In the Matter of New York
Telephone Company,
Respondent,
v.
Public Service Commission of
the State of New York,
Appellant,
and Eliot Spitzer, &c., et al.,
Intervenors-Respondents.
2000 NY Int. 71
The State Public Service Commission (PSC) appeals from the Appellate Division's annulment of its order directing petitioner New York Telephone Company (NYT) to pass on to ratepayers the intrastate portion of its profit from the sale of Bell Communications Research, Inc. (Bellcore), a shared subsidiary of the Regional Bell Operating Companies (RBOCs). We reverse and remit.
Factual and Procedural History
NYT's interest in Bellcore is traceable to the 1984
By 1995, as the seven RBOCs became more diverse and the possibility of competition among them increased, it became less feasible for them collectively to rely upon a single source for technological research and development. Therefore, they decided to sell Bellcore.
At the time that the plan to sell Bellcore became
known, NYT's 1994 request for a multi-year rate determination,
referred to as the Performance Regulation Plan (PRP), was pending
before the PSC. Hearings on the request had been previously
concluded. Upon disclosure of the prospective sale of Bellcore,
various parties to the PRP rate proceeding moved to reopen the
hearings for consideration of the impact of NYT's profits from
that sale upon intrastate telephone rates under the plan. NYT
argued against reopening of the hearings but agreed that if and
when Bellcore was sold, the PSC would "retain the authority to
In November 1996, the Bellcore Board of Directors, composed of officers of the RBOCs, formally resolved to sell Bellcore to an unrelated company called Science Applications International Corporation. In July 1997, NYT filed a petition with the PSC seeking a declaratory ruling disclaiming jurisdiction over the sale of Bellcore or, in the alternative, approval of the proposed sale. On November 7, 1997, the PSC approved the sale of Bellcore. It further ordered NYT to submit a plan for passing on $19.5 million, the intrastate portion of its profit on the sale of Bellcore, to its ratepayers by giving them a surcredit of approximately $2.50 each in a future billing.
NYT commenced this CPLR article 78 proceeding to annul
the November 7 order to the extent that it required the
distribution of the surcredit. Supreme Court confirmed the PSC's
order and dismissed the petition. The Appellate Division
reversed (258 2 234), holding that the PSC lacked jurisdiction
over the sale and that it could not order the surcredit under its
ratemaking authority, an "after-the-fact justification" (id., at
238). The court also concluded that even if the PSC had
ratemaking jurisdiction, its determination was arbitrary,
Discussion
The primary ground urged by the PSC and intervenors, the State Attorney General and State Consumer Protection Board, for upholding the order for a surcredit is that it falls within the agency's authority to regulate rates for telephone service (see, Public Service Law §§ 91[1], 97[1], 4[1]) and has a rational basis. NYT contends that the PSC is barred from offering that justification because in ordering the surcredit the agency relied exclusively on its jurisdiction to approve or disapprove the Bellcore sale itself. NYT argues that the PSC's subsequent reliance on its ratemaking authority violates the rule limiting judicial affirmance of an administrative determination to the ground applied by the agency (citing Matter of Scanlan v Buffalo Pub. School Sys., , 90 NY2d 662, 678).
The record does not support NYT's position that the
sole original basis for the PSC's surcredit order was its
assertion of jurisdiction over the sale of Bellcore. But for
NYT's stipulation in the PRP rate proceeding that the PSC
retained jurisdiction "to determine the appropriate ratemaking
treatment of any proceeds" (emphasis supplied) from the Bellcore
sale, the PSC would have granted the motion to reopen the
hearings in that proceeding and, presumably, then gone on to
order the surcredit before approving the PRP. Instead, at NYT's
The foregoing excerpts from the record are sufficient
to demonstrate the continued and consistent assertion of rate
regulation authority by the PSC with respect to the Bellcore
sale: from the denial of the motion to reopen the hearings in the
PRP rate proceeding, through the approval of the PRP, to the
order imposing the single instance rate reduction challenged
here. As we said in Matter of Rochester Tel. Corp. v Public
Serv. Commn. (87 2 17, 31), "we find no reason to require the
incantation of certain 'magic' words" to signify either the
assertion or the reason behind the exercise of the PSC's
NYT alternatively contends that, even if the surcredit was imposed pursuant to the PSC's rate regulation authority, the ordering of the surcredit to reflect the intrastate portion of NYT's profit on the sale of Bellcore, a non-utility asset not included in its rate base, was contrary to well-established PSC and judicial precedents. NYT urges that both the PSC and the courts have consistently adhered to the rule that ratepayers may only be permitted to share, through rate reduction, in gains from the sale of a corporate asset of a utility when they are obligated to bear at least some of the risk of losses from any sale of that asset. The Appellate Division agreed, holding that "because ratepayers have no obligation to reimburse the utility for losses incurred on assets not held in its rate base, they are not entitled to share in the gain realized on the sale of such property" (258 2 at 238).
No such rigid formula exists. Rather, our cases
establish that the standard of review of all PSC rate
determinations, including those involving sales of assets, is one
of flexibility. Repeatedly, we have held that the PSC's
determinations in setting just and reasonable rates "are entitled
to deference and may not be set aside unless they are without
Judicial deference is warranted because "[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'"
(Matter of Abrams v Public Serv. Commn.,
NYT's position would also contravene case law that the
PSC is entitled to consider non-regulated asset transactions in
setting rates or otherwise exercising its regulatory oversight of
utilities for the benefit of ratepayers. Thus, we held in Matter
of New York Tel. Co. v Public Serv. Commn. (72 2 419) that
The PSC and court decisions NYT relies upon merely
establish 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 (see, Spring Valley
Water Co., 30 NYPSC 1831, 1840 [PSC Opinion No. 90-28]; Matter of
Spring Valley Water Co. v Public Serv. Commn., 176 AD2d 95, 99;
Matter of New York Water Serv. Corp. v Public Serv. Commn., 12
AD2d 122, 129; Democratic Central Comm. of the Dist. of Columbia
The PSC may have a different, yet still entirely rational, basis for its determination to reflect the gain in a rate reduction.
Here, irrespective of whether a loss on the Bellcore
sale could have been passed on to NYT's ratepayers, the PSC
determined that NYT's customers were entitled to the benefit of
the intrastate portion of the gains on the sale, because "NYT's
interest in Bellcore has been funded through payments from
ratepayers." That ground for the PSC rate determination has the
requisite "reasonable support in the record" (Matter of Rochester
Tel. Corp. v Public Serv. Commn.,
Thus, the experts averred that initially, NYT's ratepayers funded Bell Labs, Bellcore's predecessor. Prior to the breakup of AT&T, calculation of the rates for telephone service to AT&T's and NYT's New York customers included charges for research and development and all other Bell Labs services integral to the operation of a telephone company. After divestiture, NYT's ratepayers continued to pay for the very same services provided by NYT's affiliates or subsidiaries, including Bellcore. Bellcore's prudent, fully allocable intrastate actual costs, plus a regulated rate of return, were paid for by New York ratepayers. The project costs which Bellcore charged to NYT included salaries and other direct expenses as well as indirect expenses and corporate costs. Thus, the costs paid for by NYT's ratepayers included a portion of Bellcore's total operating expenses as well as a return on investment paid to shareholders as dividends. The Commission authorized rate recovery of approximately $720 million to pay for Bellcore's expenses.
In our judgment, the PSC's justification, based on
ratepayers' funding of NYT's interest in Bellcore, affords a
rational basis for the surcredit order. Matter of Rochester Tel.
Corp. v Public Serv. Commn. (87 2 17,
There, we upheld a PSC rate determination which imputed royalty income to the utility "to compensate ratepayers for the free transfer of intangible assets to RTC's [unregulated] affiliate" (id., at 25). Those assets included the utility's "name and reputation" (id., at 28). In that case, the petitioner, Rochester Telephone, objected on a ground similar to that asserted by NYT here, that those assets were not part of the rate base and, hence, transactions involving them, whether donated or sold, were beyond rate-making consideration. Thus, Rochester Telephone asserted that the PSC's order "improperly permits ratepayers to benefit from a non-rate-making asset because the utility does not earn a rate of return on the utility's name and reputation" (id.). Notwithstanding that those intangible assets were not included in the utility's rate base, we upheld the rate adjustment's imputation of royalties on transfers of those assets in Rochester Tel. Corp. because "the ratepayers have borne the costs for creating value in * * * those assets" (id., at 29 [emphasis supplied]). Identically, here, because NYT's customers bore the costs of creating the intrastate portion of Bellcore's value, they are entitled to reap the corresponding share of NYT's gains on the sale of Bellcore.
Even if, as NYT contends, the risk of any loss on the
sale of Bellcore would have been exclusively borne by NYT's
shareholders, the reality was that in fully funding the Bellcore
investment through telephone rates, NYT's customers effectively
Accordingly, the order of the Appellate Division should be reversed, with costs, and the matter remitted to the Appellate Division for consideration of "additional contentions" (258 2 at 239) raised but not determined on the appeal to that court.
Footnotes
1 Moreover, NYT waived any entitlement to additional rate hearings it may have had under Public Service Law § 97(1). The PSC's decision not to address the rate treatment of the sale of Bellcore when it approved the PRP was based on NYT's explicit "understanding that no further hearings will be necessary."