Niagara Mohawk Power Corp. v. Public Service Com'n of State of N.Y.

• Decision Date: 02 April 1987
• Citation: 507 N.E.2d 287,514 N.Y.S.2d 694,69 N.Y.2d 365
• Parties: , 507 N.E.2d 287 In the Matter of NIAGARA MOHAWK POWER CORPORATION, Respondent, PUBLIC SERVICE COMMISSION OF the STATE OF NEW YORK, Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 694

514 N.Y.S.2d 694

69 N.Y.2d 365, 507 N.E.2d 287

In the Matter of NIAGARA MOHAWK POWER CORPORATION, Respondent,

PUBLIC SERVICE COMMISSION OF the STATE OF NEW YORK, Appellant.

Court of Appeals of New York.

April 2, 1987.

Lawrence G. Malone, David E. Blabey and Timothy P. Sheehan, Albany, for appellant.

Leon A. Allen, Jr., New York City, John H. Terry, Albany, John W. Dax, Albany, and Cathleen A. Moore, New York City, for respondent.

OPINION OF THE COURT

SIMONS, Judge.

This is an article 78 proceeding in which petitioner Niagara Mohawk Power Corporation challenges an order of respondent Public Service Commission. The order directed Niagara Mohawk to refund to its ratepayers moneys collected during 1977-1981 for charges imposed pursuant to the fuel adjustme clause in the Niagara Mohawk rate tariff. The Commission's action followed its determination that a portion of the company's expenses for fuel during those years had been imprudently incurred. The Appellate Division, 118 A.D.2d 908, 499 N.Y.S.2d 477, annulled the order, finding the refund illegal because there was no statutory authority for the Commission's action. The court ruled that the power to direct a refund must be grant by the Legislature and that, before the 1981 amendment to Public Service Law § 66(12), the Commission had neither express or implied authority to order a utility to refund imprudent fuel expenditures previously passed through to ratepayers by means of fuel adjustment clauses. We granted the Commission leave to appeal and now reverse. 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 from its authority over fuel adjustment allowances under former section 66(12) of the Public Service Law (L.1974, ch. 863, §§ 1, 2). ^*

I

In 1984, after Public Service Commission hearings, an administrative determination was made that certain fuel expenses, charged to Niagara Mohawk's ratepayers through fuel adjustment clauses, resulted from imprudent decisions by Niagara Mohawk relating to prolonged power outages at its Dunkirk Unit No. 3 in 1980 and 1981. A decision was issued recommending that $1.013 million in excessive fuel charges be refunded to the ratepayers. After review, the Public Service Commission modified this determination, concluding that the utility had been imprudent in its practices concerning its coal-fired generating units not only at the Dunkirk facility in 1980 and 1981 but also at Oswego, Huntley and Dunkirk during the years 1977 through 1981. The Commission therefore ordered Niagara Mohawk to refund to ratepayers $31.9 million in incurred fuel expenses which the utility had collected through its fuel adjustment clauses. Niagara Mohawk challenged the order in this article 78 proceeding.

II

The Public Service Commission possesses only those powers expressly delegated to it by the Legislature, or incidental to its expressed powers, together with those required by necessary implication to enable the Commission to fulfill its statutory mandate (see, Matter of Consolidated Edison Co. v. Public Serv. Commn., 47 N.Y.2d 94, 102, 417 N.Y.S.2d 30, 390 N.E.2d 749, revd. on other grounds 447 U.S. 530, 100 S.Ct. 2326, 65 L.Ed.2d 319, revd. on remand on other grounds 51 N.Y.2d 816, 433 N.Y.S.2d 426, 413 N.E.2d 365; Matter of Rochester Tel. Corp. v. Public Serv. Commn., 87 A.D.2d 672, 673, 448 N.Y.S.2d 827, affd. 58 N.Y.2d 874, 460 N.Y.S.2d 492, 447 N.E.2d 40; see also, Public Service Law § 4[1] ). Among the powers delegated to the Commission is the authority to establish the rates charged by a utility for gas and electric service (see, Public Service Law § 66[12]; see generally, Comment, Utility Rates, Consumers, and the New York State Public Service Commission, 39 Alb L Rev 707 [1975] ). Indeed, it has been recognized that when it comes to setting rates for such service the Commission has been granted "the very broadest of powers" (see, Matter of Campo Corp. v. Feinberg, 279 App.Div. 302, 305, 110 N.Y.S.2d 250, affd. 303 N.Y. 995, 106 N.E.2d 70), the Legislature mandating only that the rates fixed be "just and reasonable" (see, Matter of Abrams v. Public Serv. Commn., 67 N.Y.2d 205, 211-212, 501 N.Y.S.2d 777, 492 N.E.2d 1193 [construing Public Service Law § 72] ).

In the exercise of its rate-making power, the Public Service Commission may not deny a utility a reasonable rate of return on its investment (see, Matter of New Rochelle Water Co. v. Public Serv. Commn., 31 N.Y.2d 397, 407, 340 N.Y.S.2d 617, 292 N.E.2d 767). The opportunity to earn a fair return does not mean, however that a utility will be permitted to include negligent or wasteful expenditures in its operating expenses (see, West Ohio Gas Co. v. Public Util. Commn., 294 U.S. 63, 68-70, 55 S.Ct. 316, 319-320, 79 L.Ed. 761). The protection of a utility's treasury and the preservation of its financial integrity is a proper object of Public Service Commissi regulation, but the specific function of the rate-making power is to protect the utility's ratepayers (see, Matter of General Tel. Co. v. Lundy, 17 N.Y.2d 373, 380, 271 N.Y.S.2d 216, 218 N.E.2d 274). Thus, "[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" (id., at 378, 271 N.Y.S.2d 216, 218 N.E.2d 274 [citing Chicago & Grand Trunk Ry. Co. v. Wellman, 143 U.S. 339, 12 S.Ct. 400, 36 L.Ed. 176]; compare, Matter of Abrams v. Public Serv. Commn., 67 N.Y.2d 205, 501 N.Y.S.2d 777, 492 N.E.2d 1193, supra [use of "prudent investment" test in regulatory treatment of abandoned plants approved] ).

Normally, rates set by the Commission are prospective, and reflect a determination as to what the utility's allowed reven requirement should be, based upon an estimation for the upcoming rate year of the utility's rate base (working capital and net valuation of tangible property), historical operating expenses, and rate of return on capital assets (see generally, Comment, op. cit., 39 Alb L Rev, at 719-724). Once the Commission has projected the utility's revenue requirements for the rate year, it determines the maximum rates the utility can charge to meet its requirements. Thus, the rate-making process is a forum for determining, among other things, whether the utility's operating expenses were prudently and reasonably incurred in the past such that they may properly be used as a basis for projection of operating expenses in the upcoming rate year.

One of the difficulties with prospective ratesetting, however, is the problem of reconciling fixed rates to the pressures and demands of a fluctuating economy. The failure to make such a reconciliation may result in unreasonably high rates in periods of economic recession and hardship to the utility during inflationary cycles (see generally, Trigg, Escalator Clauses in Public Utility Rate Schedules, 106 U.Pa.L.Rev. 964 [1958] ). A widely used regulatory solution to this problem is the use of automatic rate adjustments, such as the fuel adjustments at issue here, whereby the rate charged for service varies automatically with changes in operating costs (see, id.; and see, Warren, Regulated Industries' Automatic Cost of Service Adjustment Clauses: Do They Increase or Decrease Cost to the Consumer?, 55 Notre Dame Law 333 [1980] ). New York utilities have used such automatic rate adjustment provisions since 1917 (see, Matter of Consumer Protection Bd. v. Public Serv. Commn., 85 A.D.2d 321, 322, 449 N.Y.S.2d 65, appeal dismissed 57 N.Y.2d 673, 454 N.Y.S.2d 1034, 439 N.E.2d 1248).

The fuel adjustment clauses presently before us provide a method for the rapid adjustment of rates, thus enabling utilities to contend with unpredictable increases in volatile fuel prices and to avoid both the 11-month delay and the forecasting procedures inherent in New York's prospective rate-making process. By including such a clause in their rate tariff, utilities may automatically, and very rapidly, adjust rates to recover actual fuel expenses as they are incurred. In this way, serious cash flow and earnings shortfalls, which can result from the cost of producing fuel-generated energy, are avoided and the financial integrity of utilities is protected (see, Matter of Consumer Protection Bd. v. Public Serv. Commn., 85 A.D.2d 321, 323, 449 N.Y.S.2d 65, supra; see also, Note, Due Process and the Automatic Fuel Adjustment Clause, 52 Ind.L.J. 637, 645 [1977] ).

The mechanics of each utility's fuel adjustment clause are set forth in company tariffs and are thus subject to approval by the Commission. Niagara Mohawk's tariffs provided that when its monthly fuel costs were higher than the "base level" of fuel costs reflected in its current rates, the company was authorized to make a filing with the Commission to recover these increased costs from its customers through fuel adjustment charges shown on their bills. Niagara Mohawk was permitted to automatically increase its rates, as requested, through such charges imposed on its customers three days after the filing. This method permitted Niagara Mohawk, like other electric utilities in New York, to increase its charges to customers by millions of dollars on short notice without the Commission's prior approval. The only review of their reasonableness was performed by the Commission retrospectively (see generally, Public Service Law § 66[12]; § 72-a).

The use of automatic fuel adjustment clauses by the Public Service Commission over the years, and its authority to do so, has been recognized by the courts (see, Matter of Consumer Protection Bd. v. Public Serv. Commn., 85 A.D.2d 321, 323-324, 449 N.Y.S.2d 65, supra ) and by the Legislature. The Legislature recognized such authority in 1974, when it added section 72-a to the Public Service Law requiring monthly reporting of fuel...