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Murphy v. Public Service Electric and Gas Co.


February 6, 2009


On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-2536-07.

Per curiam.


Argued November 17, 2008

Before Judges Carchman, R. B. Coleman and Simonelli.

Plaintiff Richard G. Murphy challenges the constitutionality of certain provisions of N.J.S.A. 48:3-49 to -98.1, the Electric Discount and Energy Competition Act (the Act) permitting "stranded costs" payments to defendants Public Service Electric and Gas Company and PSE&G Transition Funding, LLC (collectively "PSE&G") reimbursing PSE&G for losses it expected to suffer after the electricity market was opened to competition in 1999. Plaintiff appeals from the October 10, 2007 order granting summary judgment to PSE&G. We affirm.

The facts are derived from evidence submitted by the parties in support of, and in opposition to, the summary judgment motion viewed in a light most favorable to plaintiff. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). Relevant facts are also derived from our opinion in In re PSE&G Co.'s Rate Unbundling, 330 N.J. Super. 65, 83 (App. Div. 2000), aff'd, 167 N.J. 377, cert. denied, 534 U.S. 813, 122 S.Ct. 37, 151 L.Ed. 2d 11 (2001).

Prior to 1999, electric public utility companies in New Jersey were "vertically integrated" and had "virtual monopolies over their geographically-defined service territories." Id. at 83. In 1992, Congress passed the "Energy Policy Act," 42 U.S.C.A. §§13201-13556, which supported competition in the electricity marketplace. Id. at 84. Beginning in 1995, the New Jersey Legislature, in conjunction with the New Jersey Board of Public Utilities (BPU), began investigating ways to transition to a competitive electricity market. Id. at 85-86.

After soliciting and receiving input from all stakeholders and interest groups, including PSE&G, in April 1997, the BPU issued a final report, dated April 30, 2007, recommending, in part, that New Jersey consumers should have a choice of electricity suppliers in a competitive market; utility companies should institute rate reductions while competition is phased in; and utility companies should have the opportunity to recover their stranded costs. Id. at 86-87. The BPU noted in the final report that New Jersey's move toward a restructuring of the electric power industry was intended "to expand the choice of services and products for all consumers," and "to ensure that New Jersey remains competitive in the regional, national and international markets."

Stranded costs related to amounts that the utility companies had already invested in assets and equipment they had purchased with the expectation that they would continue to provide electricity in a non-competitive marketplace. To avoid financial turmoil and possible job reductions at utility companies, the BPU recommended that they have an opportunity to recover their stranded costs through customer rates.

Determining the amount of stranded costs was one of the major hurdles in restructuring the electricity market. All utilities submitted stranded cost filings to determine the value of their generation assets. The BPU transferred those filings to the Office of Administrative Law (OAL). Id. at 88-89. Numerous parties and interest groups intervened and extensive hearings were held. Ibid.

In the meantime, on February 9, 1999, the legislature approved the Act, which became effective immediately and provided schedules for deregulating and restructuring electric utilities in New Jersey. Id. at 89. The legislature declared that "it is the policy of this State to . . . [p]rovide for a smooth transition from a regulated to a competitive power supply marketplace, including provisions which afford fair treatment to all stakeholders during transition." N.J.S.A. 48:3-50(a)(12).

The legislature also made specific findings regarding the propriety of stranded costs recovery by electric utilities. See N.J.S.A. 48:3-50(a)(1) and (12); N.J.S.A. 48:3-50(b)(2) and (3); N.J.S.A. 48:3-50(c)(4). The Act permitted the electric utilities the opportunity to recover their stranded costs through a "non-bypassable" charge of limited-duration. This meant that the charge was to be collected from all customers, including new customers, that use the utility's distribution service, regardless of whether or not those customers took advantage of the opportunity to acquire their generation service from an alternative provider. In re PSE&G Co.'s Rate Unbundling, supra, 330 N.J. Super. at 89-90 (citing N.J.S.A. 48:3-59, -61(a), -62(a)).

The BPU eventually validated the stranded costs. It authorized $2.94 billion for PSE&G's stranded costs as well as a "gross-up" to reflect the tax liability for those costs. We upheld that decision. Id. at 143. Our Supreme Court affirmed, finding that the evidence in the record supported the BPU's valuation of PSE&G's generation assets, and therefore, the quantification of PSE&G's stranded costs. 167 N.J. at 390-393.

Eight years after the BPU's decision, plaintiff filed an eight-count complaint challenging the stranded costs provisions. He alleged in counts one and six that those provisions grant PSE&G a monopoly in its market area in violation of Article 4, Section 7, Paragraph 9(8) of the New Jersey Constitution.*fn1 He argues that the provisions illegally: (1) grant PSE&G the right to extract a surcharge for its own benefits on all sales made in its market area by any new competitors; (2) grant an incumbent supplier, such as PSE&G, an exclusive right not available to a new competitor in the incumbent's market area; and (3) prohibit customers in the market area to switch to a lower cost competitor.

Plaintiff also alleged in counts two and five of his complaint that the mandatory payment of stranded cost surcharges to PSE&G violates the substantive due process requirements of Article 1, Paragraph 1 of the New Jersey Constitution because such payments do not serve the public's interest. Plaintiff argues that the stranded costs impose huge additional charges on the consuming public to protect PSE&G from competition, and add billions of dollars in enhanced profits for PSE&G's shareholders at the public's expense. He also argues that the charges add to PSE&G's enhanced profits and forces customers to pay PSE&G's income taxes on those profits regardless of whether they purchase electricity from PSE&G or one of its competitors.

PSE&G sought to dismiss the complaint for failure to state a claim upon which relief can be granted, R. 4:6-2(e) or, alternatively, for summary judgment, R. 4:46. Because the motion was based on matters outside of the pleadings, Judge Harris properly reviewed it under the summary judgment standard.

R. 4:6-2. After "generously and indulgently" giving plaintiff "the benefit of all reasonable inferences", and accepting plaintiff's evidence as true, the judge granted summary judgment. In specifically dismissing counts one and six, the judge found that:

It is correct that law passed under the police power [] that are intended to shield incumbents from the effects of competition are, generally, condemned. It is also true that electric utilities in New Jersey have never been granted exclusive franchise or legal monopolies. What is wholly incorrect and barren from this record is the circumstances that stranded costs reallocation is a species of incumbent protection with its goal of squelching competition.

Plaintiff's incessant repetition of this anti-competitive refrain does not make it so, especially in light of the elements of proof that are plainly unattainable. To succeed on a special legislation, that is the prohibited monopoly or franchise prong [] the plaintiff must demonstrate, in the face of overwhelming legislative, N.J.S.A. 48:3-50, and administrative, the 1997 order and the final 1999 order of the BPU pronouncements, that they are all pretextual, and that the real intent and purpose of the [A]ct was to discourage or chill competition in the electric generation industry. . . . There is not a wit of evidence that the legislative purpose of [the Act] and/or the reallocation of stranded costs, was to favor PSE&G at the expense of either an unknown competitor or at the expense of the public interest.

What [] was known at the time of the [] adoption of the legislation is what controls. What was known and believed at the time was that it was necessary in order to protect and preserve the utilities that had already made substantial investments, that they be allowed to continue without what would be the obvious disruption, had they fallen.

The legislation cannot remotely have been viewed as having that purpose or the intent to prevent others from seeking franchise in the electric industry. Counts 1 and 6 are dismissed with prejudice.

After recognizing the presumptive validity of governmental action and the presumptive constitutionality of any action taken by government, the judge dismissed counts two and five, finding that:

The burden upon the government to meet the standards of substantive due process is quite limited. It is well said that the guarantee of substantive due process requires only that the legislative enactment not be unreasonable, arbitrary, or capricious, and that the means selected to achieve the governmental objectives bear a rational relationship to those objectives.

If a statute does not affect a fundamental right, and is supported by a conceivable, rational basis, it will withstand the substantive due process challenge . . . Stated differently, plaintiff must negative every conceivable basis, which might support the legislative arrangement. See [Singer v. Township of Princeton, 373 N.J. Super. 10, 20-21 (App. Div. 2004)].

Thus, again, as long as there is a rational basis to link the legislation to a legitimate state [] objective, [] the legislation will survive judicial scrutiny. This is so, because almost [every] piece of legislation can be argued to further a private interest.

That is, the logic, even if disagreed with, if it exists, is enough to sustain a statute. Here, the logic of [] [the Act] as mentioned in [In re PSE&G Co.'s Rate Unbundling, supra] relates to a multi-faceted, complex, complicated restructuring.

N.J.S.A. 48:3-50(c), and particularly [N.J.S.A. 48:3-50](c)(4), explains the legislative rationale as including the traditional retail monopoly, which electric public utilities have held in the state for electrical power generation and supply service should be eliminated so that all New Jersey energy consumers will be afforded the opportunity to access the competitive market for services and to select the electric power supplier of their choice.

The legislative framework is entirely non-whimsical, it is entirely rational and furthers what the legislation said it furthered. Plaintiff's mere disagreement and five years after the fact experience does not retroactively negate the rational basis linking stranded cost reallocation with the healthy restructured electrical commodity industry.

The law of unintended consequences does not trump either the constitutional underpinnings that existed either at the time of the adoption of the legislation or now. In my opinion, to allow plaintiff's after the fact attack would involve the judiciary in retroactive rate making. And while it may not be traditional retroactive rate making, it's nonetheless, functionally the same thing.

The judge ultimately concluded that:

Even at this early stage of the litigation, it's apparent to me, and I am thoroughly persuaded that facts and law are so one-sided, that plaintiff's claims and theories must fail. Despite warnings from consumer groups, deregulation was embraced by legislatures nationwide. It was supported by years of investigations and hearings.

Even if now viewed retrospectively as unwise, it is not the judicial function to reverse policy value judgments, unless clearly contrary to law. Given the palpable absence of unconstitutional activity, the plaintiff's claims are neither justiciable in the constitutional sense nor remediable in this forum.

We use the same standard as the trial judge when deciding a summary judgment motion. Jolley v. Marquess, 393 N.J. Super. 255, 267 (App. Div. 2007); Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). Summary judgment must be granted if "the pleadings, depositions, answers to interrogatories and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2(c); Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 528-29 (1995). "Genuine" issue of fact means "only if, considering the burden of persuasion at trial, the evidence submitted by the parties on the motion, together with all legitimate inferences therefrom favoring the non-moving party, would require submission of the issue to the trier of fact." R. 4:46-2(c). If there is no genuine issue of fact, we must then decide whether the lower court's ruling on the law was correct. Prudential, supra, 307 N.J. Super. at 167.

Even if the allegations in a pleading raise an issue of fact, if the other papers show that there is not a real material issue, then summary judgment can be granted. Judson v. Peoples Bank & Trust Co. of Westfield, 17 N.J. 67, 75 (1954). "Bare conclusions in the pleadings, without factual support in tendered affidavits, will not defeat a meritorious application for summary judgment." U.S. Pipe & Foundry Co. v. Am. Arbitration Ass'n, 67 N.J. Super. 384, 399-400 (App. Div. 1961). A non-movant who offers no substantial or material facts in opposition to the motion cannot complain if the court takes as true the uncontradicted facts in the movant's papers. Judson, supra, 17 N.J. at 75; R. 4:46-5. Applying these standards, we review plaintiff's contention that the judge improperly granted summary judgment.

The New Jersey Constitution prohibits the passage of private, special or local laws which grant exclusive privileges to immunities or franchises. N.J. Const. art. 4, §7, ¶9(8). This requirement prohibits government grants of monopolies or other protections from competition. George Harms Constr. Co. v. New Jersey Tpk. Auth., 137 N.J. 8, 41 (1994). In Vreeland v. Byrne, 72 N.J. 292, 298-301 (1977) our Supreme Court established a three-part inquiry to determine whether a statute is unconstitutional "special legislation." The court must: (1) ascertain the purpose of the statute; (2) determine whether there are persons similarly situated to those embraced within the statute who are excluded from its protection; and (3) decide whether the resulting classification is rational and reasonable with respect to the statute's purpose. Id. at 300-01.

Statutes are presumed constitutional. Camden City Board of Educ. v. McGreevey, 369 N.J. Super. 592, 605 (App. Div. 2004) (citations omitted). The party challenging a statute as unconstitutional must demonstrate a clear constitutional violation. Ibid. Particularly in the sphere of economic regulation, such as the Act, courts defer to the legislature. Roman Check Cashing, Inc. v. N.J. Dep't of Banking and Ins., 169 N.J. 105, 110 (2001)

Further, the Fourteenth Amendment to the United States Constitution provides that no state may "deprive any person of life, liberty, or property, without due process of law[.]" U.S. Const. amend. XIV, §1. Even though the phrase "due process" does not appear in the New Jersey Constitution, our Supreme Court has construed the expansive language of Article I, Paragraph 1 as guaranteeing that fundamental constitutional right. Caviglia v. Royal Tours of Am., 178 N.J. 460. 472 (2004).

Under both federal and state constitutions, a statute is invalid on due process grounds if "'it seeks to promote a state interest by impermissible means.'" Id. at 472 (quoting Greenberg v. Kimmelman, 99 N.J. 552, 568 (1985)). A state statute generally does not run afoul of federal due process protections if it reasonably relates to a "legitimate legislative purpose and is not arbitrary or discriminatory." Ibid. (internal quotation omitted). If the statute has some conceivable rational basis which promotes the public good, it will survive constitutional scrutiny. Ibid.

When evaluating a due process claim under the New Jersey Constitution, the courts apply a balancing test weighing the "nature of the affected right, the extent to which the governmental restriction intrudes upon it, and the public need for restriction." Id. at 472-73. (internal quotation omitted). Thus, a statute must be carefully crafted so that it bears "a real and substantial relationship to a permissible legislative purpose." Id. at 473. (internal quotation omitted).

Based on our careful review of the record, we are satisfied that Judge Harris properly concluded that there was no genuine issue of material fact, and that he properly applied the law. Plaintiff presented no evidence that the Act's intent and purpose was to freeze competition in the electricity market in violation of N.J. Const. art. 4, §7, ¶9(8). To the contrary, the Act's purpose was to destroy monopolies, to establish a fair competitive electricity market, and to assist existing electric utilities to transition into that market.

Plaintiff also presented no evidence of a substantive due process violation. To the contrary, the Act has a rational relationship to the legitimate goal of opening the electricity market to competition, and the Act attains that goal. Thus, the provisions permitting PSE&G to recover stranded costs were reasonable and rational, and promoted a legitimate state end.

Plaintiff's remaining contentions that the judge erred in sua sponte raising the issue of retroactive ratemaking, and that the title of the Act did not give proper notice to the public of the stranded costs provisions as required by the "single object" provision of the New Jersey Constitution, are without sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E). We add the following comment.

The New Jersey Constitution does not require that every provision of a statute be included in the title. New Jersey Ass'n on Correction v. Lan, 80 N.J. 199, 204-13 (1979). Moreover, the legislature and the public had sufficient notice of the stranded costs provisions prior to the Act's enactment through the BPU extensive investigation and hearings, and through a draft of the statute introduced to the legislature in September 1999. In re PSE&G, supra, 330 N.J. Super. at 89.


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