New York Law Review

Tag: New York Telephone Co.

  • 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, 64 N.Y.2d 58 (1984): Arbitrary Rate-Making and Uniform Expense Allocation

    New York Telephone Co. v. Public Service Commission, 64 N.Y.2d 58 (1984)

    A Public Service Commission (PSC) determination is arbitrary when it lacks a rational basis, especially when it deviates from established federal guidelines and uniform practices in expense allocation between interstate and intrastate services, thereby denying a service provider the opportunity to recover legitimate costs.

    Summary

    New York Telephone Company (NYT) challenged a Public Service Commission (PSC) decision to disallow updated operator work time (OWT) studies in calculating intrastate rates. The PSC insisted on using 1971 OWT factors, arguing NYT selectively updated studies to shift expenses to intrastate operations. The Court of Appeals held that the PSC’s decision was arbitrary because it deviated from the uniform practice of using updated OWT studies accepted by federal regulators and other state commissions, thereby preventing NYT from recovering $11.3 million in expenses.

    Facts

    NYT provides both interstate and intrastate telephone services. The Federal Communications Commission (FCC) sets rates for interstate service, while the PSC sets rates for intrastate service. To separate expenses, the Federal-State Joint Board uses a Separations Manual. The OWT, reflecting time spent by operators, is a key factor. Until 1978, the OWT factor remained stable, but NYT updated it in 1978, 1979, 1980, and 1981 to reflect decreased operator time on interstate calls due to automation. In its 1981 rate filing, NYT used updated OWT costs, but the PSC disallowed them, insisting on 1971 factors.

    Procedural History

    NYT challenged the PSC’s decision. The Appellate Division reversed the PSC’s determination. The Public Service Commission appealed to the New York Court of Appeals.

    Issue(s)

    Whether the PSC’s determination to disallow NYT’s use of updated operator work time (OWT) studies in calculating intrastate rates was arbitrary and lacked a rational basis.

    Holding

    Yes, because the PSC’s determination deviated from uniform practices, contradicted FCC rulings, and prevented NYT from recovering legitimate expenses, rendering it arbitrary.

    Court’s Reasoning

    The court reasoned that the PSC’s decision to disallow updated OWT studies was arbitrary and irrational for several reasons. First, it contradicted the practices of every other regulatory body, including the FCC and other New York telephone companies, all of whom permitted the use of updated five-day OWT studies. The court noted that the PSC failed to provide a meaningful explanation for treating NYT differently. Second, the court pointed out that NYT’s actions were consistent with FCC rulings. The FCC required updated OWT studies to ensure accurate expense allocation and forbade the use of seven-day studies until further review. The court emphasized the importance of a uniform nationwide system for allocating expenses, as intended by the Joint Board and the Separations Manual. The court cited the FCC’s formal opinion stating that freezing OWT at 1970 levels would be “arbitrary and contrary to providing proper consideration to relative occupancy and time.” The court emphasized that the PSC’s decision prevented NYT from recovering $11.3 million in costs, which it could not recoup from interstate rates. Finally, the court clarified that a demonstration of unconstitutionality is not always required to overturn a PSC rate determination, especially when the PSC fails to provide the statutorily mandated “reasonable average return.” The court stated that the PSC was attempting to defend its decision on grounds different from those on which it initially acted, which is impermissible. The court stated that “updated studies of OWT are required to assure representativeness” and that to freeze OWT at the 1970 level “would be arbitrary and contrary to providing proper consideration to relative occupancy and time.”