95 N.Y.2d 40 (2000)
A public service commission can order a utility to pass on profits from the sale of an asset to ratepayers if the ratepayers funded the asset’s value, even if the asset was not part of the utility’s rate base.
Summary
New York Telephone Company (NYT) sold its share of Bellcore, a research and development company jointly owned by regional phone companies. The Public Service Commission (PSC) ordered NYT to credit its ratepayers with the intrastate portion of the profit from the sale, arguing that ratepayers had funded NYT’s investment in Bellcore through their phone bills. NYT challenged the order, arguing that the PSC lacked jurisdiction and that the sale involved a non-utility asset. The Court of Appeals held that the PSC acted rationally and within its authority, as ratepayers had effectively funded Bellcore’s value; therefore, they were entitled to a share of the profits.
Facts
Following the breakup of AT&T in 1984, NYNEX (NYT’s parent company) acquired an interest in Bellcore, a research and development company. NYT’s ratepayers indirectly funded Bellcore through payments for research and services included in their phone rates. In 1996, NYNEX decided to sell its interest in Bellcore. The PSC then ordered NYT to pass along the intrastate portion of the profits from the sale to its ratepayers.
Procedural History
The PSC ordered NYT to credit its ratepayers with the intrastate portion of the profit from the Bellcore sale. NYT filed an Article 78 proceeding to annul the PSC’s order. The Supreme Court upheld the PSC’s order. The Appellate Division reversed, holding that the PSC lacked jurisdiction. The Court of Appeals granted leave to appeal.
Issue(s)
Whether the PSC has the authority to order NYT to pass on to ratepayers the profits from the sale of Bellcore, an asset not included in NYT’s rate base, on the grounds that ratepayers had funded NYT’s interest in Bellcore.
Holding
Yes, because the PSC’s determination that ratepayers funded NYT’s investment in Bellcore provided a rational basis for ordering the surcredit to ratepayers.
Court’s Reasoning
The Court of Appeals emphasized that the PSC’s rate-making determinations are entitled to deference unless they lack a rational basis or reasonable support in the record. The court rejected a rigid formula requiring ratepayers to bear the risk of loss on an asset before sharing in the gains from its sale. Instead, the court focused on whether the ratepayers had funded the asset’s value.
The Court found that NYT’s customers had effectively funded Bellcore’s value through their telephone rates, which included charges for research and services provided by Bellcore and its predecessor, Bell Labs. The Court cited Matter of Rochester Tel. Corp. v. Public Serv. Commn., which upheld the imputation of royalties on transfers of intangible assets because “the ratepayers have borne the costs for creating value in * * * those assets.”
The Court reasoned 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. The Court also noted that by fully funding Bellcore, NYT’s customers effectively eliminated the risk of loss on the investment and funded dividends to shareholders, including NYT. Therefore, the PSC’s order was a rational exercise of its rate-making authority.