The issue in this case is whether the Utilities Commission may pass on to the ratepayers the benefits of the Tax Reform Act of 1986 (TRA-86) through a rulemaking procedure rather than a ratemaking procedure. The Court of Appeals held “there is no authority either in our statutes or in the case law that allows rates to be adjusted by a rulemaking process.”
Utilities Commission v. Nantahala Power and Light Company,
One effect of the TRA-86, which was signed by the President on 22 October 1986, was to lower corporate tax rates from 46% to 34% effective 1 July 1987. On 23 October 1986, the Commission issued Docket No. M-100, Sub 113, which was entitled Order Initiating Investigation. While the docket numbering designation given this order was that of a rulemaking action, the order itself did not specifically say that the Commission was instituting a rulemaking action. The order was provisional in nature, generally requiring the affected utilities to determine the savings generated by the TRA-86 and place this amount in a deferred account pending further orders of the Commission. In this order, the Cоmmission noted:
This reduced tax rate when effectuated will have an immediate and favorable impact on the cost of providing the aforementioned public utility services to consumers in North Carolina. It is incumbent upon this Commission to take the appropriate action as required so as to preserve and flow through to ratepayers, as a reduction to public utility rates, any and all cost savings realized in this regard which would otherwise accrue solely to the benefit of the' companies’ stockholders.
The Commission further explained that it “opens this docket to examine and quantify the benefits to be derived by each utility ... arising from this tax reform,” in part because of the applicability *193 of the TRA-86 to all the utilities and the short period of time remaining until it became effective.
The Commission then ordered:
1. That effective January 1, 1987, the federal income tax and the related gross receipts tax components of the rates and charges of all electric, telecommunications, and natural gas distribution companies and all water and sewer companies with annual operating revenues in excess of $250,000 subject to the jurisdiction of this Commission shall be, and hereby are, ordered to be billed and collected on a provisional rate basis pending final dispоsition of this matter.
2. That effective January 1, 1987, each and every utility subject to the provisions of this Order shall place in a deferred account the difference between revenues billed under rates then in effect, including provisional components thereof, and revenues that would have been billed had the Commission in determining the attendant cost of service based the federal income tax component thereof on the Internal Revenue Code as now amended by the Tax Reform Act of 1986, assuming all other parameters entering into the cost of service equation are held constant.
3. That each and every utility subject to the provisions of this Order shall determine the dollar amount of the impact of the Tax Reform Act of 1986 on its annual level of income tax expense included in its North Carolina jurisdictional cost of service consistent with ordering paragraph No. 2 above and file same with the Chief Clerk of the Commission no later than November 30,1986. Said filing shall include all workpapers and a statement of all assumptions made in complying with the foregoing requirements. Further, each affected utility in conjunction with the foregoing shall file proposed rate adjustments giving effect to the reduction in its cost of service arising from the Tax Reform Act of 1986. Thе Commission will consider any additional information or comments any party may wish to offer.
On 10 November 1986, the Public Staff filed a motion recommending that each utility subject to the 23 October 1986 Order determine the dollar amount of impact which the TRA-86 had on it based on the test year for that utility as set in the utility’s *194 last general rate case. The Commission adopted the Public Staff’s motion in an Order Ruling On Motion issued 4 December 1986.
Nantahala filed a compliance with the Commission’s order on 15 January 1987. In that filing, Nantahala stated that it “strenuously objects to a requirement that it flow through as an (sic) reduction in its rates any decrease in federal income tax expense arising from the Tax Reform Act of 1986.” Nantahala based this objection on the fact that it was currently receiving only about an 8% rate of return while, in Nantahala’s last general rate case, the Commission authorized it to collect a 12.52% rate of return. Nantahala contended that the rates should only be adjusted when all components of the cost of service were examined rather than be adjusted based on the decrease of an isolated component of cost of service such as this tax decrease. Nantahala urged the Commission not to flow through the savings from this tax decrease unless it examined whether this decrease was offset by other items in the cost of service and whether the overall cost of service had actually decreased.
The Commission filed a final order on 20 October 1987, and this order was amended by an Order Modifying Order of October 20, 1987. The final effect of these two orders was that Nantahala and the other affected utilities had to calculate “[t]he rate reductions related to the tax savings from TRA-86” and “file only one set of tariffs in this docket decreasing rates effective January 1, 1988, to reflect the 34% federal corporate income tax rate.” Two Commissioners dissented from the order of 20 October 1987. Commissioner Tate stated that our statutes only allow rates to be set in general rate cases or in complaint cases. She explained that this procedure was neither a rate case nor a complaint case, and yet it decreased rates. Commissioner Cook concurred in the part of the order which affected Nantahala and dissented from the portion of the Order which flowed through less than 100% of the tax savings to the telephone subscribers.
Some utilities were not affected by this final order because they had either voluntarily complied with the order or were currently involved in rate cases. The telеphone companies as a group were allowed to offset part of their savings with revenue reductions previously ordered by the Commission, and, therefore, they were not affected by this final order. Water and sewer companies were likewise, as a group, treated differently from the rest of the utilities *195 in this order. Of all the utilities affected by the final order, only Nantahala appealed the Commission’s action to the Court of Appeals.
The Court of Appeals reversed the orders of the Utilities Commission as applied to Nantahala. The Public Staff and the Attorney General both filed petitions with this Court for discretionary review of the opinion of the Court of Appeals, and these petitions were allowed oh 5 April 1989. We now determine whether there is error in the decision of the Court of Appeals.
The Court of Appeals concluded that the Commission should have handled this matter in accordance with N.C.G.S. § 62-133, § 62-136, or § 62-137 which are the statutes setting out the procedures used in general rate cases or complaint proceedings.
Utilities Commission v. Nantahala Power and Light Company,
Chapter 62 of our General Statutes is entitled “Public Utilities” and sets out the organization and the operating procedures of the Utilities Commission. N.C.G.S. § 62-23 is entitled “Commission as ' an administrative board or agency.” This statute provides in part:
This Commission is hereby declared to be an administrative board or agency of the General Assembly created for the principal purpose of carrying out the administration and enforсement of this Chapter, and for the promulgation of rules and regulations and fixing utility rates pursuant to such administration .... The Commission shall separate its administrative or executive functions, its rule making functions, and its functions judicial in nature to such extent as it deems practical and advisable in the public interest.
*196 N.C.G.S. § 62-23 (1989) (emphasis added). The general powers of the Utilities Commission are set out in N.C.G.S. § 62-30: “The Commission shall have and exercise such general power and authority to supervise and control the public utilities of the State as may be necessary to carry out the laws providing for their regulation and all such other powers and duties as may be necessary or incident to the prоper discharge of its duties.” N.C.G.S. § 62-30 (1989).
N.C.G.S. § 62-31 is even more explicit in granting rulemaking authority to the Commission. This statute provides: “The Commission shall have and exercise full power and authority to administer and enforce the provisions of this Chapter, and to make and enforce reasonable and necessary rules and regulations to that end." N.C.G.S. § 62-31 (1989) (emphasis added). These statutes clearly authorize the Utilities Commission to promulgate rules for the utilities which it regulates. N.C.G.S. § 62-2 further defines the policy which the Commission is to carry out through the exercise of this power. In a list of eight policies of the Utilities Commission found in that statute, number one is “[t]o provide fair regulatiоn of public utilities in the interest of the public.” N.C.G.S. § 62-2(1) (1989).
While the Court of Appeals did not question the Commission’s general rulemaking authority, the court concluded that, as it interpreted our statutes, rates could not be changed through a rulemaking procedure. We find the authority for the Commission to use its rulemaking power in this case in the statutes cited above and in this Court’s approval of the rulemaking procedure used in
Edmisten III.
In
Edmisten III,
this Court upheld the Commission’s order promulgating a rule which allowed natural gas companies to participate in exploration and drilling programs to find new sources of natural gas. The companies would then make apрlication for rate adjustments to allow recovery of the costs of these programs.
Edmisten III,
The Court of Appeals distinguished
Edmisten III
in three ways.
Utilities Commission v. Nantahala Power and Light Company,
*197
The first distinction which the Court of Appeals made was that the original intent of the Commission in its rulemaking procedure in
Edmisten III
was not to raise the rates, but to study “the feasibility of increasing the supplies of natural gas to North Carolina.”
Id.
(quoting
Edmisten III, 294
N.C. at 600,
The Court of Appeals also concluded that Edmisten III is different from the present case because the final outcome of the hearings in Edmisten III was the promulgation of a “rule.” Id. While in the present case the Commission did not call its final order a “rule,” all parties involved in the proceedings had proper notice that the Commission was engaging in a rulemaking proceeding. The procedure used by the Cоmmission was clearly rulemaking procedure, and the docket number given to the proceedings was that of a rulemaking docket. Nantahala does not contend that it was not properly notified of the nature of the proceeding; its argument was that the wrong type of procedure was being instituted. The failure to formally call the procedure a rulemaking procedure in the body of the order and the failure to label a portion of the final order a “rule” do not change the Commission’s actions from that of rulemaking, particularly in view of the fact that all the parties seemed to be well informed as to what the Cоmmission was doing.
The Court of Appeals finally distinguished
Edmisten III
from the present case because
Edmisten III
provided for a possible increase or decrease in rates while the present case provides only
*198
for a decrease.
Id. Edmisten III
permitted recovery of the costs of Commission-approved projects, limited “to the amount by which reasonable costs of the programs exceeded revenues received from them.”
The Court of Appeals cited extensively from Commissioner Tate’s dissent to the Commission’s order of 20 October 1987. That dissent cited North Carolina Utilities Commission v. Edmisten (Edmisten II). The dissent included the following language from that case:
If by virtue of some change in the tax law, it develops that the company did not incur the anticipated еxpense for the payment of which it collected revenues in prior months, its rates for present and future service may not be cut, on that account, below what it otherwise would be entitled to charge for the present or future service.
Edmisten II,
In the present case, the Commission’s orders do not change current or future rates based on costs of service for previous months. Rather, the orders relate to rates for the same periods covered by the tax decrease. The Commission wisely took immediate action, filing the original order just one day after the TRA-86 was signed into law and prior to the effective date of the tax reductions. The Commission on 23 October 1986 ordered the utilities to place in a deferred account, beginning 1 January 1987, the difference between revenues billed under the old rates and revenues which would be billed after the tax reduction went into effect. The 1987 order simply disposed of those funds by requiring that they be refunded to the customers. The Commission’s order here was prospective rather than retroactive. Therefore, assuming the cоrrectness of the language in Edmisten II concerning revenues collected in prior months for nonincurred expenses, it does not apply here.
While we conclude that
Edmisten III,
rather than
Edmisten II,
is controlling on the authority of the Commission to alter rates in a rulemaking proceeding, our conclusion finds further support in the decisions of the United States Supreme Court and in scholarly discourses on administrative law. As stated earlier, the real issue here is whether rates can be changed in a rulemaking procedure under the statutes which govern the workings of the Commission or whether the Commission must hold full-fledged general rate hearings or more limited complaint proceedings every time а rate is altered regardless of the circumstances necessitating the change. While the Commission is not covered by our Administrative Procedure Act found in N.C.G.S. Chapter 150B [“The following are specifically exempted from the provisions of this Chapter . . . the Utilities Commission.” N.C.G.S. § 150B-1 (Cum. Supp. 1989)],
*200
the Commission is still an administrative agency of the state government, and general tenets of administrative law are applicable to its operation except where modified by statute. Several United States Supreme Court cases and numerous scholarly works have addressed the difference in rulemaking procedures, such as those in the present cаse, and adjudicatory procedures, such as general rate cases and complaint cases, and when an individual hearing is necessary.
E.g., United States v. Florida East Coast Railway Company,
In
Florida East Coast,
two railroad companies brought an action to set aside rates established by the Interstate Commerce Commission in a rulemaking proceeding.
United States v. Florida East Coast Railway Company,
In his article on the North Carolina Administrative Procedure Act, Professor Daye distinguished adjudication from rulemaking as follows:
The touchstone for distinguishing adjudication from rulemaking is that adjudication involves a specifically named party and a determination of particularized legal issues and facts with respect to that party. Rulemaking, by contrast, involves general categories or classes of parties and facts and policies of general applicability.
Daye,
The procedure used by the Commission was very similar to that used by the Federal Energy Regulatory Commission (FERC) as it was faced with the identical situation when the TRA-86 went into effect. FERC issued a Notice of Proposed Rulemaking in Docket No. RM87-4-000 on 12 March 1987 and later codified as Order 475. Conservation of Power, Water Resources, 18 C.F.R. § 35.27 (1989). This Notice and the Order applied only to electric utilities even though the TRA-86 applied uniformly to all utilities. The Rule did not apply to natural gas pipeline companies because they already had tax trackers included in their rate settlements, and FERC decided to deal with oil pipeline rates on a case-by-case basis. In discussing why it was using this approach, FERC explained in the Notice that the last corporate income tax reduction had been in 1978 when the rates were decreasеd from 48% to 46%. At that time FERC did not issue a statement of policy or a final rule. It merely considered this tax rate change on a case-by-case basis. The Commission explained that the situation is different in this case because the TRA-86 represents a dramatic decrease in the corporate income tax rates. As did our Commission, FERC saw the need to respond quickly to this change in the tax rates. In its Notice, FERC stated:
The Commission believes that the Federal corporate income tax rate decrease mandated by the Tax Reform Act of 1986 may result in significant overcollections by a public utility after July 1, 1987, if the public utility fails to adjust its ratеs to reflect this decrease. For this reason, the Commission is proposing to institute a procedure to encourage public utilities to voluntarily file rate reductions with the Commission ....
52 Fed. Reg. 8616, 8618 (1987). 1
The Iowa Utility Board handled the effect of the TRA-86 in much the same way as our Commission. The Board passed a rule which instructed utilities which were not currently involved in pending contested cases to lower their rates to reflect the changes
*203
caused by the TRA-86 and ordered those utilities with pending contested cases to do the same thing.
Iowa Electric Light & Power v. Utilities Board,
From a review of our holding in Edmisten III, the holding in Florida East Coast, the guidance found in scholarly works, and the actions of other agencies dealing with the same issue, we conclude that the Commission was acting within its authority when it ordered the affected utilities, including Nantahala, to determine the amount of savings resulting from the TRA-86 and to pass these savings on to the ratepayers. The Commission properly formulated a rule which applied uniformly to the affected utilities which were similarly situated. The circumstances surrounding this рrocedure made it appropriate for the Commission to use a rulemaking procedure because: 1) the tax reduction affected all utilities uniformly; 2) a large number of utilities were affected, making individual hearings for all inappropriate; and 3) no adjudicative-type facts were in dispute so as to require a trial-type hearing for each individual utility.
In this appeal, Nantahala argues two other issues which the Court of Appeals did not reach. These issues are: 1) whether the Commission’s actions violated Nantahala’s equal protection rights because some utilities, primarily the local telephone operating companies, were not required to pass on all of the tax savings to their ratepayers; and 2) whether the refund order by the Commission constituted retroactive ratemaking. We conclude that neither of these issues has merit.
*204 As mentioned above, the local telephone operating companies were allowed, as a group, to offset part of their tax savings with revenue reductions previously ordered by the Commission. Nantahala contends that it too had non-tax offsets which the Commission should have recognized just as it did for the telephone companies. We see no violation of equal protection on the part of the Commission in excluding these groups from the order.
The Commission fully discussed in its order of 20 October 1987 its reasons for excluding the local telephone exchanges from that order. The Commission pointed out that, while the Public Staff and the Attorney General both proposed that the local telephone operating companies be included in the order, it found to do so would be impractical. The Commission stated:
The impracticality of following this proposal is that there are numerous local telephone operating companies in North Carolina and the circumstances are different for many of them. To require the flow through of the federal tax savings without allowing an offset for these access charge reductions ordered by the Commission would likely place some LEC’s in a position of having to immediately file for rate increases. Therefore, subscribers of these affected telephone companies could experience a decrease and then an increase in their local rates. Such up and down effects on rates disrupt reasonable budgeting practices by both homes and businesses and should be avoided if the net gain to the customers is not significant.
While the local teleрhone operating companies were singled out as a group for different treatment, there were factors surrounding this group, which the Commission made clear in its orders, that made them subject to different treatment from the electric utilities. Nantahala argues that the Commission’s distinctions were arbitrary and not rationally related to a legitimate governmental interest. We conclude that the reasons given by the Commission for treating the local telephone operating companies differently from the other utilities bears a rational relationship to a legitimate public interest. That is all that is necessary to satisfy the requirements for equal protection in the area of economic regulation.
New Orleans v. Dukes,
Nantahala’s argument that the Commission’s final order requiring Nantahala to refund a portion of previously collected revenues constitutes retroactive ratemaking likewise has no merit. What *205 Nantahala is referring to is the portion of the final order which instructs the affected utilities to refund a part of the provisional rates, which were an overcollection of taxes, collected between 1 January 1987 and 20 October 1987 when the final order was issued.
Retroactive ratemaking has been defined as “[adjustments to future rates to rectify undue past profits . . . .”
Madison Gas & Electric v. Public Service Commission,
The decision of the Court of Appeals is reversed and the orders of the Commission as applied to Nantahala are reinstated.
Reversed.
Notes
. Nantahala argues that the North Carolina Utilities Commission should have made compliance voluntary rather than mandatory. While the Commission could have sought voluntary compliance with the TRA-86, it clearly was authorized to make compliance mandatory. We note from the record that most of the other utilities voluntarily reduced their rates to reflect the savings generated by the TRA-86.