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In re Proposed Increased Intrastate Industrial Sand Rates

Decided: October 23, 1974.


For affirmance -- Chief Justice Hughes and Justices Jacobs, Hall, Mountain, Sullivan, Pashman and Clifford. For reversal -- None. The opinion of the Court was delivered by Hughes, C.J.


[66 NJ Page 14] The Central Railroad Company of New Jersey ("CNJ" or "railroad") has been so impoverished that since 1967 it has been a Debtor in Reorganization under the Bankruptcy Act under the supervision of the United States District Court for the District of New Jersey, has [66 NJ Page 15] been forced to appeal to the Interstate Commerce Commission for permission to abandon some of its interstate operations and for a number of years has been assisted in the maintenance of its passenger service in New Jersey by substantial contractual grants from the State under N.J.S.A. 27:1A-15 et seq. In such straits, it sought relief as to certain of its freight carriage rates by publishing and filing tariffs with the New Jersey Board of Public Utility Commissioners ("PUC"), which proposed increases were suspended temporarily by PUC under the statute and in accordance with its practice. Many months of public hearings ensued and on August 10, 1972, PUC issued a "negotiation order" purportedly under the provisions of N.J.S.A. 48:2-21.1*fn1 permitting such increased rates to become effective. Shippers affected appealed that order and on February 22, 1973, in an unreported decision, the Appellate Division announced its dissatisfaction therewith on the ground that despite the substantial record compiled during those hearings "* * * the board made no basic findings from which it could make the ultimate finding that the new rates were just and reasonable," and thus remanded the cause for the determination of such

elements and supportive findings of fact.*fn2 Pending such determination the Appellate Division directed all shippers affected by the increases to deposit with the Clerk of the Superior Court sums representing the added charges, disposition of the monies so deposited to await the ultimate determination of this proceeding. The Appellate Division retained jurisdiction.

Thereafter PUC, having reconsidered the matter, filed its Decision on Remand including its determination that the average revenue per car at the old rates exceeded out of pocket costs at three destinations but was less than out of pocket costs at two, and that under the proposed increased rates, revenue would be expected to exceed costs at all destinations except one (where truck competition forced the railroad to keep rates low). In its decision PUC declared:

Although cost of capital has been allowed for in the proposed rates on the industrial sand shipments herein, respondent will still be operating at a loss overall, and the overall rate of return will still be a negative figure. However, the Board is of the opinion that respondent should have the opportunity to reduce its losses in order to assist it towards a viable reorganization for the purpose of carrying out its public service duties. [Decision on Remand, Apr. 12, 1973, Docket No. 718-506]

The increased rates affected only a small area of CNJ operations, the transportation of industrial sand from point of origin to several glass manufacturing companies in northern New Jersey which have, throughout this litigation, challenged the validity of the PUC action. The design of the rates as increased would yield an additional $500,000 annually, characterized as representing about one percent of CNJ total revenues. The Board accepted, as basic to its decision,

CNJ's cost study which, it determined, fairly represented "* * * reliable approximations or estimates of industrial sand out-of-pocket freight operating expenses, rents and taxes (including federal income taxes) plus an allowance for the cost of capital * * *." In this posture it determined:

The Board is satisfied that the proposed increased rates which have been found reasonably compensatory herein are just and reasonable and, therefore, Hereby Approves said proposed increased rates * * *.

There is no suggestion in the record of the establishing of a rate base, or an appropriate rate of return thereon. As the Board stated on August 10, 1972 (in certifying the compatibility of the increases permitted by its "negotiation order" with national standards imposed under the Economic Stabilization Act of 1970):

(5) This Board did not consider it appropriate, in this particular proceeding, to compute a rate base, nor any specific allowance as overall rate of return thereon, * * *.

In its position as a party in this appeal, PUC would justify its failure to find a rate base and a fair rate of return, viewing such findings as an "exercise in futility," as argued with much logical force in its brief to the Appellate Division:

A finding of rate base and a rate of return for this company as urged by appellants would be an exercise in futility. * * * To put this railroad to the expense of proving a rate base and requiring it to employ a rate of return expert would only compound the financial problems of the railroad and increase its losses. The railroad will still be operating at a loss if this rate increase is approved. The rate of return will be a negative figure. Ordinarily, when this Board makes a determination of the rate of return it must also determine whether or not such return is reasonable. When there is no rate of return there is nothing for the Board to pass upon with respect to reasonableness, so that such a finding would be an empty gesture. Similarly, with respect to rate base which is one of the components used in determining a rate of return, there is no need to make this calculation when a utility will continue to sustain losses both before and after a rate increase is granted. A requirement that the Board

find rate base and rate of return in this case would serve no useful purpose.

The Appellate Division, after its second scrutiny of PUC action increasing the rates, held (In re Industrial Sand Rates, 125 N.J. Super. 48 (1973)) that the approval of rates, without establishment of a rate base and the fair rate of return thereon, could not be justified as a permanent matter (as distinguished from an interim increase), under the "negotiation" statute (N.J.S.A. 48:2-21.1, supra), the scope of that statute being confined "* * * to interim relief pending a proceeding to determine the justness and reasonableness of an existing or proposed rate." Nor was the Appellate Division able to find that CNJ's factual situation as to its sand freight revenues vis-a-vis its fully allocated costs attributable to that service, brought it within the relevant section of the "three exceptional and extraordinary situations" spelled out by the Legislature in N.J.S.A. 48:2-21.2, in which PUC is not bound to find a rate base.*fn3 This Court granted certification on the petition of CNJ, 63 N.J. 585 (1973).

CNJ argues before us, however, that in its action PUC was not examining the "justness or reasonableness of any existing rate, * * *" or "prescribing a just and reasonable rate, * * *" as contemplated by the last mentioned statute, but was merely "approving" an increase in rates. This

distinction must be intended to suggest that in such case the increase could be viewed as something superimposed upon an existing rate which, at some time in the perhaps distant past, had been determined to be just and reasonable and that, therefore, the fairness and justness of such an "approved" increase should be determinable by lesser proofs (say, the relationship of fully allocated costs to the revenues of the service) than the usual foundation proofs of rate base and reasonable rate of return as ...

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