New York Law Review

Tag: rate-making

  • 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.

  • 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.

  • 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.”

  • Village of Solvay v. Onondaga County Water Auth., 23 N.Y.2d 405 (1968): Determining Proper Forum to Challenge Rate-Making Decisions

    Village of Solvay v. Onondaga County Water Auth., 23 N.Y.2d 405 (1968)

    An Article 78 proceeding is not the proper mechanism to review a rate-making decision of a public authority when the governing statute does not require notice or a hearing; however, such a proceeding can be converted to a declaratory judgment action, allowing judicial review of the rate increase for arbitrariness, discrimination, or violation of statutory standards.

    Summary

    The Village of Solvay and Lakeland Water District challenged a 64% water rate increase imposed by the Onondaga County Water Authority, arguing it was excessive. They initiated Article 78 proceedings. The Court of Appeals held that because the Public Authorities Law doesn’t provide for notice or a hearing regarding rate changes, an Article 78 proceeding was inappropriate. However, the Court also held that the proceeding should be converted to a declaratory judgment action, allowing the petitioners to challenge the rate increase on grounds such as arbitrariness or discrimination and allowing discovery.

    Facts

    The Onondaga County Water Authority, a public benefit corporation, raised water rates for the Village of Solvay and Lakeland Water District by 64% in August 1966. The Village and the Water District considered the increase excessive and arbitrary.

    Procedural History

    The Village and Water District filed Article 78 proceedings in the Supreme Court to challenge the rate increase. Special Term granted their motions for examination of the Water Authority’s officers and records, and for a hearing. The Appellate Division affirmed, but concluded that an Article 78 proceeding was not the correct procedure, holding that the court was authorized to treat the proceeding as an action for a declaratory judgment under CPLR 103(c). The Water Authority appealed to the Court of Appeals.

    Issue(s)

    1. Whether an Article 78 proceeding is the proper method to challenge the water rate increase imposed by the Onondaga County Water Authority.
    2. Whether, if an Article 78 proceeding is inappropriate, the court can convert the proceeding to a declaratory judgment action under CPLR 103(c).

    Holding

    1. No, because the Public Authorities Law does not provide for notice or a hearing in rate-making decisions, making the Authority’s action a legislative act not subject to Article 78 review.
    2. Yes, because CPLR 103(c) allows a court to convert an improperly brought civil judicial proceeding to the proper form if the court has jurisdiction over the parties, and a declaratory judgment action is a proper procedure to review a quasi-legislative act of an administrative agency.

    Court’s Reasoning

    The Court reasoned that Article 78 proceedings are generally not used to review legislative actions, and an administrative agency’s order fixing rates is considered a legislative act if no notice or hearing is required. Here, the Public Authorities Law expressly states that the Public Service Commission has no jurisdiction over the Water Authority’s rate-making decisions. Therefore, without a quasi-judicial proceeding for review, the rate increase is a legislative act not subject to Article 78. The court stated, “Neither the public service commission nor any other board or commission of like character, shall have jurisdiction over the authority in the management and control of its properties or operations or any power over the regulation of rates fixed or charges collected by the authority” (§ 1153, subd. 6).

    However, the Court emphasized that the petitioners were not without recourse. They could challenge the rate increase on grounds that the Authority acted beyond its authority, disregarded statutory standards, violated due process, or acted in a discriminatory manner.

    Addressing the conversion to a declaratory judgment action, the Court cited CPLR 103(c), which states that a civil judicial proceeding should not be dismissed solely because it was not brought in the proper form. Since the Supreme Court had jurisdiction and the proceeding was civil and judicial, it could be converted. The Court noted that a declaratory judgment action is a ‘proper procedure’ to review a quasi-legislative act. The Court found that the petitioners’ allegations that the rate increase was ‘excessive, arbitrary and capricious’ were sufficient to support a cause of action for declaratory judgment. Further, the court authorized discovery, stating that state agencies must provide disclosure as if they were a private person. However, the court found ordering a hearing before the Water Authority answered the complaint was premature.

  • Matter of General Telephone Co. of Upstate New York, Inc. v. Lundy, 17 N.Y.2d 373 (1966): Authority to Scrutinize Affiliate Transactions in Rate-Making

    Matter of General Telephone Co. of Upstate New York, Inc. v. Lundy, 17 N.Y.2d 373 (1966)

    A public service commission, in determining just and reasonable rates for a utility, has the implied authority to scrutinize transactions between the utility and its affiliates to ensure that costs passed on to ratepayers are not inflated, even without explicit statutory authority to regulate all affiliate contracts.

    Summary

    General Telephone Co. of Upstate New York, a subsidiary of GT&E, challenged a Public Service Commission order that disallowed certain rate increases. The Commission determined that General Telephone was being overcharged by its affiliated suppliers, also GT&E subsidiaries, and excluded these overcharges from the rate base and operating expenses. The New York Court of Appeals upheld the Commission’s decision, finding that the power to review affiliated transactions is implied in the Commission’s rate-making authority, despite the absence of explicit statutory authorization. The court reasoned that the Commission has a duty to protect ratepayers from excessive charges resulting from non-arm’s length transactions between affiliated entities.

    Facts

    General Telephone Co. of Upstate New York (GTC), a subsidiary of General Telephone and Electronics Corporation (GT&E), filed for rate increases with the Public Service Commission (PSC). The PSC conducted hearings and approved some increases but disallowed others. The PSC determined that GTC was being overcharged for goods and services by other GT&E subsidiaries. These subsidiaries included Automatic Electric Company (AE), General Telephone Directory Company, and Leich Electric Company (Leich). AE was a major manufacturer of specialized telephone equipment, with a significant portion of its sales to GT&E affiliates. Leich supplied standard telephone supplies, mostly to GT&E affiliates. The Directory Company specialized in yellow page advertising and telephone directories, with a majority of its business from affiliates. The PSC found the prices charged by these affiliates to GTC were excessive.

    Procedural History

    GTC filed an Article 78 proceeding to challenge the PSC’s order. The case was transferred to the Appellate Division, which confirmed the PSC’s determination. GTC appealed to the New York Court of Appeals based on constitutional grounds, arguing that the PSC should have credited the full amounts paid to its affiliated suppliers.

    Issue(s)

    1. Whether the Public Service Commission has the authority to investigate the reasonableness of prices charged to a utility by its affiliated suppliers when setting rates, even in the absence of explicit statutory authorization to regulate all contracts between affiliates.

    2. Whether it was an error to determine the telephone company was being overcharged, because it paid no more, and sometimes less, than independent telephone companies.

    3. Whether the Commission erred in using the “historical book value” of the affiliate in determining the net returns on investment, rather than the “acquisition cost.”

    Holding

    1. Yes, because the power to conduct such an inquiry and ascertain whether the prices were excessive may be fairly implied from the rate-making powers already granted by the Legislature to the Commission.

    2. No, because there is no constitutional requirement that prevailing market prices must be accepted as the standard for testing the reasonableness of operating costs.

    3. No, because the Public Service Law places the burden on the telephone company to show that the proposed rate change is just and reasonable, and the telephone company’s own expert witness provided data based on historical book value.

    Court’s Reasoning

    The Court reasoned that the PSC’s authority to determine “just and reasonable” telephone rates (Public Service Law, § 91, subd. 1; § 97, subd. 1) necessarily implies the power to scrutinize transactions between a utility and its affiliates. The Court cited Chicago & Grand Trunk Ry. Co. v. Wellman, 143 U.S. 339, 346, stating that the rate-making power cannot be “subservient to the discretion of [a utility] which may, by exorbitant and unreasonable salaries, or in some other improper way, transfer its earnings into what it is pleased to call operating expenses.” The Court emphasized the Commission’s duty to closely scrutinize transactions between affiliates, especially when those expenses arise out of dealings between affiliates. The court emphasized that in the absence of arms-length bargaining the commission must protect the utility’s rate payers.

    The Court rejected the argument that the prevailing market prices should be accepted as the standard, given the control GT&E had over its subsidiaries, stating “little, if any, weight can be accorded to price comparison.” The court stated, “comparative prices fixed in the * * * independent telephone market * * * as [a valid test] of the reasonableness of these affiliated transactions.”

    The Court dismissed the argument that the commission should have used “acquisition cost” instead of “historical book value” to determine the net returns on investment, stating that the petitioner failed to introduce comparable data. The Court stated, “In order to determine whether profits are fair rather than excessive, the commission must ascertain what similar enterprises are earning on a similar basis.”

    The Court held that there was no denial of equal protection because the Commission lacked the power to order a reduction in the prices charged by these suppliers to independent companies. If the same prices were charged to independent telephone companies, they could not be excluded from the rate base of independent companies. The court reasoned that it would be unfair to penalize a utility for a state of affairs over which it has no control, which would violate due process.