On certification from the Superior Court, Appellate Division.
For affirmance -- Chief Justice Weintraub, and Justices Heher, Jacobs, Francis and Proctor. For reversal -- Justices Wachenfeld and Burling. The opinion of the court was delivered by Francis, J. Burling, J. (dissenting). Wachenfeld, J., joins in this dissent.
We certified this cause on our own motion to review the order of the Board of Public Utility Commissioners requiring appellant Elizabethtown Water Company to extend its facilities to supply water to the respondent Board of Fire Commissioners of Fire District No. 3, Township of Piscataway, and to certain residents of the area involved.
On February 2, 1905 the Piscataway Water Company was incorporated "for the purpose of constructing, maintaining and operating water works in the Township of Piscataway * * *, and for the purpose of supplying the said township and the inhabitants thereof with water * * *."
Attached to the certificate of incorporation was the necessary approval of the governing body of the township which recited that, pursuant to an authorizing ordinance, consent was given to the incorporators to form the company for the purposes stated.
The franchise thus created constituted a contract between the utility and the municipality, subject, of course, to the state regulatory power. Bourke v. Olcott Water Co., 84 Vt. 121, 78 A. 715, 33 L.R.A., N.S., 1015 (Sup. Ct. 1911); 23 Am. Jur., Franchises, §§ 6, 15, 35; 43 Am. Jur., Public Utilities and Services, § 16. The burden assumed thereby was a community service; it was not limited to the establishment of a system suitable only to the then current needs. Included also was the utility's duty to keep in view the probable growth of the township, both in population and in structural development, and to make gradual extensions of its mains to meet the reasonable demands that would inevitably result. Reid Development Corp. v. Parsippany-Troy Hills Tp., 10 N.J. 229, 234 (1952); Hackensack Water Co. v. Ruta, 3 N.J. 139, 147 (1949); Long Branch Commission v. Tintern Manor Water Co., 70 N.J. Eq. 71, 77 (Ch. 1905), affirmed 71 N.J. Eq. 790 (E. & A. 1907); 56 Am. Jur., Waterworks, § 60.
It is not suggested that since 1905 any utilities other than the Piscataway Water Company and the appellant as its successor have supplied water within the franchised limits of the township. The operation is as presently exclusive in fact as the one examined in In re Township of Lakewood, 29 N.J. Super. 422 (App. Div. 1954), rehearing denied sub nom. Lakewood Tp. v. Lakewood Water Co., 30 N.J. Super. 79 (App. Div. 1954). No contention is advanced here (nor was there in the Lakewood case) that the franchise is exclusive in law.
On November 27, 1922 the Piscataway Water Company became consolidated with the appellant Elizabethtown Water Company, and under the agreement the latter expressly assumed all of the obligations and duties of the former. Cf. 23 Am. Jur., supra, § 35.
The township is divided into fire districts pursuant to N.J.S.A. 40:151-1 et seq. Each district is a separate corporate unit managed by commissioners, and each has specifically described geographical limits. The commissioners are given the power to provide means for protection against fires within the defined area, N.J.S.A. 40:151-1, 2; 40:151-27, including, of course, a supply of water with which to combat them. According to a statement appearing in the testimony, Piscataway presently pays over $22,000 annually to appellant for hydrant service.
The record indicates that for 22 years the commissioners of District No. 3 have been concerned about the absence of a water supply for fire fighting purposes in their area. But appellant has steadfastly refused to extend the mains unless the district would assume the original capital outlay. Over the years, the township has grown and the water facilities have been expanded proportionately. At the present time, service is provided for the "territory entirely surrounding" the section of District No. 3 which is involved in the application under consideration. The portion to be served by the proposed extension encompasses only a relatively few blocks. The map prepared by the company's chief engineer shows that the new mains, if laid according to the more extensive but only really adequate plan, would serve an area of 51 acres, interlaced with a few streets. The map indicates also that there are existing mains within a block or two blocks to the west and northwest and to the east of the suggested extensions. The situation to the south is not disclosed as the sketch covers only one block from the most southerly of the proposed new mains. However, the inference from the testimony already referred to is that the existing facilities are not far removed. In June 1956, when the water company's engineer visited the location in order to draw the map, there were 60 occupied homes in the area, and ample space remained for many more. Water is provided by wells which were dug by or for the individual owners. The engineer stated that "several new homes" had been constructed there in the year and a half between the filing of
the petition and the date of the hearings. In this connection, he testified further:
"Q. Well, in the period of time since you have become familiar with this particular territory, would you say that the construction and development in the area has increased since you first knew it? A. New construction of residences in central New Jersey is increasing greatly, and the area of Piscataway and Dunellen is growing -- there are more new residences each year than there were the year before. It is in a period of growth."
According to the secretary of the fire district, these homes have no fire protection and "if anything should happen now, we would just lose the house, that's all." Speaking of the home owners, he said also:
"They have been after the fire commissioner, 'Why isn't there water out there? Why can't we get water out there?' They have continually come to our meeting to find out why. What progress are we making? If the water was there these people building these homes would certainly be putting it in rather than digging a well,"
to which the company's engineer, who was then on the witness stand, replied:
"Well, we are in the business of selling water in there, but we have to sell it on the pattern which is established for the company."
The application for extension of the mains was filed with the Board on January 20, 1955. Some time prior thereto, a petition was presented to the fire commissioners signed by 36 home owners in the area, reciting that they
"hereby apply for city water in our area and the maximum number of fire hydrants allotted for fire protection of our property. Furthermore, the undersigned do agree to use the proposed water in their homes providing some water supply will be piped to our area without any cost to us, with the exception of having the water piped from the road into our homes which we understand will be at our own individual expense."
The record discloses that this document was filed with the Board of Public Utility Commissioners, although it was not
marked as an exhibit at the hearings. The decision of the Board notes the application of these residents as one of the factors inducing the extension order. It would have been more satisfactory from a procedural standpoint to have had these persons formally join in the petition of the fire district. Our affirmance of the order, as hereafter set forth, is made dependent upon such joinder.
The matter was assigned for hearing to an examiner, who took the testimony of the parties on two separate occasions.
The uncontradicted proof offered by the company shows that the cost of extending the mains to accomplish the plan declared by the examiner to be the only one which would provide worthwhile fire protection service would be $34,570. The engineer testified also that the estimated immediate annual revenue from the fire district and the 36 users would be $1,600, and that, considering the portion of the operating costs of the company properly allocable to this extension, an annual loss of $1,425 thereon would result. However, it is not suggested that such loss cannot be absorbed in the overall revenue without any appreciable effect upon the reasonable return now being enjoyed by the utility. Moreover, for the year 1956 the company expected to spend approximately four and a half million dollars on capital projects. And it conceded that inclusion of the additional $34,570 for the mains in question could have no material effect on its financial condition.
The examiner recommended that the Board refuse to order the extension of the mains at the expense of the company. The primary reasons for his action seem to be that a reasonable return would not be earned from the service, that the revenue to be derived at once would not suffice to meet operating costs, and that a cumulation of this and similar requests for extensions (although not yet made or even suggested or indicated) "could significantly increase the Company's rate base without providing adequate additional revenue."
After considering the record, the Board reached a contrary result. In doing so, it said:
"The test of whether an extension is reasonable and practicable is not answered by a mere showing that such an extension would not be immediately profitable. While 32 [36 probably intended] residential customers have indicated a desire to use the water service, there are 60 houses in the area which are now being supplied by local wells. Further, there are large areas of ground that have not been developed, but the witness for the Company has testified that this area has been and is still growing. We feel that the future prospects in this area are very favorable and justify an order for the construction of the proposed extension and in the absence of a showing that the extension would result in reducing the overall revenue of the Company, so as to deprive it of a fair and reasonable rate of return, the construction of the extension is justified.
We find that the extension requested is reasonable and practicable, will furnish sufficient business to justify the original cost and upkeep and will not affect the financial condition of the Company * * *." (Insertion ours)
The company charges that the order which flowed from this decision violates the applicable rule of the Board promulgated in 1923 by which the obligation to extend water utility mains was regulated. This rule generally prescribes that where the cost of the proposed enlargement exceeds three and one-half times the estimated normal annual revenue from the residences involved and from the public agency for fire protection, the excess cost shall be deposited with the utility and shall remain, without interest, in the possession of the utility until such time as three and one-half times the revenue equals the cost of the extension. At that time the deposit must be returned pro rata to the depositor, subject to the proviso that after ten years any balance not yet returned becomes the property of the utility. Of course, the authority of the Board to act in the matter is regulated by N.J.S.A. 48:2-27, and to the extent that any rule contravenes the statute as interpreted, it has no validity.
"The board [of Public Utility Commissioners] may, after hearing, upon notice, by order in writing, require any public utility to * * * construct * * * any reasonable extension of its existing facilities where, in the judgment of the board, the extension is reasonable and practicable and will furnish sufficient business to justify the construction and maintenance of the same and when the financial condition of the public utility reasonably warrants the original expenditure required in making and operating the extension."
Under this enactment, when the public convenience and necessity justify an extension of facilities, the fact that the utility will not realize a profit or an immediate profit from it is not dispositive of the matter. The criterion is the overall return. As was said in In re Township of Lakewood, supra, a franchise holder who alone serves an important and essential public need in a limited area cannot pick and choose its customers solely on the basis of pecuniary advantage and refuse to supply those who constitute an integral part of the locality simply because, considered in isolation, ...