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In re Petition of Elizabethtown Water Co.

Decided: November 27, 1985.


On appeal from the Board of Public Utilities.

Morton I. Greenberg, J. H. Coleman and Long, JJ. The opinion of the court was delivered by Morton I. Greenberg, P.J.A.D. Coleman, J.h., J.A.D., concurring in part and dissenting in part.


This matter comes on before this court on appeal from a decision and order of respondent Board of Public Utilities, 62 PUR 4th 613 ("Board") in a rate case.

The case originated on December 2, 1983 when appellant, Elizabethtown Water Company ("Elizabethtown"), a public utility water company subject to the regulatory jurisdiction of the Board, filed a petition with the Board seeking an increase in rates. Elizabethtown's request was contested by the public advocate and the matter was referred by the Board to the Office of Administrative Law for disposition as a contested case. During the ensuing proceedings it was established that although Elizabethtown had not departed from its filed tariff, it nevertheless had earnings in 1982 and 1983 exceeding its return on equity as authorized by the Board in rate determinations governing Elizabethtown effective January 1, 1982 and January 1, 1983. Indeed Elizabethtown admitted that although it was authorized to receive a return on equity of 14.5% during those years, it had earned 15.69% on average equity in 1982 and slightly over 16% on average equity in 1983. It did appear, however, that notwithstanding these favorable results Elizabethtown was suffering a downturn in its earnings. On July 13, 1984 an administrative law judge issued an initial decision

recommending that Elizabethtown be granted relief. This decision was sent to the Board for review and a final decision.

At about the same time the rate case was proceeding, the Board's staff at its direction was examining Elizabethtown's earnings to ascertain whether they were in excess of those produced by just and reasonable rates. The staff in its inquiry concluded that Elizabethtown's achieved return from January 1, 1982 through July 31, 1984 was $2.2 million in excess of the return contemplated by orders in Elizabethtown's two previous rate proceedings effective January 1, 1982 and January 1, 1983.

Elizabethtown filed a response to the staff report with the Board dated June 28, 1984 disputing certain of its calculations, asserting it would be unfair to consider 1982 and 1983 while excluding its less successful year of 1981 and contending that in any event an adjustment for 1982 and 1983 earnings would be unprecedented retroactive ratemaking. Subsequently Elizabethtown, following discussions with the Board's staff, addressed a letter dated August 28, 1984 to the Board asserting that the staff report substantiated Elizabethtown's contention that the company would have poor earnings in 1984, thus jeopardizing its ability to market new debentures and affecting its fiscal integrity. The company further asserted that the staff and Elizabethtown agreed that its underearnings during 1984 would more than offset its overearnings in 1983. Elizabethtown stated it had agreed with the staff that overearnings of $1,150,000 in 1982 could be offset by applying against them projected 1984 underearnings, to the extent these underearnings were not used to offset 1983 overearnings, and by extending the date new rates approved by the Board would go into effect. However while setting forth a method to treat the overearnings, the company stated that it would be unfair to isolate the 1982 earnings from those of prior years. It contended that its return in 1981 was only 11.15% so when that year was combined with 1982 its return was 13.4%, a rate below that allowed by the Board. It further asserted that it should not be required to suffer an adjustment for 1982 without appropriate

adjustments being given for that portion of the authorized rate of return not achieved for the nine years prior to 1982.

On September 24, 1984 the Board issued its decision and order reciting it "affirms" the initial decision with certain modifications. The Board acknowledged Elizabethtown's need for a rate increase and ordered higher rates to cover a projected revenue deficiency. But it also took the overearnings issue into account and concluded that while Elizabethtown had not been at fault in achieving them, the ratepayers should receive recognition of them to the extent of $1,150,000, the amount acknowledged by the staff and Elizabethtown. The Board determined that the most appropriate way to make the ratepayers whole for this amount was to set it off against the rate increase awarded by the Board. Thus it ruled the new rates would be held in abeyance until the difference in revenues between those that would otherwise be allowed under the new rates exceeded the current rates by $1,150,000. It contemplated that the effective date of the new rates would be about February 1, 1985, a date subject to refinement by Elizabethtown, the staff and the public advocate.

On October 25, 1984 Elizabethtown appealed to this court from the Board's order. The public advocate subsequently cross-appealed. In addition the New Jersey Utilities Association, Inc. has participated in this appeal by filing, with leave of the court, a brief amicus curiae. Immediately after appealing, Elizabethtown sought interim relief. By our order of October 31, 1984, entered after a hearing, we granted Elizabethtown's motion and ordered that the imposition of the new rates would not be deferred by reason of the adjustment for the overearnings. Our order provided, however, that depending upon the outcome of this case Elizabethtown might have to refund payments to its ratepayers. In entering this order we considered the obvious fact that unless immediate relief was granted the case could become moot because the time of deferment of the new rates could expire before this case was decided. In fact a tariff was promptly prepared and approved reflecting the

new rates and went into effect on November 9, 1984, subject to the outcome of this appeal.

On this appeal Elizabethtown asserts that the Board's action in deferring the increase is impermissible retroactive ratemaking, depriving it of rates otherwise required to produce a just and reasonable rate of return and thus establishing confiscatory rates. The Utilities Association contends the Board's action is a unilateral assumption of authority to revise retroactively a previously final, approved rate and is thus an illegitimate assumption of authority.

The public advocate contends that Elizabethtown by its letter of August 28, 1984 agreed with the Board's action subsequently taken and thus is bound by it. According to the public advocate had Elizabethtown rejected any consideration being given to the overearnings the Board might have taken action to reduce its rates. It further asserts that in any event the Board has not engaged in retroactive ratemaking but rather its decision and order represents a finding that the rates in effect at the time of its ruling, having been found to be just and reasonable, presumptively continue to be reasonable until the earned return on equity for the current period does not exceed the allowed return on equity. The public advocate further argues that the Board, by reason of the deferment, awarded Elizabethtown a larger increase in the future than would otherwise have been allowed. Overall the public advocate contends the Board acted within its legal authority and pursuant to its equitable duty to protect the ratepayers and to insure that they pay rates that are just and reasonable, but no more.

The Board asserts that by deferring the effective date of the new, higher rates it simply extended the then current rate period to allow earnings above the authorized return to average out in the normal course. It thus claims that it is not engaging in impermissible retroactive ratemaking.

The public advocate's cross-appeal is related to its answer to the appeal. It argues that under the ...

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