New York Telephone Co. v. Public Service Com'n

• Decision Date: 02 November 1978
• Parties: In the Matter of NEW YORK TELEPHONE COMPANY, Petitioner, v. PUBLIC SERVICE COMMISSION of the State of New York, Respondent.
• Court: New York Supreme Court — Appellate Division

Page 124

410 N.Y.S.2d 124

64 A.D.2d 232

In the Matter of NEW YORK TELEPHONE COMPANY, Petitioner, v. PUBLIC SERVICE COMMISSION of the State of New York, Respondent.

Supreme Court, Appellate Division, Third Department.

Nov. 2, 1978.

George E. Ashley, Raymond Burke and Gerald M. Oscar, New York City (Lawrence E. Walsh, Guy Miller Struve and L. Gordon Harriss, New York City, of counsel, Davis Polk & Wardwell, New York City), for petitioner.

Peter H. Schiff, Albany (Charles R. Gibson, Albany, of counsel), for respondent.

Before MAHONEY, P. J., and GREENBLOTT, LARKIN, MIKOLL and HERLIHY, JJ.

MAHONEY, Presiding Justice.

On November 17, 1976 petitioner, New York Telephone Company, filed tariff revisions representing a general rate increase of 12.8% Over existing rates designed to produce a gross increase in annual operating revenues of approximately $392.9 million. General rate increases had previously been granted in 1970, 1971, 1972, 1973 and 1975, and petitioner based its claim for another increase on its inability, since 1970, to earn its allowed rate of return. Commencing February 28, 1977 and ending August 9, 1977, hearings were held at which over 80 witnesses testified and numerous exhibits were introduced on behalf of various interested parties. The Administrative Law Judge issued his recommended decision September 9, 1977, concluding that petitioner was entitled to an annual rate increase of $245 million, to be supplemented by allowances for increases in wages, operating taxes and depreciation rates when they became known. He recommended an allowed rate of return of 9.59% On the rate base. On October 13, 1977 the Public Service Commission (Commission) authorized petitioner to put into effect, as temporary rates subject to refund, the rates recommended by the Administrative Law Judge, but the order directed that the tariffs implementing the temporary rates not go into effect until five days after service on all parties and until approved by the Commission. As a result, the temporary rates did not become effective until October 27, 1977. The Commission issued its final decision December 1, 1977, authorizing an annual rate increase of $232.6 million with an allowed rate of return of 9.24% On the rate base. The approved rates included an adjustment for depreciation expenses and for decreased customer demand due to the increased rates, but the Commission did authorize petitioner to file for supplemental allowances to reflect wage and tax increases. After the Commission denied its petition for rehearing, petitioner commenced this proceeding, alleging eight separate grounds for annulling the Commission's determination in whole or in part. Since each of petitioner's contentions raises a substantive issue affecting either the rate, the rate base or refunds by petitioner, an analysis of each is necessary and follows herewith.

I. PROCEDURE

Initially, petitioner contends that it was denied due process by the manner in which the Commission conducted the hearings and made its decision. Petitioner alleges, and the Commission admits, that the Commission directed its staff to represent the interests of the consumer by taking an adversary position at the hearings and that, thereafter, the Commission was assisted in its deliberations by senior supervisory staff personnel and opinion writers who had communicated with the trial staff regarding the case.

Telephone companies in this State are required to provide adequate service for a just and reasonable charge (Public Service Law, § 91). The Commission has been charged with the duty of enforcing this requirement in general (Public Service Law, § 94) and with the particular task of ensuring that any proposed rate increase be just and reasonable (Public Service Law, § 97 subd. (1); Matter of General Tel. Co. of Upstate N. Y. v. Lundy, 17 N.Y.2d 373, 379, 271 N.Y.S.2d 216, 221, 218 N.E.2d 274, 278). We perceive no inherent conflict between this duty and the Commission's directive that its staff represent the interests of the consumer by taking an adversary position at the hearings. Presumably, the consumers' interests would be best served by just and reasonable rates which are sufficient to ensure adequate service (see Matter of New York Tel. Co. v. Public Serv. Comm. of State of N. Y., 59 A.D.2d 17, 19, 397 N.Y.S.2d 223, 224, mot. for lv. to app. den. 42 N.Y.2d 810, 399 N.Y.S.2d 1025, 369 N.E.2d 774). While, as here, staff's opinion as to the magnitude of the rate increase necessary to achieve such a result may differ significantly from that of the petitioner, this fact, in and of itself, does not deprive the petitioner of due process.

As to the Commission's communications with members of its staff during deliberations, it must be noted that "(t)he process of ratemaking is a legislative function, not a judicial one" (Matter of New York City Housing Auth. v. Public Service Comm. of State of N. Y., 23 A.D.2d 277, 278, 260 N.Y.S.2d 340, 342, mod. 17 N.Y.2d 246, 270 N.Y.S.2d 417, 217 N.E.2d 140; Staten Island Edison Corp. v. Maltbie, 270 App.Div. 55, 58-59, 58 N.Y.S.2d 818, 820-821, affd. 296 N.Y. 374, 73 N.E.2d 705). It is also noteworthy that the provision of the State Administrative Procedure Act which prohibits agency members assigned to make decisions in adjudicatory proceedings from communicating with agency staff engaged in investigating or prosecuting the case specifically excludes proceedings involving public utility rates (State Administrative Procedure Act, § 307, subd. (2)). "Without a showing to the contrary, state administrators 'are assumed to be men of conscience and intellectual discipline, capable of judging a particular controversy fairly on the basis of its own circumstances' " (Withrow v. Larkin, 421 U.S. 35, 55, 95 S.Ct. 1456, 1468, 43 L.Ed.2d 712). Accordingly, petitioner's unsupported conjecture must be rejected.

II. RATE OF RETURN

Petitioner challenges the Commission's determination as to the rate of return on common equity required by petitioner, which rate is an element of the overall allowed rate of return, contending that the Commission arbitrarily failed to consider all but one of the available approaches to determining the rate of return on equity and that the one approach which the Commission did consider reached an adopted rate of return on equity unsupported by the record. We reject both contentions.

The Commission "is not bound to entertain or ignore any particular factor in discharging its primary responsibility to determine rates that are just and reasonable" (Matter of Tele/Resources v. Public Serv. Comm. of State of N. Y., 58 A.D.2d 406, 410, 396 N.Y.S.2d 906, 909). Nor must the Commission's determination be "wholly free from error in the process, or quite in accord with a judicial view of how the procedure before the Commission should be managed in detail" (Matter of City of New York v. Public Serv. Comm. of State of N. Y., 17 A.D.2d 581, 584, 237 N.Y.S.2d 617, 621, mot. for lv. to app. den. 13 N.Y.2d 594, 241 N.Y.S.2d 1025, 191 N.E.2d 680). "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 Commission's finding that the rates in question are just and reasonable * * * " (Matter of Consolidated Edison Co. of N. Y. v. New York State Public Serv. Comm., 53 A.D.2d 131, 133, 385 N.Y.S.2d 209, 210, mot. for lv. to app. den. 40 N.Y.2d 803, 387 N.Y.S.2d 1030, 356 N.E.2d 482).

Here, interested parties, including petitioner, Commission staff, the Consumer Protection Board and the General Services Administration, presented expert witnesses who gave their opinions as to the rate of return on equity required by petitioner. The various experts employed a total of five different approaches to arrive at their figures, and it is apparent from the Commission's determination that it relied on the so-called discounted cash flow method to determine the allowed rate of return on common equity. We perceive nothing inherently arbitrary and capricious in such reliance as long as the experts were not precluded from presenting other accepted methods of determining rate of return on equity so that the Commission had the opportunity to consider all methods. Implicit in its reliance on the discounted cash flow method is the conclusion that in this particular case that method is the more reliable and since five of the expert witnesses used that method, either exclusively or in addition to other methods, there is support for this conclusion. Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333, does not, as petitioner contends, hold that the comparable earnings test is a mandatory approach. On the contrary, the court stated that "the Commission was not bound to use any single formula or combination of formulae in determining rates * * * . Under the statutory standard of 'just and reasonable' it is the result reached not the method employed which is controlling" (Id., at 602, 64 S.Ct. at 287). Similarly, while the Commission's determination must be made with due regard to the value of the property actually used in public service (Public Service Law, § 97, subd. (1)), "(w)hat consideration is to be given to 'value' 'among other things' is for the commission to decide, having in mind that the overriding principle governing its primary duty is that it shall determine 'just and reasonable rates' " (Matter of New York Tel. Co. v. Public Service Comm. of State of N. Y., 309 N.Y. 569, 579, 132 N.E.2d 847, 850).

The question presented, therefore, is whether the Commission's determination that the required rate of return on common equity is 11.5% Has a rational basis (see Matter of New York State Council of Retail Merchants v. Public Serv. Comm. of State of N. Y., 62 A.D.2d 314, 318, 404 N.Y.S.2d 899, 902; Matter of Niagara Mohawk Power Corp. v. Public Serv. Comm. of State of N. Y., 59 A.D.2d 73, 74, 397 N.Y.S.2d 210, 211). If...