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In re Board''s Investigation of Telephone Companies Providing Intrastate Service

Decided: February 10, 1975.


For affirmance as modified -- Chief Justice Hughes, Justices Jacobs, Hall, Sullivan and Clifford and Judge Kolovsky. For reversal -- Justice Pashman. The opinion of the Court was delivered by Hughes, C.J. Pashman, J. (dissenting).


[66 NJ Page 479] This appeal, by rate counsel appointed to represent the public,*fn1 challenges the validity of two orders entered respectively on December 13 and December 20, 1973, by the New Jersey Board of Public Utility Commissioners (hereafter "PUC" or "the Board"), under PUC Docket No. 732-134. The December 13 order would authorize a public utility to install in its tariff schedule a "Comprehensive Adjustment Clause" (hereafter sometimes "CAC") to recover certain expenses as they increase, by way of yearly increases in its rates.*fn2 The December 20 order accepted a tariff sheet responsive to such earlier order, providing for annual adjustments in rates under such clause, effective in the first year for billings after January 1, 1974, to yield during that year $17,023,000 in increased rates. A motion by rate counsel for reconsideration and stay of such orders was denied by PUC. Having filed an appeal with the Appellate Division, rate counsel were unsuccessful in obtaining from it a stay of the orders. Thus the increased rates went into effect, and were collected during 1974. Under R. 2:12-1, this Court, on its own motion, while the matter was pending unheard in the Appellate Division, brought the case here by direct certification, by its order of May 14, 1974. For the issue to be discussed effectively, some additional procedural history is necessary.

On January 13, 1972, under its Docket No. 709-494, PUC, after final hearings (under N.J.S.A. 48:2-21*fn3 and N.J.S.A. 48:2-21.1*fn4) granted intrastate rate increases to New Jersey Bell Telephone Company (hereafter "Bell" or "the company") in amounts intended to provide a return on its property rate base of 7.93 percent, deemed to be "just and reasonable" in the sense of the statute.

Bell, on February 28, 1972, under PUC Docket No. 722-153, filed a new rate increase petition contending (while it in no way considered the previously designated rate of return of 7.93 percent to be adequate) that it faced such increases in expenses including wages, maintenance, materials and supplies, taxes and other operating costs that the levels of the increased rates would not permit it to earn in 1972 the 7.93 percent rate of return, and that it should have interim rate relief to permit it to do so. Under N.J.S.A. 48:2-21.1, supra, PUC has authority to negotiate such temporary increases pending the full "rate case" proceeding. Having suspended the suggested increased rates temporarily

as it was permitted to do under N.J.S.A. 48:2-21(d), PUC had conducted no less than 19 hearings by July 7, 1972. On July 20, 1972, after full adversary proceedings in which rate counsel representing the public and other representatives of the public were heard, PUC concluded that no "interim" rate relief should be granted. Despite its finding that Bell's rate of return would suffer attrition during 1972 which would bring it down to 7.12 percent, it saw Bell as not being confronted by an immediate emergency of the type which had justified PUC in granting such interim relief in other cases.*fn5

The 722-153 proceeding then went on to the Board's order of December 29, 1972. PUC, having determined the rate base of Bell and other elements as required (Public Service Coord. Trans. v. State, 5 N.J. 196 (1950)) determined that a fair and reasonable rate of return on such base would be 8.15 percent. Finding that Bell's existing rates yielded $96,241,000 in pro forma operating income representing a return of 6.37 percent, less than a fair rate of return on its base, PUC approved a tariff designed to produce increased rates to bring the level of net operating income to $123,175,000 which would yield the determined fair and reasonable rate of return of 8.15 percent.

PUC then projected in such order of December 29, 1972, the rate regulation technique*fn6 which, as will be indicated, is

the gravamen of rate counsel's appeal in the case presently before us.

While PUC recognized that it could allow a fixed dollar amount of rate relief which would provide the financial needs of the company over a reasonable future period, it preferred the new method as reflecting a benefit to consumers.*fn7

PUC pictured the duration of its "comprehensive adjustment clause" as being measured by the period during which the formula would be necessary, and would operate effectively, and it said:

At no time would the adjustment, which is described subsequently in great detail, provide a rate of return in excess of 8.30% * * *. The 8.30% rate of return compares with the 8.15% allowed by this order and would be permitted in recognition of some future years of operation at rates of return which are less than 8.15%. The Board further offers this .15% differential as an incentive for efficient management. The first annual adjustment under this provision would be implemented no earlier than January 1, 1974, based on independent certified audited statements for the twelve-month period ending June 30, 1973. [PUC Order of December 29, 1972, in Docket No. 722-153]

The Board in its order then described the comprehensive adjustment clause as including four categories of expense: (1) salaries and wages including fringe benefits, (2) depreciation

charges, (3) other expenses, and (4) taxes. Their propriety was intended by PUC's order of December 29, 1972, to be subject to constant surveillance by PUC and to be defeasible by order of the Board when economic trends would reach a point at which the continued functioning of the clause no longer would be necessary. As it said in its order:

Although the adjustment clause would be written in anticipation of more moderate, but continuing, economic trends, the allowances would become inoperative if the Board's review of annual audited figures reveals a satisfactory level of revenue. The Board's surveillance program and the 8.30% rate of return limitation incorporated in the clause ensure that any appropriate downward adjustments in revenues would be implemented promptly. [PUC Order, Docket No. 722-153, December 29, 1972]

As has been noted the comprehensive adjustment clause would be implemented no earlier than January 1, 1974, this timetable having accommodated the procedure which the Board had envisaged in order to finalize and make precise the design of the comprehensive adjustment clause to be put into effect. That procedure was commenced on February 15, 1973, when PUC entered its "Order Initiating Investigation" which contemplated public hearings to explore and confirm the opinion it had stated in its December 29, 1972, order in Docket No. 722-153 that:

[t]he public interest might be best served if an automatic adjustment clause were included in telephone companies' tariffs to provide interim relief or adjustment based upon costs which are beyond the direct control of the utility.

Although a different docket number, 732-134, was assigned to the later proceeding (argued by Bell to be "happenstance" and immaterial, and by rate counsel to be substantial and meaningful), we see in it a clear nexus to the former case. The Board certainly viewed this link as existent, as indicated in the preface to its Order of February 15, 1973 -- "[i]n the Board's Order of December 29, 1972

in connection with the establishing of rates for New Jersey Bell Telephone Company, on an interim basis in Docket No. 722-153, * * *" and in other references to "Phase I" and "Phase II" of the latter proceeding.

By its formal "Opinion Supporting Order Dated December 29, 1972" PUC particularized its findings and further indicated the continuum of the substance of Docket No. 722-153*fn8 and from this we note the Board's obvious intention

that the increased rates yielded by the adjustment clause would always be defeasible, on review of their legitimacy.

Meanwhile hearings on the ambiguously docket-numbered 732-134 proceeding continued, resulting in the Board's Decision and Order of December 13, 1973 and its Order Accepting Tariff Revisions validated thereby of December 20, 1973 (the orders under attack on this appeal). PUC on December 13, 1973, restated the reasoning which led to such proceeding.*fn9 It referred to public rate counsel's attitude with respect to the adjustment clause and their doubts concerning procedure in its adoption.*fn10 It equated the new adjustment

clause with the long-established fuel adjustment clause.*fn11 It carefully delineated the four categories of expense subject to the new clause and elaborate precautions with regard to its surveillance.

Our review of the expense categories of CAC indicates to us, without going into their detail, two significant factors. First, in total they return to the company considerably less than actual increases in its costs.*fn12 Second, the components of the various categories as representing recoverable expenses are, in their details, well within the range of economic expertise and jurisdictional capacity of the Board, given the basic validity of the CAC concept itself.

The PUC order of December 20, 1973, contemplated that the CAC would be implemented each year.*fn13 As we have indicated PUC had, on December 27, 1973, denied rate counsel's motion for rehearing and stay of the instant orders, seeing "* * * no merit in staying the rates, authorized on an

experimental basis to become effective for bills rendered on and after January 1, 1974, and finds no merit in reconsideration until such experiment has been conducted and evaluated." Thus the clause, absent its withdrawal or possible stay in operation, would ordinarily remain in effect, of course to yield higher increases responsive to continuing inflationary pressures to be felt in 1975, as signalled in 1974.

By way of more recent history, not formally of record herein but sufficiently publicly of record to be here noticed, Bell on July 18, 1974, filed a new rate increase proceeding under PUC Docket No. 747-522, asserting such substantial and serious impact upon it of inflationary costs that even with the yield of the comprehensive adjustment clause it faced an attrition factor bringing its rate of return far below 8.15 percent, the amount earlier determined to be "just and reasonable" and the lower limit of what later came to be regarded in the record as a rate of return range (8.15 percent to 8.30 percent) representing a "just and reasonable" return.*fn14 The company saw its predicament as endangering its ability to maintain adequate communication services in New Jersey, to attract investment capital and to insure continued financial integrity. While Bell asserted its need for much higher permanent increases in rates (an issue still pending

unresolved before PUC), it sought interim relief by increased rates of $40.7 million. Rate counsel opposed this request and PUC denied it on September 12, 1974.

On December 2, 1974, Bell again appealed for interim rate relief, projecting an emergent proposed decision to freeze hiring, promotions and new contracts, portraying these desperate measures as sure to affect service and in the long run to raise customer costs. Asking PUC to consider the implications (relating to its capacity to fulfill its public responsibilities for rendition of service) of such capital and labor retrenchments, it asserted that despite the yield of the comprehensive adjustment clause, its return for the annual period ending March 31, 1974, was 7.84 percent, falling to 7.61 percent at September 30, 1974, and projected, without relief, to decline to 6.93 percent at June 30, 1975.

Bell contends, of course, that it is confronted with a financial emergency threatening its capacity to serve the public and that it is thus in a position not unlike other utilities whose capacity to render service has been considered to be in peril.

Hearings were had before PUC on the December 2, 1974, "emergency" application for interim rate relief above and beyond the expected yield of CAC for 1975. Rate counsel and others again mounted a vigorous attack upon the comprehensive adjustment clause, seeking to prevent its implementation on January 1, 1975. On December 26, 1974, PUC in a majority decision (carefully designated as being "interlocutory" in nature, expressing deference to this Court's pending consideration of this appeal, not reaching the request for interim increase in general, but focusing on the validity of the comprehensive adjustment clause) restated its belief in the integrity of the clause as a regulatory tool,*fn15

pointed out, as we have seen, that it enables Bell to retrieve only a portion of some of its increased operating expenses, and determined that it ...

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