H. P. Higgs Co., Inc. v. Borough of Madison
| Citation | 446 A.2d 193,184 N.J.Super. 355 |
| Parties | H. P. HIGGS COMPANY, INC., Plaintiff, v. BOROUGH OF MADISON, a Municipal Corporation, Defendant. |
| Decision Date | 27 January 1982 |
| Court | Superior Court of New Jersey |
William C. Slattery, Newark, for plaintiff (Rosen, Gelman & Weiss, Newark, attorneys).
Herbert A. Vogel, Morristown, for defendant (Vogel & Chait, Morristown, attorneys).
BANGIOLA, J. D. C. (Temporarily assigned).
This is an action in lieu of prerogative writs brought by plaintiff H. P. Higgs Co., Inc., and against the Borough of Madison, a municipal corporation of New Jersey, in which plaintiff alleges that the provisions of Ordinance 31-80 are invalid and that the rates established by the said ordinance are arbitrary, capricious and discriminatory.
Madison operates a municipal electrical utility pursuant to the provisions of N.J.S.A. 40:62-12. It operates the utility solely within its geographic limits and is therefore not subject to regulation by the New Jersey Board of Public Utilities (BPU).
Madison buys all of its power at wholesale rates as regulated by the Federal Energy Regulatory Commission (FERC) and delivers energy through substations in a distribution system of transformers, poles and lines, all of which are owned by the borough. The tariffs or price at which Madison sells electricity to its consumers is not regulated by either the BPU or FERC. Madison has generally in the past followed Jersey Central Power and Light Company (JCP&L) rates in charging its customers. As a result of following those rates the municipality has realized a significant surplus and, in a sense, a "profit" by way of excess revenues over the cost of power as compared with the revenues realized from the sale of power or energy. These excess revenues have routinely been transferred to the general fund of the borough. In addition to surpluses provided by the electric utility operation, there were payments made in lieu of gross receipts taxes which have been carried as an expense of the utility. Transfers of funds from the utility from 1977 through 1981 were as follows:
1977 1978 1979 1980
-------- -------- -------- --------
Anticipated Surplus $340,000 $115,000 $389,000 $293,000
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"In Lieu of" Payments 291,000 360,000 370,000 395,000
--------------------- -------- -------- -------- --------
TOTAL $631,000 $475,000 $759,000 $688,000
1981
--------
Actual Surplus $536,232
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"In Lieu of" Payments 425,000
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TOTAL $961,232
Historically, previous governing bodies (prior to those in power at the time of the enactment of Ordinance 31-80) followed the JCP&L rates.
Subsequent to the institution of this action defendant employed H. Zinder and Associates to make a study of the rate structure of the utility. Pursuant to the recommendations of the Zinder report and the experts employed by that company, Ordinance 39-81 was enacted. 1
The testimony in this matter was extensive; exhibits totalled 50 for plaintiff and 26 for defendant. A variety of reports and briefs were submitted which are all part of the record and were considered in the rendering of this decision.
The Madison electric utility is expressly authorized by statute. N.J.S.A. 40:62-12. The borough council is empowered to establish by ordinance the rates to be charged for supplying electricity. N.J.S.A. 40:62-13. Since the borough's electric utility does not supply electricity beyond its corporate limits, the Madison Electric Department is not considered a public utility and is therefore not subject to the regulatory jurisdiction of the Board of Public Utilities. N.J.S.A. 40:62-24. See, also, N.J.S.A. 48:2-13; In re Glen Rock, 25 N.J. 241, 135 A.2d 506 (1957) (); Jersey City Incinerator Auth. v. Public Utilities, 146 N.J.Super. 243, 253-54, 369 A.2d 923 (App.Div.1976).
Substantial differences exist between the approach taken in reviewing a proposed rate increase by the BPU as contrasted to that employed by courts reviewing a challenge to a rate fixed by ordinance for the services rendered by a municipal utility. To begin with, a privately-owned utility in a rate proceeding before the BPU has the burden of proving that the increase is reasonable. N.J.S.A. 48:2-21(d). N. J. Bell Tel. Co. v. Public Utility Comm'rs., 12 N.J. 568, 585, 97 A.2d 602 (1953); In re New Jersey Power and Light Co., 9 N.J. 498, 526, 89 A.2d 26 (1952); Central R. Co. of N. J. v. Public Utilities Dep't, 7 N.J. 247, 255-257, 81 A.2d 162 (1951).
By contrast, a presumption of reasonableness and validity attends municipal enactments. Collingswood v. Ringgold, 66 N.J. 350, 358, 331 A.2d 262 (1975); Moyant v. Paramus, 30 N.J. 528, 534, 154 A.2d 9 (1959); Dock Watch Hollow Quarry Pit v. Warren Tp., 142 N.J.Super. 103, 116, 361 A.2d 12 (App.Div.1976), aff'd 74 N.J. 312, 377 A.2d 1201 (1977). A court's role in reviewing the exercise of a municipal function is narrow and limited. Dock Watch Hollow Quarry Pit, supra, 142 N.J.Super. at 116, 361 A.2d 12; Rudderow v. Mt. Laurel, 121 N.J.Super. 409, 297 A.2d 583 (App.Div.1972). Courts will interfere with the presumption in favor of municipal action only upon an affirmative showing that the action was arbitrary or unreasonable. The burden of proof is upon a plaintiff to demonstrate such unreasonableness. Dock Watch Hollow Quarry Pit, supra, 142 N.J.Super. at 116, 361 A.2d 12. See, also, Rudderow v. Mt. Laurel, supra, 121 N.J.Super. at 415, 297 A.2d 583; Bellings v. Denville Tp., 96 N.J.Super. 351, 356, 233 A.2d 73 (App.Div.1967).
This standard of unreasonableness governs the instant case. In determining whether plaintiff here has met its burden, the court is obligated to inquire into the appropriateness of those factors raised by plaintiff and in fact used by the borough in establishing its utility rate. These factors include: (1) Madison's adoption of Jersey Central Power and Light Company retail rates for residential and GS secondary class customers; (2) accounting methods used in computing the utility rate base and (3) the right of the utility to earn a profit, which may be transferred to the general fund of the municipality.
Madison has defended its policy of following the JCP&L retail rates on grounds of administrative convenience and maintaining parity with surrounding communities. In support of its contentions Madison presented the testimony of its expert witness, Jack Sanders of H. Zinder and Associates. Sanders stated that in his opinion sound reasons support the Madison council's practice of following the retail rates of JCP&L. He stated that under this practice the resultant rates are better understood by the residents of the community. Moreover, the rates for larger utilities are generally set by regulatory authorities, insuring their fairness. Sanders also stated that the practice of adopting the retail rates of larger utilities is reasonable where the larger utility is the power supplier of the smaller municipal utility.
None of these reasons are sufficient to rebut what is inherently an unreasonable method of establishing a utility rate. In the first place, it is settled that rates may not be justified as reasonable based on a comparison with rates in surrounding areas. Crowe v. Sparta Tp., 106 N.J.Super. 204, 254 A.2d 801 (App.Div.1969). Nor may rates be justified merely because they are easier to understand. The reasonableness of rates is more properly judged as a function of cost. The cost of power supplied to the municipality is based upon a wholesale rate, set by the Federal Energy Regulatory Commission. The cost of power supplied to retail customers of JCP&L (and customers of the borough as well) is based upon a retail rate, set by the Board of Public Utility Commissioners. While these rates may reflect costs to JCP&L in supplying power to its customers, there is no necessary connection between the wholesale and retail rates in terms of costs to the Borough of Madison sufficient to justify its adoption of the retail rate. Since Madison's costs reflect the wholesale rate, any differential between the wholesale rate and the retail rate simply accrues to the municipal utility irrespective of cost. By adopting JCP&L's retail rate structure, Madison has based its own utility rates, not on cost but on convenience. Such a practice must be held to be unreasonable.
The unreasonableness of this practice does not imply, however, that the borough has somehow specifically discriminated against plaintiff or the GS secondary class of customers. Indeed, plaintiff has failed to carry its burden of proving such discrimination. The rates are unreasonable, but not any more so for plaintiff than for other purchasers of electricity within the borough.
N.J.S.A. 40:62-2 provides that "any municipality" engaged in operating a "light, heat or power plant" which provides such a service only within the limits of the municipality 2
... shall with respect to such business and the property and plant used by it ... keep its books, records and accounts in the same manner as provided by statute for keeping other books, records and accounts of a municipality and file with the Board of Public Utility Commissioners a copy of its Annual Report of Audit ....
The clear import of N.J.S.A. 40:62-2 is that, with respect to the "business and the property and plant" of the Madison electric utility, the borough must keep its books in accordance with the Local Budget Law, N.J.S.A. 40A:4-1 et seq., and the Local Bond Law, N.J.S.A. 40A:2-1 et seq. Madison may not ignore municipal accounting in the establishment of rates for electric service within the borough.
The Local Budget Law requires that "[t]he budget of each local unit shall be prepared on a...
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