Board of Fire Commissioners v. Elizabethtown Water Co.

142 A.2d 85, 27 N.J. 192, 1958 N.J. LEXIS 194

• Court: Supreme Court of New Jersey
• Decided: May 26, 1958
• Status: Published

Opinions

The opinion of the court was delivered by

Prancis, J.

We certified this cause on our own motion to review the order of the Board of Public Utility Commissioners requiring appellant Elizabethtown Water Company to extend its facilities to supply water to the respondent Board of Pire Commissioners of Pire District No. 3, Township of Piseataway, and to certain residents of the area involved.

On Pebruary 2, 1905 the Piseataway Water Company was incorporated “for the purpose of constructing, maintaining and operating water works in the Township of Piseataway * * *, and for the purpose of supplying the said township and the inhabitants thereof with water * * Attached to the certificate of incorporation was the necessary approval of the governing body of the township which recited that, pursuant to an authorizing ordinance, consent was given to the incorporators to form the company for the purposes stated.

The franchise thus created constituted a contract between the utility and the municipality, subject, of course, to the state regulatory power. Bourke v. Olcott Water Co., 84 Vt. 121, 78 A. 715, 33 L. R. A., N. S., 1015 (Sup. Ct. 1911); 23 Am. Jur., Franchises, §§ 6, 15, 35; 43 Am. Jur., Public Utilities and Services, § 16. The burden assumed thereby was a community service; it was not limited to the establishment of a system suitable only to the then current needs. Included also was the utility’s duty to keep in view the probable growth of the township, both in population and in structural development, and to make gradual extensions of its mains to meet the reasonable demands that would inevitably result. Reid Development Corp. v. Parsippany-Troy Hills Tp., 10 N. J. 229, 234 (1952); Hackensack Water Co. v. Ruta, 3 N. J. 139, 147 (1949); Long Branch Commission v. Tintern Manor Water Co., 70 N. J. Eq. 71, 77 (Ch. 1905), affirmed 71 N. J. Eq. 790 (E. & A. 1907); 56 Am. Jur., Waterworks, § 60.

It is not suggested that since 1905 any utilities other than the Piscataway Water Company and the appellant as its successor have supplied water within the franchised limits of the township. The operation is as presently exclusive in fact as the one examined in In re Township of Lakewood, 29 N. J. Super. 422 (App. Div. 1954), rehearing denied sub nom. Lakewood, Tp. v. Lakewood Water Co., 30 N. J. Super. 79 (App. Div. 1954). No contention is advanced here (nor was there in the Lakewood case) that the franchise is exclusive in law.

On November ‘27, 1922 the Piscataway Water Company became consolidated with the appellant Elizabethtown Water Company, and under the agreement the latter expressly assumed all of the obligations and duties of the former. Gf. 23 Am. Jur., supra, § 35.

The township is divided into fire districts pursuant to N. J. 8. A. 40:151-1 et seq. Each district is a separate corporate unit managed by commissioners, and each has specifically described geographical limits. The commissioners are given the power to provide means for protection against fires within the defined area, N. J. 8. A. 40:151-1, 2; 40:151-27, including, of course, a supply of water with which to combat them. According to a statement appearing in the testimony, Piseataway presently pays over $22,000 annually to appellant for hydrant service.

The record indicates that for 22 years the commissioners of District Fo. 3 have been concerned about the absence of a water supply for fire fighting purposes in their area. But appellant has steadfastly refused to extend the mains unless the district would assume the original capital outlay. Over the years, the township has grown and the water facilities have been expanded proportionately. At the present time, service is provided for the “territory entirely surrounding” the section of District Fo. 3 which is involved in the application under consideration. The portion to be served by the proposed extension encompasses only a relatively few blocks. The map prepared by the company’s chief engineer shows that the new mains, if laid according to the more extensive but only really adequate plan, would serve an area of 51 acres, interlaced with a few streets. The map indicates also that there are existing mains within a block or two blocks to the west and northwest and to the east of the suggested extensions. The situation to the south is not disclosed as the sketch covers only one block from the most southerly of the proposed new mains. However, the inference from the testimony already referred to is that the existing facilities are not far removed. In June 1956, when the water company’s engineer visited the location in order to draw the map, there were 60 occupied homes in the area, and ample space remained for many more. Water is provided by wells which were dug by or for the individual owners. The engineer stated that “several new homes” had been constructed there in the year and a half between the filing of the petition and the date of the hearings. In this connection, he testified further:

“Q. Well, in the period of time since you have become familiar with this particular territory, would you say that the construction and development in the area has increased since you first knew it? A. New construction of residences in central New Jersey is increasing greatly, and the area of Piscataway and Dunellen is growing—there are more new residences each year than there were the year before. It is in a period of growth.”

According to the secretary of the fire district, these homes have no fire protection and “if anything should happen now, we would just lose the house, that’s all.” Speaking of the home owners, he said also:

“They have been after the fire commissioner, ‘Why isn’t there water out there? Why can’t we get water out there?’ They have continually come to our meeting to find out why. What progress are we making? If the water was there these people building these homes would certainly be putting it in rather than digging a well,”

to which the company’s engineer, who was then on the witness stand, replied:

“Well, we are in the business of selling water in there, but we have to sell it on the pattern which is established for the company.”

The application for extension of the mains was filed with the Board on January 20, 1955. Some time prior thereto, a petition was presented to the fire commissioners signed by 36 home owners in the area, reciting that they

“hereby apply for city water in our area and the maximum number of fire hydrants allotted for fire protection of our property. Furthermore, the undersigned do agree to use the proposed water in their homes providing some water supply will be piped to our area without any cost to us, with the exception of having the water piped from the road into our homes which we understand will be at our own individual expense.”

The record discloses that this document was filed with the Board of Public Utility Commissioners, although it was not marked as an exhibit at the hearings. The decision of the Board notes the application of these residents as one of the factors inducing the extension order. It would have been more satisfactory from a procedural standpoint to have had these persons formally join in the petition of the fire district. Our affirmance of the order, as hereafter set forth, is made dependent upon such joinder.

The matter was assigned for hearing to an examiner, who took the testimony of the parties on two separate occasions.

The. uncontradicted proof offered by the company shows that the cost of extending the mains to accomplish the plan declared by the examiner to be the only one which would provide, worthwhile fire protection service would be $34,570. The engineer testified also that the estimated immediate annual revenue from the fire district and the 36 users would be $1,600, and that, considering the portion of the operating costs of the company properly allocable to this extension, an annual loss of $1,425 thereon would result. However, it is not suggested that such loss cannot be absorbed in the overall revenue without any appreciable effect upon the reasonable return now being enjoyed by the utility. Moreover, for the year 1956 the company expected to spend approximately four and a half million dollars on capital projects. And it conceded that inclusion of the additional $34,570 for the mains in question could have no material effect on its financial condition.

The examiner recommended that the Board refuse to order the extension of the mains at the expense of the company. The primary reasons for his action seem to be that a reasonable return would not be earned from the service, that the revenue to he derived at once would not suffice to meet operating costs, and that a cumulation of this and similar requests for extensions (although not yet made or even suggested or indicated) “could significantly increase the Company’s rate base without providing adequate additional revenue.”

After considering the record, the Board reached a contrary result. In doing so, it said:

“The test of whether an extension is reasonable and practicable is not answered by a mere showing that such an extension would not be immediately profitable. While 32 [36 probably intended] residential customers have indicated a desire to use the water service, there are 60 houses in the area which are now being supplied by local wells. Further, there are large areas of ground that have not been developed, but the witness for the Company has testified that this area has been and is still growing. We feel that the future prospects in this area are very favorable and justify an order for the construction of the proposed extension and in the absence of a showing that the extension would result in reducing the overall revenue of the Company, so as to deprive it of a fair and reasonable rate of return, the construction of the extension is justified.

We find that the extension requested is reasonable and practicable, will furnish sufficient business to justify the original cost and upkeep and will not affect the financial condition of the Company * *

(Insertion ours)

The company charges that the order which flowed from this decision violates the applicable rule of the Board promulgated in 1923 by which the obligation to extend water utility mains was regulated. This rule generally prescribes that where the cost of the proposed enlargement exceeds three and one-half times the estimated normal annual revenue from the residences involved and from the public agency for fire protection, the excess cost shall be deposited with the utility and shall remain, without interest, in the possession of the utility until such time as three and one-half times the revenue equals the cost of the extension. At that time the deposit must be returned pro rata to the depositor, subject to the proviso that after ten years any balance not yet returned becomes the property of the utility. Of course, the authority of the Board to act in the matter is regulated by N. J. 8. A. 48:2-27, and to the extent that any rule contravenes the statute as interpreted, it has no validity.

The statute ordains:

“The board [of Public Utility Commissioners] may, after hearing, upon notice, by order in writing, require any public utility to * * * construct * * * any reasonable extension of its existing facilities where, in the judgment of the board, the extension is reasonable and practicable and will furnish sufficient business to justify the construction and maintenance of the same and when the financial condition of the public utility reasonably warrants the original expenditure required in making and operating the extension.”

Under this enactment, when the public convenience and necessity justify an extension of facilities, the fact that the utility will not realize a profit or an immediate profit from it is not dispositive of the matter. The criterion is the overall return. As was said in In re Township of Lakewood, supra, a franchise holder who alone serves an important and essential public need in a limited area cannot pick and choose its customers solely on the basis of pecuniary advantage and refuse to supply those who constitute an integral part of the locality simply because, considered in isolation, their consumption of the product will not produce a profit. The duty imposed on the utility so long as it holds the franchise is to serve such people.

This doctrine finds support in the cases cited in Lakewood and particularly in People of State of New York ex rel. New York & Queens Gas Co. v. McCall, 245 U. S. 345, 38 S. Ct. 122, 62 L. Ed. 337 (1917). In the latter opinion, the United States Supreme Court said:

“Corporations which devote their property to a public use may not pick and choose, serving only the portions of the territory covered by their franchises which it is presently profitable for them to serve and restricting the development of the remaining portions by leaving their inhabitants in discomfort without the service which they alone can render. * * (245 U. S. at page 351, 38 S. Ct. at page 124.)

Accord: Atlantic City Sewerage Company, P. U. R. 1925 A, 135, 137 (1924). And it was also pointed out in McCall that “even if the return on the cost of complying with the order be conceded to be inadequate, this would not suffice to render the order legally unreasonable.” Ibid. 245 U. S. at page 350, 38 S. Ct. at page 124. The effect on the overall return is the test.

Under the specific language of the Legislature, one factor to be considered is whether the financial condition of the company is such as “reasonably warrants the original expenditure required.” No problem is presented on this score. As has been indicated, the existence here of such a financial state is beyond question. And it is not contended that the failure to derive a return of 5.83% (the rate fixed in 1955 as representing a reasonable return on its total rate base) on the cost of the additional facilities will reduce the overall net operating income below the point of fair return.

Appellant contends that support for its opposition to the order is found elsewhere in the statute. And particular reference is made to the requirement that the proposed extension “will furnish sufficient business to justify” it. The contention is that the term “sufficient business” implies a' condition that an extension cannot be imposed on a utility unless an immediate profit results from its use. In the absence of such a showing, it is urged, a demand upon the proposed users for a deposit (refundable under certain circumstances) to cover the construction cost may be made with legal propriety. In this connection we regard as significant the declaration of the court in Ridley Tp. v. Pennsylvania Public Utility Commission, 172 Pa. Super. 472, 94 A. 2d 168, 171 (Super. Ct. 1953):

“Ordinarily, it is not the business of the citizen or consumer to construct any part of a utility’s system. There are, doubtless, instances where, under special circumstances, warranted by the evidence, the Commission may, in the exercise of its administrative discretion, withhold exercise of its power unless patrons offer to participate in the cost of construction. City of Altoona v. Pennsylvania P. U. C., 168 Pa. Super. 246, 77 A. 2d 740. But no inflexible rule can be laid down; participation in construction costs cannot be exacted indiscriminately; and it cannot be required upon a mere showing that an extension will not immediately produce an adequate profit. The action of the Commission must rest upon evidence which shows that, without the contribution or loan of the consumers, the cost of construction would materially handicap the utility in securing a fair return on all its operations. * *

(Emphasis ours)

It must be assumed that our statute was drafted after due deliberation as to the language to be used. Obviously, if profit was intended to be a condition precedent to an order for expansion of facilities, the addition or substitution of a few words would have accomplished that result. So it may be said that the term “sufficient business” was advisedly employed in order to avoid establishing as the criterion profit stemming solely from the new extension considered apart from the existing utility operations.

Thus we are brought to the necessity for definition of “sufficient business.” In the light of the authorities cited, it must signify that a reasonable number of prospective users in a reasonably integrated or localized group within the franchise area and within reasonable distance of existing facilities are desirous of service, and that the public convenience and necessity require that such users be served. Amount of return, present or prospective, may enter into the exercise of the Board’s discretion as to whether the group constitutes “sufficient business” but (the other conditions of the statute having been met) lack of profit or inadequacy of profit is important only as it affects the overall return of the utility. In re Township of Lakewood, supra, 29 N. J. Super, at pages 432, 433.

In the present situation, as has been outlined above, the facts adduced by appellant show that its services are being supplied in the territory immediately surrounding the locus in question and the map itself illustrates the short distance by which the mains are removed on three sides of the area. There is room for growth in the township, and it is growing. The section involved here is residential; 60 homes have been built there and the map reveals substantial space for further development. Although presently 36 home owners have agreed to take their water from the projected mains, it is only reasonable to suppose that others will take advantage of them. And it is not too much to expect that the improvement, with its attendant benefit of fire protection, will further stimulate the existing incentive for growth. But in any event we agree with the Board that under all of the circumstances, the requirement for sufficient business has been met.

A doctrine that would make immediate profit an unqualified condition precedent to an order for extension would be an uneconomic and unwise deterrent to community development. Likewise, it is inconsistent with the preferred and protected position the utility occupies by reason of its franchise. It is common knowledge in utility regulation that occasionally a particular portion of the service rendered of itself produces inadequate revenue. Yet so Jong as the system in its entirety, operating within the franchised territory, produces a fair return, the unprofitable segment cannot be eliminated while it is required by the public convenience and necessity. Cf. Pennsylvania, R. Co. v. Board of Public Utility Commissioners, 11 N. J. 43, 50, 51 (1952). As the Board noted in applying the statute in the earlier case of Middletown v. Monmouth Consolidated Water Co., 97 P. U. R., N. S., 501 (1953):

“The language of the statute [N. <7. S. A. 48:2-27] does not contemplate that the public utility have the same return on each portion of its operation, only that the remainder of its operations not be jeopardized by requiring too great a burden on the utility.”

So as the authorities referred to signify, when the requested extension is reasonable and practicable (as it is in this instance) and the public convenience and necessity will be served, the basic consideration is not immediate profit from its use. In fact, if the requirement for sufficient business, as defined above, is met, absence of any profit at all would not be dispositive. The other statutory prerequisites having been satisfied, if it appears that as the result of the extension the total revenue of the company would fail to produce a fair and reasonable return, the proper remedy is a revision of the rates unless it appears that the necessary increase would impose an unreasonable burden upon all of the consumers. People of State of New York, ex rel. Woodhaven Gaslight Co. v. Public Service Comm., 269 U. S. 244, 248, 249, 46 S. Ct. 83, 70 L. Ed. 255 (1925); Collingswood Sewerage Co. v. Borough of Collingswood, 91 N. J. L. 20, 28 (Sup. Ct. 1918), affirmed 92 N. J. L. 509 (E. & A. 1918).

At this point, comment upon the view expressed by the examiner seems relevant. His report suggests as a substantial ground for denying the present request that if a sufficient number of similar additional applications are made and granted, they “could significantly increase the Company’s rate base without providing adequate additional revenue.” But there is neither need nor justification for considering any such hypothetical problem. Our concern is with the single issue now before us. In any event, when an extension is reasonable and practicable and warranted within the contemplation of the statute, the Board must be mindful of the obligation of public service which the utility has assumed. And if an increase of rates is thus made necessary, the Board, conscious that a fair and reasonable return for the utility is a matter of right and not one of grace, may be expected to act accordingly. N. J. S. A. 48:2-21; Collingswood Sewerage Co. v. Borough of Collingswood, supra.

The Gollingswood case involved a petition to the Board for an increase in rates to be charged the users of a sewerage system. The charges sought to be revised had been fixed by the ordinance of the municipality which granted consent to the operation of the company. In discussing the jurisdiction and duty of the Board, the former Supreme Court said, among other things:

“It [the Board] found that extensions of the system for which numerous applications had been made were desirable, but that it was not reasonable and practicable for the company in its present financial condition to make them. It therefore declined to order them, and suggested municipal action which would make it possible for the company to obtain new capital. This amounted to turning over to the borough a duty which the statute imposes on the board. One of the objects meant to be secured was adequate and proper service for the public (not merely for those entitled to service with ‘present facilities’) by order of the board, including reasonable extensions where they will permit sufficient business to justify construction and maintenance and when the financial condition of the public utility reasonably warrants the original expenditure required. The board, in effect and by inference, finds that the present service is not adequate, that extensions are reasonable and practicable, that the financial condition of the company could be made to justify the expenditures, and that new capital could be obtained for the purpose if the municipality would consent to a modification of rates. If this view is correct, the board should have ordered the necessary modification of rates, and not have shifted the responsibility to the municipality * * (91 N. J. L. at pages 28, 29.)

The views we have expressed as to the validity of the Board’s order require further consideration of sections 1(c) and 2 of the 1923 “General Rule Governing Extensions Made Upon Application of Individual Permanent Residents.” As has been set forth above, these sections of the rule impose a general and unqualified obligation on a home owner applicant or group of such applicants for an extension of water mains to make a deposit with the utility in the circumstances detailed. Such a blanket fiat is violative of the letter and spirit of the statute. N. J. S. A. 48:2-27, as now interpreted and defined. The important consideration to be noted is that under the statutory language the ultimate decision rests in the discretion of the Board, subject to the conditions prescribed. Thus, each case must depend upon its own facts and circumstances, viewed in the light of the demands of the statute.

During the oral argument the operation of the “General Rule Governing Extension Requested by Land Development Agencies” was also discussed. This rule calls for deposit by the developer of the entire cost of extending the main lines into the newly developed tract. That rule is not pertinent to the present inquiry. But in passing it must be recognized that ordinarily a builder who plans to construct a number of new residences on a tract of land occupies a different status from that of a group of home owners already living in a locality and their fire district who seek a water supply. Cf. Reid Development Corp. v. Township of Parsippany-Troy Hills, 31 N. J. Super. 459, 464 (App. Div. 1954).

One further substantive matter calls for attention. Counsel for the Board informed us that the general rules relating to extensions are not considered applicable to public agencies, such as fire districts. And the impression conveyed was that a petition by a fire district for extension of mains would meet with automatic approval. It is true that the regulations do not specifically mention public bodies. However, section 1(c) seems significant. It provides that the revenue to he received from a municipality for fire protection shall be included when calculating the total anticipated income from the proposed extension for the purpose of determining whether a deposit would be ordered. This requirement militates against the indicated policy. Nevertheless, the important matter to be stressed is that such an unqualified policy would contravene the statute. When an application for extension of mains is made by a fire district, the right to a favorable order must be put to the test prescribed by the statute, just as in the case of a group of individual home owners. But in weighing the elements of reasonableness and practicability as well as those of public convenience and necessity, manifestly some additional probative force arises from the joinder of the fire district in the residents’ petition. So in the case under discussion, the request should be considered as having been made by 37 prospective users, and some added persuasive influence given to the fact that a public agency charged with an important civic duty would be one of the consumers.

Examination of the memorandum of the Board demonstrates that the order was not predicated on the public agency factor. In fact, it is not even mentioned, although undoubtedly it was taken into consideration. The principal thrust of the opinion has to do with the present number of residential users who have agreed to buy the water, the number of homes in the locality, and the future prospects for the area. The entire record, and particularly the circumstance that for 22 years Eke District No. 3 has been pleading for a water supply for fire-fighting purposes, renders the conclusion inescapable that the Board decided the issue in the light of the requirements of the statute.

Einally, appellant argues that the action of the Board should be reversed because the recommendation of the examiner was overruled without notice and opportunity to be heard. Of course, there is no obligation to follow such a recommendation. The controlling procedural rule promulgated by the Board says:

“Under no circumstances will the report and recommendations of a hearing examiner become a final decision of the Board without affirmative action of the Board. The Board, in reaching its final decision, shall consider the record and exhibits of the proceeding, together with the hearing examiner’s report and recommendations, exceptions filed thereto, if any, and arguments and briefs in support thereof. The Board shall then either adopt, reject or modify the report and recommendations of the hearing examiner.”

Provision is likewise made for the filing of exceptions to the report, in which event an opportunity for argument and briefing is given. Conference Order No. 26, §§ 7, 8. In this instance, the fire district was not represented by an attorney and no exceptions were filed. The Board then proceeded with its own study of the problem and ultimately issued the order under attack. Thereupon, appellant presented a petition for reargument and reconsideration in accordance with Conference Order No. 29. It was an elaborate petition reciting the factual and legal matters on which reargument was desired. Specific attention was directed to exhibits and to portions of the uncontradicted testimony (reference being made to the pages of the stenographic transcript of the hearing record), as well as to the statute involved and to the Lalcewood case, around which the controversy seemed to center. Denial of the petition without granting an opportunity to be heard thereon is alleged to constitute error. We cannot agree.

The record reveals that the matters referred to in the formal application for reargument, including the statute and the Lakewood case, were argued before the examiner. The discussion appears in the transcript. Uo new elements were injected for consideration by the Board which were not already before it. Appellant’s brief in this court concedes “[tjhere was no dispute on the evidence.” The legal problem to be ruled upon and the Company’s position with respect to it were entirely clear. Under the circumstances, we perceive no prejudice flowing from the denial of the petition for reconsideration without further argument, oral or written. Cf. In re Masiello, 25 N. J. 590, 600, 601 (1958); Nordco, Inc. v. State, 43 N. J. Super. 277, 283—286 (App. Div. 1957).

The order of the Board is affirmed.