Matter of General Telephone Co. of Upstate New York, Inc. v. Lundy, 17 N.Y.2d 373 (1966)
A public service commission, in determining just and reasonable rates for a utility, has the implied authority to scrutinize transactions between the utility and its affiliates to ensure that costs passed on to ratepayers are not inflated, even without explicit statutory authority to regulate all affiliate contracts.
Summary
General Telephone Co. of Upstate New York, a subsidiary of GT&E, challenged a Public Service Commission order that disallowed certain rate increases. The Commission determined that General Telephone was being overcharged by its affiliated suppliers, also GT&E subsidiaries, and excluded these overcharges from the rate base and operating expenses. The New York Court of Appeals upheld the Commission’s decision, finding that the power to review affiliated transactions is implied in the Commission’s rate-making authority, despite the absence of explicit statutory authorization. The court reasoned that the Commission has a duty to protect ratepayers from excessive charges resulting from non-arm’s length transactions between affiliated entities.
Facts
General Telephone Co. of Upstate New York (GTC), a subsidiary of General Telephone and Electronics Corporation (GT&E), filed for rate increases with the Public Service Commission (PSC). The PSC conducted hearings and approved some increases but disallowed others. The PSC determined that GTC was being overcharged for goods and services by other GT&E subsidiaries. These subsidiaries included Automatic Electric Company (AE), General Telephone Directory Company, and Leich Electric Company (Leich). AE was a major manufacturer of specialized telephone equipment, with a significant portion of its sales to GT&E affiliates. Leich supplied standard telephone supplies, mostly to GT&E affiliates. The Directory Company specialized in yellow page advertising and telephone directories, with a majority of its business from affiliates. The PSC found the prices charged by these affiliates to GTC were excessive.
Procedural History
GTC filed an Article 78 proceeding to challenge the PSC’s order. The case was transferred to the Appellate Division, which confirmed the PSC’s determination. GTC appealed to the New York Court of Appeals based on constitutional grounds, arguing that the PSC should have credited the full amounts paid to its affiliated suppliers.
Issue(s)
1. Whether the Public Service Commission has the authority to investigate the reasonableness of prices charged to a utility by its affiliated suppliers when setting rates, even in the absence of explicit statutory authorization to regulate all contracts between affiliates.
2. Whether it was an error to determine the telephone company was being overcharged, because it paid no more, and sometimes less, than independent telephone companies.
3. Whether the Commission erred in using the “historical book value” of the affiliate in determining the net returns on investment, rather than the “acquisition cost.”
Holding
1. Yes, because the power to conduct such an inquiry and ascertain whether the prices were excessive may be fairly implied from the rate-making powers already granted by the Legislature to the Commission.
2. No, because there is no constitutional requirement that prevailing market prices must be accepted as the standard for testing the reasonableness of operating costs.
3. No, because the Public Service Law places the burden on the telephone company to show that the proposed rate change is just and reasonable, and the telephone company’s own expert witness provided data based on historical book value.
Court’s Reasoning
The Court reasoned that the PSC’s authority to determine “just and reasonable” telephone rates (Public Service Law, § 91, subd. 1; § 97, subd. 1) necessarily implies the power to scrutinize transactions between a utility and its affiliates. The Court cited Chicago & Grand Trunk Ry. Co. v. Wellman, 143 U.S. 339, 346, stating that the rate-making power cannot be “subservient to the discretion of [a utility] which may, by exorbitant and unreasonable salaries, or in some other improper way, transfer its earnings into what it is pleased to call operating expenses.” The Court emphasized the Commission’s duty to closely scrutinize transactions between affiliates, especially when those expenses arise out of dealings between affiliates. The court emphasized that in the absence of arms-length bargaining the commission must protect the utility’s rate payers.
The Court rejected the argument that the prevailing market prices should be accepted as the standard, given the control GT&E had over its subsidiaries, stating “little, if any, weight can be accorded to price comparison.” The court stated, “comparative prices fixed in the * * * independent telephone market * * * as [a valid test] of the reasonableness of these affiliated transactions.”
The Court dismissed the argument that the commission should have used “acquisition cost” instead of “historical book value” to determine the net returns on investment, stating that the petitioner failed to introduce comparable data. The Court stated, “In order to determine whether profits are fair rather than excessive, the commission must ascertain what similar enterprises are earning on a similar basis.”
The Court held that there was no denial of equal protection because the Commission lacked the power to order a reduction in the prices charged by these suppliers to independent companies. If the same prices were charged to independent telephone companies, they could not be excluded from the rate base of independent companies. The court reasoned that it would be unfair to penalize a utility for a state of affairs over which it has no control, which would violate due process.