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In re Public Service Electric and Gas Company's Rate Unbundling

April 13, 2000


Before Judges King, Carchman and Lefelt.

The opinion of the court was delivered by: King, P.J.A.D.

Argued: March 8, 2000

On appeal from the New Jersey Board of Public Utilities.



This is a consolidated appeal from two decisions of respondent the Board of Public Utilities (BPU): (1) its Final Decision and Order on the rate unbundling, stranded costs, and restructuring filings of respondent Public Service Electric and Gas Company (PSE&G), and (2) its bondable stranded cost rate order (BSCRO) on PSE&G's petition to finance, or securitize, its recovery-eligible stranded costs.

Co-Steel Raritan (Co-Steel), one of PSE&G's largest commercial customers, appeals from that portion of the Final Decision which ordered payment of stranded cost charges mandated by the Electric Discount and Energy Competition Act of 1999, N.J.S.A. 48:3-49 to -98, L. 1999, c. 23, effective February 9, 1999 (the Act), despite Co-Steel's special contract with PSE&G. The Division of the Ratepayer Advocate (RA) and New Jersey Business Users (NJBUS), a group of large industrial and commercial customers, appeal from specific findings in the Final Decision and on procedural due process grounds, contending that they were denied due process when the BPU refused to reopen the record after passage of the Act and BPU decided the securitization issue without holding hearings, among other procedural irregularities. The RA is also a respondent on the issues raised by Co-Steel. Briefs have been filed on behalf of six intervenors in the proceedings before the agency:

Jersey Central Power & Light Company (GPU), Rockland Electric Company (RECO), New Jersey Commercial Users (NJCU), Enron Energy Services (Enron), Independent Energy Producers of New Jersey (IEPNJ), and Tosco Refinery Company (Tosco).

The administrative proceedings leading up to these decisions were unusual in many ways: hearings on the unbundling, stranded costs, and restructuring issues were held before an administrative law judge before the Act was passed; the securitization issue invited comments from interested parties but no hearings. Quasi-legislative public hearings were held on deregulation three years before the Act actually was introduced in the Legislature. The BPU's Final Decision relied heavily on a negotiated agreement between PSE&G and seven intervenors which had an opportunity to comment on the agreement. Despite the unusual procedural irregularities, however, we conclude that all parties had ample opportunity to be heard on all aspects of both decisions. We find no denial of due process and no fundamental unfairness. We affirm.

To assist the reader in understanding the terms and acronyms we use we provide a Table of Acronyms.



From the early 1900s until the Act was passed in 1999, the electric power industry had been composed of vertically-integrated public utility companies. Each company owned power generation plants, plus transmission, distribution, and customer service facilities. The companies had virtual monopolies over their geographically-defined service territories. The charges for all services ÄÄ power supply, electric transmission and distribution, and such customer services as connects and disconnects, metering, billing, and account administration ÄÄ were "bundled" and billed at a single price.

In the late 1970s, electricity rates increased dramatically; by 1985 New Jersey consumers were paying about 50% above the national average for electricity. This situation persisted into the late 1990s. Although such factors as a higher cost of living, higher energy taxes, tighter environmental standards, and a lack of indigenous energy supplies played a part in this rise in rates, a major factor was the high average power production costs in New Jersey. Power production costs were high due to expensive utility-owned nuclear power plants and expensive power purchase agreements with nonutility generators (NUGs).

Competition began in the production aspect of the electric power industry after Congress enacted the Public Utility Regulatory Policies Act of 1978, 16 U.S.C.A. § 2601-2645 (PURPA), which provided incentives to develop nonutility electricity generation. Because of various federal initiatives, by 1997 there were a growing number of power producers and suppliers offering power for sale regionally at competitive prices. In fact, 19% of the electricity consumed by New Jersey customers in 1997 was purchased from independent power producers.

New Jersey's move toward competitive electric power markets in the 1990s paralleled similar regional and national developments. David Pettinari, You Can't Always Get What You Want--Will Two Recent State Court Decisions Tarnish the Political Promise of Electricity Industry Deregulation?, 76 U. Det. Mercy L. Rev. 501, 519 (1999). In 1992 Congress enacted the Energy Policy Act, 42 U.S.C.A. §§ 13201-556, which supported competition and choice in the electricity marketplace, and in May 1995 the Federal Energy Regulatory Commission adopted rules which paved the way for a competitive wholesale power market. Pennsylvania, New York, Massachusetts, New Hampshire, Rhode Island, Vermont, Maine, and California passed legislation or announced plans that would initiate retail choice for electric customers during 1998 and 1999. Michigan introduced deregulation through an administrative order before legislation on the matter was adopted. Pettinari, at 529-30.

In March 1995, the New Jersey Energy Master Plan Committee, under the leadership of Governor Whitman and Herbert Tate, president of the BPU, released the New Jersey Energy Master Plan Phase I Report, which provided a policy framework for the transition from power industry monopolies to competitive markets. The Master Plan recommended several short-term measures to prepare for the transition to competition, including passage of legislation providing for rate flexibility to help retain "at risk" customers, and it directed the BPU to investigate changes to the structure of the electric power industry as a means of lowering the cost of electricity in this State. In July 1995, Governor Whitman signed into law P.L. 1995, c. 180, the Rate Flex and Alternative Regulation Act, N.J.S.A. 48:2-21.24 to -30, which mandated that the BPU implement programs which promote a transition to a market-based competitive environment in the energy industry. For example, the Rate Flex Act allowed electric utilities to enter into "off-tariff" or discounted rate agreements with business customers in order to induce them to remain in New Jersey.

By an order of June 1, 1995 the BPU initiated Phase II proceedings to investigate and develop a long-term policy for implementing a competitive marketplace for electricity. The order directed interested parties to participate through comments and reply comments to the BPU between July and October 1995. Four informal working groups composed of representatives of various interest groups and stakeholders were formed to explore the issues related to restructuring the electric industry. They submitted reports to the BPU in February 1996. The BPU staff prepared a status report based on the four working-group reports and by an order of June 27, 1996 the BPU adopted the status report's recommendations regarding the procedural steps necessary to move toward restructuring.

The BPU adopted a two-step approach to gathering additional information: (1) it ordered formal public hearings and a concurrent public comment period for written comments, and (2) it ordered informal negotiating sessions with representatives of the various interest groups in an attempt to reach a consensus on the salient issues. The status report was distributed for public comment, and public, legislative-type hearings were conducted on July 18, 1996, in Trenton; on July 30, 1996, in Atlantic City; and on August 7 and 8, 1996, in Newark. Written comments were received by August 16, 1996.

In June 1996, negotiating teams were formed; they included representatives from all stakeholders and interest groups: the four New Jersey utilities ÄÄ PSE&G, RECO, GPU, and Atlantic Electric Company (Atlantic); consumer groups; environmental interests; energy service companies; independent power producers; power marketers (nonutility companies that buy and then resell electricity); industrial, business, and commercial customers; independent contractors; labor unions in the electric industry; public power associations; local government, and the Director of the RA. The interest groups were permitted to have technical advisers help with the negotiating. Negotiating sessions occurred on a weekly basis from June 27, 1996 through October 25, 1996.

On January 16, 1997 the BPU released "Restructuring the Electric Power Industry in New Jersey: Phase II Report Proceeding Proposed Findings and Recommendations Report" (draft report). Three public hearings to receive oral comments on the draft report were held on February 4, 1997, in Newark; on February 5, 1997, in Camden County; and on February 11, 1997, in Trenton. The BPU heard testimony from forty-two parties and accepted written comments from thirty-nine parties through February 28, 1997. After review of the comments and testimony, the BPU prepared "Restructuring the Electric Power Industry in New Jersey: Findings and Recommendations (Final Report)," which was adopted and released by an order dated April 30, 1997.

The 173-page Final Report's primary recommendation was that by October 1998 retail electric customers in New Jersey should commence to have the ability to choose their electric power supplier, and by July 2000 all New Jersey retail customers should be able to exercise that choice. The Final Report also recommended rate reductions of 5 to 10% while retail competition was phased in. The BPU announced it was looking "forward to working with the State's legislators during 1997 to craft legislation which will provide the foundation and necessary legal authority for the changes" it recommended.

The BPU's April 30, 1997 order adopting the Final Report also directed the four utility monopolies in New Jersey to submit filings in accordance with the guidelines and principles in the Final Report. The Final Report's "Implementation Steps and Schedule" directed each of the four companies to submit three filings ÄÄ a rate unbundling petition, a stranded cost petition, and a restructuring plan ÄÄ by July 15, 1997. The BPU expected that several of the issues to be addressed in the filings ÄÄ standards for fair competition, affiliate relationship standards, analysis of market power, and mechanics for the phase-in of customer choice ÄÄ would be "pulled out of the individual utility proceedings and reviewed generically." The BPU intended to complete its review of each filing and render a final decision by October 1998 to meet its deadline for the introduction of retail competition by that month. The BPU set forth specific guidelines for the matters to be addressed in the three filings.

By an order of June 25, 1997 the BPU directed its Audit Division to initiate management audits on the four electric utilities and to solicit the assistance of consulting firms to perform the audit. After issuing a request for proposals, and receiving and reviewing several proposals from independent auditors, the BPU selected Vantage/ICF Consulting (ICF) to perform an audit of PSE&G's filings.

On July 11, 1997 the BPU issued an order which established procedures for the filings: the utility's rate unbundling and stranded cost filings would be transmitted to the Office of Administrative Law (OAL) for hearings and an Initial Decision; the BPU would retain the restructuring plan filings for its own review and, if necessary, for hearings. The BPU intended to issue a Final Decision and Order in all of the matters before the anticipated start date of competition.

On July 15, 1997 PSE&G submitted a single filing containing its rate unbundling, stranded costs, and restructuring proposals, as well as prefiled direct testimony of seven witnesses. The BPU transmitted the unbundling and stranded cost portions of the filing to the OAL, where ALJ Louis McAfoos was assigned to the matter. The BPU retained the restructuring portion of the filing for its own review. The ALJ granted intervenor and participant status to over thirty groups, representing the diverse concerns of utilities, customers, suppliers, labor, and environmental groups. The BPU also granted intervenor and participant status to interest groups.

On September 25, 1997 the BPU issued an order establishing procedures for the restructuring filings, identifying issues with generic implications, and directing the creation of working groups to review the generic issues and submit status reports by January 10, 1998. On January 28, 1998 the BPU established a procedural schedule for review of generic restructuring issues, e.g., divestiture of generation assets, functional separation plans, and mechanics of the phase-in of retail competition.

In November 1997, thirteen intervenors and the RA submitted the prefiled testimony of twenty-five witnesses. PSE&G filed the rebuttal testimony of ten witnesses. ALJ McAfoos conducted a status conference on January 16, 1998 and on January 24 issued a hearing schedule for the unbundling and stranded cost matters. In late January 1998, the intervenors filed the surrebuttal testimony of eighteen witnesses. On January 29, 1998 the BPU released ICF's audit report on PSE&G's unbundling and stranded cost filings, and on March 5, 1998, it released ICF's report on PSE&G's restructuring filing.

The OAL conducted twenty days of evidentiary hearings on the unbundling and stranded cost matters, from February 9 to March 18, 1998. In April 1998, after the hearings were completed, the parties filed briefs. On the restructuring matter, BPU Commissioner Carmen Armenti held twenty days of hearings between April 27 and May 28, 1998. Thirteen intervenors, the RA, and PSE&G filed the testimony of forty-five witnesses. Representatives of ICF and the three other consulting firms which submitted audit reports on the four utilities' restructuring filings also testified. Briefs on the restructuring issues were filed in June and July 1998.

ALJ McAfoos issued an Initial Decision on the rate unbundling and stranded cost matters on August 14, 1998. The parties filed exceptions and replies to exceptions in October 1998. One matter the ALJ did not resolve was the quantification of stranded costs, although he offered guidance on how the amount should be calculated. After the parties conferred on the issue but could not agree on a stranded cost total, the BPU had ICF prepare a report on the quantification of stranded costs. The BPU relied on the ICF report in its Final Decision.

Meanwhile, in September 1998, a draft of the deregulation bill was introduced in the New Jersey Legislature. The final draft was introduced in both the Assembly and Senate on January 25, 1999. On January 28, 1999 the Assembly passed the bill by a vote of sixty to nine and the Senate passed it by a vote of twenty-seven to six. It was approved on February 9, 1999, the effective date of the Act.

The Act establishes the framework and time schedules for deregulation and restructuring of electric utilities in New Jersey. Statement attached to Assembly Bill A-16, P.L. 1999, c. 23. It mandates a 5% rate reduction by August 1, 1999, the date at which retail competition was to begin, and at least a 10% rate reduction within three years of that date. N.J.S.A. 48:3-52(d) and 3-53(a). The maximum rate reduction must be sustained at least until the end of the fourth year after August 1, 1999 (July 31, 2003). N.J.S.A. 48:3-52(j). As of August 1, 1999, electric companies had to unbundle their rates and separately identify charges for discrete services, such as generation, distribution, and transmission. N.J.S.A. 48:3-52(a). The Act also establishes "shopping credits" for customers who choose to purchase generation service from an alternative supplier; this reduces their rates and offers an incentive to shop for alternative electric suppliers. N.J.S.A. 48:3-52(b).

Although the Act does not mandate total divestiture, it allows utilities to functionally separate their generation assets and transfer them to an affiliate. N.J.S.A. 48:3-59. The utilities are permitted to recover stranded costs ÄÄ the generation plant costs which the utility is at risk of losing when the supply market is opened to competition ÄÄ through a limited-duration (up to eight years) nonbypassable market transition charge (MTC). N.J.S.A. 48:3-61(a). Starting on August 1, 1999 the utilities may collect a nonbypassable Societal Benefits Charge (SBC) designed to recover the costs for social programs, nuclear plant decommissioning, demand-side management (DSM) programs, environmental programs, and consumer education programs. N.J.S.A. 48:3-60(a). They are also permitted to impose a nonbypassable transition bond charge (TBC) (for up to fifteen years) in order to recover stranded costs. N.J.S.A. 48:3-62(a). The transition bonds, issued pursuant to a BSCRO, finance eligible stranded costs. N.J.S.A. 48:3-64(a). Financing, or securitizing, stranded costs through the issuance of asset-backed securities mitigates the rate impact of stranded cost recovery because the interest rates through financing are lower than the utility's historic cost of capital.

On February 11, 1999, consequent upon passage of the Act, the BPU set a schedule to render its decision, but also urged the parties to attempt to negotiate a settlement by March 3, 1999. On March 8, 1999 the Mid-Atlantic Power Supply Association (MAPSA) moved to reopen and supplement the record in the PSE&G unbundling and stranded cost proceedings. The RA and NJBUS supported MAPSA's motion; PSE&G opposed it. The BPU denied the motion on March 25, 1999 finding there was ample evidence in the record for its decision and that the entire proceedings had been conducted in contemplation of deregulation.

On March 17, 1999 eight parties submitted a proposed stipulation of settlement (Stipulation I): they were PSE&G, New Jersey Transit Corporation, Tosco, NJCS, Enron, IEPNJ, International Brotherhood of Electrical Workers Local 94, and National Resources Defense Council. On March 29, 1999 six other parties submitted an alternative settlement proposal (Stipulation II): they were the RA, NJBUS, MAPSA, New Energy Ventures, New Jersey Industrial Customers Group, and New Jersey Public Interest Intervenors (excluding the Natural Resources Defense Council). In April 1998 both groups of negotiators submitted comments on each other's stipulations.

The BPU held a public agenda meeting to consider the proposals and on April 21, 1999 issued a summary order, finding Stipulation I more financially prudent and consistent with the Act's requirements than Stipulation II. On August 24, 1999 the BPU issued its Final Decision and Order, which supplemented and elaborated on the April summary order. It announced that PSE&G was permitted to securitize up to $2.4 billion of its stranded costs.

On June 8, 1999, after the BPU issued its summary order but before it issued its Final Decision, PSE&G filed a petition with the BPU, seeking a BSCRO to securitize $2.4 billion in stranded costs. On August 11, 1999 the RA filed comments, raising thirteen arguments in opposition to PSE&G's financing petition and requesting that evidentiary hearings be held on the issue. On August 24, 1999 the BPU held a public meeting at which it rendered the decision that no hearings were required. On September 17, 1999 the BPU denied Co-Steel's and NJBUS's motions to intervene in the securitization proceeding and issued a BSCRO approving PSE&G's securitization.

Co-Steel and NJBUS have filed separate appeals from the Final Decision and Order in the unbundling, stranded costs, and restructuring matter and from the BSCRO. (A-1108-99T3 and A-772-99T3 are Co-Steel's appeals from the restructuring and financing matters; A-643-99T3 and A-1108-99T3 are NJBUS's appeals from those matters.) We consolidated the four appeals. Although the RA considered itself a respondent and did not file a notice of appeal, we directed it to file an appellant's brief on all matters on which it opposed the BPU's orders. We granted PSE&G's motion to accelerate the appeal.



We first consider Co-Steel's contention that the BPU's order, imposing stranded cost charges on it, was an unconstitutional impairment of its special ten-year contract with PSE&G from 1995 through 2005. Co-Steel claims that the order allows PSE&G to impose an "exit fee" on Co-Steel after the contract term expires, which in effect increases the agreed price of electricity during the contract term. In addition to constitutional considerations, Co-Steel says that principles of equity and estoppel should preclude PSE&G from imposing stranded cost charges because it relied on the contract in deciding to remain in New Jersey rather than moving its operations to Kentucky, where power costs were less expensive, and also by investing $37 million in the Perth Amboy plant. In the alternative, Co-Steel argues that even if we allow imposition of stranded cost charges, the BPU incorrectly applied the Act to its contract in three ways: (1) the BPU should have applied the rate reduction to all of its electricity consumption rather than to "block 1" only; (2) the rate reduction scheduled for August 2002 should reduce rates by 10% from their 1997 level not 13.9% from their 1999 level; and (3) the August 1999 rate reduction should reduce rates by 5% from their 1997, not 1999, level, a point which all appellants raise and which we consider separately.

The United States Constitution, art. I, § 10, provides that "[n]o State shall . . . pass any . . . Law impairing the Obligation of Contracts . . . . " Our New Jersey Constitution, art. IV, § 7, ¶ 3, has a parallel prohibition. Despite the difference in language, the federal and state Contract Clauses are applied coextensively and provide the same protection. Fidelity Union Trust Co. v. New Jersey Highway Auth., 85 N.J. 277, 299-300, appeal dismissed, 454 U.S. 804, 102 S. Ct. 76, 70 L. Ed. 2d 73 (1981).

The prohibition against impairment of contracts under the federal and state constitutions is not absolute. It "must be accommodated to the inherent police power of the states to safeguard the vital interests of their residents." In re Recycling & Salvage Corp., 246 N.J. Super. 79, 100 (App. Div. 1991). "The contract clause does not deprive the states of their power to adopt general regulatory measures even if those regulatory measures result in the impairment or destruction of private contracts." Ibid.

Our federal and state courts apply a three-prong test to determine whether legislation has unconstitutionally impaired a contract: they ask (1) has it substantially impaired a contractual relationship? (2) if so, does it have a significant and legitimate public purpose? and (3) is it based on reasonable conditions and reasonably related to appropriate governmental objectives? State Farm Mut. Auto. Ins. Co. v. State, 124 N.J. 32, 64 (1991).

In determining whether a contract impairment is substantial, courts consider whether the industry has been regulated in the past. Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 242 n.13, 98 S. Ct. 2716, 2721 n.13, 57 L. Ed. 2d 727, 735 n.13 (1978) ("When he purchased into an enterprise already regulated in the particular to which he now objects," he purchased subject to further legislation upon the same topic). On this first prong of the test, courts may also consider whether one of the parties reasonably relied on the contractual terms and whether the legislation was an unexpected modification of those terms. Nieves v. Hess Oil Virgin Islands Corp., 819 F.2d 1237, 1247 (3d Cir.), cert. denied, 484 U.S. 963, 108 S. Ct. 452, 98 L.Ed. 2d 392 (1987). For example, in Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 416, 103 S. Ct. 697, 707, 74 L. Ed. 2d 569, 583-84 (1983), the Court said that the natural gas contracts at issue "expressly recognize the existence of extensive regulation by providing that any contractual terms are subject to relevant present and future state and federal law," and could be interpreted "to incorporate all future state price regulation. . . ." At the very least, the Court said, the provision suggested that the gas company "knew its contractual rights were subject to alteration by state price regulation." Id. at 416, 103 S. Ct. at 707, 74 L. Ed. 2d at 584. As to the second and third prongs of the test, the legitimacy and reasonableness of legislation, the courts generally defer to legislative judgment, unless the State itself is a contracting party. Id. at 412-13, 103 S. Ct. at 705, 74 L. Ed. 2d at 581 (holding that a state statute regulating the price of natural gas did not violate the contract clause even if it did impair an energy company's contract with a public utility).

Here, respondents BPU, PSE&G, and RA counter Co-Steel's contract impairment argument by asserting that Co-Steel fails to satisfy the first prong of the test because the Act and the BPU restructuring order did not impair its contract; in fact, the end result was lower rates than provided for under the contract. The ten-year service agreement between Co-Steel and PSE&G was approved by the BPU on November 17, 1995, with the new rate effective retroactive to April 1, 1995. On July 24, 1995 a stipulation signed by the parties, the Attorney General (for the BPU), and the RA modified the agreement, specifically with reference to the Experimental Hourly Energy Pricing Tariff (EHEP) service offered to Co-Steel. The stipulation also refers to a July 1995 agreement with the New Jersey Treasury for a lower tax rate on the energy purchased under the contract.

The agreement between Co-Steel and PSE&G articulates the motivations of the parties: Co-Steel would forego closing its steel plant in Perth Amboy and moving its operations out of state, and would invest at least $37 million in improvements to its Perth Amboy plant between 1995 and 1999 in consideration for the special discounted pricing that PSE&G offered.

Under the agreement, electric services to Co-Steel would be priced in two blocks: the first 13 million kWh (block 1), which accounts for about one-third of Co-Steel's annual electricity consumption, would be billed monthly "at prices, terms, and conditions identical to PSE&G's then effective Rate Schedule High Tension Service (HTS)," that is, whatever the HTS tariff rate was at a particular time. Anything over 13 million kWh (block 2) would be billed at PSE&G's "marginal energy cost" (the cost of the electric utilities that make up the "PJM" power pool ÄÄ Pennsylvania, New Jersey, Maryland, and Delaware). Block 2 usage is governed by the EHEP service agreement, under which Co-Steel, the only customer under this service, would receive a discounted rate, with the cost of energy "vary[ing] hourly with changes in Public Service's marginal energy cost." According to Vincent Dimiceli, controller of Co-Steel, the effect of this "interruptible service" contract was to reduce its cost of electricity from an average of 5.9 cents per kWh to an average of 4.2 cents per kWh. The contract is silent as to what might occur when the contract term expired in 2005.

In the BPU order of August 24, 1999 the Commissioner ruled that, under the Act, N.J.S.A. 48:3-60, -61, and -67, HTS customers, along with all other electric public utility customers (except eligible on-site generator customers, N.J.S.A. 48:3-77), were subject to nonbypassable stranded cost charges (MTC, TBC, and SBC). At the same time, HTS customers would also receive rate reductions totaling 13.9% by August 1, 2002, and those reductions were, in part, due to securitization of the stranded cost charges. However, since Co-Steel's block 2 usage was governed by the special EHEP contract, it would be unaffected by the BPU order. The BPU refused to exempt Co-Steel from imposition of stranded cost charges, which could continue up to fifteen years after transition bonds are issued, well beyond the expiration of Co-Steel's contract.

According to Co-Steel, before the contract went into effect, its annual electric bill was $24 million, and under the contract the annual bill was lowered to $18 million. Co-Steel admits that, despite the imposition of surcharges on its HTS consumption, its block 1 costs would decrease under the BPU order due to the rate reductions applied to HTS customers. It also acknowledges that its block 2 rates are unaffected by the Act. Thus, the overall effect of the order will be "either neutral or . . . a slight decrease." However, Co-Steel believes that after the contract expires, when the mandatory rate reductions are no longer in effect, the transition charges authorized by the BPU order will allow PSE&G to collect between $4.5 and $6 million per year for ten or more years beyond the contract term. N.J.S.A. 48:3-61(i) (MTC charges may be imposed for up to eight years); N.J.S.A. 48:3-62(d)(1) (TBC charges may be imposed for up to fifteen years).

Thus, Co-Steel appears to admit that during the term of the contract the Act, as applied by the BPU order, will not impair its contract, but will in fact enhance it. Not until after the contract expires, will Co-Steel have considerable charges which it allegedly did not anticipate when negotiating the terms of the contract.

We conclude that the contract impairment argument is undermined by Co-Steel's failure to include contingencies for post-contract charges even though its own controller, Dimiceli, acknowledged that at the time he was negotiating the contract, in the fall of 1994, he was "generally aware that electric industry deregulation was somewhere on the horizon and that it might occur to one degree or another in the succeeding few years"; he believed that "there was a good chance [that competition] would arrive sometime during the ten-year term of our contract."

Co-Steel's argument is also undermined by two provisions of the agreement which allow for unilateral changes in its terms:

7. Taxes, Assessments or Other Charges: In the event that PSE&G incurs any taxes, assessments of or other charges in connection with the services to be provided hereunder, which were not applicable at the time of entering into this Agreement, including any increase in the Gross Receipts and Franchise Unit Tax, such taxes, assessments or other charges shall be passed through to Raritan as an increase in PSE&G's costs of providing service hereunder . . . .


9. Laws, Regulations, Orders, Approvals and Permits:

This Agreement is made subject to present and future local, state and federal laws and to the regulations or orders of any local, state or federal regulatory authority having jurisdiction over the matters set forth herein . . . .

As in Energy Reserves, 459 U.S. at 416, 103 S. Ct. at 707, 74 L. Ed. 2d at 584, the express language of paragraph nine of the agreement suggests that Co-Steel knew that its contractual rights were subject to alteration by state legislation. Thus, Co-Steel cannot have reasonably relied on the immutability of the agreement.

Co-Steel tries to distinguish the types of charges allowed under paragraph seven of the agreement and those imposed by the Act. It says that whereas paragraph seven allows PSE&G to "pass through" to Co-Steel any "taxes, assessments of or other charges [incurred by PSE&G] in connection with the services to be provided . . . as an increase in PSEG's costs of providing service," stranded cost charges are "amounts collected by PSE&G for the benefit of its shareholders" and incurred before the contract was negotiated; thus, they do not represent an increase in the cost of providing service during the term of the contract. Although such semantic distinctions may be true and have a certain allure, they do not alter the fact that the Legislature has mandated that stranded cost charges be passed along to customers as a cost of service. N.J.S.A. 48:3-60, -61, and -67. Thus, such charges are covered under the plain language of paragraph seven.

We conclude that Co-Steel's contract has not been substantially impaired but even if Co-Steel could satisfy this first prong of the test, it fails the second and third prongs. Co-Steel concedes that there is a legitimate purpose behind the collection of stranded costs by utilities and recognizes the legislative policy stated in the Act: to "[p]rovide for a smooth transition from a regulated to a competitive power supply marketplace" and to "maintain the financial integrity of the electric public utility through the transition to competition. . . ." N.J.S.A. 48:3-50(a)(12) and (c)(4).

However, Co-Steel contends that the imposition of stranded cost charges on it was not reasonable, and that we should not defer to the BPU's judgment because the State is a party to the contract. Although the BPU approved the contract and the Attorney General signed the 1995 stipulation on modifications to the contract, the real parties to the contract are PSE&G and Co-Steel. Deference must be accorded the legislative judgment and BPU's judgment concerning interpretation of the Act. Energy Reserves, 459 U.S. at 412-13, 103 S. Ct. at 705, 74 L. Ed. 2d at 581; New Jersey Guild of Hearing Aid Dispensers v. Long, 75 N.J. 544, 575 (1978).

Co-Steel argues that the stranded cost charges are a devastating burden for it but because they represent only a tiny fraction of the total to be collected by PSE&G, their loss would jeopardize neither PSE&G nor electric utility competition. The BPU responds by saying there is no justification for treating Co-Steel differently from all other customers: PSE&G will continue to provide distribution, transmission, and customer services after expiration of the contract, and Co-Steel should be obligated to pay its share of providing those services and its share of the stranded costs charges, which but for the Act would have been recovered in PSE&G's rates on a continuing basis. We also recognize that the nonbypassable stranded cost charges are not exit fees assessed only to customers who leave the utility but rather are imposed on all customers, whether or not they choose another energy supplier.

We think it unreasonable to treat Co-Steel differently from other PSE&G customers when its contract does not specifically call for any special post-contract treatment. It now is receiving the benefit of reduced rates through the contract, certain tax relief from the State, and the rate reductions resulting from the Act. When the contract expires, if it remains in New Jersey, it may also receive benefits from competition among electricity suppliers. We conclude it reasonable that Co-Steel bear its share of the stranded cost charges that are an integral part of the legislative deregulation scheme.

Co-Steel also argues that equitable principles should preclude imposition of these charges since it detrimentally relied on its contract when deciding to remain in New Jersey and invested $37 million in improvements to its Perth Amboy plant. But Co-Steel was aware that deregulation was literally "around the corner" and would most likely occur during the term of the contract. In fact, according to Dimiceli, Co-Steel was looking forward to "tak[ing] advantage of open competition after the contract expired." He saw the contract as a "trade-off": Co-Steel "would lock into a favorable electric rate for ten years, but in exchange we would be giving up the opportunity to participate in any competitive market for electricity that might develop before the end of our contract term." Co-Steel appears to want a "double bite," the favorable contract rate and the advantages of competition, but none of the associated costs of deregulation. The equities do not favor Co-Steel under these circumstances. Their reliance was not so much detrimental as it was shrewd.

Co-Steel's alternative argument addresses three specific aspects of the BPU order it contends were error. First, Co-Steel asserts that the rate reduction mandated by the Act should be applied to all of its usage, not just block 1 HTS usage because (1) it is unfair to impose on it the full burden of stranded cost charges but allow it only half the rate decrease granted other customers, and (2) N.J.S.A. 48:3-52(d)(1) mandates rate reductions for each "customer class," a category into which Co-Steel must, by logic, fall.

N.J.S.A. 48:3-52(d)(1) provides:

During a term to be fixed by the board, each electric public utility shall reduce its aggregate level of rates for each customer class, including any surcharges assessed pursuant to this act, by a percentage to be approved by the board, which shall be at least 10 percent relative to the aggregate level of bundled rates in effect as of April 30, 1997, subject to the provisions of paragraph (2) of this subsection.

The Act does not define "customer class."

In its August 24, 1999 Final Decision, the BPU determined that the rate reduction and the stranded cost charges applied to Co-Steel's HTS block 1 usage, but that the Act would not affect its block 2 usage, which was governed by the EHEP contract. In its October 19, 1999 denial of Co-Steel's motion for reconsideration, the BPU clarified that the MTC, TBC, and SBC stranded cost charges would not be imposed on the block 2 discounted rate, and that the discounted rate would not be affected by the Act. It was only the HTS tariff usage (block 1) that would be affected by both the stranded cost charges and the rate reductions mandated by the Act, because that tariff was not "designed . . . to insulate customers from future additional charges relating to the provision of service." The BPU's decision was grounded solidly on holding the parties to the terms of Co-Steel's contract with PSE&G.

As to the definition of "customer class," the BPU interpreted it to mean "customers served under fixed tariffs, not customers that have made separate arrangements to receive service at heavily discounted rates." Although Co-Steel makes a strong argument that it should be considered as part of a customer class, it ignores the fact that it bargained for a special rate that literally put it into a class by itself: it is the only PSE&G customer receiving a discounted rate under an EHEP service agreement.

The interpretation of "customer class" announced by the BPU, the administrative agency charged with the enforcement of the Act, should be given great weight by the court. New Jersey Guild of Hearing Aid Dispensers, 75 N.J. at 575; In re South Jersey Gas Co., 226 N.J. Super. 327, 333 (App. Div. 1988), aff'd, 116 N.J. 251 (1989). However, even without reaching the validity of that interpretation, the underlying principle of enforcing a contract as written was a valid basis for the BPU's decision.

Co-Steel next argues that, under N.J.S.A. 48:3-52(d)(1) *fn1 , it is entitled to a 10% reduction from its April 30, 1997, rates rather than a 13.9% reduction from current rates by August 1, 2002 as ordered by the BPU, because the BPU's decision was premised on the 3.9% increase experienced by most PSE&G customers in 1998, whereas Co-Steel's increase during that period was 9%.

N.J.S.A. 48:3-52(d)(1), quoted above, mandates a rate reduction that is at least 10% below the April 30, 1997 rates, to be implemented "[d]uring a term to be fixed by the board." The following subsection of the statute allows the BPU to "set a term for an electric public utility to phase in a rate reduction of ten percent or more during the first 36 months after the starting date for the implementation of retail choice" (August 1, 1999) and requires that the rate reduction on August 1, 1999, be at least 5%. N.J.S.A. 48:3-52(d)(2). The statute allows the BPU to order a rate reduction greater than 10% "if it determines that such reductions are necessary in order to achieve just and reasonable rates." N.J.S.A. 48:3-52(e).

In its Final Decision, the BPU ordered cumulative rate reductions that would equal 5% effective August 1, 1999, 7% "on or about" January 1, 2000, 9% effective August 1, 2001 and 13.9% effective August 1, 2002. The BPU explained this decision in addressing Co-Steel's arguments in its motion for reconsideration. It said that whether or not Co-Steel should receive only a 13.9% reduction on August 1, 2002, will depend to a large extent on the particular tariff design to be developed for Co-Steel as an EHEP customer in 2002. Co-Steel's argument is based on the fact that because DSAF charges are recovered on a volumetric basis, its DSAF increases in 1998 were higher than those of other customers. Co-Steel thus asserts that it should experience, due to those earlier larger DSAF increases, a greater reduction in rates than those customers that may have experienced a DSAF increase closer to the overall average of 3.9 percent. The Board agrees that this issue should be looked into at the time the appropriate tariff designs covering these future rate reductions are completed and approved by the Board. Therefore, before the Board gives its final approval to rate reduction to be effective on August 1, 2002, it will consider the appropriate rate design for all of its customers including Co-Steel. In doing so, the Board will be considering any arguments Co-Steel may wish to present at that time. [(emphasis added).]

Thus, the BPU acknowledges that Co-Steel's 1998 increases were greater than those of the average PSE&G customer, which may indicate the need for a reduction greater than 13.9% in 2002. The BPU merely asserts, as does PSE&G, that the issue is not ripe for adjudication at this point.

N.J.S.A. 48:3-52(d) gives the BPU the discretion to determine the amount of the rate reductions and the term during which they are phased in, as long as the August 1999 reduction is at least 5%, the total rate reduction is at least 10% over the 1997 level, and the phase-in period is accomplished within three years of August 1999. The BPU has acknowledged that for Co-Steel this may mean a greater than 13.9% increase by 2002, and that it will entertain Co-Steel's ...

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