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In re Application of Rockland Electric Co.

Decided: March 2, 1989.


On appeal from New Jersey Board of Public Utilities.

J. H. Coleman, Deighan and Baime.

Per Curiam

This matter involves a dispute between Rockland Electric Company (Rockland), a public utility, and the Office of the Public Advocate, Division of Rate Counsel (Rate Counsel), regarding an adjustment in Rockland's Levelized Energy Adjustment Clause (LEAC). The Public Advocate appeals from a decision of the Board of Public Utilities (Board) which, among other things, approved Rockland's request to reduce its LEAC by $9.8 million. Rate Counsel contends that the Board adopted a proposal based on matters outside of the record below in violation of the Administrative Procedure Act (APA), N.J.S.A. 52:14B-1 et seq. and thereby denied the parties' procedural due process guarantees. Rate Counsel further contends that the increase in the base rate to include construction and renovation projects at Rockland's Lovett and Rio generating units does not provide "just and reasonable" rates as required by N.J.S.A. 48:2-21(d).

On September 12, 1986, Rockland filed a petition with the Board for approval of a voluntary reduction of revenue in the amount of $6.6 million in its 1987 LEAC. The matter was transferred to the Office of Administrative Law (OAL) and assigned to an Administrative Law Judge (ALJ), who held an evidentiary hearing following a public hearing.*fn1 At the hearings, Rate Counsel represented the public interest as a statutory party, pursuant to N.J.S.A. 52:27E-18. The Board Staff

(Staff), represented by a deputy attorney general, also appeared in the proceeding. Only Rockland and Rate Counsel presented testimony.

On December 17, 1986, Rockland filed an interlocutory appeal with the Board from the ALJ's ruling which rejected Rockland's request to include in its proposed LEAC rates the impact of the Tax Reform Act of 1986. On December 18, 1986, the Board rejected that appeal as moot but, over the objections of Rate Counsel, the Board issued an initial decision and order approving the reduction in the LEAC of $9.8 million to Rockland's customers, effective January 1, 1987. Since this reduction was authorized on an interim basis only, the Board ordered that the final amount of the LEAC be determined in the proceedings before the ALJ after a full hearing.

On March 30, 1987, after the record was closed, the ALJ filed an initial decision with the Board. On April 20, 1987, Rockland filed exceptions to the initial decision and Rate Counsel subsequently moved to strike a part of Rockland's exceptions. After an extension of the 45-day statutory period for reviewing the initial decision, on June 12, 1987, the Board issued its decision and order modifying and adopting the initial decision. On June 25, 1987, this order was amended to correct typographical errors and to revise tariff provisions by the amended order.

Rate Counsel appealed to this court and on December 4, 1987, the Board issued a subsequent order which, among other things, accepted revised tariff sheets submitted by Rockland, pursuant to the Board's order of June 12, 1987.


A utility may normally increase its rates only by instituting base rate proceedings. In order to do so, the utility must file a petition with the Board to change base rates. The filing is normally followed by a hearing wherein the utility has the burden of proving the value of utility property, the amount of its operation, maintenance, tax, depreciation and other expenses

and the level of a fair rate of return to investors. After an examination of the utility's showing on all of these factors, the Board may set base utility rates, which by statute must be "just and reasonable." See N.J.S.A. 48:2-21(d).

Rockland, like other electric and gas utilities, may also change rates once a year by petitioning the Board to modify its fuel adjustment clause. The clause allows a utility to annually adjust rates to reflect changes in just one component of the overall level of utility base rates -- the cost of fuel. In other words, the LEAC allows the utility to expeditiously pass through to ratepayers fuel cost increases or decreases.

An "energy" or "fuel" adjustment clause is a widely used and judicially accepted rate-making mechanism used to recover certain components of fuel costs incurred by a utility. Originating during the energy crisis of the 1970's, energy adjustment clauses are designed to permit a utility to include in rates initial estimates as to future fuel costs and to make subsequent periodic adjustments to reflect actual costs when ascertained.

In ruling on a utility's LEAC petition following a hearing, the Board must ultimately determine the reasonableness of the company's fuel cost projections and set an appropriate fuel factor. At the same time, it must reconcile the fuel related revenues and expenses of the preceding twelve months by increasing or decreasing the fuel clause to reflect any fuel-related revenue surplus or deficiency, commonly referred to as an "overrecovery" and "underrecovery". This overrecovery or underrecovery accrues to the utility due to the difference between the fuel costs allowed in rates by the Board in the previous year's LEAC proceeding and the actual fuel costs incurred the previous year.

Rockland's LEAC Petition

In September 1986, Rockland filed a petition with the Board to approve a $6.6 million fuel adjustment clause reduction.

Rockland supported its request for a decrease by projecting fuel costs lower than those of 1986. Rockland also submitted that it would realize additional fuel cost savings in 1987 as a result of construction and renovation projects at its Lovett and Rio generating units scheduled to be completed that year. Lovett Unit Nos. 4 and 5, which formerly burned only oil, were being converted in 1987 to allow coal burning. Rockland was also reconstructing a penstock or viaduct at its Rio hydroelectric facility to allow that plant to again generate electricity. The petition and revised exhibits further showed that a significant portion of the requested decrease was attributable to the reconciliation offset of a large overrecovery accrued by Rockland through its 1986 fuel adjustment clause.

In addition to including projections regarding the fuel costs Rockland would incur during 1987, the petition included a proposal that the estimated construction costs for the Lovett and Rio projects be passed on to ratepayers through the fuel adjustment clause in 1987, subject to a reconciliation in 1988 when actual project costs became available. Adding this factor to the LEAC would thus decrease the rate reduction that ratepayers would have experienced if only fuel costs were considered. Rockland also proposed that the Board allow it to include the full annualized "carrying costs" of the Lovett and Rio projects in base rates effective January 1, 1988, without the necessity of filing a petition to increase base rates and having the Board holding a hearing.

At an evidentiary hearing before an ALJ, Rate Counsel took the position that a $19 million LEAC reduction was warranted. This position was based on the testimony of Rate Counsel's witness, Robert J. Henkes, regarding projected lower fuel costs. Rate Counsel's argument that a $19 million reduction was warranted was also based on its opposition to Rockland's proposal to include the Lovett and Rio construction costs in the LEAC. The Board Staff also opposed this proposal.

On December 18, 1986, the Board voted to authorize an interim reduction of $9.8 million in the LEAC. Rate Counsel had opposed this reduction on the basis that the $9.8 million figure improperly included approximately $5 million in construction costs for the Lovett and Rio projects. However, the Board's order, dated January 26, 1987, stated that the interim reduction "reflect[ed] an estimated reduction in fuel costs and [did] not reflect any ratepayer payment for the cost" of the Lovett and Rio projects. Despite this statement, Rate Counsel insists in this appeal that the $9.8 million reduction included the Lovett and Rio costs.

On March 20, 1987 the ALJ filed his initial decision which essentially endorsed Rate Counsel's average price methodology for deriving fuel costs and which rejected Rockland's proposal to include the Lovett and Rio carrying charges in the fuel clause adjustment. Based upon his findings and the calculations of the parties, the ALJ recommended that Rockland's LEAC be increased by $4.363 ...

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