State Ex Rel. Utilities Commission v. Mead Corp.

78 S.E.2d 290 (1953) 238 N.C. 451

STATE ex rel. UTILITIES COMMISSION
v.
MEAD CORP.

No. 24.

Supreme Court of North Carolina.

November 4, 1953.

Jones & Jones, Franklin, and Joyner & Howison, Raleigh, for Nantahala Power & Light Co., appellant.

John R. Jordan, Jr., Blanchard & Jordan, Raleigh, David M. Hall, Sylva, Boyd Compton, Smith, Schnacke & Compton, Dayton, Ohio, for Mead Corp., appellee.

DEVIN, Chief Justice.

This proceeding was instituted by the application of the Nantahala Power & Light Company to the Utilities Commission for authority to increase its rates for electric power distributed to customers for industrial purposes. Consequent upon an order by the Commission authorizing the increase and later denying the petition of Mead Corporation to rehear, the matter came on to be heard, on appeal, by the Judge of the Superior Court. From an adverse judgment in the Superior Court the appellant, the Nantahala Power & Light Company brings the case here for review.

The statute governing procedure before the Utilities Commission prescribes the rules and extent of review on appeal from an order of the Commission. G.S. § 62-26.10. This statute provides that on such appeal to the Superior Court the review shall be on the record certified by the Commission, and the cause heard by the judge without a jury who may reverse or modify the decision of the Commission if substantial rights have been prejudiced because of findings and conclusions which are "unsupported by competent, material and substantial evidence" in view of the entire record submitted. State ex rel. Utilities Comm. v. Atlantic Coast Line R. Co., 235 N.C. 273, 69 S.E.2d 502, 503; State ex rel. Utilities Comm. v. Fox, 236 N.C. 553, 73 S.E.2d 464. The statute further provides that upon appeal to the Superior Court the finding, determination or order of the Commission shall be "prima facie just and reasonable." G.S. § 62-26.10. Appeals from the Utilities Commission are confined to questions of law, and on appeal the appellant may not rely upon grounds for relief which were not set forth in his petition for rehearing by the Commission. State ex rel. Utilities Comm. v. Queen City Coach Co., 233 N.C. 119, 63 S.E.2d 113. There is no provision for additional findings of fact by the judge for the purpose of determining the validity of the order of the Commission brought in question. State ex rel. Utilities Comm. v. Fox, supra.

At the outset in the statement of findings and conclusions by the Utilities Commission it was stated that the principal question presented was "whether the arrangement between Alcoa and its subsidiary, Nantahala Power Company, amounts to a preference and an unlawful discrimination in favor of the parent company and to the prejudice of the other customers of the applicant."

The statute G.S. § 62-70 prohibits discrimination by a public service corporation in the following language: "No public utility shall, as to rates or services, make or grant any unreasonable preference or advantage to any corporation or person or subject any corporation or person to any unreasonable prejudice or disadvantage. No public utility shall establish or maintain any unreasonable difference as to rates or services either as between localities or as between classes of service. The Commission may determine any questions of fact arising under this section."

The obligation of a public service corporation to serve impartially and without unjust discrimination is fundamental. Hilton Lumber Co. v. Atlantic Coast Line R. Co., 136 N.C. 479, 48 S.E. 813; Garrison v. Southern R. Co., 150 N.C. 575, 64 S.E. 578; North Carolina Public Service Co. v. Southern Power Co., 179 N.C. 18, 101 S.E. 593, 12 A.L.R. 304; Salisbury & S. R. Co. v. Southern Power Co., 180 N.C. 422, 105 S.E. 28. It is not essential that consumers who are charged different rates for service should be competitors in order to invoke this principle. Texas Power & Light Co. v. Doering Hotel Co., Tex.Civ.App., 147 S.W.2d 897. There must be substantial differences in service or conditions to justify difference in rates. There must be no unreasonable discrimination between those receiving the same kind and degree of service. Horner v. Oxford Water & Electric Co., 153 N.C. 535, 69 S.E. 607; Postal Telegraph-Cable Co. v. Associated Press, 228 N.Y. 370, 127 N.E. 256.

The protestant, the Mead Corporation, does not directly attack the action of the Commission in authorizing the rate increase applied for as being in itself arbitrary, unreasonable or unjust, but it does contend that the whole question of rates is bound up in the basic and determinative question of the admitted substantial difference in the rates proposed to be charged the Mead Corporation, an industrial customer, and those for which Alcoa, also an industrial customer, is now and will continue to be charged, and that the order of the Commission would result in unreasonable discrimination and subject the Mead Corporation to an unreasonable disadvantage.

The position of the Nantahala Company is that the proposed increase in rates would still leave Mead in the position of paying a less rate than that charged by other power companies in other sections; that the difference in rates does not under the facts of this case constitute an unreasonable preference or discrimination, and that the Mead Corporation is not subjected to any unreasonable prejudice or disadvantage. It is contended that the difference in rates is reasonably based upon the distinction between primary and secondary power, the protestant having primary or dependable power, and Alcoa taking only what is left over or "dumped" upon it; and that there is a difference in the service afforded users of primary power and that received by users of secondary power; that line losses are borne by Alcoa and not by Mead; that Nantahala is entitled to a reasonable return on its investment of some seventeen million dollars, and that with the increase in rates it would still be unable to earn a profit; that Nantahala and Alcoa were not competitors, and that the rates proposed apply to different classes of service.

Judge Gwyn studied the evidence and the findings of the Commission, and set out his conclusions thereon and the reasons therefor at length. He concluded that "the record contained no evidence legally sufficient to support the interpretation given it by the Utilities Commission"; that the record was susceptible to no other interpretation but that the order of the Commission would allow discrimination. He held that the record evidence did not support the finding that the difference in rates to two industrial users of electric power could be attributable to an arbitrary designation of one as primary and the other as secondary.

The facts are not in dispute. Upon them the Utilities Commission decided that "in any view of the facts of this case we are unable to find any unlawful discrimination against the North Carolina customers of the applicant (Nantahala), or any just reason for denying the application for the proposed increase in rates."

The judge held, however, that the record contained no evidence legally sufficient to support this interpretation, and upon that ground reversed the order of the Commission. Whether the findings and conclusions of the Utilities Commission were "unsupported by competent, material and substantial evidence in view of the entire record" presented a question of law for the decision of the Court. 42 A.J. 635. In that view Judge Gwyn held as a matter of law that the record was susceptible of no other interpretation but that the order of the Commission would allow an unreasonable discrimination, and that the rate increase based upon and concomitant with such discrimination was improvidently authorized. From an examination of the record we are inclined to the view that the ruling of the court below in principle should be upheld.

Here, according to the record, Alcoa owns all the capital stock of Nantahala which represents an investment of seventeen million dollars in hydroelectric plants in Western North Carolina. Presumably Alcoa furnished the capital for this enterprise. Alcoa uses electric power in enormous volume for the production of aluminum. It takes 81.65% of Nantahala's total generation of electric power for which it pays less than the cost of producing and distributing it. It derives no dividend or income from its ownership of Nantahala stock. Nantahala has other customers, including Mead, who are charged a higher rate and from whom it derives the major portion of its income. Nantahala has continued to expand its production through the years by adding to the number of its hydroelectric plants, but the percentage of resultant electric energy devoted to Alcoa has remained fairly constant. The more Nantahala expands the greater the volume of electric current Alcoa obtains at 2.3 mills per kilowatt hour. And Nantahala continues to derive the greater part of its revenue from customers other than Alcoa who consume only 18.35% of its power and are charged approximately twice as much per kilowatt hour as Alcoa pays.

The increase in rates applied for by Nantahala applies only to the industrial customers other than Alcoa. No increase in Alcoa's rate is contemplated. Among the reasons for presently asking authority to increase rates is that it will provide more revenue and enable Nantahala to put to use additional hydroelectric plants. The burden of rate increase is placed upon one particular group of customers.

Since Alcoa owns the entire stock of Nantahala ordinarily their dealings between themselves would be a matter of bookkeeping. But Nantahala is a separate legal entity, a corporation created under the laws of North Carolina and endowed with the powers, duties and obligations set forth in its charter, and as a corporation engaged in the production and distribution to the public of an essential utility it must be amenable to and required to observe all the laws and regulations prescribed for public service corporations including the statutory prohibition against unreasonable discrimination among users of its service. Notwithstanding Alcoa is the parent corporation and Nantahala the subsidiary, when the dealings between them affect the rights of others, it cannot by unreasonable discrimination differentiate between customers entitled to the same kind and degree of service. North Carolina Public Service Co. v. Southern Power Co., supra. Having received the benefit of its chartered privileges, including the power of eminent domain, Nantahala must be chargeable with corresponding responsibilities in a business affected with a public interest. Griffin v. Goldsboro Water Co., 122 N.C. 206, 30 S.E. 319, 41 L.R.A. 240. It was also in evidence from the director of accounting of the Utilities Commission that considering only the revenue afforded by customers using 18.35% of total energy, in relation to that proportion of capitalization and expense, it would show a return of 6.52% whereas the service to all customers, including Alcoa at the rate paid, would show receipts less than operating expense. So it would seem the rate increase applied for would also increase the discriminations between Mead and Alcoa.

While the investment of Alcoa in hydroelectric plants and in the generation of electric energy from the flowing streams of Western North Carolina is to be commended, we do not think it is entitled to a return on its investment in Nantahala in the form of a preferential rate to the extent it would work to the disadvantage of other users of its electric service. 73 C.J.S., Public Utilities, § 27, page 1049. Nor is a parent corporation entitled to preference from its subsidiary. Public Utilities Comm. v. East Providence Water Co., 48 R.I. 376, 136 A. 447. There must be equal treatment of all customers of utilities similarly situated. Columbia Baking Co. v. Atlanta Gas Light Co., 78 Ga.App. 241, 50 S.E.2d 382. Both Alcoa and Mead are users of electric power for industrial purposes, the one to produce aluminum, the other, paper. But the rate proposed to be charged for this power as to Mead is double that charged to Alcoa.

Notwithstanding the evidence and the findings of the Utilities Commission showed that Alcoa was charged a rate for electric power less than half that charged Mead, the Commission concluded it was unable to find any unreasonable discrimination, and based this conclusion upon acceptance of the theory of primary and secondary power as contended by Nantahala. We agree with the judge below that the question of whether the power distributed to Alcoa was secondary power, and that to Mead primary, was to a large extent the mere application of different labels to that which is essentially the same. True, there was some difference in the service and in the expense of transmission, and to some extent the electric power received by Alcoa was what was denominated undependable, but these were in no way comparable to the difference in rates which was so glaring as to compel the inference that it was unreasonable and therefore unlawful. Rates may be fixed in view of dissimilarities in conditions of service, but there must be some reasonable proportion between the variance in the conditions and the variances in the charges. Postal Telegraph-Cable Co. v. Associated Press, 228 N.Y. 370, 127 N.E. 256. Classification must be based on substantial difference. State ex rel. Laundry, Inc., v. Public Service Comm., 327 Mo. 93, 34 S.W.2d 37.

The judgment of Judge Gwyn determined from the entire record including the findings and conclusions of the Utilities Commission that there was no substantial evidence to support the finding of the Commission that the applicant, the Nantahala Power & Light Company, sold to its parent corporation, Alcoa, only "secondary power"; that there was no evidence legally sufficient to support the finding "that the Utilities Commission was unable to find therefrom (the entire record) any unjust discrimination," and that the order of the Utilities Commission, based on findings without support in the evidence, authorizing an increase in rates by Nantahala for all users of electric power for industrial purposes except Alcoa, would be to allow unreasonable discrimination, and was erroneously entered.

To this extent the judgment below is affirmed, and the cause is remanded to the Superior Court of Macon County, to the end that it be remanded to the Utilities Commission for such findings and orders in the premises as may be proper, not inconsistent with this opinion.

Modified and affirmed.

BARNHILL, Justice (concurring).

While I concur fully in the majority opinion, there are certain facts appearing of record to which I wish to direct particular attention. The petitioner, a wholly owned subsidiary of Alcoa, began business as a public utility or quasi-public corporation in 1929. It then had one plant with a capacity of 1400 KWH. When the petition herein was filed it had increased its plants to seven with a capacity of 79,435 KWH—56.7 times greater than at the beginning. One plant has been put in operation since this proceeding was instituted. Two other plants are now in process of construction. This has been accomplished without increasing its capital stock or incurring any bonded indebtedness. The parent company has furnished the necessary funds.

Petitioner's fiscal year ends on June 30. During the fiscal year 1947 it delivered 92% of its total output to Alcoa, in 1948, 89%, in 1949, 90%, in 1950, 89%, in 1951, 84%, and in 1952, 81.35%. Mead paid 5.09 mills per KWH for the power it consumed, and Alcoa paid 2.3 mills which was approximately the cost of production. "The price paid by Alcoa is just about cost."

In 1952 Alcoa, which received 81.35% of petitioner's total production of power, paid only 47.3% of petitioner's total revenue while those who purchased only 18.65% paid 52.7% thereof.

Thus it appears that petitioner has sold to local consumers a minimum of 8% and a maximum of 18.65% of its total production during the past seven years. Why then this constant increase in productive capacity? Is not the answer self-evident?

In view of these and other facts appearing in the record, to assert that the electric power retailed to North Carolina customers constitutes all the primary power produced by petitioner and the total amount delivered to Alcoa is secondary power so as to justify the present and proposed discriminations in rates in favor of Alcoa, or to contend that this is a proper basis for the decided differential in rates serves only to challenge the intelligence of the Court.

But Alcoa is under contract to purchase all the secondary power produced by petitioner. By reason thereof, Alcoa is compelled at times to accept and pay for electric current it cannot use. So it is argued. I have no doubt the contract between petitioner and Alcoa, upon its face, is wholly sufficient to make it appear that it is a contract between a public service corporation and a customer for the purchase and sale of secondary power. No doubt every wherefore and whereas to that end is included, and not a jot or tittle is omitted. Even so, the fact remains that this record will not sustain the contention that more than 81% of petitioner's production is secondary power.

"Giving it the wrong label does not conjure away the reality, and no amount of judicial legerdemain can change its true character and make undependable that which is in fact dependable. * * * Calling it secondary power does not make it so."

Corporations must operate on a profit motive basis. Not so with petitioner. Financed as it is, it can afford—indeed it proposes—to operate at an apparent loss. By so doing it can evade the payment of its fair portion of State and Federal taxes.

Unquestionably local customers of petitioner enjoy special benefits from the arrangement now in existence between it and Alcoa, and the arrangement has contributed to the development of the extreme western section of North Carolina. Local customers are entitled to these benefits in exchange for the special advantages and privileges acquired and enjoyed by petitioner and its parent corporation. It could well afford to retail the minor percentage of its total product which it sells to local customers in exchange for these privileges. Certainly the mere fact its rates are lower than those of other companies who are not financed and controlled by a giant parent-customer does not justify increasing the cost to Mead by $2,000 per month so as to further protect Alcoa and assure the continued delivery to it, at cost, of more than 80% of petitioner's total output of electric power.

Judge Gwyn's judgment reversing the order of the Utilities Commission appears in full in the statement of facts which accompanies the majority opinion. I therefore refrain from quoting some of the more striking and thought-provoking comments and observations therein contained. See majority opinion, 78 S.E.2d 295 et seq. Suffice it to say at this time that they should command the careful attention of all the right-thinking citizens of the State.

Judge Gwyn possesses a fine judicial temperament and sound judgment. His fairness to all litigants is generally recognized. He is painstakingly deliberate in the discharge of his judicial duties. He has never posed as the guardian and protector of "the people" against the "predatory aims of entrenched wealth." I am therefore confident that he incorporated these pertinent comments in his judgment only after long and prayerful consideration. In my opinion, the facts disclosed by this record fully justify what he has to say.

Neither this Court nor his can give relief against the conditions he so graphically points out. Yet his comments should serve to give notice to the public officials or agencies, having the power to act, that the time is at hand when these conditions should receive prompt and careful attention. If they will only cut through the form to the substance, they will find just another hydroelectric power producing agency of Alcoa, retailing just enough of its production—less than 20%—to permit it to pose as a quasi-public corporation with the right to use the water power resources of this State, exercise the power of eminent domain, and enjoy the other monopolistic privileges accorded a public utility while it was, in fact, created and exists primarily to serve its master which seeks and must have low-cost hydroelectric power.

Fortunately, the corporations of North Carolina, both large and small, have diligently sought to exercise their corporate powers under the law in accord with the free enterprise concept of our form of government. Seldom indeed is a situation such as the one disclosed by this record brought to light in the course of litigation or otherwise. I am certain its parallel does not exist elsewhere in this State.

Perhaps some may think the question it poses is no concern of this Court or any of its members. Certainly this Court cannot remedy the condition in this proceeding. We may only decide the legal questions presented by the appeal. Even so, I would not surrender or forego the right to direct attention to the note of warning contained in Judge Gwyn's judgment in exchange for any office within the purview of our system of government.

It must be distinctly understood that nothing I have said is intended or should be construed as a criticism of attorneys who represent petitioner. It was entitled to counsel, and the attorneys selected are men of recognized ability and standing in the legal profession. They presented the cause of petitioner in a concise, logical, and forceful manner, in accord with the best traditions of the legal profession. In so doing, their conduct at all times has been above reproach.

I join the other members of the Court in voting to affirm the judgment entered in the court below.