DIRECTOR, DIVISION OF THE RATEPAYER ADVOCATE
25 West Market Street
Trenton, NJ 08625
I am Blossom Peretz, the State's Ratepayer Advocate. I am going to present a five-minute introductory statement on this case, after which my colleague Gregory Eisenstark will address my general points and all of the issues raised in our briefs in greater detail.
In this era of rapid change that is, the concurrent deregulation of electric and gas and telecommunications utilities, public utility commissions are experimenting with new models of regulation. What concerns me here today is that in our zeal and haste to implement competition - there has been abandonment of regulatory due process rules of procedure which deprives ratepayers of the benefits of deregulation and competition. At the present time as we all know, there is little or no competition or choice for most ratepayers in the New Jersey energy marketplace. As of November 1, 2000 only 1.8% of PSE&G residential electric ratepayers have chosen an alternate supplier, and notwithstanding the mandatory statutory discount - energy ratepayers have and will certainly be faced with high energy rates - some of which are directly related to Board of Public Utilities actions which are the subject matter of this appeal. What is at stake here today is both the public interest and the public pocketbook.
More specifically:
The Board of Public Utilities' order which is the subject matter of this appeal violated numerous requirements of the Electric Discount Energy Competition Act. I want to highlight three of these violations which are fundamental to the success of the Act.
One. The Board failed to require PSE&G to implement the Act's mandatory 5% rate reduction from April 1997 rates. The Board instead allowed the utility to implement only a 1.1% reduction.
Two. The Board allowed PSE&G to count toward rate reductions excess depreciation reserves that were already due back to customers, and by deferring recovery of certain expenses until after the four-year transition period ends.
Three. In approving PSE&G's transfer of rate based generation assets to an unregulated affiliate without a hearing, the Board adopted figures for the transfer value and for stranded costs that are inconsistent with the clear arithmetic equations provided for in the Act.
Aside from the obvious failure to comply with express statutory provisions, there are two fundamental tenets of administrative law which have been ignored which ensure that an agency, in exercising its discretion, adheres to the responsibilities delegated to it by the legislature :
The first rule is that an agency must follow basic rules of practice and procedure. These rules are intended to ensure the adequacy of the evidence upon which the agency makes its decision, and they help make sure that interested parties have sufficient opportunity to be heard and challenge opposing evidence.
This case involves so many procedural irregularities that one can only presume that the Board acted with extreme haste in complete disregard of the basic norms of administrative practice.
Let me provide just a few examples:
One. Without a hearing and without giving parties an adequate time to review the proposal, the Board approved the company's proposal to issue bonds securitizing billions of dollars of stranded costs.
Two. Without making the factual findings expressly required by its own regulations, the Board waived application of its own rules on asset transfers.
Three. Without any evidentiary hearing, the Board permitted PSE&G to transfer permanently billions of dollars of generating assets, historically paid for by ratepayers, to an unregulated affiliate.
Four. The Board based its determination of the market value of the generation assets on a document that was never part of the record and was prepared seven months after the record was closed. This out-of-record document affected the allocation of billions of dollars between ratepayers and shareholders.
The second area in which the Board failed to comply with its duties as an administrative agency relates to its obligation to explain the reasons for its decisions in writing.
For example: I will just highlight one example - my colleague Mr. Eisenstark will present the others.
The Board's decision never explains why it selected the auditor's so-called "mid-range" estimate of stranded costs. Nowhere does the decision say why the "mid-range" figure was any more likely to be more accurate than the lower or higher figures, which differed by billions of dollars.
The Board's adoption of a so-called "mid-range" scenario parallels the Board's action on Interconnection costs in the Bell Atlantic-NJ proceeding, which was just recently remanded by the U.S. District Court to the Board of Public Utilities. In reaching its determination on cost and rates of a switching system, -- the Board simply applied a 60/40 solution -- without explanation. The federal court characterized this decision as "agency compromise" rather than "agency decision"-- resulting in "arbitrary and capricious" rule making. The Board was told on remand to adopt prices on an "item by item" basis and explain its decision.
An agency must explain the reasons for its decisions in writing. A reader of the agency's decision should see a logical connection between the evidence in the record, the statutory requirements, and the agency's decision.
Without this Court's intervention, the combination of the Board's violations will cost ratepayers millions of dollars. But perhaps equally important, if upheld by this Court, the violations will have serious ramifications for the administrative process in New Jersey, for they will cause a demise in the basic tenets of administrative law.
3. Effect on Competition
My third and final main point relates to electric competition. Our Legislature has determined that competition in the electric generating industry holds the promise of lower rates for consumers and the development of new, more efficient technologies.
And it is not just electricity. Recent statutes charge the Board with literally transforming three multi-billion dollar industries simultaneously: the electric, gas and telecommunications industries. This transformation -- from a century of monopoly to a future of competition -- determines the assignment of billions of dollars in past investments between consumers and shareholders.
To put this in perspective for this Court: determination of stranded costs and subsequent securitization was not a routine financial transaction: It transferred $2.525 billion dollars of shareholders corporate debt into $2.525 billion dollars of ratepayer liabilities - to retire shareholder debt and equity - putting the irrevocable burden of payment on New Jersey PSE&G customers bills for the next 15 years. This kind of obligation surely demands administrative accountability and due process.
The Board's legal violations are coming at just the wrong time. This state cannot realize the potential of competition and choice for ratepayers if its chief regulators do not comply with the fundamentals of due process or the basic demands of administrative law. The Board will try to defend its decision as "policy judgments." But setting charges for consumers based upon an incomplete record or improper allocation of dollars is not a policy judgment. How far can an administrative agency wander from procedural tenets of due process? When are settlements and negotiations of a few parties to the proceeding appropriate as a substitute for quasi-judicial fact finding by an administrative agency? How can the Board make a decision about a transfer of assets that was not proposed at the time of the litigated proceeding? Administrative due process requires deliberate attention to the quasi-judicial functioning role of the regulatory agency; determination of these issues cannot be blithely decided as quasi-legislative or policy making issues. We ask this Court to reverse the Board's erroneous decision and to require the proper legal determinations necessary for reaching our goals of the energy legislation - lower rates, choice and competition. All within the ambit of due process.
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