Utilities Comm'n v Carolina Water Svc., 155 NC App 777 (01-1340) 01/21/2003

Appeal by respondent Carolina Water Service, Inc. from order entered on 31 May 2001 by the North Carolina Utilities Commission. Heard in the Court of Appeals 21 August 2002.

    Attorney General Roy Cooper, by Assistant Attorney General Leonard G. Green, for intervenor-appellee, Attorney General - North Carolina Department of Justice.

    James D. Little, for intervenor-appellee, Public Staff - North Carolina Utilities Commission.

    Hunton & Williams, by Edward S. Finley, Jr., for respondent- appellant.

    HUDSON, Judge.

Background
    In the mid 1980's, Ammons Dare Corporation (Ammons) acquired approximately 400 acres of property in the Village at Nags Head (Village), a residential and commercial tract of land locatedwithin the Town of Nags Head. Ammons later purchased Nags Head Village Service Company (Service Company), which had installed a sewer system in the Village. Initially, Service Company was a subsidiary of Ammons.
    On 31 July 1986, the North Carolina Utilities Commission issued a sewer utility franchise to Service Company to provide sewer treatment services for the Village. In its application for this franchise, Service Company stipulated that the sewer system would be built by Ammons, and that Ammons would recover the costs of construction of the sewer system as a part of its sale of lots in the Village. On 31 December 1986, Service Company merged with Ammons.
    Pioneer Savings Bank (Pioneer) was Ammons' mortgage lender for its development of the Village. In the early 1990's, Pioneer experienced financial difficulties and had to call in its $20 million development loan made to Ammons. Rather than pay Pioneer in cash, Ammons and Pioneer agreed that Ammons would transfer to Pioneer part of the 400 acres owned by Ammons in satisfaction of the debt. After the transfer, Ammons retained approximately 140 acres of the Village, which Ammons continued to develop and sell. Pioneer sold the transferred acreage.
    Ammons and Pioneer also agreed that Pioneer was authorized to transfer to its purchasers a total of 100,000 gallons per day (gpd) of sewerage treatment by Service Company. As Pioneer sold parcels of land, the purchasers acquired the right to connect to Service Company's sewer treatment system. This agreement included aprovision that land owners would not be required to pay anything further for connecting to Service Company's sewer treatment facilities. Purchasers paid for this right at the rate of $4.00 per gpd. Pioneer collected these fees and transferred them to Ammons.
    In 1993, First Citizens Bank acquired Pioneer. First Citizens continued to sell off the acreage owned by Pioneer in the Village, under the same agreement with Ammons, through a subsidiary named Intracoastal Holding Corporation (Intracoastal).

Service Company's 1997 Ratemaking Case in the Utilities Commission
    On 26 June 1997, Service Company sought Commission authorization to increase its sewer usage rates. Service Company sought to add the treatment facilities expansion costs to the Company's rate base. Service Company's usage rates were $36.25 per month and it sought to increase the rates to $42.00 per month. During the course of its investigation in the rate case, Public Staff discovered the payments to Ammons by buyers of Village real estate for connection rights. Public Staff documented Service Company's receipt of over $528,000.00 in connection fees.
    The primary issue in the rate case, therefore, was whether the monies collected by Ammons from Pioneer and Intracoastal for sewer connection rights should be considered “Contributions In Aid of Construction,” as asserted by Public Staff, or as attributable to Ammon's cost of building sewer collection lines and thus included in Service Company's rate base, as argued by Ammons.    On 29 May 1998, the Utilities Commission Hearing Examiner concluded that these costs should not be included in Service Company's rate base. This conclusion was founded upon the original stipulation of Ammons, as the development company, that Ammons would build the collection system and recover the costs from land sales. The Hearing Examiner further ruled that the monies received by Ammons for sewer connection rights were “Contributions In Aid of Construction” attributable to Service Company's costs of expanding the treatment plant. Based upon this, he determined that Service Company had a rate base of -$127,779.00 and ordered Service Company to reduce its rates to $31.70. He further denied Service Company's request to withdraw its rate case application.
    During the pendency of Service Company's rate case, on 5 May 1998, Utilities, Inc. (UI), the parent company of Carolina Water Service, Inc., of North Carolina (CWS), purchased the Service Company sewer franchise from Ammons for $500,000.00. Included in the UI/Ammons Asset Purchase Agreement (“UI/Ammons APA”) was a document titled “Summary of Committed Facility Flows, Nags Head Village Service Company, State of North Carolina, Department of Environment, Health and Natural Resources, Permits” (“the Summary”). This document listed the names of the various subdivisions within the Village, the sewer flow permit date and number, and the capacity of sewage flow allotted to each subdivision.
    In its application to the Commission for approval of the transfer filed 15 May 1998, UI acknowledged the pendency of ServiceCompany's rate case and stipulated that it agreed to be bound by the Commission's determination. On 27 July 1998, UI petitioned to intervene in the Service Company rate case, but the Commission denied this petition.
    On appeal of the Hearing Examiner's order recommending the decrease in rates, Service Company asked the full Commission to either overturn the recommended order or to allow Service Company to withdraw its rate increase application. On 27 August 1998, the Commission granted Service Company's request to withdraw its application. Public Staff filed exceptions and notice of appeal from the Commission's order.
    UI and the Public Staff then entered into negotiations in an attempt to arrive at mutually agreeable terms under which UI could acquire the Service Company sewer system. On 25 January 1999, the parties stipulated that the Service Company system would become part of UI's subsidiary, CWS, applying CWS's system-wide rates of $30.55 per month. It was further agreed that CWS's rate base in the Service Company system would be $400,000.00. The stipulation did not address the issue of the fees paid by purchasers of Village property to Ammons for sewer connection rights. However, the Public Staff communicated to UI its position that if a consumer could provide evidence that a connection fee had been paid to Ammons by the consumer, or on her behalf, then that consumer should not be required to pay another connection fee to CWS.
    On 11 February 1999, the Commission entered an Order granting the transfer of Service Company's certificate to CWS, including theadoption of the stipulation between UI and the Public Staff concerning rates, rate base and the adoption of CWS's uniform connection fee of $1,100.00 per residential connection.

The Present Case
    This dispute arises from complaints filed with the Commission against CWS by several property owners in the Village. Within ten months, these property owners filed eleven complaints alleging that CWS had refused to honor sewer connection rights previously obtained by payments made to Ammons. The Commission consolidated these complaints into one action.
    On 15 February 2001, Hearing Examiner Larry Height issued a Recommended Order ruling that any potential CWS ratepayer owning a structure on property for which Ammons had been granted a sewer construction permit listed on the Summary (contained in the UI/Ammons APA) was exempted from paying another connection fee. The Summary list included all complainants.
    On 31 May 2001 the full Commission, after hearing arguments from all parties, affirmed and adopted the Recommended Order issued by Hearing Examiner Height on 15 February 2001. CWS appeals from this decision.
    Appellant brings forth 27 assignments of error in one argument, broken down into eight sub-parts. First, we will address appellant's contention that the Commission's findings of fact and conclusions of law are not supported by the evidence.
    The General Assembly has defined scope of appellate review ofa decision entered by the Utilities Commission in G.S. . 62-94, which provides that a reviewing court:
        (b) . . . may affirm or reverse the decision of the Commission, declare the same null and void, or remand the case for further proceedings; or it may reverse or modify the decision if the substantial rights of the appellants have been prejudiced because the Commission's findings, inferences, conclusions or decisions are:
            (1) In violation of constitutional provisions, or
            (2) In excess of statutory authority or     jurisdiction of the Commission, or
            (3) Made upon unlawful proceedings, or
            (4) Affected by other errors of law, or
            (5) Unsupported by competent, material and substantial evidence in view of the entire record as submitted, or
            (6) Arbitrary or capricious.

N.C. Gen. Stat. § 62-94(b)(1) to (6) (2001).
    On appeal, “the rates fixed or any rule, regulation, finding, determination, or order made by the Commission . . . shall be prima facie just and reasonable.” N.C. Gen. Stat. § 62-94(e) (2001). “[W]here the Commission's actions do not violate the Constitution or exceed statutory authority, appellate review is limited to errors of law, arbitrary action, or decisions unsupported by competent, material and substantial evidence.” State ex rel. Utilities Comm. v. Public Staff, 123 N.C. App. 43, 45, 472 S.E.2d 193, 195 (1996). Substantial evidence is “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.” Utilities Comm. v. Coach Co., 19 N.C. App. 597, 601, 199 S.E.2d 731, 733 (1973) (citations omitted), cert. denied, 284 N.C. 623, 201 S.E.2d 693 (1974). Further, “all findings of fact made by theCommission, which are supported by competent, material and substantial evidence, are conclusive. State ex rel. Utilities Comm. v. The Public Staff, 317 N.C. 26, 34, 343 S.E.2d 898, 903 (1986).
    “In determining whether to uphold the Commission's actions, the appellate court shall review the whole record.” State ex rel. Utilities Comm. v. Public Staff, 123 N.C. App. 43, 46, 472 S.E.2d 193, 195 (1996); N.C. Gen. Stat. § 62-94(c) (2001). In reviewing the whole record, “the court may not replace the Commission's judgment with its own when there are two reasonably conflicting views of the evidence.” Id.
    The findings of fact in the Recommended Order adopted by the Commission provided, in pertinent part, the following:
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        5. Ammons charged developers and others fees for the purpose of allowing connection to its sewer utility system. The amount of the fees was based upon the amount of sewage flow that would be expected by the proposed structure connecting to the sewer utility system.

        6. Ammons represented to the developers and others that the payment of these fees was required up-front prior to receiving permission from the Division of Water Quality or the Town of Nags Head before a building permit could be issued and construction begun on the structure to be connected.

        7. Exhibit No. 2C attached to the May 5, 1998, contract between CWS and Ammons is a summary of committed flows for which sewer extension permits have been issued, with each committed flow representing the receipt of payment by Ammons of connection fees.

        8. The fees paid by developers and others for the purpose of obtaining a connection to thesewer utility system are considered to be contributions-in-aid-of-construction to Ammons, and the payment of such fees represents the fulfillment of all obligations necessary for each developer and others to obtain sewer utility service from Ammons for the designated area identified in Exhibit No. 2C.

    Based on the findings and conclusions, the Commission also adopted the following:
        1. That CWS shall not charge a connection fee to any customer identified in the areas represented by the sewer extension permits listed in Exhibit No. 2-C of its contract with ADC, dated May 5, 1998. CWS is free to charge its connection fee to customers not included in these areas, pursuant to its tariff approved in Docket No. W-354, Sub 216, dated February 11, 2000.

        2. That any connection fees that CWS has collected from customers for properties in areas represented by the sewer extension permits listed in Exhibit No. 2-C of its contract with ADC, dated May 5, 1998, should be refunded within 60 days to the party who paid the fee.

        3. That CWS shall file and provide to the Commission and the Public Staff within 90 days of the date of this Order a report of the connection fees refunded.

After a review of the whole record, we find that there is competent, material and substantial evidence to support these findings and therefore we affirm the Commission's Final Order.
    Graham Kennedy, Senior Vice President of First Citizens Bank, testified that first Pioneer, and later Intracoastal, had an agreement with Ammons that specified that the transfer of parcels in the Village would be supplemented by the transfer of access to Service Company's sewer facility at the rate of $4.00 per gpd. Under the Ammons/Pioneer agreement, monies that Intracoastal received from purchasers of Village properties would be passed on to Ammons, dollar for dollar. Once the monies were received by Ammons, each lot in that parcel was entitled to connect to Service Company's sewer facility without paying additional fees. In total, Intracoastal received and passed on to Ammons $400,000.00 for 100,000 gallons of sewage treatment access.
    Eddie Goodrich, general partner of G&W Partnership and purchaser of tracts of land in the Village, testified that G&W paid Ammons, through Intracoastal, a total of $252,000.00 for access to Service Company's sewer facility. It was G&W's understanding that these were sewer connection fees and were paid to Ammons in order that Ammons could obtain the necessary sewer flow permits from the North Carolina Department of Environment, Health and Natural Resources (DEHNR) to enable G&W, or its successors, to build on these tracts.
    Mr. Goodrich further testified that no plan for a development within the Town of Nags Head can be approved until the developer submits proof that he has the right to connect and deliver the subdivision's projected sewer flow to a treatment facility. To fulfill this requirement, developers had to provide the Town of Nags Head with a permit or statement from DEHNR verifying their access to sewer treatment facilities. Because Ammons owned Service Company and Service Company owned the Village's only sewage treatment facility, any developer who wanted to obtain approval for a project had to first pay Ammons for the right to connect to thesewage treatment facility.
    Jesse Cobb, a builder/developer in the Nags Head area, purchased parcel “O” in the Village from Intracoastal. He paid Ammons, through Intracoastal, a total of $83,640.00 in sewer access fees. Mr. Cobb understood that these fees were required to obtain the right to connect all lots in Parcel “O” to the Service Company's treatment plant.
    Jack Floyd, a Utilities Engineer with the Water Division of the Public Staff, testified in detail concerning the extensive investigation conducted by Public Staff when it first learned that Ammons was receiving fees based upon its promise to allow customers to connect to the Service Company's sewer facility. The investigation began with Service Company's 1997 application for a rate change.
    Based upon the Town's requirement for proof of sewer access, and Ammons' requirement that developers pay Ammons before Ammons would obtain a DEHNR permit, Mr. Floyd testified that the Summary (of Committed Facility Flows contained in the UI/Ammons APA) evidences payment of connection fees for each Village subdivision listed.
    This testimony supports the Commission's conclusion that the fees paid to Ammons through Pioneer and Intracoastal should be considered prepaid connection fees.
    CWS next argues that the Commission was without authority to waive CWS's tariffed fees, and that it erred in retroactively validating the connection fees Ammons received from developers. Further, CWS argues that “[w]hen the Commission approved connection fees for CWS by its order in 1999, this order superseded any rate by contract Ammons established with Pioneer.”
    By statute, the Commission is given the authority to hear complaints against public utilities. N.C. Gen. Stat. § 62-73 (2001). G.S. . 62-60 affords the Commission general judicial authority to resolve such complaints and provides that:
        For the purpose of conducting hearings, making decisions and issuing orders, and in formal investigations where a record is made of testimony under oath, the Commission shall be deemed to exercise functions judicial in nature and shall have all the powers and jurisdiction of a court of general jurisdiction as to all subjects over which the Commission has or may hereafter be given jurisdiction by law.

N.C. Gen. Stat. § 62-60 (2002).
    Further, the Commission is
        vested with all power necessary to require and compel any public utility to provide and furnish to the citizens of this State reasonable service of the kind it undertakes to furnish and fix and regulate the reasonable rates and charges to be made for such service.
N.C. Gen. Stat. § 62-32(b) (2001) (emphasis added).
    As the Commission is vested with the authority to “fix and regulate the reasonable rates and charges,” it likewise has the authority to order CWS to honor the payments of connection fees already paid by the consumers listed on the Summary of Committed Facility Flows of the UI/Ammons APA.
    Finally, CWS argues that the Commission “failed to make appropriate findings of fact and to resolve material issues in thiscase,” regarding whether Ammons collected connection fees constituting a prepayment of CWS's tariffed connection fees.
    Pursuant to G.S. . 62-75, the complainants here bore the burden of proving that Ammons collected prepaid connection fees. See N.C. Gen. Stat. § 62-75 (2001). The Commission made and adopted findings of fact and conclusions of law indicating that they did. Based upon the testimony of Mr. Kennedy, Mr. Cobb, Mr. Goodrich and Mr. Floyd, as summarized above, we conclude that the Commission appropriately addressed these issues. Accordingly, this argument is without merit.
    The Order of the Commission is affirmed.
    Judges WYNN and CAMPBELL concur.
    (Judge Campbell concurred prior to 1/1/03).
    Report per Rule 30(e).

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