Goldmann, Conford and Haneman. The opinion of the court was delivered by Haneman, J.A.D.
This is an appeal by Plainfield-Union Water Company (the company) from a final decision and order of the New Jersey Board of Public Utility Commissioners (the Board) on the company's application for increased rates. The company complains that the rate increase allowed is less than what it maintains is necessary to permit it to carry out necessary construction. Rate counsel, appointed by the Attorney General, prosecutes a cross-appeal from the Board's inclusion of certain scheduled construction projects in the rate base.
On January 31, 1958 the company filed a schedule of rates with the Board. That schedule reflected an increase in rates equal to approximately 18% of the rates the company was then charging its users. On February 13, 1958 the Board ordered the proposed schedule of rates suspended and fixed April 14, 1958 as the first date of hearing on the justness and reasonableness of the proposed rates. The company was ordered to give notice to its customers of the purpose, time and place of the hearing. Public hearings were held on five days between April 14 and May 29, 1958. Represented at these hearings were the company, the public (through rate counsel appointed by the Attorney General), and the Inter-municipal Water Committee (a group composed of representatives of the municipalities served by the company).
By an order dated August 28, 1958 the Board determined that the existing rates were unjust and unreasonable because the company was denied thereunder an opportunity to earn a fair return; but that the yield under the rates proposed by the company would be excessive. The Board permitted an increase in the company's annual revenues equal to $201,245, rather than, as requested, $428,891. The increase allowed would permit the company to earn operating income of $574,362, a return equal to 6% per annum on a rate base of $9,572,704.
The company appeals from that order. Its appeal challenges the reasonableness of the Board's action on the following grounds: the increase allowed will not permit the company to maintain and support its credit and to raise the capital necessary to a proper discharge of its duties; the refusal by the Board to give weight to the depreciated reproduction cost rate base; its reduction of the company's rate base by the amount of profit realized on the 1931 sale of a portion of the company's distribution system; its refusal to value the company's real estate at fair market value; its refusal to "normalize" 1957 metered water consumption and adjust operating revenues accordingly for purposes of calculation of income for the 1957 "test year"; its refusal to "normalize" federal income taxes and adjust operating expenses accordingly; its rejection of amortized expenses of prior rate cases as an operating expense in the test year for the same purpose; and, finally, the order is violative of the United States and New Jersey Constitutions as a taking of private property without compensation and without due process of law.
On the cross-appeal rate counsel challenges the reasonableness of the company's rate base as determined by the Board upon the ground that the Board included $887,600 therein for projected additions to the company's plant, representing improvements and extensions (mainly non-revenue producing) which were only proposed, i.e. , facilities not then existing and used or useful in the public service.
The company provides water service to approximately 52,000 customers located in 21 municipalities in Union, Somerset and Middlesex Counties. (This represents an increase in the number of customers of approximately 2,000 over the number served in 1956). The water supply is obtained from wells and by purchase from adjacent water companies, principally Elizabethtown Water Company, Consolidated. Storage is provided by the use of collecting basins and closed reservoirs, tanks and standpipes. The distribution system is composed of approximately 500 miles of cast iron
mains ranging in size from 2 to 24 inches. Attached to the system are about 300 fire hydrants.
During World War II there had been little increase over the prior demand for water in the territory served by the company. Consulting engineers for the company estimated at that time that the average daily demand for 1956 would range between 12 and 13 million gallons. This figure was exceeded in 1949 and 1951. Service difficulties developed during drought periods from 1949 to 1955, with resulting complaints by consumers to the Board and various municipal officials.
Eighteen of the municipalities serviced by the company formed the Inter-municipal Water Committee for the purpose of investigating the necessity for improvements to assure adequate water service. After the receipt of independent engineering advice, this committee concluded that construction of additional physical facilities was required to accomplish that end, and that an increase in rates was necessary to finance such construction. The company concurred in this finding and in 1956 adopted a capital improvement program to accomplish the improvements recommended.
The company requested an increase in rates during 1953. The rates then proposed were designed to produce additional annual revenue of $582,500, thus enabling the company to obtain $1,000,000 additional capital for construction purposes. By an order dated March 24, 1954 the Board granted a rate increase to produce additional revenue of $272,280. Actual expenditures for capital improvements in 1954 amounted to $900,223.
In 1956 the company adopted a five-year construction program which provided for expenditures of $1,710,000 between the years 1956 and 1960. In that year the company again requested the Board to approve an increase in rates designed to produce $550,000 additional annual revenue in order to obtain additional funds necessary to finance the five-year improvement program. The Board granted a rate increase
designed to produce additional annual revenue of $249,600. The company expended in excess of $250,000 for major capital improvements during 1956 but deferred any further construction during 1957, assertedly because of its inability to raise further capital.
Thereafter the company adopted a new three-year program of major construction improvements necessitating a total expenditure of $1,795,000. As projected, $202,600 would have been expended immediately (in 1958), $685,000 by the summer of 1959, $476,000 by the summer of 1960, and $431,400 by the summer of 1961. Of these amounts, only the first two items, aggregating $887,600, were included by the Board in the company's rate base for purposes of the present rate application.
No one suggests that the company presently has adequate facilities to provide its customers with reasonably adequate water supply, nor that the construction program recommended to the company by its engineers and those of the Intermunicipal Water Committee, and approved and adopted by the company, is improper or unnecessary to enable the company to furnish an adequate and safe water supply to its customers.
The company argues that it is entitled to a rate of return on the rate base which will permit it to perform the duties imposed upon it, and as the rate allowed will not permit it to discharge its duties, it does not provide an opportunity to earn a fair rate of return.
Our chief duty in a rate case is to pass upon the soundness of the rate base and the reasonableness of the rate of return thereon established by the Board. The discharge of this duty necessitates a review of the record to ascertain whether there is competent and relevant evidence to support the findings of fact and the reasonableness of the rates established by the Board. Public Service Coordinated Transport v. State , 5 N.J. 196, 215 (1950); Central
R. Co. of New Jersey v. Dept. of Public Utilities , 7 N.J. 247, 260 (1951). The justness and reasonableness of the rates established can only be determined after an examination of the company's property valuation which constitutes its rate base, its revenues and expenses, including income taxes and an allowance for depreciation, and the rate of return developed by relating its net income to the rate base. Public Service Coordinated Transport v. State, supra , 5 N.J. at page 216.
However, the scope of our judicial function in rate cases does not extend to the field of original fact-finding. Our duty is to review the record to ascertain whether the facts as found by the Board are bottomed upon relevant and competent evidence and form a rational and reasonable basis for the conclusions of the Board. State v. N.J. Bell Tel. Co. , 30 N.J. 16, 29, 30 (1959). The requirement that the Board must make findings of sufficient definiteness to support a reasoned conclusion at which they arrive is a substantive matter. Findings are essential to a rate case and may not be supplied by implication. Central R. Co. of New Jersey v. Dept. of Public Utilities, supra , 7 N.J. at pages 261-262; New Jersey Bell Telephone Co. v. Communications Workers, etc. , 5 N.J. 354, 375-377 (1950), and such findings must flow from the facts (as found by the agency) by a reasoned process.
Thus, initially we look to the decision and order to determine whether a reasoned conclusion is expressed, i.e. , a conclusion grounded in findings of appropriate definiteness which are supported by relevant and competent evidence.
Although, as indicated above, the company has taken exception to various determinations of the Board affecting its conclusions as to rate base and operating income (discussed later in this opinion), the major contention of the company on this appeal is that the dollar amount of additional revenue, resulting from the Board's designation of a 6% rate of return as "adequate," "fair" ...