Elizabethtown Water Co. v. New Jersey Board of Public Utilities

527 A.2d 354, 107 N.J. 440, 1987 N.J. LEXIS 329

• Court: Supreme Court of New Jersey
• Decided: June 29, 1987
• Status: Published

Opinions

The opinion of the Court was delivered by

GARIBALDI, J.

The questions presented in this case are: (1) whether an order issued by the Board of Public Utilities (BPU) postponing the effective date of a rate increase granted to Elizabethtown Water Company (Elizabethtown or company) in order to offset the company’s overearnings from prior years constitutes retroactive ratemaking, and, if so, (2) whether the BPU has the authority to engage in this kind of retroactive ratemaking. The Appellate Division held that the BPU’s order constituted retroactive ratemaking and that such ratemaking is impermissible, but remanded the matter to the BPU for further proceedings. 205 N.J.Super. 528 (1985). We affirm the Appellate Division insofar as it held that the order constitutes retroactive ratemak-ing and that the BPU lacked authority to issue such an order, but modify the Appellate Division’s judgment insofar as it remanded the case to the BPU.

I

Elizabethtown is a public utility water company subject to the regulatory jurisdiction of the BPU. On December 2, 1983, Elizabethtown filed a petition with the BPU for an increase of approximately $9.2 million in its rates for its 1984 operating year. The Public Advocate, Division of Rate Counsel (Rate Counsel), contested Elizabethtown’s request and the matter was referred to the Office of Administrative Law (OAL) as a contested case.

At the OAL hearing, it was established that Elizabeth-town charged rates that were previously set and approved by the BPU; that the company never collected unlawful or improper rates; that Elizabethtown had not departed from its filed tariff, but due to economic factors beyond its control, its earnings in 1982 and 1983 exceeded the return on equity previously authorized by the BPU for those years;¹ and that a downturn in the company’s earnings for the year 1984 was foreseeable. On July 12, 1984, the Administrative Law Judge (ALJ) issued an initial decision granting Elizabethtown rate relief in the amount of $3.24 million. The AU’s decision was sent to the BPU for its review and final Decision and Order.

At about the same time as the OAL hearing, the BPU instructed its staff to monitor the earnings of various utilities under its jurisdiction. Pursuant to that directive, the BPU conducted an earnings analysis of Elizabethtown. On June 8, 1984, the BPU issued a report concluding that Elizabethtown had earned a return on average consolidated² equity of 16.96% in 1982 and 16.11% in 1983³ even though the utility was authorized to receive a return of only 14.5% in each of these years. The study projected that Elizabethtown would earn $2.2 million in excess of its allowed return between January 1, 1982, and July 31, 1984.

On June 28, 1984, Elizabethtown filed a response to the BPU’s report. According to Elizabethtown, its return on average equity was less than that stated by the BPU. In addition, the company argued that it was extremely unfair for the BPU to consider the company’s earnings in 1982 and 1983 without making adjustments for ten of the past thirteen years in which Elizabethtown received less than the rate of return authorized by the BPU.⁴ Moreover, according to Elizabethtown, any attempt by the BPU to adjust future rates in order to compensate for past overearnings would constitute impermissible retroactive ratemaking.

Representatives of Elizabethtown and the BPU met during the ensuing weeks to discuss and attempt to settle the issues raised by the BPU’s earnings analysis. On August 28, 1984, Chester A. Ring, 3rd, Executive Vice President of Elizabeth-town, wrote a letter to the BPU purporting to set forth the results of these meetings. The letter states that the BPU and Elizabethtown agreed that the overearnings experienced in 1983 would be more than offset by the underearnings suffered in 1984. The letter also states that the parties agreed that Elizabethtown had overearnings of $1.15 million in 1982 and that these overearnings could be offset by “[ajpplying projected 1984 underearnings, in excess of amounts used to offset 1983 overearnings, against the 1982 overearnings” and “[ejxtending the date new rates go into effect.” Based upon this last statement, Rate Counsel argues that Elizabethtown consented to a postponement in its rate increase. Elizabethtown denies this and points out that the same letter stressed the company’s continued resistance to the BPU’s position:

The Company once again maintains its position that it would be inappropriate to isolate the earnings of 1982 without giving consideration to the low level of earnings in 1981 which produced a return on equity of only 11.15%. The combined earnings of 1981 and 1982, when averaged, produced a return on equity of 13.4% which is considerably less than that allowed by the Board. Further, the Company believes it would be unfair to make any adjustments for 1982 without making appropriate adjustments for that portion of the authorized rate of return that the Company did not achieve for the nine years prior to 1982.

On September 24, 1984, the BPU issued its final Decision and Order, which affirmed and modified the AU’s initial decision. The BPU ordered a rate increase of $2,656 million.⁵ While acknowledging that the Company had not been at fault in realizing excess earnings in 1982 and 1983, the BPU nevertheless concluded that the ratepayers should receive recognition for overearnings by the Company in the amount of $1.15 million. Moreover, the BPU concluded that the most appropriate way to compensate ratepayers for this amount of overearn-ings was to set off this amount against the rate increase awarded. Thus, the BPU concluded that it would

hold the new rates found to be reasonable in this order in abeyance until the difference in revenues between those that would be received under the new rates, as against those received under current rates, equals $1.15 million. It is anticipated that this recovery should be completed on or about February 1, 1985; the date new rates shall be permitted to go into effect shall be subject to an accounting procedure agreed upon by petitioner, Board’s Staff and Rate Counsel, which will determine the exact timing of the implementation of this rate order.

[BPU, Decision and Order, supra, at 7 (footnote omitted).]

Elizabethtown appealed to the Appellate Division and applied for interim relief. The Appellate Division granted the motion and ordered that the rate increase go into effect immediately. The order provided, however, that the rate increase would have to be refunded to ratepayers if the BPU’s actions were upheld.

Subsequently, a majority of the Appellate Division reversed the BPU’s decision and remanded the matter to the BPU for further proceedings. The Appellate Division held that BPU’s deferral of the new rates constituted retroactive ratemaking in violation of N.J.S.A. 48:2-21(b)l, which provides that “the BPU shall fix rates which shall be imposed, observed and followed thereafter by any public utility____” (emphasis added). Judge Coleman concurred in part and dissented in part. He expressed uncertainty whether the BPU’s actions constituted retroactive ratemaking, but held that even if they did, such retroactive ratemaking is not prohibited if it benefits the ratepayer.

By virtue of Judge Coleman’s partial dissent, Rate Counsel and the BPU appealed as of right. See R. 2:2-l(a)(2). The BPU also filed a petition for certification seeking reversal of the Appellate Division’s judgment.⁶ Elizabethtown filed a petition for certification on the issue of whether the Appellate Division erred in remanding the matter to the BPU. Certification was granted on both petitions, 104 N.J. 385 (1986); therefore all issues are before this Court.

II

The BPU first contends that its action in this case does not constitute retroactive ratemaking, but “merely defers the implementation of a new increase prospectively.” We disagree.

“Generally, retroactive rate making occurs when a utility is permitted to recover an additional charge for past losses, or when a utility is required to refund revenues collected, pursuant to then lawfully established rates.” Chesapeake and Potomac Tel. Co. v. Public Serv. Comm’n of West Virginia, 300 S.E.2d 607, 619 (W.Va.1982) (emphasis added); see also State ex rel. Utility Consumers Council of Missouri, Inc. v. Public Serv. Comm’n, 585 S.W.2d 41, 59 (Mo.1979) (retroactive ratemaking is “the setting of rates which permit a utility to recover past losses or which require it to refund excess profits”); In re Central Vermont Pub. Serv. Corp., 144 Vt. 46, 52, 473 A.2d 1155, 1158 (1984) (any “device that enables a utility to balance its accounts for a prior period of time by making a future adjustment to its rates” is retroactive ratemaking).

In this case, the BPU reduced rates that were otherwise just and reasonable by $1.15 million in order to offset “over-earnings” of $1.15 million in 1982. This is plainly retroactive ratemaking, as demonstrated by the BPU’s own language in its Decision and Order:

The Board believes that the ratepayer must be made whole in compensation for a level of charges which, in fact, have exceeded the levels prescribed by the Board. Taking all these factors before us into consideration, the majority of the Board concludes that the ratepayers should receive recognition for over earnings by petitioner in the amount of $1.15 million.

********

The Board further concludes that the most appropriate methodology to make the ratepayers whole with respect to this level of overrecovery, is to set off this amount against the level of rate increase awarded herein, which is necessary to give petitioner an opportunity to achieve in future a reasonable rate of return. We will therefore hold the new rates found to be reasonable in this order in abeyance until the differences in revenues between those that would be received under the new rates as against those received under current rates, equals $1.15 million. [BPU, Decision and Order, supra, at 7],

Regardless of semantics, the effect of the BPU’s order is evident. Deferring Elizabethtown’s new rates until an amount equal to the prior overearnings had been offset had precisely the same effect as granting an immediate increase and ordering the company to refund $1.15 million to ratepayers.

The BPU, itself, recognized in its Decision that it was ordering a refund of the past excess earnings for 1982 and 1983:

We further believe that we have the discretion to fashion reasonable methodologies to determine whether, in fact, overeamings have been achieved, to determine the level of over-earnings that should be accounted for, and to determine the method of refund. The Board is not bound by any particular methodology so long as the methodology it selects is reasoanable.

[Id. (emphasis added).]

Indeed, it ended its Decision by stating:

Therefore, the rate increase permitted herein, will not be permitted to take effect until on or about February 1, 1985, but in no event until verification of the amount of refund has been resolved and tariffs filed in conformance with this order have been accepted, by further order of this Board. New rates pursuant to this order may not go into effect on February 1, 1985 absent further Board order.

[/d. at 8 (emphasis added).]

We reject the BPU’s argument that its actions were prospective. Future or present adjustments to offset earnings in prior rate years are, by any other name, retrospective. A contrary holding would effectively eliminate any prohibition against retroactive ratemaking because the BPU could simply defer the effective date of any rate increase rather than bill its action as a retroactive adjustment.⁷

Ill

Having found that the BPU’s action constituted retroactive ratemaking, we turn now to the primary issue in this case— whether this kind of retroactive ratemaking is prohibited. We hold that retroactive ratemaking is impermissible regardless of whether it favors the utility or the ratepayers.

The Legislature has endowed the BPU with broad power to regulate public utilities. Township of Deptford v. Woodbury Terrace Sewerage Corp., 54 N.J. 418, 424 (1969). The BPU has considerable discretion in exercising those powers. In re New Jersey Power & Light Co., 9 N.J. 498, 508 (1952). In reviewing actions taken by the BPU, the issue is whether the BPU exceeded the authority granted in its enabling statutes. Public Serv. Coordinated Transp. and Public Serv. Interstate Transp. Co. v. New Jersey, 5 N.J. 196, 214 (1950). Hence, we must determine, as stated by the Appellate Division, “whether the action of the Board violates legislative policies expressed or implied in the act governing it.” 205 N.J.Super. at 536. Based on the statutory language, the statutory ratemaking scheme, and our prior decisions, we conclude that BPU’s retroactive ratemaking in this case exceeded its legislative authority.

One of the BPU’s most important functions is to fix “just and reasonable” rates.⁸ N.J.S.A. 48:2-21b(1) provides that such rates “shall be imposed, observed and followed thereafter by any public utility” (emphasis added).⁹ Other courts have held that statutes authorizing utility commissions to fix rates to be followed “thereafter” allow a public utility commission to set rates prospectively only. See Public Utilities Comm’n of Ohio v. United Fuel Gas Co., 317 U.S. 456, 464, 63 S.Ct. 369, 374, 87 L.Ed. 396, 401 (1943); Pacific Tel. and Tel. Co. v. Public Utilities Comm’n, 62 Cal.2d 634, 651, 401 P.2d 353, 363, 44 Cal.Rptr. 1, 11 (1965); City of Miami v. Florida Pub. Serv. Comm’n, 208 So.2d 249, 260 (Fla.1968).

Moreover, the general statutory procedures for setting rates embody the general rule that “utility rates are accorded prospective effect” only. City of Plainfield v. Public Serv. Elec. and Gas Co., 82 N.J. 245, 252 (1980). N.J.S.A. 48:2-21(d) sets forth the procedure that the BPU must follow when a public utility petitions for a rate increase. Once a petition for increased rates is filed, the BPU may, by order, suspend the effective date of the proposed increase (i.e., continue the existing rates) for up to eight months while the case is pending. If the BPU does not order a suspension, the new rates go into effect as of the date stated in the utility’s notice, which must be at least thirty days after the date of the filing. N.J.A.C. 14:1-6.15(a)(4) and N.J.A.C. 14:1-6.16(a) (emphasis added). Because the proceedings may take up to eight months, the Legislature has specifically empowered the Board to allow interim rate increases while the case is pending. N.J.S.A. 48:2-21.1. These interim rates are not binding. As a consequence, any temporary increase, pending the BPU’s final decision,, is subject to rebate by the utility. In re Revision of Rates Filed By Toms River Water Co., 82 N.J. 201, 212 (1980).

Aside from these limited statutorily authorized refunds for interim rate changes, the Legislature has authorized the BPU to engage in retroactive ratemaking only in certain narrowly defined situations, not applicable to this case. N.J.S.A. 48:2-21.11 provides that if an electric utility recovers certain costs from an insurance carrier, legal action, or settlement, the recovery may be used to reduce the utility’s rates. N.J.S.A. 48:2-29.3 and N.J.S.A. 48:2-29.4 provide that where the BPU has authorized a utility to collect a surcharge for a specified purpose, the BPU may require the utility to discontinue the surcharge once the purpose has been achieved and may order the utility to refund any excess. Thus, as noted by the Appellate Division in this case, “when the Legislature has desired to authorize the Board to order refunds or reduce future rates by reason of past events it has expressly done so.” 205 N.J.Super. at 540.

The Legislature’s authorization of refunds in these carefully limited circumstances and the absence of such provisions in N.J.S.A. 48:2-21(b)l indicate that the Legislature did not intend to and did not grant the BPU general authority to make rates retroactively. See In re Niagara Mohawk Power Corp. v. Public Serv. Comm’n, 54 A.D.2d 255, 257, 388 N.Y.S.2d 157, 159 (Sup.Ct.1976). (“Since the Legislature carefully authorized refunds in two defined instances, it is reasonable and logical to conclude that no general authorization to direct refunds was intended.”); South Carolina Elec. and Gas Co. v. Public Serv. Comm’n, 275 S.C. 487, 490, 272 S.E.2d 793, 795 (1980) (“As the legislature has expressly authorized refunds in two specific instances, it is both reasonable and logical to conclude that no general authority to direct refunds was intended to be placed in the Commission.”).

This statutory scheme reflects the well-settled rule that rate-making is a legislative and not a judicial function. In re Intrastate Indus. Sand Rates, supra, 66 N.J. at 21; Public Serv. Coordinated Transp. and Public Serv. Interstate Transp. Co., supra, 5 N.J. at 214. By its nature legislative action operates prospectively and not retroactively. Chesapeake and Potomac Tel. Co. v. Public Serv. Comm’n of West Virginia, supra, 300 S.E.2d at 619. As Justice Holmes explained in Prentis v. Atlantic Coast Line Co., 211 U.S. 210, 226, 29 S.Ct. 67, 69, 53 L.Ed. 150, 158 (1908):

Legislation ... looks to the future and changes existing conditions by making a new rule, to be applied thereafter to all or some part of those subject to its power. The establishment of a rate is the making of a rule for the future____

Therefore, not only the specific language of the statute, but also its legislative nature, discloses that the BPU’s general ratemaking authority may be exercised only prospectively. In re Revision of Rates Filed By Toms River Water Co., supra, 82 N.J. 201; In re Lambertville Rates v. New Jersey Bd. of Pub. Utility Comm’rs, 79 N.J. 449 (1979); In re New Jersey Power & Light Co., 15 N.J. 82 (1954).

Additionally, we have recognized that retroactive ratemaking presents many formidable difficulties. “[T]he orderly processes of ratemaking are necessarily present and prospective if ratemaking is to be effective.” In re New Jersey Power & Light Co., supra, 15 N.J. at 93. Indeed, in In re New Jersey Power & Light Co., supra, 15 N.J. at 92-93, which specifically overruled our prior decision permitting retroactive ratemaking, Chief Justice Vanderbilt stated:

The fundamental defect of the Hackensack opinion [Hackensack Water Co. v. Board of Public Utility Commissioners, 100 N.J.L. 177 (E. & A. 1924) ] in its practical operation is that it requires the Board to look both forward and backward in rate-making when the orderly processes of rate-making are necessarily present and prospective if rate-making is to be effective. The decision would authorize just and reasonable rates for the present and future and then add thereto surcharges for the past errors of “a rate-making experiment.” This point of view is inconsistent with the businesslike processes of rate-making that have received the approval of this court[.]

As we more fully explained in In re Lambertville Rates v. New Jersey Pub. Utilities Comm’rs, supra, 79 N.J. at 457:

The problems in trying to give retroactive effect to a rate increase are formidable. Customers are constantly being added and dropped by a utility. Those who have paid their utility bills have a right to expect that they will not be surcharged for the same service at a later date. New consumers should not be called on to pay a present surcharge for service rendered prior to their becoming customers.

One problem that may result from allowing the BPU to retroactively order a refund to consumers every time the utility earns more than its rate of return is the potential disruption of the stability of the marketplace. As the United States Supreme Court explained in Bluefield Water Works & Improvement Co. v. Public Serv. Comm’n of West Virginia, 262 U.S. 679, 693, 43 S.Ct. 675, 679, 67 L.Ed. 1176, 1183 (1923), a reasonable rate of return is set to (1) assure confidence in the financial soundness of the utility; (2) maintain and support the utility's credit; (3) enable the company to attract the capital necessary to provide service; and (4) maintain the integrity of existing service. Testimony at the rate hearing indicated that Elizabeth-town’s bond rating improved as a result of the strong earnings in 1982 and 1983. An increased rating allows a company to attract more capital at lower rates. If the BPU were permitted to reduce the past earnings of a utility, investor confidence would be undermined and the utility would find more difficult to obtain the capital needed to maintain service. As one court has explained:

We are satisfied that no utility could attract capital for expansion or replacement of its property and facilities, or for any other purpose, if the Commission could at one time fix rates for that utility and then at some later time rescind those rates retroactively, fix lower rates retroactively and require the difference to be refunded to the ratepayers. The law ... was not designed or intended to create chaotic conditions in the market where utilities, as well as other businesses go to obtain capital for their legitimate business purposes. [Indiana Tel. Corp. v. Public Serv. Comm’n of Indiana, 131 Ind.App. 314, 341, 171 N.E.2d 111, 124 (Ind.App.1960).]

Rate Counsel and the BPU assert, however, that the rule against retroactive ratemaking is intended to protect ratepayers, not utilities. Therefore, they argue that the rule does not prohibit retroactive ratemaking that favors ratepayers. While such an argument may seem appealing, close examination reveals that it is flawed.

We have not yet had occasion to enforce the prohibition on retroactive ratemaking against ratepayers. Nevertheless, we have commented that “of course this rule, of looking to the future and not the past, works both ways ... ‘Deficits in the past do not afford a legal basis for invalidating rates, otherwise compensatory, any more than past profits can be used to sustain confiscatory rates for the future.’ ” In re Intrastate Indus. Sand Rates, supra, 66 N.J. at 23 (quoting Los Angeles Gas & Elec. Corp. v. Railroad Comm’n of California, 289 U.S. 287, 313, 53 S.Ct. 637, 647, 77 L.Ed. 1180, 1197 (1933)).

The BPU’s interpretation is antithetical to N.J.S.A. 48:2-21(b)l, which provides that rates shall be “just and reasonable” and “shall be imposed, observed and followed thereafter” (emphasis added). There is no indication anywhere in the statute that this rule applies only for the benefit of ratepayers. Presumably that phrase means “just and reasonable” to the utility as well as the consumer. The Legislature in establishing the BPU intended to protect the utility and the ratepayer. Neither the ratepayer nor the utility benefits from the inherent unfairness and instability that results from general retroactive ratemaking.

In this case, retroactive ratemaking would be unfair to both the public and the company. Although Rate Counsel characterizes the BPU’s action as benefitting ratepayers, it is more accurate to say that it benefits some ratepayers at the expense of others. Because people are continually moving into and out of the company’s service area, not all of the people who purchased water in 1982 and 1983 will receive a refund and not all people who would benefit from lower rates were overcharged. Moreover, ratepayers who have lived in the service area since 1982 are not necessarily purchasing as much water now as they did in 1982 and 1983. For these reasons, the amount saved by a customer through reduced rates does not necessarily bear any relation to the amount by which that customer was “overcharged” in 1982 and 1983. In effect, those ratepayers who do not receive the entire amounts they were “overcharged” are subsidizing other ratepayers. See In re Lambertville Rates v. New Jersey Bd. of Pub. Utility Comm’rs, supra, 79 N.J. at 457.

The BPU gave no reason for cutting off its retroactive inquiry at 1982. Indeed, since the company earned less than its authorized rate of return during ten of the thirteen years spanning from 1972 to 1984, such a cutoff seems, at the minimum, unfair, and at the maximum, arbitrary. If a utility does not get the benefit of a surcharge when its rate of return is less than authorized, it should not be forced to reduce rates when the utility’s rate of return exceeds that authorized. Indeed, applying retroactive ratemaking — both for and against the utility — in this case would result in unfairness to the ratepayers who would have to pay surcharges for the under-earnings for ten out of the last thirteen years.

The BPU’s decision to engage in retroactive ratemaking and to take into account only the last two years highlights the difficulty of achieving fairness with any method other than a prospective year-to-year evaluation of appropriate rates. Projecting revenue, costs, and debt-service — along with the rates they produce — is invariably an inexact science. Economic factors beyond the utility’s control may reduce or increase revenues from the levels anticipated. The rates may prove to be too high or too low. But, as this Court has noted, that “ ‘is a risk of the business.’ ” In re N.J. Power & Light, supra, 15 N.J. at 88 (quoting Georgia Railway & Power Co. v. Railroad Comm’n, 278 F. 242 (D.Ga.1922) (emphasis omitted)).

Prospective ratemaking is fair to both the public and the utility. If the BPU determines that a rate previously determined reasonable becomes unreasonable, it has broad power to “[investigate upon its initiative or upon complaint in writing any matter concerning any public utility.” N.J.S.A. 48:2-19a. N.J.S.A. 48:2-21(b)l gives the BPU the power to, by hearing, “[f]ix just and reasonable individual rates ... whenever the board shall determine any existing rate ... to be unjust, unreasonable, insufficient or unjustly discriminatory or preferential.” In the present case, therefore, the BPU could have initiated a proceeding during the rate year to reduce Elizabeth-town’s rates prospectively, if the BPU felt that such action was warranted by its earnings analysis.

And, as we stated in In re N.J. Power & Light Co., supra, 15 N.J. at 93, prospective ratemaking

is fair to the public utility, for it can act as speedily as it sees fit to move for a correction of inadequate rates, and it is fair to the consumer in safeguarding him from surprise surcharges dating back over years that he had a right to assume were finished business for him and possibly over years when he was not even a consumer.

Other states with enabling statutes similar to that of New Jersey have held that the rule against retroactive ratemaking protects the utility as well as consumers. See City of Miami v. Florida Pub. Serv. Comm’n, supra, 208 So.2d 249 (rate reduction cannot be retroactive because a statute empowered the public utility commission to fix just and reasonable rates to be followed “thereafter”); Mississippi Pub. Serv. Comm’n v. Home Tel. Co., Inc., 236 Miss. 444, 454, 110 So. 2d 618, 623 (1959) (“It is generally held that neither losses sustained nor profits gained by a public utility in the past may be taken into account in fixing rates to be charged in the future”); State ex rel. Utility Consumers Council of Missouri, Inc., v. Public Serv. Comm’n, supra, 585 S.W.2d at 58 (public service commission cannot “redetermine rates already established and paid without depriving the utility (or the consumer if the rates were originally too low) or his property without due process”); Niagara Mohawk Power Corp. v. Public Serv. Comm’n, supra, 54 A.D.2d at 257, 388 N.Y.S.2d at 159 (public service commission “does not have the general power to order a utility to make reparation or refunds to its customers”); North Carolina ex rel. Utilities Comm’n & Duke Power Co. v. Edmisten, 291 N.C. 451, 468, 232 S.E.2d 184, 194 (1977) (a “utility company may not properly be denied the right to charge” a reasonable rate “for the present use of its service, for the reason that, in a preceding month, the utility earned an excessive rate of return. ... ”); South Carolina Elec. and Gas Co. v. Public Serv. Comm’n, supra, 275 S.C. at 491, 272 S.E.2d at 795 (“The Commission has no more authority to require a refund of monies collected under a lawful rate than it would have to determine that the rate previously fixed and approved was unreasonably low, and that the customers would thus pay the difference to the utility.”); In re Central Vermont Pub. Serv. Corp., supra, 144 Vt. at 55, 473 A.2d at 1160 (“unless authorized by statute, a rate that requires consumers to pay for past deficits of a utility or that requires a utility to refund to consumers a portion of its previously earned profits constitutes illegal retroactive ratemaking”); Chesapeake and Potomac Tel. Co. v. Public Serv. Comm’n of West Virginia, supra, 300 S.E.2d at 619 (commission could not order utility to refund excess profits because it was empowered to “fix reasonable rates ... to be followed in the future”); Friends of the Earth v. Public Serv. Comm’n, 78 Wis.2d 388, 413, 254 N.W.2d 299, 309 (1977) (commission did not have power to order refund of amounts collected pursuant to a temporary order unless order specifically, provided that a refund might be required).

Rate counsel relies heavily on Narragansett Elec. Co. v. Burke, — R.I. -, 505 A.2d 1147 (1986), in which the Supreme Court of Rhode Island held that the rule against retroactive ratemaking does not preclude a public utility commission from ordering refunds where a utility earns “well in excess of its authorized rate of return.” The court said that the two functions of the rule against retroactive ratemaking are “to protect the public by ensuring that it will not be forced to pay past company deficits in future payments and also to prevent the company from employing future rates to ensure its stockholders’ investments.” Id. at -, 505 A.2d at 1148.

The court’s decision in Narragansett, however, was premised upon an enabling statute that is very different from N.J.S.A. 48:2-21. R.I.Gen.Laws § 39-3-11,¹⁰ which sets forth the commission’s power to fix rates, contains no prohibition on retroactive ratemaking analogous to that contained in N.J.S.A. 48:2-21(b)1. Moreover, Rhode Island empowered its commission with broad power to order refunds:

The division shall have the power, when deemed by it necessary to provide remedial relief from unjust, unreasonable, or discriminatory acts, or from any matter, act or thing done by a public utility which matter, act or thing is in chapters 1 to 5, inclusive, of this title, or otherwise prohibited or declared to be unlawful, to order the public utility to make restitution to any party or parties, individually or as a class, injured by said prohibited or unlawful acts * * *. [R.I.Gen.Laws § 39-3-13.1]

Furthermore, R.I.Gen.Laws § 39-1-38 provides:

The provisions of this title shall be interpreted and construed liberally in aid of its declared purpose. The commission and the division shall have, in addition to power herein specified, all additional, implied and incidental power which may be proper and necessary to effectuate their purpose.

Significantly, in a case that arose before this broad refund provision became effective, the Rhode Island Supreme Court had held that the Public Utility Commission did not have the power to order a refund. See Narragansett Elec. Co. v. Burke, 122 R.I. 13, 404 A.2d 821 (1979). The court explained that “ ‘when a commission pronounces that a specific rate is a “reasonable and lawful rate for the future,” that pronouncement has the force and effect of a statute.’ ” Id. at 22, 404 A.2d at 827 (quoting New England Tel. & Tel. Co. v. Public Utility Comm’n, 116 R.I. 356, 388, 358 A.2d 1, 20 (1976)).

Based upon the statutory language, the statutory rate-making scheme, the Legislature’s very limited and specific authorization to the BPU to engage in retroactive ratemaking, and our prior decisions, we hold that retroactive ratemaking is prohibited regardless of whether such ratemaking benefits the utility or the ratepayer. When existing rates are insufficient to provide a fair rate of return, the proper remedy for the utility is to file an application for higher rates. In re Revision of Rates Filed By Toms River Water Company, supra, 82 N.J. at 213. If, through unforeseen circumstances, a utility earns profits that are deemed excessive, the proper remedy is for a BPU to initiate a proceeding to lower the rates prospectively.

It is within the purview of the Legislature to grant the BPU general retroactive ratemaking power. It has failed to do so. If the BPU seeks such retroactive ratemaking power, it must address its request to the Legislature, not this Court.

IV

Rate Counsel argues that we should remand this case to the BPU because the amount of Elizabethtown’s rate increase was inextricably linked to the refund it ordered the company to make. We find that the BPU’s Decision and Order does not support this position.

Specifically, Rate Counsel argues that by deferring the effective date to February 1, 1985 the BPU authorized a greater increase than it would have approved if the increase had become effective immediately. Rate Counsel points to an affidavit by Anthony J. Zarillo, the BPU’s Chief Executive Officer, which states that the BPU was concerned about the financial impact on the company of delaying the effective date of the increase. Mr. Zarillo states that in order to deal with this concern, the BPU extended the test year through July and accepted certain projected construction expenditures through September, to more closely match historical data with the time rates would be effective.¹¹ We disagree with Rate Counsel’s argument that the amount of the rate increase was premised upon an effective date of February 1, 1985.

“The grounds upon which an administrative order must be judged are those upon which the record discloses that the action was based[,]” Securities and Exchange Comm’n v. Chenery Corp., 318 U.S. 80, 87, 63 S.Ct. 454, 459, 87 L.Ed. 626, 633 (1943), not an after-the-fact affidavit purporting to explain the administrative agency’s decision. The BPU’s order clearly indicates that the decision to extend the test year was based upon well-established BPU policy to select a test year that is as current as possible:

Our conclusion in this regard does not enunciate a change in direction in the policy of this Board. In line with our past policy, the Board will select a test year which is as current as possible under the circumstances but which reflects actual test year data. In addition we will exercise our discretion to recognize known and measurable changes as the off [sic] stated policy of the Board from which we do not depart from [sic] in this case.

[BPU, Decision and Order, supra, at 2.]

The earnings analysis was merely an additional reason to extend the test year: “[s]ince new rates shall not become effective until on or about [February 1, 1985], we believe this is an additional reason to extend the test year to July 31, 1984____” Id. at 7 n. 2 (emphasis added).

Since the BPU has already concluded that a rate increase of $2,656 million is just and reasonable, we find no reason to remand this case to the BPU.

As modified, the judgment of the Appellate Division is affirmed.

1 A utility may earn a rate of return in excess of that approved by the BPU if the utility’s income and/or operating expenses are not correctly estimated when the BPU approves the utility’s tariff. The goal in setting a tariff is to enable the utility to recover its expenses — e.g., operating costs, taxes, depreciation — and obtain a fair rate of return on its equity. Thus, in setting a tariff that will enable the utility to achieve a given rate of return, the BPU must correctly predict the utility’s operating results for the given rate period. If these estimates prove to be incorrect, a utility can earn a rate of return greater or less than the rate of return that is authorized even though it charges the authorized tariff.

2 The term “consolidated” is used to indicate that calculations include the equity and operating results of Mount Holly Water Co., a small subsidiary of Elizabethtown. "Unconsolidated” indicates that calculations do not include data from Mount Holly Water Co.

3 These statistics were based upon data contained in Elizabethtown's 1982 and 1983 consolidated reports to shareholders. The BPU also calculated that Elizabethtown’s return on unconsolidated equity was 17.04% in 1982 and 16.15% in 1983. These calculations were based upon data contained in Elizabethtown's and Mount Holly’s quarterly reports to the BPU and Elizabeth-town’s quarterly reports to shareholders.

4 The company provided the following information concerning earnings:

Twelve Months Ending Return On Average Return On Year End Allowed Rate of Return Equity Equity

Dec. 31, 1972 6.33% 6.32% 12.00%

1973 10.44 10.18 12.00

Twelve Months Ending Return On Average Equity Return On Year End Equity Allowed Rate of Return

1974 6.78% 6.76% 12.00%

1975 9.60 9.44 12.50

1976 14.10 13.57 13.50

1977 11.04 10.38 13.50

1978 9.48 9.41 13.50

1979 12.30 12.04 13.50

1980 12.38 12.14 13.75

1981 11.29 11.15 14.50

1982 16.31 15.69 14.50

1983 15.50 14.29 14.50

May 31, 1984 13.80 12.86 14.50

Sept. 30, 1984 12.73 11.99 14.50 [est.]

Dec. 31, 1984 11.53 11.42 14.50 [est.]

5 "In conclusion, based upon the foregoing and the record in this proceeding, the Board HEREBY FINDS a rate base of $125 million, a rate of return of 10.9%, resulting in an overall income requirement of $13,627 million; the income deficiency is $1,259 million resulting from the deduction of test year utility operating income, as adjusted, in the amount of $12,368 million, from the income requirement. The resultant revenue deficiency to be reflected in higher rates, (according to the terms and conditions which we will specify herein with regard to our treatment of the earnings analysis question), is $2,656 million.” BPU, Decision and Order, No. 8312-1072, at 6 (1984).

6 Originally, both Rate Counsel and the BPU filed petitions for certification out of fear that the right to appeal arising from Judge Coleman’s dissent would be limited to the issue of whether retroactive ratemaking is prohibited and not include the issue of whether the BPU’s rate deferral order in this case constituted retroactive ratemaking. Rate counsel withdrew its petition for certification.

7 We agree with the Appellate Division that there is no merit to the BPU’s contention that Elizabethtown consented to the deferment of the new rates by its letter of August 28, 1984. See 205 N.J.Super. at 535.

8 If rates are too low, they are "confiscatory of the utility’s right of property," and if they are too high, they permit the infliction of "extortionate and arbitrary charges upon the public." In re Intrastate Indus. Sand Rates, 66 N.J. 12, 24 (1974).

9 N.J.S.A. 48:2-21 provides:

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Fix rates, (b) The board may after hearing, upon notice, by order in writing:

1. Fix just and reasonable individual rates, joint rates, tolls, charges or schedules thereof, as well as commutation, mileage and other special rates which shall be imposed, observed and followed thereafter by any public utility, whenever the board shall determine any existing rate, toll, charge or schedule thereof, commutation, mileage or other special rate to be unjust, unreasonable, insufficient or unjustly discriminatory or preferential. In every such proceeding the board shall complete and close the hearing within 6 months and enter its final order within 8 months after the filing of the order of the board initiating such proceeding, when such proceeding is on the board’s own motion; or after issue is joined through the filing of an answer to a complaint, when such proceeding is initiated by complaint.

10 R.LGen.Laws 39-3-11 reads:

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Within ninety (90) days after the completion of any such hearing, the commission shall make such order in reference to any proposed rate, toll or charge as may be proper. Notwithstanding the provisions of this section, the commission shall periodically hold a public hearing and make investigation as to the propriety of rates when charged by any public utility and shall make such order in reference to such rate, toll, or charge as may be just. The hearing prescribed by this section may be held simultaneously with the hearing prescribed by § 39-3-7. In the event of any appeal from an order of the commission in any hearing under this section, such order shall remain in full force and effect during the pendency of said appeal.

11 The parties had stipulated that a test year ending March 31, 1984, would be used. The BPU extended the test year to September 30, 1984.