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NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
A-3401-93T1
IN THE MATTER OF THE
PETITION OF VALLEY ROAD
SEWERAGE COMPANY FOR APPROVAL
OF AN INCREASE IN ITS RATES
FOR SEWER SERVICE
_______________________________
Argued October 17, 1995 - Decided November 3, 1995
Before Judges Baime, Villanueva and Kimmelman.
On appeal from the Board of Regulatory
Commissioners.
Michael E. Rodgers argued the cause for appellant
Valley Road Sewerage Company (Pinto, Rodgers &
Kopf, attorneys; Mr. Rodgers, on the brief).
Sarah H. Steindel, Deputy Attorney General,
argued the cause for respondent New Jersey
Board of Public Utilities (Deborah T. Poritz,
Attorney General, attorney; Andrea M. Silkowitz,
Assistant Attorney General, and Elise W. Goldblat,
Deputy Attorney General, of counsel; Ms. Steindel,
on the brief).
Frank N. Yurasko argued the cause for respondent
Township of Hillsborough (Mr. Yurasko, on the brief).
Menasha J. Tausner, Deputy Public Advocate,
argued the cause for respondent Division of
Ratepayer Advocate (Frances I. Sundheim, Acting
Director, attorney; Ms. Tausner, on the brief).
The opinion of the court was delivered by
BAIME, J.A.D.
This appeal presents questions of public concern. At issue
is whether the Board of Regulatory Commissioners (now the Board
of Public Utilities) (Board) may deny or curtail rate relief to a
public utility based upon that utility's failure to furnish
adequate service. We hold that the Board may deny a rate
increase because of a utility's poor performance over an extended
period of time notwithstanding the fact that operating losses
will inevitably follow from the denial.
I.
The salient facts are not in dispute. Valley Road Sewerage
Company (Valley) applied to the Board for a rate increase on
August 21, 1992. The matter was referred to the Office of
Administrative Law as a contested case. Following lengthy
hearings, the administrative law judge issued an initial decision
in which he recommended denying Valley's application. Citing
years of financial mismanagement, the judge concluded that the
company's present management could not be relied upon to apply
the requested additional revenues to the problems besetting the
company. The Board adopted the judge's findings and denied
Valley's request for rate relief pending hearings concerning
whether the company's operating authority should be revoked. The
Board additionally directed that the docket "remain open in the
event that future circumstances render rate relief feasible."
Valley appealed the Board's order. While this appeal was
pending, the Board conducted hearings and ultimately directed the
filing of a complaint in the Chancery Division for the
appointment of a receiver to manage the company's day-to-day
operations and eventually sell it to a qualified entity. For the
reasons set forth in its letter opinion dated April 18, 1995, the
Chancery Division ordered the appointment of Robert G. Goode as
receiver with full authority over the company's assets and
operations. The court directed the receiver to solicit offers
from qualified buyers interested in acquiring Valley. We are
told that Valley has filed separate appeals from the Board's
revocation decision and the Chancery Division's judgment.
The sole issue in the present appeal is whether the Board
violated Valley's constitutional and statutory rights by denying
rate relief. The company was established in the early 1960's by
Richard Schindelar, who remains the sole shareholder. Valley
provides sewage collection and treatment services to customers in
Hillsborough and Tewksbury Townships. A small segment of its
customers are served by a treatment plant in Tewksbury known as
the Pottersville plant. The remaining customers are served by
two treatment plants in Hillsborough, namely the River Road and
Fieldhedge Drive plants.
The company's financial condition has long been precarious.
Valley has never reported a profit. Its financial statements
disclose negative retained earnings approaching two million
dollars. Its liabilities include over $400,000 in overdue gross
receipts and franchise taxes owed to the State. This liability
is the result of Valley's acknowledged failure to pay this tax
since the State began collecting it in 1980. Additional taxes
are owed to various municipalities.
Valley also has an appalling record of environmental
violations. The record reveals chronic problems with
"infiltration and inflow" of excessive amounts of extraneous
water, such as groundwater and sump pump discharge, into its
sewage collection system. Despite numerous skirmishes with the
Department of Environmental Protection (DEP), penalty assessments
continue to be imposed at an alarming rate. In 1985, Valley
entered into an administrative consent order with the DEP in
which it agreed to pay over $12,000 in penalties for numerous
violations at the company's River Road and Fieldhedge Drive
plants. Valley also agreed to undertake remedial measures,
including the hiring of a full-time operator for the two plants
and the retention of an independent contractor to reduce the
company's infiltration and inflow problem. Only parts of this
remediation plan were actually implemented.
In 1992, the DEP assessed Valley approximately $660,000 in
penalties for violations of effluent limits and other conditions
of the company's pollution discharge permit. Although the DEP
subsequently agreed to reduce these penalties if Valley's
infiltration and inflow problems were eradicated, no evidence was
presented that the company ever submitted the required plan to
the DEP.
In addition, Valley's permit for its Fieldhedge Drive plant
was conditioned upon the plant's ceasing operations no later than
November 1, 1987, by interconnecting with the Hillsborough
Township Municipal Utilities Authority system pursuant to a bulk
customer agreement. However, no interconnection has taken place
because Valley failed to reduce its infiltration and inflow to
the levels required by the bulk customer agreement.
Valley contends that its failure to resolve these
environmental problems was the result of its inability to obtain
sufficient revenues. However, the record reflects that Valley
filed for rate increases twice before the present application,
and that it received substantial increases on both occasions.
Nevertheless, the company's financial condition has continued to
deteriorate.
It would be superfluous to recite in detail the other
evidence in the record disclosing Valley's inertia. Suffice it
to say, the administrative law judge characterized Valley's
decline, especially its failure to pay overdue taxes, as the
"most egregious example[] of corporate mismanagement [he] had
[ever] witnessed." The judge concluded that "the existing
management of the Valley Road Sewer Company ha[d] failed over the
past twenty years" to provide "safe, adequate and proper service
to its customers." As we noted earlier, the Board adopted these
findings and directed that hearings be conducted to consider
whether Valley's operating authority should be revoked. We
merely add that the findings made by the administrative law judge
and the Board are supported by substantial, credible evidence
present in the record. See Mayflower Securities Co. v. Bureau of
Securities,
64 N.J. 85, 92-93 (1973); Close v. Kordulak Bros.,
44 N.J. 589, 599 (1965); State v. Johnson,
42 N.J. 146, 161-62
(1964). Indeed, the hearing transcripts fairly reek of chronic
corporate mismanagement resulting in the company's abysmal
failure to furnish adequate service to its customers.
It is against this factual backdrop that we examine Valley's
claim that the Board's action denied it a reasonable rate of
return.
II.
A public utility has the constitutional and statutory right
to a reasonable rate of return. N.J.S.A. 48:2-21(b); In re
Intrastate Industrial Sand Rates,
66 N.J. 12, 23-24 (1974); see
also FPC v. Texas, Inc.,
417 U.S. 380, 391-92,
94 S.Ct. 2315,
2323-34,
41 L.Ed.2d 141, 153 (1974); Permian Basin Area Rate
Cases,
390 U.S. 747, 769-70,
88 S.Ct. 1344, 1361,
20 L.Ed.2d 312,
337-38 (1968); FPC v. Natural Gas Pipeline Co.,,
315 U.S. 575,
585,
62 S.Ct. 736, 742-43,
86 L.Ed. 1037, 1049 (1942); Denver
Union Stockyard Co. v. United States,
304 U.S. 470, 475,
58 S.Ct. 990, 994,
82 L.Ed. 1469, 1475 (1938). A governmentally-fixed
rate confining a public utility's return from operations to an
amount below the point of confiscation violates due process.
Denver Union Stockyard Co. v. United States, 304 U.S. at 475, 58
S.Ct. at 994, 82 L.Ed. at 1475; United Rys. & Elec. Co. v. West,
280 U.S. 234, 249,
50 S.Ct. 123, 125,
74 L.Ed. 390, 408 (1930).
The term "reasonable" is hardly more precise than its antonym,
"confiscatory." Although no single formulation has achieved
universal acceptance, we have said that to pass constitutional
muster the rate must be sufficient to provide for the company's
financial security, attract necessary capital, and yield a
reasonable return on investment. New Jersey Bell Telephone Co.
v. State,
162 N.J. Super. 60, 73-74 (App. Div. 1978).
Determination of what is "reasonable" involves evaluation not
only of the interests of the investor but also those of the
consumer and the general public sought to be advanced by the
regulatory legislation. Hutton Pk. Gardens v. West Orange Town
Council,
68 N.J. 543, 570 (1975). The point we stress here is
that rate levels are not offensive to constitutional and
statutory standards merely because they fix returns at a lower
scale for inefficient operators. Ibid.
Our present inquiry is whether an established inferiority in
the service provided by the utility makes a difference in
applying the constitutional and statutory precepts. We are
convinced that it should. Price and performance are inextricably
intertwined. "[T]he caliber of a utility's service need not
remain a neutral factor" in deciding what is a reasonable rate of
return. D.C. Transit Sys. v. Washington Met. Area Transit
Comm'n,
466 F.2d 394, 419 (D.C. Cir.), cert. denied,
409 U.S. 1086,
96 S.Ct. 688,
34 L.Ed.2d 673 (1972). Neither the
constitution nor our statutes require the public "to pay for the
consequences of lazy or inefficient management." In re Board's
Investigation of Tele. Cos.,
66 N.J. 476, 502-03 (1975).
Superior service commands a higher rate of return as a reward for
managerial efficiency, but inferior service deserves less return
than normally would be forthcoming. D.C. Transit Sys. v.
Washington Met. Area Transit Comm'n, 466 F.
2d at 419. The public
is entitled to demand that no more money be extracted from it
than the services rendered by the utility are reasonably worth.
See Smyth v. Ames,
169 U.S. 466, 547,
18 S.Ct. 418, 434,
42 L.Ed. 819, 849, aff'd as modified,
171 U.S. 361,
19 S.Ct. 888,
43 L.Ed. 197 (1898).
We believe that the obligations of the utility and the
consumer are interrelated and reciprocal. The utility's
responsibility is to "furnish safe, adequate and proper service."
N.J.S.A. 48:2-23. The consumer is obliged to pay this service's
reasonable worth. But "[g]ood company management is required;
honest stewardship is demanded; [and] diligence is expected." In
re Board's Investigation of Tele. Cos., 66 N.J. at 495.
We are also satisfied that the Board has both the authority
and the duty to assure that this reciprocity is maintained. The
Board has been vested by the Legislature with "general
supervision and regulation of and jurisdiction and control over
all public utilities" to the extent necessary for fulfilling its
statutory mission. N.J.S.A. 48:2-13. Our Supreme Court has
characterized this authority as a "sweeping" grant of
jurisdiction, In re Public Service Electric & Gas Co.,
35 N.J. 358, 371 (1961), "intended to delegate the widest range of
regulatory power over public utilities . . . ." Tp. of Deptford
v. Woodbury Terrace Sewerage Corp.,
54 N.J. 418, 424 (1969). The
Board's charge extends to the caliber of the utility's operation
and service as well as to the financial reasonableness of the
rates it charges.
Stripped to its essentials, Valley's argument is that its
revenues cannot be permitted to fall below the level of fair
return no matter what the circumstances, even if its management
is uneconomical and inefficient and its service inadequate. D.C.
Transit Sys. v. Washington Met. Area Transit Comm'n, 466 F.
2d at
422. We recognize that the policy of the law is to aid utilities
to properly function. City of Elizabeth v. Public Utility
Comm'rs,
99 N.J.L. 496, 498 (E. & A. 1924). We also acknowledge
that "[a] starved utility is in no better position to render
proper service than a starved horse or a motor car without fuel."
Ibid. Nevertheless, if Valley is correct, then it may disregard
its public responsibilities at will, yet insist the public pay
ever-increasing rates for substandard service. Neither the
constitution, nor our statutes, nor common sense require such a
result.
Some thirty-six years ago, Judge Goldmann, writing for this
court, suggested that denying a rate increase might serve as "the
most practical method" of compelling a utility to remedy a
longstanding deficiency. Tp. Committee of Lakewood Tp. v.
Lakewood Water Co.,
54 N.J. Super. 371, 381 (App. Div. 1959). He
went on to note that denial of rate relief should not be employed
where the deficiency in service was "due to the company's need
for additional revenues for capital expenditures" and where
static rates would cause "further deterioration in service."
Ibid. In that context, we do not doubt that Valley's plants are
sorely in need of capital improvement. However, the
administrative law judge and the Board viewed Valley's management
as so incompetent and inefficient that it could not be relied
upon to undertake and implement the necessary changes even if
additional revenues were guaranteed. In light of this finding,
which is amply supported by the record, we are satisfied that the
course chosen by the Board was eminently reasonable.
Finally, we reject Valley's claim that it was denied
procedural due process because no prior order had been issued by
the Board compelling the company to improve service. Ratemaking
necessarily encompasses an examination and evaluation of the
economy and efficiency of the public utility's operations, the
adequacy of its service, and the competency of its management.
It is disingenuous for Valley to suggest that it lacked notice of
the scope of the Board's inquiry.
The remedy selected by the Board was within its
discretionary power. We discern no violation of Valley's
constitutional or statutory rights.
Affirmed.
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