National Fuel Gas Distribution Corp. v. Public Service Commission, 17 N.Y.3d 360 (2011)
When the Public Service Commission (PSC) reviews a utility company’s management decision for prudence, the Department of Public Service (DPS) has the initial burden to show the utility *may* have acted imprudently based on information available *at the time* of the decision; a rational basis must exist in the record to support a finding of imprudence.
Summary
National Fuel Gas Distribution Corp. (NFG Distribution) sought to increase rates to cover environmental remediation costs. The DPS challenged the increase, arguing that National Fuel’s allocation of insurance settlement proceeds among its subsidiaries was imprudent. The PSC agreed, imputing a larger share of the settlement to NFG Distribution. The Appellate Division annulled the PSC’s determination, and the Court of Appeals affirmed, holding that the DPS failed to meet its initial burden of showing imprudence. The Court emphasized that prudence is judged based on the information available at the time of the decision, and the DPS’s arguments lacked a rational basis in the record.
Facts
National Fuel, the parent company of NFG Distribution, pursued insurance coverage for environmental cleanup costs at former manufactured natural gas plants. A 1996 report estimated significant remediation expenses. Settlements were reached with insurers in 1999, totaling $37 million. National Fuel allocated the settlement proceeds among its subsidiaries using a “premiums paid” formula. NFG Distribution received approximately 46% of the settlement. Between 1998 and 2006, NFG Distribution incurred substantial remediation expenses, depleting its settlement proceeds. In 2007, NFG Distribution sought to increase rates to pass uninsured remediation costs to its customers.
Procedural History
NFG Distribution petitioned the PSC for tariff amendments. The DPS challenged the request, arguing that the settlement allocation was unreasonable. An administrative law judge (ALJ) ruled in NFG Distribution’s favor. The PSC reversed the ALJ’s decision, finding National Fuel acted imprudently and ordering a larger portion of the settlements imputed to NFG Distribution. NFG Distribution commenced an Article 78 proceeding. The Appellate Division annulled the PSC’s determination. The Court of Appeals granted leave to appeal and affirmed the Appellate Division’s ruling.
Issue(s)
Whether the DPS adequately raised a reasonable inference of imprudence, and if so, whether there is a rational basis in the record to support the grounds cited by the PSC for its conclusion that National Fuel acted imprudently when it used the premiums paid formula for the distribution of the settlement proceeds in 1999.
Holding
No, because the DPS failed to meet its initial burden of rebutting the presumption of prudence, and there was no evidentiary foundation to infer that National Fuel may have acted imprudently in 1999 when it decided to use the premiums paid formula.
Court’s Reasoning
The Court of Appeals emphasized the deferential standard of review generally applied to PSC orders but noted that an agency’s determination must be judged solely by the grounds invoked by the agency. The Court stated that “a utility’s decision is prudent if it acted reasonably based on the information that it had and the circumstances that existed at the time.” Hindsight is irrelevant to the prudence analysis. While a utility company seeking a rate change generally has the burden of proving that the requested regulatory action is “just and reasonable,” a utility’s decision to expend monetary resources is presumed to have been made in the exercise of reasonable managerial judgment. The DPS carries the initial burden of providing a rational basis to infer that the utility *may* have acted imprudently before the burden shifts to the utility. The DPS’s employee testified that the premiums paid formula was unreasonable because settlements were not procured in relation to the amount of premiums paid. The Court found this testimony insufficient to infer imprudence, noting the record did not reveal what factors prompted the insurers to settle or definitively exclude premiums paid as a relevant factor. The Court also noted that the PSC’s cited reason—that National Fuel could have used the IES report’s estimate of subsidiary liabilities—did not, standing alone, make the premiums paid approach imprudent. The Court found that the IES report contained preliminary estimates, and that its purpose was to persuade insurers to settle, not to determine the extent of environmental contamination with scientific certitude. Therefore, there was no evidentiary foundation to infer imprudence.