State high court sides with city of Redding in ‘narrow’ tax ruling

In a case monitored by government entities and taxpayer rights groups, which filed amicus briefs on each side, the state Supreme Court has ruled for the city of Redding over whether a utility fund transfer was an illegal tax under Proposition 26.

But some of those who participated in the case disagree on how important Monday's decision will turn out to be. Citizens for Fair REU Rates v. City of Redding, 2018 DJDAR 8621 (Cal. Aug. 28, 2018).

"Every public power utility in California is very closely watching this case, because every power utility has some form of fund transfer," said Michael G. Colantuono, a partner with Colantuono, Highsmith & Whatley in Grass Valley who argued the case for Redding.

Redding-based Walter P. McNeill, who argued opposite Colantuono in the high court in May on behalf of Citizens for Fair REU Rates, did not return calls seeking comment.

But Timothy A. Bittle, director of legal affairs with the Howard Jarvis Taxpayers Association, downplayed the significance of the ruling. The Sacramento-based organization filed an amicus brief in favor of the ratepayer group.

Bittle said his group was concerned when the high court agreed to hear the case; the 3rd District Court of Appeal had reversed a Shasta County Superior Court judge and sided with the ratepayers. But he added that Monday's ruling actually reinforced some past victories in Prop. 26 cases, even as ratepayers lost on a slightly different issue.

"The Supreme Court did not do anything that hurt taxpayers or ratepayers," Bittle said. "The court found this case on narrow grounds."

The case goes back to 2010, when the Howard Jarvis Taxpayers Association helped pass Prop. 26, which requires a two-thirds vote by the Legislature or local taxpayers to increase a tax. Certain fees were exempted if the agency charging the fee could show it did not exceed the cost of providing the service or if the service went "directly and exclusively to those who pay the charge."

Soon thereafter, Citizens for Fair REU Rates sued under Prop. 26 to stop a $6 million annual payment-in-lieu-of-tax (PILOT) from the Redding Electric Utility (REU), the local municipal power provider, to the city's general fund. This was intended to reimburse the city for expenses it incurred in helping the utility operate, mainly what it is excused from paying in local property taxes.

The ratepayer group alleged the amount did not reflect the actual expenses incurred by the city, and the charge was embedded in a recent rate increase as a means of collecting more money for the city's general fund.

Colantuono said he opted for a narrow oral argument that was nonetheless expansive enough to protect the interests of his client and dozens of other similarly-situated municipal utilities. Because the plaintiffs were challenging only a small portion of the expenses the utility faced in a given year, the utility could show that it had more than ample revenue from non-ratepayer sources to cover the $6 million payment.

"The question is whether the charge imposed on ratepayers exceeds the reasonable cost of providing the relevant service," wrote Justice Carol A. Corrigan for the unanimous court, citing Northern California Water Assn. v. State Water Resources Control Bd. (2018) 20 Cal.App.5th 1204.

"If the agency has sources of revenue other than the rates it imposes, then the total rates charged may actually be lower than the reasonable cost," she added.

Corrigan found that was the case here, because measured against the amount paid annually by ratepayers, the utility operates as a loss. This is made up by sources including funds from the city and the sale of excess electricity to other providers.

Colantuono said that it was his understanding that most electrical utilities operate at a loss versus ratepayers' funds, and therefore can continue to charge PILOT fees.

Bittle, meanwhile, said the ruling protects the core tenets of Prop. 26 and related case law in a way that could result in future ratepayer cases.

"I think it did a fair job of summarizing the major provisions of Proposition 26 and agreed Proposition 26 applies to electricity rates," Bittle said of the court.