Matter of Alleged Violations of Law by Valley Road Sewerage Co.

712 A.2d 653, 154 N.J. 224, 1998 N.J. LEXIS 576

• Court: Supreme Court of New Jersey
• Decided: June 12, 1998
• Status: Published

Opinions

The opinion of the Court was delivered by

POLLOCK, J.

This appeal questions the decision of the Board of Public Utilities (BPU) to revoke the franchise of Valley Road Sewerage Company (Valley Road), a small, privately owned sewerage company, and to seek the appointment of a receiver to sell Valley Road. The appeal also questions the order of the Chancery Division appointing the receiver. The Appellate Division affirmed both orders. 295 N.J.Super. 278, 284, 685 A.2d 11 (App.Div.1996). We granted Valley Road’s petition for certification, 151 N.J. 71, 697 A.2d 544 (1997), and now affirm.

I.

The parties do not dispute the essential facts. Valley Road collects and treats sewage from approximately 623 homes in Hillsborough and Tewksbury Townships, New Jersey. Two plants, known as the River Road and Fieldhedge Drive Treatment Plants, serve approximately 547 residential customers in Hillsborough. The Pottersville Treatment Plant serves approximately 76 customers in Tewksbury.

Until his death in December 1996, Richard Schindelar was Valley Road’s chairman of the board of directors, president, and sole shareholder. Schindelar’s wife, Marjorie, served as a director and as Valley Road’s corporate secretary. We collectively refer to Valley Road, Richard Schindelar, and Marjorie Schindelar, as ‘Walley Road.” None of the Sehindelars’ children live in New Jersey or have ever been involved in the company.

Schindelar established Valley Road in 1962 to treat the sewage from certain residential developments. After constructing the system, the developers donated the system to Valley Road. The BPU approved Valley Road’s franchise in 1966. Other than Schindelar, who was responsible for the day-to-day operations of Valley Road, the company employed only two employees, a day laborer and a part-time secretary.

From its inception, Valley Road has been beset with financial, managerial, and environmental problems. Notwithstanding rate increases in 1979 and 1984, the company has never operated at a profit. Yet, its rates exceed substantially those charged by the Hillsborough Township Municipal Authority (HTMUA), which serves customers in adjacent areas of Hillsborough Township. As of February 1993, moreover, Valley Road’s financial records reflected “negative retained earnings,” or a cumulative deficit, of two million dollars. Its liabilities included “loans” in excess of $760,-000 owed to Schindelar, accrued but unpaid “salary” totaling approximately $200,000 owed to him, past due Franchise and Gross Receipts Taxes totaling over $400,000 due the State of New Jersey, and municipal taxes totaling approximately $94,000 due the Township of Tewksbury.

Most of the company’s extensive environmental violations have arisen from its failure to correct a serious inflow and infiltration (I & I) problem with its sewerage collection system. During periods of wet weather, large amounts of surface and ground water infiltrate the company’s sewerage collection lines, causing the flow of wastewater entering the treatment plants to exceed design capacity. As a result, the effluent discharged by the plants has contained levels of pollutants that exceed requisite permit levels (effluent limits). Valley Road has known of the I & I problem since the mid-1970s when the New Jersey Department of Environmental Protection, Division of Water Resources (DEP) discovered that the Fieldhedge Drive Plant had “severe infiltration/inflow problems in the sewerage collection system.” The I & I problem caused wastewater flows “grossly exceeding its design capacity and permit flow limitations.”

For over 20 years, Valley Road has incurred extensive fines and penalties resulting from its broken promises to correct the I & I problem. In 1978, Valley Road promised the DEP that it would correct several violations, including those arising from I & I. Valley Road, however, failed to make the corrections. In September 1979, the DEP fined Valley Road $2,000, finding:

As a direct result of the failure by Valley Road to undertake the corrective actions required by the [DEP], there has occurred and is continuing to occur an unlawful discharge of improperly and inadequately treated wastewater from Valley Road’s Fieldhedge Plant into the waters of the State, specifically a tributary to Royce Brook which flows into the Millstone River, a potable water supply source____

Similarly, in 1985, Valley Road entered into an Administrative Consent Order (ACO) with the DEP to resolve penalty assessments in 1983 for violations at River Road and Fieldhedge Drive Plants. In the ACO, Valley Road agreed to pay $12,600 in penalties and to undertake a number of remedial measures, including replacing Schindelar with a full-time plant operator, filing for a rate increase, and hiring an independent contractor to correct the I & I problem. Consequently, the company hired a plant manager and received a substantial rate increase. Yet, Valley Road failed to hire the contractor to fix the I & I problem. Schindelar, moreover, became “dissatisfied” with the plant manager’s performance. In violation of the ACO, Schindelar resumed control over Valley Road’s operations in July 1991. Because the I & I problem continued to cause effluent limit violations, the DEP assessed Valley Road with $660,000 in penalties in 1992.

Valley Road remains at risk of incurring additional penalties. The company’s New Jersey Pollution Discharge Elimination System permit for the Fieldhedge Drive Plant required that plant’s connection to the HTMUA system by November 1987. Connection to the HTMUA system would remedy prohibited discharges from that plant. The company, however, has failed to take the necessary steps to connect to the plant.

In an attempt to negotiate a settlement of its various liabilities, Valley Road has entered into an agreement with the State of New Jersey to settle its tax liability for $160,000. Likewise, the Township of Tewksbury has agreed to accept $25,500 in full settlement of Valley Road’s past due tax liability. Both of these agreements, however, are contingent on Valley Road settling with the BPU, a contingency that remains unsatisfied. Additionally, the DEP has drafted ACOs that would, among other things, settle Valley Road’s outstanding penalty assessments for $118,750. The draft ACOs, however, are based on the BPU’s agreement to the terms of a proposed “business plan,” described in greater detail below (infra at p. 233). In a letter dated August 11, 1994, the DEP indicated that if a settlement was not reached between the DEP and Valley Road by January 1,1995, the DEP “intended] to pursue additional enforcement action in this matter as it deems appropriate.” To date, the ACOs have not been executed.

In 1992, Valley Road filed a petition for a rate increase. At a public hearing in Hillsborough Township on February 25, 1993, approximately 300 Valley Road customers appeared. Eighteen customers spoke in opposition to the increase, as did a lawyer appearing on behalf of the Rutgers Environmental Law Clinic and Hillsborough Township. The record does not reflect that anyone spoke in favor of the increase.

The Administrative Law Judge (ALJ) recommended the denial of any rate increase, stating that Valley Road presented the “most egregious example[ ] of corporate mismanagement [he] had [ever] witnessed,” and that “the existing management ha[d] failed for the past twenty years” to provide “safe, adequate, and proper service to its customers.” He concluded:

In over 23 years of practicing in the area of utility regulation, I have never seen an instance of such managerial dereliction which has resulted in the disastrous financial and operational condition that the Valley Road Sewerage Company now finds itself in. While finding no evidence of willful misconduct on the part of management it is nonetheless apparent that for the Board to grant any rate increase at this time would be inappropriate and totally inadvisable.

The BPU adopted the ALJ’s Initial Decision recommending denial of the rate increase. Like the ALJ, the BPU concluded that Valley Road’s management was so incompetent that it could not be trusted to take the .necessary remedial action, even if it received the requested rate relief. The Appellate Division found that the record amply supported that finding. In re Valley Road Sewerage Co., 285 N.J.Super. 202, 208, 666 A.2d 992 (App.Div.1995).

In affirming the denial of rate relief, the Appellate Division recited Valley Road’s precarious financial position and “appalling record of environmental violations.” Id. at 207, 666 A.2d 992. The court noted Valley Road’s “chronic problems with ‘infiltration and inflow’ of excessive amounts of extraneous water, such as groundwater and sump pump discharge, into its sewage collection system.” Ibid. Stating that “[DEP] penalty assessments eontinue to be imposed at an alarming rate,” the court referred to Valley Road’s agreement to an administrative consent order “to pay over $12,000 in penalties for numerous violations at the company’s River Road and Fieldhedge Drive plants.” Ibid. Similarly, the court observed that Valley Road had failed to submit a plan to remedy its I & I problems, which was a condition to DEP’s agreement to reduce the $660,000 in penalties. Ibid. Contrary to a condition on the permit to operate its Fieldhedge Drive plant, moreover, Valley Road failed to cease operations by November 1, 1987.

After denying Valley Road further rate relief, the BPU ordered hearings on the revocation of Valley Road’s operating authority “for failure to render safe, adequate and proper service----” In response, Valley Road proposed a “business plan,” which called for the relinquishment of managerial control to an independent contractor acceptable to the BPU, execution of consent orders with the DEP to settle environmental issues and fines, execution of agreements with the Division of Taxation and Tewksbury to settle all tax claims, and approval of a rate increase from $375 per year to $827 per year.

In its Decision and Order of November 4, 1994, the BPU found that the business proposal was “too little, too late, and too costly.” Supporting that decision were the Board’s findings regarding Valley Road’s precarious financial condition, its non-compliance with applicable legal and environmental requirements, and Schindelar’s decision to use tax monies due the State and the Township of Tewksbury as a “credit source.” Although Valley Road was still serving its customers, the BPU was wary about the company’s continuing ability to provide such service. Additionally, the BPU found that it would be “blatantly unfair to allow current management to retain its franchises and operating authority while attempting to remedy years of managerial neglect at the expense of its ratepayers.” Accordingly, the BPU directed the Attorney General to seek the appointment of a custodial receiver to operate the company and to sell it to a qualified buyer. On appointment of the receiver, the BPU revoked Valley Road’s franchise and barred the Schindelars from owning or operating another public utility.

In an unpublished opinion, Assignment Judge Wilfred P. Diana, sitting in the Chancery Division, sustained the BPU’s request. Judge Diana reasoned that the appointment of a receiver was necessary to implement the BPU’s revocation of Valley Road’s franchise and the removal of the Schindelars from the management and ownership of Valley Road. Concerning the sale of Valley Road’s assets, the Chancery Division order stated:

The receiver is directed to solicit proposals for the acquisition of the Company or its assets by a qualified buyer or buyers, and shall promptly notify [the] court and the Board of Public Utilities of all such proposals. The receiver shall provide at least sixty days notice and a copy of any proposal to the court, all known creditors and other interested parties. Any objections to or comments on the proposed sale shall be submitted to the court within said sixty day period after which the court shall render its decision on the proposal.

Valley Road requested the court to require the custodial receiver, among other things, to apply for a rate increase that would yield a “reasonable return,” and to take other measures aimed at obtaining the “highest possible net return, consistent with the law, from the sale of the company.” Those measures included appealing the BPU’s denial of any rate increase that did not yield a reasonable rate of return, selling the company at no less than its condemnation value, and postponing any such sale until the company was “put on a sound financial footing.” Judge Diana rejected the request stating:

The receiver’s function is not to obtain the highest possible value for the company, ,but to arrange a sale that is commercially reasonable in light of the Company’s current condition. The reasonableness of the proposed sale will be reviewed by the court and the parties hereto at the time of the proposal’s submission pursuant to this order.

The Appellate Division affirmed the orders of both the BPU and the Chancery Division. 295 N.J.Super. at 284, 685 A.2d 11. The court found that substantial credible evidence supported the BPU’s findings, id. at 286, 685 A.2d 11, and that the BPU’s rejection of Valley Road’s business plan “was not arbitrary and capricious.” Id. at 287, 685 A.2d 11. It also sustained the BPU’s implied power to bar the Schindelars from owning or managing a public utility. Id. at 288, 685 A.2d 11. Finally, the Appellate Division sustained the Chancery Division’s power to appoint an equitable receiver with the power to sell Valley Road’s assets. Id. at 292-93, 685 A.2d 11.

. In its petition for certification, Valley Road questions the BPU’s authority to revoke its franchise and to seek the appointment of a custodial receiver with the power to operate and sell the company. It also questions the fairness and reasonableness of the Chancery Division’s order of sale.

II.

We first address Valley Road’s contention that the BPU lacks authority to revoke its franchise and to seek the appointment of a custodial receiver with the power to operate and sell the company. The New Jersey Legislature has vested the BPU with “general supervision and regulation of and jurisdiction and control over all public utilities ... and their property, property rights, equipment, facilities and franchises so far as may be necessary for the purpose of carrying out the provisions of [Title 48 of the New Jersey Statutes].” N.J.S.A 48:2-13. The BPU’s authority extends not only to the corporate entity, but to “every individual ... that now or hereafter may own, operate, manage or control” the utility. Ibid. This sweeping grant of power is “intended to delegate the widest range of regulatory power over utilities to the [BPU].” Township of Deptford v. Woodbury Terrace Sewerage Corp., 54 N.J. 418, 424, 255 A.2d 737 (1969). Furthermore, the BPU’s authority over utilities, like that of regulatory agencies generally, extends beyond powers expressly granted by statute to include incidental powers that the agency needs to fulfill its statutory mandate. A.A. Mastrangelo, Inc. v. Commissioner of Dept. of Envtl. Protection, 90 N.J. 666, 683-84, 449 A.2d 516 (1982); New Jersey Guild of Hearing Aid Dispensers v. Long, 75 N.J. 544, 562, 384 A.2d 795 (1978).

The statutory scheme establishes the BPU’s authority to revoke Valley Road’s franchise. First, N.J.S.A 48:2-14 provides that “[n]o privilege or franchise granted ... to any public utility by a political subdivision of this State shall be valid until approved by the [BPU].” In approving a privilege or franchise, moreover, the BPU “may impose such conditions as to construction, equipment, maintenance, service or operation as the public convenience and interests may reasonably require.” Ibid. Implicit in the power to grant a franchise is the power to revoke it for breach of the franchise’s conditions. Board of Pub. Util. Com’rs v. Sheldon, 95 N.J.Eq. 408, 410, 124 A. 65 (Ch.1924).

Second, N.J.S.A 48:2-10 provides that the BPU “at any time may order a rehearing and extend, revoke or modify an order made by it.” This provision encompasses the grant of a franchise to a public utility. See Township of Deptford, supra, 54 N.J. at 424-25, 255 A.2d 737 (holding that under N.J.S.A. 48:2 — 10, BPU had authority to revoke its prior approval of option clause in license granting franchise, which permitted municipal government to purchase franchise at later date for specified sum). We conclude that, whether implied from its authority to approve a franchise or its authority to revoke prior orders, the BPU could revoke Valley Road’s franchise rights.

Finally, the authority to seek the appointment of a custodial receiver is fairly inferable from the expansive powers that the Legislature has granted to the BPU. Those powers include the authority to require compliance with State and local laws, N.J.S.A 48:2-16(l)(a), to require the provision of safe, adequate, and proper service, N.J.S.A 48:2-23, and to revoke a franchise that fails to provide such service. Fairly inferable is the legislative intent to vest the BPU with the discretion to revoke a franchise and to seek the appointment of a custodial receiver when such action is necessary to ensure the continued provision of safe, adequate, and proper utility service. Cf. Application of Pennsylvania & Newark R.R. Co., 31 N.J. 146, 154, 155 A.2d 761 (1959) '(stating that state may seek forfeiture of utility franchise that fails to serve public).

In an analogous context, the Legislature has required the BPU and the DEP to consider the acquisition of small water companies. The Small Water Company Takeover Act, N.J.S.A. 58:11-59 to - 63, provides:

Whenever any small water company is found ... to have failed to comply, within a specified time, with any order of the [DEP] concerning the availability of water, the potability of water and the provision of water at adequate volume and pressure, ... [the DEP and the BPU] shall, ... conduct a joint public hearing to determine: the actions that may be taken ... including, but not necessarily limited to, the acquisition of the small water company by the most suitable public or private entity.

[N.J.S.A 58:11-59 (footnotes and citations omitted).]

The express grant of power to order the acquisition of small water companies does not detract from the BPU’s implicit power to seek the sale of small sewerage companies.

Our research has not uncovered any case, and counsel have not provided us with any, in which the BPU previously has sought to take over a small sewerage company. Perhaps because the failure of small water companies is more common than that of small sewerage companies, the Legislature enacted the more specific provisions of the Small Water Company Takeover Act. Although we conclude that the BPU has the authority to revoke Valley Road’s franchise and to seek the appointment of a custodial receiver with the power to sell the utility, we suggest that the BPU promulgate regulations to clarify the exercise of that authority.

III.

We now turn to the BPU’s exercise of its authority. Our review of the BPU’s decisions is limited to determining whether sufficient credible evidence exists in the record to support the BPU’s findings. Mayflower Securities Co. v. Bureau of Securities, 64 N.J. 85, 92-93, 312 A.2d 497 (1973); see also N.J.S.A 48:2-46 (stating that court may set aside BPU’s order, in whole or in part, “when it clearly appears that there was no evidence before the [BPU] to support the same reasonably or that the same was without jurisdiction of the [BPU].”). Similarly, we review the BPU’s choice of remedy only for illegality, arbitrariness, or abuse of discretion. Mayflower Securities, supra, 64 N.J. at 93, 312 A.2d 497.

Valley Road no longer contests the BPU’s findings describing the utility’s “abysmal” history of violating legal and environmental requirements. Instead, Valley Road questions the BPU’s findings that the company’s business plan was “too little, too late, and too costly,” and that it would be “blatantly unfair to allow current management to retain its franchises and operating authority while attempting to remedy years of managerial neglect at the expense of its ratepayers.” Valley Road also contends that revocation of its franchise and appointment of a custodial receiver to operate and sell the company was inappropriate.

Ample evidence in the record, however, supports the BPU’s rejection of Valley Road’s proposed business plan. First, Valley Road has a history of making and breaking promises to regulatory agencies. Consequently, the BPU could question Valley Road’s ability to comply with the proposed business plan. Since 1978, Valley Road has promised the DEP that it would correct its I & I problem. Despite two subsequent rate increases, the problem persists. In fact, in its 1985 ACO with the DEP, Valley Road promised, among other things, to hire a full-time plant operator, to file for a rate increase, and to hire an independent contractor to fix the I & I problem. Sehindelar, however, eventually retook control of the company because he was “dissatisfied” with the operator’s performance. Moreover, despite receiving a rate increase in an amount stipulated by Valley Road as fair and satisfactory, the company never hired the contractor. Given Valley Road’s failure to adhere to similar agreements in the past, the BPU’s reluctance to agree to Valley Road’s business plan was reasonable.

Second, the tax agreements and consent orders in the business plan are contingent on the resolution of the issues in this proceeding. The ACOs, moreover, remain unexecuted. In the absence of executed ACOs, we decline to override the BPU’s conclusion that Valley Road has not settled its environmental problems with the DEP.

Nor can we say that the BPU was unfair in preventing Valley Road from imposing on its current customers the cost of decades of neglect. Valley Road insists that none of the proposed rate increases will pay for the costs of its past mismanagement. Yet, Valley Road does not explain how, without substantial rate relief, it plans to raise the funds needed to pay its debts.

Valley Road further maintains that Sehindelar’s financial mismanagement actually benefitted Valley Road’s customers. It argues that by lending the company money instead of seeking rate increases, Schindelar in fact “subsidized” the customers’ rates for thirty years. The argument is unpersuasive. Current customers, many of whom never benefitted from Schindelar’s “subsidies,” would be exposed to a tripling of their rates under Valley Road’s proposal.

Given the unique history of this case, the BPU’s decision to revoke Valley Road’s franchise and to seek the appointment of a custodial receiver to operate and sell the company does not constitute an abuse of discretion. Contrary to Valley Road’s contention, moreover, the BPU is not restricted to revoking a utility franchise only on a showing of “willful misconduct.” The BPU need not first make a finding of willful misconduct before concluding that a utility is incapable of providing safe, adequate, and proper service. We further reject Valley Road’s argument that the BPU may not seek the appointment of a custodial receiver with the power of sale if there is any less onerous remedy available. To assure that a utility provides safe, adequate, and proper service, the BPU must have some latitude in its choice of remedies. We anticipate that only in extreme eases such as the present one will the BPU seek the appointment of a custodial receiver with the power to sell a utility.

IV.

The remaining question concerns the Chancery Division order appointing the custodial receiver and directing the sale of Valley Road or its assets. Valley Road asserts that the receiver must put the company on a sound financial footing and correct its environmental problems before proceeding with the sale. We disagree.

As a general rule, a receiver should try to obtain the highest possible price from the sale of property. Jackson v. Smith, 254 U.S. 586, 588, 41 S.Ct. 200, 201, 65 L. Ed. 418 (1921). Unlike other corporations, however, utilities are subject to a special obligation to serve the public interest. In particular, the primary obligation of a utility is to provide safe, adequate, and proper service at fair and reasonable rates. N.J.S.A 48:2-21; N.J.S.A. 48:3-3. The Legislature has entrusted the BPU with the responsibility of assuring that utilities fulfill that obligation. N.J.S.A. 48:2-23. It follows that the sale of a utility or its assets is subject to the utility’s statutory obligation to provide safe, adequate, and proper service. Any such sale also is subject to the regulatory authority of the BPU. Satisfying those obligations may affect the terms of the sale, including the number of qualified buyers, the conditions of sale, and the sale price.

Consistent with that analysis, the Chancery Division order directs the receiver to solicit and notify both the court and the BPU of “proposals for the acquisition of the Company or its assets by a qualified buyer or buyers.” The court explained that “[t]he receiver’s function is not to obtain the highest possible value for the company, but to arrange a sale that is commercially reasonable in light of the company’s current condition.” The term “commercially reasonable” is not self-defining. In this context, we assume it implicitly recognizes that the public responsibilities of a utility can affect the value of its assets.

Property affected with a public interest, such as the assets of a public utility, fulfill a societal need while providing an investment opportunity. In general, investors may expect a utility to earn a reasonable rate of return on its assets. N.J.S.A 48:2-21(b); In re Proposed Increase Intrastate Sand Rates, 66 N.J. 12, 23-24, 327 A.2d 427 (1974). That expectation, however, is subject to the utility’s duty to provide safe, adequate, and proper service. In re Valley Road Sewerage Co., supra, 285 N.J.Super. at 209-11, 666 A.2d 992. Hence, the utility’s duty to provide such service limits the investment opportunity. Our dissenting colleagues do not recognize that when a utility fails, as miserably as this utility has failed, to meet its public obligations, that failure can affect the value of the utility’s assets. Indeed, the dissent substitutes its opinion for the concerns of the utility’s customers and the BPU, the agency entrusted with the responsibility of regulating utilities. Contrary to the dissent, we believe that the Legislature did not intend that the BPU should shrink from its delegated responsibilities when confronted with so egregious a case of utility mismanagement.

The record establishes that Valley Road will not be on a sound financial footing in the foreseeable future. Decades of mismanagement have undermined the utility’s assets and its ability to earn a reasonable return. To postpone the sale would reward Valley Road for its failure to obey environmental requirements, pay taxes, and fulfill its duty to its customers.

The judgment of the Appellate Division is affirmed.