On appeal from a decision and order of the New Jersey Board of Public Utilities Commissioners.
Matthews, Antell and Francis. The opinion of the court was delivered by Matthews, P.J.A.D.
On April 22, 1980 the Hackensack Water Company (company) filed a petition for a rate increase with the New Jersey Department of Energy, Board of Public Utilities (Board), to be effective May 22, 1980. For the 12 months ending December 31, 1981 the proposed rate increase would produce estimated additional gross annual revenues of $10,299,000 (after adjustments for increases or decreases in rate base, operating revenues and expenses), an overall rate of return of 11.81% and a return on equity of 18%.
The company believed that the rate increase was necessary because of inflation and the high cost of borrowing money, and its plans for capital expenditures of $200,000,000 over the next decade, including $75,456,000 for an undertaking designated as the Two-Bridges Project. While the company had been granted a 13.75% return on equity by order of the Board on January 17, 1980, pursuant to an earlier petition for a rate increase, it had received an unfavorable reception to a sale of its stock shortly after that grant and thus sought a higher authorized return in order to attract investors.
Rate Counsel of the Public Advocate's Office (Rate Counsel) and the County of Bergen contested the proposed increase, and the case was transferred to the Office of Administrative Law to be decided as a contested case pursuant to N.J.S.A. 52:14F-1 et seq.
The Board reminds us that the filing of the petition predated by several months the exceedingly dry summer of 1980, and the drought emergency which was first declared on September 12 and which intensified until the spring of 1981. That crisis, which impacted most severely upon the northeast part of the State and particularly in the service area of Hackensack Water Company, Executive Order No. 94 September 12, 1980, was apparently a major consideration in the Board's handling and disposition of this case.
After filing of the petition the Board suspended the proposed increase for two four-month periods by operation of N.J.S.A. 48:2-21.
Prior to the start of the hearings the parties had reached an agreement that the period September 30, 1979 to September 30, 1980 would constitute the test year for purposes of determining the necessity of the requested rate increase. The data was to be adjusted for "known and anticipated changes" and was updated throughout the hearings. On October 29, 1980, the final hearing date, actual financial data for July, August and September 1980 was entered in the record. The purpose of testimony and evidence presented at the hearings was to establish the company's rate base, operating income, operating expenses, rate of return and tariff design.
On November 24, 1980 the record in the case was closed. At that time the company maintained that it was entitled to $10,299,000 in additional revenues, while Rate Counsel and the County of Bergen claimed that the company was only entitled to a $1,577,000 increase. The staff, in its brief, recommended an increase in annual revenues of $3,899,000.
The administrative law judge (ALJ) issued her initial decision on January 6, 1981. She recommended a revenue increase of $1,581,000. The ALJ made extensive findings and recommendations on rate base, operating and maintenance expenses, rate of return and tariff design.
The parties filed exceptions and replies to exceptions to the initial decision of the ALJ during the latter half of January 1980.
On February 18, 1981 the Board issued a provisional decision and order rejecting the ALJ's recommendations and report in toto, and authorizing an interim rate increase for the company on the basis of Rate Counsel's position respecting revenue issues. In doing so the Board noted that the amount of the interim award was uncontested, that the test year employed in this case was not reflective of the "ever emerging water crisis now upon
us" and that the ALJ's recommendations "contain policy statements which the Board does not wish to endorse." In implementing the interim rate award, the Board also restructured the tariffs to remove minimum usage provisions so that the cost of water would be entirely usage-sensitive to aid the conservation and rationing effort.
On March 17, 1981 the Board issued its Decision and Order on Revenue Requirements and Rate Design which was followed with a written order on March 20. The Board noted the fact that although the petition for rate relief was filed in April 1980, hearings did not commence until August and the case was not returned to the Board for final determination until January 1981. The Board recognized, accordingly, that the hearing record "cannot account for the financial implications of the drought that is upon us, and the consequent curtailment of revenues, additional expenses and associated risk of investment." The Board also took official notice of Executive Orders Nos. 94, 96, 97, 98, 103 and 104 which dealt with emergency measures imposed by the Governor to deal with worsening water crisis. On its review of the record and in light of its concerns regarding the impact of the increasingly severe drought, and updated information, the Board issued an opinion which differed with the initial decision of the ALJ in many significant areas. Rate Counsel's brief challenges particular elements of the Board's order and sets forth specific bases for his disagreement with the Board on those issues.
Rate Counsel argues that the Board failed to make necessary findings of fact or to state the reasons underlying its decision and order of March 17, 1981, and seeks to have the cause remanded for formulation of a rate order based on precise findings and conclusions. Specifically, Rate Counsel contends that an administrative agency, when rejecting the findings of an administrative law judge, must, in specific terms, point out where it disagrees with the ALJ and why. The Board in this case rejected in toto the findings and recommendations of the
ALJ, and Rate Counsel argues that the Board did not present the basis for its disagreement with the judge.
We note briefly the standard of review that this court must apply to decisions and orders of the Board. In In re Jersey Central Power & Light Co. Petition, 85 N.J. 520 (1981), the court stated:
Before considering each of the claims presented, we note the limits of our review of the Board's actions. In Public Service Coordinated Transport v. State, 5 N.J. 196 (1950), this Court observed that "rate making is a legislative and not a judicial function, and that the Board of Public Utility Commissioners, to which the Legislature has delegated its rate-making power is vested with broad discretion in the exercise of that authority." Id. at 214. Thus, the Board's rulings are entitled to a presumptive validity and will not be disturbed unless we find a lack of "reasonable support in the evidence." In re New Jersey Power & Light Co., 9 N.J. 498, 509 (1952). [85 N.J. at 526-527]
In Mayflower Securities v. Bureau of Securities, 64 N.J. 85 (1973), the court explained the role of the appellate court in reviewing the findings of a state agency as that of determining: "'whether the findings made could reasonably have been reached on sufficient credible evidence present in the record,' considering the 'proofs as a whole,' with due regard to the opportunity of the one who heard the witnesses to judge of their credibility . . . and . . . with due regard also to the agency's expertise where such expertise is a pertinent factor." Id. at 92-93, citing Close v. Kordulak Bros., 44 N.J. 589, 599 (1965). See, also, Goodman v. London Metals Exchange, Inc., 86 N.J. 19, 28-29 (1981). Thus, the Board's order in this case should be set aside only if the essential findings of the Board were either illegally arrived at or not made. See New Jersey Bell Tel. Co. v. State, 162 N.J. Super. 60, 72 (App.Div.1978).
Our initial task is to determine what findings and conclusions the Board is required to make and whether they were, in fact, made. If the Board made sufficient findings, then we must determine whether there is reasonable support in the evidence for those findings.
The Administrative Procedure Act provides in N.J.S.A. 52:14B-10(d):
A final decision or order adverse to a party in a contested case shall be in writing or stated in the record. A final decision shall include findings of fact and conclusions of law, separately stated and shall be based only upon the evidence of record at the hearing, as such evidence may be established by rules of evidence and procedure promulgated by the director.
Findings of fact, if set forth in statutory language, shall be accompanied by a concise and explicit statement of the underlying facts supporting the findings. The final decision may incorporate by reference any and all of the recommendations of the administrative law judge.
In In re Plainfield-Union Water Co., 11 N.J. 382 (1953), the court noted that appellate courts "cannot exercise their duty of review unless they are advised of the considerations underlying the action under review." Id. at 396. The court held that "[t]he orderly functioning of the process of review requires that the grounds upon which the administrative agency acts be 'clearly disclosed and adequately sustained.'" See East Windsor Reg'l Bd. of Ed. v. State Bd. of Ed., 172 N.J. Super. 547, 552 (App.Div.1980).
Thus, an agency must indicate how it weighed the evidence before the ALJ and the ALJ's findings in order that an appellate court can determine the sufficiency of the evidence or the adequacy of its evaluation by the agency. See St. Vincent's Hospital v. Finley, 154 N.J. Super. 24, 31 (App.Div.1977). The Board was required to limit its consideration to the record made before the ALJ, N.J.S.A. 52:14B-9, which includes the recommended report and decision of the ALJ. N.J.S.A. 52:14B-10(c); St. Vincent's, supra, 154 N.J. Super. at 30.
Rate Counsel claims that the rule for which he argues is a logical extension of the rule that the grounds upon which an agency acts must be clearly disclosed and adequately sustained. Rate Counsel relies heavily on St. Vincent's Hospital v. Finley, 154 N.J. Super. 24 (App.Div.1977), a case in which this court reversed and remanded a decision of the Health Care Administrative Board on the grounds, among others, that the findings of fact and conclusions of law were insufficient to permit meaningful review of the Board's decision because the record was barren of any indication as to how, if at all, the Board evaluated the
proof before the hearing officer or his report and recommendations. The Board had rejected the recommendation of the hearing officer. 154 N.J. at 29-33.
The court in St. Vincent's discussed the "vulnerability of an administrative determination which does not specifically explain its rejection of a contrary finding of a hearing officer." The case can fairly be read to require that (1) an agency expressly indicate a disagreement with an ALJ, and (2) it set forth the basis of disagreement with the ALJ. Such a rule is necessary to allow an appellate court to perform its function of assuring that the agency has given reasoned consideration to all the material facts and issues. Id. at 32 (citing Greater Boston Television Corp. v. F.C.C., 143 U.S.App.D.C. 383, 444 F.2d 841 (D.C.Cir.1971), cert. den. 403 U.S. 923, 91 S. Ct. 2229, 2233, 29 L. Ed. 2d 701 (1971), reh. den. 404 U.S. 877, 92 S. Ct. 30, 30 L. Ed. 2d 125 (1971). The court in St. Vincent's remanded the matter to the Board to make "'findings of fact and conclusions of law, separately stated' (N.J.S.A. 52:14B-10(d)), with respect to the entire record, including the proofs before, and the report and recommendations of, the hearing examiner." 154 N.J. Super. at 33.
Rate Counsel also argues that the rule that an agency must acknowledge and explain its disagreements with the ALJ's decision is dictated by the creation of the Office of Administrative Law through which the Legislature intended to "create an independent corps of administrative law judges that would seek to preserve the expertise that results from single-agency assignment and eliminate the unavoidable tendency to predisposition that comes from hearing the cases of a single agency over an extended period of time." Rate Counsel argues that this intent is entirely defeated if any agency may disregard an ALJ's decision whenever it chooses, without regard to the merit of any part of the initial decision's findings.
The Office of Administrative Law was established by L. 1978, c. 67, N.J.S.A. 52:14F-1 et seq., in order "to create a central independent agency staffed by professionals with the
sole function of conducting administrative hearings . . . to eliminate conflict of interests for hearing officers, promote due process, expedite the just conclusion of contested cases and generally improve the quality of administrative justice." Statement of the Senate Committee on State Government, Federal and Interstate Relations and Veterans Affairs to Senate Bill 766. The statute did nothing to change the role of hearing examiners as they had functioned to that point. N.J.S.A. 52:14B-10(c), as amended by L. 1978, c. 67, describes the administrative process:
All hearings of a state agency required to be conducted as a contested case . . . shall be conducted by an administrative law judge . . . . A recommended report and decision which contains recommended findings of fact and conclusions of law and which shall be based upon sufficient, competent, and credible evidence shall be filed, not later than 45 days after the hearing is concluded, with the agency . . . . The head of the agency, upon a review of the record submitted by the administrative law judge, shall adopt, reject or modify the recommended report and decision no later than 45 days after receipt of such recommendations.
Unless the head of the agency modifies or rejects the report within such period, the decision of the administrative law judge shall be deemed adopted as the final decision of the head of the agency. The recommended report and decision shall be a part of the record in the case. [Emphasis supplied]
The ALJ's report is thus but one of many items in the record to be considered by an administrative agency. To make this fact very clear, the Legislature enacted N.J.S.A. 52:14F-7(a):
Nothing in this amendatory and supplementary act shall be construed to deprive the head of any agency of the authority pursuant to Section 10 of P.L.1968, c. 410 (C. 52:14B-10) to determine whether a case is contested or to adopt, reject or modify the findings of fact and conclusions of law of any administrative law judge.
Moreover, the sponsors of Senate Bill 766, which ultimately became L. 1978, c. 67, provided in the statement accompanying the bill that "[a]s under existing law, however, the head of an agency will himself exercise the ultimate options of adopting, rejecting or modifying the setting [ sic ] proceedings." See Statement Accompanying Senate Bill 766, January 30, 1978, p. 9.
The effect upon judicial review of an agency decision that is contrary to the recommendations of ...