New York State Council of Retail Merchants, Inc. v. Public Service Commission

• Citation: 384 N.E.2d 1282,412 N.Y.S.2d 358,45 N.Y.2d 661
• Parties: , 384 N.E.2d 1282 In the Matter of NEW YORK STATE COUNCIL OF RETAIL MERCHANTS, INC., et al., Respondents, v. PUBLIC SERVICE COMMISSION of the State of New York, Appellant, and Long Island Lighting Company, Inc., Intervenor-Appellant.
• Decision Date: 06 December 1978
• Court: New York Court of Appeals

Page 358

412 N.Y.S.2d 358

45 N.Y.2d 661, 384 N.E.2d 1282

In the Matter of NEW YORK STATE COUNCIL OF RETAIL MERCHANTS INC., et al., Respondents, v. PUBLIC SERVICE COMMISSION of the State of New York Appellant, and Long Island Lighting Company, Inc. Intervenor-Appellant.

Court of Appeals of New York.

Dec. 6, 1978.

Peter H. Schiff and John C. Crary, Albany, for appellant

David K. Kadane, Edward M. Barrett and James J. Stoker, III, Mineola, for intervenor-appellant.

Stuart M. Rosen, Paulann M. Caplovitz and Irwin H. Warren, New York City, for respondents.

Louis J. Lefkowitz, Atty. Gen. (John G. Proudfit and Cyril H. Moore, Jr., New York City, of counsel), for State of New York, amicus curiae.

James T. B. Tripp, New York City, and Philip J. Mause, Washington, D. C., for Environmental Defense Fund, amicus curiae.

OPINION OF THE COURT

JONES, Judge.

We conclude that there was a rational basis for and substantial evidence in the record to support the determination of the Public Service Commission authorizing the introduction of time-of-day pricing as the basis for a new rate structure for the furnishing of electricity, and, as a first step to that end, approving the proposal of Long Island Lighting Company to initiate the program by charging particularly designed time-of-day rates to a small group of its largest commercial and industrial customers.

On August 8, 1975 Long Island Lighting Company (LILCO) filed an application with the Public Service Commission for a general rate increase. In response the commission issued an order initiating case No. 26887, which order also directed the company to file "rate proposals to price electricity by time of day". Pursuant to that directive LILCO filed proposed rate "Service Classification 2 Multiple Rating Period" (hereafter "SC2-MRP"). That filing was served on all parties to case No. 26887 and as well on all parties to case No. 26806 (proceeding on motion of the commission as to rate design for electrical corporations).

On January 29, 1975 the commission had issued an order stating that the "rapidly increasing costs of new generating facilities and the rising cost of fuel both make it urgent, in the interest of energy conservation and the efficient use of resources, that the structure of energy prices reflect, to the greatest extent feasible, the variations in the incremental costs of service because of differences in the time of consumption, as well as in all other cost-influencing factors". By the same order the commission instituted case No. 26806, the so-called "generic proceeding", to consider, among other things, "whether marginal or incremental costs provide a reasonable basis for determining the rate structure of electric utilities", and to resolve certain issues concerning the legality, theory and practicality of marginal cost pricing before approval of any specific rate proposals. On the basis of an extended record (which included the testimony of a host of economists, engineers and experts in rate design who had been subjected to cross-examination by the Council of Retail Merchants and also included the testimony of an economist who appeared on behalf of the council) the commission concluded in that proceeding on August 10, 1976 "that marginal costs do provide a reasonable basis for electric rate structures". The commission added, however: "This finding does not mean that rate structures must in All cases embody marginal cost pricing, or that rate structures in Any case should be based exclusively on such principles. But it does mean that marginal costs are an important tool for consideration in all rate cases, and that failures to take these principles into account should be justified". After noting its cognizance of the problems of both the utility companies and their customers and denying any intention to inflict unnecessary or unreasonable hardship, the commission stated: "To the extent that implementation of marginal principles might involve abrupt changes, the Commission's guiding principle will be gradualism consistent with appreciable improvement." Noting that LILCO and Consolidated Edison Company of New York had already presented marginal cost analyses, other electric utilities were directed to transmit their studies, and the commission advised that it would proceed to evaluate LILCO's proposed marginal cost-based rates in case No. 26887. No aspect of case No. 26806, which has not been concluded, is now being appealed.

Accompanying LILCO's filed proposed rate SC2-MRP was the marginal cost study which formed the basis of the proposed rate. LILCO submitted expert testimony with respect both to the manner in which marginal costs were translated into rates and to the economic basis for the proposed SC2-MRP rate. This testimony was subject to cross-examination by the Council of Retail Merchants which also introduced expert testimony of its own.

On December 16, 1976 the commission approved SC2-MRP. The council's request for a rehearing before the commission was denied. The council then instituted the present proceeding under CPLR article 78 which was transferred to the Appellate Division. On May 31, 1978 that court annulled the commission's determination. The commission and LILCO have appealed to our court. We now reverse the judgment of the Appellate Division and confirm the order of the commission.

As a matter of analysis it appears that our consideration should proceed on three levels. The first involves the validity of time-of-day rate structures in principle; the second, the validity of the particular time-of-day rate structure proposed by LILCO; and the third, the permissibility of the classification of consumers to which LILCO proposes initially to apply its proposed time-of-day rate structure.

As to the first level there is no dispute. Respondents do not challenge the validity in principle of a rate structure based on quantity and time of consumption. Indeed classification of service "based upon the quantity used (and), the time when used" is expressly authorized by statute (Public Service Law, § 66, subd. 14; cf. Id., § 65, subd. 5).

Because the Appellate Division annulled the commission's determination at the third level, concluding that the proposed SC2-MRP rate "constitutes an unlawful inter-class price discrimination in violation of subdivisions 2 and 3 of section 65 of the Public Service Law" (62 A.D.2d, p. 316, 404 N.Y.S.2d, p. 901), without passing on the validity of the time-of-day rate structure itself, we first address this aspect of the case on which the disposition below was based. The promulgation of any classification of consumers, any subdivision of the whole, necessarily, of course, involves differentiation; the critical question is whether the particular classification works an undue or impermissible discrimination. It appears that the Appellate Division took the view that to withstand assault the particular classification must be based on some identifiable cost-justification, that rate fixing that departs from cost justification would produce an undue preference or advantage favoring those who are not within the class, in violation of the provisions of subdivision 3 of section 65 of the Public Service Law. That court then rejected the commission's and LILCO's attempt to demonstrate that there was a direct cost allocation basis to support the proposed consumer classification. While not abandoning their contentions that cost-justification can be shown in support of the proposed classification the commission and LILCO contend, and we agree with them, that in this instance at least the choice of consumers to be included within SC2-MRP was made on a rational basis incident to the phasing in of a new rate structure, and that selective, step-by-step implementation of a new theory of rate fixing is permissible.

LILCO, having been directed by the commission to file a rate based on marginal costs, with the benefit of suggestions made by commission staff, calculated the company's marginal costs and then placed those costs into three rating periods. The choice of the particular periods was a function of metering capability, homogeneity of costs within different hours, the probability of loss of load for each hour and the likelihood of consumer reaction. As a result of this weighing process the following periods were identified:

Period 1 (off-peak period, lowest demand): Midnight to 7 a. m.; all days, all year;

Period 2 (peak period, greatest demand): 10 a. m. to 10 p. m. weekdays and Saturdays, June 1 to September 30; and

Period 3 (intermediate or "shoulder" period): all remaining times.

The company then selected the group of its consumers to which new rates based on quantity and time-of-day consumption would be applied in the first phase of eventual across-the-board application. It chose its largest commercial and industrial consumers. The line of demarcation was fixed at those consumers whose peak demand exceeded 750 kilowatts in any two of the preceding 12 months as of September, 1976 there were about 175 customers in this category.

The commission's interest in the development of a more sophisticated rate structure was predicated on its view that the present condition of the State's economy made such development imperative. "Repeatedly in recent rate decisions we have stated our intention to hold rates down to the lowest reasonable level, precisely because we realize that energy costs have become oppressive to large numbers of consumers and have a magnification effect throughout the economy. Over two years ago we embarked on a program of utility management and efficiency audits and, additionally, we are demanding commitments to increased productivity. We are confident that these efforts will help to hold rates down; but they alone cannot reach the two principal cost factors that have pushed utility rates to unprecedented levels: the escalating costs of new construction and of fuel, particularly oil." Prior to the...