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H.P. Higgs Co. v. Borough of Madison

Decided: February 8, 1983.

H.P. HIGGS COMPANY, INC., PLAINTIFF-RESPONDENT AND CROSS-APPELLANT,
v.
THE BOROUGH OF MADISON, A MUNICIPAL CORPORATION, DEFENDANT-APPELLANT AND CROSS-RESPONDENT



On appeal from the Superior Court, Law Division, Morris County, whose opinion is reported at 184 N.J. Super. 355(1982).

Milmed, Morton I. Greenberg and Furman. The opinion of the court was delivered by Morton I. Greenberg, J.A.D.

Greenberg

[188 NJSuper Page 214] This matter comes before this court on appeal and cross-appeal of judgments entered in the Superior Court, Law Division, following a nonjury trial. The decision of Judge Bangiola, the trial judge, on the principal issues in the case is reported at 184 N.J. Super. 355 (Law Div.1982).

Plaintiff, a New Jersey corporation with offices in the Borough of Madison, filed the complaint on December 19, 1980. It sought to bring the case on its own behalf and on behalf of a class constituting all purchasers of electricity from defendant. Plaintiff alleged that defendant, Borough of Madison, a municipal corporation, owns and operates an electric utility which is the sole supplier of electricity for public use within defendant's boundaries. Plaintiff alleged that defendant does not own or operate generating facilities but rather purchases electricity in bulk at wholesale rates from Jersey Central Power & Light Company (hereinafter "JCP & L"). Defendant resells the electricity at retail rates and distributes it through its distribution system.

Plaintiff asserted that it requires electricity for its business operations which it purchases from defendant. Defendant charges plaintiff rates based on defendant's general service secondary rate schedule. Plaintiff asserted that defendant on December 8, 1980 had enacted Ordinance 31-80, to be effective January 1, 1981, for the purpose of increasing rates as of January 1, 1981. Plaintiff alleged that the new rates were arbitrary and unreasonable because they were predicated on rates charged by JCP & L rather than on defendant's costs. Plaintiff pointed out that the costs of JCP & L were materially different from those of defendant. Plaintiff further asserted that defendant's rates were based in substantial part on gross receipt taxes or payments in lieu of such taxes not actually paid. Plaintiff alleged that the proposed rates would produce an excessive and unreasonable return. Plaintiff asserted that the rates discriminated against customers charged on the general service secondary rate schedule. Plaintiff further alleged that the ordinance was in essence a form of illegal taxation adopted to keep down real estate taxes. Plaintiff requested judgment enjoining enforcement of Ordinance 31-80, declaring it to be void and ordering a refund of all moneys to be collected by defendant under the ordinance. Plaintiff asked that defendant be compelled to set rates based on defendant's costs. Plaintiff

brought this action in the Superior Court since defendant, in the operation of the utility within its own boundaries, is not subject to regulation by the Board of Public Utility Commissioners (hereinafter "BPU").

Defendant filed an answer to the complaint, essentially admitting the facts asserted by plaintiff. But defendant denied that its rates were arbitrary or unreasonable. It further set forth that it had the power to adopt the rates and that it was authorized by N.J.S.A. 40A:4-35 to transfer the utility surplus to its general operating fund.

After it filed the complaint plaintiff sought an interlocutory order restraining enforcement of Ordinance 31-80. This application was denied but the trial court did by order dated February 4, 1981 direct that money collected as a result of the rate increases in the new ordinance be shown on defendant's balance sheet as an item of reserve. Plaintiff also moved twice for class certification but these applications were denied. The first order denying class certification was dated February 4, 1981.

Subsequent to the institution of the action, defendant engaged the firm of H. Zinder & Associates (hereinafter "Zinder") to conduct a valuation of a rate base for its electric utility and to determine the cost of service allocation. By the use of a reproduction cost new (hereinafter "RCN") method of valuation, Zinder reported that the utility's current worth of plant in service before depreciation was $12,345,600. Zinder applied straight-line depreciation and determined that the current depreciated value of defendant's net plant in service was $9,340,600. It considered the $3,005,000 difference to be a depreciation reserve. Zinder added costs of working cash, materials and supplies to the depreciated value and arrived at a base of $9,888,700. By the use of this rate base Zinder calculated that defendant's rate of return was 3.29%. Zinder considered that this return was not unreasonably high.

After receipt of the Zinder report defendant adopted Ordinance 39-81 amending Ordinance 31-80. Ordinance 39-81 accepted

the rate base and depreciation schedule as determined by Zinder and provided for the continued transfer of payments in lieu of franchise and gross receipts taxes. Ordinance 39-81 did not change the rates established in Ordinance 31-80.

The trial began on November 2, 1981. Plaintiff produced an expert witness, Jamshed K. Madan, a principal in a management consulting firm specializing in utility regulation. Madan testified that of the several different methods of determining a rate base for the utility, the most appropriate was the original cost method. He indicated that method "goes back and accumulates cost based on what was actually expended for a certain asset at a certain point in time. Generally speaking for simplicity, these are the figures one would find when one reads a balance sheet of an entity." Taking an original cost basis as set out in the annual report that Madison had filed with the BPU as required by N.J.S.A. 40:62-2 for the year ending December 31, 1979, the latest figures available to him, Madan stated that the net utility plant investment was $1,407,139. He ascertained this figure by deducting accumulated amortization and depreciation of $2,860,921 from the gross plant of $4,268,060. This gave the net utility plant investment. He added to that figure cash working capital which he calculated at $226,805. Thus he arrived at a rate base of $1,633,944. Madan then indicated that a fair rate of return was 8.36%. He determined from the rate base and fair rate of return that the utility should earn approximately $136,000. Figures supplied by defendant in the December 31, 1979 report to the BPU showed its income from the utility to be $738,816. Madan concluded defendant had excess income of over $602,218.*fn1

An expert witness called by defendant, Jack O. Sanders, a vice-president of Zinder, contradicted Madan's testimony. Sanders stated that information contained in the annual report did not conform to the uniform system of accounts of the Federal Energy Regulatory Commission and adopted by the BPU. Thus

use of the information would give a distorted picture which could not be relied upon to determine the adequacy or inadequacy of a rate. Sanders testified further that information concerning the original cost of the facilities was not readily available and the numbers included in the annual report purportedly representing that cost were inaccurate. He further cast doubt on Madan's testimony by indicating that only amortization of bonded debt, and not depreciation of property, had been included in the total electric operating expenses line item of the report. This, in Sanders' opinion, resulted in inaccuracies in Madan's computations.

Defendant produced witnesses explaining in detail the method by which Zinder had developed the rate base. Bertil P. Dahlstrom, a consultant to Zinder, testified that Zinder made an inspection of plans showing the utility's facilities. Records were checked. In addition, a field inspection was undertaken. Further, Zinder consulted with representatives of JCP & L, Public Service Electric & Gas Company, defendant, defendant's electrical consultants and other persons with useful information. From these sources a detailed inventory of the utility components was completed and the current value of these items was determined by "trending" in accordance with a widely used engineering publication, The Handy Whitman Index of Public Utility Construction Costs. By use of this approach a current valuation of the utility plant was ascertained. After depreciation was calculated, the plant valuation was fixed at $9,340,600. Sanders stated that this method was more accurate than that followed by Madan because the RCN value ...


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