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In re Petition of Atlantic City Electric Company

Superior Court of New Jersey, Appellate Division

July 17, 2013



Argued April 15, 2013

On appeal from the New Jersey Board of Public Utilities, Docket No. EM02050313.

Edward Lloyd (Columbia Environmental Law Clinic) argued the cause for appellants Citizen's United, New Jersey Conservation Foundation, New Jersey Audubon Society, and Association of New Jersey Environmental Commissions (A-5711-09) (Mr. Lloyd, attorney; Mr. Lloyd and Susan J. Kraham (Columbia Environmental Law Clinic), on the brief).

Stefanie A. Brand, Director, argued the cause for appellant State of New Jersey, Division of Rate Counsel (A-5890-09) (Ms. Brand, attorney; Brian Weeks, Deputy Rate Counsel, and James W. Glassen, Assistant Deputy Rate Counsel, on the brief).

Geoffrey R. Gersten, Deputy Attorney General, argued the cause for respondent New Jersey Board of Public Utilities (Jeffrey S. Chiesa, Attorney General, attorney; Andrea M. Silkowitz, Assistant Attorney General, of counsel; Mr. Gersten, on the brief).

Gerard W. Quinn argued the cause for respondent Atlantic City Electric Company (Cooper Levenson April Niedelman & Wagenheim, P.A., attorneys; Mr. Quinn, on the brief).

Hesser G. McBride, Jr., argued the cause for respondent Millville 1350, L.L.C. and R.W.V. Land & C.M. Livestock, L.L.C. (Wilentz Goldman & Spitzer, attorneys; Mr. McBride and John A. Hoffman, of counsel and on the brief; Anthony Wilkinson, on the brief).

Before Judges Graves, Ashrafi, and Guadagno.


The New Jersey Board of Public Utilities (BPU) granted a petition of the Atlantic City Electric Company (ACE) which sought approval of a proposed sale of real property located in Cumberland County to residential home developers. Interveners, who include four environmental groups and the State of New Jersey Division of Rate Counsel (Rate Counsel), [1] appeal the BPU's decision. By order dated October 21, 2010, we consolidated the two appeals for purposes of this opinion. Because the BPU failed to perform a meaningful review of the petition as required by statute and failed to support its conclusions with necessary findings of fact, we reverse and remand.


In the early 1980s, ACE purchased the tract of real property at issue, intending to construct a coal-fired generating station. The property, Block 120, Lot 4, and Block 121, Lots 1, 2, and 3 of Maurice River Township, and Block 582, Lot 10 and part of Lot 1 of the City of Millville, consists of 1346.899 acres. We had occasion to describe the property in a prior opinion:

The property is in an outlying area, away from the developed portion of the City of Millville. It has frontage on Route 49 and is located near the intersection of Route 49 and Route 55, a major limited access State highway. City water and sewer are available to the property. The property is bordered on one side by the Menantico Creek and on the other by a branch of the Manumuskin River, both of which discharge into the Maurice River.
The property is not a virgin tract. It has been used over the years for mining gravel and sand, leaving behind large craters which have become ponds. A holly orchard has been planted, and, although abandoned, covers a large portion of the property. A conference center [known as the Brian Parent Center], which was unsuccessful in its intended purpose, remains on the property. The property also contains parking lots and other miscellaneous structures, as well as a former railroad bed and power line right-of-way. The property is regularly used, without authorization, by the operators of
ATVs and other off-road vehicles. The property is not within the Pinelands and is not regulated by the Coastal Area Facility Review Act (CAFRA).
[Citizens United to Protect the Maurice River and its Tributaries, Inc. v. City of Millville Planning Bd., 395 N.J.Super. 434, 439-40 (App. Div. 2007).]

The property is also the natural habitat of two endangered species, the Pine Barrens treefrog and the corn snake, as well as four threatened species including the pine snake, Cooper's hawk, barred owl, and the redheaded woodpecker. Id. at 441.

After concluding the property was no longer of use for utility purposes, ACE decided to offer the property for sale. ACE planned to retain a small portion of land adjacent to the property that contains a power plant operated by an unregulated affiliate.

Prior to listing the property for sale, ACE obtained an appraisal from Conover Appraisal Associates, L.L.C., on November 22, 1998 (Conover I). Conover I found the "as is" appraised value, as of May 15, 1999, was $3, 900, 000. Between August 1999 and December 2000, ACE received six bids, but only three were considered viable offers.

On November 5, 1999, respondents Millville 1350, L.L.C. and R.W.V. Land & C.M. Livestock, L.L.C. (developers) submitted an offer of $3, 000, 000, which was raised to $4, 000, 000 on December 11, 2000.

On August 23, 1999, the New Jersey Department of Environmental Protection (DEP) submitted an initial offer of $2, 553, 000, under the Green Acres Program.[2] The DEP offer was an all-cash transaction conditioned on "good and insurable title, " and "a satisfactory hazardous waste assessment" done at DEP's cost. ACE rejected the DEP offer because it was considered a low bid.

During 2001 and 2002, ACE advertised the property for sale at a price of $4, 200, 000. ACE received no bids in response to the advertisement.

On January 22, 2002, ACE and the developers entered into a purchase agreement for the sale of the property based on the $4, 000, 000 offer. The contract provided for a $300, 000 payment upon execution with an additional $100, 000 payment following a six-month inspection period, if developers wished to continue with the purchase. The payment of the balance of the purchase price was structured using a purchase money note and mortgage. Following the first, second, and third year after closing, developers would make payments to ACE of $100, 000. On the fourth year after closing, the balance of the purchase price, or $3, 300, 000, was due. In the event of developers' default, the purchase agreement called for the immediate surrender of the deed in lieu of foreclosure.

Developers planned to construct an age-restricted residential development of approximately 950 detached homes on 239 acres of land. In addition, developers proposed an eighteen-hole golf course and club house on 170 acres, with the remaining 930 acres to remain undeveloped open space and permanently preserved.

In anticipation of submitting its petition for approval of the sale of the property, ACE obtained a second appraisal from Conover (Conover II). Conover II determined the appraised value of the property, as of April 11, 2002, was $3, 000, 000, and that developers' purchase agreement provided a net present value (NPV) sale price of $3, 000, 000, after discounting the $4, 000, 000 face value because of the seller-held mortgage financing structure.

On May 22, 2002, ACE submitted a petition to the BPU seeking approval of the sale of the property to developers. The petition declared that the property was not then or prospectively useful for utility purposes and confirmed that ACE believed developers' offer represented the fair market value (FMV) of the property. Upon receipt of the petition, the BPU held a hearing in Millville on December 1, 2003.

In comments filed with the BPU in 2003, appellant, Rate Counsel, did not initially object to the proposed sale by ACE. However, after becoming aware of the benefits of the DEP offer to the ratepayers and citizens, Rate Counsel changed position and opposed the transaction and supported the sale to DEP.

Representatives from ACE and members of local and county government testified at the hearing. ACE projected an increase of approximately $5.8 million in new tax ratables, and the attraction of new residents to Millville who would not "place a burden on [the] school system." Those in favor of development noted the environmentally sensitive nature of the area, but believed developers' general development plan (GDP) appropriately addressed those concerns by incorporating design elements to minimize impact on the area and by ensuring more than 85% of the property would be preserved in its natural state.

Several environmental groups and local residents testified in opposition to the transaction. Those opposed to developers' purchase stressed the impact the proposed development would have on local wetlands and waterways; questioned the wisdom of placing a golf course in an environmentally sensitive area; expressed concerns regarding contamination of the Cohansey-Kirkwood Formation, an underground natural water aquifer underneath the property that provides drinking water to over a million residents in South Jersey; and expressed reservations regarding the threatened and endangered species that use the property as their natural habitat.

The New Jersey Public Interest Research Group presented the testimony of Steve Gabel who conducted an economic analysis of the proposed sale. Gabel testified as to the "comparative economics" of the developers' offer and the DEP offer and noted "it's not simply $4 million is better than $2.55 million, end of story." Rather, Gabel proposed that the offers be evaluated based on an NPV basis, with consideration given to the relative risk of the two offers, and the drop in lease value the transaction would cause to land ACE was retaining to operate a turbine power plant.

Gabel explained the DEP offer was "payment on the barrelhead, " immediately available and having an NPV of $2.55 million. He suggested that the developers' offer must be discounted because installment payments would be stretched over a four-year period and because "the relative risk of real estate . . . [and] all the contingencies of this deal falling into place" might negate developers' obligation to make the final $3.3 million payment. Gabel explained:

I used a 15 percent discount rate in calculating that present value. I believe for the overall cost of capital and the risk of the real estate development industry, that's a conservative low discount rate to use.
The 4.0 million turns into a 1.85 million payment when all these factors are taken into account. The offer from [DEP], as I said, is 2.55 million. On a discounted basis, recognizing appropriate analysis of present value, the offer that's on the table in this petition is 27 percent lower than the offer from [DEP].
So I believe that from a ratepayer perspective, this offer fails that basic ratepayer test and shouldn't be approved.

Gabel's report (Gabel I) was introduced into evidence. Gabel I showed the economic analysis of the offers, beginning with the discounting of developers' payments for the passage of time and other risk factors. This discounting, at a rate of 15%, results in an NPV of $2, 197, 000. Next, Gabel I stated the amount ACE loses from the reduction in lease payments from the unregulated affiliate is $36, 000 a year, which at a discounted rate of 8.25% for 20 years, equals an NPV reduction to the sale of $347, 000. When the reduction in lease payments is offset against the NPV of the developers' offer, the total NPV of developers' offer is $1, 850, 000. Gabel I reached the conclusion that "[o]n a risk-adjusted present value basis, the no-risk, immediate cash offer of $2.553 million from the [DEP] is clearly a better value" than the developers' agreement.

Following the hearing, several parties were granted permission to intervene in the proceedings as interested parties. On March 29, 2004, DEP increased its offer to purchase the property to $3, 400, 000. The offer continued to be "an all cash transaction" with no financial contingencies, and was not subject to any developmental approvals. This offer did not require legislative approval. Moreover, DEP offered to pay $700, 000 less for the property in exchange for voluntary settlement of ACE's liability for unrelated groundwater violations at another site.

The economic analysis in Conover II used a discount rate of between 8% and 9%, which placed the NPV of the developers' offer at $3, 000, 000. In addition, developers submitted another economic appraisal from Guastella Associates (Guastella I), which challenged the 15% discount rate used in Gabel I, because that rate was not derived from comparable sales or otherwise based on value to the owner. Rather, Guastella I concluded that the discount rate "should be . . . based on available financing." Therefore, Guastella I concluded the appropriate rates should be in the range of 5% to 10%. Guastella I also found Gabel I's approach to the drop in lease payments inappropriate, because that reduction would occur whether the property was purchased by developers or DEP. Guastella I suggested that Gabel I failed to consider the positive impact a sale to developers would have to ACE and its ratepayers in the form of nearly $800, 000 in revenue to ACE. Using discount rates of 5%, 8.25%, and 10%, Guastella I determined the NPV of developers' offer to be $3, 256, 000, $2, 857, 000, and $2, 666, 000, respectively. However, if developers' payment schedule was adjusted to assume payment began at closing, the NPV's for the same discount rates increase to $3, 375, 000, $3, 030, 000, and $2, 862, 000, respectively. Treating the DEP offer as NPV of $2, 553, 000, the Guastella I report concluded that developers' offer was "far superior" to DEP's offer and "in the best interest of [ACE] and its customers, as well as the City of Millville."

The Millville Planning Board approved developers' GDP and several environmental organizations challenged the approval, claiming the development would have an unreasonably adverse impact upon the environmentally sensitive area. During the ...

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