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Argued March 13, 2001

This appeal involves a final decision of the Board of Public Utilities (BPU) in respect of a rate petition filed by the New Jersey American Water Company (American Water). Within the context of that petition, the Division of the Ratepayer Advocate (Ratepayer Advocate) challenges the policy of the BPU that permits a utility to include half of its charitable contributions as operating expenses for purposes of calculating its service rates. Under that policy, a utility’s ratepayers subsidize fifty percent of the utility’s charitable contributions, whereas its shareholders bear the cost of the other fifty percent.

In reviewing the rate petition, the BPU applied its 50/50 sharing policy and allowed American Water to include half of its charitable contributions in its operating expenses. The Ratepayer Advocate objected on statutory and constitutional grounds. The Appellate Division affirmed the BPU’s determination. We now reverse. We hold that the BPU’s 50/50 sharing policy is arbitrary, lacks a sufficient basis in the record, and thus constitutes unreasonable agency action. Accordingly, no portion of a utility’s charitable contributions may be subsidized by the utility’s captive ratepayers. In view of that holding, we do not address the constitutional questions raised by the Ratepayer Advocate.

 
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