Appeals Court Limits CPUC Rate Reduction Power 

Representing three rural telephone companies, Munger Tolles & Olson attorneys secured an important state appeals court ruling that limits the power of the California Public Utilities Commission to order rate reductions and reaffirms the limited ownership interests utility customers have in utility assets.

In Ponderosa Telephone Company, et al. v. California Public Utilities Commission, Henry Weissmann and Hojoon Hwang’s clients had been ordered by the CPUC to credit to their customers the proceeds of the redemption of Rural Telephone Bank (RTB) stock that the companies had accumulated since the 1970s. The companies borrowed money from the RTB, a federally-chartered entity, to finance the construction of telephone facilities in their rural service areas. As a condition of the loans, the RTB required the companies to purchase RTB stock. In addition, the difference between the RTB’s costs and the interest payments it received were refunded to borrowers in the form of additional stock in the RTB. None of the stock was included in the rate base of Munger Tolles’ clients, and the companies therefore did not earn a return on the stock in the service rates paid by customers. Eventually, the RTB was dissolved and its shares were redeemed.  The CPUC held that customers were entitled to the proceeds of the stock redemption because they paid rates which were then used to repaid the loans. Munger Tolles represented the companies in seeking judicial review of the order in Court of Appeal for the Fifth Appellate District, which held that the CPUC acted unlawfully.

The court’s July 5 published opinion is significant in two respects. First, the court reaffirmed the principle that customers do not acquire an ownership interest in utility property simply because it was purchased using money paid in regulated rates. Instead, the utility’s shareholders retain their ownership rights in such property, and the CPUC’s order directing the transfer of those proceeds to customers was therefore an unlawful taking. Second, the court held that the CPUC may not order a rate reduction when an element of cost on which the rates were initially based − here, the companies’ cost of funds − turns out to be lower than forecast because the companies received interest refunds in the form of RTB stock.