CITIZENS FOR FAIR REU RATES v. CITY OF REDDING

Appellants’ Response to Amicus Curiae Brief

Cal.September 29, 2015

SUPREME COURT COPY $224779 IN THE SUPREME COURT SUPREME COURT OF THE STATE OF CALIFORNIA FIED SEP 29 2015 Citizens for Fair REU Rates,etal. Plaintiffs and Appellants, Frank A. Mctsuire Clerk vs. City of Redding,et al., Deputy enputy >) Defendants and Respondents. (cee) of8 CONSOLIDATED ANSWERBRIEF TO THE AMICUSCURIAE BRIEF OF THE LEAGUE OF CALIFORNIA CITIES AND THE CALIFORNIA STATE ASSOCIATION OF COUNTIES, AND TO THE AMICUS CURIAEBRIEF OF THE CALFORNIA MUNICIPALUTILITIES ASSOCIATION Review Of a Published Decision of the Third Appellate District, Case No. CO71906 Reversing a Judgmentof the Superior Courtof the State of California for the County of Shasta, Case No. 171377 (Consolidated with Case No. 172960) Honorable William D. Gallagher, Judge Presiding Walter P. McNeill, Cal. Bar No. 95865 wmeneill@mcnlaw.com MCNEILL LAW OFFICES 280 Hemsted Drive, Suite E Redding, CA 96002 Tel: 530-222-8992 Attorneys for Plaintiffs Citizens for Fair REU Rates,et al. and Plaintiffs Fee Fighter LLC,etal. 5224779 IN THE SUPREME COURT OF THE STATE OF CALIFORNIA Citizens for Fair REU Rates,et al. Plaintiffs and Appellants, vs. City of Redding,et al., Defendants and Respondents. CONSOLIDATED ANSWERBRIEFTO THE AMICUS CURIAE BRIEF OF THE LEAGUE OF CALIFORNIA CITIES AND THE CALIFORNIA STATE ASSOCIATION OF COUNTIES, AND TO THE AMICUS CURIAEBRIEF OF THE CALFORNIA MUNICIPAL UTILITIES ASSOCIATION Review Of a Published Decision of the Third Appellate District, Case No. C071906 Reversing a Judgmentof the Superior Courtof the State of California for the County of Shasta, Case No. 171377 (Consolidated with Case No. 172960) Honorable William D. Gallagher, Judge Presiding Walter P. McNeill, Cal. Bar No. 95865 wincneill@mcnlaw.com MCNEILL LAW OFFICES 280 Hemsted Drive, Suite E Redding, CA 96002 Tel: 530-222-8992 Attorneys for Plaintiffs Citizens for Fair REU Rates,et al. and Plaintiffs Fee Fighter LLC,etal. I. Il. IIL. TABLE OF CONTENTS INTRODUCTION ANSWER TO ARGUMENT MADEBY THE LEAGUE AMICUSBRIEF A. THE CORRECT FOCUS IS ON THE ELECTRIC RATES AND NOT ON THE BUDGETARY ENACTMENTSORINTER-FUND TRANSFERS THE PILOT AMOUNTOF THE RATES IS NOT “COVERED” BY THE PROFITS FROM WHOLESALE SALES OF POWER GIVEN THAT THE CITY HAS NEVER TAKEN ANY LEGISLATIVE ACTION TO EXPLICITLY APPROVE THE PILOT AMOUNTAS A RATE SETTING MECHANISM, THERE WAS NOTHING TO GRANDFATHER WHEN PROPOSITION 26 BECAME EFFECTIVE ANSWER TO ARGUMENTS MADEIN THE CMUABRIEF A. A DIFFERENT PERSPECTIVE ON COLLECTION OF PILOT TRANSFER PAYMENTS AND WHO ACTUALLY SUFFERS FINANCIAL STRESS OR ECONOMIC DISLOCATION THERE CAN BE NO GRANDFATHERING OF A PILOT TRANSFER THAT HAS NO GROUNDINGIN ANY LEGISLATIVE ENACTMENT OR OTHER NONDISCRETIONARY AUTHORITY A PILOT TRANSFER AND CONJOINED INCREASE IN RATES THAT PURPORTEDLY MIMICS THE PROPERTY TAX ASSESSED AGAINSTPRIVATE UTILITIES IS NOT “REASONABLE” MERELY BECAUSEIT SIMULATES PRIVATE POWER CHARGES 10 10 12 Ha s. B e y e es A g e e 2 S o B e g e IV. V. VI. 1. The Metric Liberally Prescribed By Proposition 26 Is The “Reasonable Costs To the Local Government.” No Other Metric Can Be UsedIn Its Place. 2. Redding’s Concoction Of A PILOT Is Not Even An Approximation Of The Tax Paid By Private Utilities CONCLUSION CERTIFICATE OF WORD COUNT PROOFOF SERVICE 17 19 20 ir TABLE OF AUTHORITIES CASES Barratt American, Inc. v. City ofRancho Cucamonga (2005) 37 Cal. 4» 685 Board of Supervisors v. Superior Court (1995) 33 Cal.App.4* 1724 Brooktrails Township CSDv. Board ofSupervisors of Mendocino County (2013) 218 Cal.App.4® 195 County of Butte v. Superior Court (1985) 176 Cal.App.3d 693 CALIFORNIA RULES and CODES Government Code §53728 CALIFORNIA CONSTITUTION Article XIIC §1 Article XIIC §1(e) Article XTIIC §1(e)(2) PAGE 10 13 18 O 1 Ss ‘ Oo 4 9, 14, 15 iii I, INTRODUCTION The amicus briefs filed the League of California Cities and California State Association of Counties (hereinafter “League” or “the League”) and by the California Municipal Utilities Association (hereinafter “CMUA”) do not support the main argument made by the City of Redding from the outset, so muchasshift to different arguments, perhaps recognizing the lack of legal viability for the City’s central themein its defense. Whereasthe City has consistently predicated its defense on the idea that budgetary approvals made prior to Proposition 26 showing the PILOT amountasan inter-fund transfer constitute independentlegislative approval of the PILOT as a pre-existing fee, (1) the League arguesinstead(inter alia) that the electric rates enacted after Proposition 26 incorporating the PILOT amountfor future transfer to the General Fund are not excessive because the PILOT amountis more than offset by profits from the City’s sale of wholesale power on the open powermarket, and (2) CMUAdecries the alleged “economic dislocation” that would occur in manycities that inflate their rates so as to send excess revenueto the general fundsof thosecities, while also suggesting thatit is patently “reasonable” for municipalutilities to charge municipal customers for imaginary costs that aren’t connected to municipal electric service but are costs commonly (andactually) incurred by private investor-ownedutilities. Both amici argue that the City’s pre-existing electric rates should be “grandfathered” under Proposition 26, but they neglect to mentionthatthe relief requested by Plaintiffs is to invalidate only the amountofthe post-Proposition 26 approved rates which are added onto collect sufficient funding for a later PILOTtransfer to the City’s general fund, which amountis between 6% and 7% of the rates andless than half of the City’s overall increase in the rates. Ironically, invalidating the PILOT amountofthe rates as requested by Plaintiffs would leave the City with higher rates than simply turning back the clock to the rates that existed before the December 10, 2010 rate increase of over 15%. The arguments of these amici have no legal foundation and do little if anything to support the City’s position. They are — perhaps understandable — scattershot attempts to salvage a widespread practice of revenue extraction from unsuspecting municipal ratepayers that has always been legally and ethically questionable, butthat following the passage of Proposition 26is clearly unconstitutional. Il. ANSWER TO ARGUMENTS MADE BY THE LEAGUE AMICUSBRIEF. A. THE CORRECT FOCUSIS ON THE ELECTRIC RATES AND NOT BUDGETARY ENACTMENTS OR INTER-FUND TRANSFERS. The centerpiece of the City’s defense in this matter has been the notion that years of budgetary approvals which show a PILOT amountas an inter-fund transfer (in a couple of line items from budgets that are over 200 pages in length) somehowgavethe “PILOT” genuine independentlegal existence as a fee or charge, and therefore the PILOT should be “grandfathered” under Prop.26; whereasPlaintiffs argued from the outset that the PILOTline item in budgets is only a sort of “measuring stick” that the City uses later to inflate new increases in electric rates to provide funds in the corresponding amount. This action challenges the City’s post Proposition 26 approval of Resolution 2010-179 increasing electric rates, insofar as those rates have embedded in them an amountto be collected which correspondsto a calculation of the PILOT amountso that the excess revenuescan later be transferred to the City’s General Fund. Plaintiffs filed a second suit on August 29, 2011 for only two reasons:(1) claims for refunds from 384 rate payers assigned to Plaintiff Fee Fighter LLC had been submitted to the City, denied, and therefore ripenedas claimsto suefor collection; and (2) as a protective measureit was necessary to challenge the City’s approval of Resolution 2011-111, which ostensibly was supposedto bejust a budget resolution but in fact was an aberration that onits face contains a summarylegal brief defending the City’s past and future practice of collecting the PILOT amountin electric rates (see 2 CT 530-531). It was the City which has extensively and laboriously brought forward the past budget approvals of the City as a defense on the novel theory that budgetary actionis also a legislative fee approval as to inter-fund transfers in the approved budget. (Never mindthat this theory would convert budgetary approval into a binding legislative commitmenton thousandsofcollections/ expenditures ripe for litigation and enforcementif the City were to stray from the line items as delineated in the budget.) Thetrial court, however, was convinced by this argument and ruled accordingly. The Court of Appeal reversed, and in doing so spent substantial effort addressing the argument.(Citizens For Fair REU Rates v. City ofRedding [hereinafter “Opinion”] (January 20, 2015, CO71906) (formerly published at 233 Cal.App. 4th 402)). Nonetheless, the Court below clearly ruled as to the invalidity of the electric rates in question (Opinion,at p. 19), even if stated inartfully: The December 7, 2010 increase of the PILOT does require cost justification under Proposition 26. Rather than being the continuation of a grandfatheredin rate, the December 2010 increase of the PILOT constitutes a tax under Proposition 26 unless Redding proves the amountcollected represents its reasonable costs to provideelectric service. Thus, Redding mustcost justify the PILOTcollected under the 2009 two-year Redding budgetto the extent that additional funds were collected based on the December7, 2010 rate increase. Ironically, Plaintiffs agree with the League that inter-fund transfers projected in a budgetare largely irrelevant, orat least are not the operative act that engages Proposition 26. An inter-fund transfer, in andofitself, is not a “levy, charge, or exaction” under Article XIfIC §1(e). Proposition 26 was designed to protect consumers, and the “bite” of unlawful disguised taxes occurs when the ratepayeris required to pay excessive rates. The amount shown for the PILOTasthe projected interfund transfer in Redding’s budgetis useful secondarily only in thatit indicates thelikely target amountthat the City hopesto collect in excess electric rate revenue. A City budgetis an important discretionary documentthat serves as a planningtool for financial administration of City services, but it does not breathelife into revenues, expenditures, and inter-fund transfers it describes as legally actionable fees and charges. Asstated in the City’s own budget document for FY 2010 & 2011 (p.vii) at IX AR 1991, Tab 190 : The City’s budget is an important policy document.It serves as a financial plan, identifying the spending priorities for the organization. The budgetis used to balance available resources with community needs, as determined by the City Council. It also serves as a tool for communication of the City’s financial strategies and for ensuring accountability. Based on the “separation of powers doctrine” and the nature of a budgetas a discretionary documentfor the internal guidanceofcity administration, the courts normally will not even allow outside parties or the public to sue a city based onits budget. Board of Supervisors v. Superior Court (1995) 33 Cal.App.4* 1724, 1739-1740; County of Butte v. Superior Court (1985) 176 Cal.App.3d 693, 698. Thereis no legal authority or precedent for the notion advanced by the City thatit’s budgetary process “created” the PILOTas a fee or charge. As the League now argues, the fee or charge in question here is the electric rate set by the City Council approval of a rate increase on December7, 2010. With the proper shift in focus on rates rather than past budgets, several issues becometransparent: (¢) there can be no grandfathering of the PILOT amountin the rates based on past budgets; (¢) there can be no grandfathering of the PILOT amountin the newly increased rates that are roughly 15% higher than the previous pre-Proposition 26 rates, of which the PILOT amountis roughly 7%; the PILOT amount is embeddedin the increasedelectric rates becauseit is required by Resolution No. 2010-178 approved by the City Council in December 2010 and stating that one purpose of the approvedratesis to “obtain funds necessary to maintain such intra-City transfers as authorized by law”; and (©) even with the voluminoushistorical “record” which thetrial court generously allowed the City to file, there is no cost-justification for the PILOT amount embeddedin theelectric rates — it is purely money collected with norelation to electric services, and therefore a “tax” that fits no exceptions under XIIIC §1 of the California constitution. B. THE PILOT AMOUNTOF THE RATESIS IS NOT “COVERED”BY THE PROFITS FROM WHOLESALE SALES OF POWER. After amicus League concedesthat the rates are the appropriate focus of inquiry,it attempts to justify collection of the PILOT amountin the rates imposed on ratepayers andthetransfer of those monies to the City general fund by the argumentthatelectric utility profits from the sales of wholesale powerare theoretically more than sufficient to “cover” the PILOT amount. The Court of Appeal rejected this reasoning, finding (Opinion, at page 14): Thatthe Utility has other sources of incomeis not dispositive. The gravamenof the problemis that, regardless of what else Redding mightcollect from certain customers, it has imposed a PILOT-- whichit maydo only with voter approvalor if able to showit reflects Redding’s reasonable costs of providing electric service. The view taken by the Leagueis that profits generated from wholesale sales of power should be freely allowed to be diverted straight to the General Fundin their entirety, and therefore any amountof such diverted funds could pay or substitute for the PILOT amount. This is an alarming perspective given that the City projected profits from sales of wholesale powerto be $15.8M, $31M, and $21M in FYs beginning 2011, 2012, 2013 respectively. (See Leaguebrief at p.12; and see XIII AR Tab 205, 2975,also cited in the Leaguebrief). To the extent those profits subsidizetheretail customersthatis all to the good, andin fact legally required as the fundsare part of the operational balance sheetof the utility and ultimately reflected in the retail rates by design. But again, amicus misses the point. If the retail electric rates challengedin this action are $7 million higher than they would be otherwise due to a transfer of the PILOT amount, then — regardless of subsidy from other sourcesortheir size — rates imposedto collect that extra $7 million are an unlawfultax atleast in that amount. Plaintiffs have no quarrel with thefact that in recent years the City’s sales of wholesale power through the complex exchangethat allows transfers of power throughouta large geographic area beyondthe confines of California have generated “profits.” Those wholesale transactionsare not challenged andare notat issuein this matter; they are not in any way the subject of Res. 2010-179 challengedby Plaintiffs; they are, for what its worth here, a completely different species of transaction in a highly competitive market environmentwhere buyers in remote locations have many optionsto choose from; Plaintiffs are doubtful that Proposition 26 would apply to such transactionsin the first place, because thereis no de-facto monopoly on wholesale power sources in the western United States, and it would bedifficult to argue that buyers in these transactions havethe price of wholesale power “imposed” on them. Nonetheless amicus League argues(at p. 15 of their brief) that the Court of Appeal decision suggests that it is improper for the City to makea profit from wholesale sales of power and mustsell its wholesale power “at cost”. The corollary suggested by amticus is that avoiding such a calamitousinterpretation of Proposition 26 requires that the law also allow “profit” to pay for the PILOT (evenifit necessarily comesat the cost to ordinary retail rate payersin rates higher that they would be otherwise). This argument by amicus League is grasping at straws, and even more remotely at issues (wholesale powerprices and their validity) that are notin the litigation and that have noactual relevance. This should notbe factor in this Court’s ultimate determination on the relevant Proposition 26 issues at hand. C. GIVEN THAT THE CITY HAS NEVER TAKEN ANY LEGISLATIVE ACTION TO EXPLICITLY APPROVE THE PILOT AMOUNTASA RATE SETTING MECHANISM, THERE WAS NOTHING TO GRANDFATHER WHEN PROPOSITION 26 BECAME EFFECTIVE. The City of Reddingincreasesits electric rates from timeto time simply by raising the ¢/kilowatt hour paid by customers, with minorvariancesfor different classes of rates or with some new charges, none of whichare relevant here. Whatis important to note is that the City neverlegislatively approveda transparentrate setting “formula” that would explain to the public how therates are established, muchless a formula that explicitly includes the PILOT amountalong with the othercriteria to determine the amounts of the electric rates. In the thousandsof pages of “record” submitted by the City youwill not find one page with a “rate formula.” In essence, the “experts” at the utility would determine what the rates oughtto be, and then the proposedrates would be presented to the City Council and the public with a generalized explanationthat rising costs or infrastructure needs,etc., necessitate a rate increase in the amount requested. After a pro forma presentation bythe utility director to the City Council at a public meeting, the Council approvedtherates requested.In the voluminousrecord covering over 25 years you will notfind evidence of any occasions where the City Council rejected a rate increase. In every case the rate increases are merely upwards adjustments of the rates paid by the ordinaryresidential ratepayers. Thus, even if “grandfathering” were a valid consideration in this case, the only thing prior to Proposition 26 that could be considered would be the pre-existing rates stated as the payment amounts required of the electric customers. While amicus League and the CMUAarguethat there should at least be grandfathering of the rates extant prior to Proposition 26, they seem not to understandthatthe relief requested by Plaintiff (which is not premised on grandfathering) would leave higher rates intact than the pre-Proposition. 26 rates. Simply put, Plaintiffs seek only to invalidate the portion of the rates that function asanillegal hiddentax,i.e., the amount embeddedto pay over the projected PILOT amountto the General fund. The roughly 15% rate increase approved in December 2010 includes about 7% of this embedded amountfor the PILOT.If the offensive 7% is taken out of the rates, roughly 8% of the increase remains; Plaintiffs do not contest that the City faces increased costs for power and so does not contest that portion of the rate increase legitimately neededto offset those rising costs.If you simply go back to the rates that existed prior to the increase, then the entire 15% of increased rate funding is gone. Amici seem not to understand the counterproductive nature of their grandfathering argument. Further, whenthere is a proposedincrease in rates as occurred here, the legislative body has a constitutional duty under XIIIC §1 to examine the proposed rates underthe facts that exist at that time to determineif the proposed rates do or do not exceed the reasonable cost of providingelectric services to customers. There is no other way to know whetherthe rates as proposed can be legitimately approvedas chargesfalling under the exception provided by XIIIC §1(e)(2) or otherwise should be putto a vote as a “tax.” There may also be cases wherecharging the rates in the same amountcould be problematic becausecosts have decreased (such as, for example, the falling cost of natural gas due to the new “fracking” technologies). The duty to provide current cost-justification for rates is engaged only becauseit is the City that has chosen to engagein discretionary legislative review and adjustmentof rates. (See Barratt American, Inc. v. City ofRancho Cucamonga (2005) 37 Cal. 4* 685.) There is no grandfathering of preexisting rates that prevents the City from following its Constitutional duties. il. ANSWER TO ARGUMENTS MADEIN THE CMUABRIEF. A. A DIFFERENT PERSPECTIVE ON COLLECTION OF PILOT TRANSFER PAYMENTS AND WHO ACTUALLY SUFFERS FINANCIAL STRESS OR ECONOMIC DISLOCATION. The CMUAbriefrelies primarily on a policy argumentthat PILOT transfer payments are commonin the municipal power industry, that the amounts of money involved are quite large (in 2012 the transfers from 210 public powerutilities nationwide provided their municipal governments with over $1 billion [CMUA brief, p. 3]), that these funds have becomethoroughly integrated in the operations of municipal power agencies, and that eliminating the PILOTtransfer could have the “paradoxical impact”(ibid., p. 6) of forcing municipalities dependent on these fundsto look for other sources of revenueor even reduce their expenditures for public services. With crocodile tears' flowing, the CMUA warnsthat both Moody’s and Fitch Rating Service predict that the loss of PILOT transfers could lead to “rating sensitivity” for cities issuing public debt, negatively impacting “credit ratings and finances,” and ' The crocodile is reputed to weep when consumingits victims — an 10 ultimately causing “economic dislocation” for the municipalities that haverelied on these unconstitutional exactions(ibid., p.6). Almost needlessto say, this policy argumentis speculative at bestin its financial predictions; and even if the worst predictions cometrue, the over-dependency of some municipalities on unconstitutional exactions cannotserveasjustification for ignoring the constitutional mandate of Proposition 26 to put an end to unlawful hidden taxes like these. There is, however, a real case to be made about “economic dislocation” from the opposite perspective of the ratepayers, who musttry to cope withartificially inflated electric rates calculated to generate the extra revenue necessary for the PILOTtransfer. Redding has an extraordinarily aggressive policy of late payments on short notice (10 days) and rapidly moving through warning notices to the end result of disconnection of electric service in a span of 48 days from the missed paymentto disconnection. Though Redding’selectric utility only has about 43,000 accounts,theutility in FY 2011, for example, shut off powerto 2,518 customers;of those, 1,696 were able to come up with money for delinquent payments, penalties and deposit, to have their powerrestored, but leaving 822 permanently disconnected. Redding’selectric director indicated that the utility sees roughly 1,000 disconnections peryear.” It is no coincidence that Redding’s population — i.e., the utility’s customers — has persistent disproportionately high percentage of low-income residents, with an overall average household income of $44,236 (over $15,000 below the State average), an average per capita income of $23,443, and over 18% of the population living below the poverty See Redding Record Searchlight newspaper, article “Missed connection; someresidentsstill unplugged despite policy changes,” Nov.26, 2011. 11 level.’ These are the ratepayers, real people, whostruggle to pay for electric service to begin with, whoare sensitive to even a minor increase in rates, who too often fall behind in their payments and in the most difficult cases have their power disconnected altogether. That is genuine “economic dislocation.” For the poor, the politically powerless, the unheard, it would be fatuous to suggest they go out andhire a lawyerif they believe their rates are unlawfully excessive. This case, though,if brought to the conclusion the Constitution now demandsafter Proposition 26, maystrike one small blow to at least end the abuse of excessive electric rates that plague those least capable of absorbing the increased charges. B. THERE CAN BE NO GRANDFATHERINGOFA PILOT TRANSFER THAT HAS NO GROUNDINGIN ANY LEGISLATIVE ENACTMENT OR OTHER NONDISCRETIONARY AUTHORITY. CMUAmakesthe simple but flawed argumentthat because the City had been making PILOTtransfersin the past, the practice must be grandfathered despite the voter’s approval of Proposition 26 on November4, 2010. The Court of Appeal addressedthis argumentas follows (Opinion,at page 19): The PILOT’s regular appearance in Redding’s budgetary process does not mean it was a permanentor continuing transfer compelled by ordinance or other nondiscretionary authority. As a recurring discretionary part of the Redding biennial budget, the PILOT cannotbe said to precede or be grandfathered in under Proposition 26. > U.S. Census Bureau 2009-2013 community survey 5-year estimates. 12 The voluminousrecordfiled in the trial court has thousandsof pages of budgetary documents, but there is not one documentin the record that is evidence of an ordinance or other nondiscretionary authority which would establish the PILOTas a “fee or charge” subject to grandfathering under Proposition 26. Plaintiffs have never argued that Proposition 26 is retroactive, nor has there been any need to even consider that question. A fee or charge does not independently exist and can’t be grandfatheredif it is merely a past discretionary practice, without ever having followed the formal procedures (as for adoption of an ordinanceor resolution) that subjects the charge to public scrutiny in the adoption process, that triggers the statute of limitations for those who would make a judicial challenge, and that subjects the chargeto thetest of Proposition 26 for determination of whetherit is truly a fee or a “tax.” CMUA’scitation to Brooktrails Township CSD v. Board of Supervisors ofMendocino County (2013) 218 Cal.App.4* 195is inapposite, becausein that case the court held that a local initiative approvedin the sameelection as Proposition 26 preexisted Proposition 26, which becameeffective the day after theelection, and therefore Proposition 26 was inapplicable. A voter-approved initiative is clearly a formal adoption of a fee or charge, just as binding in effect as an ordinanceorresolution. If the PILOT transfer had ever been putbefore the voters of Redding, as Plaintiffs have suggested to the Redding City Council on more than oneoccasion, the analysis would be different. Instead wehavethe insidioustype of charge that is blended into the electric rates, but never formally created as a fee or charge, norhasit ever been given direct public scrutiny in a hearing where the City Council would have to formally approveit and take 13 political responsibility for it in the future. It is precisely the type of “hidden tax” that Proposition 26 was enacted to remedy. C. A PILOT TRANSFER AND CONJOINED INCREASEIN RATES THAT PURPORTEDLY MIMICS THE PROPERTY TAX ASSESSED AGAINST PRIVATE UTILITIES IS NOT “REASONABLE” MERELY BECAUSE IT SIMULATES PRIVATE POWER CHARGES. 1. The Metric Literally Prescribed By Proposition 26 Is The “Reasonable Costs To The Local Government.” No Other Metric Can Be UsedIn Its Place. Article XIIIC §1(e)(2) provides the applicable metric for determining whetherthe City’s electric rates are “reasonable” as an exception to the general rule that increased fees and charges are “taxes” that must be approvedbytheelectorate. That constitutional provisionliterally states that the City must showthat its charges do not exceed “the reasonablecosts to the local governmentof providingtheservice or product.” This is not a market-oriented metric tied to what others may charge for the sameservice. Noris it an index. It explicitly runs to the “reasonablecosts to the local government.” Asa metric, this languagecarries results that can sometimes be good for municipal ratepayers in comparison to private market prices for services or products, but there is also the inherent possibility it can disadvantage municipal consumers. Where municipal poweris concerned, the City of Redding is capable of providingelectricity for its customers generally at costs to the City that are below those incurred byits private utility counterparts; this 14 is not unusual for municipal power, which on average charges at least 10% less than privateutilities. However, the specific circumstancesof the City’s powercosts could conceivably change (for example, it is expected that the coal fired generation plant in Arizona that Redding has invested in through a JPA will be decommissioned, leaving the City with stranded costs and a need to fill that gap in in its power production portfolio), theoretically leading to overall costs well above market — butstill real costs that the City has to pay, that are reasonable underthe circumstances, and which can only be recoupedbyraising rates. Underthat hypothetical scenario the City falls under the exception provided by XIIIC §1(e)(2) even thoughits electric rates might wind up higher than those charged byprivateutilities. The touchstone of this metric is that one need only look at the costs incurred by the City and determineif they are “reasonable.” The costs incurred by otherutilities, whether private or pubic, are irrelevant. Thusit is completely irrelevant whetherprivate utilities pay taxes ontheir assets or not. The only relevant question is whether the City of Redding paystaxes onits assets - and we knowthat the answeris that it does not pay those taxes. If taxes are not a “cost” to the City then they have noplacein therate calculations. Insofar as there is an amountof the rates imposedto pay for the City’s interfundtransfers of a PILOT amountofelectric rate revenues, the PILOTis simply fictional because the City pays no such taxes onits assets. It is a patent violation of the Constitutionalstrictures of Proposition 26 when the City charges its ratepayers amounts commensurate with a fictional cost rather than real cost incurred by the utility. 15 2. Redding’s Concoction Of A PILOT Is Not Even An Approximation Of The Tax Paid By Private Utilities. Even though the charge is impermissible to begin with, Redding doesn’t even approximate the charge that would be paid for property taxes. Refer to the City’s spreadsheet for the computation of the PILOT found at XI AR 2469. Plaintiffs did not becomeawareof the City’s methodfor calculating the PILOT until after the complaint wasfiled, but the discrepancy between the PILOTas charged by the City and a PILOT which would actually mimic property tax assessments only meansthat the City charges much more than a theoretical tax assessmentonits electric utility assets, making its violation of Proposition 26 more egregious, not less. Onefinds on the City’s spreadsheet that(a) at lines 6, 7, and 8 the City counts as tax-assessable assets its ownership interests in the intangible property interests of the JPAs to whichit belongs, accounting for $125,481,433 of the approximately $568,142,918 base property value for its PILOT calculation; a private utility would not be assessed for those intangible interests, therefore this theoretical exercise by Redding falsely inflates the PILOTcalculation it uses by at least 27% on that basis alone. In addition, the City’s calculation at line 11 automatically increases asset values by 2% each year without any particular reason, when standard accounting principles would either amortize asset values or hold themstatic if there is an aggressive maintenance program. Giventhat there is no legitimate basis for calculating and using a PILOT amountto be collected in the rates to begin with, it seems an irrelevant wasteof effort to find the flaws in the PILOT 16 calculation, and theeffort itself risks giving that calculation a veneer of legitimacy it doesn’t deserve. The City could use any random measurement device it chooses to determine how much unlawful excess revenueit intendsto take out of the electric rates and the amount would be no moreorless valid. Finally, it should be borne in mindthat the City never performed a cost of service analysis for its electric rates, nor was there any examinationof the cost of service incurred by the City for the PILOT amount embeddedin the rates. The spreadsheet calculation at XI AR 2469 is a badly constructed hypothetical tax assessmentcalculation, and since the City pays no such taxesit doesn’t reflect in any waycosts of service incurred by the City. Similarly, argument made by amicus CMUAthat the PILOT amount somehowreflects costs of services providedto the utility by other departments of the City is completely ungrounded.There is no calculation of such costs anywherein the record. Moreover, the City’s budget already adjusts services provided between departments with interdepartmental charges that would cover whatevercontribution the utility enjoys from other departments. The PILOT amountis unrelated to that process, as it is merely a revenue-generating device for the General Fund. IV. CONCLUSION The briefs of amici by implication only reinforce the position of Plaintiffs in seeking the invalidation of this unconstitutional tax embeddedin the City electric rates, and the application of the necessary remedies whichattendto that: refunds for the claimants as represented by Fee Fighter, LLC; application of the remedyof Government Code §53728for the balance of the unlawfully exacted tax; an award of fees and costs to Plaintiffs who have pursuedthis 17 matter as one of vital public interest and necessarily on a contingent fee basis; and any additionalrelief as directed bythefinal disposition of this matter. Respectfully submitted, MCNEILL LAW OFFICES Dated: September 28, 2015 YbV4YWyl! WALTERP. McNEILL » Attorneys for Citizens for Fair REURates,etal. 18 CERTIFICATE OF WORD COUNT (California Rules of Court, Rule 8.504(d)(1)) Thetext of this brief, exclusive of cover page, tables and attachments, consists of 4,938 words, as counted by the word processing program that was usedto generatethisbrief. Respectfully submitted, MCNEILL LAW OFFICES Dated: September28, 2015 LifMOA Walter P. McNeill © Attorneys for Citizens for Fair REU Rates,et al. 19 PROOF OF SERVICE I am employed in Shasta County; I am over the age of 18 years and am not a party to the within action; my business addressis MCNEILL LAW OFFICES, 280 Hemsted Drive, Suite E, Redding, California 96002; on this date I served: CONSOLIDATED ANSWERBRIEF TO THE AMICUS CURIAE BRIEF OF THE LEAGUE OF CALIFORNIA CITIES AND THE CALIFORNIA STATE ASSOCIATION OF COUNTIES, AND TO THE AMICUS CURIAEBRIEF OF THE CALFORNIA MUNICIPAL UTILITIES ASSOCIATION _X_BY FIRST CLASS MAIL: The envelope was mailed with postage thereon fully prepaid in a sealed envelope and addressedas follows: SEE ATTACHEDLIST _XTherebycertify that the document(s) listed above was/were produced on paperpurchasedas recycled. _X I declare underpenalty of perjury underthe lawsof the State of California that the foregoing is true and correct. Executed on September 28, 2015 at Redding, California. |reea Jeghifer Dug” 20 SERVICE LIST Citizens for Fair REU Rates v. City ofRedding California Supreme Court Case No. $224779 Third District Court of Appeal Case No. C071906 Barry DeWalt Office of the City Attorney, City of Redding 777 Cypress Avenue, 3+ Floor Redding, CA 96001 Arthur Jarvis Cohen Harry Zavos Attorneys at Law 2 Venture, Suite 120 Irvine, CA 92618 Attorneys for Glendale Coalitionfor Better Government, Amicus curiae Daniel E. Griffiths Braun Blaising McLaughlin & Smith, PC 915 L Street, Suite 1270 Sacramento, CA 95814 Attorneys for California Municipal Utilities Association, Amicus curiae James R. Cogdill Howard Jarvis Taxpayers Assn. 921 11+ Street, #1201 Sacramento, CA 95814 Attorneys for Howard Jarvis Taxpayers Assn., Amicus curiae Clerk of the Court Shasta County Superior Court 1500 Court Street, Rm 319 Redding, CA 96001 Michael G. Colantuono Colantuono & Levin, PC 11364 Pleasant Valley Rd Penn Valley, CA 95946-9000 Rick W.Jarvis Jarvis Fay Doporto & Gibson 492 9» Street, Suite 310 Oakland, CA 94607 Attorneys for League of California Cities and California State Association OfCounties, Amici Curine Kurt Ryan Oneto Nielsen MerksamerParinnello Gross & Leoni, LLP 1415 L Street, Suite 1200 Sacramento, CA 95814 Attorneys for California Taxpayers Association, Amicus curiae Ralph William Kasarda,Jr. Meriem Lee Hubbard Pacific Legal Foundation 930 G Street Sacramento, CA 95814 Attorneys for Pacific Legal Foundation, Amicus curiae Clerk of the Court Court of Appeal Third Appellate District 914 Capitol Mall Sacramento, CA 95814 21