Ponderosa Telephone Company

197 Cal. App. 4th 48; 2011 Cal. App. LEXIS 869 (July 5, 2011)

Petitioners were small independent local exchange carriers. Proving that reports of the demise of the rule against retroactive ratemaking are premature, the Court of Appeal (Fifth Appellate District) reversed a Commission decision which had allocated the proceeds of Petitioners’ redemptions of stock from the Rural Telephone Bank (“RTB”) to the ratepayers of Petitioners. The stock at issue was comprised of (1) shares of RTB that its borrowers (Petitioners) were required to purchase as a condition of receiving loans from RTB (“5% shares12”) and (2) “patronage shares”, a partial rebate by RTB to the borrowers reflecting the difference between interest RTB had received from its borrowers and RTB’s actual costs of providing the loans. The Commission concluded that pursuant to its Gain on Sale decision (D.06-12-043) and other Commission precedent, both the “5% stock” as well as the “patronage shares” were not shareholder funded purchases but were in fact indirectly funded by ratepayers. With regard to the “5% stock,” the Commission concluded that the stock purchase was a cost of obtaining a loan, debt ultimately included in the capital structure on which the ratepayers paid a return. Similarly, as described by the court, the Commission’s position with respect to the “patronage shares” that was “because the interest payments were supplied by the ratepayers through the regulated revenue requirement, the ratepayers furnished the funds that led to the patronage refund stock.” (The Court’s full opinion provides a far more comprehensive description of the Commission’s position with regard to the redeemed shares.) Both the Commission’s decision as well as the Court’s decision were informed by the extent to which the stock was included in rate base or was deemed a “public utility asset.” Ultimately, however, the Court concluded that the Commission’s reasoning was “circular” and “not persuasive.” The Court held that the “5% stock” was flatly owned by the shareholders and that allocating it to the ratepayers “constituted an illegal appropriation of Ponderosa’s property.” Since legislation reforming appellate review of Commission decisions was enacted in 1998, Ponderosa represents only the second instance in which a decision of the Court of Appeal annulled a Commission decision on constitutional grounds. (The first was Pacific Gas & Electric (Para. 32) finding that the Commission’s order violated the First Amendment; the second is this decision finding the order to constitute an “illegal appropriation” violative of the State and Federal Constitution (although the Court was less than precise with regard to the specific constitutional provision transgressed.)) Notably, the Court acted quickly; the Commission denied rehearing on October 28, 2010, oral argument took place on June 14, 2011 and the decision was issued three weeks later. The other notable aspect of the decision is the resuscitation of the rule against retroactive ratemaking. While the bulk of the Court’s decision addresses the “5% stock”, the far greater dollar amount at issue was that with respect to the “patronage shares” and the Court concluded that the Commission’s allocation of those shares to ratepayers violated the rule against retroactive ratemaking. The Court made no reference to Section 728, instead relying squarely on Pacific Telephone (Para. 72) and distinguishing Southern California Edison (Para. 56). The latter decision had been regarded by many to have created an exception that largely swallowed up the rule against retroactive ratemaking but the Court’s order in Ponderosa Telephone affirms that the principle retains vitality today. The Commission sought review of the decision in the California Supreme Court but review was denied on October 19, 2011. (In late 2011, the Commission granted rehearing of a companion decision by which it imposed fines on eight of the eleven LECs for alleged violations of Rule 1.1, an allegation premised on the failure of some of the LECs to disclose the receipt of the redemption proceeds. In mid 2012, the Commission issued an order returning the sums at issue to Petitioners. In-mid 2013, the assigned Commissioner issued a Scoping Memo but little transpired until late 2015 when the new Assigned Commisioner issued a new Scoping Memo. (The underlying docket, A.07-12-026, enters its ninth year next month.)

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