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In re Petition Of New Jersey-American Water Co.

July 21, 2000

IN RE PETITION OF NEW JERSEY- AMERICAN WATER CO., INC., FOR AN INCREASE IN RATES FOR WATER AND SEWER SERVICE AND OTHER TARIFF MODIFICATIONS


Before Judges Skillman, Newman and Fall.

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

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued April 18, 2000

On appeal from the Board of Public Utilities.

The Division of Ratepayer Advocate (Ratepayer Advocate) appeals from the part of a final decision of the Board of Public Utilities (BPU), which allowed respondent New Jersey-American Water Company (American Water) to include fifty percent of its charitable contributions in the operating expenses used to determine the rates it charges customers for water and sewer service.

American Water provides water and sewer service to approximately 346,000 customers in 117 municipalities throughout New Jersey. American Water also sells water for resale to various municipalities, authorities and public utilities.

On January 12, 1998, American Water filed a petition with the BPU for permission to increase its rates. The matter was referred to the Office of Administrative Law, and an Administrative Law Judge (ALJ) conducted a lengthy evidentiary hearing in which testimony was presented by American Water, the Ratepayer Advocate and various other interested parties. One of the Ratepayer Advocate's objections to the rate increase petition was that American Water should not be allowed to treat any portion of its charitable contributions as operating expenses. The ALJ concluded that "this is a policy decision that only the [BPU] can make" and "commend[ed] to the [BPU] this issue as one deserving of further consideration on a generic basis."

When the BPU reviewed American Water's petition, it decided to adhere to its policy of allowing public utilities to treat a portion of their charitable contributions as operating expenses. The BPU also concluded that American Water's overall revenue requirement was $242,013,783. Accordingly, it allowed the company to increase its total revenues by 5.71%. The $49,593 of charitable contributions American Water was allowed to include in its operating expenses represent slightly more than two hundredths of one percent of its overall revenue requirements (.0205%). Consequently, the average residential consumer of water pays approximately eight cents more per year as a result of the inclusion of a portion of American Water's charitable contributions in its operating expenses.

On appeal, the only part of the BPU's final decision the Ratepayer Advocate challenges is the allowance of fifty percent of American Water's charitable contributions as operating expenses. The Ratepayer Advocate argues that this ruling was incorrect because charitable contributions are not germane to the operation of a public utility. The Ratepayer Advocate also argues that the BPU violated the First Amendment to the United States Constitution and Article I, paragraph 6 of the New Jersey Constitution by allowing American Water to treat charitable contributions as operating expenses, because this compels ratepayers to indirectly finance charitable activities that some ratepayers may find objectionable. We reject both arguments and affirm the BPU's final decision.

I.

The BPU has been vested with "broad discretion" in the exercise of its rate making authority. In re Public Serv. Coordinated Transp., 5 N.J. 196, 214 (1950). Thus, the BPU's decisions "are entitled" to "presumptive validity," In re Jersey Cent. Power & Light Co., 85 N.J. 520, 527 (1981), and will not be disturbed unless a utility or other interested party can show an abuse of discretion. In re New Jersey Power & Light Co., 9 N.J. 498, 508 (1952).

In New Jersey Bell Tel. Co. v. State Dep't of Pub. Utils., 12 N.J. 568, 596-97 (1953), the Court held that the BPU is required to allow a public utility to include some charitable contributions in its operating expenses:

[I]t has been held that where utility corporations have inherent or statutory power to make charitable gifts and donations, the payment is properly allowed in a rate determination as an operating expense where it has an effect upon the creation of the service or product of the corporation and therefore may be considered as reasonably necessary in the rendition of service to the consumer. This appears to be a salutary legal premise. [Citations omitted.]

Subsequent to New Jersey Bell Telephone, the BPU adopted a policy of allowing public utilities to treat a portion of their charitable contributions as operating expenses. See In re Public Serv. Elec. & Gas Co., 59 P.U.R. 4th 42 (1984). In New Jersey Dep't of the Pub. Advocate v. New Jersey Bd. of Pub. Utils., 189 N.J. Super. 491, 515 (App. Div. 1983), this court recognized that "[t]he [BPU] has consistently permitted reasonable, nondiscriminatory charitable donations to qualify as operating expenses in a utility rate case[,]" and ...


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