New York Law Review

Tag: Public Service Commission

  • National Fuel Gas Distribution Corp. v. Public Service Commission, 17 N.Y.3d 360 (2011): Prudence Review of Utility Company Decisions

    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.

  • 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.

  • Rochester Telephone Corp. v. Public Service Commission, 87 N.Y.2d 96 (1995): Upholding PSC’s Authority to Impute Royalties for Intangible Asset Transfers

    87 N.Y.2d 96 (1995)

    The Public Service Commission (PSC) has broad authority to determine just and reasonable utility rates, including the power to impute a royalty to a utility for the uncompensated use of its intangible assets by its subsidiaries and affiliates, provided such imputation is rationally based and supported by the record.

    Summary

    Rochester Telephone Corporation (RTC) challenged the PSC’s decision to reduce its permissible utility rate by imputing a 2% royalty due to improper cost-shifting and uncompensated transfers of intangible assets. The New York Court of Appeals affirmed the Appellate Division’s confirmation of the PSC’s actions, holding that the royalty and the rebuttable presumption of a 2% royalty for other regulated utilities were rational means for achieving just and reasonable utility rates. The court emphasized the PSC’s broad regulatory authority and the need to protect ratepayers from imprudent utility practices. The court found the royalty was rationally based given the utility’s failure to seek compensation for the use of the its brand by subsidiary companies.

    Facts

    The PSC initiated hearings regarding the propriety of imposing a royalty on RTC based on its dealings with subsidiaries and affiliates. The hearings revealed that RTC allowed its affiliates to use its intangible assets (name, reputation) without compensation and engaged in improper cost-shifting. In 1993, the PSC imposed a 2% royalty on RTC and created a rebuttable presumption of a 2% royalty for ratemaking purposes whenever a utility invests in competitive enterprises. The royalty included a regulated value assurance mechanism (RVAM) and a positive benefits element. The RVAM compensated ratepayers for the uncompensated use of RTC’s intangible assets, while the positive benefits aspect addressed improper cost shifting.

    Procedural History

    RTC filed a CPLR article 78 proceeding challenging the PSC’s authority. The Supreme Court transferred the case to the Appellate Division, which confirmed the PSC’s determinations and dismissed RTC’s petition. RTC appealed to the New York Court of Appeals. The Court of Appeals retained the appeal after initially considering a motion to dismiss due to a Joint Stipulation and Agreement (Joint Stipulation) between RTC and the Department of Public Service. Ultimately, the Court of Appeals addressed the merits of the case.

    Issue(s)

    1. Whether the PSC has the authority to order payment of a royalty based upon a utility’s relationship with its subsidiaries and affiliates.

    2. Whether the PSC’s exercise of discretion in setting the royalty level at 2% lacked a rational basis.

    3. Whether the royalty presumption constitutes an unconstitutional taking under the Federal and New York State Constitutions.

    4. Whether the royalty presumption violates the Commerce Clause.

    Holding

    1. Yes, because the PSC has broad regulatory authority to ensure just and reasonable utility rates, and imputing a royalty for the uncompensated use of intangible assets is a rational exercise of that authority.

    2. No, because ratemaking is a highly technical field within the special expertise of the PSC, and the 2% royalty was designed to compensate ratepayers without imposing a penalty on RTC. Utilities retain the flexibility to rebut the 2% figure.

    3. The takings issue is not justiciable because the impact of the rebuttable presumption cannot be evaluated separate and apart from its actual application to a particular utility.

    4. No, because the royalty is applied evenhandedly, has a negligible financial impact on interstate commerce, and the State has a legitimate interest in setting just and reasonable utility rates.

    Court’s Reasoning

    The Court emphasized the broad regulatory authority granted to the PSC by the Legislature to set just and reasonable utility rates (Public Service Law § 65, 79, 89-b, 91). The court found that the PSC’s determinations are entitled to deference and should not be set aside unless they lack a rational basis or reasonable support in the record (Matter of Abrams v Public Serv. Commn., 67 NY2d 205, 211-212). The court reasoned that the PSC could allocate costs to shareholders where ratepayers bore the cost for creating value in RTC’s name and reputation, and RTC allowed its subsidiaries to exploit those intangible assets for free. The court stated, “[N]othing in the Constitution requires that the shareholders get a free ride on the backs of the ratepayers” (66 NY2d, at 372). The court also found that the PSC rationally determined a parent utility has an incentive to support its subsidiaries by not entering into transactions at arm’s length, and pass off any additional expense which may result to the parent’s ratepayers. The court also rejected arguments that the royalty was an unconstitutional taking, noting that the issue was not justiciable because the impact of the rebuttable presumption cannot be evaluated apart from its specific application. The court also rejected the Commerce Clause challenge, finding that the royalty was applied evenhandedly and that any financial impact on interstate commerce was negligible.

  • Crescent Estates Water Co. v. Public Service Commission, 77 N.Y.2d 611 (1991): Authority to Impute Revenue Outside Service Area

    77 N.Y.2d 611 (1991)

    The Public Service Commission (PSC) lacks the authority to impute income derived from sources outside a utility’s authorized service area when calculating rate-year projections, as it effectively compels the utility to expand its services.

    Summary

    Crescent Estates Water Company sought to increase its rates, excluding projected revenues from a planned service expansion. The PSC, despite denying approval for the expansion due to unresolved issues, imputed the expected revenue, arguing Crescent imprudently failed to expand. The Court of Appeals held that the PSC lacked authority to impute revenues from outside Crescent’s authorized service area, as this effectively forces the company to expand. The court emphasized that while the PSC can assess the prudence of a utility’s actions impacting ratepayers, it cannot compel expansion beyond its approved territory.

    Facts

    Crescent Estates Water Company, serving 1,650 customers, sought PSC approval for main extension agreements to serve 110 new homes outside its service area. These agreements involved developers constructing the mains and paying Crescent a $2,000 hook-up fee per unit. The PSC disapproved the agreements because Crescent lacked DEC approval and the hook-up fees were deemed unreasonable. Despite disapproval, the PSC hinted that a failure to expand prudently would be a factor in setting rates. Later, Crescent tried to exclude $11,124 in projected revenue from these new customers from its revenue projections, arguing the expansion was not approved.

    Procedural History

    Crescent initially filed tariff revisions, which the PSC suspended pending investigation. After the PSC disapproved the main extension agreements, Crescent attempted to exclude the projected revenue from the rate-case proceeding. The ALJ rejected this attempt, and the PSC’s final order included the revenue imputation. Crescent challenged the PSC’s determination in an Article 78 proceeding, which was transferred to the Appellate Division. The Appellate Division modified the PSC’s determination, annulling the revenue imputation. The PSC appealed to the Court of Appeals.

    Issue(s)

    Whether the Public Service Commission has the authority to impute to a water-works corporation’s operating revenue forecast income expected from serving homeowners residing outside the corporation’s approved service area, when that expansion has not been approved?

    Holding

    No, because the Public Service Commission lacks the power to compel a water-works corporation to expand and provide service to customers beyond its approved service area, and the imputation of revenues effectively coerces such an expansion.

    Court’s Reasoning

    The Court of Appeals held that while the PSC has broad authority to regulate rates and assess the prudence of a utility’s actions, it cannot compel a utility to expand beyond its authorized service area. The court distinguished this case from others where revenue imputations were upheld because those cases involved sales or activities within the utility’s existing service area. The Court emphasized that the PSC’s ratemaking power is not unlimited and does not extend to imputing revenue from sources outside the utility’s territory, as this effectively forces the company to expand to achieve the projected income and a reasonable return on investment. The court noted that, in this case, the approved rate of return of 15% could only be achieved if the disputed revenue was actually received; otherwise, Crescent’s rate of return would be significantly lower. The dissent argued that the Commission’s action was a proper exercise of its authority to protect ratepayers from the consequences of the company’s imprudent management decisions and was not an attempt to compel expansion.

  • Staatsburg Water Co. v. Staatsburg Fire District, 72 N.Y.2d 149 (1988): Limits on Issue Preclusion for Agency Determinations

    Staatsburg Water Co. v. Staatsburg Fire District, 72 N.Y.2d 149 (1988)

    An administrative agency’s determination, made outside the context of a pending complaint and without direct consequences for the party against whom preclusion is sought, is not binding in a subsequent court action.

    Summary

    Staatsburg Water Company sued the Staatsburg Fire District to recover unpaid charges for fire protection services. The Fire District argued the service was inadequate. The Public Service Commission (PSC), on its own motion, investigated and determined the service was adequate. The Water Company then sought to use this determination to gain summary judgment. The Court of Appeals held that the PSC’s determination was not binding on the Fire District because the PSC initiated the investigation without a formal complaint from the Fire District, the Fire District had no direct stake in the PSC outcome, and the PSC’s determination did not directly fix any legal rights or obligations of the Fire District.

    Facts

    Staatsburg Water Company supplied water to the Staatsburg Fire District for fire protection, charging a fixed annual rate per hydrant. Since January 1, 1982, the Fire District refused to pay, claiming inadequate service due to malfunctioning hydrants and insufficient water pressure. The Water Company sought permission from the PSC to surcharge other customers to cover the unpaid amount. The PSC authorized a temporary increase but required the Water Company to take legal action against the Fire District.

    Procedural History

    The Water Company sued the Fire District in Supreme Court. The Fire District claimed inadequate service. The Water Company moved for summary judgment based on a PSC order, but the motion was denied. The Water Company again sought a surcharge from the PSC. The PSC initiated a formal investigation into the service adequacy. After a hearing, the PSC found the service adequate. The Water Company renewed its motion for summary judgment in Supreme Court, arguing the PSC’s finding was binding. Supreme Court denied the motion. The Appellate Division reversed, granting summary judgment to the Water Company. The Fire District appealed to the Court of Appeals.

    Issue(s)

    1. Whether the PSC’s determination that the Water Company’s service to the Fire District was adequate is binding on the Fire District in the lawsuit.

    Holding

    1. No, because the PSC’s finding was essentially an unsolicited advisory opinion made outside the context of any complaint pending before the agency and without any direct consequences for the Fire District.

    Court’s Reasoning

    The Court of Appeals stated that collateral estoppel applies to administrative agencies when they act in a quasi-judicial manner. However, issue preclusion requires: (1) an identity of issue necessarily decided in the prior action and decisive in the present action, and (2) a full and fair opportunity to contest the prior decision. The Court emphasized that collateral estoppel is an elastic doctrine and should not be applied mechanically. It requires considering the realities of litigation. The fundamental inquiry is whether relitigation should be permitted considering fairness, conservation of resources, and consistent results.

    Here, the Court found that the PSC proceeding suffered from several defects depriving it of preclusive effect. The PSC’s finding was essentially an unsolicited advisory opinion made outside the context of any complaint pending before the agency and without any direct consequences for the Fire District. The Fire District did not choose to litigate before the PSC. Although the Fire District participated, it had little incentive to fully litigate because the outcome had no direct consequences. The Court reasoned that giving preclusive effect where the only incentive to litigate stems from potential collateral effects would encourage overlitigation at an earlier stage.

    The Court also noted that the PSC determination was not made in the context of an adjudicatory proceeding because it did not result in any order fixing legal rights, duties, or obligations. “[T]he PSC was not in a position to grant or deny defendant any relief.”

    The Court also addressed the doctrine of primary jurisdiction, stating it does not allow an agency to interject itself into a pending court action. It is for the court to determine whether the doctrine is triggered and to refer issues to the agency. Here, neither party requested the court to refer any issues to the PSC.

    The Court concluded that the PSC’s determination was not entitled to preclusive effect and reversed the grant of summary judgment.

  • Niagara Mohawk Power Corp. v. Public Serv. Comm’n, 69 N.Y.2d 365 (1987): Implied Power to Order Refunds for Imprudent Fuel Costs

    Niagara Mohawk Power Corp. v. Public Serv. Comm’n, 69 N.Y.2d 365 (1987)

    The Public Service Commission has the implied authority to order refunds to ratepayers for charges collected through fuel adjustment clauses when those charges are later determined to have resulted from the utility’s imprudent decisions.

    Summary

    Niagara Mohawk Power Corporation challenged an order by the Public Service Commission (PSC) to refund ratepayers for charges collected during 1977-1981 under a fuel adjustment clause, arguing that the PSC lacked statutory authority to order such refunds before a 1981 amendment to the Public Service Law. The PSC determined that Niagara Mohawk had imprudently incurred certain fuel expenses, passing these costs onto consumers. The Court of Appeals reversed the Appellate Division’s annulment of the PSC order, holding that the PSC’s power to order refunds for imprudent fuel costs is implied from its general rate-making powers and its authority over fuel adjustment allowances.

    Facts

    Niagara Mohawk’s rate tariff included a fuel adjustment clause, allowing the company to adjust rates to recover increased fuel costs from customers. From 1977 to 1981, the company charged ratepayers for fuel expenses through these clauses. In 1984, the Public Service Commission (PSC) determined that some of these fuel expenses were the result of imprudent decisions made by Niagara Mohawk, particularly relating to power outages at its Dunkirk Unit No. 3 in 1980 and 1981, and at other facilities from 1977-1981. The PSC ordered Niagara Mohawk to refund $31.9 million to ratepayers.

    Procedural History

    The Public Service Commission ordered Niagara Mohawk to refund $31.9 million. Niagara Mohawk challenged the order in an Article 78 proceeding. The Appellate Division annulled the PSC’s order, holding that the PSC lacked statutory authority to order refunds prior to the 1981 amendment to Public Service Law § 66 (12). The Public Service Commission appealed to the Court of Appeals.

    Issue(s)

    Whether the Public Service Commission had the implied authority, prior to the 1981 amendment to Public Service Law § 66(12), to order a utility to refund charges collected through a fuel adjustment clause when those charges were later determined to have been imprudently incurred.

    Holding

    Yes, because the power to order refunds of imprudent charges collected under fuel adjustment clauses may be implied from the Commission’s general rate-making powers and its authority over fuel adjustment allowances under former section 66 (12) of the Public Service Law.

    Court’s Reasoning

    The Court of Appeals recognized that the PSC’s powers are limited to those expressly delegated by the Legislature or incidental to those powers. However, the Court emphasized the PSC’s broad authority to establish just and reasonable rates for utilities. The Court noted that while rates are typically prospective, fuel adjustment clauses provide a mechanism for rapid rate adjustments to address volatile fuel prices. Although the Commission typically sets rates prospectively, the use of fuel adjustment clauses allows utilities to rapidly adjust rates to recover fuel expenses as they are incurred. The court stated: “[T]here can be no doubt that a regulatory body, such as the Public Service Commission, may review the operating expenses of a utility and thereby prevent unreasonable costs for materials and services from being passed on to rate payers”. The Court reasoned that the power to review these charges necessarily implies the power to order corrective action, including refunds, when charges are deemed imprudent. Absent such power, the review process would be meaningless, and consumer interests would be ignored. The court distinguished prior cases cited by Niagara Mohawk, noting that they did not involve the specific issue of refunds for imprudent charges collected under automatic adjustment clauses. Finally, the Court found that the legislative history of the 1981 amendment to Public Service Law § 66 (12) was inconclusive and did not necessarily indicate that the amendment created a new power rather than clarifying an existing one. The Court noted that a “realistic appraisal of the situation” requires a determination that a Public Service Commission order, directing the utility to refund to ratepayers charges based on imprudently incurred fuel expenses collected pursuant to a fuel adjustment clause in the rate tariff, reasonably promotes the legislative intention that the Commission establish just and reasonable rates.

  • Consolidated Edison Co. v. Public Serv. Commn., 63 N.Y.2d 372 (1984): Cost Allocation for Political Speech in Utility Bills

    63 N.Y.2d 372 (1984)

    A public service commission can require utilities to allocate a portion of the fixed costs associated with including political messages in billing statements to their shareholders without violating the utilities’ First Amendment rights.

    Summary

    Consolidated Edison challenged a Public Service Commission (PSC) order requiring utilities to allocate 50% of the fixed costs of including political messages in billing statements to their shareholders. The PSC reasoned that without this allocation, ratepayers would be subsidizing the utility’s political speech. The New York Court of Appeals upheld the PSC’s order, finding it did not violate the utility’s free speech rights. The court distinguished between expenses that benefit the corporation (shareholder responsibility) and those that benefit ratepayers. The court held that the cost allocation represented a reasonable balance of First Amendment interests, preventing ratepayers from being forced to subsidize the utility’s speech.

    Facts

    Following a Supreme Court decision (Consolidated Edison Co. v. Public Serv. Commn., 447 U.S. 530 (1980)) that struck down a PSC ban on political inserts in utility bills, the PSC initiated proceedings to determine how to allocate the costs of such inserts.
    The PSC issued an order stating that if utilities included inserts concerning matters defined in Account 426.4 (expenditures for influencing public opinion on political matters), 50% of fixed costs associated with preparing and mailing billing statements would be allocated to the utilities’ shareholders.
    The PSC determined that using the billing process to disseminate political messages provides a subsidy to utility management, as the costs are typically borne by ratepayers.

    Procedural History

    The Public Service Commission issued an order requiring the cost allocation.
    Consolidated Edison challenged the order.
    The Appellate Division affirmed the PSC’s order.
    Consolidated Edison appealed to the New York Court of Appeals.

    Issue(s)

    Whether the Public Service Commission’s order requiring utilities to allocate a portion of the fixed costs associated with political messages in billing statements to their shareholders violates the utilities’ First Amendment rights.

    Holding

    Yes, because nothing in the Constitution requires that shareholders get a free ride on the backs of the ratepayers; the allocation of costs represented a reasonable balance of First Amendment interests.

    Court’s Reasoning

    The court relied on its prior decision in Rochester Gas & Elec. Corp. v. Public Serv. Commn., 51 N.Y.2d 823 (1980), which held that the PSC could exclude certain informational advertising costs from being charged to ratepayers. The court stated, “nothing in the Constitution requires that the shareholders get a free ride on the backs of the ratepayers.”
    The court rejected the argument that Account 426.4 was impermissibly based on the content of speech. Instead, the court stated that “the thrust of the regulation is to distinguish between expenditures that primarily advance the interests of the corporation (properly chargeable to the shareholders) and expenditures that primarily advance the interests of the ratepayers (properly chargeable to them).”
    The court emphasized that the PSC was implementing its statutory mandate to ensure just and reasonable utility rates.
    The court also noted that the ruling attempted to balance the competing First Amendment interests of shareholders and ratepayers. Without the cost allocation, ratepayers could argue they were being compelled to subsidize the utility’s speech, violating the principles of Abood v. Detroit Bd. of Educ., 431 U.S. 209 (1977), and Wooley v. Maynard, 430 U.S. 705 (1977).
    The court quoted the dissenting justices in Consolidated Edison Co. v. Public Serv. Commn., 447 U.S. 530 (1980), stating, “[e]ven though the free ride may cost the ratepayers nothing additional by way of specific dollars, it still qualifies as forced support of the utility’s speech.”
    The court concluded that the 50-50 cost division was reasonable and within the PSC’s discretion.

  • Niagara Mohawk Power Corp. v. Public Service Com’n, 69 N.Y.2d 86 (1986): Agency Discretion in Allocating Utility Tax Refunds

    Niagara Mohawk Power Corp. v. Public Service Com’n, 69 N.Y.2d 86 (1986)

    When a utility receives a tax refund, the Public Service Commission (PSC) has broad discretion under Public Service Law § 113(2) to determine whether the refund should be passed on to consumers, in whole or in part, based on what is deemed just and reasonable.

    Summary

    Niagara Mohawk sought permission from the Public Service Commission (PSC) to retain a federal income tax refund. The refund stemmed from disallowed deductions for water rights lost due to a natural disaster and subsequent agreement with the Power Authority of the State of New York (PASNY). The PSC authorized Niagara Mohawk to retain half the refund, directing the rest to ratepayers. The Appellate Division annulled this decision. The Court of Appeals reversed, holding that the PSC’s determination had a rational basis, considering the competing interests of shareholders and ratepayers, and was within the agency’s broad discretion under Public Service Law § 113(2).

    Facts

    In 1956, rockslides damaged Niagara Mohawk’s hydroelectric station. In 1957, Congress gave PASNY exclusive rights to the Niagara River for power production. Niagara Mohawk transferred its Schoellkopf and Adams facilities to PASNY in exchange for PASNY providing equivalent power. Niagara Mohawk claimed losses of $11.4 million in real property and $25.7 million in water rights. Niagara Mohawk deducted the water rights loss on its federal income taxes from 1957-1962 but did not apply these deductions when calculating utility rates. The IRS later disallowed these deductions, leading to a deficiency which Niagara Mohawk contested and partially refunded in 1981, resulting in the tax refund at issue.

    Procedural History

    Niagara Mohawk petitioned the PSC to retain the tax refund. The PSC adopted an administrative law judge’s recommendation to split the refund equally between the utility and ratepayers. Niagara Mohawk initiated an Article 78 proceeding, which was transferred to the Appellate Division. The Appellate Division annulled the PSC’s determination. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether the Public Service Commission (PSC) acted arbitrarily and capriciously in determining that a federal income tax refund received by Niagara Mohawk should be split equally between the utility and its ratepayers, or whether the PSC’s determination was a reasonable exercise of its discretion under Public Service Law § 113(2).

    Holding

    Yes, the PSC’s determination was not arbitrary and capricious because the agency considered the competing interests of the consumers and the utility, developed over a 25-year period, and sought to resolve uncertainties through an equitable plan, which is permissible under the broad discretion afforded to the PSC by Public Service Law § 113(2).

    Court’s Reasoning

    The Court of Appeals emphasized that the PSC has broad latitude in deciding whether a utility should keep a refund or pass it on to ratepayers, citing Matter of Orange & Rockland Utils. v Public Serv. Commn. The court quoted Public Service Law § 113(2), stating that the commission has the power to determine whether a refund should be passed on, “in whole or in part * * * in the manner and to the extent determined just and reasonable.” The court found that the PSC was presented with evidence of Niagara Mohawk’s property loss during 1957-1962, but also evidence that consumers paid rates during this time that did not account for the water-rights deductions that the refund represented. The rates also reflected litigation costs and higher operating costs resulting from the loss of facilities. Thus, the PSC’s finding that the ratepayers’ burden closely approximated the shareholders’ loss was supported by the record. The court held that the PSC’s determination was not inconsistent with the evidence nor irrational. The court reasoned that judicial review should not disturb such a determination. The Court also found that the PSC’s prior 1961 determination was not binding in this case because it was not a final resolution.

  • Consolidated Edison Co. v. Public Service Commission, 63 N.Y.2d 424 (1984): State Authority to Set Higher Rates for Alternative Energy

    63 N.Y.2d 424 (1984)

    A state can require electric utilities to purchase power from qualifying alternative energy facilities at rates exceeding the federal maximum under the Public Utility Regulatory Policies Act (PURPA), but the Federal Power Act (FPA) preempts state regulation of purely state-qualifying facilities.

    Summary

    Consolidated Edison (Con Ed) challenged a New York Public Service Commission (PSC) determination requiring them to purchase power from on-site generation facilities at a minimum rate of 6 cents per kilowatt-hour for state-qualifying facilities, arguing federal preemption. The Court of Appeals held that PURPA does not preempt state regulations setting higher rates for federally qualifying facilities. However, the FPA does preempt state regulation of purchases from facilities that qualify only under state law, because these sales are considered wholesale sales in interstate commerce subject to FERC’s exclusive jurisdiction. The state’s interest in encouraging alternative energy sources does not outweigh federal authority over interstate energy sales.

    Facts

    In response to the energy crisis, Congress enacted PURPA to encourage alternative energy development. New York State passed a similar law (Public Service Law § 66-c) mandating utilities to purchase power from state-qualifying facilities, setting a minimum purchase price of 6 cents per kilowatt-hour. The PSC determined that Con Ed must purchase power from facilities qualifying under either federal or state law, with the 6-cent minimum for state facilities and an avoided-cost rate for purely federal facilities.

    Procedural History

    Con Ed initiated an Article 78 proceeding challenging the PSC’s determination based on federal preemption. The Appellate Division granted the petition in part, concluding that the FPA and PURPA preempted the field, giving FERC exclusive jurisdiction. The Appellate Division modified the PSC determination, limiting mandatory purchases to federally qualifying facilities and invalidating the 6-cent minimum rate where it conflicted with the federal avoided-cost mandate. The PSC appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether PURPA preempts state regulation requiring electric utilities to purchase power from federal qualifying facilities at a rate exceeding the avoided cost purchase rate required under PURPA?

    2. Whether Part II of the Federal Power Act (FPA) preempts the PSC from compelling utilities to offer to purchase power from facilities that qualify only under the Public Service Law?

    Holding

    1. No, because the language and legislative history of PURPA indicate that the avoided-cost rate is a maximum only in the context of the federal government’s role and allows states to separately encourage alternative power production by imposing higher rates for federally qualifying facilities.

    2. Yes, because the FPA grants FERC exclusive regulatory authority over wholesale sales of electricity in interstate commerce, and state attempts to regulate purchases from purely state-qualifying facilities indirectly regulate wholesale prices, infringing on FERC’s jurisdiction.

    Court’s Reasoning

    Regarding the first issue, the court reasoned that preemption analysis starts with the assumption that Congress did not intend to prohibit state action, especially in areas historically regulated under state police power, such as local electric utilities. The court found no direct conflict between PURPA’s maximum purchase rate and the state law’s higher minimum because PURPA’s avoided-cost rate was intended as a ceiling only for federal regulations, leaving room for states to encourage alternative power production with higher rates. Quoting the Joint Explanatory Statement of the Committee of Conference on PURPA, the court noted that the federal regulation was “meant to act as an upper limit on the price at which utilities can be required under this section to purchase electric energy.” The court also deferred to FERC’s interpretation that independent, complimentary state regulation was permissible. The court rejected Con Ed’s argument that the state law thwarted PURPA’s objective of avoiding consumer ratepayer subsidies, stating that this objective was merely one factor FERC considered and that PURPA’s primary purpose was to encourage alternative energy development, even if it meant higher rates in the short run.

    Regarding the second issue, the court held that the FPA preempts state regulation of purely state-qualifying facilities. The FPA applies to the sale of electric energy at wholesale in interstate commerce, and the court determined that the PSC’s attempt to regulate a utility’s purchase rate was an impermissible regulation of the “purchaser” which Congress intended to leave to the States. Citing Northern Gas Co. v. Kansas Comm., the court stated that such a distinction would simply achieve indirectly that which is not permitted directly. The court also rejected the PSC’s argument that the energy produced by a local state-qualifying facility and purchased by a state utility was not in interstate commerce because the energy originated and remained within the state, noting that this required scientific evidence regarding the flow of electricity which was not relied upon by the PSC in its decision. The court emphasized the importance of limiting judicial review of administrative determinations to the grounds invoked by the agency, quoting Matter of Trump-Equitable Fifth Ave. Co. v. Gliedman. Since the sole ground relied upon by the PSC was erroneous, the court found the PSC’s assertion of jurisdiction over purely state-qualifying facilities to be preempted by the FPA.

  • 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.”