everything recovered through the fuel rider . . . var[ies] by kilowatt hours consumed," Mr. Lucas responded, "Yes."

"It is not this Court's duty to evaluate the accuracy of complex statistical models, conflicting methodologies, and the opposing expert opinions drawn therefrom. This, instead, is the duty of the Commission which has the special knowledge, experience and training best suited to make such determinations." State ex rel. Utils. Comm'n v. Carolina Util. Customers Ass'n, Inc., 323 N.C. 238, 251 (1988) (cleaned up). The Commission properly performed its duty in these cases when confronted by dueling experts from CIGFUR and the Public Staff. Having reviewed their testimony, the Commission gave substantial weight to that of Mr. Lucas and made his testimony a basis for its decision to abandon the equal percentage methodology. CIGFUR's assertion that unrebutted evidence supported the continued use of that methodology—and thus that the Commission acted arbitrarily and

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Opinion of the Court capriciously—ignores the evidentiary record.²⁴ The Commission's decision to cease using the equal percentage methodology in fuel rider proceedings conducted pursuant to N.C.G.S. § 62-133.2 "is not affected by error of law and the facts found by the Commission are supported by competent, material and substantial evidence." Duke Power Co., 305 N.C. at 10. We therefore reject CIGFUR's challenges to the Commission's decision.

E. Transmission Cost Allocation Stipulation

The DEP and DEC Orders approve the Transmission Cost Allocation (TCA) Stipulation approved by DEP, DEC, and the Public Staff. CIGFUR challenges that approval in its appeal to this Court.

DEP and DEC pool their energy production under the terms of their Joint Dispatch Agreement (JDA) to satisfy the power demands of their respective customers. Approved by FERC in 2012, the JDA enables each Utility to meet

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Opinion of the Court customer demand more efficiently than it could on its own. During periods of peak demand, DEC can draw on DEP's excess power instead of building additional generation facilities, and DEP can draw on DEC's excess power during its own peak demand periods.

In 2021 the General Assembly enacted H.B. 951, authorizing PBR ratemaking and directing the Commission to develop a state-wide Carbon Plan.²⁵In 2022, following an evidentiary hearing, the Commission issued a joint Carbon Plan for DEP and DEC, which outlined a multiyear program for reducing carbon dioxide emissions from the Utilities' power generating facilities. See Order Adopting Initial Carbon Plan and Providing Direction for Future Planning, Docket No. E-100, Sub 179, at 135 (Dec. 30, 2022). Therein, the Commission expressed concern that the JDA's payment mechanism failed to compensate DEP fully for its energy transfers to DEC. Id. at 135. Primarily covering the eastern half of North Carolina, DEP's service region is a more attractive location for solar generation facilities than DEC's service region, which lies to the west. For this reason, the Carbon Plan placed a disproportionate burden on DEP to increase the number of renewable energy generation facilities in its service region. Id. at 126. Likewise, the Carbon Plan required DEP to build

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Opinion of the Court extensive new transmission infrastructure to link its new renewable facilities to its own network and that of DEC. Id.

At the evidentiary hearing to consider the Carbon Plan, an expert witness for the Public Staff observed that historically DEP's customers have paid higher rates than DEC's customers. Id. He voiced concern that DEP's new infrastructure projects would cause the rate disparity between DEP and DEC to grow even more, causing DEP's customers to absorb a disproportionate share of the costs incurred to achieve statewide compliance with the Carbon Plan. Id. In response to this concern, the Commission directed the Utilities to "take reasonable steps to mitigate further exacerbation of the rate disparity between DEC and DEP attributable to the Carbon Plan." Id. at 128. It further instructed the Utilities to address the growing rate disparity in their next general ratemaking cases. Id. at 135. Acting on the Commission's instruction, the Utilities agreed to shift a portion of DEP's revenue requirement to DEC. The Utilities and the Public Staff memorialized this agreement on 27 April 2023 by executing the TCA Stipulation. Under the TCA Stipulation, DEP's revenue requirement was reduced by roughly $20 million, and DEC's revenue requirement was increased by the same amount.²⁶

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Opinion of the Court The revenue adjustment was to become effective in October 2023 and continue until DEP and DEC either merged or implemented new rates following their next general rate cases.

On 27 April 2023, the Utilities and the Public Staff filed the TCA Stipulation in both of the instant ratemaking cases. No party opposed the TCA Stipulation during the DEP or DEC evidentiary hearings, nor did any party raise objections to it in post- hearing briefing. The Commission approved the TCA Stipulation in both cases, concluding that it "establishe[d] a reasonable method to align costs with cost causation principles."

CIGFUR did not appeal the Commission's approval of the TCA Stipulation in the DEP case. In its notice of appeal in the DEC case, CIGFUR alleged for the first time that the Commission lacked authority under both N.C.G.S. § 62-133 and the PBR Statute to approve the TCA Stipulation. According to CIGFUR, the TCA Stipulation essentially compels DEC's customers to subsidize part of DEP's revenue requirement based on the Commission's belief that the JDA is unfair to DEP's customers. CIGFUR maintains that neither N.C.G.S. § 62-133 nor the PBR Statute authorizes the Commission, "in separate proceedings, to distort two separate utilities' C.F.R. pts. 35, 385). Those tariffs set the rates and terms under which electric utilities transmit energy wholesale, both the energy the utility itself produces and that produced by third parties. See id. Duke's Joint OATT sets the open access transmission rates for both DEP and DEC. See Joint Open Access Transmission Tariff of Duke Energy Carolinas, LLC, Duke Energy Florida, LLC, and Duke Energy Progress, LLC, https://www.ferc.duke- energy.com/Tariffs/Joint_OATT.pdf.

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Opinion of the Court revenue requirements to achieve a policy outcome." Despite not having raised the issue in its DEP appeal, CIGFUR asks this Court to vacate the Commission's approval of the TCA Stipulation in both the DEP Order and the DEC Order. CIGFUR failed to preserve its argument that the Commission exceeded its statutory authority by approving the TCA Stipulation. Hence, the merits of its appeal on this issue are not properly before this Court.

In an appeal from a final order of the Commission, this Court must "review the record and the issues raised in accordance with the rules of appellate procedure[.]"

N.C.G.S. § 62‑94(a) (2025); see also N.C. R. App. P. 1(b) (declaring that the North Carolina Rules of Appellate Procedure "govern procedure . . . in direct appeals from administrative tribunals to the appellate division").

Rule 10(a)(1) of the Rules of Appellate Procedure generally requires parties to preserve issues for appeal by "present[ing] to the trial court a timely request, objection, or motion, stating the specific grounds for the ruling the party desire[s] the court to make if the specific grounds were not apparent from the context."²⁷ N.C. R. App. P. 10(a)(1). The purpose of Rule 10(a)(1) is "to require a party to call the [trial] court's attention to a matter upon which he or she wants a ruling before he or

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Opinion of the Court she can assign error to the matter on appeal." State v. Canady, 330 N.C. 398, 401 (1991). Without this rule, "a party could allow evidence to be introduced or other things to happen during a trial as a matter of trial strategy and then assign error to them if the strategy does not work." Id. at 401-02.

In its reply brief, CIGFUR insists that it twice disputed the legality of the TCA Stipulation before the Commission in the DEC case. The first instance noted by CIGFUR occurred during a cross-examination of two Public Staff witnesses by CIGFUR's counsel. We quote the relevant portion of the cross-examination in full:

Q: [C]an you point me to any statutory authority

supporting the adjustment agreed to in th[e] [TCA]

[S]tipulation?

A: [Witness 1] These adjustments recommended by

[Public Staff] witness Metz so effect would be—if you

want the detail, because it was just statutory, they

are not affect, our legal team may be the source—

A: [Witness 2] Neither of us are attorneys so—

A: [Witness 1] Yeah.

A: [Witness 2] —as far as what statute it relates to, I

would have to look to my attorneys on that.

Q: Thank you. Can you point me to any precedent for

such an adjustment that has been agreed to by this

stipulation?

A: [Witness 2] Not from the stand today, no.

This brief exchange hardly satisfies Rule 10(a)(1). CIGFUR's counsel asked two questions about the legal basis for the TCA Stipulation and then dropped the subject.

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Opinion of the Court CIGFUR's counsel did not argue that the TCA Stipulation was unlawful, much less ask the Commission to do anything about it. More precisely, CIGFUR's counsel did not present the Commission with "a timely request, objection, or motion, stating the specific grounds for the ruling" CIGFUR wanted the Commission to make. N.C. R. App. P. 10(a)(1).

CIGFUR also points to the post-hearing brief that it filed with the Commission in response to DEC's proposed final order. But CIGFUR did not dispute the lawfulness of the TCA Stipulation in that brief. CIGFUR appears to have in mind the brief's introduction, where it stated that its "silence on any issue in its [b]rief should not be interpreted as . . . waiving any position it took throughout the course of th[e] proceeding." Since CIGFUR did not take a position on the TCA Stipulation during the DEC proceeding, this sentence did nothing to put the issue on the Commission's radar.²⁸

By failing to satisfy the requirements of Rule 10(a)(1), CIGFUR waived its argument that the Commission lacked statutory authority to approve the TCA Stipulation. Thus, the issue "is not properly preserved for our review." Willowmere Cmty. Ass'n, Inc. v. City of Charlotte, 370 N.C. 553, 561 n.7 (2018).

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Opinion of the Court In its principal brief to this Court, CIGFUR also contends that "the way the Commission approved the [TCA Stipulation] denied [DEC's] customers, like CIGFUR['s] . . . members, due process." After the Commission approved the TCA Stipulation in the DEP proceeding, CIGFUR insists, it had no choice but to do the same in the DEC case: "The process that the Commission afforded to [DEC's] customers was not fair[ ] because the hearing's outcome was predetermined." To the extent that the outcome in the DEC case was predetermined, CIGFUR asserts that it violated procedural due process, which "requires the opportunity to be heard at a fair hearing without a predetermined outcome."

CIGFUR did not raise its due process challenge to the Commission. Ordinarily, a party may not raise a constitutional issue for the first time on appeal. See State v. Wiley, 355 N.C. 592, 615 (2002) ("It is well settled that an error, even one of constitutional magnitude, that [the party] does not bring to the trial court's attention is waived and will not be considered on appeal."). This Court has carved out an exception to this prohibition, however, for at least some constitutional challenges in direct appeals from the decisions of administrative agencies to this Court or the Court of Appeals. "When an appeal lies directly to the Appellate Division from an administrative tribunal, in the absence of any statutory provision to the contrary, . . . a constitutional challenge may be raised for the first time in the Appellate Division . . . ." In re Redmond, 369 N.C. 490, 497 (2017). This exception recognizes that in many cases it would be pointless to require parties to bring

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Opinion of the Court constitutional challenges in administrative proceedings because administrative agencies typically "ha[ve] no authority to decide constitutional questions." Id. at 496. In Redmond—unlike here—the constitutionality of a statute was at stake. Yet even if CIGFUR did not have to raise its due process challenge to the Commission, we must still conclude that CIGFUR failed to preserve the issue for our review. Section 62-90 reads in pertinent part:

Any party to a proceeding before the Commission

may appeal from any final order or decision of the

Commission within 30 days after the entry of the final

order or decision, or within an additional time fixed by the

Commission, not to exceed 30 additional days, and by order

made within 30 days, if the party aggrieved by the decision

or order files with the Commission a notice of appeal that

sets forth specifically the ground or grounds on which the

aggrieved party considers the decision or order to be

unlawful, unjust, unreasonable, or unwarranted and that

includes the errors alleged to have been committed by the

Commission.

N.C.G.S. § 62-90(a) (2025) (emphasis added).

Section 62-94 spells out the consequences of failing to identify the specific grounds for an appeal from a final order or decision of the Commission: "The appellant shall not be permitted to rely upon any grounds for relief on appeal that were not set forth specifically in the appellant's notice of appeal . . . ." N.C.G.S. § 62-94(c) (2025). The notices of appeal filed by CIGFUR in the DEP and DEC cases do not allege that the Commission's approval of the TCA Stipulation violated due process. Indeed, CIGFUR's notice of appeal in the DEP case omits any reference to the TCA

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Opinion of the Court Stipulation.²⁹CIGFUR's notice of appeal in the DEC proceeding alleges that the Commission exceeded its ratemaking authority under N.C.G.S. § 62-133 and the PBR Statute, but it nowhere asserts that the Commission's action constituted a denial of due process. Section 62-94 therefore bars CIGFUR from pursuing its due process claim on appeal.

None of CIGFUR's challenges to the Commission's approval of the TCA Stipulation have been preserved for appellate review. Accordingly, those challenges do not provide a basis for vacating the DEP and DEC Orders.

F. Return on Equity

The DEP Order authorized a 9.8% return on equity (ROE) for DEP, while the DEC Order approved a 10.1% ROE for DEC. The Attorney General and CUCA appeal the Commission's ROE determination in the DEC case.

Section 62-133 directs the Commission to fix a rate of return in a general ratemaking case that

will enable the public utility by sound management to produce a fair return for its shareholders, considering changing economic conditions and other factors . . . as they then exist, to maintain its facilities and services in accordance with the reasonable requirements of its

customers in the territory covered by its franchise, and to compete in the market for capital funds on terms that are reasonable and that are fair to its customers and to its existing investors.

N.C.G.S. § 62-133(b)(4).

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Opinion of the Court A utility's ROE "is one of the components used in determining a company's overall rate of return." State ex rel. Utils. Comm'n v. Cooper (Cooper II), 367 N.C. 430, 432 (2014). "The ROE represents the return that a utility is allowed to earn on its capital investment by charging rates to its customers. As a result, a higher ROE impacts profits for shareholders and costs to consumers." Id.

In the DEP case, DEP's ROE expert Dr. Roger Morin, Professor of Finance for Regulated Industry at the Center for the Study of Regulated Industry at Georgia State University, recommended an ROE of 10.4%.³⁰This constituted a 0.8 percentage- point increase from DEP's previous ROE of 9.6%. According to Dr. Morin, 10.4% was the "minimum amount needed" to comply with DEP's constitutional rights.³¹He maintained that "declining demand growth, rising operating costs, rising capital costs, [and industry-wide] lower allowed returns" had all led investors to view electric public utilities more negatively, making it difficult for DEP to raise capital. Dr. Morin's ROE recommendation included recovery of estimated flotation costs, which are one-time costs such as accounting and legal expenses associated with issuing new equities.

Several of the intervenors' expert witnesses conducted their own ROE analyses

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Opinion of the Court and proposed different ROEs to the Commission. The Public Staff's expert witness proposed an ROE of 9.45%, while CUCA's expert recommended 9.25%. Two other intervenors—the United States Government and the North Carolina Justice Center (NCJC)—recommended ROEs of 9.3% and 6.0%, respectively.³²CUCA, the Public Staff, and the federal government argued that, if the Commission approved DEP's PBR application and allowed it to increase rates incrementally under the MYRP, the ROE should be even lower; CUCA proposed 9.0%, and the Public Staff suggested 9.25%. The intervenors' expert witnesses also opposed allowing DEP to recover estimated flotation costs through its ROE.

In his rebuttal testimony, Dr. Morin criticized the methodologies used by the intervenors to arrive at their ROE recommendations. He argued that, given the rise in interest rates and inflation since DEP's last ratemaking case, it was unreasonable for the other experts to propose ROEs lower than DEP's then current rate of 9.6%. Dr. Morin defended his inclusion of flotation costs in his recommended ROE and rejected the other experts' opinion that approval of DEP's MYRP justified a downward adjustment to the ROE.

In a split decision, the Commission awarded DEP an ROE of 9.8%. In reaching this conclusion, the Commission majority observed that its task was to calculate a

"zone of reasonableness" for the ROE. That range would be bounded on the low end

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Opinion of the Court by the "investor interest against confiscation" and the need to protect DEP's access to capital and on the high end by the "consumer interest against excessive and unreasonable charges for service." Relying on the results of the parties' respective ROE analyses,³³the majority determined the zone of reasonableness to be 9.75% to 10%. In settling on this range, the majority concluded that (1) DEP should not be permitted to recover estimated flotation costs through the ROE and (2) the Commission's approval of DEP's MYRP did not justify a downward adjustment. The majority acknowledged its obligation under State ex rel. Utilities Commission v. Cooper (Cooper I), 366 N.C. 484 (2013), "to inform its selection of [an ROE] within [the range of reasonableness]" by addressing "the impact of changing economic conditions on customers." Consistent with its understanding of Cooper I, the majority declared that it must "exercise its subjective judgment so as to balance two competing [ROE]-related factors—the economic conditions facing DEP's customers and DEP's need to attract equity financing on reasonable terms in order to continue providing safe and reliable service."

Regarding the first factor, the majority observed that Dr. Morin "provided detailed data concerning changing economic conditions in North Carolina, as well as nationally," and that these data were already accounted for in Dr. Morin's recommended ROE. Nonetheless, the majority adopted an ROE closer to the low end of the zone of reasonableness. In selecting 9.8%, the majority remarked that, while

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Opinion of the Court

"some [customers] will struggle to pay the increased rates," an ROE of 9.8% did not pose a serious risk of "undue hardship" to consumers, partly because DEP was simultaneously developing programs to help its low-income residential customers pay their bills.

Turning to the second factor, the majority concluded that increasing DEP's ROE from 9.6% to 9.8% would sufficiently "allow DEP to compete in the market for equity capital, providing a fair return on investment to its investor-owners." The majority noted DEP's need to respond to "macroeconomic, geopolitical, extreme weather, public health, and other exogenous events beyond [its] control." The majority also observed that DEP faced new operating risks arising from its obligation under the Carbon Plan to transition to greater renewable power generation. In sum, and "taking into account changing economic conditions and their impact on customers," the majority exercised its "independent judgment and discretion" to conclude that its approved ROE of 9.8% would "allow DEP to . . . provid[e] a fair return on investment" and "result in the lowest rates constitutionally permissible."

Three of the seven commissioners dissented because they thought the majority's chosen ROE was too low.³⁴The three dissenters would have approved an ROE of 10%, the upper limit of the zone of reasonableness. They expressed concern that the 9.8% ROE approved by the majority would increase costs for consumers over

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Opinion of the Court the long term by impairing DEP's ability to compete for capital on the most reasonable terms available.

No party appealed the Commission's decision to approve a 9.8% ROE in the DEP Order. The Commission's membership changed, though, between the issuance of the DEP Order and the DEC Order. Two of the four commissioners in the DEP majority left the Commission, which made the DEP dissenters the majority in the DEC case.

Dr. Morin testified as an expert witness for DEC. His testimony at the DEC hearing largely resembled his testimony at the DEP hearing. As in the DEP case, he recommended an ROE of 10.4%, which included flotation costs. When asked on cross- examination whether he was aware of any "substantive difference[s]" between DEC and DEP that could justify assigning them different ROEs, Dr. Morin said he was not. He also admitted that bond rating agencies had initially reacted favorably to the 9.8% ROE approved by the Commission in the DEP case. Toward the end of his cross- examination, when asked what he thought about giving DEC an ROE of 10.2%, Dr. Morin responded, "It's in my range, but the upper portion of the range. So I wouldn't

. . . violently object to that."

As in the DEP case, the intervenors' expert witnesses recommended lower ROEs than Dr. Morin, though they uniformly recommended higher ROEs than the ones they had proposed in the DEP case. Instead of 9.45%, the Public Staff's expert recommended 9.55%. CUCA's expert recommended 9.40%, not 9.25%. Despite having

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Opinion of the Court recommended 6.00% in the DEP case, NCJC's expert testified that 6.15% would be appropriate for DEC. In his DEC testimony, the Public Staff's expert explained that he recommended a higher ROE for DEC than he had for DEP, not because he saw any difference in risk between the Utilities, but because of changing conditions in capital markets. The intervenors' experts again urged the Commission to exclude estimated flotation costs from the ROE and apply a downward adjustment if it approved the MYRP.

In his rebuttal testimony, Dr. Morin remarked that the other proposed ROEs for DEC were lower than DEC's then-current ROE of 9.6% even though interest rates had risen since DEC's last general ratemaking case.³⁵He also observed that in recent months the average ROE authorized for a vertically integrated electric utility in the United States such as DEC was 9.73%, significantly higher than the intervenors' recommendations.

In another split decision, but this time with the DEP dissenters in the majority, the Commission approved an ROE of 10.1% for DEC. Drawing once more on the parties' independent analyses, the majority determined the zone of reasonableness to be 9.99% to 10.37%. The majority, "in its discretion," then selected 10.1%, concluding that substantial evidence supported this ROE. As in the DEP case, the Commission

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Opinion of the Court excluded flotation costs and did not apply a downward adjustment for DEC's MYRP. The Commission again incorporated the customer interest analysis required by Cooper I into its ROE determination, copying the customer interest analysis in the DEP Order nearly verbatim. The majority observed that Dr. Morin's testimony took customer interests into account and "provided detailed data concerning changing economic conditions in North Carolina, as well as nationally." As it had in the DEP case, the majority judged that, while "some [customers] will struggle to pay the increased rates," the majority's chosen ROE did not pose a serious risk of "undue hardship" to consumers, due partly to DEC's assistance programs for low-income residential customers.

The Commission's analysis of DEC's interests tracked the examination of DEP's interests in the DEP Order. The Commission concluded that "macroeconomic, geopolitical, extreme weather, public health, and other exogenous events beyond DEC's control" necessitated increasing DEC's ROE, as did DEC's new obligations under the Carbon Plan. Echoing the DEP Order, the Commission stated that the 10.1% ROE approved for DEC would "result in the lowest rates constitutionally permissible."

On appeal the Attorney General and CUCA contend that DEP and DEC presented "substantially similar evidence" on their respective risk profiles, and thus it was arbitrary and capricious for the Commission to approve a higher ROE for DEC than it did for DEP. The Attorney General separately challenges the Commission's

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Opinion of the Court customer interest analysis in the DEC case, arguing that the Commission failed to consider adequately the effects of DEC's ROE increase on customers.

1. DEC's Higher ROE

The Attorney General covers essentially the same ground as CUCA and then some, so we will focus on the Attorney General's ROE arguments. In claiming that the Commission arbitrarily and capriciously approved a higher ROE for DEC than for DEP, the Attorney General maintains that the evidence before the Commission in the DEC case was "substantially similar" to evidence presented in the DEP case, including evidence on risk profiles, credit ratings, planned capital projects, and proxy groups.³⁶The Attorney General also notes that Dr. Morin served as an expert witness for both DEP and DEC and that in each case he recommended an ROE of 10.4% (adjusted to include flotation costs). In fact, much of Dr. Morin's pre-filed testimony at the DEP evidentiary hearing was, by his own admission, "substantially identical"

to his pre-filed testimony at the DEC hearing. Dr. Morin used identical economic models, for example, and argued that the same set of financial risks—"declining demand growth, rising operating costs, rising capital costs, . . . [and] lower allowed returns"—threatened both Utilities. When asked at the DEC hearing whether there was any "substantive difference" between DEP and DEC that would justify different ROEs, Dr. Morin said he was "not . . . aware of any difference that would warrant a

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Opinion of the Court difference in allowed ROE."

According to the Attorney General, the Commission "use[d] . . . the exact same methodologies and inputs to arrive at a fundamentally different result for a utility with an identical risk profile." This, says the Attorney General, was arbitrary and capricious decision-making. While the Attorney General admits that the Commission need not "always reach precisely the same ROE for utilities that come before it at the same time," he argues that, where the material evidence presented by the utilities is the same, "the Commission must treat identical facts alike unless there is evidence and good reason not to."

The Utilities maintain that the Attorney General's argument is foreclosed by this Court's VEPCO decision. We do not think VEPCO controls because here the Commission did not fail to explain why it took different positions in rate cases involving comparable facts. When read together, the DEP and DEC Orders unambiguously explain why the Commission approved a different ROE for DEC. Consequently, the Attorney General would not prevail even if this Court had ruled in VEPCO that the Commission must spell out its reasoning when it takes different positions in ratemaking cases involving comparable evidence. In their dissent to the DEP Order, the three dissenting commissioners set out in significant detail the reasons for their belief that the Commission should have approved a higher ROE—10.0%—for DEP. For instance, they expressed concern that some of the models that expert witnesses had used to measure the cost of equity were

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Opinion of the Court

"inconsistent with the current capital market environment and bias[ed] downward the range of reasonableness."³⁷Describing ROE as a "critical component of creditworthiness," the dissenters worried that an ROE of less than 10% would impair DEP's ability to compete for capital "on the most reasonable terms available." They regarded this point as important because, inter alia, "DEP faces substantial capital needs over the next several years to comply with environmental requirements, to replace and upgrade aging infrastructure, to construct or acquire new generation resources, to upgrade the transmission system, and to satisfy its debt maturities."

The dissenters argued that higher borrowing costs for DEP would eventually lead to increased costs for its customers.

When the dissenting commissioners in the DEP case became the majority in the DEC case shortly thereafter, they confronted ROE evidence that was—to adopt the Attorney General's characterization—"substantially similar" to the ROE evidence they had just analyzed extensively in their DEP dissent. Not bound by the outcome in the DEP case, they cast votes in the DEC case in line with the views they had expressed in that dissent less than four months earlier. We see nothing arbitrary or capricious in their conduct. Moreover, it would border on silly for this Court to reverse their decision merely because the DEC Order does not repeat the arguments laid out

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Opinion of the Court in their DEP dissent. Our dissenting colleagues argue that the Commission erred as a matter of law by not picking the lowest ROE within its zone of reasonableness for the DEC case. According to them, "[w]hen presented with a range of reasonable options, the Commission lacks 'discretion' to randomly select a number in that range. Instead, it must select the lowest possible rate consistent with due process."

This argument fundamentally misapprehends the zone of reasonableness. The zone does not represent—as our dissenting colleagues seem to believe—a determination by the Commission that any number within the zone will do. Rather, in delimiting a zone of reasonableness, the Commission narrows the range within which it will search for the lowest, constitutionally permissible rate, much as soldiers use bracketing to close in on artillery targets.

The Commission's ROE analysis in the DEC proceeding confirms our understanding. After identifying the zone's parameters in that case, the Commission went on to conclude, "taking into account changing economic conditions and their impact on customers, that the approved [10.1% ROE rate] will result in the lowest rates constitutionally permissible in th[e] [DEC] proceeding."

Undoubtedly, the Commission's ROE decision involved the exercise of discretion. Such rate-setting determinations always "require[ ] the exercise of subjective judgment." State ex rel. Utils. Comm'n v. Public Staff-North Carolina Utils. Comm'n, 323 N.C. 481, 490 (1988). The necessity of subjective judgment becomes

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Opinion of the Court clear when one considers the mountain of evidence—much of it highly technical— that the Commission examined and weighed before it approved an ROE of 10.1% for DEC. This evidence included an array of mathematical models produced by expert witnesses using various methodologies.³⁸Despite relying on many of the same methodologies, the experts recommended different ROEs for reasons the Commission discussed at length in the more than forty single-spaced pages that the DEC Order dedicates to the Commission's ROE decision. At the end of the day, the Commission had to set DEC's ROE rate based on voluminous, complex, and sometimes contradictory evidence. In performing this task, it had no choice but to exercise discretion.

The Attorney General further asserts that evidence presented at the DEC hearing affirmatively contradicted the Commission's award of a higher ROE for DEC. Dr. Morin testified that "the bond rating agencies ha[d] . . . reacted favorably"

following the Commission's approval of a 9.8% ROE for DEP. Such "real-world reactions" to DEP's ROE, says the Attorney General, were "perhaps the best evidence that a 9.8% (or lower) ROE was more than fair to existing investors." Dr. Morin also testified that he wouldn't "violently object" to a 10.2% ROE because it was within the

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Opinion of the Court range of what he considered reasonable. The Attorney General describes this testimony as Dr. Morin "recalibrat[ing] his recommendation," essentially adopting a 10.0% ROE when one removes flotation costs. Because no other expert recommended an ROE greater than 10.0%, the Attorney General claims that the Commission's award of 10.1% was not supported by any expert recommendation. Although Dr. Morin did say in his DEC testimony that he would not "violently object" to an ROE of 10.2%, the fact remains that he recommended an ROE of 10.4%, a number higher than the 10.1% ROE approved by the Commission. The Attorney General's argument therefore lacks merit.³⁹

Following the Attorney General's lead, our dissenting colleagues argue that Dr. Morin's testimony, "taken as a whole, fails to support an award higher than 9.8%."

Like the Attorney General, they seize upon Dr. Morin's admission that bond markets reacted favorably to the 9.8% ROE approved by the Commission in the DEP proceeding. But this short-term reaction does little—if anything—to undermine Dr. Morin's ROE recommendation in the DEC case, which rested to a significant degree on long-term financial considerations. Specifically, Dr. Morin tied his ROE recommendation to an uptick in the 30-year U.S. treasury bond yield (3% to 4%),

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Opinion of the Court explaining that common stocks are very long-term instruments more akin to very long-term bonds rather than to short-term Treasury bills or intermediate-term Treasury notes. . . . The expected common stock return is based on very long-term cash flows, regardless of an individual's holding period. Moreover, utility asset investments generally have very long-term useful lives and should correspondingly be matched with very long-term maturity financing instruments. Even if one disagrees with Dr. Morin's recommendation, his testimony unquestionably provided more than a scintilla of competent and material evidence supporting the Commission's ROE decision in the DEC proceeding. See State ex rel. Utils. Comm'n v. Carolina Util. Customers Ass'n, 348 N.C. 452, 460 (1998) ("Substantial evidence is defined as more than a scintilla or a permissible inference. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." (cleaned up)).

While our dissenting colleagues accuse us of "burying [our] heads, ostrich-like in the sand, as to the actual evidence below," the real difference between their position and ours is that we are unwilling to usurp the role of the Commission and reweigh the evidence. This Court may not "disturb an order of the Commission merely because [we] would have given [the evidence] a different weight." State ex rel. Utils. Comm'n v. Duke Power Co., 285 N.C. 377, 390 (1974) (cleaned up). If the Commission followed the law and based its decision on competent, material, and substantial evidence, we must uphold its determination, regardless of whether we would prefer a different outcome. To do otherwise would be to appropriate power that does not

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Opinion of the Court belong to us and transform this institution into something other than an appellate court.

2. Customer Interest Analysis

The Attorney General separately asks us to vacate the Commission's decision to approve a 10.1% ROE in the DEC case because the Commission "failed to properly consider the impact that its . . . determination would have on DEC ratepayers." The Attorney General's argument depends heavily on Cooper I.

While conceding that the DEC Order references the need to protect DEC's customers from excessive rates, the Attorney General insists that it gives only "scant attention" to the interests of DEC's customers and focuses almost exclusively on DEC's need for an ROE high enough to attract investors. He also points out that the customer interest analysis in the DEC Order tracks the DEP Order's analysis

"verbatim." The Attorney General regards this "parroting" as another sign that the Commission "failed to acknowledge or consider the unique circumstances facing [DEC's] customers."

In Cooper I, this Court construed N.C.G.S. § 62-133 to require the Commission to "take customer interests into account when making an ROE determination."

Cooper I, 366 N.C. at 495. To satisfy the statute, "the Commission must make findings of fact regarding the impact of changing economic conditions on customers when determining the proper ROE for a public utility." Id. In so doing, the Commission must "treat consumer interests fairly—not indirectly or as mere afterthoughts." State

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Opinion of the Court ex rel. Utils. Comm'n v. Cooper, 367 N.C. 741, 745 (2015) (cleaned up). We find the Attorney General's arguments unpersuasive. For starters, his criticism that the DEC Order copies the DEP Order verbatim rings hollow. In arguing that the Commission impermissibly failed to explain its decision to approve a higher ROE for DEC than for DEP, the Attorney General insisted that the evidence in the two cases is "substantially similar." Given this similarity, it is hardly surprising that the Commission would analyze customer interests in both cases in much the same terms.

More importantly, the DEC Order demonstrates conclusively that the Commission duly evaluated customer interests when setting DEC's ROE. Contrary to the Attorney General's allegation that the Commission gave them "scant attention," the Commission devoted considerable attention to customer interests, carefully evaluating and weighing the relevant evidence. To prove the point, we quote the Commission's customer interest analysis at length:

Cooper I Factors and Ultimate Conclusion Regarding Cost of Equity Capital

Regarding the obligation in accord with the holding in Cooper I to inform its determination of a[n] [ROE rate] within that range, the Commission must address the impact of changing economic conditions on customers. 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 DEC witness Morin and Public Staff witness [Christopher C.] Walters, an associate with Brubaker & Associates, Inc., addresses changing economic conditions at

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Opinion of the Court some length. Witness Morin 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 national economy. As such, witness Morin testified that changing economic conditions, both nationally and specific to North Carolina, are reflected in his [ROE rate] estimates.

Public Staff witness Walters generally agreed with DEC witness Morin that as of the time of the filing of his testimony, economic conditions had improved in North Carolina. As the Commission has noted, customer impact due to changing economic conditions is embedded in [ROE] expert witness analyses. Witness Morin's analysis, which the Commission credits and to which the Commission gives weight, also indicates that even though the North Carolina and U.S. economies have contracted, economic conditions in North Carolina continue to be highly correlated to conditions nationally, and, therefore, continue to be reflected in the analyses used to determine the [ROE rate]. The Commission concludes that based upon the evidence presented in this case, the econometric data relied upon by [ROE rate] expert witnesses captures the effects and impacts of changing economic conditions upon customers and the Commission concludes that based on the evidence presented in this case, it does.

With changing economic conditions in mind, the Commission concluded that an ROE of 10.1% "will not cause undue hardship to customers even though some will struggle to pay the increased rate." The Commission also highlighted programs to assist those DEC customers most affected by the increased rate:

Indeed, affordability, especially for low-income

customers, was a special focus of DEC and the intervening parties to this proceeding. As noted above, the Commission established the [Low-Income Affordability Collaborative

(LIAC)] in its April 16, 2021 Order in the 2019 Rate Case

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Opinion of the Court and tasked the LIAC with addressing affordability issues for low-income residential customers. The efforts of the LIAC are apparent in this case and include the Affordability Stipulation as previously discussed in this Order.⁴⁰The provisions in the Affordability Stipulation, which include[ ] the development of the [Customer Assistance Program (CAP)] pilot, directly benefit customers with the least ability to pay in the current economic environment. In addition, as previously discussed in this Order, through the Payment Navigator program proposed in this proceeding, DEC will work closely with customers in need of assistance with managing bills and will connect those customers with sources of support and funding, based on the unique situation of the customer. While these programs will not ease the burden that electricity rates will place on certain of DEC's customers, the Commission expects these programs to provide a meaningful level of support to eligible customers. The Commission takes these facts into account in approving the 10.1% [ROE].

The Commission exhorted DEC to continue working to provide financial relief to its customers:

[T]he Commission also concludes, based on the evidence of record, that efforts to address energy burden and support for customers needing assistance with their bills are continuing to evolve. The LIAC allowed DEC and its

stakeholders to generate data that illustrates the depth and breadth of the challenge in North Carolina. Work must continue to reach these customers and provide meaningful support both in terms of assisting customers to use energy more efficiently so that bills are reduced and in terms of providing support to those customers when they are in need of bill assistance. The Commission recognizes the difficulties attendant to solving for these issues but

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Opinion of the Court emphasizes that the utility must continue to work with community partners and the LIAC in this work. As has been previously expressed by this Commission, the electric utilities must pursue every opportunity presented by federal funding made available by the IRA and other federal legislation to support customers in need. The Commission has confidence that DEC, the Public Staff and stakeholders will identify such opportunities for customers and will develop programs that take advantage of every federal dollar that is available for customer support. The Commission also took into account the potential financial benefits to customers from an ROE that allows DEC to compete for capital on reasonable terms:

The need to invest significant sums to serve its

customers requires DEC to maintain its creditworthiness

in order to compete for large sums of capital on reasonable terms. In addition, as recent years have demonstrated,

macroeconomic, geopolitical, extreme weather, public

health, and other exogenous events beyond DEC's control

may necessitate and indeed have necessitated the need for DEC to access and invest significant sums during atypical and volatile market conditions. The Commission takes note of [the testimony of] DEC witness [Karl W.] Newlin[,

Senior Vice President of Corporate Development and

Treasurer of Duke Energy Business Services, LLC,] . . .

that particularly in light of DEC's present credit metrics, [ROE rate] is one predicate . . . to the level of

creditworthiness necessary to efficiently access the capital markets on reasonable terms during all market cycles,

including periods of high volatility, which access ultimately lowers borrowing costs passed through to customers during such time. Witness Newlin testified that high credit quality will benefit customers. Witness Newlin explained that if the credit profile of DEC is weakened, customers might pay less in rates in the short-term, but DEC would face higher debt borrowing costs in the long-term that will be passed through to customers. Witness Newlin testified that "it

would be risky to do that . . . because I can see — you know, mathematically, you might get some near-term savings,

but longer term, I believe it'd be greater cost to customers."

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Opinion of the Court (Cleaned up).

Having examined the evidence, the Commission explained that it was "mindful of the burden" higher electricity rates pose to consumers but that it "must balance the burden against DEC's being in a position to access capital: (1) on reasonable terms, and (2) in moments when DEC most needs capital in order to provide reliable service." The Commission concluded that an ROE of 10.1% "appropriately balances the benefits received by DEC's customers from DEC'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 DEC's customers will experience in paying DEC's adjusted rate."

Viewed objectively, the customer interest portion of the DEC Order demonstrates that the Commission took Cooper I seriously and duly considered customer interests before it approved DEC's ROE. Although the Attorney General finds fault with the Commission's analysis, "[i]t is not this Court's duty to evaluate the accuracy of complex statistical models, conflicting methodologies, and the opposing expert opinions drawn therefrom." Carolina Util. Customers Ass'n, 323 N.C. at 251. The General Assembly has assigned that responsibility to the Commission, and the record indicates that the Commission fulfilled its obligation during its ROE deliberations in the DEC case.

Neither the Attorney General nor CUCA has shown that the Commission's ROE determination in the DEC case was "affected by error of law" or unsupported by

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Opinion of the Court

"competent, material and substantial evidence." Duke Power, 305 N.C. at 10. We thus lack any legal basis on which to overturn that determination.

IV. Conclusion

Our careful review of appellants' arguments discloses no grounds for reversing or vacating the final orders entered by the Commission in the DEP and DEC cases. Accordingly, we affirm those orders.

AFFIRMED.

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Earls, J., concurring in part and dissenting in part Justice EARLS concurring in part and dissenting in part. The majority affirms the Utilities Commission's decision to award a rate increase to Duke Energy Carolinas and Duke Energy Progress. Specifically, the Commission awarded Duke Energy Carolinas a higher rate of return on common equity than it had received in the past—higher even than the Commission awarded Duke Energy Progress only three and one-half months earlier. Because the majority affirms these decisions, Duke Energy will charge consumers in the western part of the state more than consumers in the eastern part of the state for identical electrical services. I dissent from the majority's decision to approve this disparate treatment. In my view, the Commission's decision in the Duke Energy Carolinas rate case is quite plainly unlawful and arbitrary.

Before diving into the weeds of the particular legal challenge here, it is useful to start with a fifty-thousand-foot view of this Court's role, especially regarding North Carolina's new framework of performance-based regulation of public utilities. Under the old system, each time a utility wanted to increase rates, it would have to file a new application with the Commission. Under the new system, certain public utilities can apply once to increase rates over three years. N.C.G.S. § 62-133.16(a)(5), (c) (2025). Each such rate order is now of even greater consequence: It represents the Commission's one-time decision on what North Carolinians will pay for essential services for multiple years, and the Commission can effectively pre-approve rate

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Earls, J., concurring in part and dissenting in part hikes for all customers. This Court will typically have only one chance to review such orders on direct appeal. Id. §§ 7A-29(b), 62-90 (2025). Because the stakes are higher and chances for review fewer, this Court must exercise utmost diligence when determining the Commission's compliance with its legal obligations in these proceedings.

Yet today, the majority blanketly rejects nine distinct challenges to the Commission's orders in two such ratemaking cases.¹In doing so, the majority appears to transform appropriate deference to the Commission's technical expertise into an exercise in largely taking the Commission at its word. Our critical review requires more. Ratepayers across North Carolina deserve more.

I would not so sweepingly affirm the Utilities Commission. Instead, I would vacate the Duke Energy Carolinas award of a 10.1% rate of return on common equity as well as reverse the Commission's decision to treat hazard tree removal as a capital expense. As to the return on common equity, I conclude that the Commission's order

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Earls, J., concurring in part and dissenting in part fails to follow the law's mandate that attention be given to the consumers' interests. The record is replete with evidence that rising energy costs are hurting North Carolina consumers. Yet Duke Energy seeks to increase rates even while it posts record profits.²Here, even though Duke Energy Carolinas and Duke Energy Progress have the same capital risk profile, have previously been awarded the same rates of return, and soon may even be the same company, the Commission authorized Duke Energy Carolinas to give shareholders a thirty basis point higher rate of return on common equity than that awarded to Duke Energy Progress.³

The majority concludes that this decision is permissible because the Commission's composition changed between the two rate orders. The Commission majority's award in the Carolinas case was consistent with the dissent's view in the Progress case, it reasons—implying that Duke Energy Progress should have been able to charge its consumers more, too.

2 That includes a requested rate increase that succeeds this one. Liz McLaughlin, Duke Energy seeks rate hike as customers push back on rising bills, WRAL https://www.wral.com/news/local/duke-energy-residential-rate-hike-public-hearing-march- 2026 (Apr. 2, 2026, 2:19 PM).

Notably, Duke Energy Carolinas appears to give shareholders a higher return on common equity than is allowed by the Commission, depending on the underlying metric. Duke Energy Carolinas recently reported achieving a rate of return on common equity of 11.1%, or 150 basis points above the return on common equity authorized in its 2019 Rate Case (9.6%). Letter from Jack E. Jirak, Deputy General Counsel for Duke Energy Corporation, to A. Shonta Dunston, Chief Clerk, North Carolina Utilities Commission, Re:

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Earls, J., concurring in part and dissenting in part It is true that the Utilities Commission's composition has recently changed, in part because of recent acts by the legislature that are still undergoing judicial review. See Stein v. Hall, No. COA 25-745, slip op. at 19-24 (N.C. App. Jan. 7, 2026), appeal and filed and disc. rev. pending, No. 53P26. But this change in composition is not a valid or rational basis for awarding a higher return on common equity to Duke Energy Carolinas. Namely, the Commission does not have discretion to randomly select a rate of return on common equity. The Commission is required to award a rate that poses the lowest possible cost to the using public for quality service while being sufficient to maintain shareholder investment. The Commission's failure to award the lowest reasonable return, or to find facts and state reasons consistent with Chapter 62 for deviating from that baseline, is legal error. As to the hazard tree removal program, the Commission acted in excess of its statutory authority by awarding rate base treatment to the routine vegetation management practice of removing hazard trees. I fail to see why routinely trimming trees is an operating expense while routinely cutting trees down on property adjacent to Duke Energy's facilities is a capital one. Because Chapter 62 limits rate base treatment to only those qualifying "capital investments" and "property used and useful" during the rate period, the Commission acted in excess of its authority by allowing Duke Energy Carolinas a return on these costs.

As to the remaining challenges, I respectfully concur.

I. Rate of Return on Common Equity

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Earls, J., concurring in part and dissenting in part

A. First Principles

It bears emphasizing that public utility regulations must robustly protect the consuming public. That is a core purpose of a regulated public utility. A public utility company is granted a "legal monopoly upon a service vital to the economic well being and the domestic life of the people of a large territory." State ex rel. Utils. Comm'n v. Gen. Tel. Co. of the Se., 281 N.C. 318, 335 (1972). Because

"[a]n uncontrolled legal monopoly in an essential service leads, normally and naturally, to poor service and exorbitant charges," id., the state must check the utility's worst impulses which would otherwise threaten harm to consumers, other business industries, and the state writ large. The Public Utilities Act thus tasks the Utilities Commission with protecting the public interest by carefully setting the rates that public utilities can charge to customers. N.C.G.S. §§ 62-1, -2(a)-(b) (2025). In this way, regulation by the Commission substitutes for traditional market competition to control costs. See Frank W. Hanft, Control of Electric Rates in North Carolina, 12 N.C. L. Rev. 289, 290 (1934). The Commission is trusted to carry out North Carolina's public policy to fairly regulate public utilities and "promote adequate, reliable and economical utility service to all of the citizens and residents of the State." N.C.G.S. § 62-2(a)(1), (3).

To that end, the Utilities Commission must set rates high enough that utilities can ensure reliable service to customers, including by paying shareholders for the cost of accessing necessary capital, but low enough to be fair to consumers. Id. § 62-

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Earls, J., concurring in part and dissenting in part 133(b)(4) (2023); State ex rel. Utils. Comm'n v. Thornburg, 316 N.C. 238, 242 (1986). Above all, the "primary purpose [of this regulatory scheme] is not to guarantee to the stockholders of a public utility constant growth in the value of and in the dividend yield from their investment." State ex rel. Utils. Comm'n v. Gen. Tel. Co. of the Se.,

285 N.C. 671, 680 (1974) (emphasis added). Rather, the statutes exist "to assure the public of adequate service at a reasonable charge." Id.

As the majority notes, one step in the process of setting rates is for the Commission to determine the utility's overall rate of return, or the percentage the utility will earn on certain of its capital investments. See majority supra Section III.C; State ex rel. Utils. Comm'n v. Thornburg, 325 N.C. 463, 467 n.2 (1989). One of the most important components of that overall rate of return is the rate of return on common equity. N.C.G.S. § 62-133(b). Specifically, that figure represents what "a utility [must] earn to induce investors to hold and to continue to buy common stock."

Charles F. Phillips, Jr., The Regulation of Public Utilities 394 (3d ed. 1993) [hereinafter Phillips, Regulation of Public Utilities]. This is not a question of investor expectations generally. Rather, it captures the expectations of those investors seeking the type of "minimal risk of loss of principal" attendant to investing in a fully regulated public utility. Gen. Tel., 281 N.C. at 338. Return on common equity in this context is synonymous with the cost of equity capital for a public utility specifically.

Because the rate of return on common equity is a matter of expectations of investors in this particular type of equity, among the most important evidence is the

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Earls, J., concurring in part and dissenting in part rate of return for similar utilities: the "return[ ] on investment[ ] in other enterprises having corresponding risks." Fed. Power Comm'n v. Hope Nat. Gas Co., 320 U.S. 591, 603 (1944). Regulators must look to comparable returns, or those "generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties." Bluefield Water Works & Improvement Co. v. Pub. Serv. Comm'n, 262 U.S. 679, 692 (1923). Because the utility has "no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures," id. at 692-93, the high-water mark for a public utility's return on common equity is that which is "commensurate with returns on investments in other enterprises of corresponding risk." Phillips, Regulation of Public Utilities 381. Simply put, because the rate of return on common equity for one utility is closely tied to the returns being awarded to comparable entities, regulators must take account of those comparable returns.

Accurately calculating the proper rate of return on common equity is

"extremely important" because "it is the most expensive form of capital accumulation"

and is "ultimately borne by the ratepayer." State ex rel. Utils. Comm'n v. Pub. Staff (Public Staff I), 322 N.C. 689, 697-98 (1988). Each increase in the rate of return on common equity triggers substantial costs for consumers. See State ex rel. Utils. Comm'n v. Cooper (Cooper I), 366 N.C. 484, 485 n.1 (2013) ("The higher the [return on equity], the higher the resulting rates that customers will pay to the utility.").

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Earls, J., concurring in part and dissenting in part Indeed here, a single basis point alone is worth millions of dollars. For a typical residential customer receiving 1000-kilowatt hours of service who had a $123 energy bill, roughly $24 of that amount would go to paying the return on common equity-- i.e., shareholders--according to one estimate. As Duke Energy's own expert witness agreed, shifts in the rate of return on common equity cause "real-world impacts on people's bills." If the rate of return on common equity is set higher than the cost of capital, the Commission will, in effect, unlawfully transfer wealth from ordinary consumers to Duke Energy's shareholders—essentially exploiting captured customers for shareholders' gain. See Phillips, Regulation of Public Utilities 375, 387-

88.

In light of these factors, the Commission has limited discretion to set rates, including the rate of return on common equity. The Commission must "fix rates as low as may be reasonably consistent with the requirements of the Due Process Clause of the Fourteenth Amendment to the Constitution . . . [and] those of the State Constitution, Art. I, § 19." State ex rel. Utils. Comm'n v. Duke Power Co., 285 N.C. 377, 388 (1974) (emphasis added); see also id. (noting that the federal and state constitutional requirements are "the same in this respect"); State ex rel. Utils. Comm'n v. Pub. Staff (Public Staff II), 323 N.C. 481, 490 (1988) (observing that case law on the overall rate of return applies to the rate of return on common equity and that rates must be "as low as may be reasonably consistent with" due process (cleaned up)).

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Earls, J., concurring in part and dissenting in part In addition to adhering to this baseline, the Commission must also directly consider consumer interests. It is required to evaluate "the impact of changing economic conditions on customers" when making a return on equity determination. Cooper I, 366 N.C. at 495.

These requirements mean that, when presented with a range of reasonable options for a return on common equity, the Commission's compass must always point downward. Rates must be set at the "lowest possible cost to the using public for quality service" while assuring "sufficient shareholder investment in utilities." Id. at 494 (quoting State ex rel. Utils. Comm'n v. Carolina Util. Customers Ass'n (CUCA I),

348 N.C. 452, 458 (1998)). Ultimately, "[w]hat constitutes a fair rate of return on common equity is a conclusion of law that must be predicated on adequate factual findings." CUCA I, 348 N.C. at 462 (citing Public Staff I, 322 N.C. at 693). In turn, our Court is responsible for directly reviewing whether the Commission complied with these legal obligations. See N.C.G.S. §§ 7A-29(b), 62-90 (2023). Although the Commission has authority and expertise to determine which rates are reasonable, CUCA I, 348 N.C. at 462, this Court is obligated to critically review "the evidentiary underpinning for the Commission's findings and whether the findings support its conclusion regarding this figure." State ex rel. Utils. Comm'n v. Pub. Staff (Public Staff III), 331 N.C. 215, 223 (1992). We must set aside an order fixing a return on common equity when the decision is "not supported by adequate findings of material facts," Public Staff I, 322 N.C. at 693, not supported by

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Earls, J., concurring in part and dissenting in part

"substantial evidence in the record as a whole," Public Staff III, 331 N.C. at 222, or arbitrary or capricious, N.C.G.S. § 62-94(b)(6) (2025). Substantial evidence is "more than a scintilla" of evidence; it means "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." State ex rel. Utils. Comm'n v. Cooper (Cooper III), 367 N.C. 644, 648 (2014) (quoting CUCA I, 348 N.C. at 460). We must also reverse the Commission for errors of law. N.C.G.S. § 62-94(b)(4) (directing that the reviewing "court shall decide all relevant questions of law" and "may reverse or modify" a decision "[a]ffected by other errors of law"). We review the Commission's conclusions of law de novo. E.g., State ex rel. Utils. Comm'n v. Va. Elec. & Power Co.,

381 N.C. 499, 515 (2022).

B. Challenges to the Duke Energy Carolinas Return on Common Equity

Here, the Utilities Commission awarded Duke Energy Carolinas (Carolinas) a return on common equity of 10.1% merely three and one-half months after it awarded Duke Energy Progress (Progress) a return on common equity of 9.8%. No one disputes that the two utilities are materially identical. Yet this decision means that, according to one estimate, North Carolinians in the central and western parts of the state will pay over $129 million more than others in the central and eastern parts of the state— millions more for the same services from the soon-to-be same company.⁴

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Earls, J., concurring in part and dissenting in part The Attorney General, on behalf of the using and consuming public, see N.C.G.S. § 62-20 (2023), and Duke Energy Carolinas' customers objected to this decision. They advanced three distinct challenges: they argued that the Commission's award of a 10.1% return on common equity was arbitrary or capricious, unsupported by substantial evidence in the whole record, and inconsistent with Cooper I's requirement to take account of customer interests. See id. § 62-94(b)(4)-(6) (2023). I agree and would vacate on these bases.

1. The Award Is Unsupported by Substantial Evidence

The Commission's conclusion that a 10.1% return on common equity was the lowest possible rate consistent with due process is unsupported by "substantial evidence in the record as a whole" and must be set aside. Public Staff III, 331 N.C. at

222. As the Commission's order acknowledged, the only expert witness whose return on common equity recommendation supported a 10.1% award was Duke Energy's own Dr. Roger Morin. Every other expert witness recommended an award below 10%— indeed even below 9.8%.⁵Thus Dr. Morin was the sole expert upon whose testimony the Commission could have based its decision. But his testimony, taken as a whole, fails to support an award higher than 9.8%.

Dr. Morin was Duke Energy's rate of return expert in both the Progress and the Carolinas rate cases. He was also the only one of Duke Energy's return on equity

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Earls, J., concurring in part and dissenting in part witnesses who conducted his own quantitative analysis.⁶Dr. Morin concluded that Duke Energy Progress and Duke Energy Carolinas were entitled to the same return on common equity, in part because of their materially identical risk profiles and similar other inputs.⁷Other witnesses corroborated that both Progress and Carolinas had the same long-term Moody's Investors Service (Moody's) credit rating of A2. For Carolinas, Dr. Morin calculated that a return between 9.8% and 10.9%, including flotation costs—which may not be awarded to Carolinas under this Court's precedent, see Public Staff I, 322 N.C. at 696-701—would be reasonable in both cases. He ultimately recommended the midpoint of that range: 10.4% including improper flotation costs, or 10.2% excluding them.

After Dr. Morin's initial testimony in the Carolinas case, the Commission announced that it would award Progress a 9.8% return on common equity. Dr. Morin was then questioned about how that development affected his recommendations for Carolinas. After all, the cost of equity capital for one public utility depends in part on the comparable returns of peer public utilities.⁸How the market received Duke

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Earls, J., concurring in part and dissenting in part Energy Progress's award was thus some of the best comparable evidence of investors' likely expectations for Duke Energy Carolinas.

In light of the Commission's award of 9.8% to Duke Energy Progress, Dr. Morin acknowledged that 9.8% for Duke Energy Carolinas was "reasonable." Indeed, he conceded that this figure was at the "bottom of [his recommended] range." He further conceded that "bond rating agencies . . . reacted favorably" to Progress's 9.8% award. He again affirmed that he was not "aware of any [substantive] difference that would warrant a difference in allowed [return on equity]" between the two public utilities. Thus, the testimony of the only expert who supported a rate of 10.1% or higher added that 9.8% was also reasonable and that Duke Energy Carolinas and Duke Energy Progress were entitled to the same return. Indeed, his conclusion that 9.8% was reasonable was bolstered by early indications that the market too thought this figure was reasonable and that concerns voiced by the dissenters in Duke Energy Progress about the utility's possible downgrading did not materialize. The Commission in Carolinas found no facts to support that the two companies exhibited different risk profiles warranting a greater return on common equity for one of them. of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties; but it has no constitutional right to profits such as are realized or anticipated in highly profitable enterprises or speculative ventures." (emphasis added)); Phillips, Regulation of Public Utilities 381 (noting that the public utility rate of return on equity must be high enough to, in part, "provide a return on common equity that is commensurate with returns on investments in other enterprises of corresponding risk").

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Earls, J., concurring in part and dissenting in part It also offered no specific reasons for rejecting Dr. Morin's testimony that 9.8% was the lowest rate within the range of reasonableness.

Instead, after identifying its own "zone of reasonableness of 9.99% to 10.37%"

based on various averages of witness testimony, "the Commission in its discretion"

selected a number in the "approximate midpoint of this range." This is an error of law. See Public Staff I, 322 N.C. at 693. When presented with a range of reasonable options, the Commission lacks "discretion" to randomly select a number in that range. Instead, it must select the lowest possible rate consistent with due process. See Duke Power, 285 N.C. at 388; Cooper I, 366 N.C. at 494. If it does not select the lowest possible rate consistent with due process, it must provide reasons why it is departing from that figure—reasons that (1) comport with legal requirements governing the return on common equity and the Commission's mandates under Chapter 62, and (2) are factually supported by substantial evidence. See Gen. Tel. Co., 285 N.C. at 680. The Commission failed to do so here.

The majority waves away this evidence (or lack thereof). It concludes simply that "the fact remains that [Duke Energy's witness] originally recommended an ROE of 10.4%, a number higher than the 10.1% ROE approved by the Commission." See majority supra Section III.F.1. But our job here is not to ask whether any evidence supported the Commission's conclusion. Rather, we must assure ourselves that there is "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Cooper III, 367 N.C. at 648. Reasonable minds surely do not focus

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Earls, J., concurring in part and dissenting in part myopically on an initial, top-line recommendation to support a particular conclusion, irrespective of intervening evidentiary developments and underlying assumptions. Summary approval of the Commission's determination here amounts to little more than the majority burying its head ostrich-like in the sand as to the actual evidence below.

Speaking of the actual evidence below, not only did the Commission fail to provide reasons for departing from the lowest reasonable rate, but its higher award was unsupported in light of the ample record evidence showing the harmful likely impact of the proposed rate increase on customers. The Commission heard testimony that "[n]early 20 percent of North Carolina residents were unable to pay their electric bills at least once in 2021." For the "90,000 workers in this state [who make] at or below the minimum wage," a rate increase would pose a serious hardship, "just pil[ing] onto housing costs that have gone out of control." Consumers reported that they would have difficulty affording a higher rate, especially those who are living on fixed or low incomes, and that they are concerned about inflation and the general state of the economy. Others expressed alarm that a company "which reported a $2.56 billion profit last year" had grounds to demand more revenue from ratepayers, particularly in light of "ongoing economic challenges caused by the pandemic."

Testimony illuminated the disproportionate burdens imposed by new rate increases. Seniors and others on fixed or low incomes "do not receive sufficient annual income increases to cover the financial burden of potentially[ ]approved requested

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Earls, J., concurring in part and dissenting in part rate hikes" and have experienced a profound burden from ongoing requests for rate increases that "never seem to stop." The Commission heard testimony that Hispanic households, as well as Black and Native American households, spend a larger share of their income on energy bills, putting them at a higher risk of utility shutoffs should rates go up. Multiple witnesses expressed concern that Duke's initially proposed rate increase would raise the average customer's bill more than $240 a year by 2026, requiring thirty-three more hours of work for someone being paid at the minimum wage.

In personal terms, consumers told the Commission that their utility bills are

"very stressful" and that the "rate increase hike is just going to be even more detrimental." A rate increase could pose the risk of having insufficient funds to

"meet[ ] other essential needs like food and medicine" or not allowing a child to participate on a sports team. Increasing rates would place "an undue burden on those who are already struggling financially" and force the too "many North Carolinians who already have to make tough decisions [to choose] between paying utility bills or other basic necessities." Testimony reflected that those individuals and others

"simply [can]not afford a rate increase."

In light of this evidence, the Commission's decision to depart from the lowest recommended "reasonable" rate and to instead award a return thirty basis points higher than that—without offering any reasons consistent with Chapter 62 for doing

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Earls, J., concurring in part and dissenting in part so—is affected with legal error and unsupported by the record, and therefore must be set aside.

In a tacit acknowledgement that the evidence before the Commission in this case does not support its ultimate award, Duke Energy offered post hoc justifications. Specifically, Duke argued, and the majority agrees, that the Commission's change in composition justified its larger return on common equity award in Carolinas. As the majority puts it, the Commission acted reasonably because the new commissioners

"cast votes in the [Carolinas] case in line with views they had expressed in that dissent [in Progress] less than four months earlier." See majority supra Section

III.F.1.

To start, this observation about the change in the Commission's composition is beside the point. The Commission's rate order never cited its change in composition as the reason it adopted a different position on the rate of return on common equity. There is no discussion about the different membership of the Commission's decision- making panel or explanation of how that different composition changed the underlying inquiry as to the legal conclusion regarding the lowest possible rate of return consistent with due process.

As a general matter, judicial review of agency actions is limited to those

"grounds invoked by the [Commission]" when it took the challenged action. Godfrey

v. Zoning Bd. of Adjustment, 317 N.C. 51, 63-64 (1986) (cleaned up). This Court should not affirm an agency's decision because we can conceive of a legal basis to

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Earls, J., concurring in part and dissenting in part support it; to do so would be to abandon the critical review called for in our statutes and precedent, e.g., Public Staff III, 331 N.C. at 222-23; N.C.G.S. § 62-94(b), in favor of a hyper-deferential hypothetical rational basis review. For the majority now to rely on reasons to affirm the Commission's decision that were not stated in the Commission's decision contradicts basic principles of judicial review of agency actions.

Second, while the majority concludes that "it would border on silly for this Court to reverse [the Commission's] decision merely because the [Carolinas] Order does not repeat the arguments made in the [Progress] dissent," see majority supra Section III.F.1, that conclusion ignores the reality that some of the reasoning in the Progress dissent did not and could not justify the Carolinas return on common equity order. Namely, the evidence of how the bond rating agencies reacted to the Progress order undermined the Progress dissenters' reasoning and thus could not apply to the Carolinas order. The dissenting commissioners in the Duke Energy Progress case were specifically concerned that the market would not react well to the 9.8% award. The primary dissent in the Progress rate order feared that a return on equity lower than 10.0% could result in a "downgrade" in creditworthiness specifically from credit rating agencies like Moody's. The favorable reaction by bond rating agencies to the Progress award was thus contemporaneous evidence that the earlier dissenters' concerns were misplaced. The reasoning from the earlier order's dissent could not be uncritically copied over to the later order in light of this new information. Put simply,

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Earls, J., concurring in part and dissenting in part it is no justification that "[the Commissioners] cast votes in the [Carolinas] case in line with the views they had expressed in that dissent [in Progress] less than four months earlier." When intervening evidence undermined those views. Third, the majority gestures to changed economic conditions that developed in the three and one-half month interim between the Progress award and the Carolinas award. See majority supra Section III.F. Duke argued, and the majority apparently agrees, that the higher return on equity in Carolinas was supported because all expert witnesses raised their recommendations in the later rate order in light of changed economic conditions. Under the actual facts of this case, though, this argument is without merit. The Commission never acknowledged the earlier 9.8% Progress award and tied its greater award to Carolinas to different economic conditions, so this cannot be grounds to affirm the Commission's decision. See Godfrey, 317 N.C. at 63-64. Moreover, no expert's recommended increase accounted for the full variation between the Commission's two rate orders. Looking at the witness testimony, all experts increased their recommendations by ten to twenty basis points at most. The difference in the Commission's ultimate award to Carolinas was thirty basis points. We do not improperly override the Commission's expertise by merely observing that its math does not add up. Our responsibility to review the Utilities Commission's action demands more than simply concluding that "the witness's numbers got bigger, so the Commission's bigger number was justified."

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Earls, J., concurring in part and dissenting in part

It bears emphasizing that shifts in "economic conditions" were the only factual

basis Duke Energy itself was aware of that would justify a different cost of equity

capital for Carolinas than for Progress. When pressed about the grounds for awarding

a different return to Carolinas than for Progress, a Duke Energy executive responded

as follows:

[Question from attorney for Public Staff:] [W]e know that

this Commission ordered a 9.8 ROE in the DEP case, and

DEP covers, let's say, Wake County, for example. So, when

DEC is asking for a 10.4, 60 more basis points [than its

current award], when we go to Graham County and people

say why is - why am I paying 60 basis points more than

9 Dr. Morin originally recommended a 10.2% return on common equity in his first Progress direct testimony, and he later updated his recommendation in each case to 10.4% based on an "increase in forecast interest rates." So Dr. Morin still recommended the companies receive the same return on common equity award, but he calculated that the interest rate changes required a more modest increase of twenty basis points—still less than the Commission's thirty. Dr. Morin's 10.4% figure includes flotation costs, which are omitted from other witnesses' testimony.

10 Mr. Walters and Mr. O'Donnell recommended a downward adjustment in the rate of return on common equity if Duke Energy's multiyear rate plan was approved. The chart shows the witnesses' recommended figures without those downward adjustments, which the Commission rejected in both cases despite approving the multiyear rate plan for Carolinas and Progress.

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Earls, J., concurring in part and dissenting in part people in Wake County, what answer do I give?

[Answer from Duke Energy executive Laura Bateman:] I think from the Company's perspective we requested the same ROE in both - both - for both utilities and, obviously, there is slightly different timing of the cases, slightly different contents to the cases, but I think primarily the timing would have an impact or could have an impact. So Duke Energy itself cannot explain to Graham County consumers why they must pay more than Wake County consumers for the same services. How the Commission still determined that such disparate treatment was justified is a mystery. The majority does not explain or identify the substantial evidence it believes supports this disparate treatment. In my view, it cannot, because the Commission's conclusion here is unsupported and unlawful.

Furthermore, according to Duke Energy's own evidence, economic changes in the intervening three months should not account for a substantially different return on equity between these two arms of Duke Energy. Dr. Morin conceded that "day-to- day fluctuations in interest rates and current spot circumstances" should not be reflected in the "allowed rate of return," in that the rate of return on common equity is "to remain in effect typically for the next several years." So again, the only witness whose recommendation supported an award of 10.1% also thought short-term economic shifts (maybe over three months) should not bear heavily in the Commission's award. Short-term changes cannot account for the 10.1% award, and this further bolsters that the award itself is unsupported and must be set aside. See

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Earls, J., concurring in part and dissenting in part Public Staff III, 331 N.C. at 226 (setting aside Duke's rate of return on common equity where "the Commission went beyond the boundaries established by the evidence").

2. The Award is Arbitrary and Capricious

I also dissent from the majority's conclusion that the Commission's return on equity award to Carolinas was not arbitrary or capricious.

"Decisions are arbitrary and capricious when, among other things, they indicate a lack of fair and careful consideration or fail to display a reasoned judgment." State ex rel. Utils. Comm'n v. Thornburg, 314 N.C. 509, 515 (1985). Here, the Commission's analysis shows a lack of careful consideration and reasoned judgment because it affirmatively relied on the Progress rate order sometimes and other times acted like the Progress rate order did not exist, apparently without any good or consistent reason for doing so.

Specifically, throughout its Carolinas order, the Commission used its Progress rate order as a point of comparison. That included multiple times in its very analysis of the return on common equity. E.g., Order Accepting Stipulations, Granting Partial Rate Increase, Requiring Public Notice, and Modifying Lincoln CT CPCN Conditions, In re Application of Duke Energy Carolinas, LLC for Approval to Construct a 402 MW Natural Gas-Fired Combustion Turbine Electric Generating Facility in Lincoln County & for Adjustment of Rates and Charges Applicable to Electric Service in North Carolina and Performance Based Regulation, Docket Nos. E-7, SUB 1134 & 1276, slip op. at 199 (N.C.U.C. Dec. 15, 2023) ("The Commission notes also that it rejected

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Earls, J., concurring in part and dissenting in part downward adjustment [of the return on common equity in light of North Carolina's adoption of performance-based regulation] only a few months ago in the [Duke Energy Progress] Rate Case . . . ."); id. at 203 (rejecting reliance on "the sustainable growth methodology" and the "Multi-Stage DCF" methodology, "just as [another witness] himself accorded [those methods] no weight in the [Duke Energy Progress] Rate Case"); id. at 206 ("The Commission rejected these [additional calculations of] beta measures in the [Duke Energy Progress] rate case and does so again here."

(cleaned up)); id. at 213 ("Based on similar evidence, the Commission declined to allow recovery of flotation costs in the [Duke Energy Progress] rate case. The Commission similarly declines to allow recovery of flotation costs in this case." (emphasis added)); id. at 214 ("Accordingly, as [the Commission] did based on virtually identical evidence in the [Duke Energy Progress] Rate Case, the Commission rejects the downward adjustment theory." (emphasis added)).

Yet despite finding the Duke Energy Progress award a probative baseline for some parts of the rate of return on common equity analysis, the Commission strangely omitted any reference to its earlier choice to award Progress a 9.8% return on common equity.

This selective omission is further suspect because the Commission carefully analyzed returns on common equity for peer utilities. The Commission looked at the range of "currently authorized rates of return on common equity for vertically integrated electric utilities in the United States," including the overall average of

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Earls, J., concurring in part and dissenting in part

"9.73% so far in 2023." It specifically considered comparable rates across the southeast, including Duke Energy Progress's rate of return on common equity from 2023 in South Carolina as well as its rate of return from 2021 in North Carolina.¹¹ Nevertheless, the Commission inexplicably refused to look at the most recent version of the same data: Progress's 2023 North Carolina return. So even as the Commission insisted that the Carolinas award must be sensitive to the fact that the utility "is in competition for equity capital with other utilities," it blatantly ignored what was arguably the best comparable indication of the market for this kind of equity capital. Such selectivity is clearly arbitrary.

Notably too, the Commission discounted some witnesses' return on common equity recommendations where the award would have been "below any rate of return on equity ever approved by this Commission for [Duke Energy Carolinas]." The Commission credited Dr. Morin's testimony that Carolinas' last return was 9.6% and his testimony that the cost of equity capital was at least as great as that figure. So the Commission apparently relied on historical precedent where it justified a higher return but ignored historical precedent when that evidence counseled in favor of a lower one. Again, seemingly random selectivity shows "a lack of fair and careful consideration" and dooms the Commission's reasoning as arbitrary and capricious. Thornburg, 314 N.C. at 515.

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Earls, J., concurring in part and dissenting in part To be clear, this is not a case in which a party complains that the Commission only "sparse[ly]" addressed relevant evidence. Conservation Council, 312 N.C. at 62. The Progress rate order's return on common equity award was essential data even under the Commission's own criteria and analysis. Yet the Commission inexplicably disregarded "the actual experience of a utility in the attraction of capital" in estimating a materially identical utility's ability to attract capital. Gen. Tel., 281 N.C. at 371. Its conspicuous failure to account for that relevant data, which contradicted its ultimate outcome, shows "a lack of fair and careful consideration" and reasoned decision making. Thornburg, 314 N.C. at 515. The Commission is not bound by stare decisis. Va. Elec. & Power, 381 N.C. at 524. Even so, it is not permitted to willfully disregard evidence obviously relevant to the inquiry at hand—particularly when doing so renders its resulting rate order internally inconsistent. Our holding in Virginia Electric & Power Co. is consistent with this conclusion. There we held that the Commission validly exercised its discretion to consider "other material facts" under N.C.G.S. § 62-133(d), that its findings were "supported by competent, substantial evidence," that its conclusions "were adequately explained in its order," and that the Commission's order accurately reflected "North Carolina ratemaking law as set out in prior decisions from this Court." Va. Elec. & Power, 381 N.C. at 526 (cleaned up). That case has little relevance here, where the return on

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Earls, J., concurring in part and dissenting in part common equity portion of the Commission's order was not adequately supported or reasoned and evinces errors of law.¹²

3. The Award Fails to Account for Consumer Interests

Finally, the majority concludes that "the customer interest portion of the [Carolinas] Order demonstrates that the Commission took Cooper I seriously and duly considered customer interests before it approved [Carolinas'] [return on equity]."

See majority supra Section III.F.2. The majority quotes the Commission's conclusions at length, including its determination that the 10.1% rate of return "will not cause undue hardship to customers even though some will struggle to pay the increased rate," and that Duke Energy Carolinas has some supplementary programs to help customers "with the least ability to pay," aided by funding from the federal Inflation Reduction Act. See id. The majority apparently reaches this conclusion even as it agrees with the Attorney General that the Carolinas order's customer interest analysis was a near verbatim copy of the Progress order. Contrary to the majority, I find it difficult to conclude that the Commission adequately took account of customer interests in the Carolinas rate order where the Commission's analysis was substantively the same as in the Progress order yet the

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Earls, J., concurring in part and dissenting in part former was thirty basis points higher. The Commission apparently employed the exact same analysis to reach different results. By analogy, the Commission determined that 1+1 = 2 in the first order and 1+1 = 3 in the second. This does not, in my view, show that the Commission took its obligations to customers "seriously"

and "duly considered" their interests. I would vacate and remand.

II. Rate Base Treatment to Hazardous Tree Removal

Although less consequential, I also dissent from the majority's decision to affirm the Utilities Commission's treatment of a hazard tree removal program as a capital expense. In my view, this kind of vegetation management practice is indistinguishable from other routine vegetation management practices that are properly classified as operating expenses. It does not meet the statutory criteria for a capital expense eligible for return. I would vacate this part of the Commission's decision too and remand for removal of this project from the rate base and for recalculation of Duke Energy Carolinas' operating expenses to account for this change.

Public utilities have a significant financial incentive to classify their expenses as "capital" rather than "operating" because only capital expenses earn a return for the utility. Thornburg, 325 N.C. at 475. Capital expenses are distinct from "operating expenses" under traditional ratemaking and performance-based regulation. N.C.G.S. § 62-133(b)(1), (3) (2023) (distinguishing "property used and useful" from "reasonable operating expenses" and affording rate base treatment to the former only); id. § 62-

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Earls, J., concurring in part and dissenting in part 133.16(c)(1)(a) (2023) (distinguishing "capital investments" from "operating benefits, including operation and maintenance savings"). So while classifying an expense as

"capital" or "operating" can be an accounting question, in this case it is also a question of statutory interpretation. The Commission only has that power delegated to it by statute, Gen. Tel., 281 N.C. at 336, and the statutes govern when the Commission can award a return to certain capital expenses. N.C.G.S. §§ 62-133, -133.16 (2023). Statutory interpretation is a question of law reviewed de novo. See Va. Elec. & Power,

381 N.C. at 515. The Attorney General and the Carolina Utility Customers Association challenge the Commission's order for improperly allowing Carolinas' hazard tree removal program to be treated as a capital project. They allege that this decision was in excess of the Commission's statutory authority because the program is quintessentially an operating program to manage vegetation growth and maintain the utility's provision of services. See N.C.G.S. § 62-94(b)(2) (2023). I agree and would hold that the Commission does not have statutory authority to award a return on this operating program estimated to cost $71.6 million.

The record showed that Duke Energy Carolinas' hazard tree removal program is one aspect of its overall vegetation management program. This overall program has been routine, or "cycl[ical]" since after 2013. Other parts of Carolinas' vegetation management program are classified as operating expenses, according to the Commission. Trimming trees along existing property lines, for example, is routine

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Earls, J., concurring in part and dissenting in part maintenance and classified as an operating expense. Similarly, "herbicide management" and "post outage vegetation management" are routine maintenance and thus are operating expenses not entitled to a return. Within this vegetation management program, the hazard tree program manages trees "which lie[ ] outside [Duke Energy Carolinas'] rights-of-way." The program identifies and removes "structurally unsound, dying, diseased, leaning or otherwise defective trees that could strike electrical lines or equipment" from beyond Carolinas' existing property. This routine maintenance of existing corridors is distinct from Carolinas' efforts to clear trees to construct a new right-of-way or building. The costs of clearing trees for a new right-of-way are statutorily classified as eligible for rate base treatment. N.C.G.S. § 62-133(b)(1a), (4), (4a) (2023) (allowing a return for some newly purchased rights-of-way and costs related to new construction in progress). In contrast, hazard tree removal maintains existing rights-of-way and is

"performed in conjunction with normal trimming cycles."

This type of routine tree management is a classic operating expense not eligible for rate base treatment. See operating expense, Black's Law Dictionary (12th ed. 2024) ("An expense incurred in running a business and producing output."). Just as the costs associated with trimming trees are operating expenses, so are the costs associated with routinely cutting them down. Federal regulators have concluded the

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Earls, J., concurring in part and dissenting in part same.¹³Thus, the latter is not a "capital investment" eligible for rate base treatment. N.C.G.S. § 62-133.16(c)(1)(a).

Nor is it "property used and useful." Id. §§ 62-133(b)(1), -133.16(c)(1)(a). Cutting down trees on someone else's property is hardly usefully using your own property under the ordinary meaning of those words.

Notably, the Commission offered no reasons why it classified costs associated with maintaining trees on the right-of-way as operating while those off the right-of- way are capital. Why does the tree being on someone else's property transform this operating expense into a capital one? The Commission did not say nor does any evidence in the record appear to provide an explanation.

The majority gestures to the "permanent" or long-term benefit of cutting down these trees that helps the company maintain services. See majority supra Section III.C. But whether something is permanent is not a useful standard for whether an item is a capital or operating expense. Surely any routine efforts to maintain reliable service for a business whose main asset is physical property has a long-term benefit. Of course, routinely maintaining physical equipment redounds to a long-term

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Earls, J., concurring in part and dissenting in part benefit—but cleaning equipment or periodically changing the oil for an expensive machine, for example, are classic operating expenses, not capital ones. Such a broad interpretation of a "capital investment" would allow public utilities to impermissibly aggrandize their returns. And Chapter 62's particularly phrased language—"capital investments, net of operating benefits, associated with a set of discrete and identifiable capital spending projects to be placed in service during the first rate year

. . . [and] used and useful during [subsequent] rate years"—is not so expansive. See N.C.G.S § 62-133.16(c)(1)(a).

In any event, it is curious to me that anything associated with vegetation management could in fact be "permanent." Presumably Duke Energy is not in the habit of constructing power lines next to hazardous trees. The issue is simply that vegetation grows. Saplings become trees, and trees can eventually become

"hazardous." Public utilities may not categorize operating expenses as capital ones on the mistaken premise that some kinds of vegetation will somehow remain static.

III. Electric Vehicle Charging Decoupling and Interclass Subsidy Reduction

As to the other issues on appeal, I concur with the majority's analysis and write separately to underscore narrow points.

Regarding the majority's interpretation of incremental electric vehicle charging to be exempt from the decoupling mechanism, I concur with the majority that the clear legislative intent here was to "preserve the electric public utility's incentive to encourage electric vehicle adoption." See majority supra Section III.B &

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Earls, J., concurring in part and dissenting in part n.9. I also agree with the Attorney General that this language must mean that the public utility cannot simply sit back and take no action at all while reaping the benefit of new electric vehicle adoption. The statute clearly contemplates that the utilities will act "to encourage electric vehicle adoption" in order to take advantage of this exclusion opportunity. See N.C.G.S. § 62-133.16(c)(2) (2025).

As the majority notes, here Duke Energy stipulated in both rate orders that it would work with the Public Staff and industry representatives to develop and file electric vehicle tariffs and programs to obtain accurate estimates of revenue from electric vehicle charging usage. The record also indicated that Duke Energy operates public-facing programs that educate consumers about costs and opportunities associated with electric vehicle adoption, including the Make-Ready Credit Program, through which Duke Energy "will defray part of the cost of installing the infrastructure necessary to charge [electric vehicles]." See majority supra Section III.C n.11. This stipulation and record evidence supports that procedures have been agreed upon that will position Duke Energy to continue incentivizing electric vehicle adoption in order to have the benefit of excluding these revenues from the decoupling mechanism, consistent with legislative intent.

Second, on the Commission's approval of the 10% reduction in interclass subsidies for Duke Energy in both rate orders, I agree with the Majority's explanation of why the Commission did not err here, particularly as it relates to the scope of the word "practicable" in the context of this statute and the interrelation of subsections

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Earls, J., concurring in part and dissenting in part

(b) and (d). See majority supra Section III.A; N.C.G.S. § 62-133.16(b), (d) (2025). In my view, the Carolina Utility Customers Association's argument that the Commission erred by approving the 10% reduction without having established that uniform reductions between 10% and 25% were not practicable is particularly unpersuasive in light of the long-standing burden-shifting framework that applies in utilities cases.

By statute, the public utility has the burden of proof to show that a proposed rate change "is just and reasonable." Id. § 62-134(c) (2025). Nonetheless, "the reasonableness and prudence of those costs is 'presumed' unless the Commission or an intervenor adduces sufficient evidence to cast doubt upon their reasonableness or prudence, at which point the burden to make an affirmative showing of the reasonableness of the costs in question shifts to the utility." State ex rel. Utils. Comm'n v. Stein, 375 N.C. 870, 908 (2020) (citing State ex rel. Utils. Comm'n v. Intervenor Residents of Bent Creek/Mt. Carmel Subdivisions, 305 N.C. 62, 76 (1982)). Because we generally assume the legislature knows the law and legislates in reference to it, see C Invs. 2, LLC v. Auger, 383 N.C. 1, 13 (2022), I would expect similar burden-shifting principles to apply in this context and under the new performance-based regulation framework unless the legislature indicates otherwise. As the majority explains, the Carolina Industrial Group for Fair Utility Rates II proposed a 25% uniform interclass subsidy reduction, which the Commission rejected as impracticable and likely to cause severe rate shock. See majority supra

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Earls, J., concurring in part and dissenting in part Section III.A. The Commission instead adopted a 10% reduction as practicable after hearing evidence to that effect. See id. Absent some quantum of affirmative evidence that a percentage reduction between 10% and 25% was the appropriate rate to

"minimize[ ]" interclass subsidies "to the greatest extent practicable," neither the Commission nor Duke Energy had the affirmative responsibility to prove a negative- -i.e., that some unspecified other percent reduction would not also work.

IV. Conclusion

I dissent in part from the majority's decision to affirm the return on common equity award, which I conclude unlawfully fails to give weight to the considerable consumer interests at stake and is the result of arbitrary and capricious reasoning and conclusions that are unsupported by substantial evidence in the record and inadequately took account of customer interests. I also dissent from the Commission's decision to award rate base treatment to Duke Energy Carolinas' routine vegetation management practice of removing hazard trees. As to the Majority's other conclusions, I respectfully concur.

Justice RIGGS joins in this dissenting opinion.

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