Fee or Illegal Tax? Calif. Justices Will Decide Electric Case

SAN FRANCISCO (CN) – Southern California Edison customers shouldn’t have to foot the bill for a 1 percent electricity surcharge that is actually an illegal tax, a lawyer for a local Santa Barbara hotelier told the California Supreme Court.

Paul Heidenreich, an attorney who represents Hotel Santa Barbara owner Rolland Jacks on behalf of a class of Santa Barbara ratepayers, told the state’s highest court Tuesday that the 1 percent surcharge violates Proposition 218 – a voter-passed law that prohibits local governments from imposing taxes without voter consent.

“Proposition 218 was enacted to expressly limit the taxing powers of local government, and my clients have had financial burdens imposed upon them,” he said.

As part of a 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 the surcharge on to customers and send the money to Santa Barbara’s general fund.

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

Jacks brought a class action against the city in 2011, claiming the surcharge is an unlawful tax imposed without voter approval. The city argued the surcharge was just part of the franchise fee agreement.

A state court judge sided with the city, finding the surcharge doesn’t qualify as a tax under Proposition 218. An appellate court reversed that decision.

“The 1 percent franchise fee resembles a traditional franchise fee. Its purpose is to compensate the city for allowing Southern California Edison a right-of-way to purvey electricity. The 1 percent surcharge is something else entirely. Its purpose was ‘to raise franchise fee revenues for use by the City Council for general city governmental purposes,’” Second Appellate District Judge Steven Perren wrote in reversing the trial court.

On appeal before the state Supreme Court, Heidenreich said the franchise fee, as the city calls it, is very similar to a tax that Edison’s customers never agreed to pay.

“My clients are paying a charge. Someone is reaching into their pocket and taking their money, and that someone is the city of Santa Barbara and they did it by enacting Ordinance 5135,” he said.

Chief Justice Tani Cantil-Sakauye challenged Heidenreich’s continued reference to the surcharge as a “tax,” rather than a “franchise fee,” saying that was the crux of the case.

“You keep insisting it’s a tax, but that’s what we’re trying to determine,” she said.

Heidenreich said because it was imposed by the city, the surcharge by its very definition must be a tax.

“If it’s a direct obligation imposed upon them by the city it cannot be a franchise fee as a definitional matter,” he said.

He distinguished the case from Sinclair Paint v. State Board of Equalization, where the state’s high court ruled that a fee imposed on manufacturers of lead paint is not a tax because the fee was used to pay for health screenings for victims of lead poisoning.

“Here there is no benefit to my clients,” Heidenreich said.

Representing Santa Barbara, attorney Michael Colantuono said the ratepayers do get something out of the deal.

“They are getting electricity,” he said. “We’ve been allowing people to use public property for private profit, then requiring them to share some of that profit since the beginning of the Republic. I’m advocating that a fee in exchange in consideration for private use of public property is for that reason alone not a tax.”

Cantil-Sakauye questioned Colantuono on the benefit conferred by the charge.

“Since 1978, courts have been suspicious about fees masquerading as taxes,” she said. “What we’ve seen is that the fee has to be reasonably related to the value of the service or benefit conferred. In this case, do we know that?”

Colantuono acknowledged this isn’t his favorite line of inquiry, but said, “Edison agreed to it and the Public Utility Commission allowed it to be charged to customers and no one on the Santa Barbara City Council got recalled.”

His words drew a retort from Justice Carol Corrigan.

“There’s a test,” she joked.

Colantuono likened the surcharge to a fee for service.

“Let’s say we’ve got office space for rent at City Hall and I’m going to rent a street-facing suite to a travel agency, and I’m going to charge rent to that travel agent. And if the travel agent is a capitalist, and one hopes they are, they’re going to recover that rent from their fees for service. You can’t have a test which makes that rental payment a tax,” he said.

The justices did not indicate how they would rule, which will happen in the next 90 days.

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