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In the Matter of the Petition


March 1, 2011


On appeal from the New Jersey Board of Public Utilities, Docket No. ER09020113.

Per curiam.


Argued January 31, 2011 - Decided

Before Judges Reisner, Sabatino and Alvarez.

Petitioner Public Service Electric and Gas Company (PSE&G or the company) appeals from a June 23, 2010 decision of the Board of Public Utilities (BPU): (a) disapproving the company's application to pass on to its ratepayers an assessment imposed by PJM Interconnection, L.L.C. (PJM) for PSE&G's share of the cost of a default by two other PJM-member companies; and (b) allowing PSE&G to recover 50% rather than 100% of the interest the company proposed to charge its ratepayers based on accounting entries in a bad debt reserve.*fn1

We conclude that the agency's decisions on both those issues fell within the ambit of its statutory authority and policy-making discretion and were supported by substantial credible evidence. Therefore, we affirm.


Both issues stem from policies the Board adopted to implement the Electric Discount and Energy Competition Act of 1999, N.J.S.A. 48:3-49 to -98 (EDECA). The background was addressed at great length in In re Public Service Electric & Gas Co.'s Rate Unbundling, 330 N.J. Super. 65, 83-92, 138-40 (App. Div. 2000), affirmed, 167 N.J. 377, cert. denied, Co-Steel Raritanv.New Jersey Board of Public Utilities, 534 U.S. 813, 122 S. Ct. 37, 151 L. Ed. 2d 11 (2001). It need not be repeated here in that level of detail. It is sufficient for our purposes to acknowledge that, along with introducing retail competition into the electric power industry, the Legislature authorized the BPU to devise mechanisms to allow existing public utilities to recover "stranded costs," N.J.S.A. 48:3-61, as well as costs associated with their ongoing obligation to participate in certain BPU-approved social programs, N.J.S.A. 48:3-60.

We will discuss each issue separately, but our decision as to each is informed by the same bedrock legal principles. Our review of the agency's decision is extremely limited. We will not reverse a decision of the BPU "unless it is arbitrary, capricious, or unreasonable or it is not supported by substantial credible evidence in the record as a whole." In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, supra, 330 N.J. Super. at 123; see also In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, supra, 167 N.J. at 385; In re Pub. Serv. Elec. & Gas Co. for Approval of Elec. & Gas Rates, 304 N.J. Super. 247, 264 (App. Div. 1997). And we must "give[] 'due regard' to the agency's expertise when this is a factor." In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, supra, 330 N.J. Super. at 123; see also In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, supra, 167 N.J. at 384.

We may set aside BPU orders only "when it clearly appears that there was no evidence before the board to support the same reasonably or that the same was without the jurisdiction of the board." N.J.S.A. 48:2-46; see In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, supra, 167 N.J. at 393. Procedural defects warrant reversal only if "the irregularity or informality tends to defeat or impair the substantial right or interest of the appellant." N.J.S.A. 48:2-46; see In re Pub. Serv. Elec. & Gas Co. for Approval of Elec. & Gas Rates, supra, 304 N.J. Super. at 264.

"In rate-setting cases, where the administrative agency must balance competing consumer and utility interests, courts allow the agency 'the fullest exercise of administrative discretion.'" In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, supra, 330 N.J. Super. at 106 (quoting In re Rockland Elec. Co., 231 N.J. Super. 478, 494--95 (App. Div.), certif. denied, 117 N.J. 129 (1989)); see also In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, supra, 167 N.J. at 384; In re Pub. Serv. Elec. & Gas Co. for Approval of Elec. & Gas Rates, supra, 304 N.J. Super. at 264. The BPU is "the administrative charged with enforcing the [EDECA], [thus] its interpretation of the Act and its policy decision should be given great weight." In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, supra, 330 N.J. Super. at 129.


The first issue concerns a Non-Utility Generation Charge (NGC), which is intended to reflect the utility's cost of buying energy from non-utility generators (NUGs) (e.g., co-generation companies). The Federal Public Utility Regulatory Policy Act of 1978 (PURPA), 16 U.S.C.A. §§ 824 to 824w, requires utilities such as PSE&G to buy some electrical power from NUGs, even though that power may be more expensive than power available on the open market. The Board authorizes PSE&G to re-sell that power to PJM, which operates a multi-state power grid. Along with many other utilities, PSE&G is a member of PJM.

Ordinarily, PSE&G can recover from its ratepayers the difference between what it pays the NUGs and the (generally lower) price it receives from PJM. See N.J.S.A. 48:3-61a(3) (authorizing utilities to recover "stranded costs" associated with NUG power purchase contracts). In this case, PJM reduced its total payment to PSE&G by the amount of an assessment which was based on defaults by other PJM members, as opposed to being based on the market price of NUG power.*fn2 PSE&G claimed it should be able to recover that assessment from its ratepayers through the NGC clause because paying the assessment was a cost attributable to its membership in PJM.

Both Rate Counsel and PSE&G presented expert testimony on this issue. In her testimony, Rate Counsel's expert, Andrea Crane, testified that the PJM assessments bore no relationship to the NUG contract costs which were the subject of the clause. She also testified that requiring PSE&G to absorb the assessment cost would have no impact on the financial integrity of the company, whose shareholders earned $1.264 billion "for the first nine months of 2009."

PSE&G presented rebuttal testimony from its Director of Rates and Regulation, Gerald W. Schirra, who asserted that the company was simply following the methodology it had always followed since the Board first implemented the NGC. He argued that as a result of the assessment, the "net revenues" the company received from PJM "were reduced by $254,000." However, at oral argument of this appeal, all counsel agreed that this case represented the company's first attempt to use the NGC to pass on to its ratepayers an assessment imposed by PJM.

In her initial decision, Administrative Law Judge (ALJ) Irene Jones reasoned that the assessment should not be considered a recoverable cost of purchasing power from non-utility generators and selling it to PJM. She noted that no other state utility commission had allowed the pass-through of those costs to ratepayers under a NGC clause. She also reasoned that if PJM members could simply pass through those costs to ratepayers, they would have no incentive to object to future PJM assessments. In adopting the initial decision, the Board reasoned that the default charges were not "properly recoverable through the NGC as the difference between the market value of the energy and the price paid to NUGs under the pre-existing contracts."

On this appeal, PSE&G repeats its argument that the assessment was not an "extraneous cost" associated with its PJM membership, but should be considered as a reduction in its "revenues" from PJM. We find no error in the Board's decision to reject that contention.

EDECA authorizes the Board to allow public utilities the opportunity to recover "stranded costs" associated with NUG power purchase contracts. N.J.S.A. 48:3-61a(3). In pertinent part, the statute defines "stranded cost" as the amount by which the net cost of an electric public utility's . . . electric power purchase commitments, as determined by the board consistent with the provisions of P.L.1999, c.23 (C.48:3-49 et al.), exceeds the market value of those . . . contractual commitments in a competitive supply marketplace [N.J.S.A. 48:3-51.]

Notably, in the 1999 order initially authorizing the NGC, the Board construed N.J.S.A. 48:3-61 as permitting "recovery by an electric public utility through a market transition charge of stranded costs related to long-term NUG contracts . . . subject to periodic review and adjustment of the charge to ensure that the utility will not collect charges that exceed actual stranded costs" (emphasis added). See In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, supra, 330 N.J. Super. at l40. In other words, the utility is required to buy some above-market-priced power from NUGs for social benefit purposes, and the clause is intended to reimburse the utility for the difference between the per-unit price it pays the NUGs and the per-unit price for which it can resell that power to PJM.

In the Board's view, the fact that PJM assessed PSE&G for an expense unrelated to the per-unit price of the NUG power did not make that assessment recoverable under the NGC. Mindful of the high degree of deference we owe the Board's ratemaking determinations, including its construction of EDECA, we find nothing arbitrary or legally erroneous in the Board's decision. See In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, supra, 330 N.J. Super. at 129. In fact, its decision is entirely consistent with the 1999 order and with EDECA. See N.J.S.A. 48:3-51, -61a(3).


The second issue concerns the company's Societal Benefits Charge (SBC), a mechanism for recovering from its ratepayers, with interest, the cost of bad debt the company writes off when some of its residential customers do not pay their bills. In this case, PSE&G proposed to collect $1.0799 million in interest that accrued on its bad-debt expenses through its electric SBC rate. Rate Counsel challenged the method PSE&G employed to calculate the total amount of accrued interest.

PSE&G established a "bad debt reserve" to account for unpaid bills. No actual funds are deposited into the reserve. Rather, when PSE&G wants to add to the reserve, it simply records the amount as an expense. When PSE&G writes off a bad debt, it reduces the reserve account balance. PSE&G incorporated into its proposed electric SBC rate the amount of interest that accrued on the amount it added to its bad debt reserve. Rather than allowing the company to recover all the interest it sought, the agency allowed it to recover half.

At the proceedings before the ALJ, both parties presented expert testimony on this issue. Rate Counsel's expert, Crane, agreed that using a bad debt reserve is a traditional means used by utilities to account for bad debt, however, she opined that the practice of charging ratepayers interest on the reserve was problematic. She pointed out that the entries in the reserve account do not represent funds actually deposited into an account. Further, "the bad debt reserve is under the control of the Company." In cogent detail, Crane explained that PSE&G could manipulate the account, and earn more interest from ratepayers, simply by increasing the numbers it wrote down in the bad debt reserve account, regardless of whether it actually incurred the losses reflected in that account. Therefore, allowing PSE&G to collect interest based strictly on the amounts in its bad debt reserve could permit the company to obtain a windfall at the ratepayers' expense.

Looking at the actual accounting figures the company provided, Crane opined that ratepayers "should not be required to pay interest on any Social Program cost under-recovery during this period since the expenses used to derive the under-recovery were under the Company's control and were excessive relative to actual write-offs." For future purposes, Crane also recommended "that the BPU takes steps to ensure that the Social Programs expenses recovered through the SBC are reasonable in light of the actual amounts being written-off by the Company."

In rebuttal, PSE&G presented testimony from Schirra and Assistant Controller Daniel Furlong, aimed at demonstrating that the company used a reasonable methodology for calculating its bad debt reserve. Furlong described the company's reserve account for "uncollectibles" as "an estimate of . . . what billed revenues will turn into bad debts in the future." There is generally a six- to seven-month lag between "when a bad debt accrual is made and when an account is actually written off" as a bad debt. In his pre-filed testimony, Furlong explained that due to the deepening economic recession, the company forecasted that its write-offs for uncollectible debts would increase, and therefore raised the level of its bad debt reserve.*fn3

On cross-examination, Furlong admitted that, using its methodology of charging interest on projected amounts or "accruals," the company could recover interest from its ratepayers on projected bad debts that never actually materialized. He stated that if the reserve appeared to be too high, the company would adjust it prospectively. However, it would not "true up" the account retrospectively so as to credit ratepayers for their past payments of interest on bad debt losses the company did not actually incur.

On this appeal, PSE&G argues that the Board's decision is arbitrary and not supported by the record, and is an unexpected departure from its past policies. We disagree. The decisions of the ALJ and the Board reflected the concerns Crane expressed in her testimony. The ALJ recognized that the Board had a policy of allowing PSE&G to charge interest on book accruals, but recommended that the "interest methodology be adjusted to remove the perverse incentive that results from this accounting convention."

The Board adopted the ALJ's recommendation that the company be awarded only half the interest it sought, in light of the imprecise connection between the company's paper losses and its actual losses. The Board acknowledged that under its current policy, "[t]he determination of whether the ratepayer or the Company is due interest is based upon Company-controlled expense estimations, and not on the actual amount of lost revenues due to ratepayers failing to pay their utility bills." The Board further recognized that "the forecasts [PSE&G] uses in determining the accrual rate are uncertain" and accepted the ALJ's recommendation that it place some additional controls on the company's ability to add to the bad debt reserve.

We find nothing arbitrary, novel, or legally erroneous in the Board's decision, which reflects a ratemaking policy choice within its expertise. The 1999 settlement order allowing the SBC provides that the "[a]ctual costs incurred by the Company for each of the cost components enumerated in paragraph 5 will be subject to deferred accounting. Interest . . . will be accrued on any under- or over-recovered balances" (emphasis added). By its terms, the order does not refer to accounting entries, but "actual costs." In other words, if the SBC rate proves too low to allow the company to recover from its ratepayers the amount of bad debt it actually incurred, the company can back-charge the ratepayers, with interest, for that under-recovery once the true amount of bad debt is determined. On the other hand, if the SBC rate results in the company recovering more than the amount of the bad debt it actually incurred, the company must refund the over-recovery to the ratepayers, with interest. In a 2003 decision,*fn4 the Board allowed PSE&G to use a less precise methodology on which to base its interest calculations, but that does not preclude the agency from fine-tuning its approach based on expert testimony in this case, highlighting the problems with that method. See In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, supra, 330 N.J. Super. at 106.

The agency recognized that using a bad debt reserve was a legitimate accounting approach for the company to use, but the reserve amount could be an imprecise basis for an interest calculation. There is not necessarily a dollar-for-dollar correlation between the amounts the company accrues on paper in the bad debt reserve and the amounts of its actual bad-debt losses during the corresponding period, and evidence presented at the hearing showed that to be the case here. Recognizing the imprecision, the Board awarded PSE&G only half the interest it sought. The agency also imposed prospective reporting requirements aimed at preventing the company from manipulating the bad debt reserve to the ratepayers' detriment.

Because the underlying purpose of the SBC is to compensate the company for its actual bad debt losses, including interest, we find nothing arbitrary or capricious in the Board's approach. In light of the deference we owe the agency's expertise in ratemaking issues, we find no basis to disturb its decision, which is supported by substantial credible evidence in this record. See In re Pub. Serv. Elec. & Gas Co.'s Rate Unbundling, supra, 330 N.J. Super. at 123.*fn5


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