On certification to the Superior Court, Appellate Division, whose opinion is reported at 158 N.J. Super. 57 (1978).
For reversal -- Chief Justice Wilentz and Justices Sullivan, Pashman, Clifford, Schreiber and Handler. For affirmance -- None. The opinion of the Court was delivered by Pashman, J.
Last Term, our decision in In re Lambertville Water Co., 79 N.J. 449 (1979), raised but declined to resolve the issue whether the Board of Public Utility Commissioners (Board) may give retroactive effect to an approved increase in a utility's rates. See id. at 457. We now address that issue. A second, related question before us is whether a utility's application for a rate increase takes effect if the Board does not act upon it before the expiration of the suspension period for the proposed rates. We granted certification, 81 N.J. 270 (1979), to consider the effect of "regulatory lag" -- the lapse of time while tariff proceedings are pending, see State v. New Jersey Bell Tel. Co., 30 N.J. 16, 28 (1959) -- upon the fair and efficient resolution of rate petitions.
Toms River Water Company (Water Company) is a New Jersey public utility corporation which provides water and fire protection services to designated areas of Ocean County, New Jersey. On April 1, 1975, it filed a petition with the Board for permission to raise the rates for its services effective May 7, 1975. Citing mainly spiraling costs and the need for a greater cash flow, Toms River Water sought a 40% increase in its rates.
On April 17, the Board ordered hearings on the proposed higher tariff and suspended its effect for four months until September 7, 1975. Although the Board had the authority to suspend the new rates for an additional four months, see N.J.S.A. 48:2-21(d), it did not issue a second order.
A hearing examiner conducted proceedings on the application for nine days between May 13 and July 29, 1975. During the hearings a witness for the Water Company attempted to persuade the examiner that the utility should receive some compensation specifically for "regulatory lag." Henry G. Mulle, an official with an affiliate of the Water Company, testified that an increase should be allowed in the percentage rate of fair and reasonable return to reflect the passage of time while the rate application was pending. According to Mr. Mulle, this adjustment was necessary because rising interest rates would make the cost of borrowing money higher at the conclusion of the proceedings than at the time of the application.
The Public Advocate, Berkeley Township, Dover Township and the Board of Fire Commissioners of Dover Township participated as objectors. After the hearings were completed, the Water Company, the Public Advocate and Berkeley Township filed briefs with the examiner. The utility filed a reply brief on October 9.
On December 30, 1975, the Board on its own motion extended the time for the examiner to submit his report and recommendations until January 28, 1976.*fn1 In an order dated February 26, 1976, the Board granted a further extension until March 15.
Both orders referred to the heavy workload of the examiner and the need for "an intelligent recommendation" based on sufficient review. Both extensions were unopposed.
The hearing examiner filed his report and recommendation on May 27, 1976. He concluded that the utility's application should be denied, but recommended that it be permitted to file a new proposal incorporating a smaller rate increase.*fn2 In his report, the examiner rejected the argument that the Water Company should receive compensation for "regulatory lag." He found that such a proposed adjustment "seeks protection against future increases in debt which have already been included to an extent reasonable in this case."
The Water Company, the Public Advocate and Berkeley Township filed exceptions to the report. The Water Company again claimed that its rate of return should receive an adjustment for "regulatory lag."
In its decision on September 13, 1976, the Board substantially adopted the findings and conclusions of the hearing examiner.*fn3 It rejected the Water Company's tariff proposal, but permitted the utility to file a revised schedule which would provide slightly more revenue than the examiner's recommendation. According to the Board's order, the new ...