Redding and the Future of Rate Review in California
On August 27, 2018, the California Supreme Court released an important decision for public utility rates and budgetary transfers in Citizens for Fair REU Rates v. City of Redding (Case # S224779“Redding”), that among other things: (I) determined that a public utility’s budgetary transfer in and of itself is not a tax; and (II) provided key variables for analysis of what constitutes a rate that reflects reasonable costs sufficient to satisfy the ratesetting requirements of Proposition 26.
In Redding, a citizen challenged the City of Redding’s (“City”) budgetary transfer from Redding Electric Utility’s (“REU”) enterprise fund to the City, raising the issue of whether the transfer that compensated the City for its services to REU (known as the Payment-in-Lieu-of-Taxes, or“PILOT”) constituted a tax under Proposition 26’s amendments to Article XIII C of theCalifornia Constitution. Proposition 26 became effective on November 3, 2010, and provides that with limited exceptions “any levy, charge, exaction of any kind imposed by a local government” is a tax. One such exception is that the local government service or product is provided directly and exclusively to those who pay the charge. Another exception is that the charge does not exceed the “reasonable costs” to the local government of providing the service.
(I) A Budgetary Transfer is Generally Not an Imposed Tax
The Redding court stated early in the decision that it is “important to distinguish” between a budgetary transfer such as the PILOT and rates charged to utility customers. In the Redding court’s decision, it is only the rate charged to customers for electric service that is imposed per Proposition 26 and thus the primary question is whether the utility’s rates, not the transfer, exceeded reasonable costs. This determination differs from the lower appellate court’s earlier split decision in this case, which determined that the City’s budgetary transfer was imposed and must be subject to a reasonable cost analysis. The California Supreme Court supported their focus on the rates charged to customers through a citation to Webb v. City of Riverside (2018) 23 Cal.App.5th 244 (“Webb”), where the Fourth Appellate District determined on May 4, 2018 in response to similar citizen challenge to a public utility transfer that the relevant inquiry in Proposition 26 analysis is not the transfer but rather whether the amount charged to ratepayers had increased.
(II) The Relationship Between Rate Revenues and Operating Expenses is Important
In past cases, such as Howard Jarvis Taxpayers Assn. v. City of Roseville (2002) 97 Cal.App.4th 647-648, California appellate courts have held that reasonable costs under Proposition 26 include expenditures to generate and acquire electricity and other costs typical of utility operations. Redding provides key variables on what components of revenue and costs contribute to a findingthat a utility’s charges to ratepayers reflect reasonable costs. In Redding, the total rate revenues from REU were “insufficient to cover the operating costs that plaintiffs concede were reasonable.” In the instance of 2009, REU’s rate revenues were $86.3 million with total operating expenses of $111 million. In 2010 there was also a projected shortfall between revenues and expenses of $34.6 million. Though REU also generated revenues from wholesale electric sales and bond proceed reimbursements, the Redding court held that Proposition 26 “does not compel a local government utility to use other non-rate revenues to [subsidize or] lower its customers’ rates.” Thus, the Redding court concluded that since the operating costs were reasonable, and the rate revenue was insufficient to cover these costs, then the challenged rates were not a tax under the California Constitution.
To summarize, Redding provides support for the notion that budgetary and interfund transfers are not imposed on ratepayers and in and of itself are not taxes. Redding also supports the reasonableness of a utility’s rate assessment when rate revenues track closely to reasonable operating expenses. If you have any questions about the Redding decision or how it may impact your organization, please contact Dan Griffiths at firstname.lastname@example.org.