Legal Alerts May 17, 2018

City’s Electric Utility Fund Transfer to General Fund Upheld by Court

California Appellate Court Interprets Term “Increase” and Statute of Limitations

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The City of Riverside’s transfer of electric utility service charge revenue to the City’s general fund for general purposes was upheld last week by a California Appellate Court. The suit was time-barred based on the court’s broad interpretation of a 120-day statute of limitations to challenge electric utility service rates. The court also found that a change in methodology for calculating the rates to be charged, which does not result in any person or parcel being charged a higher rate, is not an increase under California Constitution article XIII C.
 
This decision comes at a time when general fund transfers are being closely scrutinized. The court’s decision bolsters local governments’ discretion to apply revenues from fees and charges pre-dating Proposition 26 so long as such action does not increase the amount customers are actually paying. In addition, the court’s broad interpretation of the statute of limitations under Public Utilities Code section 10004.5 is helpful not only to municipal corporations providing electric service, but also to a wide range of agencies that rely on such statutes for fiscal stability and certainty.
 
In Webb v. City of Riverside, the City provided electric service to customers through its electric utility, which was created by the City’s charter. Since 1977, the charter authorized a transfer of up to 11.5 percent of the utility’s gross operating revenues from electric fund reserves to the City’s general fund for general purposes. In addition to infrastructure to service its own customers, the City owns several high-voltage transmission lines that carry power outside of the City. In 2002, the City authorized the California Independent System Operator to use its lines, and charged CAISO for such use (TRR Revenues). The charter did not define “gross operating revenues,” and in December 2013, the City determined to include TRR Revenues in calculating the utility’s gross operating revenues, thereby increasing the transfer from the electric utility’s reserves to the City’s general fund.
 
The petitioner challenged the transfer, alleging the determination to include TRR Revenues in gross operating revenues was a “tax increase” without voter approval, in violation of article XIII C. The trial court found that the suit was time-barred by Public Utilities Code section 10004.5, which contains a 120-day statute of limitations on any judicial action “to attack, review, set aside, void, or annul an ordinance, resolution, or motion fixing or changing a rate or charge for an electric commodity or an electric service furnished by a municipal corporation…”
 
Article XIII C, added to the California Constitution by Proposition 218 in 1996, governs the voter approval requirements for the adoption of local government taxes. As adopted, article XIII C did not define the term “tax.” Proposition 26, later approved by the voters in 2010, added a definition of the term “tax” to article XIII C. Under this definition, a local government fee or charge is a tax unless it qualifies under one of seven exceptions. Further, electric service charges imposed by a local government are a tax if the service provided to a payor is provided to others who are not charged for the same service, and the amount of the service charges imposed on a payor exceeds the reasonable costs of providing the service. If a local government transfers electric service charge revenues to its general fund, it must show that the transfer reimburses the general fund for services provided by the general fund to the electric utility, or other costs incurred by the general fund on behalf of the electric utility. However, Proposition 26 is not retroactive, and charges that would be “taxes” if imposed or increased after Proposition 26 are considered “grandfathered” in and not subject to its constraints unless they are subsequently increased. Thus, if the City’s electric service charges were “increased” by the City Council’s action in December 2013, they were required to comply with article XIII C, section 1(e)(2) or be classified as a tax.
 
The court upheld the transfer to the general fund, based on certain findings:

  • Looking to the plain meaning of “rate” and “charge,” the court interpreted section 10004.5 to require a legal challenge to the service charges within 120 days of the municipal utility fixing or changing the rates for electric service charges.  
  • In a broad read of section 10004.5 to encompass challenges to any ordinance, resolution or motion to fix or change any rate or charge for electric services or commodities, the court found that the petitioner’s claim amounts to a challenge to an alleged increase of the City’s electric service charges. Therefore, the 120-day statute of limitations applied.  
  • Even if the suit was not time-barred, the court found the electric service charges were not “increased” because the City Council revised the methodology for calculating the transfer to the general fund in a way that had no effect on the rates charged to ratepayers, and no person or parcel was required to pay more than prior to the City’s determination.  


General fund transfers continue to be subject to scrutiny. However, Webb supports a more narrow application of the term “increase” when reviewing decisions of local governments regarding taxes, fees, and charges. Citizens for Fair REU Rates v. City of Redding is currently pending before the California Supreme Court, and involves issues relating to electric utility fund transfers pre-dating Proposition 26. The Supreme Court may provide further guidance or limitations on such transfers once that decision comes down.

If you have any questions about this opinion or how it may impact your agency, please contact the authors of this Legal Alert listed to the right in the firm’s Special Districts practice group, or your BB&K attorney.
 
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Disclaimer: BB&K Legal Alerts are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information in this communiqué.

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