State Ex Rel. Utilities Commission v. CF Industries, Inc.

BROCK, Justice. The question presented by this appeal is whether or not the Commission may allow an undercollection of $518,610 accrued by NCNG during the year prior to October 31, 1976 to be rolled forward to offset an overcollection of $625,586 during the following annual period ending October 31, 1977; and thereby create a net cash refund to NCNG customers in the amount of only $106,976. For the reasons which follow we hold that the decision of the Commission to allow a roll in of the past undercollection was proper. Appellant argues to this Court that a CTR undercollection must be treated like any other utility under collection, and may not be collected from customers of that utility in a subsequent period. In the area of general rate making, it is settled law in this jurisdiction that the Commission has no authority to allow a public utility to increase the rates of its present customers to collect a past deficit. Utilities Commission v. Edmisten, 291 N.C. 451, 232 S.E. 2d 184 (1977); Utilities Commission v. City of Durham, 282 N.C. 308, 318, 193 S.E. 2d 95, 102 (1972). Justice Lake speaking for the Court in Edmisten noted the rationale behind this rule. “Such rate making throws the burden of such past expense upon different customers who use the service for different purposes than did the customers for whose service the expense was incurred.” Id. at 470, 232 S.E. 2d at 195. We have concluded, however, that a rate adjustment pursuant to an annual CTR “true up” is not a change in a fixed general rate, and thus the rate adjustment in this case which allowed NCNG to offset its overcollection by its previous undercollection does not *508 constitute retroactive rate making prohibited by Utilities Commission v. Edmisten, 291 N.C. 451, 232 S.E. 2d 184 (1977). The CTR was established as part of NCNG’s basic rate structure by order of the Commission on 12 December 1974, and was implemented at a time of uncertainty of the continuing availability of gas supplies. The CTR’s purpose was to prevent NCNG and its customers from making continued appearances before the Commission to request general rate adjustments with each increase and decrease of natural gas supplies. The adjustments would have been necessary to maintain the same “Base Period Margin” approved by the Commission. The CTR eliminates the need for such procedure by allowing NCNG to base its price per volumetric unit on projected volumes of gas which it might receive over a yearly period. At the end of the yearly period when the actual amount of gas received during that period is known, the rate is “trued up” to reconcile the rate charged with the amount of gas received. This “true up” efficiently maintains the NCNG “Base Period Margin” approved by the Commission at the general rate hearing of 12 December 1974. In Utilities Commission v. Public Service Company, 35 N.C. App. 156, 241 S.E. 2d 79 (1978) our Court of Appeals upheld the use of a formula known as the Volume Variation Adjustment Factor (VVAF), which provided for the yearly “true up” of projected volumes of natural gas in a manner identical to that of the CTR. In distinguishing this “true up” from prohibited retroactive rate making in a general rate case, the Court of Appeals noted: “The ‘true’ VVAF rate is based on actual curtailment experience. The ‘true’ VVAF is the incremental rate necessary to allow Public Service to maintain its base period margin. Since the VVAF actually charged is based upon projected curtailment levels, it must be trued-up periodically to reconcile it with actual experience.” Id. at 162, 241 S.E. 2d at 83. Also in the case at bar, prior to the annual “true up” of the CTR, NCNG cannot know the actual rate which must be charged in order to maintain its approved “Base Period Margin.” Until the annual “true up,” no firm rate has been “fixfed], established or allow[ed]” for the preceding year as required by G.S. 62-130, and thus without the “true up” there is no general rate established for that year. The CTR merely creates an estimated rate based *509 on projected gas availability. It is a system designed by the Commission to enable NCNG to maintain its general rate previously set by the Commission in September of 1974, without the necessity of a general rate hearing with each fluctuation in the availability of natural gas. Therefore like the “true up” of the VVAF, the “true up” of the CTR is a correction of an estimated rate, and does not constitute retroactive general rate making. We also note that in the case of an approved general rate, “a utility may not properly be denied the right to charge such a rate, for the present use of its service, for the reason that, . . . the utility earned an excessive rate of return due to the fact that an expense which it was expected to incur ... [in a previous period] did not materialize.” Utilities Commission v. Edmisten, 291 N.C. 451, 469-70, 232 S.E. 2d 184, 194 (1977). Such is not the case with excess rates collected pursunt to the CTR. As in the case sub judice if the rate charged by NCNG during the annual period, prior to the “true up,” exceeds the rate necessary for NCNG to maintain its “Base Period Margin,” the NCNG is required by the Commission to refund the excess. We therefore conclude that the CTR is not a general fixed rate, and that rolling forward NCNG’s past undercollection does not constitute prohibited retroactive rate making. If pursuant to the CTR, NCNG is required to refund the excess revenues collected during the year ending October 31, 1977, then it is entitled to reduce the amount of this refund by its undercollection due to an error in computing its “Base Period Margin” during the year ending October 31, 1976. The decision of the Court of Appeals affirming the Commission’s order that NCNG refund the amount of $315,389 is affirmed. Affirmed. Justice CARLTON did not participate in the consideration or decision of this case.