August 15, 2013
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In a recent opinion, the Appellate Division reversed a decision by the majority of the Commissioners of the Board of Public Utilities (Board or BPU) approving the sale by Atlantic City Electric Company (ACE) of property no longer used by ACE in the provision of electric service.

The case had its inception in 1999, when ACE determined to sell the property located in Cumberland County. The primary bidders consisted of land developers and the State Department of Environmental Protection (DEP). DEP’s initial offer was significantly lower than that of the developers and was conditioned on a requirement of good title, but it was an all-cash transaction. In contrast, the developers’ offer was financed and in part contingent upon a determination to continue following an inspection period.

In JaCommissioners of the Board of Public Utilitiesnuary 2002, ACE and the developers entered into a written agreement for the sale of the property. The developers’ plans included the construction of an age-restricted residential development and a golf course, with much of the property remaining undeveloped. In May 2002, ACE petitioned the BPU for approval of the sale. At a public hearing convened by the BPU, representatives of ACE and members of local government testified in favor of the sale, while others opposed the sale largely on environmental grounds. In support of its request, ACE noted the projected increase in new tax ratables and the attraction of residents who would not adversely impact the school system. Those favoring the sale recognized the “environmentally sensitive nature of the area, but believed [the] developers’ general development plan … appropriately addressed those concerns.…”

Opposing the developers’ purchase, several environmental groups and local residents also testified, stressing the impact of the proposed development on the environment. One opponent, the New Jersey Public Interest Research Group (PIRG), presented a witness who offered an economic analysis of the proposed sale. PIRG contended that a simple comparison of the face value of the offers was insufficient and that a proper analysis should factor in the relative risk and consider the net present value (NPV) of the offers. On that basis, PIRG argued that the DEP offer was actually superior to that of the developers.

Following the public hearing, the DEP increased its offer, again on an all-cash basis with no financial contingencies nor for the need for any developmental approvals.

During the BPU proceeding, ACE presented its own economic analysis, contending that the PIRG report utilized unwarranted assumptions. Factoring in proper adjustments, contended ACE, resulted in the conclusion that the developers’ offer, even on the basis of NPV (as distinct from face value), exceeded that of the DEP.

The local planning board approved the developers’ plan, which was thereafter challenged by several environmental organizations. During the course of the planning board proceedings, as well as an appeal regarding same, the BPU stayed its consideration of ACE’s petition. Following the Appellate Court’s 2007 affirmation of the planning board’s approval, ACE filed a motion before the BPU seeking expedited treatment of its petition.

the ultimate question centers on whether or not the BPU should approve the sale to the developer[s].

The BPU deemed the matter a “contested case” and on April 14, 2009, issued a pre-hearing order in which it determined that “the ultimate question centers on whether or not the BPU should approve the sale to the developer[s].” The prehearing order established a schedule permitting the parties to submit property appraisals and updated economic analyses regarding the offers. On March 23, 2009, the DEP further increased its offer, but shortly thereafter ACE rejected such offer on the basis that the property was already under contract with the developers. Supplemental reports, including economic analyses of the offers, were submitted by ACE, DEP and the environmental group interveners.

Thereafter, the Board designated BPU President Jeanne M. Fox as the presiding Commissioner at a hearing subsequently conducted on September 23, 2009. The witnesses at the hearing were the economic consultants retained by the developers, DEP and the environmental group intervenors. The New Jersey Division of Rate Counsel (Rate Counsel) also participated in the proceeding and opposed the sale to the developers, favoring instead the DEP offer.

On April 14, 2010, a majority of the BPU Commissioners approved ACE’s petition for authorization to sell the property to the developers. The BPU’s decision was memorialized in an Order dated June 21, 2010. Commissioner Fox, in a separate opinion, dissented.

The majority’s position was premised on its conclusion that ACE had reviewed the offers before it in 2002 and that ACE, utilizing its best business judgment, had concluded that the developers’ offer was best: “… [T]he final consideration is that, except in rare situations, the Board is hesitant to replace a valid and reasonable business judgment of a utility with its own business judgment.… In this particular ‘battle of the experts,’ with each party providing different and conflicting discount rates [regarding the NPV of the offers], the Board is inclined to accept the judgment of the party that has the most financial stake in the decision and the most desire to maximize financial benefit––and that is ACE.”

As to the issues raised by the environmental group intervenors, the majority recognized environmental issues to be a “major … question of … public interest,” but concluded that the BPU lacked “the ability or authority to place environmental issues above utility issues.”

The majority also concluded that the Board’s review should be limited to the facts as they existed in 2002, not as modified by events occurring through 2009. Notwithstanding economic changes between 2002 and 2009, the Board noted that ACE was “willing to accept the 2002 offer despite the delay … [and that] it is not the Board’s role to second-guess that decision.”

Commissioner Fox disagreed, concluding that the BPU should not simply defer to the business judgment of ACE but rather that the BPU has an affirmative obligation to review the transaction. The Commissioner further concluded that the DEP and the environmental groups’ expert witnesses were more credible, based upon “stronger credentials and experience directly related to the specific factors involved in this particular transaction[,]” and she adopted their analysis of the risk factors inherent in the developers’ agreement. In addition, Commissioner Fox opined that intervening economic conditions should be taken into consideration.

The environmental group intervenors and Rate Counsel appealed. In its decision, the appellate court noted its limited judicial capacity to review administrative decisions, particularly given the presumptive validity accorded such rulings. The court also noted that the BPU is endowed with “broad powers” to regulate public utilities. Nevertheless, the court agreed with Commissioner Fox, concluding that “[t]he majority’s deferral to ACE’s ‘business judgment’ … ignored the Legislature’s delegation of authority to the BPU in N.J.S.A. 48:3-7a.” The BPU was required, the court held, to make explicit findings of fact regarding its determination.

The court also agreed with Commissioner Fox in concluding that the BPU was required to consider economic conditions between 2002 and 2009 impacting the sale. On that basis, the court concluded that disregarding the majority of the financial evidence contained in the record “limited [the BPU’s] ability to undertake a meaningful statutorily mandated review.”

Notwithstanding the BPU order in mid-2010, none of the opposing intervenors nor the DEP had moved for a stay of the order at any time. Thus, on October 8, 2010, ACE and the developers consummated the transaction. On appeal, the developers therefore argued that the appeal was moot. The court noted, however, that the New Jersey Supreme Court has held that consummation of a transaction during the pendency of an appeal does not render the appeal moot and that where circumstances “equitably call for such action the court may order the [transaction] undone.” The Appellate Division observed that the sale is voidable if “[the] BPU failed to perform a meaningful review of the petition as required by the statute[,]” and that “this case involves an important matter of public interest.” As a result, and notwithstanding the fact that the fact that the transaction had already closed, the court determined that the BPU’s majority decision lacked foundation and that the case should be reversed and remanded for further proceedings.

Author Dennis C. Linken