Kessel v. Public Service Com'n of State of N.Y.

• Decision Date: 03 March 1988
• Parties: In the Matter of Richard M. KESSEL, as Executive Director of the State of New York Consumer Protection Board, Petitioner, v. PUBLIC SERVICE COMMISSION OF STATE OF NEW YORK et al., Respondents, and New York State Telephone Association, Intervenor-Respondent. (And Two Other Related Proceedings.)
• Court: New York Supreme Court — Appellate Division

Page 717

525 N.Y.S.2d 717

136 A.D.2d 86

In the Matter of Richard M. KESSEL, as Executive Director of the State of New York Consumer Protection Board, Petitioner, v. PUBLIC SERVICE COMMISSION OF STATE OF NEW YORK et al., Respondents and New York State Telephone Association, Intervenor-Respondent (And Two Other Related Proceedings.)

Supreme Court, Appellate Division Third Department.

March 3, 1988.

Joel Blau, Albany, for petitioner.

Robert A. Simpson (Marilyn Mann Faulkner, of counsel), Albany, for Public Service Com'n of State of N.Y., respondent.

John M. Clarke (Davis Polk & Wardwell, New York City, of counsel), New York City, for New York Telephone Co., respondent.

Read & Laniado (Howard J. Read of counsel), Albany, for intervenor-respondent.

Before MAHONEY, P.J., and CASEY, YESAWICH and HARVEY, JJ.

CASEY, Justice.

In these three CPLR article 78 proceedings, the State Consumer Protection Board and others (hereinafter collectively referred to as petitioner) seek to annul certain portions of determinations made by respondent Public Service Commission (hereinafter the PSC) concerning the rates charged by respondent New York Telephone Company (hereinafter NYT). In particular, petitioner raises a number of procedural and substantive objections aimed at two separate and distinct aspects of the rate-making process: (1) the moratorium plan which permitted NYT to file a second-stage and third-stage rate increase limited to certain items, and (2) the removal of the recovery of nontraffic sensitive costs from interexchange access charges and intra-LATA toll rates. An understanding of the terminology, procedural background and

relevant facts for each of these aspects is essential to the resolution of the issues raised by petitioner. As a matter of convenience, the remainder of this decision shall be divided into two parts, which will discuss the moratorium plan and the reallocation of nontraffic sensitive costs.

THE MORATORIUM PLAN

The moratorium plan is an outgrowth of the PSC's continuing effort at restructuring the rate-making process to avoid the instability, expense and inefficiency resulting from successive general rate case filings. In November 1977, the PSC issued a "Statement of Policy on Test Periods in Major Rate Proceedings" (17 NY PSC 25-R), in which the PSC reaffirmed that its goal was "to set rates on the basis of the utility's projected rate base, revenues and expenses in the first 12 months of new rates" (17 NY PSC 26-R). To achieve this goal, and to end the confusion and inefficiency arising out of the utilities' use of various test year periods since the traditional fully historic test year period proved unsuitable in the early 1970s, the PSC adopted a specific policy on test years, requiring data for a historic test year ending just prior to the rate filing and a projected revenue requirement for the first year of the new rates (called the rate year), with "a verifiable link between the two periods" (17 NY PSC 26-R).

The use of a projected rate year did not solve the problem created by large cost increases which are virtually certain to occur during the rate year but are difficult to forecast quantitatively. In addition to the difficulty in projecting the amount of the cost increase, the full annual effect of the increase could not be included in the rates since the cost increase would occur during the rate year and thus would not be in effect for the full year upon which the rates are based. ¹ As a result, the utility would have to seek another general rate increase at the end of the rate year to obtain new rates which would reflect the full annual amount of the cost increase. Second-stage filings were designed to avoid this problem. Where a second-stage filing is allowed, the anticipated cost increase is not factored into the original rates, but at a time close to the onset of the cost increase; a second-stage increase in the rates occurs to cover the additional cost. These second-stage filings have been permitted where cost increases are fairly certain to occur during the rate year, easily quantified once they occur and do not reflect any underlying changes in the magnitude or manner of the utility's operations. As a result of these limitations, second-stage filings traditionally covered only employee wage and benefit increases and local ad valorem tax increases. By 1983, these second-stage filings had become a "regular feature", and the PSC began to experiment with the use of third-stage filings effective after the end of the rate year, in an effort to delay the utility's next full-scale rate case (see, Orange and Rockland Utilities, 23 NY PSC 5874, 5875).

In the case at bar, NYT requested a general rate increase, effective in October 1985, in its November 1984 filing with the PSC (hereinafter the 1985 rate case), seeking not only an initial revenue increase but also an expanded second-stage increase based on a number of specified items. At hearings held on the 1985 rate case, NYT presented evidence concerni its request for a second-stage increase. The PSC's staff and petitioner also presented evidence relative to the second-stage increase. The PSC, in Opinion 85-17, limited NYT's second-stage increase to the traditional local taxes and employee wages and benefits, stating with respect to the other items which NYT sought to include in the second-stage increase that "expansion of the second-stage Petitioner's objection to the moratorium plan arises out of the denial of its request, during the formal but expedited evidentiary hearings on the second-stage increase, to submit evidence of NYT's revenue growth and declining capital costs that, according to petitioner, should offset the second-stage increase. Distilled to its basics, petitioner's two-pronged argument is that the PSC's determination to grant a second-stage increase ² is procedurally defective since the denial of petitioner's request to submit relevant evidence violated the "full hearing" requirement of Public Service Law § 92(2), and that the determination is substantively flawed since, in the absence of evidence concerning revenue growth, capital costs and other relevant factors, there is no rational basis for determining whether the rates resulting from the second-stage increase are fair and reasonable.

as the company requests may be warranted if it permits postponement of a general rate filing". (25 PSC 3699, 3879). NYT was invited to submit a proposal for the PSC's consideration, which it did. The PSC sought written and oral comments on this moratorium plan, which proposed a total of four automatic increases during 1986 and 1987, and a number of parties, including petitioner, submitted written comments, with several parties presenting oral statements at a hearing. The PSC ultimately presented a counterproposal, which included many but not all of the items requested by NYT, and also included several items which, according to the PSC, might tend to decrease rates. The rate changes under the PSC's moratorium plan proposal would go into effect in two steps, a second stage in August 1986 and a third stage in August 1987, with formal but expedited evidentiary hearings, and NYT would have to agree unconditionally not to seek a general rate increase until after August 1987. NYT accepted the plan, subject to one revision, and the PSC adopted the plan, as revised, in Opinion 85-17A.

We begin our analysis by holding that the PSC's use of an expanded second-stage increase following "formal but expedited hearings", coupled with a moratorium on a general rate increase, falls within its broad authority to set public utility rates. Setting such 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 [PSC]" ( Matter of New York State Council of Retail Merchants v. Public Serv. Commn. of State of N.Y., 45 N.Y.2d 661, 672, 412 N.Y.S.2d 358, 384 N.E.2d 1282). The PSC's authority to establish public utility rates has been recognized as "the very broadest of powers" ( Matter of Niagara Mohawk Power Corp. v. Public Serv. Commn. of State of N.Y., 69 N.Y.2d 365, 369, 514 N.Y.S.2d 694, 507 N.E.2d 287). In keeping with this principle, we said in Matter of New York Tel. Co. v. Public Serv. Commn. of State of N.Y., 64 A.D.2d 232, 239, 410 N.Y.S.2d 124, lv. denied 46 N.Y.2d 710, 414 N.Y.S.2d 1028, 387 N.E.2d 1221) that:

The [PSC] "is not bound to entertain or ignore any particular factor in discharging its primary responsibility to determine rates that are just and reasonable" * * *. Nor must the [PSC's] determination be "wholly free from error in the process, or quite in accord with a judicial view of how the procedure before the [PSC] should be managed in detail" * * *. "The scope of judicial review in these matters is, of course, very limited * * *. The question before us is whether there is a rational basis for the [PSC's] finding that the rates in question are just and reasonable" * * * (citations omitted).

In Matter of Niagara Mohawk Power Corp. v. Public Serv. Commn. of State of N.Y. (supra), the Court of Appeals held that the authority to order refunds of imprudent charges collected under fuel adjustment clauses may be implied from the PSC's general rate-making powers and from its authority over fuel adjustment Before resolving this issue, we must first address petitioner's claim that since the second-stage increase exceeded the threshold for "major changes", as defined in Public Servi Law § 92(2), the full hearing requirement of that statute was triggered by NYT's second-stage filing and, thus, the PSC could not thereafter exclude evidence of NYT's revenue growth and declining capital costs. We reject the argument for two reasons. First, petitioner's argument would convert every second-stage increase that exceeds the statutory threshold into a general rate case, thereby effectively crippling an accepted regulatory solution to problems...