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In re Revision

Decided: May 26, 1952.


On review of final decision and order of the Board of Public Utility Commissioners.

For affirmance -- Chief Justice Vanderbilt, and Justices Oliphant, Wachenfeld, Burling, Jacobs and Brennan. For reversal -- Justice Heher. The opinion of the court was delivered by Burling, J.


This is an appeal by New Jersey Power & Light Company (hereinafter referred to as the Utility), from a decision and order of the Board of Public Utility Commissioners, Department of Public Utilities, State of New Jersey (hereinafter called the respondent), filed April 27, 1951, ordering that proposed increased rates for electric service filed by the Utility on May 28, 1950, should not be placed in effect, and cancelling the schedules filed by the Utility in connection therewith. The appeal was addressed to the Superior Court, Appellate Division, under Rule 3:81-8. Prior to hearing there certification was allowed by this court upon the respondent's petition. In re New Jersey Power & Light Co., 8 N.J. 320 (1951).

The Utility is a New Jersey corporation engaged in the business of generating, purchasing, transmitting, distributing and selling electric energy. It was incorporated under the laws of New Jersey on December 14, 1915, and maintains

its principal office at Dover, Morris County, in this State. The electric service of this corporation, at the time of the initiation of these proceedings, was rendered throughout or in portions of 105 municipalities in the western and northwestern portions of the State of New Jersey, in the Counties of Hunterdon, Mercer, Morris, Passaic, Somerset, Sussex, and Warren, a territory of approximately 1,750 square miles with a population of approximately 180,000 according to the 1940 census. During the period covered by these proceedings it was a member of what is termed the "G.P.U. power group," composed of four affiliated companies, namely Metropolitan Edison Company, New Jersey Power & Light Company, Jersey Central Power & Light Company and Pennsylvania Electric Company, all of which were subsidiaries of General Public Utilities Corporation. This group's transmission facilities were interconnected directly or indirectly with Public Service Electric & Gas Company of New Jersey, Philadelphia Electric Company, and Pennsylvania Power & Light Company through what was denominated the "Pennsylvania-New Jersey interconnection," and also were interconnected with other Pennsylvania, New York and New Jersey generating facilities.

In accordance with formal approval contained in an order of the respondent filed March 28, 1944, the Utility had entered into an automatic rate adjustment plan, developed jointly by representatives of the respondent and of the Utility. Under this plan which was known as the New Jersey Rate Adjustment Plan, rate adjustments of this utility were made annually from 1944 to 1948 inclusive. In 1949 the Utility sought the respondent's approval of a deviation from the standard application of the aforesaid Rate Adjustment Plan for a temporary rate increase pending completion by the Utility of studies which it had undertaken and believed would serve as a basis for revision of the Rate Adjustment Plan formula relating to the determination of rate of return. This temporary rate increase was denied by the respondent for the reason that no emergency or critical situation requiring

such relief was proved. Re New Jersey Power & Light Co., Docket No. 4496, 82 P.U.R.N.S. 554 (not officially reported). Pursuant to the authority contained in the plan as approved by the respondent, the Utility, after notice, terminated the Rate Adjustment Plan as of December 31, 1949, and on May 25, 1950, filed with the respondent the schedule of increased rates which became the source of this appeal. These rates were to become effective June 26, 1950, but on May 31, 1950, the respondent filed an order suspending the same pending hearing thereon. R.S. 48:2-21. Hearings before the respondent began on June 26, 1950. A subsequent hearing took place on July 13, 1950, at the close of which the proceedings were adjourned to October 9, 1950. Additional hearings were held in October and November, 1950, and at the hearing of November 21, 1950, the Utility stipulated "it will not put its proposed rates into effect before March 15th (1951), unless this Board should decide the matter prior to that time, and then it will do whatever the decision calls for." Further hearings occurred in January and February, 1951, concluding on February 21, 1951. At the last hearing the Utility stipulated that it would not put its proposed rates into effect prior to May 1, 1951. On April 27, 1951, the respondent filed its decision and order denying the proposed rate increases and the Utility appealed to the Superior Court, Appellate Division. Prior to hearing there, this court allowed certification upon respondent's petition, as hereinabove mentioned.

The questions involved on this appeal include: (1) was the respondent's determination of rate base unlawful, (2) was the respondent's decision and order illegal, arbitrary and capricious with respect to various items of revenues and expenses, (3) was the respondent's decision and order (a) arbitrary and without evidential support in its basic findings as to rate of return and (b) illegal in that it failed to find and determine a specific fair rate of return, and (4) was the respondent's denial of the Utility's proposed increase in rates a deprivation of its property without due process of law in

violation of the provisions of the Federal and State Constitutions.

Upon consideration of the arguments addressed to these questions, the applicable law and the relevant and competent evidence in the record, we are of the opinion that the decision and order appealed should be affirmed.

The ultimate decision in any rate of fare or service controversy is whether the rates are just and reasonable. The statute aims to secure justice to both sides and the court stands between the public utility and its consumers to effect a just and reasonable status. Central R. Co. of N.J. v. Dept. of Public Utilities, 7 N.J. 247, 260 (1951). The three primary factors involved in the determination of justness and reasonableness of rates are an examination of a company's property valuation which constitutes its rate base, its expenses and the rate of return developed by relating its income to its rate base. This is settled law in New Jersey. Central R. Co. of N.J. v. Dept. of Public Utilities, supra (p. 261); Public Service Coordinated Transport v. State, 5 N.J. 196, 216 (1950); Atlantic City Sewerage Co. v. Board of Public Utility Commissioners, 128 N.J.L. 359 (Sup. Ct. 1942), affirmed 129 N.J.L. 401 (E. & A. 1943). These factors were determined by the respondent in the present case and it is to the sufficiency of these components of its decision and order that the Utility addresses the instant appeal.

It is our duty to weigh the evidence under the pertinent legal principles and determine whether the issue of reasonableness has been properly considered and decided. Central R. Co. of N.J. v. Dept. of Public Utilities, supra (pp. 257-260); Public Service Coordinated Transport v. State, supra, p. 215; Atlantic City Sewerage Company v. Board of Public Utility Commissioners, supra (p. 364). There is, of course, a presumption in favor of the validity of the action of the respondent, since the respondent's exercise of the rate-making power involves a broad measure of legislative discretion. Public Service Coordinated Transport v. State, supra (p. 214); Atlantic City Sewerage Company v.

Board of Public Utility Commissioners, supra (p. 365); State Board of Milk Control v. Newark Milk Co., 118 N.J. Eq. 504, 523 (E. & A. 1935); O'Brien v. Public Utility Board, 92 N.J.L. 587, 589 (E. & A. 1919); Public Service Gas Co. v. Board of Public Utility Commissioners, 84 N.J.L. 463, 467 (Sup. Ct. 1913), affirmed on reargument 87 N.J.L. 581, 597 (E. & A. 1915), writ of error dismissed on stipulation, 242 U.S. 666, 667, 37 S. Ct. 243, 61 L. Ed. 552 (1917). However this is not a "strong" or "conclusive" presumption. The respondent's determination must find reasonable support in the evidence. Central R. Co. of N.J. v. Dept. of Public Utilities, supra (p. 261). Compare R.S. 48:2-46.

Further it is provided by statute that the burden of proof to show that an increase, change or alteration in existing rates proposed by a public utility is just and reasonable shall be upon the public utility making the same. R.S. 48:2-21 d. See Central R. Co. of N.J. v. Dept. of Public Utilities, supra (at pp. 255-256); Public Service Coordinated Transport v. State, supra (p. 219). Compare Federal Power Commission v. Hope Nat. Gas Co., 320 U.S. 591, 602, 64 S. Ct. 281, 88 L. Ed. 333, 345 (1944); Atlantic City Sewerage Co. v. Board Pub. Utility Commissioners, supra (p. 369).

I -- Rate Base

It is established that the rate base in a proceeding of this nature is the fair value of the property of the public utility that is used and useful in the public service at the time of its employment therein and is determined by viewing the plant as an integral and unitary whole, considering all the elements properly entering into the ascertainment of a reasonable return for supplying the public need. Public Service Coordinated Transport v. State, supra (at p. 217); Atlantic City Sewerage Company v. Board of Public Utility Commissioners, supra (128 N.J.L., at pp. 365, 366).

The Utility, however, contends that the rate base determined by the respondent in the present matter results from

consideration of original cost only, to the exclusion of all other evidence of value of the property, and is therefore illegal. The respondent argues that the Utility adduced evidence as to cost and current value relating to the rate base factor, in the proceeding before the respondent, and that it gave consideration to all evidence, as is exemplified in its decision.

The guide to determine the fair value figure, the rate base, is clearly expressed in Public Service Coordinated Transport v. State, supra (at pp. 217-218), wherein Mr. Chief Justice Vanderbilt speaking for this court said:

"There are a number of formulae useful in the determination of fair value; depreciated original cost, depreciated prudent investment, reproduction cost of the property less depreciation, cost of reproducing the service as distinct from the property, and there are undoubtedly others. But the Board is not bound to and, indeed, should not use any single formula or combination of formulae in arriving at a proper rate base, for the determination of fair value is not controlled by arbitrary rules or formulae, but should reflect the reasonable judgment of the Board based upon all the relevant facts, Atlantic City Sewerage Company v. Board of Public Utility Commissioners, 128 N.J.L. 359 (Sup. Ct. 1942); affirmed 129 N.J.L. 401 (E. & A. 1943)."

Compare Colorado Interstate Gas Co. v. Federal Power Comm., 324 U.S. 581, 65 S. Ct. 829, 89 L. Ed. 1206 (1945), rehearing denied 325 U.S. 891, 65 S. Ct. 1082, 89 L. Ed. 2004 (1945); Petition of New England Tel. & Tel. Co., 115 Vt. 494, 66 A. 2 d 135 (Vt. Sup. Ct. 1949); New England Tel. & Tel. Co. v. State, 95 N.H. 353, 64 A. 2 d 9 (N.H. Sup. Ct. 1949); Federal Power Comm. v. Hope Natural Gas Co., supra; Los Angeles G. & E. Corp. v. Railroad Comm., 289 U.S. 287, 53 S. Ct. 637, 77 L. Ed. 1180 (1933); Miles v. West, 151 Md. 337, 135 A. 579, 49 A.L.R. 1470 (Md. Ct. App. 1926); Petersburg Gas Co. v. Petersburg, 132 Va. 82, 110 S.E. 533, 20 A.L.R. 542 (Va. Sup. Ct. App. 1922); O'Brien v. Public Utility Board, supra (92 N.J.L., at p. 590); Public Service Gas Co. v. Board of Public Utility Commissioners, supra (84 N.J.L., at p. 475). See 43 Am. Jur., Public Utilities and Services, Sec. 105, pp. 646-647.

In the present case the Utility introduced evidence in two categories, one of which it termed historical cost and the other present value. It defined its asserted net historical cost rate base as including "original cost of the property together with the acquisition cost (where purchased from predecessor companies) plus experienced engineering and other overhead costs excluded from original cost on the Company's books, together with the estimated cost of plant in process of construction or projected to meet existing loads and service requirements," and its asserted present value rate base as "the cost new either actual or estimated of the property of Appellant reflecting price levels at December 31, 1949, less allowance for loss in value due to deterioration, obsolescence and other factors." It now asserts that the respondent rejected all the testimony and exhibits relating to the present value of its property and "used the cost rate base."

The respondent was entitled to determine the probative force of the Utility's evidence upon both of its asserted rate bases. Assuming that in doing so it eliminated for valid reasons all the Utility's evidence relating to purported "present value" as being without sufficient weight to constitute a reasonable basis for the establishment of increased rates, that fact alone would not render its decision and order invalid, for it was left with evidence of historical cost which is admissible, and if that is sufficient or substantial, competent and relevant evidence it may be considered in connection with all the circumstances of the case, for determination of a rate base. Such was the decision under comparable conditions in Railroad Comm. of Cal. v. Pacific G. & E. Co., 302 U.S. 388, 58 S. Ct. 334, 82 L. Ed. 319, 324-325, at p. 326 (1938), in which case the U.S. Supreme Court held that the Utility could not successfully contend that it was not heard by the commission, that the evidence it offered was not received and considered and its competency and weight determined by the commission, or that the commission did not place its valuation upon the property and fix the rates upon that

valuation. A comparable decision was rendered in 1942 by the former Supreme Court of this State (affirmed by the former Court of Errors and Appeals on the opinion of the former Supreme Court), namely Atlantic City Sewerage Co. v. Board of Public Utility Commissioners, supra. In the Atlantic City case the utility company submitted evidence of two valuation bases, reproduction cost new less depreciation and book value, and the City of Atlantic City submitted a variant form of reproduction cost new less depreciation. The respondent's valuation, on certiorari proceedings to review its order, was asserted to be the acceptance of original cost without attempting to valuate such cost to reflect prevailing prices. Mr. Justice Heher, speaking for the former Supreme Court which affirmed the board's order, said (128 N.J.L., at p. 363):

"We concur in the Board's appraisal of the property as the fair value base. Its own expert calculated the original cost of the property, less depreciation, at $2,075,985.49; and there is no reasonable basis in the proofs for a finding in excess of that sum."

Although we have in the record of this case no current testimony of calculation of original cost by an engineer or expert of the respondent, as we shall demonstrate there is sufficient or substantial competent and relevant evidence to support the respondent's calculation as to the present fair value of the Utility's property and there is no reasonable basis in the proofs in this case for a finding in excess of that sum. We proceed to the evaluation of the evidence to support these conclusions in the inverse order.

a. Present Value Rate Base:

Let us first examine the present value rate base theories as advanced during the testimony of the Utility's witnesses.

It was asserted by Mr. Davis that there are in general two methods followed by engineers and economists in establishing the cost of a facility expressed in terms of the current purchasing [9 NJ Page 513] power of the dollar. He testified that one is a determination of the cost of reproducing in new condition the exact facilities presently existing generally on the theorem that the property would be reproduced in its entirety as a single construction project (termed the reproduction cost method), and that the second method is the establishment of current nominal dollar cost of constructing existing facilities in new condition in a manner similar to that used by the company in the actual construction of its facilities. The reproduction cost new method, as explained by Mr. Davis, involves detailed inventory of plant and facilities in service; development of unit costs at current material prices and labor rates, to be applied to the inventory quantities; and establishment of appropriate engineering and administrative overhead charges which would be incurred in the event the theoretical construction of the property were to be carried forward on a single project or single impulse basis. He testified that this method is very expensive as it involves a tremendous volume of detailed work and because of this fact there has developed a tendency to the use of the other method. The actual cost related to current price method was described by this witness as one in which the actual costs of plant in service are adjusted "by various appropriate methods, to reflect changes in the purchasing power of the dollar." He testified that the total original cost of plant in service of the Utility on December 31, 1949, (as computed by the Utility at $38,401,189) adjusted to reflect the reduced purchasing power of the dollar at the approximate levels existing during 1949 was $56,055,450, an average upward adjustment of 43 ...

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