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In re Petition of Elizabethtown Water Co.

Decided: June 29, 1987.


On appeal from and certification to the Superior Court, Appellate Division, whose opinion is reported at 205 N.J. Super. 528 (1985).

For modification and affirmance -- Chief Justice Wilentz and Justices Clifford, Handler, Pollock, Garibaldi and Stein. For reversal -- Justice O'Hern. The opinion of the Court was delivered by Garibaldi, J. O'Hern, J., dissenting.


[107 NJ Page 442] The questions presented in this case are: (1) whether an order issued by the Board of Public Utilities (BPU) postponing the effective date of a rate increase granted to Elizabethtown Water Company (Elizabethtown or company) in order to offset the company's overearnings from prior years constitutes retroactive ratemaking, and, if so, (2) whether the BPU has the authority to engage in this kind of retroactive ratemaking. The Appellate Division held that the BPU's order constituted retroactive ratemaking and that such ratemaking is impermissible, but remanded the matter to the BPU for further proceedings. 205 N.J. Super. 528 (1985). We affirm the Appellate Division

insofar as it held that the order constitutes retroactive ratemaking and that the BPU lacked authority to issue such an order, but modify the Appellate Division's judgment insofar as it remanded the case to the BPU.


Elizabethtown is a public utility water company subject to the regulatory jurisdiction of the BPU. On December 2, 1983, Elizabethtown filed a petition with the BPU for an increase of approximately $9.2 million in its rates for its 1984 operating year. The Public Advocate, Division of Rate Counsel (Rate Counsel), contested Elizabethtown's request and the matter was referred to the Office of Administrative Law (OAL) as a contested case.

At the OAL hearing, it was established that Elizabethtown charged rates that were previously set and approved by the BPU; that the company never collected unlawful or improper rates; that Elizabethtown had not departed from its filed tariff, but due to economic factors beyond its control, its earnings in 1982 and 1983 exceeded the return on equity previously authorized by the BPU for those years;*fn1 and that a downturn in the company's earnings for the year 1984 was foreseeable. On July 12, 1984, the Administrative Law Judge (ALJ) issued an initial decision granting Elizabethtown rate relief in the amount of $3.24 million. The ALJ's decision was sent to the BPU for its review and final Decision and Order.

At about the same time as the OAL hearing, the BPU instructed its staff to monitor the earnings of various utilities under its jurisdiction. Pursuant to that directive, the BPU conducted an earnings analysis of Elizabethtown. On June 8, 1984, the BPU issued a report concluding that Elizabethtown had earned a return on average consolidated*fn2 equity of 16.96% in 1982 and 16.11% in 1983*fn3 even though the utility was authorized to receive a return of only 14.5% in each of these years. The study projected that Elizabethtown would earn $2.2 million in excess of its allowed return between January 1, 1982, and July 31, 1984.

On June 28, 1984, Elizabethtown filed a response to the BPU's report. According to Elizabethtown, its return on average equity was less than that stated by the BPU. In addition, the company argued that it was extremely unfair for the BPU to consider the company's earnings in 1982 and 1983 without making adjustments for ten of the past thirteen years in which Elizabethtown received less than the rate of return authorized by the BPU.*fn4 Moreover, according to Elizabethtown, any attempt

by the BPU to adjust future rates in order to compensate for past overearnings would constitute impermissible retroactive ratemaking.

Representatives of Elizabethtown and the BPU met during the ensuing weeks to discuss and attempt to settle the issues raised by the BPU's earnings analysis. On August 28, 1984, Chester A. Ring, 3rd, Executive Vice President of Elizabethtown, wrote a letter to the BPU purporting to set forth the results of these meetings. The letter states that the BPU and Elizabethtown agreed that the overearnings experienced in 1983 would be more than offset by the underearnings suffered in 1984. The letter also states that the parties agreed that Elizabethtown had overearnings of $1.15 million in 1982 and that these overearnings could be offset by "[a]pplying projected 1984 underearnings, in excess of amounts used to offset 1983 overearnings, against the 1982 overearnings" and "[e]xtending the date new rates go into effect." Based upon this last

statement, Rate Counsel argues that Elizabethtown consented to a postponement in its rate increase. Elizabethtown denies this and points out that the same letter stressed the company's continued resistance to the BPU's position:

The Company once again maintains its position that it would be inappropriate to isolate the earnings of 1982 without giving consideration to the low level of earnings in 1981 which produced a return on equity of only 11.15%. The combined earnings of 1981 and 1982, when averaged, produced a return on equity of 13.4% which is considerably less than that allowed by the Board. Further, the Company believes it would be unfair to make any adjustments for 1982 without making appropriate adjustments for that portion of the authorized rate of return that the Company did not achieve for the nine years prior to 1982.

On September 24, 1984, the BPU issued its final Decision and Order, which affirmed and modified the ALJ's initial decision. The BPU ordered a rate increase of $2.656 million.*fn5 While acknowledging that the Company had not been at fault in realizing excess earnings in 1982 and 1983, the BPU nevertheless concluded that the ratepayers should receive recognition for overearnings by the Company in the amount of $1.15 million. Moreover, the BPU concluded that the most appropriate way to compensate ratepayers for this amount of overearnings was to set off this amount against the rate increase awarded. Thus, the BPU concluded that it would

hold the new rates found to be reasonable in this order in abeyance until the difference in revenues between those that would be received under the new rates, as against those received under current rates, equals $1.15 million. It is anticipated that this recovery should be completed on or about February 1, 1985; the date new rates shall be permitted to go into effect shall be subject to an accounting procedure agreed upon by petitioner, Board's Staff and Rate Counsel, which will determine the exact timing of the implementation of this rate order.

[BPU, Decision and Order, supra, at 7 (footnote omitted).]

Elizabethtown appealed to the Appellate Division and applied for interim relief. The Appellate Division granted the motion and ordered that the rate increase go into effect immediately. The order provided, however, that the rate increase would have to be refunded to ratepayers if the BPU's actions were upheld.

Subsequently, a majority of the Appellate Division reversed the BPU's decision and remanded the matter to the BPU for further proceedings. The Appellate Division held that BPU's deferral of the new rates constituted retroactive ratemaking in violation of N.J.S.A. 48:2-21(b)1, which provides that "the BPU shall fix rates which shall be imposed, observed and followed thereafter by any public utility. . . ." (emphasis added). Judge Coleman concurred in part and dissented in part. He expressed uncertainty whether the BPU's actions constituted retroactive ratemaking, but held that even if they did, such retroactive ratemaking is not prohibited if it benefits the ratepayer.

By virtue of Judge Coleman's partial dissent, Rate Counsel and the BPU appealed as of right. See R. 2:2-1(a)(2). The BPU also filed a petition for certification seeking reversal of the Appellate Division's judgment.*fn6 Elizabethtown filed a petition for certification on the issue of whether the Appellate Division erred in remanding the matter to the BPU. Certification was granted on both petitions, 104 N.J. 385 (1986); therefore all issues are before this Court.


The BPU first contends that its action in this case does not constitute retroactive ratemaking, but "merely defers the implementation of a new increase prospectively." We disagree.

"Generally, retroactive rate making occurs when a utility is permitted to recover an additional charge for past losses, or when a utility is required to refund revenues collected, pursuant to then lawfully established rates.' Chesapeake and Potomac Tel. Co. v. Public Serv. Comm'n of West Virginia, 300 S.E. 2d 607, 619 (W.Va.1982) (emphasis added); see also State ex rel. Utility Consumers Council of Missouri, Inc. v. Public Serv. Comm'n, 585 S.W. 2d 41, 59 (Mo.1979) (retroactive ratemaking is "the setting of rates which permit a utility to recover past losses or which require it to refund excess profits"); In re Central Vermont Pub. Serv. Corp., 144 Vt. 46, 52, 473 A.2d 1155, 1158 (1984) (any "device that enables a utility to balance its accounts for a prior period of time by making a future adjustment to its rates" is retroactive ratemaking).

In this case, the BPU reduced rates that were otherwise just and reasonable by $1.15 million in order to offset "overearnings" of $1.15 million in 1982. This is plainly retroactive ratemaking, as demonstrated by the BPU's own language in its Decision and Order:

The Board believes that the ratepayer must be made whole in compensation for a level of charges which, in fact, have exceeded the levels prescribed by the Board. Taking all these factors before us into consideration, the majority of the Board concludes that the ratepayers should receive recognition for over earnings by petitioner in the amount of $1.15 million.

The Board further concludes that the most appropriate methodology to make the ratepayers whole with respect to this level of overrecovery, is to set off this amount against the level of rate increase awarded herein, which is necessary to give petitioner an opportunity to achieve in future a reasonable rate of return. We will therefore hold the new rates found to be reasonable in this order in abeyance until the differences in revenues between those that would be received under the new rates as against those received under current rates, equals $1.15 million. [BPU, Decision and Order, supra, at 7].

Regardless of semantics, the effect of the BPU's order is evident. Deferring Elizabethtown's new rates until an amount equal to the prior overearnings had been offset had precisely the same effect as granting an immediate increase and ordering the company to refund $1.15 million to ratepayers.

The BPU, itself, recognized in its Decision that it was ordering a refund of the past excess earnings for 1982 and 1983:

We further believe that we have the discretion to fashion reasonable methodologies to determine whether, in fact, overearnings have been achieved, to determine the level of over-earnings that should be accounted for, and to determine the method of refund. The Board is not bound by any particular methodology so long as the methodology it selects is reasonable.

[Id. (emphasis added).]

Indeed, it ended its Decision by stating:

Therefore, the rate increase permitted herein, will not be permitted to take effect until on or about February 1, 1985, but in no event until verification of the amount of refund has been resolved and tariffs filed in conformance with this order have been accepted, by further order of this Board. New rates pursuant to ...

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