Board's Investigation of Tel. Companies, In re

• Decision Date: 10 February 1975
• Citation: 66 N.J. 476,333 A.2d 4
• Parties: , 8 P.U.R.4th 36 In the Matter of the BOARD'S INVESTIGATION OF TELEPHONE COMPANIES Providing Intrastate Service in New Jersey of a Proposed Comprehensive Adjustment Clause. RATE COUNSEL, Appellant, v. NEW JERSEY BELL TELEPHONE COMPANY and the Board of Public Utility Commissioners of the State of New Jersey, Respondent.
• Court: New Jersey Supreme Court

Page 476

66 N.J. 476

333 A.2d 4, 8 P.U.R.4th 36

In the Matter of the BOARD'S INVESTIGATION OF TELEPHONE COMPANIES Providing Intrastate Service in New Jersey of a Proposed Comprehensive Adjustment Clause RATE COUNSEL, Appellant, v. NEW JERSEY BELL TELEPHONE COMPANY and the Board of Public Utility Commissioners of the State of New Jersey Respondent.

Supreme Court of New Jersey.

Argued Sept. 23, 1974.

Decided Feb. 10, 1975.

John G. Graham, Newark, for appellant (William E. McGlynn, Jack B. Kirsten and John G. Graham, Rate Counsel, Dept. of Public Advocate, Newark, attorneys).

Michael J. O'Neil, Newark, for respondent, N.J. Bell Tel. Co. (Michael J. O'Neil and Richard C. Schramm, Newark, attorneys).

The opinion of the Court was delivered by

HUGHES, C.J.

This appeal, by rate counsel appointed to represent the public, ¹ challenges the validity of two orders entered respectively on December 13 and December 20, 1973, by the New Jersey Board of Public Utility Commissioners (hereafter 'PUC' or 'the Board'), under PUC Docket No. 732--134. The December 13 order would authorize a public utility to install in its tariff schedule a 'Comprehensive Adjustment Clause' (hereafter sometimes 'CAC') to recover certain expenses as they increase, by way of yearly increases in its rates. ² The December 20 order accepted a tariff sheet responsive to such earlier order, providing for annual adjustments in rates under such clause, effective in the first year for billings after January 1, 1974, to yield during that year $17,023,000 in increased rates. A motion by rate counsel for reconsideration and stay of such orders was denied by PUC. Having filed an appeal with the Appellate Division, rate counsel were unsuccessful in obtaining from it a stay of the orders. Thus the increased rates went into effect, and were collected during 1974. Under R 2:12--1, this Court, on its motion, while the matter was pending unheard in the Appellate Division, brought the case here by direct certification, by its order of May 14, 1974. For the issue to be discussed effectively, some additional procedural history is necessary.

On January 13, 1972, under its Docket No. 709--494, PUC, after final hearings (under N.J.S.A. 48:2--21 ³ and N.J.S.A. 48--2--21.1 ⁴) granted intrastate rate increases to New Jersey Bell Telephone Company (hereafter 'Bell' or 'the company') in amounts intended to provide a return on its property rate base of 7.93 percent, deemed to be 'just and reasonable' in the sense of the statute.

Bell, on February 28, 1972, under PUC Docket No. 722--153, filed a new rate increase petition contending (while it in no way considered the previously designated rate of return of 7.93 percent to be adequate) that it faced such increases in expenses including wages, maintenance, materials and supplies, taxes and other operating costs that the levels of the increased rates would not permit it to earn in 1972 the 7.93 percent rate of return, and that it should have interim rate relief to permit it to do so. Under N.J.S.A. 48:2--21.1, Supra, PUC has authority to negotiate such temporary increases pending the full 'rate case' proceeding. Having suspended the suggested increased rates temporarily as it was permitted to do under N.J.S.A. 48:2--21(d), PUC had conducted no less than 19 hearings by July 7, 1972. On July 20, 1972, after full adversary proceedings in which rate counsel representing the public and other representatives of the public were heard, PUC concluded that no 'interim' rate relief should be granted. Despite its finding that Bell's rate of return would suffer attrition during 1972 which would bring it down to 7.12 percent, it saw Bell as not being confronted by an immediate emergency of the type which had justified PUC in granting such interim relief in other cases. ⁵

The 722--153 proceeding then went on to the Board's order of December 29, 1972. PUC, having determined the rate base of Bell and other elements as required (Public Service Coord. Trans. v. State, 5 N.J. 196, 74 A.2d 580 (1950)) determined that a fair and reasonable rate of return on such base would be 8.15 percent. Finding that Bell's existing rates yielded $96,241,000 in Pro forma operating income representing a return of 6.37 percent, less than a fair rate of return on its base, PUC approved a tariff designed to produce increased rates to bring the level of net operating income to $123,175,000 which would yield the determined fair and reasonable rate of return of 8.15 percent.

PUC then projected in such order of December 29, 1972, the rate regulation technique ⁶ which, as will be indicated, is the gravamen of rate counsel's appeal in the case presently before us.

While PUC recognized that it could allow a fixed dollar amount of rate relief which would provide the financial needs of the company over a reasonable future period, it preferred the new method as reflecting a benefit to consumers. ⁷

PUC pictured the duration of its 'comprehensive adjustment clause' as being measured by the period during which the formula would be necessary, and would operate effectively, and it said:

At no time would the adjustment, which is described subsequently in great detail, provide a rate of return in excess of 8.30% * * *. The 8.30% Rate of return compares with the 8.15% Allowed by this order and would be permitted in recognition of some future years of operation at rates of return which are less than 8.15%. The Board further offers this .15% Differential as an incentive for efficient management. The first annual adjustment under this provision would be implemented no earlier than January 1, 1974, based on independent certified audited statements for the twelve-month period ending June 30, 1973. (PUC Order of December 29, 1972, in Docket No. 722--153)

The Board in its order then described the comprehensive adjustment clause as including four categories of expense: (1) salaries and wages including fringe benefits, (2) depreciation charges, (3) other expenses, and (4) taxes. Their propriety was intended by PUC's order of December 29, 1972, to be subject to constant surveillance by PUC and to be defeasible by order of the Board when economic trends would reach a point at which the continued functioning of the clause no longer would be necessary. As it said in its order:

Although the adjustment clause would be written in anticipation of more moderate, but continuing, economic trends, the allowances would become inoperative if the Board's review of annual audited figures reveals a satisfactory level of revenue. The Board's surveillance program and the 8.30% Rate of return limitation incorporated in the clause ensure that any appropriate downward adjustments in revenues would be implemented promptly. (PUC Order, Docket No. 722--153, December 29, 1972)

As has been noted the comprehensive adjustment clause would be implemented no earlier than January 1, 1974, this timetable having accommodated the procedure which the Board had envisaged in order to finalize and make precise the design of the comprehensive adjustment clause to be put into effect. That procedure was commenced on February 15, 1973, when PUC entered its 'Order Initiating Investigation' which contemplated public hearings to explore and confirm the opinion it had stated in its December 29, 1972, order in Docket No. 722--153 that:

(t)he public interest might be best served if an automatic adjustment clause were included in telephone companies' tariffs to provide interim relief or adjustment based upon costs which are beyond the direct control of the utility.

Although a different docket number, 732--134, was assigned to the later proceeding (argued by Bell to be 'happenstance' and immaterial, and by rate counsel to be substantial and meaningful), we see in it a clear nexus to the former case. The Board certainly viewed this link as existent, as indicated in the preface to its Order of February 15, 1973--'(i)n the Board's Order of December 29, 1972 in connection with the establishing of rates for New Jersey Bell Telephone Company, on an interim basis in Docket No. 722--153, * * *' and in other references to 'Phase I' and 'Phase II' of the latter proceeding.

By its formal 'Opinion Supporting Order Dated December 29, 1972' PUC particularized its findings and further indicated the continum of the substance of Docket No. 722--153 ⁸ and from this we note the Board's obvious intention that the increased rates yielded by the adjustment clause would always be defeasible, on review of their legitimacy.

Meanwhile hearings on the ambiguously docket-numbered 732--134 proceeding continued, resulting in the Board's Decision and Order of December 13, 1973 and its Order Accepting Tariff Revisions validated thereby of December 20, 1973 (the orders under attack on this appeal). PUC on December 13, 1973, restated the reasoning which led to such proceeding. ⁹ It referred to public rate counsel's attitude with respect to the adjustment clause and their doubts concerning procedure in its adoption. ¹⁰ It equated the new adjustment clause with the long-established fuel adjustment clause. ¹¹ It carefully delineated the four categories of expense subject to the new clause and elaborate precautions with regard to its surveillance.

Our review of the expense categories of CAC indicates to us, without going into their detail, two significant factors. First, in total they return to the company considerably less than actual increases in its costs. ¹² Second, the components of the various categories as representing recoverable expenses are, in their details, well within the range of economic expertise and jurisdictional capacity of the Board, given the basic validity of the CAC concept itself.

The PUC order of December 20, 1973, contemplated that the CAC would be implemented each year. ¹³ As we have indicated PUC had, on December 27, 1973, denied rate counsel's motion for rehearing and stay of the instant orders, seeing '* * * no merit in...