PERREN, J. —
Appellants are an individual and a hotel that incurred a 1 percent surcharge on their electricity bills (1% surcharge) collected by Southern California Edison (SCE) and remitted to respondent City of Santa Barbara (City). The City did not seek voter approval of the 1% surcharge. SCE collects it pursuant to an ordinance and franchise agreement with the City. The California Constitution, as amended by Proposition 218, prohibits local governments from imposing new or increased taxes without first obtaining voter consent. (Cal. Const., art. XIII C, § 2.)
We conclude that the 1% surcharge is an illegal tax masquerading as a franchise fee. (See Estate of Claeyssens (2008) 161 Cal.App.4th 465, 467 [74 Cal.Rptr.3d 304].) Our decision in Santa Barbara County Taxpayer Assn. v. Board of Supervisors (1989) 209 Cal.App.3d 940 [257 Cal.Rptr. 615] (SBC Taxpayers), to the extent it is relevant in the context of Proposition 218, is distinguishable. SBC Taxpayers concerned traditional franchise fees collected for grants of rights-of-way rather than, as here, a surcharge collected for general revenue purposes. Therefore, we reverse and remand.
FACTS AND PROCEDURAL BACKGROUND
For more than 50 years, SCE has provided electricity to the City pursuant to a series of franchise agreements allowing SCE to use the City's streets and other property. In 1994, as a 10-year franchise agreement was expiring, the City and SCE began negotiating the terms of a possible franchise renewal. Because the negotiations for a new long-term agreement took longer than anticipated, they entered into five one-year extensions in the interim.
The expiring agreement and subsequent extensions required SCE to pay the City a "franchise fee" of 1 percent of SCE's gross annual receipts for
The 1989 PUC decision sought to address a growing inequality among utility customers in terms of the benefits they received for the rates they paid. Prior to the passage of Proposition 13 in 1978, local government entities raised revenue — which they in turn spent on local services — primarily through property taxes. Local officials generally could increase local taxes without voter approval. Although local governments within a public utility's service area imposed upon the utility some nonproperty taxes, including franchise fees, these local taxes tended to average out equally in the aggregate. Thus, the utility could roll these costs into its basic rates applicable to all ratepayers without resulting in inequitable differences where one jurisdiction's taxpayers would be subsidizing the tax revenues flowing to another.
In passing Proposition 13, the voters set property value for tax purposes at 1976 levels and restricted any increase in valuation to no more than 1 percent per annum. In addition, they eliminated local governments' authority to raise property taxes to secure general obligation bonds. Proposition 62, enacted in 1986, further limited local governments' ability to raise revenue in that it required a majority popular vote for any increase in local general purpose taxes. These changes caused many cities to rely on revenue-producing mechanisms other than property taxes. The PUC became concerned that the increasing number of such mechanisms and amounts that they produced would create inequities among classes of utility ratepayers. In response, it authorized public utilities to seek its approval, via an advice letter, to impose a surcharge on local utility customers when the franchise fees and other specified local taxes and fees "in the aggregate significantly exceed the average aggregate of taxes or fees imposed by the other local governmental entities within the public utility's service territory." These surcharges appear
In light of the 1989 PUC decision, SCE proposed and the City accepted an arrangement in which the increase in the franchise fee sought by the City was contingent on the PUC authorizing the additional 1 percent to be treated as a surcharge. Their agreement was memorialized in December 1999 in City Ordinance No. 5135 and became effective upon SCE's filing its written acceptance.
Under the terms of the renewed franchise agreement, SCE would continue to pay the City the 1% franchise fee for 30 years. SCE's obligation to pay the 1% surcharge would begin 60 days after the PUC's approval of it, which SCE was required to "use all best efforts" to obtain. If the PUC did not approve the 1% surcharge within a specified period of time,
In November 2005, following the PUC's approval of the 1% surcharge, SCE began billing and collecting it from the City's electricity users and remitting the revenues to the City. The 1% surcharge was expected to generate approximately $600,000 in revenue each year and increase the monthly electricity bill for a typical residential customer by about 54 cents. It was never submitted to or approved by City voters.
Appellants filed a class action complaint. They sought an order declaring that the 1% surcharge is invalid under Proposition 218 as a tax imposed without voter approval, enjoining the City from its further collection, and requiring the City to repay the revenues already collected. Appellants moved for summary adjudication of the liability issues and the City sought summary judgment. The City asserted that the 1% surcharge is part of its franchise fee and, as such, is not a tax. In addition, it argued that the PUC had exclusive jurisdiction to approve the 1% surcharge, that appellants failed to exhaust their administrative remedies by seeking rehearing of the PUC's approval of SCE's advice letter, that their challenge to that approval is time-barred, and that both SCE and the PUC are indispensable parties to this action.
The trial court rejected the City's defenses regarding jurisdiction, exhaustion, timeliness, and indispensable parties, but accepted its argument that the
The sole issue before us is whether the 1% surcharge is a tax subject to Proposition 218's voter approval requirement or a franchise fee that may be imposed by the City without voter consent.
We review a trial court's grant of summary judgment de novo. (William Jefferson & Co., Inc. v. Assessment Appeals Bd. No. 2 (2014) 228 Cal.App.4th 1, 9 [174 Cal.Rptr.3d 642].) Likewise, the determination whether an imposition is a "tax" or a franchise "fee" is a legal question for this court to decide de novo. (Southern California Edison Co. v. Public Utilities Com. (2014) 227 Cal.App.4th 172, 197 [173 Cal.Rptr.3d 120].) In interpreting Proposition 218, we must liberally construe its provisions "`to effectuate its purposes of limiting local government revenue and enhancing taxpayer consent.'" (Silicon Valley Taxpayers' Assn., Inc. v. Santa Clara County Open Space Authority (2008) 44 Cal.4th 431, 448 [79 Cal.Rptr.3d 312, 187 P.3d 37].)
"`Although the classification of a revenue-producing device can be determinative of the lawfulness of the device, courts look to the actual attributes of the device as enacted in order to arrive at the proper classification; the label attached to the device by the local government is not determinative.' [Citation.]" (Weisblat v. City of San Diego (2009) 176 Cal.App.4th 1022, 1038 [98 Cal.Rptr.3d 366].) In Sinclair Paint, the California Supreme Court adopted a "primary purpose" test for determining whether a regulatory fee should be deemed a tax. We will apply the same test to distinguish between legitimate franchise fees and illegitimate taxes masquerading as such. Thus, "if revenue is the primary purpose, and [compensation for the franchise] is merely incidental, the imposition is a tax, but if [compensation for the franchise] is the primary purpose, the mere fact that revenue is also obtained does not make the imposition a tax." (Sinclair Paint, supra, 15 Cal.4th at p. 880.)
The 1% franchise fee resembles a traditional franchise fee. Its purpose is to compensate the City for allowing SCE a right-of-way to purvey electricity. The 1% surcharge is something else entirely. Its purpose was "to raise franchise fee revenues for use by the City Council for general City governmental purposes." The franchise agreement became effective, and SCE had the privilege of using the City's property, regardless of whether or not the PUC authorized SCE to impose the 1% surcharge. The only benefit to SCE from acting as the City's agent in collecting the 1% surcharge was to know with certainty how long the franchise would last. As the trial court found, "[f]rom the perspective of the utility consumer, there is no functional difference between the [1% surcharge] and a utility user tax."
By statute, utilities have a variety of protections against claims that the utility user taxes they collect are illegal. They "have no duty to independently investigate or inquire with the local jurisdiction concerning the validity of the tax ordinance." (Pub. Util. Code, § 799, subd. (a)(1).) They cannot be held "liable to any customer as a consequence of collecting the tax." (Id., subd. (a)(2).) "In the event a local jurisdiction is ordered to refund the tax, it [is] the sole responsibility of the local jurisdiction to refund the tax." (Id., subd.
The franchise agreement here specifies that SCE must collect the 1% surcharge from electric utility customers it serves within the City rather than from its entire customer base. The collection is applied to all of SCE's customers in the City equally based on their electricity consumption. Pursuant to the 1989 PUC decision, which the franchise agreement expressly incorporates, the 1% surcharge must be included in customer bills as a separate item identifying the City as the entity responsible for it. If SCE is prevented by law from collecting the 1% surcharge, it must stop collecting and remitting it. If the PUC or a court orders that the 1% surcharge be returned to ratepayers, the City is "solely responsible for such repayment."
We have stated that "fees paid for franchises are not taxes, user fees or regulatory licenses," but instead are matters of contract. (SBC Taxpayers, supra, 209 Cal.App.3d at pp. 949-950; see Tulare County v. City of Dinuba, supra, 188 Cal. at p. 670 [stating that a franchise fee "is purely a matter of contract"].) But we explained the reason for this distinction is that "[f]ranchise fees are paid as compensation for the grant of a right of way ...." (SBC Taxpayers, at p. 949.) In that way, our holding was limited in scope: "franchise fees collected for grants of rights of way are not `"proceeds of taxes"' under article XIII B, section 8, subdivision (c) [of the California Constitution]."
We decided SBC Taxpayers before Sinclair Paint clarified that the classification of a revenue-generating mechanism as either a tax or a fee turns on its
The City argues that the 1% surcharge is a traditional franchise fee simply because its collection from the taxpayers and remittance to the City is one of SCE's obligations under the franchise agreement. The untenability of the City's position is apparent from the 1999 franchise agreement itself, which obligates SCE to collect and remit any utility user tax that the City imposes. Under the City's reasoning, any such utility user tax, the collection of which being contractual in nature, would also be a franchise fee not subject to voter approval.
The reason that a traditional franchise fee is not normally a tax is not just that it is contractual in nature. It is not a tax because its primary purpose is consideration for the right-of-way rather than simply to raise revenue. Cities cannot avoid Proposition 218's requirements merely by contracting out the collection of otherwise unlawful taxes.
In this case, three factors support the conclusion that the 1% surcharge is a tax and the 1% franchise fee is not: (1) SCE's ability to use the City's property is contingent on its paying the 1% franchise fee but not the 1% surcharge; (2) SCE is not required to recoup the 1% franchise fee in any particular way from any particular group but is required to collect the 1% surcharge from utility users within the City; and (3) the 1% surcharge exceeds the prevailing rate for franchise fees in SCE's territory.
Of course, the City's ability to impose exorbitant franchise fees is not unfettered. At some level of taxation, irate voters will express their displeasure at the ballot box. But to allow such a state of affairs would turn Proposition 218 on its head. The point of Proposition 218 is that cities must obtain voter approval of taxes before imposing them. Otherwise, cities could impose many taxes that a majority of the electorate opposes but is powerless to repeal due to collective action problems. (See Kousser & McCubbins, Social Choice, Crypto-initiatives, and Policymaking by Direct Democracy (2005) 78 So.Cal. L.Rev. 949, 956-957; Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (2d ed. 1971) pp. 127-128.)
The other basic flaw in the League's argument is its assumption that the 1% surcharge was imposed on SCE. As we have explained, it was actually imposed on the utility users. SCE is merely a conduit through which the tax revenues flow with no real interest in the tax's validity or amount.
The League also asserts that cities will face a parade of horribles if they cannot rely on franchise fee revenue. It notes that the median California city receives 5.8 percent of its general revenue from franchise fees. We are not foreclosing legitimate franchise fees, however, only those that are in effect utility user taxes masquerading as franchise fees. It is not an onerous requirement that local governments seek taxpayers' consent before subjecting them to new and increased taxes. And even if it were, that is what the
The judgment is reversed and this matter remanded. The trial court is directed to grant appellants' motion for summary adjudication because the City imposed the 1% surcharge without complying with Proposition 218. Costs to appellants.
Gilbert, P. J., and Yegan, J., concurred.
Structurally, Proposition 218 has two parts, set forth in articles XIII C and XIII D of the California Constitution. Article XIII C, with which we are solely concerned here, pertains to voter approval of local government taxes. Article XIII D establishes additional procedures, requirements, and voter approval mechanisms for assessments on real property and property-related fees and charges. (Cal. Const., art. XIII D, §§ 1, 2, subds. (b), (e); City of Palmdale v. Palmdale Water Dist. (2011) 198 Cal.App.4th 926, 931 [131 Cal.Rptr.3d 373].) Article XIII D, section 3, upon which Citizens for Fair REU Rates relies, provides that "[f]or purposes of this article, fees for the provision of electrical or gas service shall not be deemed charges or fees imposed as an incident of property ownership." (Cal. Const., art. XIII D, § 3, subd. (b), italics added.) This provision merely clarifies that user fees for gas and electricity are not subject to article XIII D's additional requirements for property-related exactions. It says nothing about whether a local revenue measure labeled an electricity "user fee" but actually a tax is subject to the voter approval requirement of article XIII C. In fact, it is.
"The ballot arguments in favor of Proposition 218 emphasized the guarantee of the right to vote on taxes even if denominated `fees,' including the right to vote on utility taxes. (`Proposition 218 guarantees your right to vote on taxes imposed on your water, gas, electric, and telephone bills.' ...)" (Citizens Assn. of Sunset Beach v. Orange County Local Agency Formation Com. (2012) 209 Cal.App.4th 1182, 1196 [147 Cal.Rptr.3d 696], italics added.) Several cases have held that utility user taxes imposed on the use of electricity are subject to Proposition 218's voting requirement. (E.g., Howard Jarvis Taxpayers Assn. v. City of Roseville (2003) 106 Cal.App.4th 1178, 1186 [132 Cal.Rptr.2d 1].) Thus, to the extent Citizens for Fair REU Rates stands for the proposition that local gas and electricity taxes are categorically exempt from the voter approval requirement of California Constitution, article XIII C, section 2, which Proposition 26 left unaltered, we disagree.