IN THE MATTER OF THE BOARD'S REVIEW OF THE APPLICABILITY AND CALCULATION OF A CONSOLIDATED TAX ADJUSTMENT (NEW JERSEY BOARD OF PUBLIC UTILITIES)

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court."
Although it is posted on the internet, this opinion is binding only on the
parties in the case and its use in other cases is limited. R.1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-1153-14T1
IN THE MATTER OF THE BOARD'S
REVIEW OF THE APPLICABILITY
AND CALCULATION OF A
CONSOLIDATED TAX ADJUSTMENT.
_____________________________
Argued October 25, 2016 – Decided September 18, 2017
Before Judges Fisher, Ostrer and Vernoia.
On appeal from the New Jersey Board of Public
Utilities, Docket No. EO12121072.
Diane Schulze argued the cause for appellant
Division of Rate Counsel (Stefanie A. Brand,
Director, attorney; Ms. Schulze and Christine
M. Juarez, on the briefs).
Carolyn A. McIntosh, Deputy Attorney General,
argued the cause for respondent New Jersey
Board of Public Utilities (Christopher S.
Porrino, Attorney General, attorney; Andrea M.
Silkowitz, Assistant Attorney General, of
counsel; Ms. McIntosh, on the brief).
Stephen B. Genzer argued the cause for
respondent Aqua New Jersey, Inc., and United
Water New Jersey, Inc. (Saul Ewing LLP,
attorneys; Mr. Genzer, on the brief).
Lawrence S. Lustberg argued the cause for
respondent Atlantic City Electric Company
(Gibbons PC, attorneys; Mr. Lustberg and
Amanda B. Protess, on the briefs).
Gregory Eisenstark argued the cause for
respondent Jersey Central Power & Light
Company (Windels Marx Lane & Mittendorf, LLP,
attorneys; Mr. Eisenstark, on the brief).
Ira Megdal argued the cause for respondent New
Jersey-American Water Company, Inc. (Cozen
O'Connor, PC, attorneys; Mr. Megdal and Mark
Lazaroff, on the brief).
James C. Meyer argued the cause for respondent
New Jersey Utilities Association (Riker Danzig
Scherer Hyland & Perretti, LLP, attorneys; Mr.
Meyer, of counsel and on the brief; Diane N.
Hickey, on the brief).
Fox Rothschild LLP, attorneys for respondent
New Jersey Large Energy Users Coalition
(Steven S. Goldenberg, of counsel and on the
brief).
Cullen and Dykman LLP, attorneys for
respondent Pivotal Utility Holdings, Inc.,
(Kenneth T. Maloney, on the brief).
Janine G. Bauer argued the cause for amicus
curiae AARP (Szaferman, Lakind, Blumstein &
Blader, PC, attorneys; Ms. Bauer, on the
brief).
PER CURIAM
The Director of the Division of Rate Counsel appeals the
Board of Public Utilities' final order revising its policy for
calculating the consolidated tax saving adjustment (CTA) the Board
utilizes in part to determine just and reasonable utility rates.
2 A-1153-14T1
Rate Counsel and other interested parties1 argue the revised CTA
is not supported by adequate findings of fact, is not founded on
sufficient evidence in the record, and constitutes a rule that was
not enacted in accordance with the Administrative Procedure Act
(APA), N.J.S.A. 52:14B-1 to -15, and due process requirements. The
Board, and respondents, the New Jersey Utilities Authority and
various utility companies2 contend the Board's adoption of the
revised CTA did not constitute rulemaking requiring compliance
with the APA, is supported by the evidentiary record, and
constitutes a proper exercise of the Board's discretion. Because
we conclude the Board's adoption of the CTA constitutes rulemaking
and the Board failed to comply with the APA's requirements, we
reverse.
I.
The Board is charged with supervising and regulating public
utility companies, N.J.S.A. 48:2-13(a), and setting "just and
reasonable" rates for those utilities, N.J.S.A. 48:2-21(b)(1).
1
Respondent New Jersey Large Energy Users Coalition and amicus
American Association of Retired People (AARP) filed briefs
supporting Rate Counsel's appeal. The Coalition participated in
the proceeding before the Board. We granted AARP leave to
participate in the appeal as amicus curiae.
2
The respondent utility companies are Aqua New Jersey Inc., United
Water New Jersey Inc., Atlantic City Electric Company, Jersey
Central Power & Light Company, American Water Company, Inc., and
Pivotal Utility Holdings, Inc.
3 A-1153-14T1
The Division of Rate Counsel is a quasi-independent agency
authorized by statute to represent the interests of utility
ratepayers in rate-setting matters before the Board. N.J.S.A.
52:27EE-48(a); I/M/O Provision of Basic Generation Serv., 205 N.J.
339, 360 (2011).
To obtain an increase in utility rates, a utility company
must petition the Board and prove that an increase is just and
reasonable. N.J.S.A. 48:2-21(d). To sustain its burden of proof,
a utility must establish "(1) the value of its property or the
rate base, (2) the amount of its expenses, including operations,
income taxes, and depreciation, and (3) a fair rate of return to
investors." In re N.J. Am. Water Co., 169 N.J. 181, 188 (2001).
A company's "rate base" is "the fair value of the property
of the public utility that is used and useful in [providing the
regulated] public service." In re Petition of Pub. Serv.
Coordinated Transport, 5 N.J. 196, 217 (1950). Reasonable rates
for the service are generally set at an amount meant to "cover the
utilities' expenses plus a return on the shareholders'
investment," that is, an amount that permits "the public utility
to earn a fair return on its rate base." Penpac, Inc. v. Passaic
Cty. Utils. Auth., 367 N.J. Super. 487, 506 (App. Div.), certif.
denied, 180 N.J. 457 (2004).
In an assessment of a utility's claimed expenses, a reasonable
4 A-1153-14T1
rate shall be based only on "actual operating expenses . . . , and
not for hypothetical expenses which did not and foreseeably will
not occur." In re N.J. Power & Light Co., 9 N.J. 498, 528 (1952).
The calculation of a utility company's tax expenses for use in the
determination of its rate base is controlled "only by [its] real
tax" expense, "rather than that which is purely hypothetical."
Lambertville Water Co. v. N.J. Bd. of Public Util. Comm'rs, 153
N.J. Super. 24, 28 (App. Div. 1977), rev'd in part on other
grounds, 79 N.J. 449, 458 (1979).
The Board has used a CTA to calculate the real tax expenses
of utility companies whose federal tax returns are filed as part
of the consolidated tax returns of their parent companies. The
filing of a consolidated tax return permits the parent to offset
the tax liability resulting from the profits of one or more of its
affiliates against the losses of other affiliates. This reduces
the tax obligations of each member of the group and saves each
member a portion of the tax obligation they would have incurred
if they filed their returns separately. Our Supreme Court has made
clear that ratepayers must share in the resulting benefit to the
utility. N.J. Power & Light Co., supra, 9 N.J. at 528. Otherwise,
ratepayers would pay a utility's hypothetical and not real tax
expenses. Ibid.The Board has "the power and function to take into
5 A-1153-14T1
consideration the tax savings flowing from the filing of [a]
consolidated return and determin[e] what proportion of the
consolidated tax is reasonably attributable to" the utility.
Lambertville Water Co., supra, 153 N.J. Super. at 28. The Board
is not bound by any particular methodology and may exercise its
sound discretion to determine and make appropriate adjustments for
a company's actual tax liability and thus ensure the reasonableness
of the resultant rates. In re Revision of Rates Filed by Toms
River Water Co., 158 N.J. Super. 57, 60-61 (App. Div. 1978), rev'd
on other grounds, 82 N.J. 201 (1980). The Board has exercised its
authority by using the CTA as the means to share with the company's
ratepayers the benefits of the tax savings resulting from the
consolidated tax filings.
The CTA Methodology
Prior to the Board's order challenged on appeal, the Board
used what has been characterized as "the Rockland methodology"3 to
determine the CTA. Under the Rockland methodology, calculation of
the CTA first requires a determination of the net taxable gains
3
The Rockland methodology was developed in a series of rate cases
culminating in I/M/O The Verified Petition Of Rockland Electric
Company, BPU Docket No. ER02100724 (Apr. 20, 2004) (slip op. at
62-64); see also In re Petition of Jersey Cent. Power & Light Co.,
BRC Docket No. ER91121820J (June 15, 1993) (slip op. at 8); In re
Petition of Atlantic City Elec. Co., BRC Docket No. ER90091090J
(Oct. 20, 1992) (slip op. at 6).
6 A-1153-14T1
and losses of all of the companies on the consolidated federal tax
return for each year during a review period which begins in 1991
and ends in the most recent tax year. The companies that
experienced net taxable gains are grouped together and their net
taxable gains are aggregated. The companies that experienced net
taxable losses are grouped together and their net taxable losses
are aggregated. The aggregated losses are then multiplied by the
applicable federal income tax rate to determine the group's
consolidated tax benefit. The amount of the consolidated tax
benefit is then allocated proportionately to the companies that
experienced net taxable gains based on their proportionate share
of the total aggregated gains.
If application of the Rockland methodology establishes that
a New Jersey utility experienced net taxable gains during the
review period, its proportionate share of the consolidated tax
benefit constitutes its CTA. The amount of the CTA affects the
utility's rate base because the larger the tax savings adjustment
under the CTA, the greater the reduction in the utility's rate
base.4
4
The CTA does not result in a dollar-for-dollar reduction in the
utility's tax expenses that are used to calculate the rate base.
The CTA tax savings are treated as a loan from ratepayers, whose
payments contributed to the profits that would otherwise have been
taxed if not for the consolidated filing. Jersey Cent. Power &
7 A-1153-14T1
The Board Modifies the Rockland Methodology
In January 2013, the Board approved an order opening a generic
proceeding to review the CTA. The Board noted that its current CTA
methodology had been used for approximately twenty years and that
federal tax laws and many of the companies' corporate structures
had changed. The Board sought "input from stakeholders, including
the utilities, customers, and . . . Rate Counsel" to determine the
Board's use of the CTA, the calculation of tax savings from the
filing of consolidated returns, the manner in which the savings
should be shared with the utility companies and ratepayers, and
if a rulemaking proceeding should be initiated. The order was
posted to the Board's website and circulated to those on its
generic stakeholder service list.
In March 2013, the Board posted an official Notice of
Opportunity to Comment on its website and circulated it to
stakeholders on its service list. The notice requested comments
concerning the CTA and responses to requests for information about
the stakeholders' respective positions on whether a CTA should be
Light Co., supra, slip op. at 8. The parent company gains use of
those profits earlier than it otherwise would have, and the CTA,
in turn, compensates ratepayers for the time-value of their money
by adjusting the company's rate base in an amount intended to
prospectively credit ratepayers for the carrying costs of the
loan. Petition of Atlantic City Elec. Co., supra, slip op. at 6.
8 A-1153-14T1
utilized and what changes should be made to the CTA. The Board
requested that the utility companies calculate their current CTA
using the Rockland methodology and include, if applicable, the CTA
included in the company's last rate base case. The notice advised
that following the Board's review of the responses, it would
announce a schedule of hearings to provide all interested parties
with the opportunity to provide testimony on CTA issues.
The New Jersey Utilities Authority (NJUA) submitted comments
on behalf of its members and various utility companies also
submitted written comments. They advocated for the abolition of
the CTA, arguing that the adjustment had become arbitrary due to
an ever-expanding review period that used 1991 as its fixed
starting point, and due to the CTA calculation's inclusion of
companies that no longer participated in the consolidated income
tax filings. They also asserted that application of the CTA
adversely affected the utility companies' ability to attract
capital and other investments necessary to ensure the safe and
efficient provision of their regulated services.
The utility companies and the NJUA further noted that the
relatively small CTAs that resulted from application of the
methodology when it was first implemented had been replaced by a
CTA that in one case was more than forty times higher. They urged
the elimination of the CTA and argued that if the Board continued
9 A-1153-14T1
its use, the review period should be reduced to as few as three
years, electric company transmission assets and other operations
should be removed from the analysis because they are not regulated
by the Board, and companies that have been divested, dissolved,
or are otherwise inactive should be excluded from the calculation.
Rate Counsel also submitted comments acknowledging that the
length of the review period could result in inappropriately large
adjustments and that changes in the tax code during the twenty
years since the adoption of the methodology might impact the
propriety of the calculation. Rate Counsel recommended that the
CTA be reevaluated and adjusted based on utility specific data in
fourteen different areas. Rate Counsel also urged that adoption
of a revised CTA be completed through formal rulemaking.
In July 2013, the Board issued a Notice of Opportunity to
Provide Additional Information, requesting that the utility
companies provide data in each of the fourteen areas suggested by
Rate Counsel. The notice further advised that following its review
of the requested data, the Board would schedule a hearing to
provide interested parties with an opportunity to testify
concerning the CTA.
In November 2013, the Board issued a letter request for data
concerning the taxable gains and losses for the utility companies
and their affiliates for each calendar year from 1991 through
10 A-1153-14T1
2012, and similar information from electric and gas companies
broken down into gains and losses attributable to their separate
electric and gas operations.
Based on the information and comments received during the
process, at the Board's June 2014 meeting its staff recommended
the retention of the Rockland methodology for calculation of the
CTA with the following three revisions: (a) reduction of the review
period to a fixed span of five calendar years; (b) an allocation
of the benefits of consolidated tax savings with the utility
company receiving seventy-five percent of the savings and the
ratepayers receiving twenty-five percent; and (3) the exclusion
of electric company transmission assets from the CTA calculation.
The Board published notice of the proposed policy on its website
and in the New Jersey Register, 46 N.J.R. 1657(a) (July 7, 2014),
and distributed the notice to its service list, advising that
public comments would be received until August 18, 2014.
The NJUA, the utility companies, Rate Counsel and the New
Jersey Large Energy Users Coalition submitted comments. At its
October 2014 meeting, the Board considered the recommended
revisions and issued a final decision adopting them. The Board
ordered that the CTA Rockland methodology would remain in effect
with the following modifications:
11 A-1153-14T1
1. The review period for the calculation shall
be for five calendar years including any
complete year that is included in the test
year.
2. The [CTA] based on that review period shall
be allocated so that the revenue requirement
of the company is reduced by 25% of the
adjustment; and
3. Transmission assets of the [electric
distribution companies] would not be included
in the calculation of the CTA.
The Board further ordered that the modified CTA would be utilized
in all pending and future rate cases. The Board permitted the
reopening of cases to permit recalculation of the CTA where the
record was closed but the Board had not yet rendered a final
decision. The Board's decision and order was entered on October
22, 2014. Corrective orders were entered on November 3, 2014 and
again on December 17, 2014. Rate Counsel appealed.
II.
Rate Counsel, the Coalition and amicus AARP assert that the
Board's decision and order must be reversed because the Board was
obligated to promulgate the CTA modifications through formal
rulemaking in accordance with the APA. N.J.S.A. 52:14B-4. They
contend the Board's order establishes a uniform policy defining
the CTA methodology and, therefore, it establishes a rule that can
only be adopted in accordance with the APA. In its decision, the
Board found that rulemaking was not required because it had
12 A-1153-14T1
"flexibility to determine how to proceed in matters presented to
it, and [could] use its discretion to choose the most appropriate
manner, including by contested case, rulemaking or informal
process, based on the issues raised and the potential effects of
the resolution." The Board, the NJUA and the utility companies do
not dispute that the Board did not comply with the APA's procedures
for rulemaking, but they contend rulemaking was not required
because the CTA does not establish the rates, and application of
the CTA can be adjusted in rate cases to ensure that the Board
fulfills its obligation to set fair and reasonable rates. See
N.J.S.A. 48:2-21(b)(1).
"Administrative agencies possess wide latitude in selecting
the appropriate procedures to effectuate their regulatory duties
and statutory goals." In re Auth. For Freshwater Wetlands Statewide
Gen. Permit 6, Special Activity Transition Area Waiver For
Stormwater Mgmt., Water Quality Certification, 433 N.J. Super.
385, 413 (App. Div. 2013); accord In re Request for Solid Waste
Util. Customer Lists, 106 N.J. 508, 519 (1987). "[A]gencies enjoy
great leeway when selecting among rulemaking procedures, contested
hearings, or hybrid informal methods in order to fulfill their
statutory mandates." Provision of Basic Generation Serv., supra,205 N.J. at 347. However, "[a]n agency's ability to select
procedures it deems appropriate is limited by 'the strictures of
13 A-1153-14T1
due process and of the [APA].'" In re Consider Distrib. of Casino
Simulcasting Special Fund, 398 N.J. Super. 7, 16 (App. Div. 2008)
(quoting Request for Solid Waste Util. Customer Lists, supra, 106
N.J. at 519).
An agency's "discretion to act formally or informally is not
absolute." In re N.J.A.C. 7:1B-1.1 Et Seq., 431 N.J. Super. 100,
133 (App. Div.), certif. denied, 216 N.J. 8 (2013). "If an agency
determination or action constitutes an 'administrative rule,' then
its validity requires compliance with the specific procedures of
the APA that control the promulgation of rules." Auth. For
Freshwater Wetlands Statewide Gen. Permit 6, supra, 433 N.J. Super.
at 413 (quoting Airwork Serv. Div. v. Div. of Taxation, 97 N.J.
290, 300 (1984), cert. denied, 471 U.S. 1127, 105 S. Ct. 2662, 86
L. Ed. 2d 278 (1985)); accord Provision of Basic Generation Serv.,
supra, 205 N.J. at 347.
"Agencies should act through rulemaking procedures when the
action is intended to have a 'widespread, continuing, and
prospective effect,' deals with policy issues, materially changes
existing laws, or when the action will benefit from rulemaking's
flexible fact-finding procedures." Provision of Basic Generation
Serv., supra, 205 N.J. at 349-50 (quoting Metromedia, Inc. v. Div.
of Taxation, 97 N.J. 313, 329-31 (1984)). To determine if the APA
14 A-1153-14T1
rulemaking requirements are implicated, we apply the following
analysis:
[A]n agency determination must be considered
an administrative rule . . . if it appears
that the agency determination, in many or most
of the following circumstances, (1) is
intended to have wide coverage encompassing a
large segment of the regulated or general
public, rather than an individual or a narrow
select group; (2) is intended to be applied
generally and uniformly to all similarly
situated persons; (3) is designed to operate
only in future cases, that is, prospectively;
(4) prescribes a legal standard or directive
that is not otherwise expressly provided by
or clearly and obviously inferable from the
enabling statutory authorization; (5)
reflects an administrative policy that (i) was
not previously expressed in any official and
explicit agency determination, adjudication
or rule, or (ii) constitutes a material and
significant change from a clear, past agency
position on the identical subject matter; and
(6) reflects a decision on administrative
regulatory policy in the nature of the
interpretation of law or general policy.
[Metromedia, supra, 97 N.J. at 331-32.]
"The factors need not be given the same weight, and some
factors will clearly be more relevant in a given situation than
others," Doe v. Poritz, 142 N.J. 1, 97 (1995), and "[n]ot all
factors need be present for an agency action to qualify as an
administrative rule," Provision of Basic Generation Serv., supra,205 N.J. at 350. "The pertinent evaluation focuses on the
importance and weight of each factor, and is not based on a
15 A-1153-14T1
quantitative compilation of the number of factors which weigh for
or against labeling the agency determination as a rule." Ibid.
Based on our review of the record, we are satisfied that the
Board's order satisfies all of the Metromedia factors and thereby
constitutes a rule requiring adoption through rulemaking in
accordance with the APA. See Auth. For Freshwater Wetlands
Statewide Gen. Permit 6, supra, 433 N.J. Super. at 413. With regard
to the first Metromedia factor, the modified CTA applies to all
of the utility companies whose tax returns are filed as part of
the consolidated returns of their respective holding companies.
Cf. Deborah Heart & Lung Ctr. v. Howard, 404 N.J. Super. 491, 506
(App. Div.) (finding rulemaking was not required in part because
the nine of eighteen cardiac surgery facilities subject to the
policy change constituted a "narrow, select group," and not a
"large segment of the regulated public"), certif. denied, 199 N.J.
129 (2009). In addition, because the utility company respondents
serve a significant portion of the regulated public and the CTA
modifications will "impact the general public in its rate-paying
capacity, the first Metromedia factor . . . support[s] closer
adherence to rulemaking procedures." Provision of Basic Generation
Serv., supra, 205 N.J. at 350-51; see also In re Attorney General's
"Directive on Exit Polling: Media and Non-Partisan Public Interest
Groups," 402 N.J. Super. 118, 134 (App. Div. 2008) (finding first
16 A-1153-14T1
Metromedia factor supports rulemaking where the agency's order "is
intended to affect a large segment of the public"), aff'd in part
and modified in part on other grounds, 200 N.J. 283 (2009).
The second Metromedia factor also favors rulemaking because
the modified CTA generally and uniformly applies to all regulated
utilities whose tax returns are filed as part of consolidated
returns. Metromedia, supra, 97 N.J. at 331. Moreover, the Board's
order directs that the modified CTA applies prospectively,
including in those cases that were not yet decided but where the
record remained open at the time the order was entered. Thus,
application of the third Metromedia factor supports a finding that
the modified CTA constitutes a rule. Ibid.
As set forth in the Board's order, the modified CTA
"prescribes a legal standard [and] directive that is not otherwise
expressly provided by or clearly and obviously inferable from the
[Board's] enabling statutory authorization." Ibid. The Board is
required to set "just and reasonable rates," N.J.S.A. 48:2-21, but
there is no statutory directive establishing the methodology for
calculating a utility's real, as opposed to hypothetical, tax
payments to determine its rate base, and no statute directs the
use of a CTA. See Airwork, supra, 97 N.J. at 301 (holding
rulemaking is not required for an agency order directing the form
of a tax assessment where tax statute is specific concerning the
17 A-1153-14T1
underlying tax obligation). We are therefore satisfied the fourth
Metromedia factor favors a finding that rulemaking is required.
Application of the fifth Metromedia factor also favors
rulemaking. Although the use of a CTA and the Rockland methodology
were previously expressed in the Board's determinations in
adjudicated cases, the shortened and finite review period, the
allocation of the tax savings, and the elimination of electric
transmission assets constitute "material and significant
change[s]" to the Board's prior CTA policy. Metromedia, supra, 97
N.J. at 331. The Board never before employed a finite review period
or a defined allocation, and never previously excluded a class of
a utility company's assets from its CTA calculation. Further, it
is not disputed that the modifications constitute material and
significant changes to the CTA. Indeed, Rate Counsel, the
Coalition, the NJUA and the utility companies argued before the
Board that the CTA required material and significant changes, and
the Board's order achieved that result.
Last, the modifications reflect the Board's decision on a
regulatory policy "in the nature of an interpretation of law or
general policy." Id. at 331-32. The Board acknowledges as much in
its decision and order, stating that the modifications are required
to recognize "the fact that a fundamental tenet of utility
regulation is that any methodology used by a regulator must result
18 A-1153-14T1
in an end result that is just and reasonable for both ratepayers
and shareholders." The Board adopted the modifications based on
its finding that the prior CTA methodology "may not be the
appropriate means of achieving that fundamental principle." See
Provision of Basic Generation Serv., supra, 205 N.J. at 352
(finding the Board's decision to "pass through" certain costs to
ratepayers could be viewed as a regulatory policy which was to be
applied later in individual rate-recovery hearings).
In sum, all of the Metromedia factors favor rulemaking here.
The Board's order constitutes a "statement of general
applicability and continuing effect that implements [and]
interprets" the Board's "policy" concerning the calculation of tax
adjustments to a utility company's rate base, N.J.S.A. 52:14B-
2(e), and therefore is a rule within the meaning of the APA. See,
e.g., Auth. For Freshwater Wetlands Statewide Gen. Permit 6, supra,
433 N.J. Super. at 413 (finding agency's adoption of a computer-
based program used to determine the sufficiency of proposed
nonstructural stormwater management measures constituted
rulemaking); N.J. Animal Rights Alliance v. N.J. Dep't of Envt'l.
Prot., 396 N.J. Super. 358, 369-70 (App. Div. 2007) (finding
agency's policy detailing requirements for a public bear hunt
constituted a rule requiring APA rulemaking).
19 A-1153-14T1
Rate counsel, the Coalition and amicus AARP argue the Board's
failure to comply with the APA requires reversal of the Board's
order. They contend the Board's failure to engage in formal
rulemaking deprived the stakeholders of APA procedural safeguards
and an opportunity to present evidence and testimony at an
evidentiary hearing.
For example, Rate Counsel argues the Board failed to comply
with the following APA requirements: publish a proposal containing
"a clear and concise explanation of the purpose and effect of the
rule, the specific legal authority under which its adoption is
authorized, [and] a description of the expected socio-economic
impact of the rule," N.J.S.A. 52:14B-4(a)(2), and prepare and
distribute "a report listing all parties offering written or oral
submissions concerning the rule, summarizing the content of the
submissions and providing the agency's response to the data, views,
comments, and arguments contained in the submissions," N.J.S.A.
52:14B-4(a)(4). The record supports Rate Counsel's position. These
APA requirements were not satisfied in the generic proceeding.
Rate Counsel also argues, and the record shows, that the
Board's March 2013 Notice of Opportunity to Comment and July 2013
Notice of Opportunity to Provide Additional Information each
stated that following the collection of the requested data and
comments, the Board would "announce a schedule for hearings to
20 A-1153-14T1
provide all interested parties with the opportunity to provide
testimony on the CTA issues." The Board, however, never announced
such hearings or conducted any hearings providing interested
parties with the opportunity to present testimony.
Although agencies enjoy leeway to choose among rulemaking,
adjudicatory hearings, and hybrid informal proceedings to fulfill
their statutory mandates, Provision of Basic Generation Serv.,
supra, 205 N.J. at 347, leeway is not a license to ignore the
APA's requirements. The Board has discretion to utilize various
procedures to fulfill its statutory mandate, but our Supreme Court
has held that "administrative action, and an agency's
discretionary choice of the procedural mode of action, are valid
only when there is compliance with the provisions of the [APA] and
due process." Ibid.; see also Airwork, supra, 97 N.J. at 300 ("If
an agency determination or action constitutes an 'administrative
rule,' then its validity requires compliance with the specific
procedures of the APA that control the promulgation of rules.");
Consider Distrib. of Casino Simulcasting Special Fund, 398 N.J.
Super. 7, 16 (App. Div. 2008) ("An agency's ability to select
procedures it deems appropriate is limited by 'the strictures of
due process and of the [APA] . . . .'" (quoting In re Request for
Solid Waste Util. Customer Lists, supra, 106 N.J. at 519)). Where,
as here, the Board promulgates an administrative rule, it is
21 A-1153-14T1
required to comply with the APA's requirements. Provision of Basic
Generation Serv., supra, 205 N.J. at 347. Because the Board failed
to do so here, we are constrained to reverse the Board's order.
We are not persuaded that the Court's decision in Provision
of Basic Generation Service, requires a different result. There,
the Court applied the Metromedia factors to a Board order that in
part allowed utility companies to pass through increased energy
supplier costs to the ratepayers. Id. at 349-52. The Court found
that the first five Metromedia factors supported a finding that
the order constituted rulemaking and that the sixth factor "[did]
not advance the analysis in any compelling way." Id. at 350-52.
In weighing the factors, the Court determined that the
preponderance of the "factors favor[ed] treating the [order] as
akin to rulemaking" but that in adopting what the Court
characterized as a "quasi-rule, the [Board] was entitled to greater
flexibility with regard to procedural formalities than if this
process could only have been completed by way of a strict
rulemaking process." Id. at 352 (emphasis added).
Under those circumstances, the Court found the Board's use
of a hybrid proceeding "which had attributes of rulemaking and
adjudicative proceedings and included a legislative-type hearing,
two opportunity-to-comment periods, discovery periods, and public
hearings throughout the state, was sufficient to satisfy the
22 A-1153-14T1
requirements of the . . . APA." Id. at 353 (emphasis added). But
the Court expressly conditioned its conclusion upon the
requirement that "evidentiary rate-setting hearings take place
which apply to the cases of specific energy providers the
principles to be established in" an ongoing contested case before
the Board.5 Ibid. Thus, the court allowed a departure from the
APA's rulemaking requirements because the policy was going to be
further defined in an ongoing adjudicated case.
Here, all the Metromedia factors clearly favor rulemaking.
Therefore, unlike in Provision of Basic Generation Service, we
address the requirements for the adoption of an actual, and not a
quasi-rule, and the Board did not have the concomitant flexibility
to depart from the APA's requirements. See id. at 352. Moreover,
in its adoption of the modified CTA, the Board did not utilize the
hybrid process the Court found provided the flexibility to abandon
the requirements of formal rulemaking in Provision of Basic
Generation Service.6 The Board's order constitutes a general policy
5
The ongoing contested case cited by the Court was In re Provision
of Basic Generation Service for the Period Beginning June 1, 2008
– BGS SREC Recovery Mechanism Proceeding, BPU Docket No.
ER07060379. Ibid.
6
As an alternative to acting through rulemaking, adjudication or
a hybrid proceeding, an agency may act informally. Request for
Solid Waste Util. Customer Lists, supra, 106 N.J. at 518.
"[I]nformal action constitutes the bulk of the activity of most
23 A-1153-14T1
that will be applied in future cases without the benefit of any
of the adjudicatory proceedings the Court required in Provision
of Basic Generation Service. See id. at 353.
"The purpose of APA rulemaking procedures is 'to give those
affected by the proposed rule an opportunity to participate in the
process, both to ensure fairness and also to inform regulators of
consequences which they may not have anticipated.'" Id. at 349
(quoting In re Adoption of 2003 Low Income Hous. Tax Credit
Qualified Allocation Plan, 369 N.J. Super. 2, 43 (App. Div.),
certif. denied, 182 N.J. 141 (2004)). We find nothing in the
Court's decision in Provision of Basic Generation Service
supporting an abandonment of the well-settled principle that where
an agency adopts a rule, it must proceed through formal rulemaking
in accordance with the APA. Id. at 347; Airwork, supra, 97 N.J.
at 300; Auth. For Freshwater Wetlands Statewide Gen. Permit 6,
supra, 433 N.J. Super. at 413.
administrative agencies," "and the line between . . . rulemaking
. . . , and informal action, . . . can become blurred." Ibid.
However, informal action is defined as "statutorily authorized
agency action that is neither adjudication nor rulemaking." Id.
at 519. "[I]nformal agency action includes investigating,
publicizing, planning, and supervising a regulated industry."
Ibid. Here, the Board's order did not constitute informal action
because, as noted, it satisfied each of the Metromedia factors and
therefore constituted a rule that required rulemaking. Metromedia,
supra, 97 N.J. at 332. It is only where "the APA does not require
rulemaking [that] an agency may act informally." Ibid.; N.J.A.C.
7:1B-1.1 Et Seq., supra, 431 N.J. Super. at 133.
24 A-1153-14T1
We are also persuaded that the Board's departure from the APA
requirements constituted an "irregularity or informality [that]
tends to defeat or impair the substantial right or interest of the
appellant." N.J.S.A. 48:2-46. In the first instance, the Board's
proceeding violated the ratepayers' right to have the new CTA
policy adopted in accordance with the APA.
Second, although the Board's process provided opportunities
for the submission of evidence and comment and the Board made
certain submissions available on its website, the Board failed to
comply with the APA's requirements that it publish "a description
of the expected socio-economic impact of the rule," N.J.S.A.
52:14B-4(a)(2), and prepare and distribute a report "summarizing
the content of the submissions and providing the [Board's] response
to the data, views, comments, and arguments contained in the
submissions," N.J.S.A. 52:14B-4(a)(4). We do not consider these
APA requirements to be insubstantial. They require more of the
Board than merely making information available on a website and
requesting comment.
Compliance with the requirements provides the stakeholders
with the Board's analysis and assessment of the economic impact
of a proposed rule and the Board's response to a stakeholder's
data, comments and arguments before a rule is adopted. Moreover,
compliance provides the stakeholders with the opportunity to
25 A-1153-14T1
present evidence and address the Board's economic impact
assessment and response to the stakeholder's data, comments and
argument. In other words, the statutory requirements guarantee
that Rate Counsel and the stakeholders are fully informed of the
Board's position concerning a rule's economic impact and the
Board's response to the submitted data, comments and arguments,
thus permitting Rate Counsel and the stakeholders an opportunity
to present further evidence and argument. When the requirements
are ignored, the Board gathers information and comment, but Rate
Counsel and the stakeholders are deprived of the right granted by
the APA to consider and contest the Board's assessment of economic
impact and responses to the submissions prior to the adoption of
a rule.
In our view, the Board's failure to comply with the
requirements deprived Rate Counsel of substantial rights and
interests under the APA: the right to obtain the Board's assessment
of the economic impact of the proposed modified CTA and responses
to Rate Counsel and the other stakeholders' submissions, and the
right to provide evidence and argument in opposition to them. The
failures are of particular significance here because of the
conflicting evidence presented concerning the modified CTA's
potential economic impact on ratepayers. We are therefore
convinced that the Board's failure to comply with the APA's
26 A-1153-14T1
requirements in its adoption of the modified CTA constituted an
irregularity that tended to defeat and impair the rights and
interests of Rate Counsel and the other stakeholders.
Because we reverse the Board's order, it is unnecessary to
address the arguments that the Board's decision and order lacks
sufficient support in the record or is otherwise contrary to
applicable law. Any remaining arguments that we have not addressed
directly are without sufficient merit to warrant discussion in a
written opinion. R. 2:11-3(e)(1)(E).
Reversed.
27 A-1153-14T1