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In re Petition of South Jersey Gas Co.

Decided: August 3, 1989.


On certification to the Superior Court, Appellate Division, whose opinion is reported at 226 N.J. Super. 327 (1988).

For affirmance -- Chief Justice Wilentz and Justices Stein, Clifford, Handler, and O'Hern. For reversal -- None. The opinion of the Court was delivered by Stein, J.


In this case we consider whether SunOlin Chemical Company (SunOlin), a corporation that seeks to harvest the by-product of a refinery process and to use its New Jersey pipeline system to sell methane-rich gas to a select group of large industrial users, is a "public utility" subject to the jurisdiction of the Board of Public Utility Commissioners (BPU or Board). The Appellate Division affirmed the Board's determination that SunOlin's activities were "clothed in the public interest to such an extent as to require" that SunOlin be subject to BPU jurisdiction. 226 N.J. Super. 327, 330 (1988). We granted certification, 114 N.J. 299 (1988), and now affirm.


The material facts are set forth in detail in the Appellate Division opinion, 226 N.J. Super. at 329-32. For our purposes a summary will be sufficient.

SunOlin operates a chemical plant in Claymont, Delaware, where it converts oil refinery by-products produced by SunOlin Company, its parent corporation, into industrial gases. As part

of this process, SunOlin produces a by-product known as methane-rich fuel (MRF). MRF can be used as an alternative-energy source to natural gas, provided that certain firing equipment has been adapted. MRF is generally suitable for industrial but not residential use. SunOlin produces approximately 8,000 to 10,000 million cubic feet (mcf) of salable MRF every day.

SunOlin maintains and operates a T-shaped network of eight pipelines, which originate from Claymont, Delaware. The pipelines are capable of providing MRF to users in Salem and Gloucester counties. The lines traverse both public and private property.

B.F. Goodrich Company (Goodrich) operates a manufacturing facility in Pendrictown, New Jersey. Goodrich uses natural gas to fire boilers and to operate dryers used in a chemical process. Until 1986, Goodrich had been supplied with fuel by South Jersey Natural Gas (South Jersey). South Jersey is a regulated public utility that serves approximately 180,000 residential, commercial, and industrial customers in all or part of seven southern counties of New Jersey. Sixteen of these industrial customers are large volume users, representing approximately twenty percent of South Jersey's firm sales volume.

In July 1983, Goodrich attempted unsuccessfully to enter into an arrangement with South Jersey for the transportation of natural gas from the Southwest. Goodrich subsequently contacted SunOlin, hoping to use SunOlin's pipelines to transport the gas. SunOlin then offered to sell Goodrich MRF as an alternative to natural gas. The transaction was never completed, apparently because SunOlin determined that it would not be profitable.

In the fall of 1985, a pipeline became available through which MRF could be delivered profitably to Goodrich. Goodrich requested that SunOlin develop a proposal to sell and deliver MRF. Goodrich estimated that it could save $18,000 per month by converting to MRF. SunOlin viewed the transaction as an opportunity to develop a broader market for MRF.

While the Goodrich sale was under negotiation, SunOlin pursued other select industrial customers. In particular, E.I. Dupont Nemours and Company (Dupont) was targeted as a potential buyer. In January 1986, SunOlin offered to provide Dupont's Deepwater, New Jersey plant with 3,000 mcf per day of MRF and its Repauno, New Jersey facility with 5,000 mcf per day of MRF. Although a preliminary understanding was negotiated, no contract was ever consummated.

SunOlin offered to sell South Jersey between 8,000 and 10,000 mcf per day of MRF, but South Jersey rejected its proposal. SunOlin also had discussions concerning the sale of MRF with several other large companies in the region including Mobil Oil Research, Monsanto Chemical Company, Shell Oil Company, Allied Chemical, and the Atlantic City Electric Company.

In late 1986, an agreement in principle was reached between Goodrich and SunOlin. SunOlin agreed to provide Goodrich with 617 mcf per day of firm*fn1 MRF and 1628 mcf per day of interruptible MRF. Goodrich notified South Jersey that it intended to terminate its natural gas service contract as of March 1, 1987. As a result, South Jersey filed a petition with the BPU on February 13, 1987, seeking a preliminary restraining order prohibiting SunOlin from selling and delivering MRF to Goodrich.*fn2

In March 1987, the BPU determined that substantial factual questions existed. It ordered the matter transferred to the Office of Administrative Law for a hearing to consider whether SunOlin was a "public utility" under N.J.S.A. 48:2-13 and therefore subject to the jurisdiction of the BPU.

SunOlin stipulated before the Administrative Law Judge (ALJ) that it "owns, operates, manages or controls pipeline or gas system, plant or equipment in the State of New Jersey" and does so "under privileges granted by this state or a political subdivision thereof." 226 N.J. Super. at 330. The only question to be determined was whether SunOlin's ownership, operation, management or control of this pipeline or gas system was for "public use." The ALJ reasoned:

In this jurisdiction, whether an entity is a public utility depends on the character and extent of the use. [ Lewandowski v. Brookwood Musconetcong River, etc., Ass'n., 37 N.J. 433, 443-45 (1962).] Here, the character of the use is the sale of manufactured gas to only the most profitable industrial customers. The extent of the use is presently one industrial customer, with efforts to obtain other industrial customers held in abeyance. The sale to one customer equates to a revenue loss to South Jersey of $1.3 million and a loss to the State of New Jersey of $210,000 in gross receipts and franchise taxes. The effect on the public could be a rate increase of $400,000. Thus, the sale by SunOlin to one customer is sufficiently substantial to be of consequence to the public. Moreover, if sales of this nature were allowed to proliferate without consideration of the public convenience and necessity, the ability of franchised public utilities to carry out their substantial responsibilities under Title 48 would be jeopardized.

The matter was then returned to the BPU for a final determination on the merits. Defining "public use" as that which effects the "public interest," the BPU ruled that "it is apparent that SunOlin, by making sales to Goodrich, is providing service that is clothed in the public interest to such an extent as to require this Board's regulatory supervision." The rationale for the imposition of jurisdiction was the potential effect that SunOlin's sales of MRF could have on the regulated market for natural gas. The Board also noted that it had the authority to regulate competition by excluding it. N.J.S.A. 48:2-14 and 48:9-17.

The Appellate Division affirmed the Board's finding, observing that

a determination of "for public use" has always implicated an inquiry into the impact upon the "public interest." * * * The public interest involved here must be reached through a consideration of the economic impact of SunOlin's "cream skimming" operation upon the regulated rate structure in selling only to the most profitable large customers of public utilities. [226 N.J. Super. at 334.]

The Appellate Division rejected SunOlin's claim that it is exempt from regulation because the public has no right to demand service from it. "If we were to accept this position the result would be to permit SunOlin to escape the confines of the regulatory statute simply by its declaration that it would not sell to ...

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