Court Opinion

ID: 9713763
Source: CourtListenerOpinion
Date Created: 2023-08-26 05:21:54.71821+00
Date Added: 2024-06-11T18:23:20.414522
License: Public Domain

Pashman, J.
(dissenting). This case concerns the validity of orders promulgated by the Board of Public Utilities *497Commissioners (PUC) on December 13, 1973 and December 20, 1973. These orders incorporated into the tariffs of respondent New Jersey Bell Telephone Company a so-called “comprehensive adjustment clause,” permitting the telephone company to increase its rates in response to certain increases in operating expenses without the necessity of a proceeding under N. J. 8. A. 48:2-21.
The majority has fully recounted the history of this matter before the PUC. In response to a rate increase petition filed by Bell, the PUC conducted a full rate proceeding, culminating in an order dated December 29, 1972, and a supporting opinion in which the Board made findings as to the rate base and operating expenses of the telephone company and determined a proper rate of return. In its order, the PUC also announced its intention to consider on its own motion whether telephone company tariffs ought to include a clause permitting certain increases in operating expenses to be automatically passed through as they arise to telephone customers. On December 13, 1973, after a series- of hearings at which all concerned parties had an opportunity to present evidence and arguments, the PUC issued a further order authorizing inclusion in Bell tariffs of such an adjustment clause.1 It is this order and the order of December 20, 1973, accepting the amended tariffs submitted by Bell pursuant to the December 13 order, which are the subjects of the present appeal.
I
Except in the limited classes of cases prescribed in N. J. 8. A. 48:2-21.1 and N. J. 8. A. 48:2-21.2, the PUC may not approve a rate increase without conducting a full rate pro*498ceeding pursuant to N. J. 8. A. 48:2-21. In re Intrastate Industrial Sand Rates, 66 N. J. 12 (1974); In re N. J. Power & Light Co., 15 N. J. 82 (1954); Public Service Coordinated Transport v. State, 5 N. J. 196 (1950). Such a proceeding involves notice to interested parties, public hearings, and a written order supported by findings of fact made on the record. The matters to be considered in such a proceeding are now well established:
The justness and reasonableness of a particular rate of fare can only be determined after an examination of a company’s property valuation which constitutes its rate base; its expenses, including income taxes and an allowance for depreciation; and the rate of return developed by relating its income to the rate base. [Public Service Coordinated Transport v. State, supra at 216].
An automatic adjustment clause which permits rate increases without public hearings and appropriate findings on the record is beyond the power of the PUC under N. J. S. A. 48:2-21. The Court has recently had occasion to specifically condemn similar attempts to circumvent the requirements of this statute in In re Intrastate Industrial Sand Rates, 66 N. J. 12 (1974). In that case, the PUC approved a new schedule of tariffs for carriage of certain categories of freight proposed by the Central Railroad Company of PTew Jersey, without establishing a rate base or rate of return, merely on the conelusory finding that “The Board is satisfied that the proposed rates which have been found reasonably compensatory herein are just and reasonable * * 66 N. J. at 17. The Court, in an opinion by the Chief Justice, properly rejected this procedure, explaining:
The theory that in emergent circumstances, such as caused by the inflationary impact of rising labor and material costs on operations, there could sometimes be a valid rate increase, on a permanent basis, without exploring the rate base and considering the consequent rate of return thereon * * * has long since been discarded. [66 N. J. at 23: citations omitted].
Accord, In re N. J. Power & Light Co., 15 N. J. 82 (1954); Central R.R. Co. of N. J. v. Dept. of Public Utilities, 7 N. J. *499247 (1951); Public Service Coordinated Transport v. State, 5 N. J. 196 (1950); Hudson & Manhattan R.R. Co. v. Bd. of Pub. Utility Com'rs., 16 N. J. Super. 396 (App. Div. 1951).
The principal argument of the telephone company in the present case is not that the adjustment clause is a valid rate-making procedure under N. J. S. A. 48:2-21, but rather that it is valid under N. J. S. A. 48:2 — 21.1, one of the exceptions to the general rate-making statutes.
It is now well established that N. J. S. A. 48:2-21.1 is not an independent basis for rate making by the PUC. It is designed simply to provide interim relief to utilities while rate increase petitions filed pursuant to N. J. S. A. 48:2-21 are pending. In re N. J. Power & Light Co., 15 N. J. 82, 96-97 (1954). Rate increases granted pursuant to this statute are temporary and conditional and ultimately merge with the final order in the pending case. In Sand Rates, supra, the Court described the character of increases granted under this limited statute:
The vital justification for the “negotiation statute” and rates established under it, temporarily bypassing the establishment of rate base and fair rate of return, rests upon the legal umbilical cord which ties them to the anticipated eventual determination of these fundamentals; at which time the temporary rates, their legitimacy having been validated, merge into the PUC judgment ordaining the final rate structure or, if and to the extent found to have been excessive, are refunded to the consumers who paid them. Such interim relief permits the utility to escape the unfair and sometimes confiscatory impact of “regulatory lag,” i. e., the considerable time necessary for final resolution (perhaps after the exhaustion of appeals to the courts after a complex full-blown “rate ease”) of a rate increase predicated upon the justice and reasonableness, in the context of rate base, of a rate of return on its investment. In practice, PUC makes it clear that such increase is temporary and conditional * * *. [66 N. J. at 25].
The adjustment clause incorporated into Bell tariffs by the present orders was not intended as an interim measure pending disposition of a rate increase petition under N. J. S. A. 48:2-21. At the time the orders were promulgated, *500no such petition was pending before the PUC.2 The period of operation of the adjustment clause was not tied to any rate proceedings but was simply set at one year, renewable each year, subject to the approval of the PUC. Yo provision was made for review of such rates in the course of any subsequent full rate proceeding nor for refund of any excessive *501charges.3 The rationale of the adjustment clause, as expressed by the PUC itself, was not one of ad interim relief during the pendency of a rate increase petition, but one of providing a mechanism for rate increases alternative to full rate proceedings. Thus in its order of December 29, 1972 the PUC declared:
Based on past practice, the Board could allow a fixed dollar amount of rate relief which would provide the financial needs over a reasonable future period. The Board, however, with the adoption of the adjustment clause could allow a smaller current amount plus the adjustment clause because the closer matching of operating costs and allowable revenues would be advantageous to the consumer, who would face more gradual increases in his charges for service. Customers, who bear the cost burden of rate matters, would further benefit from a decline in the number of proceedings.
This language was repeated in the order of December 13, 1973. In that order, the PUC also described the purpose of the adjustment clause as “during periods of rising costs, to allow smaller increases at shorter intervals, and thus avoid the time and expense of larger rate cases.”
These facts clearly demonstrate that the adjustment clause involved in the December 13 and December 20 orders cannot be reconciled with the construction of N. J. S. A. 48:2-21.1 which the Court has consistently adopted. In re Intrastate Industrial Sand Rates, 66 N. J. 12 (1974); In re N. J. Power & Light Co., 15 N. J. 82 (1954).
*502The majority proposes, as an. alternate rationale for sustaining the authority of the PUC under N. J. S. A. 48:2-21.1 to issue these orders, that the phrase "or at any other time” in the statute permits the adoption of an automatic adjustment clause even absent the pendency of a rate increase petition. Ante at 492. If by this proposal, the majority means that the PUC may at any time approve rate increases without notice, hearings, findings of fact, or any of the other incidents of rate making which this Court has in the past held to be essential for the protection of the public, subject only to a vaguely defined duty to hold a full rate proceeding every now and again, we are truly working a revolution today in utility regulation. This was precisely the regulative strategy undertaken by the P'UC in Sand Rates, which this Court emphatically rejected but a few months ago.
While the legislative intent behind the phrase "at any other time” is not altogether clear, a reading of the statute in the broader context of the legislative scheme for utilities regulation suggests that the Legislature contemplated that the PUC would be able to grant interim relief in connection with rate petitions soon to be filed or temporarily out of the Board’s jurisdiction much as the courts grant temporary restraining orders and emergent relief. B. g., R. 2:9-7, R. 2:9-8, R. 4:52-1.
II
The basic purpose of all utilities regulation is to insure that public utilities, which have monopoly power and are thus beyond the reach of conventional market controls, do not exploit that monopoly power to extort excessive charges from their customers. “The public is not to be laden with unreasonable or extortionate rates in order that dividends may be provided for the utility’s stockholders.” Atlantic City Sewerage Co. v. Bd. of Pub. Utility Com’rs., 128 N. J. L. 359, 366 (Sup. Ct. 1942), aff’d 129 N. J. L. 401 (E. & A. 1943). Nor is the public to be made to pay for the con*503sequences of lazy or inefficient management. See N. J. Central Traction Co. v. Bd. of Pub. Utility Com’rs., 96 N. J. L. 90 (Sup. Ct. 1921). It is these general concerns that have motivated the Legislature in its adoption of the present statutory provisions for utility regulation. We must be guided by these same general principles.
The Legislature has sought to protect the public against depredations by utility companies by requiring that rate increases not be approved by the PUC without public hearings conducted upon a record. Despite the inadequacies of such procedures, the public’s surest safeguard lies in searching public examination of the factual bases for requested rate increases in proceedings before the PUC, conducted with the assistance of rate counsel.
It would, of course, be self-defeating to insist that this admittedly time-consuming and ponderous procedure be required for setting of interim rates pending disposition of a rate increase petition, and the Legislature has not done so. In providing a more informal mechanism for interim rate increases, though, the Legislature has not left the public wholly to the mercy and benevolence of the utilities. Rather, in N. J. S. A. 48:2-21.1 it provided alternate, albeit less effective, safeguards:
1) such rates are made only in connection with specific pending full rate-making proceedings at which the effects of excessive interim orders may be corrected;
2) such rates are temporary and remain in force over only a very short period of time;
3) such rates must be the result of specific “negotiation and agreement” between the utility and the PUC.
The last requirement does not contemplate that the PUC may establish a policy of automatically approving requested rate increases. Instead, it demands that the Board affirmatively act on each proposed increase to evaluate its merits and to negotiate with the utility to protect the interests of the consuming public.
*504In general, automatic adjustment clauses are suspect if adopted under N. J. 8. A. 48:2-21.1; for they have the potential to undermine the protection of the requirement that each rate increase be “negotiated” in that they permit pass-through of classes of alleged cost increases without effective review by the PUC. The more broadly and vaguely defined the classes of costs which may be passed on to utility customers, the greater the potential conflict, between such adjustment clauses and the “negotiate and agree” language of the statute.
While I would hold that no automatic adjustment clause could be adopted pursuant to N. J. 8. A. 48:2-21.1 even for purposes of interim relief pending determination of a rate increase petition, if the majority upholds such a clause, it must be drawn narrowly to comply with the spirit of that statute. At a minimum, I would require that the categories of cost increases for which automatic pass-through is permitted be strictly limited:'
1) the type and amount of the cost must be truly beyond the control of the utility;
2) there must be objective standards by which the reasonable necessity of the type and amount of the cost can be determined with certainty.
The “comprehensive adjustment clause” authorized by the PUC orders of December 13, 1973 and December 20, 1973 permits the telephone company to pass on to its customers portions of increases in its operating expenses attributable to
1) salaries and wages, including fringe benefits,
2) depreciation expense,
3) other expenses, a catch-all classification, and
4) taxes, including federal income taxes, real estate taxes, revenue taxes, and social security taxes.
The Board chose these categories because it concluded that they covered substantially all or most of Bell’s operating expenses. Despite the PUC’s efforts to build some safeguards into the clause, I could not reconcile the use of such vague *505and all-encompassing categories with the “negotiate and agree” requirement of N. J. S. A. 48:2-21.1, even if the adjustment clause were properly adopted as an interim measure under this statute.
My concern with the conflict between the “comprehensive adjustment clause” and the language of N. J. S. A. 48:2-21.1 is not inspired by mere literal-mindedness. The use of overly permissive automatic adjustment clauses enhances the risk that utility companies will, out of laziness or greed, extract unreasonable charges from the public. This is a problem to which we must he alert, even where, as in this case, there is no evidence that this utility can be charged with such behavior.
First, such arrangements reduce the incentive for a utility to bargain vigorously for the goods and services which it purchases. See, e. g., FPC v. Sunray DX Oil Co., 391 U. S. 9, 25-26, 88 S. Ct. 1526, 20 L. Ed. 2d 388 (1968); Permian Basin Area Rate Cases, 390 U. S. 747, 793-794, 88 S. Ct. 1344, 20 L. Ed. 2d 312 (1968). Even fuel adjustment clauses, which the majority and the PUC appear to take for granted (although they have never been considered by the courts of this State), have been questioned in some jurisdictions on this ground. Union Electric, 92 P. U. R. 3d 254 (Mo. Pub. Serv. Com. 1971); cf. Southern California Edison Co., 94 P. U. R. 3d 252 (Cal. PUC 1972).4 This ap*506plies generally to goods and services purchased from third parties; it applies with additional force to goods and services purchased from interrelated parties, a problem of special importance in the telephone industry, cf. N. J. Bell Telephone Co. v. Bd. of Pub. Utility Com'rs., 12 N. J. 568, 591-92 (1953), General Telephone Company of Upstate New York, Inc. v. Lundy, 17 N. Y. 2d 373, 271 N. Y. S. 2d 216, 218 N. E. 2d 274 (N. Y. Ct. App. 1966), and to wages arrived at by collective bargaining, since wage negotiations are often conducted with a conscious eye toward management’s ability to pass wage increases on to its customers.
Second, such arrangements, since they oblige the PUC to rely on the uncorroborated assertions of the utility, tend to put the public at the mercy of the utility’s accounting practices. This Court has long cautioned against excessive reliance on the books of utility companies in rate proceedings :
The dangers inherent in accepting the books of account at face value in a rate proceeding are apparent. The prescription of a uni*507form system of accounts by regulatory commissions, such as the Board of Public Utility Commissioners, has been uniformly accompanied by the qualification that in prescribing the system of accounts, the commissioners do not commit themselves to the approval or acceptance of any item set out in any account for the purpose of fixing rates or in determining other matters before the commission.
Neither this Court nor the Board can accept the books of account of a public utility at face value in a rate case in which reasonableness is always the primary issue. * * * It must be emphasized that rate making is not an adversary proceeding in which the applying party needs only to present a prima facie case in order to be entitled to relief. There must be proof in the record not only as to the amount of the various accounts but also sufficient evidence from which the reasonableness of the accounts can be determined. * * *
Lacking such evidence, any determination of rates must be considered arbitrary and unreasonable. [Public Service Coordinated Transport, supra at 218-19],
Accord, Hudson & Manhattan R. R. Co. v. Bd. of Pub. Utility Com'rs., 16 N. J. Super. 396 (App. Div. 1951). This is particularly true where taxes and depreciation are involved.
In computing its annual tax expenses, a utility is of course subject to restrictions imposed upon it by the various taxing authorities. See, e. g., FPC v. Memphis Light, Gas, Electric, & Water Division, 411 U. S. 458, 93 S. Ct. 1723, 36 L. Ed. 2d 426 (1973). Nevertheless, the precise amount of taxes and rate at which those taxes accrue is subject to wide variations depending upon the utility’s accounting practices. See, e. g., In re N. J. Power & Light Co., 9 N. J. 498, 528-29 (1952); FPC v. United Gas Pipe Line Co., 386 U. S. 237, 87 S. Ct. 1003, 18 L. Ed. 2d 18 (1967); Southern New England Telephone Co. v. Pub. Util. Com’n., 29 Conn. Super. 253, 282 A. 2d 915 (Conn. Super. Ct. 1970). The amount of taxes shown on the company’s books may not be the amount which ought to be reflected in utility rates. FPC v. United Gas Pipe Line Co., 386 U. S. 237, 87 S. Ct. 1003, 18 L. Ed. 2d 18 (1967); San Francisco v. Pub. Util. Com’n., 6 Cal. 3d 119, 98 Cal. Rptr. 286, 490 P. 2d 798 (Cal. Sup. Ct. 1971); Colorado Municipal League v. Pub. Util. Com’n., 172 Colo. 188, 473 P. 2d 960 (Colo. Sup. Ct. 1970).
*508Depreciation is purely an accountant’s fiction, although a reasonable and useful one, cf. Public Service Coordinated Transport v. State, 5 N. J. 196 (1950). The amount of depreciation that appears on the company’s books may vary widely depending upon wholly discretionary decisions made by the company’s accountants. Precautions must be taken to insure that such variations are not reflected in utility rates. E. g., In re Wilmington Suburban Water Corp., 58 Del. 494, 211 A. 2d 602, 607 (Del. Sup. Ct. 1965); Pittsburgh v. Pennsylvania Pub. Util. Com’n., 187 Pa. Super. 341, 352-357, 144 A. 2d 648, 655-57 (Pa. Super. Ct. 1958).
Ill
Justice Holmes, not wholly in jest, once defined “great” cases as those that “deal with the Constitution or a telephone company.”5 The present matter has indeed been presented to the Court as a “great” case. We have been warned of the certainty of dire consequences if Bell is not permitted the benefits of the “comprehensive adjustment clause.” History demonstrates that such predictions of imminent doom are rarely justified.6 We must be wary of yielding to what Justice Holmes, writing quite seriously, described as the i£hydraulic pressure” of such “great” cases, “which makes what previously was clear seem doubtful, and before which even well settled principles of law will bend.” Northern Securi*509ties Co. v. United States, 193 U. S. 197, 401, 24 S. Ct. 436, 438, 48 L. Ed. 2d 679 (1904) (Holmes, J. dissenting).
In today’s decision we abandon principles of utilities regulation which are not only sound but which we expressly reaffirmed earlier this term in In re Intrastate Industrial Sand Rates, 66 N. J. 12 (1974).
I am obliged to dissent.
For affirmance as modified — Chief Justice Hughes, Justices Jacobs, Hall, Sullivan and Clieeokd and Judge Kolovsky — 6.
For reversal — Justice Pashman — 1.

The order was broader in its effect. In addition to making specific findings and orders applicable to N. J. Bell, PUC also set out the terms of an automatic adjustment clause which any telephone company could incorporate into its tariffs and established a procedure for Board approval of such provisions.

The majority seeks to avoid this conclusion by finding that the rate proceedings culminating in the December 29, 1972 order were still pending as of December 13, 1973. In a formal sense this is, of course, true. The PUC did treat the proceedings concerning the proposed automatic adjustment clause as a continuation of the prior case and also in its order expressly reserved questions raised by rate counsel concerning overall rate structure and design for further proceedings. The analysis of the majority, though, entirely misconstrues the function of If. J. B. A. 48:2-21.1, and exalts form over substance.
As discussed in the text, the purpose of rate making under N. J. B. A. 48:2-21 is to provide interim relief pending determination of a rate increase petition. In connection with its December 29, 1972 order, the PUC made the findings as to rate base, expenses, and rate of return required by Public Service, supra, granted a rate increase, and in fact disposed of all the issues raised by Bell in its rate increase petition. It expressly characterized its order as “final” with respect to those issues. In substance, no rate increase petition was pending after that date. What remained before the PUC were collateral matters raised during the course of the proceedings by rate counsel and the question of the adjustment clause raised by the Board itself. Nothing has been brought to the attention of the Court, either within the record or outside it, to indicate that the parties have continued to pursue before the PUC the questions raised by rate counsel and reserved by the Board. These questions concern not the level of rates but their overall structure and design. It would appear that the PUC does not contemplate that any orders it might make on these questions, if they are actually pursued, will affect its completed determinations as to the amount of total overall revenues to which Bell is entitled. Under these circumstances, it is difficult to see how an interim order under N. J. B. A. 48:2-21.1 could possibly be appropriate. It is of interest that when the telephone company subsequently decided that it needed greater revenues, it did not seek relief in the allegedly “pending” proceeding but instituted a new and separate rate proceeding.
It need hardly be pointed out that insofar as the majority’s analysis relies on the proceedings involving consideration of the adjustment clause, its argument is hopelessly circular.

The majority suggests that this defect has been retroactively remedied in the Board order of December 26, 1974, extending approval of the adjustment clause through 1975. Since this order is not before us on the present appeal it is, of course, improper to comment on its possible validity or invalidity. Public Service Coordinated Transport v. State, 5 N. J. 196, 226-27 (1950). Since the majority places some reliance on it, it may, however, be worth noting that this order is on its face not part of the same proceeding as the orders under review, but is cast as an interim ordef issued in connection with a rate increase petition filed by Bell on July 18, 1974. In that proceeding the Board may not order refunds for prior excesses, In re N. J. Power & Light Co., 15 N. J. 82 (1954), as the majority seems to require.

The principal policy arguments against the use of an automatic fuel adjustment provision are summarized in Southern California Edison Co., supra at 257-58:
(1) It represents an abdication of the commission’s regulatory function; (2) it denies the ratepayer the opportunity to participate in a public hearing and to develop a full and complete record; (3) it has an inflationary effect on the economy; (4) frequent rate changes would result and this is undesirable; (5) there would be no incentive for the utility to attempt to obtain an economical supply of fuel nor to increase efficiency and absorb all or part of fuel cost increases; (6) it ignores other rate-making factors usually considered by the commission in spreading rates, such as competition, characteristics of use, and public benefit; and *506(7) it segregates and places emphasis on only one factor in setting rates, fuel cost, and ignores possible savings and efficiencies that have occurred in other portions of the utility’s operation.
Over a strong dissent, the California Public Service Commission did approve the inclusion of a fuel adjustment, but surrounded its use with stringent safeguards.
Similar policy objections were expressed by Commissioner Jacobson in his dissent to the December 26, 1974 order of the PUC extending the “comprehensive adjustment clause” through 1975:
The Comprehensive Adjustment Clause prevents the PUC from properly evaluating the validity of such utility cost factors as depreciation, taxes, labor and other expenses before passing them on to the ratepayers.
To permit the automatic pass-through of these costs by mere computer-like calculations — even if agreement could be reached on a number of complex indices which are to be employed as the basis for such calculations — is an abandonment of the authority delegated to the PUC to regulate our state’s utilities. In my opinion, retention of the Comprehensive Adjustment Clause impairs the due process upon which sound regulation depends. Proposed rate increases should be tested in the crucible of a record hearing with opportunity for Rate Counsel and other parties to be heard.

O. W. Holmes, Jr., “John Marshall” quoted in Freund, “Foreword: On Presidential Privileges,” 88 Harv. L. Rev. 13, 34 (1974).

See, e. g., Justice McReynolds’ dissent in Gold Clause Cases, 294 U. S. 240, 381, 55 S. Ct. 407, 427, 79 L. Ed. 885 (1935) : “Loss of reputation for honorable dealing will bring us unending humiliation ; the impending legal and moral chaos is appalling.” In delivering the opinion from the bench the Justice sounded the trumpets of doom even more clearly: “Shame and humiliation are upon us now. Moral and financial chaos may confidently he expected.” Quoted in Freund, “Foreword: On Presidential Privileges,” 88 Sarv. L. Rev. 13, 35 n. 112 (1974).