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In the Matter of the Board's Main

June 22, 2012

IN THE MATTER OF THE BOARD'S MAIN EXTENSION RULES N.J.A.C. 14:3-8.1 ET SEQ.


On appeal from the New Jersey Board of Public Utilities.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

APPROVED FOR PUBLICATION

Argued March 13, 2012

Before Judges Carchman, Fisher and Baxter.

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

In this appeal, we address the question of whether, and to what extent, our 2009 opinion in In re Centex Homes, LLC, 411 N.J. Super. 244 (App. Div. 2009) should have retroactive effect. In Centex, we invalidated as ultra vires the 2005 Board of Public Utilities (BPU or the Board) regulations known as the Main Extension Rules, N.J.A.C. 14:3-8.1 to -8.13. The Main Extension Rules required utility companies to pay for the extension of utility lines to new homes in designated "smart growth" areas of the State, but forced the developer or the homeowner to absorb that cost in portions of the State that were not so designated. Centex, supra, 411 N.J. Super. at 248. We deemed the Main Extension Rules an "extreme departure" from the procedures that had been extant for nearly a century, id. at 261, and held that BPU lacked the authority to institute such a "drastic alteration" of the prevailing statutory scheme in the absence of legislative approval, id. at 267.

Despite our sweeping invalidation of the Main Extension Rules, BPU announced in its October 22, 2010 Final Decision that it would afford our Centex decision only pipeline retroactivity, confining the benefit of Centex to only the eighteen developers who had not yet completed the utility extension process or who had applied for an exemption from the Main Extension Rules. BPU denied the benefit of Centex to hundreds of others.

In the present appeals, which we have consolidated for purposes of disposition, appellants Toll Bros., Inc., Dunhams Farm Developers, L.L.C., the New Jersey Builders Association, and an individual homeowner, Barry Spindler, assert that BPU's refusal to grant Centex full retroactive effect was an error of law not entitled to our deference. We agree. Because our opinion in Centex did not announce a new rule of law, but instead accomplished the reinstatement of a well-accepted and well-understood century-long procedure, and because the meticulous records maintained by the regulated utilities will enable them to provide refunds to the hundreds of parties affected by the ultra vires 2005 Main Extension Rules, we reverse BPU's October 22, 2010 pipeline retroactivity decision.

We remand to BPU for the adoption of a regulation establishing the procedures for granting refunds to all developers and homeowners affected by the ultra vires 2005 regulation.

I.

Because the history of the Main Extension Rules was previously before us in Centex, id. at 253-60, there is no need to repeat at length either the history of the Main Extension Rules or our reasons for invalidating them, id. at 261-68. For present purposes, we need only summarize the portions of Centex that have a bearing on the retroactivity issue that is before us today.

Ever since 1911, N.J.S.A. 48:2-27 has conferred an obligation on BPU and its predecessor agencies to order regulated utilities to pay for extensions of utility service to new homes if: 1) the service extension was reasonable and practicable; 2) the extension would furnish sufficient business to justify the extension; and 3) the financial condition of the utility company reasonably warranted the expenditures involved in making and operating the extension. Prior to the adoption of the Main Extension Rules in 2005, BPU regulations "specified when a regulated utility was required to provide extensions free of charge to applicants 'and when and how [the utility] may charge applicants for new extensions.'" Centex, supra, 411 N.J.

Super. at 255 (quoting 36 N.J.R. 276(a) (January 20, 2004)) (alteration in original).

Notably, the pre-2005 rules did not incorporate environmental or land use considerations into the system of paying for service extensions. Instead, regulated utilities were required to reimburse developers and homeowners for the cost of extending utility service, and the utilities did so over time using the revenue generated from the extensions, regardless of the portion of the State in which the service extension was to be made. See 36 N.J.R. 276(a); 34 N.J.R. 992(a) (March 4, 2002).

All of that changed in 2005, when BPU "dramatically altered" its regulations, and for the first time, incorporated environmental and planning principles into the reimbursement scheme. Centex, supra, 411 N.J. Super. at 255. Upon the adoption of the Main Extension Rules in 2005, regulated utilities such as water, natural gas and electricity, were --for the first time in nearly a century -- prohibited from paying for or financially contributing to utility extensions in portions of the State that were not designated for growth according to the New Jersey State Planning Commission State Plan Policy Map (State Plan Map), unless the applicant for the extension was able to establish that it qualified for one of the exemptions contained in N.J.A.C. 14:3-8.8.*fn1

In August 2006, Centex Homes, LLC, began developing an age-restricted community in Howell, known as Colts Neck Crossing. Centex, supra, 411 N.J. Super. at 249. In November 2006, Centex filed a petition for utility service extensions pursuant to N.J.S.A. 48:2-27. Id. at 250. Shortly thereafter, BPU issued an order rejecting Centex's petition for an extension of service for natural gas, water and electricity, finding that the Centex project was located in an area not designated for growth on the State Plan Map. Id. at 251. For that reason, BPU prohibited the regulated utilities from paying for, or in any way financially supporting, the extension of utility service to the Centex project. Ibid. Centex appealed, and on December 30, 2009, we reversed BPU's decision, invalidated the Main Extension Rules as ultra vires, and remanded the matter to BPU for further proceedings. Id. at 244, 249. We did not address the question of whether our opinion was entitled to any retroactive effect, and if so, whether full retroactivity, or instead more limited pipeline retroactivity, was required.

On May 3, 2010, BPU issued a public notice seeking comments regarding whether and to what extent Centex should be applied retroactively. BPU received comments from nineteen interested parties, including the Division of Rate Counsel, utilities, individuals, and developers. These comments ranged from completely opposing retroactive application to supporting it unconditionally, while some commenters adopted a middle ground, urging BPU to order refunds to those parties who had specifically requested a refund.

BPU considered the matter at its August 18, 2010 meeting and determined to apply limited "pipeline" retroactivity. On October 22, 2010, BPU issued its Final Decision, retroactively applying Centex to eighteen matters pending as of December 30, 2009 -- the date of the Centex decision. BPU ordered that refunds would be issued only to applicants who had sought an exemption pursuant to the Main Extension Rules, as well as to any applicant who was in the process of obtaining a service extension but had not, prior to December 30, 2009: (1) entered into an Extension Agreement; (2) paid a deposit; or (3) commenced the physical installation (not including installation of temporary service or design work) of the extension of utility service. The Board refused, however, to apply Centex to any other Main Extension agreements.*fn2

BPU justified its refusal to give our Centex opinion full retroactive effect by pointing to what it claimed would be "significant economic, legal, operational and public policy concerns." As for the "economic concerns," BPU maintained that interested parties had relied upon the growth area/non-growth area distinction contained in the 2005 regulations, and that "any retroactive application would result in an increase in costs to ratepayers." BPU concluded that in all likelihood the costs paid by developers for service extensions had already been passed on to the purchaser when the property was sold; and if full retroactivity were to be ordered, the cost of service extensions that were not refundable prior to the Centex decision "would likely enrich the developer," who had already passed on the cost of service extension to the buyer, rather than "make [the] developer whole for expenses it incurred."

The second factor on which BPU relied in rejecting full retroactivity was "the impact of retroactive application on the administration of justice." BPU asserted that "full retroactive application" would "re-open numerous matters and private contracts [that] are long closed and on which no appeals were taken." Additionally, according to BPU, "many new cases would be created, significantly impacting the administration of justice."

Third were the operational "practicalities" that "come into play[.]" BPU concluded that full retroactive application would generate "substantial legal, accounting and rate-making challenges with respect to . . . how previously collected deposits and contributions in aid of construction ('CIACs') would be recalculated." BPU voiced a concern that if full retroactivity were ordered, and regulated utilities were ordered to issue refunds, the ultimate consumer would pay twice for the extension of utility service -- once when the developer incorporated such costs into the purchase price of the home, and a second time if the regulated utility were to be granted a rate increase to offset the costs incurred in issuing refunds. BPU also voiced concern about the potential for a significant surge in the number of requests from regulated utilities for rate increases -- and the concomitant administrative burden of resolving such requests -- were the regulated utilities to be ordered to issue refunds.

BPU's October 22, 2010 decision closed with the following justification of pipeline retroactivity:

The Board seeks to move forward in a manner that accords due deference to the Centex holding in light of the independent business decisions made by developers, individuals and utilities as well as filed tariffs, prior Board Orders and other determinations in the service extension area. The Board also seeks to balance the interests of all parties, including ratepayers. On balance, the Board believes that any retroactive application has great potential for severe administrative problems and regulatory havoc. This ...


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