(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the
convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in
the interests of brevity, portions of any opinion may not have been summarized).
Argued November 8, 2000 -- Decided May 18, 2001
PER CURIAM
Plaintiffs in this case have challenged the Final Decision and Order (Final Order) issued by the Board of
Public Utilities (BPU) in respect of Public Service Electric and Gas Company's (PSE&G) rate unbundling, stranded
cost, and corporate restructuring filings. Also at issue is BPU's Bondable Stranded Costs Rate Order (BSCRO)
issued in response to PSE&G's petition to securitize its recovery-eligible stranded costs.
BPU issued a Final Report in April 1997, recommending that by July 2000 all of the state's retail
customers should be able to select their electric power suppliers, and that rate reductions of from five to ten percent
should be implemented during the phase-in of retail competition. The order adopting the Final Report required the
four utility monopolies, including PSE&G, to submit three filings to the BPU: a rate unbundling petition involving
the manner in which the single, per-kilowatt-hour charge can be separated into component parts; stranded cost
filings relating to the utilities' right to recover some portion of the stranded costs that would have been recovered
had they continued as regulated monopolies; and the restructuring filings relating to the reorganization of the
utilities. The BPU's Final Order addressed PSE&G's submissions and was issued pursuant to the Electric Discount
and Energy Competition Act (EDECA).
An appeal from the Final Order was taken by the Division of the Ratepayer Advocate (Ratepayer
Advocate), New Jersey Business Users (NJBUS), a group of large industrial and commercial customers, and Co-
Steel Raritan (Co-Steel), one of PSE&G's largest commercial customers. The Appellate Division upheld both the
BPU's Final Order and BSCRO. In re PSE&G Co.'s Rate Unbundling, Stranded Costs and Restructuring Filings,
330 N.J. Super. 65 (2000).
The Court granted the petitions for certification filed by the Ratepayer Advocate and NJBUS, and granted
in part the petition of Co-Steel, limited to the issues concerning rate reduction. Following arguments on November
8, 2000, this Court issued an Order affirming without an accompanying opinion because of the need for an
expeditious resolution of plaintiffs' challenge. The Court relies substantially on the reasons expressed in Judge
King's thorough and well-reasoned opinion.
HELD: The BPU's Final Order reflects findings that are supported by the record and are consistent with the
enabling legislation.
1. The Legislature has endowed the BPU with broad power to regulate public utilities and considerable discretion in
exercising those powers. The BPU's rulings are entitled to presumptive validity and will not be disturbed unless
there is a lack of reasonable support in the evidence. Beginning as early as 1995, the BPU held numerous public
hearings, solicited comments from the public and interested parties and facilitated negotiation sessions between and
among those parties. Following the issuance of the Final Report in 1997, the BPU and an Administrative Law
Judge conducted trial-type proceedings, receiving testimony and evidence on PSE&G's filings. The extensive
record demonstrates that the Final Order and BSCRO represent the culmination of years of agency review, including
negotiations and agreements between PSE&G and others. Under those circumstances, substitution of the Court's
judgment for that of the agency is unwarranted unless the Court is firmly convinced - and it is not - that the agency
had abused its discretionary powers. (Pp. 4-10)
2. The dissent contends that the BPU ignored clear statutory language and its own public positions when it ordered
the five percent transition rate reduction to be measured from 1999 rates instead of 1997 rates. One provision of the
EDECA requires an overall rate reduction of ten percent and expressly makes such a reduction relative to the level
of bundled rates in effect on April 30, 1997. Another provision permits the BPU to phase-in this reduction and
requires that on the implementation of the plan, the utility must reduce its rates by no less than five percent. Absent
from this latter provision, however, is any mention of a benchmark time against which the five percent is to be
measured. Contrary to the dissent, the Court concludes that the drafters intentionally left out a measuring date for
the initial rate reduction to allow the BPU to exercise its discretion when phasing-in the entire ten percent reduction.
The Court therefore holds that BPU's approach is a plausible and permissible interpretation of the legislation, well
within the discretion of the agency. (Pp. 10-14)
3. The BPU acted within its discretion in allowing PSE&G to accelerate the amortization of its excess depreciation
reserve. The EDECA gives the BPU the power to authorize alternative accounting methods over the period when
sustainable rate reductions are required. The practical result of allowing PSE&G to amortize its excess depreciation
reserve is to soften the financial blow of the required reductions. (Pp. 14-17)
4. There is substantial evidence in the record to support the BPU's findings on valuation of stranded costs, and
those findings are consistent with the EDECA. The BPU's stranded costs determination involves complex valuation
formulas and accounting concepts, which are exactly the type of decisions best left to the agency's expertise.
Further, the process undertaken by the BPU afforded ample opportunity to the parties to comment and present their
cases. There was no procedural infirmity that would compel a remand for additional hearings. (Pp. 17-21)
5. The Court is not unmindful of the impacts of rate deregulation in California. But the Court is not ruling on the
wisdom of the EDECA. That is for the legislative and executive branches of government, and they have chosen
their course. (Pp. 21-24)
Judgment of the Appellate Division is AFFIRMED.
JUSTICE STEIN, concurring in part and dissenting in part, rejects the contention that the Final Order
must stand or fall as an integrated and indivisible unit, concluding that the constitutional obligation of judicial
review is disserved and frustrated if the Court must ignore illegal and invalid components to preserve the claimed
practical benefits of an integrated Final Order. Justice Stein disagrees with the Court's ruling on three issues, and
would find that: the EDECA mandates the five percent initial rate reduction must be calculated from rates in effect
in April 30, 1997; there is insubstantial support for PSE&G's accelerated amortization of depreciation; and the
evidence was insufficient to support BPU's asset valuation and stranded cost determination.
CHIEF JUSTICE PORITZ and JUSTICES COLEMAN, LONG, and VERNIERO join in the
Court's opinion. JUSTICE STEIN has filed a separate opinion, concurring in part and dissenting in part.
JUSTICES LaVECCHIA and ZAZZALI did not participate.
SUPREME COURT OF NEW JERSEY
A-139/140/
147 September Term 1999
IN THE MATTER OF PUBLIC
SERVICE ELECTRIC AND GAS
COMPANY'S RATE UNBUNDLING,
STRANDED COSTS AND
RESTRUCTURING FILINGS
IN THE MATTER OF THE PETITION
OF PUBLIC SERVICE ELECTRIC
AND GAS COMPANY FOR A
BONDABLE STRANDED COST RATE
ORDER IN ACCORDANCE WITH
CHAPTER
23 OF THE LAWS OF 1999, TO AUTHORIZE THE
IMPOSITION OF A NONBYPASSABLE
TRANSITION BOND CHARGE, TO
AUTHORIZE THE SALE OF
BONDABLE TRANSITION PROPERTY,
THE ISSUANCE AND SALE OF NOT
TO EXCEED $2.525 BILLION
AGGREGATE PRINCIPAL AMOUNT OF
TRANSITION BONDS BY A
FINANCING ENTITY TO RECOVER
PETITIONER'S BONDABLE
STRANDED COSTS, AND THE
APPLICATION OF TRANSITION
BOND PROCEEDS TO RETIRE
OUTSTANDING UTILITY DEBT,
EQUITY OR BOTH, AND TO
APPROVE THE FORMULA FOR THE
CALCULATION AND ADJUSTMENT OF
THE TRANSITION BOND CHARGE
AND MARKET TRANSITION CHARGE
AND MARKET TRANSITION CHARGE-
TAX RELATED THERETO.
Argued November 8, 2000 -- Decided May 18, 2001
On certification to the Superior Court,
Appellate Division, whose opinion is
reported at
330 N.J. Super. 65 (2000).
Phyllis J. Kessler argued the cause for
appellant New Jersey Business Users (Kudman
Trachten Kessler Newman & Rich and Goldberg,
Mufson & Spar, attorneys; Ms. Kessler and
Jeffery L. Kantowitz, on the briefs).
Blossom A. Peretz, Ratepayer Advocate, and
Gregory Eisenstark, Deputy Ratepayer
Advocate, argued the cause for appellant
Division of the Ratepayer Advocate (Ms.
Peretz, attorney; Mr. Eisenstark, Diane
Schulze, Assistant Deputy Ratepayer Advocate
and Nusha Wyner, Kurt S. Lewandowski and Ami
Morita, Deputy Ratepayer Advocates, on the
briefs).
Philip L. Chabot, Jr., a member of the
District of Columbia bar, argued the cause
for appellant Co-Steel Raritan (Pearson and
Shapiro, attorneys).
Helene S. Wallenstein, Senior Deputy
Attorney General, argued the cause for
respondent New Jersey Board of Public
Utilities (John J. Farmer, Jr., Attorney
General of New Jersey, attorney; Andrea M.
Silkowitz, Assistant Attorney General, of
counsel).
John A. Hoffman argued the cause for
respondent Public Service Electric and Gas
Company (Francis E. Delany, Jr., Corporate
Rate Counsel and Wilentz, Goldman &
Spitzer, attorneys; Mr. Hoffman, Mr. Delany,
James T. Foran, R. Edwin Selover, Anne S.
Babineau and Matthew M. Weissman, of counsel
and on the briefs).
James E. McGuire argued the cause for
respondent New Jersey Commercial Users (Reed
Smith Shaw & McClay, attorneys).
Gerald W. Conway argued the cause for
respondent Jersey Central Power & Light
Company, d/b/a GPU Energy (Thelen Reid &
Priest, attorneys; Mr. Conway and Marc B.
Lasky, of counsel; Pauline Foley, on the
brief).
William Harla argued the cause for
respondent Independent Energy Producers of
New Jersey (DeCotiis, Fitzpatrick, Gluck,
Hayden & Cole, attorneys).
Michael J. Mehr argued the cause for
respondent Tosco Refining Company (Waters,
McPherson, McNeill, attorneys).
Stephen B. Genzer submitted a brief on
behalf of respondent Atlantic City Electric
Company (LeBoeuf, Lamb, Greene & MacRae,
attorneys; Mr. Genzer, Mark L. Mucci and
Colleen A. Foley, on the brief).
Murray E. Bevan submitted a brief on behalf
of respondent Enron Energy Services, Inc.
(Courter, Kobert, Laufer & Cohen, attorneys;
Richard P. De Angelis, Jr., on the briefs).
James C. Meyer submitted a letter in lieu of
brief on behalf of respondent Rockland
Electric Company (Riker, Danzig, Scherer,
Hyland & Perretti, attorneys).
PER CURIAM
Plaintiffs in this case have challenged the August 24, 1999
Final Decision and Order (“Final Order”) issued by the Board of
Public Utilities (“BPU”) in respect of Public Service Electric
and Gas Company's (“PSE&G”) rate unbundling, stranded cost and
corporate restructuring filings. Also at issue is the validity
of the BPU's September 17, 1999 Bondable Stranded Costs Rate
Order (“BSCRO”), issued in response to PSE&G's petition to
securitize its recovery-eligible stranded costs.
The Appellate Division upheld both the BPU's Final Order and
BSCRO. Following arguments on November 8, 2000, this Court
issued an order disposing of the matter without an accompanying
opinion because of the need for an expeditious resolution of the
plaintiffs' challenge. That order announced our decision
affirming the judgment of the Appellate Division. Although we
rely substantially on the reasons expressed in Judge King's
thorough and well-reasoned opinion, we take this opportunity to
elaborate on that opinion and respond to the concerns of our
dissenting colleague.
On April 30, 1997, the BPU issued a report entitled “Restructuring the Electric Power Industry in New Jersey: Findings and Recommendations” (“Final Report”). The Final Report recommended in part that by July 2000 all of the state's retail customers should be able to select their electric power suppliers, and that rate reductions of from five to ten percent should be implemented during the phase-in of retail competition. Under the Agency's proposed restructuring, the generation component of electric power production would be competitively priced on the open market. The BPU's order adopting the Final Report required the existing four utility monopolies, PSE&G, Jersey Central Power & Light Company, Rockland Electric Company and Atlantic Electric Company, each to submit three filings to the BPU: a rate unbundling petition, a stranded cost petition, and a restructuring plan. The rate unbundling petitions involve the manner in which the single, per-kilowatt-hour charge would be separated into its component parts (generation, transmission and distribution); the stranded cost filings relate to the utilities' right to recover some portion of the overmarket (stranded) costs that would have been recovered had they continued as regulated monopolies; and the restructuring filings relate to the reorganization of the four utilities, focusing on the utilities' divestiture of generating assets, including the valuation of the transferred assets where, as here, those assets are transferred to an unregulated affiliate. The BPU's Final Order addressed PSE&G's submissions and was issued pursuant to the Electric Discount and Energy Competition Act (“EDECA”), N.J.S.A. 48:3-49 to 98,See footnote 11 enacted in February 1999. This is the first case involving one of the state's utility monopolies to receive final agency review. An appeal from the Final Order was taken by the Division of the Ratepayer Advocate (“Ratepayer Advocate” or “RA”), New Jersey Business Users (“NJBUS”), a group of large industrial and commercial customers, and Co-Steel Raritan (“Co-Steel”), one of PSE&G's largest commercial customers. In re PSE&G Co.'s Rate Unbundling, Stranded Costs and Restructuring Filings, 330 N.J. Super. 65 (2000). We granted the petitions for certification filed by the Ratepayer Advocate and NJBUS, and granted in part the petition for certification filed by Co-Steel, limited to the issues concerning rate reduction. Certification was denied on Co- Steel's contract impairment claim. 165 N.J. 489 (2000).
This case implicates questions of statutory interpretation and executive agency decision making. When considering the meaning of a statutory provision, absent any legislative intent to the contrary, courts must give effect to the language of the provision. Phillips v. Curiale, 128 N.J. 608, 617-18 (1992); Renz v. Penn Cent. Co., 87 N.J. 437, 440 (1981). When a statute is ambiguous, however, “[w]e are . . . warranted in placing considerable weight on the construction of the statute . . . by the administrative agency charged by the statute with the responsibility of making it work.” The Passaic Daily News v. Blair, 63 N.J. 474, 484 (1973). Because “[t]he grant of authority to an administrative agency is to be liberally construed to enable the agency to accomplish the Legislature's goals,” Gloucester Cty. Welfare Bd. v. State Civil Serv. Comm'n, 93 N.J. 384, 390 (1983), we defer to “[t]he agency's interpretation . . . provided it is not plainly unreasonable.” Merin v. Maglaki, 126 N.J. 430, 437 (1992). Likewise, when reviewing an administrative agency's factual findings, our function is not to substitute our judgment for that of the agency, particularly when that judgment reflects agency expertise. Flanagan v. Department of Civil Serv., 29 N.J. 1, 12 (1959); see Close v. Kordulak Bros., 44 N.J. 589, 599 (1965) (stating that courts should afford due deference “to the agency's expertise where such expertise is a pertinent factor”).
The proceedings and decisions in this matter involve rate making by the BPU, “to which the Legislature has delegated its rate-making power, [and which] is vested with broad discretion in the exercise of that authority.” In re Public Serv. Coordinated Transp., 5 N.J. 196, 214 (1950). “[T]he BPU's authority over utilities, like that of regulatory agencies generally, extends beyond powers expressly granted by statute to include incidental powers that the agency needs to fulfill its statutory mandate.” In re Alleged Violations of Law by Valley Rd. Sewerage Co., 154 N.J. 224, 235 (1998); see In re Elizabethtown Water Co., 107 N.J. 440, 449-50 (1987) (“The Legislature has endowed the BPU with broad power to regulate public utilities. . . . [and] considerable discretion in exercising those powers.”). We have long recognized that
[a]dministrative agencies possess the ability
to be flexible and responsive to changing
conditions. See Heir v. Degnan,
82 N.J. 109,
121 (1980). This flexibility includes the
ability to select those procedures most
appropriate to enable the agency to implement
legislative policy. See N.J.S.A. 52:14F-7(a)
(Supp. 1981). Therefore, agencies sometimes
develop hybrid proceedings possessing
characteristics of both adjudication and
rulemaking. See Cunningham, supra, 69 N.J.
at 21 (public utility ratemaking procedures,
although quasi-legislative in origin, are
conducted like quasi-judicial proceedings);
N.J.A.C. 1:1-1.6(a)(3). In fact, courts and
commentators have encouraged hybrid agency
proceedings as a way of producing more
reasoned agency decisions, especially in
complex and controversial policy areas. See,
e.g., International Harvester Co. v.
Ruckelshaus,
478 F.2d 615, 649 (D.C. Cir.
1973); id. at 651-652 (Bazelon, C. J.,
concurring); Bazelon, “Coping with Technology
Through the Legal Process,”
62 Cornell L.
Rev. 817, 824-826 (1977); Stewart, “Vermont
Yankee and the Evolution of Administrative
Procedure,”
91 Harv. L. Rev. 1805, 1812-1814
(1978).
[Texter v. Department of Human Serv.,
88 N.J. 376, 385 (1982).]
Accordingly, upon the exercise of its broad authority and the
conduct of appropriate proceedings, “the Board's rulings are
entitled to presumptive validity and will not be disturbed unless
we find a lack of 'reasonable support in the evidence.'” In re
Jersey Cent. Power & Light Co.,
85 N.J. 520, 527 (1981) (quoting
In re New Jersey Power & Light Co.,
9 N.J. 498, 509 (1952)); see
also N.J.S.A. 48:2-46 (stating that courts may set aside BPU's
order, in whole or in part, only “when it clearly appears that
there was no evidence before the [BPU] to support the same
reasonably or that the same was without the jurisdiction of the
[BPU]”).
In this case, beginning as early as 1995, the BPU held
numerous public hearings, solicited comments from the public and
interested parties and facilitated negotiation sessions between
and among those parties. Following the issuance of the Final
Report in 1997, the BPU and an Administrative Law Judge
(“Administrative Law Judge” or “ALJ”) conducted trial-type
proceedings, receiving testimony and evidence on PSE&G's
unbundling, stranded cost and corporate restructuring filings.
The BPU also retained an independent auditor to audit those
filings and to assist in calculating PSE&G's stranded costs. An
extensive record, consisting of a continuum of testimony,
evidence, reports, findings and proposals received in
contemplation of and subsequent to the enactment of EDECA,
supports the BPU's Final Order and BSCRO.
The BPU was required to balance complex and competing
interests and did so. The record demonstrates that the Final
Order and BSCRO represent the culmination of years of agency
review, including the negotiations and agreements reached between
PSE&G and seven other interveners. We note that as a part of the
discussions, PSE&G agreed to absorb a $250 million reduction in
the amount of its unsecuritized stranded costs to the benefit of
ratepayers. Under those circumstances, substituting our judgment
for that of the agency would be unwarranted unless we were firmly
convinced, and we are not, that the agency had abused its
discretionary powers. We decline, also, to reject specific
elements of the BPU's decision because we find that each element
is separately sustainable and because we accept the agency's
representation that the Final Order and BSCRO function as an
integrated whole in which the parts are related and
interdependent.
Our dissenting colleague, however, believes that the “statute is crystal clear” in requiring that the five percent transition rate reduction is to be measured from 1997 rates. Post at __ (slip op. at 11). That reduction spans the initial thirty-six months when retail choice is to be phased in under EDECA. See N.J.S.A. 48:3-52(d). The dissent contends that the BPU ignored clear statutory language and its own public positions when the agency ordered the five percent reduction from 1999 rates, which include a 3.9% rate increase approved in April 1998. Post at ___ (slip op. at 9-11).
N.J.S.A. 48:3-52(d) provides:
d. (1) During a term to be fixed by the
board, each electric public utility shall
reduce its aggregate level of rates for each
customer class, including any surcharges
assessed pursuant to this act, by a
percentage to be approved by the board, which
shall be at least 10 percent relative to the
aggregate level of bundled rates in effect as
of April 30, 1997, subject to the provisions
of paragraph (2) of this subsection.
(2) The board may set a term for an electric
public utility to phase in a rate reduction
of ten percent or more during the first 36
months after the starting date for the
implementation of retail choice as provided
in subsection a. of section 5 of this act;
provided, however, that, on the starting date
for the implementation of retail choice as
provided in subsection a. of section 5 of
this act, each electric public utility shall
reduce its aggregate level of rates for each
customer class, including any surcharges
assessed pursuant to this act, by no less
than five percent.
[(Emphasis added).]
Subsection (d)(1) mandates that each electric utility shall
reduce its aggregate level of rates for each customer class by no
less than ten percent “relative to the aggregate level of bundled
rates in effect as of April 30, 1997.” Subsection (d)(2)
provides that the reduction shall be phased in over a period of
three years, with an initial reduction of at least five percent.
By its terms, subsection (d)(1) deals with the overall ten
percent rate reduction to be achieved as measured against the
rates in effect on April 30, 1997. Absent from the text of
subsection (d)(2), however, is any mention of a benchmark time
period from which the five percent reduction is to be measured.
Contrary to the dissent, we conclude that the drafters
intentionally left out of subsection (d)(2) a measuring date for
the initial rate reduction in order to allow the BPU to exercise
its discretion when phasing in the entire ten percent required.
Indeed, the plain language of subsection (d)(2) states that the
BPU may “set a term for an electric public utility to phase in a
rate reduction.” N.J.S.A. 48:3-52(d)(2). Even the Ratepayer
Advocate's March 29, 1999 proposed stipulation of settlement
states that the initial five percent reduction should be measured
from current 1999 rates:
The Better Choice Settlement Proposal,
consistent with the requirements of the
Energy Competition Act, would require PSE&G's
[sic] to reduce its overall rates according
to the following schedule (reductions are
cumulative):
August 1, 1999 - 5% reduction from current
rates; . . . .
[Ratepayer Advocate's Settlement Proposal at
10.]
Although the Ratepayer Advocate's settlement proposal was not
accepted, we assume the 1999 benchmark would not have been
suggested by the Ratepayer Advocate if she believed that date to
be in derogation of the statute.
We observe as well that one of the critical objectives of
EDECA is to implement rate reductions without impairing the
financial integrity of the utilities. N.J.S.A. 48:3-50(c)(4).
The BPU's approach, which begins with an initial reduction of
five percent from 1999 rates and gradually introduces the full
reduction over three years, is consistent with this goal. See
Fiore v. Consolidated Freightways,
140 N.J. 452, 466 (1995) (“Our
task is to harmonize the individual sections and read the statute
in the way that is most consistent with the overall legislative
intent.”). We therefore hold that the Agency's approach is a
plausible and “a permissible interpretation of the legislation,
[well] within the discretion of the agency.”See footnote 22 In re Schedule of
Rates for Barnert Mem'l Hosp.,
92 N.J. 31, 42 (1983).
Our dissenting colleague also joins in the petitioners' objection to PSE&G's accelerated amortization of its excess depreciation reserve fund and use of those amortization amounts to partially fund the utility's rate reductions and stranded costs recovery. Post at ___ (slip op. at 12). The excess- depreciation reserve fund resulted from changing the useful life of the company's distribution plant investments from twenty-eight years to forty-five years. By lengthening the useful life of its assets, a substantial excess depreciation reserve accrued on PSE&G's balance sheet. The BPU approved PSE&G's amortization of that $568.7 million excess depreciation reserve over three years and seven months, beginning January 1, 2000 and ending July 31, 2003, by establishing amortization amounts of $125 million in 2000, $125 million in 2001, $135 million in 2002 and $183.7 million in 2003. Those amounts are to be recorded in the appropriate year as credits against expenses, thereby increasing PSE&G's ability during the transition period to absorb the financial impact of the rate reductions mandated by EDECA. This scheme, contends the dissent, “might very well violate the letter and spirit of EDECA, create a windfall for PSE&G, and undermine public confidence in the fairness of the Final Order.” Post at ___ (slip op. at 18-19).
We agree with the Appellate Division that “there is nothing in [EDECA] to prohibit deferred accounting.” In re PSE&G, supra, 330 N.J. Super. at 114. Although there are statutory provisions in relation to the required level of rate reductions, supra at ___ (slip op. at 11-14), and as to the “manner in which to apply the rate reductions,” N.J.S.A. 48:3-52(f), the Legislature has not specified the funding source for those reductions. However, as also pointed out by the Appellate Division, In re PSE&G, supra, 330 N.J. Super. at 114, N.J.S.A. 48:3-57(b)(3) provides that
[t]he board may devise an alternative accounting or cost recovery process that permits an electric public utility to purchase power from a related competitive business segment of its public utility holding company, or otherwise, to provide basic generation service to its customers during the period that the electric public utility is providing for sustainable rate reductions . . ., if the board determines that such process is necessary to mitigate the impacts of market price fluctuations and to sustain such rate reductions.
Section 57(b)(3) is clear: the BPU has the power to
authorize “alternative accounting” over the period when
“sustainable rate reductions” are required. Most interesting,
the language of the provision tells us that “sustainable” is
being used, not in the temporal sense, but, rather, to mean
“supportable,” i.e., that alternative methods may be needed to
adjust for market pricing “and to sustain [(support)] such rate
reductions” during the three years reductions are in place. Id.
In effect, the practical result of allowing PSE&G to amortize its
excess depreciation reserve is to soften the financial blow of
the required reductions during the early phase-in period of
deregulation.
Although the dissent and petitioners have their own view of
how best to achieve “sustainable rate reductions,” we are
convinced that neither the law nor the facts in the record below
permit the Court to second-guess the BPU's judgment. We hold
that the BPU acted well within its discretion in allowing PSE&G
to accelerate the amortization of its excess depreciation
reserve.
Finally, our dissenting colleague contends that the record does not “support the BPU's generation asset valuation and stranded cost determination.” Post at ___ (slip op. at 19). On that basis, and because he believes that the BPU failed to hold “an adequate evidentiary hearing,” the dissent would remand for a further hearing on that determination. Id.
The EDECA scheme has been succinctly described by the Appellate Division:
Although [EDECA] does not mandate total
divestiture, it allows utilities to
functionally separate their generation assets
and transfer them to an affiliate. N.J.S.A.
48:3-59. The utilities are permitted to
recover stranded costs, the generation plant
costs which the utility is at risk of losing
when the supply market is opened to
competition through a limited-duration (up to
eight years) nonbypassable market transition
charge (MTC). N.J.S.A. 48:3-61(a). . . .
They are also permitted to impose a
nonbypassable transition bond charge (TBC)
(for up to fifteen years) in order to recover
stranded costs. N.J.S.A. 48:3-62(a).
Following hearings before an Administrative Law Judge, the BPU commissioned an independent auditor to assist in the calculation of PSE&G's stranded costs. When settlement negotiations between the parties failed, PSE&G and seven other intervenersSee footnote 33 submitted a proposed stipulation of settlement to which the petitioners responded by submitting their own proposal for settlement. After considering those competing proposals and the parties' respective comments, on April 21, 1999 the BPU found PSE&G's stipulation more financially prudent and consistent with EDECA's requirements. In its Final Order, the BPU adopted the auditor's mid-range calculation of stranded costs, and then adjusted the amount downward to account for nitrogen oxide and sulfur dioxide emission credits.
We are satisfied that the BPU's Final Order reflects findings that are supported by the record and are consistent with EDECA. Contrary to the dissent's assertion that the BPU should have considered “market-based valuations,” post at ___ (slip op. at 31), the Appellate Division again correctly observes that EDECA “does not specify what methodology should be used in determining the value of assets to be transferred to an affiliate.” In re PSE&G, supra, 330 N.J. Super. at 124. During the administrative proceedings below, the ALJ used a “market price forecast” or “administrative” methodology to examine asset value. At the time, PSE&G had not proposed a transfer of its generation facilities to an affiliate and so the ALJ's income projection approach was developed “in the context of determining the amount of stranded costs PSE&G could recover for each of its generating plants.” Id. In any case, the ALJ's methodology became the basis for the independent auditor's calculations. The auditor's report, in turn, contained three stranded costs calculations based on different inflation estimates: low, middle and high. The BPU accepted “as reasonable” the auditor's mid- range calculation.
The dissent, however, argues that the BPU's choice constitutes an utter failure “to provide . . . any explanation for” the agency's adoption of the auditor's mid-range stranded costs calculation. Post at ___ (slip op. at 31). But common sense tells us that by selecting the mid-range figure, the BPU was simply applying its expertise to reject more extreme estimates in the face of uncertainty regarding inflation rates. In sum, the record demonstrates that the BPU's asset valuation is grounded in the ALJ's findings, albeit in a marginally different context, the independent auditor's report, and PSE&G's proposed stipulation of settlement. Further, the BPU's stranded costs determination involves complex valuation formulas and accounting concepts, which are exactly the type of decisions that our precedents instruct are best left to the agency's expertise. In re Kessler Mem'l Hosp., 78 N.J. 564, 576-77 (1979) (Handler, J., concurring) (stating that rate-setting decisions by the BPU require “judicial deference to the discretion exercised by the agency experts”). We are therefore convinced that “there was substantial evidence in the record to support [the BPU's] findings on valuation.” In re PSE&G, supra, 330 N.J. Super. at 128.
On the issue whether a remand is necessary, we are also convinced that the process undertaken by the BPU afforded ample opportunity to the parties to comment and present their cases. We disagree with our colleague's assertion that the BPU should have held a hearing “with respect to the [immediate] transfer of generation-related assets to [PSE&G's affiliate] GENCO”, post at ___ (slip op. at 31), because that transfer was anticipated as a possibility by the parties. As the Appellate Division noted, there was “testimony on alternatives: for example, a witness on behalf of [Independent Energy Producers of NJ] faulted PSE&G for separation of its generating facilities after, rather than at the beginning of, the transition period and a witness on behalf of the [Ratepayer Advocate] testified that complete divestiture was the best option.” In re PSE&G, supra, 330 N.J. Super. at 112. But even if we accept the dissent's contention that the BPU should have reopened the proceedings and permitted further testimony and cross-examination, post at ___ (slip op. at 31), a reviewing court may set aside an order of the BPU only “when it clearly appears that there was no evidence before the board to support the same reasonably . . . .” N.J.S.A. 48:2-46. The Public Utilities Act also specifically prohibits courts from reversing a BPU decision for a mere “irregularity or informality in the proceedings of the board unless the irregularity or informality tends to defeat or impair the substantial right or interest of the appellant.” Id.
The BPU's valuation of PSE&G's generation facilities and its stranded costs determination were based on years of fact-finding and extensive quasi-judicial and quasi-legislative proceedings. The parties participated fully and vigorously at all stages. We find no procedural infirmity that would compel us to remand at this juncture for additional hearings on those matters.
We note the dissent's concern that we abdicate our appellate responsibilities when we review the BPU's decision as an integrated whole in which the component parts are both interrelated and interdependent. Post at ___ (slip op. at 5-6). That approach, the dissent fears, undercuts the function of the Court and inappropriately insulates the Final Order from review. Id.
The dissent's fears are unfounded. Our review suggests only that the separate aspects of the BPU decision should not be separately invalidated but, rather, the whole should fall if some component is infirm. However, we need not reach that question, because we do not find any single component of the Final Order to be infirm. Moreover, the BPU's understanding of its decision as an indivisible unit appropriately serves to inform our review as we examine both the discrete decisions and consider their relationship to the whole.
The judgment of the Appellate Division is affirmed. The filing of this opinion constitutes entry of the Court's judgment.
CHIEF JUSTICE PORITZ and JUSTICES COLEMAN, LONG and VERNIERO join in the Court's opinion. JUSTICE STEIN filed a separate opinion, concurring in part and dissenting in part. JUSTICES LaVECCHIA and ZAZZALI did not participate.
SUPREME COURT OF NEW JERSEY
A-139/140/
147 September Term 1999
IN THE MATTER OF
PUBLIC SERVICE ELECTRIC AND
GAS COMPANY'S RATE UNBUNDLING,
STRANDED COSTS, AND RESTRUCTURING
FILINGS
---------------------
IN THE MATTER OF
THE PETITION OF PUBLIC SERVICE
ELECTRIC AND GAS COMPANY FOR A
BONDABLE STRANDED COST RATE ORDER
IN ACCORDANCE WITH CHAPTER 23 OF
THE LAWS OF 1999, TO AUTHORIZE
THE IMPOSITION OF A NONBYPASSABLE
TRANSITION BOND CHARGE, TO
AUTHORIZE THE SALE OF BONDABLE
TRANSITION PROPERTY, THE ISSUANCE
AND SALE OF NOT TO EXCEED $2.525
BILLION AGGREGATE PRINCIPAL AMOUNT
OF TRANSITION BONDS BY A FINANCING
ENTITY TO RECOVER PETITIONER'S
BONDABLE STRANDED COSTS, AND THE
APPLICATION OF TRANSITION BOND
PROCEEDS TO RETIRE OUTSTANDING
UTILITY DEBT, EQUITY OR BOTH,
AND TO APPROVE THE FORMULA FOR
THE CALCULATION AND ADJUSTMENT
OF THE TRANSITION BOND CHARGE
AND MARKET TRANSITION CHARGE-TAX
RELATED THERETO.
STEIN, J., concurring in part and dissenting in part.
This complex appeal primarily concerns the validity of the
final decision and Order, dated August 24, 1999 (Final Order),
issued by the Board of Public Utilities (BPU), in respect of
filings by Public Service Electric and Gas Company (PSE&G) that
relate to rate unbundling, stranded costs and corporate
restructuring. Also at issue is the validity of the BPU's
September 17, 1999 Bondable Stranded Cost Rate Order (BSCRO),
issued in response to PSE&G's petition to securitize its
recovery-eligible stranded costs. The Final Order was issued
pursuant to, and was intended to implement, the provisions of
the Electric Discount and Energy Competition Act (EDECA),
N.J.S.A. 48:3-49 to -98. That statute, which took effect in
February 1999, was enacted to authorize the BPU, to (1) “permit
competition in the electric generation and gas marketplace” and
“thereby reduce the aggregate energy rates currently paid by all
New Jersey consumers;” (2)“[p]rovide for regulation of new
market entrants in the areas of safe, adequate and proper
service and customer protection;” (3) “[r]elieve electric public
utilities from traditional utility rate regulation” for services
provided in a competitive market; (4) provide electric public
utilities “the opportunity to recover above-market power
generation and supply costs . . . associated with the
restructuring of the electric industry;” and (5) “[p]rovide [the
BPU] with ongoing oversight and regulatory authority to monitor
and review composition of the electric generation and retail
power supply marketplace in New Jersey. . . .” N.J.S.A. 48:3-
50(c).
The PSE&G filings that were the subject of the Final Order
were made in response to a report released by the BPU on April
30, 1997 entitled “Restructuring the Electric Power Industry in
New Jersey: Findings and Recommendations.” (Final Report).
The Final Report recommended, in part, that by July 2000 all of
the State's retail customers should be able to select their
electric power supplier and that rate reductions of from five to
ten percent should be implemented while retail competition was
being phased in. The BPU's order adopting the Final Report
mandated that the existing four utility monopolies, PSE&G,
Jersey Central Power & Light Company (GPU), Rockland Electric
Company (RECO), and Atlantic Electric Company (Atlantic), submit
three filings to the BPU: a rate unbundling petition, a stranded
cost petition, and a restructuring plan.
The rate unbundling petition was to address the manner in
which the single, per-kilowatt-hour charge that appears on a
customer's bill would be separated into its component parts,
including generation, transmission and distribution _ an
essential step because the Final Report contemplated that only
the generation segment of the bill would be subject to
competition. The stranded cost filings related to the
utilities' right to recover after deregulation some portion of
their overmarket (stranded) costs that would have been recovered
in rate cases if they had continued as regulated monopolies.
The issues in the stranded cost filings focused on entitlement
to stranded cost recovery and quantification of stranded costs.
The restructuring filings related to the reorganization of the
four utilities to promote competition in electricity generation,
focusing on the utilities' divestiture of generating assets and,
if such assets were transferred to unregulated affiliates as in
PSE&G's case, the valuation of such transferred assets.
Thus, the BPU's Final Order, applicable only to PSE&G as
the first of the State's utility monopolies whose filing under
EDECA has received final agency review, constitutes an agency
determination of monumental significance in the process of
restructuring and deregulating the sale of electric power in
this State. An appeal from the Final Order was taken by the
Division of the Ratepayer Advocate (RA), New Jersey Business
Users (NJBUS), a group of large industrial and commercial
customers, and Co-Steel Raritan, one of PSE&G's largest
commercial customers. On appeal, the Appellate Division, in a
thoughtful and comprehensive published opinion, affirmed the
Final Order in all respects. In re PSE&G Co.'s Rate Unbundling,
Stranded Costs and Restructuring Filings,
330 N.J. Super. 65
(App. Div. 2000). We granted the petitions for certification
filed by the RA and NJBUS, and granted in part the petition for
certification filed by Co-Steel limited to the issues concerning
rate reduction.
165 N.J. 489 (2000).
At oral argument, and in supplemental post-argument briefs
filed by the parties at the Court's request, the BPU, PSE&G, and
various intervenors that supported the Final Order, argued that
the Court should reject various discrete challenges to the Final
Order advanced by petitioners, not only because those challenges
were unmeritorious but, more importantly, because the Final
Order constituted the BPU's comprehensive and indivisible
response to PSE&G's filings, and because invalidation of any
discrete aspects of the Final Order would unbalance the BPU's
carefully and comprehensively integrated determination, require
offsetting modifications to the Final Order, delay rate
reductions, and do harm to the public interest.
The Court, by order filed December 6, 2000, has affirmed
the judgment of the Appellate Division. I write separately
because in my view three aspects of the Final Order are
seriously flawed. Moreover, I would reject the contention of
respondents and some intervenors that reversal of discrete
aspects of the Final Order is unsound because the Final Order
must stand or fall as an integrated and indivisible unit. That
approach would effectively insulate the BPU's Final Order from
judicial review and partial invalidation on the premise that,
even if aspects of the Final Order are contrary to law, the
public interest is better served by preserving an integrated
disposition with unlawful components than it would be by
invalidating the unlawful components and requiring modification
of the Final Order in conformity with applicable legal
principles. The pragmatism that inspires the argument of the
proponents of the Final Order must, in my view, yield to the
constitutional authorization of judicial review of
administrative agency determinations. N.J. Const., art. IV, §
5, ¶ 4. See Fischer v. Township of Bedminster,
5 N.J. 534, 538-
40 (1950). Clearly, our constitutional obligation of judicial
review would be disserved and frustrated if we were to ignore
illegal and invalid components of the Final Order for the
purpose of preserving the claimed practical benefits of an
integrated Final Order, notwithstanding its flaws.
I
The first issue on which I part company with the Court
concerns the calculation of the statutorily-mandated rate
reduction during the first thirty-six months following the
starting date for the implementation of retail choice pursuant
to N.J.S.A. 48:3-53(a). EDECA mandates that each electric
utility shall reduce its aggregate level of rates for each
customer class by no less than five percent during such three-
year period. The BPU's Final Order permitted PSE&G to calculate
that rate reduction from its 1999 rates, which included a 3.9%
rate increase approved in April 1998. Petitioner's contend that
the five percent rate reduction must be calculated from rates in
effect on April 30, 1997, which would require an initial rate
reduction of 8.9% from 1999 rates. NJBUS and the RA assert that
the difference between their calculation of the initial rate
reduction and the smaller rate reduction approved by the BPU's
Final Order is between $250 and $300 million, but PSE&G contends
that the difference involves approximately $160 million.
The analysis begins with the language of EDECA:
d. (1) During a term to be fixed by the
board, each electric public utility shall
reduce its aggregate level of rates for each
customer class, including any surcharges
assessed pursuant to this act, by a
percentage to be approved by the board,
which shall be at least 10 percent relative
to the aggregate level of bundled rates in
effect as of April 30, 1997, subject to the
provisions of paragraph (2) of this
subsection.
(2) The board may set a term for an electric
public utility to phase in a rate reduction
of ten percent or more during the first 36
months after the starting date for the
implementation of retail choice as provided
in subsection a. of section 5 of this act;
provided, however, that, on the starting
date for the implementation of retail choice
as provided in subsection a. of section 5 of
this act, each electric public utility shall
reduce its aggregate level of rates for each
customer class, including any surcharges
assessed pursuant to this act, by no less
than five percent.
[N.J.S.A. 48:3-52(d)
(emphasis added).]
The Board's Final Order acknowledges that because the
statutory starting date for the implementation of retail choice
is not later than August 1, 1999, see N.J.S.A. 48:3-53(a), EDECA
mandates that “each electric public utility shall reduce its
aggregate level of rates by at least 10% relative to the level
of bundled rates in effect as of April 30, 1997.” Final Report
at 92. Because PSE&G had received in 1998 a 3.9% rate increase,
the Board acknowledged that EDECA mandated that PSE&G reduce its
current rates by 13.9% as of August 1, 2002. The BPU's Final
Order noted further that the statute also mandated a five
percent rate reduction commencing August 1, 1999, but the BPU's
Order fails to state specifically whether under EDECA that
reduction, like the ten percent reduction, must also be from the
rate in effect on April 30, 1997, or whether the five percent
reduction can be from current rates, which include the 1998 3.9%
increase. Rather the BPU sidesteps the issue by making a
finding that the rate reductions proposed in the Stipulation
offered by PSE&G are adequate and, as that Stipulation reveals,
the proposed five percent reduction is from current rates. In
my view both the statute and its legislative history clearly
indicate that the five percent reduction should be calculated
from the rates in effect on April 30, 1997.
In view of the BPU's lead role in the drafting of EDECA,
for the Board to fail to justify its strained construction of
the statute it helped to draft, and resort instead to reliance
on PSE&G's stipulation, simply strains credulity. Nevertheless,
the Appellate Division sustained the BPU's determination, noting
that “[c]ommon sense leads to the conclusion that the BPU's
schedule of rate reductions is a reasonable interpretation of
the statute.” In re PSE&G, supra, 330 N.J. Super. at 103. That
court also noted that under the BPU's Order the full 13.9%
reduction must be in place by August 1, 2002, whereas the RA's
reading of the statute would mandate an 8.9% reduction by August
1, 1999, with the additional five percent reduction implemented
over the next three years.
The RA and NJBUS argue persuasively that the BPU ignores
overwhelming evidence demonstrating that its approval of PSE&G's
formulation of the initial five percent rate reduction is
contradicted by the BPU's own public positions on the issue.
For example, the BPU's Final Report, issued April 30, 1997,
contained this statement about the calculation of rate
reductions:
However, we believe that the introduction of
a near term rate reduction on the order of
5-10%, concurrent with the unbundling of
rates and the introduction of retail
customer choice in conjunction with
securitization, is an appropriate goal.
In response to concerns that these
targeted rate reductions may be eroded by
subsequent upward rate adjustments between
now and the date of retail competition, we
emphasize that the targeted rate reductions
must be in comparison to the current level
of rates as of the date of his report.
[(Emphasis added).]
Moreover, when the BPU approved in April 1998 PSE&G's 3.9%
Demand Side Management (DSM) increase, its own Order approving
that increase confirmed that the increase would not erode rate
reductions required by EDECA. That Order stated:
The Board notes its intent that
regardless of the ultimate allocation of
costs to the various rate components, rate
reductions will be calculated based on a
comparison of the aggregate level of bundled
rates in effect in April 1997 to the new
aggregate level of rates.
[I/M/O the Motion of Public
Service Electric and Gas Company
to Increase the Level of the
Electric Demand Side Adjustment
Factor, BPU Docket No. ER 97-
020101, (April 1, 1998) at 12-13.]
I also note that when the RA appealed to the Appellate
Division the BPU's Order granting PSE&G its 3.9% rate increase,
the BPU's Appellate Division brief asserted on page 17: “The
Board's approval of this single item rate increase is not to
affect its requirement that, as part of restructuring, PSE&G's
5% to 10% rate reduction will be in comparison to its April 30,
1997 rates, that is, prior to the demand side adjustment factor
increase.”
I also believe the statute is crystal clear. Section d(1)
of N.J.S.A. 48:3-52 requires a ten percent rate reduction by
August 1, 2002 from rates as of April 30, 1997. Section d(2)
modifies d(1) to permit the ten percent rate reduction to be
phased in over three years from August 1, 1999, provided that a
five percent rate reduction is implemented immediately. That
reading of the statute is confirmed by the Assembly and State
Legislative Fiscal Estimate that states: “These estimates
assume that the rate discount is applied to the total electric
rate using April of 1997 as the basic date.”
PSE&G contends that if the Court were to order a
retroactive rate adjustment, the BPU would be obligated to
consider reducing the shopping credit and restructuring PSE&G's
stranded cost recovery. I find no support in EDECA for the
contention that shopping credits, stranded cost recovery, and
the statutorily mandated rate reduction necessarily are
interdependent. Moreover, by urging the BPU to adopt
Stipulation I that provided that the initial five percent rate
reduction was from current rates, PSE&G clearly understood and
assumed the risk that a reviewing court would reject that
interpretation of the statute.
Because the BPU's Final Order unlawfully allows PSE&G to
implement the initial mandatory five percent reduction from
current rates, rather than from the rates in effect on April 30,
1997, I would remand the matter to the BPU to order a
retroactive adjustment of PSE&G's initial rate reduction to
conform to the clear requirements of EDECA.
II
I also disagree strongly with the Court's affirmance of the
Appellate Division's determination, In re PSE&G, supra, 330 N.J.
Super. at 138, that the BPU's approval in the Final Order of the
accelerated amortization over forty-three months of PSE&G's
excess depreciation reserve fund “was within its discretion and
did not violate the Act.”
PSE&G's $568.7 million-dollar excess-depreciation reserve
fund resulted directly from PSE&G's proposal to the BPU, at the
outset of the stranded cost proceedings, to change the average
life used to establish depreciation rates for PSE&G's
distribution plant investment from twenty-eight years to forty-
five years. That proposal was supported by the testimony of
Robert C. Krueger, Jr., Director-Tax Services of PSE&G, who
justified the change solely on the basis that a forty-five year
life for the distribution plant was consistent with data
presented in PSE&G's last depreciation rate proceeding. Mr.
Krueger explained that by lengthening the useful life of PSE&G's
distribution plant assets from twenty-eight to forty-five years,
a substantial excess depreciation reserve would accrue on
PSE&G's balance sheet to account for the fact that its
distribution plant assets had been depreciated too quickly (over
twenty-eight rather than forty-five years). In his testimony
Mr. Krueger estimated the amount of that reserve to be $433
million dollars as of December 31, 1996.
Mr. Krueger also testified that
[t]here are two ways to address this over
accrual. The first is to utilize it in the
calculation of the new depreciation rate
which would reduce the rate for the
remaining [useful life of the plant assets].
The second would be to amortize it over a
shorter period of time maintaining the
depreciation rate at a higher level.
Krueger proposed to the BPU that the excess depreciation reserve
be amortized over seven years.
In its Final Order, however, the BPU approved the proposal
in PSE&G's stipulation to amortize the $568.7 million excess
depreciation reserve over three years and seven months,
beginning January 1, 2000 and ending July 31, 2003. The BPU
established amortization amounts of $125 million dollars in
years 2000 and 2001, $135 million in 2002, and $183.7 in 2003,
and acknowledged in the Final Order that those amortization
amounts were to be used by PSE&G to partially fund its rate
reductions and stranded cost recovery. PSE&G acknowledges that
the amortization amounts would be recorded by PSE&G as credits
against expenses (cost-reductions), resulting in increased
income available to PSE&G during the transition period to absorb
a substantial portion of the impact of the rate reductions
mandated by EDECA. In fact, NJBUS asserts that of the $1.294
billion rate reduction ordered by the BPU, approximately forty-
four percent would be funded by the excess-depreciation reserve
fund created by excess depreciation charges previously imposed
on ratepayers. PSE&G responds that, giving effect to related
tax liabilities and other factors, the actual amount of the
depreciation reserve available for rate reductions or stranded
cost recovery is $380 million.
Petitioners contend that the overly-generous amortization
of PSE&G's excess depreciation reserve has the effect of
creating an available source of funds, generated by excess
depreciation charges to ratepayers over prior years, that PSE&G
can use to finance the rate reductions that the Legislature
contemplated would result in a reduction of the company's
profits. Petitioners rely on section 4 of EDECA, N.J.S.A. 48:3-
52(f), that provides:
f. The board shall determine,
consistent with the provisions of this act,
the manner in which to apply the rate
reductions established pursuant to
subsections d. and e. of this section among
some or all of the unbundled rate
components, including the distribution and
transmission charges and market transition
charges, in order to provide for a
sustainable aggregate rate reduction for
customers and to encourage a competitive
retail supply marketplace.
Petitioners argue that that subsection of EDECA specifically
contemplates not only that the rate reduction shall be allocated
among PSE&G's distribution, transmission and market transition
changes, but that the Act's reference to “a sustainable
aggregate rate reduction for customers” clearly is inconsistent
with the BPU's decision to allow PSE&G to fund a substantial
portion of the statutory rate reduction with a one-time, non-
recurring excess depreciation reserve fund.
Moreover, petitioners note that pursuant to sections 13 and
14 of EDECA, N.J.S.A. 48:3-61 and -62, electric utilities are
authorized to recover that portion of their stranded costs not
securitized by the issuance of t