Opinion
September 2, 1999
Appeal from a judgment of the Supreme Court (Keegan, J.).
Davis, Polk Wardwell (Guy Miller Struve of counsel) and Sandra Di Iorio Thorn, New York City, for appellant.
Lawrence G. Malone, Public Service Commission (Carl F. Patka of counsel), Albany, for Public Service Commission of the State of New York, respondent.
Eliot Spitzer, Attorney-General (Richard W. Golden of counsel), New York City, intervenor-respondent in person.
James F. Warden Jr., New York State Consumer Protection Board, Albany, for New York State Consumer Protection Board, intervenor-respondent.
Before: CARDONA, P.J., MERCURE, SPAIN, CARPINELLO and GRAFFEO, JJ.
OPINION AND ORDER
Prior to its breakup in 1984, ATT provided local telephone service through a number of Bell operating companies (BOCs), including petitioner. Agreements between ATT and the BOCs gave the latter rights to all ATT patents, the research and systems engineering work conducted by Bell Telephone Laboratories Inc. (hereinafter Bell Laboratories) and telephone equipment and technology produced by ATT's Western Electric Company subsidiary. Pursuant to ATT's plan of reorganization dated December 16, 1982, which resulted in a 1984 modified final judgment (hereinafter MFJ) in the lawsuit between ATT and the Justice Department, seven regional Bell operating companies (hereinafter RBOCs) were formed to provide local telephone service. NYNEX Corporation, a holding company consisting of petitioner, New England Telephone and Telegraph Company (hereinafter NET) and several other subsidiaries, was the RBOC formed to provide service in the northeast United States.
NYNEX, along with petitioner and NET, have since merged with and all are now subsumed under Bell Atlantic.
Under the MFJ, ATT and the RBOCs established the Central Staff Organization, later renamed Bell Communications Research Inc. or Bellcore, a common entity created in order to permit a single point of contact for national security purposes and, of particular relevance here, to provide the RBOCs with the technical services formerly provided by Bell Laboratories and Western Electric. Each of the RBOCs received a single share representing a one-seventh interest in Bellcore. NYNEX's share in Bellcore was initially assigned to its subsidiary NYNEX Service Company, which was subsequently transferred to petitioner and NET and merged with other of their subsidiaries, to become Telesector Resources Group (hereinafter TRG).
As a result of changes in the telecommunications industry and increased specialization and competition among the RBOCs, in 1996 the RBOCs decided to sell their individual interests in Bellcore to Science Applications International Corporation. Several months following the decision to sell Bellcore, respondent Public Service Commission (hereinafter the PSC) informed petitioner of its belief that it had jurisdiction to approve the sale of TRG's ownership interest in Bellcore. In response, petitioner sought an expedited declaratory ruling from the PSC disclaiming jurisdiction over the sale or, in the alternative, an order approving the sale. Ultimately, the PSC issued a final order effective November 7, 1997 exercising jurisdiction over the sale and granting petitioner permission to sell Bellcore, but directing petitioner to distribute the intrastate portion of the net profits resulting from the sale (approximately $19.5 million) to its ratepayers in the form of a one-time credit on their telephone bills. Petitioner subsequently challenged the PSC's determination in this CPLR article 78 proceeding. Supreme Court confirmed the PSC's determination, dismissed the petition and granted requests for intervention by the chair of respondent Consumer Protection Board and respondent Attorney-General. Petitioner appeals.
Initially, we agree with petitioner's contention that the PSC had no jurisdiction over TRG's sale of its interest in Bellcore as a matter of law. Pursuant to Public Service Law § 99 (2), "[n]o telephone corporation shall transfer * * * its works or system or any part of such works or system to any other person or corporation or contract for the operation of its works or system, without the written consent of the [PSC]". It is undisputed that TRG does not own, operate or manage any telephone lines or any part thereof and that it therefore falls outside the statutory definition of "telephone corporation" (see, Matter of New York State Cable Tel. Assn. v. Public Serv. Commn., 87 A.D.2d 288, 292). Nonetheless, making no concrete finding that TRG was a telephone corporation (although stating that it may be), the PSC simply concluded that because "Bellcore was formed to provide essential services to NYT and the other RBOCs, it is appropriate to attribute TRG's ownership of Bellcore to NYT", which of course is a telephone company. The PSC's decision offers no legal or factual support for its exercise of this pass-through jurisdiction, however, and this court has on at least two occasions rejected the contention that an entity's status as a wholly owned subsidiary of a telephone company will of itself subject it to PSC jurisdiction (see, id., at 292; Matter of Brooklyn Union Gas Co. v. Public Serv. Commn. of State of N.Y., 34 A.D.2d 71, 73).
Public Service Law § 2 (17) defines "telephone corporation" as an entity "owning, operating or managing any telephone line or part of telephone line used in the conduct of the business of affording telephonic communication for hire".
"Telephone line" is in turn defined as including "conduits, ducts, poles, wires, cables, cross-arms, receivers, transmitters, instruments, machines, appliances and all devices, real estate, easements, apparatus, property and routes used, operated or owned by any telephone corporation to facilitate the business of affording telephonic communication" (Public Service Law § 2 [18]).
The PSC's analysis of its jurisdiction over the transfer is contained in its October 3, 1997 "Order Approving Transfer"; that discussion is expressly incorporated into the PSC's November 7, 1997 final order.
We also agree with petitioner that TRG's one-seventh interest in Bellcore does not constitute a telephone "works or system". In fact, the PSC's decision makes no finding to the contrary. As properly contended by petitioner, Bellcore is not a telephone corporation. Rather, it is a supplier of research and technical services to various companies around the world. It does not own or operate any telephone lines or other facilities that are used to provide telephone service in this State or elsewhere.
On appeal, respondents' primary claim of PSC jurisdiction is predicated upon the PSC's broad power to adjust utility rates, which is broader than its authority to require, prevent or authorize certain utility action (see, Matter of Consolidated Edison Co. of N.Y. v. Public Serv. Commn. of State of N.Y., 66 N.Y.2d 369, 372). In our view, this after-the-fact justification for the PSC's exercise of jurisdiction must fail, for it is a fundamental tenet of administrative law that "judicial review of an administrative determination is limited to the grounds presented by the agency at the time of its determination" (Matter of Scanlan v. Buffalo Pub. School Sys., 90 N.Y.2d 662, 678; see, Matter of Scherbyn v. Wayne-Finger Lakes Bd. of Coop. Educ. Servs., 77 N.Y.2d 753, 758; Matter of Malchow v. Board of Educ. for N. Tonawanda Cent. School Dist., 254 A.D.2d 608, ___, 679 N.Y.S.2d 172, 173; Matter of Van Antwerp v. Board of Educ. for Liverpool Cent. School Dist., 247 A.D.2d 676, 678-679).
In any event, even if we found that the PSC had jurisdiction over the sale, we agree with petitioner's further contention that the PSC exceeded its authority in directing petitioner to distribute the intrastate portion of the sale profits to its ratepayers. As correctly asserted by petitioner, the legal standard that has been uniformly employed by the PSC and this court in determining ratepayers' entitlement to a gain on the sale of a utility's asset is whether the asset is included in the utility's rate base. The underlying rationale for that standard, as explained by the PSC in Spring Valley Water Co. (30 N.Y.PSC 1831, 1834, 1840, affd sub nom. Matter of Spring Val. Water Co. v. Public Serv. Commn. of State of N.Y., 176 A.D.2d 95, appeal dismissed 80 N.Y.2d 825, lv denied 80 N.Y.2d 758) is that, because ratepayers are responsible for the cost of reasonable utility losses, they should benefit from any gains on the sale or transfer of utility property (see, id.; see also, Matter of New York Water Serv. Corp. v. Public Serv. Commn. of State of N.Y., 12 A.D.2d 122, 129). Conversely, 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. The record establishes that the subject interest in Bellcore was not included in petitioner's rate base.
Not disputing (or, for that matter, discussing) any of the foregoing, the PSC merely concluded, "[a]s far as the proper disposition of the net proceeds is concerned, [petitioner's] interest in Bellcore has been funded through payments from ratepayers, and it is reasonable that the net proceeds of the sale should inure to their benefit". In our view, that conclusion is factually and legally erroneous.
First, the record provides no support for the conclusion that petitioner's interest in Bellcore was "funded" by the ratepayers. In order to properly assess the extent of ratepayer "funding" of Bellcore, it is important to recognize Bellcore's dual role vis-a-vis the RBOCs; that is, Bellcore is both an investment asset of the RBOCs and a vendor of research and development services to the RBOCs. While there can be no question that throughout the years ratepayers have been charged with substantial payments by petitioner to Bellcore, petitioner has supported its petition with a compelling factual showing that those payments represented no more than the actual cost of the services provided by Bellcore to petitioner. In fact, petitioner's payments to Bellcore (as allowed by the PSC for rate-making purposes) fell more than $300 million short of covering Bellcore's operating expenses and, as such, provided nothing toward any return on investment in Bellcore. As contended by petitioner, its ratepayers did not "fund" Bellcore any more than it "funded" the many other suppliers of goods or services to petitioner.
Second, we are unaware of any legal authority for the proposition that, in the absence of a sharing of the risk of loss, ratepayers' "funding" of a subsidiary will entitle them to share in the profits realized upon a sale of the "funded" assets. We are wholly unpersuaded by the PSC's speculation that there really was no "risk" that petitioner would have sustained a loss on its investment in Bellcore. Notably, respondents do not deny that the ratepayers had no obligation to make petitioner whole for any loss on Bellcore. Further, as previously discussed, respondents' varying efforts to justify the PSC's distribution of $19.5 million in profits as an exercise of its power to adjust utility rates or its general power to order refunds to customers advances arguments that were either not passed upon or rejected by the PSC in its administrative determination (see, Matter of Van Antwerp v. Board of Educ. for Liverpool Cent. School Dist., 247 A.D.2d 676, 679,supra). Finally, we conclude that respondents' reliance uponMatter of Rochester Tel. Corp. v. Public Serv. Commn. of State of N Y ( 87 N.Y.2d 17) is unavailing.
In view of the foregoing, we conclude that the PSC's determination was arbitrary and capricious and should be annulled. The parties' additional contentions need not be addressed.
CARDONA, P.J., SPAIN, CARPINELLO and GRAFFEO, JJ., concur.
ORDERED that the judgment is reversed, on the law, with costs, determination annulled, petition granted and matter remitted to respondent Public Service Commission for further proceedings not inconsistent with this court's decision.