CITIZENS FOR FAIR REU RATES v. CITY OF REDDING

Amicus Curiae Brief of League of California Cities and California State Association of Counties

Cal.August 27, 2015

SUPREME COURT COPY S224779 IN THE SUPREME COURT OF THE STATE OF CALIFORNIA SUPREME COUR) CITIZENS FOR FAIR REU RATES,etal. PUP ED Plaintiffs and Appellants, AUG 27 2015 Vv. CITY OF REDDING,etal. netstat eneneans Defendants and Respondents Deputy APPLICATION FOR LEAVE TO FILE AMICI CURIAE BRIEF AND PROPOSED AMICI CURIAE BRIEF OF THE LEAGUE OF CALIFORNIA CITIES AND THE CALIFORNIA STATE ASSOCIATION OF COUNTIES IN SUPPORT OF DEFENDANT AND RESPONDENTCITY OF REDDING Review of a Published Decision of the Third Appellate District, Case No. C071906 Reversing a Judgmentof the Superior Court of the State of California, County of Shasta, Case No. 171377 (Consolidated with Case No. 172960) Honorable William D. Gallagher, Judge Presiding *Benjamin P. Fay, SBN 178856 Rick W.Jarvis, SBN 154479 JARVIS, FAY, DOPORTO & GIBSON 492 Ninth Street, Suite 310 Oakland, CA 94607 Telephone: (510) 238-1400 Facsimile: (510) 238-1404 Attorneys for Amici Curiae _ LEAGUE OF CALIFORNIACITIES and CALIFORNIA STATE jacWED ASSOCIATION OF COUNTIES ae vara * mee ey pes Saab TABLE OF CONTENTS Page APPLICATION FOR PERMISSION TO FILE AMICI CURIAE BRIEF .......0 2.00.0 ccc cece eee eens 1 AMICI CURIAE BRIEF ..........0. 0. ccc cece cece cece eee eens 6 I. INTRODUCTION ..... 0...0ccence nes 6 I. BACKGROUND ......... 0... c cc cece nee eee eee e anaes 8 WW. ARGUMENT ........... 0.00. cece ccc ee cee cence teen eees 10 A. Issue #1: Is a paymentin lieu of taxes (PILOT) transferred from thecity utility to the city general fund a “tax” under Proposition 26 (Cal. Const., art. XII C, § 1, subd. (e)(1))? 2...eee eee 10 1. The Court of Appeal asked whether the PILOT violates Proposition 26, when it should have asked whetherthe Utility’s retail rates violate Proposition 26 2.0.0... eee cee eens 10 2. Proposition 26 should not apply to Redding’s PILOTin the absenceofevidence that the PILOT is funded bythe rates charged to the Redding Electric Utility’s retail customers ............... 12 3. By applying Proposition 26 directly to the PILOT, which is funded by Redding’ssale ofelectricity on the wholesale market, the Court of Appeal has suggested that Proposition 26 applies to the wholesale of electricity ................0000055 15 B. Issue #3: Does the PILOTpredate Proposition 26? ...... 16 1. Because the PILOTpredates Proposition 26,it is grandfathered ............. 0.0.0 c eee ee eee 16 2. At a minimum,the electricity rates in effect when Proposition 26 was adopted should be grandfathered ........ 0.0... c cece ce ence nes 18 WI. CONCLUSION ........ 0.0... 2c ccc eee nee ees 20 il TABLE OF AUTHORITIES Page(s) Cases AB Cellular LA, LLCv. City ofLos Angeles (2007) 150 Cal.App.4th 747 .. 0... eeeeeeee 19 Brooktrails Township Community Services District v. Board ofSupervisors ofMendocino County (2013) 218 Cal.App.4th 195 2.0...ceeeee 7, 16 County ofSacramento v. Lackner (1979) 97 Cal.App.3d 576 2.0... 0c ccc ccc eee eee 17 Hansen v. City ofBuenaventura (1986) 42 Cal.3d 1172 22...cccee eee ee 18 HowardJarvis Taxpayers Association v. City ofFresno (2005) 127 Cal.App.4th 914 2.0.2.2... cee ee eee 13, 14, 18 HowardJarvis Taxpayers Association v. City ofRoseville (2002) 97 Cal-App.4th 637 ..... 00.0... eee eee ees 13, 14, 18 Public Utilities Com’n ofState ofCal. v. F.E.R.C. (9th Cir. 2006) 462 F.3d 1027 2...eece eee 8 United Milk Producers v. Cecil (1941) 47 Cal.App.2d 758 2.0... 0c ccc cece eens 17 ili Statutes California Constitution, article XIII C Sle)...cccece ence eas 6, 9-12, 14, 15 California Constitution, article XIII D Ss)15, 18 C 13, 14 Government Code §53750 20ceeeeeen een eee sees 19 §53750(h) .0.ceee eee n teen nae 19 iv APPLICATION FOR PERMISSION TO FILE AMICI CURIAE BRIEF TO THE HONORABLECHIEF JUSTICE OF THE SUPREME COURT OF THE STATE OF CALIFORNIA: Pursuant to Rule 8.520, subdivision (f), the League of California Cities (“the League”) and the California State Association of Counties (“CSAC”) respectfully request permission of the Chief Justice to file the accompanying amici curiae brief in support of Defendant and Respondent City of Redding (“Redding”). The Leagueis an association of 474 California cities dedicated to protecting and restoring local control to provide for the public health, safety, and welfare of their residents, and to enhance the quality oflife for all Californians. The League is advised by its Legal Advocacy Committee, which is comprised of 24 city attorneys from all regions of the State. The Committee monitors litigation of concern to municipalities and identifies those cases that have statewide significance. The Committee has identified this case as having suchsignificance. The League filed an amicibrief in support of Redding in the appellate proceedings below and also submitted two amicus letters to this Court regarding this case, one dated March 19, 2015 (filed March 20) requesting depublication and one dated April 7, 2015 (received April 8) supporting the Petition for Review. CSACis a non-profit corporation whose membership consists of the 58 California counties. CSAC sponsorsa Litigation Coordination Program, whichis administered by the County Counsels’ Association of California and is overseen by the Association’s Litigation Overview Committee, comprised of county counsels throughout the state. The Litigation Overview Committee monitors litigation of concern to counties statewide and has determinedthatthis case is a matter affecting all counties becauseit concerns this Court’s interpretation and application of Proposition 26 (Cal. Const., Art. XHI C, § 1, subd., (e)), adopted in 2010). Accordingly, CSAC joined with the Leaguein the amici brief supporting Redding in the appellate proceedings below. The League and CSAC andtheir membercities and counties have a substantial interest in the outcome of this case. The case raises important questions regarding the impact of Proposition 26 on municipalities that have long ownedand operated their own municipalutilities. These questions include: (1) whether a long-standing interfund transfer between a city’s utility fund and its general fund can be directly challenged as a “tax” subject to Proposition 26 or whether, instead, Proposition 26 only applies to the rates a municipalutility charges its customers, (2) whethera city’s sale of electricity on the open wholesale market can ever be considered a “tax” subject to Proposition 26, and (3) how Proposition 26 affects pre-existing utility rates. Like many California cities, Redding operates its own electric utility. It provides electric service to residents, businesses, and other customers within its boundaries, for which it chargesutility rates. Redding generates its own electricity for this purpose, and it also generates excesselectricity whichit sells wholesale at market prices to other utility providers (such as Pacific Gas & Electric) and private corporations (such as the former Enron). For over 25 years, Redding hastransferred certain money from its electric utility to its general fund, referred to as a “paymentin lieu of taxes” or “PILOT.” Many of the League’s membercities who operate utilities have similar PILOTsor other such interfundtransfers. The Third District below held that this 25-year practice of transferring certain moneyfrom its electric utility fund to its general fund 2 constitutes a “tax” under Proposition 26. The League and CSAC believe this holding to be contrary to the plain language of Proposition 26, which defines “tax” as meaning “any levy, charge, or exaction of any kind imposed by a local government except the following:[list of seven exceptions].” (Cal. Const. art. XIII C, § 1, subd. (e); emphasis added.) The budgetary act of transferring sums from one fund to the other does not constitute any such imposition and thus cannot be found,byitself, to be a tax. (The amicus brief submitted on behalf of the plaintiffs by Glendale Citizens for Better Governmentactually advocates in agreement with the League and CSAConthis point.) In the eventof a legal challenge, rather than looking at an interfund transfer, a court’s focus should instead be on the extent to which the electricity rates themselves comply with Proposition 26. Proposition 26 excepts from its definition of “tax” any “charge imposed for a specific governmentservice or product provided directly to the payorthat is not provided to those not charged, and which does not exceed the reasonable costs to the local governmentofproviding the service or product.” (Cal. Const. art. XIII C, § 1, subd. (e)(2); cf. Art. XIII A, § 3, subd. (b)(2) (substantially identical exception for State fees).) So Redding’s utility rates could only be “taxes” if Redding directly charges its residents more than “the reasonable costs” that Redding incurs in providing theutility service. An interfund transfer (such as the PILOT here) would, at most, only be indirectly relevant to the analysis. The Court of Appeal treated the PILOT as a charge directly subject to Proposition 26 and held that, after the passage of Proposition 26, Redding hadto justify the PILOT as reasonable compensation for costs incurred by the general fund in the provision ofelectricity service. In doing so, the court effectively made Proposition 26 retroactive, even though the 3 court agreed it was not. Although the PILOT wasvalid underpre- Proposition 26 law, the Court of Appeal’s holding rendered the PILOT invalid after the passage of Proposition 26, without any grandfathering. Had the Court of Appeal instead focused on Redding’s electricity rates, it would have been compelled to find that Proposition 26 could not be applied retroactively to challenge the rates in existence before Proposition 26 was adopted in 2010 (evenifthose rates historically funded someshare of the previously authorized PILOT), and Redding’s rate increases after 2010 would not be subject to challenge under Proposition 26 so long as the increases were themselvesjustified by Redding’s increased costs in providing services (and not by any increase in the PILOT). In addition, if this Court were to hold Redding’s entire PILOT subject to Proposition 26, it would call into doubt the ability of cities to sell electricity (and perhapsother utility commodities, such as water and natural gas) wholesale at market prices, effectively holding that cities may only sell electricity at actual cost. Redding’sutility generates electricity in excess of its customers’ needs, whichit sells on the open market to wholesalers. The trial court found that the proceeds from such market sales were more than enough fund the PILOT, and yet the Court of Appeal held that the PILOT was subject to Proposition 26. In adopting Proposition 26, the electorate soughtto restrict the ability of local agencies to “impose”taxes and fees on those who havenopractical alternatives to those services, but it had no intent to regulate an agency’s sale of a product on the open market to sophisticated market participants with alternative sources of supply. The Court of Appeal’s holdinghas caused significant confusion and uncertainty for all publicly-ownedutilities in California that sell electricity (or other utility commodities) on the open market, and then transfer a portion of the proceeds of suchsales to their general funds. 4 The League and CSACbelieve that their perspective will assist the Court in deciding this matter. The undersigned counsel has examined the briefs on file in this case and is familiar with the issues involved and the scope of their presentation. This amici brief primarily addresses relevant legal issues which were not presented in the parties’ briefs. In compliance with subdivision (f)(4) of Rule 8.520, the undersigned represents that his firm authoredthis brief in its entirety on a pro bonobasis and is paying forits entire cost, and that no party to this action or any other personeither authored this brief or made any monetary contribution to fund the preparation or submission ofthis brief. Webelievethere is a need for additional briefing on this issue, and hereby request that leave be granted to allow the filing of the accompanying amici curiae brief. JARVIS, FAY, DOPORTO & GIBSON, LLP Dated: August 19,2015 By: BenjamifP. Fay a Attorneys for Amici Curiae LEAGUE OF CALIFORNIA CITIESand CALIFORNIA STATE ASSOCIATION OF COUNTIES AMICI CURIAE BRIEF I. INTRODUCTION This Court has identified three issues for its review of this case. In this brief, the League and CSACwill address two: Issue#1: Is a paymentin lieu of taxes (PILOT) transferred from the city utility to the city general fund a “tax” under Proposition 26 (Cal. Const., art. XIII C, § 1, subd. (e))? Issue#3: Does the PILOT predate Proposition 26? With regard to the first issue — whether a PILOTis a tax under Proposition 26 — the Court of Appeal focused on the wrong question. The appropriate question is not whether Redding’s PILOTviolates Proposition 26, but whether the rates Redding’s electric utility (“the Redding Electric Utility”or “the Utility”) chargesto its retail customers violate Proposition 26. The PILOTis an internal budgetary transfer from the Utility’s fund to Redding’s general fund. Proposition 26 applies to a “levy, charge, or exaction of any kind imposed by a local government.” (Cal. Const. art. XIII C, § 1, subd. (e).) The PILOT, however, is not “imposed” on anyone, and therefore it cannot, by itself, implicate Proposition 26. If any charge related to the Utility’s provision of electricity service is “imposed,” and is therefore subject to Proposition 26, it would be the rates charged by the Utility to its retail electricity customers. Consequently, the appropriate question is whetherthe Utility’s retail rates comply with Proposition 26 — whether the retail rates exceed the reasonable cost to the Utility to provide electricity serviceto its retail customers. The PILOTcan only be relevant under Proposition 26 ifit is funded by the retail rates and is therefore paid by the Utility’s retail customers. But Redding has shownthat the cost of the PILOT is more than covered by the Utility’s other sources of income,in particular its sale on the wholesale 6 marketofthe electricity it produces. The trial court found no evidencethat the PILOTis fundedbythe retail rates, and therefore Proposition 26 is not implicated. In fact, because the Utility’s non-retail revenues exceed the PILOTtransfers, it appears that the Utility’s retail customers’ rates are being subsidized by the Utility’s non-retail revenues and are thus well within what Proposition 26 allows. The League and CSACareparticularly concerned with the Court of Appeal’s application of Proposition 26 directly to the PILOT rather than to the rates because it implies that the Utility’s sale of electricity on the wholesale market is subject to Proposition 26. By focusing on the PILOT and holding that the PILOT mustbe justified by actual costs incurred by Redding’s general fund, the Court ofAppeal’s holding suggests that if a municipalutility sells electricity or other commodity to corporate purchasers in the competitive wholesale marketplace, it cannot transfer the profits to its general fund. In effect, it can only sell at cost and cannotsell for a profit, even though the corporate purchasers willlikely be reselling the electricity for their own profit. This was certainly not the purpose of Proposition 26, and the Court should make clear that Proposition 26 does not apply to wholesale transactions. With regard to the third issue for review —— whether the PILOT predates Proposition 26 — Redding has shownthat the PILOT has been implemented unchanged since 2005. It certainly predates the 2010 adoption of Proposition 26, and therefore it should be grandfathered under the holding ofBrooktrails Township Community Services District v. Board of Supervisors ofMendocino County (2013) 218 Cal.App.4th 195. The Court of Appeal’s focus on whether the PILOT was implementedby ordinance, resolution, or budget draws a meaningless distinction. Howeveradopted, the Redding City Council would have always had the discretion to amend 7 the PILOT, which the record showsit has done multiple times. Importantly, the PILOT has remained unchangedsince 2005, well before the voters approved Proposition 26 in 2010. But even if this Court decides the PILOTis not grandfathered, the fact that Proposition 26 is not retroactive should mean, at a minimum,that the rates in effect before Proposition 26 was passed should be grandfathered. Those rates should not be subject to Proposition 26, and only increases to those rates should be reviewed under Proposition 26. II. BACKGROUND Like many California cities, the City of Redding owns and operates a municipal utility, which provides electric service for Redding’s residents and businesses. Theseretail customers pay Redding’s electric rates for the service. Redding’s utility also generates excess electricity which it has long sold on the open market — at market prices — to wholesalers, such as the former Enron. (See, e.g., Public Utilities Com’n ofState ofCal. v. F.E.R.C. (9th Cir. 2006) 462 F.3d 1027 [demonstrating Redding’s participation with Enronin the wholesale market regulated by F.E.R.C.].) Redding maintains an operating fund for the Utility that includes incomefrom its retail electricity rates and from its sale of excess electricity on the wholesale market, much of which is used to pay for the Utility’s operating costs. And, likeall cities and counties, Redding has a “general fund,” that includesits discretionary income from various sources, such as general taxes, and whichit uses to fund general municipal services. As the Court of Appeal acknowledged, some of Redding’s general fund expenditures significantly benefit the Utility. (See Citizensfor Fair REU Rates v. City ofRedding [hereinafter “Opinion”’] (Jan. 20, 2015, C071906) (formerly published at 233 Cal.App.4th 402) [pp. 21-22] [“Undoubtedly, Redding incurs costs to provide infrastructure and support to the Utility. 8 For example, Redding police protect the Utility property and the Utility’s workers. Redding’s streets, used by the Utility in its operations, are built and maintained by Redding’s general fund. Redding’s fire department stands ready to respond if a Utility transformer sparksa fire, or a downed tree cuts a live utility line, endangering Redding’s citizens.”].) Redding has long transferred certain sums from its Utility fundto its general fund. Since 1988, the amountofthis transfer has been calculated based on the amountofthe one percent ad valorem property taxes the Utility would otherwise payif it were a private rather than a public utility. This transfer is referred to as a “paymentin lieu of taxes” or “PILOT.” Manyofthe League’s membercities who operateutilities have similar PILOTs. (See Opinion,p.4, fn. 2 [“PILOTsare not uncommon among California municipalities.”].) In November 2010, the State electorate adopted Proposition 26, which amended Article XIII C of the California Constitution by adding a definition of “tax” as meaning “any levy, charge, or exaction of any kind imposed by a local government.” The measure includesa list of seven exceptions, including “(2) A charge imposed for a specific government service or product provideddirectly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local governmentofproviding the service or product.” (Cal. Const. art. XIII C, § 1, subd. (e)(2).) In December 2010, Redding adopted a resolution increasingits electricity utility rates by just over 15 percent, with half ofthe increase effective in January 2011 and the remaindereffective in December 2011. (See City of Redding’s Opening Brief, filed June 1, 2015 [hereinafter “Opening Brief”], p. 11, citing IV AR Tab 163, pp. 1041-1042.) According to Redding, the purpose of the increase wasto coversignificant increases in 9 costs of generating electricity over recent years, during which Redding had previously deferred rate increases. (See Opening Brief at pp. 10-11, citing Il] AR Tab 140, pp. 797-800; [IV AR Tab 159, p. 1031.) Citizens for Fair REU Rates and Feefighter, LLC (hereinafter collectively “Citizens”) filed two actions challenging Redding’s December 2010 rate increases andits adoption of a biennial budget in June 2011. The actions were subsequently consolidated. Following a benchtrial, the trial court entered judgment for Redding, and Citizens appealed. The Court of Appeal held that “the PILOT constitutes a tax under Proposition 26 for which Redding must secure voter approvalunlessit proves the amountcollected is necessary to cover the reasonable costs to the city to provide electric service.” (Opinion, p. 3.) It further held that Redding may not makethis budgetary transfer unless it can proveattrial that “the PILOT does not exceed reasonable costs ... .” (Opinion, p. 4 [holding “Proposition 26 would nonetheless require the PILOTto either reflect the city’s reasonable cost ofproviding electric service or be approved by voters.”’].) Il. ARGUMENT A. Issue #1: Is a paymentin lieu of taxes (PILOT) transferred from the city utility to the city general fund a “tax” under Proposition 26 (Cal. Const., art. XIII C, § 1, subd. (e)(1))? 1. The Court of Appeal asked whether the PILOTviolates Proposition 26, when it should have asked whether the Utility’s retail rates violate Proposition 26. The entire focus of the Court of Appeal’s decision was whetherthe PILOTis a tax under Proposition 26. The Court of Appeal began “by” considering whether the PILOT constitutes a tax under Proposition 26.” (Opinion, p. 7.) It concludedthat “the PILOT constitutes a tax under 10 Proposition 26 unless Redding proves the amountcollected is necessary to cover the reasonablecosts to the city to provide electric service.” (Opinion, p. 16.) And the Court remandedthe case “for an evidentiary hearing in which Redding has the opportunity to prove the PILOT does not exceed reasonable costs under Article XIII C, section 1, subdivision (e)(2).” (Opinion,p. 4.) But the PILOTitself cannot violate Proposition 26 becauseit has not been “imposed” on anybody. Proposition 26 applies to “any levy, charge, or exaction of any kind imposedby a local government.” (Cal. Const. art. XIII C, § 1, subd. (e); emphasis added.)' The PILOT, however, is an internal budgetary transfer — a transfer from the Redding Electric Utility’s fund to Redding’s general fund. It is not imposed on anyone. If the Redding Electric Utility imposes a “levy, charge, or exaction of any kind” in connection with its provision of electricity services, it does so by its chargesto its retail customers. Therefore, to the extent Proposition 26is an issue in this case, the proper question is whetherthe rates charged to the Utility’s electricity retail customers comply with Proposition 26, and not whether the PILOT complies with Proposition 26. ' The exceptions to Proposition 26 further indicate that Proposition 26 only applies to charges that are “imposed,” since the exceptions almost uniformly apply to charges that are “imposed.” In particular, the exception that would apply to charges for electricity service states that it applies to “(a] charge imposed for a specific governmentservice or product provided directly to the payorthat is not provided to those not charged, and which does not exceed the reasonable costs to the local governmentofproviding the service or product.” (Cal. Const. art. XIII C, § 1, subd.(e)(2); emphasis added.) il 2. Proposition 26 should not apply to Redding’s PILOT in the absence of evidence that the PILOTis funded by the rates charged to the Redding Electric Utility’s retail customers. To comply with Proposition 26, the rates charged to the Utility’s retail customers cannot “exceed the reasonable costs to the [City] of providing the [electricity] service.” (Cal. Const. Art. XIII C, § 1, subd. (e)(1).) The PILOT can only becomerelevantto this inquiry if the cost of the PILOTis funded bythe rates, because then the question would arise whetherthe cost of the PILOT as embeddedintherates is a reasonable part of the cost of providing electricity service. The Court of Appeal’s focus on the PILOT wasbased on the apparent assumption that the PILOT is a componentofthe electricity rates paid by the customers andthat, therefore, when the Utility’s retail customerspaytheir electricity rates, they are necessarily also paying the PILOT. But contrary to this assumption, Redding has shownthatits Utility’s non-rate sources ofrevenue, in particular the Utility’s sale of electricity on the wholesale market, are more than sufficient to pay the cost of the PILOT.’ In fact, the trial court found that “there is no evidence that the PILOTis paid out of customers’ rates.” (Opening Brief, p. 38, citing 3 CT 74.) Thereis thus no basis for assuming that the PILOT is funded by the rates or is otherwise a componentoftherates. In fact, because the Utility’s non-retail revenues significantly exceed the PILOTtransfers, it appears that the non-retail revenues are subsidizing the retail customers, with the result that the retail customers are actually * The Utility’s revenues from wholesale customers and other non-rate sources are more than twice the PILOT. (City’s Opening Brief, pp. 11, 35, 37-38, citing IV AR Tab 145, p. 831; IV AR Tab 149, p. 873; XIII AR Tab 205, p. 2975.) 12 payingless than the reasonable cost to the Utility to provide them with electricity, which explains why the Utility’s rates are amongthe lowest in California. (City’s Opening Brief, p. 7, citing [V AR Tab 166, pp. 1074, 1080-1085.) That the PILOTis not funded by the rates paid by Redding’s electricity retail customers distinguishes two Proposition 218 cases relied uponby both the Court ofAppeal and Citizens: Howard Jarvis Taxpayers Association v. City ofRoseville (“Roseville”) (2002) 97 Cal.App.4th 637 and Howard Jarvis Taxpayers Association v. City ofFresno (“Fresno”’) (2005) 127 Cal.App.4th 914. (Opinion, pp 11-12, 14-15; Citizens’ Answer Brief, filed July 2, 2015, pp. 25, 29.) Roseville concerned an “in-lieu franchise fee” that a city transferred to its general fund from the enterprise funds ofits water, sewer, and garbage utilities. (Roseville at p. 639.) The transfers were calculated at four percent of each utility’s annual budget. (/bid.) Theplaintiffs argued that the transfers violated Proposition 218, and the court agreed, becausesection 6, subdivision (b), of Article XIII D of the California Constitution (part of Proposition 218) requires that the amountofa fee for a property-related service not exceed the cost to provide the service; that the revenues from such a fee only be spent on providing the service for whichit is charged; and that revenues from such a fee not be spent on general governmental services. (/d. at p. 647.) The court could reach this conclusion because the in-lieu fees were “a blended componentofthe rates charged by those utilities” (id. at p. 647) and consequently were “paid by theutility ratepayers”(id. at p. 638). Fresno involved a PILOTthat wastransferred to a city’s general fund from its enterprise funds for its water, sewer, and garbageutilities. Similar to Redding’s PILOT,the transfers were calculated at one percent of 13 the assessed value ofthe fixed assets of each utility. (Fresno at pp. 917- 919.) The court found that these transfers violated both Proposition 218 and the city’s charter. (/d. at p. 922.) Proposition 218 requires that revenues from a fee cannot exceed the funds needed to provide the service for which the fee is charged, and the charter prohibited the city from makinga profit on its utilities. Ud. at p. 922.) Like Roseville, the Fresno court foundthat “[t]he amount paid by each utility [was] passed through to its customers. The overall amountofthe in lieu fee [was] ‘blended’ into the user fees.” (/d. at p. 918.) In contrast, in the present case, the trial court found no evidence that Redding’s PILOTis fundedbyits electricity rates. It is therefore irrelevant whether the PILOTis a reasonable reflection of the costs incurred by Redding’s general fund in the provision ofelectricity. The question should only be whetherthe rates charged to Redding’s retail electricity customers are a reasonable reflection of the cost ofproviding electrical service to those customers. It is also worth noting that Fresno and Roseville concerned Proposition 218, whichhasstricter restrictions on utility rates than Proposition 26. While Proposition 26 only requires that charges for a service “not exceed the reasonable costs to the local government of providing the service” (Cal. Const. art. XIII C, § 1, subd. (e)(2)), Proposition 218 requires that “[rJevenues derived from [property-related fees] shall not exceed the funds required to provide the property related service .. . [and] shall not be used for any purpose other than that for which the fee or charge was imposed.” (Cal. Const. art. XIII D, § 6, subd. (b).) Moreover, the amount of each property-related fee “shall not exceed the proportional cost of the service attributable to the parcel” and a property- related fee cannot “be imposed for general governmental services.” (/bid.) 14 This language is morerestrictive than Proposition 26’s requirement“that the manner in which thosecosts allocated to a payor bear a fair or reasonable relationship to the payor’s burdenson, or benefits received from, the governmentalactivity.” (Cal. Const. art. XIII C, § 1, subd.(e).) Importantly, Proposition 218 does not apply to fees for electricity services (Cal. Const., art. XIII D, § 3, subd. (b)), and therefore only Proposition 26 applies here. 3. By applying Proposition 26 directly to the PILOT, which is funded by Redding’ssale of electricity on the wholesale market, the Court of Appeal has suggested that Proposition 26 applies to the wholesale ofelectricity. Again, as thetrial court found, the PILOTis easily funded by proceeds from Redding’ssale of electricity on the wholesale market. Nevertheless, the Court ofAppeal held that Proposition 26 applied directly to the PILOTandthat therefore the PILOT could be no morethanthe actual costs incurred by Redding’s general fund for the provision ofelectricity services. This holding strongly suggests that if a municipalutility sells electricity on the wholesale market place to electricity providers who in turn sell the electricity for a profit, the city cannotsell the electricity for more than the cost to producethe electricity — that the city cannot makea profit from such sales that it then remits to its general fund. This Court should reject any such inference. Wholesale charges should not be subject to Proposition 26 because they are not “imposed.” Theyare the result of a competitive marketplace and of contracts negotiated between sophisticated parties. In contrast to Redding’s retail purchasers of electricity, who arguably do not have viable alternatives to buying Redding’s electricity, wholesale purchasers have manyoptionsin the marketplace. Ifa city must sell wholesale electricity at cost, then the 15 ultimate profit from that electricity will go entirely to the corporate entity that resells it. While Proposition 26 wasintendedto protect individual citizens who haveto purchase services from their local governments, it was not intended to prevent local governments from negotiating with private corporations for the profitable sale of a commodity producedbythecity. Such a result would not follow from Proposition 26’s purpose of reducing the cost of government, and indeed, it would be to the detrimentofthe local taxpayers Proposition 26 was intendedto protect. Such taxpayers would clearly benefit from the use of the proceeds of such sales to private companiesto help pay for general fund costs. B. Issue #3: Does the PILOT predate Proposition 26? 1. Because the PILOT predates Proposition 26,it is grandfathered. Asthe First District correctly held in Brooktrails Township Community Services District v. Board ofSupervisors ofMendocino County, supra, 218 Cal.App.4th at 206-07, Proposition 26 is not retroactive as to local governments. Because Redding has shownthat its PILOT has been implemented unchangedsince 2005,its continued implementation does not implicate Proposition 26. In this case, the Third District agreed that Proposition 26 is not retroactive, but decided — because the PILOT was implemented through Redding’s biannual budgets and not through an ordinance — thatit could not continue to be applied without complying with Proposition 26. But whether the PILOT was implementedby ordinance, resolution, or biannual budget is an unnecessary distinction that is ultimately meaningless here. The Court of Appeal’s conclusion appearsto reflect the erroneousbelief that if the PILOT had been adopted by ordinance, the Redding City Council would have hadless discretion to amend or terminate it, as comparedto the 16 existing PILOT legislated through City budgets for 22 years. The court explained that “[t]he PILOT’s regular appearance in Redding’s budgetary process does not mean it was a permanentor continuing transfer compelled by ordinance or other non-discretionary authority.” (Opinion, p. 19.) The court explained: “Each budgetis a discretionary legislative act made by each city council. [Citation omitted.] The broadlegislative discretion with which a city council is imbued stands in contrast to a tax or fee fixed by ordinance. In this case, each PILOTtransfer represented a readoption in the discretion of each city council. Indeed, the record shows changesto the method of calculating the PILOT were made in 1992, 2002, and 2005. Consequently, the PILOT cannot be deemedto be grandfathered-in as preceding the 2010 adoption of Proposition 26.” (Opinion, p. 18.) However, the Redding City Council would have had ample discretion to amend an ordinance implementing a PILOT,just as it had discretion to modify the PILOT implemented through annual budgets. An ordinance can be amendedorrepealed at any time by a city council. In fact, any attempt to limit that discretion would beinvalid. “Every legislative body may modify or abolish the acts passed by itself or its predecessors. This power ofrepeal may be exercised at the same session at whichthe original act was passed; and even whilea bill is in its progress and beforeit becomesa law. The legislature cannot bind a future legislature to a particular mode ofrepeal. It cannot declare in advancethe intent of subsequentlegislatures or the effect of subsequentlegislation upon existing statutes.” (County of Sacramento v. Lackner (1979) 97 Cal.App.3d 576, 589-590 quoting United Milk Producers v. Cecil (1941) 47 Cal.App.2d 758, 764-765.) Howevera PILOTis enacted, whether by ordinance,resolution, or any other action, a city council always has discretion to amend or terminate 17 it. That Redding’s PILOT wasnot enacted by ordinance has no constitutional significance. What is importantis that the city council continued the PILOT for more than twenty years before the adoption of Proposition 26 and that the PILOT wasa well-established fixture in Redding’s financial structure. That this was not done by ordinance should not be the basis for deciding that the PILOTis not grandfathered under Proposition 26. 2. At a minimum,theelectricity rates in effect when Proposition 26 was adopted should be grandfathered. Evenifthe PILOTitselfwas not grandfathered, the electricity rates in effect when Proposition 26 was adopted were, and only increases to those rates imposed after Proposition 26 should be evaluated under Proposition 26. Rates that existed when Proposition 26 was passed should,in effect, be treated as base rates that should be reviewed under pre-Proposition 26 law. Until Propositions 218 and 26, rates charged by a municipalutility only had to be reasonable. (Hansen v. City ofBuenaventura (1986) 42 Cal.3d 1172, 1180.) Municipal utility rates were presumedto be reasonable, fair, and lawful, and a plaintiff had the burden of showingthat they were unreasonable or unfair. (/d., at p. 1180.) A utility could be operated for a profit, and it could benefit the city’s general fund. (Jd. at p. 1183.) Proposition 218 changed the standard for municipal water, sewer, and garbage fees (Roseville, supra, at p. 649; Fresno, supra, at p. 922), but left municipal electricity fees untouched because it explicitly does not apply to fees for electricity or gas (Cal. Const. art. XIII C, § 3, subd. (b)). Consequently, until the passage of Proposition 26, the standard set forth in Hansen v. City ofBuenaventura applied to charges for electricity, and that is the standard that should be applied to the rates in existence when 18 Proposition 26 was adopted. Only increases in the rates since the passage of Proposition 26 should be reviewed under Proposition 26, and a municipal electrical utility should only be required to show that fee increases since Proposition 26 are supported by corresponding increases in the reasonable costs to providethe electricity service. Furthermore,if a city established a rate formula before Proposition 26, that formula should be grandfathered. Provided the city maintainsthat formula, the rates should be secure; adhering to an established formulais not a tax increase. (Gov. Code § 53750; AB Cellular LA, LLC v. City ofLos Angeles (2007) 150 Cal.App.4th 747, 763-64 [change in application of telephone tax was a change in “administrative methodology”and therefore a tax “increase” under Gov. Code § 53750, subd. (h) triggering voter approval requirement of Prop. 218].) By focusing on the PILOTandnotthe rates, the Court ofAppeal effectively made Proposition 26 retroactive, althoughit stated it agreed with Brooktrails that it is not. If the PILOT were a componentofthe Redding Electric Utility’s rates before the passage of Proposition 26 (which has not been established, but which, as explained above would be necessary for Proposition 26 to apply to the PILOT),it is grandfathered as part ofthose pre-Proposition 26 rates and the Utility should be able to continue to include the PILOTin rates at the same level into the future. By holdingthat after the adoption of Proposition 26 the PILOT must be justified by the actual costs incurred by Redding’s general fund in the provision ofelectricity, the Court ofAppeal effectively denied the grandfathering effect of Proposition 26 to the PILOT, whichresult is not supported by any language in Proposition 26 or the case law. 19 Il. CONCLUSION Asthe Brooktrails courts held, Proposition 26 does not apply retroactively to local fees and charges that pre-existed its adoption. The Court of Appeal below purported to agree with this holding, and even Plaintiffs do not dispute it. It thus follows that the electric utility rates charged by Reddingprior to the effective date ofProposition 26 are grandfathered, regardless of whetherthose rates funded any portion of the PILOTchallenged herein. It further follows that any increases in Redding’s utility rates post-Proposition 26 should withstand legal challenge so long as those rate increases themselvesare justified by increases in Redding’s cost ofproviding electricity since it last adjustedits utility rates. A decision by any municipality to increase its rates should not open the doorto a retroactive application of Proposition 26 to pre-existing rate practices and formulas, such as Redding’s long-standing interfund budgettransfer represented by the PILOT. The facts ofthis caseillustrate the significant complexity all municipalities may face if Proposition 26 is retroactively applied in such a manner. Thetrial court would have to engage in a complexhistorical factual analysis of the 25-plus year old PILOTtransfer to determine what portion ofthe PILOTis actually funded by proceeds of Redding’s utility rates (as opposed to other sources of income such as Redding’ssale of excess electricity on the wholesale market) and then whetherthat portion exceeds the general fund’s reasonable cost ofproviding variouscity servicesto the utility, including police, fire, public works, street maintenance, and otherservices. While this issue is of obvious importance to local agencies that operate their ownutility systems, it actually impacts every city and county in the State, each ofwhom provide many municipal services supported by 20 rate and fee structures that were in place when Proposition 26 was adopted. It wasthe intent of the voters to only apply Proposition 26 prospectively, and not to expose each municipality to complex andcostly legal challenges to justify rates and fees that were alreadyin place. The League and CSACthusurge this Court not to find Proposition 26 retroactively applicable to long-standing budgetary practices, such as the PILOTchallengedin this case. JARVIS, FAY, DOPORTO & GIBSON, LLP Dated: August 19,2015 By:ZEEE in P. Fay ~~ Attomey sCor Amici Curiae LEAGUE OF CALIFORNIACITIES and CALIFORNIA STATE ASSOCIATION OF COUNTIES 21 WORD COUNT CERTIFICATION I certify that this brief and accompanying application containsa total of 6, 157 wordsas indicated by the word count feature of the Corel Word Perfect computer program used to prepareit. Dated: August 19, 2015 — Benjgeaifi P. Fay7 22 DECLARATIONOF SERVICE I, the undersigned, declare as follows: I am a citizen of the United States and employed in the County of Alameda; I am overthe age of eighteen years and nota party to the within entitled action; my business address is Jarvis, Fay, Doporto & Gibson, LLP, 492 Ninth Street, Suite 310, Oakland, California 94607. On August 19, 2015, I served the within APPLICATION FOR LEAVE TO FILE AMICI CURIAE BRIEF AND PROPOSED AMICI CURIAE BRIEF OF THE LEAGUE OF CALIFORNIA CITIES AND THE CALIFORNIA STATE ASSOCIATION OF COUNTIES IN SUPPORT OF DEFENDANT AND RESPONDENT CITY OF REDDING on the parties in this action, by placing a true copy thereofin a sealed envelope(s), each envelope addressed as follows: Walter P. McNeill Attorneysfor Plaintiffand McNeill Law Offices Appellant CITIZENS FOR FAIR 280 Hemsted Drive, Suite E REU RATES, FEE FIGHTER LLC, Redding, CA 96002 MICHAEL SCHMITZ, and SHIRLYN PAPPAS Michael G. Colantuono Attorneysfor Defendant and Colantuono, Highsmith & Whatley Respondent CITY OFREDDING 420 Sierra College Drive, Suite 140 Grass Valley, CA 95945-5091 Richard A. Duvernay Attorneysfor Defendant and City Attorney Respondent CITY OF REDDING City of Redding 777 Cypress Avenue, 3™ Floor Redding, CA 96099 23 James Ryan Cogdill Howard Jarvis Taxpayers Association 921 11™ Street, Suite 1201 Sacramento, CA 95814 Daniel E. Griffiths Braun Blaising McLaughlin etal. 915 L Street, Suite 1270 Sacramento, CA 95814 Arthur Jarvis Cohen Harry Zavos 2 Venture, Suite 120 Irvine, CA 92618 California Court of Appeals Third Appellate District 914 Capitol Mall, 4" Floor Sacramento, CA 95814-4719 Clerk of the Court Shasta County Superior Court 1500 Court Street Redding, CA 96001-1686 Attorneysfor Pub/Depublication Requestor HOWARD JARVIS TAXPAYERS ASSOCIATION Attorneysfor Pub/Depublication Requestor CALIFORNIA MUNICIPAL UTILITIES ASSOCIATION Attorneysfor Amicus Curiae GLENDALE COALITION FOR BETTER GOVERNMENT I caused each such envelope, with postage thereon fully prepaid, to be placed in the United States mail to be mailed by First Class mail at Oakland, California. I declare under penalty ofperjury under the lawsofthe State of California that the foregoing is true and correct. Executed on August 19, entiDerhAr 2015, at Oakland, California. 24 Jennifer Oberholzer