New York Law Review

Tag: Bellcore

  • New York Telephone Co. v. Public Service Commission, 95 N.Y.2d 43 (2000): Ratepayer Benefit from Sale of Non-Rate-Based Asset

    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.

  • New York Telephone Co. v. Public Service Commission, 95 N.Y.2d 40 (2000): Ratepayer Benefit from Utility Asset Sales

    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.