On July 19, the New Jersey Board of Public Utilities (BPU) issued an order directing utility companies to provide refunds of certain deposits retained by utilities for main extension construction to comply with prior rulings by the Appellate Division. The Appellate Division’s rulings, made in 2009 and 2012, concerned revisions that the BPU had adopted in 2004 to its Main Extension Rules, which substantially departed from prior regulatory schemes. These revisions limited refunds for the construction of extensions for utility services to only “areas designated for growth” (or “growth areas”) set forth in N.J.A.C. 14:3-8.1 et seq. This limit on refunds was invalidated by the Appellate Division in 2009. In June 2012, after subsequent litigation, the Appellate Division ordered full retroactive application to the 2009 invalidation. The 2012 decision also required reimbursement to eligible developers whose deposits were wrongfully withheld from as far back as 2005. The July 19 order marks the BPU’s first substantial act to implement the Appellate Division’s June 2012 decision.

BPU Main Extension Rules and the Centex Appeal

For almost a century, New Jersey statutory law, N.J.S.A. 48:2-27, required regulated utilities to pay for the extension of utility service to new developments so long as the service was reasonable, the extension would provide sufficient monetary returns for the utility, and the utility could reasonably afford to provide the extension. This all changed in 2004, when the BPU revised the Main Extension Rules, N.J.A.C. 14:3-8.1 et seq. The revisions took effect in March 2005 and prohibited public utilities from paying for or financially contributing to the cost of utility extensions that were not located in designated growth areas, as defined by the State Planning Commission in the New Jersey State Development and Redevelopment Plan (the “state plan”).

The BPU’s amendment of the rules to limit refunds for utility service extensions to only designated growth areas had a significant effect on developers in New Jersey. One such developer, Centex Homes, challenged the BPU’s 2004 amendments to the rules. In 2006, Centex began construction on its Colts Neck Crossing project. The 555-unit, age-restricted residential development in Howell Township had been planned for many years. It was located on a major highway, and it was within two miles of the town center of the Borough of Farmingdale. Despite its accessible location, the project was not in a designated growth area and was, therefore, ineligible for a utility extension refund. Centex paid over $5 million to construct utility extensions for Colts Neck Crossing.

In November 2006, Centex petitioned the BPU for an exemption from the rules and to order the utilities to reimburse Centex for utility extension costs expended for Colts Neck Crossing. The BPU rejected this request, and Centex filed an appeal with the Appellate Division. In its appeal, Centex argued that the 2004 amendments to the rules were invalid because they violated the BPU’s statutory directive and were, therefore, ultra vires. Centex also argued the 2004 amendments created an illegal regulatory application of the state plan and “smart growth” principles. The BPU claimed the rules were a valid exercise of the BPU’s authority to determine whether a utility extension was reasonable and practical. The BPU also defended its action under the premise that the State Planning Act authorized the incorporation of the state plan into its rulemaking.

Although the Appellate Division noted that the BPU does have broad power to regulate utilities, it found that the power to do so must come from the BPU’s enabling legislation or a general statutory provision that delegates additional or incidental powers to the BPU. The court found that the 2004 amendments to the rules were an “extreme departure” from the procedures that had been used for nearly a century, and held that the BPU lacked the statutory authority to make such sweeping changes without legislative authorization. In re Centex Homes, 411 N.J. Super. 244, 248, 267 (App. Div. 2009). Therefore, the court held that the rules exceeded the BPU’s rulemaking authority and were invalid.

Subsequent Litigation

In response to the Appellate Division’s decision in Centex, the BPU solicited comments from interested parties concerning how to treat refunds to parties other than Centex. The BPU directed the utilities to process all new applications for extensions as if the project was occurring in an authorized growth area. However, the BPU went on to issue an order on Oct. 22, 2010, which limited the retroactive application of the Centex decision only to those projects that were still in the process of requesting an extension. There were only 18 matters pending before the BPU that would fit this narrow category, leaving thousands of extensions paid-for or installed prior to Centex that were nonrefundable.

The BPU’s October 2010 “pipeline retroactivity” order was also challenged in the Appellate Division and, like the 2004 amendments to the rules, was struck down. Although the BPU argued that full retroactivity was inappropriate due to economic, legal and operational concerns, the court dismissed those justifications. Judge Baxter, writing for the three-judge panel, noted that, when a ruling applies settled principles and does not announce a new rule of law, it will be given retroactive application. In re Board’s Main Extension Rules, 426 N.J. Super. 538, 549 (App. Div. 2012). Because the decision in Centex did not announce a new rule of law, but instead reinstated the “well-accepted and well-understood century long procedure,” full retroactive application was appropriate. The court ordered the BPU to adopt rules so that all developers and homeowners affected by the invalidated rules were to be granted refunds. The court further declared that the rulemaking process to grant all applications refunds under Centex should not only consider the time, place and manner for refund requests, but also whether any costs associated with the invalidated rules were passed on to homebuyers by developers. Board’s Main Extension at 563.

BPU Order of July 19, 2013

On Oct. 4, 2012, the BPU took its first step to comply with the Appellate Division’s decision requiring full retroactivity. All utilities were directed to submit information regarding utility extensions built from March 1, 2005, through Dec. 30, 2009. The BPU then held a stakeholder meeting in January 2013, which was followed by a written comment period.

There was a general consensus among the stakeholder group that the refund of the extension payment should go to the initial applicant, rather than speculate as to any pass-through of main extension installation costs to subsequent owners of the property. This position was supported by the New Jersey Rate Counsel, the utility companies, developers and industry organizations.

Additionally, in its July 19 order, the BPU admitted that the ongoing rulemaking process was unnecessarily delaying utilities from providing refunds where the applicant and the utility agreed on the refund amount. In its July 19 order, the BPU directed utilities to provide refunds. This order became effective July 29, and should resolve most of the thousands of outstanding refund claims.

In the July 19 order, the BPU ordered utilities to engage in either an individual or public notice process to identify and notify eligible parties of their refund, starting no later than August 29. All contributions paid by applicants for utility extensions installed between March 20, 2005, and Dec. 30, 2009, are to be re-evaluated as if they occurred in an authorized growth area.

In its July 19 order, the board established the following refund criteria:

(1) The party requesting the refund submits a written request to the utility;

(2) The utility and the party agree on the appropriate recipient of the refund;

(3) The party provides “sufficient evidence” of entitlement, including supporting affidavits;

(4) The utility and the party agree on the amount to be refunded;

(5) The party agrees, in writing, to hold harmless and indemnify the utility against any competing claim for the refund; and

(6) If the utility does not have sufficient documentation reflecting payment, the party must submit proof of payment.

In those instances where the party and the utility cannot agree on the amount of the refund, the BPU will determine the amount that would have been refunded as if the extension were built to serve a “growth area.”

The decision by the BPU, ordering the utilities to begin issuing refunds, is a welcome outcome for the development community. As noted by the Appellate Division, utilities maintain “meticulous” records for utility extension projects and are required to do so by statute. It should not be a cumbersome process for utilities to notify recipients of utility extensions that occurred during the prescribed time period or determine and verify the amount of refund owed to parties. This July 19 order will bring long-awaited, significant financial relief to individuals and developers, both large and small. •

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