Opinion ID: 2094756
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Heading: the doctrine of the hackensack water company case

Text: The company rests its case primarily on Hackensack Water Company v. Board of Public Utility Commissioners, 98 N.J.L. 41 ( Sup. Ct. Dec. 7, 1922), 100 N.J.L. 177 ( E. & A. April 17, 1924). The case, which was decided by a single justice in the former Supreme Court and affirmed in the Court of Errors and Appeals on the opinion below, held that a public utility is entitled to recoup deficits in operations by temporary surcharges added to its regular rates. In that case the Board had relied on Galveston Electric Co. v. City of Galveston, 258 U.S. 388, 42 S.Ct. 351, 66 L.Ed. 678 (1922), in denying such surcharges to the company, but the court, though likewise relying on that case, gave it an interpretation diametrically opposed to that of the Board. The Galveston case, decided seven months before the Hackensack case, was the first expression of the United States Supreme Court on the question of whether or not it was confiscatory under the Fourteenth Amendment not to allow a public utility to recoup deficits in operations by surcharges. That court answered the question squarely in the negative in an opinion by Mr. Justice Brandeis, holding that public utilities were not entitled to a guaranty on their investment: If net deficits so estimated were made a factor in the rate base, recognition of 8 per cent as a fair return on the continuing investment would imply substantially a guarantee by the community that the investor will net on his investment ultimately a return of 8 per cent yearly, with interest compounded on deferred payments; provided only that the traffic will in course of time bear a rate high enough to produce that amount. 258 U.S. 388, at 394, 42 S.Ct. 351, at 354, 66 L.Ed. 678, at 682. This was the view of the case adopted by the Board but our former Supreme Court, reasoning from certain language used by Mr. Justice Brandeis in his opinion, sought to confine its operation to those instances where the deficits were produced by the acts or failures of the public utility and not to apply it to cases where the deficits were caused by the rulings of state regulatory bodies: The Board [of Public Utility Commissioners] relies upon the recent decision of the United States Supreme Court in Galveston Electric Co. v. [ City of ] Galveston [258 U.S. 388, 42 S.Ct. 351, 66 L.Ed. 678], but this view of the effect of that decision seems erroneous. Mr. Justice Brandeis says: `A company which has failed to secure from year to year sufficient earnings to keep the investment unimpaired and to pay a fair return whether its failure was the result of imprudence in engaging in the enterprise, or of errors in management, or of omission to exact proper prices for its output, cannot erect out of past deficits a legal basis for holding confiscatory for the future rates which would, on the basis of present reproduction value, otherwise be compensatory.' It might well be held that the court, in naming these three species of deficits (imprudence in engaging in the enterprise, errors in management, and omission to exact proper prices) meant to make an enumeration of the cases to which the opinion applies, none of which is the present case, but it is unnecessary to go as far as that, and it may be conceded that the list is not a complete enumeration and that other causes may occur which may stand on the same legal footing. Be that as it may, the reasoning of the opinion applies only to deficits due to the conduct of the public utility itself and does not justify the refusal to include deficits that are due to the acts of the public authorities alone. 98 N.J.L. 41, supra, at 43, 44. Georgia Railway & Power Co. v. Railroad Commission, 278 F. 242 ( D.C. Ga. 1922), decided a few months before the Hackensack case, had been cited to the court in the argument of the Hackensack case but the court rejected its holding which was as follows: The claim that the failure to earn a reasonable return, if established, should now be either allowed as capital investment or amortized under this or future rates we cannot allow. To concede this as a right would be to guarantee income, and would raise a correlative duty to account for earnings beyond what were reasonable in the past. No limit could be placed to the period of the inquiry, nor could justice really be done by it to the individual stockholders or consumers actually concerned, for these are constantly changing. A rate established as reasonable, whether by the company or by the commission, is not guaranteed by the commission or the public. Whether it will actually yield more or less than a fair return during its continuance is a risk of the business. We do not deny that it is within the discretion of the commission to consider the experience of the immediate past in fixing a just rate for the future, but we hold that no legal right exists to have disappointments or surprises in results balanced. (Italics supplied.) (278 F. at 247) The decision of the District Court, supra, was affirmed on appeal to the United States Supreme Court, 262 U.S. 625, 43 S.Ct. 680, 67 L.Ed. 1144, the court in an opinion again by Mr. Justice Brandeis holding: That past losses are not to be capitalized as property on which the fair return is based was held in [ City of ] Knoxville v. Knoxville Water Co., 212 U.S. 1, 14, 29 S.Ct. 148, 53 L.Ed. 371; Galveston Electric Co. v. [ City of ] Galveston , supra. Here this conclusion seems even clearer than it was in those cases. The losses under consideration in the case at bar were obviously not a part of development cost. They were due to insufficiency of previous rates. (262 U.S. 625, at 632, 43 S.Ct. 680, at 682, 67 L.Ed. 1144, at 1148) The sole dissent from this opinion was by Mr. Justice McKenna, who took exception to the italicized words quoted from the District Court's opinion, supra, apparently on the ground that it ran counter to the Federal Constitution. His dissent gives added weight to the scope of the decision of the court. This pronouncement came after the decision of our former Supreme Court in the Hackensack case but before the decision in the Court of Errors and Appeals, where the Georgia Railway case in the United States Supreme Court was cited to the court but was not followed by it. In Bluefield Water Works & Improvement Co. v. Public Service Commission, 262 U.S. 679, 43 S.Ct. 675, 67 L.Ed. 1176 (1923), decided on the same day as the Georgia Railway case, supra, the United States Supreme Court, speaking through Mr. Justice Butler, recognized that: The company may not insist as a matter of constitutional right that past losses be made up by rates to be applied in the present and future   . (262 U.S. 679, at 694, 43 S.Ct. 675, at 679, 67 L.Ed. 1176, at 1183) To the same effect is the same justice's observation in Board of Public Utility Commissioners v. New York Telephone Co., 271 U.S. 23, at 31, 46 S.Ct. 363, at 366, 70 L.Ed. 808, at 812 (1926): If there is no return, or if the amount is less than a reasonable return, the company must bear the loss. Past losses cannot be used to enhance the value of the property or to support a claim that rates for the future are confiscatory. The rule became so well established as to be stated summarily in Wisconsin Telephone Co. v. Public Service Commission, 232 Wis. 274, 287 N.W. 122, 593 ( Sup. Ct. 1939) ( certiorari denied 309 U.S. 657, 60 S.Ct. 514, 84 L.Ed. 1006 (1940)): As already pointed out, the cases hold that in establishing a rate for the future and in the absence of statutory authorization therefor, the Commission may not amortize a loss or make a rate sufficiently low to recapture the excesses. (287 N.W. 122, at 137) That the federal rule works both ways was demonstrated in Los Angeles Gas & Electric Corp. v. Railroad Commission of California, 289 U.S. 287, at 313, 53 S.Ct. 637, at 647, 77 L.Ed. 1180, at 1197 (1933), where Mr. Chief Justice Hughes, in speaking for the court, said: Deficits in the past do not afford a legal basis for invalidating rates, otherwise compensatory, any more than past profits can be used to sustain confiscatory rates for the future. Thus it is clear that while there was some justification in state decisions for the holding in the Hackensack case when it was first handed down in our former Supreme Court, the trend of the decisions has been in the opposite direction not only in the Federal courts but also in the state courts and before state commissions: Western Oklahoma Gas & Fuel Co. v. State, 113 Okl. 126, 239 P. 588, 591 ( Sup. Ct. 1925); Re Great Northern Utilities Co., 26 P.U.R. ( N.S. ) 393, 397 ( Montana, 1933), Re New York Telephone Co., 84 P.U.R. ( N.S. ) 267, 295 ( N.Y. 1950); Re Carolina Mountain Telephone Company, 89 P.U.R. ( N.S. ) 13, 19 ( N.C. 1951), Re Southwestern Bell Telephone Co., 92 P.U.R. ( N.S. ) 481, 502 ( Mo. 1952). The rationale of these decisions is well summarized in Hope Natural Gas Co. v. Federal Power Commission, 196 F. 2 d 803, 808 (4 Cir. 1952) where Chief Judge Parker said: With changes in economic conditions rates must be changed from time to time, and the lag which necessarily accompanies the making of changes may result to the benefit of the utility as well as to its detriment.    It is true, of course, that a utility is entitled to rates that are just and reasonable; but this is not to say that rates must fluctuate automatically with every change in economic conditions or that a reasonable time may not be allowed for determining the reasonableness of a proposed increase in rates before it is allowed to go into effect. Any loss sustained by a maintenance of the status quo while such determination is being made is properly considered, not as a violation of constitutional right, but as a necessary incident of rate regulation so long as the period of suspension does not `overpass the bounds of reason.' See American Telephone & Telegraph Co. v. United States, 299 U.S. 232, 247, 57 S.Ct. 170, 177, 81 L.Ed. 142; Federal Power Commission v. East Ohio Gas Co., 338 U.S. 464, 475, 70 S.Ct. 266, 94 L.Ed. 268. Not only has the decision in the Hackensack case been rendered ineffectual by the course of federal decisions, but the decision has been ignored by the Board for over a quarter of a century in complying with its statutory duty to fix just and reasonable    rates, R.S. 48:2-21. It will serve no good purpose to review those decisions of the Board seriatim ; suffice it to say that in the instances where the orders of the Board were taken to court the question of the right to surcharge was not raised and the Hackensack case was never cited, Plainfield Union Water Co. v. Board of Public Utility Com'rs, 6 N.J. Misc. 267 ( Sup. Ct. 1928); Middlesex Water Co. v. Board of Public Utility Com'rs, 6 N.J. Misc. 107 ( Sup. Ct. 1928); Plainfield Union Water Co. v. Board of Public Utility Com'rs, 117 N.J.L. 18 ( Sup. Ct. 1936); New Jersey Suburban Water Co. v. Board of Public Utility Com'rs, 122 N.J.L. 54 ( Sup. Ct. 1939), affirmed 123 N.J.L. 303, 306 ( E. & A. 1939). On the contrary, in Acquackanonk Water Co. v. Board of Public Utility Com'rs, 1 N.J. Misc. 575, 579 ( Sup. Ct. 1923), affirmed without opinion, 100 N.J.L. 169 ( E. & A. 1924), though the Hackensack case was not mentioned, the decision was opposed to the doctrine of that case: The next point is that the board was in error in not taking into account the deficiency in earnings caused by the action of the board in preventing the companies from obtaining adequate rates during the litigation through its order suspending the posted rates. But the companies were collecting all the rates they were entitled by law to collect, and the board would not have been justified in undertaking to make up any such deficiencies. Looking backward in the light of subsequent decisions, it is not difficult to perceive the inherent contradictions in the Hackensack decision. Thus the opinion concedes: It is, to be sure, not for the Public Utility Board to guarantee a rate to the public utility company, and I agree that it would be improper to allow the public utility company to capitalize its losses   . To allow all deficits to be capitalized and added to the base value would be unjust to future consumers, who would be burdened perpetually   . To make up the loss of the company by increase in the rate for a single year would impose an undue burden on present consumers. 98 N.J.L. 41, supra, at p. 44 These views, while consistent with the prevailing rule in the federal cases hereinbefore cited, are obviously at variance with the conclusions of the decision itself. Thus: There is nothing unfair in holding the public to a guarantee that the rate fixed shall come within the authority fixed by the statute and be just and reasonable.    (98 N.J.L., at 44) ignoring the fact that the Board cannot make a guaranty of return to a public utility. Again the Board's duty under the statute is to fix just and reasonable    rates, R.S. 48:2-21, but the opinion holds: The usual method of correcting the error after the loss is ascertained, is by amortization, by allowing an additional charge; that is, a higher rate, for such a length of time as will suffice to wipe out the deficit. (98 N.J.L., at 44) To do this would be adding a further charge to rates that are already just and reasonable, which is beyond the Board's powers. Finally the opinion states: The consumer will then pay the cost of the experiment, but it will be so distributed that it may be paid during what may be called the life of the experiment. (98 N.J.L. at 45) Obviously this is not so, because the surcharge is not imposed until the experiment is at an end and the imposition of a surcharge is therefore inconsistent with its being paid for during the life of the experiment. Nor is it at all clear if a public utility may not capitalize its losses, or impose them on its present customers for a single year, as the opinion concedes it cannot, why it should be permitted to allocate such surcharges, admittedly imposed above just and reasonable rates, on its present and future customers for a period of years. The fundamental defect of the Hackensack opinion in its practical operation is that it requires the Board to look both forward and backward in rate-making when the orderly processes of rate-making are necessarily present and prospective if rate-making is to be effective. The decision would authorize just and reasonable rates for the present and future and then add thereto surcharges for the past errors of a rate-making experiment. This point of view is inconsistent with the businesslike processes of rate-making that have received the approval of this court: Where by reason of circumstances beyond the control of the Utility and unforeseeable at the time of the rate order it becomes apparent that the existing rates are insufficient to provide a fair rate of return, and rates reasonable both to the public utility and the public, the remedy is not by way of invalidation of the past order on the basis of the subsequent events introduced in evidence before the appellate court, but by way of filing new schedules of rates in accordance with the statutory requirements.    In re New Jersey Power & Light Co., 9 N.J. 498, 527 (1952) See also New Jersey Bell Tel. Co. v. Department of Public Utilities, Board of Public Utility Com'rs, 12 N.J. 568, 582-583 (1953). The present practice, as set forth in these cases, is fair to the public utility, for it can act as speedily as it sees fit to move for a correction of inadequate rates, and it is fair to the consumer in safeguarding him from surprise surcharges dating back over years that he had a right to assume were finished business for him and possibly over years when he was not even a consumer. Not only does the company have its power to file new rate schedules, as above set forth, but it may apply for ad interim relief through negotiation and agreement: The board may, during the pendency of any hearing instituted by it, on its own initiative or on complaint, in which the approval or fixing of just and reasonable individual rates, joint rates, tolls, charges or schedules thereof, as well as commutation, mileage or other special rates is in issue, or at any other time, negotiate and agree with any public utility for an adjustment of the individual rates, joint rates, tolls, charges or schedules thereof, as well as commutation, mileage or other special rates for any product or service supplied or rendered by such public utility. Such adjustment may be for, or without, a specified limit of time. In no event shall any such adjustment be regarded as contractual. Such adjustment shall at all times be subject to change through the proceedings provided for by this chapter, or through negotiation and agreement under this section. The board as a part of any such negotiation and adjustment shall provide for the continuance, suspension or other disposition of any hearing of the character aforesaid then pending. R.S. 48:2-21.1 (Italics supplied.) The company made no application under this statute. On the contrary, even after the affirmance by this court of its appeal from the 1950 application for rate increases (May 26, 1952), it waited five months before it filed its next application for a rate increase on October 16, 1952 and it made no application for surcharges until two days after this application became effective on June 1, 1953. The course of opinions in the United States Supreme Court since the handing down of the Hackensack decision, the fact that the decision has long been ignored both in proceedings before the Board and in the courts, and that decisions have been handed down here in conflict with it, the inherent contradictions of the decisions that have become apparent in the course of time, its unworkableness in practice and its direct conflict with the sound principles of rate-making approved in recent decisions of this court, all indicate the necessity of our overruling Hackensack Water Company v. Board of Public Utility Commissioners, 98 N.J.L. 41 and 100 N.J.L. 177, supra, and we accordingly so do.