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Penpac, Inc. v. Passiac County Utilities Authority

March 11, 2004


A-0350-01T1 is on appeal from the Superior Court of New Jersey, Law Division, Passaic County, Docket No. L-3054-01. A-0592-01T1 is on appeal from the New Jersey Department of Environmental Protection, Docket No. SR92101003J.

Before Judges Stern, Lefelt and Payne.

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


Submitted January 21, 2004

PENPAC, Inc., a New Jersey public utility, provided solid waste transfer station operations and transportation services for the Passaic County Utilities Authority (PCUA). PENPAC appeals and PCUA cross-appeals from the final decision of the Commissioner of the Department of Environmental Protection (DEP) awarding PENPAC $3,238,792 as compensation for an under-recovery incurred through interim rates PENPAC had been authorized to charge PCUA for its services from 1993-96. The appeal and cross-appeal present the following six issues: (1) whether the initial decision of the Administrative Law Judge (ALJ) should be deemed adopted because the DEP Commissioner issued a summary order and then delayed over one year before issuing the final decision; (2) whether administrative precedence or the prohibition against retroactive ratemaking precludes interest on the under-recovery award; (3) whether the Commissioner erred by adopting the"operating margin" rate setting methodology instead of the"base rate/rate of return" with an operating reserve; (4) whether the Commissioner erred by adopting a 26.44% operating margin; (5) whether the Commissioner erred by failing to make certain adjustments when determining PENPAC's cost-of-services; and (6) whether the Commissioner erred by failing to reopen the matter to consider the sale of PENPAC in August 1998. We affirm the Commissioner on issues (1) and (3) through (6). On issue (2), we conclude that the Commissioner should have awarded limited pre-judgment interest to PENPAC. Consequently, we remand for an interest determination. We also note that PENPAC performed services for PCUA until November 1997, when the parties ceased doing business with each other, and the Commissioner's award appears to end in 1996. Thus, on the remand the Commissioner must also consider whether the under-recovery award should be extended through November 1997.


We first summarize the facts and procedural history. The PCUA was responsible for implementing the Passaic County District Solid Waste Management Plan. From April 10, 1987 to December 12, 1992, PCUA contracted with PENPAC to provide solid waste transfer station operations and transportation services to PCUA for a fixed price per ton of municipal waste, which was established through the competitive interactions of the market place. PENPAC's only solid waste customer was PCUA.

The Board of Public Utilities (BPU) had initially approved the contract between PENPAC and PCUA, pursuant to the Solid Waste Utility Control Act, N.J.S.A. 48:13A-1 to -7, but in August 1991, the Legislature transferred jurisdiction over solid waste from BPU to the Department of Environmental Protection (DEP). N.J.S.A. 13:1D-1 (Reorganization Plan No. 002-1991). Thus, after August 1991, PENPAC and PCUA came under the regulatory supervision of DEP.

Pursuant to the contract, private companies and municipalities that collected solid waste within Passaic County would deliver the waste to one of PENPAC's transfer stations. From the stations, the waste was transferred to tractor-trailers for disposal at out-of-state landfills.

As the end of its contract with PENPAC drew near, PCUA requested bid proposals to handle the district's solid waste disposal needs after the contract with PENPAC expired. After reviewing the bids, PCUA applied for DEP approval of a proposed contract with A.J.R. Enterprises, Inc., so that PCUA could transfer responsibility for solid waste transportation services from PENPAC to A.J.R. Enterprises. PCUA also sought approval from DEP to have PENPAC continue to provide solid waste transfer station services.

After PENPAC's contract had expired and until PCUA's contract with A.J.R. Enterprises was approved in June 1993, DEP directed PENPAC to continue to provide all solid waste services to PCUA, including transportation services, at interim rates, subject to adjustment. After June 1993, when A.J.R. Enterprises began providing transportation services, DEP approved a series of interim rates, also subject to adjustment, for the remaining solid waste services that PENPAC continued to provide. PENPAC thus continued to provide its services to PCUA, after termination of its written contract, well into 1997 based upon a series of interim rates that were adjusted from time to time, but never made permanent.

In January 1993, before approval of the A.J.R. Enterprise contract, and in September 1994, after PENPAC's services had been reduced, DEP transferred the question of PENPAC's rates to the Office of Administrative Law for a hearing on the appropriate permanent rates for 1993, 1994, and 1995 and the setting of a new interim rate for 1996 and prospectively.

At the time of the lengthy hearings, conducted on various dates between November 1996 and May 1997, the ALJ and the parties assumed that interim and permanent rates for PENPAC were the only issues. After all witnesses had testified, however, PENPAC and PCUA terminated their relationship. At that point, the issues morphed into whether PENPAC suffered an under-recovery or over-recovery for the services performed during the period in question, which encompassed only the period PENPAC operated under interim rates and included none of the years that PENPAC's operations were controlled by the written contract.

The ALJ's initial decision recommended that DEP order PCUA to compensate PENPAC in one lump sum of approximately 7.7 million dollars for an under-recovery from 1993 through 1997. The parties filed their exceptions to the initial decision with the DEP Commissioner. Pursuant to N.J.S.A. 52:14B-10(c) and N.J.A.C. 1:1-18.8, the Commissioner applied for and was granted nine forty-five-day extensions to prepare the final decision.

The final resolution was so delayed that PENPAC filed an order to show cause in the Law Division, seeking to enforce the ALJ's initial decision as the agency's final decision. Shortly thereafter, four days before the last extension would have expired, the Commissioner issued a"Summary Order" in which he outlined the modifications he would make to the initial decision and indicated that a final decision would follow"in the near future."

Over one year after the"Summary Order," and less than one day before the order to show cause was to be heard in the Law Division, the Commissioner issued the final decision, re-affirming his summary order that PENPAC's operating margin should be 26.44%, which resulted in an under-recovery of $3,238,792.

PENPAC appealed and PCUA cross-appealed to the Appellate Division from the Commissioner's final decision, and the Law Division transferred PENPAC's pending order to show cause to us pursuant to R. 1:13-4.


In the following sections, we deal with each issue raised by the parties on the appeal and cross-appeal. We start with whether the ALJ's initial decision should have been"deemed adopted." The Administrative Procedure Act (APA), N.J.S.A. 52:14B-1 to -25, requires an agency head to issue its final decision within 45 days of receipt of the ALJ's initial decision, unless the time period is extended by the Director of the Office of Administrative Law (OAL) for good cause. N.J.S.A. 52:14B-10(c). If the agency head fails to issue the agency's final decision within the allotted time, the ALJ's initial decision is"deemed adopted" as the final decision of the agency. Ibid.

In this case, the ninth and last extension that the Commissioner obtained was to end on July 9, 2000. On July 5, the Commissioner issued the"Summary Order," in which he outlined, without setting forth any real factual or legal basis, the modifications that he would make to the ALJ's initial decision.

The summary order stated that the Commissioner would be issuing a"more detailed Decision and Order in this matter in the near future, which will provide a full discussion of the issues as well as the reasoning for the Department's determinations." DEP also made clear subsequently that the order was not final and the parties' time for appeal would run from the final decision. Over one year later, on August 16, 2001, the Commissioner issued the more detailed final decision, reaffirming his summary order.

PENPAC argues that the APA does not contemplate the process followed by the Commissioner and contends that the ALJ's initial decision became the final decision by operation of N.J.S.A. 52:14B-10(c). However, the statute does not specifically preclude the issuance of a summary order. Ibid. Indeed, the OAL's implementing Uniform Administrative Procedure Rules not only permit the 45-day period to be extended, N.J.A.C. 1:1-18.8, but also permit the agency head to"enter an order or a final decision." N.J.A.C. 1:1-18.6(a). Nevertheless, the agency's final decision must contain findings of fact and conclusions of law supporting any rejection or modification of the ALJ's initial decision. N.J.S.A. 52:14B-10(c).

We have previously indicated that the"deemed adopted" provision of N.J.S.A. 52:14B-10(c) should not be applied when a timely though cursory announcement rejecting an ALJ's decision was followed almost two months later by more specific findings and conclusions. DiMaria v. Bd. of Trs. of Pub. Employees' Ret. Sys., 225 N.J. Super. 341, 347 (App. Div.), certif. denied, 113 N.J. 638 (1988); Steinmann v. State, Dep't of Treasury, 235 N.J. Super. 356, 360 (App. Div. 1988), rev'd on other grounds, 116 N.J. 564 (1989) (approved a short timely decision"stated on the record" followed in two months by a written final decision); see In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, Stranded Costs & Restructuring Filings, 330 N.J. Super. 65, 91 (App. Div. 2000), aff'd, 167 N.J. 377 (2001) (noted that BPU had issued a "summary order" followed four months later by a"Final Decision and Order")."[T]he lack of findings of fact and conclusions of law in an agency's [summary order preceding its final decision] does not automatically require the ALJ's initial decision to be 'deemed approved.'" Capone v. N.J. Racing Comm'n, 358 N.J. Super. 339, 341 (App. Div. 2003). ...

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