A desire to promote increased competition in the New York natural gas retail market, an industry once served exclusively by regulated gas utilities, has caused the New York State Public Service Commission ("Commission") to undertake an examination of the role the gas utility should have in the emerging competitive natural gas market with respect to its "provider of last resort" responsibilities./1 This memorandum addresses the question of whether existing New York law permits a regulated gas utility to divest itself of its merchant function. As set forth more fully herein, the answer appears to be no.

Under current statutory law, gas utilities are obligated to provide both residential and non-residential sales service to customers who request it. However, even absent a statutory requirement, it appears that a gas utility still could be required to provide sales service to customers due to the fact that (a) the utility has been granted and exercises a monopoly within the service territory covered by its governmental consents, and (b) it is a public utility dealing in a commodity (gas) which is connected with the public welfare. Under existing case law, utilities have a common law duty to provide service, which duty most likely would be interpreted to mean an obligation to provide sales service to customers. In order for a utility to terminate its merchant activities entirely with complete certainty that a New York court could not require the utility to resume its merchant function, both the Public Service Law and Transportation Corporations Law would need amending and the amendment would need to include an affirmative statement that gas companies no longer have an obligation to provide sales service to customers.

Applicable Statutes

Discussion

In New York State, any corporation engaged in manufacturing, distributing, transporting or furnishing gas must comply with both the Public Service Law ("PSL") and the Transportation Corporations Law ("TCL"). N.Y. Pub. Serv. Law §§ 2(10), 2(11), 31 (McKinney 1996); N.Y. Trans. Corp. Law §§ 10, 12 (McKinney 1996)./2 Section 12 of the TCL sets forth the basic obligations of gas and electric corporations with respect to the provision of utility service to non-residential customers. It provides that "[e]xcept in the case of an application for residential utility service under article two of the public service law, upon the written application of the owner or occupant of any building within one hundred feet of any main of a gas corporation . . . appropriate to the service requested and payment from him of all money due to the corporation, it shall supply gas . . . ." TCL § 12 (emphasis added). Article two of the Public Service Law, also known as the Home Energy Fair Practices Act ("HEFPA"), sets forth the basic terms and conditions for the provision of utility service to residential gas, electric and municipal customers. PSL §§ 31-50. Section 31 of the PSL states, in part, that "[e]very gas corporation . . . shall provide residential service upon the oral or written request of an applicant, provided that the [C]ommission may require that requests for service be in writing under circumstances as it deems necessary and proper as set forth by regulation . . . ." PSL § 31 (emphasis added).

In interpreting statutes like the TCL and PSL, a court "is to ascertain and give effect to the intent of the Legislature." N.Y. Statutes § 92(a) (McKinney 1971). The Legislature's intention "is first to be sought from a literal reading of the act itself." Statutes § 92(b). Courts look to the plain language of the statute in order to ascertain the Legislature's intent. Albano v. Kirby, 36 N.Y.2d 526, 369 N.Y.S.2d 655 (1975). If statutory terms are free from any ambiguity and clearly communicate legislative intent, then resort cannot be had to other means of interpretation, such as common law rules of statutory construction. Patrolmen's Benev. Assoc. v. Buffalo, 50 A.D.2d 101, 376 N.Y.S.2d 291 (4th Dep't 1975) (courts may not utilize rules of construction where the statute is not ambiguous).

The plain language of TCL § 12 refers to a gas utility's obligation to "supply gas" to non-residential customers meeting certain basic requirements./3 The term "supply gas" is not defined under TCL. Neither is the word "supply" defined in the statute./4 Unlike TCL § 12, PSL  § 31 does not require a gas utility to "supply gas" to customers. Rather, it states that a gas company shall provide residential service to customers on application. Neither the PSL nor the Public Service Commission's ("PSC") regulations promulgated thereunder/5 define the terms "residential service" or "service."/6

The statutes, by their express terms require the utility to "supply gas" and "provide residential service." The legislative intent "is to be ascertained from the words and language used, and the statutory language is generally construed according to the natural and most obvious sense, without resorting to an artificial or forced construction." Statutes § 94. The "natural and most obvious" meaning of the words "supply gas" appear to suggest a requirement to sell gas to customers who request it. The phrase "provide residential service" arguably suggests the same outcome. It could be argued that if a consumer was unable to buy gas from a party other than the utility, the utility, to fulfill its obligation to "supply gas" or "provide residential service" would necessarily have to sell the customer the gas commodity.

On the other hand, it could also be argued that the precise meaning of the terms "supply gas" (TCL §12) and "residential service" (PSL § 31) are not clear from a four corners reading of the statute and are ambiguous, in which case, the courts would look beyond the words, using time-honored rules of statutory construction in order to discern the intent of the Legislature in enacting the statute. Thomas v. Bethlehem Steel Corp., 95 A.D.2d 118, 466 N.Y.S.2d 808 (3d Dep't 1983), aff'd, 63 N.Y.2d 150, 481 N.Y.S.2d 33 (1984). If the meaning of the statute is not clear, "the intent may be ascertained from such facts and through such rules as may, in connection with the language, legitimately reveal it." Statutes  § 92(b).

One rule of statutory construction provides that a law is said to speak "not from the time when it was enacted, or when the courts are called on to interpret it, but as of the time it took effect." Id. § 93 (emphasis added). Moreover, "statutes framed in general terms ordinarily apply to cases and subjects within their terms subsequently arising." Id. That is, a statute should be construed in light of its historical background. Civil Service Employees Assoc. v. County of Oneida, 78 A.D.2d 1004, 433 N.Y.S.2d 907 (4th Dep't 1980).

The language of TCL § 12 reflects a gas utility's obligation to "supply gas" to non-residential customers meeting certain basic requirements. When read in its proper historical context, this provision can only be interpreted as requiring utilities to provide a bundled sales and transportation service to customers. Although today gas utilities are providing non-residential customers both an unbundled transportation service and a bundled sales service, at the time the TCL became effective in 1907, the only type of gas service being offered by local distribution companies was a bundled sales service. Under the rules of statutory construction (Statutes  § 93), in such a case, courts should interpret the "supply gas" language of TCL § 12 as requiring gas utilities to provide the only type of service they were providing when the statute became effective -- a bundled sales service to non-residential customers who request it./7

As noted, PSL  § 31 by its terms does not require a gas utility to "supply gas" to customers. Rather, it states that a gas company shall provide residential service to customers on application. As was the case with non-residential customers served pursuant to TCL § 12, although utilities now offer unbundled transportation service to residential customers, at the time HEFPA became effective in 1981, the only type of "residential service" gas utilities were offering customers was a residential sales service (i.e. a bundled sales and transportation service). Under the rule of statutory construction that a statute "speaks" not from the time the courts are called on to interpret it, but "as of the time it took effect" (Statutes  § 93), PSL § 31 should be interpreted as requiring utilities to provide a bundled sales and transportation service to residential customers who request it.

In addition, HEFPA is a remedial statute./8 A remedial statute is one which provides for a remedy where none previously existed. Anderlohr v. New York, 201 Misc. 605, 606, 112 N.Y.S.2d 135, 136 (Sup. Ct. Kings County 1952) (citing Statutes § 35, which states that a remedial statute is one which provides "a mode of remedy for a wrong not available or ineffective under the prior system of law"). One remedy provided by Article 2 was to make it easier for customers to obtain "residential service." Prior to HEFPA's enactment, gas utility service obligations to both residential and non-residential customers were governed by TCL § 12,/9 under which customers were required to make written applications to obtain gas service. PSL § 31 now obligates gas utilities to provide service to residential customers (meeting certain basic requirements) on their oral application. Remedial statutes are to be liberally construed to carry out the reforms intended and to promote justice." Statutes § 321; see also Asman v. Ambach, 64 N.Y.2d 989, 489 N.Y.S.2d 41 (1985); Festa v. Leshen, 145 A.D.2d 49, 537 N.Y.S.2d 147 (1st Dep't 1989) (where the court held that since the Rent and Stabilization Law was intended by the Legislature to alleviate a critical housing shortage, that law should be interpreted broadly to permit relatives who reside with the named tenant to obtain a lease upon the named tenant's death). A liberal construction of a remedial statute is one that spreads the beneficial result of the statute as widely as possible. Mlodozeniec v. Worthington Corp., 9 A.D.2d 21, 189 N.Y.S.2d 468 (3d Dep't 1959), aff'd 8 N.Y.2d 918, 204 N.Y.S.2d 163 (1960), cert. denied 364 U.S. 328 (1961).

Since HEFPA is a remedial statute, pursuant to rules of statutory construction, it most likely will be liberally construed. A liberal construction of HEFPA would be one that spreads its benefits as widely as possible. This lends additional support for broadly interpreting PSL § 31 as imposing a gas utility obligation to provide a bundled sales service (transportation and sales) to residential customers on oral application, rather than narrowly interpreting it to require merely the provision of transportation service./10

Another rule of statutory construction holds that statutes are to "be construed as a whole, and all parts of an Act are to be read and construed together to determine the legislative intent" Statutes  § 97. "Statutes are to be interpreted to give effect to every part thereof, and leave each part some office to perform." 97 N.Y. Jur.2d, Statutes § 181; see also Levine v. Bornstein, 4 N.Y.2d 241, 173 N.Y.S.2d 599 (1958). In addition, statutes enacted at different times but relating to the same subject matter are said to be in pari materia and should be read and construed together, as if they were part of the same statute. In re Seaman, 78 N.Y.2d 451, 576 N.Y.S.2d 838 (1991) (where the adoption statute and the descent and distribution statute were read together in order to define the incidents of relation between the adopted child and the biological parent); Mugavin v. Nyquist, 78 Misc.2d 914, 358 N.Y.S.2d 980 (Sup. Ct. Albany County 1974) (statutes in pari materia are to be read as if they were part of the same statute). By applying these two rules of statutory construction to the PSL and the TCL, the conclusion is inescapable that gas utilities cannot satisfy their statutory obligations under the PSL and TCL merely by providing unbundled transportation service./11

As noted above, when the TCL and HEFPA each became effective, local distribution companies were offering only one type of service, a bundled service which included both the transportation and sale of gas. In 1984, the New York State Legislature amended the PSL and added section 66-d, which enabled the Commission to order gas companies to provide unbundled transportation service to customers under certain conditions. PSL § 66-d provides in pertinent part that the Commission "shall, upon such terms and conditions as the [C]ommission considers just and reasonable, have the authority to order any gas corporation to transport or contract with others to transport gas . . . provided that the [C]ommission finds that such gas corporation has available capacity, that no undue burden shall be placed upon the gas corporation or its ratepayers and that the ability of the gas corporation to render adequate service to customers is not impaired." In 1985, pursuant to its authority under this statute, the Commission ordered local distribution companies to provide unbundled transportation service to certain customers/12 and, in 1994, the Commission extended this obligation residential customers./13 Thus, today gas utilities are providing both an unbundled transportation service, and a bundled sales and transportation service to their customers.

Since the PSL and the TCL relate to the same subject matter, they are statutes in pari materia and are to be read and construed together. Construing the PSL "as a whole," and reading the TCL and PSL in para materia, if the obligation to supply gas under TCL § 12, and to provide residential service under PSL  § 31 (each of which were enacted prior to PSL § 66-d), were interpreted merely to create an obligation to provide transportation service to customers, then the enactment of PSL § 66-d in 1984 would not have been necessary. Moreover, construing PSL § 31 and TCL § 12 as requiring nothing more than transportation would mean that PSL § 66-d would become superfluous, leaving it no "office to perform," an interpretation that would not comport with accepted rules of statutory construction. Therefore, TCL § 12 and PSL § 31 must require gas companies to do something more than offer transportation service to customers. Under the circumstances, the only service that could satisfy the obligation would be a bundled sales and transportation service.

To the extent the "provide residential service" language used in the PSL or the "supply gas" language used in the TCL is viewed as unclear and ambiguous, the rules of statutory construction may lead to the conclusion that a gas utility's obligation, pursuant to both statutes, is to provide sales service to both its residential and non-residential customers. Thus, if the Commission wishes to require or permit gas utilities to exit the merchant function, a minimum first step would be the amendment of TCL § 12 and PSL § 31 to eliminate the gas utility obligation to provide sales service to customers who request it.

Underlying the current statutory framework is the historical obligation imposed upon a utility to provide service to customers who request it,/15 in exchange for which a utility is granted right to provide utility service within the service territory authorized by its "consents."/16 Like other franchises, a utility franchise "is a special privilege conferred by government on individuals, and which does not belong to the citizens of a country generally, by common right." Curtis v. Leavitt, 15 N.Y. 9 (1857).

When a public utility accepts a consent, it is granted the right, and assumes the obligation, to provide service within the area of its consent. "The law presumes that a public utility corporation will perform its duty . . . and discharge its obligations." Mamaroneck v. N.Y. Interurban Water Co., 198 A.D. 396, 190 N.Y.S. 580 (2d Dep't 1921), aff'd, Mamaroneck v. Baker, 233 N.Y. 666 (1922). As Judge Cardozo stated, the duty to serve the public "goes hand in hand with the privilege of exercising a special franchise." Cayuga Power Corp. v. Public Serv. Comm'n, 226 N.Y. 527, 532 (1919). In another case, Judge Cardozo declared that "the duty to serve would exist without the statute, for it results from the acceptance of the franchise of a public service corporation." Tismer v. New York Edison Co., 228 N.Y. 156, 161 (1920). Furthermore, in Penn. Gas Co. v. Public Serv. Comm'n, 225 N.Y. 397, 402 (1919), aff'd, 252 U.S. 23 (1920), Judge Cardozo stated that:

Id. at 40 (emphasis added); see also Purcell v. N.Y. Central R.R. Co., 268 N.Y. 164, appeal dismissed, 296 U.S. 545 (1935) (by stating that the PSL superseded all common law remedies, the court gave recognition to the existence of such remedies). Whether this duty requires the provision of a bundled sales service is not discussed in these cases./17 However, in reference to PSL § 65, Judge Cardozo's stated that "[w]hat is being regulated by the . . . [PSL] is not the act of transportation; it is the sale of the thing transported." Penn Gas, 225 N.Y. at 225.

New York utilities operate within and around their respective service territories by virtue of their governmental consents. Thus, even without the existing statutory obligations set forth under TCL § 12 and PSL § 31, a utility still would have a common law duty to provide service to its residential and non-residential customers within the geographic area designated by its governmental consents.

It is unclear whether this common-law utility obligation to serve is an obligation to provide sales service to its customers. At the time the above-referenced cases were being decided by the courts, the only type of gas service being offered by utilities to both residential and non-residential customers was a bundled sales and transportation service. Hence, while it is not absolutely clear, considered in their correct historical context, it is reasonable to interpret these cases as requiring a utility to provide bundled sales and transportation service.

However, viewing the case law in its historical context does not reveal how a court might interpret a utility's obligation to serve if it were asked that question today. If TCL § 12 and PSL § 31 were amended to remove a utility's obligation to provide sales service, as suggested in the previous discussion, the courts would be freed from their obligation to interpret or apply applicable statutory law. If the TCL § 12 and PSL § 31 did not exist and, if a court were asked to define the nature of a utility's obligation, it would look to age-old common law principles which traditionally guide the development of judge-made law.

Unlike statutory law, the common law is a continuing evolving body of law. Hurtado v. California, 110 U.S. 516, 530 (1984) ("flexibility and capacity for growth and adaption is the peculiar boast and excellence of the common law"). "The common law is not a compendium of mechanical rules written in fixed and indelible character, but a living organism which grows and moves in response to the larger and fuller development of the nation." Oppenheim v. Kridel, 236 N.Y. 156, 164 (1923). Courts develop common law rules in response to the changing times and conditions of the country and formulate rules designed to address the novel situations presented to it. In the absence of legislation on the subject, it is properly within the court's power to fashion a rule of law "upon a given subject in light of fundamentally altered conditions." Funk v. United States, 290 U.S. 371, 383 (1933).

If the TCL § 12 and PSL § 31 were repealed, it is possible that due to the changing circumstances of the gas industry, a court might find that a utility's basic service obligation also should change. However, this cannot be stated with certainty. It is possible that such a statutory repeal, taken together with the changing circumstances of the gas industry, might be viewed as a basis for a court finding that a utility's "contract with the public" is not the same as it once was, that the common law should be allowed to evolve, and that a gas company's obligation to provide service might be satisfied merely by providing an unbundled transportation service. Hence, recognizing that the outcome of such a case would be uncertain, even if TCL § 12 and PSL § 31 were repealed, a utility should be counseled to seek a legislative amendment affirmatively stating that gas companies no longer have the obligation to provide sales service to qualifying customers, and that such obligation extended only to the provision of transportation service.

The Commission, in its Gas Policy Statement,/18 has indicated that the best way to develop a competitive gas supply market is to have local distribution companies exit the business of selling gas. As stated at the outset of this memorandum, the Commission has instituted a proceeding in New York ("POLR Proceeding") to examine the future role that regulated utilities should play in providing natural gas./19 The POLR Proceeding was instituted under the guidance of the Office of Hearing and Alternative Dispute Resolution to, among other things, provide recommendations regarding "provider of last resort" and related issues.

A question arises in this context as to what extent a utility could rely on a Commission declaratory ruling authorizing a utility to exit the merchant function. The answer turns on whether the courts would defer to a Commission interpretation of section 31 of the PSL and section 12 of the TCL which concludes that a utility is not required to sell gas in order to meet its obligation to "provide residential service" (PSL § 31) or "supply gas" (TCL § 12).

As a general rule, broad interpretative authority is accorded an agency responsible for administering a statute/20 and its interpretation or construction of such a statute is given great deference by the courts and will be upheld if its is not irrational or unreasonable,/21 or if it has a rational or a reasonable basis in law./22 This principle of deference to an administrative agency's interpretation of a statute which it is responsible for administering is particularly followed where the interpretation of a statute or its application involves knowledge and understanding of the underlying operational practices or entails an evaluation of factual data and inference to be drawn from such data. Dworman v. New York State Div. of Housing, 94 N.Y.2d 359, 704 N.Y.S.2d 192 (1999); Denton v. Perales, 72 N.Y.2d 979, 534 N.Y.S.2d 364 (1988), related reference, 195 A.D.2d 506, 601 N.Y.S.2d 821 (2d Dep't 1993); Kurcsics v. Merchants Mut. Ins. Co., 49 N.Y.2d 451, 426, N.Y.S.2d 454 (1980). Still, the agency's construction is not controlling upon the courts. People ex rel. Public Service Commission v. New York Tel. Co., 262 A.D. 440, 29 N.Y.S.2d 513 (3d Dep't 1941), order aff'd, 287 N.Y. 803 (1942). This rule is particularly applicable where the matter involves a question of pure statutory reading and analysis, dependent only on an accurate apprehension of legislative intent and does not implicate the agency's specialized knowledge or expertise./23 In such a situation, an agency's interpretation of a statute is to be accorded less weight./24

Whether a gas utility could rely on a declaratory ruling authorizing a termination of its merchant activities depends on the likelihood of that Commission determination being upheld on appeal. Appellate scrutiny likely would involve a question of whether the Commission's interpretation of the operative statutory provisions (PSL § 31 and TCL § 12) required its specialized knowledge or expert factual analysis or only called for a statutory reading and analysis to ascertain the legislative intent./25 Arguably, the Commission has a special understanding of gas deregulation and the associated changes experienced in the natural gas markets, putting it in the best position to interpret what it means to "provide residential service" or "supply gas." Still, that interpretation appears to raise the legal question of legislative intent, rather than a technical understanding of the facts. Also, the Commission's enabling legislation is contained in the PSL, not the TCL, and, therefore, the principles of deference may not be as great for a Commission interpretation of the TCL. There are also a utility's obligations which derive from governmental consents, as well as the assumption of the responsibility to provide a service which is connected to the public welfare. A Commission order authorizing a utility to exit the retail gas business could not set aside these governmental consents and common law duties. Individual utility governmental consents may have covenants which specify the type of service that must be performed, and a termination of a utility's merchant function activities, even if authorized by the Commission, could potentially breach the terms of the consents relied upon by the utility to operate. Given all these considerations, the preferable approach remains a legislative amendment.

Conclusion

Public utilities are subject to regulation under two statutes, the PSL and the TCL, as well as being subject to PSC regulations. Because the plain language of the statutes may be susceptible to more than one interpretation, rules of statutory construction can be utilized in order to ascertain legislative intent. The various rules of statutory construction, the historical context, the legislative history, the contemporaneous authority, and HEFPA's remedial nature all suggest that a utility has an obligation to sell gas to qualified customers who request it. This view is buttressed by the governmental consents and common law obligations which are still operative. Consequently, given all of the foregoing, a utility could not determine with certainty that it would no longer be required to provide a merchant function without a legislative amendment affirmatively declaring that gas utilities do not have an obligation to provide sales service to residential or non-residential customers who request it.

Recommendations

In order for a utility to eliminate its sales service, the Legislature would have to amend the current statutes by making clear that a utility is not required to sell gas in order to meet its obligation to "provide residential service" under PSL § 31, "supply gas" under TCL § 12, and provide service pursuant to its previous common law obligation (under applicable municipal consents). Such an amendment should affirmatively state that the obligations created under both these statutes and the common law do not require utilities to sell gas to customers requesting service.

An appeal to the Legislature would echo language found in the legislative history accompanying the passage of Section 66-d. See e.g., N.Y. Pub. Serv. Law § 66-d (Historical and Statutory Notes) (McKinney 2000). The statement in support of the proposed bill would point to the increased competition which would result from deregulation and the protection that an active market would provide. See Memoranda, Ch. 529 (1984). This increased competition arguably would reduce the prices paid for gas, would diversify and expand the number of suppliers, would create jobs within the state, and would increase the property taxes collected by local governments and improve the state's economy.

If you have any questions or require further information regarding the issues addressed in this memorandum, please contact Kenneth Maloney at (202) 223-8890 or via e-mail at kmaloney@cullenanddykman.com, or Deborah M. Franco at (718) 780-0057 or via e-mail at dfranco@cullenanddykman.com.