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In re Petition of Public Service Coordinated Transport and Public Service Interstate Transportation Co.

Decided: June 27, 1950.

IN THE MATTER OF THE PETITION OF PUBLIC SERVICE COORDINATED TRANSPORT AND PUBLIC SERVICE INTERSTATE TRANSPORTATION COMPANY FOR AN APPROVAL OF AN INCREASE IN THE RATES OF FARE. PUBLIC SERVICE COORDINATED TRANSPORT AND PUBLIC SERVICE INTERSTATE TRANSPORTATION COMPANY, PETITIONERS-RESPONDENTS,
v.
STATE OF NEW JERSEY, APPELLANT



On certification to the Appellate Division of the Superior Court.

For reversal and remandment -- Chief Justice Vanderbilt, and Justices Case, Heher, Oliphant, Wachenfeld, Burling and Ackerson. For affirmance -- None. The opinion of the court was delivered by Vanderbilt, C.J.

Vanderbilt

The State, by the Attorney General, appeals from a decision and order of the Board of Public Utility Commissioners entered on December 14, 1949, dismissing an order to show cause issued by the Board and directed to Public Service Coordinated Transport and Public Service Interstate Transportation Company, why the rate of fare approved by an order of the Board dated May 5, 1948, should not be reduced or adjusted. The appeal was taken to the Appellate Division of the Superior Court, but while pending there was certified by this Court on the petition of the State.

I.

The order here appealed from was the culmination of a proceeding commenced on October 30, 1947, when Public Service Coordinated Transport and Public Service Interstate Transportation Company filed a petition with the Board for approval of an increase in the basic rate of fare for trolley and bus service from five to seven cents, so as to offset an anticipated increase in operating costs resulting from a 16 1/2c an hour wage increase awarded their employees on August 14, 1947, by a board of arbitration appointed by the Governor of the State of New Jersey pursuant to statute. Notice of this application and the basis thereof was duly given to the public and hearings thereon were held by the Board in January and February, 1948, at which a number of municipalities, labor organizations, independent bus lines, and other interested groups and individuals appeared.

From the outset of these hearings it was made clear that the companies were not undertaking a full-fledged rate case, but were seeking an increase only to compensate for the increased costs of labor occasioned by the arbitration award. The companies proceeded on the theory of O'Brien v. Board of Public Utility Commissioners, 92 N.J.L. 44 (Sup. Ct. 1918); affirmed, 92 N.J.L. 587 (E. & A. 1919), wherein it was held that the Board was empowered to grant emergency

relief to a utility by way of a rate increase without the necessity of redetermining the rate base. To proceed on this theory necessarily required the Board to assume and the companies to admit that the existing rate was fair and reasonable, prior to the wage increase, and supported by an adequate rate base. In thus seeking to avoid the delays incident to the establishment of an increased rate by the usual procedure, the companies called upon the Board to give temporary emergency relief by putting in the seven-cent fare at once "to test out what it will produce."

Proceeding on this theory the companies introduced evidence to support the allegations made in their petition that the wage increase granted by the board of arbitration would increase their total annual operating costs by an estimated $3,703,406; that the net increased cost, after deducting an allowance for income taxes, would amount to $2,989,626 annually; and that an increase in fare from five to seven cents, taking into consideration an anticipated decrease in business resulting from passenger resistance to the higher fare and an expected general business recession, would produce a gross annual increase in revenue of $4,482,878, which after allowances for the federal income tax and the five per cent state tax on passenger revenues, would net the companies an increase annually of $3,348,957. The State and other interested parties acceded to the theory on which the increase was sought, but objected to and examined the companies' witnesses on the need for a two-cent increase (it being their contention that a six-cent fare would be adequate) and on the propriety of making the increase effective for all the routes of both companies without regard for the profit and loss figures of each company and their individual lines.

By the companies' own admission a seven-cent fare would produce approximately $400,000 more than enough to offset the increase in labor costs. However, if income tax computations are excluded, as they properly should be where a raise in rate is sought only to offset an increase in operating costs, since only that income in excess of the amount needed to

compensate for the increased costs would be subject to tax, and if the companies' revised estimate of the increase in labor costs, which totaled $3,562,354, be considered instead of their original estimate, it is apparent that the seven-cent fare could be expected to produce annually about $700,000 more than enough to offset the wage increase.

Notwithstanding these obvious facts, on the urging of the companies "to put a rate into effect and see what happens," on May 5, 1948, the Board rendered its decision in which it found the requested rate increase to be justified and reasonable and ordered the seven-cent fare into effect. In this order, however, the Board specifically provided as follows:

"* * * The results that the fares herein allowed will produce can only be known after a reasonable period of actual experience with them.

"The Board, therefore, will retain jurisdiction in this matter for the purpose of investigating and giving further consideration to the effect of the proposed new fares on the revenues and expenses of the applicants, as well as the effect of increase in fares on riding habits under the circumstances in the case. If it develops that under the new conditions the effect upon customers is such that a revision of the proposed fares herein permitted to go into effect is required, the Board will on its own motion institute such revision." * * *

"This order is limited by and subject to the condition that the applicants file with the Board before the effective date of the revised schedules of fares, an acceptance, in writing, of this Order and its conditions, and incorporate therein a stipulation that the Board shall retain full and complete jurisdiction over the applicants herein, with power and authority, upon notice and hearing or on agreement, to modify, amend or alter this Decision and Order as the results of operation thereunder may warrant."

After six months' operation with the seven-cent fare it became apparent that greater revenues were being produced than had been anticipated and accordingly on February 24, 1949, the Board, exercising the control it had retained over the proceedings, ordered the companies to show cause why the fares or rates of fare should not be reduced or adjusted. Hearings on this order were held in March, April and June, 1949, the same being conducted without notice to the public other

than that which had been given at the time of the filing of the companies' petition in 1947. At these hearings various independent bus companies petitioned the Board for permission to intervene for the purpose of submitting proof in support of their contention that if Public Service Companies' fare were reduced, they, the independents, would be unable to survive, since operation at fares below seven cents was financially impossible and since operation at a seven-cent fare if the Public Service Companies charged a lower rate would be competitive suicide.

At these hearings the companies did not seek to justify the seven-cent fare as necessary to meet the increased wage cost, the theory on which the increased fare had originally been sought and granted, but to justify it on the theory that it merely provided a fair return on a proper rate base. Thus without notice to the riding public and other interested persons the entire nature of the proceeding was changed. The reason for this change is obvious, for the actual reported net income of the companies for the first twelve months' operation under the rate increase was $2,984,963, as compared with the estimate made at the time of the previous hearing in 1948 that the net income for the first year's operation under the new rate would be $1,238,114. The companies could thus not even hope to justify as reasonable on their original theory a rate of fare which had resulted in more than doubling their net income. The State and the municipalities that appeared objected to this change in the basis of the proceeding adopted by the applicants and took the position that the seven-cent fare was producing excessive revenues and that a six-cent fare should be instituted for an experimental period.

To support their new contention that the seven-cent fare produced no more than a reasonable return on an adequate rate base, the companies called one witness, introduced five exhibits, and then rested their case. This was not the complicated, expensive and time-consuming procedure of proving a rate base which the companies had sought to avoid at the time of the filing of their application for an increase in rates. [5 NJ Page 206] A single one-page exhibit entitled "Development of estimated rate base as at December 31, 1948," was virtually the only evidence offered by the companies to support their contention for a rate base of $61,404,587. After disallowance and adjustment of certain items, the most significant of which were the elimination of $10,574,912 labeled as "Intangibles attaching to buses the operating authority for which stems from street car franchises" and a $3,000,000 allowance for cash working capital, the Board arrived at a rate base of $47,127,365. Included in this figure was an item of $17,233,538 representing the cost of intangible property related to the organization and acquisition of the various auto bus properties now included in the companies' state-wide system. These intangibles had been rejected by the Securities and Exchange Commission in the exercise of its jurisdiction over the financial structure of the companies and had been ordered eliminated from the companies' books by charging it off to surplus. The Board, however, considered that these acquisitions were necessary in the integration of the auto bus transportation system and served the public through improved and extended service and said: "The record shows that the expenditures represented by this claimed item were the result of arm's length bargaining, continue to represent functional value, and have not been recouped by the investors." By relating this rate base of $47,127,365 to an adjusted operating income of $3,827,054, the Board found the rate of return produced to be 8.12 per cent, and that the return on the companies' stock for the first full twelve months of operation under the seven-cent fare was 9.41 per cent on a stated value of $60 per share. The Board concluded, however, that in view of the risks involved in local transportation, the applicants' descending trend of revenue, the need for additional capital for modernization and continued maintenance of safe and adequate service, "the present fares are just and reasonable and do not now and will not in the foreseeable future yield more than a fair return." The Board accordingly on December 14, 1949, ordered that the proceedings initiated by

the order to show cause be terminated. It is from this Decision and Order that the present appeal was taken.

II.

Before discussing the real issue before the Court on this appeal there are three procedural questions which must be determined.

1. The Public Service Companies contend that the Attorney General may not as a matter of law maintain the appeal in the instant case. It is argued that, although the Attorney General has limited power to appear on behalf of or as counsel for the Board, he has never had the right to appear on behalf of the people in lieu of the Board in matters wherein it is acting in its capacity as an agent of the Legislature. The prerogative of representing the public in utility matters, it is urged, is bestowed upon the Board itself, citing Board of Public Utility Commissioners v. Sheldon, 95 N.J. Eq. 408 (Ch. 1924). The instant case, it is stated, is not an appeal by the State against the Public Service Companies, but an action by the Attorney General against the Board itself, in which he arrogantly substitutes his own judgment for that of the regularly constituted state agency and attempts to usurp the function granted it by the Legislature. By R.S. 52:17A-4(e) his sole power, it is claimed, is to represent the Board, and others, "in all matters other than those requiring the performance of administrative functions entailing the enforcement, prosecution and hearing of issues as imposed by law upon them." It is also asserted that the action of the Attorney General herein is particularly anomalous in that he, or his deputies, actually appeared of record on behalf of the Board at the hearings. Indeed, the Public Service Companies would have it appear that the Attorney General is a Hydra which at one and the same time defends and attacks the various agencies of the State.

This concept of the positions of the Attorney General and the Board on this appeal is a mistaken one. Clearly the

Board is not here under attack; the appeal is in no way directed against it. As the court stated in Public Service Interstate Transportation Company v. Board of Public Utility Commissions, 129 N.J.L. 94, 95 (E. & A. 1942), wherein the Board itself sought to take an appeal:

"We are clear that it has no status as such. It is in no sense a party whose interests are adversely affected, but obviously a subordinate statutory tribunal which made a legal decision reviewable by certiorari like those of other special statutory tribunals."

The Board is not a party to this proceeding and its prerogatives are not being usurped by the Attorney General. To hold otherwise would be tantamount to holding that a trial court is a party to an appeal from a judgment entered therein, or that the Legislature is a party to a proceeding in which the constitutionality of a statute is contested.

It does not require an acute sense of discrimination to distinguish between the Board itself and a determination of the Board. The Board is a creature of statute operating legitimately only within definite statutory limitations. It would be an odd situation indeed if the people, through the executive, were unable to enforce the legislative restrictions placed upon its functions. The Attorney General has traditionally been recognized as the defender of the public interest. This power is an attribute of his office, bestowed by the common law, which has not been taken away by legislative enactment. The Legislature makes laws in the public interest, but their enforcement is a matter for the Governor, who, pursuant to the authority vested in him by Article V, Section I, paragraph 11 of the Constitution of 1947, has directed the Attorney General to take this appeal in the name of the State. It cannot be seriously disputed that the public has an interest which is here in need of adequate representation. The record discloses that the Public Service Companies in 1947 operated 3,408 buses and 171 street cars to transport 665,000,000 passengers 116,000,000 miles. Their routes are located in 20 of the State's 21 counties and serve some 375 municipalities having

a total population, according to the 1940 census, of 3,812,750, or almost 92 per cent of the total population of the State, and ranging in size from Newark, the largest with a population of 430,000, to Tavistock in Camden County, with a population of 13. These two Public Service Companies provide 60 per cent of this State's local bus and trolley service, as against the 40 per cent being furnished by the scores of independent companies. It would be futile to argue that the people of New Jersey do not have an interest in this proceeding. The interest of the citizens of the State is the interest of the State itself, and by R.S. 52:17A-4(g) the Attorney General is charged to "Attend generally to all legal matters in which the State * * * is a party or in which its rights or interests are involved." As was said in Attorney General v. Delaware and Bound Brook Railroad Company, 27 N.J. Eq. 631, 633 (E. & A. 1876):

"The State is not left without redress in its own courts because no private citizen chooses to encounter the difficulty of defending it, but has appointed this high public officer, on whom it has cast the responsibility and to whom, therefore, it has given the right of appearing in its behalf and invoking the judgment of the courts on such questions of public moment."

The challenge to the Attorney General's authority to take this appeal is thus not well made.

2. The next procedural question to be considered in limine is the status of the independent operators whose petition to participate in the hearings on the order to show cause was granted by the Board, and who contend that they are proper and necessary parties to this proceeding, that the failure of the Attorney General to properly serve them on the appeal is fatal, and that the appeal should accordingly be dismissed. There can be little doubt that these independent bus companies, many of whom compete directly with the Public Service Companies in the same municipalities and over the same routes, have a vital ...


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