The California Court of Appeal, Second Appellate District ruled that the franchise fee, including a surcharge imposed by electric utility Southern California Edison (SCE) on its customers in Santa Barbara, pursuant to SCE’s agreement with the city, was not a tax requiring voter approval under Proposition 218. Dating back to 1959, SCE has had franchise agreements with Santa Barbara, allowing SCE the ability to distribute electricity to customers in the city through equipment running along, under and over the city’s streets in exchange for a franchise fee.  SCE and Santa Barbara agreed to a new franchise agreement in 1999, after five years of negotiations. Under the prior agreement, SCE was required to pay the city a fee equal to one percent of its gross annual receipts from the sale of electricity within Santa Barbara. Under the 30-year agreement entered into in 1999, SCE was required to continue paying the one percent franchise fee based on its gross receipts for the first two years, and for the remaining 28 years, include an additional one percent surcharge on customers’ bills, for a total franchise fee of two percent.

Customers initiated a class action following the imposition of the one percent surcharge, alleging that it was a tax imposed in violation of Proposition 218, which generally requires taxes imposed by local governments be subject to voter approval.  The plaintiffs filed suit in 2011 and the trial court ruled on cross-motions for summary adjudication that the surcharge was not a tax subject to Proposition 218. The Court of Appeal reversed in 2015, reasoning that because the primary purpose was to raise revenue, the surcharge was a tax.  In 2017 the California Supreme Court reversed the Court of Appeal, ruling that while all franchise fees raise revenues, only those that are not reasonably related to the services provided are taxes. The Supreme Court further found that the plaintiffs had alleged sufficient facts to overcome summary adjudication, but had not established their own right to summary adjudication, so the case was remanded to the trial court for further fact-finding. On remand, the trial court determined that Santa Barbara met its burden of proof by showing that the two percent franchise fee had a “reasonable relationship” to the value of the property interest Santa Barbara transferred to SCE.

In affirming the trial court’s decision, the appellate court determined that for purposes of analyzing Proposition 218 compliance, the entire two percent charge must be analyzed, and ruled that both the initial one percent included in the rates customers pay and the additional separately stated one percent surcharge, is a payment made in exchange for the property interest that SCE needs in order to provide electricity. The court went on to rule that Santa Barbara met its burden of establishing a reasonable relationship between the two percent charge and the franchise rights SCE paid for, and thus the fee was not a tax subject to Proposition 218.  In reaching that conclusion, the court noted there is no requirement of an actual relationship between the franchise right and the fee amount, only that two percent reasonably approximates the value of the franchise rights provided to SCE. In finding there was a reasonable relationship, the court noted the best indicator of market value are negotiations, which in this case were lengthy, conducted at arm’s length, and yielded the two percent fee in dispute. Ultimately, the court found that the plaintiffs made “virtually no effort” to rebut the trial court’s factual findings supporting the reasonable relationship between the franchise right and franchise fee, and thus, the franchise fee was not a tax subject to Proposition 218 protection.

Jacks et al. v. City of Santa Barbara, 2d Civ. No. B299297 (Cal. Ct. App. Aug. 19, 2021).