Court Opinion

ID: 9704940
Source: CourtListenerOpinion
Date Created: 2023-08-26 00:52:39.837511+00
Date Added: 2024-06-11T18:22:06.777862
License: Public Domain

O’HERN, J.,
dissenting.
I believe that the correct resolution of the issues before us is to have the Board of Public Utilities Commissioners (BPU or Board) reconsider its rate resolution in accordance with the principles that the Court adopts. This is the basic approach that we have taken in other ratemaking cases, and it more accurately reflects the appropriate role of the courts in this essentially legislative process of ratemaking.
This case is not readily resolved by labeling the issue as one of retroactive ratemaking. What we basically have here is an administrative response to an extraordinary and nonrecurring set of circumstances. As a result of extreme drought in 1981 and parts of 1982, severe restrictions were imposed on the use of water in the utility’s service area. These drought restrictions prompted the BPU to adopt water rate increases to stabilize water utility earnings. But as one Commissioner noted, when the drought eased, “[Revenues increased dramati*462cally as the effects of the drought disappeared and higher usage returned.” It was this dramatic increase in revenues that prompted the BPU’s over-earnings analysis that is the pivotal issue in this case.
The majority and minority of the Board differed on the amount of the over-earnings but not the public policy issue. The Board did not fault the company for any lack of forecasting with regard to earnings, nor did it believe penalties in the form of interest or other sanctions were appropriate. “But [it found that] the imposition of state curtailments on water usage due to the drought, and the removal thereof, contributed to elastic, unpredictable usage patterns, along with the variable effects of rainfall.” The Board concluded that “the ratepayers should receive recognition for over-earnings by [Elizabethtown] in the amount of $1.15 million.” But the minority member of the Board calculated over-earnings, as did the staff, at $2.2 million and concluded that “the dominant portion of the overrecovery was caused by the Board’s quick response to a state emergency [by raising water tariffs]. The sacrifices endured by the ratepayers merit a return in full for any overrecovery linked to the consequences of the worst drought in 100 years.”
The question that the Board had to face was how to fairly resolve this vicissitude of weather. Should the water users who had suffered through the drought restrictions share in the providential cash windfall that had followed the rainfall? The Board believed that it had the statutory duty and flexibility to reconcile the interests of the utility and the ratepayers. As it viewed the issue, the Board concluded that “the most appropriate methodology to make the ratepayers whole with respect to this level of overrecovery, [was] to set off this amount against the level of rate increase awarded * * *, which [was] necessary to give [Elizabethtown] an opportunity to achieve in [the] future a reasonable rate of return.” It therefore readjusted the test year upon which it was basing the projected increase, and held the new rates “in abeyance until the difference in revenues between those that would be received under the new rates, as *463against those received under current rates, equaled] $1.15 million.”
The Court finds this to be a forbidden methodology. In other words, the Board has applied what the Court now considers to be an incorrect principle of law in the context of the ratemaking process. I would follow in this case the policy that we followed in Riverside General Hospital v. New Jersey Hospital Rate Setting Commission, 98 N.J. 458 (1985). In that case, we recognized that the establishment of rates partakes of a legislative determination. Ordinarily in this complex area of ratemak-ing, “where the Legislature has delegated a great amount of discretion * * *, deference must be accorded to the administrative agency’s expertise and experience in its domain.” Id. at 469. We restated the limited scope of judicial review of administrative adjudication simply to be “ ‘whether the findings made could reasonably have been reached on sufficient credible evidence present in the record * * *’ with due regard also to the agency’s expertise where such expertise is a pertinent factor.” Id. at 468 (citations omitted). This requires only a “careful and principled consideration of the agency record and findings.” Ibid. “There should be applied the time-tested precepts of judicial review of administrative action, that agency action proceed upon an evidential foundation and that the grounds of decision be fully revealed.” In re 1976 Hosp. Reimbursement Rate for Kessler Memorial Hosp., 78 N.J. 564, 577 (1979) (Handler, J., concurring). In Riverside Hospital, supra, when the grounds of decision were not fully revealed, we accorded due deference to the expertise of the ratemaking agency and directed the Hospital Rate Setting Commission “to conduct another hearing in which it should examine the facts, carefully apply the pertinent regulations, and clearly set forth its conclusions.” 98 N.J. at 473.
I would do that here. Our statutory jurisdiction is sharply limited under N.J.S.A. 48:2-46 to setting aside orders of the Board when it “clearly appears that there was no evidence before the board to support the same reasonably or that the *464same was without the jurisdiction of the board.” It simply cannot be said that the order was outside the jurisdiction of the BPU. The evidence is clearly there to support its order. In fact, we do not have before us any dispute that there were over-earnings during the relevant period, although there is dispute as to the exact amount. The only thing that we are concerned about here is the rationale adopted by the BPU for its decision. And on that point, the Board’s view was that it was not ordering a refund but instead was allowing the utility to even out the rate of return on its prior tariff. It adjusted that return to recognize that the utility would decline in performance in 1984. Although not concurring in the wisdom of the decision, Elizabethtown seemed to believe that the methodology was within the Board’s power. A company official discussed the proposed procedure as follows:
1982 overearnings in the amount of $1,150,000 was agreed upon by the Staff and the Company. The Company believes that this amount can be offset in the following manner:
a. Applying projected 1984 underearnings, in excess of amounts used to offset 1983 overearnings, against the 1982 underearnings;
b. Extending the date new rates go into effect.
The methodology is at least debatable. In In re Lambertville Rates v. New Jersey Board of Public Utility Commissioners, 79 N.J. 449, 457 (1979), Justice Sullivan noted the extraordinarily broad discretion of the Board to “fix an effective date” for rate increases. He noted the policy underlying prospective ratemaking, by reference to retroactive ratemaking, thus:
The problems in trying to give retroactive effect to a rate increase are formidable. Customers are constantly being added and dropped by a utility. Those who have paid their utility bills have a right to expect that they will not be surcharged for the same service at a later date. New consumers should not be called on to pay a present surcharge for service rendered prior to their becoming customers. [Ibid.]
The point is that whatever the methodology, the Board should exercise its statutory charter within the limits found by the Court.
*465In the absence of a constitutional claim of confiscation, all that is required is that the rate of return established by the Board be sufficient “to permit the company to maintain its financial integrity, attract capital needed to serve the public, and provide a return to the equity owner commensurate with the returns on investment in other enterprises having corresponding risks.” New Jersey Bell Telephone Co. v. State, 162 N.J.Super. 60, 73-74 (App.Div.1978) (citing Federal Power Comm’n v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 2d 333 (1944)). See Bergen Pines County Hosp. v. Department of Human Serv., 96 N.J. 456, 478 (1984) (citing New Jersey Bell Telephone Co., supra, 162 N.J.Super. 60, with approval and according deference to the Board’s determination). Conceptually, I suppose, the basic question is what rate of return is necessary to maintain investor confidence in a utility that has accumulated significant operating profits from an extraordinary sequence of events.
Viewed within that frame of reference and the narrow scope of judicial review of agency ratemaking, the question is whether the Court should determine the rate that is necessary to “maintain financial integrity[ ] [and] attract capital needed,” or whether the Board should be permitted to reconsider the issue in light of the legal principles that we now hold to be applicable. Ordinarily, within its constitutional and statutory confines, a ratemaking agency is “free to make ‘pragmatic adjustments which may be called for by particular circumstances.’ ” Township Comm. of Lakewood v. Lakewood Water Co., 54 N.J.Super. 371, 381 (App.Div.1959) (quoting Atlantic City Sewerage Co. v. Board of Public Utility Comm’rs, 128 N.J.L. 359, 368 (Sup.Ct.1942), aff'd o.b., 129 N.J.L. 401 (E. & A. 1943)).
As noted, there is a linkage between the methodology employed by the BPU and its ultimate decision. In fact, the caption of the case itself bespeaks the linkage, embracing the combined aspects of the administrative determination (“Increase In Rates” and “Analysis of Earnings”). The Court now has split the two aspects of the agency action. The Public *466Advocate asserted before the Appellate Division that the actual rate increase (about $2.6 million) was established, but premised on the knowledge that the increase would be postponed “resulting in a higher level of rates than would have been authorized had the Board contemplated a September, 1984 effective date.” Elizabethtown counters this by arguing that the $2.6 million hike' independently was found to be just and reasonable regardless of the effective date. The Appellate Division agreed with the Public Advocate and remanded the case even though it found “difficult to support on the record” the Public Advocate’s contention that the approved rates were intertwined with the deferral. 205 N.J.Super. 528, 541 (1985). The Appellate Division nevertheless concluded that it “should not in the first instance pass on the issues” not raised before the Board, and thus remanded the case. Ibid.
The BPU, and not the courts, is charged with fixing appropriate rates. In re Intrastate Industrial Sand Rates, 66 N.J. 12, 19-20 (1974). If the Court invalidates the deferral methodology, and if the deferral did enter into the rate calculation for 1984-1985, then the approved rates are in fact excessive. At the least, the Board should be permitted to make a record on its contentions that 1) in conformity with the methodology seemingly concurred in by Elizabethtown, it reduced the over-earnings figure in recognition of both the company’s 1984 decline in financial performance and the potential for further earnings erosion; 2) the Board extended the test year from March 31, 1984, to July 31, 1984, to match more closely historical data with the time when rates would become effective; and 3) it also accepted the utility’s projections of routine construction expenditures through September 30, 1984, with the result that Eliza-bethtown’s “financial integrity [was] better under the Board Order incorporating the overearnings question than it would have been under an award [not incorporating overearnings and] effective in September but based on the agreed upon test year.”
*467We were informed at oral argument that the amount in controversy has decreased during the course of the litigation, and now the matter may be much more amenable to resolution.
For modification and affirmance —Chief Justice WILENTZ and Justices CLIFFORD, HANDLER, POLLOCK, GARIBALDI and STEIN — 6
For reversal —Justice O’HERN — 1.