On certified appeal from a decision of the Board of Public Utility Commissioners.
For affirmance -- Chief Justice Vanderbilt, and Justices Heher, Burling and Brennan. For reversal -- Justice Oliphant. The opinion of the court was delivered by Vanderbilt, C.J.
This appeal by the New Jersey Power & Light Company from a decision of the Board of Public Utility Commissioners dismissing its application for a surcharge of 5% on its newly established rates comes before us on the company's petition for certification granted by us, 14 N.J. 15 (1953).
In October 1952 the company applied to the Board for a revision of its rates so that it could obtain additional revenue of $1,400,000 annually. In a decision handed down in May, 1953 the Board granted rate increases that would allow the company additional revenue of $991,141 a year, based on a return of 5.85%. No appeal was taken from this decision.
On June 3, 1953, two days after the new schedule of rates went into operation, the company filed with the Board a notice that effective July 15, 1953 it would increase its rates by the addition of a surcharge of 5% to the new rates, effective for two years to permit the company to recoup a deficiency of $1,238,000 in gross revenue that had resulted under the order of the Board denying the application of the company for increased rates. The purpose of this surcharge was to restore to the company an alleged deficiency in net income of $578,000 in 1951, 1952 and the first five months of 1953 under the Board's order in the application of 1950 and thus to permit the company to obtain the minimum return contemplated by the earlier order of the Board.
In the proceedings commenced in 1950 the Board found the company's rate of return for the year 1950 after adjustments in revenues and expenses to be 6.52% on a net original cost rate base (91 P.U.R. (N.S.) 331, 340). This return the Board found not unreasonable, stating: "Actual operating results thus far available for 1951 do not support the company's claim that 1951 earnings will be lower than experienced in 1950. If anything there are significant indications that the reverse may be true." (91 P.U.R. (N.S.) 331, 341). The actual return determined on the basis of the same adjustments to earnings as those made by the Board in the 1950 case and on a rate base determined in the same manner as that found by the Board in that case, earned by the company in 1951 was 5.19%, in 1952 was 4.65% and, for the five months ending May 31, 1953 was 1.99%, which is equivalent to 4.78% on an annual basis.
The company's calculations of the deficiencies in returns which the company suffered as a direct result of the Board's action in the 1950 rate case were submitted on different bases:
First, the deficiencies suffered during 1951, 1952 and the first five months of 1953 were calculated by taking the amount by which the gross revenue was less than the anticipated gross revenue applying the lower range of reasonable return found by the Board in the 1950 proceedings, i.e., 5.53% on the net original cost rate base. On this basis, the deficiencies
in returns aggregated $589,000. Because of income taxes and gross receipt taxes, it would require $1,261,700 in gross revenues to recoup these deficiencies;
Second, the deficiencies suffered by the company were calculated by limiting them to 1952 and the first five months of 1953 and utilizing the amount below the allowable rate of return of 5.85% on the net original cost rate base found by the Board on May 13, 1953 in the company's 1952 rate proceeding as a result of which, as hereinbefore stated, the company was permitted to put increased rates into effect on June 1, 1953. In the 1952 proceedings the Board expressly admitted the existence of a deficiency in returns in 1952 of $463,150 below the allowed 5.85% rate of return and conceded the existence of a deficiency in returns for the first five months of 1953 of $185,000 when calculated on the same basis. Thus the total deficiencies for 1952 and the first five months of 1953 aggregated $647,000 and the gross revenues required to make good such deficiencies amounted to $1,384,600;
Third, calculations of deficiencies in returns based upon the upper range of reasonableness of rate return found by the Board in the 1950 proceeding, i.e., 6.52%, were also submitted. The deficits under this calculation were still greater both as to deficits in returns and required gross revenue to recoup the deficiency in such returns.
The amount of deficiencies in returns which the company sought to recover in this proceeding was slightly below the lowest of the three amounts so calculated, i.e., $587,000, and it is this amount which is the subject of appeal.
The decision of the Board in the 1950 rate case stated that rates of return from 5.53% to 6.52% lie within the range of reasonableness (91 P.U.R. (N.S.) 331, 365). The company's proofs in this proceeding established deficiencies in returns for the years 1951, 1952 and five months ending May 31, 1953, below the lower range of rate of return above stated. The company's proposed recoupment of deficiencies in returns through a 5% surcharge was estimated to be realized over a period of about two years in which event
the surcharge of 5% would be terminated. The Board in the 1952 rate case found that the company was entitled to a rate of return of 5.85% on a net original cost rate based on operations for the year 1952; that this rate of return had not been earned by the company in the year 1952 and that it had suffered a deficiency in return of $463,150 for that year, the equivalent of $991,141 deficiency in gross revenue.
At the conclusion of the company's case the State and two large consumers, the Riegel Paper Corporation and the Sanco Piece Dye Works, Inc., which had been permitted to intervene, moved for the dismissal of the petition for the surcharge "upon the ground that the proposed surcharge is based upon erroneous premises of fact and law, and upon unwarranted assumptions made in the statements, testimony and exhibits presented by New Jersey Power & Light Company." They argued that the company erred in its contention that in the 1950 proceeding the Board had actually set a minimum return of 5.53% and also that the Board lacked the power to permit such a surcharge. The Board granted the motion and from this decision the company appeals.
II. THE DOCTRINE OF THE HACKENSACK WATER COMPANY CASE
The company rests its case primarily on Hackensack Water Company v. Board of Public Utility Commissioners, 98 N.J.L. 41 (Sup. Ct. Dec. 7, 1922), 100 N.J.L. 177 (E. & A. April 17, 1924). The case, which was decided by a single justice in the former Supreme Court and affirmed in the Court of Errors and Appeals on the opinion below, held that a public utility is entitled to recoup deficits in operations by temporary surcharges added to its regular rates. In that case the Board had relied on Galveston Electric Co. v. City of Galveston, 258 U.S. 388, 42 S. Ct. 351, 66 L. Ed. 678 (1922), in denying such surcharges to the company, but the court, though likewise relying on that case, gave it an interpretation diametrically opposed to that of the Board. The Galveston case, decided seven months before the Hackensack
case, was the first expression of the United States Supreme Court on the question of whether or not it was confiscatory under the Fourteenth Amendment not to allow a public utility to recoup deficits in operations by surcharges. That court answered the question squarely in the negative in an opinion by Mr. Justice Brandeis, holding that public utilities were not entitled to a guaranty on their investment:
"If net deficits so estimated were made a factor in the rate base, recognition of 8 per cent as a fair return on the continuing investment would imply substantially a guarantee by the community that the investor will net on his investment ultimately a return of 8 per cent yearly, with interest compounded on deferred payments; provided only that the traffic will in course of time bear a rate high enough to produce that amount." 258 U.S. 388, at 394, 42 S. Ct. 351, at 354, 66 L. Ed. 678, at 682.
This was the view of the case adopted by the Board but our former Supreme Court, reasoning from certain language used by Mr. Justice Brandeis in his opinion, sought to confine its operation to those instances where the deficits were produced by the acts or failures of the public utility and not to apply it to cases where the deficits were caused by the rulings of state regulatory bodies:
"The Board [of Public Utility Commissioners] relies upon the recent decision of the United States Supreme Court in Galveston Electric Co. v. [City of] Galveston [258 U.S. 388, 42 S. Ct. 351, 66 L. Ed. 678], but this view of the effect of that decision seems erroneous. Mr. Justice Brandeis says: 'A company which has failed to secure from year to year sufficient earnings to keep the investment unimpaired and to pay a fair return whether its failure was the result of imprudence in engaging in the enterprise, or of errors in management, or of omission to exact proper prices for its output, cannot erect out of past deficits a legal basis for holding confiscatory for the future rates which would, on the basis of present reproduction value, otherwise be compensatory.'
"It might well be held that the court, in naming these three species of deficits (imprudence in engaging in the enterprise, errors in management, and omission to exact proper prices) meant to make an enumeration of the cases to which the opinion applies, none of which is the present case, but it is unnecessary to go as far as that, and it may be conceded that the list is not a complete enumeration and that other causes may ...