Toms River Water Co. v. New Jersey Bd. of Public Utility Com'rs

• Decision Date: 11 March 1980
• Citation: 412 A.2d 430,82 N.J. 201
• Parties: In the Matter of the Revision of Rates Filed by Toms River Water Company Increasing Its Rates for Water Service. TOMS RIVER WATER COMPANY, Respondent, v. NEW JERSEY BOARD OF PUBLIC UTILITY COMMISSIONERS, Appellant.
• Court: New Jersey Supreme Court

Page 201

82 N.J. 201

412 A.2d 430

In the Matter of the Revision of Rates Filed by Toms River Water Company Increasing Its Rates for Water Service TOMS RIVER WATER COMPANY, Respondent, v. NEW JERSEY BOARD OF PUBLIC UTILITY COMMISSIONERS, Appellant.

Supreme Court of New Jersey.

Argued Jan. 7, 1980.

Decided March 11, 1980.

Bertram P. Goltz, Jr., Deputy Atty. Gen., for appellant (John J. Degnan, Atty. Gen., attorney; Stephen Skillman, Asst. Atty. Gen., of counsel).

Alfred L. Nardelli, Deputy Public Advocate, for respondent Public Advocate (Stanley C. Van Ness, Public Advocate, attorney; Anne S. Babineau, Asst. Deputy Public Advocate, and Alfred L. Nardelli, Deputy Public Advocate, on the briefs).

William C. Davis, Cherry Hill, for respondent Toms River Water Co. (Davis & Reberkenny, attorneys; John S. Fields and William D. Lavery, Jr., Cherry Hill, on the briefs).

The opinion of the court was delivered by

PASHMAN, J.

Last Term, our decision in In re Lambertville Water Co., 79 N.J. 449, 401 A.2d 211 (1979), raised but declined to resolve the issue whether the Board of Public Utility Commissioners (Board) may give retroactive effect to an approved increase in a utility's rates. See id. at 457, 401 A.2d 211. We now address that issue. A second, related question before us is whether a utility's application for a rate increase takes effect if the Board does not act upon it before the expiration of the suspension period for the proposed rates. We granted certification, 81 N.J. 270, 405 A.2d 814 (1979), to consider the effect of "regulatory lag" the lapse of time while tariff proceedings are pending, see State v. New Jersey Bell Tel. Co., 30 N.J. 16, 28, 152 A.2d 35 (1959) upon the fair and efficient resolution of rate petitions.

Toms River Water Company (Water Company) is a New Jersey public utility corporation which provides water and fire protection services to designated areas of Ocean County, New Jersey. On April 1, 1975, it filed a petition with the Board for permission to raise the rates for its services effective May 7, 1975. Citing mainly spiraling costs and the need for a greater cash flow, Toms River Water sought a 40% increase in its rates. On April 17, the Board ordered hearings on the proposed higher tariff and suspended its effect for four months until September 7, 1975. Although the Board had the authority to suspend the new rates for an additional four months, see N.J.S.A. 48:2-21(d), it did not issue a second order.

A hearing examiner conducted proceedings on the application for nine days between May 13 and July 29, 1975. During the hearings a witness for the Water Company attempted to persuade the examiner that the utility should receive some compensation specifically for "regulatory lag." Henry G. Mulle, an official with an affiliate of the Water Company, testified that an increase should be allowed in the percentage rate of fair and reasonable return to reflect the passage of time while the rate application was pending. According to Mr. Mulle, this adjustment was necessary because rising interest rates would make the cost of borrowing money higher at the conclusion of the proceedings than at the time of the application.

The Public Advocate, Berkeley Township, Dover Township and the Board of Fire Commissioners of Dover Township participated as objectors. After the hearings were completed, the Water Company, the Public Advocate and Berkeley Township filed briefs with the examiner. The utility filed a reply brief on October 9.

On December 30, 1975, the Board on its own motion extended the time for the examiner to submit his report and recommendations until January 28, 1976. ¹ In an order dated February 26, 1976, the Board granted a further extension until March 15. Both orders referred to the heavy workload of the examiner and the need for "an intelligent recommendation" based on sufficient review. Both extensions were unopposed.

The hearing examiner filed his report and recommendation on May 27, 1976. He concluded that the utility's application should be denied, but recommended that it be permitted to file a new proposal incorporating a smaller rate increase. ² In his report, the examiner rejected the argument that the Water Company should receive compensation for "regulatory lag." He found that such a proposed adjustment "seeks protection against future increases in debt which have already been included to an extent reasonable in this case."

The Water Company, the Public Advocate and Berkeley Township filed exceptions to the report. The Water Company again claimed that its rate of return should receive an adjustment for "regulatory lag."

In its decision on September 13, 1976, the Board substantially adopted the findings and conclusions of the hearing examiner. ³ It rejected the Water Company's tariff proposal, but permitted the utility to file a revised schedule which would provide slightly more revenue than the examiner's recommendation. According to the Board's order, the new rates would "become effective for service rendered after (their) acceptance by the Board."

An initial revision submitted on October 1, 1976, did not conform with the Board's guidelines. After the Water Company amended the second proposal, the Board approved the new tariff as "effective for service rendered on and after the date of this Order" November 10, 1976. The resolution of the Water Company's application took over nineteen months from the filing of the original petition.

While the utility's last proposal was still pending, it filed a notice of appeal to the Superior Court, Appellate Division, challenging two portions of the Board's September 13 order denying the initial petition. The first cause for appeal was the imputation of an improper amount of tax expense based on the utility's participation in a consolidated federal tax return. As stated in the notice of appeal, the second was the "(r)efusal of the Board to make the Petitioner's revised tariffs effective as of the date on which the Board was required by law to have made a determination * * *." This is the first time in the record before us that the utility sought this form of compensation for "regulatory lag." ⁴

The Appellate Division reversed the Board on both challenged rulings. 158 N.J.Super. 57, 385 A.2d 862 (1978). Relying on its earlier opinion in In re Lambertville Water Co., 153 N.J.Super. 24, 378 A.2d 1158 (App.Div. 1977), rev'd in part, 79 N.J. 449, 401 A.2d 211 (1979), the court remanded the matter to the Board for redetermination of the Water Company's effective tax rate in accord with some express, rational formula. 158 N.J.Super. at 59-61, 385 A.2d 862; see Lambertville Water Co., 153 N.J.Super. at 29, 378 A.2d 1158, rev'd on other grounds, 79 N.J. 449, 401 A.2d 211 (1979). ⁵ The Appellate Division also reiterated its holding in Lambertville Water Co. that any increase ultimately granted by the Board should apply to all service rendered after the end of the statutory suspension period. ⁶ 158 N.J.Super. at 61, 385 A.2d 862. The Board now seeks review of this latter ruling.

Our reversal of the Appellate Division in Lambertville Water Co. came after that court's decision in the present case. We must therefore begin our analysis with our earlier opinion. We held there that N.J.S.A. 48:2-21(d), which empowers the Board to suspend the effect of a proposed tariff for up to eight months, ⁷ "has no bearing on the effective date of a substituted rate increase fashioned by the Board when it rejects that sought by the utility." 79 N.J. at 455, 401 A.2d at 214. We noted that the statutory suspension procedure applies only to the tariff actually proposed. We therefore held that the suspension provision does not limit the Board's "broad discretion to fix an effective date in the light of circumstances" for a substituted rate increase. Id. at 456, 401 A.2d at 214.

In the present case, the Appellate Division held that N.J.S.A. 48:2-21(d) denied the Board any discretion to fix an effective date beyond the suspension period for a substituted tariff schedule. We have since rejected that view in Lambertville Water Co.; therefore, the decision of the Appellate Division must be reversed.

The Water Company concedes that our earlier ruling necessitates such a result. However, it urges us to consider the effects of our holding upon the interests of utilities and the public in the regulatory process. We noted in Lambertville Water Co. that the suspension provision of N.J.S.A. 48:2-21(d) may impliedly grant a utility the right to implement its proposed rate increase without approval if the Board fails to pass upon it within the eight-month suspension period. 79 N.J. at 456, 401 A.2d 211. We also raised the possibility that the Board may have discretionary authority to give retroactive effect to a substituted filing, although we reaffirmed that rate making must generally be prospective only. Id. at 457, 401 A.2d 211. Because neither issue was presented to this Court, we refrained from resolving them. See id. at 456, 457, 401 A.2d 211. However, the need for guidance to avoid protracted future litigation is now apparent. We therefore accept the invitation to clarify the procedures governing the disposition of tariff applications under the public utility law.

The principal provision describing the Board's authority over tariffs is N.J.S.A. 48:2-21. The statute grants the Board power to require all public utilities to file with it their rates and charges. N.J.S.A. 48:2-21(a); see N.J.A.C. 14:1-7.1 to -7.5. The Board may also "(f)ix just and reasonable individual rates, * * * charges or schedules thereof" on its own initiative, after a hearing with appropriate prior notice, N.J.S.A. 48:2-21(b)(1). Section 21 further empowers the Board to pass upon whether a proposed increase in rates or charges is "just and reasonable." N.J.S.A. 48:2-21(d); see N.J.A.C. 14:1-6.16. To invoke that authority, the Board "may order the suspension of the increase, change...