California Supreme Court OKs 1% Electricity Surcharge

SAN FRANCISCO (CN) — The California Supreme Court ruled Thursday that a 1 percent surcharge to Southern California Edison electricity customers in Santa Barbara is a valid fee, not an illegal tax.

“Valid fees do not become taxes simply because their cost is passed on to the ratepayers,” Chief Justice Tani Cantil-Sakauye wrote for the majority, noting that publicly regulated utilities are allowed to pass on their costs and expenses.

In the deal the City of Santa Barbara negotiated in 1999 with Southern California Edison, the utility agreed to pay a 1 percent franchise fee to use city property to deliver electricity. The city then passed an ordinance allowing Edison to pass on the surcharge to customers and send the money to Santa Barbara’s General Fund.

The surcharge was expected to generate $600,000 a year and increase monthly electric bills for the average customer by roughly 54 cents.

Santa Barbara hotelier Rolland Jacks brought a class action against the city in 2011, calling the surcharge an unlawful tax under Proposition 218, a voter-passed amendment to the state constitution that prohibits local governments from imposing taxes without voter consent.

At a hearing in April, class attorney Paul Heidenreich argued that the surcharge is a tax because the ratepayers do not get any benefits from paying it.

But the supreme court found the surcharge reasonable since the ratepayers get electricity in return.

“It is a payment made in exchange for a property interest that is needed to provide electricity to city residents,” Cantil-Sakauye wrote. “Because a publicly regulated utility is a conduit through which government charges are ultimately imposed on ratepayers, we would be placing form over substance if we precluded the city from establishing that the surcharge bears a reasonable relationship to the value of the property interest it conveyed to SCE because the city expressed in its ordinance what was implicit — that once the PUC [Public Utilities Commission] gave its approval, SCE would place the surcharge on the bills of customers within the city.”

The fact that the City of Santa Barbara collects the franchise fees from Southern California Edison to generate revenue doesn’t make the surcharge passed on to its customers a tax.

“Historically, franchise fees have not been considered taxes,” Cantil-Sakauye added. “Nothing in Proposition 218 reflects an intent to change the historical characterization of franchise fees, or to limit the authority of government to sell or lease its property and spend the compensation received for whatever purposes it chooses.”

Justice Ming Chin, the only one to dissent, said the surcharge is an illegal tax masquerading as a fee.

Citing the majority opinion, he wrote: “The electricity users upon whom the city imposes the charge, and who actually pay it, do not receive the franchise, any franchise rights, or any property interests. The ordinance grants those valuable rights and interests only to SCE, the electricity supplier. Because the ordinance requires SCE’s customers to pay for rights and interests the city has granted to SCE, the charge does not constitute a ‘franchise fee’ for purposes of the rule that ‘franchise fees [are not] considered taxes.’”

In a shot at what he called “euphemistic relabeling,” Chin added: “In reality, it is just an increase in the city’s user tax, which the city calls a franchise fee. It thus constitutes precisely what the voters adopted article XIII C to preclude: a ‘tax increase[] disguised via euphemistic relabeling as ‘fees,’ ‘charges,’ or ‘assessments.’”

Chin said the majority opinion opens the door to litigation over utility franchises: “(T)he line the majority draws between a valid franchise fee and a tax — whether the amount of the charge to a utility’s customers bears a reasonable relationship to the value the entity receives — is problematic in many ways and renders long-standing statutory provisions regarding utility franchises vulnerable to constitutional challenge.”

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