On appeal from the Board of Public Utility Commissioners.
For modification and remandment -- Justices Mountain, Sullivan, Pashman and Clifford and Judge Conford. Opposed -- None. The opinion of the court was delivered by Pashman, J.
This is an appeal taken by the Department of the Public Advocate from that portion of an order issued by the Board of Public Utility Commissioners (The Board) authorizing the Redi-Flo Corporation (Redi-Flo) to incorporate an automatic "fuel adjustment clause" into its permanent tariff. The Board's order, dated July 10, 1975, modified two earlier decisions in which it had granted a measure of rate relief to Redi-Flo in the form of increased rates but had refused to approve its proposed fuel adjustment clause. In challenging this action, the Public Advocate takes the position that the statutes governing the Board's rate setting authority (N.J.S.A. 48:2-21, 48:2-21.1 and 48:2-21.2) permit such clauses only as an interim measure. In addition, he attacks particular features of Redi-Flo's fuel adjustment clause, arguing that the Board erred in overturning its earlier orders which had denied such relief.
The Attorney General, appearing on behalf of the Board, and the New Jersey Utilities Association, appearing as amicus curiae, have joined Redi-Flo in urging affirmance of the order below and ratification of the Board's authority to approve fuel adjustment clauses as a permanent part of its tariff. In order to expedite consideration of this important issue, we granted a motion by the Public Advocate to certify this appeal directly while it was pending unheard in the Appellate Division. 71 N.J. 535 (1976).
A necessary preface for an understanding of the issues presented by this case is a description of Redi-Flo's operations and the procedural history of this matter.
Redi-Flo is a New Jersey corporation whose stock ownership is equally divided between Rele, Inc., a closely held family concern which manages its operations, and Amerada Hess Corporation, a major oil firm which provided much of Redi-Flo's original financing and currently supplies it with fuel oil for resale to customers. Redi-Flo distributes fuel oil by means of a system of underground pipelines to some 1,300 residences in a planned retirement community known as Holiday City, located in Dover Township, Ocean County.*fn1 When the Holiday City system was originally planned in 1965, Redi-Flo's founders viewed it as a model for similar distribution systems to be constructed in other housing developments in New Jersey and throughout the country. Their hope was that this "modern" form of fuel oil distribution would prove an attractive alternative to the existing system of individual oil truck delivery by eliminating the risk of late deliveries and accidental oil leakages.
However, the economic downturn in the construction industry and the fuel oil shortage combined to abort these plans for expansion, leaving the Holiday City installation as the company's only project. And this system, which was based on a novel technology, proved to be far more costly than expected as technical difficulties developed and led to expensive repairs. Consequently, the economic benefits the company had anticipated would result from decreasing marginal costs for new customers never materialized. Its financial position was further weakened by a slow attrition in the number of customers and a dual pricing scheme based on individual consumer contracts and Board regulation.
When Redi-Flo began operations in 1965, it entered into a standard contract with each of the Holiday City residents who chose to link up with its system.*fn2 Under this agreement, which was renewable annually, Redi-Flo promised to supply fuel oil at a per gallon price not to exceed the average retail price of major oil distributors in the area or a maximum price set on June 1 of each year. The Company also promised to install a fuel oil tank and a fully operative heating system in the home of the consumer if it ever chose to discontinue service. In the event the consumer chose to terminate the agreement, he was to bear the expense of switching to another system. In addition, under a separate contract the company offered a comprehensive service plan guaranteeing part replacements and servicing of burners on a 24-hour basis.
The second level of price regulation was imposed in 1970 when the Board, having successfully asserted its jurisdiction over Redi-Flo as a public utility, see In re Petition of N.J. Natural Gas Co., 109 N.J. Super. 324 (App. Div. 1970), certif. den. 56 N.J. 475 (1970), required the company to file a tariff of its rates and charges. See N.J.S.A. 48:2-21(a). This tariff, however, reflected the company's contractual commitments by setting a ceiling on prices for each 12-month period beginning June 1 and requiring a credit to consumers for any excess charges over the average retail price of local distributors for the same period. The Board permitted Redi-Flo to continue its practice of announcing a new ceiling on prices on June 1 of each year,
which was incorporated into a revised tariff filed in accordance with the Board's procedures.
The rigidities of this pricing scheme painfully affected Redi-Flo when the oil embargo in the fall of 1973 caused the wholesale price of fuel oil to skyrocket. The maximum retail price of $.239 per gallon for the year beginning on June 1, 1973 had been set when the wholesale price was roughly $.14 per gallon. Over the course of 1973-74 the company's costs for fuel oil almost doubled, reaching a wholesale price of $.267 per gallon on May 31, 1974. Thus, Redi-Flo eventually found itself in the position of sustaining a loss on every gallon of fuel oil sold to its customers. Over the course of that year, its gross profit on sales of fuel oil fell from $63,918 to $12,310, and its net operating loss rose from $53,621 to $99,830.*fn3
By the spring of 1974 Redi-Flo's finances were thoroughly debilitated. However, the company chose not to seek rate relief from the Board before the end of its fiscal year, May 31, apparently because of its contracts with individual consumers. As noted previously, in prior years, the Board had permitted the company to file revised tariffs without full-scale rate proceedings, and the company assumed that it would be able to increase its rates in the same manner on June 1, 1974. However, the Board, concerned by the volatile nature of the fuel oil market, proved unwilling to permit this procedure. After discussions with company officials, it directed Redi-Flo to file a formal petition for rate relief seeking Board approval of any increases in charges to customers.
On April 27, 1974, the company filed such a petition with the Board. It sought to increase the maximum retail charge from the existing level of $.239 per gallon to $.3668 per gallon of fuel oil, effective June 1. It also requested permission to adopt a fuel adjustment clause which would allow the company to raise the maximum price by the amount of any increase in wholesale fuel oil costs. The fuel adjustment clause also provided for lower retail charges corresponding to decreases in wholesale costs.
On May 16, 1974, the Board issued an order suspending the effective date of the new tariff until October 1, 1974,*fn4 and setting the matter down for a public hearing on May 24. Rate counsel*fn5 participated in the proceeding and several spokesmen for Holiday City residents testified.
Redi-Flo had filed its petition for rate relief under N.J.S.A. 48:2-21.2(a), a special statutory rate-making provision which permits the Board to dispense with a rate base determination when it finds (1) that the utility sustained a net operating loss over the preceding 12 months and (2) that the proposed increase in rates will not yield a net operating
profit over the next succeeding 12 months.*fn6 It submitted financial statements showing a net operating loss of $99,830 for the 12-month period ending on March 31, 1974 and projecting a net operating loss of $10,700 for the following year under its proposed rates. (It estimated that its operating losses would total $148,250 under the existing schedules of rates.)
At the hearing, Redi-Flo's representatives explained that they had decided not to seek a specific rate of return on the company's investment because their calculations had shown that a rate base-rate of return approach would result in a retail price far above the competitive price of fuel oil. As an alternative method of setting prices, they suggested that the Board peg the company's charges to the
average retail price of independent oil dealers in the local area. Taking data from six major oil distributors, they calculated that the average price was $.3668 per gallon. They proposed this figure as the maximum charge under the tariff and also advocated a provision whereby consumers would receive a credit at the end of the year for any amount by which Redi-Flo's charges exceeded the actual price charged by other distributors. To complement this provision for decreasing charges, they also proposed a fuel adjustment clause which would permit Redi-Flo to increase its prices by the amount of any rise in the wholesale cost of fuel oil. In no event, however, could the company exact a charge which exceeded the average price of other distributors.
The main thrust of the company's presentation was the urgent need for immediate rate relief. It stressed that Amerada Hess was no longer willing to supply fuel without current payments, as it had done in the past, and warned that denial of adequate relief would imperil the ability of the company to continue service. Therefore, it also presented a petition for interim rate relief (N.J.S.A. 48:2-21.1) ...