New York Telephone Co. v. Public Service Commission, 95 N.Y.2d 43 (2000)
A public service commission can order a utility to pass on profits from the sale of a non-rate-based asset to ratepayers if the ratepayers previously funded the asset’s value through their payments for services.
Summary
New York Telephone Company (NYT) sold its interest in Bell Communications Research, Inc. (Bellcore). The Public Service Commission (PSC) ordered NYT to pass on the intrastate portion of the profit from the sale to its ratepayers. NYT challenged the PSC’s authority. The Court of Appeals held that the PSC had a rational basis for its decision because NYT’s ratepayers had funded NYT’s interest in Bellcore through their payments for telephone services. The court emphasized the PSC’s broad discretion in rate-making and its authority to consider non-regulated asset transactions when setting rates.
Facts
Following the 1984 divestiture of AT&T, NYT became part of NYNEX, one of seven Regional Bell Operating Companies (RBOCs). Bellcore was created to provide research and development services previously provided by Bell Labs. The seven RBOCs jointly owned Bellcore. By 1995, the RBOCs decided to sell Bellcore. NYT’s 1994 request for a multiyear rate determination (Performance Regulation Plan – PRP) was pending before the PSC. NYT stipulated that the PSC would retain authority to determine the ratemaking treatment of any proceeds from the Bellcore sale. In November 1996, the Bellcore Board resolved to sell Bellcore to Science Applications International Corporation. NYT sought a declaratory ruling disclaiming PSC jurisdiction over the sale. The PSC approved the sale but ordered NYT to pass on $19.5 million, the intrastate portion of its profit, to ratepayers.
Procedural History
NYT initiated a CPLR article 78 proceeding to annul the PSC’s order. The Supreme Court confirmed the PSC’s order and dismissed NYT’s petition. The Appellate Division reversed, holding that the PSC lacked jurisdiction over the sale and that its determination was arbitrary and capricious. The Court of Appeals granted leave to appeal.
Issue(s)
Whether the PSC had a rational basis to order NYT to pass on the profits from the sale of Bellcore to its ratepayers, even though Bellcore was a non-utility asset not included in NYT’s rate base.
Holding
Yes, because the PSC’s determination that NYT’s interest in Bellcore was funded through payments from ratepayers provides a rational basis for requiring NYT to pass along the profits from the sale.
Court’s Reasoning
The Court of Appeals emphasized the PSC’s broad authority to regulate telephone service rates and the deference courts must give to the PSC’s expertise. The court stated, “[s]etting utility rates presents ‘problems of a highly technical nature, the solutions to which in general have been left by the Legislature to the expertise of the Public Service Commission.’ ” The court found that the PSC’s determination was not arbitrary or capricious, as it had a rational basis in the record.
The Court rejected NYT’s argument that ratepayers must bear the risk of loss on an asset for them to share in the gains from its sale. The Court stated, “No such rigid formula exists.” The court emphasized that it had previously held the PSC is entitled to consider nonregulated asset transactions when setting rates for the benefit of ratepayers, citing Matter of New York Tel. Co. v Public Serv. Commn., 72 NY2d 419. The Court noted that ratepayers had effectively funded Bellcore as though it were part of NYT, paying for its expenses and a return on investment. The Court found the PSC had reasonably concluded that ratepayers were entitled to benefit from the sale because “NYT’s interest in Bellcore has been funded through payments from ratepayers.”
The court distinguished cases cited by NYT as merely establishing that ratepayer risk of loss on the sale of a utility’s assets may serve as a rational basis for imposing a rate reduction reflecting a gain on such sales, but not precluding other rational bases. The court likened the situation to Matter of Rochester Tel. Corp. v Public Serv. Commn., 87 NY2d 17, where the court upheld the imputation of royalty income to a utility based on assets not included in its rate base because the ratepayers had borne the costs for creating value in those assets.
The court concluded that because NYT’s customers bore the costs of creating the intrastate portion of Bellcore’s value, they were entitled to reap the corresponding share of NYT’s gains on the sale of Bellcore, even if shareholders would have exclusively borne any loss. Effectively, the ratepayers had eliminated any risk of loss by fully funding Bellcore.