Tacoma Click! Network Lawsuit Threatens to Restrict Authority of Publicly-Owned Utilities to Meet Community Needs

A decade ago, a group of Seattle City Light ratepayers, including a retired City Light attorney, brought a series of class action suits against the utility, arguing that City Light programs ranging from street lighting to the purchase of carbon offsets exceeded the utility’s statutory authority.  These decisions, referred to as the Okeson cases, frequently turned on whether the court concluded that the challenged function was “governmental” or “proprietary,” a distinction with a long but troubled history.  In fact, Justice Frankfurter in 1955 described the governmental/proprietary distinction as a “quagmire that has long plagued the law of municipal corporations.”  Unfortunately, the Okeson decisions only further muddied this “murky” and “inconsistent” doctrine.

For example, Washington courts have long recognized that publicly-owned electric utilities are “proprietary” and therefore can enter into contracts and otherwise “engage in any undertaking which is necessary to render the system efficient and beneficial to the public.”  Yet a 5-4 majority of the Washington Supreme Court ruled in Okeson that Seattle City Light could not purchase carbon offsets even though this likely was the least expensive method for the utility to mitigate its greenhouse gas emissions – a decision that forced legislative action to reverse the court’s holding.  The resulting doctrinal confusion is so severe that one Washington appeals court judge has identified six different “overlapping” and “inconsistent” tests used by Washington courts to determine whether a function is “governmental” or “proprietary,” resulting in distinctions that are “razor thin, if not silly.”

History now seems to be repeating itself.  Recently, a retired Tacoma Utilities attorney and other former Tacoma officials served notice that they will sue Tacoma over allegedly illegal “subsidies” between Tacoma Power and Tacoma’s publicly-owned Click! Network, which provides broadband telecommunications services to the citizens of Tacoma.  Established in the mid-1990s as an operating section of Tacoma Public Utilities, Click! is credited with bringing advanced broadband services to Tacoma residents that were not available at the time from the private sector, and thereby contributing significantly to the City’s economic revival.  Click! was built on the backbone of Tacoma Power’s hybrid fiber coax (“HFC”) system, which was used to carry signals from Tacoma Power’s system of advanced “smart” electric meters and advanced grid equipment.  Hence, the costs of the HFC infrastructure were originally split between Click! and Tacoma Power.  However, the share of costs borne by Tacoma Power has declined as the power utility has moved to a wireless system for its advanced metering infrastructure.  As a result, Click! has run significant deficits in recent years.  After a careful community study of the problem, the Tacoma City Council in September 2016 adopted an “All In” business plan for Click! that contemplates a significant expansion of Click! offerings and customer base, although the plan also projects continued financial support from Tacoma Power while the Click! expansion is underway.

In response, on February 21, a group of former city officers, along with the Industrial Customers of Northwest Utilities, filed a claim with the City arguing that Click! should be required to refund $21 million in “improper subsidies” to Tacoma Power.  Should litigation ensue, as seems likely, the case will raise a number of important questions, ranging from the authority of city governments to address pressing needs for economic development to the ability of municipally-owned utilities to manage their own affairs without judicial interference.  The case is also likely to give the Washington courts another chance to revisit and clarify the governmental/proprietary distinction, and perhaps other equally murky doctrines such as the distinction between “taxes” and “fees.”  Rather than simply adding another increment of confusion to these doctrines, hopefully the courts will take this opportunity to comprehensively reassess these doctrines and apply a new framework – several have been proposed by legal academics — or even abandon the doctrine entirely.