New York's highest court OK with rate increase

Jessica M. Karmasek Apr. 4, 2011, 11:10am


ALBANY, N.Y. (Legal Newsline) - The New York Court of Appeals said in a ruling last week that there was "no evidentiary foundation" to infer that a utility company may have acted imprudently when it decided to increase its rates.

At issue were the legal standards that apply when a utility company seeks permission from the Public Service Commission, or PSC, to recoup from ratepayers certain environmental remediation costs it has incurred.

Petitioner National Fuel Gas Distribution Corp., or NFG Distribution, is a natural gas delivery utility that operates in western New York and is regulated by the PSC. NFG Distribution is a subsidiary of the National Fuel Gas Company, or National Fuel, and has a number of corporate affiliates.

In the 1990s, National Fuel began pursuing insurance coverage for potential environmental cleanup costs at its former manufactured natural gas plants. National Fuel had commissioned an environmental report, issued in 1996, which estimated that site investigation and remediation, or SIR, expenses at the former plants would be about $300 million.

To determine the extent of its insurance coverage for these estimated remediation expenses, National Fuel filed notices of potential claims with its general liability insurance companies and provided copies of the IES report to its insurers. All of the insurance carriers initially denied coverage.

Eventually, the insurers and National Fuel reached two separate settlements in 1999, totaling about $37 million.

National Fuel then decided to allocate the proceeds of the settlements among its subsidiaries that had been covered by the insurance policies through the use of a "premiums paid" formula of allocation. Under this approach, each subsidiary received an amount from the settlements proportionate to its share of the insurance premiums paid and its contribution to the costs incurred in obtaining the settlements.

As a result, NFG Distribution received almost 46 percent of the settlement proceeds.

Between 1998 and 2006, NFG Distribution incurred actual SIR expenses of almost $27 million -- 85 percent of National Fuel's aggregate environmental remediation costs during that period, depleting the company's proceeds of the monetary settlement.

As a result, in 2007, NFG Distribution petitioned the PSC for tariff amendments to increase its rates to pass its uninsured SIR costs to its customer base. At that time, NFG Distribution was collecting $600,000 per year for SIR expenses from ratepayers. The tariff request sought to increase that amount to $1.7 million.

DPS challenged the requested increase, arguing that it was "unreasonable" for National Fuel to use the premiums paid methodology to allocate the settlements because the percentage of premiums paid by each subsidiary bore no relation to the amount of the settlement funds. DPS said the settlements should have been distributed to the subsidiaries based on the actual SIR expenses incurred.

An administrative law judge ruled in NFG Distribution's favor, concluding that the premiums paid formula was "not unreasonable on its face" since DPS had failed to demonstrate that some other settlement distribution method would have been reasonable at the time the corporate decision was made.

Exceptions were filed to the judge's decision and the matter was brought before the PSC. The PSC concluded that National Fuel had acted imprudently, finding that "the 46 percent allocation of the insurance proceeds was unjust and unreasonable at the time it was made" because National Fuel "should have taken into account the estimates that were available at the time of the liabilities that each subsidiary company was facing."

The PSC determined that the proper allocation to NFG Distribution in 1999 should have been 64 percent of the settlements and ordered that the company be imputed with an additional 18 percent of the settlements in developing the proper rate structure.

NFG Distribution contested the PSC's determination, and the case was transferred to the Appellate Division, which annulled the PSC's imputation of additional settlement proceeds to NFG Distribution. The court held that it was reasonable for National Fuel to use the premiums paid formula in 1999.

The Court, in its decision filed March 29, affirmed the Appellate Division's ruling. Justice Victoria A. Graffeo authored the 14-page opinion.

The justices, all except for Chief Judge Jonathan Lippman, held that when the PSC reviews a management decision of a utility to assess its prudence, DPS bears the initial burden of showing that the utility "may have acted imprudently based on what was known at the time the challenged decision was made."

"Furthermore, there must be a rational basis in the record evidence to support the grounds cited in a PSC order for a finding of imprudence," the Court wrote.

The only DPS employee to testify -- a public utility accountant -- said the premiums paid formula was unreasonable because the settlements were not procured in relation to the amount of premiums paid, the Court noted. The DPS employee also did not explain why the factors that led the insurers to settle should have dictated National Fuel's allocation method.

"In our view, this testimony did not provide a rational basis to infer that National Fuel acted imprudently or sought to maximize future recovery from utility rates," the justices wrote.

And the IES report was not the sole rational means for reasonably allocating the proceeds of the settlements, the Court said.

"The figures included in the IES report were estimations, whereas each subsidiary's share of the premium payments could be accurately tallied," it wrote.

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