Supreme Court finds City's Transfer from Electrical Enterprise Fund to General Fund Proper, and not a Tax, as City's Cost of Providing Electrical Utility did not Exceed Charges

The California Supreme Court reversed a court of appeal decision. The court held that municipal utility rates challenged as invalid taxes under Cal. Const. art. VIII C do not constitute taxes because they do not exceed the reasonable cost of providing the service.

The City of Redding operates an electric utility to provide electric service for residents and commercial businesses within the city. Each year, the city's budget includes a transfer from the utility's enterprise fund to the city's general fund to compensate the general fund for the costs of services that other city departments provide to the utility. In 2010, the city increased the rates charged to residents for electric service. Citizens for Fair REU Rates filed suit challenging the rate increase, arguing that the rates improperly included the cost of the transfer from the utility fund to the general fund. Citizens contended the transfer was simply a device to collect extra money from utility customers for the general fund, did not reflect the city's actual costs to provide services, and thus constituted an invalid tax under art. XIII C, which prohibits local governments from imposing, increasing, or extending any tax without voter approval. In 2011, Citizens again filed suit when the city council approved annual budgets incorporating the same transfer of funds.

The trial court consolidated the actions and entered judgment for the city. The court of appeal reversed, holding that the transfer of funds constituted an invalid tax.

The California Supreme Court reversed, holding that the budgetary transfer is not a tax. Excepted from art. XIII C's definition of tax is any charge imposed for a service or product that does not exceed the reasonable costs of providing it. At issue was not whether each cost in the utility's budget was reasonable, but, rather, whether the charge imposed on ratepayers exceeded the reasonable costs of providing the relevant service. Here, the undisputed evidence showed that the challenged rates were actually far less than the city's actual and reasonable cost to provide electric service. For 2010 to 2011, for example, projected rate revenues were $102.1 million. Actual projected expenses were $136.7 million, including the $6 million transfer challenged by Citizens, with the resulting shortfall to be covered using utility revenues from a variety of non-rate sources. Because the rate charged to utility customers did not exceed the actual cost of providing the service, the utility rates were not taxes for purposes of art. XIII C, and voter approval was not required. 

Citizens for Fair REU Rates v. City of Redding, August 27, 2018

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