A California court of appeals recently held that utility companies operating in rural areas of the state do not collect a higher cost of capital, also referred to as a rate of return, than other utility companies.
In Ponderosa Telephone Co. v. California Public Utilities Commission, several small, rural, privately-owned telephone companies asked the California court of appeals to review a decision of the California Public Utilities Commission (“PUC”). The PUC’s ruling related to the companies’ cost of capital, “a measurement of the cost of obtaining debt and equity financing, and it reflects the amount investors would demand to compensate them for the risks of investing capital in the company.” This is also referred to as the rate of return, as it provides the target return on the utility’s capital. The number is a factor in determining a company’s rate base and is calculated by examining (1) the cost of debt, (2) the cost of equity, and (3) the capital structure.
The companies filed a petition to the PUC proposing that their rates of return be reviewed and altered to approximately 14.6%. The proposed amount represented a significant increase from the previous figure of 10% and reflected special risk factors the companies faced, including their small size, industry risks, and regulatory risks. However, following its review, the PUC denied the companies’ requests and lowered their rates of return to approximately 9%. The companies sought a review of the ruling, arguing that the PUC’s conclusion was arbitrary and capricious, and was unsupported by substantial evidence.