Title: In the Matter of Petition of New Jersey American Water Company, Inc., for an Increase in Rates for Water and Sewer Service and Other Tariff Modifications
Citation: N/A
Docket Number: a-32-00
State: new-jersey
Issuer: new-jersey Supreme Court
Date: July 25, 2001

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized). VERNIERO, J., writing for a majority of the Court. This appeal involves a challenge to the policy of the New Jersey Board of Public Utilities (BPU) that permits a utility to include half of its charitable contributions as operating expenses for purposes of calculating its service rates. New Jersey American Water (American Water) is a water utility engaged in the production, treatment, and distribution of water, and the collection of sewage within its designated service territory, which includes parts of fifteen counties. American Water is subject to the jurisdiction of the BPU. It provides water service to about 346,000 customers, and also provides sewer service to about 18,600 customers. In January 1998, American Water filed a petition with the BPU to increase its rates for water and sewer service. The matter was transferred to the Office of Administrative Law and assigned to an Administrative Law Judge (ALJ), who heard testimony from representatives of American Water, from the Ratepayer Advocate (which is administratively located within the BPU and which represents the financial interests of customers in matters relating to utility rates and policy), and from several other interested parties. Among its objections, the Ratepayer Advocate argued that American Water should not be allowed to treat any portion of its charitable contributions as operating expenses. American Water's charitable contributions amounted to $99,185. Under the BPU's 50/50 sharing policy, $49,592 of that amount was included in American Water's operating expenses. Inclusion of that figure in American Water's operating costs would require residential ratepayers to pay an additional eight to ten cents annually on their water utility bills. During the administrative proceedings, American Water contended that its contributions were an important element of its responsibility to the communities it serves. The Ratepayer Advocate argued that all of the charitable contributions should be excluded from operating expenses and thus be borne exclusively by the company's shareholders. In January 1999, the ALJ rendered a decision that provided that the inclusion of charitable contributions was a policy decision that only the BPU could make. While acknowledging the reasonableness of the Ratepayer Advocate's arguments, the ALJ concluded that legitimate public policy concerns remained, which the BPU addressed by articulating a sharing policy. In this case, the ALJ found that 50/50 sharing policy to be reasonable, but suggested to the BPU that the issue was one deserving of further consideration on a generic basis. In March 1999, the BPU adopted that portion of the ALJ's decision pertaining to the 50/50 sharing policy. The BPU memorialized its action in an order dated April 6, 1999. In that order, the BPU stated that it continued to believe that charitable contributions by a public utility benefit ratepayers sufficiently to warrant some degree of rate recognitions as an expense related to a utility's business operations. The Ratepayer Advocate challenged the BPU's decision on appeal, arguing that the BPU's ruling was erroneous because charitable contributions are not germane to a public utility, and that the ruling violated the First Amendment of the United States Constitutions and Article I, paragraph 6 of the New Jersey Constitution because it compelled ratepayers indirectly to subsidize charitable activities. The Appellate Division affirmed the BPU's action. The Supreme Court granted the Ratepayer Advocate's petition for certification. HELD: The New Jersey Board of Public Utilities' 50/50 sharing policy, which permits a utility to include half of its charitable contributions as operating expenses for purposes of calculating its service rates, is arbitrary, lacks a sufficient basis in the record, and thus constitutes unreasonable agency action; no portion of a utility's charitable contributions may be subsidized by the utility's captive ratepayers. 1. Rate making is a legislative and not a judicial function, and the BPU, to which the Legislature has delegated its rate- making power, is vested with broad discretion in the exercise of that authority. (p. 8) 2. Although the BPU's rulings are entitled to presumptive validity, they are not immune from judicial review, and may be set aside when it clearly appears that there was no evidence before the board to support them. Thus, actions by the BPU or any other administrative agency that are arbitrary, capricious, unreasonable, or beyond the agency's delegated powers will not be sustained. (pp. 8-9) 3. BPU's 50/50 sharing policy is arbitrary and lacks sufficient evidentiary basis in the record. Accordingly, no portion of American Water's charitable contributions may be subsidized by consumers. To the extent that the holding in New Jersey Bell Telephone Co. v. Board of Public Utility Commissioners, 12 N.J. 568 (1953), requires a contrary conclusion, it is disapproved. (pp. 12-13) 4. In determining whether the BPU's sharing policy is reasonable, courts may look to the actions of other states. Such a review discloses that forty states, either by statute, regulation, or case law, do not permit a utility's charitable contributions to be treated as an operating expense. (pp. 13-16) 5. In holding that charitable contributions cannot be subsidized by ratepayers, courts in other jurisdictions have focused on two interrelated considerations. On general fairness grounds, courts have determined that ratepayers should not be forced to pay additional amounts for charitable purposes at the hand of a regulated monopoly. In addition, courts have determined that because a utility's charitable contributions are discretionary, they are more appropriately borne by the entity's shareholders, not its captive ratepayers. (pp. 16-19) 6. Although an agency's administrative action is presumptively valid, that deferential standard is lessened in this case because the disputed policy does not involve the BPU's area of expertise. (pp. 19-20) 7. The BPU has cited no fact or proof in the record to support its general contention that there is a close nexus between a utility's contributions and the claimed benefits to actual consumers, and its order is barren of any analysis that might indicate a connection between the utility's specific contributions and a measurable benefit to its ratepayers. Thus, its policy is arbitrary and lacks an evidentiary basis both in its general formulation and as applied in this instance. (pp. 20- 21) 8. In the determination of fair and reasonable rates, contributions and donations to charitable organizations are not a proper charge to operating expenses. (pp. 21-22) 9. Courts should not reach constitutional questions unless necessary to the disposition of the litigation. (p. 22) Judgment of the Appellate Division is REVERSED. JUSTICE LaVECCHIA filed a separate dissenting opinion and would affirm the judgment of the Appellate Division. Justice LaVecchia believed that the Court failed to accord the BPU's policy determination due respect under the appropriate standard of review, but rather simply reached a different policy choice than the BPU concerning public utility charitable contributions, and then supplanted the regulatory commission's decision on that issue. CHIEF JUSTICE PORITZ and JUSTICES STEIN, COLEMAN, LONG, and ZAZZALI join in JUSTICE VERNIERO's opinion. JUSTICE LaVECCHIA has filed a separate dissenting opinion. IN THE MATTER OF PETITION OF NEW JERSEY AMERICAN WATER COMPANY, INC., FOR AN INCREASE IN RATES FOR WATER AND SEWER SERVICE AND OTHER TARIFF MODIFICATIONS Argued March 13, 2001 -- Decided July 25, 2001 On certification to the Superior Court, Appellate Division, whose opinion is reported at 333 N.J. Super. 398 (2000). Blossom A. Peretz, Ratepayer Advocate, and Andrew K. Dembia, Deputy Ratepayer Advocate, argued the cause for appellant, Division of the Ratepayer Advocate (Ms. Peretz, attorney; Mr. Dembia, Robert J. Brabston and Diane Schulze, Assistant Deputies Ratepayer Advocate, on the briefs). William D. Lavery, Jr., argued the cause for respondent New Jersey American Water Company, Inc. (Cozen and O'Connor, attorneys; William D. Hogan, on the brief). Carla Vivian Bello, Senior Deputy Attorney General, argued the cause for respondent New Jersey Board of Public Utilities (John J. Farmer, Jr., Attorney General of New Jersey, attorney; Andrea M. Silkowitz, Assistant Attorney General, of counsel). The opinion of the Court was delivered by VERNIERO, J. This appeal involves a final decision of the Board of Public Utilities (BPU) in respect of a rate petition filed by the New Jersey American Water Company (American Water). Within the context of that petition, the Division of the Ratepayer Advocate (Ratepayer Advocate) challenges the policy of the BPU that permits a utility to include half of its charitable contributions as operating expenses for purposes of calculating its service rates. Under that policy, a utility's ratepayers subsidize fifty percent of the utility's charitable contributions, whereas its shareholders bear the cost of the other fifty percent. In reviewing the rate petition, the BPU applied its 50/50 sharing policy and allowed American Water to include half of its charitable contributions in its operating expenses. The Ratepayer Advocate objected on statutory and constitutional grounds. The Appellate Division affirmed the BPU's determination. We now reverse. We hold that the BPU's 50/50 sharing policy is arbitrary, lacks a sufficient basis in the record, and thus constitutes unreasonable agency action. Accordingly, no portion of a utility's charitable contributions may be subsidized by the utility's captive ratepayers. In view of that holding, we do not address the constitutional questions raised by the Ratepayer Advocate. IN THE MATTER OF PETITION OF NEW JERSEY AMERICAN WATER COMPANY, INC., FOR AN INCREASE IN RATES FOR WATER AND SEWER SERVICE AND OTHER TARIFF MODIFICATIONS ____________________________ LaVECCHIA, J., dissenting. I would affirm the judgment of the Appellate Division substantially for the reasons expressed in the thorough and thoughtful opinion of Judge Skillman. In re Petition of New Jersey-American Water Co., 333 N.J. Super. 398 (2000). The panel correctly analyzed First Amendment jurisprudence and rejected the Ratepayer Advocate's broad claim that charitable giving by public utilities constitutes an impermissible compelled contribution to expressive activity. Id. at 409. In reversing the Appellate Division's judgment, the majority does not reach the First Amendment issue raised by the Ratepayer Advocate. Instead, the majority reverses exclusively on the basis that the Board of Public Utility's (BPU) policy that permits a utility to include half of its charitable contributions as operating expenses for purposes of calculating its service rates, ante at ___ (slip op. at 2), is arbitrary, capricious, and unreasonable. Because the Court fails to accord the BPU's policy determination due respect under the appropriate standard of review, I respectfully dissent. I add only the following to the Appellate Division's sound opinion. [Hayden W. Smith, If Not Corporate Philanthropy, Then What?, 41 N.Y. L. Sch. L. Rev. 757, 763 (1997).] Understanding the nature of corporate enlightened self- interest, the BPU's judgment appropriately recognized that the benefits of a public utility's charitable contributions inure to both ratepayer and shareholder. See Peter M. Sikora, Note, Charitable Contributions of Public Utilities: Who Should Bear the Cost?, 30 Case W. Res. L. Rev. 357, 373 (1980) (commenting that shared allocation of charitable contributions to both ratepayers and shareholders is necessary for equitable treatment of those expenses because any approach which places the burden on one group to the exclusion of the other ignores the only persuasive rationale for allocating such burdens -- those who benefit should bear the burden ). The allocation of charitable costs to both ratepayers and shareholders reflects an equitable distribution of cost to benefit: If the ratepayers benefit from the contributions in the form of a better place in which to live and work, so too must the corporation and its shareholders benefit. It is quite probable that a community in which efforts succeed in making it more stable and attractive is likely to retain current residents and attract new ones _ all of whom represent potential new subscribers to the utility's products and services. A growing customer base is generally a boon to any corporation and helps assure the continued value of the shareholders' investment. Similarly, other benefits, such as lower finance costs and decreased vandalism, would accrue to ratepayers, shareholders, and the company alike. While ratepayers can expect lower costs, shareholders and the company can expect a more valuable and more easily transferable investment. NO. A-32 IN THE MATTER OF PETITION OF NEW JERSEY AMERICAN WATER COMPANY, INC., FOR AN INCREASE IN RATES FOR WATER AND SEWER SERVICE AND OTHER TARIFF MODIFICATIONS DECIDED July 25, 2001 Chief Justice Poritz