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

May 18, 2001


On certification to the Superior Court, Appellate Division, whose opinion is reported at 330 N.J. Super. 65 (2000).

The opinion of the court was delivered by: Per Curiam

Argued November 8, 2000


Plaintiffs in this case have challenged the August 24, 1999 Final Decision and Order ("Final Order") issued by the Board of Public Utilities ("BPU") in respect of Public Service Electric and Gas Company's ("PSE&G") rate unbundling, stranded cost and corporate restructuring filings. Also at issue is the validity of the BPU's September 17, 1999 Bondable Stranded Costs Rate Order ("BSCRO"), issued in response to PSE&G's petition to securitize its recovery-eligible stranded costs.

The Appellate Division upheld both the BPU's Final Order and BSCRO. Following arguments on November 8, 2000, this Court issued an order disposing of the matter without an accompanying opinion because of the need for an expeditious resolution of the plaintiffs' challenge. That order announced our decision affirming the judgment of the Appellate Division. Although we rely substantially on the reasons expressed in Judge King's thorough and well-reasoned opinion, we take this opportunity to elaborate on that opinion and respond to the concerns of our dissenting colleague.


On April 30, 1997, the BPU issued a report entitled "Restructuring the Electric Power Industry in New Jersey: Findings and Recommendations" ("Final Report"). The Final Report recommended in part that by July 2000 all of the state's retail customers should be able to select their electric power suppliers, and that rate reductions of from five to ten percent should be implemented during the phase-in of retail competition. Under the Agency's proposed restructuring, the generation component of electric power production would be competitively priced on the open market.

The BPU's order adopting the Final Report required the existing four utility monopolies, PSE&G, Jersey Central Power & Light Company, Rockland Electric Company and Atlantic Electric Company, each to submit three filings to the BPU: a rate unbundling petition, a stranded cost petition, and a restructuring plan. The rate unbundling petitions involve the manner in which the single, per-kilowatt-hour charge would be separated into its component parts (generation, transmission and distribution); the stranded cost filings relate to the utilities' right to recover some portion of the overmarket (stranded) costs that would have been recovered had they continued as regulated monopolies; and the restructuring filings relate to the reorganization of the four utilities, focusing on the utilities' divestiture of generating assets, including the valuation of the transferred assets where, as here, those assets are transferred to an unregulated affiliate. The BPU's Final Order addressed PSE&G's submissions and was issued pursuant to the Electric Discount and Energy Competition Act ("EDECA"), N.J.S.A. 48:3-49 to 98,*fn1 enacted in February 1999.

This is the first case involving one of the state's utility monopolies to receive final agency review. An appeal from the Final Order was taken by the Division of the Ratepayer Advocate ("Ratepayer Advocate" or "RA"), New Jersey Business Users ("NJBUS"), a group of large industrial and commercial customers, and Co-Steel Raritan ("Co-Steel"), one of PSE&G's largest commercial customers. In re PSE&G Co.'s Rate Unbundling, Stranded Costs and Restructuring Filings, 330 N.J. Super. 65 (2000). We granted the petitions for certification filed by the Ratepayer Advocate and NJBUS, and granted in part the petition for certification filed by Co-Steel, limited to the issues concerning rate reduction. Certification was denied on Co- Steel's contract impairment claim. 165 N.J. 489 (2000).


This case implicates questions of statutory interpretation and executive agency decision making. When considering the meaning of a statutory provision, absent any legislative intent to the contrary, courts must give effect to the language of the provision. Phillips v. Curiale, 128 N.J. 608, 617-18 (1992); Renz v. Penn Cent. Co., 87 N.J. 437, 440 (1981). When a statute is ambiguous, however, "[w]e are . . . warranted in placing considerable weight on the construction of the statute . . . by the administrative agency charged by the statute with the responsibility of making it work." The Passaic Daily News v. Blair, 63 N.J. 474, 484 (1973). Because "[t]he grant of authority to an administrative agency is to be liberally construed to enable the agency to accomplish the Legislature's goals," Gloucester Cty. Welfare Bd. v. State Civil Serv. Comm'n, 93 N.J. 384, 390 (1983), we defer to "[t]he agency's interpretation . . . provided it is not plainly unreasonable." Merin v. Maglaki, 126 N.J. 430, 437 (1992). Likewise, when reviewing an administrative agency's factual findings, our function is not to substitute our judgment for that of the agency, particularly when that judgment reflects agency expertise. Flanagan v. Department of Civil Serv., 29 N.J. 1, 12 (1959); see Close v. Kordulak Bros., 44 N.J. 589, 599 (1965) (stating that courts should afford due deference "to the agency's expertise where such expertise is a pertinent factor").

The proceedings and decisions in this matter involve rate making by the BPU, "to which the Legislature has delegated its

rate-making power, [and which] is vested with broad discretion in the exercise of that authority." In re Public Serv. Coordinated Transp., 5 N.J. 196, 214 (1950). "[T]he BPU's authority over utilities, like that of regulatory agencies generally, extends beyond powers expressly granted by statute to include incidental powers that the agency needs to fulfill its statutory mandate." In re Alleged Violations of Law by Valley Rd. Sewerage Co., 154 N.J. 224, 235 (1998); see In re Elizabethtown Water Co., 107 N.J. 440, 449-50 (1987) ("The Legislature has endowed the BPU with broad power to regulate public utilities. . . . [and] considerable discretion in exercising those powers."). We have long recognized that

[a]dministrative agencies possess the ability to be flexible and responsive to changing conditions. See Heir v. Degnan, 82 N.J. 109, 121 (1980). This flexibility includes the ability to select those procedures most appropriate to enable the agency to implement legislative policy. See N.J.S.A. 52:14F-7(a) (Supp. 1981). Therefore, agencies sometimes develop hybrid proceedings possessing characteristics of both adjudication and rulemaking. See Cunningham, supra, 69 N.J. at 21 (public utility ratemaking procedures, although quasi-legislative in origin, are conducted like quasi-judicial proceedings); N.J.A.C. 1:1-1.6(a)(3). In fact, courts and commentators have encouraged hybrid agency proceedings as a way of producing more reasoned agency decisions, especially in complex and controversial policy areas. See, e.g., International Harvester Co. v. Ruckelshaus, 478 F.2d 615, 649 (D.C. Cir. 1973); id. at 651-652 (Bazelon, C. J., concurring); Bazelon, "Coping with Technology Through the Legal Process," 62 Cornell L. Rev. 817, 824-826 (1977); Stewart, "Vermont Yankee and the Evolution of Administrative Procedure," 91 Harv. L. Rev. 1805, 1812-1814 (1978). [Texter v. Department of Human Serv., 88 N.J. 376, 385 (1982).]

Accordingly, upon the exercise of its broad authority and the conduct of appropriate proceedings, "the Board's rulings are entitled to presumptive validity and will not be disturbed unless we find a lack of ?reasonable support in the evidence.'" In re Jersey Cent. Power & Light Co., 85 N.J. 520, 527 (1981) (quoting In re New Jersey Power & Light Co., 9 N.J. 498, 509 (1952)); see also N.J.S.A. 48:2-46 (stating that courts may set aside BPU's order, in whole or in part, only "when it clearly appears that there was no evidence before the [BPU] to support the same reasonably or that the same was without the jurisdiction of the [BPU]").

In this case, beginning as early as 1995, the BPU held numerous public hearings, solicited comments from the public and interested parties and facilitated negotiation sessions between and among those parties. Following the issuance of the Final Report in 1997, the BPU and an Administrative Law Judge ("Administrative Law Judge" or "ALJ") conducted trial-type proceedings, receiving testimony and evidence on PSE&G's unbundling, stranded cost and corporate restructuring filings. The BPU also retained an independent auditor to audit those filings and to assist in calculating PSE&G's stranded costs. An extensive record, consisting of a continuum of testimony, evidence, reports, findings and proposals received in contemplation of and subsequent to the enactment of EDECA, supports the BPU's Final Order and BSCRO.

The BPU was required to balance complex and competing interests and did so. The record demonstrates that the Final Order and BSCRO represent the culmination of years of agency review, including the negotiations and agreements reached between PSE&G and seven other interveners. We note that as a part of the discussions, PSE&G agreed to absorb a $250 million reduction in the amount of its unsecuritized stranded costs to the benefit of ratepayers. Under those circumstances, substituting our judgment for that of the agency would be unwarranted unless we were firmly convinced, and we are not, that the agency had abused its discretionary powers. We decline, also, to reject specific elements of the BPU's decision because we find that each element is separately sustainable and because we accept the agency's representation that the Final Order and BSCRO function as an integrated whole in which the parts are related and interdependent.



Our dissenting colleague, however, believes that the "statute is crystal clear" in requiring that the five percent transition rate reduction is to be measured from 1997 rates. Post at __ (slip op. at 11). That reduction spans the initial thirty-six months when retail choice is to be phased in under EDECA. See N.J.S.A. 48:3-52(d). The dissent contends that the BPU ignored clear statutory language and its own public positions when the agency ordered the five percent reduction from 1999 rates, which include a 3.9% rate increase approved in April 1998. Post at ___ (slip op. at 9-11).

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

d. (1) 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.

(2) The board may 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 as provided in subsection a. of section 5 of this act; provided, however, that, on the starting date for the implementation of retail choice as provided in subsection a. of section 5 of this act, each electric public utility shall reduce its aggregate level of rates for each customer class, including any surcharges assessed pursuant to this act, by no less than five percent. [(Emphasis added).]

Subsection (d)(1) mandates that each electric utility shall reduce its aggregate level of rates for each customer class by no less than ten percent "relative to the aggregate level of bundled rates in effect as of April 30, 1997." Subsection (d)(2) provides that the reduction shall be phased in over a period of three years, with an initial reduction of at least five percent. By its terms, subsection (d)(1) deals with the overall ten percent rate reduction to be achieved as measured against the rates in effect on April 30, 1997. Absent from the text of subsection (d)(2), however, is any mention of a benchmark time period from which the five percent reduction is to be measured.

Contrary to the dissent, we conclude that the drafters intentionally left out of subsection (d)(2) a measuring date for the initial rate reduction in order to allow the BPU to exercise its discretion when phasing in the entire ten percent required. Indeed, the plain language of subsection (d)(2) states that the BPU may "set a term for an electric public utility to phase in a rate reduction." N.J.S.A. 48:3-52(d)(2). Even the Ratepayer Advocate's March 29, 1999 proposed stipulation of settlement states that the initial five percent reduction should be measured from current 1999 rates:

The Better Choice Settlement Proposal, consistent with the requirements of the Energy Competition Act, would require PSE&G's [sic] to reduce its overall rates according to the following schedule (reductions are cumulative):

August 1, 1999 - 5% reduction from current rates; . . . . [Ratepayer Advocate's Settlement Proposal at 10.]

Although the Ratepayer Advocate's settlement proposal was not accepted, we assume the 1999 benchmark would not have been suggested by the Ratepayer Advocate if she believed that date to be in derogation of the statute.

We observe as well that one of the critical objectives of EDECA is to implement rate reductions without impairing the financial integrity of the utilities. N.J.S.A. 48:3-50(c)(4). The BPU's approach, which begins with an initial reduction of five percent from 1999 rates and gradually introduces the full reduction over three years, is consistent with this goal. See Fiore v. Consolidated Freightways, 140 N.J. 452, 466 (1995) ("Our task is to harmonize the individual sections and read the statute in the way that is most consistent with the overall legislative intent."). We therefore hold that the Agency's approach is a plausible and "a permissible interpretation of the legislation, [well] within the discretion of the agency.*fn2 In re Schedule of Rates for Barnert Mem'l Hosp., 92 N.J. 31, 42 (1983).


Our dissenting colleague also joins in the petitioners' objection to PSE&G's accelerated amortization of its excess depreciation reserve fund and use of those amortization amounts to partially fund the utility's rate reductions and stranded costs recovery. Post at ___ (slip op. at 12). The excess- depreciation reserve fund resulted from changing the useful life of the company's distribution plant investments from twenty-eight years to forty-five years. By lengthening the useful life of its assets, a substantial excess depreciation reserve accrued on PSE&G's balance sheet. The BPU approved PSE&G's amortization of that $568.7 million excess depreciation reserve over three years and seven months, beginning January 1, 2000 and ending July 31, 2003, by establishing amortization amounts of $125 million in 2000, $125 million in 2001, $135 million in 2002 and $183.7 million in 2003. Those amounts are to be recorded in the appropriate year as credits against expenses, thereby increasing PSE&G's ability during the transition period to absorb the financial impact of the rate reductions mandated by EDECA. This scheme, contends the dissent, "might very well violate the letter and spirit of EDECA, create a windfall for PSE&G, and undermine public confidence in the fairness of the Final Order." Post at ___ (slip op. at 18-19).

We agree with the Appellate Division that "there is nothing in [EDECA] to prohibit deferred accounting." In re PSE&G, supra, 330 N.J. Super. at 114. Although there are statutory provisions in relation to the required level of rate reductions, supra at ___ (slip op. at 11-14), and as to the "manner in which to apply the rate reductions," N.J.S.A. 48:3-52(f), the Legislature has not specified the funding source for those reductions. However, as also pointed out by the Appellate Division, In re PSE&G, supra, 330 N.J. Super. at 114, N.J.S.A. 48:3-57(b)(3) provides that

[t]he board may devise an alternative accounting or cost recovery process that permits an electric public utility to purchase power from a related competitive business segment of its public utility holding company, or otherwise, to provide basic generation service to its customers during the period that the electric public utility is providing for sustainable rate reductions . . ., if the board determines that such process is necessary to mitigate the impacts of market price fluctuations and to sustain such rate reductions. [N.J.S.A. 48:3-57(b)(3).]

Section 57(b)(3) is clear: the BPU has the power to authorize "alternative accounting" over the period when "sustainable rate reductions" are required. Most interesting, the language of the provision tells us that "sustainable" is being used, not in the temporal sense, but, rather, to mean "supportable," i.e., that alternative methods may be needed to adjust for market pricing "and to sustain [(support)] such rate reductions" during the three years reductions are in place. Id. In effect, the practical result of allowing PSE&G to amortize its excess depreciation reserve is to soften the financial blow of the required reductions during the early phase-in period of deregulation.

Although the dissent and petitioners have their own view of how best to achieve "sustainable rate reductions," we are convinced that neither the law nor the facts in the record below permit the Court to second-guess the BPU's judgment. We hold that the BPU acted well within its discretion in allowing PSE&G to accelerate the amortization of its excess depreciation reserve.


Finally, our dissenting colleague contends that the record does not "support the BPU's generation asset valuation and stranded cost determination." Post at ___ (slip op. at 19). On that basis, and because he believes that the BPU failed to hold "an adequate evidentiary hearing," the dissent would remand for a further hearing on that determination. Id.

The EDECA scheme has been succinctly described by the Appellate Division:

Although [EDECA] 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, the generation plant costs which the utility is at risk of losing when the supply market is opened to competition through a limited-duration (up to eight years) nonbypassable market transition charge (MTC). N.J.S.A. 48:3-61(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). [In re PSE&G, supra, 330 N.J. Super. at 90.]

The quantification of stranded costs therefore is directly affected by the market value of any generating assets transferred, in this case, to an affiliate. N.J.S.A. 48:3-61(e). Under N.J.S.A. 48:3-55(d), "the transfer of electric public utility assets . . . to a related competitive business segment of that electric public utility . . . shall be recorded at full value as determined by the Board." The statute requires maximization of the "market value of the generating asset," N.J.S.A. 48:3-61(f), in order to reduce the stranded costs to be recovered from ratepayers. Id. Once the BPU determines the total amount of recoverable stranded costs, it may authorize the securitization of those costs by the issuance of transition bonds and the imposition of a transition bond charge so that the utility can recover those costs. ...

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